Andreesson Horowitz's Chris Dixon shared a presentation about crypto and blockchain during the holiday break.
Interesting, but is it good? Not sure, but I'm not going to make big predictions about tokenisation, regulation and the price of bitcoin in January 2022. Instead, I asked Janis Legler to do this.
Janis is Chief Product Officer at LSE-listed challenger Mode, where I'm an advisor, and here's our chat about all things crypto 2021.
Chris Skinner: What is your long-term view on Bitcoin?
Janis Legler (JL): Long term, Bitcoin will have a very strong place in the modern digital economy. You are very likely to see the adoption of a global Bitcoin standard, where savers, corporates and also central banks can all use it to store value as a global reserve currency. It’s just decentralising digital money for the internet. It will be similar to how we had a gold standard and the scarcity is within the code, and it’s powered by the biggest computer network in the world. If that is the case, and once that is the case, Bitcoin can have absorbed value most other asset classes like bonds, which is negative yielding at the moment, as well as treasuries, commodities etc, which are used as stores of value at the moment. In terms of fiat-denominated future prices, it’s not unlikely that bitcoin eventually will reach prices of millions. That might take five or twenty years to get there, but the sheer magnitude of it will be like nothing we’ve ever seen before in our lifetimes. Bitcoin will also then take its place in the history of human ingenuity, next to the internet or the printing press, so that’s a long take on Bitcoin.
CS: The question most big governments are asking is: how do they regulate it? Do you have a view on that?
JL: There are certainly frameworks around KYC and AML, which are important for regulators to implement. That is already in place. For the asset bitcoin alone, there’s a lot of regulatory frameworks and also tools you can use as a financial institution to be comfortable with the customers that you’re dealing with, to facilitate buying and selling and transacting in bitcoin.
CS: The price of bitcoin has gone through the roof to, last time I looked, 23,000 USD, more than doubled since October. What’s your short-term view for 2021 on what will happen with bitcoin, and whether it’s over valued?
JL: bitcoin obviously had great momentum this year, and adoption in 2020 was significantly accelerated, like a lot of other things, by the Covid pandemic. We are currently seeing all-time highs for bitcoin – it’s up over 200% year-to-date – so we could see significant correction in 2021, maybe 50%. There’s a lot of momentum around the macronarrative, because it’s very relatable in the current times. In 2020, we’ve seen money printing and stimulus which is unprecedented in our time. We may also see all-time highs well above $100,000 in 2021. Both is possible.
In terms of whether I think it’s overvalued in general, if you look at the overall potential of bitcoin to take a share of entire asset classes, it’s actually undervalued. bitcoin’s market cap is still below $500 billion. Imagine the effect on the price once more and more of the cumulative wealth is stored of over $300 trillion globally across all asset classes, as investors and banks change their asset allocations from 0% to 1% to 10% and more.
By design, bitcoin creates bubble cycles where you have increased demand, supply shocks, and rising prices. The mimetic desire to own bitcoin at these prices has a reflexive effect on the demand and price and causes the price to skyrocket even more as supply is limited. The difference to the bitcoin bubble in 2017 is that, even though we have reached all-time highs currently, you haven’t really seen any of the mania or hype coming from retail at this point. If you compare, for example, bitcoin Google searches to that of 2017, you will see that the all-time high this time has been going mainly unnoticed in the mainstream retail press. That implies that there’s still a lot of upside for 2021.
This recent bubble has been mainly driven by the High-Net-Worth Individuals and Family Offices, Institutions and Corporates that have put bitcoin on their balance sheets, like Microstrategy, Square or Mode.. We’ve seen a lot of big macro investors that have publicly been stating that they have built positions which has then removed career risk from hedge fund managers, and also CFO’s that speak about bitcoin, which is a new thing compared to last time. In my opinion, it will soon be a career risk not to actively consider bitcoin for your investment strategy or your corporate treasury strategy.
To sum it up, whilst considering all that, knowing that stimulus and money printing all over the world will continue, bitcoin just has the best risk-reward characteristics across all asset classes, even at these prices.
CS: Should people be looking at the other cryptocurrencies or is bitcoin it?
JL: I don’t think you can make a lot of fundamental sense out of the price movements within these coins. So Ripple, Litecoin and so on for example. we don’t offer them on our app, because we only want to promote and provide access to assets and products that we actually believe in, and that we can stand behind. That’s where a lot of crypto exchanges could be more diligent, in order to offer to retail customers only solid assets, because otherwise there is not a lot that separates you from a casino. As an investor, , I think you should focus a lot more on what’s been happening in decentralised finance (DeFi), which is essentially a version of software eating Wall Street.
CS: You also see a lot of momentum in the last couple of years around stablecoins, particularly when Facebook announced Libra now Diem, and others like JPMorgan, IBM and other companies talking about stablecoins. Is that not a better bet?
JL: Stablecoins definitely can improve efficiency of the legacy financial systems, just by offering cheaper and faster payments rails for, for example, cross border remittances. They can also really drive financial inclusion and offer a store of value to savers in regions that don’t have stable domestic currencies. You have seen these asset-backed and centrally issued stablecoins, like USDC which have had a lot of adoption in the last year, and they’ve found applications for various use cases globally. They are being integrated more and more into the traditional financial ecosystem around banks and payment cards. Flor example, Another very interesting use case in case in DeFi (decentralised Finance) are permissionless stablecoins backed by other cryptocurrencies, for example Ether. Here, the interesting thing is that you see the overall collateralisation ratio of the stablecoin on the blockchain, so it’s publicly transparent on the blockchain and, with this, you effectively replace the trust that you put into the centralised issuers of stablecoins. Here you have it on the blockchain, and basically you trust the code, not the issuer.
The stablecoin market is growing, and there are also very interesting products around it, especially interest-bearing products and decentralised finance applications. These products have a lot of potential of bringing new users, and attracting new users, to the crypto space, especially when they’re compared to the yields of traditional savings products in a historic low interest environment. They obviously come with more risk, but it attracts a lot more users into the space. So, this is a short summary of the stablecoin space, but there’s a lot of other interesting things to look at as well. Permissionless stablecoins that regulate expansion and contraction of monetary supply through an algorithm will be interesting to watch for the next year.
CS: If we look at the other category of emerging forms of payment, central bank digital currencies [CBDCs], they are obviously not the same as the stablecoins and the crypto currencies. Do you see that being something that will get much more momentum?
JL: I think you’re right, that they’re not a direct competition to bitcoin or other stablecoins, but they definitely have potential to bring a massive change to the global financial system, with impact which we haven’t seen actually since Bretton Woods was removed. CBDCs can become a competition to the US dollar, as a global reserve currency, and also they have the potential to, and will most likely, replace retail banks in the way they enable savers to hold deposits and also the way that central banks can issue credit. This will bring a massive change to the retail banking sector and it will come with benefits because, for example, stimulus money can be distributed a lot quicker, which is a use case needed now as we’ve seen in the economic crisis. Also, other sorts of financial products can be offered, such as a wallet that you hold with a central bank. It can have a massive impact definitely, but I do think there can be a world where bitcoin, CBDC, stablecoins and other forms of crypto assets can coexist.
CS: If you think about coexistence, and I talk a lot about platformification and the platform economy, the APIs that open software enables means that you could see a clever company taking all of these currencies and integrating them into some form of global exchange and global coinage. Do you think that’s a possibility?
JL: I definitely like where you’re going with this. I think an important thing is if you want to offer a global product that you really work closely with a regulator and comply with KYC and AML on all these matters. This is an example of something that we’re doing. We’re doing everything we can to offer crypto in the most compliant and trustworthy way. We also intend to do something around stablecoins, which we want to build a comprehensive product around, so that people can do everything they need related to crypto. Software and APIs are definitely at our core and I can see us fitting in the entire offering that we have around crypto, stablecoins, and Open Banking via APIs somewhere in this great new sphere of embedded finance. This does mean that it is soon imaginable that the whole payments and commerce space is managed via APIs, offering financially embedded products. Through this we can embed cryptocurrencies, stablecoins, also other tokenised assets that represent some form of value, within the Mode ecosystem. I think that’s definitely possible at some point.
At the moment we’re building the foundations for this by sorting out regulation, by building products, by building the tech and APIs, by seeing which currencies you should actually offer on your platform. Then this is definitely a further step which should be taken, and will be taken, in embedded finance and crypto globally.
CS: If we look at 2021, does that mean that we’ll start to see the tokenisation of finance in a decentralised structure that’s got regulatory oversight being something that accelerates rapidly? Or do you think 2021 will be just further slow developments?
JL: I think Covid has accelerated many things that we did not expect to be adopted until 2030. bitcoin will be more normal and adopted in 2021. The same goes for developments of applications like Ethereum that have been accelerated also. We can expect decentralised finance to have more essential breakthroughs, and the global financial world will be watching. At the same time, it will be up to the regulators to try to understand this emerging field, which is growing at a rapid pace. In terms of having a global system, there’s a lot of very smart people and there will be more competition among regulators to use regulatory frameworks that understand the technology and facilitate and enable innovation. It will be dependent upon the regulators and the entire infrastructure of the economy to implement this and facilitate it, because it’s a global phenomenon. It’s just like the internet, but for finance and money.
CS: Maybe you should tell me what Mode is.
JL: Mode is an LSE listed fintech challenger building next generation products for consumers and for businesses, focusing on security and compliance. To date we have launched the first UK finance app that brings together fiat currencies with bitcoin accounts and high yielding interest features for bitcoin. Our aim is provide everything in one place and for businesses, we are offering marketing and ecommerce and payments services for UK companies that look to attract and engage with high value customers globally. We’re also an official partner with the Chinese payment platforms of WeChat Pay and Alipay. Our ambition is to create an ecommerce ecosystem which goes beyond investments and payments – that is the overall ambition – but we are also committed to supporting Bitcoin in various ways, for starters by building the fastest way to buy into bitcoin in the UK. We have done the first IPO with a consumer facing bitcoin offering, and we have also made bitcoin a treasury reserve asset of the company.
CS: What’s going to be top of the agenda for Mode in 2021?
JL: We’re obviously building out the Bitcoin product but, at the moment, we’re actually developing our own payment rail and loyalty solution which is powered by Open Banking technology. The aim is to connect Mode users and businesses through the Mode app. We see huge potential in Open Banking in the next years. I personally see similarities and synergies in what Open Banking and what cryptocurrencies want to achieve, because Open Banking actually aims to democratise access to your banking data which is currently only really owned by banks. This is why we’re still seeing a major lack of innovative technology in the West, because it is built upon legacy banks and card schemes that aren’t real-time and settle your payments a lot later. Through Open Banking we can finally address the inefficiencies in cards schemes and banks because we facilitate payments via instant account-to-account transfers. That’s the exciting plans we have around crypto and Open Banking in 2021. We can’t wait to show our customers what we have built.
About Janis Legler
Chris M Skinner
Chris Skinner is best known as an independent commentator on the financial markets through his blog, TheFinanser.com, as author of the bestselling book Digital Bank, and Chair of the European networking forum the Financial Services Club. He has been voted one of the most influential people in banking by The Financial Brand (as well as one of the best blogs), a FinTech Titan (Next Bank), one of the Fintech Leaders you need to follow (City AM, Deluxe and Jax Finance), as well as one of the Top 40 most influential people in financial technology by the Wall Street Journal's Financial News. To learn more click here...