Why one Wall Street strategist is a bitcoin skeptic

16 August 2021

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Bitcoin (BTC-USD) may be holding above $46,000 Monday, but one prominent Wall Street strategist is still somewhat skeptical of the cryptocurrency.

At a recent Yahoo Finance Plus webinar, Liz Ann Sonders, chief investment strategist at Charles Schwab, explained her principle misgiving about bitcoin, being careful to emphasize she doesn’t completely dismiss the cryptocurrency altogether.

“I am an admitted skeptic to some degree. I’m not on either end of the spectrum — meaning I’m a skeptic, but I’m not [saying] this is complete nonsense … I have yet to get a very compelling answer to the question I ask all the time of — whether it’s crypto experts or crypto fanboys, so to speak — which is what problem is this solving for? And I get myriad answers, but none that at least resonate with me to a significant degree,” she said.

Sonders lists the common responses by bitcoin enthusiasts, beginning with a mistrust of the global fiat currency regime. Sonders explains that she trusts the keepers of the extant financial system more than she trusts cryptocurrency miners.

“I still put some faith in the entire U.S. financial system, the banking system, all of its protections — as well as the power of the central bank, the Federal Reserve — to sort of control the fiat currency that is also the global monetary standard and the world’s reserve currency — versus, say, bitcoin miners,” she said.

To people who like bitcoin as an inflation hedge, Sonders points out that there haven’t been any major bouts of price inflation in the history of bitcoin until very recently. “Bitcoin has been around since 2009, and the only burst of inflation that we’ve gotten since that period of time was during a three-month period where bitcoin was cut in half. So you sort of lose that argument.”

Unappreciated risk

Sonders also revealed a deeper concern about bitcoin positioning — namely, concentration — an issue that has recently roiled financial markets. At least twice this year, putatively-savvy institutional investors have amassed undisclosed whale-sized positions that suddenly took a turn for the worse — taking out entire hedge funds and bruising brokers to the tune of billions of dollars. Sonders details these incidents and relates them to bitcoin.

“The implosion of Melvin Capital with GameStop was a short concentration issue. The implosion of Archegos and stocks like CBS Viacom was a concentration issue — in that case on the long side. The latest data that I’ve seen is the top 2% of bitcoin holders own somewhere between 90% and 95% of bitcoin. And then there’s leverage associated with a lot of this,” she said.

Sonders explains this is a largely unappreciated risk with respect to bitcoin investing.

“I think that thread of leverage and concentration arguably can weave its way through a lot of these areas where you’ve seen tremendous amount of speculation,” Sonders said. “And I’m not suggesting it’s some moment-in-time house of cards, but I just don’t think that there is yet enough connecting those concentration and leverage dots, and [that] could be a risk factor that is underestimated right now.”