An interview with AAX Head of Strategy and Research
2020 was an exceptional year for Bitcoin. After facing a tumultuous time during the end of the 1st quarter, the largest digital asset performed admirably to end its year on a new all-time high. The asset has continued its rapid growth into 2021 as well, currently valued at just under $38,000. With institutions becoming increasingly involved with the digital asset, Bitcoin is presently undergoing a price discovery similar to 2017. The only difference is that BTC is in a much better position in 2021 in terms of interest, on-chain fundamentals, and market sentiment.
With respect to Bitcoin’s future in 2021, Ben Caselin, Head of Research and Strategy at cryptocurrency exchange AAX, recently presented a research paper titled ‘Bitcoin in 2021’. It is a comprehensive paper categorized into three different sections describing Bitcoin from a perspective of an asset class, investable standpoint and future horizon. Structurally, it is a well-drafted research paper that is palatable to someone who is new to Bitcoin, but also to investors who are seeking to further understand the asset from a valuation perspective.
CryptoCoiney recently sat down with Mr. Caselin and discussed various topics from his research paper. We explored various insights with respect to Bitcoin and its future in the larger financial landscape.
Good evening Ben! Thank you for your time for this interview. How are you?
Ben- Hello! I am good, nice to meet you. How are you doing?
I am doing good! Alright, let’s start off with one of the facts from your paper. Bitcoin’s first decade of emergence resulted in 9,000,000% ROIs in 10 years but it was widely led by high risk, skepticism, and FUD. What will be the major factors running Bitcoin’s growing valuation for the decade forward?
Ben- Yes, during the first 10-years of Bitcoin, there was a long period of stagnancy with Bitcoin. People knew about cryptocurrency but they were not paying too much attention. However, over the past 3-4 years, after the bull run in 2017, Bitcoin was pushed into this limelight when major publications and financial outlets were covering its price actions. Market analysts were trying to identify its intrinsic value and hence, there was a lot of criticism and FUD as you said. Now, 2020 changed public perception, and Bitcoin has finally completed its decade of emergence in its own right.
In terms of what is ahead, it is fair to state that we might be heading towards a decade of adoption. We have already witnessed Bitcoin being part of important discussions.
If we see Bitcoin being mentioned more and being understood in relation to monetary policies, when we see great political instability, if we see Bitcoin being part of that conversation, then those are signs of adoption. So in this decade of adoption, we should also see regulators open up more to Bitcoin, but we definitely should not be surprised if we also see clashes as well. The decade of adoption is not some smooth, beautiful process. Certain regulations would make it very difficult for exchanges to operate effectively. So, as a part of the Bitcoin community, we will have to deal with these challenges to stake a presence in global finance. Then, as Bitcoin gains force and more institutional investors integrate the asset into their strategies and outlook, then there’s no reason to believe that we can’t find a proper balance.
Well said. Alright, speaking about balance, there is a constant discussion in some Bitcoin communities that BTC should overhaul Fiat U.S dollar as the main mode of currency. While Bitcoin has performed admirably well whenever there has been some socio-economic turmoil, the fall of the US dollar might not happen anytime soon, how do you see Fiat and Bitcoin co-exist together in the future?
Ben- So, you know, this is a very interesting question. I think one way to look at it, is from a generational perspective. If you ask, let’s say someone who is a teenager, they might be very open to this idea and they don’t necessarily think of the wider impact and consequences. However, a veteran economist may find it ridiculous. Now, although maximalists might wish to see Bitcoin overtake the U.S dollar or Fiat, it doesn’t seem to be very realistic at this point in time. There are so many interests tied into the U.S dollar. Hence, if anything, we may see fiat being converted to central bank digital currencies, right? Like, there’s no reason that we cannot move into a kind of digital form of fiat. But central bank digital currencies are a fiat currency.
Bitcoin is more censorship-resistant, decentralized and then there are utility tokens and security tokens. So these, these are very different. Just because they share a similar technological architecture doesn’t mean that they’re the same. And so yes, they can coexist. I think the coming years is more about rebalancing. I think the whole world is rebalancing at the moment. The world is one giant portfolio and it’s re-balancing money, political power, everything. So, I think it’s really interesting to see that Bitcoin was part of the historical transformations we’ve seen in 2020.
Bitcoin’s volatility has been one of the most talked-about characteristics in recent years. In 2020, while the asset underwent strong uncertainty, it maintained lower volatility levels than some of the major stocks. From a purely market perspective, is volatility still important to describe the crux of Bitcoin?
Ben- When we talk about Bitcoin volatility, there are different opinions. Some love it and others like to criticize it. First of all, volatility was not intended to be part of Bitcoin’s identity, but over the past 10 years, or at least five or six years, it’s definitely become part of Bitcoin’s ethos. But at the same time, I think everybody understands that as an asset matures, such high volatility is not realistic. Let’s say if 2% of global wealth was locked in Bitcoin, it would not be possible to think of 30% price swings that would kind of upset everybody. So it’s very logical that over time, some of that volatility should decrease. From a payments perspective, that’s of course great. However, from a store of value perspective people say, it’s so volatile, you cannot store your, well, it depends on how long you want to store it for.
If you want to store it for five years, maybe volatility is really great, giving you plenty of buy-in opportunities. If you want a store your wealth for five minutes, maybe it’s really awful. I think Bitcoin is a great trainer of the mind and people that deal with Bitcoin, there’s a certain effect that it has on you as a person and how you deal with the volatility of life. Now things are changing. Others have come into the market, the institutions have come into the market and some don’t like that, then some do like that, but it’s a reality and it will impact volatility one way or another.
One major comparison following Bitcoin’s rise over the past few years is its similarities with Gold. While traditional economists and market analysts continue to trust Gold as a true inflation hedge, in terms of ROIs, Bitcoin has completely blown Gold out of the water in recent months. How would you define Bitcoin being a better inflation hedge against Gold?
Ben- So, there are two answers for this. One is actually more profound than the other one and lets me start with the other one. The other one is kind of technical and common. It goes that gold as a hedge against inflation and it has been around for thousands of years and it’s scarce. And then people will say Bitcoin is also scarce and it’s easier to keep track of and transact. All of that is fine.
The point is, and this is, I think the more important answer, if we agree that Bitcoin is just a very awesome technology that can offer the same type of scarcity as gold. So let’s just agree on that because it’s not that complex. The reality is it depends on what we agree on because yes, we can say gold is a great hedge. And the reason why it’s a great hedge is not because it’s yellow. It’s not because it’s hard and because you can melt it. And not even because it’s scarce, it’s just because over time, this has become the habit.
Now are in the process of agreeing that Bitcoin is a wonderful store of value and now gold is going to have to share the market. It’s simple, but also profound because it’s quite a big shift. Newer generations prefer Bitcoin now. Gold may carry the weight of history and tradition, but Bitcoin offers a vision for the future.
Liquidity is a key aspect of Bitcoin but according to recent data, it was revealed that 78% of Bitcoin in the current market is illiquid. Does that affect Bitcoin’s long-term affinity as an investable asset?
Ben- Now, it is important to note that the 78% coverage is only counting the coins that are currently in circulation. We know that a whole lot of Bitcoins are already lost and we should stop saying that there are 21 million Bitcoins. The 78% figure is an indication that people have some trust and confidence in the coin and that they want to hold it for the long-term. Investors are taking the asset off-exchange but again it is only a metric. It is a helpful metric to look at but there is nothing more to that and it does not affect Bitcoin’s long-term credentials as an investable asset.
Tomorrow, illiquidity may drop down to 72%, or 64%, or 10%, so these are just numbers, metrics. Additionally, Chainalysis, reported that much of the liquidity now that we see in the market is actually provided by long-term holders that have been holding on to Bitcoin for a long time and are now just selling some of it on the market because you know, why not? And so, that means that it’s also new investors coming into the market. It’s is a continuous cycle.
Grayscale has been a massive accumulator of Bitcoin in 2020. It is leading the institutional interest in Bitcoin and there is concern that Grayscale may become a concentrated hodler in the future. What are the advantages and disadvantages of Grayscale accumulating BTC at such a rate? Is there a possible indirect monopoly in the future?
Ben- Well, when I look at Grayscale, there are a bunch of advantages and disadvantages but the disadvantage is a conditional situation. Let’s make it extreme. Let’s say Grayscale ends up buying all Bitcoin in circulation. Now what? Nobody sells, nobody buys, it’s just sitting there in that big wallet and Bitcoin’s valuation kind of attains a paralyzed state. It makes no sense. So, it’s all on a spectrum. If a point comes where Grayscale accumulates too much Bitcoin, then demand for Bitcoin would also go down and prospective clients would be less interested to join them. Therefore, Grayscale would eventually need to limit their positions. It is just basic market dynamics.
From an advantage point of view, Grayscale is a great advocate for Bitcoin. They are bringing a lot of attention to Bitcoin and with that, legitimacy is also increasing. Grayscale is a brilliant voice for the institutional investors in Bitcoin and I would not be worried about any form of monopoly over Bitcoin in the future.
Alright! Now coming to the last question Ben. Predicting the price direction of Bitcoin is always extremely difficult. The paper suggested that maintaining current momentum would lead Bitcoin to breach $55,000 by end of Q1. Now, we have witnessed some corrections over the past few days, so without putting you on the spot, what kind of price range are you looking for Bitcoin by March 2021?
Ben- Haha, yes. It is very difficult to estimate Bitcoin’s price in the short-term and as you just said, it registered a massive crash recently. We are currently looking at a parabolic rise and we do not know if it is sustainable. So, Bitcoin’s price may depend on different sociological and economic factors. We should not see Bitcoin in seasonal terms like altcoin seasons and crypto winters, although they sound nice, and we should understand instead its position with respect to the state of the world and global markets.
Now, coming to predictions, our paper mentioned a moderate target of $55,000 by March 2021 and I feel it still holds. If support at $36,000 is held, Bitcoin may continue to build on its momentum but again, we continuously need to account for different factors. Over the long-term, we’re very bullish on Bitcoin, but Bitcoin is no stranger to 25% drops, and when we’re at $40,000 price levels, those spikes can be intimidating. Let’s see how everything pans out in 2021. Lots of things to worry about, but I don’t think Bitcoin is one of them.
For more information on the AAX exchange, please visit their official website.