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How Sustainable is the Cryptocurrency Rally?

8 January 2018Economics
  • Despite its short and highly volatile track record, cryptocurrencies have made their way into the limelight – but is this sustainable or will it be short-lived?
  • While Citi analysts are not prepared to entirely dismiss cryptocurrencies, they are not yet in a position to be considered a stable asset class and there are significant hurdles to widespread adoption. As such, it is impossible to say which (if any) of the current cryptocurrencies will be an investable asset.

    Past performance is no guarantee of future results, real results may vary.

  • Trading volumes and values in Bitcoin – the cryptocurrency with the largest market share – soared in late 2015 with a rise in CNY-denominated trading, probably fueled by CNY devaluation.
  • Although trade volumes in Ethereum picked up in June 2017, Korea's ban on domestic initial coin offerings and margin trading in cryptocurrencies late last year has dampened sentiments – pushing trade volumes down again.
  • Apart from the short history of cryptocurrencies, there have been a number of significant pullbacks and daily moves of 10% up or down are relatively common in the major currencies while much larger moves are frequent in the smaller ones.
  • With this in mind, Citi analysts are of the opinion that cryptocurrencies are too volatile to serve either as a medium of transaction or as a store of value – it is more than six times as volatile as the most volatile emerging-market currency.
  • As a result, Citi analysts believe markets are possibly undergoing a cryptocurrency bubble that may eventually fade. Citi analysts believe that the timing of the bubble peak is unclear, although government action could be a trigger.

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