Cryptocurrencies continue to be speculative instruments, which investors mostly use as a store of value rather than a means for commerce, despite some moves toward broader adoption, S&P Global said in a report. The ratings agency added that regulations and much greater public confidence are the keys to the more widespread use of cryptocurrencies.
Financial markets are once again excited about cryptocurrencies such as bitcoin and ethereum, after prices rallied to record highs above $58,000 in late February.
However, in the long run, S&P Global sees a greater chance of large-scale adoption of central bank digital currencies (CBDCs) as a means of payment than private digital currencies. “In our view, ultra-low interest rates, substantial liquidity, growing inflation expectations, and high valuations for other securities may have contributed to the renewed interest by investors in bitcoin,” the rating agency had said in a recent note.
S&P Global still considers bitcoin and other cryptocurrencies more as speculative instruments than as payment vehicles that could substantially alter the financial system.
Acceptability of these instruments has increased somewhat over the past couple of years, though more as an investment rather than a payment tool. “We have seen the first exchange-traded fund (ETF) launched in Canada and a few others lining up. We also observe traditional asset managers becoming more open to the idea of investing in cryptocurrencies or in taking positions,” S&P Global.
Blackrock, for example, announced that bitcoin derivatives registered on commodity exchanges will become eligible investments for a couple of its funds. Moreover, new players have started to accept or offer products connected to cryptocurrencies, with large payment providers such as Visa and Mastercard as well as PayPal and Tesla being the most noteworthy examples.
Despite rising interest, the overall bitcoin market is still concentrated, with about one million active addresses among the 30 million with non-zero balances and only 788,000 addresses with more than one bitcoin. The number drops to 16,000 if we increase the minimum holding to 100 bitcoins, as of 22 February, according to blockchain data and intelligence provider Glassnode.
S&P Global is of the opinion that such concentration makes the instrument prone to market manipulation.
The rating agency cautioned that if bitcoin price nosedives, retail investors would feel most of the heat because they represent most of the market’s activity either directly or through investment in funds. “The damage would unlikely be felt beyond this group of investors,” S&P Global said.