In this episode of Word on the Block, Editor-in-Chief Angie Lau sits down with Kevin Kelly of Delphi Digital to explore the recent trends in the market has seen for Bitcoin given monetary policy. Kelly recently published a piece, The Perfect Storm for Bitcoin. Is the global macroeconomic environment creating an opportune moment for cryptocurrency? What does this inflection point look like? From the negative-yielding debt to long-term currency devaluation, Kelly explains why institutional investors might want to start paying attention.

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The Perfect Storm for Bitcoin

Full Transcript

Welcome to Word on the Block, the series that takes a deeper dive into the topics we cover right here on Forkast.News. I’m Editor-in-Chief, Angie Lau. Well, the industry is getting more attention from the big boys and girls.

In the second quarter of this year Grayscale, a digital currency investing firm, which manages cryptocurrency investment funds saw an uptick in institutional investors who made up the highest percentage of total demand for its investment products: 84%. So what’s driving the interest?

Joining me on this episode is Kevin Kelly, principal at Delphi Digital. He helps those investors assess the market; his firm provides institutional-grade analysis on digital asset markets to institutional and retail investors alike, AKA you. So we follow up right now on his piece on Forkast.News and the current macro trends driving Bitcoin. Kevin joins us from New York. Kevin, Hello.

Hey, how’s it going? Thanks for having me.

Absolutely. Let’s set the scene right now Kevin. We’ve got trade wars. We’ve got slowing global growth, weak inflation, 14 trillion dollars of negative-yielding debt, you write. We’ve got unprecedented monetary policies and policymakers, the FOMC, divided over US interest rate cuts. How does cryptocurrency provide an alternative for investors?

Yeah, so it’s a pretty crazy backdrop we find ourselves in. If you look back hindsight is always 20/20 and it makes a bit of sense how we got here but nonetheless crypto I think is definitely to play a bigger role. Not only for, the retail investor out there, but also as you mentioned for institutions going forward, and there’s a number of different reasons for that.

So if we’re setting the stage, on the surface things actually don’t look too bad in markets, but there are some warning signals were getting. You’ve got stocks trading near all-time highs. If you look at just about every asset class here, it’s in positive territory one way or another. But if you look farther out, the outlook for a lot of these at these different asset classes whether you’re going stocks, bonds, even some commodities is looking a lot more bleak. You’ve got corporate earnings that were mixed this past quarter. You’ve got companies that are starting to pull back on their capital expenditure plans, which can cut into US growth.

A lot of this is happening on the, to your point, geopolitical uncertainty. On top of that, you’ve got now I think 16 trillion on negative-yielding debt. And so how does this all play into the investing landscape? And I think one of the real reasons why you’re seeing an uptick in the institutional interest is because when you look at that outlook, and there are two ways to approach crypto, one from the technological monetary advanced side. But also if you’re an institution and you’re sitting there and you’re trying to get, five, six, seven, maybe eight percent a year annualized return over the next decade, where are you really going to put your money? Right?

You’re going to continue to get further out on the risk curve, get more into private equity, venture capital because if you look at the outlook for the public publicly traded stock market, that’s probably going to net you somewhere in the three to four percent. You’ve now got negative-yielding debt as we mentioned. So I think a lot of things are playing into the institutional interest but part of it certainly is the fact that Bitcoin didn’t die and didn’t go totally bust after every institution was pretty much calling it a bubble 18 months ago, but at the same time when you look at the opportunity cost of some of these other places to put capital, I think institutions are really starting to wake up that Bitcoin might not be the bad alternative that some of them may have assumed it was.

To your point, we are in an inverted yield curve environment in the US. I mean, this is where you get a higher yield or higher return on the loan to the US Treasury in the short term. Then in the long term, I mean that’s essentially betting that the US can pay now easier than it can pay back in the future. That’s not a good sign here and usually a sign of recession. So how does crypto preserve value in a way that the dollar pegged to the US economy doesn’t?

Yeah. No, it’s a great point. And I think it’s important and interesting to note, too: yes, an inverted yield curve typically has preceded every recent recession, but it doesn’t necessarily imply that a recession is coming. But certainly the bond market is sending warning signs and one of the big themes we have and why we think Bitcoin is going to play a growing role in the institutional investment space is that when you talk about the amount of national debt that the US has, and this example I’ll give you can really apply to a lot of different countries, in Japan and Europe and the such. When you look at the way in which the US is going to be able to get out from underneath that debt burden, all roads pretty much lead to higher inflation and the Federal Reserve basically trying to weaken the dollar with rate cuts and things of that nature.

Our big theme is that this current broad base currency devaluation– weaker reserve currencies is going to play into the bullish narrative for not only Bitcoin, but also something like gold. I think long term there’s a number of reasons why we think Bitcoin is a more attractive alternative and really can serve that that digital gold role in a more digital world, but I think in the short to medium term a lot of the same drivers of gold are going to be what drive, potentially the bullish narrative, for Bitcoin.

Calling it a safe haven today is pretty difficult, or even a store of value because again, it’s still very volatile. But at the same time, it’s still a speculative asset. We’re still trying to figure out exactly how we can use Bitcoin and Bitcoin really hasn’t been challenged too much. There have been pockets over this last 10 years where the global macro backdrop got a bit mixed, but at the same time, there hasn’t really been this recession, this stock market crash so to speak for Bitcoin to really be tested so I certainly think it’s coming up to an inflection point.

When that inflection point is, it could be tomorrow, it could be 12 months from now, but I definitely think that again, people are waking up to the fact that if you have a relatively scarce, non-sovereign asset that’s not going to be nearly as influenced by… Whether it’s trade wars or some of the economic policies that are going on, or economic downturns that are potentially around the corner, I think that’s when people are really going to wake up to the value proposition of something like Bitcoin.

You’re sitting there in Wall Street. You’re talking to your investors. And what is the market saying to you? 

So what’s really interesting now, and we’ve been hammering on this point for a while now and it was actually one of the key themes when we came out with one of our keynote reports called the State of Bitcoin back in December. We’ve been hitting on this macro backdrop that I’ve been setting up for a bit: I think not only has the crypto space really adopted that and started to run with it. Right now if you just go on crypto Twitter, you can see people talking about Fed funds rate, futures expectations, and a bunch of things that they weren’t really talking about or weren’t necessarily relevant to the conversation six months ago.

Not only is it happening the crypto space but again, tying this back to institutions, we’ve had conversations just from our prior lives. I was a US Equity strategist so we obviously know a good amount of people on the traditional finance and investing side of things and a lot of people are starting to… Again, global macro strategies. Waking up to what the potential value proposition of crypto and really Bitcoin at the moment can serve and I think there are a lot of people that are very very well respected in that investing space that are starting to take the handle on being the go-to crypto person and they’re seeing a lot of adoption.

So as you get to see more people that you respect buy into the crypto narrative and the Bitcoin narrative, you’re starting to see a bit of a spiral here, I guess you could say. We’re starting to see more traditional finance and investors come into this space and not only try to understand what Bitcoin is, but again, even if it’s just a pure hedging instrument, how can they actually use that in a multi-asset portfolio construct?

And look, that’s the thing, isn’t it? Because it’s still got to be tying to traditional fiat markets. Otherwise how you’re going to unleash that value? And that in and of itself creates stress point, doesn’t it?

Yeah, certainly. And tying it back to this broad-based long-term currency devaluation narrative that we’ve got, again if you use gold, it’s a similar comparison where oftentimes you can either quote gold in a number of different currencies. It’s heavily traded; it’s one of the most liquid markets on the planet and it’s also usually denominated in dollars which is fiat. But at the same time, you can look at gold and say gold is appreciating against other assets or appreciating against other currencies similar to how you would quote the euro against the dollar.

So again this broad base currency devaluation is sometimes a little tough to grasp because currencies are all quoted against each other, right? So it could look like the dollar is actually doing decently well or holding up or is pretty strong compared to the euro or specifically the pound with everything going on in the UK with Brexit. But we think it’s going to be this long-term devaluation against hard assets, especially ones that are relatively scarce like gold and like Bitcoin. So I think when you’re when you’re quoting your portfolio returns in fiat, and we’ll use dollars as the example, I think that helps bolster the long-term investment value proposition or use case for Bitcoin because in dollar terms, similar to gold, you would expect Bitcoin to rise in that type of scenario.

Yeah, I mean gold, that’s a great example of a commodity that really preserves value only because people’s perception of it, but you actually have to use fiat to engage in the real world. And one could argue that in cryptocurrency land, and it’s there, but there really isn’t a broad adoption where you could buy things, you could exchange goods and services with it directly in a day-to-day way, and that in of itself actually does undermine the actual value of cryptocurrency in that there is no corresponding infrastructure to really be relevant to people’s daily lives that they could see value in it.

Yeah, I totally agree. But I also think, to that point… I’m sure everybody who comes on talks about how we’re in the earliest innings right of crypto in this whole digitally native money medium exchange narrative. To be honest, our longer-term view… if you take a step back, if Bitcoin can actually do what we all think it’s capable and has a decent shot at doing, it has to accrue a ton of value, right? It has to be in the trillions of dollars of value to become this more stable, less volatile, real true medium of exchange, right? So the real opportunity and again, this is where we talk to investors and this is the pitch: a lot of the returns are going to be in this stage where Bitcoin essentially still trades as a speculative asset, oftentimes maybe even as a bit of a growth asset as investors can’t really find that growth elsewhere.

But at the same time, a lot of that return profile is going to be the build-up or the value that it accrues to become that we’ll call it a global medium of exchange, right? We certainly don’t sit in the camp where we think that fiat’s all doomed and you’re going to have Bitcoin as the universal currency, the one that rules them. I think we’ve talked about that before. But at the same time, it’s not like you’re going into Starbucks and breaking off a gold bar and handing it to…

The medium of exchange argument is certainly being built, but I think the real value proposition or investment use case right now at this stage is the next 5-10 years as it builds up that asset base to become that medium of exchange. That’s the option on digital gold that presents itself.

And that is the long tail of the game, as you said it is a scarce non-sovereign asset when we talk about crypto but look, central banks are getting in on the act. We are anticipating a cryptocurrency asset, or more likely, a scenario where we see a central bank-backed digital currency from China with word that the PBOC speeding up its schedule to launch something this year. Does this change the scenario?

I don’t necessarily think so because… And I think this gets lumped into the Libra argument as well, right, in terms of a threat to the dollar as a global reserve currency. I think that just the natural progression, even if you didn’t necessarily have Bitcoin come along, I mean that certainly is accelerated this process, but I think the move towards digitally native assets and digitally native currencies is just one that was going to happen eventually which is the advancement of technology. And just making it a lot easier. I personally don’t carry a ton of cash on me; if I’m going out with friends, I can use things like Venmo. I can even pay people in Bitcoin for whoever accepts it. And that type of move towards a digitally… We’re all digitally native at this point, certainly think that central bank digital currency is just the next iteration of that.

The thing that’s interesting too is when you start thinking about… We’re talking about monetary policy and the different ways in which these central banks are trying to essentially stimulate the economy. When you think about it, people have tossed around the idea of helicopter money for a while now, right? Where you’re literally depositing money into people’s bank accounts because one of the big arguments against quantitative easing and basically monetary policy, this cycle… And it’s widened the income inequality gap, is that it really flowed to asset prices, right? A lot of that money still got trapped in the financial system.

And so if you weren’t part of this massive bull run in risk assets, a lot of people aren’t that much better off than they were 10 or even 20 years ago. And so I think what would be really interesting with central bank digital currency is… And again, there’s always going to be pros and cons, right? You could have the opportunity for central banks and governments to have more surveillance or information about their citizens and their users of currency, or at the same time you could have some really creative ways to try and stimulate the economy where for example you drop in a thousand dollars into everyone’s digital wallet or bank account and it has to be used within a certain period of time to kick start the economy or it goes away. So you literally could almost force people to use a digital currency that’s fiat-based.

Now at the same time, it still plays into that long-term narrative of helicopter money; whatever mechanism that it would come in, or these other more unconventional monetary policies, it still would devalue, longer-term, the fiat currency base which gives rise to the value proposition for something like gold or Bitcoin. But I think the digital currency narrative sometimes can get a little bit overblown when you compare it to something like Bitcoin because I think they’re playing very different games.

Well, either way this narrative is very interesting. Can you imagine this conversation 10 years ago at the height of the global financial crisis? I think as this discussion really underscores, it is really the continuation of the aftermath of the GFC since 2008 and no doubt the emergence of crypto as an alternative asset class. And certainly us being in this space talking about it is part of that story that continues and we’re covering it. And thank you Kevin for helping us cover this story and today’s deeper dive into the macroeconomic environment driving more to adoption. Thanks a lot.

Absolutely. My pleasure.

And thank you everyone for joining us on this latest episode of Word on the Block. I’m Forkast.News Editor-in-Chief, Angie Lau. Until next time.