Bank of America says there's no good reason to own bitcoin other than price speculation

Published Wed, Mar 17 20211:16 PM EDT

Bank of America believes there's only one reason to own bitcoin: speculation on its rising price. "Bitcoin has ... become correlated to risk assets, it is not tied to inflation, and remains exceptionally volatile, making it impractical as a store of wealth or payments mechanism," Francisco Blanch, a commodity and derivatives strategist with the bank, said Wednesday in a note to clients. "As such, the main portfolio argument for holding bitcoin is not diversification, stable returns, or inflation protection, but rather sheer price appreciation, a factor that depends on bitcoin demand outpacing supply," he added. Bank of America also pointed to bitcoin's subpar ESG rating – that is, its environmental, social and corporate governance factors. By the firm's estimates bitcoin consumes as much energy as Greece. Additionally, while the democratization of money and anonymity of ownership can be positive for the "S" and "G" metrics within "ESG," anonymity can also spur nefarious activities. Bitcoin has been on a tear this year, surging nearly 90%. Over the weekend, prices topped $60,000 for the first time, before falling from those highs. On Wednesday the cryptocurrency was worth $55,382, according to date from Coinbase. Broader acceptance The surge higher comes as bitcoin becomes more accepted. In February, Tesla purchased $1.5 billion worth of bitcoin. Mastercard said it will open its network to some digital assets, and PayPal and BNY Mellon have also explored the crypto space. On Wednesday, CNBC reported that Morgan Stanley became the first major U.S. bank to offer its wealth management clients access to bitcoin funds. Blanch noted that institutional announcements have in the past led to major price increases. According to Bank of America, around 95% of bitcoin is controlled by just 2.4% of accounts, which could act as a headwind to mainstream adoption. "The fact that such a small percentage of bitcoin accounts hold most of the BTC in circulation makes this instrument impractical as a payments mechanism or even as an investment vehicle," Blanch said. The largest holders have been buying rather than selling, further reducing liquidity and leaving the digital asset vulnerable to swings when the largest accounts do take action. Despite the volatile nature, the gains for investors who have held onto their positions have been eye-popping. "Even with susceptibility to large movements on account of ownership concentration and limited supply, the asset has produced relatively high risk-adjusted returns despite having one of the highest volatilities in the cross-asset space," Bank of America added. But ultimately, this volatility translates to bitcoin being impractical as a payment or store of wealth mechanism. Blanch noted that even after a decade of trading, prices are still highly volatile, including when compared with commodities like foreign exchange, gold and silver. "The persistently high volatility levels are a big concern, as they suggest that even after 10+ years of trading and major episodes of price appreciation, bitcoin has failed to develop some price stability," he said. Bitcoin bulls have traditionally argued that the cryptocurrency is a good investment given that it isn't correlated with other asset classes. But Bank of America said that no longer appears to be the case, noting that it more positively correlates with equities and commodities, while being neutral/slightly negatively correlated to the dollar and U.S. Treasuries. "As a new development in the crypto space since the pandemic, bitcoin correlations with risk assets have tended to move in lock step even across asset classes," the firm noted. - CNBC's Michael Bloom contributed reporting.

Representation of the virtual currency Bitcoin is seen on a motherboard in this picture illustration taken April 24, 2020.

Dado Ruvic | Reuters

Bank of America believes there's only one reason to own bitcoin: speculation on its rising price.

"Bitcoin has ... become correlated to risk assets, it is not tied to inflation, and remains exceptionally volatile, making it impractical as a store of wealth or payments mechanism," Francisco Blanch, a commodity and derivatives strategist with the bank, said Wednesday in a note to clients.