The Future of Payments Series 2 Part III Bitcoin

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The Future of Payments: Series 2
Part III. Bitcoins: Can the Tinkerbell Effect

Become a Self-Fulfilling Prophecy?
#PositiveImpact
Marion Laboure, Ph.D.

Research Analyst
+44-207-545-0679
Corporate Bank Research March 2021

Summary
− Bitcoin’s market cap of $1 trillion makes it too important to ignore. Big

players who buy and sell bitcoins have considerable market-moving
power. As long as asset managers and companies continue to enter the
market, Bitcoin prices could continue to rise.
− But bitcoin transactions and tradability are still limited. And the real
"
debate is whether rising valuations alone can be reason enough for
bitcoin to evolve into an asset class, or whether its illiquidity is an "It is frightfully
obstacle. difficult to know much
− Bitcoin’s value will continue to rise and fall depending on what people about the fairies, and
believe it is worth. This is sometimes called the �� ect — a almost the only thing
recognised economic term stating that the more people believe in for certain is that there
something, the likelier it is to happen based on Peter Pan’s assertion are fairies wherever
that Tinkerbell exists because children believe she exists. there are children."
− Central banks and governments understand that cryptocurrencies are — J.M. Barrie, "Peter Pan"
"
here to stay, so they are expected to start regulating crypto-assets late
this year or early next year. They are also speeding up research on their
own Central Bank Digital Currencies (CBDCs) and launching pilots.
Click here for more details.
− In the medium to long run, due to very strong network effects, there will
likely be little room for using cryptocurrencies as a widespread means
of payment. The regulatory landscape related to CBDCs, current
cryptocurrency projects, and future efforts (e.g. Libra/Diem by
Facebook) is still uncertain. "
In the short term, Bitcoin is here to stay and its value will
remain volatile
“It is not a speculative
investment even
− We estimate that less than 30% of transactional activity in bitcoins is
though it is being
related to payment for goods and services, with the rest largely used as
used as such by other
a financial investment.
people. As Bitcoin
− As an investment asset, Bitcoin liquidity remains low. In 2020,
network grows, the
28mn bitcoins changed hands (150% of total bitcoins in circulation),
value of Bitcoin grows.
compared to 40bn shares of Apple (270% of its total shares in
As people move into
circulation).
Bitcoin for payments
− Due to its still limited tradability, Bitcoin is expected to remain ultra-
and receipts, they
volatile; a few additional large purchases or market exits could
stop using US Dollars,
significantly impact the supply-demand equilibrium.
Euros and Chinese
− The root causes of Bitcoin’s volatility include: small tactical asset
Yuan, which in the
allocations and the entries and exits of large asset managers.
long term devalues
these currencies.”
— Eric Schmidt, Executive
Chairman of Google
"
Deutsche Bank Research / The Future of Payments: Series 2. Part III. Bitcoins: Can the Tinkerbell Effect Become a Self-Fulfilling Prophecy? 2
In the long term, Bitcoin, like Tesla, will have to transform
potential into results to sustain its value proposition
− Tesla’s current market capitalisation is $665 billion (as of
03/12/2021), which is almost five times the market cap of Ford
and GM combined. That's remarkable because GM sold around
"
8 times as many cars as Tesla in 2020, while Ford sold more than
5 times as many. The ratio of market-cap to vehicle sold by Tesla
and Ford shows that the current value of Tesla is 63 times that of "The world ultimately will
Ford. have a single currency;
− Tesla’s valuation is pricing in a significant market shift toward the internet will have
electric cars, leading to the hypothesis that Tesla will remain an a single currency. I
absolute leader in that market. personally believe that it
− Similarly, Bitcoin’s total value is $1,075 (as of 03/15/2021), which will be Bitcoin."
is around 102% of the yen in circulation, 65% of the euros, 53% of — Jack Dorsey co-founder and
"
the USD, and 904% more than the GBP. Yet, the average number CEO of Twitter
of bitcoins exchanged daily in USD is equivalent to only 0.05% of
the yen and 0.06% of the GBP.
− Bitcoin’s current valuation is pricing in a shift toward cross-
border digital currencies; the hypothesis is that Bitcoin, as
the leader, will benefit from network effects and become an
important means of payment in the future.
"
− Tesla is five years older than Bitcoin and has always sparked
robust debates between people who see it as a soon-to-die fad
and those who see it as the future of the car. Market sentiment "Stay away from it.
has started to shift significantly in the last 18 months as Tesla It’s a mirage, basically."
delivered early results, such as Model 3, at scale. — Warren Buffet, CEO of
− The next two or three years should be a turning point for Bitcoin; Berkshire Hathaway
"
consensus about its future may emerge as people monitor digital
currency developments. For more details, see Part II. When digital
currencies become mainstream.
Currency in circulation and daily trading volume Tesla vs. General Motors and Ford
USD bn USD bn 400
1200 1200
USD bn USD bn 400 8,0008,000
1000 350 350 7,0007,000
1000
300 6,000
300 6,000
800
800 250 5,000
250 5,000
600 200
600 200 4,000
150 4,000
400 150 3,000
400 100 3,000
200 0.76bn 100 2,000
200 0.76bn 50 2,000
50
0 0 1,0001,000
0 Japanese Bitcoin Indian 0
British
JapaneseYenBitcoin 0
15/03/2021IndianRupee BritishPound 0 Vehicle sold ('000s) Market Cap (USDbn)
Yen 15/03/2021 Rupee Pound Vehicle sold ('000s) Market Cap (USDbn)
Market cap / currency in circulation Daily spot volume, rhs Tesla GM+Ford
Market cap / currency in circulation Daily spot volume, rhs Tesla GM+Ford
Sources: Deutsche Bank, BIS, Bloomberg Finance LP, Blockchain.com Source: Bloomberg Finance LP, Statista, Deutsche Bank.
Note: currency in circulation at the end of 2020. Currency volume data is from Note: Vehicles sold data is for 2020 and Market cap as of March 12, 2021.
BIS Triennial FX survey (daily average volume in April 2019) and Bitcoin as of
Feb 2021.
1. Lay of the Land
Bitcoin should continue to rise

At the beginning of 2017, bitcoin prices were below $1,000 per coin. In December of the same year, bitcoin
reached nearly $20,000. Then came the fall and by February 2018, the price had dropped to $7,000. In
a year only, prices surged from $4,900 in March 2020 to hit a new high of $60,000 last Saturday. One of
the most important factors driving bitcoin’s increased demand was the entrance of hedge funds and other
institutional investors.
Bitcoin continues to rise
70,000 900
Bitcoin price, lhs Tesla market cap, rhs 2021: New high. Tesla
announced USD1.5bn 800
60,000 investment in Bitcoin in Feb
2021. Paypal announced in
700
October 2020 to support BTC,
Market Capitalisation in USD bn

50,000 2017: Bitcoins ETH, BCH and LTC.
surged to an 600
Market price in USD
all-time high
40,000 2015-19: Over $1 billion 500
was invested in bitcoin 2018: Bitcoin's
and blockchain startups value dropped Libra was formally
30,000 by 2/3 400
announced on
June 18, 2019
300
20,000
200
10,000
100
0 0
2016 2017 2018 2019 2020 2021
Source: Bloomberg Finance LP, Deutsche Bank.
Every year, people declare Bitcoin (and Tesla) as dead or dying. Since 2010, Bitcoin has been declared dead
about 400 times. The number of such proclamations peaked in 2017, but the trend has been decreasing;
2020 saw the fewest Bitcoin obituary predictions in eight years.
Yearly Bitcoin ‘Obituaries’ approximate count
140
124
120
100 93
80
60
39 41
40
29 28
17 14
20 10
6
1 1
0
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
Source: 99Bitcoins, Deutsche Bank. Note: approximate count of yearly bitcoin “obituaries”.
What is a cryptocurrency?
A cryptocurrency is a digital “asset” that uses peer-to-peer networking. It is decentralised and widely
accessible. Bitcoin, like many other cryptocurrencies, is privately operated; it is not issued by a central bank,
government, economy, or territory. The asset is a digital “token” with no backing or intrinsic value.
The concept of cryptocurrency started around 30 years ago when DigiCash created the first worldwide
virtual currency. It went bankrupt in 1998, less than 10 years after its creation. The most famous
cryptocurrency, Bitcoin, was invented in 2008 by a developer using the pseudonym of Satoshi Nakamoto.
Since 2011, cryptocurrencies have gained momentum from investors and captured media attention,
particularly after Bitcoin prices rose dramatically in 2013. Following Bitcoin, many new cryptocurrency
companies have been created, including Litecoin (2011), Ripple (2012), Ethereum (2015), and Bitcoin Cash
(2017).
In total, there are over 5,000 cryptocurrencies worldwide, but Bitcoin by far tops the ranking of
cryptocurrencies in terms of market cap. Bitcoin’s current market cap is over four times higher than the
second-most-traded cryptocurrency, Ethereum. Most cryptocurrencies work the same way, with limited
supply.
Most cryptocurrencies work the same way, with limited supply
Current market cap Quantity of tokens Maximum amount of to-

Cryptocurrency Release (USDmn) issued (mn) kens issued (mn)
Bitcoin 2009 1,074,598 18 21
Ethereum 2015 207,791 112 Not limited
Cardano 2017 32,996 31,100 45,000
Binance Coin 2017 39,808 154 170
Tether 2015 38,528 30,300 NA
Polkadot 2017 33,316 1,000 NA
XRP 2012 19,765 44,000 100,000
Litecoin 2011 14,005 65 84
Chainlink 2017 11,525 405 1,000
Dogecoin 2013 7,276 118,000 5,200 per year perpetually
Source: Deutsche Bank, Wikipedia, various websites. Note: as of March 15, 2021.
What are the specificities of Bitcoin?
Bitcoin is the most widespread and successful cryptocurrency. It is the first blockchain-based
cryptocurrency in the world. “Miners” use cryptographic code to process large quantities of data to earn
coins. The underlying algorithm fixes the maximum quantity of bitcoins to 21 million tokens, and so far an
estimated 18.7 million are in circulation. It is estimated that the full amount of 21 million bitcoins will be
mined by 2140.
All mining operations start with the blockchain. A miner’s goal is to add individual blocks to the blockchain
by solving sophisticated mathematical problems. This requires enormous computational and electrical
power. While many miners compete to add each new block, the miner who solves the problem actually adds
the block—along with its approved transactions—to the blockchain. Currently, the miner receives a reward
of 6.25 bitcoins for each new added block. This reward value went into effect on May 11, 2020. It is worth
noting that the reward is cut in half roughly every four years. Furthermore, Bitcoin is designed to adjust the
difficulty required to mine one block every 14 days (or every 2,016 blocks mined).
An important concern that could hinder widespread use of cryptocurrencies is related to energy
consumption. Although Bitcoins’ liquidity remains low and very few bitcoins are exchanged per day, mining
bitcoins require a tremendous amount of energy. As of early 2021, Bitcoin’s annual electricity consumption
puts it at the edge of being the equivalent of a top 30 country. In one year, it uses around the same
electricity as the entire population of Pakistan (c.217m people) and in the developed world more than the
Netherlands Holland’s (c.17.5m people).1
Energy use increases proportionally with the cryptocurrency’s market valuation. As such, numerous alarms
have been warning us about the environmental impact caused by cryptocurrency energy consumption.
However, capital currently engaged in the cryptocurrency market could be used to develop green
technological advancements. This is called a “positive externality”; that is, technological innovation in the
financial sector that drives innovation in the energy sector.
Annual electricity consumption (TWh/ year)
7,000
6,000
5,000
4,000
3,000
Bitcoin
2,000
1,000
0
China
USA
India
Russia
Japan
Brazil
South Korea
Canada
Germany
Saudi Arabia
France
UK
Italy
Mexico
Iran
Turkey
Spain
Australia
Taiwan
South Africa
Vietnam
Indonesia
Thailand
Poland
Egypt
Malaysia
Sweden
Bitcoin
Ukraine
Argentina
Norway
Source: University of Cambridge Bitcoin Electricity Consumption index. Deutsche Bank. Note: National energy use in TW/h.
1 Fore more details, please see Thematic Research: DB CoTD: Bitcoin and ESG….
What are the key drivers of the currency price?
As for any other assets, the pricing of traditional currencies is ultimately driven by demand and supply.2 The
demand for and supply of a currency can be “read” based on a country’s balance-of-payments position,
which acts as a kind of accounting statement for how much money is flowing in versus how much is flowing
out of the country. The balance of payments is split into two broad accounts: the current account (which
captures trade in goods and services, income payments) and the capital account (FDI, portfolio flows and
other flows like loans and trade credits). In simple terms, if more money is coming into China to buy Chinese
goods or Chinese bonds, relative to the amount of money leaving China, that drives up the price of the CNY.
So it is just about demand and supply, and this approach makes it easy to compare to other assets.
The key difference between Bitcoin and currencies today is on the supply side. Supply of Bitcoin is fixed,
while in many fiat currencies central banks control the supply and have been increasing it in recent years
via their QE programs. Higher supply of one currency relative to others should theoretically drive down the
price of that currency in the long run. Of course one needs to account for how the demand to hold assets
in these currencies changes as well (if demand to hold USD starts to decline or stagnate even as the Fed
continues to print USD, this would show up in relative USD weakness down the line).
The other differences between currencies and Bitcoin include institutional and retail investors, liquidity3,
market sentiment4, miners5 and technical factors.6 In the next section, we conduct a basic microeconomic
analysis to understand supply, demand, and liquidity.
2 If there is more demand for Currency X, then it goes up in price (appreciates relative to other currencies) and vice versa.
3 ~78% of Bitcoin supply is illiquid, with some going into escrow for borrowing/lending. This might put upward pressure on the Bitcoin price, but illiquid funds are
more sensitive to market changes, potentially adding more volatility.
4 With the rise of social media as a source of information for investors, platforms (e.g. Twitter and Reddit) will influence the demand for Bitcoins, as the recent
case of the STONKS proved. This might create pump/dump cycles in the short term and add volatility that might keep more serious investors away, adding some
downward pressure on the price. Studies have shown that the power of social networks to concentrate the market is not well understood, therefore, there are
motives to believe that signals coming from social networks are highly unreliable. For more, please click this link
5 Even though there is little evidence that energy prices and hashrates do not significantly influence the price, they can generate signals when they take market
positions. For example, since the last days of December 2020, miners stopped selling and started accumulating. This can be interpreted as a bullish position by
the market and consistent with recent moves by big mining companies such as Shanghai Yitang Data Technology, Riot Blockchain, Marathon Patent Group and
even NVIDIA, which reported increased revenue coming from Ethereum miners in Q4 2020.
6 When applied to technical trading, Deep Learning models tend to be more accurate, perform better and bring better information to the markets, potentially
reducing volatility and/or allowing concentration in several experienced early entrants. All this could favor the entrance of institutional investors and banks that
could have bullish implications.
2. Understanding the Drivers of Value
Bitcoin supply
The pre-programmed, finite supply of all bitcoins determines the value of each bitcoin. The maximum
number of bitcoins that will ever exist is just under 21 million. That number is expect to be reached in about
2140. Today, over 18.7 million bitcoins have been mined. About 89% of the total supply of Bitcoin is in
circulation, and the supply is unlikely to increase dramatically in the near term. Interestingly, it seems that
the supply of bitcoin has remained steady, independent of market value.
Number of Bitcoins in circulation worldwide

20 mn
18
16
14
As of March 2021,
over 18.7 mn Bitcoins
12
exist (~89% of the
total supply)
10
0
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
Source: Blockchain, Deutsche Bank.
If the current mining rate continues, the percentage of total bitcoins in circulation will remain on a plateau
of about 89% for several years. Another 10% will likely be discovered by 2028, at which point 20mn
bitcoins will have been discovered. The last 1 million will be mined slowly — likely before 2140. At that
point, the Bitcoin system will become a transaction-only system. Importantly, Bitcoin transactions are not
intermediated by a bank or clearing party. This can make individual transactions very cheap, but the overall
cost of implementing a network can be extremely expensive because of the computing and energy costs of
some validation processes.
Bitcoin is one of the oldest cryptocurrencies and thus the most well-known. But the broader crypto category
is booming because of Bitcoin’s limited supply and because most bitcoins are already in circulation.
At present, about 800 cryptocurrencies have gone public via ICOs (initial coin offering). Currently there are
three active ICOs—PolkaFoundry, Launchpool and Inverse. Another 16 will start this month like Casper,
Convergence and Tidal Finance. And another 69 are in the pipeline.
ICOs of some recently closed offerings
Market Price as
Headquar- Market Cap
Project Category Raised Month ICO Price on March 15,
ters (mn)
2021
SafePal China Platform $5,000,000 Feb-21 $0.10 $2.6 $282
Razor
Singapore Network $9,000,000 Feb-21 $0.53 $0.6 $26
Network
Poolz Israel Protocol $70,000 Jan-21 $0.70 $21.3 $14
YOP UK Platform $60,600 Jan-21 $0.05 $1.9 $19
CUDOS UK Network $4,100,000 Jan-21 $0.01 $0.1 $19
Blockchain
DAO Maker US $7,800,000 Jan-21 $0.10 $4.3 $71
Service
BiFi Korea Defi $80,000 Dec-20 $0.01 $0.1 $3
Exeedme US Platform $75,000 Dec-20 $0.05 $1.3 $37
Fire
Seychelles Platform $1,100,000 Dec-20 $0.10 $0.9 $4
Protocol
Whiteheart NA Protocol $3,300,000 Dec-20 $1,081 $3,927 $35
Source: icodrops.com, coinmarketcap, Deutsche Bank.
Bitcoin’s success has fueled demand for other cryptocurrencies, at least as investment assets. We
believe there could be an externality effect. Most likely, there will only be space for a handful of these
cryptocurrencies, and few will ever be used as a means of payment. We also wonder whether cannibalisation
between these cryptocurrencies might occur.
Bitcoin demand
Initially Bitcoin and other cryptocurrencies were used for illicit purposes (e.g., trafficking, tax evasion, money
laundering). Now it is different because Bitcoin transactions are a lot harder to hide: in 2019, just over 2%
of the activity in the cryptocurrency space was linked to illicit activity; and in 2020 it was down to only 0.3%.
Bitcoin has become a large market and is therefore more carefully scrutinized. Law enforcement agencies
are using the blockchain to track down suspected criminals and the flows of digital money.7
Cryptocurrencies are based on protocols that greatly benefit from network effects. As more people use it,
the more valuable it becomes. The same is true for Bitcoin.
Early Bitcoin investors were extremely wealthy individuals from the tech space, libertarians and small
family offices.8 It's widely believed that the first real-world Bitcoin transaction was made in May 2010 by
programmer Laszlo Hanyecz. Hanyecz spent 10,000 bitcoins on two Papa John's pizzas; those pizzas would
now be worth more than $30 million at today's Bitcoin price.
Top 5 investors and companies
Company Name Activity Investment (USDmn)

Grayscale Investments Asset management 7,400
Massachusetts Mutual Life Insurance Insurance 100
SkyBridge Capital Alternative invesments 182
3iQ Crypto-asset portfolio manager 128
ETC Group Bitcoin ETP Develops digital asset backed securities 80
Source: Bit2buzz, Deutsche bank.
7 Criminals Thought Bitcoin Was the Perfect Hiding Place, but They Thought Wrong
8 The top 5 Bitcoin individuals investors are: (i) Cameron and Tyler Winklevoss who are believed to be the first bitcoin billionaires, reportedly holding about
100,000 coins; (ii) Dan Morehead who launched the first cryptocurrency fund in the U.S. when bitcoin was trading for $65 each; (iii) Michael Novogratz who is
the famously bullish bitcoin investor who predicted a $40,000 price a month before it began a year-long collapse; (iv) Barry Silbert who is the founder of Digital
Currency Group, which has made more than 125 blockchain-related investments.
Bitcoin is now another treasury-management tool. Recently, a few publicly traded companies have started
converting cash in their treasuries into Bitcoin as an alternative store-of-value. For example, in August 2020,
MicroStrategy, a business analytics company, converted $425 million worth of cash in its treasury to Bitcoin.
"Company leaders believe that Bitcoin “as the world’s most widely-adopted cryptocurrency, is a dependable
store of value” and they “continue to believe Bitcoin will provide the opportunity for better returns and
preserve the value of our capital over time, compared to holding cash.”9
Square then made a $50 million purchase. Several other companies have followed suit, reinforcing the
confidence in Bitcoin as a store-of-value and safe-haven asset. On February 8, 2021, Tesla said it had
invested $1.5 billion in Bitcoin and that the company would also soon accept Bitcoin as a form of payment
for its vehicles. In February 2021, in Switzerland, the Canton of Zug started accepting tax payments in
Bitcoin.
Publicly traded companies holding bitcoins
Approximate value
Investment
Company Name Activity # of BTC in early March
(USDmn)
2021 (USDmn)
MicroStrategy Inc. Application software 91,326 2,211 @ $ 24,210 $ 3,690mn (67%)
Electric vehicles and
Tesla Inc. 47,000 1,500 @ 31,915 $ 2,580mn (72%)
components
Ruffer Investment Company
Investment company 45,000 744 @ $ 16,539 $ 1,044mn (40%)
Ltd.
Galaxy Digital Holdings Institutional brokerage 16,402 134 @ $ 8,170 $ 851mn (535%)
Square Inc. Payments 8,027 220 @ $ 27,408 $ 224mn (11%)
Marathon Patent Group Inc. IP company 4,813 150 @ $ 31,166 $ 250mn (67%)
Hut 8 Mining Corp Cryptocurrency mining 3,012 37 @ $ 12,904 $ 148mn (302%)
Voyager Digital Ltd. Crypto-currency brokerage 1,239 8 @ $ 6,398 $ 64mn (711%)
Riot Blockchain Inc. Digital currency 1,175 7 @ $ 6,128 $ 61mn (747%)
Bit Digital Inc. Bitcoin mining 950 10 @ $ 10,616 $ 33mn (226%)
Coin Citadel Inc. Mining Digital Assets 513 0.2 @ $ 359 $ 27mn (14,343%)
Cypherpunk Holdings Inc. Investment company 277 2 @ $ 5,895 $ 17mn (938%)
Advanced Bitcoin Specialty software products
254 2 @ $ 8,345 $ 14mn (595%)
Technologies AG development
DigitalX Digital payment systems 215 0.9 @ $ 4,069 $ 12mn (1,075%)
Hive Blockchain Cryptocurrency mining firm 211 NA $ 8mn
Argo Blockchain Crypto asset mining 209 1 @ $ 6,411 $ 12mn (788%)
Fortress Technologies Inc. Industrial equipment 163 NA $ 9mn
BIGG Digital Assets Inc. Application software 145 1 @ $ 7,392 $ 13mn (1,075%)
NexTech Application software. 130 4 @ $ 30,722 $ 4.2mn (5%)
Neptune Digital Assets Corp. Blockchain company 75 NA $ 4mn
FRMO Corp. Financial risk management 63 NA $ 4mn
Source: Cryptotips.eu
9 MicroStrategy Announces Over $1B in Total Bitcoin Purchases in 2020
Bitcoins: an accepted means of payment? Not yet there!
Overall, given the volatility of bitcoins, most merchants are not keen to accept cryptocurrencies as a
payment method.10 According to a 2020 survey by HSB, 36% of small-medium businesses in the US
accept Bitcoin (including Wikipedia, Microsoft, and AT&T).11 But once we see some stability in the market,
the use of crypto for the exchange of goods and services could normalise. Before that, the risks for both
merchants and payment providers outweigh the benefits. Usually, settlement is not in real time. This
provides merchants with a guarantee of a certain payout (amount); the lack of that timeliness can be tricky
for payment providers (they would need high risk provisions or could have transactions end in losses).
Companies accepting bitcoins
Small and medium Sports and gaming

Major companies Retail stores businesses companies
− Wikipedia − Burger King (some outlets) − Alza (Czech online retailer) − Miami Dolphins
− Microsoft − KFC Canada for a limited − Alternative Airlines − Dallas Mavericks
− AT&T time − Bitcoin,Travel − Benfica (sports club
− Virgin Galactic − Overstock − Pembury Tavern (a pub in in Lisbon Portugal)
− Norwegian Air − Subway London) − San Jose
− Namecheap − Twitch − Old Fitzroy (a pub in Earthquakes
− CheapAir − Pizza Hut (Venezuela) Sydney) − Green Man Gaming
− Gyft − NewEgg − The Pink Cow (a dinner in (popular digital
− The Interet Archive − Purse.io (allows shopping Tokyo) game reseller)
− The Pirate Bay on Amazon with bitcoin) − EZTV (Torrents TV shows − Zynga (mobile
− 4Chan − PizzaForCoins.com provider) gaming)
− Mega.nz (Domino's Pizza has signed − Lumfile − Humblebundle.com
− ExpressVPN up with them) − Etsy Vendors (Indie game site)
− Intuit − eGifter.com (allows − Bitcoincoffee.com − BigFishGames.com
− Paypal shopping for brands like − Grass Hill Alpacas (a local
− SimplePay (Nigeria) GAP, GameStop and JC farm in Haydenville, MA
− T-Mobile (Poland) Penney) − Jeffersons Store (a
− Curryupnow.com (meal streetwear clothing store
can be ordered from in Bergenfield, NJ)
12 restaurants in San − A Class Limousine
Francisco) (Newwark, NJ)
− Dish Network (America) − Suntimes.com (a Chicago
− Euro-Pacific (a precious newspaper)
metal dealer) − Crowdtilt.com
− CEX ( a shop in Glasgow, − Meuseum of the Coastal
Scotland) Bend (Victoria, Texas)
− PSP Mollie − RE/MAX London
− ShopJoy (an Australian − Amagi Metals (precious
retailer) metal furnisher)
− Grooveshark (USA) − Foodler ( North American
− MIT Coop Store (MIT restaurant delivery
student bookstore) company)
− SFU bookstore (Simon − Save the Children (global
Fraser University in charity organisation)
Vancover, Canada) − NCR Silver (point of sales
− Famsa (a Mexico retailer) systems)
− Shopify.com
− mspinc.com
− Rakuten (Japan)
Sources: Deutsche Bank, 99 Bitcoins website, various other websites.
10 For example, Adyen – a payment provider perceived as working with the most tech-savvy companies in the world – does not see cryptocurrencies as a payment
method yet; it does not see the demand from its customers (merchants). However, neo-banks are promoting the trade of crypto on their platforms and make it
increasingly easier for consumers to engage in trading crypto. At some point, they may be able to offer spending those currencies through the cards they issue
(possibly through any of the networks, but given the engagement of V/MA in crypto already, it is more likely to be in a collaboration with these two).
11 Who Accepts Bitcoins in 2021? List of 20+ Major Companies
That said, digital payment providers such as Square have started implementing cryptocurrencies in their
services, facilitating the adoption of cryptocurrency payments by their client bases (e.g., e-commerce
companies). And consumers might still use PayPal, Visa, Mastercard, or any other provider to own/trade the
asset – but again, mainly for investment.
In late October, PayPal officially announced that it will add cryptocurrency capability to its wallets. PayPal
saw strong early adoption of cryptocurrencies with an early waiting list that was larger than anticipated in
the US, which is now open to everyone in the US. The company plans to expand the rollout internationally
and to the rest of its platform, including Venmo, in the first half of 2021. PayPal plans to allow users to
complete transactions for goods and services with digital currency in early 2021. This is a big development
for the adoption of cryptocurrency as a means of payment because PayPal is one of the biggest payment
providers in the world. PayPal services are used by over 300 million customers worldwide. Twenty-eight
million stores now accept PayPal as a payment method.
Visa and Mastercard are also pivoting to cryptocurrency. Visa CEO Alfred Kelly stated his view in May
2020 that digital currency backed by fiat will be an emerging payment technology. His statement came as
Visa filed a patent for a “digital fiat currency.” This filing points to a CBDC use case. Visa also partnered
with Circle in December to let card issuers integrate USDC payment capability. Mastercard jumped on the
bandwagon in July, when the company announced a card deal with Wired, thereby expanding its crypto
efforts. Wired’s multicurrency Mastercard debit card will allow users to buy, hold, exchange, and sell up to
18 traditional currencies and cryptocurrencies, while also allowing for free international ATM withdrawals up
to a certain amount. Mastercard also launched a customisable CBDC testing platform in September.
Consumers are starting to own bitcoins. In the past five years, the number of blockchain wallets has
multiplied by six, growing from 11 million in 2016 to 63 million in 2020. Assuming that governments back
cryptocurrencies and consumers still want them, adoption rates will drive the timeline for mainstream use.
More and more, online cryptocurrency concierges (e.g., The White Company) enable people to convert
national currencies into a cryptocurrency and then manage their own e-wallets as they wish.
The chart below shows the adoption rates of blockchain wallets with the equivalent for internet adoption
rates. We are still in the early days of blockchain wallet use, but the curves are similar after adjusting for
scale. Indeed, if current trends continue, there could be 200 million blockchain wallet users in 2030.
Adoption rates of cryptocurrencies and Internet

4,000 300
Number of Internet users (lhs)
3,500 Number of Blockchain wallet users (rhs) Number of Blockchain wallet users (in millions)
250
Number of Internet users (in millions)
DB forecast of number of Blockchain wallet users (rhs)

3,000
200
2,500
2,000 150
1,500
2030 100
1,000
50
500
2020
0 0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24
Number of years since the Internet and bitcoins have been public
Source: Deutsche Bank forecasts, InternetWorldStats.com and Blockchain.com. We measure “adoption rate” by the number of users adopting internet and bitcoins
since they went public.
Future generations may usher in mass adoption. The older people we surveyed had fears about
cryptocurrencies, found them harder to understand, believed they create volatile financial bubbles (like the
dotcom bust), and saw them as low-liquidity financial instruments. A third of those surveyed had no idea
how cryptocurrencies work, and 40% had only a partial understanding.
By contrast, around a third of millennials believed that cryptocurrencies are replacing cash and credit/debit
cards according to our exclusive survey of over 4,700 people in the United States, the United Kingdom,
Germany, France, Italy, Spain and South Korea.
Millennials who think that cryptocurrencies are replacing cash and debit/credit cards
50% Millennials agreeing that cryptocurrencies are …
40%
30%
20%
10%
0%
USA France Spain Italy South Korea Germany China United Kingdom
Replacing cash Replacing debit/ credit cards
Source: Deutsche Bank dbDIG
3. Bitcoin: Commodity, Currency, or
Equity?
Some people think Bitcoin is a commodity. Others think it is a currency. A few think it is a stock. Despite
these opinions, bitcoin transactions and tradability are still limited. Nevertheless, its market cap is among
the top ten, both as a currency and as a stock.
Bitcoin vs. Gold

The typical comparison between bitcoin and gold also really comes mostly from the supply angle — namely
that the supply of gold in the world is also theoretically fixed to whatever can be found in the ground, and it
cannot be created by a central bank or government, just like bitcoin is limited to 21 million and fixed by code.
To the extent that the supply of something is fixed, the marginal driver of its price becomes demand.
There is little evidence of a direct correlation between the prices of both assets. First, the value of gold
relies on demand from central banks, which means that it is more directly exposed to monetary and
macroeconomic policies. Second, gold prices are also affected by demand from the jewellery market.
Conversely, Bitcoin’s harshest critics cite several major flaws. First, it offers no income. Second, it has no
intrinsic value, even though it might be beneficial during a crisis when conspicuous consumption (and retail
sales in general) are low. Third, unlike gold, demand for Bitcoin does not affect its supply. Fourth, Bitcoin
electronic markets do not rely on derivatives or futures, making them more volatile.
Looking at the liquidity of gold and various other commodities in comparison to bitcoins, it is fair to say that
Bitcoin is an illiquid asset. Volume and open interest are the two commonly used metrics to describe the
liquidity and activity of options and future contracts. "Volume" refers to the number of contracts traded in a
given period, and "open interest" denotes the number of contracts that are active, or not settled. In February,
the average daily volume and open interest of Bitcoin was only 1.9% and 2.8% the volume and open interest
of gold, respectively.
Daily volume (in USD billion) Open interest (in USD billion)
Bitcoin Bitcoin
Silver Nickel
Gasoil Heating Oil
Heating Oil Gasoline
Iron Ore Aluminium
Gasoline Gasoil
Soybeans Soybeans
Copper Gold
Brent Copper
WTI WTI
Gold Brent
0 10 20 30 40 50 0 20 40 60 80 100 120 140 160 180
Source: Bloomberg Finance LP. Note: Average daily volume over February 2021. Source: Bloomberg Finance LP. Note: Average open interest over February
2021.
Bitcoin vs. Currencies
Bitcoins and fiat currencies are different types of assets. First, while the supply of bitcoins is fixed, this is
not the case with traditional currencies. Second, fiat currencies not only are backed by an entire government
but are also legal tender – it is a legal obligation to accept them as a means of payment – which is not the
case for any private cryptocurrency. Third, dollar-backed instruments such as TIPS are used as long-term,
low-risk assets, whereas Bitcoin can only be used as a hedge against inflation. Fourth, Bitcoin’s systemic
risk is low. Any causality is unidirectional; that is, the value of the US dollar can directly influence the price of
Bitcoin but not the other way around.
The US dollar currency index is usually inversely correlated with the price of Bitcoin. The nature of this
correlation is still unclear. At this point, it is not even clear if the rise in yields is having any direct effect on
the price of Bitcoin.
In terms of total currency in circulation, Bitcoin is the third-largest in the world, after the US dollar and the
euro. This is mainly due to the vast increase in Bitcoin’s value recently. In early 2019, Bitcoin represented
“only” 3% of the US dollars in circulation, but in February 2021 it surged beyond 40% of the US dollars in
circulation.
Total value of currency in circulation in USD billion
2,000
1,500
1,000
500
0
US dollar Euro Bitcoin Japanese Indian Bitcoin Ethereum Bitcoin British Brazilian Bitcoin Indonesia Turkish Bitcoin
'now' Yen Rupee early 'now' early Pound Real early Rupiah Lira late
2018 2020 2019 2017
Source: Bloomberg Finance LP, coinmarketcap, Deutsche Bank. Note: for Bitcoin, we took the current market price as of 03/15/2021, 01/01/2018, 01/01/2020 and
01/01/2019. Note: the conclusions would change dramatically if we looked at monetary base, or M1 or M2 to define the universe of USD in existence. Just the amount
of cash/coins printed appears small as it does not include all the assets held in USD in deposits at banks.
Bitcoin transactions are growing, but not as exponentially as its market cap. Currently, Bitcoin transactions
average about 0.5 billion per day, which is minuscule. This is only 0.02% of the euro and 0.009% of
transactions in dollars. The average daily traded value for USD is 5.8 trillion and for the euro is 2.1 trillion,
according to the 2019 BIS triennial FX survey. Thus, Bitcoin is comparable to the smallest currencies.
Bitcoin’s liquidity is much closer to the Thai baht.
Daily volume (in USD billion)
Bitcoin Spot transactions daily volume, USD bn

New Zealand dollar
Hong Kong dollar
Chinese yuan
Swiss Franc
Canadian dollar
Australian Dollar
British pound
Japanese yen
Euro
US dollar
0 200 400 600 800 1000 1200 1400 1600 1800
Source: Deutsche Bank, BIS, Blockchain. Note: Currency data is from BIS Triennial FX survey daily average volume in April 2019 and Bitcoin as of Feb 2021.
Bitcoin vs. Equities

If we look at the market cap of its stocks, Bitcoin is today ranked sixth—between Alphabet and Tencent, and
bigger than Facebook.
Largest companies by market cap (USD trillion)

2.5
2.0
1.5
1.0
0.5
0.0
Apple Saudi Microsoft Amazon Alphabet Bitcoin Tencent Facebook Tesla Alibaba Berkshire
Aramco (Google) 'now' Hathaway
Source: Bloomberg Finance LP, Coinmarketcap, Deutsche Bank.
However, despite Bitcoin’s large capitalisation, very few bitcoins change hands. As we discussed in the
previous section, just $0.5 billion worth of bitcoins are traded daily. This is only a fraction of all stock trading.
Looking at exchanges in February 2021, we attempted to benchmark Bitcoin’s liquidity against different
stocks. We calculated the number of stocks traded in February divided by the total number of stocks in
circulation and found that the liquidity of Bitcoin is like that of a Fortune 100 stock.
Trading value of stocks in February 2021 (ranking by market cap)
300
Traded value, USDbn
250
200
150
100
50
0
Apple Amazon Microsoft Alphabet Tencent Bitcoin Saudi
(Google) 'now' Aramco
Source: Bloomberg Finance LP, Coinmarketcap, Deutsche Bank.
Volume traded in February/total outstanding

40%
35%
30%
25%
20%
15%
10%
5%
0%
Plains GP Holdings
Levi Strauss
Commercial Metals
Simon Property Group
Franklin Resources
Huntington Bancshares
Cerner
Capital One Financial
Northrop Grumman
ConocoPhillips
Post Holdings
Fortune Brands Home &...
World Fuel Services
Bitcoin
Crown Castle Int.
Rush Enterprises
Exelon
StoneX Group
AbbVie
Coca Cola
Honeywell Int.
Source: Bloomberg Finance LP, Bitcoinity, Deutsche Bank
Conclusion: Will market sentiment move Bitcoin into the mainstream?
Bitcoin’s market cap of $1 trillion, and scope for a continued rise in prices, makes it too important to ignore.
And central banks and governments understand that Bitcoin and other cryptocurrencies are here to stay.
Thus, governments are expected to start regulating them late this year or early next year.
But transactions and tradability have still not evolved. The real heart of the comparison of Bitcoin vs. FX vs.
gold is supply. And the real debate is whether rising valuations alone can be the reason for Bitcoin to evolve
into an asset class, or whether its illiquidity is an obstacle.
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.
Facebook’s strategy (revised last year from its 2019 initial version) has shifted. The company now places
more emphasis on reducing the cost of payment transactions rather than competing with governments
or creating a parallel means of payment. 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, especially because relatively few bitcoins are in circulation. So, if several pension funds or large asset
managers with trillions of dollars decide to allocate a few basis points of their portfolios in a cryptocurrency,
it can have a very large impact.
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.
The next question about Bitcoin is: Will the Tinkerbell Effect turn into a self-fulfilling prophecy? Central
bankers are reacting by speeding up research and launching pilots. Among central banks, 86% are
researching and developing central bank digital currencies (CBDCs). The Bahamas launched the first
nationwide CBDC last October, and both Sweden and China launched pilots in early 2020. 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.
We would like to thank Anthony Chaimowitz of dbDIG Primary Research and Apurv Chaudhari, CFA an
employee of Evalueserve Pvt Ltd, a third-party provider for their contributions to this report.
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Copyright © 2021 Deutsche Bank AG
January 2020
Part I. Cash: the Dinosaur Will Survive...For Now
Part II. Moving to Digital Wallets and the Extinction of Plastic Cards
Part III. Digital Currencies: the Ultimate Hard Power Tool

March 2021
Part I. Post Covid 19: What Executives Are Thinking and Doing
Part II. When digital currencies become mainstream
Part III. Bitcoins: Can the Tinkerbell Effect Become a Self-Fulfilling Prophecy?
We would like to thank Anthony Chaimowitz of dbDIG Primary Research and Apurv Chaudhari, CFA an employee of
Evalueserve Pvt Ltd, a third-party provider for their contributions to this report.

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The Future of Payments: Series 2

Part III. Bitcoins: Can the Tinkerbell Effect

Marion Laboure, Ph.D.

Corporate Bank Research March 2021

− Bitcoin’s market cap of $1 trillion makes it too important to ignore. Big

Bitcoin should continue to rise

Bitcoin continues to rise

Market Capitalisation in USD bn

Source: Bloomberg Finance LP, Deutsche Bank.

Most cryptocurrencies work the same way, with limited supply

Current market cap Quantity of tokens Maximum amount of to-

Annual electricity consumption (TWh/ year)

Number of Bitcoins in circulation worldwide

Source: Blockchain, Deutsche Bank.

Source: icodrops.com, coinmarketcap, Deutsche Bank.

Top 5 investors and companies

Company Name Activity Investment (USDmn)

Publicly traded companies holding bitcoins

9 MicroStrategy Announces Over $1B in Total Bitcoin Purchases in 2020

Companies accepting bitcoins

Small and medium Sports and gaming

Sources: Deutsche Bank, 99 Bitcoins website, various other websites.

Adoption rates of cryptocurrencies and Internet

DB forecast of number of Blockchain wallet users (rhs)

Source: Deutsche Bank dbDIG

Bitcoin vs. Gold

Total value of currency in circulation in USD billion

Bitcoin Spot transactions daily volume, USD bn

Bitcoin vs. Equities

Largest companies by market cap (USD trillion)

Source: Bloomberg Finance LP, Coinmarketcap, Deutsche Bank.

Source: Bloomberg Finance LP, Coinmarketcap, Deutsche Bank.

Volume traded in February/total outstanding

Simon Property Group

Capital One Financial

Fortune Brands Home &...

World Fuel Services

Crown Castle Int.

Source: Bloomberg Finance LP, Bitcoinity, Deutsche Bank

Korea: Distributed by Deutsche Securities Korea Co.

Copyright © 2021 Deutsche Bank AG

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