Bitcoin is a “wannabe” asset hindered by price volatility and security concerns, a recent report by Citi’s analysis project said. Ultimately, it argued, Bitcoin is only worthwhile for its blockchain technology, which should be separated from bitcoins and used to secure transactions in fiat currency and other assets. 

The short Bitcoin analysis was part of a larger report on “Disruptive Innovations,” written by a global team of experts for Citi Global Perspectives and Solutions (GPS), which took a look at ten game-changing emerging technologies like 4D printing, robots, and precision agriculture. 
 
Digital currency is one of those disruptive innovations, the Citi experts decided, and the report takes a look at the opportunities, potential, and obstacles for cryptocurrencies from a banking perspective. Here’s what they said: 

Bitcoin is interesting, but not worth much yet. 

After five years of operation, the market cap for Bitcoin is about $US 6.2 billion. Transaction volume is at about 60,000 bitcoins per day and (as of April 2014), there are at least 29,000 merchants accepting Bitcoin. 
 
Still, “our assessment is that Bitcoin (and digital currencies) are still ‘wannabe assets’ and ‘wannabe means of transactions,’” the Citi experts wrote. “Bitcoin holders, even if they are very wealthy on paper, have a hard time at present converting Bitcoin wealth into conventional goods and assets. You can have a lot of Bitcoin but there’s not much to do with it.” 
 

Bitcoin doesn’t have great potential as just an alternative asset. 

Cryptocurrency is attractive both as a means of transaction and as an alternative asset. The two qualities hold very different paths for Bitcoin, the report said, implying that digital currency will ultimately go one way or another – but that the latter path isn’t very exciting. 
 
“Paradoxically, if Bitcoin takes off primarily as an alternative asset, the opportunities for investors may be more modest,” it said. “Bitcoin would potentially have the characteristics of a high volatility, low liquidity commodity, and probably emerge as a fringe asset.” 

Security, price volatility, and regulation are problems for Bitcoin. 

Everybody knows that you’ve got to be careful with your bitcoins, or they’ll get stolen. The Citi report estimates that, between the Mt. Gox bankruptcy, the Silk Road seizures, and petty theft, well over 10% of all bitcoins have been lost or stolen in the last year. 
 
Regulating Bitcoin would help boost security issues, but tax policies like those of the US (where the currency is “property” and subject to capital gains) make it less accessible. 
 
Price volatility is still a trust issue for merchants as well, the report said, correctly noting that most merchants who now accept Bitcoin convert it immediately back into fiat currency rather than take the risk of losing money on its ever-changing value. 

Solution: the blockchain is the most interesting thing about Bitcoin. We should take bitcoins out of the picture and use the Bitcoin cryptography and ledger to secure fiat transactions. 

The Bitcoin encryption system is “an almost infinitely flexible” way to transfer property rights, the Citi experts said, and we should be combining Bitcoin cryptography with a blockchain ledger to secure exchanges of fiat currency and other assets - taking the bitcoins themselves out of the equation entirely.  
“The transactions technology is generic and efficient and less complicated than introducing an intermediate currency (Bitcoin) to facilitate USD to USD or USD to EUR transactions,” the report said. 
 
Naturally, the idea of taking bitcoins out of, well, Bitcoin has been largely unpopular with advocates of the cryptocurrency, who say that the Citi experts missed the point of Bitcoin entirely. By removing the source of value from Bitcoin, they argue, you also compromise the founder’s original intentions, which was to remove “trusted third parties” like governments and banks completely from transactions. 
 
Other Bitcoin community members, however, have embraced the idea of applying the blockchain technology to secure fiat transactions. 
 
Bitcoin expert Patrick Dugan said he has been designing infrastructure in the cryptocurrency’s master protocol that would allow decentralized generation of tokens backed by Bitcoin but tied to short forward contracts on dollars or euro. Dugan commented: 
“The BTC commodity/currency will be more like gold, the base of the monetary pyramid, and its value will be buoyed by the demand for shorting it into dollar coins. This is the future of Bitcoin adoption.” 
Citi’s “Disruptive Innovations” report was ultimately a bit of a mixed review: encouraging to Bitcoin advocates in recognizing the application potential of the confirmation blockchain, though a damper on the (very realistic) obstacles facing the cryptocurrency’s advancement. It comes as no surprise, though, that a massive financial institution would not come out as Bitcoin’s biggest cheerleader.