Is the worst of the crypto winter behind us?
Can we expect a new Bitcoin bull run in 2023? And what are the hottest crypto projects
for investors at the moment? These are The questions that everyone is asking
as we enter the new year. The result: Crypto Twitter filled up with all sorts of
predictions. In this video we try to cut through The noise to identify the main trends that will
mark the crypto industry in 2023. Jeff Dorman, The chief investment officer at hedge
fund Arca, joined us in our quest. I don't think Bitcoin's correlation to the
market will go away. When you look at Ethereum, And you look at Polygon, and you look at Solana, And you look at FTT, their returns
had nothing to do with macro. I'm Giovanni. On this show, we challenge the ideas
that shape the world of crypto. In each episode, We assess a crypto narrative, a price outlook, or
a potentially disruptive technology. Only the most Solid ideas will make it to the other side. This
video is presented by our sponsor Web3 Antivirus, A security solution that helps protect users from
online threats and scams on the decentralized Web. Talking about prices for 2023, you said that
we are likely to have reached the bottom, But you don't know what could push us
higher. So tell us more about that. You know, there's a couple of factors that
lead me into believing that the worst is Behind us. Most of the force selling is over.
Any funds that needed to unwind before year End have largely done so. There's not nearly
as much leverage in the market. There's also Really very difficult to short anymore. FTX was
one of the easiest places to short the market, As well as getting loans from places like
Voyager, and Celsius, and BlockFi, and Genesis, All of which are now defunct. So it's hard to
short the market. There's a lack of supply. I think that is encouraging for a bottom. But
also generally when investors are all on one side, And for the last few months everybody was
negative, everybody was high cash balances, Everybody was short, you start to see negative
news no longer matter. And I think that's what We're seeing now is most of the FTX dump
has retraced. You're seeing negative news About DCG and Genesis and NEXO, and
the market just doesn't care anymore. You can't see what this catalyst
or these catalysts could be that Will bring the market higher in 2023? You know, probably my biggest
thesis with regard to this is that We're going to continue to see an onboarding of
Web2 and other corporations coming into Web3 and DeFi. Companies have been around for 50 to 100
years, are starting to utilize blockchain. We've Seen financial companies like KKR and Apollo
start to tokenize funds and securitizations. You've seen Goldman and JPMorgan and BNP start
to get involved in some DeFi transactions. And Then you're seeing on the NFT side, you've
seen companies like Nike and Starbucks and
Reddit start to adopt NFTs and start to find
different product lines and revenue enhancing Functions there. And what happens is, you look at
the total digital asset market, there's only an Estimated 200 or 300 million people who have
ever really interacted with the blockchain. That's smaller than some of these companies
I just mentioned. I mean, Visa alone has 200 Million users, right? Apple and iTunes has
300 million users. You start to pour it over, You know, Starbucks has 60-70 million users. You
start to pour it over some of these user bases That already exist in the non-blockchain world,
and you start giving them blockchain tools. So I think when we see that, that's going to be
a massive catalyst to the upside, certainly For layer 1s and layer 2s, but ultimately
for DeFi and for NFTs and other projects. On the other hand, we saw that in 2022
crypto was tightly correlated to the Stock market. We saw how these two types
of assets were responding in the same way To the macroeconomic picture. So why would
you think that in 2023 it will be different? Sure. Well, first of all, not all that is true
in my opinion. So Bitcoin has definitely been Very correlated to traditional markets and to
traditional macro factors, and largely because Bitcoin has just become a 24/7 VIX, it's just
a trading vehicle now for large funds who want To get in and out of risk on weekends and
overnight trading hours. So I don't think Bitcoin's correlation to the market will go away,
but the rest of the market decoupled back in May, You know, again, the first four or five months
of the year, the every single market was being Hit by the central bank policies and by the
speed with which central banks were raising Rates relative to expectations and the fact that
inflation was much stickier. But the digital Asset market decoupled in May. When Terra Luna
blew up, the digital asset market got crushed, Whereas the traditional equity and debt markets
didn't move. And that's because that was a very Idiosyncratic event that was specific to Luna
and UST. Now we decoupled to the downside, Not the upside, so most people don't want
to admit that that was a decoupling because Everyone wanted us to decouple up, not down, but
we decoupled down. And then in July and August, When the Ethereum 2.0 Merge roadmap became
reality, we decoupled to the upside. And we Rallied pretty hard because of Ethereum.
That again, had nothing to do with macro. But don't you think that that
decoupling was just a short-term one, So one that was strictly related to that
specific crypto event? In the macro picture, We really haven't noticed like a consistent
decoupling of these two types of assets. There's no reason to lump all of these assets
in the same category just because they're all Digital assets. When you look at Ethereum, and
you look at Polygon, and you look at Solana, And you look at FTT, their returns had nothing to
do with macro. FTT went bankrupt, right? Solana Basically went down 95% because of its ties to
bankrupt and failing entities. Polygon went up.
And that leads into really what I wanted to get
to, which is most investors three years ago, Two years ago, even last year would say:
"Okay, I'm starting to believe in blockchain, But I don't believe in tokens because tokens
have no intrinsic value. I want to own equities Where it's safe." Well, how those equities do?
How'd your equity and BlockFi do? How'd your FTX equity do? How'd your Coinbase equity do? So
in equities what drives the value of equities is If you're a going concern, meaning if you're a
company that's not bankrupt, it's the multiples That you can get on your revenue and your cash
flow stream. Well, if we head towards a recession And we have higher rates, well, two things
happen, right? Those revenues and those cash Flows go down and the present value of those
cash flows go down because of higher rates. But also you may have trouble refinancing
your debt and you might end up in bankruptcy Where all of a sudden your equity gets
wiped out in a liquidation and creditors Take over the new equity of the business.
Well, that's very different from tokens, Right? How do tokens generate their value? Well,
there's two components. One is a financial value Very similar to stocks, right? If you look at the
revenues and the fees of Ethereum, or a Uniswap, Or a Binance, or any of these companies or
projects that have real revenues, there's Certainly a financial component to the value of
a token. And if those financial values go down, Then those tokens will go down. But the other
component of the tokens value is the rewards, Or the loyalty, or the usefulness, or the utility
of it. That doesn't go away in a recession. So I think we're headed into an environment
where you're going to see a lot of stocks Get punished under the weight of restructurings
and under the weight of lower revenues and lower Cash flows. And you're actually going
to see a lot of tokens do really well. Basically, according to your outlook, Basically we're going to see a decoupling
of crypto from equities, but that is not Going to concern Bitcoin. So Bitcoin is not
going to decouple, the rest of crypto is. Correct. That's my view. And that's because Bitcoin does not respond to These logics of being like a token with
a utility. It's just a store of value. Yeah, I think it's a store of value, but more
importantly, it's how it's being used. It's being Used by macro traders and by long-short equity
investors and by other companies around the world As a trading tool, as a trading tool
to express risk-on and risk-off. We saw that 2022 was the year where a lot of CeFi
players failed. And that is why a lot Of people are now very bullish towards
DeFi. So one of the most widespread Predictions is that this is going to
be the year of DeFi. You are also very
Bullish in your predictions about DeFi.
You said that in 2023 TradFi will lose Market share to DeFi. So let's get into that
prediction and explain what you mean by that. Three, four years from now you might come out of
this. Actually, 2022 was the year that everyone Realized that decentralized finance just works
better than traditional finance. Right, code Works better than humans. Humans make mistakes.
Humans are greedy. Humans do things and cut Corners. Code doesn't do that. I think probably
the most important thing is when you look at Each of the companies that have gone under this
year, there is a DeFi or decentralized substitute That does the exact same thing with the exact
same customers that has flourished, right again, For every Voyager and Celsius and BlockFi, there's
a Compound and a Maker and an Aave that are doing Really well. For every FTX, there's a Uniswap or
a dYdX or a GMX that trades the same instruments. Ultimately, when you look again where DeFi was two
years ago, two years ago when DeFi just started, The spot trading of digital assets was
less than 1% of total volume. Now it's 12%. That's a big jump over two years, and
that's largely because of the success of Uniswap and some other aggregators. You're going
to continue to see that shift happening where More and more people just get comfortable
using these decentralized alternatives. Of course, code potentially is going to be more
trustworthy than just like a centralized entity, But maybe we are not there yet
because we started in 2022, The highest amount of hacks was
directed towards DeFi protocols. And so it seems that these protocols still have
a vulnerability towards these sort of exploits. Yep, I agree with that. I think that's a harder
one to solve for. I don't actually know if that Gets solved for in 2023, but I know that that's
a big theme that we are investing out of Arca. You know, I think with record numbers of hacks
and exploits and bad actors, there's no question That we need more rigorous security and testing
practices. The test in prod is not going to work, Whether it's products that offer simulation
stress testing for DeFi protocols or just Greater security of private key storage or more
transparency around where your assets are. I mean, These are initiatives that are basically going
to have to be taken much more seriously in 2023 And beyond. And there are companies
and projects that are attacking that. From the excitement that they get about DeFi, I
guess that you are far more bullish on Ethereum, Which is basically the foundation
of DeFi than you are on Bitcoin. So Ethereum is going to outperform
Bitcoin in 2023 according to you? Yeah, I think so. Bitcoin still has a very
large overhang of supply from the inflation Rate and from the miners. On top of that
you have again Mt. Gox distributions. You Have government seizure distributions, you
have a fair amount of collateral still held On lenders and bankrupt entities that might
eventually get sold. The number I estimate is
About $11 billion of supply is going to come
out for Bitcoin next year or this year 2023. That basically means you need a $1 billion of
buy pressure a month just to keep Bitcoin flat. That's a lot. That's a lot of demand. You know,
Ethereum is, basically because of its transition From proof-of-work to proof-of-stake is now
certainly disinflationary and in some cases Even deflationary. I think in the last week
and a half it's been deflationary. There's Been more Ethereum tokens burned than there was
a new ETH issued that flows to stakers. That's A big supply/demand dynamic. Now, all else equal,
Ethereum can be flat even if there's no new demand Just because the supply is being burned. That's a
big deal. And then on top of it, Ethereum has real Revenues and cash flows that come in. You can
think of Ethereum as like the Apple App Store, Right? The more people who build in the App
Store, the more transactions, the more volumes, The more revenues that go to Apple. Same thing
with Ethereum. Then you also have your utility Function, which is you have to still use Ethereum
in the ecosystem, right? It is a currency within Its ecosystem. So I just think the usefulness,
I look at everything from a financial modeling Standpoint and from a growth standpoint, and
Ethereum just has more usefulness. It has more Revenues and cash flows, and therefore I think
it has more likelihood of outperforming Bitcoin. I'm very excited to see how this all plays out
in 2023. And I'm looking forward to talk to you Again, maybe in one year from now and see
how these predictions will have played out. So, yeah, thanks a lot,
Jeff, for coming to our show. Good luck for everything this year. And
yeah, I hope to see you soon on our show. Great. I appreciate it. And yeah, we'll see in
12 months how accurate these predictions are.
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