Bank of America: ‘Bitcoin’s dirty little secrets’ — full report

BofA Securities, a unit of the Bank of America, put out a report on Wednesday 17 March: “Bitcoin’s dirty little secrets.”

The report was prepared by several analysts from Commodities Global. It’s imperfect — but it’s worth your time to look over.

Sections of the report were written up in the crypto and finance press — but not the whole thing, and the report wasn’t widely available. In fact, Bank of America have gone to some lengths to make it unavailable. But I got hold of a copy.

If you want to read the original report, I understand that there’s a copy on LibGen, if you search on “Commodity Strategist: Bitcoin’s dirty little secrets”.

Key takeaways

Bitcoin supply is artificially scarce, demand drives prices: BofA attributes the price of Bitcoin to institutional announcements and miner rewards dropping. Widely known price manipulations are barely mentioned.

No good reason to own BTC unless you see prices going up: “the main portfolio argument for holding Bitcoin is not diversification, stable returns, or inflation protection, but rather sheer price appreciation.”

Our Bitcoin ESG read: low on E, mixed on S and G: ESG stands for “environmental, social and corporate governance” — a good ESG score is increasingly important to investors, and hence to companies. Bitcoin is a straight-up environmental disaster, running on Xinjiang coal. On social and governance issues, the analysts accept at value the Bitcoin marketing claims that “it is helpful in territories with corrupt financial systems and lowers costs by eliminating intermediaries.” But they hold that the negatives still outweigh this — money laundering, corruption, bribery, fraud, and data privacy breaches.

CBDCs are kryptonite for crypto, but DeFi is intriguing: the report thinks CBDCs will destroy interest in Bitcoin and other cryptocurrencies — though the analysts’ reasoning is unclear. The analysts are very impressed by DeFi’s innovation, even given its practical issues.

What drives Bitcoin prices?

BofA believes the price of Bitcoin is driven by short supply from mining — particularly after the 2020 halving in the mining reward — and institutional demand. Nothing else is significant.

The report barely mentions Tether, or the known shenanigans surrounding it — Tether gets only a passing mention in the DeFi section. Nor does the report mention the margin trading manipulations through 2018-2019.

The only Bitcoin price manipulation mentioned is wash trading on unregulated exchanges. This is surprising, given the report notes how thin the market is — “A net inflow into Bitcoin of $93mn may result in a 1% price rise, while the analogue for gold is more than 20 times higher.”

This report comes from the BofA Securities commodities section, who should have noticed the ways that Bitcoin acts like the thinly traded and heavily manipulated unregulated commodity market it is. These should be the precise people who are fully equipped to see a Bart on a price graph and understand what it implies about that market.

The report says that “institutional demand is overwhelming supply” — but the analysts calculate bitcoins flowing into Grayscale as if they were being bought on the open market for actual money: “we also show that the Trust has been steadily buying Bitcoin over 2020, especially in 4Q20”.

This is false. We know that by Q3 2019, 80% of GBTC’s incoming bitcoins were direct deposits of bitcoins by customers — and I’m told that through 2020, deposits have been near 100% Bitcoin — and Grayscale stopped breaking out the percentage of direct Bitcoin deposits after Q3 2019, and just stated everything in dollars; which seems to have been sufficient to fool BofA. This is a glaring slip-up.

Bitcoin price rises run ahead of Google searches for “bitcoin” — the price went up in December 2020, but the searches didn’t start going up until Tesla bought bitcoins in February.

The report says that “Nowadays, about 80% of Bitcoin is exchanged in dollars” — but doesn’t mention the considerably higher Tether volume.

How does Bitcoin compare to traditional portfolio assets?

Ninety-five percent of Bitcoin is in just 2.4% of addresses. The report sees Bitcoin’s inequality as a major barrier to mainstream adoption.

“In our view, the fact that such a small percentage of Bitcoin accounts hold most of the BTC in circulation makes this instrument impractical as a payments mechanism or even as an investment vehicle. It can also create social and governance issues.”

Bitcoin’s ridiculous volatility remains a major concern, and “makes crypto-assets impractical as a payments or store of wealth mechanism.”

Bitcoin no longer appears uncorrelated to other major risk assets — remember how Bitcoin crashed with everything else in March 2020. This means Bitcoin is not useful for portfolio diversification.

Bitcoin “has not been particularly compelling as an inflation hedge as commodities and even equities provide better correlations to inflation.”

How does Bitcoin score on ESG?

Environmental: As everyone reading this blog knows, Bitcoin has “major environmental risks.” The energy consumption is directly correlated to the price (though with a lag) — “the skyrocketing prices have propelled Bitcoin’s CO2 emissions higher.”

Bitcoin’s carbon dioxide emissions are “astronomical.” At $50,000 per bitcoin, mining could use 0.4% of global energy consumption. (That’s about a Philippines of electricity.) Rising prices could push this even higher.

Hardware becomes more efficient with time — but miners are competing with the more efficient hardware, so the network remains inefficient by design.

A $1 billion Bitcoin purchase may have a carbon dioxide footprint of 5.4 million tons.

“We believe ESG-minded investors have to pay attention to the enormous environmental costs of Bitcoin, as well as its social and governance flaws.”

Tesla’s Bitcoin purchase is called out — “by applying our Bitcoin emissions analysis to TSLA’s recent investment of $1.5bn of reserves in Bitcoin, the indirect carbon intensity of the company if disclosed would jump by a significant amount.”

Social: The report accepts Bitcoin’s claims — unproven and largely failed — that it democratises financial markets, eliminates intermediaries and lowers remittance costs. All these benefits are stated as hypotheticals, because even the BofA analysts realise they can’t get away with claiming these in the present tense.

The negatives are stated in present time. Bitcoin has heavy technological requirements; volatility is bad for adoption; anonymity gives usage patterns “consistent with terrorist financing”; Bitcoin facilitates “high-yield investment programs, ransomware, pump and dump schemes, and crypto jacking.”

ESG tracking company Reprisk found that “181 companies faced risks linked to Bitcoin around money laundering, corruption, bribery, fraud, and breaches of data privacy.”

BofA suggests more regulatory oversight.

Governance: BofA gives Bitcoin “mixed reviews” on governance — “Bitcoin presents mostly negative G consequences from the perspective of decentralised finance, where key stakeholders (particularly the exchanges) remain relatively concentrated and lack regulatory oversight.” Unregulated exchanges are noted as a particular issue.

Are CBDCs Kryptonite for crypto?

This section is not great. The report itself isn’t very clear on how CBDCs will destroy crypto, except that the European Central Bank doesn’t take Bitcoin seriously as money.

Nor are the BofA analysts very clear what a CBDC will actually be. CBDCs are described only as an ill-understood hypothetical, and none of the existing or soon-forthcoming CBDC initiatives are mentioned.

As I note in chapter 15 of Libra Shrugged, the existing CBDC initiatives are all completely different in financial structure, use case and implementation — the only thing they have in common is that they deal in central bank liabilities. (And China’s DC/EP is talking about not even doing that.)

It’s really not at all clear what the CBDC section of this report has to do with Bitcoin — apart from blockchainy handwaves.

Is DeFi potentially more disruptive than Bitcoin?

This section talks about Ethereum, which the ESG section noted has the same sort of CO2 issues as Bitcoin. Vitalik Buterin’s first name is misspelt as “Vitalek.”

The report describes what DeFi offers and how it works. The analysts are very impressed by the concept of DeFi — “DeFi is, we think, the most fundamental challenge to modern finance that we’ve encountered.”

“Smart contracts” are noted as just being computer programs, not any sort of “contract.” But you can do anything Turing-complete on Ethereum.

This section is the only part of the report to mention Tether — as a stablecoin used in DeFi.

The report notes problems with DeFi — it’s not very big, it’s not scalable, it doesn’t actually create credit, and, unlike in conventional finance, the DeFi providers aren’t required to make good on losses caused by their own technical issues. And Ethereum miners might take your money.

Most worryingly, DeFi is a honeypot for hackers — the code is sloppy, it’s difficult to fully analyse, and you just end up with a trust-based system where you hope your DeFi provider’s security analysis has been sufficient.

If Ethereum ever goes fully proof-of-stake — which they’ve been promising since 2014 — then this will solve that blockchain’s environmental issues, but it will lead directly to oligopoly and a trust-based system. (As I’ve noted is the obvious endgame of proof-of-stake.)

The analysts love DeFi’s innovation — but “at present, we think that there is nothing which is likely to provide a material challenge to mainstream finance.”

The comments on DeFi got an enthusiastic headline in CoinDesk — “Bank of America Sees DeFi ‘Potentially More Disruptive Than Bitcoin’” — which was not quite supported even by the cherry-picked quotes they used. [CoinDesk] What the report actually says is: “DeFi is interesting, but small and faces challenges in going mainstream. We think it hasn’t a compelling lending proposition at present, and its diversification makes it challenging for the mass market.”


You shouldn’t take the report’s conclusions at face value — in particular, the Grayscale error and the complete failure to note well-documented Bitcoin market manipulations are major issues.

The ESG section would be a good stick to whack anyone who talks up corporate investment in Bitcoin around you over the head with.

But the report’s well worth a read — for its findings, as well as for an insight into how analysts approach crypto from the outside, and what they make of all this.


I refuse to make a “bofa deez securities” joke. Absolutely not.


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