Compiled & edited by TechFlow
Moderators: James Seyffart , Analyst, Bloomberg Intelligence; Alex Kruger , Founder, Asgard; Joe McCann , Founder, CEO & CIO, Asymmetric
Guest: Jack Platts, Co-founder and Managing Partner of Hypersphere Ventures
Podcast source: Unchained
How to Play the 'Trump Trade' in Crypto: Bits + Bips
Air Date: July 18, 2024
Background Information
In this episode of Bits + Bips, hosts James Seyffart, Alex Kruger, and Joe McCann are joined by guest Jack Platts to discuss the market’s reaction to the assassination attempt on former President Donald Trump and analyze how this event could affect the 2024 U.S. presidential election and the cryptocurrency market.
They also explored potential rate cuts: Will there be a rate cut in July? How big a cut might be in September? And could the decision be influenced by the upcoming election?
Additionally, they forecast the percentage of BTC ETF inflows that the ETH ETF will reach, and James also shared his thoughts on Grayscale’s ETHE (hint: his opinion is positive for ETH).
Finally, they discussed the future of Bitcoin after the German government ran out of BTC and Mt. Gox began to distribute it. Will it now enter a stage where it can only go up and not down?
Crypto Market Sentiment After Trump Shooting
The impact of Trump's shooting
James mentioned that former President Trump was shot during a speech, and although he only scratched his ear, the incident caused a huge response in the political and financial markets. James believes that this may affect the upcoming election.
Joe said that regardless of political stance, this kind of political violence is unacceptable in the United States. He pointed out that Trump's image has improved significantly after the incident and may gain sympathy points in the polls.
Joe also shared that his first reaction as an investor and hedge fund manager was to check market dynamics. He noticed a surge in trading volume on the prediction market for Trump's victory.
Cryptocurrency market reaction
Joe compared the impact of this event on the price of Bitcoin to the market reaction when Silicon Valley Bank's funds dried up in March 2023, and considered it a "flight to safety" transaction. He explained that this "flight to safety" behavior shows that investors tend to buy "digital gold" such as Bitcoin when they panic.
Although Alex agrees with most of Joe’s points, he has reservations about the “flight to safety” trade, which he believes is largely the result of the “Trump trade.” Many investors believe that Trump is pro-cryptocurrency and have bought into Bitcoin and other cryptocurrencies following the incident.
Market sentiment and future outlook
Jack reviewed the changes in Bitcoin prices since Trump was elected president, noting that Bitcoin has experienced tremendous growth during Trump's term. He believes that the market sell-off in recent months may be coming to an end, and the market may rebound in the future due to Trump's political prospects.
James added that recent polls showing Trump leading in several swing states further bolstered investor confidence in the “Trump trade.” He also mentioned that even non-cryptocurrency professionals are beginning to pay attention to Bitcoin’s price action.
How election markets became a place to watch the odds, and whether crypto is “leaning to the right”
Election Markets as a Tool for Observing Election Odds
Joe mentioned that although the Democratic Senate candidates in some states are leading, the prediction market provides a more accurate expectation of the election results. Joe believes that the prediction market is more reliable than traditional polls because participants bet on their expectations with real money instead of just expressing their wishes.
James agreed with Joe, adding that prediction markets such as Polymarket and PredictIt have done a good job of predicting election results. While these markets may have some bias, they are generally more credible than the media and traditional polls.
The cryptocurrency market’s “rightward shift”
Alex pointed out that despite the excellent performance of prediction markets in election predictions, there are also some criticisms that these markets may have a "right-leaning" bias. Especially Polymarket, because its user base is mainly cryptocurrency enthusiasts, who generally tend to support the right.
Jack added that Trump’s vice presidential nominee, JD Vance, is a clear pro-cryptocurrency supporter, which further strengthens the market’s confidence in cryptocurrencies. JD Vance not only publicly supports cryptocurrencies on Twitter, but also holds six-figure Bitcoin assets.
Market sentiment and future outlook
Joe emphasized that the visual impact of Trump's shooting is extremely strong, which will become an important propaganda tool for his campaign team. The power of images and stories may significantly affect voter sentiment and further promote Trump's election prospects.
James mentioned that Trump plans to speak at a Bitcoin conference next week, which shows that his support for cryptocurrency has not changed. James believes that this is a positive signal for the cryptocurrency market.
Rate cut: July or September, magnitude: 25 or 50 basis points?
Election Markets as a Tool for Watching Election Odds
Joe mentioned that although the Democratic Senate candidates in some states are leading, the prediction market provides a more accurate expectation of the election results. Joe believes that the prediction market is more reliable than traditional polls because participants are betting on their expectations with real money, rather than just expressing their wishes.
James agreed with Joe, adding that prediction markets such as Polymarket and PredictIt have done a good job of predicting election results. While these markets may have some bias, they are generally more credible than the media and traditional polls.
Interest rate policy and its impact on the cryptocurrency market
James pointed out that the current market expectation is that there is a 100% chance of a 25 basis point rate cut at the meeting on September 18. He believes that although the possibility of a rate cut in July is small, there is still a certain probability.
Joe believes that the Federal Reserve System is very likely to cut interest rates, and the key lies in the magnitude and timing of the rate cut. He pointed out that the recent CPI data is negative and inflation has clearly declined, which makes the current interest rate of 5.5% appear too high. He also mentioned that if retail sales data is weak, it may promote the possibility of a rate cut in July.
Both Alex and Joe believe that a rate cut in September is more likely, but Alex is concerned that if the rate cut reaches 50 basis points, the market may interpret it as a sign that the Fed is forced to act, which may trigger a risk-averse reaction.
Jack pointed out that interest rate cuts are generally good for the cryptocurrency market, but the specific impact depends on the context of the cut. If the rate cut is due to an economic slowdown, the impact on the market may be different from a "safe rate cut" due to falling inflation.
How Joe sees the relationship between the global liquidity cycle, rate cuts, and the potential rise of Bitcoin
Current state of the global liquidity cycle
Joe believes that the global liquidity cycle has not yet peaked. Although the second quarter usually sees a slowdown in liquidity due to factors such as taxation and the Treasury General Account (TGA), he pointed out that global liquidity has begun to pick up at the beginning of this year.
Joe mentioned that China faces currency defense issues, which is not good for global liquidity. However, he believes that as the Fed cuts interest rates, other central banks around the world may also coordinate actions, which will help increase global liquidity.
The impact of interest rate cuts on global liquidity
Joe pointed out that the Fed's interest rate cut will lead to a weaker dollar, which will in turn increase global liquidity. He believes that there is an almost one-to-one positive correlation between the global liquidity cycle and the price of Bitcoin, while the US dollar index is negatively correlated with it.
Joe explained that when interest rates fall, investors will look for new investment opportunities instead of leaving their money in short-term Treasury bonds with falling returns. This will drive funds into risky assets, including Bitcoin and other cryptocurrencies.
Potential upside for Bitcoin and the cryptocurrency market
Joe mentioned that ordinary investors are currently buying a large amount of short-term Treasury bonds (T-bills), but as interest rates fall, these investors may transfer funds to risky assets such as stocks or cryptocurrencies.
Alex added that when short-term yields fall from 5% to 7%, the proportion of funds flowing into stocks and other risky assets increases significantly. This means that Bitcoin and the cryptocurrency market may benefit in an environment of interest rate cuts.
James mentioned that the current level of money market funds has reached an all-time high, and many investors may regard these funds as savings. Once interest rates fall, these funds may flow into the stock or cryptocurrency market.
Future Outlook
Joe believes that as interest rates fall, funds will flow out of money market funds and short-term Treasury bonds and into risky assets including cryptocurrencies. He also mentioned that Ethereum ETFs could become an important channel for capital inflows.
New Update on Ethereum ETF and Its Expected Launch
Ethereum ETF Latest Developments
James said that the Ethereum ETF is expected to be officially launched on July 23 (Tuesday). The U.S. Securities and Exchange Commission (SEC) has required all issuers to submit final documents this Wednesday (July 17). These documents need to include all relevant information, such as fee structure.
James noted that VanEck and Bitwise are currently waiving fees, and other issuers are expected to take similar steps. The launch of the ETF is just two days before the Bitcoin Conference, which will make it a hot topic during the conference.
Institutional Investors’ Views
Joe invited Jack to share his views as a long-term cryptocurrency supporter and institutional investor. Jack believes that the launch of the Ethereum ETF is a very positive signal for the entire cryptocurrency industry. As the second largest cryptocurrency after Bitcoin, Ethereum has received institutional attention, which will boost confidence in the entire market.
Jack mentioned that although the Ethereum ETF may not be as popular as the Bitcoin ETF, it is still an important milestone. He believes that even if the Ethereum ETF has a net inflow of less than $1 billion in the first six months, it will still be a positive boost for Ethereum in the long run.
Market expectations and impact
James emphasized that people should not pay too much attention to the initial inflow of funds into the ETF. The launch of the ETF itself provides a new bridge for traditional financial capital to enter the Ethereum market, which is a long-term positive factor.
Joe believes that the launch of the Ethereum ETF will make the cryptocurrency market no longer rely solely on Bitcoin. He also predicted that Solana may be the next cryptocurrency to launch an ETF, which shows that the trend of "ETFization" of crypto assets is taking shape.
Alex added that the launch of ETFs will enable institutional and individual investors who are unable to invest directly in cryptocurrencies to gain market exposure through ETFs. This will further expand the investor base of cryptocurrencies.
Why Solana Hasn’t Significantly Outperformed Since the Trump News
Market Expectations and Solana’s Performance
Alex said he was surprised that Solana did not significantly outperform the market. Since the Trump news, many people expected the Solana ETF to launch next year, so he expected Solana to have a larger market performance.
Joe responded by saying that while Solana has not clearly outperformed Bitcoin and Ethereum in terms of relative value, it has slightly outperformed both cryptocurrencies over the past few days. He believes this is because Solana has a higher market volatility and traders prefer to trade on this asset.
Relative Value and Market Volatility
Joe further explained that Solana’s actual volatility is similar to Bitcoin’s in the past, so traders are more willing to trade on Solana than on Bitcoin and Ethereum, which have lower volatility. This trading behavior is reflected in relative value.
Joe noted that while Solana didn’t see huge gains, it still performed slightly better than Bitcoin and Ethereum, driven by market volatility and trading behavior.
Market sentiment and expectations
Alex mentioned that market sentiment and expectations played an important role in Solana’s performance. Although many people expected the Solana ETF to be launched, this expectation did not immediately translate into significant market performance.
Joe believes that the market may be waiting for more clear signals, such as formal approval from the SEC or other relevant news, which may drive Solana's market performance in the future.
Market breadth shows the impact of the current market rally and small-cap stock interest rates
Changes in market breadth
Alex mentioned that market breadth refers to the number of stocks participating in market movements. In the past month, especially last week, market breadth has become very low. This is generally considered a bearish signal, meaning that the market rebound may be false and the market may usher in a sharp correction.
Alex raised a counter-argument that the current market moves are driven primarily by investments in artificial intelligence (AI) and cloud computing, data centers, etc. Therefore, it is normal for the market breadth to be low because these areas are outperforming while other parts of the economy are not able to match their performance.
Small-cap performance
Alex pointed out that after the inflation data was released last Thursday, the small-cap index (Russell 2000) rose more than 4.5%, while the Nasdaq fell 2%. This significant divergence between large-cap technology stocks and small-cap stocks indicates that market breadth has improved, which undermines the bears' argument.
Alex also mentioned that Trump's policies may be more favorable to small-cap stocks because these policies generally include tax cuts and deregulation, factors that are relatively more favorable to small-cap stocks.
The impact of interest rates on small-cap stocks
Joe added that Bank of America's global research team released a report last week predicting that the second quarter will be the first quarter in which all 493 companies in the S&P 500, excluding the top seven technology companies, will achieve earnings per share (EPS) growth. This is a big change, as this has not been the case in the past few quarters.
Joe pointed out that small-cap companies are more constrained by high interest rates because they need to borrow money to operate, while large companies such as Apple can make money by investing in short-term Treasury bills. Therefore, if interest rates fall, the performance of small-cap stocks may improve.
Technological breakthrough
Joe mentioned that from a technical perspective, the small-cap index has seen a huge breakout, forming a "gap and go" pattern. This suggests that the market's interest in small-cap stocks is increasing, partly due to their sensitivity to interest rates.
The impact of interest rates on the real estate market
Alex mentioned that the commercial real estate market is also affected by interest rates. A decline in short-term interest rates is good for commercial real estate, while an increase in long-term interest rates is bad for residential mortgages. Therefore, we may see a change in the trend of the commercial real estate market.
Future market expectations
Joe concluded that there are two possibilities for the market: Either the leading technology stocks (such as the "Magnificent Seven") pull back, or other stocks begin to catch up to the current market breadth. The next few months will reveal which scenario will become the reality.
Prediction of ETH ETF inflows and outflows
ETH ETF Inflow Prediction
Jack predicts that the Ethereum ETF will see slightly less inflows than the Bitcoin ETF in the first six months. He believes that inflows between $100 million and $200 million are reasonable because Ethereum has lower brand recognition and no staking rewards.
Joe believes that the inflow of Ethereum ETF will account for about 20% of Bitcoin ETF. He agrees with speaker 2's prediction that the inflow will be between 20% and 25%.
Alex also agreed with this range, believing that an inflow of between 20% and 30% was reasonable.
Market expectations for ETH ETF
James noted that while many expect Ethereum ETF inflows to be higher, even if it reaches 20% of the Bitcoin ETF, it will be a very successful ETF launch and may become the second most successful ETF launch in history.
James also mentioned that Grayscale’s ETHE product will not see a massive sell-off like GBTC because ETHE is not affected by bankruptcy events like GBTC.
Grayscale's ETHE products
James mentioned that Grayscale is launching a mini Ethereum Trust, which could diversify some of the inflows when the ETH ETF is launched.
James believes that although the launch of the ETH ETF may have a certain impact on ETHE, since ETHE has not experienced a bankruptcy event like GBTC, its performance may be relatively stable.
Jack added that Ethereum’s market cap is around $400 billion, so a 1% inflow would be $4 billion, and he thinks a $300 million forecast might be more reasonable than his previous $100 million to $200 million.
After German Government Selloff and Mt. Gox Distribution, What’s Next for BTC?
German government sells off Bitcoin
Joe mentioned that the German government’s Bitcoin sell-off has been completed, but the impact of this event on the market is very large because they chose to sell during the holiday period with low trading volume, which dealt a severe blow to holders.
Mt. Gox Allocation
Alex explained that Mt. Gox will distribute approximately 141,000 bitcoins, of which 95,000 will be distributed within 90 days to users who choose to receive them early. It is expected that approximately 30% of the bitcoins will be sold, but these sales will be carried out in stages so that they will not cause a huge shock to the market like the German government's sell-off.
Joe added that Genesis Trading also has some Bitcoin to distribute, but these distributions are in physical form, so they will not necessarily be sold on the market immediately.
market trend
Alex believes that although the German government's sell-off has had a certain impact on the market, he believes that this is a major change in the market trend and the market will continue to move higher in the future.
Jack pointed out that the market performance in the past few months shows that the bull market is not over yet, and the market trend in recent days has further proved this. He believes that with Trump's possible re-election as president, this will have a positive impact on Bitcoin and the entire crypto market.
Future market expectations
James believes that although the distribution of Mt. Gox is called "early distribution", it has actually been a process that has been going on for ten years. He believes that many users who choose early distribution have already sold their bitcoins through other channels, so the actual market selling pressure may be lower than expected.
Joe mentioned that if Trump is re-elected as president, this would have a positive impact on Bitcoin and the entire crypto market. In addition, he mentioned that China might lift its ban on Bitcoin and cryptocurrencies, which would further push the market higher.
Alex believes that if China really lifts the ban, the price of Bitcoin may rise sharply in a short period of time.
