Next 2-3 Years 'Should Be a Turning Point for Bitcoin' - Deutsche Bank
Bitcoin’s market capitalization of more than USD 1trn “makes it too important to ignore,” while large players who buy and sell BTC have “considerable” market-moving power, said the March 2021 report prepared by Deutsche Bank Research. The coin’s price could continue to rise as long as asset managers and companies continue to enter the market.
So in the short term, bitcoin “is here to stay,” though its value will remain volatile due to its limited tradability, small tactical asset allocations, and the entries and exits of large asset managers. However, according to the authors of the report, in the long term, BTC will have to “transform [its] potential into results to sustain its value proposition.”
“The next two or three years should be a turning point for Bitcoin; consensus about its future may emerge as people monitor digital currency developments,” the researchers said.
For now, according to them, bitcoin’s current valuation is pricing in a shift toward cross-border digital currencies and the hypothesis is that BTC, as the leader, will benefit from network effects and become an important means of payment in the future.
The researchers argued that "the race is fierce" for cryptos to become a mainstream means of payment – BTC is an illiquid asset rarely used as a means of payment, while yet to be launched Facebook-backed Diem is focused on consumer adoption and real usage of money, it said. Furthermore, many countries have moved to create their central bank digital currencies (CBDCs).
Therefore, in the medium to long run, because of strong network effects, it’s unlikely cryptos will be used as a widespread means of payment, said the report, adding:
“And as long as governments and central banks exist and hold the power to regulate money, there will be little room for bitcoin—as a means of payment—to replace traditional currencies.”
However, US Federal Reserve Chairman Jerome Powell, said, citing a recent report from the Bank for International Settlements and a group of seven central banks, that a CBDC "needs to coexist with cash and other types of money in a flexible and innovative payment system."
In general, due to its volatility, most merchants don’t want to accept cryptocurrencies as a payment method. Consumers might use providers to own/trade the asset – but mainly for investment, said the Deutsche Bank report.
It concluded that,
“But once we see some stability in the market, the use of crypto for the exchange of goods and services could normalize. Before that, the risks for both merchants and payment providers outweigh the benefits.”
The report also noted that since 2010, Bitcoin has been declared dead about 400 times, but the trend has been decreasing, and 2020 saw the fewest Bitcoin obituary predictions in 8 years.
And if governments were to back cryptocurrencies and consumers still want them, “adoption rates will drive the timeline for mainstream use.” Now we’re seeing the early days of blockchain wallet use, it said, but “if current trends continue, there could be 200 million blockchain wallet users in 2030.”
Among other conclusions, the bank said that:
- There is little evidence of a direct correlation between the prices of bitcoin and gold, while the average daily volume and open interest of Bitcoin was only 1.9% and 2.8% of the volume and open interest of gold, respectively.
- The USD currency index is usually inversely correlated with the BTC price, for unclear reasons, while it’s also unclear if the rise in yields is having a direct effect on the BTC price.
- Given the small number of BTC transactions compared to those in fiat currencies, “bitcoin is comparable to the smallest currencies. Bitcoin’s liquidity is much closer to the Thai baht.”
In February, the bank announced its own crypto custody plans, saying that it "has completed its proof of concept and is aiming for a minimum viable product in 2021 while exploring global client interest for a pilot initiative."
Meanwhile, the Bank of America (BofA) strategists said in a note Wednesday that "Bitcoin is extremely sensitive to increased dollar demand," as quoted by Bloomberg. Per this note,
"We estimate a net inflow into Bitcoin of just [USD] 93 million would result in price appreciation of 1%, while the similar figure for gold would be closer to [USD] 2 billion or 20 times higher."
In contrast, they added, "multibillion money flows do not have a significant impact on price, pointing to the much larger and stable nature of the US Treasuries markets."
BofA concluded that 'whales' have been buying and hodling BTC since the start of the pandemic, possibly bossing the price, while "modest capital inflows" are what has created "the enormous upside pressure" on the coin's price in the recent years.
Commenters, however, disagreed with the note's conclusions, arguing that USD 93m is too small of a number, doubting the math, while others say that money doesn't go "into" BTC, but to the seller.
At the time of writing (13:34 UTC), BTC trades at USD 58,682 and is almost unchanged in a day. It's up by 1.5% in a week and 19% in a month. The price rallied by 991% in a year.
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