US Banks regard bitcoin as great storage of value

March 31, 2016 - Bitcoin
US Banks regard bitcoin as great storage of value

David Andolfatto, a prominent US banker, believes that bitcoin is quite reliable as a safe asset while Needham & Company bank claims that the cryptocurrency is undervalued by at least $200.

In his blog, Andolfatto, Vice President and Research Director at the Federal Reserve Bank of St Louis, argues that bitcoin “could be the world’s next great safe asset” even though it “makes for lousy money” because of volatility rate and especially because its deflationary nature.

Regardless of that, the banker believes, bitcoin is extremely well suited to be a safe asset. Apart from being liquid and having a limited supply, it is “simple” because, similar to cash or gold, you don’t need any documents proving you own bitcoin, it is enough to know the private key. Of course, it is not so simple from the technical point of view, but an average car owner does not know very well how a car engine works either, which does not prevent them using it.

Even if it becomes illegal to trade bitcoins for fiat money, it would not deprive them of value, according to Andolfatto. Governments “can make life more difficult for the competing currency” but cannot extinguish its use, especially when everything one needs to use bitcoins is only a smartphone and internet access.

Even in the case of complete failure of the bitcoin network due to the scaling problem if it hits the ceiling number of transactions it can process, it won’t damage bitcoin as storage of value, says Andolfatto. While “Satoshi Nakamoto’s original vision of a low-cost, high-speed, high-volume P2P payment system may fail to materialize” because of the growing transaction fees, bitcoin would still be used for large-value transactions. Andolfatto believes that as in times of crisis people may flock to bitcoin as an alternative payment system, in a normal economic situation, they would keep it because of its liquidity despite relatively low returns.

At press time, one bitcoin is worth $411, according to the Coindesk Price Index. However, Needham & Company, an investment bank and asset management firm specialising in advisory services, believes that bitcoin is at present strongly undervalued. Its real price, according to the bank’s report, must be estimated at $655. The reason quoted is the emergence of rival blockchains and alternative cryptocurrencies. Yet, according to the company, “there’s a strong possibility that bitcoin will be the nucleus of security for all these blockchains.” The report recommends buying shares in the Bitcoin Investment Trust because their price is likely to grow.

Alexey Tereshchenko