Cryptocurrency Analysis

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Pros and cons of bitcoin as an investment tool

While the bitcoin rate continues to push in the $54,000-$60,000 range, Bank of America published a report that does not see a compelling reason to own bitcoin. The bank's economists concluded that bitcoin has only one advantage over many disadvantages. It should be understood that we are talking about bitcoin as a financial instrument or derivative, with which you can build various trading strategies and make money.



Many cryptocurrency enthusiasts have recently argued that one of the main speculative advantages of cryptocurrency is the ability to hedge inflationary risks, which, by the way, is the time for central banks of the developed countries to think about. But that's not the point. The point is that Bank of America does not see the benefits of diversifying risks with bitcoin, since it is impractical as a store of value or payment mechanism.

There is only one good reason for owning bitcoin, and that is the rise in its price. Obviously, bitcoin is a rather risky asset, as it is not tied to inflation, and therefore it is subject to serious volatility. This makes it impractical as a store of value. There are also few places where you can use bitcoin for calculations, and given the current transaction fees, this function is now generally meaningless. Therefore, the only argument for adding bitcoin to your investment portfolio is not diversification, stable profitability, or inflation protection, but rather the expectation of a clear price increase in the future - a factor that depends on outstripping demand.

The Bank of America report downplayed the diversification benefits of cryptocurrency. Experts are confident that the price of bitcoin is more strongly correlated with stocks and commodities. Correlation with safe assets such as the dollar and US Treasuries, however, is the least visible. It is difficult to disagree with this because since January this year a very strong correlation trend has been observed with the American stock market - the S&P 500 index.



The markets began to overlap most sharply during the onset of the coronavirus pandemic crisis when the collapse of stock indices led to a similar decline in cryptocurrencies. Then, as it recovered throughout 2020, the S&P 500 index managed to return to its highs and update them, and at the beginning of 2021, Bitcoin already followed it. In recent months, these two markets have been very strongly correlated with each other, and when one falls, there is a noticeable correction in the other.



An equally interesting study was published today by Glassnode, which says that large bitcoin investors have sold part of their assets amid rising prices this year. This confirms the theory that it is retail buyers who have become a key factor in supporting the market. According to Glassnode, the number of unique addresses containing more than 1,000 BTC has dropped by more than 8% since February 8 this year. And although the wallets of the whales are gradually getting rid of some of their assets, it is more likely to take profit than to run out of the market. It is unlikely that the upward trend in bitcoin will end before the middle of this year, as long as there are programs to help economies in several developed countries.

As for the technical picture of bitcoin, much depends on the behavior of investors at the level of $59,200. Its breakout will provoke a new large wave of growth with a return to the level of $60,000 and the subsequent renewal of historical highs around $62,000 and $65,000. It will be possible to talk about a downward correction in Bitcoin only after the trading instrument drops below $54,400, which will lead to a rapid collapse in the area of $49,600 and $44,900.





Jakub Novak
Analytical expert
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