Hashdex Director of Marketing Chris Glendening recently sat down with Chief Technology and Product Officer Samir Kerbage for a discussion on the current state of the crypto markets. Samir covered the three “waves” driving current events, his thoughts on stablecoins, and shared advice for crypto investors given the current market conditions.
Chris: Market volatility has clearly made its way into crypto assets and events like the Terra (LUNA) collapse and the liquidation of crypto hedge fund Three Arrows Capital are making some investors nervous. What are your thoughts on the short- to medium-term outlook for the asset class?
Samir: What we're seeing in the digital assets markets right now is a conjunction of three major waves.
The first wave is the macro landscape. The combination of high inflation, tightening global monetary policies, and geopolitical tensions are causing a major risk-off movement across the board, including bonds, equities, and crypto. New technologies (e.g., tech stocks and crypto assets) are particularly affected due to their long-term nature. As interest rates rise, the discount factor of future value (or cash flow) also increases. The Nasdaq Crypto Index is down 64% year to date, but some tech stocks are also taking huge losses, like Netflix (-70%), Paypal (-62%), and Meta (-50%). This can be seen as a long-term wave, since the current macro crisis is far from being solved.
The second big wave is the cyclic nature of new technologies, which has more of a medium-term impact. Just like personal computers or the internet, crypto is a new technology that advances in cycles of hypes and then consolidation. The last big cycle was between 2014 and 2018, when bitcoin prices went from ~$200 to ~$20,000 and then "crashed" to ~$3,000. During the current cycle (2018-2022) we saw prices going from ~$3,000 to ~$65,000 and now it's again "crashing" to ~$20,000. Meanwhile, technology is still advancing and institutional/mainstream adoption is only growing. In the last cycle the main question was "is this the end of Bitcoin and Crypto?" Today, the main question is "is this the bottom?" We believe this is evidence that crypto is here to stay. Our opinion is that the cycle will repeat and crypto will surpass its previous all time high significantly within the next five years.
The third wave is short term—the liquidity crisis for some crypto companies. This includes proprietary trading firms (like 3AC) and lending agents (Celsius, BlockFi, Babel, and Voyager). It is a consequence of high leverage and a lack of proper counterparty risk mitigation across those private actors. These approaches worked well during the bull market but, as Warren Buffett might say, the tide is now going out we're seeing who’s been swimming naked. This wave has little to no long-term effect on crypto fundamentals, but can add a lot of volatility to short-term prices.
The conjunction of these three waves are creating a perfect storm in the short term, so we expect a lot of volatility in the next few days/weeks. However, fundamentals are only getting stronger, so I'm still optimistic about medium- and long-term growth.
Chris: What will ultimately stop the crypto market's current fall?
Samir: Resolution to the three waves I mentioned will be important to stabilizing prices over time. To that end, we are keeping our eye on three key factors: the Fed ‘s actions with regard to the direction of looser monetary policy; the maturation of crypto technologies, such as the institutional adoption of Bitcoin, Ethereum’s transition to Proof-of-Stake, and the evolution and regulation of stablecoin networks; and how the liquidity crisis and deleveraging unfolds across the industry.
Chris: You mentioned stablecoins is something you are watching. A lot has been made of the failure of stablecoins and algorithmic stablecoins during the current downturn. Can you describe what’s occurring and what has been learned?
Samir: Stablecoins are some of the most interesting use cases for smart contract technology. These are a new form of payment networks that allow 24-hour cross-border settlement and are way more efficient than traditional payment networks. But the Achilles heel with stablecoins is how they maintain (or peg) their value to the fiat currency. The most consolidated type of stablecoins are the ones collateralized by fiat currency deposits (like USDC and USDT), but they have centralization risk and the lack of regulation makes it very hard to keep standardized checks and balances to prevent bank runs and liquidity problems.
There are also stablecoins that are collateralized by crypto deposits, such as DAI from MakerDAO. These are decentralized protocols that are more transparent but can be less robust and harder to scale. The most experimental ones are the uncollateralized ones like algorithmic stablecoins—such as Luna's UST and Tron's USDD. These are still very risky and subject to design flaws, bugs, and death spirals. This is what we saw in May with the collapse of LUNA/UST.
Chris: What is your advice for investors in stablecoins?
Samir: When Hashdex co-created the Nasdaq Crypto Index, we built a methodology that we believe is suitable for long-term investors in this space. In addition to liquidity thresholds and other screens, the NCI can only include crypto assets that have a market-based price—in other words, no stablecoins. This strict methodology helps us avoid situations like we saw with Terra/LUNA, while also giving investors confidence that if they invest in an NCI product, they are only investing in the most promising and mature crypto assets.
Investors and users of stablecoins should be more aware of the risk factors and the experimental nature of some stablecoins. They should also remember that there's no free lunch. UST has grown exponentially because its money market (Anchor Protocol) offered a 20% yield on deposits. Many investors were naive to believe that such a high guaranteed reward would come without significant risks.
If we want to see mainstream use of stablecoins—which could be very beneficial for society and for crypto adoption—we need investor-focused regulation that provide protection for users and accountability for issuers. Requirements like liquidity risk management, full collateralization, segregation of assets, public audits, and regulatory oversight will help alleviate concerns about the technology and help this use case reach its full potential.
Chris: Finally, what would be your advice for investors looking to invest in crypto assets during this market turmoil?
Samir: Down markets can provide excellent opportunities for investors to enter this space. We continue to believe that crypto assets make a unique component for portfolios and that the industry has a very promising long-term outlook. As use cases continue to scale, whether for cryptocurrencies like bitcoin or crypto segments like DeFi and NFTs, this outlook will only grow stronger.
Investors should enter crypto with a long-term mindset, in our opinion, and be less concerned about short-term price movements.
Patient investors with extended horizons will benefit as crypto assets help bring new solutions to old problems throughout the global economy. These are assets that are well-positioned to benefit from the digitalization and decentralization trends we see leading us into the future. Having broad exposure to this asset class can provide the opportunity to benefit from these trends over time.
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