FX.co ★ BofA and ESMA warn about BTC rally

Analysts at Bank of America Global Research unveiled a devastating report entitled "Bitcoin's Dirty Little Secrets". It literally destroys the attractiveness of BTC. Experts have studied the value of BTC as a financial asset and concluded that bitcoin is absolutely useless and impractical. As the cryptocurrency exchange rate is very unstable and not tied to inflation, BofA does not see its great potential as a store of wealth and as a payment mechanism.

"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. As such, the main portfolio argument for holding Bitcoin is not diversification, stable returns, or inflation protection, but rather a sheer price appreciation, a factor that depends on Bitcoin demand outpacing supply," analysts said.

The role of bitcoin as a financial instrument is significantly belittled by a small percentage of Bitcoin accounts in the world. "Bitcoin is also heavily concentrated, with 95% of the total mined coins controlled by the top 2.4% of addresses with the largest balances," experts pointed out. "In our view, 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. It can also create social and governance issues," BofA said.

The mass distribution of bitcoin is also hindered by problems with mining. The capabilities of modern mining do not allow the payment network to process more than 14,000 transactions in one hour. For comparison, Visa processes 236 million transactions each hour.

The mining of digital currencies has been heavily criticized for more than just one reason. The main problem is the very high energy consumption of mining. Experts calculated that "a $1bn investment in bitcoin would produce the same carbon emissions as the annual output of 1.2m cars due to energy usage associated with bitcoin." The cryptocurrency industry has a carbon footprint of 60 million tons annually. This figure is equivalent to the one of Greece.

BofA analysts are also concerned about the constant volatility of bitcoin. Even the long-term presence on the market and significant surges in price could not lead to the relative stability of the exchange rate in comparison with the key world currencies or gold. These fluctuations keep BTC from becoming a reliable and, therefore, widely-used financial instrument.

Another reputable bank also warned about the high risks of investing in cryptocurrency. The European Securities and Market Authority (ESMA) last Wednesday published a report on "Trends, Risks and Vulnerabilities". In their study, the analysts assessed the impact of COVID-19 on financial markets and highlighted the increased risks associated with investments in "unregulated crypto assets".

Experts called many digital currencies extremely volatile and speculative. It is hard to predict their movements. Additionally, they are not regulated in the EU. The report states, "Consumers must be alert to the high risks of buying and/or holding these instruments, including the possibility of losing all their money." Therefore, the regulator warned investors, "This means that consumers buying and/or holding these instruments do not benefit from the guarantees and safeguards associated with regulated financial services." The law that will regulate the situation in the cryptocurrency market within the EU is still underway and has no legislative force, ESMA stressed.