Citadel has released its Citation report for Q2 2017.
The report addresses issues affecting global investments, including property, South African equities, and Bitcoin.
Citadel has lauded blockchain technology, but considers cryptocurrency a bad investment due to its lack of intrinsic value.
Speaking to MyBroadband in June, Citadel Director George Herman described cryptocurrency as “nothing more than loyalty points for extravagant computer games with absolutely zero intrinsic value”.
“It is illegal for us to invest our clients’ money in an unregulated, over-hyped loyalty point system,” he said.
Citadel portfolio manager Mike van der Westhuizen and Citadel investment analyst Nishlen Govender have detailed the firm’s perception of the world’s biggest cryptocurrency and the “cryptocurrency bubble” in the Q2 report.
Blockchains and cryptocurrencies
Citadel states that Bitcoin has seen massive growth in 2017, and factors influencing this include:
- The adoption Bitcoin as an official medium of payment in Japan.
- The currency’s potential as an alternative asset to the traditional investment market.
- The resolution of an upcoming hard fork thanks to the SegWit2x scaling platform.
Citadel does not perceive the cryptocurrency to be a sound investment, but appreciates the technology behind it.
“The technology/algorithm behind Bitcoin, namely blockchain, is what we would consider to be a far more powerful platform than Bitcoin itself,” it said.
Blockchain technology is being explored by numerous companies and startups, and promises a next-generation platform on which to build decentralised applications.
Citadel said the difficulty in evaluating Bitcoin as a traditional currency lies in its lack of central authority, domiciled area, or any linked economic fundamentals.
The firm said it must also account for the cryptocurrency’s relatively small percentage of global trade.
Citadel said a large portion of the current demand for Bitcoin stems from speculative traders, and the lack of a valuation framework prevents short sellers from assessing the true value of the asset.
“The lack of short sellers implies that the market has no natural balance, which could exacerbate or lead to bubbles, excessive valuation, or to volatility.”
Bitcoin vs Blackberry
Citadel drew comparisons between Bitcoin’s price appreciation and that of Blackberry from 2006-2008, when the company saw growth of 525%.
The stock then crashed, following considerations of its fundamentals, strategic positioning, and the competitive landscape.
The investment firm said the value of cryptocurrencies is determined by hype and optimism, and not quantifiable measures or underlying traits.
“We believe that hype and subsequent price appreciation of select cryptocurrencies belies any of the underlying traits that we would look for in a sound investment, and rather feeds on optimism as to the future of cryptocurrencies,” said Citadel.
Other factors also prevent the company from perceiving Bitcoin as a good investment, including its slow transaction processing and resistance from governments.
The cryptocurrency is also not a useful store of value, as its value can fluctuate wildly.
The firm said that although Bitcoin is based on revolutionary technology, it could well be overtaken by newer technology or a cryptocurrency better suited to the global market.
“Bitcoin is to cryptocurrencies what the Motorola DynaTAC 8000X was to mobile phones,” it said.
“While the price can continue to run, the biggest risk is not missing out but rather in waking up to the realisation that Bitcoin isn’t the chosen one. Just ask BlackBerry.”