Several weeks after Goldman's chief technician started covering bitcoin, overnight Bank of America has released what some may call an "initiating coverage" report on bitcoin which notes that while the cryptocurrency remains very volatile and risky, bitcoin has experienced a spectacular surge in liquidity in the last six months. However, BofA remains stumped when it comes to making any official forecasts BofA's commodity strategist Francisco Blanch writes that bitcoin is uncorrelated to any financial asset, "so there is no way to explain let alone predict returns."
While we will present some of the more notable findings from the report shortly, one observation caught our attention, namely that in at least one regard, bitcoin has already surpassed gold: the total daily trading bolume for bitcoin has now surpassed that of the biggest gold ETF, the GLD.
As BofA notes, "it is hard to ignore that trading volumes for major digital currencies like bitcoin and ethereum have skyrocketed in recent years. For example, daily trading volumes for bitcoin were $400mn in 2012 and have now moved up to about $2bn a day at present" which also means that - at current BTC prices - the total ADV of BTC traded is higher than that of GLD.
Meanwhile, ethereum had daily trading volumes of $1.5mn when it first launched in 2015 and it is now experiencing daily trading of about $1bn. Most importantly, for a digital token to become a currency, it must build to a certain scale, a bit like the silver mine in Bolivia found by the Spanish. In some ways, this is exactly what has been happening in recent quarters, with the total market value of digital tokens growing exponentially from $1.5bn to around $87bn at present.
And while Bitcoin liquidity still has a ways to go before catching up to equity and fixed income markets, BofA does note that there is a distinct overlap in the historical price pattern of gold with that of bitcoin:
A big uncertainty facing bitcoin and other digital tokens we see is their expected real rate of return. So far, early adopters have enjoyed a sharp appreciation in prices. While bitcoin seems to have followed a pattern similar to gold over a much more compressed time period (Chart 18), there is no certainty that that will continue and, most certainly, no way to predict it. Also, there are large inherent risks to digital tokens such as fraud, hacking, outright theft, new protocol adoption, limited acceptance, and it is not legal tender in many places in the world.
As Blanch summarizes, "put differently, cryptocurrencies have built scale rapidly and are now accepted as a means of payment by some corporations and individuals."
The only question is if, and when, will cryptos in their current iteration start being accepted by central banks, and more importantly, as pledgeable collateral. More on that shortly.