Wall Street's dismissal of bitcoin becoming harder

Miles Johnson
Roslan Rahman | AFP | Getty Images

Fear of missing out, or "fomo", is often said to be one of the most powerful psychological forces in finance. As retail investor interest in bitcoin and other cryptocurrencies has surged, investment professionals have often cast confused and disapproving looks towards what many believe is a wild and speculative bubble.

In a year when the price of bitcoin has risen almost fivefold to beyond $5,500, there are signs of tentative interest from mainstream finance. The question is whether cryptocurrencies are gradually being accepted as a legitimate asset class, a cynical attempt to cash in on a bubble or a mix of both.

Ami Ben David, co-founder of venture capital fund Spice, argues that there has been a noticeable shift in the attitude of traditional finance towards cryptocurrencies in the past 12 months, driven by "fomo".

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"A year ago they didn't know about it, six months ago they thought it was a scam and now they realise they simply just don't understand it and are starting to get nervous and want to learn about it," he says. "There is definitely an element of fomo. People have been told by their advisers, 'Don't touch it! It's a bubble!', and now they are upset they might have already missed it."

Once met with bafflement in financial circles, bitcoin appears to have graduated to even being discussed as a fully fledged "asset" in some of the more rarefied offices of Wall Street and the City of London.

Last week the bosses of both JPMorgan and Citigroup were asked questions about bitcoin, while the white-shoe law firm Davis Polk was moved enough by client demand for more information on cryptocurrencies to organise a telephone briefing on the topic.

"In our practice we've seen fund managers busy looking for ways to satisfy growing investor demand for this asset," Joe Hall, partner at Davis Polk, said on the call.

One London-based private banker describes how they have been having a growing number of requests from ultra-high net worth clients who are curious about investing in cryptocurrencies who would never have considered it a year ago. "It is getting to a point where we can't ignore the interest," they say. "We don't want our clients to go near this stuff, but we will have to find a way to make it available if they keep asking".

But debate continues between sceptics, often from traditional backgrounds in banking and money management who believe the new world of cryptocurrencies will come crashing back down to earth, and true believers who proclaim that bitcoin and associated technology will revolutionise finance.

Regulators round the world are also taking a harder line over cryptocurrencies, a point underlined last week when Jamie Dimon and Larry Fink said governments would crush bitcoin before long. The finance chiefs also argued at a conference in Washington that the only real value in bitcoin is as a tool for criminals and money launderers.

While many investors remain convinced that bitcoin is a mania that will end in tears (a recent Bank of America Merrill Lynch survey of investors concluded bitcoin was the most crowded trade in the world today) a growing number of better-known figures in finance have gone public to say they are at least dabbling in the area.

Mike Novogratz, a former macro hedge fund manager at Fortress and a figure on Wall Street, recently announced that he had not only made what he appeared to suggest was at least a $250m profit from buying bitcoin and ether, but that he was also trying to launch a dedicated hedge fund to trade cryptocurrencies.

However, Mr Novogratz also has displayed the opportunistic cynicism of a trader in his approach to bitcoin, happily predicting a speculative gold rush rather than the value of bitcoin would rise based on its justified fundamental value. "This is going to be the largest bubble of our lifetimes," he said in a recent television interview. "You can make a whole lot of money on the way up, and we plan on it."

Kyle Bass, a well-followed hedge fund manager who made money betting against subprime mortgage, has also reversed his previous scepticism about bitcoin and now believed that it was now "here to stay".

In spite of growing acceptance that investors and bankers need at the very least to learn the basics of the wild world of cryptocurrencies and the block chain technology that underpins them, few are any closer to developing a plausible way in which to value these highly volatile coins.

And many still remain far from convinced, in spite of growing curiosity they see around them. "Bubbles nearly always occur when there is something new, or relatively new in the economy," UBS's wealth management team wrote in a briefing to clients last week, invoking one of history's most famous speculative manias. "Change, by definition, creates uncertainty about the future. The tulips of the 17th century were new and exotic".

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