Many of Wall Street’s top executives don’t have anything good to say about Bitcoin. Jamie Dimon, the chairman and CEO of JP Morgan Chase, the largest bank in the US, has called it a fraud.
Speaking at an investment conference last year, Dimon went on to say that anyone at his bank who was found trading in Bitcoin would be fired.
What does Dimon have against Bitcoin? According to him, it’s “stupid” and “far too dangerous” and “It won’t end well, they will eventually blow up.”
When Your Actions Contradict your Words
Although the top management of JP Morgan Chase has made statements denouncing bitcoin, a news report points out that the bank has invested in exchange-traded notes (ETN) that track the price of Bitcoin.
JP Morgan Chase, Image from Bitcoin.com
The public records of Nordnet, a digital bank that has its headquarters in Stockholm, revealed that JP Morgan Securities and Morgan Stanley bought about three million Euros worth of Bitcoin-linked ETNs.
Bitcoin ETNs are a favourite with institutional investors who want to gain an exposure to the cryptocurrency.
In fact, several months after telling Bitcoin investors that “If you’re stupid enough to buy it, you’ll pay the price for it one day,” Dimon reversed his stand to a certain extent. In an interview with Fox News, an American news channel, he said that “I regret making” the comment that called Bitcoin a fraud.
Plenty of Naysayers from the Traditional Finance Sector
Ray Dalio is the founder of Bridgewater Associates, the world’s biggest hedge fund firm with US$160 billion in assets under management. Dalio holds the view that Bitcoin’s volatility makes it an ineffective “storehold of wealth.” He thinks that gold is a better option. According to him, “Bitcoin is a highly speculative market. Bitcoin is a bubble.”
He’s not the only one to hold a poor opinion of Bitcoin. Warren Buffett, the legendary investor and CEO of Berkshire Hathaway, the world’s largest financial services company by revenue, says, “People get excited from big price movements, and Wall Street accommodates…. You can’t value Bitcoin because it’s not a value-producing asset.”
Warren Buffet, Image from CNBC
Tidjane Thiam, the CEO of Credit Suisse, a major Swiss bank, has an equally poor opinion of Bitcoin. He says, “From what we can identify, the only reason today to buy or sell bitcoin is to make money, which is the very definition of speculation and the very definition of a bubble.”
Jack Bogle, head of Vanguard Group, an investment adviser with over US$4.5 trillion in assets under management says, “Avoid Bitcoin like the plague. Did I make myself clear?”
Bogle reasons that bitcoin has no underlying value while bonds have a coupon rate and stocks earn dividends. He says that the only reason that anyone buys Bitcoin is in the hope of selling to someone else at a higher price.
“Bitcoin may well go up to U$20,000,” (it did), “but that won’t prove I’m wrong. When it gets back to US$100, we’ll talk.”
Bitcoin is Seen as a Threat to the Banking System
Why do many of the biggest names in the traditional financial sector disparage Bitcoin? Could it be because they are scared that the cryptocurrency could lead to a loss in business for them?
Writing in Forbes, Panos Mourdoukoutas, a professor and Chair of the Department of Economics at LIU Post in New York, says that the big banks want to destroy Bitcoin before it destroys them.
He says that Bitcoin could become a “peoples’ currency” and replace national currencies. If that happens, governments will lose the ability to print money. This will take away their ability to control the economy. As a fall-out of this, the entire banking system could be severely impacted.
Traditional lending, which is controlled by the banking sector could be hit. Banks would be unable to earn an interest spread, one of their largest sources of income. A new “Bitcoin economy” that is based on peer-to-peer lending could emerge.
In fact, Bitcoin has several advantages over the fiat currencies that are issued by various governments. Firstly, the supply is limited to 21 million Bitcoin. This makes it similar to a currency that follows the gold standard. The supply is limited and cannot be increased at the whims of the central bank.
The other advantage that Bitcoin has over fiat currencies is that it doesn’t require a regulator to monitor it. Fiat currencies are closely watched by their respective central banks around the world. These institutions often take measures to influence the value of their country’s currency vis-à-vis that of others.
But in the case of Bitcoin, the cryptocurrency’s code establishes the rules. A distributed network checks for compliance with these rules, obviating the need for a central agency.
All this could sound like bad news for governments and the big banks.
However, it is not necessary that Bitcoin will replace fiat currencies. Apostolos Pittas, an adjunct professor of economics at LIU Post, thinks that the two could play a complementary role. He gives the example of how events played out in the immediate aftermath of the 2007-08 global financial crisis.
At that time, credit became very difficult to come by as the banks tightened their lending policies. In such a situation, Bitcoin could provide a method for borrowers to access funds for their requirements.
Wall Street has Plenty of Bitcoin Supporters as well
Ben Miller, who is the founder of Miller Value Partners, an investment advisory firm, has an impeccable track record. During his 35-year stint with Legg Mason, an investment management company, he managed a fund that beat the S&P 500 for 15 straight years.
Ben Miller, Image from Coindesk
A CNBC report states that a hedge fund that Miller now runs has about half its money in Bitcoin. Miller is looking for ways to mitigate the risk of holding such a high proportion of the fund in cryptocurrency. But he clarifies that it doesn’t necessarily mean that he will sell any of the Bitcoin that the fund owns.
Possibly the greatest testament to Bitcoin’s acceptance by the traditional financial sector is provided by Goldman Sachs. The investment banking firm, which is also the fifth-largest bank in the US by total assets, has acquired cryptocurrency exchange Poloniex.
Circle, a payments company backed by Goldman Sachs recently announced that it has taken over Poloniex, one of the world’s biggest marketplaces for digital currencies and tokens. The cryptocurrency exchange, which was launched in 2014, is also one of the largest over-the-counter markets for Bitcoin trading.
Bitcoin Prices in 2018 and Beyond
Tom Lee is a highly regarded Wall Street Strategist. He is the managing partner and head of research at Fundstrat Global Advisors, a research firm. His company is one of the few to provide an official price target for Bitcoin.
How does he calculate the cryptocurrency’s future value? His projections are based on factors like money supply growth, the ratio of alternative currencies like gold to money supply, and the amount of investment Bitcoin attracts.
According to Lee’s calculations, Bitcoin will reach a value of US$25,000 by the end of 2018. What about its long-term prospects? Fundstrat’s estimates are even more optimistic. According to the research firm, Bitcoin will be valued at US$125,000 by 2022.
