Bitcoin surged more than 1,000 percent in 2017, and investor optimism may be favouring speculation over fundamentals, Wells Fargo Investment Institute said in a report dated Monday.
“The latest cryptocurrency price movements are most likely due to investor speculation and may subject these assets to violent price responses to any market, technological, security, or regulatory developments in the digital currency space,” Wells Fargo said.
One key problem: Cryptocurrencies such as Bitcoin don’t have an industry-wide accepted valuation method, said the report, which was titled “Cryptocurrencies like Bitcoin: Opportunity or Bubble?.”
Traditional currency valuation methods, such as interest-rate parity, doesn’t apply to cryptocurrencies because they aren’t tied to any single country’s interest rates, Wells Fargo noted.
Bitcoin supply and demand
It added, however, that cryptocurrencies are subject to supply and demand like other assets, and it said attempts to provide a valuation can focus on the “initial utility feature,” or the demand to use it for transactions on the peer-to-peer network.
But it calculated that Bitcoin’s implied U.S. dollar transaction volume on the peer-to-peer network, based on the number of Bitcoin in circulation, its market price in U.S. dollars and the time needed for transaction data to be confirmed, was around $137 billion an hour. It compared that figure to estimated 2017 U.S. holiday retail sales of around $680.4 billion.
That implied that Bitcoin trading wasn’t tied to real-world transactions.
Wells Fargo also noted that Bitcoin’s total market capitalisation had exceeded the market cap of 87 percent of the S&P 500 index companies at end-January.
It pointed, as well, to the cost per transaction on the Bitcoin network, which has surged to more than $100 from $7 at the beginning of 2017.
”The elevated market capitalisation and transaction costs point to a Bitcoin rally boosted primarily by market speculation, rather than by the cryptocurrency’s utility function as a method of payment,” it said.
Bitcoin’s end date?
Wells Fargo also pointed to a factor that could diminish Bitcoin’s attractiveness severely in the relatively near future: The estimated “end date” for the network to deplete the “coin reward” for mining is around June 2020, after which , there will be no new supply of Bitcoin.
”Network participants will only rely on transaction fees to continue to verify transactions on the peer-to-peer network,” it noted. “That could cause ‘miners’ to leave the network and thereafter reduce the security and acceptance of Bitcoin.”
Store of value?
To be sure, Wells Fargo noted that there were a few cases where Bitcoin could act like, or even be preferred as, a “store of value,” similar to gold’s traditional function.
”For example, for those living in areas in which it is believed that the local banking and finance industry is corrupt, and physical property is subject to seizure, use of Bitcoin as a store of value can be a preferable option,” Wells Fargo noted.