As Bitcoin’s price soared to the highest it’s ever been overnight, UBS economist Paul Donovan was tweeting about tulips in reference to the impending doom of cryptos.
In the tweet, the first of many in his Twitter cryptocurrency tirade, Donovan said:
“Amsterdam 1636. Cash-settled futures markets in tulip bulbs start. Prices soar. Amsterdam February 1637. Tulip bubble bursts.”
Donovan is UBS’s global chief economist. He expanded his tulip analogy to CNBC Thursday, seeming to honker down on it over the CME Group’s move to introduce Bitcoin futures contracts by the end of the year. He told the news outlet:
"The idea of not physically delivering the product was rather shocking to contemporaries (as it turns out, the market crashed before bulbs could have been delivered anyway – bulbs were lifted in June 1637 for physical delivery). Traders met in groups (in taverns), called 'Colleges.' Think of the taverns as the cryptocurrency exchanges of their day."
Donovan’s UBS thinks CME's plan for bitcoin futures mirrors the moment just before the 1637 tulip bubble crash.
What’s up with the tulip analogy?
When pundits like Donovan and JP Morgan’s Jamie Dimon talk about their worries over cryptos, especially Bitcoin, they talk about tulips.
They are literally referring to the tulip plant. When tulip plants first hit the market in 1593 in Europe, they were so eye-catching, people were willing to pay high prices. The market initially boomed as people speculated on their prices, but a series of events caused them to become less attractive and panic selling ensued.
Crypto pundits see the same happening for these digital currencies.
This is not the first time Donovan has spoken out against Bitcoin. It seems that the higher Bitcoin’s price goes, the more feverish becomes his pitch that it’s a bubble similar to the dot.com bubble, and those tulips.
He’s taken the time to not just tweet his disdain for Bitcoin, or speak to the press, but he’s also penned several reports outlining his logic.
In September, he wrote:
Crypto-currencies are very unlikely to be used for the world's most important activity. Over a third of economic activity in the OECD goes toward paying taxes. Governments that print money will not accept crypto-currencies for tax. Thus, crypto-currencies are useless for the biggest payment in any economy.
Donovan has said he sees the relatively high volume of cryptocurrency turnover, against limited real-world use, as meaning buyers are in search of speculative gain. He thinks there are very many people who never intend on using their cryptos to make real-world purchases.
Not just tulips, but bubbles too
We’ve constantly heard how the crypto space is a bubble. This is another argument Donovan has consistently used in shooting down Bitcoin. Donovan’s UBS said in a white paper released in October that unlike in government-backed currencies, no cryptocurrency has an economy behind it.
"With each of the other characteristics of typical bubbles in evidence, a twenty-fold increase in bitcoin prices in just two years, and an absence of any fundamental economic backing, cryptocurrency prices are almost certainly a bubble." – UBS, Cryptocurrencies, Beneath the Bubble
Donovan also says that cryptos are useless as a store of value. He points out that each cryptocurrency's supply is relatively fixed, but demand swings wildly. As a result, values swing wildly.
All this plays into Donovan’s stance that cryptocurrencies will likely never become a mainstream means of exchange. The fact that the CME Group is entering the crypto space, and other financial pundits continue to throw their weight behind it, Donovan’s view hasn’t budged. He said:
“Unless governments choose to abandon their money monopoly, cryptocurrencies will never be used for the majority of economic activity. More crypto-currency hyperinflation is likely. Bubbles are not currencies.”