Bitcoin Isn’t Trading as a Currency but as a Speculative Asset: Morgan Stanley

As concerns mount about traditional banks following the forced closures in the U.S., this should be bitcoin’s (BTC) “moment to shine” because holders of the largest cryptocurrency in private wallets should be protected from counterparty risk, Morgan Stanley (MS) said in a research report Monday.

Morgan Stanley notes that bitcoin was designed as a way for people to hold value in a private digital wallet without the need for an intermediary to store the value for them or to enable transactions.

In practice, “bitcoin isn't isolated from the traditional banking system” because its price is supported by “USD bank liquidity, making it trade as a speculative asset rather than a currency,” the report said.

“Crypto prices rose quickly in 2020/21 due to central bank monetary expansion, causing capital to move from the traditional fiat banking world to the crypto world,” analysts Sheena Shah and Kinji C Steimetz wrote.

While the Bitcoin network can operate without banks, BTC’s price, and therefore its purchasing power, continues to be influenced by Federal Reserve policy, and it needs banks to facilitate flows into the cryptocurrency market, Morgan Stanley said

Bitcoin’s reaction to the negative news flow changed in recent days, rising almost 20% on Monday after the Federal Reserve and the Treasury Department said they would support the banking sector, the note said. However, last week, at the height of uncertainty, bitcoin fell along with risk assets and bank stocks, trading as a speculative asset.

“If bitcoin had been trading on its core value proposition – the ability to ‘be your own bank’ – then bitcoin would have rallied with rising bank uncertainty,” the note added.

Price action indicated the rally earlier in the week was driven by a small number of market participants and was likely helped by a short squeeze as opposed to a “fundamental shift in the trading dynamic,” the report added.

Shorting is a way of betting that the price of an asset will decline. An investor borrows a security and sells it in the hope that the price will drop. They then repurchase the security and return it to the lender, pocketing the difference in price. A short squeeze occurs when an asset gains in price and investors positioned short are forced to cover their positions for a loss.

Read more: Morgan Stanley Sees More Regulatory Scrutiny of Crypto On-Ramps as Silvergate Falters