Bitcoin bubble could lead to 'destructive' consequences, UBS says

Key Points
  • The bitcoin bubble could be "destructive" in the long-term, UBS economist Paul Donovan said
  • Donovan said there could be a "negative wealth effect" and this could be "disruptive" if more people get involved in cryptocurrencies
  • His warnings come after the U.S. Securities and Exchange Commission issued a statement on the dangers of investing in cryptocurrencies and initial coin offerings
Need to think of economic consequences when bitcoin bubble bursts: UBS
Need to think of economic consequences when bitcoin bubble bursts: UBS

The bitcoin bubble could be "destructive" in the long term if more people keep pumping money into the cryptocurrency, UBS analyst Paul Donovan told CNBC on Tuesday.

UBS has previously called bitcoin a "speculative bubble." And Donovan, who is the wealth management global chief economist at the investment bank, has compared the cryptocurrency's rise to the 17th century tulip craze in the Netherlands that saw the price of the flower skyrocket and crash.

Donovan explained that the rising investment in cryptocurrencies from retail investors could have damaging consequences.

"I dislike bubbles because bubbles sucker in large numbers of people and take their money and give it to a small number of people. And that's very destructive in the long term. And I think this is one of the problems that we've got," Donovan told CNBC in a TV interview.

"We are now having to start to think about what's going to be the economic consequence when this bubble bursts. 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."

The economist explained that so far there are a small number of people involved in cryptocurrency trading so if the bubble does burst, the damage is "spread quite thinly." But if the rising interest in cryptocurrencies continues, then the risk will increase too, Donovan said.

Regulators are also beginning to warn on the dangers of cryptocurrencies and the initial coin offering (ICO), a way for a start-up to raise money by issuing new digital coins.

Ever heard of an ICO? Here's what that means
Ever heard of an ICO? Here's what that means

"As with any other type of potential investment, if a promoter guarantees returns, if an opportunity sounds too good to be true, or if you are pressured to act quickly, please exercise extreme caution and be aware of the risk that your investment may be lost," U.S. Securities and Exchange Commission Chairman Jay Clayton said in a statement Monday.

There have already been a handful of cases of ICOs that have gone wrong. CNBC recently reported on a start-up called Confido that raised nearly $375,000 through an ICO, with investors unable to track down the founding team after making an investment. Since then, however, the company has promised to refund investors.