A new note from Bank of America's Global Commodities and Derivatives Research department has offered up some potential reasons why Bitcoin has not broken into the mainstream as its supporters have hoped. In spite of the dramatic increase in trading prices and volume over the past several months, Bitcoin and other cryptocurrencies have found it difficult to win mainstream support from well-established financial institutions and brick-and-mortar storefronts. The key issue holding up Bitcoin, which up to this point remains the largest cryptocurrency by proportion of total market share? According to BofA, it is a set of "large inherent risks."
Bitcoin Needs to Become "Pledgeable Collateral"
According to Francisco Blanch, the head of the Global Commodities and Derivatives Research area at BofA, "a key step for Bitcoin would be for it to become pledgeable collateral." Blanch wrote his recommendations in a note published earlier this week and reported by Bloomberg. "Large inherent risks to digital tokens such as fraud, hacking, theft, new protocol adoption, limited acceptance, and that it is not legal tender in many places in the world make [Bitcoin's becoming pledgeable] an unlikely development," he continued.
Blanch still cautions against Bitcoin's future, even as trading for the digital currency has peaked in the past several months, climbing to more than $1 billion in transactions per day on average, and at times reaching up to $2 billion per day. Ample trading volume does not mean that Bitcoin is a proper store of value, however, cautions Blanch, and investors would be wise to consider safety (or volatility) and return as well.
Reducing Volatility is Key
"The more liquidity and scale Bitcoin builds to, the lower the volatility over time," Blanch indicated. Nonetheless, Bitcoin's volatility remains far above most emerging market currencies, and cryptocurrencies do not correlate with other existing currencies or resources, either.
Blanch also indicated in the report that cryptocurrency returns will largely depend upon price appreciation, which "will mostly depend on the faith placed by individuals, corporations, and financial institutions on this emerging technology." He continued by stating that "most regulated financial institutions allow their clients to borrow against financial or physical assets, but we are not aware of any major institution that takes cryptocurrency as collateral at the moment." Morgan Stanley analysts, writing a few weeks prior to Blanch's report, suggested that government acceptance would be necessary in order for cryptocurrency appreciation to take place. In this way, representatives from these two big banks are in agreement that a few important fundamental components of Bitcoin (and, by extension, the cryptocurrency field at large) may need to change in order for digital currencies to become fully established in mainstream investing.