Bitwise Alpha Strategy Manager Interview: Strategy is the "Altcoin" of Traditional Finance

Original Article Title: Market Crash. But at Least We Get a $200K Bitcoin? - The Chopping Block

Original Source: Unchained

Original Article Translation: Deep Tide TechFlow

Guest: Jeff Park, Director of Bitwise Asset Management Alpha Strategy

Host:

· Haseeb Qureshi, Partner at Dragonfly Capital

· Robert Leshner, CEO & Co-founder of Superstate

· Tom Schmidt, Partner at Dragonfly Capital

Air Date: April 11, 2025

Key Takeaways

· Bitwise Alpha Strategy Director - The year-end target price for Bitcoin is expected to reach $200,000.

· Bitcoin vs. Gold - Bitcoin, as a store of value, shares similarities with gold. When choosing between the two, investors primarily consider volatility. Therefore, older individuals tend to prefer gold, while younger individuals favor Bitcoin. The reason why young people lean towards Bitcoin is largely due to its volatility. If you believe this is one of the key factors driving Bitcoin's value.

· "TradFi's Shitcoin" - MicroStrategy plays the role of a shitcoin in traditional finance, as it is essentially a combination of cryptocurrency and Bitcoin.

· Circle Delays IPO - Circle's financial situation is better than initially perceived. Although their costs are high, their current revenue is much higher than a year ago.

· Ripple Acquires Hidden Road - This acquisition is strategically significant for Ripple as it allows them to more effectively utilize their balance sheet. The acquisition also helps expand the market for their new stablecoin, RLUSD.

· Bitcoin Market Resurgence - Some believe that based on interest rate changes, Bitcoin will perform differently. A decrease in interest rates benefits Bitcoin as it leads to financial repression and inflation, making Bitcoin a tool for storing value.

· Impossible Trinity - After the end of the Bretton Woods system, we faced the Impossible Trinity, which means you can only choose two out of three among open capital flows, independent central banks, and floating exchange rates to build a monetary system. If you give up one, the other two must adjust.

· Cryptocurrency Macroeconomic Decoupling - The Federal Reserve and global central banks are engaging in true stimulus to try to rescue their economies from shocks, which will distort asset prices. In that scenario, a decoupling between Bitcoin and other tokens may occur.

The Impact of Tariffs on Cryptocurrency & Bitcoin's Role in Portfolios

Haseeb:

Jeff, you work at Bitwise Asset Management and have a deep understanding of macroeconomics. Let's discuss the impact of tariffs on cryptocurrency, what changes have occurred in the crypto market? Why should we expect tariffs to have such a significant impact on cryptocurrency, even though cryptocurrencies themselves are not directly affected by tariffs as they are not involved in imports or exports? So why would the crypto market care about tariff-related issues?

Jeff:

From a positive perspective, I hope to mark the bottom of the market so we can look back on this episode in the future.

Overall, cryptocurrency and Bitcoin have always been the focus of investors, and their role in portfolios is evolving. Since the launch of ETFs, mainstream investors can more effectively include Bitcoin as part of a global asset, which is why the correlation of Bitcoin with risk appetite and risk-off sentiment has strengthened.

Especially as Bitcoin serves as a store of value, with characteristics similar to gold, investors primarily consider volatility when choosing. Therefore, older individuals tend to prefer gold, while younger individuals favor Bitcoin. The reason young people prefer Bitcoin is largely due to its volatility. If you believe this is one of the key factors driving Bitcoin's value.

On the other hand, if other macro assets become more volatile, the opportunity cost of holding Bitcoin will also rise as you need to compete with these non-traditional assets. The volatility of traditional assets via ETFs has affected institutional investors' interest in Bitcoin. Therefore, I believe Bitcoin is usually the best choice for risk trading, but timing is crucial, especially regarding the behavior path dependence of other assets. Undoubtedly, with changes in volatility and the VIX index, many people are starting to pay attention to stock discounts, where they may find opportunities in the prices of Tesla or NVIDIA, and may sell Bitcoin for arbitrage. I think these are the reasons behind the market's volatility in recent months.

Haseeb:

We've seen a significant market downturn over the past few days. If you look at Thursday and Friday, the market's trading days following the tariff announcement, you'll find that the market dropped by 4% to 5%. Then by the close on Tuesday, the market saw another 2% decline. So overall, we've dropped nearly 16% to 17% from this year's market high. Depending on the indices you follow, the situation could be even worse. So far, Bitcoin hasn't really acted as a safe haven; its trading performance has closely mirrored other major indices.

Retail Investors vs. Institutional Investors & Bitcoin's Sensitivity to Interest Rate Changes

Haseeb:

In the stock market, retail investors are actually buying while institutions are selling. J.P. Morgan reported that last Thursday and Friday were the biggest days of retail buying volume in decades, setting a remarkable record. Retail investors took advantage of buying the dip, believing in a market rebound, and they seized that opportunity.

Not sure if this situation also applies to the cryptocurrency market, which is primarily driven by retail investors. While institutional investors have a presence in the crypto space, retail investors remain the primary holders, even in the complexity of ETFs. So, considering that the cryptocurrency market is retail-driven, is this why Bitcoin has maintained relative strength? Would the situation be worse if Bitcoin were more like an institutional asset?

Jeff:

I believe Bitcoin has always demonstrated its leading indicator characteristics as a global liquidity conduit, with Bitcoin's movements typically reflecting people's expectations of global liquidity changes. Currently, institutional capital's speed of reaction may be faster than retail capital from two years ago, which is still a significant factor.

A unique challenge for Bitcoin is its complexity in terms of investor targets. I often discuss Bitcoin with institutional investors in terms of two scenarios: positive rho Bitcoin and negative rho Bitcoin. Here, rho represents Bitcoin's sensitivity to interest rate changes. Some believe that Bitcoin performs differently based on interest rate changes. Negative rho Bitcoin refers to Bitcoin benefiting from interest rate decreases, as this leads to financial repression and inflation, making Bitcoin a store of value tool.

On the other hand, positive rho Bitcoin is seen as a safe haven asset in a world on the brink of collapse or extreme deflation. In such scenarios, Bitcoin becomes the asset people seek in a crisis. Yesterday's situation in China is an example of this complex relationship. In response to what Trump has done, China has actually expanded the range of its currency devaluation to allow the yuan to appreciate in ways historically not allowed. Today, we see the yuan devaluing so rapidly, almost back to the levels of 2008. If we think about this impact, the actual devaluation of the yuan is a result of deflation, which typically lowers global prices, making it more likely for us to see deflation due to imports. This is a positive rho Bitcoin world, not a situation desired by the U.S. or China. They are essentially ramping up the intensity of this confrontation.

Another approach China could have taken is through a large-scale internal fiscal stimulus plan to boost consumption, which is essentially an inflationary version, akin to releasing the Bitcoin floodgate with a negative rho Chinese quantitative easing. Yesterday, the Bitcoin market experienced some fluctuations, initially seeing an uptick but later realizing the risk of deflation, causing the price to fall back.

Overall, Bitcoin's sensitivity to interest rates has shown relative instability in the global market adoption process. I believe we are currently in a negative rho Bitcoin environment, where people generally expect inflation and loose policies to drive Bitcoin's value. However, undoubtedly, 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 play. As Bitcoin becomes a more mature asset, this dynamic may become more pronounced. Bitcoin's reactions at times appear unstable and unpredictable. Sometimes it shows no response to macroeconomic shocks but then plummets significantly over the weekend. Today we see its performance closely resembling that of the Nasdaq.

Altcoins and Institutional Investor Interest

Haseeb:

In the current market environment, altcoins have been under greater pressure. How do you view the performance of altcoins in this environment? There are now many expectations for policy easing, apart from tariffs, there may also be significant tax cuts. In addition, the market anticipates the Fed to cut rates more frequently than previously expected. As far as I know, CME currently anticipates five rate cuts this year, compared to just a few cuts in previous expectations, and at one point, only one. How do you view these changes, and how will they affect the altcoin market?

Jeff:

Altcoins are quite complex and face two main challenges.

First, aside from Bitcoin, other altcoins have significant differences in their consensus mechanisms, requiring more maintenance. Bitcoin is like a cold wallet you can keep under your mattress, usually without issues. The problem with altcoins is that if they are proof-of-stake tokens, investors need to participate in the ecosystem to earn rewards, which increases investors' costs. If you are an institutional investor and cannot participate in this value accrual mechanism, similar to missing out on a stock's special dividend because your stock holdings are in custody that doesn’t allow on-chain operations, as opposed to the kind that does, investors will naturally have reservations because they do not want to be in an unfair competitive situation. In the altcoin market, these unfair situations do sometimes exist.

The second factor is that many investors see altcoins as a leveraged trading tool. They are excited by Bitcoin's volatility and believe that altcoins can offer higher returns, higher leverage, and greater volatility in terms of capital efficiency.

But the fundamental shift is that in December of last year, we had Bitcoin ETF options. Through regulated markets, we can trade Bitcoin options, providing a similar speculative and hedging thrill. This way, investors can engage in leveraged trading more strategically without worrying about the risks associated with those "insider" or "narrative" elements.

MicroStrategy: An Alternative Investment in the Traditional Financial Space

Haseeb:

It sounds like you're saying that altcoins appeal to institutional investors because they find Bitcoin's volatility not stimulating enough and seek higher-risk investments. Altcoins are like a more speculative version of Bitcoin. Now, institutions can trade Bitcoin options and ETF options via CME, making them more inclined to choose Bitcoin options over altcoins.

Jeff:

Perhaps this is why MicroStrategy has risen. In my view, MicroStrategy plays the role of an altcoin in traditional finance; it's actually a blend of cryptocurrency and Bitcoin.

MicroStrategy is like an additional thrill. Its volatility is actually greater than Bitcoin's. Currently, Bitcoin's price ranges between $45,000 and $55,000, while MicroStrategy's stock price is around $100, sometimes even reaching $200. Therefore, for liquidity-seeking investors, MicroStrategy provides a more exciting investment experience than altcoins without the need to take on the risks of those less understood altcoins. Additionally, MicroStrategy has created leverage through financial engineering. They have issued convertible bonds and various structured preferred stocks, providing investors with multiple risk preference options. It's like choosing your desired altcoin risk from Bitcoin's buffet.

I believe that MicroStrategy becoming the highest-traded stock and options contract, along with the success of the 2x leveraged MSTR ETF, demonstrates that Bitcoin's financialization has allowed traditional investors to see greater appeal through MicroStrategy, thereby reducing the allure of altcoins to some extent.

Haseeb:

I find this story a bit hard to believe. While MicroStrategy's derivative structure may indeed be so, in the ETF market, institutional investors mainly acquire altcoins through Ethereum, and Ethereum's ETF market has never exceeded $100 billion. Therefore, this is not a large market. Most altcoins are actually held by retail investors and are not a true institutional asset class. Therefore, any analysis explaining the current state of the altcoin market must start with retail investors. Retail investors are not the reason dominating this market. Institutional investors may be trading Bitcoin ETF options or leveraged trading on MicroStrategy, but this is not the reason for the altcoin decline.

Jeff:

Yes, if you talk to most cryptocurrency traders and investors, they would say they are working to make their tokens generate returns. Even though Ethereum's performance relative to Bitcoin was poor last year, when considering the additional returns from using Ethereum for productive purposes, this price difference is not so obvious. If you stake Ethereum and leverage the capabilities of Eigenlayer or EtherFi Rent, participating in these staking activities, the total return of the ETH market does not only reflect Ethereum's price. That's the point I'm trying to make. Therefore, if you're an institutional investor and you can't access Renzo and EtherFi.

Haseeb:

If I could rephrase your point just now, now global funds are pouring into the U.S. stock market. Although this is somewhat abnormal because the U.S. is a relatively slow-growing country, it has attracted global savings. We are trying to address the issue of trade imbalances, hoping 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 U.S. stock market but the crypto market.

Jeff:

In this scenario, I think this is advantageous for Bitcoin because at least then we can start thinking about building a strategic Bitcoin reserve since Bitcoin's development path may require redefining the social contract of dollar hegemony.

Haseeb:

Now we are clearly in an uncertain situation, no one knows how the tariff issue will evolve, causing the market to fluctuate.

Geopolitical Impact of Tariffs

Tom:

Jeff, about two months ago you wrote an article about "Plaza Accord 2.0," mentioning using tariffs to adjust the dollar exchange rate and lower interest rates. We are experiencing a different version of this situation. Obviously, this situation existed ten years ago, is the current development as you expected? What surprised you? How do you think we deviated from this path?

Jeff:

Since I shared my views on the long-term impact of tariffs on the Bitcoin price, I have become less certain about Trump's ultimate goal.

In an ideal world, developing a strategy similar to the Plaza Accord or Core Accord 2.0 would be reasonable. That is, the dollar does need to depreciate to enhance America's competitiveness, but you would want foreign creditors to continue buying U.S. Treasury bonds, which requires some form of agreement to achieve this goal. This must be achieved through strategy rather than undisputed consensus. This is the ideal scenario.

The moment that made me lose confidence was when Trump began blindly attacking almost everyone, including allies who I thought should be untouchable—such as Japan. If there is a country that needs special treatment, it is Japan, as they are currently the largest holder of U.S. Treasury bonds. You need to be sensitive to this. However, Trump not only did not show this sensitivity but instead lumped Japan together with China, calling them currency manipulators. This shocked me because Japan's currency manipulation is usually for America's benefit. Therefore, this lack of careful handling of allies made me realize that the ultimate goal may be a greater degree of protectionism, which I did not think would happen.

Robert:

I gradually formed a theory: This is not just about protectionism but creating conditions for the transformation of protectionism. Now many companies are considering, perhaps we should reshore some production activities because of the uncertainty, we want to be closer to the market. Many people are actually pulling demand forward. I know many are trying to cope with tariffs by buying cars, furniture, and durable goods. I think the government does want to see a return of manufacturing jobs. There's a lot of discussion and joking about this because we might not be making sweaters, socks, and Nike shoes here.

I don't think anyone realistically expects us to bring back low-end manufacturing to the U.S. I think if anything, it would be focused on very specific industries, such as strategic industries like semiconductors and chips.

Haseeb:

But we didn't impose tariffs on semiconductors. It seems like the only part of this policy that might make sense geopolitically has been excluded from the tariffs.

Robert:

We can't afford to disrupt the system to that extent. Can you imagine if we placed tariffs on them? But I do believe there's one aspect that hasn't been discussed enough, and that is I think this is not just about the trade itself from a geopolitical standpoint. In fact, it's an attempt to shift the focus of manufacturing away from China to countries closer aligned with us.

Haseeb:

We've been pushing people to build factories in Vietnam, Malaysia, and Mexico, and then we hit them with higher tariffs than China.

Robert:

But we'll strike deals with them and find an amicable solution with these countries. We might not strike such a deal with China; the rhetoric and the escalation with China are on a different level. So, I think the end state could be substantial tariffs on China while not on our allies. If you're a company based in China, your first thought is I need to relocate to Vietnam or Japan or some country more closely related to the U.S.

Jeff:

I agree with your perspective, Robert. This is somewhat the path we as Americans have to envision because it's the most effective and ideal outcome. However, we also can't assume the path to achieving this outcome doesn't come with negative repercussions.

For example, I think the White House conveyed yesterday that Japan will have a priority lane as a way to engage in tariff negotiations. I believe part of the reason is to give Japan some compensation because the U.S. has somewhat offended them to provide them with a strategic advantage as an ally. So, they're playing these games. But in reality, in the past week and a half, just as Japan was getting frustrated and the U.S. hadn't given them the priority lane, China actually announced that they were exploring a trilateral trade relationship with South Korea and Japan. This public declaration of intent indicates that some back-channel talks have already occurred in a way that China would benefit from it, as China wouldn't readily make such a statement.

These three countries in Asia are less likely to cooperate because they're not friendly with each other. So, you can't be sure if there's some sort of quid pro quo arrangement in America's action path that might eventually have a negative impact on America's power vacuum—which is my biggest concern, worrying that these things might come with collateral damage as we live in a multilateral world, and we should be cautious about it.

Haseeb:

I believe these tariff policies are very misguided and lack a coherent strategy. While we have exempted semiconductors, which are considered among the most critical products in terms of military and geopolitical importance, our tariffs on many allies are higher than those on openly hostile nations. Russia and Belarus are the only countries excluded from the tariff list, which clearly gives us an opportunity to engage in free trade with them. Meanwhile, China has taken advantage of this situation by becoming a very stable partner, gradually committing to free trade and increasingly becoming a stable trading partner for more and more countries.

The Global Monetary System and the Role of Bitcoin

Haseeb:

I think Trump focuses more on power play in negotiations and political decisions rather than alliances and diplomacy. Sometimes, this strategy is tactical. However, during peacetime, when the economy is strong, unemployment is at historic lows, and we are on the cusp of the AI and cryptocurrency tech revolution, stirring up disputes suddenly, turning everyone into enemies, is not a good move.

Jeff:

I am concerned that if the world begins to reassess the role of the US dollar and the US-led global financial system, various alternative scenarios may emerge. One of the scenarios we can discuss is the "Impossible Trinity" theory, whose core idea is that after the Bretton Woods system, we face an impossible trinity where you can only choose two of open capital flows, independent central banks, and floating exchange rates to construct a monetary system. If you give up one, the other two must adjust.

For example, the US has chosen open capital flows and an independent Fed, so it needs to let the dollar float freely. China has adopted a different strategy; they do not have open capital flows and manage the exchange rate by the PBOC, so they can maintain a fixed exchange rate. The Eurozone has chosen open capital flows and floating exchange rates but no independent central bank, with each country's policies aggregated into a larger Eurozone. Therefore, there are multiple design options for the global monetary system, and now people are starting to question if there is a more effective system than the free-floating model advocated by the US.

Bitcoin's Performance in Different Economic Environments

Haseeb:

There is a high possibility of an economic recession, and if we enter a stagflation state, where there is both economic recession and high inflation simultaneously, possibly due to the impact of tariffs. How do you think Bitcoin would perform in such a scenario?

Jeff:

I expect Bitcoin's target price to reach $200,000 by the end of the year, and I still believe there is a high chance of achieving this target. Even in a stagflation scenario, Bitcoin can still be the fastest-growing asset and perform well.

Haseeb:

So you think Bitcoin will win in the speculative market. If it's not stagflation but instead the Fed significantly cuts interest rates and implements quantitative easing, the economy will regain vitality, but inflation will remain high. How do you think Bitcoin would perform in that scenario?

Jeff:

I think it would perform even better. The trajectory of these things could change significantly, and it's really just a reflection of time. As a liquid asset, no one knows where these things will ultimately go; it's a commodity.

I am an extremely path-dependent option pricer, so I evaluate the entire implied volatility surface, which requires us to recalibrate.

Haseeb:

Assuming the tariffs are withdrawn, the courts overturn them, and Congress lacks the courage to reimpose them. So, the whole tariff strategy ends like that. Do you think in that environment, Bitcoin would be higher or lower, compared to the tariffs remaining unchanged, entering a stagflation world, and Fed expansion?

Jeff:

I think that would still be a good outcome, favorable to Bitcoin, and perhaps eventually reaching $175,000.

Haseeb:

So, if withdrawing the tariffs would be worse, and if tariffs remain unchanged and the Fed expands, it would be better, what are your thoughts?

Robert:

I think that scenario is almost impossible. If we reverse the tariffs, the actual impact is minimal, just like going back two weeks, the only real change is the trust between the U.S. and different trading partners. I do think this could continue to be a potential issue for the U.S., but it could also be beneficial for alternative economic structures, even good news for Bitcoin. I think people might lose confidence in U.S. Treasury bonds and the dollar.

Haseeb:

Do you think if tariffs remain unchanged and the Fed continues its expansionary policy, would this be more favorable for Bitcoin? Or the opposite?

Robert:

I think tariffs remaining unchanged might be better. Because the market usually only focuses on current changes, not future two-step changes, the market operates based on what is happening now.

Tom:

Even if tariffs were completely rolled back, we would go back to two weeks ago, the dollar is still devaluing, I think this might be more favorable for Bitcoin. I've been thinking about global liquidity and Bitcoin's relationship. Although we have discussed it many times, Bitcoin still seems to be like a risk asset. I hope it could become an alternative to gold, but that has not happened yet. Maybe now is the time, there is always a first time, if you look at the price trend of the past three to four years, you will feel this is a fundamental transformation.

Haseeb:

So, would rolling back tariffs be better? I'm not so sure because unchanged tariffs might bring more pain and instability, which could drive up Bitcoin prices by the end of the year. I see this as a possibility of decoupling of cryptocurrency from the real economy, as the Fed and central banks globally are engaging in real stimulus to try to save their economies from shocks, which will distort asset prices. I believe this is likely to happen to Bitcoin rather than to other tokens.

In that case, there might be a decoupling between Bitcoin and other tokens, and I am uncertain about the outcomes of both scenarios. I think it is very counterintuitive because on any given day, Bitcoin's performance does not meet expectations, nor do other tokens, the correlation is breaking down. Sometimes Bitcoin trades with gold, sometimes with the Nasdaq, and sometimes completely abandons both, following its own path, it is clear that this asset is evolving.

I think by 2025 or 2026, we will be talking about Bitcoin in a very different way, and we will have a different psychological model. I guess by the end of this year, we will have a different understanding of how cryptocurrency performs in a huge macro imbalance.

Jeff:

I agree. Global liquidity as well. I think people will start to understand the leverage in these conversations more granularly. Because, Tom, as you said, one of the issues with global liquidity is that the devaluation of the dollar actually benefits global liquidity. But I'm not sure if the increase in global liquidity brought about by the devaluation of the dollar will drive the valuation of Bitcoin.

Circle's IPO and Its Business Viability

Haseeb:

I want to talk about two stories related to the capital markets, which are relevant to the overall context. The first is the news of Circle's announcement of filing for an IPO. Circle plans to go public with a valuation of $40 billion to $50 billion. Apparently, Circle has been striving to enter the public market, but was previously hindered by Gensler and the former SEC, making it difficult for cryptocurrency companies to go public. Now they have finally received approval, but due to tariff issues, they announced a delay in the IPO. Therefore, Circle withdrew the application. However, discussions about the viability of this company are still ongoing, how the capital markets will perceive it, and whether they will be able to achieve the expected valuation, these questions are still up in the air.

How do you view the prospects of Circle? How do you think it will be treated in the public market? Obviously, all IPOs are currently on pause, and all companies planning to go public are waiting for market stability. But setting that aside, how do you view Circle as a company entering the public market?

Robert:

I believe that their financial data does not fully reflect the growth of USDC in the past few months. USDC has been growing. Since they are a company that earns interest through a stablecoin reserve, there is a certain lag effect. If a business continues to grow over a year, its revenue will not increase significantly immediately, due to averaging effects. Therefore, I think their financial situation is better than it initially appears, although their costs are also high, their current revenue is much higher than a year ago. If the supply of USDC is growing, this will disproportionately benefit them. I think this has been underestimated.

Regarding the discussions on crypto Twitter, I also noticed that Circle is a massive organization compared to Tether. People say that Circle's scale is only a small part of Tether, but its number of employees is 40 times that of Tether. This suggests that they may be able to allocate human resources more efficiently in the future. Executive compensation is also high. All of these indicators suggest that their current operations may not be the most effective, which could be because they achieved returns of over 4% in times of economic prosperity without exerting too much effort. Therefore, there may be a "good times syndrome." But if the economy continues to improve, their business will soar; if the situation worsens, they will have to make some tough decisions.

Haseeb:

One key question about Circle is how the public market will perceive this company? Will they see it as an asset management company or a tech company? This will directly impact the multiple they can command. Robert, how do you think the public market will view Circle when it goes public?

Robert:

I believe it is an asset management company because their earnings per dollar are quite significant, at around 4% or more. They have to share some fees with Coinbase, but their yield is still very high.

They earn significant fees in asset management behind stablecoins. So, no matter what additional features they roll out for developers, those won't really change their revenue. The driving force of their revenue and profits is how much USDC they issue and what the target rate is. That's the entire business.

Jeff:

Indeed, it is an asset management structure, but it may have an inverse asset management multiple. As an asset management company, it may be very profitable in a high-interest-rate environment, as you mentioned, it's a long-term rate, whereas most publicly traded firms like Blackstone benefit in a low-rate environment. Hence, it has a different relationship with the direct creative component of the asset management business, which could have far-reaching implications. I would even say that combining a Bitcoin portfolio with Circle as a hedge could be a useful tool.

But I want to emphasize the revenue split with Coinbase again because the multiple's height depends on having a defensible moat. If the fee Circle charges as a distribution partner is this high, how strong is the defensibility of Circle's business model? This makes me ponder, whether this is really not a tech game but more of a distribution game. If it's a distribution game, then the underwriting approach applied to that multiple will be completely different. We await eagerly.

Haseeb:

Tom, how do you see Circle?

Tom:

I'll be a bit restrained here because I don't want to be seen as a detractor of Circle. I think their people are great, and I really appreciate their contributions to the industry. I just feel that last year I half-jokingly tweeted that Tether could easily acquire Circle with just one quarter's profit. Frankly, as time has passed, this joke seems less and less exaggerated. I think Tether has a better structure in terms of overall company operational costs. They could easily buy out this company. They have no one trying to interfere with them in Washington. And they could easily tear apart agreements with Coinbase or simply shut down products, transition to USDT, and ultimately form a better corporate structure.

When I look at their changes over the past year, their profit margin has been consistently shrinking, and overall profitability has also been declining. I really don't know what their strong prospects are. I think the tech story is cool, but it hasn't really materialized. It looks more like an asset management company.

Haseeb:

I have to admit I haven't closely studied Circle's S1 filing, but I did notice some points. As interest rates start to rise, the overall stablecoin supply decreases. This is understandable because when the interest rate is zero, putting funds on-chain has no opportunity cost, and businesses can profit from it. As interest rates decrease, it should attract more funds into the stablecoin market. So is this countervailing force completely symmetrical? I'm not sure, maybe not. In a situation where stablecoins are more regulated and considered safer than in 2021 and 2022, some changes may occur.

Secondly, apparently, Circle can charge high fees for issuance and redemption. If you hold a stablecoin that people use for payments, then if Circle can gain an advantage in the stablecoin bill and other regulations, find it easier to get licensed, and win favor from regulators, they may have a significant advantage in terms of regulation compared to Tether. So, can they monetize this regulatory advantage? Perhaps, especially as other companies rush to collaborate with stablecoins and integrate them into their domestic operations. So, apart from banking business, holding assets and liabilities, collecting float income, there are many stories to tell. I agree with your view that the current business does indeed look more like this, as interest rates are high. As interest rates decline, they will find other ways to monetize this business. After all, it is currently basically a duopoly market between Circle and Tether. I think you may see the market segmented into different areas, just like you see in DeFi, with USDC dominating the market. While Tether's use dominates in emerging markets.

If things evolve in this way, then every stablecoin issuer can aggressively monetize within their own domain without worrying too much about price competition. Because if you are in DeFi, there are hardly any other choices. If you are in emerging markets, there are hardly any other choices. You must use their tokens, so they can charge more fees upstream and downstream. Take Tron, for example, Tron's fees historically have been very high. If you look at Tron's blockchain fees now, most blockchains' fees are currently very low because it's a downturn period, everyone is focused on macro activities, and the transaction volume is not high, but Tron's fees are high.

Why is Tron's Fee So High? Tron's fee is not due to network congestion, but rather because of validator voting increasing the fee. You can see this as Justin Sun taking advantage of people's necessity to use Tron. Therefore, Tron essentially extracts a significant profit from all payment activities conducted on Tron. This is a great example for me, showcasing the situation when having a monopoly on payment infrastructure. So, can Tether and USDC find a way to create such a fee for themselves? I don't see why they couldn't do that, especially when their core business model in commercial paper is no longer as appealing.

Tom:

I think this is a narrative, and all rent-seeking narratives are part of it. But I think the balance sheet almost tells a different story, which is how much of USDC is held on Coinbase. So, it's not being used as payment infrastructure. Thus, I think it's a nice wish, and I really hope this situation can materialize. I hope to see more duopoly in this market, having more competitors. But in reality, unless their efforts make Tether illegal, I really don't see this becoming a reality.

Jeff:

I think this scenario is almost impossible because the U.S.' strategic interest lies in maintaining the independence of these two entities. The privilege you mentioned actually reflects foreign willingness to hold funds in USD and pay any price for it. Thus, the U.S. can treat foreign fund holders and domestic citizens differently, where this privilege itself is a premium that can be extracted. Therefore, philosophically speaking, even if the U.S. wants to showcase its superiority, it still wants these two entities to remain independent. So, if these two entities were to merge, it would be a terrible outcome as there might be other companies emerging trying to compete with Tether, which would present a bigger challenge to the U.S.

Meaning of Ripple Labs Acquiring Hidden Road

Haseeb:

Today we learned about the largest acquisition in the history of the crypto industry, where Ripple Labs acquired Hidden Road for $1.25 billion. Hidden Road is an institutional product provider that primarily serves institutional clients, likely unknown to most retail investors. As the second-largest major broker in the crypto industry, Hidden Road processes around $3 trillion in transactions annually and has over 300 institutional clients. Typically in acquisition deals, the headline number often is a combination of multiple factors or a complex structure tied to performance making up a large figure. But this deal is undoubtedly significant, strategically for Ripple. Firstly, they can more efficiently leverage their balance sheet as they obviously have a lot of cash on hand; secondly, the acquisition aids in expanding their new stablecoin RLUSD's reach in the market.

This M&A transaction is very intriguing. We were actually investors in Hidden Road, so now we are also investors in Ripple Labs. Congratulations to us, the Hidden Road team has performed remarkably. For the entire industry, this is an interesting moment, especially in the current macroeconomic context where the market is generally unstable, with almost all crypto industry assets falling. It has been a tough year, but stablecoin growth, increasing institutional involvement, and the ETF ecosystem all look very robust. Therefore, I would like everyone to share their thoughts on this significant transaction. Robert, when you saw this transaction news, what was your immediate reaction?

Robert:

I need to disclose that I am the CEO of Superstate, we are a client of Hidden Road. We use their trade execution service, the team is outstanding, and the product is great. When I saw this news, I had a bit of an "aha" moment. There were rumors previously about Falcon X considering acquiring them, and I could also envision them being acquired by Coinbase or another exchange. Hence, seeing Ripple as the acquirer was somewhat surprising. I think it makes sense for Ripple, considering Hidden Road's market share, the price wasn't too high. If this can increase the usage of the XRP Ledger, I believe they can sell this narrative to the public and sell enough XRP to finance the entire transaction. Therefore, this is a smart move for Ripple. I just didn't expect this outcome.

Jeff:

I am also surprised, but not entirely shocked, as the trend of integration between crypto services and traditional financial services is very evident, and providing a multi-asset solution might be a worthwhile pursuit.

What surprises me is that I always viewed Hidden Road as Citadel's "down payment" when considering the crypto market. I thought Citadel would find this to be a business worth undertaking, especially given the regulatory transparency, or they would continue to fund it as an outsourced business but not directly getting involved.

This confirms my view: it is much easier for traditional companies to enter the crypto space offering some ancillary services than the other way around is relatively difficult. I noticed Hidden Road was trying to expand into some non-crypto-related areas. For example, they have crypto short-term trading, but they also aim to provide a full multi-asset solution, wanting to be a fixed income clearing partner or a market maker, things that Citadel can do.

This reminds me of the current situation where companies like Goldman Sachs are trying to provide prime brokerage services to compete with Falcon X. In fact, for crypto companies, entering the traditional finance space is quite challenging, while traditional financial firms entering the crypto space is relatively easier. This transaction may reflect this trend.

Haseeb:

Tom, what are your thoughts?

Tom:

I'm really surprised, considering this is an investment firm, but this is great. As an investor in Ripple Labs, this is truly exciting.

Haseeb:

I think for most of the audience, the average person might not even know what a prime broker is. So for many people, hearing "wow, the largest M&A deal in the crypto industry" is like a complex thing, with only 300 clients using it. So, I think this is to some extent the growth of the crypto industry's financial infrastructure. In a way, Hidden Road is also a response to FTX because more and more institutional traders, especially after the FTX incident, do not want to face counterparty risk. They want a neutral party between them and the trading platform, and that's exactly the core function of a prime broker. So Hidden Road offers many 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 truly is the intersection and integration of traditional finance with the crypto market structure.

For me, the biggest story is that besides Ripple seeing the advantage of leveraging Hidden Road for distribution, Hidden Road still needs to remain neutral and operate independently to continue being a useful prime broker. This is also why Coinbase couldn't truly own a prime broker because Coinbase itself is an exchange and hence not considered neutral. So, I think the biggest thing is that this proves the maturation of the crypto industry. Such real M&A deals, and the success of such a company, are signs of growth in the crypto industry, which is maturing. I think for everything in this space, it's a good signal for the future market.

Now, due to global events and the extent of the market downturn, maintaining a positive attitude is extremely challenging. However, events like this, I believe, serve as positive highlights, indicating forward-looking reasons to be optimistic in this space. I think, for long-term capital, many people see this and are willing to make large investments in this regard. For me, this is an important takeaway: mergers and acquisitions are still happening, which is also a good sign.

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