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Coinbase Institutional Head of Research David Duong joins host Jennifer Sansie to discuss macro factors, why March will be a big month for crypto market movements and why ether is an essential part of a 2024 crypto portfolio allocation.
This episode was hosted by Jennifer Sanasie. “Markets Daily” is executive produced by Jared Schwartz and produced and edited by Eleanor Pahl, alongside Senior Booking Producer Melissa Montañez. All original music by Doc Blust and Colin Mealey.
Audio Transcript: This transcript has not been edited and may contain errors.
JENNIFER SANASIE:
Let’s just get a quick reaction to what you heard going on in the markets this morning. What are you watching?
DAVID DUONG:
Yeah, I think that there’s a lot of technical factors that are driving performance at the moment. And I believe that a lot of them are starting to actually fade. So if the macro backdrop remains positive, which so far it has, and I think that that’s the evidence we’re going to get from the Fed coming this afternoon, we could actually be up for a pretty constructive outlook for the next few weeks.
JENNIFER SANASIE:
There was a report that came out recently that said that market watchers might be too optimistic about upcoming rate cuts. What are your thoughts there?
DAVID DUONG:
So, I feel very strongly that we’re in a disinflationary period. And I think there’s been some concern that due to kind of like shipping issues, like problems in the Red Sea, for example, that have kind of potentially put pressure on inflation to the upside, I don’t really see that. I mean, number one, shipping costs don’t actually add that much to the cost, final cost of goods. I mean, we’re talking like single digit percentages. So I mean, we’ve kind of over indexed a little bit to what happened during the pandemic. And, you know, a lot of that didn’t have to do with just the issues with supply chain, but had a lot to do with the actually producers of those goods. And as a result, we tend to have this thing in our minds of, well, that means that, you know, anytime there’s any issues with shipping, that adds to the value of the goods, and therefore, inflation needs to go higher. The reality is, that doesn’t tend to happen unless you see something happening with the producers themselves. And in that case, China was still shut down, not really producing, they weren’t able to get their goods out anyway, they’re like, Well, you know, we have COVID pandemic to worry about. So I think it’s much more important right now to be looking over abroad and seeing what’s happening in the Chinese economy. And unfortunately, they are, you know, still suffering, not able to give enough stimulus to their economy, goods prices are very likely to come down. You know, we’re gonna benefit from that as the rest of the world. So I think that’s something to kind of keep in mind here that yeah, it’s, you know, bad for the Chinese economy, but very likely, it’s only going to support the disinflationary trends that we’re seeing.
JENNIFER SANASIE:
Break that down even more for me, what do you expect to hear from the meeting today?
DAVID DUONG:
So I think the Fed is paying attention to this, they understand this core PCE came in line with expectations, for example, there’s not much trade off so far as in terms of activity versus inflation. And I think that’s kind of the key because we haven’t had to sacrifice anything to get the, for the most part, pretty good levels of growth that we’ve gotten. And that’s important, because had it been like any other situation, and we know why this has occurred, right. A lot of this had to do with procyclical spending by the U.S. government. Had it been any other situation, I would have said that the Fed would say like, “Well, we don’t need to do much the environments actually okay,” but because we know it’s been driven more by the fiscal side, and we know that that boost is starting to kind of go to the, you know, move to the back seat. I think the Fed’s well aware that, you know, if there’s a continued disinflationary trend growth is going to start slowing down and maybe we’ll avoid a recession, but growth is going to start slowing in the first half of this year, they’re very likely going to need to do something, or be behind the curve. So I think, for me, I’m expecting the Fed to say that, you know, rate cuts are still going to be in the picture. I don’t think they’re going to completely discount the idea of a March rate cut. You know, but very likely it’s going to happen sometime between March or June.
JENNIFER SANASIE:
You noted recently that March could be a pivotal macro month for other reasons other than rate cuts. Unpack that for us.
DAVID DUONG:
Yeah, I think there’s a lot that is going to happen starting in March. And you know this for crypto, of course, we are going to be anticipating the bitcoin halving, which is still going to be a very pivotal point. And, you know, there’s a lot of kind of unintended consequences of what we’ve seen emerging from the spot bitcoin ETF. And part of that has to do with what’s happened in the miners contingent, for example, we saw a lot of miner selling, which added to the pressure that we’ve had in last few weeks, for example, I think that that could potentially be another issue as we get closer to the having. Probably post having when the more efficient miners are going to be required to continue, you know, either consolidate with other firms or find a way to kind of sustain themselves, I think that this is going to be probably a key issue. And that’s something that’s probably going to be realized closer to the March timeline. If the Fed cuts rates around the same time, though, like this will provide very favorable context for the rest of the crypto ecosystem. So I think that’s gonna be important. That’s also probably going to be right around the time when we’ll start hearing more in earnest from the SEC about the potential for a spot ETH ETF, even though the first deadline for that, and I think that’s for VanEck is going to be on May 23. So I think that there’s going to be a lot that we’re going to need to unpack when we get towards the March period.
JENNIFER SANASIE:
I’m glad you brought up those ETFs we took a look at prices this morning. And the price of bitcoin didn’t really react to the spot bitcoin ETF the way everyone was anticipating it to at the end of last year, what do you make of the sluggishness of bitcoin’s price after that approval?
DAVID DUONG:
Yeah, so I think a lot of people are kind of just watching the short term flows. And I’m not the first person to say this, I think that we’re paying a little bit too much attention to the short term flows, and not enough attention to what we’re going to see as you know, really transformative changes in the next, like, medium to long term. But right now, there are several kinds of offsetting issues that are driving these flows below expectations, or maybe if not below expectations, certainly, you know, it’s it’s not what people want to see in terms of like the the huge numbers. So far the the flows themselves have been fairly decent, actually. But there’s been a lot of rebalancing, there’s been people moving away from less efficient bitcoin holding vehicles to more efficient ones, i.e. ETFs. There’s been a rotation away from like higher fee products in some jurisdictions, to lower fee products in the U.S., because you know, a lot of what’s coming out in terms of the ETFs in the U.S. are cheaper. You also had, of course, the liquidations from FTX. That was pretty significant as far as their 22 million shares in Grayscale. I think that it was also important to note that, you know, there was a lot of buildup in terms of, you know, people buying spot ahead of these ETF launch, or the launches of these ETFs. And, you know, probably hedging themselves with short CME futures. So they were playing the bases, a lot of that’s now been unwound. So I think that’s why I look at this and say, well, the technical setup looks a lot better than where it was a few weeks ago, because the FTX liquidations, for the most part seem to be done. There are still some unknowns here, because like 3 Arrows Capital, which, you know, went unsolved, and of course, they’re still dealing with their liquidation proceedings. I think that they had at their peak, like around 38.9 million shares of Grayscale. We don’t know how that’s going to go down. So there are still some things in there that we’re not fully sure of how it’s gonna work out. But for the most part, I think this is why we’ve started to kind of come back here slowly, as far as bitcoin prices.
JENNIFER SANASIE:
You mentioned that ETH deadline for the spot ETF, of course, amongst all of the hype for the spot bitcoin ETF, the price of ether was pumping, because people were looking forward beyond bitcoin. Now Standard Chartered said that they expect that approval to come through in May and the price could be as high as $4,000. I’ve heard some other market watchers say, you know, it could take a little bit longer. Let’s not get too optimistic here. What do you think the story is for ether leading up to May? And do you think that we’ll see an approval in 2024?
DAVID DUONG:
So I think the odds of an approval are very high to see at least one if not many, spot ETH ETFs. But it’s not going to look exactly like the spot bitcoin ETF approval, and there’s a few things that kind of go into that. Number one, I think we have to be aware that a lot of people are looking forward to spot ETH ETFs to actually include some form of staking, which very likely they won’t. At least in the first instance. And there are just some complications to that more on the legal side than there are on the procedural side, because we know that there are Exchange Traded products, at least in Europe that do include staking in their their ETH product. But, you know, there that doesn’t say that there’s not challenges to the custody, to the tax implications of this that still haven’t been thought through. So I think that that kind of adds to it. But if you don’t have staking in that product, it’s very hard to differentiate the ETH spot product from the bitcoin spot product. And I think that kind of goes into the minds of institutional investors as well, who I think they understand bitcoin as a macro asset pretty easily. But when you go into ETH, then you’re talking about something completely different, because then you have to really understand the Web3 ecosystem. What does that represent? And there’s competitors out there that already pre built like, we have to deal with the whole like Web 2 ecosystem to like compete with. So for right now, I think people are still kind of looking at something like Ethereum. And this isn’t just Ethereum, this kind of whole, like layer 1 slash layer 2 kind of platform plays anyway. But they’re looking at that more as competitors, to like upstarts, to the existing kind of paradigm we have with tech. So I think that’s what kind of makes it hard for the case for Ethereum, which isn’t to say, I don’t think there’s gonna be enclosed, I think there will be, I just don’t think that they will probably be at the same order of magnitude as bitcoin, for example. So I’m very optimistic, I think that this is going to be an important part of it. But I also don’t think that’s entirely why people are looking to ETH right now on. ETH has been, for the most part, not well loved, I think for the better part of like, the second half of last year, and even even, I could say, a little bit into January. And in part, you know, that’s because a lot of crypto native players were probably not fully benchmarked to, or rather didn’t have like the full complement of holdings in the bitcoin. So the to capture alpha, they moved further out the risk curve went into the altcoin space. Meanwhile, heavier institutions who were anchoring on bitcoin. So Ether, kind of like existed in this kind of, you know, like black hole a little bit. Now, I think that we have a formal asset class because of the spot bitcoin ETFs. As a result, I think if you don’t have ETH, because there’s two key assets in the asset class, whether you like it or not, it’s bitcoin in it’s ETH. Like you have to have some ETH your portfolio because if you don’t, that represents real career risk. Like if you don’t have Solana, if you don’t have AVAX, if you don’t have all the L1s that they perform, yeah, that’s performance risk for your portfolio. If you don’t have ETH, then your boss will ask you, Hey, why do you not have ETH in your portfolio? And I think that is going to be a bigger problem.
JENNIFER SANASIE:
All right, David, we do have to wrap but I have to ask you very quickly, what you think the biggest misconception is about crypto markets right now.
DAVID DUONG:
So I think that a lot of people believe that we’re kind of over indexed on bitcoin right now. And I don’t believe that’s true. I think that the next wave of like, you know, there’s gonna be important, like idiosyncratic catalysts. And I’m thinking not just the halving, but I think the context around the halving itself are going to support like this, this ecosystem more, I think that there’s actually a lot more upside for bitcoin, because we’re starting to hit that supply wall. So if anything, I think that it’s still important to kind of keep bitcoin inside of your portfolio. And I don’t think we’re done with the upside move just yet. But that said, Yeah, you know, like, someone asked me just yesterday, like, hey, what else should I be looking at, at the moment? Should I be like, which altcoins are important? Like, should I be paying attention to the launch of Jupiter, for example, and like, airdrops are coming? Like, are we still in airdrop season? I think that we will see that in the post- spot bitcoin ETF environment, it’s going to be a big deal. Because number one, the search for yield is going to be a lot more, it’s going to probably anchor a lot more on DeFi. That’s gonna be hugely important because, frankly, you won’t have the same kind of like easy trades, like the cash and carry trade that people would play in terms of like, going long bitcoin, spot selling the CME futures, for example, like, that’s not probably going to come back in the same way, you know, like, it’s already we’re already seeing kind of more depressed levels there, and you’re not going to see the same spike-ups there anymore. So you’re going to need to do something else. And if the Fed’s cutting rates, and let’s say we’re down like 4% by the end of the year, for example, you’re going to need to find other ways to kind of capture that. So I think like borrowing lending and DeFi those things are gonna become a lot more attractive. ETH’s gonna be like a, I think, a winner in my book for the first half of the year. And I also think that probably we’re gonna see a lot more people rotate in two apps away from kind of just pure platform plays. And that might be expressed through places that you can kind of capture that because you’re going to try to capture sectors, I don’t think you’re going to you’re going to try to capture the ultimate winner because I think that’s still tough. What I mean by that is you’re going to try to find a way to play the gaming proxy, rather than trying to like pick the triple A game that’s going to ultimately win here because we don’t know. But I think that’s what’s going to be important for 2024.
JENNIFER SANASIE:
David, thanks so much for joining the show this morning. That was Coinbase institutional Head of Research David Duong. That’s it for today’s show.
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