In mid-October, the chief investment office (CIO) of UBS, which serves wealthy clients with up to SFr2.263 trillion of invested assets at the bank, chose to weigh in on the debate over whether cryptocurrencies are a valid investment asset class or not.
The UBS CIO toes a conventional line of thinking.
The UBS CIO analysts dismiss the chances of cryptocurrency ever becoming a widely accepted medium of exchange while governments demand tax payments in conventional currency, or even of becoming a dependable store of value.
They point to bitcoin’s collapse in value in early September, following Chinese moves against bitcoin exchanges, as “worse than the collapse in the value of the German mark at the start of the Weimar hyperinflation”.
For any ultra-high-net-worth clients pondering that brief decline in the value of one bitcoin – from $4,950 at the start of September to $3,226 two weeks later – in the context of its climb from $968 at the end of December last year to $6,323 at the end of October 2017, while wondering how much they might have made if their wealth manager had put a portion of their holdings into it – UBS has some stern words: “The sharp rise in cryptocurrency valuations in recent months is a speculative bubble.”
'Currency of crime'
And for any clients considering if they should maybe pass some of their wealth to a manager more willing to engage with cryptocurrency, UBS brands bitcoin as the currency of crime.
“It could be argued that greater banking regulation and transparency along with more sophisticated attempts to identify money laundering have reduced the supply of government-backed money to the illegal economy.
“If this is so, then it is entirely in line with historical precedent that those operating in the illegal economy will seek to create their own alternatives to government-backed money, and cryptocurrencies could fill that role.”
Euromoney has no knowledge whether Jamie Dimon, chief executive of JPMorgan, has a portion of his own riches managed by UBS, but we can almost sense him nodding furiously at all this.
It is against this background that the announcement on Tuesday from the world’s largest derivatives market place, the CME Group, that it intends to launch bitcoin futures in the fourth quarter of 2017 – pending all relevant regulatory reviews – looks so significant.
Since November last year, when the bitcoin price stood at a mere $740, the CME Group has calculated and published the bitcoin reference rate, which aggregates the trade flow of major bitcoin spot exchanges to deliver a daily dollar value.
It is now clearly responding to increasing investor interest in the cryptocurrency markets by launching a futures contract.
Terry Duffy, CME Group chairman and chief executive, says: “As the world’s largest regulated FX marketplace, CME Group is the natural home for this new vehicle that will provide investors with transparency, price discovery and risk transfer capabilities.”
The news follows the launch of exchange traded notes on Nasdaq for the second largest cryptocurrency, ether, and leads inevitably to speculation that regulated exchanges will develop more conventional investment products around this emerging asset class: exchange traded funds up next, perhaps.
When UBS CIO published its paper dismissing cryptocurrency two weeks ago, the market value of bitcoin was $74 billion and the UBS analysts compared that to the value of all Singapore cash and demand deposits of $134 billion-equivalent.
By the time CME published the launch of futures contracts on the last day of October, the market value of bitcoin had risen to $94 billion.
What’s more, the bitcoin spot market has also grown to trade roughly $1.5 billion in notional value each day.
No one much in the conventional banking industry seems to like cryptocurrency, but it is not going away. And the banks’ investing clients are embracing it. Researchers at Autonomous Next trace 124 funds now devoted in part or in whole to cryptocurrency, of which 90 have been founded this year.