Fireside Chat: Beating Inflation with Bitcoin Which stage of the cycle are we in now

19 Aug 2021


Cryptocurrency markets are experiencing a period of calm, making this the best time to assess a key claim – how well do they actually serve as inflation hedges? In this session Phillip Futures Executive Director, Grace Chan, and Phillip Futures Investment Analyst, Mooris Tjioe, will draw key lessons from Bitcoin’s past price performance, and attempt to make sense of the often-confusing ecosystem by focusing on key technological and regulatory developments.

Key Talking Points

  1. Are cryptocurrencies a fad or are they here to stay?
  2. Is there value in holding cryptocurrencies?
  3. Decentralised Finance – what is it and is it really the future?

Speakers
Grace Chan – Grace Chan is the Executive Director of Phillip Futures. Her 20 years of experience in the financial industry spans across customer service, marketing, business development and management. As Executive Director of Phillip Futures, one of the region’s top brokerages for the trading of CFD, Forex, global Futures and Commodities, Grace establishes business goals, designs, develops and implements strategic plans for the company. She oversees business operations and provides leadership to all staff.

Mooris Tjioe – Mooris is an Investment Analyst at Phillip Futures, primarily focusing on equity analysis, commodities, and the relatively young field of cryptocurrency research. He regularly writes and speaks on a range of asset classes such as equities and cryptocurrencies, mainly through editorial contributions, commentaries, and special reports. Mooris constantly strives to deliver a somewhat unique perspective on the market by merging his public policy and market research experience, and is always on the lookout for and making sense of new opportunities and risks to the market through his work.


Q&A

Q: Hi Mooris, besides Bitcoin and Ethereum, what are some other coins you are looking at?

A: I think the top market-cap coins across the various “sectors” of cryptocurrencies offer an investor good exposure to still-developing projects with real-world use cases.

For instance, a good resource would be to explore “Coinmarketcap.com”, where you can look into the various sectors: “DeFi”, “NFT”, “Polkadot”, “BSC”, “Solana”, and more. The top projects in each of these categories typically have real-world use cases, and finding research/news coverage on the top coins (by market capitalisation) for these coins is typically easier due to their higher profile in the crypto community.

To answer your question directly, I am looking at projects that address scaling solutions for Ethereum, particularly “Layer-2” solutions and “Ethereum-killers” as I believe that a major impediment to the widespread adoption of smart contracts is the scalability problem.

Q: How did you allocate funds for equity, unit trust and Bitcoin or cryptocurrency in %?

A: While I am unable to answer this question due to ethics concerns, I can perhaps direct you to conduct your own research into the Efficient Frontier-style analysis of assembling a portfolio (ala Modern Portfolio Theory) and utilising the Sharpe Ratio to obtain the best risk-adjusted returns for cryptocurrencies.

Q: Cryptocurrency is not just Bitcoin. What are your comments/thoughts on other cryptocurrency like Ethereum, XRP Ripple, and Dogecoin?

A: Ethereum is relatively unique in that Ether tokens are actually used as a form of currency to run “programmes” (smart contracts) on the Ethereum network – thus, many have an underlying need to possess Ether tokens (ETH). Thus the more smart contracts and functionalities get added to the Ethereum network, the higher the demand for ETH tokens – thereby driving at least one component pushing ETH’s price higher.

XRP – the main reason for its price increasing recently, has been the progress made in the SEC’s lawsuit against Ripple (Ripple is the company, XRP is the cryptocurrency). The key difference investors should be aware of is that the company Ripple owns around half of all XRP (that’s around 50 billion XRP), and sells part of them on a regular basis (at a rate of around a few hundred million a month) to raise funds for “further development of Ripple payments”. This obviously has the effect of diluting the value of each XRP token on a regular basis, and dictates that the value of XRP should be assessed on a separate set of metrics from other cryptocurrency projects.

Dogecoin – there seems to be a concerted effort to turn it into a legitimate payment method (such as through Elon Musk’s highly publicised improvements to it). But beyond that, there are several other projects that already do payments much better – even Bitcoin’s Lightning Network is a superior solution that is being used on a country-level scale in El Salvador, while Litecoin has always been better in terms of transaction speeds and costs. Thus, the value of Dogecoin seems to have less to do with its utility, but more of its celebrity appeal – and therein lies the limitation of my analysis.

Q: What about NFTs?

A: While Bitcoin sentiment can arguably be driven by discussions of its usefulness as an inflation hedge and store of value, NFT valuations are driven by a whole range of factors such as the price of Ether (most NFT transactions are conducted in ETH), current market sentiment towards valuing an NFT (there is no possible science/quantitative calculation behind this), and euphoria (many NFTs are bought with the hope of selling it for a higher price immediately).

I can point to many examples of NFT speculation gone wrong, such as the B20 Token (allows you to “own” a piece of a selection of NFT art) – which spectacularly crashed from $28 in March, to $1.14 at time of writing.  From my view, there was nothing that fundamentally changed about the market in between the two time periods, but simply that “investors” lost interest in NFT art after realising that much of the market was caught in a purely speculative cycle.

Q: If you can transfer money to friends via services like PayLah! and PayNow, why can’t you transfer Bitcoin?

A: You may actually transfer Bitcoin to a friend – but both of you must have the requisite “wallets” set up first. A quick search of wallets – such as the popular MetaMask or Blockchain.com will perhaps suffice. Wallets are also usually decentralised.

Should you and your friend both have a cryptocurrency wallet (they don’t have to be the same wallet e.g. both of you don’t have to be using MetaMask together), you can send cryptocurrencies to each other directly from the wallet.

Think of the wallet as your own personal PayLah! account with a ledger kept separate from your bank account/other cryptocurrency accounts. However, usage of such wallets is often not intuitive to many, and extreme caution should be exercised during transactions as it is possible to lose your entire transaction amount with no possible recourse should you key in the wrong details.

Q: Unlike stocks, what is the basis of Crypto earning or what and how does it generate income and profit, in order for the price to pump or dump?

A: Various cryptocurrencies have different use cases behind them. Ether tokens (ETH) for instance, are utilised mainly as a “currency” to power transactions on the Ethereum network, as well as for the upcoming “Proof of Stake” transition on the Ethereum network – where holders of at least 32 ETH tokens can potentially earn even more ETH tokens by helping to validate transactions on the network.

Many other projects run on a similar principle – that to participate in the solution that the project is running, you have to own and use their coins/tokens. Thus, this gives rise to a “natural” demand for the tokens.

For other kinds of cryptocurrency projects such as Bitcoin and Litecoin where their use cases have more to do with transfers than other applications, the provable scarcity of the tokens tends to drive the price in that demand is currently outstripping supply. There is no definitive way to prove the “fair value” of a Bitcoin, but certainly the circulating amount of Bitcoin has been holding steady/on a slight decline in recent years, thus driving the individual value of each Bitcoin up.

In my opinion, there is no clear reason to buy Bitcoin for its utility as there are better solutions out there – Bitcoin sentiment seems to be held up by the fact that it is the first cryptocurrency, and that its reliability in terms of its de-centralisation means that high-net worth investors and institutions can reliably invest in it. During this bull market cycle, the Realised Market Cap of Bitcoin has actually been reaching new all-time highs – and this metric in my opinion is more important than the current price and “normal” market cap of Bitcoin, as it shows that there is a net inflow of money into Bitcoin.

Q: Why is the price movement of Bitcoin and altcoins so similar?

A: Bitcoin sentiment tends to lead sentiment in cryptocurrencies. Certainly not all cryptocurrency projects are perfectly correlated – if you were to look into projects to do with NFTs or perhaps Decentralised Finance (DeFi), you could perhaps be able to observe that their correlation sometimes diverges based on developments in their own respective spaces – e.g. if Ethereum gas fees are overly high, you would have seen alternate DeFi projects surge as smart contracts migrate to Ethereum alternatives, and this happens regardless of what happens to Bitcoin.

Bitcoin is also often used to drive purchasing in other cryptocurrencies – while we often think about cryptocurrencies paired against the US Dollar, particularly if we are buying from exchanges and such, many people do buy cryptocurrencies paired against BTC instead. Thus, a selloff in BTC tends to overly affect many other cryptocurrencies as well due to the dry-up in liquidity.

Q: How can we consider cryptocurrency as means of payment or an actual currency, given it is so volatile?

A: Many transactions are driven by stablecoins – which explains their rapid growth in recent months. Some of the most popular stablecoins are Tether, USDC, BUSD, and Dai. Many users rely on stablecoins to preserve the value of their crypto holdings in between transfers/conversion into other forms of cryptocurrencies.

When cryptocurrency payments or transfers are executed however, many people actually then convert their stablecoins into cryptocurrencies just for the actual transfer.

For payments, there are also increasing numbers of vendors/middlemen in the market who service corporate clients in terms of crypto payments. One dominant model is for a middleman to quote a “locked-in” spot price for a merchant should a customer attempt to pay in crypto. The merchant is then able to receive payments in actual currencies (USD, SGD etc) even though the customer chooses to pay in cryptocurrencies. The middleman is then the one who takes up the “exchange-rate risk” and subsequent risk in holding cryptocurrencies.

The generally appreciating trend of cryptocurrencies in recent years has also lent itself as a popular alternative when compared to emerging market currencies in several countries, which is why crypto adoption is currently highest in those kinds of countries despite its volatility (e.g. Turkish citizens would be comparing holding BTC vs holding the Turkish Lyra).

Q: Would you consider cryptocurrency as a security?

A: Cryptocurrencies are by definition, not a security. They have more in common with currencies than securities due to their de-centralised nature – particularly for Bitcoin.

Some cryptocurrencies do however cause confusion when they are seen as being beneficial to a centralised holder, such as what we can observe in the ongoing SEC lawsuit against Ripple. For a fact however, most of XRP’s validator nodes are not under the control of Ripple, technically making XRP de-centralised, and thus technically not a security, although the matter is currently still before the courts.

Q: Do you see Dogecoin rallying in the future?

A: It is hard to give a fundamental reason for further price rallies in Dogecoin.

Q: Which price I can buy in if I believe Bitcoin can be held for over 3 to 5 years, or even longer?

A: For a longer investment timeframe, the price at which you buy Bitcoin should not matter, primarily as timing the market is incredibly difficult. A look at the past performance of Bitcoin (keeping in mind that it does not predict future trends) shows that Bitcoin tends to dip in between the halving events every 4 years, which may provide a good timeframe for accumulation as opposed to buying only at the market tops right after a halving event.