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Digital assets: bear market would be bitcoin’s acid test

Bitcoin has received no validation stronger for diehard fans than Jamie Dimon calling it “worthless”. JPMorgan, which he runs, is exactly the kind of dominant, regulated institution cryptocurrencies are intended to disrupt.

“He keeps commenting on cryptos”, says Oleg Giberstein, a London crypto entrepreneur, “but the market is proving him wrong”. Bitcoin jumped to around $60,000 last week, close to historic highs, anticipating long-awaited exchange-traded fund launches.

The combined value of cryptos monitored by the CoinGecko website rose to $2.5tn, around five times the market worth of JPMorgan. Despite Dimon’s broadsides, his bank gave wealth management clients access to cryptocurrency funds this summer.

Lex will examine digital assets in a daily note this week because they are edging into the financial mainstream. Giberstein’s comment is only half-right, however. The popularity of cryptos is nudging some regulated institutions into providing dealing services. But a real market test will only come with a prolonged downturn.

This column’s position on bitcoin is that its utility is limited to secrecy (some of it illegal), dissent (some of it justified) and speculation (it is always with us). In the latter guise, bitcoin is a good barometer of exuberance precisely because it is a clumsy transactional medium.

The price of this supposedly uncorrelated asset roughly halved last year when the S&P 500 fell by a third. It bounced back swiftly when bailouts and vaccines flowed. It is polluting and fabulously unstable: around five times more volatile than the S&P 500 index by one measure.

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Our hunch is that bitcoin would stay glued to the linoleum through a prolonged bear market. A sharp retreat by equities is possible if governments and central banks bungle the switch from free-handed stimulus to rate rises and tax hikes.

It is a moot how well bitcoin, a legacy asset lacking an intrinsic yield would recover from this. Other handier cryptos are emerging. But even if it becomes a historic footnote this flagship crypto would have shown that digital assets can be widely held. Central banks, rallying in defence of fiat money, are therefore experimenting with electronic versions using the same blockchain technology.

Ultimately, monetary authorities are likely to impose regulated digital assets on Dimon and his successors. This would reduce transaction costs and the margins they yield to banks. That would be a far cry from the decentralised disruption bitcoin evangelists envisage. But its effects would be far-reaching nevertheless.

The Lex team is interested in hearing more from readers. Please tell us what you of the rise cryptos and the broader asset bubble in the comments section below.

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