Digital Assets: Bank of America Punctures Most Arguments In Favor Of Bitcoin

March 19, 2021 | Digital Assets, News
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Bank of America analysts said bitcoin’s only USP is “sheer price appreciation.”

Bank of America issued a report on Wednesday that debunked many arguments generally touted in favor of bitcoin as an investment. A team of analysts led by  Francisco Blanch, the head of Global Commodities, Equity Derivatives, and Cross-Asset Quantitative Investment Strategies at the bank, said the only reason for owning bitcoin was if you “see prices going up.” (Bitcoin.com)

In other words, invest in it only if you are confident of palming it off to someone else at a higher price by practicing the Theory of the Greater Fool.

“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,” wrote the analysts.

There’s more bitcoin bashing in the report:

“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.”

What diversification?

The analysts juxtaposed bitcoin’s price movements against various asset classes and effectively called the crypto’s so-called diversification edge a myth.

“Correlations with risk assets such as MSCI World tend to move in lockstep even across asset classes,” Bank of America said in its report.

“Bitcoin more positively correlates with equities and commodities, while [it is] neutral/slightly correlated to haven assets such as the dollar and U.S. treasuries.”

Inflation neither

One reason often trotted out in favor of bitcoin is that it works as a hedge against the debasement in the value of the dollar, the decline in its purchasing power, and rampant inflation.

However, the Bank of America analysts beg to differ.

Based on their data, they found that bitcoin’s “inflation hedging benefits are not particularly apparent.”

“Looking year by year, we find that bitcoin has been positively correlated with CPI inflation in 5 out of the 9 past years, with the largest correlations in 2014 and 2018.”

Related Story:   Stimulus Checks Could End Up Chasing Bitcoin And Stocks (Mizuho)                                                

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