Grayscale Economist Says Bitcoin Is a Dollar Rival
This article was originally published on ETFTrends.com.
Grayscale was one of the firms spearheading the January debut of the first U.S.-listed spot bitcoin ETFs, which was the culmination of years of wrangling with the SEC and its concerns. The Grayscale Bitcoin Trust debuted in 2013, more than a decade before its conversion into an ETF. Today, the Grayscale Bitcoin Trust (GBTC) has roughly $25 billion in assets under management. VettaFi spoke recently with economist Zach Pandl, Grayscale's head of research, about the recent runup in bitcoin's price and what lies ahead for the cryptocurrency, among other topics.
Two Major Drivers for Bitcoin Performance
Bitcoin has been on fire lately. What is the best kind of environment to support bitcoin's performance, and are we in it now?
There's always two trends that are driving bitcoin’s price. One is macro factors. Bitcoin is a macro asset. It is a store of value that competes with the dollar, and it competes with physical gold for that role.
The kinds of things that drive demand for these types of assets — for stores of value —those types of episodes are good for Bitcoin. [The reason for that is] Bitcoin competes with the dollar. If Federal Reserve rate cuts, that can be something that weighs on the dollar, that make the dollar a little bit less attractive. [That’s] good for competitors to the dollar like gold, like Bitcoin, like other currencies. I think [expected] Federal Reserve rate cuts are a positive for bitcoin’s valuation, for crypto valuation and are something that has been driving the market over the last two quarters, since the Fed pivoted and turned its attention towards rate cuts from rate hikes last year.
The second big trend is going to be the technological developments that are happening in crypto. Bitcoin is a macro asset, but ultimately this public blockchain tech technology is about innovation, a new type of digital infrastructure and all the things that can be done with that. Bitcoin is just one part of the story.
We'll be watching for the technological [developments] as well. One example would be that the ethereum network — the second biggest blockchain and the second biggest asset in crypto markets — is going through an upgrade this month. That's the kind of technological advancement that can take Bitcoin and crypto forward.
Why the Halving Matters
Is the April halving one of the factors driving bitcoin's recent performance?
That's a big part of it as well. Bitcoin is a money system that competes with other types of money [including] the US dollar, for example. What makes Bitcoin special is that it has a fixed ultimate supply and the rate of new Bitcoin issuance — unlike national money systems, where the supply always seems to be increasing — declines over time. And, in particular, every four years, the creation of new Bitcoin falls by half.
Every day, the Bitcoin network releases 900 new Bitcoin, as of today. As of mid April, after the halving event, the number of new coins per day will fall by half to 450 coins per day. So, every four years the amount that the network is emitting is releasing into the into the market falls by half. Again, [that’s] very different than other types of financial markets where supply is grows typically over time and is unpredictable. When are we going to get more government bonds? When will the Federal Reserve print more money? We don't really know those limits.
Bitcoin is different as it's an open source piece of software that anybody can see and that has this prescribed monetary policy. That's all the halving is — just a cutting in half of the rate of new coins issued every day.
Scarcity & Simplicity in One Package
Bitcoin people in crypto get excited about this for two reasons. One is you Is that supply affects price — supply and demand. If there's new demand coming in through things like ETFs and less supply, that is more positive for the price. But the other thing is that the halving is a demonstration or a reminder of the scarcity of the asset class and what makes it special. It's part of the inexorable march to 21 million coins. What Bitcoin investors want is something that is very mechanical, simple and scarce as a as a kind of store-of-value money system.
Is that scarcity and that simplicity part of the reason some talk about it as a replacement for gold?
Gold is a traditional store-of-value asset. Why gold? There are 70 or so metals in the periodic table. Why did we pick gold? Well, gold has physical properties that make it attractive as a kind of store of value money. It's dense; it's malleable and can be shaped in bars and coins; it doesn't rust or corrode. You have a piece of gold; you can carry it around; and you can put it away for 100 years and come back to it — it will be exactly the same as it was before. Gold has physical properties that have made it attractive as a money medium over time.
Bitcoin Versus Gold
Bitcoin is a kind of digital object that has digital properties that make it attractive as a store of value. It's scarce; it's divisible; it's fungible; it's easy to exchange with people. It has digital properties in the same way that gold has physical properties that make it attractive as a money medium. All the other things that are happening in crypto are a little bit different from that, but that's what makes Bitcoin special.
Why do people want something like that? They buy it in the context of a portfolio to protect their assets from risks of various kinds. They are looking at the past several years of inflation and seeing that the Federal Reserve is about to cut rates. They're looking at a contentious presidential election in which neither party seems to care about deficit reduction. And [they’re] saying, “I'm concerned about the medium term outlook for the dollar, so I want a store of value.”
Both gold and Bitcoin reached all time high prices [recently]. It's not just about what's happening in crypto. It's about this underlying demand a lot from investors for stores of value and things to protect the value of their assets over medium term to for various types of risks.
What Now?
We saw spot bitcoin ETFs launch in the U.S. in January. Where does Bitcoin – and cryptocurrency as a whole – go from here?
We are still at an early stage of Bitcoin and crypto adoption. Before joining Grayscale, I spent almost two decades on Wall Street as a macro analyst. I wouldn't have left my career to go work full time at a crypto asset manager unless I thought the industry had a huge amount of growth ahead of it in the next five to 10 years.
We don't know exactly how that will play out and the timelines. But I think that these will continue to be the best-performing assets available to the average investor for a significant amount of time to come. I really think that investors should be participating in what's happening in these in these markets over the shorter term.
Bitcoin is going to depend on macro factors. Does the Federal Reserve cut rates this year or not? If it does go ahead with rate cuts, that's a positive. But if inflation picks back up and they become uncomfortable with the idea of cutting rates, that could hold back crypto valuations over the short term. The same goes for the election.
Macro Asset & Dollar Competitor
This is fairly improbable, but if one of the two — or both — parties decide [to get] serious about balancing the budget and bringing down government debt over time [and] that becomes a more important political issue, that would be a negative for Bitcoin and positive for the dollar. Now, it seems like neither party is going to do that at the moment that we're in, a rising debt environment, and that tends to be positive for Bitcoin.
Where are we going? I think investors should think about this as a macro asset and competitor to the dollar. If the dollar outlook gets worse, that will probably be positive for Bitcoin. Is the dollar likely to be stronger? That would be a negative for Bitcoin. Fed rate cuts, government deficits and debt — these are the types of things that I think ultimately are going to drive demand for this asset.
For more news, information, and analysis, visit the Crypto Channel.
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