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, said S&P Global Ratings in a new report.

After its spectacular rise, bitcoin prices pulled back in what some market watchers believe is a sign of caution, it added.

“We believe regulators and much greater public confidence are the keys to more widespread use. In the long run, we see a greater chance of large-scale adoption of central bank digital currencies (CBDCs) as a means of payment than private digital currencies,” the report said.

“In our view, ultralow interest rates, substantial liquidity, growing inflation expectations, and high valuations for other securities may have contributed to the renewed interest by investors in bitcoin. Some investors see bitcoin as a competitor to gold and other commodities as a store of value and hedge against inflation.

“In our analysis of risks, we note that the environmental footprint of these instruments, mainly bitcoin, is reportedly high. For example, last year bitcoin reportedly consumed a broadly comparable amount of electricity as the Netherlands or the United Arab Emirates consumption.

“However, we view cryptocurrencies' price volatility as a limited risk for the financial institutions we rate. We believe a collapse in the value of cryptocurrencies would be just a ripple across the financial services industry, still too small to destabilize the system or weaken the creditworthiness of banks we rate. That said, some banks—for instance those active in marketing cryptocurrency ETFs (exchange-traded funds)—might be exposed to product mis-selling or reputational risks if prices collapse. It could be argued that buyers do not really understand the risks of investing in digital currencies,” it added.

S&P Global Ratings still considers bitcoin and other cryptocurrencies more as speculative instruments than as payment vehicles that could substantially alter the financial system. Showing bitcoin's speculative nature, prices peaked on Feb. 21 at 10 times the March 2020 low. Prices then dropped almost a quarter and subsequently started to recover.

However, 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 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 Ratings said. – TradeArabia News Service