Global investment bank Citi has released a report about the current and potential future status of Bitcoin, describing the cryptocurrency as the “North Star” of innovation.
The report makes several claims about Bitcoin’s potential. One of the most significant observations in the report is that—because an increasing number of businesses are accepting Bitcoin—the flagship cryptocurrency is already breaking into the mainstream. The report also states that Bitcoin’s base is markedly different from 2017, when Bitcoin was trading almost exclusively as a retail asset.
The report also suggests that Bitcoin may be the currency of choice for future international trade. The report points to the cryptocurrency’s global reach, borderless design, and lack of foreign exchange exposure as key features that could drive this phenomenon.
But the most important factor that influences whether Bitcoin becomes the currency of choice for international trade is perception. According to the report, Bitcoin’s perception moved from a focus on technology, to a focus on the cryptocurrency’s ability to resist censorship, and finally to a focus on scarcity. In the future, the focus may shift to Bitcoin’s “globality” and value exchange networks, which, according to the report, is when Bitcoin may be considered a facilitator of global trade.
“Bitcoin is becoming the de facto ‘North Star’ of the digital asset space, with its trajectory being seen as a compass for the evolution of the broader ecosystem”, the report said.
Bitcoin is also set to benefit from advancements in—and the broadening use of–blockchain technology. Blockchains are already being used in ways that look beyond Bitcoin and cryptocurrencies in general. These efforts, according to the report, validate Bitcoin’s underlying technology and might bring it into the mainstream.
In addition, the report suggests that Bitcoin—and other cryptocurrencies—are becoming more interlinked with the traditional fiat currency system. When Bitcoin was first invented, it operated outside of traditional finance. Fiat currencies were converted in and out of the crypto market, but now, that too is changing.
With PayPal’s decision to add Bitcoin to its platform in 2020, it is now far easier to see how Bitcoin is further integrated into traditional finance. “All the user needs to do is choose to pay in Bitcoin, and PayPal will handle the rest of the transaction,” the report said, adding, “This is a marked improvement in the ability of money to move between the two ecosystems”.
The risks to Bitcoin’s success
However, despite some of the more optimistic assessments of Bitcoin’s future, the Citi report also deals with some of the largest obstacles Bitcoin may encounter.
One of these obstacles is the risk that other cryptocurrencies overtake and displace Bitcoin. In support of this view, the report points to the fact that Bitcoin’s market capitalization increased by 2.70x in 2020, but the market capitalization for altcoins—cryptocurrencies other than Bitcoin—increased by 3.75x during the same period.
This means that Bitcoin’s share of the crypto market is declining. In 2019, Bitcoin’s market dominance sat at 69%, but it fell to 62% in 2020.
Bitcoin may also fall victim to the developing macro economic environment. The report suggests one of the reasons why institutional investors are buying into Bitcoin is because they are convinced it’s a hedge against inflation and currency devaluation.