Bitcoin has reached a “tipping point” that could see it either be adopted as the preferred currency for international trade or face another burst bubble, Citigroup analysts have said.
Following interest in the cryptocurrency by Tesla, Mastercard and Square, bitcoin has become the “North Star” for digital assets such as fiat-backed stablecoins, including those being developed by central banks.
Citi said crypto exchange volumes reached $500bn in the first three weeks of 2021, nearly double the record volume noted in 2017-2018. Though ownership of the digital currency remains primarily retail, institutional interest is increasing.
“In a search for yield and alternative assets, investors are drawn to Bitcoin’s inflation hedging properties and it is recognised as a source of ‘digital gold’ due to its finite supply,” said the analysts in a 1 March note.
“Specific enhancements to exchanges, trading, data, and custody services are increasing and being revamped to accommodate the requirements of institutional investors.”
The surge in interest from institutional investors demonstrates the inflection point that bitcoin has reached, Citi said, similar to the evolution of adoption of other landmark inventions such as the telephone, television and the internet.
Bitcoin’s price reached a high of more than $58,000 in February 2021, surpassing a $1tn market capitalisation to rival those of major tech companies such as Apple and Amazon. However, it remains volatile, retreating down to around $47,000 as of 1 March.
“There are a host of risks and obstacles that stand in the way of bitcoin progress,” the analysts added. “But weighing these potential hurdles against the opportunities leads to the conclusion that bitcoin is at a tipping point.”
Bitcoin could continue past this hurdle if the advent of digital currencies and wallets developed by central banks enters mainstream adoption, showcasing the cryptoasset’s ability for usage in e-commerce and digital payments more broadly.
Remaining concerns for institutional investors include capital efficiency, insurance and custody and security. Issues also arise with how bitcoin can gel with investors’ ESG goals, as mining the cryptocurrency is particularly energy-intensive.
“The vision of bitcoin as a force that will transform the world may seem self-evident in just a few more years,” analysts wrote. “The fact this progression has occurred in just over a decade makes bitcoin remarkable regardless of its future.”
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