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Crypto holds key to future despite high risk; may be store of value but know this first: JP Morgan strategist

Contary to popular belief, bitcoin also has high wealth concentration. Only 2% of bitcoin holders own 72% of its value. “For all the libertarian anti-elitists out there, that’s even worse than the concentration of US household wealth,” JP Morgan’s Michael Cembalest said.

Crypto holds key to future despite high risk; may be store of value but know this first: JP Morgan strategist
An illustrative picture of bitcoin. (File Photo: Reuters)

Crypto is a highly risky asset and may not be as egalitarian and decentralised as it is assumed to be, yet it is an innovative asset that holds potential, says JP Morgan’s Michael Cembalest. Cembalest, who is the chairman of market and investment strategy for JP Morgan Asset Management, compared investing in crypto with investing in futuristic projects like hydrogen economy or metaverse, which are innovative ventures despite concerns over scalability and valuations.

Cembalest said questions remain such as how much money it will make and for whom, yet the argument over crypto’s store of value looks credible to him. “Some crypto use cases will endure but valuations assume broader and faster adoption. I’m tempted by the store of value thesis given the degradation of money but have no crypto valuation tools to time my investment, and its volatility and market concentration are hard to manage,” he added in the note.

High wealth concentration: 2% of Bitcoin holders own 72% of its value

Bitcoin’s volatility continues to be ridiculously high, and this volatility could be the byproduct of Bitcoin concentration, Cembalest said, adding that about 2% of Bitcoin holders own 72% of its value. Bitcoin is the largest traded crypto currency in terms of value. “For all the libertarian anti-elitists out there, that’s even worse than the concentration of US household wealth: it takes 10% of US households to get to 70% wealth, rather than just 2%,” he said in the note.

The arguments over crypto’s relevance arise at a time when tons of money have been pouring into crypto and blockchain investments by retail investors as well as marquee investors and venture capitalists. In terms of total investments by VCs in crypto, about 40% of the investment was in trading, investing and lending businesses. “The year 2021 was a particularly strong year for capital raising; average pre-IPO valuations for crypto and blockchain investments are now much higher than for VC investments overall,” Cembalest added.

Is crypto an alternative to fiat currency?

Cembalest also wrote about looking at crypto in the light of accumulating debt in the developed world, which is rising at a pace that dwarfs the debt seen during the 2008 crisis. He and in such times it would be strange if some alternative to fiat money did not appear on the scene. “The developed world has drowned itself in debt and fiat money, and at a pace that dwarfs anything seen in the wake of the financial crisis in 2008,” he said.

“These are the kind of economic degradations that accompanied the end of prior world reserve currencies during the last millennia, and which accompanied the end of reserve currency status during ancient times as well. Central Banks and Treasuries have created a massive confidence void, and it would have been strange if some alternative to fiat money didn’t appear on the scene,” he added.

In his concluding remarks however, Cembalest erred on the side of caution and said he would not invest his own money in crypto. “I would take another look if crypto valuations and the companies linked to them plummeted to deeply distressed values. But until then, the most widely discussed use cases and the valuations at which they’re trading are still the “stuff that dreams are made of”, he said.

(The suggestions/recommendations around cryptocurrencies in this story are by the respective commentator. Financial Express Online does not bear any responsibility for their advice. Please consult your financial advisor before dealing/investing in cryptocurrencies. )

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