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Crypto Universe ‘Too Large to Ignore’: BofA Securities

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What You Need to Know

  • The brokerage arm of BofA issued a 141-page report extolling the growing importance of the crypto ecosystem.
  • The crypto universe is expanding quickly due to retail, institutional and central banks' interest, the report says.
  • But it notes regulatory and technology-based risks that could impact the growth of the crypto ecosystem.

“The digital asset universe is too large to ignore,” according to Bank of America Securities in its inaugural research report on digital assets.

The market has a value of more than $2 trillion, more than 200 million users and “has the potential to transform every industry by improving efficiency and reducing friction across transactions,” according to a BofA press release announcing the launch of the company’s research coverage of digital assets.

“Bitcoin is important, but the digital asset ecosystem is so much more,” said Alkesh Shah, head of Global Cryptocurrency and Digital Asset Strategy, in a statement.

According to the firm’s report titled Digital Assets Primer: Only the First Inning, ”crypto-based digital assets could form an entirely new asset class” as the use case of the digital asset ecosystem grows well beyond Bitcoin’s store-of-value thesis to include more product innovation, mainstream adoption and increased institutional usage along with regulatory clarity.

“The largest near-term risk” to that growth is “regulatory uncertainty,” but “regulation may drive increased investor participation over the long term once the ‘rules of the road’ … are established,” according to the report.

The 141-page report provides examples of the expanding crypto ecosystem and the drivers of that growth as well as the technological and regulatory risks that could slow it down.

Why Crypto Is Growing

These are the key developments behind the expanding crypto universe, according to the BofA Securities report:

Increasing corporate interest in the digital economy, which is at an all-time high, according to a BofA analysis of more than 161,322 earnings call transcripts from the first quarter through early August of this year.

Hundreds of companies are participating in the digital asset ecosystem providing infrastructure support, marketplaces and applications such as decentralized finance, supply chain, gaming and social media. T

hey include online payment companies like PayPal, which lets account holders to buy, sell and hold crypto in their digital wallets; banks like JPMorgan, which has established a network for instantaneous payments based on blockchain technology; and major media companies like Fox and Disney involved in the non-fungible token (NFT) space.

Growing retail interest, especially among millennials and Gen Z. These digital natives expect Internet transactions to be digital in real time and without multiple steps and middlemen. Even older adults are engaging in digital asset investing, according to the BofA report. Approximately 14% of adults own digital assets and another 13% plan to buy some this year, according to the BofA report, which says their average age is 44.

More products beyond Bitcoin, including what BofA analysts called “altcoins,” short for alternative coins. There are currently more than 11,500 of these coins, and three of them — Ether, Cardano and Binance Coin — are the most popular and have exploded in value year-to-date, ranging from a 365% gain for Ether and over 1,100% for the Cardona (1,427%) and Binance Coin (1,142%).

An extended use of blockchain, the record-keeping technology behind Bitcoin and other cryptocurrency networks, in applications for decentralized finance, digital identity and supply chain tracking. Decentralized finance (DeFi) allows users to access financial products and services, such as lending, borrowing, insurance and trading, without relying on a traditional financial institution.

NFTs, unique cryptographic tokens that exist on a blockchain and cannot be replicated, are a key example of the digital identity uses of blockchain, allowing artists and musicians to retain ownership of their digitized assets and the rights to continuously resell them.

Central bank digital currency (CBDC) activity has been increasing significantly, according to BofA. The Federal Reserve plans to launch a review of the benefits and risks of issuing a CBDC within days, while China and Europe’s central banks are already studying the issue. To date, only five countries have CBDCs, and they’re all in the Caribbean. El Salvador has adopted Bitcoin as legal tender.

Plans for shifting to greener energy mining. These plans could potentially make crypto assets more attractive to investors and consumers who believe that production of these uses up too much energy for too little benefit and contributes to climate change.

According to the BofA report, Bitcoin production consumes about 91 terawatt hours of electricity a year, more than is used by Finland, which has 5.5 million people. (A recent Cambridge Bitcoin Electricity Consumption Index update says Bitcoin using 102.43 terawatt hours of electricity, almost as much as the electricity use (110.7 terawatt hours) of the Netherlands, which has more than 17 million people.)

Risks for Digital Assets Growth: Regulatory and Technology-Based

The flip side of these bullish signs for the continued growth of the crypto ecosystem are the regulatory and technological risks that the crypto universe is facing.

On the regulatory side are crackdowns on crypto trading in India and China, which recently banned all cryptocurrency transactions and any citizens from working for crypto-related companies and concerns that the U.S. and other governments will require greater anti-money laundering and know-your-customer disclosures by DeFi companies as well as larger reserve requirements.

Perhaps most important, the U.S. Securities and Exchange Commission could prevent the formation of crypto exchange-traded funds (ETFs), which crypto enthusiasts have been craving. (More than a dozen such applications have been filed with the SEC.)

As to risks involving technology, the BofA report lists the possibility that the underlying blockchain technology won’t scale effectively, that software bugs could cause smart contracts to fail and that hacking or fraud involving current adopters of DeFi with limited recourse could cause other current and potential adopters to revert to doing business with traditional financial institutions.

Other tech-related risks include the potential failure of stablecoins pegged to fiat currencies,  which could create a liquidity shock.