Roundtable | Cryptocurrency: A Boom or Bust?

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On January 27, 2021 JConnelly hosted a digital panel discussion on the topic: Cryptocurrency: A Boom or Bust?

Cryptocurrency continues to make headlines with Bitcoin and Ethereum leading the way. Reaching a record high this month, Bitcoin, in particular, has attracted the attention of the investment community. Will cryptocurrency continue to have the same interest level as we have seen during the backend of 2020 and now into 2021? In a virtual roundtable hosted by JConnelly, a panel of wealth management professionals with experience in cryptocurrency, will discuss the digital asset landscape and its future.

Erin: Thank you to everyone for joining us today, I’m excited to welcome you to the latest installment of JConnelly’s Virtual Roundtable series. The topic of today’s panel is centered around cryptocurrency. We have compiled an incredible group of wealth management professionals from SkyBridge Capital, Fiduciary Trust International, Trust Company, and VanEck who have experience in cryptocurrency to discuss the recent interest level in Bitcoin in addition to the digital asset landscape as a whole in its future.

Now, I’d like to introduce our moderator Sylvia Jablonski. Sylvia is the Chief Investment Officer and co-founder of Defiance ETFs. A recognized expert in the ETF industry, Sylvia uses her expertise in markets to provide economic outlooks, market commentary, product ideas, and ETF expertise to the asset management ecosystem. Sylvia, thank you so much for leading today’s conversation. I’ll turn it over to you now.

Sylvia Jablonski: Thank you, Erin. Thank you so much for inviting me to join the panel today. Very excited to talk about this topic today. I’ll just jump right into it and introduce our esteemed panel here. We have Brett Messing, who is partner, president, and COO of SkyBridge Capital. SkyBridge Capital is a leading global alternative investment firm that recently launched the SkyBridge Bitcoin Fund to mass affluent investors with an investment-grade vehicle to get exposure to Bitcoin.

We have Viraj Patel who is Managing Director and Head of Asset Allocation at Fiduciary Trust International. Fiduciary Trust International is a global wealth management firm that specializes in strategic wealth planning, investment management, real estate, and trust services, tax and custody services.

We also have Ken Nakamura. Ken is the CEO of Trust Company. GMO Trust connects traditional finance and blockchain for everyone. They are issuing GYEN, the world’s first regulated Japanese Yen-pegged stablecoin, ZUSD, which is USD pegged, under the regulatory oversight of the New York State Department of Financial Services. That’ll be interesting to hear about. The company is a subsidiary of GMO, a market leader in the internet infrastructure, internet finance, and digital asset management space.

Gabor Gurbacs is Director of Digital Assets and Strategy at VanEck. VanEck has a history of looking beyond financial markets to identify trends that are likely to create impactful investment opportunities. They were one of the first US asset managers to offer investors to international markets, for example. They set the tone for the firm’s drive to identify asset classes and trends including global investing in 1968, emerging markets in 1993, and ETFs in 2006. In carrying on that tradition, VanEck has established itself as a leading voice and pioneer in digital assets and digital asset management. Some great experts here on both the topic at hand and investment management.

With that, we’ll get right into it. As Erin said, feel free to ask questions as we go along. Bitcoin is becoming more and more mainstream, more and more popular as the days go by. It’s an asset class that has a $21 million cap because of a stipulation in a code. It has this natural supply and demand interest there, coupled with individuals are able to buy it in fraction. Institutions are picking it up. I’ve been reading in the paper, every other day, whether it’s Harvard, Yale, some of the firms that the panelists work for are just picking up Bitcoin investments for themselves or for their clients. It continues to grow, but there are also a lot of questions as Bitcoin develops, and we see more crypto and digital assets enter the market.

Some of those questions are things like why is it so volatile? A couple of weeks ago, we were crossing the 40 line, and this morning, I looked at it and we were at [$]29,000. You have this wild price fluctuation volatility, yet a lot of asset managers used it as a hedge for inflation or even as a hedge for volatility. Why is that? What about regulation and infrastructure? Will there ever be a conventional use case for Bitcoin? These are some of the questions that are out there.

One thing is for sure, it seems like everyone wants a piece of it. Depending on who you talk to, it’s going to zero or [$]100,000 by the end of the year. Exciting topic, and with that, I will get to our panelists and start diving into some of these things. I’ll start with Raj. Raj, what do you believe to be the main factors driving the current resurgence of Bitcoin in the last few months?

Viraj Patel: Yes, a great question, and thanks for having me. I think that we have a pretty interesting macro backdrop here that favors a hard asset like Bitcoin. I’ll only break my answer up into two specific drivers if you will. One is the macro backdrop and the second part is more of a technology ecosystem, and perhaps idiosyncratic drivers that are more specific to Bitcoin itself. No surprise, starting off with the macro drivers first, that investor sentiment could be described as quite bullish, borderline euphoric here. We do have a risk on the pulse in the markets here today. Bitcoin is known to be a little bit of a risk-on type of asset. The other primary macro driver in my opinion is probably the inflation hedge aspect. We have unprecedented money printing going on. We have coordinated global monetary policy by central bankers, quantitative easing, a lot of liquidity. The world is awash in liquidity, and the money has to make its way somewhere. It’s making its way into a lot of different risk assets.

Then you’ve got the traditional economic part of it. You’ve got increasing demand in Bitcoin or a hard asset or something that is deemed to be an inflation hedge or Gold 2.0 met with a fixed supply of Bitcoin, as you mentioned earlier with the 21-million fixed schedule. Then just a lot of interesting things happening in the ecosystem broadly. We talked about the happening that happened in May of 2020 last year. You’re finally starting to see real-life use cases within the ecosystem. The rise of decentralized finance or DeFi, the upcoming launch of Ethereum 2.0, the institutional interest in Bitcoin is slowly growing, and perhaps more importantly, there’s finally a real strong infrastructure in place with some of the advancements that have been made for institutional investors, namely custody, security, easier ways to buy and trade Bitcoin. Those are some of the main drivers in my opinion.

Sylvia: Great. Thank you. Gabor, what about on the institutional side and institutional adoption, how do you see Bitcoin and other digital assets impacting financial services on the institutional level?

Gabor Gurbacs: Excellent question. Primarily digital assets have been a retail play. This was a situation where Main Street beat Wall Street. Wall Street is playing catch up. The two ways I see Bitcoin, in fact, in institutional spaces, one, institutions are looking to add Bitcoin to their portfolios. We’ve actually published some research called “Investment Case Bitcoin,” for Bitcoin, which is one of the top read pieces in the space. I walked through scenarios where how a 1% to 3% allocation would benefit institutional portfolios. Sure enough, we found that Bitcoin is not a correlated asset, has a low correlation to traditional asset classes. It has outperformed most assets in the past 10 years and actually increased and improved the risk-reward profile of institutional portfolios. One of the ways that I see the impact is just institutional portfolios and public listed companies adding Bitcoin to their asset mix like they do for gold. We have seen MicroStrategy and the Marathon Patent Group and some other decently-sized institutions on the public side, adding Bitcoin to their portfolios. We hear from family offices and endowments and institutions like Harvard, Yale, and others that they are adding to their portfolio, so that’s obviously one clear trend.

The second way in which I think Bitcoin has the potential to improve the mainstream financial infrastructure is just the pathways of where transactions [42 million] clients. They make more money than most brokerages. There are some other functions that Bitcoin has introduced, like proving that financial infrastructure, we are providing faster settlements, an alternative railway for trading, and new ways to interact with stuff like capital markets and lending, but in sort of a parallel universe. There are new ways to lend out Bitcoin that do not exist in the banking space. Those are all improvements to the financial system. I think the key to remember here is that all these things are additive to the financial system. I don’t think it’s necessarily disruptive. Right now, finance in Wall Street is just benefiting from what Bitcoin brings to market. Just super-quickly, we’re going to see a number of IPOs coming to the market this year. This will help more of the institutions to participate in the digital asset space.

Sylvia: Do you think that this is specific to Bitcoin, or do you see the interest, as you said, from the institutions that you speak to on the other cryptocurrencies as well?

Gabor: Most of the institutions only care about Bitcoin because it’s a mature asset with 70% of the market cap. It has a finite supply, and that makes sense, a gold alternative type of thing. That’s the vast majority of the conversations, I would say, on interest. There’s a subgroup of people who are interested in decentralized finance and flag the technology behind what may help to take Wall Street to the next level. I think it’s a smaller subsector of people. Lots of conversations around stablecoins and how money market instruments will be reformed. We should probably keep an eye on them. Stablecoin market capitalization is around $34 billion now. Going from zero to $34 billion five years, it’s pretty big. I think 4 out of 10 central banks announced that they would monitor… In my opinion, 95% of the crypto space does not make any sense. There’s competing protocols and it’s mostly a zero-sum game with the exception of, I think, Bitcoin and some stablecoins, maybe Ethereum, but again, institutions are focusing on Bitcoin.

What I would add to this is there is a very slow level of development towards Tokens 2.0, tokens that represent real things as opposed to just some random protocol or decentralized networks. I would just call attention to our listeners to watch that space, how tokens that are representing things of real value will change capital markets. We’ve seen some bullish tokens coming to market, for instance, which are really interesting to me.

Sylvia: Great. interesting stuff. Brett, what do you think about the volatility and the price swings of Bitcoin and how does that impact a few things? Number one, investor fear where it’s an appetite for buying an asset that sort of gyrates like that. Number two, is the volatility really that high? When you look at it now as compared to, let’s say, two years ago, it’s certainly half or certainly a lot less than it was before. Is it stabilizing? How do you deal with volatility in Bitcoin and cryptocurrencies?

Brett Messing: Yes, super volatile, the volatility has trended down a little, but you have to be prepared for it to be volatile. I actually think that volatility is a good thing. Most of the volatility in Bitcoin has been upwards. We expect that to continue to be the case. I would prefer that it stay volatile and you have an asset that, yes, you can go from 10,000 to 40,000 in a space of three months and sort of go from 40 to 29. Let’s do that again, and again. That seems okay to me.

We tell investors, it’s all about sizing. You have to size your Bitcoin position to a level where the volatility won’t cause you not to sleep or that you’ll sell it at an inadvisable time. It’s not a leveraged asset. You don’t have to worry about margin calls or things of that nature, and I think people have to have a long time, a 5- to 10-year timeframe, and embrace the volatility, if you will.

Sylvia: Great. To your point, do you think that these swings actually lead to more interest in terms of buying on the dips?

Brett: It’s interesting because, as you mentioned, we’re raising a fund and we have $400 million invested in Bitcoin, which just goes to the maturation of it as an asset class. A year ago, that’s not something I think we would ever contemplate, but you have two cohorts of people. You have some who when it goes up, they’re like, “I got to get in,” and then you have another cohort of people who want to buy when it swings down, although actually, there’s a third, which is they say they want to buy when it swings down, but they get terrified when it swings down, and they don’t actually buy it. They never get to own Bitcoin.

I think the volatility provides entry points for various people. My personal view is that it’s folly to try to time your entry into Bitcoin, and you’re not buying it to make 20%, you’re buying it because you think you’re going to have exponential growth on your capital and it’s not going to matter if you pay 38 or 25. I think people overthink the entry.

Sylvia: To your point, it almost makes me feel like we could replace the word Bitcoin with what was Facebook or what was Amazon, or what is Tesla in some cases. It speaks to how mainstream it is and how it’s just become another typical investor habit in the market.

Brett: Actually, when I think about it, I’m an equities guy, so I just take the three zeros off and I think about it, “Well, it’s 30 now, it’s 29, it went to 40,” but the three zeroes just bother me. I actually think that everyone’s looking for, what’s going to be the next great tech stock over the next decade. For the last decade, it was, as you said, Tesla, Facebook, and Google, and what were those stocks? They were networks. Google was an information network. Facebook is a social network. Bitcoin is a monetary network. I have to credit Michael Saylor of MicroStrategy with characterizing it as such. I think Bitcoin is actually going to be the great tech stock over the next decade, in addition to being digital gold as we’ve discussed previously.

Sylvia: Great. I think it falls into this digital innovator’s category. It’s certainly an asset class that is getting the attention of all investors. Ken, let me ask you a question, why did you go through the difficult process of getting DFS to approve a Japanese-pegged currency and a USD-pegged currency with your products? Tell us a little bit more about them and how they work.

Ken Nakamura: I think the crypto space overall, it’s shifting more and more towards regulation. Especially when Facebook came out with their stablecoin, Libra, which is now the Diem, it basically opened up the eyes of all the regulators across the globe, and they freaked out. They were all like, “Okay, how do we regulate these asset classes?” I think, near term, 1, 2, 3 years away from now, I think a lot of the jurisdictions will come out with a regulatory framework to regulate these. If you’re not regulated, and if you’re not compliant with these regulations, it’s really hard to backtrack and restructure your organization and start building a robust program.

That is one of the reasons why we took so much time going through this application process with the Department of Financial Services. The New York Department of Financial Services, they have a lot of experience already regulating stablecoins. Getting into how a stablecoin works, in our case, our stablecoin is backed one for one with the actual fiat currency. We will not issue any tokens unless we have the fiat currency come in from our purchasers. It’s always backed one for one, one is backed by Japanese yen, and one is backed by US dollars.

Sylvia: Interesting, why do you think that there’s a need for more JPY [Japanese Yen] in the system, for example?

Ken: Fiat currency backed stablecoins are basically a digital dollar, digital JPY. The way people would start using this, what we envision is that both institutional and retail space, they will use it just like they use the fiat currency. The world is becoming more and more digitized, and governments looking into their own digital fiat currency, or CBDC, it becomes more and more clear that there need to be much more stablecoins that are backed by different currencies.

It’s an interesting environment where it’s a global crisis, and looking at the US, for example, they’re issuing trillions of dollars of new US dollars, there’s a potential devaluation of the dollar, and historically speaking, the Japanese yen it’s often seen as sort of a safe haven currency when the US dollar starts devaluating. In this environment under the coronavirus, the Japanese yen might get devaluated as well, who knows, but in general, I think it’s a good hedge currency against the US dollars.

Sylvia: Absolutely, and we actually have a question from one of the reporters on the call, maybe you can take this one too since we’re on topic. They ask, isn’t there clearly an inverse correlation to USD with Bitcoin?

Ken: You mean, the US dollar and Japanese yen correlation, right?

Sylvia: I think they’re asking about the inverse correlation to USD of Bitcoin. I’m not sure if you want to take that one.

Ken: In terms of that correlation between US dollars and Bitcoin, I would like to have someone take that one.

Sylvia: Pass, okay. Does anyone want to take that one? Guys?

Gabor: We usually say…I did not come up with this, our CEO Jan van Eck usually says that Bitcoin right now is 2/3 a tech stock and 1/3 digital gold. With respect to inverse correlation, I would say, part of the time, it’s like stocks, and part of the time, it’s gold. I don’t think that there’s a specific inverse correlation. We’re actually coming up with a study on correlations in 2020 on Bitcoin historically to mainstream currencies and asset class in the next few days. If you guys want to keep a lookout for that blog tweet or Linkedin post, we’ll have some currencies in there too. Correlations have increased pretty significantly in 2020 from 0.1 to 0.3 to major asset classes, including gold too. I guess the takeaway is 2/3 tech stock, 1/3 digital gold. I don’t think a discernible dollar correlation is worthwhile to note.

Viraj: If I can chip in here quickly, I agree with Gabor’s comments. I think if you look over the longer term, you’re not really seeing a very strong correlation or inverse correlation to the US dollar, but what you’re seeing is periods of some of Bitcoin’s strongest performance in recent years, like 2017 was a weak dollar environment, strong Bitcoin price for the current environment. In 2020, for example, where off the lows Bitcoin performed really well and again 2020 was another where the dollar weakened significantly, so there are periods where you do see these really strong inverse relationships, but I’m not necessarily sure that they’re consistent across time, at least that’s some of what our research has shown.

Sylvia: Thanks, Raj. Another follow-up question here. I’ll direct this one at Brett. Do you believe there’s a ceiling and that investors have missed the ground floor opportunity on Bitcoin and people are ready for the next big thing?

Brett: Oh, no, I still think it’s really early. I would just ask everybody…You think about most of the money in the United States is owned by people 50 to 75. Randomly pick some percentage of those people and ask them how many of them own Bitcoin. Always remember that there are 47 millionaires in the world and there will only ever be 21 million Bitcoin. There’s not enough Bitcoins for every millionaire to have a Bitcoin.

I view Bitcoin as having — It really has a binary outcome for me, it’s either a niche asset and it trades between 5,000 and 50,000 forever, or it’s going to grow up and be a real asset, in which it’s hard for me to see it not being worth 500,000, a million because in order for it to get to, let’s say, 125,000, it’s going to require institutional capital. Retail can’t get it there.

If it’s going to stay at 125,000, what that means is Harvard, Yale, Brown, and Michigan buy it, but Princeton, and Dartmouth, and University of California say no. MassMutual and a few other insurance companies say yes, and the rest of the insurance companies say, “No, we don’t want to buy Bitcoin.” Morgan Stanley makes it available to its clients, but Goldman Sachs says, “We’re not going to.” I don’t see how that’s possible. My personal view is it’s quite binary, and if you believe, like we do, that we are hitting this inflection point, I think this is the last chance to be early, meaning these prices, if you will.

Sylvia: Okay, great. Thank you. Ken, what do you think about the idea that there are more and more regulators entering the industry, and what does this mean for digital assets and investment in digital assets?

Ken: I think overall, it’s a good thing for the industry. You have to protect your customers, especially the retail customers. A lot of people in the retail space don’t do enough research, so when they see the Bitcoin prices going up and up and up, they don’t research and they just buy into it. Same with other cryptocurrencies, a lot are scams. If it’s not regulated, there’s going to be a lot of money that retail customers are going to be moving. At the same time, it does slow down the growth of the industry, but I think the more and more reputable institutions coming into the market are already licensed in some shape or form. These are big money coming into the market. In general, I think it’s good.

Sylvia: Great. As a follow-up question, for Brett, we have an immediate question for you on this same topic of regulation. The question is, how is your fund regulated, and how do you solve problems with custody, creating new units, and trading on these unregulated exchanges?

Brett: We’ve looked at this very carefully because our flagship fund is actually a registered investment company, so it’s a ’40 Act fund. For the purpose of that fund, we actually had to invest in a fund that owns Bitcoin. Because we did have these custody issues, we could acquire a limited partnership interest in a passively managed Bitcoin fund, but we were not able to buy the Bitcoin itself.

For the fund that we manage, interestingly we’re a $7 billion RIA, but for the purpose of managing our Bitcoin fund, we are not acting in the capacity as an RIA. We’re an RIA, but we’re not acting as an RIA. By doing that, we don’t have to satisfy what’s called a custody rule under the Advisers Act. It’s a good question. There’s still ambiguity around whether any of the institutional custodians, we use Fidelity, satisfy the custody rule. We think they do, but we were able to avoid tangling with that issue again by not acting as an RIA, but it’s our expectation that Gary Gensler, who we expect to be very Bitcoin-friendly, that one of his first acts will be to provide clarity on the custody role. Hopefully, he’ll then approve the VanEck ETF shortly thereafter.

Sylvia: Okay, great. Raj, let’s lay it out in the most simple way for the average institutional investor, how do they get access to Bitcoin? What are the entry points?

Viraj: Great question. Perhaps the most popular way for institutions and retail investors alike has been the Grayscale product, the GBTC Bitcoin Investment Trust, which is publicly quoted. There are some other firms like Pantera, for example, that offer limited partnership type vehicles where you could hold a Bitcoin, but you have some longer-term lockups and things like that. Obviously, Fidelity has been in the news a lot as an on-ramp with a variety of services that make buying, custody, trading Bitcoin, a lot easier. Then there have been the usual suspects in a place like Coinbase, which started off with a lot of retail activity, that have branched off into having really strong institutional services in which you can stay off exchanges, and trade OTC, over-the-counter markets as well, so you could avoid some of the exchanges.

Obviously, there’s been a lot of maturation in the market, and you could also get exposure to Bitcoin if you’re an institution in the futures market as well. You have a tool here that offers you exposure to Bitcoin without necessarily having to hold the underlying, and I think, as Brett mentioned, in the future, perhaps, if we could get an ETF off the ground, that could potentially be a watershed type moment for institutional investors getting access.

Sylvia: Thanks. Gabor, I’ll throw this back to you because I think you guys have a European product that is at the $100 million mark. Do you want to talk about that one a little bit because it’s a little bit further along, right? What have the liquidity issues been, lockup issues, direct access, and ease of trade and investment?

Gabor: Thank you for asking, Sylvia. Our European product VBTC is indeed closing in on the 100 million mark. I think it’s around 70 million euros right now. That took about four years to bring that product to market. We work closely with the European regulators there. It’s an exchange-traded product, so it’s analogous to the 1933 Act ETF structure that we have, applied for it in the US. That product does not have any lockups, like most of closed end fund structures and over-the-counter trading structures in the US, and no premium and discount issues, and some of the OTC funds have seen 10% to 7% premium then discount numbers that were sustained. The institutional investors that are in Europe and Asia are very interested in that product. In two months, we went from zero to 70 million. A lot of other banks have expressed interest. That is the structure. I think that can show a blueprint to a US approval or to a US ETF, and really the European funds were the first ones that showed a functioning daily creation and redemption mechanism and are facilitated by authorized participants.

With that fund, I think the US has something to potentially follow, and I’m excited. There haven’t been many scenarios where the US would be lagging from a fund structuring perspective behind Europe, but this is definitely a case. I’m bullish and positive that we can make a dent in the US as well and bring a similar structure to market, but until then, institutions in the US with European clients and European arms can access those products. Our European teams are getting a lot of questions.

Sylvia: All right, great. While we’re on the topic of global digital asset investment, Ken, can you tell us a little bit how GMO Trust works and how GMO is a little bit different than other stablecoin issuers?

Ken: Sure. GMO Internet Group is a group of 140 companies across the globe, and in the financial and crypto space we have a variety of businesses that we have been running for over 20 years. We have a digital bank that’s regulated in Japan. We have the largest FX platform. We have the largest payment gateway provider in Japan. We have a cryptocurrency exchange. We have a fairly large-sized Bitcoin mining operation.

Putting all these together, we truly think that we can bridge the traditional finance and the digital asset space. We’re an internet company at heart. Our goal is to provide API or make it truly open source so that any developers can use our asset freely whenever they want to, and however, they want to. I think that that’s the biggest differentiator. We have a strong footprint in this space, and we have a deep resource to really scale the business.

Sylvia: Interesting. Do you think that there are a lot of new entrants in the world of mining coins?

Ken: Yes, mining space is getting more and more crowded. I think the overall hash rate is growing. The past few weeks it’s been growing, but it’s difficult too. As a Bitcoin miner, I always get really scared. What if all of the 21 million Bitcoin is fully mined, how do we make money after that? Basically, it’s the transaction fees, but in order for the miners to be profitable after all the Bitcoins are mined, Bitcoin has to be used as some sort of a payment mechanism, or there needs to be a lot of transactions for the miners to make profit, and if the economics doesn’t work, there is a potential risk that miners would start shutting down their computing power. I think that’s the biggest risk in Bitcoin. This is, 10, 20 years down the road, but it always scares me when I think about that.

Sylvia: Fair point. I’ll put this question out to the group and raise your hand if you’d like to answer it. It’s from one of our media guests. What are the limits in crypto in terms of trading behavior? Does anything go in the absence of regulatory constraints and how has behavior such as market manipulation monitored?

Brett: I’ll take a shot at this one. I think I’m well-equipped to because we have exposure to Melvin Capital. We’ve been watching GameStop with interest. I find this question amusing in light of that. In terms of the level of manipulation we see on national regulated exchanges, Bitcoin is unregulated. I would say some of the volatility comes from some of the derivatives where you have the absence of regulation results in just massive leverage, as much as 100 times X, which can contribute to the volatility at times. It’s now a $600 billion asset class. I think it is arguably beyond the point at which it can be manipulated, and I think as it matures, that will become increasingly the case.

Sylvia: There was recently something in the paper about duplication or the doubling of coins. Do you have any thoughts on that? The most recent thing that came up, I’m fogging the details of it, but I believe that the same coin was sort of duplicated in various accounts and things like that. Is that a real thing in this space?

Brett: Okay. I’ll take that, I’m sorry. Yes, there was a rumor of a double spend last week which the blockchain operated exactly as it should. When you wire any kind of material amount of money on a blockchain with Bitcoin, you wait for six confirmations, right? That’s essentially additional blocks being added to the blockchain. What happened was, there were two people that claimed blocks at the same time. That would be one confirmation, and then the consensus gathered on one of those blocks and the blockchain continued, and all the transactions on the second one that people didn’t get behind just evaporated, and this happens multiple times a year. It’s exactly the way the blockchain’s supposed to work. It’s the kind of nonsense we see during a bull market. It’s why holding Bitcoin through the volatile ups and downs is hard, very rewarding but very hard, but this was just absolutely pure nonsense.

Viraj: I can just quickly jump in here. I agree with Brett. It’s what’s commonly referred to in the industry as FUD; fear, uncertainty, and doubt. Without getting too technical into the details, I think as Brett mentioned, these confirmations have been in blocks claiming that they constantly have what are called reorganizations on the blockchain, which then eventually iron themselves out, and in the end, there is no true double spend, which is exactly what Bitcoins blockchain aims to circumvent.

Sylvia: Brett and Raj, we have a follow-up to that. Isn’t there a threat from the number of counterfeit BTC and the fact that many BTC or inactive keys are permanently lost, et cetera?

Brett: No, I don’t think that. That’s a further positive. I think as you started the discussion off with one of the attractive, not attractive, the defining feature of Bitcoin is limited supply, that there’ll only ever be 21 million Bitcoin, but that’s actually- it’s even less than that because somewhere between 2 million and 3 million Bitcoin are gone forever. The supply is even less, it’s even more scarce, and that happened, these cute stories in the New York Times, but at the beginning, it was like trading cards. No one treated it as if it was valuable and it’s gone. I think it’s yet another asset of Bitcoin because it just, again, makes the supply even more limited than the nominal 21 million Bitcoin.

Viraj: I totally agree with Brett on the supply and demand side. Some of the stories you’re hearing about with the lost private keys is what makes investors wary. Maybe eight or nine years ago, if you were a miner mining Bitcoin on the laptop because it just didn’t require a lot of brute force computing power, and they were worth less than a penny or a penny, you might not have thought about it. It’s about just having the infrastructure with security in place, and there are reasons why investors could be worried.

Brett: The one other thing is, there’s this mantra in Bitcoin land, “Not your keys, not your Bitcoin,” and that’s great for early adopters, people who are technically savvy. I keep my personal Bitcoin at Fidelity, people buy it on PayPal. I don’t want my private key. I don’t want to have anything to do with my private key. Again, early Bitcoiners will say, well, I’m not a real Bitcoiner. Well, it’s fine. They need me for the Bitcoin price to go to six figures. They need people like me who don’t want to touch their private keys. We’re at a development point in the ecosystem where you don’t even need to know what a private key is. Literally, you don’t even understand the concept and you can invest in Bitcoin

Ken: The custody space is getting more and more crowded on the institutional side, but for the retail customers, there’s not really a viable option right now. I think the fact that the OCC gave a green light to the banks, that they can start custodying digital assets, that’s going to further grow the market, the overall market for the retail.

Gabor: On the other side of the equation, I think highlighting the double-spend that happened, there are risks to this space. There are unintentional coding errors, how the system will be maintained, the potential for double-spends, or state coordinated attacks. There’s a ton of risks through this space. I think that needs to be acknowledged, and on coins coming to market, recently, there’s litigation around some of the earliest loss coins potentially coming to market, and the nation-state of Bulgaria owning $4 billion for Bitcoin. Some of these older confiscated coins, I think there are real potential to, if they come to market, they can depress the price from just an economic perspective beyond the additional technical risks.

I think we should, in general, keep those things in mind, and actually, just on the technical part, we have a podcast series coming up under our Trends with Benefits arm on Bitcoin, and what are some of these technical considerations that investors actually should think about? The technical upgrades that you never talk about that are actually important to Bitcoin, most people don’t know about what Taproot means. It’s a privacy upgrade that might change Bitcoin forever and the institutional investor doesn’t ask questions because it’s digital gold. Trends with Benefits will have a Bitcoin series, more important stuff like technical considerations that even institutional investors should be [inaudible] to this asset class.

Sylvia: Great. That’s a great point, Gabor. I think we’re getting towards the end here. I’d like everybody to get the chance to have a final word. One of the last questions which I think you all addressed in one way or another, but maybe give you a last word with it. What is your outlook on Bitcoin or stable digital assets? Whatever it may be, we’ll just go around the room. Maybe, Ken, we’ll start with you.

Ken: Yes. Overall, my view is bullish Bitcoin and bullish on the overall blockchain and crypto ecosystem. Just like I mentioned, OCC giving green lights to the banks to use stablecoins or even set up a node on blockchain, that’s a very bullish sign for the industry. They’re essentially saying that the banks can use blockchain just like they’d be using the legacy system, like the SWIFT or the Fedwire or the ACH. That’s I think within one or two years, many banks will start looking into this asset class and taking things more and more seriously, and that banks entering the market will provide comfort to many of the retail players as well. I think it’s going to be very, very — the speed of growth will be much faster than in the past few years.

Sylvia: Sounds good. Raj, we’ll go to you next.

Viraj: Sure. I largely agree with that. I think that we’re in a backdrop here that’s largely constructive. I think we’re in the middle of a disruptive financial technology here. I will caveat that with that I think there will continue to be booms and busts like we’ve seen in previous cycles. I think as the market cap, adoption, acceptance grows, that maybe those booms will be a little less aggressive, and the bust will be a little less shallow here. I truly think that this is in the early stages, and we are currently laying the foundation for a potential alternative financial system through this technology breakthrough. I’ll just end with the fact that it’s going to take some time. I think the fact that we’re seeing so much volatility and so much dispersion in potential outcomes from price through regulatory risks to drivers is because this is a multi-dimensional asset class that’s really complex. It transcends technology, cryptography, economics, monetary policy, financial systems, and what we’re seeing right now is price discovery for a non-fundamental utility cashflow driven asset. A lot of those multi-dimensional aspects mean different things to different people, and I just think that the ecosystem will continue to grow as we get better adoption interest in the place with the increasing regulatory guidance as well, so a lot of interesting things happening in the space. It should continue.

Sylvia: Okay. Thank you. Brett, we’ll go to you next.

Brett: Sure. I think it’s probably come across. We’re extraordinarily bullish. This is a combination of money and technology. It’s like nothing we’ve ever seen before. It feels like we’ve hit, not to be cliche, a Malcolm Gladwell tipping point. If you look at the history of these digital networks, they go much farther than you expect. Anyone who’s owned the stocks we discussed before Tesla, the only mistake they ever made was selling them. I think that’ll be the case here too, but at the risk of being just overly bullish because I am a father of three, there are three things that I worry about.

One is regulation is by far the biggest risk. I think the outlook for regulation, as Ken pointed out, is really good right now. If you talk to… what is Mark Zuckerberg worried about? What is Jeff Bezos worried about? The thing they worry about the most is the government, and that’s the first concern. The second I worry about is an infrastructure breakdown. Coinbase goes down, every day there’s a big move in Bitcoin. If you had some type of… the on-ramps are still fragile, the on-ramp and off-ramps. If you had some type of a breakdown in the infrastructure, which is maturing quickly, but it’s still immature, I think you’d have a lot of institutions say, “Yes, not yet, not ready,” and you could see a pause in this adoption cycle.

Of course, I worry about, I don’t often quote Don Rumsfeld, but the “unknown unknowns”, which could be something technical that I don’t understand, but I try to, and actually, we’re funding a Bitcoin core developer. We’re trying to get in the weeds on this. We run a node here at SkyBridge. We’re trying to be crypto-hip, but whoever knew that we’d be sitting here in a pandemic on Zoom? No one predicted this. I imagine the risk for Bitcoin is one that none of us are going to identify.

Sylvia: Okay, great. Gabor, I’ll give you the last word here. What is your outlook? Any final thoughts?

Gabor: The three areas monitoring and my outlook on is-I think we’re going to see similar to successes in the US, that’s point number one. Point number two that I’m watching and I’m focusing on is there’s a lot of M&A, so mergers and acquisitions and purchases in the crypto space. My outlook is we’re going to see a ton of them in 2021 and 2022. Some of the numbers that will shock you, like Coinbase’s IPO, as expected, in the multi $10 billion range matching NYSE and NASDAQ.

Crypto will have to be taken seriously because a lot of companies will be coming to market and those will be accessible to the public markets and they’re going to create a new group of very young billionaires and influential people that you should keep in mind. The third area, again, as I mentioned, watching the what I call the tokens and coins 2.0. I think there’s going to be a number of really interesting coins coming to market that represent real stuff, so I’m watching those, and if you want to follow along on Twitter or LinkedIn, either my company or myself, feel free, happy to answer media inquiries and questions anytime or someone from our team is always open.

Sylvia: Great. Thank you. With that, thank you all for your participation and your great insights into the topic. I personally learned a lot. I’m going to make sure I do have one of those long codes. I’m going to make sure I tattoo it on my arm, never lose the key what we’re talking about today. All joking aside, I think it was a great discussion, and with that, Erin, I’ll hand it over to you.

Erin: I think it’s fair to say that we had a really great discussion and I look forward to seeing how things play out as we continue on for the year with the digital asset landscape. Once again, I want to thank everyone for joining us today.

Building Financial-Grade Digital Assets. The World’s First Regulated JPY-Pegged Stablecoin Issuer.

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