No Good Reason to Own Bitcoin Other than Sheer Price Appreciation - BofA

BofA commodities strategist Francisco Blanch believes there’s practically no good reason to own Bitcoin (BTC) as the digital asset is correlated to other risk assets.

Moreover, BTC is “exceptionally volatile making it impractical as a store of wealth or payments mechanism,” writes Blanch in today’s research note titled "Bitcoin’s dirty little secrets."

“The main portfolio argument for holding Bitcoin is not diversification, stable returns, or inflation protection, but rather sheer price appreciation, a factor that depends on Bitcoin demand outpacing supply. Unlike other asset classes, our work shows liquidity bursts measured by the Amihud ratio caused positive Bitcoin returns. Average 10y Sharpe ratio for Bitcoin is about 1.3 despite stellar returns, compared to 1 for NDX. Plus 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 writes.

The demand for Bitcoin is what drives prices higher as supply is artificially scarce. The digital asset is designed to become increasingly constrained due to halving events that occur every four years.

“Demand swings are key to price moves. Indeed, we show major institutional announcements and miner reward cuts have been followed by upward Bitcoin moves. Similarly, flows into the Grayscale Bitcoin Trust (GBTC) appear to lead weekly Bitcoin returns. A while ago, we argued a surge in trading liquidity was a key feature of the asset. Yet Bitcoin remains limited by its complex settlement process (crypto mining), and can just handle 14k transactions per hour relative to Visa’s stated 236mn,” Blanch adds.

Bitcoin also fares pretty poorly in the Environmental, Social, and Governance (ESG) ratings. In the environmental field, BTC emits about 60 million tons of CO2 today. According to BofA analysts, a $1 billion fresh inflow into Bitcoin may cause CO2 to rise by the equivalent of 1.2mn ICE cars.

“As hash power today is mostly in coal-fired Xinjiang, a link between prices, energy demand & CO2 means Bitcoin is tied to Chinese coal. Should prices rise to $1mn, Bitcoin may turn into the world’s 5th largest emitter, surpassing Japan. On Social & Governance issues, democratization of money and anonymity of ownership can be positive, as it is helpful in territories with corrupt financial systems and lowers costs by eliminating intermediaries. But negatives outweigh. Anonymity aids nefarious activities. Reprisk, an ESG tracker, found 181 companies faced risks linked to Bitcoin around money laundering, corruption, bribery, fraud, and breaches of data privacy,” adds Blanch.

On a more positive note, Blanch says that the growth of decentralized finance (DeFi) shows the strength of the world’s second biggest digital asset Ethereum (ETH), whose platform is vital for DeFi applications.

“Yet 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,” the analyst concludes.

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