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The crypto currency market has surged past a $1 trillion market cap. But is this fair valuation or is it a bubble? UBS thinks they know the answer.
Not your grandma’s bubble
The crypto market jumps back and forth hundreds of billions of dollars a day. In recent months, the net movement has been upward. When BTC’s price passed $20,000, few thought that it would double in only a few weeks’ time.
But don’t sell the farm just yet. UBS analyst Mark Haefele said that while the risk of the bubble may be real, everything is (probably) going to be okay.
In a note on Friday Jan. 15, 2021, Mr. Haefele said that, “all bubble preconditions are in place.” Financing costs are at record lows. New participants are entering the market (perhaps from Robinhood?), and low interest rates have left market participants thirsty for returns.
The result is that investors have nowhere to turn but equities (and cryptocurrency). With interest rates negative in parts of Europe, and CD’s scraping the bottom of the barrel, not investing in equities is little better than holding cash.
That’s not to mention the stimulus money pumping out of the US government, to businesses and investors’ pockets, and then back into businesses, valuations and skyrocketing.
Inflated currency, but inflated valuation?
Haefele said that crypto markets, as well as IPOs and SPACs, are the hottest they’ve been, “in two decades.” Investors eagerly awaited recent IPO launches by Airbnb (which jumped 155% on the first day of trading) and DoorDash (which opened 78% higher than launch price) despite the lull in the hospitality industry.
SPACs (Special Purpose Acquisition Companies) are companies that do not have any operations, but work like a shell allowing investors to buy-in on private equity. These entities are often used in acquisitions and mergers.
Nonetheless, Haefele says that the “irrational exuberance” seen in these markets is not out of control.
The chief investment officer of global wealth management says the likes of Guggenheim’s Scott Minerd have predicted Bitcoin may hit $400,000. Despite this incredible jump in price, almost 10x the current Bitcoin valuation, a bubble has yet to set in.
On a Historical Backdrop
Haefele points out that the overall price growth of the market is driven by large-cap companies. Take out the likes of Facebook, Google, Amazon and other major tech giants, and the S&P 500 only rose 6% in 2020. This means that room for growth across many sectors remains.
Likewise, taking into account low interest rates and other indicators, stocks should be valued high, and they still look cheap compared to bonds.
Still, the executive warned about buying into narratives. Though sector narratives may be accurate, they do not always predict the price of individual companies.
Remember 2000
Haefele gave the example of the dotcom bubble in 2000. The narrative that the internet would change life as we know it was spot on. That didn’t stop the industry from crashing. In this way, narratives can be, “deceptive.”
One can only be reminded of the promises of bankless, decentralized finance and egalitarian equity promised by blockchain technology. Just because a technology may change the world, it does not mean individual companies or coins are actually worth their valuations.
Finding Alpha
Haefele reiterated that the excitement was based in fact. He said investors may catch the upside of the IPO/SPAC/Crypto trends, but they must diversify for safety’s sake.
Of course, there are few industries with great potential for growth. He pointed out fintech (which includes crypto), greentech, and healthtech. UBS is also bullish on emerging markets, he said.
Since cryptocurrency is international, permissionless, and new, one could argue it is emerging.
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