Bitcoin has gone from trending to sticky, says Deutsche Bank analyst

Fashion mogul Karl Lagerfeld is not an obvious person to quote when discussing financial markets. Again, bitcoin is hardly a conventional financial asset.

Thus, Lagerfeld’s claim that “fashion is the last step before tack” may be a useful framework for analyzing bitcoin, according to Marion Laboure, analyst at Deutsche Bank and professor at Harvard University.

The London-based analyst said Wednesday’s plunge into the cryptocurrency space, including an 11% drop for bitcoin BTCUSD,
+ 0.52%,
was proof that digital currencies can quickly become outdated. “It only took three months for bitcoin to go from fashion to fashion, and it only took a tweet and a statement from the Chinese government for the cryptocurrency to go out of fashion,” Laboure said.

The tweet was from Tesla TSLA,
+ 4.14%
Chief Executive Officer Elon Musk, when he said the electric car company would stop using bitcoin as a payment method due to environmental concerns, and the statement came from the People’s Bank of China, when it said that digital tokens were banned as a means of payment.

“The value of Bitcoin will continue to rise and fall based on what people think it is worth,” Laboure wrote in a note to clients. “This is sometimes referred to as the ‘Tinkerbell effect’ – a recognized economic term based on Peter Pan’s claim that Tinkerbell existed simply because the children believed it existed. In other words, the value of bitcoin is based entirely on wishful thinking, ”she said.

Cryptocurrencies as a popular payment method will be unlikely. Laboure estimated that less than 30% of Bitcoin’s transactional activity is linked to payments for goods and services – most of which is linked to financial investments. Bitcoin’s liquidity is low – in 2020, 28 million bitcoins changed hands, or 150% of total bitcoin in circulation, compared to 40 billion shares of tech giant Apple AAPL,
+ 2.10%,
or 270% of its total shares.

Bitcoin’s limited tradability will keep it ultra-volatile, as a few large buys or exits from the market can have a significant impact on the equilibrium.

And that is before the arrival of governments, which “are unlikely to give up their monetary monopolies,” Laboure said.

Governments are working on their own digital currencies, she noted, and regulation is forthcoming.

It was China’s reiteration that cryptocurrencies cannot be used for payments that triggered Wednesday’s decline. After the initial publication of this article, the Treasury Department recommended that crypto transactions greater than $ 10,000 be reported to the government.

The European Union has proposed the Cryptoasset Markets Regulation, or MiCar, which could come into effect as early as the end of 2021, and India has tightly regulated cryptocurrencies.

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