#59 - Haseeb Qureshi: What Happened to Crypto?

In almost every country in the world, the banks are nationalized and the banks are the chokehold over financial transactions historically. If you control the banks, you control all the monetary flows in and out of your economy. And therefore, you can say at least somewhat believably that you cannot use financial assets or own financial assets that we do not approve of. Now, in the era of crypto, much like in the era of social media, all of a sudden it becomes laughable to claim you cannot own a stablecoin. On what grounds are you going to stop people from owning a private key and being able to have stablecoins move into that private key? How would you know? How would you enforce it? You can break down doors and force people to give up their passcodes? It's implausible that a government could do this. And what happens is not that, oh, okay, now the state collapses because they can't enforce state censorship laws. No, what happens is that the balance of power between individuals and governments gets renegotiated. That's what happens. And it happens every time a new technology gets created.

Of course. Thank you for having me, I should say.

Where's crypto? If you checked out in '22, first depends on when in '22 you checked out, but let's assume you checked out the end of the year, the natural time where most people would say screw this, I'm out. I think what you saw at that time was that crypto was fundamentally unserious, that nothing in the space really worked, that it was all a house of cards, that it was all going to come tumbling down the moment that a wind blew a little too aggressively against it, and that basically the systems that we thought worked didn't actually work. I think that was the takeaway for most people at the end of '22.

Now fast forward to today. I think the picture you get is very different. The picture that you get is that actually crypto works. Pretty much everything that we said works actually does work. So DeFi works. You look at the actual underlying technology. We claim that L1s are going to scale dramatically and we were going to make everything be able to move through blockchains super cheaply, very quickly with very high throughput. That works. We got that working. You now can clear tens of thousands of transactions a second through these networks. And then there's the question of are the systems themselves robust? Are they trustworthy? Are they stable? The answer now increasingly is yes. We have not just a regulatory regime, but even for the part that doesn't have a regulatory regime, if you look at what clarity is meant to regulate, what we see is a lot more robustness and regularity to exchanges, to the institutional partnerships that we have across the industry. And then you look at the stablecoin side, the stories that honestly I was telling back in 2017. This idea that stablecoins would be great for international payments, for B2B flows, for anybody who's sending a macro payment or a micro payment. Stablecoins are just fundamentally better than the existing payment rails. And for a long time, including up until 2022, that was a story. It was not really true. Stablecoins were primarily used by crypto traders at that time. It was basically the medium of exchange for people who did not have access to traditional banking rails. Today, that's a completely different story. We're now upwards of $300 billion in stablecoins. The payment volumes and the flows both on the B2B side and the consumer side are ramping at a crazy speed. And the number one thing that is also notable about that story is that it's no longer about crypto in the sense that if you look at exchange volumes, your exchange volumes over the last year have basically been down and to the right. And yet stablecoin flows have been up and to the right. And it used to not look that way. It used to be that actually crypto volumes and stablecoin supply were extremely correlated. That basically when crypto volumes grew, stablecoin supply grew. When crypto volumes decreased, stablecoins increased. That connection has been totally broken, which tells you stablecoins have hit escape velocity and they're just going to keep doing their thing. From the perspective of it is now both in the US interest to expand stablecoins and the consumer and the enterprise demand for stablecoins at this point shows no sign of stopping. That's what's different.

Yeah. So the first thing is that clearly the biggest product market fit of anything in crypto is Bitcoin. And that is kind of an obvious statement, but it's important to underscore that Bitcoin is bigger than stablecoins. Bitcoin is bigger than the whole shebang. If you take all of the public markets companies combined, Coinbase and Circle and eToro and all this stuff and Bullish and Galaxy and all that stuff. Combine all of it together and it is worth less than 60% of Bitcoin. It's tiny. It's absolutely like nothing. Even Tether, which of course is not public, Tether is still a private company. Tether is probably worth about as much as Ethereum and that's the biggest stablecoin company. Bitcoin is worth way more than both of them. Bitcoin is about six times the value of Ethereum, which tells you that Bitcoin is the main thing. Bitcoin is the largest thing that we've built as an industry.

So that's the first thing. Now, the question of okay, is Bitcoin money? I think calling Bitcoin money is kind of a marketing exercise.

Nobody denominates anything in number of Bitcoin. And it's not even a medium of exchange. It's a terrible way to transfer money. It's very slow. Takes up to an hour in order to confirm a transaction. And even store of value, usually what people mean by store of value is that it has a stable price.

Because if you store value you want to be able to later retrieve it predictably. Bitcoin does not do that. Bitcoin is very volatile. I mean it's obviously less volatile than other things in the space but everything in the space is an extremely volatile asset except for stablecoins. So I think calling Bitcoin money is a stretch. It's obviously not money. And that's true for everything in the space. There's a meme that ETH is money and then SOL is money and blah blah blah. I think the reality is that these things want to someday be money. Bitcoin wants to someday, and I think probably for Bitcoin it's obviously not money in these other senses. Probably store of value. It should be more like gold.

The reality is that Bitcoin is a risk asset and it's going to remain a risk asset for many years. The reason why Bitcoin is a compelling investment is the belief that it will someday be like gold. It will someday be a store of value. And when and if you front-run that process of it someday becoming a store of value, that is the generational trade that so many people now have made so much money investing into Bitcoin from. So if you just think about in 20 years, I mean Bitcoin right now is 18 years old.

Bitcoin, if you're entering college today, Bitcoin has existed basically since you were born. You do not remember a time before Bitcoin. To somebody going into college, Bitcoin is boring. Bitcoin is just a pedestrian thing that's always been there. And we're not that far away from the same thing being true for Ethereum.

Eventually, it will have the same fate that Ethereum will be boring.

And that is when you can start to creep into the status of being money.

Yeah. This is brand new for this stuff to become institutionally underwritable.

So, if you're asking why didn't the price go up, which is basically it sounds like the kernel of your question.

Yeah. So two things that I'd say in response to that. So one is that actually when the Iran war began Bitcoin actually started recovering. Bitcoin kind of traced the lows in the 60s and it pushed back above 70 after the Iran war began and it's not that dissimilar from what you saw when the Ukraine invasion began. That was also another period where Bitcoin actually overperformed and started rallying quite strongly. So it does seem that Bitcoin likes geopolitical crisis. Now it doesn't like economic crisis and I think that's an important distinction with gold. Bitcoin seems to have this, gold responds well in economic crisis and in political crisis. It seems like Bitcoin does not. The tariff tantrum was terrible for Bitcoin. But when wars began, that seems to be increasing the demand for Bitcoin. And you saw some part of this when Iran was taking these bribes to go through the Strait of Hormuz in Bitcoin. It explains very cleanly why it is that Bitcoin seems to respond positively, is that actually increases demand for an asset that's not tied to any particular economic region or system. That being said, it's pretty clear that having a simplistic view about what Bitcoin is supposed to do, right? Either, okay, Bitcoin is supposed to behave like gold. Well, Bitcoin is also supposed to behave like a tech stock. Why the NASDAQ went up, but Bitcoin didn't go up. Why? What's going on? Then you have gold went up, why didn't Bitcoin go up? It's sort of, I think the reality is that the double, triple, quadruple standard that we have for Bitcoin, and then of course lastly is that oh I thought Bitcoin was a correlated asset, why is it being uncorrelated there, right? So we sort of want Bitcoin to go up for every possible reason. Either it needs to go up because gold went up, needs to go up because geopolitical craziness happened, needs to go up because techs went up, or it needs to go up because we saw risk assets generally go up, or lastly it needs to be uncorrelated. So those things can't all simultaneously be true.

I think Bitcoin is clearly losing a lot of its steam for multiple reasons. There's not just one. One of those reasons is that a lot of capital is being pulled into AI and Bitcoin has nothing to do with the AI trade. If anything, the story of demand for proof of work being pulled away by data center demand and the energy being pulled into data centers and AI compute, that probably has some marginal drag on the story of, hey, Bitcoin is going to be the safest thing in the world because there's going to be all this spare energy that's going to go into proof of work. So that I think is a small part of the picture. The bigger part of the picture, of course, is that Bitcoin is mostly priced by retail. And that's been true from the beginning. It's true even now. Now that you have ETFs and you have all these institutions in the game, it's still true that the marginal demand for Bitcoin is set by retail, not by institutions. And when retail is gone, as we've seen, retail is mostly in AI. Retail is in the public markets. And if you go into a period where crypto is less volatile than the stock market is, if Nvidia, the most valuable company in the world, is actually more volatile than Bitcoin, then it's very hard to explain to a retail investor why they should own crypto. They might think, oh well, crypto, yeah, I think that's real, but AI is for sure, I mean that's super real and it's way more volatile. It's way more fun, way more interesting, way more exciting to hold. So I do suspect there's some sort of capital drain, capital flight from crypto into AI that will likely persist so long as the volatility within AI remains higher than in crypto. There will come a point when that volatility dies down. It always does. The stock market usually is not this volatile as we're seeing within the last couple years. And so when that volatility decreases, I expect marginal bid for crypto will start to come back. And then the other thing of course is that there have been some pretty big reputational hits for crypto and I think...

A lot of this comes from what's been happening around the claims of corruption within the presidential administration towards crypto that has lost a lot of the sheen that crypto had over the last couple years. And I think it's hard to pinpoint exactly how much of the damage is caused by that, but it's clearly a number of things happening simultaneously that are causing a lot of the blood to get drained from the crypto markets.

Now, that said, crypto is cyclical and part of it, of course, is just the cycle has clearly worn its way through. People believe in this four-year cycle concept and it's self-fulfilling to some degree is that if people believe it that's going to make them want to sell at a high that is close enough to four years.

And that's a lot of what we saw and that probably contributed in some part to the damage that we saw in 2022 which also cleaned out a lot of retail investors. But the one thing that we learned from being in crypto for long enough is that people have short memories. You know not extremely short but moderately short. Even today it's hard to remember just how incredibly bearish people were on the recovery of crypto in 2023.

Yeah. And people don't even remember what it was like after FTX, after BlockFi, after Luna, after all this stuff. So I tend to think, you know, give it a year or two and people will refresh their expectations about what's going to happen in this industry.

Yeah. Stablecoins, I mean, it's the simplest thing in the world is you put a dollar, you put a bunch of dollars in a bucket, and when somebody wants one of the dollars, you take a dollar out of the bucket and give it to them. That's what stablecoins are. Very simple. And you can trade the assets in the bucket. The end. As long as the bucket is trustworthy and you know that the money is going to be there, you're good.

We are in the fortunate position now to have had the first piece of crypto legislation in the US ever, which is the Genius Act, which now puts stablecoins under regulation by the Fed. So we now have credible oversight of stablecoin issuers. And that is going to be a big boon for anybody worried about hey is the money there. Now of course Tether, largest stablecoin in the world, they are not going to be licensed in the US, are not going to be compliant under Genius which means they can't offer their stablecoin to US customers but you know stablecoins you can hold them if you want to. It's completely up to you. You're not allowed to market. You're not allowed to do business dealings in the US. But if you're an American, you want to hold Tether, whatever, go for it. You know, caveat emptor. So that's stablecoins. Very simple, very old idea.

And it has clearly just taken off like gangbusters. We're now, yeah, so Secretary Bessent believes that stablecoins are going to hit 2.7 trillion by the end of the decade. Right now we're at 315 billion roughly. So that would imply a roughly 70% year-over-year growth rate for the next four years if we're to hit that. That's a pretty massive number.

Yeah. So first thing is that you do not need to have a relationship with the issuer or with anybody in order to hold a stablecoin. So if you want a eurodollar, you have to be a customer of the bank that issues the eurodollar. If you want to have Venmo, you have to be, as far as I know, an American and you have to directly have a relationship with Venmo, PayPal, whatever. So for stablecoins, you can be literally anyone anywhere in the world and hold a stablecoin.

You can be any business in any country. You can be a non-human, you can be an AI agent, you can be a machine, you can be anything. As long as you can custody your private key, you can hold stablecoins. That's the law. That is not just an economic reality. It is the law. It is what Genius says is that you do not have to KYC. You don't have to be known by anybody in order to hold a stablecoin. That is fundamentally different from what eurodollars do. And then of course unlike eurodollars these things clear instantaneously. They're transferred for basically almost nothing. You know effectively fractions of a penny that it costs to transfer stablecoins. And so the core of it is really that in times past when you had countries that wanted to import dollars obviously some of them would have dollar banking relationships with banks that would set up some kind of dollar banking through the correspondent banking system. But in countries where that's difficult or impossible or illegal, then you would have people importing dollars, right? There would be a black market where you take little green piece of paper, you circulate in the economy. And when countries dollarize, so dollarization is when a country moves from its own currency to the dollar. Usually from a bottoms up perspective, it's not the government wants to dollarize. Sometimes that happens, but most of the time the government wants to have their crappy inflating currency and push it onto their citizens, but their citizens say, 'No, screw you. We are going to use dollars.' And the central bank and the state become so weakened that they basically give up on the local currency and accept that the country is dollarized.

Correct. Correct. That is how it works. So when you are issuing a rapidly inflating currency, what that means is that your citizens and foreign investors have lost confidence in your stewardship over the economy. They've lost confidence in your liabilities. That's what it means for a country to have its currency inflating at that kind of speed. So normally what happens, like I said, is that people import these little green pieces of paper and these little green pieces of paper are bought and sold on the black market. These are not legal. You're not supposed to be, you know, you're in Venezuela 15 years ago, you are not supposed to be getting US dollars via any means, including through paper currency. So that's why there's often this sort of published exchange rate and the real exchange rate. And the real exchange rate is determined on the black market and it's called the black market because it's illegal. You're not supposed to get access to dollars. So this is the reality is that when you talk about failed states or states that are on the border of failing, it stops being useful to talk about what's illegal and what's not because laws are no longer effectively being enforced because the states are ultimately too weak to be able to enforce those laws. And people know that well this is nominally illegal but you know it's like in New York you jaywalk okay this is nominally illegal but obviously everyone's doing it and there's no capacity to enforce this law this law everyone kind of understands is like you know doesn't have the teeth of what you might otherwise think of a law. The weaker that a state gets the more that citizens just sort of trod over this law until it stops meaning anything and eventually the state gives up because they realize that it is actively counterproductive to their goals to pretend that this law is being enforced when it's not. So the economic reality becomes so overwhelming that they concede.

No, no, I don't think that's right. There are a lot of countries that don't have their own currencies. So having so the first thing I'll say is that it is weird if you zoom out far enough to look at this world and realize how many currencies there are in the world right where do we get this idea that every country should have its own currency it's a relatively modern invention this idea that countries should have their own currencies and ultimately a currency is a liability of the country right which means that basically a currency is an expectation that this country is going to pay its debts and be a good financial steward. And so it makes sense then that the countries that should have their own currencies are countries that are good financial actors, right? Because they would have demand for their debt.