A top Wall Street analyst has said that bitcoin still faces challenges in becoming a widely accepted currency, CNBC has reported.
Bank of America Merrill Lynch's commodity and derivatives strategist Francisco Blanch published a report on Monday, examining the prospects of digital coins becoming viable currencies. The report begins with a brief summary of the history of currency development, highlighting how practical needs and new discoveries have led to the development of new media of exchange – from salt through gold and copper coins, and silver dollars, to paper money.
Given this history of currency development, Blanch seems to hint that bitcoin may soon become legitimate. But the analyst also sees a number of challenges that the cryptocurrency needs to overcome in order to become widely accepted.
One of these challenges is whether financial institutions will accept the digital currency as collateral. Blanch describes this as a “crucial hurdle” for bitcoin, adding that “we are not aware of any major institution that takes cryptocurrency as collateral at the moment”.
The analyst pointed to three main criteria that bitcoin must meet to become a reserve currency of the world: safety, liquidity and return.
Bitcoin did not score that well in terms of safety, Blanch said, arguing that the lack of a “centralised decision-making process or authority creates risks such as a currency split”. He also highlighted other risks such as hacking, identity theft and scams.
However, Blanch also used volatility to measure bitcoin’s safety, which showed that the cryptocurrency had actually beat silver.
“Bitcoin's volatility is very high compared to the euro, the yen or even gold," Blanch said, as quoted by CNBC. "But it fell twice last year below the volatility of silver, the world's currency for 400 years."
In terms of liquidity, cryptocurrencies are currently dwarfed by stocks, fixed income and traditional currencies, Blanch noted. But the analyst also highlighted the rapid increase in trading volumes for major cryptocoins. Bitcoin trading volumes, in particular, have grown five times since 2012 to $2 billion a day.
In terms of return, the cryptocurrency market has impressed investors, especially this year. Bitcoin has more than doubled in value this year, while several altcoins, including ethereum (ETH) have posted quadruple-digit percentage gains. However, Blanch notes that the bitcoin price jump is in part due to the increasing difficulty of mining.
“This could change with the advent of quantum computers or through agreements among developers to adopt simpler protocols,” he said.