Key Highlights

  • As a non-sovereign, decentralized, and digitally native asset, Bitcoin has a strong value proposition to hedge against any risk of a major currency devaluation
  • Cryptocurrency is censorship-resistant; it’s accessible to everyone, and anyone can acquire it, making it powerful for long-term wealth storage for both companies and individual
  • Quantitative easing and the Federal Reserve’s bond buybacks could be beneficial for Bitcoin in the near-term

Kevin Kelly, Co-Founder of Delphi Digital, sits down with Angie Las to discuss what investors should be on the look out for the upcoming quarter. 

In his view, Bitcoin’s key distinguishing factor is that it functions more as a monetary phenomenon rather than a digital one. Given the massive debt problems major economies are facing, as well as slowing economic growth, Bitcoin can pose a strong alternative to fiat currencies due to its decentralized and unregulated nature.

Despite the advantages, Kelly explains how there is still not a “major flux” in institutional investors shifting to the crypto market. When looking at currency investment in terms of pension funds, it would be hard to generate the same returns through crypto as you would with fiat currencies. Given that Bitcoin is new on the financial stage, investors also see the currency as a risk. With that said, stagnating economic growth could give Bitcoin a “boost” that it needs. With the fear of another recession, many experienced investors are starting to make more of an effort to move into the space.

Finally, Kelly offers a few tips for investors who may be interested in moving into the crypto asset market. He suggests first looking at and reevaluating your portfolio before moving forward. Second, start off small and make a small allocation to the Bitcoin space rather than betting your entire portfolio, and third simply using Bitcoin, whether it be through crypto mobile wallets or paying for different products and services with Bitcoin. 

Full Transcript

Welcome to Word on the Block, the series that takes a deeper dive in to the topics we cover on Forkast.News. I’m Editor-in-Chief, Angie Lau. We are looking at cryptocurrencies right now as a digital asset. For investors with cryptocurrencies as an alternative asset class in their portfolio or those that may be thinking about it, what are the macro fundamentals that are driving the market? We welcome Kevin Kelly, Co-Founder at Delphi Digital, which provides institutional-grade analysis on digital asset markets. He joins us live from New York.

Kevin, you just released your macro outlook for the quarter, and thanks by the way, for the exclusive write-up on Forkast.News sharing some of your insights. So, what should investors be aware of right now when it comes to cryptocurrency sentiment in the market? 0:07

Thank you for having me. I think one of the big things that we’re trying to focus on with our work is to differentiate between cryptocurrencies instead of painting with this wide brush. And try and differentiate between the Bitcoins of the world versus some of these alternative crypto assets, and what they’re trying to do, and what the different factors are that are kind of driving the price of those. 

This market is still very small, so a lot of these assets trade pretty much in line with one another. The inter-market correlations are really high. And we think a big reason is because there is just kind of a general misunderstanding of the differentiating factors between some of these crypto assets versus something like Bitcoin. Which, the way we think about it is, it’s almost more of a monetary phenomena than it is a technological one.

So basically, you regard Bitcoin as the monetary alternative to what we are seeing in more of the fiat markets — the traditional markets – and what you’re saying is that your thesis is that Bitcoin actually should be regarded as a different asset class to other cryptocurrencies that are either tokenized or more technology-based? 1:47

Yeah, exactly. So when we think about … we’ll focus on Bitcoin for now. When you think about Bitcoin and what it’s trying to do — if you put it in this kind of global macro landscape the fiat currency market right now is extremely vulnerable. We’ve got massive debt problems, not only in some of the emerging economies that are growing quickly, but also in some of the more advanced ones, or the world’s largest economies like the US. And so what that means is you have massive debt loads, and the government continues to print and issue money. You have at the same time this kind of slowing economic growth. What that means is, the risk of major currency devaluation is something that we think makes Bitcoin a really, really strong value proposition, longer term, because it is this non-sovereign, digitally native asset that is decentralized. We love to talk about it. It’s not controlled by any single one person, and it’s not subject to monetary policy similar to the US dollar.

You use the term in your research “censorship-resistant.” I think that that’s a really intriguing concept for Bitcoin, especially if you take a look at the backdrop of the 2008 global financial crisis and what it birthed, for essentially all of us when it comes to Bitcoin. 3:25

Absolutely. That’s a really key factor to this kind of long-term store argument that we make. Because again, we are of the opinion that Bitcoin won’t necessarily become this one universal currency — and all of fiat is doomed and will go to zero. I mean, there’s long histories of fiat currencies working again for a while until they don’t.

But that being said, in the next decade or so, I don’t think that the US dollar is really going to go anywhere. We do think that Bitcoin is really going to be — the argument is very strong for it — because of some of the qualities that it has over something like gold, which is commonly held by investors to kind of hedge against not only inflation, but also currency devaluation. 

The censorship-resistant aspect of Bitcoin means that it’s accessible to anybody, and anybody can acquire Bitcoin. Oftentimes, it’s easier to do than acquiring something like gold. You actually own the Bitcoin itself. So, if you’re investing in a gold ETF, for example, you’re exposed to that underlying asset, but you don’t actually hold physical gold bars. So the censorship-resistant aspect, the fact that nobody can really block you from using Bitcoin, from storing it, from having it, is something that we certainly think is a very strong value proposition. Not only for companies or long-term being alternative digital reserve currency, but also for individuals. 

If you look at the size of money that is stored offshore or in offshore bank accounts, again, not all of that is just malicious money — held to evade taxes or things of that nature. A lot of it is just how generations have stored wealth for a long time. And when you think about it from that perspective, the value proposition of something like Bitcoin, which can’t be stopped by a foreign government, and its assets can’t be frozen, again is a really kind of strong value proposition and an alternative for storing one’s wealth long-term.

And yet you don’t expect a major influx of institutional investors into the crypto market. Why is that and what needs to happen to change that? 5:55

So I think the way in which a lot of — I’ll call them crypto enthusiasts — think about institutional investing, and again this is more kind of the world that a lot of us come from, myself included. I was US equity strategist before this. So my days were filled with stock market analysis, and talking to people who are really putting some serious capital work in the markets. I think institutions will come into this market once they A) understand the benefits that we’re talking about here, but also getting past the decentralizing, distributed ethos of this space. 

I think it’s going to be almost kind of a hedge against under performance long-term, getting into something like crypto and specifically Bitcoin and holding a little bit in a portfolio. Because when you look at the outlook for traditional or conventional assets over the next 10 years, the price would be very, very different than the last decade for a number of reasons. We were talking about the global macro backdrop, the debt problems that we’re seeing, and the rising possibility of currency devaluation. 

When you look at the expected return of certain asset classes like US large cap stocks — the S&P 500 has had an incredible run-up the last decade. But when you’re looking at the expected returns going forward, especially on a real return basis, they’re pretty much sub-three percent on an annual basis over the next 10 years. So if you think about it from a pension fund perspective – or someone who’s really trying to hit trying to hit a seven, eight percent return a year – it’s going to be very difficult to generate those types of returns without going very, very far out on the risk curve at a time when the market has been really, really strong for the last 10 years. 

We’re closing in on the longest economic cycle here in the US. And so, you’re kind of at this inflection point where returns for traditional assets are not looking as strong as they were the last 10 years. At the same time, we’re likely gonna have some type of recession. You can argue the depth of that. But probably going to happen within the next 18 to 24 months, I would say.

So it’s kind of a really interesting time if you’re in the capital market, you’re putting money to work and investing in traditional asset classes. I think that will eventually push institutions in. But I don’t think it’s going to be this wave of institutional money that one day it comes in all at once, and really gives a big boost to the crypto market.

Well, it’s hard to make that argument right now, especially in 2018 and the infamous Crypto Winter, which a lot of people are still digging out of. And that has just really frozen a lot of the sentiment when it comes to crypto and Bitcoin. But right now in the macro outlook of the global economy, we have really, this dovishness that seems to persist, this fear of future recession around the corner. So, is this kind of fear driving Bitcoin sentiment or doing the reverse? What is the relationship that you see in your analysis? 8:32

That’s a really great question. I think it’s two-fold, and it’s almost kind of like a double-edged sword. So Bitcoin, we’ve talked obviously about the long-term store value narrative thesis that we have on it. But in the short term as you get institutions wading in a bit, you start getting more sophisticated investors trading Bitcoin or getting interested in crypto. As they start to understand that process … it is still looked at as very much a risk-on asset.

So, in the near term, when you have a reverse or a pivot back to more dovish monetary policy, if we do end up getting some type of return to quantitative easing and bond-buying from the Fed, that liquidity pump back in the system actually could be beneficial for Bitcoin and crypto in near-term. Because as that money pushes interest rates down, you have sovereign debt yields at historical lows right now, you’re going to continue to push investors further out the risk curve, especially as they’re starting to get hungry for growth against that global slowing economic backdrop. So, I think it actually could give a boost to Bitcoin because right now, it does trade more as this risk-on asset. 

But the flip side of that is what’s going to hold it up or potentially prop it up in the near term, could also be one of its biggest long-term tail winds. Because again, the outlook for some of these traditional assets that are getting really, really bid up because of the central bank policy and because of the dovish nature of central banks. This cycle actually could end up being something that that really allows Bitcoin to shine when the Judgment Day comes.

Right now, you have the S&P historically returning 11% in equity returns on average. How does Bitcoin outperform that? 11:01

Yeah, so I think in the near term the narrative that stocks have been in the TINA narrative: There Is No Alternative. I think that narrative stays. And I think in the near term, stocks could certainly outperform Bitcoin and the rest of the crypto-market because it’s up against that backdrop of a more dovish Fed and a potential return to either interest rate cuts, which I think are still being highly debated within the equity markets and among economists as well. There’s also potentially the return to QE. 

I think stocks could outperform in the near term. One of the things that we focus on – and I did this doing equity strategy in the past is –  when you look at valuations, oftentimes people have been talking about the stock market being overvalued for going on five years now. And if you were five years ago calling that warning sign and pulling yourself out of the equity market, you’re kicking yourself at this point because it’s gone on a historic run. 

And so, the important thing that you think about valuations and where we are today, is that things can always get more expensive, especially as you get interest rates that potentially drop or yields that already are in near historic lows. That actually allows valuations or valuation multiples in the equity market to increase, because people are willing to pay up more for earnings growth and these riskier asset classes. So I definitely think that the market can continue to move higher until there is a big catalyst for a downturn. 

But I think what’s important is that if you look at valuations, they are, very, very poor timing mechanisms. When you look long-term, the correlation between starting valuations or valuation multiples, like price to earnings ratios, and the subsequent 10 or four, 10-year returns, they’re actually a really good predictor for longer term stock market returns. So in the short term, I certainly can see the stock market move higher. It certainly can outperform Bitcoin or other crypto assets. Valuation models can continue to expand. 

But at a certain point, they can’t grow to the sky. And if you look at that kind of longer term history, of where valuations are today compared to where they were in prior cycles and again what those subsequent returns were, that’s what’s kind of drawing a red flag for us when it comes to the equity market.

If you were a mainstream investor, if you were a traditional investor, if you are an institutional investor thinking about getting into the space, what are the three takeaways right now that you want to share about getting into the crypto asset market? 13:34

That’s a really good question. If I could narrow it down to three, one would be nothing operates in isolation. So if you’re an institutional investor, or even an individual investor looking your portfolio over the last decade, five years, or whatever it may be, and maybe reevaluating what you think those expectations are going forward.

And then the second would probably be that you don’t have to bet the house on Bitcoin. We’ve never told anybody go out, and entirely sell equity positions or bet the entire portfolio on Bitcoin.  That’s certainly not something that we would ever recommend, especially for an institutional investor. But I do think a small allocation to this space is really starting to become more prevalent. Some of these discussions about the possibility of putting one or two percent into Bitcoin, or maybe even less, just based on the kind of same or upside potential that it does have.

And I think the third would just be to — this is not investment advice at all, not recommending you to do anything. But this is what I’ve told some friends and family who’ve asked me about Bitcoin. When I first learned about it, I was started by buying a very, very small incremental amount and playing around with it, trying to transact with it, trying to send to people, trying to pay for things and different services. We’re in the early days of Bitcoin becoming this medium of exchange. We think it will be a store value for a long time, before it really takes off into this kind of universal medium of exchange that’s accepted everywhere. But there are places in which you can use it. There are ways in which you can use it today.

So, kind of just getting familiar with mobile wallets and these different things that you hear people talk about when it comes to crypto that people don’t necessarily understand. Just start kind of playing around with it. I think once you do that, and you see how quick and almost seamless this process is becoming, you can start to wrap your head around what the long-term potential of this would be. 

What’s difficult about that argument, and as you mentioned, I’m in New York. So I sit in the US. We’ve never really gone through in my lifetime a major currency crisis. So, I don’t know personally what it’s like to be someone who’s struggling with a government that’s got very irresponsible monetary and fiscal policy. I don’t know what it’s like to sit in a country like Venezuela, and not have an alternative option. So I think when you start to think about outside of your comfort zone, outside of the environment that you’re in, it’s really it is to be a really easy to see what the long-term value proposition of something like Bitcoin would be.

Thank you, Kevin, that was Kevin Kelly, CFA and Co-Founder of Delphi Digital. And really, thanks for those insights. Macro headwinds are coming. And how do you think about Bitcoin and cryptocurrencies as a digital asset class as an alternative, as a hedge? So that kind of insight is really, really powerful, thanks to Kevin who does institutional-grade research on digital assets. Keep an eye for his work, and more market analysis on Forkast.News.

Well, thank you as well for joining us on this edition of Word on the Block. I’m Angie Lau…until next time. 16:40