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Heres what needs to happen

for the bitcoin boom to keep
going
Bank of America Merrill Lynch is the latest major Wall Street firm to issue a
report on bitcoin.
Commodities and Derivatives Strategist Francisco Blanch looked at the history
of currencies.
Based on precedent, Blanch still sees a major hurdle for bitcoin to become an
MENU established world currency.
Evelyn Cheng | @chengevelyn
Monday, 24 Jul 2017 | 3:00 PM ET

Yuriko Nakao | Bloomberg | Getty Images

Bitcoin still faces many challenges in becoming a globally accepted

currency, Bank of America Merrill Lynch's commodity and derivatives
strategist Francisco Blanch said in a sweeping Monday report
comparing digital currencies' growth to that of gold, silver and even
salt in ancient times.

"A crucial hurdle" for bitcoin is whether major financial institutions will
accept the digital currency as collateral, said Blanch, who is considered
by many to be one of the best commodity analysts on Wall Street. "But
we are not aware of any major institution that takes cryptocurrency as
collateral at the moment."

The report is one of a handful from major Wall Street firms and FROM THE WEB Sponsored Links by Taboola

strategists that have recently warmed to bitcoin for its potential as an

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Beginning with salt in ancient times, Blanch noted how practical needs Hotel Prices You're Not Allowed to See.
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and new discoveries have led to the development of new currencies:

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1. Salt was "once mined and treasured in the ancient world." tripsinsider.com

2. But salt and other commodity-backed currencies often

proved impractical and not durable enough, so governments 5 Countries That May Give Free Housing To New
began making coins with metals such as gold and copper. Residents
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3. The Spanish discovered large silver deposits in Bolivia in the

16th-century, leading to nearly 400 years of trade dominated by Taboola

by silver dollars.
It's not bitcoin or
ethereum: This digital
4. Carrying around large amounts of gold and silver wasn't
currency rose 3,977%
ideal either, so the world started to move to paper money in the
in the first half of
last 200 years. 2017

5. Paper money created huge waves of price increases and The hottest stocks in
declines along with the business cycle. Today, most countries' the market Tuesday
are mining shares
currencies rely on "full faith of the issuing government" that
central banks will comply with their mandate not to let inflation $32 million worth of
run too high or low. digital currency ether
stolen by hackers
This 'ugly' chart is
Given this history of currency development, BofAML's Blanch seems to about to get even
hint that bitcoin may soon be considered legitimate. He laid out three uglier: Trader
main criteria that bitcoin must meet in order to become a reserve Bottom falling out of
currency of the world: safety, liquidity and return. US dollar: Drops to
near 2-year low vs the
"Bitcoin and other cryptocurrencies score well on some, and not so well euro, 2017 loss now
on others," Blanch said. 10%
Shrinking dollar could
Safety boost the market and
make these stocks big
Bitcoin didn't score that well on this parameter, Blanch said. "The lack
winners
of a centralized decision-making process or authority creates risks such
as a currency split," he said. "Also, risks such as
hacking, identity theft, or outright scams are a recurring problem."

However, when using volatility to measure the safety of bitcoin, the

cryptocurrency has actually beat silver.

"Bitcoin's volatility is very high compared to the euro, the yen or even
gold," Blanch said. "But it fell twice last year below the volatility of
silver, the world's currency for 400 years."

Bitcoin's volatility starting to approach that of silver

Source: Bank of America Merrill Lynch Global Research

Liquidity
Market liquidity as reflected by the amount of trading is still far greater
in stocks, fixed income and traditional currencies, Blanch said.

But "it is hard to ignore that trading volumes for major digital
currencies like bitcoin and Ethereum have skyrocketed in recent years,"
he said, noting that since 2012, daily trading volumes for bitcoin have
grown five times to $2 billion a day.

Return
The recent interest in bitcoin and other digital currencies has sent their
prices soaring. The market capitalization of all cryptocurrencies has
leaped from around $20 billion at the start of this year to around $90
billion.

Bitcoin has more than doubled in value this year, while rival digital
currency Ethereum has skyrocketed several thousand percent.

However, Blanch, like others, noted that the gains in bitcoin's price are
due partly to the increasing difficulty of mining, or generating, new
bitcoins. "This could change with the advent of quantum computers or
through agreements among developers to adopt simpler protocols."

A 'pattern similar to gold'

Amid the emergence of new currencies, gold has long been a
benchmark for international measures of value. The precious metal
backed the U.S. dollar for decades, marking a peg for global currencies.
But in 1971, President Richard Nixon suspended the ability for the dollar
to be converted into the precious metal.

Cryptocurrencies arose during the financial crisis and have

demonstrated "a few advantages" over major world currencies, such as
the ability to cheaply and instantaneously transfer money around the
world, and record all transactions through a digital accounting system
known as a blockchain, Blanch said.

In expectation of this potential, many have called bitcoin "digital gold"

despite the lack of businesses that accept bitcoin and the often high
transaction fees.

Gold itself has stagnated in the last several years. The precious metal
leaped from several hundred dollars in the early 2000s to near $2,000
in 2011, and has traded between $1,000 and $1,400 in the last two
years.

Fundstrat's Tom Lee said in a report on bitcoin in early July that buyers'
shift from gold into cryptocurrencies is a reason why the digital
currency's price could rise into the tens of thousands.

Due to higher bitcoin mining costs and a surge of interest, the digital
currency's price has climbed in "a pattern similar to gold" and "over a
much more compressed time period," Blanch said.

Bitcoin (years in parentheses) vs. gold

Source: Bank of America Merrill Lynch Global Research

To be sure, short-term appearances of similarities among bitcoin, gold

and the development of historical currencies don't imply that bitcoin is
here to stay.

"There is no certainty that that [similarity to gold] will continue and,

most certainly, no way to predict it," Blanch said. "In our view,
cryptocurrency returns will mostly depend on the faith placed by
individuals, corporations, and financial institutions on this emerging
technology."

Evelyn Cheng
Writer

RELATED SECURITIES

Symbol Price Change %Change

Bitcoin/USD 2585.95 20.92 0.82%

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