A customer uses a bitcoin ATM (ATM) at a kiosk in Barcelona, Spain, on Tuesday, February 23, 2021.
Angel Garcia | Bloomberg | Getty Images
Citi believes that bitcoin is at an “inflection point” and may one day “become the currency of choice for international trade” as companies like Tesla and PayPal become interested in it and central banks explore issuing their own digital currencies.
“There are a number of risks and obstacles that stand in the way of Bitcoin’s progress,” wrote the U.S. investment bank’s global solutions and perspectives team in a note on Monday.
“Bitcoin’s future, therefore, is still uncertain, but developments in the short term are likely to be decisive, as the currency balances at the tipping point of general acceptance or speculative implosion.”
This marks a change in the tone of major financial institutions towards bitcoin. Many banks have historically avoided the digital asset, arguing that it has no intrinsic value and that the enthusiasm surrounding it is similar to the 17th century tulip craze.
But bitcoin’s wild rise in recent months has forced big Wall Street players to reassess the cryptocurrency. BNY Mellon, the oldest bank in the United States, said last month that it would offer custody services for bitcoin and other digital currencies. Meanwhile, JPMorgan said it is seriously looking like a bitcoin.
Bitcoin and other cryptocurrencies are often subject to violent attacks of volatility. Just over a week after reaching a historical record of more than $ 58,000, the price of bitcoin has dropped by more than $ 10,000. It is still above 60% in the year and 460% in the last 12 months.
Crypto investors say bitcoin’s latest spike is different from previous cycles – including in 2017, when it rose close to $ 20,000 before plummeting 80% the following year – due to the increased share of institutional investors.
Initially created as a digital payment system to bypass banks and other financial intermediaries, bitcoin has since gained momentum among traditional investors as a kind of “digital gold” that can act as a hedge against rising inflation.
There are several obstacles that bitcoin would have to overcome before seeing dominant adoption, according to Citi.
“The influx of institutional investors has sparked confidence in the cryptocurrency, but there are still persistent problems that can limit widespread adoption,” said Citi.
“For institutional investors, this includes concerns about capital efficiency, insurance and custody, security and ESG considerations of Bitcoin mining,” added the bank. “Cryptocurrency security issues do occur, but when compared to traditional payments, performance is better.”
Bitcoin mining – the process that releases new coins into circulation – requires a considerable amount of energy. So-called miners with custom-made computers are competing to solve complex math puzzles to verify transactions. According to the Digiconomist, the bitcoin network has a carbon footprint equivalent to that of New Zealand. This alarmed environmental activists.
Last month, JPMorgan analysts called bitcoin an “economic show” and said crypto assets were classified as the “poorest hedge” against significant falls in stock prices. The rise of digital finance and the demand for fintech alternatives is the “true transformation story of the Covid-19 era”, they added.