The Bitcoin bubble may have negative economic consequences in the future, if more money keeps pouring into the cryptocurrency, warns UBS economist Paul Donovan.
Speaking to CNBC, Donovan (who has earlier likened the Bitcoin frenzy to the 17th-century Dutch tulip mania) professed his “dislike” for bubbles, and claimed the Bitcoin bubble could prove destructive in the long-term. Growing investment means Bitcoin may end up taking the wealth of many (mostly retail investors), and depositing it in the hands of a few when the bubble bursts.
“We are now having to start to think about what's going to be the economic consequence when this bubble bursts”, he explained. “And you've got a transfer of wealth, you've got a concentration of wealth, you've got a negative wealth effect — it potentially is disruptive.”
Donovan pointed out that the number of people involved in cryptocurrency trading is relatively small, at present, which means that in the event of the bubble bursting, the damage will be “spread quite thinly”. However, this stands to change as cryptocurrencies explode in popularity, drawing in more investors and thus amplifying the risk.
Bitcoin is currently booming, as are most other cryptocurrencies, with Ether and Litecoin having recently smashed through all-time highs.
However, as the prices skyrocket and FOMO-driven investors clamber to grab a piece of the Bitcoin pie, ‘bubble’ fears are beginning to intensify. Recently, Coinbase, one the of the largest cryptocurrency exchanges in the world, issued a statement imploring its users to invest with care, and even Charlie Lee, founder of Litecoin which has risen over 8000% this year, has urged everybody to “invest responsibly”.
Donovan’s statement also comes on the heels of a warning issued by the chairman of the United States Securities and Exchange Commission (SEC), Jay Clayton, who advised investors to be careful when putting money into cryptocurrencies and initial coin offerings which may be in violation of securities laws. He added that since the crypto market is unregulated, the SEC may not be able to “effectively pursue bad actors or recover funds” if things go awry.