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#Market Strategy — 01.02.2018

Bitcoin: Innovation Versus Speculation

Guy Ertz

Cryptocurrencies like Bitcoin are new means of payment. Arguments suggest these are highly speculative but also promising technological innovations.

What are cryptocurrencies?

Cryptocurrencies are a new means of payment in digital mode. They use a so-called cryptography for security. (1) Bitcoin is one example of a cryptocurrency. It has the biggest market share of these currencies. Bitcoin can be used as a means of payment using a process based on “blockchain“ technology. It enables the transfer of value anywhere in the world where a blockchain file can be accessed. The process needs so-called “miners” (any individuals who can access a computer) who compiles transactions into “blocks” that are used to validate transactions. Miners are rewarded in Bitcoins. There is no entity in the process that has full control, but just part of it.

The Blockchain: example of a transaction


In late 2017, the value of Bitcoin was roughly 0.5% of global money supply and there were around 100 million transactions processed by Bitcoin (annualised) compared with approximately 80 billion transactions processed by the payment system VISA over the same period (2).

The pros and cons of cryptocurrencies


Proponents argue that cryptocurrencies make the transfer of value easier, cheaper and faster. There is no central authority or central bank that can actively influence the value of its own currency, for example via excessive money creation that can lead to a loss of purchasing power.


  1. Transactions are anonymous, which reduces the ability of governments to fight tax evasion, which increases the risk of money laundering.
  2. If digital currencies are used on a large scale, central banks would have less control over monetary policy and would lose revenue linked to money creation (“seigniorage”).
  3. Miners use economies of scale and have become very big. At this stage, there is a concentration of miners in China.
  4. Price volatility is quite extreme. It is thus very unlikely that cryptocurrencies such as Bitcoin with huge daily price volatility could act as a secure way of preserving value. Even for transactions, such volatility can be a serious drawback. Volatility reduces the likelihood that digital currencies can act as a monetary unit on a large scale.  
  5. Security issues (hacking, computer crashes) remain. At this stage, it is not possible to reverse transactions. The recent theft at the Tokyo-based exchange, “Coincheck” (Japan) of approximately 523 million units of a cryptocurrency (worth approximately $530 million) is a key example.
  6. The number of Bitcoins in circulation is limited (due to the underlying technology). Value is driven by supply and demand. Speculation can lead to enormous price fluctuations.
  7. There is no central entity that can intervene in the event of a problem or if regulations need tightening.
  8. Miners have large needs in computing power. This leads to quite extreme electricity consumption. A widespread use of cryptocurrencies is thus difficult to imagine using the technology in its present state.

The technological innovation behind cryptocurrencies

The initial aim of cryptocurrencies is to allow for cheaper and faster transactions in a less regulated environment. Blockchain technology makes this possible. It is indeed likely that digital currencies will be part of our future. They will probably be more regulated and it is possible that central banks will issue them.

Central bank cryptocurrencies might become a true innovation. An even more promising technological innovation is the widespread use of blockchain technology. Blockchain technology could be a disruptive technology in a number of areas. The first is in the world of payments as already discussed for digital currencies. Another area could be supply chain systems. Blockchain technology could help to secure and track supply chains in meat for example. It could also generate reliable records of ownership in areas such as luxury goods, land, real estate, or assist governments with census data (3) management. This could be the very start of a value creation process in today’s increasingly digital world.

The major issue with cryptocurrencies at this stage is that it seems that they are not bought for transaction reasons but rather for speculation. During the growing bubble observed recently, the demand fuelled by speculation typically outstripped supply.

Why the Bitcoin market is highly speculative

Cryptocurrencies are said to have been primarily created to allow a faster and cheaper means of carrying out transactions. The perception of scarcity relative to the expected need of such digital currencies has however attracted many speculators in a logic of supply and demand. There are arguments that suggest that such a view could prove vastly exaggerated.

In the case of Bitcoins, there is a limited amount of issuance at 21 million (limited by technology). It is however quite easy to create a new cryptocurrency and until recently there were about 50 to 60 new such currencies created per month (via “initial currency offerings”).

Logically, the market share of an individual currency such as Bitcoin fell from almost 80% to around 40% over the course of 2017. In other words, supply is much more elastic than initially thought.

Furthermore, central banks could also step in and create their own digital currencies that would offer users the same advantages and allow governments to make transactions more transparent, guarantee the safe receipt of tax revenues and fight criminal activities. Governments and central banks could limit usage over time. This has already been suggested by the authorities in South Korea. It is also likely that demand is limited by factors mentioned previously.

The launch of financial derivatives, such as futures contracts on Bitcoins is not necessarily a stabilising factor. Indeed, these contracts settle in cash without the use of Bitcoins. It is also interesting also to note that the first type of futures contacts were introduced in 1636 during the “Tulip mania” prior the crash in 1637 (4). The systemic risks in the event of a collapse of cryptocurrencies are however rather small given the total amount of cryptocurrencies in circulation.  

All in all, we expect a very volatile price evolution and possibly a price collapse when investors lose confidence if and when supply dries up. In conclusion, digital currencies are extremely risky.


Bitcoins (and other cryptocurrencies) as such cannot be traded nor kept in custody in a Bank but they are more and more used as underlying assets for derivatives products on listed Stock Exchanges and ETFs.

Considering their speculative and non-transparent nature, we do not recommend buying these products and we do not want to execute "buy" transactions even at the request of a client (reverse solicitation). Existing positions will have to be progressively unwound in agreement with the clients concerned.

(1) This technology ensures that transactions with cryptocurrencies can be carried out by the person that owns the currency and a unit can only be exchanged once.

(2) See V. Hofstätter « Bitcoin – An Overview », Raiffeisen Research, Dec 2017.

(3) Bernard Marr, “Blockchain is changing our world: Here are the best practical examples of how it is used in 2018” Forbes, January 2018.

(4) See “Futures Contracts in Bitcoin – Booming Futures?”, The Economist, December 16th 2017