Bank of America analysts took a rather devastating swing at bitcoin prices, saying they are not backed by hard fundamentals but by fund flows, big-name buyers and miner rewards cuts, according to a market-moving report entitled “Bitcoin’s Dirty Little Secrets.”
There is no good reason to own bitcoin “unless you see prices going up,” the analysts said. They also said that CO2 emissions tied to the world’s biggest cryptocurrency are equal to that of Greece.
Bitcoin prices hit a new all-time high of $61,742.42 on March 13 but fell back as much as 9 percent as investors scrambled to take profits and weighed a Reuters report that India will propose a law banning cryptocurrencies.
Bitcoin has risen more than 1,000 percent in the past year, thanks in part to increased institutional and corporate interest along with speculative demand. Bitcoin miners, brokers and companies have invested in the token, and their fortunes are increasingly tied to it, according to Bloomberg.
Institutional buyers including Tesla, Square and PayPal have in recent months announced big purchases of the digital coin. These buy-ins, Bank of America says, were responsible for bitcoin gains.
In comparison, BofA argues that while gold needs around $1.86 billion worth of transactions to increase its price by 1 percent, bitcoin only needs $93 million of net flows to trigger such a change. This means the bitcoin price rally is largely on thin liquidity.
Here are 10 important issues Bank of America pointed out about bitcoin:
According to the BofA report, bitcoin suffers from a concentration ownership ratio with about 95 percent of total bitcoin in circulation owned by just 2.4 percent of addresses with the largest balance. In comparison, the latest Fed data suggests that the top 1 percent of Americans control about 30.4 percent of all household wealth in the U.S. This” makes it impractical” to have bitcoins as a payment mechanism or even an investment vehicle.
Even after a decade of trading, bitcoin remains very volatile, which makes it difficult to use it as a means of payment or store of value, Bank of America analysts said in the report. Its volatility is even worse than many emerging markets’ foreign exchange.
“Bitcoin volatility is well above that of FX, gold, and even silver. Bitcoin volatility in 2021 is already the second highest in history year-to-date.”
More than 80 percent of bitcoin is exchanged in dollars, while other currencies such as the euro, Japanese yen and the South Korean won account for 19 percent, 0.01 percent and 0.43 percent of bitcoin trading, respectively.
Capping bitcoin output at 21 million coins and halving its supply growth every four years has created an artificial scarcity of cryptocurrency. This has made the price rise susceptible to announcements of major institutions buying and miner reward cuts being followed by bitcoin upward moves. Bitcoin trading also remains limited by its complex settlement process (crypto mining) and it’s slow. Bitcoin can handle about 14,000 transactions per hour compared to Visa’s stated 236 million transactions per hour.
Bitcoin transactions have remained steady at an average of 287,000 per day as prices rose over the last four years. This means that much of the growth in crypto trading has not resulted in increased bitcoin liquidity.
“While renewed interest is apparent, much of the increased institutional focus has translated into rising prices (and thus transactional values) and not into rising Bitcoin liquidity and not even in new Bitcoin addresses,” BofA said.
While correlation does not mean causation, bitcoin prices has been found to correlate with Google searches with increased or reduced searches acting as warnings of price movements.
“Some investors have pointed to internet searches as a potential leading indicator of cryptocurrency moves. The last two large Bitcoin rallies have been accompanied by a large increase in online interest in crypto,” BofA said.
Bitcoin is a major environmental disaster as its prices are directly correlated to its energy consumption. Its environmental score is very poor. The bitcoin network emits about 60 million tons of carbon dioxide — the same as Greece.
“Plus, a $1bn fresh inflow into Bitcoin may cause CO2 to rise by the equivalent of 1.2mn ICE cars,” the report said. “Should prices rise to $1mn, Bitcoin may turn into the world’s 5th largest emitter, surpassing Japan.”
With a number of central banks already talking about launching their own retail digital currencies that might use mainstream technology and operate on mainstream payment rails, bitcoin could quickly lose its flare and fizzle out.
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“Central Bank Digital Currencies (CBDCs) are aimed at protecting CBs against private sector stablecoins,” BofA analysts said.
With more mainstream institutions adopting bitcoin, more regulations are likely, “as reflected in European Central Bank President Christine Lagarde’s call for regulation to address ‘funny business’ associated with cryptocurrencies”.
Grayscale (GBTC), an open-ended trust that provides exposure to bitcoin, is now the largest public holder of bitcoin. CBTC was launched in September 2013. Its total bitcoin holdings have skyrocketed to about 3.5 percent of the total supply — $31 billion worth.
“We also show that the Trust has been steadily buying Bitcoin over 2020, especially in 4Q20 …and has become one of the 5 largest holders of the crypto-currency,” BofA reported.
