No good reason to own Bitcoin other than pure price appreciation

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BofA commodities strategist Francisco Blanch believes there is hardly any good reason to own Bitcoin (BTC), as the digital asset is correlated with other risky assets.

Additionally, BTC is “exceptionally volatile, which makes it impractical as a store of wealth or a payment mechanism,” Blanch writes in today’s research note titled “Bitcoin’s Dirty Little Secrets.”

“The portfolio’s main argument for holding Bitcoin is not diversification, stable returns, or protection against inflation, but rather simple price appreciation, a factor that depends on whether demand for Bitcoin exceeds supply. . Unlike other asset classes, our work shows that liquidity bursts as measured by the Amihud ratio caused positive Bitcoin returns. The 10-year average Sharpe ratio for Bitcoin is around 1.3 despite stellar returns, compared to NDX 1. In addition, Bitcoin returns are sensitive to increased demand for dollars. A net inflow of $ 93 million into Bitcoin can cause prices to rise by 1%, while the analogue of gold is more than 20 times higher, ”writes Blanch.

Demand for Bitcoin is what drives prices up because supply is artificially scarce. Digital assets are designed to become increasingly limited due to the halving of events that occur every four years.

“Fluctuations in demand are the key to price movements. Indeed, we show that major institutional announcements and reductions in miner rewards have been followed by upward movements in Bitcoin. Likewise, flows entering the Grayscale Bitcoin Trust (GBTC) appear to result in weekly Bitcoin returns. Some time ago, we argued that an increase in trading liquidity was a key feature of the asset. However, Bitcoin remains limited by its complex settlement process (crypto mining) and can only handle 14,000 transactions per hour compared to the 236 minutes declared by Visa, ”adds Blanch.

Bitcoin also ranks fairly poorly on environmental, social, and governance (ESG) ratings. In the environmental field, BTC today emits around 60 million tonnes of CO2. A further influx of $ 1 billion into Bitcoin could result in an increase in CO2 equivalent to 1.2 million ICE cars, according to BofA analysts.

“As hash energy today is mostly found in coal-fired Xinjiang, a link between prices, energy demand, and CO2 means that Bitcoin is tied to Chinese coal. If prices reach $ 1 million, Bitcoin could become the 5th largest issuer in the world, overtaking Japan. On social and governance issues, the democratization of money and the anonymity of property can be positive, as they are useful in territories where financial systems are corrupt and reduce costs by eliminating middlemen. But the negatives outweigh. Anonymity facilitates harmful activities. Reprisk, an ESG monitoring tool, found that 181 companies face Bitcoin-related risks relating to money laundering, corruption, bribery, fraud and data privacy breaches, ” adds Blanch.

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

“Still, Ethereum has ESG issues similar to Bitcoin’s, although it may have better tools to tackle them. DeFi is interesting, but small, and faces challenges in becoming mainstream. does not have a convincing loan proposition at the moment, and its diversification makes it difficult for the mass market, ”concludes the analyst.

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