Forbes interviews Grayscale research director: This rate cut is different from the past, and Bitcoin has a promising future

Original title: 『Mission-Accomplished』 Rate Cuts From The Fed Will Boost Bitcoin, Weaken Dollar

Original author: Steven Ehrlich, Forbes

Original translation: Luffy, Foresight News

Zach Pandl, Head of Research at Grayscale

Zach Pandl is the head of research at Grayscale Investments, the world's largest crypto asset management company. Forbes magazine recently had a conversation with Pandl, in which Pandl provided an important perspective on the full-year expectations for the crypto market. He made some interesting insights into the market crash that occurred in August and the impact of future Fed policies. In addition, he also shared his views on cryptocurrencies, which assets will stand out, and why other assets may be in trouble.

Forbes: Let's talk about August first. At the beginning, the yen carry trade was unwound, and then there was panic in the market, which lasted for about a week. Then the market rebounded. How do you make sense of all this?

Zach Pandl: Last month was a turbulent month, but it can really be divided into two phases. From the end of July to August 5, it was a phase of growing panic; then from August 6 to now, the market returned to the recovery phase. Most major asset classes fell, but many of them are now back to the level of early August. Some markets have not fully recovered, including the carry trade strategy in the currency market (which was the focus of investors at the beginning of the month), Japanese stocks, and Ethereum.

Some markets performed well in early August and then continued to perform well in the second half of the month, such as the bond market and non-US currencies. The yen, Swiss franc, euro, and pound sterling have all risen this month. I think the themes of the market in the turbulent August were lower interest rates and a weaker dollar, which will affect Bitcoin in the coming months.

Forbes: Do you think this panic was a one-off event? If the market gets spooked again, will something similar happen again?

Zach Pandl:First of all, I would like to say that looking back at the market in early August, I feel strongly that the focus on Japan and the yen was a bit of a distraction. Japan is a challenging subject even for professional macro investors, and it is often a source of confusion. I think the real driver behind the market plunge was the growing panic. Some US economic data led to this panic, the most important of which was the increase in unemployment in the first week of August. The US unemployment rate is now rising to the extent that it has only happened in recessions. Economists call it Sam's Rule, named after economist Claudia Sam. It does not mean that we are definitely going to have a recession, but the data tells us that there are some statistical laws, such as an inverted yield curve and rising unemployment, which are consistent with what happens in a recession. The reason why it had such a big impact on the market is that before August, the market generally believed that the US economy would have a soft landing. People were worried about a recession last year, but the economy performed well, so people became more and more convinced of a soft landing, and the market became more and more convinced of this. Therefore, the increase in unemployment made many investors believe that the economy might have another recession. We need to watch the data for a few more months to make sure the labor market doesn't deteriorate further. That said, some of what's happening in the market has been surprising, especially in terms of stock volatility. The VIX has risen to levels similar to past extreme market events, such as the COVID-19 pandemic, the 2008 financial crisis, and the Lehman Brothers bankruptcy. The VIX rose to over 65 intraday in the first week of August, then fell to over 20 by the close of the same week. Many other indicators, such as high-yield bond spreads, have seen similar reversals. All in all, the market may have overreacted in the short term.

Forbes: Now let's talk about cryptocurrencies. I'm interested in whether there will be a divergence between Bitcoin and other cryptocurrencies. For example, the Ethereum ETF has not been as successful as the Bitcoin ETF, and there are some concerns about the prospects for Ethereum. What do you think?

Zach Pandl: First of all, this is really a period of Bitcoin dominance. Bitcoin's dominance across the market is rising, and the ETH/BTC price ratio is falling. Will this continue? I think it will continue in the short term because there are a lot of positive factors for Bitcoin, especially the macro economy, the Fed rate cuts, the presidential election, and the growing demand for Bitcoin ETFs. I think all of these factors combined have created a very positive macro environment for Bitcoin. Therefore, Bitcoin dominance may rise further in the short term. However, altcoins had a good last week and we are seeing parts of the market recover as well.

Compared to the success of the Bitcoin ETF earlier this year, the performance of the Ethereum ETF has been disappointing. The Ethereum ETF has seen very impressive trading volume, and with the exception of the Grayscale closed-end fund that was upgraded to an ETF, other products have seen very impressive inflows. Therefore, I don't think the performance of the Ethereum ETF is too bad.

As for the outlook for Ethereum, I’m certainly not giving up on Ethereum. I think the pessimism in the market is mainly due to ETH’s performance this month. In my opinion, ETH’s performance this month is technical. In May, when the SEC approved the 19b4 application for ETF products, leverage on Ethereum futures on the Chicago Mercantile Exchange (CME) and perpetual futures was rising, which continued until August. It happened that under the influence of macro catalysts, namely panic sentiment and the triggering of Sam’s Law, all markets fell, and Ethereum suffered a heavy blow because it had accumulated a large number of long positions before the event.

In my opinion, the recent poor performance of ETH is mainly a technical problem, not a problem with the Ethereum ecosystem. What I am saying is that Ethereum and Bitcoin are completely different assets and require different education for investors. Bitcoin and Ethereum ETFs provide a channel for a range of new investors and financial advisors to get exposure to crypto products. But they are completely different assets. They are both blockchains, but we will put them in different categories in the Grayscale crypto industry framework. Bitcoin is primarily a currency, while Ethereum is primarily a smart contract platform. They are both blockchains, but they function differently. I think Ethereum has a longer education process than Bitcoin. It is the foundation for smart contracts, decentralized applications, tokenization, stablecoins, and DeFi, which may be why the demand for Ethereum ETFs has grown more slowly than Bitcoin.

Forbes: Another big difference between Bitcoin and Ethereum is that Bitcoin does not have to face competition from networks like Arbitrum, Optimism, and Base. Especially after Dencun, the cost of using these networks has become very low. Is this related to the current situation of Ethereum?

Zach Pandl: I think cryptocurrency investors should apply some investment principles of securities markets to enter new markets, such as the nature of competition, whether it is a monopoly market or a competitive market. Bitcoin is dominant and no longer faces fierce competition. In the field of smart contract platforms, although Ethereum is also dominant, it faces more intense competition from many competitors. I think there are important investment opportunities among these competitors, and they are valuable. Perhaps in segments where Ethereum faces more competition, a more diversified investment approach is better. That being said, we strongly believe in the idea of network effects, and that there is a future where there are likely to be a few very dominant blockchains rather than hundreds or thousands of smaller blockchains. Under network effects, investors and users benefit from the network with the most capital, the most applications, and the most developers. Ethereum remains such a network today. Ethereum is ahead of other networks in terms of network effects, and I believe that Ethereum is poised to remain dominant over the long term despite very intense competition in this segment.

Forbes: Why do you think now is the right time to launch Avalanche?

Zach Pandl: All smart contract platform blockchains make their own design choices, and it will take a few years to determine which blockchain's design works best to attract users, generate fee income, etc. But I think Avalanche has established itself as an effective platform with a solid design and complete functionality. It is mature enough that we think it is certainly a reasonable choice for investors to pay attention to. In terms of specific catalysts in the near term, Avalanche may have application in the asset tokenization theme. Avalanche has been used in various TradFi tokenization proofs of concept over the past few years. In my opinion, the tokenization of real-world assets is just getting started. We have invested tens of millions of dollars in some of these products, and major financial institutions are involved, but we can't predict how it will develop. I think the Avalanche infrastructure, with its combination of permissionless and permissioned structures, may be a good fit for certain tokenization projects, and now is a reasonable time to revisit the network.

Forbes: Solana has become the most popular blockchain after Bitcoin and Ethereum. However, it seems that a lot of activity on Solana is copying Ethereum and other chains. What do you think?

Zach Pandl: Solana provides an excellent user experience. For a cryptocurrency newcomer, few experiences are as simple and enjoyable as downloading the Phantom wallet and starting to use Solana: it's fast and it's cheap. In this sense, it has been very successful in attracting new users. I also think that Solana has established itself as the third largest blockchain. At the same time, I don't think user experience necessarily creates a lasting moat for a project. Ultimately, the real value accumulation will occur on Layer 1, which can be integrated into the largest real-world use cases, and major companies and industries can build on Layer 1 networks. For Solana, this is an open question: does tokenization happen on the Solana blockchain, and do large consumer product companies (Sony or Disney) build on Solana?

Forbes: What do you think of DeFi?

Zach Pandl: It's hard for this space to avoid the U.S. election and the politics surrounding cryptocurrencies. The Biden administration is taking approaches to regulate this market. I think it's hindering innovation and adoption, and the Biden administration's attitude toward DeFi is hindering the development of the market. (Editor's note: In April, the U.S. Securities and Exchange Commission issued a Wells Notice to Uniswap, indicating that enforcement action may be taken.)

For DeFi to continue to succeed, we may need to change the way regulation works. A Republican win, especially in the Senate, would give control of the Senate Banking Committee. This could affect the appointment of certain officials who are responsible for overseeing the industry. I think DeFi is a core part of cryptocurrency. It's one of the core use cases for smart contracts, but to be more successful in the United States, it needs to be combined with traditional financial assets in some way. And you can't do that without clear regulatory guidelines. So, we are waiting for more regulatory clarity in order for DeFi to flourish in full.

Forbes: Then, let's talk about artificial intelligence. For me, the connection between cryptocurrency and artificial intelligence has always been a little vague. The prices of many artificial intelligence tokens tend to rise and fall with the price of Nvidia, but the connection between the two does not seem to be deep. What do you think about this?

Zach Pandl:There are several specific channels through which blockchain technology can connect to the artificial intelligence industry. The first is to provide infrastructure. I think shared computing networks are a good example that are working and are just getting started. Intellectual property and deepfakes are another important issue and one of the most challenging issues facing this new technology. I use generative AI tools so often in my work that I don’t even need a research assistant anymore. At the same time, I know that when I query these tools and pay clients, that revenue doesn’t all go to the original authors of the material used. So protecting intellectual property is a very important issue, and public blockchain technology can provide us with detailed information about the provenance of specific data. Again, these projects are just getting started, but I believe they have potential synergies.

Finally, there is the broader category, including Bittensor, which is trying to use blockchain technology to develop AI projects from the bottom up. I think this vision is impressive. Bitcoin showed the value of using decentralized computer networks to develop a monetary system. What projects like Bittensor are trying to do is use the same idea: the power of decentralized communities to build machine intelligence or artificial intelligence on the Internet and create an open system where anyone can add or use the technology without going through a central authority. Anyone who has lived in an environment where the monetary system is restricted, capital controls, bank failures, or hyperinflation understands the value of having an independent open monetary system like Bitcoin.

I believe that in the future, as more and more people use generative AI tools, they will realize the need for an open structure that is not controlled by a single government or a single company. This is what projects like Bittensor are trying to do.

One of our broader views is that as more investors look closely at the fundamentals of AI tokens and try to understand them, their correlation with AI will gradually decrease. Worldcoin rose because of Nvidia, and there is not much fundamental reason behind it. In some ways, cryptocurrency is still an immature market, and I think the high cross-correlation between assets is an example of this, and as the market matures, this correlation will decrease.

Forbes: What are your expectations for the rest of the year?

Zach Pandl: We think that the core outlook for Bitcoin is quite positive because there are three positive factors at play. 1. Bitcoin ETFs are attracting new funds. 2. The political situation in the United States has improved in terms of cryptocurrency. There are still unknown factors on this issue, especially the position of the Democratic Party. But in my opinion, things are moving in a favorable direction. 3. The Fed cuts interest rates and the economic environment is healthy. I think the last point is very important. This may be a point that people overlook. Usually, the Fed cuts interest rates because of a recession. This time, the Fed cuts interest rates because it has won a long-term fight against inflation. So these rate cuts are the result of mission accomplished, which is very different from the past.

Cutting rates in the context of a soft landing is quite negative for the dollar, but positive for assets like Bitcoin. Combined with these factors, I believe we will retest all-time highs in the coming months. The main risk now is the health of the US economy and whether it can have a soft landing. I think that's the view of most economists today, but we need to keep a close eye on the labor market data. If unemployment continues to rise and layoffs begin to show signs, we may see a period of economic weakness during which many assets such as Bitcoin and technology stocks will also weaken in a typical cyclical manner. My view is that recessionary periods will be excellent times to accumulate Bitcoin because you are likely to see loose monetary policy and loose fiscal policy next, just like what happened during the COVID-19 pandemic. But if the US labor market continues to deteriorate and the US economy falls into a short recession, we may face downside price risks. This is the main risk we face in the next 6 to 12 months.

Forbes: Do you have any contrarian views, other projects, tokens that we should pay attention to?

Pandl:First, cryptocurrencies are an indispensable asset in most investors' portfolios. Most of my time at Grayscale has been spent educating investors on how to understand this asset class, the fundamentals of blockchain technology, and the statistical properties of the assets themselves. This is a contrarian view in the broader financial markets: cryptocurrencies should have a place in the portfolio of almost every investor except the most conservative. For short-term liquidity alone, I believe cryptocurrencies can serve as a diversification asset.

The second thing I want to say, and maybe a contrarian view in the cryptocurrency community, is that I think in some ways, blockchain tokens are less risky than stocks. Cryptocurrencies have different volatility factors, but in at least one factor, they are less risky than stocks, because they have no debt. Public companies can disappear because they have debt. Their revenue needs to support those liabilities. Blockchains mostly have no debt. They have revenue, they have activity, they have a community of users around them, but they don't have liabilities that need to be paid continuously. So I think when a lot of people talk about the risk of public blockchain tokens going to zero, it's a bit misleading. We would be surprised to find that even some of the less successful projects will last a long time.

I want to emphasize that we are still in the early stages of analysis of public blockchain tokens, and there are not many traditional financial analysts publishing research on valuing these assets. And some very basic things, like the debt structure of crypto projects, are still not well understood. So, I am fortunate to be able to write some articles on these topics in a market that I think is still in its very early stages.

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