Merrill Lynch Plots Bitcoin's Path to Global Legitimacy - CoinTelegraph

Bitcoin / 2 weeks ago

In a report on Bitcoin, Merrill Lynch'scommodity and derivatives strategist Francisco Blanch, has noted the similarities of digital currencies to gold but says it can take the next step up in money’s evolution if issues on safety, liquidity and return are addressed.

The report has looked at the history of trading commodities and how those gave rise to paper money, noting that Bitcoin could be the latest innovation that has seen people switch from salt to dollar notes.

Collateral damage

On this path to legitimacy, Blanch mentions that Bitcoin’s first and biggest hurdle is to be accepted as collateral as an asset, once that happens, it will take a huge step to global asset legitimacy.

"We are not aware of any major institution that takes cryptocurrency as collateral at the moment," Blanch said

Despite this though, Wall Street is warming to the digital currency as a potential investment product.

Worth its salt

Blanch begins his report with a brief history of commodities and their value as a currency explaining that practical needs, innovation and new discoveries have seen money evolve.

It seems logical then that because Bitcoin addresses some of the issues faced by paper money, it could become legitimized, but there are some of its own issues it needs to sort out.

Safety

Safety has always been a sore spot for Bitcoin and digital currencies, and it has been noted by Blanch too.

“The lack of a centralized decision-making process or authority creates risks such as a currency split," he says. "Also, risks such as hacking, identity theft or outright scams are a recurring problem."

However, in terms of its volatility, another hallmark of the digital currency, Bitcoin actually outscored silver on few occasions.

"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."

Source: Bank of America Merrill Lynch Global Research

Liquidity

Unsurprisingly, for an asset that is practically on the margins of society, it is being outperformed by stocks, traditional currencies and fixed income when it comes to market liquidity, but Bitcoin’s trading volumes are hard to ignore.

"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 bln a day,” Blanch added.

Return

One area where Bitcoin does score high is its returns. The digital currency has more than doubled its value this year while rivals in the same sphere, such as Ethereum, are seeing more than a 1,000 percent growth.

However, linking it back to gold, Blanch believes that it is the difficulty in miningBitcoin that is making it so valuable.

In a rather too simplistic assumption, Blanch believes things could be different: "This could change with the advent of quantum computers or through agreements among developers to adopt simpler protocols."

Truly is digital gold

Mining, as well as its increased difficulty, alongside an upsurge in interest, has seen Bitcoin climb in "a pattern similar to gold" and "over a much more compressed time period.”

Source: Bank of America Merrill Lynch Global Research

"There is no certainty 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,” Blanch concludes.

Here’s How World Fiat Money Affects Bitcoin Price

Major international currencies are quoted to the US dollar, thus making them quite dependable. For the most part, foreign currencies do not represent any significant value to each other, but the exchange is essential for open trade. And that’s why significant news are instantly reflected on quotes. A vivid example of that is the referendum on Brexit aftermath.

This is how GBP\USD, EUR\USD and USD\CHF reacted.

Simultaneous movement. And it’s not uncommon, since currencies almost always form the same trend in response to ‘big’ news.
And see what happened with Bitcoin price in light of the Brexit announcement.

The price was growing the day before the event. It’s okay to assume these circumstances turn some investors to look for other investing alternatives.

Wanna see how prices responded to during the day to breaking news?

June 27, Bank of England Governor made his statement on Brexit.

July 3, Eurozone unemployment data was reported.

July 6, the balance of trade on all the trading operations in the US was published.

You can clearly see that Bitcoin chooses its own direction despite the news and world currencies price trends.

Correlation 

A good tool to diversify your risks would be the Pearson product-moment correlation coefficient or PPC. The formula determines the correlation between assets’ prices. It helps to reduce risks and gives the most accurate picture.

Here are correlations between the GBP\USD, EUR\USD and USD\CHF quotes.

For the last couple of years, the prices correlated closely with an approximate coefficient of 0.9. This goes for almost all currency pairs, except franc.

Bitcoin and world currency correlation

Now let’s use PPC for Bitcoin and fiat money.

As seen from the graph, the coefficient has been indicating little dependence between BTC and EUR, GBP, CHF. This year’s events have formed negative dependence between BTC price and GBP\USD.

Conclusion

So far there is no indication that fiat money influence Bitcoin price after all. Bitcoin has been developing on its own, disregarding international news and major currencies movement.

Ethereum, Ripple, Litecoin, Ethereum Classic

BTC

Bitcoin price is forming the third wave of $1,838 mid-term uptrend. Currently, it is being decided whether we’ll see a big price hike or downwards correction to $2,800

The third wave can become the turning point. If there are new capital flows, BTC will move up. The key level responsible for the whole future of the uptrend is at $3,150. Providing no reversal down takes place during the pullback to the level, high chances the rise will remain. Otherwise, the price will have a reversal to the correction.

USDT\ETH

Ethereum price has similar structure forming. The demand levels show significantly lower numbers, compared to the first wave. This may trigger a pullback.

The $246 point is breaking for the whole trend. If the price corrects to this channel without a reversal downwards, it will mean, there are still big purchases in place. In this case, ETH will go up.

A reversal down at the $246 point will indicate major buyer closing positions. That way the price might have a pullback.

USDT\XRP

Ripple is in the midst of its $0.1542 uptrend correction. It is being traded at the most likely pullback bottom. 

Correction zone to the $0.1542 upward trend will take place till $0.17. XRP might speed up the growth. But the correction peak might be broken at $0.177 in case of a pullback.

USDT\LTC

Litecoin has a big supply level at the current peak. That’s why we see an upwards trend forming.

The $45 mark will indicate whether the trend will be broken and whether it will have a reversal down.

USDT\ETC

A correction peak has been formed to the $13.2 uptrend with Ethereum Price. The demand level exceeds the previous figures, and this is a good sign for further growth.

The structure needs to keep on. Otherwise, there’ll be a reversal at $13.2 and the price might fall to the starting point.

                                The fork aftermath

On Aug. 1 Bitcoin was traded in the long-term $3,000 channel. Technically, the movement needed a pullback, as it had larger scale resistance. The fork resulted in the instant correction for Bitcoin price. The buyers’ prevailed, which is proved by the purchase volumes. There was also an attempt to form a reversal down at the peak of the correction. But you need to remember, that a reversal shatters the previous trend. Price movement is the result of the market demand and supply. So for a reversal, the demand volumes at the correction peak need to be at least equal to the ones, formed previously at this level.

                   

Long-term growth remains

Bitcoin seems to be conquering the world step by step. It was announced that by the end of the year or in early 2018, Bitcoin will be listed on the Chicago Board Options Exchange.

And the price continues its long-term growth. Providing the trend structure keeps on, the $3,500 seems even more plausible. The current key level is placed at the largest trading volume around $2,800, the point, where the upward trend might break.
In case there are big sales and the price falls into this zone, no downward reversal will mean the upward trend is still supported. Reversal at the $2,800 channel could trigger the price collapse to the lowest resistance line, around $2,250.