The bitcoin fever is already reaching proportions comparable to the famous gold rushes of the 19th century – but is there anything behind the hype?
The cryptocurrency market – with bitcoin as its most notable representative – has seen extremely strong growth of late. There are currently more than 8,500 different cryptocurrencies, says OP Financial Group’s CEO, Asset Management Tuomas Virtala.
“The combined market value of different cryptocurrencies is approximately USD 150 billion, and bitcoin accounts for around 60 per cent of the total”, Virtala explains.
The growing numbers are surely one major reason why some large global banks have announced an intention to invest in bitcoin. Brokering financing and financial instruments is part of the ethos of financial institutions, Virtala points out.
“Should banks get involved as brokers and build up significant market shares, the prospect of earning a commission on transactions becomes rather appealing. It is also worth noting that JP Morgan, for example, has hinted at plans to launch its own cryptocurrency”, he adds.
OP does not deal in cryptocurrencies
OP has not invested in cryptocurrencies and refrains from speculating on their value or prospects.
“We are, however, monitoring the situation and continuously educating ourselves about this market as well”, Virtala says.
So why has OP stayed off the cryptocurrency bandwagon? According to Virtala, OP wants to be a trusted keeper of its customers’ assets and make sure to always respect its customers’ wishes on how those assets are invested and not speculate with them. OP’s customers have not warmed to cryptocurrencies either.
“We have not seen significant demand for investment in cryptocurrencies from any of our customer groups so far”, Virtala explains.
“The value and frequent changes in the price of cryptocurrencies also seem to be largely based on speculative factors, which make the price of bitcoin, for example, very volatile. The wildly fluctuating prices combined with the fact that the real value of the currencies is so difficult to forecast or measure make cryptocurrencies less likely to end up in professional investors’ portfolios.”
Electricity-hogging and favoured by crooks?
And then there are the ethical dilemmas. We already know that bitcoin mining consumes huge amounts of electricity.
“This is difficult to justify by the social benefits of bitcoin and cryptocurrencies in general – of which there are barely any – which makes the enterprise problematic from an environmental perspective”, Virtala says. The lack of regulation also makes cryptocurrencies more vulnerable to money laundering, terrorist financing and other criminal abuse than markets regulated by a central bank.
However, cryptocurrencies cannot be dismissed outright as meaningless or as the ramblings of a marginal group. Their number, market value and daily trading volume alone are enough to challenge these views, Virtala notes.
“I also find it a positive sign that even large, traditional banks have taken a relatively open-minded approach to cryptocurrencies and the risks and opportunities involved in them. Current cryptocurrencies, however, are still a dubious investment in many ways.”
Potential in blockchains
One of the commonly acknowledged benefits of cryptocurrencies is the development of blockchain technology.
“Blockchains have already been successfully used for other purposes, and there is significant potential for more extensive use,” Virtala says.
Blockchain-based asset tokenisation gives investors access to non-liquid assets classes that might otherwise be beyond their reach.
“Tokenisation stands to automate significant components of the process of managing non-liquid investments relative to, for example, limited partnerships. It is important to remember, however, that an investment in a cryptocurrency does not confer any rights to the potential value of the underlying blockchain.”
The best way to eat an elephant is one bite at a time
Ted Roberts is the CEO of a Finnish-Swiss start-up called Realstocks and has more than 20 years of experience in the financing market. He believes that one of the biggest benefits of blockchain technology is its potential to “chop up” a loan, for example, into smaller portions, all of which have exactly the same properties and are subject to the same terms. Smart contracts offer a cost-effective way to automate contract terms.
“Tokenisation makes it possible to convert a secured mortgage for EUR 100 million, for example, into security tokens worth, say, EUR 10 each”, he explains, and adds that such security tokens can then be developed by trading them on the stock exchange.
“This naturally leads to better liquidity,” Roberts explains, pointing out that the process is by no means automatic but requires the establishment of an ecosystem between different operators first.
Hiding behind anonymity is not an option
According to Roberts, one of the biggest problems with cryptocurrencies from the perspective of the financial market is the anonymity of their owners: financial institutions have a duty to know their customers.
“Central banks around the world are contemplating creating their own digital currencies at the moment, and such currencies, or at least limited versions of them, are likely to begin cropping up in, for example, the retail-banking sector.”
Roberts knows that cryptocurrencies may have appeal in a world where states print money at record rates and inflation looms over the economy.
“Such circumstances make people look for a safe place, and some may be attracted to bitcoin in this sense – despite its not having any real value underneath.”
Many feel that the decisions of Goldman Sachs and JP Morgan to start trading in bitcoin have given cryptocurrencies much-needed credibility.
“The banking business is based on providing a service, brokerage in this instance, without taking a position on the ethics of the underlying investment instruments”, Roberts concludes.