If the running joke of the late 2017 bitcoin price surge was the image of families discussing crypto around the Thanksgiving dinner table (“Grandma, you should buy litecoin!”), the theme of the late 2020 run has been Wall Street hedge fund runners and billionaire investors going on television to say some form of, “I was wrong.”
In the past year, Paul Tudor Jones said he has put 2% of his portfolio in bitcoin and predicted that as new cryptocurrencies proliferate, bitcoin will become even more distinct as the “precious crypto.” Stan Druckenmiller said he has bought bitcoin, and predicts his “bitcoin bet will probably work better” than his gold bet “because it’s thinner, more illiquid and has a lot more beta to it.” Ray Dalio, one month after saying on Twitter that he sees three major problems with bitcoin, including the potential for governments to “outlaw” them, reversed his tune, now saying bitcoin “could serve as a diversifier to gold” and that investors ought to “have some of these types of assets.” Jamie Dimon, three years after calling bitcoin a “fraud... worse than tulip bulbs,” now says bitcoin is merely “not my cup of tea” and acknowledged that “very smart people” are investing in bitcoin. His bank in 2020 partnered with multiple major U.S. bitcoin exchanges.
In 2020, Wall Street warmed up to bitcoin. So did big consumer-facing payments names like PayPal and Square, two brands with more mass recognition and legitimacy than, say, early crypto adopter Overstock.com. Visa and Fidelity are some of the other major financial names that have partnered with crypto startups or dipped into crypto in other forms, if not quite as loudly as PayPal (PYPL) and Square (SQ).
The COVID-19 pandemic provided the spark. With central banks pulling levers and printing stimulus checks, bitcoin’s long-hyped appeal as “digital gold” and a hedge against inflation became more convincing than ever before. “There’s so many uncertainties in this pandemic, but one thing that seems almost assured is when you print trillions of dollars more paper money, it’s going to drive up bitcoin and other cyptocurrencies,” Dan Morehead, CEO of crypto firm Pantera Capital, said in August.
Bitcoin took more than 10 years to hit $20,000 on most exchanges (since cryptocurrency is traded on multiple exchanges, there is rarely one consensus price). Then it leapt from $20,000 to $30,000 in a little over two weeks. It topped $35,000 four days later.
Roadblocks to legitimacy
Since its inception, the bitcoin market has always been fueled by narratives.
After events like the FBI shutting down Silk Road in 2013 (an online black market site that used bitcoin as its payment) and the theft of 850,000 bitcoins from Mt. Gox in 2014 (an early bitcoin exchange that filed bankruptcy shortly thereafter), bitcoin was for years dogged by a stigma that it is unsafe, subject to theft, and favored by hackers and scammers.
Crypto diehards adopted the retort that the U.S. dollar is used for crime too, but it didn’t do much to combat bitcoin’s association with cybercrime. Over the years, Nouriel Roubini called bitcoin the “mother of all scams”; Jamie Dimon called it “fraud”; Saudi Arabia’s Prince Alwaleed called it “Enron in the making”; and Charlie Munger of Berkshire Hathaway called it “disgusting... stupid... turds.”
The image of bitcoin as vaguely fraudulent lingered, but bitcoin and ether (the token of the Ethereum blockchain, launched in 2015, and the No. 2 cryptocurrency by market cap) both eventually enjoyed a boost in legitimacy compared to the junky, meme-based coins of the ICO boom.
Amid bitcoin’s dramatic surge in 2017, fledgling tech startups flocked to a new funding method: the initial coin offering, in which a company creates and sells its own digital token to raise instant capital without begging at the feet of venture capital firms. Token sales began in 2014, but intensified with the rise of Ethereum and peaked in Q4 2017, with investors buying $3.4 billion worth of newly created coins, more than three-quarters of them from companies that had no product and had done nothing apart from sell the token.
Then 2018 brought the ICO bust, as the SEC widened its crackdown on companies that conducted token sales and repeatedly made clear its view that the vast majority were unregistered securities offerings. (At a Yahoo Finance summit in 2018, an SEC official declared that the agency does not view bitcoin and ether as securities; XRP, the token created by Ripple Labs, is currently facing a $1.3 billion SEC suit over this same distinction.)
With the ICO frenzy largely in the rearview, and with the largest U.S. crypto exchange site Coinbase planning to go public this year, the bitcoin market may be entering a new phase of maturity. The hope among crypto investors: “This time is different” from 2017.
Wall Street investment firms pumped a total $5.75 billion into crypto funds in 2020, up 660% from 2019, according to a crypto inflows report from CoinShares. That flood has boosted Grayscale Investments, the largest crypto asset fund, to $20 billion in assets.
The surge has brought the overall crypto market cap above $1 trillion for the first time. This week, trading volume across the major cryptocurrency exchanges hit a new daily record of $68.3 billion, according to CryptoCompare, suggesting an extremely active (if also volatile) trading market. The blockchain research firm Glassnode estimates so much bitcoin is being held by long-term institutional investors that just 22% of existing bitcoin is in circulation for trading, which could mean increased volatility.
But with maturity comes regulation.
Last month, FinCEN (the Financial Crimes Enforcement Network, an arm of the U.S. Treasury) proposed new, tighter customer information rules for crypto wallets. Companies that hold customer crypto funds were quick to voice their displeasure. Square released a statement saying that the new rules “would not only hamstring law enforcement capabilities, but also limit American innovation by hindering our ability to create a competitive service that allows customers to seamlessly transfer and transact in crypto.” Coinbase and the powerful VC firm Andreessen Horowitz plan to fight the rules in court. Separately, this week the OCC (Office of the Comptroller of the Currency, a different bureau within Treasury) declared that federally chartered banks are free to embrace stablecoins, cryptocurrencies that are pegged to the price of the fiat currency like the U.S. dollar to limit volatility. (Facebook’s intended Libra token, now rebranded Diem, is a stablecoin.)
Wall Street firms may welcome regulation as a sign of seriousness, but regulation is at odds with the original appeal of bitcoin to its earliest adopters (many of whom were libertarian): that it’s outside government reach and control, unregulated, no middleman. This push and pull is yet another narrative that will continue and intensify in 2021 and beyond, as the bitcoin investment market matures.
Daniel Roberts is an editor-at-large at Yahoo Finance and has covered bitcoin since 2011. Follow him on Twitter at @readDanwrite.