Facebook with 2.8B Users and its Diem Initiative May Compete with Online Payment Platforms, but Bitcoin with $1T Market Cap Can’t be Ignored: Report

Researchers at Deutsche Bank (XETRA: DBKGn.DB /NYSE: DB) have published an update, titled The Future of Payments in which they look into whether Bitcoin (BTC) may offer any value to the financial system.

The bank’s research team points out that Bitcoin or BTC’s market capitalization of over $1 trillion “makes it too important to ignore.” Big players or whales who trade Bitcoin have very significant  “market-moving power,” the bank’s analysts acknowledge.

Deutsche’s report adds that as long as asset or fund managers and firms keep entering this nascent market, the Bitcoin price should also keep increasing steadily (or even dramatically). However, the bank points out that BTC transfers and tradability are still fairly limited. According to Deutsche, the “real debate” is whether these rapidly rising valuations will be a legitimate reason for BTC to “evolve” into an established asset class, or whether the crypto’s illiquidity is a challenge or obstacle.

Deutsche added that Bitcoin’s value may keep rising and declining depending on what the market thinks the leading digital currency is actually worth. As explained by Deutsche, this is sometimes referred to as the Tinkerbell Effect — “a recognized economic term stating that the more people believe in something, the likelier it is to happen.”

Researchers at the bank further noted:

“So, will cryptocurrencies become a mainstream means of payment? The race is fierce. Bitcoin remains an illiquid asset rarely used as a means of payment. Facebook’s strategy for Libra (renamed Diem) is based on a different approach, one that is centered on consumer adoption and real usage of money.”

Deutsche bank’s report points out that Facebook’s strategy (updated significantly from its 2019 initial release) has now shifted considerably. The social media giant now places “more emphasis on reducing the cost of payment transactions rather than competing with governments or creating a parallel means of payment,” the report argues.

The report also mentioned:

“Facebook, with nearly 2.8 billion users (one-third of the world’s population), now has the potential to compete with traditional online payment platforms and propel digital currencies into the mainstream. Importantly, small changes in investors’ overall perceptions about Bitcoin can have a large impact on its price.”

This is especially true or plausible since there are relatively few Bitcoins currently in circulation. The bank’s research team notes that if, for example, several pension funds or major fund managers with trillions of dollars decide they want to allocate a few basis points of their portfolios in a digital currency, then it can arguably have “a very large impact,” the bank’s report added.

It also mentioned:

“In the medium to long run, due to strong network effects, there will be little room for digital currencies to gain widespread use as a means of payment. The landscape is still uncertain between existing (e.g. Bitcoin) and forthcoming (e.g. Facebook Diem) cryptocurrencies.”

According to Deutsche, the very next question about Bitcoin might be: “Will the Tinkerbell Effect turn into a self-fulfilling prophecy?” 

Deutsche adds that central bankers are reacting to these transformative changes in the financial services sector by “speeding up research and launching pilots.” Among reserve banks, 86% are currently researching and even implementing these so-called central bank digital currencies (CBDCs), the bank added.

Its report pointed out that the Bahamas introduced the first State-backed, nationwide CBDC this past October. Meanwhile, China and Sweden have introduced their own extensive pilots (during the early part of last year).

Deutsche’s detailed research report concluded:

“In the long run, central banks are unlikely to give up their monopolies. And as long as governments and central banks exist and hold the power to regulate money, there will be little room for Bitcoin—as a means of payment—to replace traditional currencies.”

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