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Bitcoin at $10,000 - So should private banks start to play?
29/11/2017 , John Evans, International Editor

The price of a single tulip bulb has just hit 10,000 guilders on the Amsterdam exchange as investors continue to pile in, hoping to make a killing amid the mania for these newly-found exotic blooms.

That would be a fairly accurate statement to make, say in 1630.

To bring things up to date, one only has to substitute a few words and the numéraire, for a single Bitcoin has just hit $10,000 for the first time.  So, in the latest financial mania deja vu, the crypto currencies, has likely sparked a bubble considered eerily similar to the Great Tulip speculation, South Sea bubble and Wall Street stocks circa 1929, many senior financial figures contend.

And a bubble it is: the value of the 16.7 million Bitcoin units in circulation, for example, has just exceeded a staggering $160 billion.

Still, note that the volume of Bitcoin transactions has not grown at a similar rate to its value, indicating that many of those buying it are speculating on its value rather than using the currency to buy anything.

Among senior figures who have warned about the bubble they assert that Bitcoin, and its various clones like Ethereum, have generated is Jamie Dimon, head of JP Morgan. He has famously publicly branded the cryptocurrency as a fraud.  Others have called dubbed them a Ponzi racket.

The cryptos are “just too dangerous” and “have Ponzi written all over them,” says the head of one London private bank,  speaking off the record.  “Consider if Bitcoin was a stock or an index of a market with this much volatility, any balanced or moderately aggressive investor would either never have invested as being too speculative or has take profits and run to the nearest hill.”

Indeed, one obscure firm touting the cryptos has nowadays taken to holding investment seminars on digital currencies – to rooms full of old age pensioners.

Only one private bank has so far publicly pinned its flag to the Bitcoin mast.  Switzerland’s Falcon Private Bank, which got thrown out of Singapore because of the Malaysian 1MDB wealth scandal, is to purchase and store Bitcoin on behalf of clients– a first for conventional banks. 

Elsewhere, Denmark’s Saxo Bank, which likes to play in the speculate wide of markets, has started to let clients to gain exposure to Bitcoin via exchange-traded notes.

Other private banks though are taking a very low profile, and even have issued some stern ‘elf and safety’ warnings. Certain banks none the less are believed to be quietly financing client interest in crypto-trading and managing any backoffice requirements; others are said to be more actively helping clients who want a crypto-gamble. Vontobel is launching futures products that will allow clients to bet against the price of Bitcoin, for example.
 
And JP Morgan was embarrassed by that Dimon comment when it appeared because its traders will start trading Bitcoin futures early next month. And this despite Dimon’s warning that he would fire anyone within the bank who initiates Bitcoin trading.
 
But such relatively cautious crypto-activity is nothing like the way that hedge funds have piled in. More than 90 funds focused on digital assets have launched this year, bringing the total of such crypto-funds to 124.

In addition, there are enough UK crypto-brokers out there to help these who want a gamble – like Etoro, Plus500 and Avatrade in the UK.  And there is no shortage of crypto-coins, with varieties like Litecoin, Ripple, Dash and Bitcoin Cash all available.

The attitude of most private banks is perhaps summed up by Coutts & Co.  In a recent investment note,  Monique Wong, a multi-asset investment manager, declared, “While we see long-term benefits from the technology involved, there are too many unknowns for us to include virtual currencies in our investment strategy”.

Still, private banks should alert to mainstream trends in client service which may be spawned by Bitcoin and blockchain technologies. A Swiss startup, SwissBorg. aims to shakeup wealth management services with a client-first approach powered by the blockchain and smart contracts. One of the platform’s main goal is to create a democratic, decentralised and professional “ecosystem” to efficiently manage cryptocurrency assets portfolios.

Its model is essentially a wealth management solution platform that offers highly optimised portfolio management services to its clients as well as integrated payment solutions in what’s described as a secure exchange.

Notwithstanding this, there’s another reason for the wealth sector to be nervous over cryptos, apart from the potential for a great speculative crash - the anonymity available for crypto-users when conducting online transactions.

As Coutts’ Ms Wong observed, cryptos have attracted criticism as a vehicle of exchange for black markets in drugs and a mechanism for money laundering and tax avoidance. Some believe that this will limit the growth of crypto currencies as governments crack down on these anti-social aspects.

At this stage, central banks seem more concerned by the short-term dangers such as a collapse in the cryptos which could trigger wider financial instability.

Bitcoin is not a currency but a mere instrument of speculation, Vitor Constancio, the vice president of the European Central Bank recently declared, saying, “Bitcoin is a sort of tulip...”  The EU itself has crushed an attempt by Estonia to introduce a cryptocurrency for Europe - leaving the euro unchallenged.

Finally, a couple of private investors this writer knows are making a steady, albeit unexciting income from crypto-currency and getting nervous about the huge volatility from trading directly in digital money.  They are leasing out the substantial private computing capacity they have in their homes to assist digital trading demand, and thereby also meeting power demand involved in crypto-mining as well.

In fact, estimates are that the amount of energy used by computers "mining" bitcoin so far this year is greater than the annual usage of almost 160 countries.  Research by energy tariff comparison service PowerCompare shows that the amount of energy expended in mining Bitcoin globally has already exceeded the amount used on average by Ireland and most African nations.

So, tulips in Amsterdam, anyone?

 

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