- Bitcoin has grown in popularity in the last few years, with big firms and many retail investors looking to snag a portion of the highly-rated cryptocurrency.
- Despite the glowing accolades that Bitcoin has earned following its astronomical increase in price, there are still skeptics who believe that an investment in the digital currency is simply not worth it.
- A report from Bank of America (NYSE:BAC) has stated that Bitcoin is impracticable as a currency and its volatility makes it a poor choice for investment.
- However, Bitcoin has strong points to counter the opinions of the Bank of America report and has consistently exceeded the expectations of believers and critics alike.
Throughout Bitcoin’s lifespan, it has had its fair share of critics lashing out at the digital currency at every opportunity available. Janet Yellen, Dr Nouriel, and the heads of some central banks around the world all hold the opinion that Bitcoin as an asset class is not sustainable and viable in the long run.
Certain critics have even referred to the currency as a “Ponzi scheme.” The latest wave of Bitcoin criticism comes from Bank of America (BofA) in research titled “Bitcoin’s Dirty Little Secrets.”
The report levels several scathing criticisms against Bitcoin; we will analyze each of the points raised by BofA.
Bitcoin’s Dirty Little Secrets
Bank of America released a report titled “Bitcoin’s Dirty Little Secrets,” which fired several shots at the cryptocurrency, identifying it as an unworthy investment choice for a host of reasons.
These reasons included Bitcoin’s volatility, lack of diversification and stable returns, and the environmental impact Bitcoin mining has on the environment.
Bank of America’s assumptions about bitcoins are far-reaching, but they resonate with the opinions of several Bitcoin critics.
Bitcoin’s Only Good When The Price Goes Up
The report stated that there isn’t really any incentive to buy Bitcoin “unless you see prices going up,” casting a huge shadow of doubt on the cryptocurrency as a long-term store of value.
The report argued that the recent increase in the price of Bitcoin is simply inorganic and largely a result of major institutional investors taking huge positions in Bitcoin.
For instance, after reports trickled to the media that Tesla (NASDAQ:TSLA) had purchased $1.5 billion worth of Bitcoin, it set off a price rally that quickly sent the digital currency to new highs of over $45,000.
Similarly, MicroStrategy’s move to augment its Bitcoin holdings with a $1 billion investment also contributed to the epic price rally of Bitcoin. PayPal and MasterCard’s announcements that they will provide crypto services for their clients have all triggered spikes in the price of the asset.
The report stated that the numbers behind these spikes are pretty grim for Bitcoin. It observed that about $93 million inflow into Bitcoin accounts for a 1% increase in the price. In contrast to gold, which would require a $1.86 billion injection before a similar increase could be achieved.
BofA said that this makes Bitcoin highly volatile and impracticable as a hedge against inflation. Through the report, it claimed Bitcoin does not promise stable returns but only “sheer price appreciation, a factor that depends on Bitcoin demand outpacing supply.”
The report also argued that the central bank digital currencies making their way into popularity will be the kryptonite for cryptocurrencies. However, it sees a glimmer of hope in decentralized finance.
According to the bank, from cryptos to DeFi, there is a radical change to mainstream capital markets but, at $35 billion, this has a long way to go compared to mainstream finance.
Bitcoin Isn’t Good For The Environment
The BofA report argued extensively that Bitcoin carbon emissions were off the charts as it requires huge amounts of energy to mine BTC. The report stated that to inject $1 billion worth of Bitcoins into the economy, CO2 levels will rise to the equivalent of $1.2 million ICE (NYSE:ICE) cars.
It stated that the “link between prices, energy demand, and CO2 means Bitcoin is tied to Chinese coal.” If Bitcoin prices climb up to $1 million, the cryptocurrency will surpass Japan to become the world’s fifth-largest emitter of CO2.
BofA also argued that the environmental impact from the complexity of Bitcoin is taking a toll on the cryptocurrency itself, accounting for the slow pace of transactions that it can handle. Bitcoin can handle only 14,000 transactions per hour, unlike Visa (NYSE:V), which can process over 200 million transactions each hour.
Highly Concentrated, A Recipe For Failure
Bitcoin is an asset that is highly concentrated in the hands of a few. This, according to the BofA report, is ironic as it touts itself to be a global, decentralized currency.
Around 95% of the total amount of Bitcoin mined is in the hands of 2.4% of addresses. This minute number of Bitcoin addresses holds a bulk of the total number of Bitcoins in circulation, with some accounts holding as much as 100,000 BTC. Bitcoin has a fixed supply of 21 million BTC, and, currently, around 18 million are in circulation.
In the estimation of the paper, the large amount of Bitcoin concentrated in a few addresses makes it “impractical as a payment mechanism or as an investment vehicle.” If left unchecked, this trend could spiral into severe social and economic issues as more people swarm to the cryptocurrency.
This scenario bears many similarities to the situation in which only a small fraction of Americans control 30% of their country’s household wealth.
On the Flipside
- Despite the scathing nature of the remarks in the report published by Bank of America, Bitcoin has a pretty solid defense to the accusations.
- Concerning the issue of Bitcoin as an impracticable store of wealth, several analysts have noted that as the price of the cryptocurrency surges, its volatility will be reduced and the asset class will become more stable.
- Generally, the lesser the market capitalization of an asset is, the more likely it is to be rocked by issues of volatility.
- Bitcoin’s market capitalization is still growing, and as it continues its steady ascent, the volatility will be less of a problem.
- Already, the daily volatility rate of Bitcoin has been under 6% since 2020, which is an improvement from previous years. In contrast, according to Meltem Demirors, chief strategy officer at CoinShares, Bitcoin is even less volatile than certain shares such as Tesla, which soared by over 673% in 2020.
- Bitcoin’s complexities render fraud uneconomical. Through the use of a proof-of-work algorithm, Bitcoin users expend computational power to validate transactions. While it may have a form of impact on the environment, it greatly reduces the occurrence of fraud.
- By doing away with intermediaries, third parties, and middlemen in transactions by relying on computational power, Bitcoin has saved billions of dollars.
Bitcoin’s concentration issue will not be a cause of concern in the near future, according to financial analysts. More retail investors are realizing the immense potential of Bitcoin as an alternative currency and are also massively buying and holding the asset.
Recently, retail investors rivaled Wall Street giants as the mania around Bitcoin continued to boom. With this sort of stiff competition, we could see the dissipation of Bitcoin and avoid the concentration issues currently associated with it.
Bitcoin, Satoshi Nakamoto’s Gift
In 2008, Satoshi Nakamoto released Bitcoin’s White Paper, “Bitcoin: A Peer-to-Peer Electronic Cash System,” describing a digital, decentralization currency without an administrator that can be transferred peer to peer without the need for intermediaries or third parties.
Bitcoin was launched in 2009, utilizing the timestamping scheme of proof-of-work, with each block time being ten minutes.
Since its inception, about 18 million BTC have been mined and are currently in circulation, while the total supply has been capped at 21 million BTC. Transactions on the network are verified by network nodes and recorded in a public ledger called the blockchain.
Bitcoin has soared in value, going from a few dollars to hitting its most recent all-time high of $61,683, which translates to an over 43,583% return on investment. Several large corporations, such as Tesla, Morgan Stanley (NYSE:MS), Microstrategy (NASDAQ:MSTR), and Square, have invested in the cryptocurrency, fueling the recent buzz about the coin. Retail investors are not taking a step back as they are also actively investing in the currency, further beefing up the price.
While it may seem all rosy for Bitcoin, the path hasn’t always been smooth. Bitcoin has suffered terrible price crashes in recent years, with the most infamous fall being the 2018 price crash that saw Bitcoin trade at less than $5,000.
Vicious attacks from skeptics and governments further contributed to the rocky path of Bitcoin. In Nigeria, the Central Bank has banned private banks from facilitating Bitcoin transactions, while India is also proposing a similar ban.
South Korea has rolled out plans to tax profits from cryptocurrency investments but despite these challenges, the currency is still thriving. Recently, its market capitalization soared past the $1 trillion mark, which gives it over 60% of the market share of cryptocurrencies.