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Institutional investors blast bitcoin prices to new stratosphere

As bitcoin breaks new records, will its bull run end soon? Here’s why investment pros like Trent Barnes of Zerocap believe there’s still more wind in BTC’s sail.

When Melbourne-based digital assets investments and custodial services firm Zerocap published its report, “Bitcoin: This is the Hedge,” at the end of Q3 this year, bitcoin prices had recovered to above US$10,000 since the Coronavirus Crash of March. Back then, Zerocap advised: “You haven’t missed the boat yet. Now is the time to ride the wave of change and invest in bitcoin.”

Fast forward to today. Bitcoin prices have not only rebounded from a minor price tumble last week but are now cresting to a new all-time high of US$19,749. Not only is bitcoin on the cusp of reaching US$20,000 for the first time since its birth in 2009, it has also already surpassed the market cap of the world’s largest traditional bank, Wall Street pillar JPMorgan Chase & Co. 

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“We know that it’s going to go up as long as the market and the participants in that market continue to value it as so,” Zerocap Principal Trent Barnes told Forkast.News in a recent video interview. “And we’ve got that validation not just from retail, but also from the institutional investors.”

Since its “black swan” event shortly after the Covid-19 pandemic crippled much of the global economy earlier this year, bitcoin has been on a tear. Prices rose after “bitcoin halving” happened in May, which signaled a reduction in the rate of future new bitcoin getting mined, and kept rising alongside the tremendous growth of decentralized finance (DeFi) this year.

Last month saw bitcoin passing up JPMorgan in market cap. This week, bitcoin broke its own all-time high in prices not seen since 2017 during the initial coin offering boom. 

See related article: Bitcoin’s ‘black swan event’ — should investors worry?

Bitcoin prices crashed after its 2017 heights, as the market became a graveyard of startups that were overly speculative or turned out to be little more than scams. But that was then — and bitcoin’s 2020 bull market is driven by entirely different forces. Now, it’s institutional investors and large corporations that are increasingly buying up bitcoin as an inflation hedge for their portfolios. 

“I think the Fed’s printed three times more this year than they did back in the GFC in 2008,” Barnes said. “So I really think that this has increased the curiosity for a lot of our client base.”

As 2020 approaches its end, institutional investors that have been buying up bitcoin include global investment firm Guggenheim Partners, which disclosed in a recent SEC filing its plans to potentially invest up to 10% of its Macro Opportunities Fund, or about US$500,000, in bitcoin. Software company Microstrategy also recently disclosed that it, too, has put money — over US$400 million — into bitcoin. Other bold-faced names that have jumped on the bitcoin bandwagon include PayPal, Twitter CEO Jack Dorsey’s Square and hedge fund manager Paul Tudor Jones.  

“You’ve got multiple different companies moving their cash reserves or their cash balance into bitcoin, because I think it’s much more safe a hedge,” Barnes said. 

Barnes refrained from speculating on where bitcoin prices would go from here. But he believes that the strong interest from institutional investors and high-net-worth family offices will carry on in 2021. 

“We know that it’s going to go up as long as the market and the participants in that market continue to value it as so,” Barnes said. 

Watch Barnes’ full interview with Forkast.News Editor-in-Chief Angie Lau to find out more about how investors are looking into bitcoin as a hedge against inflation, potential treatments from regulators around the world, ethereum on the rise as an investment option within the DeFi boom, and more. 

Highlights:

  • How bitcoin’s bull run is different from 2017: “What we’re seeing is that bitcoin has become a validated asset, particularly because of the institutional inflows and the institutional protections available. So, we definitely see from our investor and client base a lot more curiosity because it seems to be a lot more certain, more so than it was back in 2017, amidst the ICO boom.”
  • Bitcoin as an inflation hedge: “When we talk about bitcoin being an inflation hedge or a safe haven asset, in a liquidity crunch all markets and all assets will just go down because there’s unprecedented uncertainty in the market, particularly if investors are looking to make margin calls.”
  • The right time to invest in bitcoin: “Now has always been the right time to invest in bitcoin, and if you ask any of the early adopters, they saw that the programmatic money supply schedule, as we go into the last bitcoin, will be mined in 2140. So it’s very predictable. It’s borderless, it’s permissionless. I think Obama called it “walking around with a Swiss bank account in your pocket.” It’s more like a Swiss bank where you are the CEO, the teller and the manager, all in one.” 
  • How DeFi is pushing ethereum investments: “What we’re noticing is that, it’s almost like in that bubble graph, the exuberance stage, the yield farming craze that happened, the amount of time and energy that you need to invest in it. So for us, that’s why we have ethereum as one of our assets that we speak about, that we educate on, purely because you can have all these different DeFi plays, but if you really look at it, what are they built on? Ethereum is the protocol that nine out of 10, 10 out of 10 are actually built on.”
  • How much are people investing in bitcoin? “There are some investors that like to go quite high — I’ve got friends that have 50% of their portfolio in bitcoin. Now, that’s really quite high. But a lot of our investors tend to be attributing or allocating between 1% to 5%. And that’s because it’s an asymmetric risk profile of it. That means that a very small investment can equate to minimal losses or extremely high returns, particularly if you look at the track record of bitcoin.”

Full Transcript

Angie Lau: The narrative on bitcoin shifting once again – has the pandemic legitimized crypto assets? Is bitcoin the hedge? What is bitcoin’s role in the economic cycle? And is bitcoin’s race to six digits a fantasy, or is it inevitable? 

Welcome to Word on the Block, the series that takes a deeper dive into blockchain and the emerging technologies that shape our world at the intersection of business, politics, and economy. It’s what we cover right here on Forkast.News. I’m Forkast Editor-in-Chief Angie Lau. 

Well, in mid-September, 17 top Fed officials agreed to allow inflation to run moderately above 2% for some period of time. While fear of inflation looms around the globe, investors are looking towards alternative investments to protect their portfolios. For some time now, this alternative investment has been gold. But in 2009, that changed; we now have what’s often referred to as digital gold, or the almighty bitcoin, and we’re seeing more and more sophisticated investors flocking towards bitcoin. 

On this episode of Word on the Block, we’re going to answer the question: is bitcoin the hedge? And to answer that question, our guest today is the principal of Zerocap, the digital asset firm for private clients. Trent Barnes, welcome to the show. It’s great to have you on.

Trent Barnes: Thank you for having me and glad to be a part of this.

Lau: Absolutely. So let’s talk about what you’ve been doing in this space. You’ve been in the space for a little bit, but increasingly your business now serves the kind of clientele that once upon a time would have mocked this space. We’re talking about family offices, high net worth, more the institutional, traditional investors, and they are increasingly coming into this space. Tell us about what their needs are right now.

Barnes: Yeah, definitely. So essentially what we’re finding, particularly with Covid pandemic conditions, uncertain economic conditions particularly since March, there has been a real increase in interest from our investor and client base. So we traditionally deal with family offices, high net worths, but one of the really interesting demographics for us is the emergent wealth, which is that wealth that isn’t really covered on any private bank client list. It’s the sort of wealth that we would classify into the demographic of millennials and potentially even Gen Z. Now, quite young, but essentially property markets globally are completely out of control. 

You’re in Hong Kong, I’m in Melbourne, Australia — once considered the world’s most liveable city, is now the world’s most locked-down city — but regardless, we both live in cities that have some of the highest property prices in the world. So where do the emergent wealth turn to? And so digital assets — which is an asset for a digital age, that’s why, I guess bitcoin representing over 50% of the total crypto market share — bitcoin has been one that not only the emerging wealth that aren’t necessarily investing in the traditional legacy assets that their parents or Gen X or baby boomers were investing in, they go to bitcoin, but also traditional sophisticated investors, because what we’re seeing is that bitcoin has become a validated asset, particularly because of the institutional inflows and the institutional protections available. 

So, yeah, we definitely see from our investor and client base a lot more curiosity because it seems to be a lot more certain, more so than it was back in 2017, amidst the ICO boom.

Lau: Yeah, and it really feels like the momentum of the emerging class and just new liquidity into the space has been accelerated since Covid.

Barnes: 100%. In March, we saw a black swan, a liquidity crunch, which affected all financial markets. So, bitcoin retraced like 50%. But when we talk about bitcoin being an inflation hedge or a safe haven asset, in a liquidity crunch all markets and all assets will just go down because there’s unprecedented uncertainty in the market, particularly if investors are looking to make margin calls. But what we also saw out of March was the rise of the stablecoin, which is that store of wealth where, particularly with low volatility, it maintains a relative one for one against the U.S. dollar. There are other stablecoins as well, but the U.S. dollar is the strongest one out of them all. But particularly since March, since that event, what we noticed was a retrace, but then there was just a lot more uncertainty within the existing financial system, within the governments’ decision to boost quantitative easing, to go on an unprecedented bonanza of money printing — I think the Fed’s printed three times more this year than they did back in the GFC (“Great Financial Crisis”) in 2008. So I really think that this has increased the curiosity for a lot of our client base. They’re asking a lot more questions. They wanted to be educated and not necessarily on, “what is a private key,” “what is a public key,” because a lot of those institutional custody protections and solutions are already there for them; they just wanted to understand, “how does this fit into a portfolio?” And we only ever talk about bitcoin as an addition to a portfolio. 

There are some investors that like to go quite high — I’ve got friends that have 50% of their portfolio in bitcoin. Now, that’s really quite high. But a lot of our investors tend to be attributing or allocating between 1% to 5%. And that’s because it’s an asymmetric risk profile of it. That means that a very small investment can equate to minimal losses or extremely high returns, particularly if you look at the track record of bitcoin. It’s still the best performing asset over the last decade, the last five years, even this year, so I think it has a proven track record.

Lau: Absolutely. You just take a look at how equity markets have been performing and, often with bitcoin, we talk about volatility — there’s no doubt there, but I think in a Covid world, that volatility is just baked in. You shared a recent report from Zerocap with us on Forkast.News calling bitcoin a hedge. You stated that there has never been a more important time to invest in bitcoin and ethereum. What’s your thesis here?

Barnes: Well, now has always been the right time to invest in bitcoin, and if you ask any of the early adopters, they saw that the programmatic money supply schedule, as we go into the last bitcoin, will be mined in 2140. So it’s very predictable. It’s borderless, it’s permissionless. I think Obama called it “walking around with a Swiss bank account in your pocket.” It’s more like a Swiss bank where you are the CEO, the teller, and the manager, all in one. 

I think particularly with bitcoin now, we released this report and we tried to do it in a way that was really digestible for a lot of our investors. We try to really minimize the real technical aspects of bitcoin and the Bitcoin network, which is really quite beautiful in terms of how it came about and how it solved the double-spend problem. For our investors, they’re not necessarily interested in how it all operates in the background — what is a node, what is miner, what I do with the private key — what they’re interested in is finding confidence, and finding opportunity and trusted partners to be able to work with. You’ll notice that the retail market will typically go to exchange. There’s an over-the-counter market which is off the market, which doesn’t reflect what’s happening, so the retail market only sees what’s going on in exchanges. So if you look at CoinMarketCap, you’ll see bitcoin sitting around $10,600 at the moment, but if you really look at the over-the-counter and off the market flows, then it primarily represents 80% to 90% of all transactions happening in bitcoin. 

And so if the price was actually reflective of what’s happening off the market on the market, then we’d see a very different price — something more towards six figures, as you mentioned at the start. So with bitcoin, this is a hedge. We’ve noticed more curiosity, our clients wanting to be educated and wanting to find confidence, and “what happens if I lose the ledger?” But that’s where the institutional custody protections come in. Fidelity (trillion-dollar asset manager) entered the space. You’ve got BitGo, that’s essentially been the crème de la crème of custodial solutions. And now you’ve got some really interesting ones coming out, particularly multiparty computational NPC technology, which to us is an evolution of the custody solution, because it breaks down the private key into multiple different shares, so it just makes it a lot more distributed and less prone to hacking attacks like we saw on KuCoin, I think it was like $200+ million, a few weeks ago. 

Some of those things that kept institutional investors and private clients out of the market a few years ago, a lot of those uncertainties, things I worried about, have all been alleviated due to what’s available now.

Lau:  there’s technical innovation that is addressing that, and then on the regulatory front, though, in the real world, you’re still in what is a legacy monetary and capital system, and that includes tax liabilities and paying your taxes. That, for preservation of wealth, obviously, there is a good thing when you pay taxes, but when it comes to crypto, there has just been a lot of vagueness and not only in Australia, but around the world, in the U.S., in nations around the world. How does one address that? Could that be a detriment to the liquidity that is looking to get into the space?

Barnes: I think, if we’d had this conversation in 2017, I’d definitely say yes, 100%. You essentially saw in 2017 the retail market get access to opportunities that were typically restricted to accredited investors, or what we call in Australia, sophisticated investors and institutions. So the regulators aren’t necessarily there to regulate markets, in my opinion, they’re there to regulate human behavior. So although we see in bitcoin, in the network, beautifully played out are the game theory incentives that incentivize people to participate and to act in a positive and productive manner and incentivizes good behaviors, we don’t necessarily see that in the markets. 

As we saw, there are multiple different scams, fraudulent activity, and the SEC has been coming down on ICOs, over the last few years, even more recently. Salt Lending I think has had to pay back $47 million of their capital raise. So the regulators — I’ve sort of got mixed feelings on this. Right now I think we’re at a really good point. But if we had had regulators at the very start, if Satoshi Nakamoto had actually gone to the regulators and made them a part of the conversation, we wouldn’t have Bitcoin now. We wouldn’t have a lot of the cryptocurrencies that we have now, the privacy coins or any of that. We would probably have something similar to what you would call a central bank digital currency now. 

So fast forward to today: the regulators, particularly in Australia, have been really proactive, productive, working with the community, there’s very clear guidelines around the treatment of crypto, particularly for all participants in the crypto economy, be them crypto exchange providers or people wanting to purchase on crypto, the Australian Tax Office has very clear guidelines. It’s considered as property, so you’ll pay capital gains tax on it. AUSTRAC, which is the AML regulator here — very clear guidelines if you are an exchange provider, that you need to fulfill your reporting obligations. Also ASIC, which is the Australian Securities and Investment Commission, they’re very clear, very similar to the SEC on what constitutes a security alarm. So any projects looking to come out, they just need to abide by the guidelines to put in place. 

Now, if we go overseas, you’ve got a really interesting thing going on in the U.S., like Ripple recently has been talking about wanting to leave the U.S. just because of the regulatory squashing of what they would consider to be, a free, open market of ideas and projects coming to life. But in my opinion, I think regulators globally, even though there’s no real international framework that everyone abides by, I think that they want to be a part of the conversation. 

And just on a side note as well, originally I’m from New Zealand, and New Zealand I think is one of five countries in the world that doesn’t have capital gains tax. So really attractive for crypto digital asset holders. But in short, I’d say that the regulators, in at the right time, they’ve learnt from what happened in 2017, they went to put those protections in place, which is then bringing on a new wave of investors like the investors that we deal with.

Lau: That is a huge question, and the other huge question that a lot of people are speculating about, including our recent conversation with Tim Draper, the famed bitcoin investor, early, early on, when we spoke, of course, I asked him about his claim that bitcoin will reach six figures, that $250,000 mark by 2022, or even by early 2023. Increasingly, as we see the unending printing of money, we know that bitcoin, it is a finite supply. And so obviously that suggests that as more people demand it and as supply goes down, it’s just going to drive up the price. In your view, do you think that we will get to six figures sooner or later?

Barnes: The value of bitcoin, in our mind, we don’t tend to speculate too much on price because we think that the real value is in hedging the tail risk. Particularly for portfolios, as an investable asset, I think it’s certainly proven its track record. 

Regardless of the short term volatility, if you look over the long term, there’s an increasing upward trend that has just been going up and up. Now, if we look at the six-figured bitcoin, I think the Winklevoss twins came out and said, US$500,000, and that was based off of the comparison to gold’s market cap. Gold has a market cap of US$9 trillion. Bitcoin’s market cap’s roughly US$200 billion, I think, or I believe. And so if you 45x that, or 50x that, it gets us to a price of US$500,000, which would be super nice. Now, if you look at the whole scarcity model of what bitcoin represents, that’s what it comes down to: what is sound money, what is real value. Little story from when I was a kid, because it’s one of those things that kids understand, even. 

I’m not too sure about yourself, Angie, but I played with marbles when I was a kid, and I ended up building a pretty substantial marble empire. And what I did at the time, it was just something that’s sort of inherent within the behavior of the circles I used to walk in as a kid, was that you would always trade. So if you had a lot of the same type of marble, you would trade it for the ones that were more rare. And so even as a child, when I look at what we’re doing today, I always reflect back to that time as a kid as I built my empire. 

I was always trading for those ones that had — they were really beautiful — that had swirls or whatever. But it was really unique. And so coming back to the price of bitcoin, what could that look like today? Bitcoin has a deflationary property built into it already. So even though we know that the last bitcoin is going to be mined in 2140, there’s 18.5 million bitcoin in existence at the moment. What we haven’t factored into account necessarily is how many bitcoin have actually been lost over the years. If you put a rough estimate, say 2 to 3 million, if that is the case, then we’re roughly sitting at 15 million bitcoin. Now, that obviously makes it more scarce. Does that also then increase the value of it? Well, value is always dependent on what the market’s willing to pay for it. And that’s where I think, if you look at the Austrian school of economics, they look at what is sound money, or what is good money. It is what the free market decides money is. What we have in today’s environment is obviously the case of fiat, where governments not only decide, but through taxation and through the goods and services, that the prices are always value in it. So the market is basically saying that bitcoin is money. It’s a store of value, just like gold is money, it’s a store of value, just like other asset classes that they’re getting into. So if you had asked me what I think bitcoin is going to be by the end of the year, it’s not something we tend to speculate on because we think the value in it is not necessarily in the price, because we’ve got a track record of the prices. We know that it’s going to go up as long as the market and the participants in that market continue to value it as so. And we’ve got that validation not just from retail, but also from the institutional investors. 

I’m just conscious I’ve been talking a little bit, and I get quite excited or quite enthusiastic or quite energized talking about these things. But even if you look at the institutional investors recently this year, since March, Paul Tudor Jones came out, said that it’s the best inflation against exuberant cash printing. You’ve got multiple different companies moving their cash reserves or their cash balance into bitcoin, because I think it’s much more safe a hedge.

Lau: No, I totally want to pick up on that point because it is more of these traditional trusted voices getting into the space. I think price is an interesting marker for people who are on the periphery and then wonder about why more and more people are pricing one bitcoin or one asset at such high levels. And that’s actually both of those things is actually what draws the kind of money that we haven’t seen come into the market into crypto, into this industry, until really increasingly this year, as that inflationary hedge, as that hedge play, as that digital gold play. 

So that’s what’s really interesting, because you actually are asked to be stewards of a lot of this type of new money that is getting into the space, which is really important, as you know, because at the end of the day, it’s what somebody is willing to pay for what you are willing to sell. So if there’s more money in the market, if there’s more demand, obviously what you have is increasing in value. And so in your view, when you are dealing with your family offices and even all the way down to emerging wealth, this kind of language in that attracts this money in the periphery is intensifying, it feels like.

Barnes: Definitely. And so one of the big things for us is that a lot of our traditional investors that have moved into the digital asset crypto space, they’re looking for yield. And so that’s one of the big plays that we see through towards the end of this year and through next year.  In terms of what’s been going on in the crypto market with the futures, with some of the recent news that has come out, like the BitMEX news, or the BitMEX event, we thought that was going to have some major effect on bitcoin, but it didn’t really seem to move much.

Lau: It didn’t really move much, except out of BitMEX is what we actually saw. You talk about yield. What about DeFi? Is that changing the game?

Barnes: Yeah, DeFi is something that we have looked at. It’s not exactly right for our investor or our client base, purely because it feels like it’s another bubble forming. It feels like 2017 all over again. What we’re noticing is that, it’s almost like in that bubble graph, the exuberance stage, the yield farming craze that happened, the amount of time and energy that you need to invest in it. So for us, that’s why we have ethereum as one of our assets that we speak about, that we educate on, purely because you can have all these different DeFi plays, but if you really look at it, what are they built on? Ethereum is the protocol that nine out of 10, 10 out of 10 are actually built on. And so if you want exposure to that DeFi market, then Ethereum is an amazing investment for that. If you actually do want to invest the time and learn yield farming, then I almost feel we’re sort of on the way down. If you look at the DeFi market and how far to trace back, there was a golden period between like April to like July or August, when you saw yEarn go from like 1,000 up to 40,000, and then back down to like 18,000 or so.

Lau: Well, it’s equivalent to almost a commodity play,  that’s essentially Ethereum being the fuel for what we’re seeing in DeFi.

Barnes: 100%t. And just adding on to that, like the Ethereum investment case, particularly with what’s coming with Ethereum 2.0, the staking model as well, the ether that’s getting locked up in the DeFi space, it’s almost starting to be considered as a store of value; not necessarily in line with bitcoin value proposition, but still, there’s a lot of conversations that are happening around that. We’re getting asked a lot of questions: “What is Ethereum? How do we invest in it? Why is this going to be a good investment for us?”

Lau: Well, one final question before I let you go, and I’m sure it’s on the minds of a lot of people in the market right now. Will more of this institutional, traditional, family office money be coming into the market, in your view?

Barnes: 100%, in my mind. If we look at the market, the amount of conversations that we’re having with family offices that are wanting to diversify their portfolio, to hedge out the inflation risk, we haven’t necessarily seen the full impact of what inflation is going to look like, but our clients, particularly the ones that are forward-thinking, a lot of our clients through our conversations have been talking about, “we’ve been on the sidelines. We’ve been watching. We’ve been waiting for the right time to enter.” And as you would know, if you’re sitting on the sidelines waiting for the right time to enter with bitcoin, when it goes up, you’re just waiting for it to come back down. When it goes down, you lose confidence and you’re uncertain. So I think particularly now because of what’s happening in the macro conditions, we’re starting to see even publicly traded companies like MicroStrategy, that would have taken 6 to 12 months for them to have passed that through. So I think we’re not yet seeing really what’s going to be happening in 2021, because a lot of those things are in play at the moment. But, yes, a hundred percent, I do believe that based on the conversations we’re having with our client base and based on partners within the space as well and the conversations they’re having with their high net worth clients as well, yeah.

Lau: Well, thank you for this conversation and sharing all of these observations in this space. There’s no doubt that there is more liquidity coming to the market as the general, more traditional markets, the monetary system, creates the roller coaster effect. We’re all holding on really tight, but it’s interesting to see that more and more interest is getting into the crypto space. Trent Barnes, thank you so much for your insights.

Barnes: Thank you.

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