Analyst Exposes Fatal Flaw in Bitcoin

Bitcoin had another tough day of trading on Friday, declining 6.7 percent to less than $4,000. Bitcoin investors are hoping the world’s most valuable cryptocurrency is approaching a market bottom after a horrendous 2018, but UBS analyst Paul Donovan says this year’s sell-off may only be the beginning.

In a new interview with CNBC, Donovan says cryptocurrencies like bitcoin will never become actual currencies because they are missing one of the major attributes required of a currency.

“The main problem with these things, the absolute fundamental flaw, is that they’re never going to be a store of value,” Donovan says. “Every economist knows the store of value is about balancing supply and demand, and with cryptocurrencies, you cannot control the supply in response to the drop in demand.”

While bitcoin bulls argue that 2018’s struggles are simply growing pains and that bitcoin has had multiple declines of at least 80 percent in the past, Donovan and other bitcoin bears say trading action in bitcoin over the past year and a half has been textbook market bubble behavior.

“Right from the start of the hike in late last year, it was fairly obvious that this was going to end badly, unfortunately, for some of the people who weren’t protected by any kind of regulation and got sucked into the process,” he says.

Donovan says the U.S. government and other global regulators are a major obstacle standing in the way of mainstream bitcoin adoption.

Earlier this week, U.S. Securities and Exchange Commission chairman Jay Clayton said the agency still isn’t seeing sufficient progress being made in ensuring the integrity of the cryptocurrency market and protecting investors. The SEC has repeatedly denied applications for bitcoin exchange-traded funds to trade on major U.S. exchanges, and Clayton said he is still not comfortable with the idea of a bitcoin ETF.

“What investors expect is that trading in the commodity that underlies that ETF makes sense and is free from the risk of manipulation,” he said.

Earlier this month, Bloomberg reported that the Department of Justice is investigating potential bitcoin price manipulation in 2017 involving Tether and cryptocurrency exchange Bitfinex.

Until the SEC is satisfied that bitcoin is safe for investors, funds like the Bitcoin Investment Trust (ticker: GBTC), which is now down 78 percent year-to-date, will…

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