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A chief economist at UBS, the largest bank in Switzerland, says cryptocurrency has a fundamental flaw. Bitcoin’s fixed supply could cause the collapse of its value and spending power, making it unattractive to use as a currency, he claims.
A UBS Chief Economist Says Bitcoin’s Fixed Supply Is a ‘Fundamental Flaw’
Paul Donovan, Chief Economist of UBS Global Wealth Management, explained last week why people won’t want to use bitcoin as a currency. UBS is the largest bank in Switzerland.
“The debate about bitcoin and other crypto tends to be very passionate. Crypto supporters say that economists are just dinosaurs, and economists say that crypto supporters are just selling a bubble.” He also pointed out that bitcoin and other cryptocurrencies have been volatile in price terms.
“If we look objectively at the issue, I think an important question is whether bitcoin and other crypto could be currencies,” the UBS chief economist continued, emphasizing, “And, I don’t think that they can.”
He explained that “One of the key reasons for that is that a currency has to be a stable store of value. With a proper currency, you got a genuine certainty that the basket of goods you can buy today is going to be the same as the basket of goods that you can buy tomorrow.”
However, he asserted that “With bitcoin and other crypto, you don’t have that certainty.” The UBS chief economist explained:
It’s all down to a rather fundamental flaw with crypto. In order to achieve stable spending power, a store of value, the balance of supply and demand needs to be maintained.
“So, if demand for proper currency goes down, the central bank can reduce supply, maintaining the balance and therefore maintaining spending power,” the UBS chief economist opined. However, he did not differentiate between cryptocurrencies with a fixed supply, like bitcoin, and other coins without a fixed supply, including stablecoins.
Donovan continued:
But if demand for crypto goes down, and self-evidently it does, the supply cannot go down to maintain balance. So, the value, and the spending power, immediately collapses.
“It might collapse for a short period of time or it might collapse for a long period of time. But people are unlikely to want to use something as a currency if they got absolutely no certainty about what they can buy with that tomorrow,” he concluded.
Many financial strategists, on the other hand, have said that bitcoin’s volatility falls as adoption increases. Fidelity recently pointed out that BTC’s volatility is down about 50% from a few years ago. In July, BTC’s volatility hit a three-year low. Billionaire investor Bill Miller said bitcoin becomes less risky the higher the price goes.
UBS recently published guidance on bitcoin investing. “While we wouldn’t rule out further price increases,” the bank warned: “We are also cognizant of the real risk of one losing one’s entire investment. Investors in cryptocurrencies must therefore limit the size of their investments to an amount they can afford to lose.”
What do you think about the UBS economist’s view on bitcoin? Let us know in the comments section below.
Image Credits: Shutterstock, Pixabay, Wiki Commons
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