Compiled edited by TechFlow
Guest: Jeff Park, Head of Alpha Strategy and Project Manager at Bitwise Asset Management
host:
Haseeb Qureshi, Managing Partner, Dragonfly
Robert Leshner, Superstate CEO Co-founder
Tom Schmidt, Partner, Dragonfly
Podcast source: Unchained
Original title: Market Crash. But at Least We Get a $200 K Bitcoin? - The Chopping Block
Summary of key points
Bitwise Alpha Strategy Director - Bitcoins target price will reach $200,000 by the end of the year.
Bitcoin vs. Gold - As a means of storing value, Bitcoin has similar characteristics to gold, and investors mainly consider volatility when choosing. Therefore, older people usually prefer gold, while young people prefer Bitcoin. The reason why young people prefer Bitcoin is largely due to its volatility. If you believe this is one of the key factors driving the value of Bitcoin.
TradFis Altcoin - MicroStrategy plays the role of an altcoin in traditional finance. It is actually a combination of cryptocurrency and Bitcoin.
Circle Delays IPO – Circle’s financials are in better shape than it initially appears, and while their costs are also high, their revenues are now much higher than they were a year ago.
Ripple acquires Hidden Road - This is strategically important for Ripple as they can use their balance sheet more efficiently and the acquisition will also help expand the market for their new stablecoin RLUSD.
Bitcoin Market Regression - Some believe that Bitcoin will behave differently depending on the change in interest rates. Falling interest rates are good for Bitcoin because it leads to financial repression and inflation, making Bitcoin a store of value.
The impossible trinity - After the end of the Bretton Woods system, we are faced with an impossible trinity, that is, you can only choose two to build a monetary system between open capital flows, independent central banks and floating exchange rates. If you give up one of them, the other two must be adjusted.
Macroeconomic decoupling of cryptocurrencies - The Fed and central banks around the world are doing real stimulus to try to save their economies from shocks, which will distort asset prices. In that case, a decoupling between Bitcoin and other tokens may occur.
The Impact of Tariffs on Cryptocurrencies Bitcoin’s Role in Portfolios
Haseeb:
Jeff, you work at Bitwise Asset Management and have a deep understanding of macroeconomics. Lets talk about the impact of tariffs on cryptocurrencies, what has changed in the crypto market? Why should we expect tariffs to have such a big impact on cryptocurrencies, even though cryptocurrencies themselves are not directly affected by tariffs because they are not involved in imports or exports. So why does the crypto market care about tariff-related issues?
Jeff:
On a positive note, I hope to mark the bottom of the market so I can review this episode in the future.
Cryptocurrencies and Bitcoin in general have been a focus for investors, and their role in portfolios is constantly changing. Since the launch of ETFs, mainstream investors can more effectively include Bitcoin as part of global assets, which is why Bitcoins correlation with risk appetite and risk aversion has increased.
In particular, Bitcoin, as a means of storing value, has similar characteristics to gold, and investors mainly consider volatility when choosing. Therefore, older people usually prefer gold, while younger people prefer Bitcoin. The reason why young people prefer Bitcoin is largely due to its volatility. If you believe that this is one of the key factors driving the value of Bitcoin.
On the other hand, if other macro assets become more volatile, the opportunity cost of holding Bitcoin will also rise because you need to compete with these non-traditional assets. The volatility of traditional assets has affected the interest of institutional investors in Bitcoin through ETFs. Therefore, I think Bitcoin is generally the best choice for risk trading, but timing is important, especially in terms of the path dependencies of other assets. There is no doubt that with the changes in volatility indexes and VIX indexes, many people begin to look at the discounts in stocks and may find opportunities in the price of Tesla or Nvidia and sell Bitcoin for arbitrage. I think these are the reasons for the volatility in the market in the past few months.
Haseeb:
Weve seen that the market has clearly fallen over the last few days. If you calculate Thursday and Friday, which were the market trading days after the tariff announcement, the market was down 4% to 5%. And then on Monday, oh sorry, until the close of Tuesday, the market was down another 2%. So overall, were down almost 16% to 17% from the market highs for the year. Depending on which index you look at, it could be worse. So far, Bitcoin has not really acted as a safe haven, and it has traded very close to other major indices.
Retail vs. Institutional Investors Bitcoin’s Sensitivity to Interest Rate Changes
Haseeb:
Retail investors are actually buying in the stock market, while institutions are selling. JPMorgan Chase reported that last Thursday and Friday were the largest single day of retail buying in the past few decades, setting an amazing record. Retail investors took the opportunity to buy at a low point, thinking that the market would rebound, so they took advantage of this opportunity.
I wonder if this also applies to the cryptocurrency market, which is dominated by retail investors. While institutional investors are also involved in the crypto space, retail investors are still the main holders, even in the complex environment of ETFs. So, given that the cryptocurrency market is dominated by retail investors, is this the reason why Bitcoin remains relatively strong? If Bitcoin was more of an institutional asset, would it be worse?
Jeff:
I think Bitcoin has always shown the characteristics of a leading indicator of global liquidity channels, and the movement of Bitcoin usually reflects peoples expectations of changes in global liquidity. Now, institutional capital may react faster than retail capital two years ago, which is still an important factor at present.
One of the unique challenges of Bitcoin is its complexity for investor objectives. I usually divide Bitcoin into two cases to discuss with institutional investors: positive rho Bitcoin and negative rho Bitcoin. Here rho represents Bitcoins sensitivity to changes in interest rates. Some people believe that Bitcoin will behave differently depending on the change in interest rates. Negative rho Bitcoin means that falling interest rates are good for Bitcoin because it can lead to financial repression and inflation, making Bitcoin a tool for storing value.
And the positive rho bitcoin is that in the event of the world collapse, extreme deflation, bitcoin is seen as a safe haven asset. In this case, bitcoin becomes an asset that people seek in a crisis. What happened in China yesterday is an example of this complex relationship. In response to what Trump did, China actually expanded the scope of its currency devaluation to allow the yuan to appreciate in a way that it has not historically allowed. Today, we saw the yuan depreciate so quickly that it is almost back to 2008 levels. If you think about the impact of this, the actual depreciation of the yuan is a deflationary result, which generally lowers global prices, making it more likely that we will have deflation from imports. This is a positive rho bitcoin world, and it is not a situation that both the United States and China want. They are actually increasing the intensity of this confrontation.
Another approach China could have taken was through a massive internal fiscal stimulus package, boosting consumption, which is actually the inflationary version of the negative rho of Chinas quantitative easing that would have released the Bitcoin valve. Yesterday, the Bitcoin market saw some volatility, initially rising, but then realizing the risk of deflation, the price fell back.
Overall, Bitcoins sensitivity to interest rates has been relatively volatile in its adoption across global markets. I believe we are currently in a negative rho Bitcoin environment, where inflation and loose policy are widely expected to drive Bitcoins value. However, there is no doubt that when the situation becomes extremely chaotic, Bitcoin will rise as the ultimate store of value.
Haseeb:
In the world of Bitcoin, there are two forces at work. These forces may become more pronounced as Bitcoin becomes a more mature asset. Bitcoins reactions can sometimes appear erratic and unpredictable. Sometimes it does not react to macroeconomic shocks, but suddenly drops sharply over the weekend. Today we saw it perform very closely to the Nasdaq.
Altcoins and Institutional Interest
Haseeb:
In the current market environment, altcoins have been hit harder. How do you think altcoins will perform in this environment? There is a lot of expectation for policy easing now, and in addition to tariffs, there may be significant tax cuts. In addition, the market expects the Fed to cut interest rates more frequently than previously expected. As far as I know, CME currently expects five rate cuts this year, compared to only a few, and even once only one, before. What do you think of these changes and how will they affect the altcoin market?
Jeff:
Altcoins are quite complex and face two main challenges.
First, other than Bitcoin, other altcoins have very different consensus mechanisms, which require more maintenance. Bitcoin is like a cold wallet that you can put under your mattress and usually have no problems. The problem with altcoins is that if they are proof-of-stake based tokens, investors must participate in the ecosystem to receive returns, which reduces the cost to investors. But if you are an institutional investor and cannot participate in this value accumulation mechanism, it is like missing out on a special dividend of a stock because your shares are held in a custodian that does not allow on-chain operations, rather than one that does. In this case, investors will have a natural resistance because they do not want to be on an unfair playing field. In the altcoin market, this unfair situation sometimes does exist.
The second factor is that many investors view altcoins as a leveraged trading tool. They are excited about the volatility of Bitcoin and believe that altcoins can provide higher returns, higher leverage, and greater volatility in terms of capital efficiency.
But the fundamental change is that we had the option of a Bitcoin ETF last December. Through a regulated market, we can trade Bitcoin options, which provides the excitement of speculation and protection. In this way, investors can trade leveraged more strategically without worrying about the risks brought by those insiders or narratives.
MicroStrategy: Alternative investments in traditional finance
Haseeb:
It sounds like youre saying that altcoins are attractive to institutional investors because they find Bitcoins volatility not exciting enough and want a higher risk investment. Altcoins are like a more gambling version of Bitcoin. Now that institutions can trade Bitcoin options and ETF options through CME, it makes them more inclined to choose Bitcoin options over altcoins.
Jeff:
This may be the reason for the rise of MicroStrategy. In my opinion, MicroStrategy plays the role of altcoin in traditional finance. It is actually a combination of cryptocurrency and Bitcoin.
MicroStrategy is like an extra kick. Its actually more volatile than Bitcoin. Right now Bitcoin is between $45,000 and $55,000, while MicroStrategys stock is around $100, sometimes even $200. So for liquidity investors,
MicroStrategy offers a more exciting investment experience than altcoins without having to take the risk of lesser understood altcoins. In addition, MicroStrategy creates leverage through financial engineering. They issue convertible bonds and preferred stocks with different structures, which gives investors a variety of options for risk appetite. Its like choosing the altcoin risk you want in a buffet of Bitcoin.
I think MicroStrategy becoming the most traded stock and options contract, as well as the success of the 2x leveraged MSTR ETF, shows that the financialization of Bitcoin has given traditional investors greater appeal through MicroStrategy, which has reduced the appeal of altcoins to some extent.
Haseeb:
I find this story a little hard to believe. While that may be true with MicroStrategys derivative structure, the way institutional investors get access to altcoins in the ETF market is primarily through Ethereum, and the ETF market for Ethereum has never been over $10 billion. Therefore, this is not a very large market. Most altcoins are actually held by retail investors and are not a true institutional asset class. Therefore, any analysis that explains the current state of the altcoin market must start with retail investors. Retail investors are not the reason for dominating this market. Institutional investors may be trading Bitcoin ETF options or taking leveraged trades on MicroStrategy, but this is not the reason altcoins are falling.
Jeff:
Yes, if you talk to most crypto traders and investors, they will say that they are trying to get their tokens to generate yield. Even though Ethereum has underperformed relative to Bitcoin last year, this price difference is not as significant if you consider the additional yield from using Ethereum for productive purposes. If you re-stake Ethereum and take advantage of the ability to participate in these re-staking activities with Eigenlayer or EtherFi Rent, the total return of the ETH market reflects more than just the price of Ethereum. This is the point I am trying to make. So if you are an institutional investor and you dont have access to Renzo and EtherFi.
Haseeb:
If I can rephrase your point, now global funds are pouring into the US stock market. Although this is somewhat abnormal, because the United States is a relatively slow-growing country, it attracts global savings. We are trying to solve the problem of trade imbalances and hope to change the direction of dollar inflows, but we still need a market where investors are willing to take risks. This market may no longer be the US stock market, but the crypto market.
Jeff:
In this case, I think this is good for Bitcoin because at least at that point, we can start thinking about building strategic Bitcoin reserves, because Bitcoins path forward may require redefining the social contract of USD hegemony.
Haseeb:
We are clearly in an uncertain situation right now where no one knows how the tariff issue is going to play out and the markets are volatile as a result.
The geopolitical impact of tariffs
Tom:
Jeff, you wrote about two months ago about Plaza 2.0, using tariffs to adjust the dollar and lower interest rates. Were going through a different version of that. Obviously, this was in place a decade ago, is it playing out the way you expected? Is there anything thats surprised you? How do you think we strayed from that path?
Jeff:
Since I shared my thoughts on the long-term impact of tariffs on Bitcoin prices, I have become less certain about Trump’s ultimate goals.
In an ideal world, it would make sense to have something like the Plaza Accord or Core 2.0. That is, the dollar does need to be devalued to make the U.S. more competitive, but you want foreign creditors to continue to buy U.S. Treasuries, and you need some form of agreement to achieve that. This must be achieved through strategy rather than unanimous consensus. This is the ideal scenario.
The moment that made me lose confidence was when Trump started blindly attacking almost everyone, including what I thought was the last ally to be touched, Japan. If there was one country that needed to be treated specially, it was Japan, because they are currently the largest holder of US Treasury bonds. You need to be sensitive to that. However, not only did Trump not show that sensitivity, but he put Japan in the same category as China, saying that they are also currency manipulators. This shocked me because Japan usually manipulates its currency for the benefit of the United States. So this lack of nuanced treatment of allies made me realize that the ultimate goal might be a higher degree of protectionism, which I didnt think would happen.
Robert:
Ive come to the theory that this isnt just about protectionism, but creating the conditions for a shift toward protectionism. There are a lot of companies right now thinking, maybe we should relocalize some of our production because theres uncertainty and we want to be closer to the market. A lot of people are actually front-loading demand. I know a lot of people are trying to get ahead of the tariffs by buying cars, furniture, and durable goods. I think the administration does want to see manufacturing jobs come back, and theres a lot of talk and jokes about that because we probably wont be making sweaters and socks and Nikes here.
I dont think theres a realistic expectation that were going to bring low-end manufacturing back to the U.S. I think if we do, its going to be in very specific industries, like strategic industries like semiconductors and chips.
Haseeb:
But we don’t have tariffs on semiconductors, and it looks like the only part of this policy that might make geostrategic sense is being left out of tariffs.
Robert:
We cant have such a big shock to the system, can you imagine if we put tariffs on them? But I do think one aspect that doesnt get discussed enough is that I think its not just about the geostrategic element of trade itself. Its actually about trying to shift the center of gravity of manufacturing away from China and into countries that are closer to us.
Haseeb:
Weve been trying to get people to build factories in Vietnam, Malaysia, and Mexico, and as a result our tariffs on them are higher than on China.
Robert:
But we will make deals with them and find amicable solutions with those countries. We may not make such a deal with China, the rhetoric and escalation with China is a very different situation. So I think the end state may be that we have significant tariffs on China and not on our allies. If you are a business located in China, the first thing you think is, I need to relocate to Vietnam or Japan or other countries that are more closely associated with the United States.
Jeff:
I agree with you, Robert, that this is to some extent the path that we as Americans must assume because it is the most efficient and desirable outcome. At the same time, we cannot assume that the path to achieve this outcome is without negative consequences.
For example, I think yesterday the White House conveyed that Japan would have priority lane as a way to conduct tariff negotiations. I believe part of it was to give Japan a little bit of compensation because the United States had offended them in some way in order to give them a strategic advantage as an ally. So, theyre playing these games. But actually, over the last week and a half, just when Japan was getting annoyed that the United States wasnt giving priority lane, China actually announced that they were exploring a trilateral trade relationship with South Korea and Japan. The fact that this announcement was made public suggests that some kind of backstage conversation had taken place to do this in a way that China could benefit from it because China doesnt make statements like this lightly.
All three of these countries are unlikely to cooperate in Asia because they are not friendly with each other. So you dont know if there is some kind of marginal deal in the path dependency of the US actions, which may eventually have a negative impact on the US power vacuum - this is also my biggest concern, worrying about the collateral damage that these things may bring, because we live in a multilateral world, and we should be cautious about this.
Haseeb:
I think these tariffs are very misguided and lack a coherent strategy. While we exempted semiconductors, which are considered the most important products militarily and geopolitically, we have higher tariffs on many of our allies than on openly hostile countries. Russia and Belarus are the only countries that have been excluded from the tariff list, which gives us an obvious opportunity to trade freely with them. China, on the other hand, has taken advantage of this situation by becoming a very stable partner, increasingly committing to free trade, and gradually becoming a stable trading partner for more and more countries.
The Global Monetary System and the Role of Bitcoin
Haseeb:
I think Trump is more focused on power in negotiations and political decisions than alliances and diplomacy. Sometimes, this strategy is tactical. But in peacetime, when the economy is good, unemployment is at a historical low, economic growth is rapid, and we are on the verge of a technological revolution in artificial intelligence and cryptocurrency, it is not a good time to suddenly provoke disputes and turn everyone into an enemy.
Jeff:
What I am worried about is that if the world begins to reassess the role of the dollar and the global financial system dominated by the United States, various alternatives may emerge. One of them we can discuss is the trinity theory. The core idea of this theory is that after the end of the Bretton Woods system, we are faced with an impossible trinity, that is, we can only choose two to build a monetary system between open capital flows, independent central banks and floating exchange rates. If you give up one of them, the other two must be adjusted.
For example, the United States has chosen open capital flows and an independent Federal Reserve, so it needs to let the dollar float freely. China has taken a different approach, they do not open capital flows, the Peoples Bank of China manages the exchange rate, so it can keep the exchange rate fixed. The eurozone has chosen open capital flows and a floating exchange rate, but there is no independent central bank, and the policies of various countries are aggregated into a larger eurozone. Therefore, there are many ways to design a global monetary system, and people are now beginning to question whether there is a more effective system than the free floating model promoted by the United States.
How Bitcoin performs in different economic environments
Haseeb:
There is a high chance of a recession if we enter a state of stagflation, which is a situation where there is both a recession and high inflation, possibly due to the impact of tariffs. How do you think Bitcoin would perform in this scenario?
Jeff:
I expect Bitcoins target price to reach $200,000 by the end of the year, and I still think there is a good chance of achieving this goal. Even in a stagflationary situation, Bitcoin can still be the fastest growing asset and perform well.
Haseeb:
So you think Bitcoin will win in the speculative market. If instead of stagflation, the Fed cuts rates aggressively and does quantitative easing, the economy picks up steam, but inflation remains high. How do you think Bitcoin will perform in that scenario?
Jeff:
I think it will perform better. There can be a lot of variability in where these things go, and its really just a reflection of timing, and as a liquid asset, no one knows where these things are going to end up, its a commodity.
I am an extremely path-dependent option pricer, so I assess the entire local volatility surface, which requires us to recalibrate.
Haseeb:
Lets say the tariffs are rolled back, the courts overturn them, and Congress doesnt have the courage to re-impose them. So the whole tariff strategy ends there. Do you think Bitcoin would be higher or lower in that environment, versus if the tariffs stay the same and we go into a world of stagflation and an expansionary Fed?
Jeff:
I think that would still be a good outcome and still positive for Bitcoin, maybe eventually reaching 175,000.
Haseeb:
So it would be worse if we withdraw tariffs, and better if tariffs stay the same and the Fed expands, what do you think?
Robert:
I think thats highly unlikely to happen. If we reverse the tariffs, its actually going to be a small impact, its like going back to where we were two weeks ago, the only thing that really changes is the trust between the US and different trading partners. I do think that could continue to be a potential problem for the US, but it could also be good for alternative economic structures and even good news for Bitcoin. I think people could lose confidence in US Treasuries and the dollar.
Haseeb:
Do you think it would be more bullish for Bitcoin if tariffs remain the same and the Fed continues to be expansionary, or vice versa?
Robert:
I think its probably better if the tariffs remain the same. Because the market usually only focuses on the current changes, not the future two-step changes, and the market operates based on whats happening right now.
Tom:
Even if the tariffs are completely reversed and we go back to two weeks ago, the dollar is still depreciating, and I think this may be more favorable for Bitcoin. I have been thinking about the relationship between global liquidity and Bitcoin. Although we have discussed it many times, Bitcoin still seems like a risk asset. I hope it can become another alternative to gold, but it has not yet happened. Maybe now is the time. There is always a first time. If you look at the price action over the past three or four years, you will feel that this is the final qualitative change.
Haseeb:
So, would it be better if the tariffs were withdrawn? I’m not so sure, because leaving tariffs unchanged would probably bring more pain and instability, which could push Bitcoin prices higher at the end of the year. I think there is a possibility of cryptocurrencies decoupling from the real economy, because the Fed and central banks around the world are doing real stimulus to try to save their economies from shocks, which will distort asset prices. I think this is more likely to happen with Bitcoin than with other coins.
In that case, there could be a decoupling between Bitcoin and other coins, and Im very uncertain about the outcome of both scenarios. I think its very counter-intuitive because on any given day, Bitcoin doesnt perform as expected, other coins dont perform as expected, and the correlation is breaking down. Sometimes Bitcoin trades with gold, sometimes it trades with the Nasdaq, and sometimes it completely abandons both and goes its own way, and its clear that this asset is changing.
I think by 2025 or 2026, we’re going to be talking about Bitcoin very differently, and we’re going to have a different mental model. I’m guessing by the end of this year, we’re going to have a different understanding of how cryptocurrencies behave in big macro dislocations.
Jeff:
I agree. Same thing with global liquidity. I think people are going to start to understand more nuancedly the leverage thats in these conversations. Because, Tom, one of the issues with global liquidity is that a lower dollar is actually good for global liquidity, as you said. But Im not sure that the increase in global liquidity that comes from a lower dollar is going to drive the valuation of Bitcoin.
Circles IPO and its commercial viability
Haseeb:
I want to talk about two capital markets-related stories that are relevant to the overall context. The first is the news that Circle announced that it had applied for an IPO. Circle plans to go public at a valuation of $4 billion to $5 billion. Obviously, Circle has been trying to enter the public market, but it was previously hindered by Gensler and the former SEC, which made it difficult for crypto companies to go public. Now that they have finally been approved, they have announced a postponement of the IPO due to tariff issues. As a result, Circle withdrew its application. However, discussions about the feasibility of this company continue, and how the capital markets will view it and whether they can get the expected valuation remain unresolved.
How do you guys see Circles prospects going forward? How do you think it will be received in the public markets? Obviously, all IPOs are on hold right now, and all the companies that were planning to go public are waiting for the market to stabilize. But putting that aside, how do you see Circle as a business entering the public markets?
Robert:
I think their financials dont fully reflect the growth of USDC over the last few months. USDC has been growing. Since they are a company that earns interest on the floating of stablecoin reserves, there is a certain lag effect. If a business continues to grow over a year, its revenue will not increase significantly immediately. There is an averaging effect. Therefore, I think their financial situation is better than it initially appears, and although their costs are also high, their revenue is now much higher than it was a year ago. If the supply of USDC is growing, this will disproportionately benefit them. I think this is underestimated.
Regarding the discussion on crypto Twitter, I also noticed that Circle is a huge organization relative to Tether. People say that Circle is a fraction of the size of Tether, but it has 40 times the number of employees. This suggests that they may be able to allocate human resources more efficiently in the future. The executives are also paid very well. This all suggests that the current operations may not be the most efficient, perhaps because they are getting more than 4% returns in the economic boom without putting in much effort. So there may be good times syndrome. But if the economy continues to improve, their business will take off; if things get bad, they will have to make some hard decisions.
Haseeb:
A core question about Circle is how will the public market view this company? Will they view it as an asset manager or a technology company? This will directly affect the valuation multiple they can get. Robert, how do you think the public market will view Circle when it goes public?
Robert:
I think its an asset manager because they make a pretty good return on every dollar, somewhere north of 4%. They have to share some fees with Coinbase, but their yield is still pretty high.
They make huge fees on the management of the assets behind their stablecoins. So no matter what additional features they roll out for developers, that doesnt really change their revenue. The driver of their revenue and profit is how much USDC is issued and what the target interest rate is. Thats the entire business.
Jeff:
Its really an asset management structure, but its probably an inverse asset management multiple. As an asset management company, its probably very profitable in a high rate environment, as you said, its long rates, and actually most public companies like Blackstone benefit in a low rate environment. So it has a different relationship to the direct creation component of the asset management business, which could have far-reaching consequences. I would even say that combining a Bitcoin portfolio with Circle as a hedge could be a useful tool.
But I want to reiterate the revenue split with Coinbase because the multiple is dependent on having a defensible strategic moat. If the fee percentage as a distribution partner is so high, how defensible is Circles business model? It makes me wonder if this is really less of a tech play and more of a distribution play. If it is a distribution play, then that would be very different from the underwriting that should be applied to this multiple. Well see.
Haseeb:
Tom, what do you think of Circle?
Tom:
Im going to hold back a little bit because I dont want to be seen as a Circle naysayer. I think they have great people and I really appreciate what theyve done for the industry. I just think that last year I half-jokingly tweeted that Tether could easily acquire Circle with just one quarters profits. And frankly, that joke seems to have become less exaggerated over time. I think Tether is better structured in terms of overall company operating costs. They could easily acquire the company. They dont have anyone trying to interfere with them in Washington. And they could easily tear up the agreement with Coinbase or just shut down the product and convert to USDT and end up with a better company structure.
When I look at their year-over-year changes, their margins continue to shrink and overall profitability is declining. I really dont know what their strong outlook is. I think the technical story is cool, but it doesnt really come to fruition. It looks more like an asset management company.
Haseeb:
I must admit that I havent studied Circles S1 filing closely, but I noticed a few points. When interest rates started to rise, the overall stablecoin supply fell. This is understandable because when interest rates are zero, there is no opportunity cost to keep money on-chain and businesses can profit from it. As interest rates fall, more money should be attracted to the stablecoin market. So is this opposing force completely equal? Im not sure, probably not. Maybe something will change in a situation where stablecoins are more regulated and considered safer than they are in 2021 and 2022.
Secondly, obviously Circle can charge high fees on issuance and redemption. If you have a stablecoin that people use to pay, if Circle can get an advantage in the context of the Stablecoin Act and other regulations, get licenses more easily, and win the favor of regulators, they may have a big advantage over Tether in terms of regulation. So can they monetize that advantage? Probably, especially as other companies rush to work with stablecoins and integrate them into domestic operations. So there are a lot of stories to tell in addition to banking, holding assets and liabilities, collecting floating returns. I agree with you that the business does look more like this at the moment because interest rates are high. As interest rates fall, they will find other ways to monetize this business. After all, it is basically a duopoly market between Circle and Tether at the moment. I think you may see the market fragmented into different areas, just like you see in DeFi, where USDC dominates the market. And in emerging markets, Tether usage dominates.
If things go this way, then each stablecoin issuer can monetize aggressively within their space without having to worry too much about price competition. Because if youre in DeFi, there are almost no other options. If youre in emerging markets, there are almost no other options. You have to use their tokens, so they can charge more fees upstream and downstream. Take Tron, for example, Trons fees have historically been very high. If you look at Trons blockchain fees right now, most blockchains have low fees right now because its a downturn and everyone is focused on macro activity and theres not a lot of volume, but Trons fees are high.
Why are Trons fees so high? Trons fees are not because of network congestion, but because validators voted to raise fees. You can think of this as Justin Sun taking advantage of the fact that people have to use Tron. So Tron is basically extracting a huge profit from all payment activity that takes place on Tron. This to me is a great example of what happens when you have a monopoly on payment infrastructure. So can Tether and USDC find a way to create these kinds of fees for themselves? I dont see why they cant do this when Tethers core business model is no longer that attractive.
Tom:
I think thats one story, and all the dividend capture stories are part of it. But I think the balance sheet almost tells a different story, which is what percentage of USDC is on Coinbase. So its not being used as payment infrastructure. So I think thats a nice aspiration, and I really hope that happens. Id like to see more of a duopoly in this market, with more competition. But realistically, unless their efforts make Tether illegal, I really dont see that happening.
Jeff:
I think this scenario is highly unlikely to happen, because the strategic interest of the United States is to keep the two entities separate. The privilege you mention actually reflects the value that foreign countries are willing to pay any price to keep their money in the U.S. dollar. Therefore, the privilege that the United States can treat foreign fund holders differently from its own citizens is itself a premium that can be extracted. Therefore, philosophically, even if the United States wants to demonstrate its superiority, it wants the two entities to remain separate. Therefore, if the two entities merge, it will be a bad result, because other companies may emerge to try to compete with Tether, which will bring greater challenges to the United States.
The significance of Ripple Labs’ acquisition of Hidden Road
Haseeb:
Today we learned about the largest MA deal in the history of the crypto industry, as Ripple Labs acquired Hidden Road for $1.25 billion. Hidden Road is an institutional product provider that primarily serves institutional clients and is probably unfamiliar to most retail investors. As the second largest prime broker in the crypto industry, Hidden Road processes approximately $3 trillion in transactions per year and has over 300 institutional clients. Usually in MA deals, the headline number is often a combination of multiple factors or a complex structure tied to performance that makes up a large number. But this deal is undoubtedly significant and strategically significant for Ripple. First, they can use their balance sheet more effectively because they obviously have a lot of cash on hand, and second, the acquisition helps expand the market for their new stablecoin RLUSD.
This is a very interesting deal. We are actually an investor in Hidden Road, so now we are also an investor in Ripple Labs. Congratulations to us, the Hidden Road team has done a great job. This is an interesting time for the entire industry, especially in the current macroeconomic context, the market is generally unstable and almost all assets in the crypto industry are down. It has not performed well this year, but stablecoins are growing, more and more institutions are entering, and the ETF ecosystem looks very strong. So I wanted to ask everyone to share their thoughts on this major deal. Robert, what were your thoughts when you saw the news of this deal?
Robert:
I need to disclose that I am the CEO of Superstate and we are a customer of Hidden Road. We use their trade execution service and the team is amazing and the product is great. I had a bit of an aha moment when I saw the news. There were rumors that Falcon X was considering acquiring them, and I could also imagine them being acquired by Coinbase or another exchange. So I was a bit surprised to see Ripple as the acquirer. I think it makes sense for Ripple and the price is not expensive considering Hidden Roads market share. If this can increase the use of the XRP Ledger, I think they can sell this story to the public and sell enough XRP to finance the entire transaction. So this is a smart decision for Ripple. I just didnt expect it to be this result.
Jeff:
I am also surprised, but not entirely surprised, because there is a clear trend towards integration between crypto services and traditional financial services, and offering multi-asset solutions may be a worthy goal.
What surprises me is that I have always viewed Hidden Road as a “down payment” for Citadel as they considered the crypto market. I would have thought that Citadel would find it a business worth taking on themselves, especially with regulatory clarity, or that they would continue to fund it as an outsourced business but not want to be directly involved.
This confirms my view that it is much easier for traditional companies to enter the crypto space to provide some ancillary services, while the reverse is relatively difficult. I noticed that Hidden Road tried to expand into some areas that are not related to crypto. For example, they have crypto short-term trading, but also want to provide a complete multi-asset solution and want to become a fixed income clearing partner or market maker, which are things that Citadel can do.
This reminds me of the current situation, where companies like Goldman Sachs are trying to offer prime brokerage services to compete with Falcon X. In fact, it is quite challenging for crypto companies to enter the traditional financial field, while it is relatively easy for traditional financial companies to enter the crypto field. This deal may reflect this trend.
Haseeb:
Tom, what do you think?
Tom:
I was actually surprised, considering it’s a portfolio company, but that’s great. As an investor in Ripple Labs, it’s really exciting.
Haseeb:
I think for most of the listeners, the average person probably doesnt even know what a prime broker is. So for a lot of people, they hear, Wow, the biggest MA deal in crypto, and its like this complex thing that only 300 clients are using. So I think this is, in a way, the growth of financial infrastructure in crypto. In a way, Hidden Road is also a response to FTX because more and more institutional traders, especially after the FTX incident, dont want to face counterparty risk. They want to have a neutral participant between them and the exchange, and thats what a prime broker essentially does. So Hidden Road provides a lot of other services to improve capital efficiency, but this is one of the main stories. As you mentioned, they were spun out of Citadel, which is a large hedge fund asset management company. So this is really the intersection and marriage of traditional finance and crypto market structure.
The biggest story for me is that, in addition to Ripple seeing the advantage of using Hidden Road for distribution, Hidden Road still needs to remain neutral and will operate in an independent manner in order to continue to be a useful prime broker. This is also the reason why Coinbase cant really have a prime broker, because Coinbase itself is the exchange and therefore is not considered neutral. So, I think the biggest thing is that this is proof that the crypto industry is maturing. Real MA like this, and this company being able to succeed, is a sign of growth in the crypto industry, and that the industry is maturing. I think its a good sign for the future market for everything in this space.
Now, its very difficult to stay positive because of whats happening globally and how much the market has fallen. But at least events like this, I think are positive bright spots that show that there are forward-looking reasons to be optimistic in this space. I think for long-term capital, there are a lot of people who see this and are willing to invest a lot of money in this. Thats a big takeaway for me: MA is still happening, which is also a good sign.
