Volatility in cryptocurrencies is hampering their wider adoption

Bitcoin has soared in value in recent months, rising on January 8 this year to almost $42,000

A physical imitation of a Bitcoin is displayed at a crypto currency shop in Istanbul. AFP

Concentrated holdings and thin market volumes are driving volatility in cryptocurrencies, which is one of the greatest barriers to their adoption in real world transactions, according to Swiss private bank Lombard Odier.

Gains in crypto assets such as Bitcoin, the world’s biggest digital currency, have attracted institutional investors looking for inflation havens, but the concentrated nature of their holdings – often by early adopters known as “whales” – makes them highly speculative, Stéphane Monier, the bank's chief investment officer said in a research note on Tuesday.

Bitcoin and other cryptocurrencies, he said, meet some of the standard economic definitions of a currency as they are hard to counterfeit and both durable and portable.

“However, they fail on two other criteria: they do not yet offer a ready means of payment and, because of their volatility it is difficult to argue that they provide a store of value, even if some physical currencies can also struggle on these [factors] too,” Mr Monier said.

Bitcoin has experienced a meteoric rise in the past few months, rising on January 8 this year to almost $42,000 and then slumping below $33,000 in a matter of days. It has swung wildly since, and was trading 2.9 per cent higher at $37,207 on Tuesday, with no clear catalysts.

“The last time cryptocurrencies soared, in the space of just under one year, the price of Bitcoins fell from $19,783 on December 17, 2017 to $3,300 on December 7, 2018,” Mr Monier said.

However, the main difference between the 2017-18 boom and bust and this year’s record highs is that public interest is now “backed by cryptocurrency holdings with more traditional institutional investors and hedge funds looking for a cushion from inflation”, he added.

Bitcoin’s recent wobbles have turned the cryptocurrency spotlight onto other digital coins including Ether, whose gain this year has outstripped the performance of its bigger rival. Ether has risen 87 per cent in 2021 compared with Bitcoin’s 28 per cent jump.

“Bitcoin has been in a range for the past few weeks, which gives time for capital to rotate” into other digital assets, Bloomberg cited Vijay Ayyar, head of business development with crypto exchange Luno in Singapore as saying.

JPMorgan Chase strategists have said $40,000 is a key level for Bitcoin, flagging the risk of a further drop unless it climbs back above that price soon.

The volatility of digital currencies has attracted greater scrutiny from regulators and central banks, some of whom view them as a threat to monetary stability as they cannot be subjected to the usual checks on capital flows.

“And while every transaction is transparent, they are also anonymous,” Mr Monier said.

"The real value in cryptocurrencies, we believe, is not the currencies themselves but the potentially disruptive blockchain technology that makes them possible."

The UK’s Financial Conduct Authority, which described cryptocurrencies as “highly speculative” last week, said “if consumers invest in these types of product, they should be prepared to lose all their money”.

Christine Lagarde, president of the European Central Bank, also said last week that Bitcoin needs to be regulated at a global level.

While some regulators are critical of investing in digital assets, others are laying out ground rules for their trading.

Dubai Financial Services Authority, the regulator of the emirate's financial free zone, is drawing up a framework for regulating digital assets, such as cryptocurrencies.

"We will look to regulate a wide range of digital assets, including security tokens, utility tokens, the various types of exchange (or payment) tokens, such as cryptocurrencies [and] the firms that provide relevant services in these markets," Peter Smith, the head of strategy, policy and risk at the Dubai Financial Services Authority (DFSA) told The National, on Tuesday.

Abu Dhabi Global Market's Financial Services Regulatory Authority published its first guidance on the topic in 2018 and in-principal approval to a number of crypto asset exchanges in 2019, including BitOasis, Digital Assets Exchange, Matrix Exchange and MidChains, among others. The Central Bank of Bahrain also launched rules governing the provision of crypto asset services in the kingdom in 2019.