Bank of America sees no compelling reason to own bitcoins other than the simple rise in price. The firm’s experts concluded that the benefits of hedging inflation in cryptocurrencies are not particularly clear. Bank of America also claims that bitcoin offers no diversification benefits and is impractical as an asset store or payment mechanism.
Bank of America sees good reason to own bitcoins
The Bank of America team, led by strategist Francisco Blanch, said in a report Wednesday that there is no compelling reason to own bitcoin unless you see prices rise. Blanche is head of global commodities, equity derivatives and multi-asset quantitative investment strategies at Bank of America Merrill Lynch Global Research.
Strategists have written that bitcoin is correlated to risky assets, is not tied to inflation and remains extremely volatile, making it impractical as a store of wealth or a means of payment. They continued:
The main argument for holding bitcoins is not diversification, stable returns or protection against inflation, but price appreciation – a factor that depends on demand for bitcoins exceeding supply.
As for using bitcoin as an inflation hedge because of its fixed supply, Bank of America strategists concluded that the benefits of inflation hedging are not particularly clear based on their data.
Strategists have also downplayed the benefits of diversifying cryptocurrencies. The Bank of America report indicates that the price of bitcoin tends to be positively correlated with stocks and commodities, while it is neutrally/lowly correlated with Hawaiian assets such as the dollar and U.S. Treasury bonds. Moreover, its correlations with risky assets such as the MSCI World tend to evolve at the same rate, even across different asset classes.
Developed strategies for Bank of America: Year-on-year, bitcoin has been positively correlated with CPI inflation in 5 of the past 9 years, with the highest correlation in 2014 and 2018….. However, if we look at the correlation with inflation surprises since 2011, we see that bitcoin has one of the weakest correlations and lags behind most asset classes, such as commodities, TIPS and EM currencies.
The price of bitcoin has repeatedly shot high in recent months. At the time of writing, the price is $57,201, up nearly 78% over the past year and about 24% since the beginning of the month. According to Bank of America, the rise in BTC prices has largely been fueled by institutional buyers announcing large purchases, such as Elon Musk’s Tesla, Square, Paypal and Grayscale Bitcoin Trust.
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