‘Impractical’ Asset to Own
The bank’s strategist Francisco Blanch says the world’s largest cryptocurrency is “impractical” as a store of wealth or a payments tool. Some industry experts and analysts, such as venture capitalist (VC) Bill Gurley, believe BTC is similar to gold as a secure place to keep money.
However, Blanch and his colleagues still disagree. The exceptional volatility that accompanies Bitcoin (BTC) makes it difficult to act as a store of wealth as some analysts claim. Other than that, the only reason why investors would be looking to invest in the cryptocurrency is for sheer price appreciation.
“Bitcoin returns are sensitive to increased dollar demand. A net inflow into Bitcoin of $93mn may result in a 1% price rise, while the analogue for gold is more than 20 times higher,” Blanch wrote in a note sent to the bank’s clients.
Bitcoin’s nature makes the cryptocurrency artificially scarce. The world’s largest cryptocurrency undertakes the “halving” process every four years. It means that the block reward given to BTC miners for processing transactions is cut in half.
According to Blanch, the demand swings are key to price moves as supply is constantly decreasing with each halving event. Ethereum (ETH), the second-largest cryptocurrency by market capitalization, is more attractive than BTC as it is crucial for the growth of the decentralized finance (DeFi) sector.
“Ethereum has similar ESG issues as Bitcoin, even if it may have better tools to tackle them. DeFi is interesting, but small and faces challenges in going mainstream. We think it hasn’t a compelling lending proposition at present, and its diversification makes it challenging for the mass market,” BofA analysts further wrote in a note.
Cryptocurrencies are made by the mining process, where computers network to form a blockchain network as a transaction processor and validator. This process consumes a lot of electricity, leading toward a low Environmental, Social, and Governance (ESG) score for BTC.
It’s estimated that about 20% of the world's Bitcoin mining takes place in China's Xinjiang region, meaning the mining process is closely associated with Chinese coal. Blanch calculates that “should prices rise to $1mn, Bitcoin may turn into the world’s 5th largest emitter, surpassing Japan.”
BTC price is trading below the $55,000 mark after setting the all-time high of $61,700 on March 14.
Bank of America strategists believe Bitcoin shouldn’t be seen as a store of wealth or a payment method. Instead, the demand is what is driving the price of this cryptocurrency higher.
About the Author
Mariliana has an MSC in consumer analytics and business strategy. She has a special interest in fast-moving industries and big data.