Bitcoin (CRYPTO:BTC) prices remained steady at around $55,200 on Wednesday morning after one Wall Street analyst blasted the cryptocurrency for all of its shortcomings as both an inflation hedge and a store of wealth.
Prices Based Purely On Demand: Bank of America analyst Francisco Blanch said bitcoin is akin to other commodities in that its price is driven purely by supply and demand. Given bitcoin’s supply is fixed, swings in demand are the only thing driving its price action.
Blanch said weekly flows into the Grayscale Bitcoin Trust (OTC:GBTC) are a significant demand driver and contributor and to near-term price action.
Blanch said that, despite its popularity among retail traders, bitcoin has several major problems that might hold it back in the long-term. One of its biggest hurdles is the complex nature of the crypto mining that underlies its settlement process. Blanch said bitcoin can only handle about 14,000 transactions per hour compared to the 236 million transactions Visa Inc (NYSE:V) can reportedly handle.
“Bitcoin has also 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,” Blanch wrote in the note.
Blanch said the main argument for holding bitcoin in a portfolio is not diversification, stable returns or protection against inflation. It's simply the expectation that prices will rise.
Low ESG Rating: At the same time, Blanch said ESG investors will likely have no interest in bitcoin, which has an extremely harmful environmental impact. The bitcoin network currently emits about 60 million tons of CO2 annually, roughly the same carbon footprint as the nation of Greece. For every $1 billion of fresh inflow into bitcoin, Blanch estimates the cryptocurrency will generate additional CO2 levels equivalent to about 1.2 million ICE cars.
When it comes to social and governance measures, Blanch said the anonymity of cryptocurrency networks contributes to their use for nefarious activities.
“Reprisk, an ESG tracker, found 181 companies faced risks linked to Bitcoin around money laundering, corruption, bribery, fraud, and breaches of data privacy,” Blanch said.
Finally, Blanch said bitcoin is facing tremendous long-term threats from central bank digital currencies, or CBDCs. There is currently nothing preventing central banks from building their own blockchains and replicating the bitcoin network, and the ECB is reportedly already discussing its own CBDC.
Benzinga’s Take: A key driver of the recent bitcoin rally is concerns over the negative impact unprecedented government stimulus spending could have on the dollar.
A cryptocurrency’s supply is fixed, it doesn’t have the intrinsic value of a share of stock or a plot of real estate, and it doesn’t have the yield of a bond or certificate of deposit. Therefore, the prices of cryptocurrencies in the long term will be determined only by changes in long-term demand from investors and users.