Crypto Debate

Hello, and welcome to another annual great Crypto debate. Of course, we did one last year right around this time. It was a very different environment for Bitcoin and the Crypto space, overall. Then, it was straight up, these days it’s straight down. So, today we are going to have a little round table discussion to talk about what the future holds for this space. Quick introductions to the folks here. We have Mike McGlone, a commodity strategist with Bloomberg Intelligence. Mike McKee, who everyone knows, Caroline Hyde, myself, and Ryan Selkis of Messari Crypto. He is our bull, so we’ll start with him. Ryan, tough times. What’s the bull case here for Crypto? Yeah, I mean, I missed the party last year, I guess. Yeah, sorry. But it’s a heck of a lot easier to come on TV when the price is trading down 85%, in some respects. I think if you look at the long-term fundamentals of this asset class, things haven’t really changed. We’ve seen Bitcoin get a little bit more resilient, a little stronger, thanks to some of the challenges of the past year. Layer two scaling solutions, like Lightning, which facilitate smaller and much more rapid payments have come online. We’ve seen challenges from the Bitcoin hard fork kinda dissipate. At one point towards the end of last year, Bitcoin Cash was about 30% of the Bitcoin network. Now that ecosystem has had some in-fighting and has fallen down to a combined seven percent. And if you look at the developer activity, and just the institutional interest in building tools, that make this asset class more accessible, those have all improved drastically over the course of the past year. So, price has fallen. It’s done this about four or five times, 80 to 90% corrections. If you look at any other time scale, aside from just the last 12 months, this has been one of the top-performing assets in the world. Mike, when you’re looking at trying to do technical analysis, it’s incredibly hard. There aren’t many fundamentals to even go off when it comes to Crypto currencies. When you’re looking at Bitcoin, for example, we got Tom Lee, who’s over at Fundstrat, who’s saying, you know, I’m still seeing a much higher overall fair price, fair value price. Where do you see fair value when it comes to, in particular, Bitcoin? Good question. I like to look at the migration process. It’s very important to recognize what just Ryan has said. This is the past, when the market was for the select few. Now, it’s institutionalized. We’re having more regulation, adult supervision, futures options, even the Bloomberg Galaxy Crypto Index. So Markets change, and from my key level, I’ve been looking for over a year is a base. Where’s the base for Bitcoin? I still look around fifteen hundred, or so. That’s been the continuous mean, and that’s Bitcoin alone. So more to fall basically? More to fall, but getting closer. But a lot of the indications are showing it’s really getting close forming that base. Indications are getting way oversold. And finally we’ve seen supply decline, come off a little bit, I mean overall supply. But overall, and the key thing I want to watch is, I want to see volatility get to new lows. Last time volatility, 180 day volatility bottomed at the lowest 41%, and that was October 2015. And that marked the beginning of the bull market. It needs to go to new lows, and should probably stay there for a while. I have a question for everybody though. You’re using Bitcoin and crypto interchangeably. And to me that seems like a mistake, because Bitcoin seems to have gotten caught up in the whole mania, the bubble issue, whereas crypto the idea of mediums of exchange is something that is a different issue. Well, as we think about the asset class, we really do think about it as a whole re architecture of the financial system, where you’ll have currencies, you’ll have commodities, digital resource tokens, which could provision things like file storage or computing power, scarce digital resources of real economic value. And finally you have actual securities that are just issued on top of this new technology. And that’s starting to happen, right? People are looking at putting credit markets, in particular, on crypto. Exactly, yeah and so, I think if you look at the fundamentals dating back the past few years, bitcoin may be one of the healthiest right now, just because it’s the longest dated. It’s been around for almost 10 years, it’s been through these cycles before where you wanna actually do a little bit more diligence and deep dives both in technically and in terms of the economics of these systems, is in the longer tale of assets, which of these are gonna come out the other side in tact, and which are on a slow and steady march down to zero? So, I mean, when you look around, you mentioned the Bloomberg Galaxy Crypto Index, signs of institutionalization of this space. Price indices are sort of key to everything. Do you get interest from people in sort of some of the more tertiary coins, or for now, do people just sort of care about the price of bitcoin? It’s kind of shocking the amount of interest I get from people who wanna provide data information, and to me, that’s an indication that it just needs a good gleaning, we need to glean, more of what we’re seeing this year. We need some of these peripheral coins, that you know, the total on coin market cap dot com is over 2,000, that probably needs to drop by 15%. I mean, if you look at just the top 10. That’s conservative. Well, I mean, yeah exactly. So you look at the top 10, the best performing in terms of capitalization this year is tether. It’s the stable coin. To me, that’s where, if it’s a currency, that’s where we need to go, to stabilization. And I do believe bitcoin is a good value for digital gold, but it’s still way too volatile. When it comes to stable coins, this is something that’s certainly been a theme of 2018 it feels like. We started with tether, but now we do have some more coming to the form, likes of, Circle is launched, for example, which is a Boston-based company. You’re starting to see, Ryan, stable coins doing what they should do, what they’re meant to do, what they’re going to help evolve the space? Well, I think stable coins, at least some of the ones you mentioned are certainly good for inter-exchange liquidity, and allowing trading between some of these different global organizations, but if you think about it, the solutions from Paxos, from Circle, and coin-base and USDC, they are really centralized stable coins, so what actual difference do you have between a centrally managed digital currency that’s fully reserved and something like bitcoin? The similarities are not, are few and far between. One stable coin project that is fairly interesting, and has held its peg despite being collateralized with ether, which is down 90 plus percent, is maker and their die currency, which is actually powering a lot of the decentralized applications that are actually starting to get experimented with. Very, very small volumes, but I agree that you do need that backbone for any of these censorship resistant applications to ultimately pan out and gain any type of adoption, because no one wants to play with an asset that’s gonna move 50%. Mike, you’ve just been in Argentina, for example. Many felt that crypto and the raison d’etre, the thing that was really gonna help was for countries that didn’t have a stable currency of their own, or certainly, it was very hard to transact internationally with it. Is this something you still see, or hear from the likes of Venezuela, or the likes of Argentina, that cryptocurrencies could be an answer, in whatever form, whether it be bitcoin or whatever, cryptocurrency or indeed store of value we want to talk about? Interesting, we saw some stores with signs that said bitcoin accepted, but it doesn’t seem to be widely adopted. People don’t seem to be looking at it as the solution to their problems. I don’t think anything is gonna save Venezuela at this point but Argentina, you make a good point, where people don’t know necessarily what the value of the currency has been because it’s been so volatile, but bitcoin, nothing if not volatile. I would say that that has more to do with just the evolution of the ecosystem, right? I think in terms of where we are from an infrastructure standpoint, we can’t really get bitcoin into the hands of people that need it the most just yet. That’s slowly changing. No, no, yeah, keep going. No I was gonna ask about, on a slightly related question, about different currency correlations. Because when I look on the terminal, we have COIP go, or you can sort of pull them, and usually they’re all red on a day, or they’re all green on a day. There’s very little discrimination. Either it’s a bullish day for crypto, or a bad day. At what point do you think there will be a time where some are doing well and some are doing badly and some will actually have a view, because right now it seems like they either all go down or all up at the same time? Yeah, I mean, the answer is, honestly I don’t know. I think we’ve been looking for that decoupling since the beginning of the year. It’s surprising, isn’t it, that there isn’t more sort of discrimination among traders between good and bad projects? Yes, and no, I think what you’ll more likely see is a long-term decoupling. We saw this in the last bull run, where if you looked at the top 10, 15, 20 assets, from the 2013 run-up, almost all of them are gone, right? So these things do decouple over time, I would argue they might have to decouple during a bear market, not when people are fearful, but when they’re just apathetic, and the only people that are actually using these assets are the power users, the ones building applications that are looking for true utility. Things that technically work. Isn’t that part of the problem for widespread adoption we were just talking about is that, as long as you don’t know what to invest in and it’s hard to get into, people are gonna look at it and say I’m gonna stay away from this, and so widespread adoption becomes a matter of self-fulfilling prophecy. Yeah, I’m trying not to talk around book too much, but, the entire company that we’ve built, Massari, is structured to answer this question. How do you help people become more knowledgeable about these assets, and actually look at their fundamentals beyond just the price movements that you’d seen on currency app. Well I think that’s getting to defining exactly what they are, last year they were highly speculative cryptographic assets. Now we’re getting to points where bitcoin is really digital gold. When you’re in Argentina, and you can leave the country with some of your value on a thumb drive versus gold shoving in your pockets, that’s to me just an advancement of technology, and it’s happening with bitcoin. Now some of the other currencies, well, cryptos, that are called currencies, they’re really not. They’re still speculative digital assets. To get the currencies, they have to be more like tether, or lightcoin where they can actually transact with very little volatility. I think we’re getting there, but we’re still, that’s my point, we still have much further to go in terms of volatility and stability. Ryan, you make a really interesting point. You say talking about the applications that we’ll start to see built on these things. Where is the killer DAP? Because at the moment, I’m still hearing, oh well crypto was really successful, I’m sorry, that was a 2017 story, and how much are we gonna start to see these Ethereum and the likes of the blockchains being built upon with interesting applications? I mean, the initial use case is still money, right? If bitcoin or whatever the winning cryptocurrency is, captures just a quarter of offshore banking and emerging market fiat currency reserves, then it’s a ten trillion dollar asset just by itself, so, in some respects that’s a big enough opportunity for the near term, and if you look at something like Ethereum, it’s much, much, younger. The public blockchain has only been around since 2015. That’s three years versus 10, there’s that much less infrastructure built that’s had a chance to adapt and just based on sheer time. Well, let’s just focus on the Ethereum slash smart contracts part of the world. Is any of it working, or even close to working, or getting anywhere close to meaningful adoption? Yes and no. I’d say today, very, very few. But what we did see in 2017 in the run up was Ethereum, ether itself became a reserve currency almost for a distributed investment bank. So if you think of bitcoin as a reserve currency for a distributed central bank, the run up that we saw last year was largely fueled by these ICOs and the billions of dollars that were invested without permission from the FCC or any of their international equivalents. Now, you can argue about the merits of those assets that raised money, but ether itself proved its value. Ethereum proved that it could be this censorship resistant form of capital allocation. The only other one currently, which I already mentioned, is probably Maker, which is a fully collateralized stable coin that’s built entirely on the Ethereum blockchain. But we’re still light years away from anything even remotely resembling mainstream adoption for those even for something like bitcoin. How do you define light years? You mentioned the idea of a 25% of offshore reserve assets. The Chinese yuen has been, now, a reserve currency for about three years and it’s got about 3%, and it is used by people in the actual economy. I think we look at the long tail of currencies. National currencies, right, so Argentina, Venezuela, African countries, right? If you aggregate the bottom 150 or so currencies, you have to imagine that many of them already use the dollar, or something pegged to the dollar, or pegged to gold. If you have that emerge over time to an empeso like international reserve currency, that could look something like bitcoin, or a derivative of it. Alright, Mike, let’s get back to what a lot of people care about which is trading and making money. So this year has been a lot of disappointing to people, because several times they’re like, oh, this has gotta be the bottom, and then it falls another 20%, and they’re like, okay but this is the bottom, but then it keeps plunging. Just from your sort of trader camp, what would be the types of things you’d watch for to say, okay now this is truly capitulation. Is it just sort of indifference overall, like a sense that everyone has truly given up? Actually, we’re getting near signals like that now. The outsides are buried, the market’s going straight down, the market’s well below its 200-day average. You look in the chats, everybody’s bearish. That’s what you’re looking for, it’s just the wrong time of year. There’s tax loss, and actually tax-gain selling from last year that people didn’t do yet, so I’m looking for those indications and the opposite of what happened this year. When we mentioned Ethereum, when Ethereum’s main competitor Ewos launched and we had that pump, we had bitcoin cash pump, those kinda things you need to see the opposite. When the market gets buried and looks oversold. It’s just not there yet. Do you think there’s any correlation between risk appetite and legacy markets like stocks and crypto, or is it different? Oh, completely, I think people are missing that point. Last year was the key thing, the VIX was the lowest, the longest ever, at the same time, almost within the same month, that bitcoin reached the highest for ever. And guess what, we’re just mean reverting right now. The key level, if you look at means, and like the SNP 500 it’s 2400, in the VIX its 2400. Market’s coming back to that. To me, it’s not as big as the housing market in 2008 when the VIX reached its previous low, but to me it’s a key thing that needs to be mentioned is this bubble we had is just bursting and its happening everywhere in the stock market. It’s just indicative, what markets needed to do is mean revert, and the VIX is just going back to its normal levels. So what happened to the diversified trade? What happened to this being separate in some way from this equity market? Do you see it as something very similar, when risk appetite diminuates.. Yeah, and look this might be a cop out, but it just comes back to how early this asset class is. At some point I do think that there will be a recession that’s an inflationary recession, where investors flock to something like a digital gold. Some will go to gold, some will go to a digital gold, and that right now would be bitcoin if we saw it like that. Now, whether that will happen, if I knew how to buy the bottom and sell the top every time that this market has moved, I wouldn’t be here, I’d be on the beach, but maybe you can show me the way after. You said something interesting about ether and the sort of distributed platform from capital raising. And that’s good on the way up, but a lot of people wanna talk about this phenomenon on the way down where a lot of projects have treasuries, have a lot of money in ether, and then as the price goes down, they see their runway collapse, and then that forces further liquidations cuz they gotta pay their developers, and then that reduces the runway for everyone else, and then you have this spiral. Is that process real? And if so, how far along are we in that sort of, essentially the opposite of the capital raise period. I think everybody’s trying to figure out the answer to that exact question. One of the things that we’re working on at Messari is driving transparency standards for many of these projects that did raise money and one of the key inputs there is what does their ongoing treasury look like? You only hear about team’s treasuries after they’re laying people off, and they say we have 12 months, we have 18 months. And we’ve seen that with a few projects that didn’t really manage their treasuries appropriately. How pervasive that was and is, I still don’t think we have a full grasp on. What I do think is interesting is will this religious community of supporters that have developed around this Ethereum ecosystem, this is a pretty difficult battle that they need to overcome, and are they really true believers that’ll get through the trough here, or will you start to see some defections to other more stable, well-capitalized projects that might start a little bit more centralized. EOS is a perfect example. Definiti, Cosmos which is another project, both are private now but will come online in 2019. Will developers start using those other blockchains, because Ethereum has gone so low and it’s become insecure. There was this talk I remember, 2017, 2018, that VC was gonna be dead itself because ICOs was the new way of raising cash, and a new cleaner way of raising money. Do you see that as a future? Do you think ICOs have died their death to a certain extent, because, there was so much more regulatory hurdles for them to jump through the second time. Well, it’s self-inflicted wounds. People look at what happened with some of those and feel like they got scammed and we’re not gonna be interested in that. To me, one of the interesting aspects of the whole discussion is that there has been some talk but no real movement towards any kind of regulation of these things and if you’re really gonna be adopted, widespread, and it’s gonna have an impact on financial transactions around the world, governments, theoretically, should be getting nervous and getting involved, and we don’t see that yet. So I’m wondering, you know, when does that come along? Jim, you were looking just last week, or the week before, that we are starting to see people wanting or looking at ICOs, the money that they’ve raised and saying, maybe we’re gonna have to get some of our cash back. It was Pantera, wasn’t it, where the hedge fund. Yeah, what was the quote, not a thing you want to have to tell your investors that 25% of the projects he raised might not have been legitimate securities and have to be liquidated. What do you uh, I mean, is there progress being made on this from your view or is it still everyone just sort of poking in the dark trying to get regulators to make a comment that backs up their own view? I think it’s a little bit of both, but remember, Uber went against the taxi cartel. AirBnB has fought their battles in every single city when it comes to hotel regulations, so this is more about a new technology, a new asset that doesn’t really fit as cleanly into any existing regulatory structure. Now, the SEC, the CFDC, the IRS, name your favorite three or four letter agency, they’re all claiming dibs on who can regulate this the fastest and that’s created a lot of this confusion. But I don’t think that, whether you’re talking about a cryptocurrency and the way that funds flow through something like bitcoin, whether you’re talking about an ICO, that these fit far outside of any existing regulatory structures, it’s just, I think the regulators are really trying to grapple with this and figure out how are they gonna set precedent and make sure that other good actors have the ability to comply and continue to innovate. I gotta, we have a question from a viewer, and it’s something that I think in 2016 and 2017 you heard this a lot that bitcoin was so centralized in China between both the mining chip design and the actual mining itself, that China de facto had a significant control over the currency. Is that right, and how much control could the Chinese government potentially wield on bitcoin with the current level of concentration there if they were to find it a threat. I’d say leave China aside for a second. Geopolitical risk is probably like the granddaddy of all risks to this asset class, still. If a government wanted to, or a group of governments decided that this technology was dangerous and they wanted to try to centralize transactions it would pretty quickly be moved underground. With respect to China, I actually think that’s been de-risked quite a bit in the last year, mostly because some of the largest Chinese mining manufacturers went to the bitcoin cash side of the hard fork from last November, and actually bitmain is rumored that they’re having trouble with their IPO listing right now, and I normally don’t speculate on rumors, but if you just look at the economics of that business and how far of a nosedive it’s taken, coupled with the amount of bitcoin cash units that they had on their balance sheet, it’s scary times. So that’s probably one of the biggest mining manufacturers in China. If you assume that that has siphoned off some of the total Chinese impact on bitcoin mining in particular, then it might be in the positive, if you’re into schadenfreude, but the other thing I would say is because China has been typically restrictive of this asset class, many of the mining companies that were previously located there have moved offshore. Can I just follow up on that real quick? One thing I think, the key thing to point out in this space and maybe just to ask you about this is, China was a significant demand factor before, but now they aren’t, they’re only supply. I was in Hong Kong back in September and the only word I heard everywhere was banned. Banned, banned, you have to go offshore. You can’t, if you’re a Chinese mainland citizen you just can’t get access to bitcoin anymore unless you’re a miner, which is supply. So I find that is one thing that’s really shifted in this space that’s pressuring prices. Yeah, we were in China in June, and I can tell you that’s not true. Now officially what the policy is gonna be is one thing, now, that’s not to make light of a subject. If the Chinese government, especially through WeChat is able to censor many of the projects and companies and service providers that focus on bitcoin, then it is a longterm drag, but in terms of some of the larger holders and investors, I don’t think that’s really slowed them down. If anything, it’s moved some of their operations and holdings offshore. They still find a way. Alright, this has been the Great Crypto Debate.