Bitcoin's "One-Two Punch" in Crypto Regulation, Clears Fog on Blockchain Outlook

SPEAKER_1 (0:00)

Joining us, Matthew Sheffield, the Chief Investment Officer over at Sharp Link. Matthew, thank you for taking the time to be with us today. Now, as we look at crypto over the last month, I mean, Bitcoin and Ether both up.

What do you think is driving this move? And are you viewing this rally as being different from crypto rallies that we've seen?

Matthew Sheffield (0:21)

Yeah, I think that this is a very different rally because it's off of a de-risking of the political side of things that I think was honestly a cloud looming over the industry.

We saw clarity ultimately not pass in less than 24 hours later. We went on a pretty swift run higher. And I think that was largely because up until that point, anytime we had heard a whiff of doubt whether or not it would pass, the market was overreacting and thinking that that was a death knell for the industry. And ultimately, the rules making process that happened along the way, the discourse added so much value that we immediately saw rules getting submitted 48 hours later to the White House. We saw innovations, exemptions happen. And I think that once people realized that the majority of the value had already happened, that clarity wasn't this kind of point in time, super important event. We were able to move past what had been this narrative kind of holding us back for a bit and start to actually reprice a bit of the momentum that we've actually started to see on chain actually realize.

SPEAKER_3 (1:21)

So is that alone enough to continue to propel things higher when you have the other added risk right now of obviously high yields and you know a sort of tighter macro environment given what the Fed's doing?

Matthew Sheffield (1:37)

So ultimately there's always going to be a risk trade component to it, but what I do think we see here is a really good setup for an industry that really never goes with the consensus. Crypto is very difficult to trade with the rest of the population because at the end of the day, it's still a very tightly retailed traded market with a lot of momentum factors. So we've seen this historically. About a year ago this time, we had the largest de-leveraging event, and that really caused crypto to enter into a six-month period of just trying to get out from under the damage that had happened from that $19 billion that was lost on a single day October 10th. It really caused it to break from the fundamentals of what we were seeing happening on chain. It also broke from General Macro doing well. So I think we're seeing a repricing right now of playing a bit of catch up, and I think what we need to see continue is these fundamentals improve. We continue to see more and more large traditional institutions tokenizing their funds. There's never been more job openings at the large banks for crypto positions. Just today, we saw Morgan Stanley announcing a crypto innovation center.

All these banks a year or two ago weren't even allowing you to either buy ETFs or hold spot crypto. And so, there's been a very quick repricing of what does that future on chain look like? And the TAM is just so much larger than where we currently are. I think that there's a lot of room to go on this and it's got legs.

SPEAKER_1 (2:55)

And Matthew, crypto has had some very interesting reactions that of course we've been tracking. And one of them that stuck out for me was the reaction to the Fed rate hike. I mean, we saw it sell off after we got that expected September hike, but then it reversed sharply. So what has changed since that initial reaction to the rally that we're seeing now? And also how important is the tenure being around 5% north of 5% to the crypto outlook?

Matthew Sheffield (3:24)

So I think that it was actually a one-two punch because clarity was also a day before the Fed hike. And so losing clarity and then having the Fed hike happen the next day, I think that there was just a general sentiment problem and you did see an immediate knee jerk reaction to both events. And then one day after the Fed hike, you actually started to see the rules getting submitted. We saw the CFTC submit rules to the White House. We saw an innovation exemption come from the SEC that will enable on-chain trading of certain securities. These are things that ultimately we wanted to see from clarity. And at the end of the day, as long as the agencies are going to be accommodative to the on-chain finance growth story, we don't necessarily need that rulemaking to happen from a single bill. And then when you go back to the macro side of things, I think the same trade as everything else, as long as the growth continues, I don't think the rates are necessarily going to be prohibitive. If anything, a lot of the value proposition for why we think the next trillions come on-chain is capital efficiency and that people are leaving so much on the table, I mean, stable coins as one of the primary use cases that Wall Street is adopting right now, is all about NIMC capture. And so the higher rates are, the more valuable those are for people to adopt and the more valuable it is for you to not have your float tied up in efficient processes. So I think there's a lot of opportunity for crypto to seize the day here. At the end of the day, there's still a risk asset trade. We need risk to perform well. But I think crypto ultimately has the fundamentals to capitalize on this environment better than most.