BofA Says Bitcoin Needs Acceptance to Thrive But That's Unlikely

  • Key step for recognition is becoming pledgeable collateral
  • Firm considers bitcoin liquidity, safety and returns

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Bank of America Merrill Lynch is looking past the increase in bitcoin trading volume to caution against a surge in optimism surrounding the digital currency.

"A key step for bitcoin would be for it to become pledgeable collateral," Francisco Blanch, BofA’s head of Global Commodities and Derivatives Research, wrote in a note published Tuesday. "However, large inherent risks to digital tokens such as fraud, hacking, theft, new protocol adoption, limited acceptance, and that it is not legal tender many places in the world make it an unlikely development."

Trading in bitcoin has surged in recent months to beyond $1 billion a day, at some points reaching above $2 billion, according to data from CoinMarketCap.com. A proper store of value, though, also considers safety (think: volatility) and return, Blanch wrote.

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"The more liquidity and scale bitcoin builds to, the lower the volatility over time," Blanch said. Still, bitcoin volatility remains well above that of emerging market currencies. And it’s not like the cryptocurrencies correlate with Group-of-10 currencies, gold, oil or equities either.

Cryptocurrency returns, the third parameter Blanch wrote about, depend on price appreciation which "will mostly depend on the faith placed by individuals, corporations, and financial institutions on this emerging technology." Bitcoin is currently trading over $2,500 per coin, more than doubling its price since the start of the year.

"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," Blanch writes. That sentiment is in line with the view of Morgan Stanley analysts, who wrote in June that government acceptance would be required for cryptocurrency appreciation, at the cost of regulation.

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