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JPMorgan's quant guru says cryptocurrencies have 'some parallels to fraudulent pyramid schemes'

Business Insider | Sep 14, 2017, 01.19AM IST

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Reuters/Fabrizio Bensch

JPMorgan quant guru Marko Kolanovic says cryptocurrencies have "some parallels to fraudulent pyramid schemes."

JPMorgan's global head of quantitative strategy has joined his boss, CEO Jamie Dimon, in the growing legion of anti-cryptocurrency crusaders.

In a client note on Wednesday, Marko Kolanovic said that cryptocurrencies as a whole have "some parallels to fraudulent pyramid schemes." The comments come a day after Dimon called bitcoin a "fraud" that was "worse than tulip bulbs." He even went as far as to say he'd fire any trader that transacted it for being stupid.

Kolanovic highlighted bitcoin in his comparison, noting that while the initial mining of coins requires minimal effort for a disproportionally large share of profits, there are diminishing returns in the future, until the gig is up. This same dynamic is at the core of a pyramid scheme, he said.

But Kolanovic's analogy doesn't end there. He also said that one way to circumvent this potential dead end is to simply create a new cryptocurrency altogether. This would be akin to the new blockchain-based instruments popping up all the time - with red-hot ethereum being the most successful example.

"While we don't know whether the price of cryptocurrencies will go up or down in the near-term, the history of currencies, governments and financial fraud tells us that the future for cryptocurrencies will likely not be bright," Kolanovic wrote.

For an idea of just how popular bitcoin is, look no further than its more than 300% surge this year - although it's experienced weakness in recent sessions, declining in earnest following Dimon's comments. The cryptocurrency has also been pressured by negative headlines out of the United Kingdom and China.

On Tuesday, the UK's financial watchdog, the Financial Conduct Authority, warned investors about the risk associated with initial coin offerings, the cryptocurrency-based fundraising method.

Earlier this month, China banned ICOs, and more recently, rumors that it might ban cryptocurrency trading altogether have escalated - a Caixin report out Friday suggested that China would shut down its domestic exchanges.

On a broader basis, cryptocurrencies aren't the only area of the global marketplace that gives Kolanovic pause. He's also publicly lamented the continued shorting of volatility through the use of exchange-traded products linked to the CBOE Volatility Index -or VIX.

In a report from late July, Kolanovic said that record-low volatility should "give pause to equity managers." He even compared the strategies that are suppressing price swings to the conditions leading up to the 1987 stock market crash.

So while JPMorgan isn't going as far as to call the end of these increasingly tenuous market trends, they're stressing caution as investors chart new territory. Everything seems fine when everyone is making money. But when the first signs of unease hit, just how exposed do you want to be? That's the questions investors should be asking themselves.

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Markets Insider

Bitcoin has surged more than 300% this year, but has faltered since JPMorgan CEO Jamie Dimon called it a fraud.

Get the latest Bitcoin price here.

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