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If you’re looking for a hedge against inflation, Bitcoin probably won’t work. And if you’re worried about climate change, it’s a problematic asset as well. Those are two conclusions from a new Bank of America report that takes a negative outlook on the digital currency.
The report by Francisco Blanch analyzes Bitcoin based on various criteria, including reviewing the key argument for many recent Bitcoin bulls — that it can hedge a portfolio against inflation risks. Supply is capped at 21 million Bitcoin, so presumably the cryptocurrency is protected from the kind of “money printing” that devalues traditional currencies. Blanch, however, says that evidence from the past several years seems to disprove that argument.
“Broadly, we find that Bitcoin has not been particularly compelling as an inflation hedge as commodities and even equities provide better correlations to inflation,” he wrote. “As such, we think the main portfolio argument for holding Bitcoin is not diversification, declining volatility, or inflation protection, but rather sheer price appreciation, a factor that depends exclusively on Bitcoin demand outpacing supply on a forward basis.”
Some of this is still hard to gauge, because major developed nations — particularly the U.S.–have seen relatively little inflation over the past decade. So Bitcoin has not been fully tested in a truly inflationary environment.
Blanch also looked at other aspects of the cryptocurrency that may make it unsuitable for many investors’ portfolios. He says that 95% of Bitcoin is owned by just 2.4% of accounts, a level of concentration that “makes this instrument impractical as a payments mechanism or even as an investment vehicle.” And the big accounts have continued buying amid the latest run-up, according to Blanch. Bitcoin recently hit all-time highs above $60,000.
The high ownership concentration leaves “the asset vulnerable to sharp price swings on account of movements in these ‘whale’ accounts,” he wrote. “Indeed looking at the income distribution, we find that Bitcoin inequality is unprecedented and easily eclipses countries plagued with the most income inequality.”
Blanch also looked at the societal impact of Bitcoin. A growing environmental, social and governance movement (ESG) has tried to quantify how various companies and assets affect society. The social benefits may be mixed — Bitcoin has been used for nefarious activities, but can also be used by people living under repressive regimes to store their money. Blanch thinks the social “negatives outweigh” the positives.
Bitcoin’s environmental impact has increasingly come under scrutiny, because the “miners” that produce Bitcoins use considerable electricity to run their computers. In fact, the network is now using as much electricity in a year as Greece, he noted. And he estimates that every additional $1 billion put into Bitcoin causes as much carbon dioxide as 1.2 million cars produce in a year.
Others have come to mixed conclusions on Bitcoin’s environmental impact. The University of Cambridge Center for Alternative Finance has estimated that Bitcoin consumes 0.6% of the world’s electricity, using about as much as Sweden and Ukraine. While that raises concerns about its environmental sustainability, “there is currently little evidence suggesting that Bitcoin directly contributes to climate change,” the center wrote. Companies including
Square
(ticker: SQ) are working on reducing Bitcoin’s environmental impact, though some Bitcoin proponents argue that the network’s “inefficiencies” are a key feature keeping it from being hacked.
Write to Avi Salzman at avi.salzman@barrons.com
