The pandemic has shown that there is a need for digital currencies, especially bitcoin

It sure looks like 2017 again – a powerful fix could also be in the cards. To see what the future holds for bitcoin, I spoke to Juan Manuel Villaverde of Weiss Ratings, an independent rating agency.

Villaverde is an econometrician and mathematician who has been tracking and studying cryptocurrencies since 2012. He leads the Weiss Ratings team of analysts and programmers that created the Weiss cryptocurrency ratings.

MarketWatch: Is the rapid rise of bitcoin a surprise?

Juan Manuel Villaverde: It had to happen. We have seen the demand for bitcoin grow steadily even as crypto assets entered a bear market in early 2018 and through much of 2019. Since mid-2019, we’ve seen a growing disconnect between improving fundamentals and improving. adoption by users. Yet prices snaked sideways, unable to gain any traction. The cryptocurrency rally we saw in 2020 was simply the culmination of those improving fundamentals, which has finally translated into higher bitcoin valuations.

MW: How does the current bitcoin rise compare to that of 2017? How is it different?

Villaverde: It compares to 2017 in only two ways: Prices reached similar levels to what we saw at the end of 2017’s bull market, and many people were caught off guard by the surge as they swore that bitcoin could never rise again. . It’s very different as the tone has changed substantially: where 2017 was dominated by retail investors, 2020 is largely driven by large institutional investors, such as [Stanley] Miller print o [Paul] Tudor Jones, who commit a small portion of their portfolios to bitcoin. As a matter of fact, we recently stated in a note to our clients that retail is not in action in the current wave of bitcoin.

This tells us about a market that is becoming increasingly professionalized, with deeper liquidity and better infrastructure to support large volumes of capital moving into space. Also, retail involvement is usually related to the tail of a bull market. The surge we’ve seen so far in 2020 has come without broad public participation, which [indicates] healthier fundamentals underpinning price action than in 2017.

MW: What is the place for bitcoin in a post-COVID 19 world?

Villaverde: COVID sparked a conversation about the need for fully digital versions of money created by central banks. This was largely the result of central banks finding they lack the proper tools to reach out to the general public when they want to stimulate the economy. One of the interesting things about central bank digital currencies (CBDCs) is that every citizen gets an account with the central bank. This, in turn, means that if the need arises, central banks could choose to put money directly into people’s pockets during times of severe economic downturn, as we saw in 2020.

The flip side, however, is that this new form of monetary policy gives central banks total control of the money supply – and who has access to it. While the past 10 years of monetary stimulus hasn’t caused widespread inflation, it has largely been [because] that new money creation went only to commercial banks, which in turn chose to deposit that money back with the central bank. If central banks are able to address the public directly, chances are good that we will see consumer price inflation much higher than in previous decades.

This creates a need for safe haven assets unlike anything we have seen before. Bitcoin plays the role of sound money in this purely digital world, and it probably does it better than gold, as anyone in the world can have direct custody of this asset, regardless of how much or how little they buy.

Not only that, but a digital version of money would make the average citizen much more comfortable with the idea of ​​digital assets than they are now. The bottom line is that COVID has accelerated the transition to government-issued originally digital money, and this will create both the need and the means for the masses to purchase crypto assets.

MW: Recently, BlackRock’s Fixed Income CIO Rick Rieder predicted that bitcoin would become a reserve asset that will replace gold in the long run. We have arrived?

Villaverde: We haven’t arrived yet. Gold is still the go-to resource for large fund managers to diversify into alternative safe havens. Gold is a $ 10 trillion asset, while bitcoin is still small by comparison, at around $ 360 billion. The big fund managers are sitting on around $ 30 trillion of zero-yield government bonds. They need to diversify this part of their portfolio, and as much as they want to get into bitcoin, the fact is that they can’t. For them, gold is the only game in town.

This is not to say that bitcoin won’t beat gold price performance by several orders of magnitude as the world seeks alternative safe havens. We expect it will. But this will be a function of its lower liquidity rather than most of the capital that will be invested in it. Beyond that, it’s too early to tell whether or not bitcoin can completely replace gold as a safe-haven asset.

MW: What is the upside potential of bitcoin?

Villaverde: With a market capitalization of $ 360 billion, bitcoin is currently deeply undervalued. While we expect it to take a small amount of gold market share, we are still talking about a $ 2 trillion asset at a minimum, within the next five years or so. This puts the price of bitcoin at around $ 100,000 as a conservative estimate. A more realistic estimate for the next five years would be half the market capitalization of gold, which would put the price of bitcoin at around $ 250,000, and this assumes that gold has zero price appreciation during that time period. , which is unrealistic. Bitcoin is deeply undervalued at less than $ 100,000 per coin and its likely future price will be in the mid to six-digit high over the next decade.

MW: Is it the institutional FOMO moment of this bitcoin?

Villaverde: The key difference between now and 2017 is that the current rally is largely driven by reputable investors dipping their toes in bitcoin. Not only do we have the likes of Stan Druckenmiller or Paul Tudor Jones claiming to be involved in cryptocurrency markets now, but we also have diehard skeptics like Nouriel Roubini admitting that there may be a place for bitcoin in a world of digital fiat money.

Is this enough to provoke the institutional FOMO? Not yet. It’s still the first inning. Even fund managers in general have yet to take the “orange pill” and commit a portion of their portfolios to bitcoin. Most institutions are likely to enter only after bitcoin passes the $ 100,000 mark.

MW: Is this the right time to let average investors in?

Villaverde: Despite the short-term corrections, bitcoin is deeply undervalued, even at $ 20,000. This is at least a five-fold return using a very conservative valuation of $ 100,000 per bitcoin. As long as bitcoin is trading below the six-digit threshold, it’s a good time to get involved.

One caveat, though: Our time models indicate – and have been for a few weeks – that crypto assets are overdue for a fix in the near future. We would be remiss if we didn’t point out that bitcoin is known to experience high volatility, both to the upside. is the other side of the coin. While investing in bitcoin is not for the faint of heart, those with the will to endure high volatility can still reap huge benefits, even at current prices.