Bitcoin, Elon, Doge… crypto is on fire again — so where to from here?
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Bitcoin and Elon Musk — a crypto cocktail that fanned the flames of red-hot digital asset markets this week.
So with BTC now pushing towards a historic high of $US50,000 at time of print, how should investors appraise the 2021 outlook?
For Alex Saunders — crypto investor and CEO at Nugget’s News — the signs are broadly bullish as more big companies enter the space.
Tesla’s 2020 annual report (to December 31) revealed the company changed its investment policy in January and promptly bought $US1.5bn of Bitcoin.
Apropos of Musk’s mercurial style, the buying spree must’ve come shortly after this tweet (on December 20):
Bitcoin is almost as bs as fiat money
— Elon Musk (@elonmusk) December 20, 2020
But Tesla definitely wasn’t the first Bitcoin mover, becoming the latest in a “long list of companies to add Bitcoin to their corporate balance sheet”, Saunders said.
Back in October, US payments company Square (led by Twitter co-founder Jack Dorsey) announced it had purchased 4,709 bitcoins at an aggregate price of $50 million.
(That computes to an average cost of $US10,618 per coin — good enough for a ~400pc return [at current prices] in four months).
“Corporates have been a bit gun-shy in the past when it comes to talking publicly about BTC, but that’s changing,” Saunders said.
In terms of allocations, “the percentages being thrown around are like — everyone should have 1% exposure, 5% at the high-risk end.”
“But some of these big names…I think it was (famous investor) Bill Miller the other day threw around 15%.”
“So these are really big numbers and a company like Tesla can put a massive dent in the available supply of BTC, which is already scarce.”
The clear parameters around Bitcoin’s relative scarcity — no more than 21m tokens — plays a key role in its value proposition, Saunders said.
“Particularly since the halving took place, there’s been lowest number of BTC ever available on exchanges because people believe in this long term.”
“I think $US100k is probably the number that everyone has in mind for the end of this year. People just aren’t going to sell at $US40k, $US50k, $US60k,” he said.
“There’s always some people that will take profits, some of the miners will have to cover their costs but we’ve now got data that shows a lot of investors haven’t touched their coins in more than a year.”
Perhaps adding to the mystique around Bitcoin is that people who have proven to be really good at making (fiat) money are split on the issue.
Famous trader Paul Tudor Jones has championed Bitcoin’s speculative properties, adding that every day it exists is an incremental value-add to the ‘digital gold’ proposition.
In connection with the percentage-allocation framework that Saunders outlined, Jones last year said he had between one and two per cent of his assets allocated to Bitcoin.
But in more recent commentary, US investor Paul Singer (net worth ~$US3.6bn) weighed in on the Grant Williams podcast, in what could mildly be described as the ‘bearish view’.
He began by arguing that investors try to be rational (and often think they are rational), but “quite frequently, they’re not”.
“There’s hardly a better example of that today than cryptocurrencies. To tell me something that’s constructed as a computer program where you engage in a process and after a period of time, a message appears on your screen that you’ve actually created something — it’s ridiculous. It’s nothing.”
“With crypto, I have smart people sending me articles that read to me like a Babylonian religious text,” Singer said.
“Cryptos are a cult. And then people say, ‘well the central banks are creating digital currencies’. What are you talking about? All currencies created by central banks are digital currencies.”
“What do you mean they’re not digital? The bank account is right here on my computer. So people have been lulled into a variety of beliefs,” he said.
Not all the elder billionaires are on board, but Bitcoin isn’t the only major crypto that’s been surging this year.
Ethereum is up by more than 1,300 per cent from its March 2020 lows in the wake of the pandemic, along with the growth in decentralised finance (DeFi) that’s built on top of it.
For a quick primer, Stockhead took a deep dive into the DeFi waters last November which you can read here.
“Ethereum is more of a tech solution than a kind of money,” Saunders says.
“BTC’s trying to be a global currency — store of value and a medium of exchange. With ETH, the way to describe it is a world computer.”
“(The community) is trying to rebuild a framework or protocol for the internet itself so anyone can build programs and applications on top of it.”
The broader aim is to build a decentralised internet as opposed to ‘Web 2.0’, which came to be dominated by the big tech giants, Saunders aid.
That’s a lofty goal, but using Ethereum as a platform the early activity has manifested in finance — decentralised versions of lending, borrowing and trading of options and derivatives.
“ETH has moved from mining to a new model called proof of stake,” Saunders said.
“Users now stake their ETH as collateral and get yield reward for doing so. At the moment that yield is around 5%, but it can get as high as 10-15% depending how many people are doing it,” he said.
“So that’s going to be a big driver in a world of low interest rates — where big companies can get a yield like that, as well as get exposure to this new tech narrative.”
“There’s a lot of money flowing around. It’s gone up quite a bit already this year, so for people who are speculating and investing for the first time I’d certainly be careful,” Saunders aid.
But as activity increases, “there’s plenty of upside value left in this space long-term”.
Speaking of upside, we would’ve been remiss if we didn’t get Saunders’ thoughts on the surge in Dogecoin amid the latest round of crypto-mania.
“Whether you love it or hate it, these are the things that catch on like wildfire across social media,” Saunders noted.
But in terms of the outlook, he’s much more cautious about the world’s foremost memecoin compared to the major cryptos.
“It’s ridiculous, it’s crazy, it’s a bubble and its gonna pop and unwind sooner or later, but these are the times that we’re living in,” Saunders said.
“You’ve got Elon, probably the most famous person on the planet and he’s tweeting about Doge several times a day?”
“It’s almost like penny stocks, sometimes they can pump 1000pc but just be cautious. If you’re a beginner don’t chase these things — this is for experienced guys who know how to trade, and know how to get out.”
So unlike BTC, the Dogecoin trade is “probably about to unwind very quickly very soon”, Saunders said.