Allianz: Bitcoin’s Intrinsic Value ‘Must Be Zero’

Via Allianz Global

The weeks before Christmas 2017 marked the heyday of bitcoin speculators. Bitcoin futures made their trading debut at two of the world’s leading options exchanges – the Chicago Board Options Exchange (CBOE) and the Chicago Mercantile Exchange (CME) – and prices in the spot and futures market hit an all-time high on 18 December, closing in on USD 20,000.

Yet soon thereafter, prices plummeted and never recovered: at approximately USD 10,000 at the end of February, one bitcoin is now worth about half of what it was only two months ago.

So is this the end of the hype about bitcoin as the future of global currencies? Probably not yet, since speculation in bitcoin and similar instruments appears set to continue for some time. Yet from our perspective, bitcoin has serious flaws: its trajectory resembles a textbook case of a financial-market bubble, and it is lacking several key qualities that would qualify it as a currency.

Bitcoin’s bubble behaviour

The hyperbolic price movements of bitcoin since its early 2009 inception have been very bubble-like in nature. When one compares bitcoin’s five-year price momentum (adjusted for inflation) against that of previous asset bubbles, bitcoin dwarfs the runners-up – the Mississippi bubble of 1720 and the Amsterdam Tulip Mania of 1637. And among more recent examples, bitcoin far surpasses the IT bubble of the 1990s and the Japan bubble of the 1980s.


Moreover, bitcoin ticks all of the boxes that we consider to be essential criteria of any asset bubble:

  • “New-era” thinking. Bitcoin is perceived to be an entirely new kind of currency and a monetary innovation in the internet age.
  • Overtrading. Trading volumes have increased by almost fivefold in the last five years, according to BIS data.
  • Ultra-easy monetary conditions. Accommodative policy is still in place globally, despite a series of rate hikes by the US Federal Reserve.
  • A lack of financial regulation. The “Wild West” bitcoin environment is only gradually being addressed by regulators around the world.
  • The launch of related financial instruments. New products related to the bubbling asset class are popping up – from CBOE and CME futures contracts to the launch of “ICOs” (initial coin offerings).
  • Rising leverage. Not only has private-sector leverage increased to record highs globally, but leveraged speculation in bitcoin is increasing.
  • Swindles. Bitcoin has become the instrument of choice for many criminals, thanks to its ability to exist entirely outside of traditional banking channels.
  • Significant overvaluation. Many other asset classes are pricey in today’s market, but bitcoin’s valuation seems to be without peer.

This brings us to a key question: what is the fair value of a bitcoin? In our view, its intrinsic value must be zero: a bitcoin is a claim on nobody – in contrast to, for instance, sovereign bonds, equities or paper money – and it does not generate any income stream. Admittedly, one could make the same argument about gold, but gold has been widely accepted by humankind as a thing of value for more than two-and-a-half thousand years – compared to less than a decade for bitcoin. 

One could argue that bitcoin’s price developments are indicative of a certain amount of overheating in other asset classes:

  • The S&P 500 index’s cyclically adjusted price-to-earnings ratio is around twice its long-term average.
  • Spreads in many high-yield and investment-grade bonds globally are razor-thin.
  • House prices are significantly overvalued in many markets that were not severely hit by the global financial crisis in the first place – notably Canada, Sweden, Australia and Hong Kong.

Nevertheless, despite the fact that bitcoin is not the only overvalued asset class, it appears to us that bitcoin mania is a textbook-like bubble – and one that is probably just about to burst. 

So would the end of the bitcoin bubble matter for investors in conventional asset classes, such as fixed income or equities? We don’t believe so. In our view, bitcoin’s demise would have few spillover effects on the “real world”, since the market for this cryptocurrency is still quite small in size. As a result, we believe that the risks to financial stability stemming from bitcoin are negligible – at least as of today.

Not a currency – and not ESG-friendly

So if bitcoin is flawed enough not to be considered a proper asset class, can it at least serve the purpose of being a currency? We believe the answer is no for several reasons:

  • First, given the high cost of conducting transactions in bitcoin, it could only be used for paying big-ticket items.
  • Second, given bitcoin’s tremendous price volatility, it does not qualify as a numeraire – a commonly accepted benchmark used to assign value to goods and services.
  • Third, considering all the arguments we have previously presented, it seems all but impossible to use bitcoin as a store of value.

Moreover, if we consider environmental, social and governance (ESG) factors, bitcoin is certainly not an instrument we favour. The energy consumption related to bitcoin production in a single year is equivalent to the annual energy consumption of Ireland – a worrisome trend that seems to be rising.

Blockchain has its benefits

Despite our concerns about bitcoin, its underlying blockchain (or distributed-ledger) technology clearly has potential merits – not least of which is blockchain’s ability to reduce significantly the costs of verifying transactions and networking. This is prompting a range of financial institutions, including central banks, to explore blockchain more closely and to evaluate practical applications – including conducting financial transactions.

It is this aspect of cryptocurrencies in general – and not the specific cryptocurrency du jour – that we as an asset-management firm find to be the most interesting.


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