UBS issues caution on bitcoin

In the near term, crypto prices could climb anew, powered by market momentum, institutional adoption and limited supply.
In the near term, crypto prices could climb anew, powered by market momentum, institutional adoption and limited supply.PHOTO: REUTERS

(BLOOMBERG) - Strategists at one of the world's largest wealth managers are issuing a warning to newbie crypto investors plunging into the record rally: You could still lose all your money.

Between regulatory threats and central bank-issued competitors, there is nothing stopping a wipeout in big-name digital currencies eventually, according to UBS Global Wealth Management.

As Wall Street jumps on the bitcoin rally like never before, the Swiss firm says prices may rise in the near term, but the industry faces existential risks over the long haul.

"There is little in our view to stop a cryptocurrency's price from going to zero when a better designed version is launched or if regulatory changes stifle sentiment," said the authors of a recent report, including Mr Michael Bolliger, UBS' chief investment officer for global emerging markets.

"Netscape and Myspace are examples of network applications that enjoyed widespread popularity but eventually disappeared," the strategists wrote in response to rising client interest.

With bitcoin soaring to more than US$40,000 in recent trades, the famously volatile asset class is stoking debate among the world's biggest money managers.

While famed investors such as Mr Paul Tudor Jones and Mr Stanley Druckenmiller are entering the industry, critics see gambling, scandal and manipulation.

In the near term, crypto prices could climb anew, powered by market momentum, institutional adoption and limited supply.

But in the long term, the market risks regulatory intervention, the strategists said, citing the United Kingdom's decision to ban sales of certain crypto-derivative products to retail investors.

Like most firms, UBS Wealth is sceptical about the real-world utility of virtual tokens, but stops short of calling crypto prices a bubble, given the difficulty of determining a fair value for an asset without cash flows.

Other investors have put ambitious price targets on bitcoin, saying it is destined to keep rising as more institutional investors sell their gold holdings in favour of the digital currency to diversify portfolios.

Mr Scott Minerd of Guggenheim Investments said bitcoin could be worth about US$400,000, while JPMorgan Chase & Co strategists see a case for US$146,000 in the long run.

"Investors in cryptocurrencies must therefore limit the size of their investments to an amount they can afford to lose," UBS Wealth said.