A Glimpse into sound valuation models, the institutional impact, and crypto’s seat at the portfolio table (nur auf Englisch verfügbar)

A Glimpse into sound valuation models, the institutional impact, and crypto’s seat at the portfolio table

An interview with Matthew Sigel, Head of Digital Assets Research at VanEck, about potential U.S. spot ETFs, sound valuation models and digital assets in traditional portfolios.

Introduction

Dominic Weibel: Welcome to our Outlook ‘24 interview in the light of institutional digital asset adoption. We are very honored to welcome Matthew Sigel who heads the digital assets research division at VanEck. With a profound understanding of the digital asset ecosystem, Matthew is at the forefront, sharing research and analysis and insights that elucidate the transformative potential of the crypto domain. VanEck is known not just for its innovative ETFs, but also as a player that is very forward thinking in the digital asset space and currently manages billions in assets. VanEck continually showcases its influence and trustworthiness in various markets. Today, we aim to tap into Matthew’s expertise, as he hopefully provides us with a lens into the current and future trajectory of the crypto landscape. And therefore, Matthew, thank you for taking the time to be with us today. 

Matthew Sigel: Thanks for having me and the kind introduction. 

Dominic Weibel: We have a lot of ground to cover today, and I suggest we start with a brief introduction of yourself and VanEck. Moreover, I know you have a TradFi background, thus, I’d be keen to know why you dedicated yourself to this entirely new and interesting asset class. Go ahead. 

Matthew Sigel: I started my career as a news reporter, journalist at Bloomberg, CNBC. And what you find in journalism is that the logistics and the logistical effort involved in just getting images and audio on a TV screen or words on the print, like so much time goes into that, that a lot of time focus is lost on the real work and the real truth. And we can see that today very clearly. The polarization of facts. 

15 years ago, I was relatively early to understand that the mainstream media was going through a huge period of disruption because of web2 companies like Google, and there was not much future there. So, I always covered finance. I got jealous of all my sources who had bigger balance sheets than me, networked my way into TradFi and ended up spending four years working for Cathie Wood who now runs ARK Invest. This was during the Alliance Bernstein days. So, we were running global equity portfolio, very heavy in web2 platforms. We recognized that there would be natural monopolies that would form. And even though this was pre-Bitcoin days, we were asking ourselves, what is going to disrupt these super normal margins that Google and its peers are likely to generate? The disruption can come from regulation, or it can come from innovation. Being a relatively free market capitalist, I hoped it would come from innovation. 

So, when Bitcoin started to take off, I just identified that as a killer app that would leverage the new kind of liberalization of cryptography that had emerged when Bill Clinton allowed for cryptographic exports in the early part of this century, which kind of turbocharged the growth of Google and web2. Maybe I’d be tortured in creative ways for my passphrase. Given the performance of the asset right now, it seems like others may be thinking along the same route. After working for Cathie, I had 10 years in investment banking research and sales equities. And it’s during that period that I began to invest pretty heavily in Bitcoin and other digital assets. 

Meanwhile, VanEck, as an $80 billion money manager with large exposure to gold and gold mining stocks is a macro thematic shop. And the CEO, Jan van Eck, is someone who embraces the innovator’s dilemma. Hence, we didn’t want to let Bitcoin disrupt our gold holdings without getting involved in that ecosystem. So VanEck, unable to get the spot Bitcoin ETF to market in 2017, when we first filed, began investing in Bitcoin and ventures off the firm’s balance sheet in order to get smarter and build a network. And then I joined in 2021 to accelerate the product offering.

The implications of a U.S. Spot ETF

Dominic Weibel: I would like to dive into the subject of spot ETFs first. As we know, a lot of momentum currently centers around the potential U.S. spot ETFs. VanEck is also part of that marathon. Things heat up as January is knocking on the door where the final deadline sits for some of these applications. As you mentioned in that context, it is impressive that VanEck was one of the earliest applicants. What’s your outlook on the timeline, when do we get green light and how is VanEck currently preparing for that scenario?

Matthew Sigel: There are a few limitations as to what I can speak to about the ETF because our filing is live with the SEC, but the deadlines for these products are basically all in the first couple weeks of January. Unless something changes in the body language of the SEC chair, we would expect all products to come to market generally at the same time by January 10th. It could be earlier and really depends on how quickly the SEC can circulate the documents around their various departments who all have to chime in. 

Dominic Weibel: The markets position themselves as we speak and price in potential approvals. As such, we had a substantial spike in inflows to various funds. Let’s cover the potential implications of such an approval. As we know, a spot ETF is considered to bring way more demand. At the same time, the halving event happens in April 2024 removing around $6 billion in annual supply at current valuations from the market. Given the law of supply demand curves, we should face more demand while supply drops. Therefore, we will arguably see a higher equilibrium price. 

Moreover, there are some cool indicators around long-term holder supply versus supply that moved in less than 24 hours. Both metrics are diverging indicating signs of declining on-chain liquidity. Just recently, we published a report with CoinMetrics on free float supply containing sharp insights on the ever decreasing free float supply. What I’m trying to say is this kind of price inelastic supply of Bitcoin and all the upcoming catalysts should lead to a fairly high impact of spot ETFs. 

Outlets like Galaxy Digital modeled how much value could flow into these ETFs, projecting $14.4 billion in the first year and around $40 billion in year 3 with a potential price impact of 75%. What’s your outlook on that? Moreover, why will the U.S. spot ETF have such an impact when the Canadian one didn’t have a lot of impact? What differences are we dealing with?

Matthew Sigel: One interesting stat over the last month: there are about 30 Bitcoin ETFs that are already on the market. And those are a mix of spot products in Canada and Europe and the futures-based products, including ours, that trade here in the U.S.. In the last month, those products, just the Bitcoin ETNs, have seen a combined inflow of $400 million. 

The total year-to-date number is $600 million. Thus, two-thirds of the inflows into all these products came in the last four weeks, and that coincided with Bitcoin being up 26% in October. I think that’s an indication of how much the price can move on what feels like relatively modest flows when those flows are one way. 

With the spot ETF, you’re going to be mainlining a Bitcoin only exchange directly into the veins of every brokerage account holder in the U.S., including the registered investment advisors that have not been able to buy these futures-based products.

And the reason why it matters is because the size of the U.S. institutional capital markets and asset management industry is orders of magnitude larger than it is in Canada or Europe. You have a much freer market DNA among American investors. 

The SEC’s objection was around issues of custody and market manipulation. As Coinbase has gained market share throughout the year and the SEC looks set to bless these products, those fears have faded. We were debating on today’s morning call what would be a successful outcome and what would be an unsuccessful outcome. Somewhere in the $100 million plus range on day one and a billion dollar plus at the end of month one could be the base case for what these products could attract. 

Dominic Weibel: Those are fairly substantial numbers. I also think the U.S. is generally perceived as a role model and plenty of jurisdictions and entities follow what the U.S. does. Hence, greenlighting a U.S. ETF will likely bring a huge bump in legitimacy to that asset class.

When it comes to digital asset valuations, both institutional investors and retail investors alike face challenges. For instance, what is the fair value of Bitcoin or ETH. When is it overvalued, when undervalued? In the domain of valuation models, VanEck established themselves as one of the pioneers.

In my opinion, VanEck arguably came up with the soundest valuation models for both Bitcoin and ETH. 

In TradFi, it’s common to have a broad range of valuation models and there are various tools on how different assets such as equities or commodities are treated. Since digital assets are fairly new asset class however, there are still plenty of entities trying to figure out proper valuation models. Let’s dive into the available approaches, shed some light on their importance and explore which traditional tools are currently applicable to the digital asset space. 

Matthew Sigel: Sure, I think you identify what is a large obstacle for institutional investors to buy tokens directly. And that is a lack of cohesive and commonly agreed upon valuation model. Many of the most sophisticated institutional investors want to have risk parameters around the assets that they’re buying. They want to be able to identify what is fair value? What is the replacement cost? What is the possible upside potential? 

In equities, you basically do that by trying to predict what the earnings of a company will be, say, five years out. Try to figure out what valuation the market may pay for those earnings. So that’s price divided by earnings, known as PE ratio, and then discount that back to today. For stocks, earnings consist of a numerator, the income, and then the denominator, which is the shares outstanding. And in TradFi, generally, the share’s outstanding portion is relatively predictable, and it’s governed by regulation and self-regulation around: new share issuance and the disclosure that must come with granting new shares.

Matthew Sigel: But how many tokens will there be outstanding? How will that token capture value from all the value that’s going across its network? The tokens oftentimes blend elements of commodities, currencies, equity, fixed income, all into one asset. So, it’s a very bespoke process. And I’d say that’s one of the reasons why we have a lot more uncertainty in our valuation models for crypto than we do for equities. 

We recently put out a piece on Solana and the price target ranged from $10 to $3,000 with a base case of $300. And I understand the kind of pushback and laughter about how wide that range is. The lower bound could be zero. We did not say that, but these call options are just incredibly volatile. And in most cases, the cash flow, the stream of earnings, that we want to project and then discount back to today, haven’t materialized, yet. 

We’re buying liquid venture, which in a lot of cases does not even have revenues or earnings. So, we must center ourselves around three major pillars. What’s going to be the penetration rate of these open source blockchains? How much market share are they going to take? And in what categories?

We divide the world into these three categories. The one pillar is penetration. The second is market share, meaning how much of that open source blockchain value can blockchain A capture? And then the third pillar is the monetization. What’s their take rate going to be of all the value that flows across the blockchain? And from there we can arrive at a cashflow estimate, from which we deduct expenses, which often include validator expenses and taxes. And then we DCF (Discounted Cash Flow, editor’s note) that back to today. That’s the overarching way we approach it.

Dominic Weibel: I am familiar with the Solana report and figured that it’s quite a broad range, but frankly, it’s also a first attempt to get an idea with a rather high degree of confidence. The discounted cashflow model is one of the most powerful tools to value certain digital assets. However, it does not apply to Bitcoin because Bitcoin is more perceived as a commodity and a store of value like digital gold. Bitcoin actually outperforms gold and fiat currencies when it comes to monetary traits. Just to name a few, scarcity, durability, portability, divisibility, or scalability. In these traits, Bitcoin dominates against both fiat and gold. You also explored Bitcoin valuation models. What approach did you take for Bitcoin? How do you account for monetary premium? And which cash flow multiples did you apply to your models? 

Matthew Sigel: Our Bitcoin valuation is different from others. To your point, Bitcoin is not a cash flowing asset except to the miners. It’s impossible to do a DCF for now. We’ll see, and this is hotly debated internally, that Ethereum’s roadmap transforms Ethereum into a settlement layer while transactions and data availability happen on other chains. If that materializes, Ethereum and Bitcoin may be more similar than they have been previously. 

Our BTC price target is $275k and it doesn’t incorporate the potential that Bitcoin becomes a settlement layer for other smart contract layer twos like Stacks or Lightning Network. It really just looks at what’s the stock of all the gold that is above ground and held for investment purposes. Let’s assume that Bitcoin reaches half the market share of gold as a ratio of all the money outstanding in the world. And that’s how we get to $275k on BTC. If there emerges a functioning stablecoin market on a Bitcoin L2 or a flourishing NFT market, that would provide upside to our target price. But we’re basically looking at the polling of young people that perceive Bitcoin as digital gold. Given our significant gold holdings, we have a decent read on the supply demand dynamics in the gold market. 

Dominic Weibel: So, you primarily derive the indicators from the gold market. The demographics aspect you mentioned will play a crucial role in my opinion. Imagine the amount of wealth at some point within the next 10 to 20 years is flowing to young generations who are more familiar with digital assets than they are with other traditional asset classes. What I’m trying to say is, the demographics induced wealth transition will play a vital role in the adoption of digital assets.

Matthew Sigel: Now there may be a point when that turns, and I do think that we’re going to need institutional adoption and we can get into how we define that to power the next leg of this bull market. 

Dominic Weibel: Did we ever have such an asset? A retail driven asset? 

Matthew Sigel: Lots of collectibles are like that. If you look at how people in China, for example, want to get their money offshore, a lot of times they’re using Rolex watches. That’s a type of asset class that individuals use to transport and transact. There’s less institutional participation. It’s collectible commodities with unique characteristics that preserve purchasing power. And Bitcoin now, it’s 15 years of franchise value. It’s a brand now. Stanley Druckenmiller was just talking about that last week. I think that’s what appeals to young people. 

Moreover, Bitcoin does have a use, it absorbs stranded energy. The oil, gas and coal companies, especially outside of the U.S., that are facing bigger barriers to get their product to market either because of carbon intensity targets or U.S. sanctions, find a beneficial set of characteristics in Bitcoin. It provides an incredible sink to monetize stranded energy and move it anywhere in the world. I noticed that Argentina’s largest private oil and gas company that accounts for 15% of domestic Argentinian production just announced that they will be mining Bitcoin with the excess gas that is created in the flaring process. 

Dominic Weibel: I would like to recycle back to Ethereum arguably being on a path to a valuation model that might be more akin to the Bitcoin one. Interestingly Bitcoin might also come to the Ethereum cash flow side now that we see elevated development activity around L2s, the BitVM or zk-rollups for Bitcoin. Of course, that would be awesome without changing opcodes at the base layer, but even if it’s necessary, it will be overall beneficial, as Ethereum proves that fees follow functionality. Currently however, Bitcoin does not offer too much functionality, but at some point, that might change, bringing cash flow aspects towards Bitcoin too. 

In Ethereum substantially different aspects are at play. For instance, we have reward emissions in the form of staking rewards, and a dynamic that is akin to buybacks in the stock market, Ethereum’s burning mechanism. Both play a vital role in your valuation models and fairly so.

And so do transaction fees and MEV (Maximal Extractable Value, editor’s note), basically every value that can accrue at the base layer. if you don’t mind, please guide us through your Ethereum analysis framework and don’t hesitate to share your bull and bear cases for ETH based on your cashflow multiples. 

Matthew Sigel: One way that might be helpful is comparing and contrasting the Solana price target to the Ethereum price target. Our base case for Solana implies about a 10x upside. And that happens with Solana achieving just a 30% market share in terms of the value being intermediated among all open source blockchains. For ETH, we get 5x upside, and that’s assuming that ETH captures double the market share, hence double the market share of Solana. We need 70% market share for that 5x. With simple math like that, you can see that in a vacuum, risk reward for Solana appears to be a lot better than Ethereum. There’s very little in the price in terms of what the market is expecting on their terminal market share. 

Now you also have to account for the volatility of the token, some of the unique supply demands of the token, the level of uncertainty around the future roadmap, or the lack of any meaningful TVL on Solana. But in a vacuum, you’d have a higher Solana weighting than Ethereum in our fundamental model because of the upside that can be generated with half the market share. 

The key variables that we look at, I mentioned those three pillars earlier, are penetration, market share, and monetization. In our Solana model, we’re assuming that the token captures value at one fifth the level of Ethereum. Thus, the blended Ethereum token take rate comes out to about 2% in our model when you combine finance, metaverse, social, gaming, and infrastructure. For Solana, we’re assuming about 60 bps blended, therefore a much lower take rate. The network is engineered from a perspective of abundance, whereas Ethereum appears to be engineered from a perspective of scarcity by pushing all those transactions to L2s. 

Dominic Weibel: That’s highly interesting Matthew. In the last weeks, ETH snapped back into a slightly inflationary environment and at the same time we see increased rollup activity. 

Matthew Sigel: There’s not too much activity on the base layer. That’s one problem of this month’s rally. The flows are coming from ETNs. We can also see the ETH to BTC ratio breaking down. It looks quite similar to me as it did in late 2019 when BTC had bottomed and was kind of in a choppy but upward range. The market didn’t sound all clear that we’re into this new bull market until the BTC halving and then ETH dominance rose along with the entire market cap. My framework is that we’re in that late 2019 parallel. Same thing’s happening with Bitcoin miners. They’re lagging the Bitcoin price pretty dramatically here, which also occurred pre-halving in 2020. For ETH, I just think we need to see more on-chain activity. That’s what drives gas fees. That’s what drives monetization of the token while for BTC, the use case is hodling. 

Dominic Weibel: I fully agree from the cycle perspective, it’s very similar. However, while being in a slightly inflationary environment of ETH issuance, we also see Ethereum’s rollup centric roadmap materializing. Transactions happening on L2s are now at a scaling factor of 4.8 compared to base layer transactions. Is there a case for Ethereum, where blockspace becomes abundant via L2s and we face a scenario similar to Solana? 

Matthew Sigel: I think that’s the thesis, but even L2 transactions started tailing off. I think it was in August, which really corresponded with the new leg lower that we’ve seen in the ETH-BTC ratio. 

Dominic Weibel: They peaked, yes. Moreover, I guess a good amount of activity is not organic based on airdrop farmers. 

Matthew Sigel: You can tell from our approach that we’re trying to make money by taking a slightly longer-term view than the high frequency folks. The volatility of market share within the L2s is quite high and unpredictable to justify large positions in those types of tokens. From my perspective, it’s more of a wait and see on those. 

Dominic Weibel: The layer two narrative is very alive. Monitoring how much value accrues to these rollups is highly important. Several dashboards indicate that we are and will deal with substantial cash flows to L2s as they rake the delta between transaction fees paid to the base layer and the transaction fees collected in the first place, but also the MEV accruing to rollups, something to watch. 

Moreover, there are rather established players already. From early on, Arbitrum and Optimism could gather quite significant market share and made important progress on the decentralization side. So yes, while a volatile space and no clear winner yet, Lindy Effects are at play. 

I’d like to refer back to valuation models, especially looking at cashflow assets. How do we consider the difference in supply impact compared to stocks? What I’m talking about is that neither dividends in the most common case nor buybacks in stock markets change the total supply of the underlying stock. There’s no burning of supply for instance. And if there’s a dividend paid, it’s usually in fiat terms and not based on inflationary emissions. Yet for both Ethereum dynamics like burning and staking rewards, we have a material supply impact that alters the total and the free float supply. 

Another important difference is that digital assets have way less overhead and substantially higher margins than stocks. I wonder, how did you account for these two mechanics in your valuation models? 

Matthew Sigel: Well, I would slightly disagree with the premise that equities who buy back their shares don’t occasionally see declining share count. They do. And that declining share count can make their earnings per share look a lot better. You can see that with many equities that ended up having negative equity. It is possible to buy back shares, decrease your share count and make your stock go up because of that. In the case of digital assets, determining the terminal supply is one of the biggest unknowns that we have. Every other Ethereum model essentially uses the price of Ethereum in order to predict the price of Ethereum, which doesn’t make any sense to me. You have to start with some top-down beliefs about what the penetration levels of this asset class can be, and then what the take rate for the network can be benchmarking it against existing networks with similar functionality. The whole use case here, I think, is that this is a deflationary asset class that brings automation to existing workflows. It should enable cost savings and consumer welfare because of that. So that’s of how we think about it.

Matthew Sigel: Then we look at the value capture. How much can the Ethereum token capture as a percentage of all that value benchmarking it against competition in the web2 or TradFi world. And because finance is such a competitive and mature market, we give ETH just a 3% take rate. For infrastructure, we give it a 5% take rate, looking at AWS margins and others. And then for metaverse social and gaming, our take rate is much higher, as high as 10%. 

When we’re monitoring this, we’re going into the subcategories. Who’s consuming the gas? What category do we put them into? How fast are they growing? Is that application likely to sustain momentum or is it just being goosed by airdrop incentives? That is how we think about it in an end market by end market basis. 

Finally, we had to make some considerable assumptions to figure out what percent of the outstanding ETH would be burned and how many transactions might occur. The number of transactions is not that relevant. They’re selling block space. It’s about how much data, what’s the demand for data across these blockchains and which chain is going to be most efficient and able to sell that space at the most predictable and lowest prices.

Dominic Weibel: Great insights, thank you. However, I thought that stock buybacks usually end up in the treasury and are therefore not really removed from the total supply. 

Matthew Sigel: Usually that is the case, but it doesn’t have to be. And there’s considerable regulations around how transparent companies must be around their share count. I was looking at the Bitcoin miners just the other day and the top five miners have grown their share count by an average of around 400 to 500% in the last three years. So, we got to keep those companies’ feet to the fire as well, right? 

Dominic Weibel: To consolidate the previous conversation, ETH can more or less be perceived or valued akin to a growth, high beta stock or cash flow equity and dividend paying asset, while the characteristics of Bitcoin lead to a valuation model that is more akin to a commodity which is mostly driven by a monetary premium. 

Which one of these asset specifics is usually performing better in tight monetary conditions and an inflationary environment? Is it cash flow assets or is it a store of value kind of commodity? Or can it be both? 

Matthew Sigel: In the real world, when there’s a big risk-off event, then profitability, cash flow, strong balance sheets tend to outperform. In crypto, the correlations are more volatile. And just when you think you’re in the safe asset, for instance ETH versus alternative coins, let’s say in May or June of 2022. The bear market is underway, Luna has collapsed, the alts are acting terribly, everyone’s crowded in ETH and then boom, there’s a deleveraging event and ETH went from being the lowest vol crypto asset to the highest vol crypto asset. 

I have some biases around which of the digital assets should be the highest vol and the lowest vol (volatility, editor’s note) and Bitcoin should probably be the lowest vol in my opinion. Yet two weeks ago we got to a point where Binance’s BNB and Tron’s TRX were at lower vol than Bitcoin. That didn’t make any sense to me. That’s a signal you want to buy BTC and ETH and sell TRX and BNB. And it played out in the last couple weeks. It’s overall just so much more of a changing and dynamic environment.

Digital assets entering traditional portfolios

Dominic Weibel: You must be on your toes continuously in these markets. Let’s focus on the case for crypto in portfolios and how that will play out in the upcoming years. For instance, Larry Fink just recently shifted his crypto emphasis rather significantly. He now considers it to be a flight to quality and safety asset. It’s one of the best performing assets YTD, even on a risk adjusted basis. And even financial advisors shifted from a potential 1% allocation to now considering even 5% exposure to crypto. 

Why will digital assets, maybe based on the above facts, become an integral part of traditional portfolios, maybe even in the not-too-distant future? Is crypto really that ultimate hedge against sticky inflation, monetary debasement, and extreme fiscal policies? 

Matthew Sigel: Well, at VanEck, we are fundamentally macro thematic investors. That’s the DNA of the firm. We meet twice a week as a firm, all the active management professionals, and all asset classes are present: emerging markets equity, emerging markets debt, multi-asset portfolios, natural resources, digital assets. And the one theme that continued to arise over the last several years is around the vast amounts of debt in the world, and the declining credibility of those who are issuing it, i.e., G7 governments plagued by incredible amounts of polarization and disagreement about basic facts. Including the basic fact around what the U.S. debt levels are going to look like. The implications of that have not been properly digested by investors.

Macro and tokenization

Matthew Sigel: And you just wonder what young people are going to think as they come of age and realize that they’re paying more interest on debt than they’re getting back. And Bitcoin in particular acts as a protest vote from U.S. government trading counterparties who no longer want to fund some of what the U.S. tax revenues are going to, namely sanctions, war, super woke policy at the social level. They’re looking for some type of neutral monetary system that is not subject to the whims of these unaccountable fed bureaucrats who keep getting it wrong. 

I was in a Twitter debate with a pro-Palestinian folk just a couple hours ago. They’re a Bitcoiner, I’m a Bitcoiner. We disagree pretty vehemently on what the facts are on the ground in the Middle East and we agree that every 10 minutes Bitcoin is going to create a block that contains a version of the truth that both sides agree on.

For the countries that are on the fringes of the world’s financial system like El Salvador being a good case in point and hopefully Argentina in a couple weeks, they will slowly adopt Bitcoin either for their central bank reserves or as legal tender over the next decades, just as a safety valve that lets the entropy from this polarization out into something which everyone can agree on. That’s where my strongest conviction is. The past cycles show that when Bitcoin rallies, folks take their profits and speculate on higher risk assets. In past cycles that was Ethereum and the long tail of all L1s. I think there’s a lot of policy work that needs to get sorted out in the U.S. before those tokens are bought and put on company balance sheets or country balance sheets. I think that day is much closer for Bitcoin. We’ll see what that rally will unlock for the rest of the ecosystem. In our terminal DCFs for Ethereum, we’ve got this 5% penetration level for finance, banking, and payment revenues. It’s still a very, very modest target that gives us 5x upside for ETH, 10x upside for Solana and BTC.

Dominic Weibel: If you have that context, that 5x seems pretty conservative. However, the current macro landscape with its interdependencies and dynamics has broad side effects on the digital asset industry. The S&P is in correction territory, we face an ever-increasing monetary debasement, the Fed is trying to curb inflation, but GDP remains above expectations, and there might be a debt spiral looming. Just recently, the Treasury announced that it puts another $1.6 trillion on top of their debt pillow. If you think about it, it’s more than double the market cap of Bitcoin, that the Treasury just adds within the next six months. Bitcoin seems tiny if you look at these numbers. House prices in the U.S. are incredibly unaffordable. You need $100K in annual income, while the median household income is only $68k. Three years ago, you could afford a house at $60 annual income. These numbers are crazy. If that was not enough, the yield curve is un-inverting making it very hard to navigate the space right now. If there’s one asset class that benefits from all that, it must be crypto. Arthur Hayes in one of his recent reports said, they must start the money printer again as things break. As a result, we will have a big party especially in risk assets, but subsequently, we also face a major hangover. 

Matthew Sigel: Meanwhile, Bitcoin makes higher highs and higher lows throughout each cycle. Best performing asset class in three, five, 10 years. I don’t think it’s going to be too hard to get some of these institutional investors to put 50 bps or 1% into a spot Bitcoin ETF. Remain hopeful that that’s one of the major catalysts of next year’s bull run. 

Dominic Weibel: Pieces are falling into place. There’s one more major catalyst, tokenization. While it’s a flavor of the last quarter, real world assets are getting traction in the midst of tightened monetary conditions and elevated risk-free rates. The on-chain citizens seek access without having to move off-chain. Thus on-chain treasuries are booming. Then we see tightened credit conditions from banks who are more conservative in lending money. Private credit markets might be the next area that will substantial and sustained growth in this environment. 

Real world assets allow us to build traditional portfolios on chain, diversify more, and bring liquidity to illiquid off-chain assets. There’s a lot to be excited about. How do you see the real-world asset narrative to play out in the coming months and years? Will it be another bullish catalyst? 

Matthew Sigel: We’ve done a lot of work on real world assets, both from an issuer perspective, as well as an investor perspective. And I have to say that the conclusion is not too bullish. The real-world assets that are going on chain, especially these T-bills products, which by the way, peaked a couple of weeks ago, and now the AUM has been declining as folks likely take assets out to chase the BTC bull run. 

But most of these assets are not permissionless. They must be minted to whitelisted wallets. They cannot be pledged in DeFi unless that DeFi exchange itself is essentially a whitelisted entity. They offer lower yields than you can get in T-bills directly with less security because of the smart contract risk and the lack of liquidity. I appreciate the infrastructure that’s being built and in our venture portfolios, we are invested in some of these infrastructure builders. But as an $80 billion TradFi player, we have no interest in putting a portion of those assets on-chain because of lower liquidity, and elevated risk. 

As an issuer, we’re struggling to see the economics. And especially with MiCA, even bringing a simple commodity gold token, market requires treating it like a stable coin. There’s all types of capital requirements that MiCA demands and it’s very tough to make the economics work unless you are already at scale. MiCA seems to be more about regulatory capture and entrenching winners than it is about really unlocking innovation in this space. 

It feels to me like these T-bills products are a place for sophisticated digital asset investors to capture yield when they are bearish. Maybe that becomes a bigger story in three or four years when hopefully Bitcoin made another all-time high, much of TradFi is now involved and they want to take risk off the table. But if you’re looking at this, what might be the beginning of this bull run and a much better setup for 2024 with the halving, the election and the ETFs, why would you want to dither around in these real world assets? I’m just not seeing the use case. 

Dominic Weibel: Interesting take and a nice alternative perspective on the mostly bullish views around the RWA area. 

Matthew Sigel: Look at Maker underperforming dramatically here in the last one month. That was the best proxy for real world assets. I appreciate very much the revenue that they’re able to derive from that. But in a period where it’s risk on, that token is down. 

Dominic Weibel: What do you think about the current risk-free rate, which considering the debt, deficits and the monetary debasement, appears not so risk-free anymore? Do you think there’s a future where we see a broadly accepted risk-free rate stemming from staking rewards? Is that a possibility? 

Matthew Sigel: It will for a very small subset of digitally native corporations. Yet even in our bull case, that’s less than 10% of financial activity. I like to think about which countries are most likely to adopt digital assets as a part of their policy. For Bitcoin, that will be countries that are rich in energy. For Ethereum, it would be countries that are rich in human capital, that have programming talent to build a storefront on Ethereum, to build a business on Ethereum. It has less to do with your energy and more to do with the human capital in your country. 

Dominic Weibel: I think we are not too far away from achieving application stage escape velocity where the infrastructure layer is not the focus anymore, but adoption is really driven by major applications. I feel that should happen within the next year. For some closing thoughts, do you mind giving us your boldest, maybe two predictions for the next year? 

Matthew Sigel: Sure, prediction number one, another sovereign besides El Salvador will buy BTC for their central bank reserves. Number two would be that Gary Gensler resigns. It’s quite common for SEC chairs to step down after big losses in the courts. I found a couple in the last 20 years. So that would be call number two, although I had that as a prediction a year ago and it hasn’t happened yet. So, running out of time on that one. 

Dominic Weibel: Let’s close the interview here. It’s been an absolute pleasure to talk to you and gather experience and knowledge. Your insights into this very dynamic, volatile world of digital assets were invaluable for us and very enlightening. On behalf of Bitcoin Suisse and our audience, thank you so much for sharing time with us. 

Matthew Sigel: It’s great spending time with you all. Thank you, Dominic.

Check out the video interview with Matthew Sigel, Head of Digital Assets Research at VanEck, about potential U.S. spot ETFs, sound valuation models and digital assets in traditional portfolios.