In the wake of fairly negative reports by Goldman Sachs and Deutsche Bank, JPMorgan released its own cryptocurrency outlook, and despite past skepticism from Chief Executive Jamie Dimon, analysts at the U.S. banking giant painted a more upbeat picture on the outlook for digital currencies.
The debate around cryptocurrency prices has turned to their existence, with many banks and ‘experts’ calling bitcoin a scam and predicting it’s heading to zero. However, despite the growing pessimism, JPMorgan sits at the other end of the spectrum saying cryptocurrencies will continue to attract investment, especially from those who are skeptical of centralized and regulated markets.
At the same time, cryptocurrencies must overcome flaws and other considerations that present hurdles to their widespread adoption.
Here are the key takeaways from the 71-page report:
Cryptocurrencies are here to stay
Cryptocurrencies “are unlikely to disappear completely and could easily survive in varying forms and shapes among players who desire greater decentralization, peer-to-peer networks and anonymity, even as the latter is under threat,” JPMorgan said.
Blockchain is the real deal
The power of blockchain from a storage and tracking perspective has vast potential. With both the data and access to the data encrypted, it offers security, which is in high demand. JPMorgan believes blockchain can assist banks in the areas of transparency, trade finance, and as a payment system.
The bank adds that the blockchain technology offers greater potential than cryptocurrencies, which are limited to a trading vehicle.
See: Vanguard’s chief economist: ‘Decent probability’ that bitcoin goes to zero
Bitcoin transactions are expensive
What is often an overlooked in the cost of buying or selling a financial security is its spread. This is predominantly because we live in a world that is flooded with liquidity. Whether it’s currencies, stocks, ETFs or futures, entering and exiting trades is cheap because spreads—the difference between the best bid and the best ask—are tight.
However, the spread investors face when buying and selling bitcoin remains expensive, which undercuts the argument that the digital currency can become a widely tradable asset.
The average spread to buy 10 bitcoin BTCUSD, +0.92% in U.S. dollar terms is 2%. This means, if bitcoin is trading at $8,000, an investor could buy or sell 10 bitcoin with a spread of $7,920 / $8,080. Compare this to a widely traded currency, ETF or stock, which is transacted with a spread under well under 0.1%.
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Bitcoin is volatile. Like, very volatile. While volatility can be a trader’s best friend, to those who are hoping for widespread adaptation, wild price moves are unwelcome. If large institutional investors are to begin using bitcoin, it will have to mature as a market and that means reduced volatility and tighter spreads.
“Based on its historical performance, [Cryptocurrencies] can be 10 times more volatile than core assets like stocks, or than portfolio hedges, like commodities,” JPMorgan said.
Lack of coordinated regulation
While U.S. regulators are moving to work together with Congress, JPMorgan noted that regulations vary widely from country to country and there’s been no coordinated effort in place to create a universal set of rules.
“So far, there is little global coordination on cybercurrency regulation,” JPMorgan said.
In many countries, trading bitcoin is banned, and in some countries like South Korea, capital controls see bitcoin trading at a large premium or discount.
While JPMorgan’s overall narrative is that cryptocurrencies are here to stay, they argue that the notion they are going to challenge the gold market or become a global currency remains a distant dream.
“It will be extremely hard for [cryptocurrencies] to displace and compete with government-issued currencies, as dollars to euros and yuan are virtual natural monopolies in their regions and will not easily give up their seigniorage profits,” JPMorgan said.