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Highlights from the first episode of the Pacific Drop Webinar: Anchoring coordinates for the next crypto destination

Highlights from the first episode of the Pacific Drop Webinar: Anchoring coordinates for the next crypto destination

BlockBeats-Article2024/04/03 07:59
By:BlockBeats-Article
Original source: Waterdrip Capital


In January 2024, the cryptocurrency market ushered in a historic moment. According to the disclosure on the SEC's official website, the Bitcoin spot ETF was officially approved on January 10 local time. A seemingly unstoppable bull market cycle has arrived, and the frenzy of attention in the market has finally turned into a soaring amount of funds. Crypto asset investors and onlookers have flocked in, seeking to get a piece of this wave.


The cycle has gone up and down, from cryptocurrency technology to the use of smart contracts, and now to the development of asset securitization. Looking at it today, we will find that the situation has become unprecedentedly hot, and for those who are in the great wave of the times, only the most instinctive question remains: What will happen to the cryptocurrency market?


In the first episode of the Pacific Waterdrop Webinar, we tried to answer this important question. Pacific Waterdrop Fund has specially launched the Pacific Waterdrop Webinar Series. The first issue of this series, "Bull Catcher: A Dialogue between CG Zhou and Seth Ginns", was jointly initiated by Pacific Water Drop and the old cryptocurrency fund CoinFund. This seminar invited CG Zhou, CEO and founder of Pacific Insurance Asset Management Hong Kong, and Seth Ginns, partner and head of secondary strategy investment at CoinFund. With decades of rich experience in traditional finance and the earliest investment background in emerging fields, they sorted out the inspiration brought by the past few years and tried to provide a "where are we going" answer sheet for the partners of Pacific Water Drop Fund to anchor the coordinates for the next cryptocurrency market destination.


During the live broadcast, CoinFund partner Seth Ginns pointed out: "With the approval of the Bitcoin spot ETF, the investor base is expanding. Regulatory clarity may drive the market into a longer growth cycle." - This change indicates that the allocation of cryptocurrency assets will become more complicated in the future.


At the same time, the approval of the Bitcoin spot ETF is reflected by a large number of traditional financial institutions and individual investors. In Seth's view, the scale of capital inflows not only greatly exceeded his expectations, but also exceeded the overall expectations of the market. Bitcoin spot ETFs have attracted the attention of wealth advisors and some central banks, and capital inflows have shown a continuous and growing trend.


Coincidentally, looking back at the past, there has never been a lack of new concepts and hot targets in the field of cryptocurrency investment. Similar historical nodes are constantly being staged, and every technological innovation and regulatory breakthrough will cause significant market fluctuations. Behind the gradual love of traditional capital for cryptocurrencies is the sluggish international economic growth and the complex international relations situation, which has forced innovation in financial asset allocation and product substitution.


"We have reason to believe that this bull market cycle may be longer than before, and there is more room for price increases." Speaking of his views on this round of bull market, Seth was quite optimistic. "As long as we are in a relatively stable economic environment, cryptocurrencies should continue to outperform traditional stocks." Whether it is looking at the upcoming Bitcoin halving event or estimating the approval results of the Ethereum spot ETF in May, Seth has shown a relatively positive attitude.


So, what is the biggest risk that may be faced in the short term? Faced with this question, Seth did not comment: "Regulatory risks and the macro environment of accelerated inflation are still a factor that cannot be ignored, but the current regulatory environment shows more positive signs." He believes that the probability of these two risks is relatively small, "but if they do happen, they may still have a significant impact on the market."


During the live broadcast, Seth also mentioned some eye-catching investment cases. When talking about how he views WorldCoin led by Sam Altman, he expressed his expectations for the integration of artificial intelligence and encryption.


In 2024, are we already in a super cycle? What opportunities and risks does regulatory clarity bring? In emerging markets, how can investors grasp the key moments of technological iteration, macro factors, larger narratives, and the integration of other fields such as AI? As mentioned in the live broadcast, facing the future of the cryptocurrency market, Pacific Water Drop Fund has always maintained an optimistic and cautious attitude to continue learning and adapting, leading its partners to move forward steadily in this unknown journey.


The following is a selection of the interview content:


Standardized supervision clearly boosts the bull market and looks forward to the super cycle


CG: Most investors believe that we are in a bull market cycle, so what stage of this cycle are we in now? Is the turning point coming soon, and where will the market go after that?


Seth:When we look back at past cycles, we tend to view Bitcoin as a bellwether for the entire cryptocurrency market. Although it has relatively low risk and a relatively solid return in the cryptocurrency space, its performance has an important impact on the entire market. At present, Bitcoin has successfully broken through the all-time high set in 2021. This achievement is generally regarded as a sign of the first half of the bull market, suggesting that we may be in a relatively early stage of the bull market.


In Hong Kong, Europe, the Middle East, especially the UAE, Singapore, and even the United States, regulators are actively promoting the standardized regulation of cryptocurrencies and establishing a suitable operating environment for them. The gradual maturity of this regulatory environment may also extend the duration of the current bull market cycle. Therefore, we have reason to believe that this bull market cycle may be longer than before, and there is more room for price increases.


In most market cycles, we typically observe multiples from lows to highs, followed by a downward phase. However, the current clarity and developments in the U.S. regulatory environment have added new variables to this conventional pattern. Many of you may be familiar with SEC Chairman Gary Gensler. He took a negative stance on cryptocurrencies after a series of crashes in 2022 including FTX, Three Arrows, and Luna. These incidents revealed the risks of highly leveraged players in the space, some of whom were even suspected of fraud. Additionally, U.S. attitudes toward cryptocurrencies have become more complicated due to a backlash against cryptocurrencies after some Democrats accepted donations from FTX.


As a result, in early 2023, the SEC stepped up its crackdown on cryptocurrencies and filed lawsuits against well-known cryptocurrency trading platforms such as Binance and Coinbase. However, it is worth noting that the issue of the SEC’s jurisdiction over cryptocurrency regulation is currently being considered by the courts. Preliminary court decisions show a bias toward the cryptocurrency industry, with some judges arguing that crypto issues should be addressed through congressional legislation rather than solely regulated by the SEC. If this trend continues and we are able to achieve more regulatory clarity, more investors may enter this space.


According to data from Coinglass.com, recent net inflows into ETFs exceeded $1 billion[vs1] , indicating an expanding investor base. As regulatory clarity is combined with traditional financial infrastructure, we can expect investor participation to increase further and potentially drive the market into a longer growth cycle.


CG: Positive developments in regulation may indeed be a positive factor moving the market forward. However, regulatory progress by itself may not be enough to trigger a supercycle on its own. When we talk about super cycles, we are referring to the broader market funding phenomenon that includes Bitcoin and ETFs, and goes beyond the current focus on Bitcoin and ETFs. Can positive regulatory developments alone really lead us into a so-called super cycle?


Seth: We firmly believe that this is completely feasible, and there are several good reasons to support this idea. First, if you look at how tokens are designed today, many of them are designed to avoid attracting too much attention from regulators. These tokens have no value capture mechanism of their own. However, once regulatory clarity is obtained, you will create an environment in which projects can legally capture all costs they incur. In fact, many projects can indeed generate large amounts of fees, such as lending protocols, decentralized exchanges, etc., and they can all bring considerable income.


If these fees can be reasonably attributed to tokens, we believe that it will attract a wider range of investors to become interested in this space. And to achieve a super cycle, the market size of potential investors in this space needs to be continuously expanded. If it relies solely on a small number of crypto-focused funds to invest, it will be difficult for the market value of this industry to reach 5 or 10 trillion US dollars. However, when more institutional investors participate, when central banks also begin to get involved to a certain extent, and when we start to hear news that central banks are engaging with Bitcoin ETFs and other important cryptocurrencies, this is the real driver of super cycle potential.


Therefore, regulatory clarity has substantially expanded the market size of cryptocurrencies. It provides the necessary legal framework and compliance for the development of the cryptocurrency market, allowing more investors and institutions to participate in it with confidence, thereby driving the market into a whole new stage of growth.


CG: On the one hand, regulation may help promote market development, however, on the other hand, if cryptocurrencies are overly intervened or supported by the government, it may indeed pose a threat to their decentralized nature. This is an issue that needs to be carefully weighed. What do you think about this? It’s worth noting that many Bitcoin geeks may not like such developments, including the concept of a Bitcoin ETF.


Seth:The fact that ETFs currently hold about 5% of all Bitcoin does raise some concerns. However, I personally have no concerns about this. This is because, regardless of the ETF’s holdings, individual investors will still have full control over their Bitcoin by owning their own self-custodial wallet. This is exactly the beauty of Bitcoin - it gives you full ownership and control, and you can use it whenever and wherever you want.


On the other hand, for institutions that don’t want to deal with the complexities of finding a custodian and managing an exchange, they can choose to invest in BlackRock ETFs or other available ETF products. The cryptocurrency market is unique in that it operates in an open financial system that can be accessed through ETFs and traditional financial channels while also maintaining full self-ownership and self-custody. This flexibility allows cryptocurrencies to meet the needs of different investors, whether it’s institutional investors seeking convenience or individual investors who value ownership and control.


Bitcoin ETF attracts wealth advisors and central banks to enter the market, and long-term holding becomes the mainstream


CG: You have mentioned Bitcoin ETF many times, and the expectation of its expansion and capital inflow after its approval. We have witnessed a large amount of funds flowing into ETFs, which has driven up prices. Has this inflow of funds exceeded your expectations or disappointed you?


Seth:The size of the inflows has been significantly larger than not only my expectations, but also the market's overall expectations. It's been a consistent and growing trend, which is very striking. What's interesting is that if you look closely, some of the existing funds have actually experienced large outflows. According to Grayscale's website, when it converted to an ETF, the Bitcoin Trust had about $30 billion in assets under management, [vs2] and part of that was held by bankruptcy estates. So you see billions of dollars of outflows from those bankruptcy estates, and now there's another bankruptcy estate that's being sold. Despite this, the net inflows we've observed are still much stronger than expected. This shows that even though there have been quite large outflows from pre-existing products, this has not hindered new inflows.


So will this continue? In the United States, there are some very traditional retail brokerage firms, known as wire houses, such as Smith Barney and the old Merrill Lynch retail advisor network. Many of these companies are not currently allowing new ETFs to be listed and traded, and they typically wait 90 days before considering allowing new ETFs to enter the market. So we may continue to see this trend of inflows for some time to come.


We understand that over the next month and a half, more and more wealth advisor platforms will list ETFs to enable their clients to invest. When we think about the addressable market, it is just beginning to reach the U.S. financial advisor community. The number that people have been talking about is that according to public market data, the total assets managed by wealth advisors in the United States are as high as $30 trillion [vs3]. The initial expectation was that in a one-and-a-half to two-year time frame, Bitcoin ETFs would attract 0.5% of that. However, the interesting thing about Bitcoin is that it is extremely positively cyclical. When the price goes up, it triggers more demand, which in turn drives the price up further. This is what creates parabolic growth and sharp pullbacks. Therefore, I think over time, wealth advisors may end up allocating more than 0.5% of their funds to Bitcoin ETFs. Bitcoin's strong performance may have prompted the existing wealth advisor community to increase their allocations. And as Wire House gradually lists ETFs, we will also see greater allocation of funds into this field.


CG: So can we say that Bitcoin is now an asset allocation for institutions?


Seth:We once had a conversation with a central bank governor and asked them if they would consider including Bitcoin on the central bank's balance sheet. The central bank governor replied: "You will never hear us say that we have 2% Bitcoin on our balance sheet." However, he mentioned that they are a client of BlackRock.


Interestingly, the central banker also told us that almost all the larger central banks are BlackRock clients. They leveraged BlackRock's portfolio solutions, delegating $50 billion to BlackRock, allocating a portfolio that includes a basket of stocks, U.S. equities, credit and real assets. A few months ago, prior to the launch of the ETF, they mentioned plans to incorporate a Bitcoin spot ETF into the real assets portion of the portfolio solution. Additionally, they assured us that they would provide the option to exclude Bitcoin if needed. The central banker said they feel comfortable and comfortable leveraging BlackRock’s portfolio solutions and including a Bitcoin spot ETF. BlackRock does not need to obtain approval from investors to expand their investment portfolio before allocating assets to the Bitcoin ETF.


CG: What is the makeup of ETF investors so far in terms of institutions, corporate executives, retail investors and others?


Seth: We don’t have a detailed breakdown, but we can discuss some known types of ETF investors. First, look at investment advisors, who typically allocate a small portion of their clients’ portfolios to Bitcoin. Generally, they adopt a buy-and-hold strategy, gradually accumulating Bitcoin. This is just a rough summary, but it's in line with our expectations. As for central banks, if they decide to buy a Bitcoin ETF, only a few may do so initially, but they tend to be long-term holders.


We also note that investment banks, particularly their private wealth management arms, are also involved. We spoke to one of the world's top investment banks headquartered in New York, and they mentioned that before the launch of ETFs, their private wealth management clients who owned Bitcoin had to use their art collateral to borrow because Bitcoin could not be used as collateral. Taste. This results in higher borrowing rates and inefficient use of collateral in other parts of the portfolio. With ETFs, they can now include Bitcoin in investment banks’ operations, avoiding the cumbersome capital charges that come with keeping the physical cryptocurrency on their balance sheets. This category also represents long-term holders.


In addition, there are also known short-term trading hedge funds involved, such as Point72 and Citadel. Previously, they were uneasy about holding spot cryptocurrencies due to their large equity and credit operations and concerns about attracting the attention of regulators. However, with the launch of the Bitcoin ETF, they can now feel more comfortable holding Bitcoin and may trade it more frequently. They buy when they expect prices to rise and sell when they think a short-term high has been reached. This group represents short-term traders. However, most of the capital inflows currently come from buy-and-hold investors. This is why Bitcoin prices are showing strong growth, as most of the capital appears to be invested in long-term holdings.


Bitcoin breaks through historical highs, short-term market fluctuations may reappear


CG: Bitcoin The coin seemed to be expected to keep rising and never fall back. So what are the risks for Bitcoin right now? Going forward, we may still see continued inflows into the ETF, or there may be outflows.


Seth: Regarding this issue, we should discuss some relevant market dynamics. First, let's consider the recent breakout of the three-year all-time high. In October 2021, Bitcoin reached a record high of $69,000. However, it was only in recent days that it passed this important milestone again.


Back in December 2020, the last time Bitcoin topped a three-year all-time high, it doubled in price over the next three weeks. Specifically, in mid-December 2020, Bitcoin broke through the $20,000 mark and then quickly climbed to $40,000 in the second week of January. Despite a pullback to $30,000 during the period, the upward momentum remains strong. In line with this model, historical data seems to suggest that breaks above multi-year all-time highs often trigger significant market moves in the short term. Therefore, we have reason to expect that there may be a major change in the market in the near future.


History often repeats itself, especially for Bitcoin. During these critical market moments, specific market patterns tend to resurface. As we approach all-time highs, investors are starting to pay more attention to Bitcoin, often ignoring other cryptocurrencies like Ethereum or Solana. Typically, however, once Bitcoin successfully breaks out of its all-time highs, it often serves as the starting signal for the entire cryptocurrency market to enter a true bull market.


As an example, Bitcoin’s market capitalization increased by only 66% in 2021. However, our fund's net return (after a 20% performance fee) was about 270%. This is largely due to our strategy of investing primarily in the altcoin space, resulting in a total return of over 300%. I think we are currently witnessing a moment like this when Bitcoin breaks all-time highs and causes significant market volatility, which is an excellent time to pivot investments into the broader altcoin space. Based on historical experience, significant profit opportunities often emerge thereafter.


The rise of Bitcoin activates Alt Coin, and the price surges strongly


CG: Regarding market allocation, it seems that what we are seeing so far is basically Bitcoin leading the way? In addition to mainstream coins, other coins like blue chip coins seem to have not really caught up with Bitcoin. People have mentioned that there may soon be an era of altcoins. What do you think about this?


Seth:I think that’s right. Again, this is part of a normal cycle in the cryptocurrency market, where after Bitcoin breaks out, the rest of the altcoin space starts to see very strong price action.


In our current portfolio, we hold significant exposure to Bitcoin via options and also have spot exposure to other cryptocurrencies. Our strategy remains consistent with expectations for continued significant action in Bitcoin. In February and March, our options strategy performed extremely well compared to Bitcoin spot. However, as our allocation adjustments to other cryptocurrencies are gradually implemented, which will account for a significant proportion of the liquidity and cash portion of our funds, we expect these assets to perform very well going forward. Our strategic positioning is similar to where we were in late 2020 and early 2021. Furthermore, as we discussed at the beginning, macro factors play a crucial role in the cryptocurrency market. When Bitcoin hits new all-time highs against various currencies such as the US dollar, Euro or Japanese yen, it means that our local currency is losing value against Bitcoin. Bitcoin has a strong negative correlation with two factors: the U.S. dollar and real yields (i.e. interest rates minus inflation). Currently, we are witnessing a decline in real yields and a weakening of the U.S. dollar. This has created a favorable tailwind environment for Bitcoin and the broader cryptocurrency market, and we expect this to continue.


Supervision and fraud risks are overwhelming, and central bank policy may become the biggest uncertainty


CG: You just didn’t mention the risks or negative information we may face, and the major retracement that may occur before entering the bull market again. What risks may we face in the next few months or even shorter?


Seth:I think the biggest risk facing the market right now is the sustainability of the strong momentum. We are currently in a period where the regulatory environment is starting to show more positive signs, supported by real-time data from the United States. While I'm not particularly concerned, regulatory risk remains a factor that cannot be ignored.


The second risk is that if we experience a loss of market momentum, or encounter a major fraud case, or face a major leverage event, these will This may change the current situation and may prompt some Democrats in the United States to turn their views on cryptocurrencies from positive to negative. This will bring about a series of major problems.


Another potential risk is if we enter a macro environment of accelerating inflation and major central banks, including the Federal Reserve, decide to respond by raising interest rates Inflation. While I believe these two risks are relatively unlikely to occur, in fact, just because they are considered unlikely to occur, they may not be fully reflected in market prices. If they do occur, although the probability is low, they could still have a significant impact on the market.


Bitcoin halving is neutral to positive, the market welcomes the positive


CG: Bitcoin's halving event is coming soon, are you worried about the negative selling pressure that may occur? Will the halving be positive for the Bitcoin price?


Seth:When Bitcoin undergoes a halving event, its new supply is halved, and this event occurs approximately every four years. During the halving, if miners are in a bad financial situation, it may cause a lot of selling pressure. The 2020 halving event is an example of this situation. Miners hold Bitcoin on their balance sheets, and after the halving, in order to remain competitive, they need the latest and most efficient mining equipment, so they start selling their holdings to finance payments to mining equipment manufacturers. However, this is not the case at the moment. The mining community is in a healthy state. Even at the current price level, they can still use the previous generation of mining equipment and remain competitive at a cost price of about 4 cents per kilowatt-hour, which is a fairly reasonable electricity price in the United States. In addition, a large part of Bitcoin mining has moved from China to Central Asia and North America due to the Chinese government banning mining activities in May 2021. Therefore, the mining industry is strong and is unlikely to exert significant selling pressure on the market as it approaches the halving event.


Halving has indeed been a positive factor historically. But at the same time, it coincides with the macro cycle and the liquidity cycle. I think the question is, is the halving really a positive catalyst, or are central banks also printing a lot of money in a cycle of about four years? Perhaps this is a question that cannot be answered definitively. However, the halving event is currently happening, and we are also supported by a lot of liquidity provided by the central bank. Overall, I think the halving is neutral to positive.


Liquidity and AI shape the market landscape, and macro factors are in the spotlight


CG: You just mentioned some of the macro factors that affect the cryptocurrency market, especially the Bitcoin market. Are there macro factors that you consider when making investments? What key factors or key data are you paying close attention to?


Seth:With each cycle, miners are paying more and more attention to profitability and are beginning to adopt more professional financial management practices. As the price of Bitcoin rises, miners' fees (usually denominated in the local currency of their location) become a smaller and smaller portion of their total revenue. As a result, the amount of Bitcoin they need to sell to cover their costs also decreases, allowing them to keep more Bitcoin on their balance sheet. In the current market environment, as the price of Bitcoin continues to rise, miners are putting less selling pressure on the market. This is an important macro factor that we must consider when investing.


When conducting macro analysis, liquidity is a key factor that needs to be monitored closely. In the U.S., I pay particular attention to a liquidity monitor that combines technical indicators such as optimal balance sheet, reverse repo utilization, and total trading accounts. This indicator can provide insights into whether the Fed is increasing or reducing liquidity in the system.


Currently, high levels of liquidity have been going on for about a year and a half, and this is a phenomenon we have observed. This expansion of liquidity is consistent with the Fed's goal during the election year to achieve a balanced economy that is neither too hot nor too cold. This is the first macro aspect to consider.


The second aspect, as we have discussed before, is the impact of artificial intelligence (AI). During the last decade, the Federal Reserve under Chairman Powell continued to face the challenge of generating inflation despite its implementation of zero interest rates and quantitative easing. Powell now expects advances in AI to put significant downward pressure on prices from 2025 to 2026. In order to deal with the risk of deflation in the U.S. economy, the Federal Reserve may continue to inject liquidity.


Turning to the case of China, the country has recently faced deflationary pressures and its stock market was underperforming until January this year. However, the Chinese government implemented additional stimulus measures to boost the stock market, resulting in positive market performance.


Given these factors, the most important macro factor to watch closely right now is the increased liquidity provided by the two largest economies, the United States and China. This expansion of liquidity is also tied to currency dynamics, specifically the relationship between the U.S. dollar and other major global currencies, including Bitcoin, which has begun to trend downward. Therefore, in macro analysis, we need to comprehensively consider the impact of these factors on global markets, including the cryptocurrency market.


As long as we are in a relatively stable economic environment, cryptocurrencies should continue to outperform traditional stocks



CG:To me, cryptocurrency or Bitcoin is a quality asset that typically exhibits a negative correlation with traditional financial assets such as U.S. stocks or other financial markets. However, now with the launch of spot ETFs, their outsized impact could lead to a positive correlation between Bitcoin or other crypto assets and trends in traditional financial assets. This means that when traditional markets (such as the U.S. stock market) experience deep declines or crashes, the price of Bitcoin may also fall with it. For actual investors, this is not an ideal situation. What one would like to see is investment products that have a high negative correlation with traditional financial assets, ideally a correlation of -1, in order to truly diversify the portfolio. If cryptocurrencies are highly correlated with other assets, and this is exacerbated by the introduction of spot ETFs, this may be an undesirable side effect for a subset of investors. What do you think of it?


Seth:I agree with some of your points. When I spoke to the COO of a large asset management firm a few months ago, he said, “I don’t currently own cryptocurrencies, but it’s time to seriously consider it.” I asked further why, and he explained that in 2022 Bitcoin and cryptocurrencies have a fairly high correlation with the Nasdaq, showing similar trends to other assets he already owns. However, by 2023, we started to observe a decrease in correlation and dispersion. Despite the launch of ETFs, the correlation remains at a relatively low level. It has not reached the level of negative correlation you mentioned, but has remained at a relatively stable low correlation state. Therefore, the current situation reflects more of irrelevance than negative correlation. From a diversification perspective, there has been plenty of research over the years showing that adding Bitcoin to an investment portfolio is beneficial in the long term. And, I think the benefits are even more pronounced for cryptocurrencies more broadly. Cryptocurrencies have excellent diversification effects and can effectively increase the Sharpe ratio of a portfolio. But I think another very critical factor is that when you dig into these theories, when you look closely at projects like Solana and the various applications that are being built, whether it's gaming companies, financial infrastructure companies, or cryptocurrency For artificial intelligence companies in the field, you will find that they are all long-term growth trends. We have invested in companies at the intersection of artificial intelligence and cryptocurrencies that are poised to continue to grow and maintain momentum regardless of changes in the macro environment. Even if the macro environment fluctuates, the growth of these businesses will not be affected.


This is one of the reasons I love cryptocurrencies. In fact, when I talked about investing in Coinbase in 2012, I was investing in early-stage startups for the same reasons. Because at the time, I was worried about the macro environment and that we were not getting enough support from quantitative easing. Before unlimited QE was introduced, I wanted to allocate a portion of my portfolio to early-stage startups to prepare for possible changes in the macro environment or an economic downturn.


Cryptocurrency is an asset class with this characteristic. Cryptocurrencies are entering their massive development cycle as the regulatory standardization process we discussed moves forward. This is a time of great energy and opportunity. For cryptocurrencies, it is gradually entering a regulated status, which will make investors feel more comfortable and is expected to drive its continued growth from a business perspective, regardless of changes in the external environment.


Of course, it needs to be emphasized again that if governments around the world raise interest rates significantly again, say by 5 percentage points, cryptocurrencies may join other assets. fell. But as long as we're in a relatively stable economic environment, cryptocurrencies should continue to outperform traditional stocks.


CG: I asked you about your views on the U.S. stock market. You answered then that 2023 will be a good year and 2024 will be a good year. I want to confirm, do you still hold the same view?


Seth: The cyclical indicators for the U.S. economy actually look pretty good, and that’s something I follow closely every day . The breadth of the U.S. market is expanding, and signs of a cyclical recovery are already beginning to emerge.


Is it a little too hot? Probably yes. But what's interesting is that two days ago we got data on the Consumer Price Index (CPI), which is an important measure of the level of inflation. I have been watching to see how the US market reacts to this CPI data.


However, the US market's reaction to the CPI data was very interesting. If the CPI data is lower than expected and the stock market falls, that would be a worrying sign because it means that the market has priced in the good news and may be facing some corrections. But in fact, we observed exactly the opposite. Although the CPI data slightly beat expectations, the stock market performance remained solid. This is a very interesting development.


The Ethereum ETF has been approved or licensed, but the market attention is not as high as that of Bitcoin


CG: Given the remarkable success of the Bitcoin spot ETF, it is natural to be curious about the timing of the approval of the Ethereum spot ETF. Many predict that once an Ethereum spot ETF is approved, it will trigger a significant increase in the price of Ethereum. In fact, Ethereum has shown momentum to catch up with the price of Bitcoin. So, what do you think about the timeline for possible approval of an Ethereum ETF?


Seth: Blackrock has also submitted an application for an Ethereum spot ETF, specifically in November. Interestingly, of all the crypto-assets, only Ethereum met all the criteria the SEC relied on when approving a Bitcoin ETF.


As we take a closer look at the various factors that led to the eventual approval of a Bitcoin ETF, there is reason to believe that an Ethereum spot ETF is also expected to be approved. The Blackrock ETF deadline is set for mid-year. However, as it stands, we are yet to observe any substantial progress despite the deadline being approximately 2.5 months away. The issuer has not yet been asked to hold further discussions with the SEC, as is often the case in the 2.5 months leading up to the Bitcoin spot ETF deadline.


This situation may imply two possibilities. One possibility is that we may not need to see similar developments two months in advance because the approval process for Bitcoin spot ETFs has provided clear guidance on the regulatory path, making the entire process simpler and more efficient. Another possibility is that the SEC intends to reject the ETF’s application, which would likely trigger litigation from the issuer. In this case, I suspect the lawsuit will likely rule quickly in favor of the issuer, and given the clear framework established by the Bitcoin ETF, we are still expected to see an ETF approved before the end of the year.


In terms of probabilities, I personally estimate a 50% chance of approval in May and a 50% chance of approval before the end of the year. However, it is important to note that as time passes without any new developments, the probability of approval in May will gradually decrease. As for your second question, regarding the significance of the launch, I have a hunch that it may not be as significant as when Bitcoin launched. This is mainly because Bitcoin is often regarded as digital gold, providing a means of wealth protection against excessive government money printing that leads to currency devaluation. This narrative fits with mainstream financial thinking. In contrast, Ethereum is more complex and involves technical aspects such as open source blockchain. While we are optimistic about its potential, and it has delivered substantial returns for us, it needs a more detailed and in-depth explanation to be accepted by the masses, similar to how one would explain why one should invest in Amazon or Google discussing its search capabilities , Google Cloud and other complexities. Therefore, it may take longer for people to become familiar with and trust Ethereum.


Of course, I may be wrong. We have heard from investment advisors expressing strong interest in Bitcoin and Ethereum, and considering holding a combination of both in their portfolios, perhaps with an allocation of 75% Bitcoin and 25% Ethereum. . From a programmatic configuration perspective, this approach may further increase demand. However, I still think Ethereum is unlikely to have the same level of impact as Bitcoin. Another factor to consider is that Ethereum allows users to earn rewards through staking. However, U.S. exchange-traded funds may not offer such a staking option.


CG: The fund we provide investment advisory also invests in Ethereum and realizes an additional 3.5% annual return through staking. However, I have some concerns about market expectations for ETF approval in May. While I don’t think the market has overly high expectations for its approval, if news breaks that the Ethereum ETF fails to receive approval, it could impact Ethereum and the entire cryptocurrency market. What do you think about this?


Seth: There are two important aspects to consider. First, Ethereum has not been the main focus for cryptocurrency investors during this cycle. We can assess this by looking at the Ethereum to Bitcoin price ratio, which is currently near the lows of the cycle. Although it improved slightly, it was not significant. Therefore, only a few people are actively paying attention to Ethereum, while more attention is focused on other currencies and small and medium market capitalization areas.


Therefore, if the Ethereum ETF fails to be approved in May, it will be a setback for Ethereum. However, I do not think this will have a substantial long-term impact on the entire cryptocurrency market, although there may be some volatility in the short term. The cryptocurrency industry is showing significant momentum and is becoming more and more widely used in various projects. Therefore, I believe that any setbacks will be short-lived for the entire cryptocurrency market.


Narratives of concern include Solana ecosystem (DePin), the integration of games and cryptocurrencies, and the integration of AI and cryptocurrencies


CG: In the cryptocurrency world, narratives are very important and have a significant impact on price movements. In addition to large currency ecosystems and existing exchange-traded funds, we are also paying attention to some other narratives or new model narratives that may emerge. Whether these narratives have the potential to provide investors with more investment opportunities.


Seth:There are a few different areas I would like to explore in depth. The first is the Solana ecosystem. Solana is a blockchain known for its efficiency and speed, and it has won important support in the market. However, when its key supporter FPX faced bankruptcy, Solana's price suffered a heavy blow, plummeting from a high of $35 to $40 per coin to less than $10. But it was encouraging that it managed to recover last year, with the price climbing from the bottom to about $100. CoinFund has observed a significant growth trend in developer activity within the Solana ecosystem, thanks to a large influx of talented people and the creation of new businesses.


Decentralized physical infrastructure is an area of interest on the Solana blockchain. Among them, the Helium project stands out, which encourages people to deploy real-world infrastructure through the incentive mechanism of crypto tokens. These infrastructures come in various forms, including mobile hotspots, improved GPS base stations, innovative projects that collect data from cars to realize value realization (such as Demo), and even building GPU computing networks for AI model training (for example, using high-demand NVIDIA GPUs).


When it comes to the intersection of gaming and cryptocurrencies, presenting gaming assets in the form of non-fungible tokens (NFTs) and giving players true ownership is gradually becoming the focus of the industry. In 2021, the gaming sector has attracted a lot of financial support, and after three years of careful development, we are finally witnessing the advent of high-quality games. One of the highlights in our portfolio is Gunzilla - this first-person shooter game will be available for trading in the coming weeks.


In addition, we are full of expectations for the integration of artificial intelligence and encryption. One high-profile investment case is WorldCoin, led by Sam Altman. As one of the co-founders of OpenAI, Sam Altman built WorldCoin into a unique platform: one that scans a user’s eyes to generate a unique cryptographic hash that is securely stored in the user’s wallet. Users can then use the wallet to sign photos or videos, enabling identity verification and proof of authenticity. In an age where it’s so easy to create photo-realistic fake videos, you can actually prove the authenticity of a video with your signature, making it clear: “No, this video is me.”


CG: Although I may personally have reservations about some aspects, it is undeniable that blockchain technology has indeed succeeded in linking the crypto world with the real world and providing services for our daily lives. With life comes practicality. We deeply agree with this. We have also invested in some in-depth projects.


Denver Developer Conference focuses on Bitcoin second-layer innovation, and the ecosystem welcomes new projects


CG: Today, people are enthusiastic about building ecosystems like Bitcoin, but do we really need so many similar ecosystems? Or do we already have enough advantages that we no longer need to pursue such an ecosystem too much?


After all, we already have other blockchains like EOS, Polkadot, etc. that offer similar functionality. I personally think we can probably think of this as a digital destination, a store of value. But in terms of practical functions, we may not need to rely on the BTC ecosystem to achieve it. Other blockchains can also provide us with the functionality we need. What do you think about people’s enthusiasm for BTC to become a bigger and better ecosystem?


Seth: I just attended the largest developer conference in North America, Denver, where people were eagerly discussing Bitcoin. Issues related to the currency ecosystem. Bitcoin’s second-layer solution has become one of the hot topics. Interestingly, many people say they enjoy holding Bitcoin but also want to earn income in some way. Therefore, the field of decentralized finance has become a focus of attention. They don’t want to go through the risk of the bankruptcy of centralized companies like Celsius and BlockFi that offered Bitcoin lending for yield in the last cycle. Nowadays, people prefer to use decentralized protocols to achieve this goal.


In addition, the second-layer solution is expected to significantly increase Bitcoin’s transaction speed and reduce transaction costs, which is very exciting. Currently, many capitals and developers are working on improving and expanding the functionality of Bitcoin. Although we haven’t seen too many teams building related projects yet – most of these projects are focused on the field of entrepreneurial investment rather than circulating tokens – I believe there will be some very interesting projects in the future.


In terms of circulating tokens, one of the projects we currently hold is Stacks. This project has been around for a while, and they're about to launch a major upgrade next month called Nakamoto. This upgrade is expected to increase the throughput of Stacks, thereby bringing new development opportunities to the Stacks ecosystem. We are looking forward to this.


Q&A


How to determine the top of this cycle and how to mitigate risks? Also, do you think Bitcoin will break the four-year cycle pattern?


When it comes to cycle tops and mitigating risks, we have two different ways of looking at the path of the cycle. One of the most straightforward methods is to use the 150-day moving average. This is a good long-term cyclical indicator. Generally speaking, when Bitcoin price falls below this indicator, we are likely to enter a more bearish phase. However, we also need to watch how the dollar appreciates and whether real yields rise. Therefore, both macro dynamics and Bitcoin price performance suggest that we are entering a more bearish cycle.


As for whether Bitcoin will break the four-year cycle pattern, my basic judgment is that it will still follow the four-year cycle, because I think history has a strong tendency Sex, like we discussed before. However, I also think there is potential for an extended cycle. I think the reason is that we're actually seeing the United States building a regulatory regime, and Hong Kong has also opened up a lot to cryptocurrencies in the last 18 months. In addition, the UAE, Singapore, continental Europe and the UK are also standardizing the regulation of cryptocurrencies. I think that could be a very strong driver of an extended cycle this time around. However, in the base case we should still follow the four-year cycle. We then look for signs that regulatory normalization is driving an extended cycle. Thanks.


What is your opinion on the price Bitcoin may reach during this cycle?


This is a very difficult question to answer, but I think a lot of it has to do with the liquidity provided by banks, because ultimately the price of Bitcoin is The response to the depreciation of the dollar - if we are talking about the price of the dollar. I personally believe that the price of Bitcoin may reach $500,000 to $1 million per coin. At the peak of this cycle, the price per Bitcoin could hit $1 million. If we are going through an extended cycle, Bitcoin could even hit $1 million.


The price will then likely fall back to around $500,000 and stabilize at that level. But the point is, I think as regulation becomes more formalized, the entire cryptocurrency market will become similar to the stock market. Different tokens will represent different technologies. Just like Amazon didn’t start out as the biggest stock on the market but gradually rose to prominence over time, we will also continue to see new tokens emerge in this dynamic market, many of which could materially outperform Bitcoin in the future.


Do you think Bitcoin as an asset class is risky or risk-averse?


Bitcoin performs differently in different market environments. Sometimes it is viewed as a risk asset, and sometimes as a risk-off asset. I'm more concerned with its correlation with actual returns, which tends to be stronger than its correlation with risky trades.


How to assess the risk scale of Bitcoin and other cryptocurrencies? We have about 15 core projects in our portfolio and we divide them into three different tiers. Riskier, early-stage projects have a smaller share, typically between 0.5% and 2.5%. If the project starts to enter the mainstream rollout stage, it can reach around 5%. For mature protocols, it can be closer to 10% if it still meets our return requirements. Then, the only assets that might be bigger than that are Bitcoin and Ethereum. Under certain market conditions, we may not hold Bitcoin and Ethereum, but will make adjustments to other projects.


As for the impact of high funding costs and major exchanges, this has certainly had an impact on Bitcoin's performance over the past few weeks. How do you view the short-term trends in the market? In fact, we do face the problem of high financing costs, which is mainly caused by the situation in the trading market. But when we get a rapid sell-off, financing costs actually get reset. From what I checked earlier today, Bitcoin has seen a significant pullback, while many other coins are still overbought from a funding perspective. This is reflected when we look at market performance. We are still in a relatively high-dominance environment, and Bitcoin is still outperforming a lot of other assets.


How often is rebalancing performed? At what point will a position be required to be re-evaluated?


When we re-evaluate, we will set a bar for expected returns of at least five times over the next nine to 12 months. When a token in the portfolio drops 20% to 30% in price, we re-evaluate it based on its volatility. The process includes analyzing whether the project still has the potential to return more than five times over the next nine to 12 months.


We adjust our portfolio based on the current market conditions and the extent of the increase. If we believe that a project has developed in line with expectations and has found the catalysts and paths to achieve the expected returns, we may choose to reduce the holdings of the project or exit completely. At the same time, we will look for other more attractive projects that should have the catalysts and return potential we are looking for.


It is important to note that our turnover rate is relatively low. Although there is a certain positive correlation between volatility and turnover rate, our turnover rate is relatively low compared to stock funds due to the high volatility of the cryptocurrency market itself.


Do you think that the current large-scale arbitrage transactions in the market will push up prices by compressing funding rates?


In the futures market, there is a price difference between spot and futures. In fact, when the market is in a bull market, an interesting phenomenon is that the basis tends to widen. Although you might think that as the basis widens, more people will try to buy spot and sell futures to obtain risk-free returns, thereby compressing this difference.


So I think it depends on how the market cycle affects this behavior. Historically, there were a lot of frictions and barriers to doing this kind of arbitrage trade, but now many hedge funds can use ETFs for spot trading and can also conveniently short futures. Therefore, this kind of arbitrage trade has become easier to implement, which may lead to the compression of the futures basis. However, the final price trend still depends on the combined effect of market supply and demand and other factors.


In general, while arbitrage trades may have an impact on funding rates and basis, its ultimate impact on prices depends on the interaction of multiple factors.


This article comes from a contribution and does not represent the views of BlockBeats.

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