Michael Cembalest, chairman of investment strategy for JPMorgan, is skeptical about bitcoin and other cryptocurrencies.
In a commentary published Feb. 3, the strategist said his remarks were his own opinions, not those of JPMorgan Chase. (JPM)
First, there’s the issue of whether bitcoin is a store of value. Cembalest says a digital store of value could exist.
But bitcoin doesn’t meet two of his criteria: volatility settling into a range consistent with store of value investing, and that value going up or remaining stable when systemic risks and/or inflation are rising.
“Bitcoin’s volatility continues to be ridiculously high, and its volatility often rises when equity market volatility is rising too,” Cembalest said.
“This volatility could be the byproduct of bitcoin concentration: 2% of bitcoin holders own 72% of its value.”
Another source of volatility for crypto currencies is pump-and-dump maneuvers, he said. “Such schemes and other activities that would be prohibited in regular securities markets are by definition not illegal on decentralized blockchains.”
Cembalest said he didn't see a valid valuation model for bitcoin or other cryptocurrencies.
He doesn’t buy the argument that bitcoin represents a viable medium of exchange for commercial transactions.
“Bitcoin is currently not a medium of exchange other than in a few niche cases,” Cembalest said. “The declining number of bitcoin transactions per day and the spikes in execution costs bear no resemblance to any functioning fiat currency.”
The Defense Department and companies like Microsoft (MSFT) “found [it] to be too weak for cyber-protection, decommissioning its use in the early 2010s.”
“Some analysts note that bitcoin uses a ‘secure hash’ algorithm which is more than 20 years old,” he said.
Some companies are using blockchain technology in their operations, Cembalest notes. But that “adoption often has nothing to do with crypto valuations,” he said. “For these firms, the blockchain is simply another cost-saving or productivity tool.”
The excitement surrounding bitcoin reminds Cembalest of that for hydrogen.
“Some hydrogen use cases make sense, but energy investors are pricing in a lot more than that,” he said. “And that’s how I feel about crypto valuations too. Some crypto use cases will endure, but valuations assume broader and faster adoption.”
Remittances and permissioned, private blockchains with little to no cryptocurrency impact are the most likely use cases for bitcoin, Cembalest said.
“The success of permissionless public blockchains which could yield income for token holders is the big question,” he said, adding that is the most coherent argument he has seen.
“But the higher the access fees, the higher the impediments for users who would migrate to the blockchain to reduce costs in the first place," he said. "I don’t know how that tension gets resolved.”
