Forward the Original Title ‘Conversation with Bitwise Alpha Head of Strategy: Bitcoin Is Setup to Rally to $200,000 by the end of the year’

Key Takeaways

• Head of Strategy at Bitwise Alpha - Bitcoin price target projected to reach $200,000 by the end of the year.
• Bitcoin vs. Gold – Bitcoin, as a store of value, has characteristics similar to gold, and investors mainly consider volatility when choosing. Therefore, generally older people prefer gold, while younger people prefer Bitcoin. This preference among young people is largely due to Bitcoin’s volatility, which is considered one of the key factors driving its value.
• “TradFi’s altcoin” - MicroStrategy plays the role of an altcoin in traditional finance, functioning as a combination of cryptocurrency and Bitcoin.
• Circle Delays IPO - Circle’s financials are in better shape than initially appeared, and while their costs are also high, their revenue is much higher now than it was a year ago.
• Ripple Acquires Hidden Road – This acquisition is strategic for Ripple as they can utilize their balance sheet more efficiently, and it will also help expand the market for their new stablecoin RLUSD.
• Bitcoin Market Returns - Bitcoin’s performance is believed to vary differently depending on changes in interest rates. Falling interest rates are good for Bitcoin because they lead to financial repression and inflation, making Bitcoin a store of value.
• Impossible Trinity - After the end of the Bretton Woods system, we are faced with an impossible trinity, that is, there are only two choices between open capital flows, independent central banks, and floating exchange rates to build a monetary system. When you drop one, the other two will need to adjust.
• Cryptocurrency Macroeconomic Decoupling – The Federal Reserve and central banks around the world are engaging in real stimulus to try to save their economies from shocks that will distort asset prices. Under these circumstances, a decoupling between Bitcoin and other coins could occur.

Impact of Tariffs on Crypto & Bitcoin’s Role in Investment Portfolios

Haseeb:

Jeff, you work at Bitwise Asset Management and have a deep understanding of macroeconomics. Let’s talk about the impact of tariffs on cryptocurrencies. What’s happening in the crypto market? Why should we expect tariffs to have such a large impact on cryptocurrencies, even though cryptocurrencies themselves are not directly affected by tariffs since they are not involved in imports or exports. So why does the crypto market care about tariff-related issues?

Jeff：

On a positive note, I hope to mark the bottom of the market so I can review this episode in the future.

Cryptocurrencies and Bitcoin in general have been a focus for investors, and their role in investment portfolios is constantly changing. Since the launch of the ETF, mainstream investors have been able to more effectively access Bitcoin as part of a global asset class, which is why Bitcoin’s correlation with risk appetite and risk aversion sentiment has increased.

In particular, Bitcoin, as a means of storing value, has characteristics similar to gold, and investors mainly consider volatility when choosing. Therefore, generally older people prefer gold, while younger people prefer Bitcoin. Young people prefer Bitcoin largely because of its volatility. If you believe this is one of the key factors driving the value of Bitcoin.

On the other hand, if other macro assets become more volatile, the opportunity cost of holding Bitcoin will also rise because you will need to compete with these non-traditional assets. Volatility in traditional assets has impacted institutional investor interest in Bitcoin through ETFs. Therefore, I think Bitcoin is generally the best choice for risky trades, but timing is important, especially in terms of the path dependence of other assets’ behavior. There is no doubt that with the changes in the Volatility Index and the VIX index, many people are starting to look at discounts on stocks, and they may find opportunities in the price of Tesla or Nvidia to sell Bitcoin for arbitrage. I think these are the reasons why the market has been volatile over the past few months.

Haseeb:

We have seen that the market has declined significantly over the past few days. If you count Thursday and Friday, the market trading days after the tariffs were announced, you see the market was down 4% to 5%. And then on Monday, oh, sorry, until Tuesday’s close, the market was down another 2%. So overall, we’re down almost 16% to 17% from the market highs this year. Depending on which index you look at, it could be worse. Bitcoin hasn’t really acted as a safe haven so far, trading very closely with other major indices.

Retail vs. Institutional Investors & Bitcoin’s Sensitivity to Interest Rates

Haseeb:

In the stock market, retail investors are actually buying, while institutions are selling. JPMorgan Chase reported that last Thursday and Friday were the biggest days of retail buying in decades, setting a staggering record. Retail investors took advantage of the dip to buy, thinking the market would rebound, so they seized the opportunity.

It is unknown whether this situation also applies to the cryptocurrency market, whether cryptocurrencies are mainly dominated by retail investors. While institutional investors have a presence in the crypto space, retail investors remain the major holders, even in the complex environment of ETFs. So, given that the cryptocurrency market is dominated by retail investors, is this why Bitcoin remains relatively strong? Would things be worse if Bitcoin was more of an institutional asset?

Jeff：

I believe that Bitcoin has always demonstrated the characteristics of being a leading indicator of global liquidity channels, and Bitcoin’s movements generally reflect people’s expectations for changes in global liquidity. Institutional capital may be reacting a little faster now than retail capital was two years ago, which is still an important factor right now.

A unique challenge with Bitcoin is the complexity of its investor goals. I usually divide Bitcoin into two scenarios for discussions with institutional investors: positive rho Bitcoin and negative rho Bitcoin. rho here represents Bitcoin’s sensitivity to changes in interest rates. Some believe that Bitcoin will behave differently depending on changes in interest rates. Negative rho for Bitcoin means that falling interest rates are good for Bitcoin because it leads to financial repression and inflation, making Bitcoin a store of value.

And positive rho Bitcoin is seen as a safe haven asset in the event of world collapse and extreme deflation. In this case, Bitcoin becomes the asset that people seek in times of crisis. What happened in China yesterday is an example of this complex relationship. In response to what Trump did, China actually expanded the scope of its currency devaluation to allow the yuan to appreciate in a way that historically had not been allowed. Today we are seeing the yuan depreciate so rapidly that it is almost back to 2008 levels. If you think about this impact, the actual depreciation of the yuan is a deflationary result, which usually lowers global prices, making it more likely that we will have deflation due to imports. This is a positive rho Bitcoin world, which is not a situation that neither the United States nor China want. They are actually increasing the intensity of this confrontation.

Another approach that China could have taken is to push consumption through a massive internal fiscal stimulus program, which is effectively the inflationary version of negative rho Chinese quantitative easing that essentially unleashed the Bitcoin valve. There was some volatility in the Bitcoin market yesterday, initially rising but then falling back as the risk of deflation was realized.

Overall, Bitcoin’s sensitivity to interest rates has been relatively volatile amid global market adoption. I believe we are currently in a negative rho Bitcoin environment, with inflation and easing policy widely expected to drive Bitcoin’s value. However, there is no doubt that when things get extremely chaotic, Bitcoin will rise as the ultimate store of value.

Haseeb:

In the world of Bitcoin, there are two forces. This power is likely to be more pronounced when Bitcoin becomes a more mature asset. Bitcoin’s reaction has appeared erratic and unpredictable at times. Sometimes it does not respond to macroeconomic shocks, but suddenly falls sharply over the weekend. Today we see that it’s performing very closely to the Nasdaq.

Altcoins and institutional interest

Haseeb:

In the current market environment, altcoins have taken a bigger hit. How do you see altcoins performing in this environment? Now everyone has a lot of expectations for policy relaxation. In addition to tariffs, there may also be significant tax cuts. Additionally, markets expect the Federal Reserve to cut interest rates more frequently than previously expected. As far as I know, the CME is now predicting five rate cuts this year, compared with just a handful, and at one point, just one. What do you think of these changes and how will they impact the altcoin market?

Jeff：

Altcoins are quite complex and face two main challenges.

First, except for Bitcoin, other altcoins have very different consensus mechanisms, which require more maintenance. Bitcoin is like a cold wallet you can keep under your mattress, usually without a problem. The problem with altcoins is that if they are proof-of-stake based tokens, investors must participate in the ecosystem to receive benefits, which reduces costs for investors. But if you are an institutional investor, not being able to participate in this value accumulation mechanism is like missing out on a stock’s special dividend because your shares are held in a custodian that does not allow on-chain operations, rather than the one that does. In this case, investors will have a natural resistance because they do not want to be on an unfair playing field. In the altcoin market, this unfair situation does sometimes exist.

The second factor is that many investors view altcoins as a leveraged trading tool. They are excited about Bitcoin’s volatility, arguing that altcoins can offer higher returns, higher leverage, and greater volatility on capital efficiency.

But the fundamental change is that last December we had a Bitcoin ETF option. Through regulated markets, we can trade Bitcoin options, which provide a sense of excitement similar to speculation and protection. In this way, investors can conduct leveraged transactions more strategically without worrying about the risks posed by those “insiders” or “narratives.”

MicroStrategy: The altcoin of TradFi

Haseeb:

It sounds like you’re saying that altcoins are attractive to institutional investors because they don’t find Bitcoin’s volatility exciting enough and want higher-risk investments. Altcoins are like a more gambling version of Bitcoin. Institutions can now trade Bitcoin options and ETF options through CME, making them more likely to choose Bitcoin options over altcoins.

Jeff：

This may be the reason for MicroStrategy’s rise. In my opinion, MicroStrategy plays the role of an altcoin in traditional finance, it is actually a combination of cryptocurrencies and Bitcoin.

MicroStrategy is like an extra kick. It is actually more volatile than Bitcoin. Bitcoin is now priced between $45,000 and $55,000, while MicroStrategy shares are trading around $100 and sometimes as high as $200. Therefore, for liquidity investors, MicroStrategy offers a more exciting investing experience than altcoins without having to take the risks of lesser-understood altcoins. Additionally, MicroStrategy creates leverage through financial engineering. They issue convertible bonds and preferred shares in different structures, which provide investors with options for various risk appetites. It’s like choosing which altcoin exposure you want from the Bitcoin buffet.

I think MicroStrategy becoming the most traded stock and options contract, and the success of the 2x leveraged MSTR ETF, shows that the financialization of Bitcoin is allowing traditional investors to see greater traction through MicroStrategy, which has somewhat reduced the appeal of altcoins.

Haseeb:

I kind of find it hard to believe this story. While this may be true of MicroStrategy’s derivatives structure, the primary way institutional investors access altcoins in the ETF market is through Ethereum, whose ETF market has never exceeded $10 billion. So it’s not a big market. Most altcoins are actually held by retail investors and are not truly an institutional asset class. Therefore, any analysis explaining the current state of the altcoin market must start with retail investors. Retail investors are not the reason for dominating this market, institutional investors may be trading Bitcoin ETF options or doing leveraged trades on MicroStrategy, but that is not why altcoins are falling.

Jeff：

Yes, if you talk to most cryptocurrency traders and investors, they will say that they are trying to make their tokens generate revenue. Even though Ethereum underperformed relative to Bitcoin last year, this price difference is less significant when the additional benefits of using Ethereum for productive uses are taken into account. If you re-stake with Ethereum and take advantage of Eigenlayer or EtherFi Rent’s ability to participate in these re-staking events, the total return in the ETH market is not just reflective of the price of Ethereum. This is the point I want to make. So if you’re an institutional investor and you don’t have access to Renzo and EtherFi.

Haseeb:

If I can rephrase your point, money from around the world is now pouring into the U.S. stock market. Although this is somewhat anomalous, since the United States is a relatively slow-growing country, it has attracted savings from around the world. We are trying to solve the problem of trade imbalance and hope to change the direction of dollar inflows, but we still need a market where investors are willing to take risks. This market may no longer be the U.S. stock market, but the crypto market.

Jeff：

In this case, I think it’s good for Bitcoin because at least at that point, we can start thinking about building strategic Bitcoin reserves, because Bitcoin’s path may require a redefinition of the social contract of dollar hegemony.

Haseeb:

Now we are clearly in an uncertain situation, no one knows how the tariff issue will develop, and the market is volatile as a result.

Geopolitical implications of tariffs

Tom：

Jeff, you wrote an article about “Plaza Accord 2.0” about two months ago, mentioning the use of tariffs to adjust the U.S. dollar exchange rate and lower interest rates. We are experiencing different versions of this. Obviously, this situation existed ten years ago. Is it developing as you expected? What surprised you? How do you think we have strayed from this path?

Jeff：

Since I shared my thoughts on the long-term impact of tariffs on Bitcoin prices, I have become less certain about Trump’s ultimate goals.

In an ideal world, it would make sense to have a strategy like Plaza Protocol or Core Protocol 2.0. That is, the dollar does need to depreciate to improve U.S. competitiveness, but if you want foreign creditors to continue buying U.S. Treasuries, you need some form of agreement to achieve that goal. This must be achieved through strategy rather than disagreement-free consensus. This is the ideal scenario.

The moment I lost faith was when Trump started blindly attacking almost everyone, including the ally I thought he should least touch - Japan. If there’s one country that needs special treatment, it’s Japan, as they are currently the largest holder of U.S. Treasuries. You need to be sensitive to this. However, Trump not only failed to show this sensitivity, but also lumped Japan into the same category as China, saying that they are also currency manipulators. This shocks me because Japan typically manipulates its currency for the benefit of the United States. So this lack of nuance towards allies made me realize that the end goal might be a higher level of protectionism that I didn’t think was going to happen.

Robert：

I came to theorize that this was not just about protectionism, but about creating the conditions for a shift toward protectionism. There are a lot of companies now thinking that maybe we should re-localize some of our production because there is uncertainty and we want to be closer to the market. A lot of people are actually driving demand ahead of time. I know a lot of people are trying to deal with the tariffs by buying cars, furniture, and durable goods. I think the government does want to see manufacturing jobs come back and there’s a lot of talk and banter about that because we probably won’t be making sweaters and socks and Nike shoes here.

I don’t think anyone realistically expects us to bring low-end manufacturing back to the United States. I think if there is, it’s only for some very specific industries, such as strategic industries such as semiconductors and chips.

Haseeb:

But we don’t have tariffs on semiconductors, and it looks like the only part of this policy that might make geostrategic sense is left out of the tariffs.

Robert：

We can’t have such a big shock to the system, can you imagine if we put tariffs on them? But I do think there’s one aspect that’s not discussed enough, and that is I think it’s not just the geostrategic element of the trade itself. In effect, it’s an attempt to shift the focus of manufacturing away from China and toward countries that are closer to us.

Haseeb:

We’ve been trying to get people to go build factories in Vietnam, Malaysia, and Mexico, and we end up with higher tariffs on them than we have on China.

Robert：

But we will reach agreements with them and find amicable solutions with these countries. We may not reach such an agreement with China, the rhetoric and escalation regarding China are very different circumstances. So I think the end state may be that we have significant tariffs on China and none on our allies. If you’re a business based in China, the first thing you think about is, I need to relocate, to Vietnam or Japan, or some other country that’s more closely associated with the United States.

Jeff：

I agree with you, Robert, that this is to some extent the path that we as Americans have to envision because that is the most efficient and desirable outcome. At the same time, we cannot assume that the path to this outcome is free of negative consequences.

For example, I think yesterday the White House communicated that Japan would have priority lanes as a way to conduct tariff negotiations. I believe part of the reason was to give Japan a little compensation for the US offending them in some way, in order to give them a strategic advantage as an ally. So, they’re playing these games. But actually, over the past week and a half, while Japan was getting annoyed that the U.S. was not giving priority access, China actually announced that they were exploring a trilateral trade relationship with South Korea and Japan. The publicity of this statement suggests that some kind of backstage conversation has taken place in a way that China can benefit from, because China does not make such a statement lightly.

None of these three countries are likely to work together in Asia because they are not friendly to each other. So you have no way of knowing if there’s some kind of fringe deal-making in the U.S.’s path-dependence that could ultimately have a negative impact on the U.S. power vacuum — and that’s my biggest concern, the concern that these things could have collateral damage because we live in a multilateral world and we should be cautious about that.

Haseeb:

I think these tariff policies are very wrong and lack a coherent strategy. While we exempt semiconductors, the products considered most militarily and geopolitically important, we impose higher tariffs on many allies than on openly hostile nations. Russia and Belarus are the only countries excluded from the tariff list, making it clear that we have an opportunity to trade freely with them. China, on the other hand, has taken advantage of this situation by becoming a very stable partner, increasingly committing to free trade, and gradually becoming a stable trading partner for more and more countries.

Global Currency Models and Bitcoin’s Role

Haseeb:

I think Trump is more focused on power than alliances and diplomacy in negotiations and political decision-making. Sometimes this strategy is tactical. But in peacetime, when the economy is doing well, unemployment is at historic lows, economic growth is rapid, and we are on the brink of a technological revolution in artificial intelligence and cryptocurrency, it is not a good time to suddenly start a fight and turn everyone into an enemy.

Jeff：

My concern is that if the world begins to reassess the role of the dollar and the U.S.-dominated global financial system, various alternatives may emerge. One of the things we can discuss is the “Trinity” theory. The core idea of ​​this theory is that after the end of the Bretton Woods system, we are faced with an impossible trinity, that is, we can only choose two between open capital flows, independent central banks, and floating exchange rates to build a monetary system. If you drop one, the other two will have to adjust.

For example, the United States has chosen open capital flows and an independent Federal Reserve, so it needs to let the dollar float freely. China has adopted a different strategy. They do not open up capital flows and let the People’s Bank of China manage the exchange rate, so they can keep the exchange rate fixed. The Eurozone has chosen open capital flows and floating exchange rates, but without an independent central bank. The policies of various countries are aggregated into a larger Eurozone. As a result, there are many ways to design the global monetary system, and now people are beginning to question whether there is a more efficient system than the free-floating model promoted by the United States.

Bitcoin’s performance in different economic scenarios

Haseeb:

The likelihood of a recession is high if we enter a state of stagflation, which is a situation where a recession and high inflation exist at the same time, possibly due to the impact of tariffs. How do you think Bitcoin would perform in this scenario?

Jeff：

I expect Bitcoin’s price target to hit $200,000 by the end of the year, and I still think there’s a good chance of hitting that target. Even in a stagflation scenario, Bitcoin can still be the fastest growing asset and perform well.

Haseeb:

So you think Bitcoin will win in the speculative market. If instead of stagflation, the Fed cuts interest rates sharply and implements quantitative easing, the economy will regain its vitality, but inflation will remain high. How do you think Bitcoin would perform in that scenario?

Jeff：

I think it will perform better. The direction of these things can vary greatly, it’s really just a reflection of time, and as a liquid asset, no one knows where these things will ultimately go, it’s a commodity.

I am an extremely path-dependent options pricer, so I evaluate the entire local volatility surface, requiring us to recalibrate.

Haseeb:

Assuming the tariffs are withdrawn, the courts overturn them, and Congress lacks the courage to reimpose them. So that’s the end of the whole tariff strategy. Do you think Bitcoin would be higher or lower in that environment, versus a world where tariffs stayed the same and we entered a world of stagflation and Fed expansion?

Jeff：

I think that’s still a good result, still positive for Bitcoin, maybe eventually reaching 175,000.

Haseeb:

So it would be worse if we rolled back the tariffs, and it would be better if the tariffs stayed in place and the Fed expanded, what do you think?

Robert:

I think this is highly unlikely to happen. If we rolled back the tariffs, it would actually have very little impact, just like going back two weeks ago, the only thing that had really changed was the trust between the United States and its different trading partners. I do think this could continue to be a potential problem in the United States, but it could also be good for alternative economic structures and even good news for Bitcoin. I think people may lose confidence in U.S. Treasuries and the dollar.

Haseeb:

Do you think it would be better for Bitcoin if tariffs remain unchanged and the Fed continues its expansionary policy? Or is it the other way around?

Robert:

I think it would probably be better if the tariffs stayed the same. Because markets typically only focus on current changes, rather than two-step changes in the future, markets operate based on what’s happening right now.

Tom:

Even if the tariffs are completely lifted and we go back to two weeks ago, the dollar is still depreciating, which I think is probably better for Bitcoin. I’ve been thinking about the relationship between global liquidity and Bitcoin. Although we have discussed it many times, Bitcoin still seems like a risk asset. I hope it becomes another alternative to gold, but that hasn’t happened yet. Maybe now is the time, there is always a first time, if you look at the price trend in the past three or four years, you will feel that this is the ultimate qualitative change.

Haseeb:

So would it be better to remove tariffs? I’m not so sure, as unchanged tariffs could bring more pain and instability, which could push Bitcoin prices higher at the end of the year. I see this as a possibility of cryptocurrencies decoupling from the real economy as the Fed and central banks around the world are engaging in real stimulus to try to save their economies from shocks that will distort asset prices. I think this is more likely to happen with Bitcoin than with other coins.

In that case, there could be a decoupling between Bitcoin and other coins, and I’m very uncertain about the outcome of either scenario. I think this is very counter-intuitive because on any given day, Bitcoin is not performing as expected, other coins are not performing as expected, and the correlation is breaking down. Sometimes Bitcoin trades alongside gold, sometimes alongside the Nasdaq, and sometimes ditches both entirely and goes its own way, it’s clear that the asset is changing.

I think by 2025 or 2026 we’re going to be talking about Bitcoin in a very different way, and we’re going to have a different mental model. My guess is that by the end of the year, we will have a different understanding of how cryptocurrencies perform in the midst of huge macro imbalances.

Jeff:

I agree. The same goes for global liquidity. I think people will start to understand the leverage in these conversations more nuancedly. Because, Tom, as you said, one of the problems with global liquidity is that a lower dollar is actually good for global liquidity. But I’m not sure whether the increased global liquidity brought about by the dollar’s ​​depreciation will drive Bitcoin’s valuation.

Circle’s IPO and its business viability

Haseeb:

I want to talk about two stories related to capital markets that are relevant to the overall context. The first was the announcement that Circle was filing for an IPO. Circle plans to go public at a valuation of $4 billion to $5 billion. Apparently, Circle has been trying to enter the public markets, but has been previously blocked by Gensler and the former SEC, making it difficult for crypto companies to go public. Now they finally got the green light, but they announced a delay in the IPO due to tariff issues. As a result, Circle withdrew its application. Still, discussions about the company’s viability continue, and questions remain up in the air about how capital markets will view it and whether they can achieve the expected valuation.

What do you think of Circle’s prospects? How do you think it will be treated on the open market? Obviously, all IPOs are now on hold and all companies planning to go public are waiting for the market to stabilize. But all that aside, how do you see Circle as a business entering the public markets?

Robert:

I don’t think their financial numbers fully reflect the growth USDC has seen over the past few months. USDC keeps growing. Since they are a company that earns interest by floating stablecoin reserves, there is a certain lag effect. If a business continues to grow over a year, its revenue will not increase significantly immediately, there is an averaging effect. So I think their financials are in better shape than they initially appeared to be, and while their costs are also high, their revenue is much higher now than it was a year ago. If the supply of USDC is growing, this will disproportionately benefit them. I think this is underestimated.

Regarding the discussion on crypto Twitter, I also noticed that Circle is a large organization relative to Tether. Circle is said to be a fraction of the size of Tether, but has 40 times the number of employees. This suggests that they may be able to allocate human resources more efficiently in the future. Executives are also well paid. These all suggest that operations may not be the most efficient now, possibly because they were earning over 4% during the good years without putting in much effort. Therefore, there may be a “good times syndrome.” But if the economy continues to improve, their business will take off; if things take a turn for the worse, they’ll have to make some tough decisions.

Haseeb:

A central question about Circle is, how will the public market view the company? Will they view it as an asset management company, or as a technology company? This will directly impact the valuation multiples they can command. Robert, how do you think the public market will view Circle when it goes public?

Robert:

I consider it an asset management company because they earn quite a bit on every dollar, somewhere in the region of 4% plus. They have to share some fees with Coinbase, but their yield is still high.

They earn huge fees on the management of assets behind stablecoins. So no matter what additional features they roll out for developers, it won’t really change their revenue. Their revenue and profits are driven by how much USDC they issue and what their target interest rate is. That’s the whole business.

Jeff:

This is indeed an asset management structure, but it may be an inverse asset management multiple. As an asset management company, it can be very profitable in a high interest rate environment, as you said, it’s long-term interest rates, whereas actually most public companies like Blackstone benefit in a low interest rate environment. As such, it has a different relationship to the direct creation component of the asset management business, which can have far-reaching consequences. I would even say that combining a Bitcoin portfolio with Circle as a hedge could be a useful tool.

But I want to emphasize the revenue share with Coinbase again, because the multiple depends on having a defensible strategic moat. How defensible is Circle’s business model if the percentage of fees for being a distribution partner is so high? This got me thinking if this is really less of a tech play and more of a distribution play. If it were a distribution play, that would be very different than the underwriting approach applied to that multiple. We’ll see.

Haseeb:

Tom, what do you think of Circle?

Tom：

I’m going to hold back a little bit because I don’t want to be seen as an opponent of the Circle. I think they are great people and I really appreciate their contribution to the industry. I just think last year I half-jokingly tweeted that Tether could easily acquire Circle with just one quarter of profits. Frankly, the joke seems to have gotten less exaggerated over time. I think Tether is better structured in terms of overall company operating costs. They could easily acquire the company. None of them tried to interfere with them in Washington. And they could easily tear up their agreement with Coinbase, or simply shut down the product, convert to USDT, and end up with a better company structure.

When I look at their changes over the year, their margins continue to shrink and their overall profitability is declining. I really don’t know what their strong prospects are. I thought technology stories were cool, but they didn’t really come to fruition. It looks more like an asset management company.

Haseeb:

I must admit that I didn’t look closely at Circle’s S1 file, but I noticed a few points. When interest rates start to rise, the overall stablecoin supply decreases. This is understandable because when interest rates are zero, there is no opportunity cost to keep money on-chain and businesses can profit from it. As interest rates fall, more funds should be attracted into the stablecoin market. So is this reverse force completely equal? I’m not sure, probably not. As stablecoins become more regulated and considered safer than they were in 2021 and 2022, some changes may occur.

Second, it is clear that Circle can charge high fees on issuance and redemption. If you have a stablecoin that people use to pay, then if Circle can get an advantage in the context of the Stablecoin Act and other regulations, get a license more easily, and win favor with regulators, they could get a big regulatory advantage over Tether. So, can they monetize this advantage? Probably, especially as other companies rush to work with stablecoins and integrate them into their domestic operations. So beyond banking, holding assets and liabilities, collecting floating income, there’s a lot of story to tell. I agree with you, business does look more like that right now because interest rates are so high. As interest rates come down, they will find other ways to monetize this business. After all, it’s basically a duopoly market right now between Circle and Tether. I think you might see the market fragmented into different areas, like you see in DeFi, where USDC dominates the market. In emerging markets, Tether usage dominates.

If things play out this way, each stablecoin issuer can aggressively monetize within their own space without having to worry too much about price competition. Because if you’re in DeFi, there are almost no other options. If you’re in an emerging market, there are few alternatives. You have to use their tokens, so they can charge more upstream and downstream. Take Tron as an example, Tron fees have historically been very high. If you look at Tron’s blockchain fees now, most blockchain fees are very low at the moment because it’s a downturn and everyone is focused on macro activities and the transaction volume is not huge, but Tron’s fees are high.

Why are Tron fees so high? Tron’s fees are not due to network congestion, but because validators vote to increase fees. You can think of this as Justin Sun taking advantage of people having to use Tron. So, Tron basically takes a huge profit from all the payment activity that happens on Tron. This to me is a great example of what happens when you have a monopoly on payments infrastructure. So, could Tether and USDC find a way to create such fees for themselves? I don’t see why they can’t do that now that Treasury’s core business model is no longer so attractive.

Tom:

I think it’s a story that all bonus capture stories are a part of. But I think the balance sheet almost tells a different story, which is what percentage of USDC is on Coinbase. Therefore, it is not used as a payment infrastructure. So I think that’s a good aspiration and I really hope that happens. I would like to see more of a duopoly in this market, with more competitors. But realistically, I really can’t see this becoming a reality unless they work hard to make Tether illegal.

Jeff:

I think this scenario is highly unlikely to happen as the strategic interest of the United States lies in keeping both entities separate. The privileges you mentioned actually reflect the value of foreign countries willing to park their funds in dollars and pay any price for it. The United States can therefore treat foreign capital holders differently than its own citizens, a privilege that in itself is a premium that can be extracted. Therefore, philosophically, even if the United States wishes to project its own superiority, it also wants the two entities to remain separate. Therefore, if these two entities merge, it will be a bad outcome because other companies may emerge to try to compete with Tether, which will create a greater challenge for the United States.

Ripple Labs’ acquisition of Hidden Road

Haseeb:

Today we learned about the largest M&A deal in crypto industry history, with Ripple Labs acquiring Hidden Road for $1.25 billion. Hidden Road is an institutional product provider that mainly serves institutional clients and may not be familiar to most retail investors. As the second-largest prime broker in the crypto industry, Hidden Road handles approximately $3 trillion in trades annually and has more than 300 institutional clients. Often in M&A transactions, the headline number is often a combination of multiple factors, or a complex structure tied to performance that makes up one big number. But this deal is undoubtedly significant and strategically important for Ripple. First, they can use their balance sheet more efficiently since they obviously have a lot of cash on hand, and second, the acquisition helps expand the market for their new stablecoin, RLUSD.

This M&A deal is very interesting. We’re actually investors in Hidden Road, so now we’re investors in Ripple Labs as well. Congratulations to the Hidden Road team on a job well done. This is an interesting time for the industry as a whole, especially in the current macroeconomic context where markets are generally unstable and almost all crypto industry assets are declining. It’s been a rough year, but stablecoin growth, more institutions coming in, and the ETF ecosystem are looking very strong. So I’d like to ask you all to share your thoughts on this momentous deal. Robert, what were your thoughts when you saw the news about this deal?

Robert:

I need to disclose that I am the CEO of Superstate and we are a client of Hidden Road. We use their trade execution services, the team is great and the product is great. I had a bit of an “aha” moment when I saw the news. There were rumors before that Falcon X was considering acquiring them, and I could also imagine them being acquired by Coinbase or another exchange. So I was a little surprised to see Ripple become an acquirer. I think this makes sense for Ripple and the price is not too expensive considering Hidden Road’s market share. If this increases XRP Ledger usage, I think they could sell this story to the public and sell enough XRP to finance the entire deal. Therefore, this is a smart decision for Ripple. I just didn’t expect this outcome.

Jeff:

I am also surprised, but not entirely surprised, that there is a clear trend towards integration between crypto services and traditional financial services and that providing a multi-asset solution may be a worthy goal.

To my surprise, I had always viewed Hidden Road as a “down payment” for Citadel when considering the crypto market. I would have thought that Citadel would find this a business worth taking on themselves, especially with regulatory transparency, or they would continue to fund it as an outsourced business but not want to get directly involved.

This confirms my belief that it is much easier for traditional companies to enter the crypto space and provide some ancillary services, while it is relatively difficult to go the other way. I noticed that Hidden Road is trying to expand into some areas that have nothing to do with crypto. For example, they have crypto short-term trading, but also want to offer a complete multi-asset solution, want to be a fixed income clearing partner or a market maker, those are all things that Citadel can do.

This reminds me of what’s going on right now, where firms like Goldman Sachs are trying to offer prime brokerage services to compete with Falcon X. In fact, it is quite challenging for crypto companies to enter the traditional financial field, while it is relatively easy for traditional financial companies to enter the crypto field. This deal may reflect that trend.

Haseeb:

Tom, what do you think?

Tom：

I’m really surprised, considering this is a portfolio company, but that’s fine. As an investor in Ripple Labs, this is really exciting.

Haseeb:

I think for most listeners, the average person probably doesn’t even know what a prime broker is. So for a lot of people, they hear, “Wow, the biggest M&A deal in crypto,” it’s like a complex thing that only has 300 customers using it. So I think this is somewhat the growth of financial infrastructure in the crypto industry. In a way, Hidden Road is also a response to FTX, as more and more institutional traders, especially after the FTX incident, do not want to face counterparty risk. They want to have a neutral player between them and the exchange, and this is the basic function of a prime broker. So Hidden Road offers many other services to improve capital efficiency, but this is one of the main stories. As you mentioned, they were spun off from Citadel, which was a large hedge fund asset management firm. So this is really the intersection and combination of traditional finance and crypto market structures.

The biggest story for me is that, aside from Ripple seeing the advantages of leveraging Hidden Road for distribution, Hidden Road still needs to remain neutral and will operate in an independent manner in order to continue to be a useful prime broker. This is also why Coinbase cannot truly have a prime broker, as Coinbase itself is the exchange and therefore is not considered neutral. So I think the biggest thing is that this is proof that the crypto industry is maturing. Such real mergers and acquisitions, and the success of this company, are signs of growth in the crypto industry, which is maturing. I think for everything in this space, that’s a good sign for the market going forward.

Right now, with what’s going on globally and how far the market has fallen, it’s very difficult to stay positive. But at least events like this, I see as positive bright spots, show that there are forward-looking reasons to be optimistic in this area. I think for long-term capital, there are a lot of people who see this and are willing to make a large investment in this. To me, this is an important takeaway: M&A is still happening, which is also a good sign.

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