Bitcoin price: The supply of this cryptocurrency is artificially scarce. Demand drives prices just like in other commodities. But there are twists. Bitcoin output is capped at 21mn coins and supply growth halves every 4 years. It is designed to become increasingly constrained. So demand swings are key to price moves. Indeed, BofA Securities show major institutional announcements and miner reward cuts have been followed by upward Bitcoin moves.

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Similarly, flows into the Grayscale Bitcoin Trust (GBTC) appear to lead weekly Bitcoin returns. A while ago, we argued a surge in trading liquidity was a key feature of the asset. Yet Bitcoin remains limited by its complex settlement process (crypto mining), and can just handle 14k transactions per hour relative to Visa’s stated 236 mn.

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Bitcoin has also become correlated to risk assets, it is not tied to inflation, and remains exceptionally volatile, making it impractical as a store of wealth or payment mechanism. As such, 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.

Unlike other asset classes, our work shows liquidity bursts measured by the Amihud ratio caused positive Bitcoin returns. Average 10y Sharpe ratio for Bitcoin is about 1.3 despite stellar returns, compared to 1 for NDX. Plus Bitcoin returns are sensitive to increased dollar demand. A net inflow into Bitcoin of $93mn may result in a 1% price rise, while the analogue for gold is more than 20 times higher.

Bitcoin may turn into the world’s 5th largest emitter, surpassing Japan. On Social & Governance issues, democratization of money and anonymity of ownership can be positive, as it is helpful in territories with corrupt financial systems and lowers costs by eliminating intermediaries. But negatives outweigh. Anonymity aids nefarious activities. Reprisk, an ESG tracker, found 181 companies faced risks linked to Bitcoin around money laundering, corruption, bribery, fraud, and breaches of data privacy

A number of central banks (notably, the ECB) are talking about launching retail digital currencies that may use mainstream technology and operate on mainstream payment rails. Central Bank Digital Currencies (CBDCs) are aimed at protecting CBs against private sector stablecoins (such as Diem), as CBs view Bitcoin et al as (spec) assets, not currencies. BofA Securities think it hasn’t a compelling lending proposition at present, and its diversification makes it challenging for the mass market.