Why Bitcoin is not a rational investment choice: Citadel

Investment group Citadel has released its Citation report for Q2 2017, breaking down its views on Bitcoin and other cryptocurrencies – which the firm believes is not a rational investment decision.

According to Citadel, the key problem with Bitcoin, and cryptocurrencies in general, is that there is no fair way to determine their true value, and that makes it almost impossible to make rational trading decisions.

In Bitcoin’s case, there is nothing to say that it is as valuable as it is, besides the fact that’s what people are willing to pay for it.

While online circles attribute Bitcoin’s value on key events – such as being adopted as a legal currency in Japan and its potential as a hedge to market uncertainty – Citadel believes its true value is in the technology behind it.

But in the same breath, that means there is nothing particularly special about Bitcoin in itself.

“The technology/algorithm behind Bitcoin, namely blockchain, is what we would consider to be a far more powerful platform than Bitcoin itself,” the group said.

Some uses of blockchain technology in the real world include:

  • Making payments (the most commonly known)
  • Supply-chain management (for example, tracking your food at every step from farm or sea to your table)
  • Smart contracts (including land registries)
  • Cloud storage
  • Online voting
  • Trade settlement
  • Payments of grants

The over-simplified assumption regarding Bitcoin, is that it is a currency, Citadel said – but if that were the case, traders would look at known models to try and determine its fair value – looking at “relative purchasing power parity, inflation differentials or interest rate differentials”.

But these values are impossible to ascertain for Bitcoin given the lack of central bank involvement, the absence of a domiciled area or any linking economic fundamentals, it said.

Were the Bitcoin has emerged with the greatest demand is among speculative traders.

“If we treat Bitcoin as a basic security, then there are no fundamentals that we can use to assess it, which leaves us unstuck when it comes to any appropriate valuation assessment,” it said.

“If the only way we can value Bitcoin is based on supply and demand, and if those using Bitcoin practically as legal tender make up just a small part of its demand, then we are left with a large portion of the current demand for Bitcoin coming from speculative traders.

“Furthermore, without a valuation framework, there is no way for short sellers to assess the value of the asset, which makes short selling unlikely given the significant risk. The lack of short sellers implies that the market has no natural balance, which could exacerbate or lead to bubbles, excessive valuation or to volatility.”

Simply put, there is no viable way to determine what price Bitcoin, or any cryptocurrency for that matter, should be trading at based on the usual valuation criteria at our disposal, Citadel said.

“The value in Bitcoin lies in the blockchain itself. This, in tandem with the problem that there is no clear way of putting an accurate valuation on Bitcoin (or any other cryptocurrency for that matter), does not instil confidence in making any kind of rational investment decision,” the group said.


Read: Finance minister Gigaba speaks out on Bitcoin regulation in South Africa

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Why Bitcoin is not a rational investment choice: Citadel