(24 DECEMBER 2017)Thought of the week :Betting on blockchain, not cryptocurrency casinos

UBS believes that cryptocurrencies meet most of the characteristics of a bubble. The one characteristic that is missing so far is that bubbles burst.

Cryptocurrencies will no doubt meet that characteristic in time. It is unwise to directly bet against a bubble, however. Bubbles are by definition irrational. Betting against a bubble is a rational bet in an irrational world. Only the lucky make money in such circumstances. It is safest to avoid a bubble entirely.

The value of a cryptocurrency depends on its being widely used to buy things with. If that does not happen, the cryptocurrency does not have value.

The underlying technology of blockchain does have value. This is independent of the cryptocurrency hype. This technology increases reliability and efficiency when deals are done. The UBS White Paper "Cryptocurrencies – beneath the bubble" looked at how investors might get exposure to blockchain. Computer power and computer security are obvious requirements to operate blockchain. Companies that engage in complex transactions could experience efficiency and lower costs.

One thing that blockchain does do is remove the need for trust in deals. "Don't trust, verify" has become a blockchain slogan. The economics of a world with less trust are more difficult to predict.

By UBS

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