From a low of $4,000 in mid-March last year, Bitcoin price has skyrocketed, surging nearly 900 percent, despite an almost 30 percent correction recently. The fairy tale rise in the price of the world's first and most famous cryptocurrency has understandably garnered interest from investors across the globe.
Global brokerage UBS, in a recent report, points out the pros and cons of buying the cryptocurrency.
Should investors buy?
Even though the brokerage doesn't rule out further price increases, it said that it is hard to estimate a fair value for Bitcoin. Thus, to avoid the real risk of losing one’s entire investment, it advises investors in cryptocurrencies to limit the size of their investments to an amount they can afford to lose and also suggests thinking about an exit strategy.
Will the prices continue to rise?
Given the strong price momentum, the potential for further institutional adoption, huge media, and social media attention, and the limited supply, it expects prices to continue climbing in the near term.
Anecdotal evidence suggests institutional investors are buying more than in 2017, when Bitcoin exceeded $20,000 for the first time, observed UBS.
It also believes that the growing acceptance of cryptocurrencies by mainstream asset managers may further lift the sentiment.
"We see evidence that retail investors have become more active again. More people are searching for information on cryptocurrencies on the internet. The number of transactions and digital wallets is on the rise, and the topic is trending on social media," the brokerage report noted.
While still underdeveloped, the open interest in the Bitcoin futures market has also increased more than threefold since October, it added.
An attractive investment opportunity: The brokerage believes that some investors see Bitcoin as part of a broader strategy to position for new opportunities in an increasingly digital world. Some investors, for example, believe that the decentralised Bitcoin network could become a competitor to the established global settlement system, moving international transactions away from US dollars, euros, or yuans into cryptocurrencies, it added.
A hedge against depreciating fiat currency: A second reason relates to unorthodox central bank policies for over a decade. Some investors fear that the use of central bank money to fund emergency expenditure programs will eventually result in high inflation, eroding the purchasing power of their currencies. Cryptocurrencies, thanks to their limited supply, are seen as alternative stores of wealth, similar to precious metals, commodities, or other real assets, that are beyond the reach of public authorities and can be moved quickly at comparatively low cost, UBS explained.
Sentiment shifts: The brokerage also noted that most cryptocurrencies are volatile, and the increase in institutional participation may make things worse. Empirical evidence from other asset classes suggests that higher participation by institutional investors could increase volatility due to their more opportunistic investment approach, it added.
Competition: Cryptocurrency prices are also sensitive to new supply and since they are not legal tender in any jurisdiction, they may at some point be replaced by other digital currencies with better features. These features could include being faster, cheaper, more environmentally friendly, or gaining government backing.
Regulation: The risk of regulatory change is also crucial, stated UBS.
"Aside from Libra, the digital currency project launched by Facebook, cryptocurrencies haven’t received significant attention from authorities and regulators in recent years. This might change with the rise of institutional participation and the increase in market capitalisation. Regulators might see the more widespread institutional exposure to cryptocurrencies as a risk to financial stability, resulting in new regulations like higher capital requirements,: it observed.
(Edited by : Ajay Vaishnav)