Investing.com - Despite losing more than 40% of its value in recent weeks bitcoin prices still have a lot further to fall, according to analysts from Capital Economics.
As policymakers in South Korea once again indicated on Thursday that they are considering shutting down domestic cryptocurrency exchanges Capital Economics also dismissed claims that bitcoin or other cryptocurrencies could replace established currencies as “rubbish”.
"Claims that cryptocurrencies will replace established fiat currencies are rubbish; our view is that bitcoin is a bubble," Capital’s research note said.
Cryptocurrency enthusiasts argue that fiat currencies - money issued or backed by central banks - are intrinsically worthless.
"Of course, modern paper currencies don't have any intrinsic value either. But unlike dollars, for example, bitcoin is not backed by a credible authority, such as a central bank or government," the note countered.
The note said that the latest bitcoin price falls “suggest that the bubble is bursting” although because the price was still ten times higher than it was a year ago, it still had a long way further to fall.
Capital argued that the surge in the price was not being driven by any strategic world view but more a simple belief that it will continue to rise in value.
“Most people are buying bitcoin, not because of a belief in its future as a global currency, but because they expect it to rise in value,” the note said.
“Accordingly, it has all the hallmarks of a classic speculative bubble, which we expect to burst. When it will fully burst is anyone’s guess and prices could yet rise again, before they fall further ahead,” they added.
Capital noted that even if the bubble does burst it should not have too great an impact on the global economy because the amount of money invested in cryptocurrencies is still relatively small and they are not held by institutions.
The note also acknowledged that the blockchain technology which underpins cryptocurrencies will have a lasting impact.
“Not only could it transform the financial system – by removing the need for banks to act as intermediaries – but it could have applications elsewhere, for example, in maintaining tax and hospital records. A particularly interesting element is smart contracts, which could transform supply chains and trade finance,” the note said.