Bank of America: Blockchain could be “revolutionary”
The bank’s new research seeks to provide a framework for digital assets investment
Digital asset bulls expect strong performance once governments and regulators introduce the rules of the road, but there’s likely to be plenty of volatility along the way, Bank of America (BofA) warned investors as it launched its digital asset research, providing an investment framework for the digital asset landscape and looking at it through a variety of lenses.
“We are only in the first innings of a major change in applications across most industries that will take place over the next 30 years. While we acknowledge concerns about the speculative digital asset trading that takes place currently, we believe it’s the underlying blockchain technology driving this speculation that could be revolutionary,” said researchers.
Estimates indicate about 221 million people globally have traded a cryptocurrency or used a blockchain-based application as of June 2021, up from 66 million at the end of May 2020.
Digital assets adoption
Hundreds of companies are now within the digital assets ecosystem, providing infrastructure support, marketplaces and applications. Many are just two quants in a garage, though digital asset public companies’ aggregated market caps are $130bn, boosted by COIN’s listing in 2021, whose market cap was $54.6bn as of August 31, according to researchers.
Meanwhile, digital assets-related mergers and acqusitions (M&A) jumped to $4.2bn year-to-date, up from $940m in 2020 and $2.5bn in 2019.
“We’re still in the early innings and we see the potential for value creation over the next five years but, as in prior tech cycles – see PCs, software and internet, for example – only a handful of well-run, focused companies will likely succeed,” said researchers.
Among a background of increasing crypto adoption, bans in India and China and the US attempting to bring the sector into a defined regulatory framework, researchers found corporate interest in digital assets is at an all-time high, while the development and adoption of digital assets will likely be led by Gen X, Millennials and Gen Z – the generations that grew up with the internet.
It’s estimated that 14% of US adults, or 21.2 million people, own digital assets, and an additional 13% (19.3 million people) plan to buy digital assets in 2021. The average age of these potential buyers is 44, researchers noted, and 53% of them are female.
Digital assets analysed
BofA researchers analysed the most “trendy” cryptos, claiming that regulation will likely speed up mainstream adoption of digital assets.
“For now, more speculative digital assets or those viewed as stores of value are complementary and not competitive with regular money. Despite increased volatility as regulatory frameworks appear, clearer rules for digital assets and their applications may accelerate the adoption,” they said.
While Central Bank Digital Currencies appear to be inevitable, the Non-Fungible Token (NFT) boom could slow as NFTs seem to be “not fully understood” by investors. The NFT market is still, however, one of the fastest-growing, reaching over $3bn sales in August with over 200,000 participants.
This is the fastest growth area for token applications: total sales for 1H/2021 were $2.5bn, up from only $14m in 1H/2020.
According to BofA data, Bitcoin is the ninth largest asset in the world by asset value, larger than Tesla but smaller than Facebook with a $0.9trn market cap. With a 63% increase in its price in the last twelve months, the lead crypto is the second-best performing asset by market value, outperforming gold and silver.
Bitcoin’s value drivers include supply and demand dynamics, scarcity (there are a maximum of 21 million bitcoins in total, of which 19 million have already been mined) and potential ETF approval timing.
“Bitcoin’s volatility is still high at nearly 70% annualised volatility; however, it is showing signs of maturing from when it breached 300% in 2013,” said researchers.
PayPal and crypto
BofA also analysed the US companies with the biggest exposure to cryptos, suggesting a "buy" on Paypal which turned out to be the most exposed to digital assets, with a target price of $323 standing out against its current price of around $264.
“We highlight potential upside from PYPL’s entrance into the fast-growing digital asset economy and reiterate our Buy on PYPL given outsized growth, structural tailwinds and overall business model quality,” said the BofA analysts.
“Downside risks to our price objective are: weak consumer spending in the event of a macroeconomic downturn, increased competition from other digital wallets and/or providers of P2P payment platforms, and large fluctuations in the value of currencies/foreign exchanges rates,” said BofA.
Other financial companies analysed by BofA analysts included Coinbase; Signature Bank, which is proving popular with digital assets-focused institutional clients due to Signet, its proprietary, blockchain-based real-time platform; JPMorgan, which was the first global bank to design a network facilitating instantaneous payments using blockchain technology, and developed JPM Coin; Morgan Stanley, which provides access to bitcoin funds for its wealth management clients; and SVB Financial.
Moreover, BofA analysts analysed energy and data companies involved in mining, such as energy providers Black Hills and Exelon, which offers a low-carbon power source to ESG-conscious digital asset miners; NRG, a merchant power company benefitting from an increasing load, particularly in the core TX market; Public Service Enterprise Group, offering the opportunity to secure long-term contracts and reduce volatility with its remaining merchant nuclear assets; and Vistra, whose TX generator could serve mining companies with growing renewables and storage development.
Media firms and crypto
Last but not least, BofA analysts analysed media companies that have jumped on the NFT train.
These included Fox, the first major media company to meaningfully enter the NFT space with the launch of Blockchain Creative Labs, a $100m NFT fund; Disney, which launched a global collectables experience where fans can buy and collect official Marvel NFTs; iHeartMedia, who plan to leverage NFT giveaways to drive fan engagement ahead of music festivals; and Warner Music, who've signed a partnership with Genies to bring Warner’s roster of artists to life as avatar NFTs
Finally, also included in the BofA list of crypto companies were chemicals company Archer-Daniels-Midland & Bunge, which is leveraging blockchain technology to efficiently and accurately process transactions in global agriculture; the gaming company DraftKings, which launched an NFT marketplace in August and has an exclusive deal with NFT platform Autograph to create unique digital collectables; and data centre specialist Digital Realty & Equinix, which is well positioned to capitalise on the migration of digital asset mining from China to North America.