(Kitco News) – Digital assets have entered into a new era of legitimacy as the largest asset managers in the world have begun to offer crypto-related services, including access to spot Bitcoin (BTC) exchange-traded funds (ETFs) and the launch of the first on-chain fund by BlackRock.
With reports now emerging that hedge funds, registered investment advisors, and other institutional players have started to explore making allocations to cryptocurrencies in earnest, Kitco Crypto spoke to Brian Dixon, CEO of OTC Capital, to get insights into how demand has increased over the past six months.
Jumping into the topic of the ramping up bull market, Dixon noted that OTC Capital is up “a little over 33% this year and is excited about how things are moving with our portfolio.”
“Sometimes the private equity can create a little bit of drag because it takes time for the secondary stock markets to pick up with where the digital asset markets move, but we’re really starting to see that now as some of our positions,” he said. “So we’re excited.”
When asked how things have changed since the launch of the spot BTC ETFs, Dixon said, “The increase in inflows to Bitcoin and the performance of Bitcoin has been quite impressive, noting that roughly 38% of their portfolio is exposed to Bitcoin through either bankruptcy claims or digital asset trusts.”
“So when Bitcoin goes up, we see that directly in our portfolio,” he said, noting that at times, the demand for Bitcoin from the ETFs is “between 10 to 15 times more than the supply created by the Bitcoin network.”
“Another interesting data point is that, according to BlockWorks, about 70% of the Bitcoin in existence hasn’t moved in over a year,” he said. “According to Glassnode, about 45% haven’t moved in three years. So what that shows us is that if 70% hasn’t moved in a year, then these ETFs that are going to capture this Bitcoin only have a 30% tradable market to get it from, which means that 30% that is willing to sell needs to be incentivized by a higher price appreciation for them to actually go in and want to sell that asset.”
“I think that creates a really interesting supply-demand crunch, and in addition to that, the next Bitcoin halving is expected to occur in April,” Dixon said. “As of now, there are 900 Bitcoin produced by the network each day. When the halving occurs, it’ll get cut in half to 450 Bitcoin produced each day. So if these ETF inflows continue at the pace we’re seeing, and the Bitcoin supply is going to further get cut in half, I think we’re going to see some really interesting things over the next couple of months.”
With individuals like Michael Saylor saying that Bitcoin “is the exit plan,” and he has no plans to sell the top crypto for fiat, there’s a possibility that the 30% available to trade could continue to dwindle, especially if the institutional crowd adopts the HODL mentality.
“Over time, we’re seeing more and more people with the HODL mentality,” Dixon said, before noting that during Bitcoin’s price runup to a new record high, “we saw a little bit of a sell-off.”
“I would say that 70% that I noted is probably around 67 to 68% now of people that have been hodling because we did see some of the long-term holders sell into that price hike to capture some profits,” he noted. “So it just depends on the individuals or institutions and what is that price point where they will want to capture some profits and take a little off the table versus people that are long-term holders. I got into the space in 2012, and this data about how many people are actually holding is a higher percentage than I’ve ever seen my entire time in the space, so that’s promising.”
Pricing Bitcoin in a future without fiat
As the conversation moved to the topics of Bitcoin availability, the fact that there aren’t enough BTC for every millionaire on the planet to own one, and what will motivate holders in the future to sell their Bitcoin for fiat, Dixon suggested that the global financial system could be set for a paradigm shift.
“We can trade dollars for Bitcoin today, but in the future – and I don’t know how many years this will take – I believe that we won’t be able to trade dollars for Bitcoin anymore,” he said. “I think we’ll reach a point where the government-backed currency becomes so devalued over time that the only way to earn Bitcoin will be through your time, energy, and labor, meaning your work. That is unless you have another asset that you want to trade for Bitcoin, but I do think years into the future, it’ll be less and less likely that people will accept dollars for Bitcoin.”
While he sees this as a possible future development, Dixon added that he “thinks the dollar will be the primary medium of exchange in the United States for a while,” and said he sees Bitcoin “as more of a supercharged savings account and a store of value long term.”
“But it also largely depends on what jurisdiction you’re in, because there are some developing regions who have adopted Bitcoin as legal tender,” he noted. “And in those places, it’s a lifeline for them, because Bitcoin is less volatile than their currency.”
As for why BTC isn’t used more in everyday transactions in the U.S., he noted that the current regulations mean it’s taxed as property, “So it doesn’t make sense to buy a cup of coffee or fill your gas tank up with Bitcoin because you have to claim it on your tax report every time you do that.”
“But if that law gets changed at some point in the future, if Bitcoin gets characterized differently from an IRS standpoint, it very well could become a medium of exchange,” he said.
When asked what the world will use as a reserve currency once the U.S. dollar no longer fills that role, Dixon said he thinks “some type of global stablecoin” will be created.
“We’ll see this transition from jurisdictional banks in different countries and continents around the world to one centralized bank, like the IMF or something like that,” he said. “They will create this centralized global monetary standard that is a stablecoin, so you can do cross-border transactions very easily. You won’t have to worry about currency exchange risks and things of that nature.”
He added that while this is where he sees things heading, it’s not necessarily an ideal outcome “because if you have a centrally-backed digital asset that’s a stablecoin and serves as a global monetary medium of exchange, then you also have them surveilling transactions or the ability to do that. There’s the ability to turn off someone’s bank account if they don’t agree with what you’re doing. And so I do think Bitcoin is the shining light.”
Dixon suggested that if Bitcoin’s layer-two ecosystem, including the Lighting Network, can allow for a higher throughput of instantaneous transactions, then it will have “a good opportunity to become a global freedom layer that could offer an alternative to a global central bank digital currency (CBDC).”
A stabilizing Bitcoin market
As the discussion moved to Bitcoin price, Dixon noted that “The drawback we saw recently of around 17%, although it seems like a lot, it’s a lot smaller than what we’ve seen with some of the other drawbacks historically around the halving cycles.”
“A lot of the former ones were closer to 30%, so it’s not uncommon when we go on these bull cycles to see 15 to 30% drawbacks at different points in time throughout the cycle,” he said. “If you look historically through the having cycles specific to Bitcoin and how the rest of the digital asset markets correlate with that, the best time to be exposed to the space is six months before the having, and then 12 to 18 months post having.”
He noted that one model has shown that if an investor holds Bitcoin six months before the halving and waits to sell for 18 months after the halving, they have a 100% track record of outperforming the Bitcoin market if they sit out the subsequent bear market and wait to reallocate until six months before the next halving.
“But in terms of what we’re going to see now with the institutions, I think when we go through the next crypto cycle, and whenever Bitcoin reaches new all-time highs, I think the drawbacks that we’ll see are not going to be as severe as what we’ve seen before,” he said. “Historically, we’ve seen 70 to 90% drawbacks, but when we have this amount of institutional money coming into the space, which I anticipate will continue or increase, we’re going to still have a steep drawback, but maybe it’s closer to 50% as opposed to 90%.”
While crypto traders use the idea of Bitcoin cycles to inform their price targets, the 2021 bull cycle threw many for a loop as Bitcoin’s price topped out below $69,000 when many models predicted it would surpass $100,000.
“There’s an interesting thing about that point that I think about,” Dixon said. “The models that we use to help us value Bitcoin – like trendline analysis, stock to flow, stock to flow with gold, and Bitcoin halving cycles – indicated Bitcoin should have hit $100,000. A lot of people were of that mindset, and if you go back and look, you have to ask what would have happened if the customers at FTX who were buying Bitcoin actually had their orders filled.”
“The data shows that FTX was not buying the Bitcoin; they were taking the cash and doing stuff they shouldn’t have been doing with it,” he said. “So if those customers’ purchases would have been executed, it’s plausible that Bitcoin would have gone over $100,000 because that was billions and billions of dollars of transactions. It’s very possible that could have happened but for the fraud that occurred.”
“And so this year, or in the next year, as we’re looking at it, it’ll be interesting to see, will this cycle play out again? Will we reach the levels that some of these models indicate?” he said. “Because I do think that compliance controls in the industry and things like that are going to be much more secure this time around since there was a lot of learnings that happened in 2022.”
An improving landscape for crypto companies
Switching gears to the topic of the updated guidelines for accounting and disclosure of crypto assets from the Financial Accounting Standards Board (FASB), Dixon said they have made the process of holding crypto on a balance sheet easier for companies.
“FASB is responsible for governing the rules for GAAP accounting, which apply to all public corporations,” he said. “And with that, historically, if you wanted to buy Bitcoin or digital assets for your balance sheet as a corporation, it was marked as an intangible asset. That’s how it was characterized by FASB.”
He said that means that in the past, if a company held Bitcoin on its balance sheet and its price went up in value from the cost basis of where they purchased it, they could not show that appreciation on their books for financial reporting. But if Bitcoin went down in value, they had to mark that depreciation against their earnings. “So it was actually prohibited to mark it above your cost basis,” he said.
After a series of meetings and in-depth analysis, FASB decided to recharacterize Bitcoin and digital assets as fair value assets, as opposed to intangible assets, Dixon said.
“What that means now is if I buy Bitcoin for the balance sheet, and Bitcoin goes up in value, I get to show it’s reflective appreciation,” he said. “If Bitcoin goes down in value, I have to show it. So you mark the asset at fair value, wherever it’s moving in the market.”
He said that while the rule is set to formally go into effect in 2025, “FASB has noted that they’re allowing for early implementation of the rule, so people can start implementing it this year.”
This means that in the upcoming quarterly reports from public companies, there could be a host of new companies that report making allocations to Bitcoin, he said. “They’re likely going to be disclosing that. It’ll be interesting to see if they have allocated to Bitcoin directly or through the Bitcoin ETFs. I would imagine that there’s probably a combination of the two depending on the corporations, but that’s something that I’m anticipating.”
Dixon said OTC Capital has registered an increase in interest from various family offices and larger scale institutions in recent months, and while many have not yet “dipped their toes into the water with crypto yet, the Bitcoin ETFs have helped with that, and interest is definitely on the rise.”
He added that the recent launch of an on-chain fund by BlackRock has also brought more legitimacy to the ecosystem and is encouraging more firms to explore all that crypto has to offer.
“They also have a lot of their investors and constituents asking them if they’re allocated to Bitcoin, and if not, why?” he said. “Because we’ve reached a point in the industry now where it’s so much more commercial and mainstream, people are starting to recognize the performance. Bitcoin has been the best-performing asset in 12 out of the last 15 years. And so with that, people’s customers are saying, why aren’t you getting exposed to this?”
“As that pressure continues to increase, I think that’s going to increase people’s appetite for the space,” he said. “BlackRock, without a doubt, was a huge deal in terms of not only them launching the ETF, but also with the tokenization of this new fund, because Larry Fink has been on multiple media publications talking about how all assets will be tokenized in the future, and that’s something that we’ve believed for a very long time. We’re now entering that era.”
The rising stature of Bitcoin and digital assets has led to the point where it could be considered negligent for a registered investment advisor (RIA) to not recommend an allocation to digital assets, he suggested.
“The big thing people don’t think about with RIAs is that as an RIA, you have a fiduciary duty to find the most or the best risk-adjusted return assets in your portfolio,” he said. “And when you look at Bitcoin from a risk-adjusted returns perspective, it’s been the best one for years now. So if your RIA is still telling you to not get exposure to Bitcoin, in my opinion, you should fire them because they’re not paying attention to this asset, and they should be.”
Other tokens of interest
Aside from Bitcoin, Dixon noted that they have seen an uptick in interest in Ethereum (ETH) and Solana (SOL).
“I think a lot of Ethereum’s price appreciation in recent months was for anticipation of the ETF,” he said. “Now, we don’t know how soon that’s going to happen. It may take longer than people expect. If we look at the approval of the Bitcoin ETF, it took over ten years, and a court victory for Grayscale over the SEC for the approval to come. If that’s any indication of how the Ethereum ETF will play out, we may be in for some delays.”
“But then again, we also now have the legal precedent of an ETF,” he said. “So I’m hopeful it’ll happen sooner than later. I’m very confident it will happen at some point. It’s probably a matter of when, not if, but I think that’s a lot of Ethereum’s price appreciation recently, as people were seeing how successful the Bitcoin ETFs were a couple of months after launch, and they’re expecting the same thing with Ethereum. So we’re getting more interest there.”
That said, Dixon indicated that Solana has been getting a lot more interest recently.
“Its developer application layers are getting stronger and stronger on top of it. Its use cases are getting stronger, and since inception, it’s been cheaper, faster, and more efficient than almost any of its competitors,” he said. “So as we continue to see that ecosystem develop, I think there will be a lot more utility and people interested on the retail and institutional side.”
He said the rising interest is reflected in the price appreciation for SOL. “People are noticing it. We have retail and institutional investors loading up on Solana, either directly or through digital asset trusts like those offered by Grayscale and Osprey.”
One of the biggest selling points for Solana is the low fee to transact, which has been a major pain point for Ethereum over the years. While the network recently underwent its Dencun upgrade which promised to lower transaction costs, it did so only for layer-two networks like Polygon and Arbitrum, meaning the cost to transact on mainnet Ethereum remains high.
Dixon said that for this reason, OTC Capital is “pretty bullish on Solana and Binance Smart Chain because of the efficiency of each of them.”
Regulations
One area where the U.S. needs to play catch-up with the rest of the world is on crypto regulation, Dixon noted.
“We’re not at risk of falling behind because we are already significantly behind other jurisdictions and have been for years,” he said. “If you look at some other jurisdictions that are more crypto-friendly, like the UAE as an example, they ruled everything as a digital commodity dating back to 2018, and some other jurisdictions have done similar things.”
“The reason that’s so important is that if you’re an entrepreneur in this space, and you’re trying to launch a digital asset product to the market, you need to know what is the regulatory guardrails for you to operate in,” he said. “That isn’t really possible right now in the U.S. We’ve even seen SEC Commissioner Hester Pierce write dissents on this exact thing, talking about crypto companies coming to the SEC, trying to get feedback before they launch a product, and the response is, ‘Go to the website and register,’ which is not easy to do or even possible in some of these scenarios based on the questions.”
“That’s just not what we need in our industry,” Dixon stressed. “We need regulatory clarity.”
He noted that with the entry of BlackRock into the space, “we’ve seen a big change in tone with digital assets in terms of institutions and regulators and the government in general,” but he sees the Biden administration as a major barrier.
“The current administration has been notoriously very resistant to crypto,” he said. “I believe they’ve done several things to try to tamp out the industry with both disinformation campaigns around Bitcoin mining and also enforcement actions they’ve taken related to crypto banks. So I believe a change in administration would be a very healthy thing for crypto, but that’s largely going to depend on how things turn out at the voting booth.”
Bitcoin layer-two
On the topic of Bitcoin Ordinals, BRC-20 contracts, and layer-two networks, Dixon noted that “we are starting to see a lot more activity on the Bitcoin protocol” following the launches, and said they could open a new avenue of adoption for the top crypto.
“If we use the Internet as an example, when the Internet first came out, there were multiple competing open-source protocols that were battling it out to serve as the base layer,” he said. “And what ultimately won, because that’s where all the adoption fell, was Internet Protocol (IP). That’s where all the tech companies built their applications all around the world.”
“Today we have Bitcoin, and then we have all these other digital asset protocols as well,” he said. “What happens if, in the future, Bitcoin’s software layers on top of the base protocol become so advanced that the rest of the digital asset ecosystem collapses on top of it, and we have this one dominant protocol?”
“I see a universe where both could happen,” he added. “We can have Bitcoin for its use cases, and then we can have a lot of digital assets and their protocols for other utility and use cases. Maybe it’s something where it depends on what the utility is, or on what area of the world you’re in. There’s a lot of factors to look at there.”
He said, “It’s also possible that if the adoption continues and the advancements in the software layers on Bitcoin grow exponentially, things could collapse and Bitcoin could be the dominant blockchain with all the applications on top of it. It’s just too early for us to see what’s going to play out there, but it’s something to think about.”
Bitcoin price predictions
As the current crypto bull cycle ramps up, Dixon said he sees the possibility of it extending into 2025, and based on the models they use, BTC price is already significantly undervalued.
“The trend line analysis model that we use for Bitcoin shows that it should be worth around $136,000 today, so where it’s trading at tells us it’s undervalued from that model on a stock-to-flow basis,” he said. “In the next 12 to 18 months, it could go anywhere from $500,000 to $1 million. I know those numbers sound crazy, but if FTX had not occurred last cycle, it’s possible that stock-to-flow would have hit $100,000 or more.”
“So this cycle, when we look at it, one standard deviation above the model puts it at a million dollars per Bitcoin,” he said. “Two standard deviations above it puts BTC’s price at $2.5 million. If we look at historical cycles up until 2021, before that, Bitcoin went two standard deviations higher than that model.”
“So it remains to be seen, but I do think the floor is probably going to be somewhere around $150,000 to $200,000, with a ceiling maybe around $1 million,” he said. “It will fall somewhere in between that over the next 12 to 18 months, and that doesn’t seem outlandish to me.”
When asked what could help drive its price this high, Dixon pointed to central banks and rampant money printing.
“It’s reached a point where we can’t actually sustain it anymore, and the only way out of it is to print more money over time,” he said. “This isn’t a solution, it’s just a reaction to what has happened. As they print more, it gets further and further devalued, and eventually we will reach a point in time where people realize they can’t even use the currency anymore, so they just default into the next system.”
“If you look at things from a systems perspective, when one system crumbles, a new system always emerges. And that’s how I look at what’s happening now,” he said. “We have a system that since 1971, when Nixon took us off the gold standard and our money was backed by nothing, we’ve been slowly dripping out as the governments in power around the world print more money. We’re reaching the point now where it’s becoming much more noticeable.”
He noted that the uptick in money printing that occurred during the COVID pandemic led to a “massive inflation whiplash that continues to this day,” and said that countries’ budgets’ are going to continue to expand moving forward, which will result in continued money printing to cover the costs.
“We’ll ultimately have some type of universal central currency asset people will use, and that’ll probably serve more as a medium of exchange, while Bitcoin will serve as the default into this new system that people will say is the best option.”
As the conversation wrapped up, Dixon noted that “traditional investment firms like Merrill Lynch, Wells Fargo, Morgan Stanley, Edward Jones, and Vanguard are still not allowing their clients to buy the Bitcoin ETFs,” which means there is still tremendous upside for Bitcoin over the next year and a half.
“There’s around 40 trillion of assets under management that are controlled by these advisor firms like this, and that’s money that hasn’t been able to even begin to be invested in this Bitcoin products yet,” he said. “At some point, the customer demand will get so great and they’ll get so much pressure where they will start losing customers if they don’t allow it, I’m sure some of them already have.”
“So when that floodgate opens, I think that’s a whole new wave of capital that flows into the space, and I’m hopeful these firms change their position sometime over the next halving cycle,” he concluded. “If it does, we can see some really interesting inflows.”
Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.
