Paul Donovan, global chief economist at UBS Wealth Management, said investors looking to short the cryptocurrency were playing a “high risk” game, as no one knows when the so-called bubble will burst.
The warning comes after the value of bitcoin surged 25% following the launch of the first futures contracts by the Chicago Board Options Exchange (Cboe).
Bitcoin’s value has already surged 1,500% since the start of 2017.
“UBS believes cryptocurrencies are a bubble,” Donovan said. “However, being able to short a bubble does not make the bubble burst at once. Cash settled futures contracts on tulip bulbs began in Holland in 1636. The tulip bubble did not burst until February 1637.”
Bubbles are “by definition irrational”, Donovan added.
He said: “Predicting when a bubble will burst cannot use rational analysis. Ignoring a bubble is the best course of action.”
Lee Wild, head of equity strategy at Interactive Investor, also said the bitcoin bubble could have further to run than many people presume.
While the introduction of formal bitcoin futures improves the accessibility and legitimacy of the cryptocurrency, increasing the number of potential investors, the trade continues to come with a lot of risk.
“Already, rapid and substantial gains on cryptocurrency exchanges have drawn in even seasoned investors, who are now earmarking some portfolio cash for bitcoin,” Wild said.
He added: “Opportunities to profit from such extreme market conditions, akin to the dotcom boom, are rare indeed, but inevitably come loaded with risk. However, the music may have much longer to play on this one than people think.”
