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ECONOMY| 2021.01.19

2021: Just getting started or the end of the bitcoin rally?

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A new year begins, and experts are divided over their forecasts for the fate of the world’s most famous cryptocurrency—bitcoin—with its current total market pricing exceeding 600 billion euros.

The bitcoin virtual currency was founded in 2009. Since then, supported by decentralized blockchain technology, it has only gained popularity as a form of payment and investment asset, and continues to make headlines.

2020 was the best year in the history of cryptocurrency. During the pandemic, investors have been eager to increase their bitcoin positions. Its price didn’t stop rising until it recently surpassed 28,000 and suffered the correction anticipated by analysts around the world, passing the baton to other top 10 digital currencies like ethereum, bitcoin cash, litecoin and ripple.

To date, warnings from the European Central Bank (ECB) and the Financial Conduct Authority in the United Kingdom, as well as the tendency to tighten regulation in the US, stopped bitcoin’s bull run on the stock market in its tracks.

Cryptocurrencies: complex and volatile

We spoke to Alberto Matellán, Chief Economist at MAPFRE Inversión, about the potential of this type of assets and the keys to understanding what is at stake when investing in virtual currencies.

Question (Q:) Is it a good time to invest in what many have termed a millennial stock?

A: I believe that, in general, investment should never depend on timing, and this is especially true in this case. It is a question of what concept you have of investment. At MAPFRE, with our tradition of security and putting people first, investment is a tool for preserving capital, for saving. Therefore, seeking return on the inputs and outputs of a highly volatile asset that does not generate productive cash flows does not fall into our concept of investment.

It is true that for millennials, it is a new and attractive concept. However, whenever we talk about “millennial trends” (understood as those born in the last decade of the twentieth century), I think we have to separate two things, especially in the area of investment. One thing is the new trends, which come from a structural change in our production system, like the entire digital sector. In this case, it is a fact that millennials understand and assume the trends more quickly than older generations.

It is a generation that has been raised amid the immediacy of information. That is why, based on my several years of experience as a professor of finance to young people, I think that interest in very volatile and novel assets tends to be diluted with age.

What I do believe in—and this is a great opportunity for MAPFRE—is the use of alternative channels. The so-called millennials are very willing to use digital channels for their investments, and we must provide that. But when they stop to think about their savings, family assets or retirement, they may choose more stable assets.

Q: What is your view of this highly volatile form of investment, and the fact that the ECB and FCA do not recommend it because it poses a risk to investors and they link it to questionable businesses?

A: Like everything, cryptocurrencies have a good and bad side. And one of those is that they are beyond the control of the authorities. Let us not forget that central banks have a monopoly over the creation of money, which gives a huge amount of power to both them and governments that have access to data on the circulation of that money. If there is money that the public authorities cannot control, then, on the one hand, such money lends itself to being used in activities that are illegal and harmful to society. On the other hand, it creates a space for freedom, which is very quickly shrinking elsewhere.
In any case, it is valid as a concept. However, I would never recommend investing in an asset that is not subject to the controls of the financial authorities. Investors, especially retail investors, cannot have a deep understanding of all the assets in which they invest. That is why the financial authorities play a role in filling in for that knowledge and providing the investor with security.

Q: How do these assets fit in with the current environment of uncertainty? Do you think bitcoin will establish itself as an investment alternative for retail and institutional investors?

A: In the short-term, it is difficult to see it happening. Although it is an asset that makes many headlines, there are factors that make it difficult. Firstly, because I do not consider it an asset as such, but an alternative currency. A currency that, moreover, is not backed by any central authority, but only by the fact that its supply is limited. This solves one of the conceptual problems of central bank money, which is that it can be created out of nothing, thus diluting its value. But at the same time, it does not have the other features that money as a concept should have, such as being generally accepted (particularly for the payment of taxes), or being backed by real assets, something that is unfortunately not the case with fiat money at present. Thus, for example, its limited nature is intended to make it similar to gold, an asset class that is used as a safe haven from inflation, but which in this case is supported by an intrinsic value.
In addition, currencies themselves are not a valid asset class in all cases, but only in very particular situations. For example, I may be interested in having dollars or euros if I am going to buy assets (this time they are “assets”) as bonds or shares in that currency. However, the currency itself is a highly risky and volatile type of investment, which is seldom recommended.

Q: Did you ever think a trend toward investing in cryptoassets that can be stored on a computer would burst onto the scene?

A: Again, following on my argument in response to previous question, it is not an asset, but an attempt to create a currency, an alternative money. In this sense, most of the world’s money is already a mere accounting entry in a computer system. The difference is that, for cryptocurrencies, this accounting entry is the money itself, whereas for traditional money the entry is the reflection of a right to claim bills or coins. Thus, cryptocurrency can be stored on digital media (such as a pendrive or hard drive) as if it were a wallet, with all the same implications. For example, if I lose my pendrive, I lose my digital money.

Therefore, the fact that it is stored on a computer system makes it untrusted by non-computer experts. They think, often quite rightly, that they may be exposed to computer theft or hacking, as in fact has happened in the past. It is true that traditional money is also exposed to theft, but the general perception is that it is easier to establish security systems for traditional money than for cryptocurrencies. Moreover, by escaping all control, cryptocurrency is very difficult to claim once it has been stolen, while for example, a fraudulent card payment is relatively easy to undo.
On the whole, we come back to my argument in response to the first question: buying something that does not generate cash flows or have intrinsic value does not appeal to me as an investment. Whether it’s stored on a computer or not, the important thing about the investment is that it’s productive. If I buy something just because I think it will rise in price, that is distorting the concept of investment.

Q: On a different note, place your bet: What are your recommendations and what should we expect in 2021?

The trend of cryptocurrencies will be to rise in value compared to traditional currencies for several reasons. Firstly, because central banks are printing money in large quantities in response to the consequences of the pandemic, and thus reducing its value. Secondly, because the total amount of cryptocurrencies is limited; and thirdly, because they are increasing in popularity. However, its enormous volatility will remain. Because of this, and all the reasons stated above, I do not think it reasonable to recommend cryptocurrencies as a method for saving. In an environment like the current one, any retail investor would recommend leaning toward productive assets and, as much as possible, real assets, which serve as a safe haven from massive currency printing.