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As of January 16, Bitcoin recorded a modest increase of 0.2% since the beginning of the year, following an impressive 157% rise in 2023. The cryptocurrency received regulatory approval last week in the US when the Securities and Exchange Commission (SEC) greenlit the first Bitcoin exchange-traded funds (ETFs), while UBS economists are scrutinizing the overall outlook of this digital asset.
US Regulatory Approval: Improved Access, Yet Weak Fundamentals Persist
The recent approval of Bitcoin ETFs by the SEC signifies a turning point in expanding investors’ access to the world’s largest cryptocurrency. This regulatory approval is expected to facilitate safer storage of digital assets.
However, UBS economists warn that despite improved accessibility and secure storage options, the fundamental case for Bitcoin remains weak.
Limited Real-World Applications and Portfolio Volatility Concerns
Cryptocurrencies, including Bitcoin, continue to grapple with the issue of limited real-world applications. UBS economists note that despite regulatory developments, the practical utility of cryptocurrencies remains limited.
Moreover, the analysis reveals that cryptocurrencies have the potential to significantly increase portfolio volatility. A modest 10% allocation to Bitcoin in a balanced portfolio could contribute to nearly 50% of the overall volatility, based on a decade-long retrospective analysis.
Bitcoin’s Diversifying Role and Sustainability Concerns
Bitcoin’s historical performance as a diversifier, despite significantly higher volatility, tends to move in tandem with the stock market. This correlation raises questions about its effectiveness as a risk-reducing asset in diversified portfolios.
Furthermore, concerns about Bitcoin’s sustainability persist, especially due to energy-intensive mining processes. As Bitcoin prices rise, so does energy consumption, leading to increased environmental sustainability concerns.
Charting Bitcoin’s Future: Balancing Amid Challenges
As Bitcoin embarks on its 2024 journey, regulatory developments provide a more accessible path for investors. However, cautionary notes from UBS economists highlight the ongoing challenges faced by Bitcoin.
Limited real-world applications, potential increases in portfolio volatility, and sustainability concerns underscore the need for a balanced approach when considering Bitcoin as part of a diversified investment strategy.
