Dubai bank Emirates NBD has issued a warning against crypto investments

While cryptocurrency is gradually being accepted by investors and financial enthusiasts, the Dubai-based bank Emirates NBD (ENBD) cautions against investments in Bitcoins and another cryptocurrency because their volatility makes them risky.

Why is Dubai-based Emirates NBD cautioning against cryptocurrency investments?

According to Emirates NBD (ENBD) recent update webinar, the warning was due to the volatile nature of BTC and other cryptos.

Institutional participation in cryptocurrency has seen marked growth over the past few years because of its social utility and increasing speculative appeal.


Georgio Borelli, Head of the asset allocation and quantitative strategies at Emirates NBD

“Most of you know cryptocurrencies because of their extremely high level of volatility and speculative appeal. The digital currencies volatility must subside for its broader adoption within finance,” Borelli explaining that both of these key factors are marred by cryptocurrencies’ volatility.

This high level of volatility will have to subside substantially for cryptocurrencies to be universally accepted in society, for portfolio managers to accept cryptocurrencies in their portfolios and for investors, in general, to be able to ascribe a fair value to them.

However, despite the high volatility, cryptocurrency usage has increased sharply this year. In fact, some institutions have defied the risks of cryptocurrencies to gain profits. Digital currencies derive their social utility from their transactional value, which depends on the number of transactions, he explained.

“Given that cryptocurrencies are tied to the number of transactions, as we have seen, they hence fluctuate with the business cycle”, Borelli added. “We, therefore, come to the conclusion that cryptocurrencies are cyclical macro assets which raises the question of whether they have space in an institutional investors’ portfolio. Our answer is as of today, no, not yet. Not all Bitcoin risk can be explained consistently by market factors.”

While some might argue that because the crypto risk is unique, Borelli also drew a comparison between crypto volatility and the volatility of other risky assets, like equities and credit. In order for the two assets to be equal, investors will need to ensure a reasonably positive return. However, BTC and other cryptos are currently unable to offer this security.

Borelli concluded his presentation by outlining some of the challenges that cryptocurrencies will face in the near future, which include the sustainability of mining some digital currencies and anti-money laundering and counter-terrorism financing regulations. He also noted that the future of crypto is still uncertain. In fact, he pointed out that not all cryptos will survive and be universally adopted. Similarly, it is yet unclear how regulations will affect how cryptos function.

“In a not too far distant future, central banks are going to issue digital currencies or CBDCs and we don’t know yet what kind of challenges these currencies are going to pose for today’s cryptocurrencies,” he continued.

Along with this, it remains unclear what role CBDCs will play as more countries have begun to explore their use. Notably, China has begun testing its digital yuan, but other countries are still in the growth or research phase. As AZCoin News reported, as of 30 June 2021 there were a total of 1.32 million DC/EP trial sites around China.

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