Barring economic collapse on a “dystopian” scale, investors should steer clear of Bitcoin as a means of diversifying their portfolios, according to an internal client report published on Jan. 24 by JPMorgan.
Citing concerns that cryptocurrencies like Bitcoin are “an emerging financial asset displaying bubble-like properties,” similar to gold in the 1970s and tech stocks in the 1990s, “Blockchain and Cryptocurrencies 2019: Adoption, Performance and Challenges,” by JPMorgan strategist Jan Loeys, said that even if there is a complete loss of confidence in major currencies like the dollar, euro, and yen, as well as traditional reserve assets like gold, there are “more liquid and less complicated instruments for transacting, investing and hedging, in part due to the scale afforded by fiat currencies’ legal tender status.”
The report also predicted that Bitcoin could drop as low as $1,260 if the current bear market continues. As of Jan. 25, BTC stood at $3,568, while JPMorgan predicts that it will hit $3,200 in February.
One problem facing cryptocurrencies like Bitcoin include the fact that for at least the near future it is likely to be accepted as payment mostly by small businesses and individuals rather than major retailers and large corporations, said the report. The same is true for cryptocurrency investing, which is “dominated by individual investors, as participation by financial institutions has faded,” it said.
JPMorgan Chase CEO Jamie Dimon has been one of the most vocal skeptics of Bitcoin over the past five years, famously calling it “a terrible store of value” and a “fraud” that he doesn’t “give a shit about.”
There are two main roadblocks to cryptocurrencies’ value as a diversification tool, Loeys’ report said. One is the difficulty of predicting the risk vs. return of an “emerging financial asset displaying bubble-like properties.”
The second is the fact that cryptocurrencies have not been able to outperform equities during periods of significant decline like the summer of 2015 and February 2018.
“During the S&P 500’s 10 worst months of the past five years, for example, Bitcoin has only rallied twice [and in] six other instances, its losses were often multiples of those in equities,” the report noted. “For comparison, U.S. Treasuries rallied in nine of these 10 episodes, the yen in eight instances, and gold in seven.”
It added: “[I]f the future indeed entails dystopia, then for consistency, investors and corporates should be making broader and deeper preparations beyond just acquiring cryptocurrencies.”