PriyankaGrayscale’s Zach Pandl anticipates that Bitcoin could reach new highs in the upcoming months.
Zach Pandl, who leads research at Grayscale Investments—the world’s largest crypto asset manager—offers a crucial perspective on market trends for the year ahead. In this discussion, Pandl delves into the market fluctuations seen in August, analyzing whether similar volatility might recur as the Federal Reserve eases its restrictive economic stance. Additionally, he shares his thoughts on various crypto assets, highlighting those likely to outperform and those that may face challenges.
Forbes: Reflecting on last month, we saw significant market turbulence. The unwinding of the yen carry trade caused panic initially, but markets rebounded soon after. How do you interpret these events?
Zach Pandl: August was indeed volatile and can be segmented into two distinct periods. From late July to August 5, there was a growth scare. Then, from August 6 onwards, a recovery phase ensued. While most major asset classes experienced declines, many returned to their starting positions by the end of the month. However, some assets like Japanese stocks, carry trade strategies in currency markets, and Ethereum did not fully recover.
Conversely, certain assets performed well throughout August, such as high-quality bonds including U.S. Treasuries and non-dollar currencies like the yen, Swiss franc, euro, and British pound. A key takeaway from August is the trend towards lower interest rates and a weaker dollar, which has implications for Bitcoin moving forward.
Forbes: Was this growth scare an isolated event, or should we expect similar market reactions in the future?
Pandl: The focus on Japan and the yen might be misleading when analyzing early August market events. Japan’s complex economic landscape often confuses even professional macro investors. The true cause was a genuine growth scare triggered by U.S. economic data, particularly an increase in the unemployment rate—the largest rise outside of recession contexts according to the Sahm rule. This spiked fears of a recession, disrupting the prevailing consensus of a soft landing for the economy.
The unexpected rise in the unemployment rate challenged the previously strong belief that a soft landing was guaranteed, leading investors to reassess recession risks. The market overreacted to this news, evident in the VIX index’s surge to levels seen during extreme events like Covid-19 and the 2008 financial crisis, only to settle down later in the same week. High-yield bond spreads also experienced similar volatility.
Forbes: Turning to crypto, do you foresee a divergence between Bitcoin and other cryptocurrencies? Ethereum ETFs haven’t seen the same success as Bitcoin ETFs recently. What are your thoughts?
Pandl: Bitcoin has dominated the market for some time now. Its dominance is increasing, reflected in the falling ETH/BTC ratio. This trend might continue in the short term due to several favorable factors for Bitcoin: potential Fed rate cuts, political uncertainties surrounding the upcoming U.S. presidential election, and high demand for Bitcoin ETFs.
Although Ethereum ETF launches seem underwhelming compared to Bitcoin’s earlier success, they are performing well within typical ETF launch expectations, showing healthy volumes and inflows.
Regarding Ethereum’s outlook, I remain optimistic despite recent underperformance attributed largely to technical factors like increased leverage in Ethereum futures and macroeconomic catalysts such as the growth scare. The fundamental health of Ethereum’s ecosystem remains intact.
Bitcoin and Ethereum are fundamentally different assets; Bitcoin serves primarily as a currency while Ethereum is a smart contract platform facilitating decentralized applications (dApps), tokenization, stablecoins, and DeFi. The complexity of Ethereum’s ecosystem requires more time for investor education compared to Bitcoin.
Forbes: Unlike Bitcoin, Ethereum faces competition from platforms like Arbitrum, Optimism, Base, and Polygon. How does this competition affect Ethereum’s position?
Pandl: In crypto markets, competition dynamics are critical. Bitcoin enjoys dominance without significant competition, whereas Ethereum faces stiff competition in the smart contract platform segment. Grayscale provides investment options across various competing platforms, recognizing valuable investment themes among them. For instance, we recently launched an Avalanche product, highlighting our belief in diversified approaches within competitive sectors like smart contracts.
Despite fierce competition, Ethereum benefits from network effects—where larger networks with more capital, applications, and developers have significant advantages. Hence, Ethereum is likely to maintain its dominant position over time due to these network effects.
Forbes: Why did you choose now to launch an Avalanche product?
Pandl: Each smart contract platform blockchain has unique design choices that will take years to fully evaluate. Avalanche stands out with its solid design and effective platform infrastructure. Recent applications in tokenization also make Avalanche appealing; its hybrid permissionless/permissioned chain architecture suits tokenization projects well. As tokenization of real-world assets is still experimental but promising, Avalanche’s infrastructure positions it well for future developments.
Forbes: Solana has emerged as a popular blockchain after Bitcoin and Ethereum but seems to replicate activities already happening on other chains. What is your take?
Pandl: Solana offers an excellent user experience—it’s fast, cheap, and easy for newcomers to use. This has helped it attract new users and establish itself as a top blockchain. However, user experience alone may not create long-lasting competitive advantages. True value will accrue to Layer 1 blockchains that can onboard significant real-world use cases involving major firms and industries. It’s still uncertain whether Solana will secure such large-scale adoption.
Forbes: What are your broader views on DeFi?
Pandl: DeFi is integral to crypto but faces regulatory challenges that hinder its growth. The Biden administration’s regulatory approach has stifled innovation and adoption. For DeFi to thrive in the U.S., we need clearer regulatory guidelines which might require political changes favoring more progressive oversight.
Forbes: Let’s discuss AI’s connection with crypto. The relationship seems unclear beyond AI tokens fluctuating with Nvidia’s stock price. What are your thoughts?
Pandl: Blockchain technology offers several avenues for integration with AI. Shared compute networks can provide essential infrastructure for AI development. Public blockchains can help address intellectual property issues associated with AI-generated content by tracking data origins transparently. Projects like Bittensor aim to decentralize AI development akin to how Bitcoin decentralized money systems, potentially creating open systems for AI free from central control.
Forbes: What are your expectations for the rest of the year?
Pandl: We foresee a positive outlook for Bitcoin driven by several factors: new investment products increasing access, favorable U.S. political developments around crypto, and Fed rate cuts amidst a healthy economy. Rate cuts due to successful inflation control rather than recession could weaken the U.S. dollar and boost assets like Bitcoin.
However, monitoring U.S. labor market data is crucial; rising unemployment could signal economic weakness impacting Bitcoin prices. In such scenarios, accumulating Bitcoin during economic downturns could be advantageous as easier monetary policies typically follow recessions.
Forbes: Any contrarian ideas or emerging projects we should watch?
Pandl: Crypto deserves a place in most investment portfolios due to its diversifying potential. Contrary to common beliefs about high risk, blockchain tokens might be less risky than stocks since they lack liabilities—unlike public companies burdened by debts and operational costs.
We are still in the early stages of mature analysis of public blockchain tokens. Traditional financial analysts are just beginning to understand these assets’ fundamentals and liabilities structures.
Overall, Grayscale remains committed to educating investors about blockchain technology’s potential and exploring diverse crypto investment opportunities as this nascent market continues to evolve.
