Bitcoin still faces many challenges in becoming a globally accepted currency, Bank of America Merrill Lynch's commodity and derivatives strategist Francisco Blanch said in a sweeping Monday report comparing digital currencies' growth to that of gold, silver and even salt in ancient times.
"A crucial hurdle" for bitcoin is whether major financial institutions will accept the digital currency as collateral, said Blanch, who is considered by many to be one of the best commodity analysts on Wall Street. "But we are not aware of any major institution that takes cryptocurrency as collateral at the moment."
The report is one of a handful from major Wall Street firms and strategists that have recently warmed to bitcoin for its potential as an investment product. The digital currency briefly tripled in value this year, rising from below $1,000 to $3,000 in June. traded near $2,800 Monday.
Beginning with salt in ancient times, Blanch noted how practical needs and new discoveries have led to the development of new currencies:
1. Salt was "once mined and treasured in the ancient world."
2. But salt and other commodity-backed currencies often proved impractical and not durable enough, so governments began making coins with metals such as gold and copper.
3. The Spanish discovered large silver deposits in Bolivia in the 16th-century, leading to nearly 400 years of trade dominated by silver dollars.
4. Carrying around large amounts of gold and silver wasn't ideal either, so the world started to move to paper money in the last 200 years.
5. Paper money created huge waves of price increases and declines along with the business cycle. Today, most countries' currencies rely on "full faith of the issuing government" that central banks will comply with their mandate not to let inflation run too high or low.
Given this history of currency development, BofAML's Blanch seems to hint that bitcoin may soon be considered legitimate. He laid out three main criteria that bitcoin must meet in order to become a reserve currency of the world: safety, liquidity and return.
"Bitcoin and other cryptocurrencies score well on some, and not so well on others," Blanch said.
Bitcoin didn't score that well on this parameter, Blanch said. "The lack of a centralized decision-making process or authority creates risks such as a currency split," he said. "Also, risks such as
hacking, identity theft, or outright scams are a recurring problem."
However, when using volatility to measure the safety of bitcoin, the cryptocurrency has actually beat silver.
"Bitcoin's volatility is very high compared to the euro, the yen or even gold," Blanch said. "But it fell twice last year below the volatility of silver, the world's currency for 400 years."
Bitcoin's volatility starting to approach that of silver
Source: Bank of America Merrill Lynch Global Research
Market liquidity as reflected by the amount of trading is still far greater in stocks, fixed income and traditional currencies, Blanch said.
But "it is hard to ignore that trading volumes for major digital currencies like bitcoin and Ethereum have skyrocketed in recent years," he said, noting that since 2012, daily trading volumes for bitcoin have grown five times to $2 billion a day.
The recent interest in bitcoin and other digital currencies has sent their prices soaring. The market capitalization of all cryptocurrencies has leaped from around $20 billion at the start of this year to around $90 billion.
Bitcoin has more than doubled in value this year, while rival digital currency Ethereum has skyrocketed several thousand percent.
However, Blanch, like others, noted that the gains in bitcoin's price are due partly to the increasing difficulty of mining, or generating, new bitcoins. "This could change with the advent of quantum computers or through agreements among developers to adopt simpler protocols."
Amid the emergence of new currencies, gold has long been a benchmark for international measures of value. The precious metal backed the U.S. dollar for decades, marking a peg for global currencies. But in 1971, President Richard Nixon suspended the ability for the dollar to be converted into the precious metal.
Cryptocurrencies arose during the financial crisis and have demonstrated "a few advantages" over major world currencies, such as the ability to cheaply and instantaneously transfer money around the world, and record all transactions through a digital accounting system known as a blockchain, Blanch said.
In expectation of this potential, many have called bitcoin "digital gold" despite the lack of businesses that accept bitcoin and the often high transaction fees.
Gold itself has stagnated in the last several years. The precious metal leaped from several hundred dollars in the early 2000s to near $2,000 in 2011, and has traded between $1,000 and $1,400 in the last two years.
Fundstrat's Tom Lee said in a report on bitcoin in early July that buyers' shift from gold into cryptocurrencies is a reason why the digital currency's price could rise into the tens of thousands.
Due to higher bitcoin mining costs and a surge of interest, the digital currency's price has climbed in "a pattern similar to gold" and "over a much more compressed time period," Blanch said.
Bitcoin (years in parentheses) vs. gold
Source: Bank of America Merrill Lynch Global Research
To be sure, short-term appearances of similarities among bitcoin, gold and the development of historical currencies don't imply that bitcoin is here to stay.
"There is no certainty that that [similarity to gold] will continue and, most certainly, no way to predict it," Blanch said. "In our view, cryptocurrency returns will mostly depend on the faith placed by individuals, corporations, and financial institutions on this emerging technology."