Crypto Observers Debate What’s Next After Bitcoin Hits Record?

This time is different has been a recurring theme during the boom and bust periods of Bitcoin’s little more than a decade long existence. With the largest cryptocurrency topping $20,000 for the first time, the mantra is growing louder.

Dave Weisberger, co-founder and chief executive officer of trading software provider CoinRoutes, and Frances Coppola, author of “The Case for People’s Quantitative Easing,” commented Wednesday on what’s next in the digital-asset world. Their remarks have been edited and condensed.

What is the significance of this threshold?

Coppola: Bitcoin is clearly on a tear, and this will attract investors looking for yield, including institutional investors who are getting short commons at the moment because of very low yields. I expect more institutional investors to come in.

Weisberger: Today’s price action, in particular, is instructive. There was (supposedly) a “wall of sellers” at $20,000, but those were not “natural” sellers that had bought at that previous price. Rather, they’re speculators betting against the price getting through that level. The result was an immediate pop, as those short sellers covered. What happens next is anyone’s guess, as it could fall below that level again. I suspect $20,000 will form a new support level unless there is actual negative news.

To what extent did the wave of monetary and fiscal support spark the Bitcoin rally?

Weisberger: The monetary debasement has been unprecedented. That, coupled with the demonstrable success of Bitcoin’s non-inflationary monetary policy, has been and will continue to be the main driver of the rally.

Coppola: Many investors think all this monetary and fiscal stimulus will debase fiat currencies, so cryptocurrencies -- especially coins like Bitcoin that have limited supply -- are attractive as inflation hedges. I think the theme for Bitcoin next year will be whether fiscal and monetary stimulus is unwound and whether interest rates rise. Bitcoin’s strength relies very much on fiat money being copious and unrewarding. If central banks tighten monetary policy and/or governments take action to reduce deficits, the attractiveness of Bitcoin as an inflation hedge and source of scarce yield could decline rapidly.

How much of this rally is driven by retail investors compared with the run three years ago?

Weisberger: This hasn’t been a retail-led rally. Unlike 2017, the Google searches for Bitcoin have been unremarkable, and the speculation levels (as seen by leveraged foreign retail markets) have been quite low. The buying interest has been coming from corporates (such as MicroStrategy Inc.), funds (such as from Paul Tudor Jones) and other institutional-type buyers.

Coppola: I am seeing a lot of Twitter chat about people taking out loans or using credit cards to buy crypto, so clearly there is retail interest. It’s worrying how easy it is for retail investors to use credit cards to buy crypto. They could lose a lot of money and be left with debts they can’t afford.

Is the move in Bitcoin related to gold’s price action? And could it be on its way to becoming a mainstream asset class or store of value?

Coppola: I’m not convinced that there is all that much of a relationship between Bitcoin and gold. Right now, inflation fears are driving people into both, and that might continue next year until stimulus unwinds. But Bitcoin is also a speculative asset, unlike gold. So I’d expect Bitcoin’s volatility to be much higher.

Weisberger: If increasing numbers of asset owners (pension funds, insurance companies, wealth managers, etc.) start to believe in that narrative, then there simply isn’t enough Bitcoin float to absorb those buyers without significant price appreciation. In short, it could trigger a self-fulfilling prophecy in which Bitcoin overtakes gold. Gold trades with a monetary premium in its price that is a holdover from the 2,000-plus years when it was the main medium of exchange and store of value for the global economy. It was delinked from medium-of-exchange status in 1971, but has functioned as a reliable store of value since then regardless, appreciating from roughly $30 an ounce to $1,800 today as monetary inflation occurred. That has not kept up entirely, however, and gold represents somewhere around 10% of global monetary aggregates. What this means for Bitcoin is that it could easily surpass gold, even with gold appreciating as money printing continues. Certainly, Bitcoin has room for significant gains while gold could also appreciate, albeit at a much slower pace.

Isn’t Bitcoin’s value ultimately based on the belief that it will someday replace the dollar as the world’s default currency? How could that happen?

Coppola: There’s a small minority of holders who believe Bitcoin will eventually replace the dollar. These people are holding for the long term, and their faith helps to prevent Bitcoin falling to zero in its frequent crashes. I personally think Bitcoin replacing the dollar is a pipe dream. Tether, on the other hand, people use as a proxy for the dollar, but it’s not fully backed by actual dollars and it’s not at all clear what its reserves actually consist of. It doesn’t guarantee to deliver actual dollars when you redeem Tethers, either. So people using Tether to “ensure” they can always realize their crypto in dollar terms are actually taking a risk.

Weisberger: There is a lot of cash sitting on corporate balance sheets that has traditionally been used either for acquisitions or share buybacks. As corporations manage their cash and don’t see their own stock as being cheap, the notion of holding Bitcoin to protect against depreciation of the dollar (or other fiat currencies) is interesting and could gain favor.