A big Morgan Stanley report shows how bitcoin is in danger of becoming a victim of its own success

A man walks past an electric board showing exchange rates of various cryptocurrencies including Bitcoin (top L) at a cryptocurrencies exchange in Seoul, South Korea December 13, 2017.  REUTERS/Kim Hong-JiThomson

  • Bitcoin has had a rough start to the year, but a note
    from Morgan Stanley shows there are issues surrounding the coin
    aside from slumping prices. 
  • The bank argued institutional money pouring into
    bitcoin could reduce its usefulness as an asset.
  • Further, the cryptocurrency’s energy consumption
    presents a problem. 
  • The number of people using credit cards to buy bitcoin
    is another issue. 

Bitcoin is in danger of becoming a victim of its own success.

That’s according to a big note by Morgan Stanley out to clients
Wednesday titled “Bitcoin Critics Grab the Mic,” in which
the bank examined three issues facing the crypto. 

The red-hot digital currency, which soared close to $20,000 in
December, has been trading under $10,000 for much of
February. Bitcoin bulls point to institutional money diving into
the digital coin as a major tailwind moving forward. But an
increase in the coin’s popularity among institutions might
actually hurt it, according to the bank. That’s
 it’ll put the coin’s moves more in line
with the broader markets, reducing its appeal as a non-correlated
asset. Here’s the bank:

“The idea is that as institutional investors seek out
increasingly higher levels of risk/return, that Bitcoin may
represent the most risky/potentially highest return available,
and hence could be evolving quickly into a primary
barometer/leading indicator for broader financial markets and
risk appetite.”

That raised a big question among the bank’s investor clients: “If
Bitcoin correlation with the broader market fully materializes,
does that limit its ultimate potential?”

Screen Shot 2018 02 07 at 10.31.48 AMMS

That correlation has increased, according to the bank, but there
are some caveats. Here’s Morgan Stanley:

“But the current level of correlation still stands below previous
periods in the past 14 months. And looking at the overall trend
during that period, it is clear that correlation with the broader
equity market has not been fully established in the data.”

As a second problem, the energy cost of mining has long been
touted as one of the most negative consequences of bitcoin.
Miners, the folks are rewarded new bitcoin for processing
payments on the coin’s network and running computationally
intensive algorithms to maintain the cryptocurrency’s security,
have consumed more and more power as bitcoin’s popularity has
soared. In mid-December,
Newsweek estimated
the cryptocurrency was on track to consume
as much energy as every country on earth by 2020.

Bitcoin’s price rout has not pumped the brakes on its eye-popping
energy consumption. 

Screen Shot 2018 02 07 at 1.01.15 PMMorgan

“And as predicted, even as Bitcoin has fallen in price since Dec
17, we estimate electricity consumption has increased by over 50%
to ~4,000MW (~35 terawatt hour/year run rate),” Morgan Stanley

As such, if bitcoin’s price were to recover to previous highs,
the bank estimates the coin’s ecosystem would consume as much
energy as 18 million US homes.

Bitcoin proponents say that having a decentralized financial
system is worth the cost. 

“Labeling Bitcoin mining as a ‘waste’ is a failure to look at the
big picture,” Marc Bevand, a bitcoin miner, wrote
in a blog

Bevand argues that bitcoin’s positive impact on the global
economy will make up for its energy costs:

Even in the future, economic modeling predicts that
if Bitcoin’s market capitalization reaches $1 trillion,
then miners will still not account for more than 0.74% of the
energy consumed by the world.
Bitcoin becomes this successful, it would have probably
directly or indirectly increased the world’s GDP by at least
0.74%, therefore it will be worthwhile to spend 0.74% of the
energy on it.”

Finally, Morgan Stanley also notes that bitcoin is more
leveraged than previously thought — people are taking on debt to
buy the cryptocurrency. The bank pointed out 
prohibitions on using credit cards to buy cryptocurrencies,
implying that perhaps a substantial amount of Bitcoin buying in
2H17 had been funded with credit cards.”

Already, nearly 20% of cryptocurrency owners went into debt to
invest in the market, according to
Bloomberg reporting.

The fact that bitcoin is more leveraged than previously thought
means it is more risky. Taking on debt to purchase bitcoin could
result in amplified losses for someone who sees their holdings
depreciate. That’s why a number of banks have lined up to
announce a ban on purchasing crypto with credit cards. 

In the US, JPMorgan
Chase, Bank of America, and Citigroup
 recently announced
they would do just that. 

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