Bitcoin has branded itself as digital gold. I think it's a strong thesis, but, like, we kinda tied ourselves to the mast of making the analogy of Bitcoin to gold. What caught the debasement trade this past year?
It was gold. What drove the price of gold up was actually central bank buying.
It jumped up after the Russia-Ukraine invasion, when the US seized Russia's treasury assets, and all of a sudden, central banks needed a way to gain exposure to the market outside of fiat currencies.
They started buying gold. They persisted buying gold in '22, '23, '24, and eventually they exhausted supply, and the price skyrocketed to the moon. But I don't think it was a debasement trade.
I don't think people suddenly started freaking out about debasement. Debasement is sort of a boil the frog phenomena. Incrementally, people get more worried about that.
I think ultimately Bitcoin will serve as digital gold because its fundamental characteristics fit that environment, and I think it'll do just fine. It just suffered from-- it had a negative four-year cycle effect.
At the same time, gold had this self-custody for central banks bull market, and so it looks bad on the chart. Over time, we'll, we'll catch right back up.
Matt Hougan, CIO of Bitwise, says that Bitcoin is in a crypto bear market, but that might be ending sooner than you think. Matt and I talk about a lot of interesting things, quantum Bitcoin.
We talk about crypto's changing narratives. We talk about Bitcoin's revenue problem, and the debasement trade may still be on the menu for Bitcoin. This is a really fascinating conversation. I think you will like it.
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We'll see you April sixteenth at the Times Center in New York City. Matt, welcome to the Block Space Podcast. Thanks for hopping on. I'm gonna hit you with a price question.
You put out a X article a couple weeks ago on two-three saying, "We're in the midst of the c-crypto winter." Mm-hmm. Since then, two days later, we had the infamous crash, two-- the two-five event.
Does that change your timeline at all? No. No, unfortunately. I think we're still in a crypto winter. The two-five event was shocking, but I'm not sure it was the final cathartic bottom.
I think we're in a bottoming phase. Look, I think we're gonna get out of it this year, but we're still, we're still in the depths of it.
There are often one or two big shakeouts, so I wouldn't be shocked to see another event like that at some point in the future.
You know, it's funny 'cause one of the points in your X article was that the winter started in January, and yet it really followed ten months of, like, Bitcoin decline, like, gradual disillusionment with crypto, other trades getting the bid, the ten-ten event, which I'll probably come back and hit you with again.
Why January and not October? Yeah. October is the obvious one, right?
Because that's when Bitcoin itself peaked, um, and you had ten-ten, and it's down fifty percent since then, so the easy way to say when the winter started is to point to that.
But if you look at the underlying data, there's a funny thing that's happening, which is outside of Bitcoin and Eth, really, everything else in crypto got crushed, basically starting with the Trump inaug-inauguration in January.
So, uh, big L ones like Sui and Aptos and Avalanche were down seventy percent plus in twenty twenty-five, and if you plot them on the chart, they started going down in January, and they just went straight down.
And if you remember back in the summer or early fall of twenty twenty-five, we all talked about this weird dichotomy in crypto, how institutional investors were really bullish, but crypto retail was really bearish, and you had fear and greed already at low levels that then fell to the lowest time ever.
And I think what was happening was there was a crypto winter for retail OG crypto investors, and then institutions were bullish, and they were papering that over in the assets that they could get exposure to.
They were papering it over in Bitcoin, papering it over in Eth. And so I think the crypto retail winter started in January, and we're well into that, right?
It's-- We're, we're about as long as those winters typically go.I think institutions just sort of caught on in October, and they're moving at a different cycle. They're almost like two seasons.
Um, and I suspect crypto retail gets out of it soon. I think there are even some green shoots suggesting that may be happening, and I think institutions hopefully figure that out.
But yeah, I think we could be out of this in Q2 or over the summer. I wouldn't be surprised to see the winter end on that kind of timeframe.
It's interesting 'cause you bring up almost like now two different market participants, which indicates perhaps some dislocation or maturation in the market, the retail and the institutions now operating on almost different timelines and cycles and narratives, which we can get into.
Mm-hmm. What are the implications of that? Like... Yeah, what are your thoughts? Well, there are lots of implications for that.
Like, one is that crypto should be less volatile than it was in the past and should have shorter or smaller drawdowns than it did in the past, right?
So not seventy-five, eighty percent, but maybe fifty, fifty-five, sixty percent, which would suggest we're nearer to the bottom. That's because you'll have some people buying while some people are selling, right?
And the same thing was true last year, right? Absent the institutional flows, I think Bitcoin would not have been minus six, it would've been minus sixty.
So already we compressed that volatility, and I think that will continue. So lower, less volatile assets.
It also means there'll be this on-the-run, off-the-run phenomenon, where assets that institutions are investing into will perform differently than assets that they're not. So what's a good example of that?
Over the last week or so, we've seen BlackRock invest in Uniswap. We've seen Apollo invest in Morpho. I've seen more interest in DeFi from my institutional clients.
Could it be that DeFi leads us out of this winter because it's getting that institutional flow and institutional interest? I think you might see that sort of dynamic as well.
So keeping in your mind this sort of two-part structure, I think it's probably gonna be important to thinking about how crypto performs, you know, broadly over the next, well, I guess forever, right?
This is the new reality we're in. This is-- That's good news for my Degen buddies on Discord who are, like, [chuckles] looking, they're looking for some new trade, and e-everything's amiss right now.
You know, I reflect on the last year because we-- because Bitcoin has branded itself as digital gold. I think it's a strong thesis, but, like, we kinda tied ourselves to the mast of making the analogy of Bitcoin to gold.
What caught the debasement trade this past year? It was gold, precious metals. Bitcoin didn't really. Why? And do you think this is a narrative that can happen? And yeah. Yeah.
I definitely think it's a narrative that happened. I would say that the issue with what you're pointing out was it actually wasn't a debasement trade.
It got positioned as a debasement trade, but what it was was a central bank self-custody phase that turned into momentum market. So the-- In other words, what drove the price of gold up was actually central bank buying.
It jumped up after the Russia-Ukraine invasion, when the US seized Russia's treasury assets, and all of a sudden, central banks needed a way to gain exposure to the market outside of fiat currencies.
They started buying gold. They persisted buying gold in '22, '23, '24, and eventually they exhausted supply, and the price skyrocketed to the moon. But I don't think it was a debasement trade.
I don't think people suddenly started freaking out about debasement. Debasement is sort of a boil the frog phenomenon.
Incrementally, people get more worried about that, and incrementally they gain exposure to hedges, and I think that's still happening, and I think Bitcoin is catching that bit, right?
We're still up substantially since COVID. We're up substantially over the last three years. I think that's intact.
I think what caught people by surprise is they have, like, one vision of what can drive the gold market, and everything should follow along. And in this case, it was just a force that didn't apply to Bitcoin, right?
Central banks are not buying Bitcoin. We want them to, but they're not. So I don't think it was a debasement trade.
I think ultimately Bitcoin will serve as digital gold because its fundamental characteristics fit that environment, and I think it'll do just fine. It just suffered from... It had a negative four-year cycle effect.
At the same time, gold had this self-custody for central banks bull market, and so it looks bad on the chart. Over time, we'll, we'll catch right back up. So central banks are not buying Bitcoin.
Is that a main driver of Bitcoin in the coming cycle? What causes them to start buying Bitcoin? Is that anytime soon, or is that still kinda kicked off in the future? Yeah. Well, it's soon on a central bank scale.
The issue is that central banks move on a glacial timeframe. So when I think about, I think all investors are going to buy Bitcoin, and all the evidence I see suggests that I'm right, right?
Originally, it was cypherpunks, and then it expanded to retail, and then it was family offices, and then it was financial advisors, and now you're seeing some endowments, and now you're seeing some sovereign wealth funds.
Bitwise did, I think, four meetings with central banks last year to talk about Bitcoin. So I think they are coming. The issue is that they just move extraordinarily slowly, right? Everyone moves on their own timeframe.
Maybe not surprisingly, a central bank moves slower than your, your Degen friends. And so I think we just have to sort of expect this to happen. What timeframe will it happen on? It'll happen over the next twenty years.
So this is not a near-term phenomenon. If you're, if you're wondering what pulls us out of this bear market, it's not the Fed deciding to put twenty percent of its balance sheet in Bitcoin.
That would be nice.You might see one or two central banks somewhere around the world start to allocate in a small experimental way. For sure, that could happen, but this is not going to be the, the big driver.
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I want to go back to the, you know, crypto Twitter loves the ten ten and two five rumors, loves to speculate. There's something that definitely broke in market structure, whether it's a conspiracy or not, I don't know.
What's your take? Yeah. How do you treat these two events? S- so there's some things that are unequivocally untrue. So, like, the paper Bitcoin thesis is just mathematically untrue.
The idea that, like, BlackRock or someone is manipulating the price of Bitcoin is unequivocally untrue. But then there are things that are probably true. In fact, there are things that we know are true, right?
So in ten ten, we know of a few small crypto hedge funds that had to cease operations and unwind. They were tiny, but I know who they are. It's not, like, private information.
And if a s- few small crypto hedge funds had to unwind, it's very possible that a few larger crypto hedge funds are still unwinding. It's very possible that some macro hedge funds are still unwinding.
It's possible that there's more than just block fills, which ran into issues and had to freeze withdrawals. All of that is true.
The thing to consider when I say that is that's, like, maybe it's ten percent of the driver of what's happening in the market. It's not a hundred percent.
So the, the problem with these conspiracy theories is, like, people say, "It's this. It's an unwind by a hedge fund." No. It's that OGs are selling. It's that people are afraid of Kevin Warsh.
It's, you know, it's quantum risk. It's all of these factors. This definitely has happened, but it only explains a little bit of it.
And then the other stuff like paper Bitcoin or gross manipulation by large financial services companies, that is just a dark place where investors go to die because those things are just untrue, um, point and period.
But this hedge fund unwind is true. It's just not the only driver of what's happening in the market. I wanna, I wanna touch on those other drivers. Yeah. Um, Kevin Warsh, new Fed chair. Uh, how much does that drive you?
What are your thoughts? Like, what... You know, is, is his hawkishness, comparative hawkishness, is that accurate, do you think?
Like, I'm not convinced that he is as ac- Also, I'm, I don't, like, pay as close attention to this type of stuff. There's a lot of things to keep tabs on. Is he a bearish signal for our industry? What are your thoughts?
Yeah. So at this point, I think he's gonna be a bullish catalyst. I do think Trump naming him was bearish for the market, but I don't think the market has it exactly right.
So the, the reason I think it was bearish for the market is that Trump was choosing between Kevin Hassett and Kevin Warsh, right? The two Kevins. And between the two Kevins, Warsh is more hawkish.
He wants to shrink the balance sheet. He's not quite as Ray Rah. He's more maybe sort of measured and serious, all of those things, right? He's, he's maybe more normal, and Hassett was on the outside.
And because it was like a fifty-fifty toss-up, the market was pricing in a fifty percent chance that we got a very aggressive Fed chair and a fifty percent chance that we got a more hawkish Fed chair.
And it collapsed to the more hawkish version, and that delta was why it was a negative. At this point, I think the market is wrong about Warsh.
I think he's going to aggressively cut rates, and then I think he's gonna struggle to shrink the balance sheet that much because there's sort of this element of fiscal dominance where he won't be able to.
So my guess is he's gonna cut rates more than people expect, and as the market realizes that now, that's gonna be a bullish catalyst for the market.
So I think him coming into the chairmanship or being confirmed is actually gonna be one of those factors that starts to pull us out. But look, it was a fair reaction given that we were...
had the possibility of a very aggressive Fed chair, which would have sent Bitcoin much higher, and we didn't get that. So I think that's what the market priced in.
But again, right now, it's gonna be a bullish catalyst 'cause he's more dovish than people think. Isn't, isn't that always the case?
Somebody comes in saying they're gonna shrink the balance sheet, and they find, "Oh, it's way more difficult than we thought." A hundred percent. I mean, that's the case on everything with the government, right?
Elon came in trying to cut spending and basically gave up and said our only hope is to grow out of it, right? So yeah, as, as Lyn Alden says, nothing stops that train. We're, we're spending money. We're printing money.
We have a huge amount of debt. There's, there's just no way off that train.
And I think Warsh will try his best because he does believe the Fed should be more narrow, but he's gonna be constrained by how the market responds to that.
So one of the other pressures on Bitcoin you mentioned was Quantum. So for context, we do a lot of technical coverage, so we're pretty deep in the, like, the technical Bitcoin world.
Myself, just produced a mini-series on Quantum, getting deep into signatures and all that stuff. I see these charts which are like, "Here's where Bitcoin could be if we didn't have the Quantum discount."
And it's very clear investors care about Quantum. I'm skeptical that we're seeing, that we're seeing a material sell-off because of it. You are much more dialed into the investors.
From what I see you talk about, you have a pretty more sophisticated understanding of Quantum than the average, even Bitcoiner, I would say.What are your thoughts on Quantum?
Well, I wanna watch your series, so you certainly know more than me about this space. I'll share the little bit where I have expertise, which is how it impacts institutional investors who are considering this.
When, when you have, like, a financial advisor or a large institutional group deciding whether to invest in Bitcoin, there's typically an investment committee, which is, like, six folks who sit around and debate things.
And the reason Quantum is a challenge is not because I think it's something the Bitcoin community can't and won't eventually solve, which I do think that is the case.
It's that when you're in this investment committee and you have six people, there's one person who says, "Yeah, but what about Quantum risk?"
And maybe they've read what Nic Carter is writing, maybe they've read what Willy Woo is writing, maybe they've studied the issue.
And if your answer is like, "Yes, let me tell you about the technicals of this and what portion it...
and how the community will rally together even though there's no Bitcoin corporation, and eventually solve it and make these hard decisions about, you know, quantum-exposed wallets," you, you've lost, right?
Like, what you need is like, "No, that's not a risk. Actually, your bank account is at risk, and Bitcoin will be fine." And we haven't had that because the community hasn't had, like, a focused vision on that.
So I, I do think it's-- I don't know-- I don't believe those charts either. I think that's nonsense.
But I do think it's holding back what would otherwise be a recovery, 'cause some of the dip buyers are using that as an excuse not to come into the market. That's pretty much identically the point that I've made.
It seems like it could become a thing if new information about Quantum is revealed or investors become more sophisticated in understanding it. I'll probably double tap on this a bit, and this might get in the weeds.
Feel free to say I don't know too much. But there is a criticism that, like, the Bitcoin developers corporately, Bitcoin core, the broader Bitcoin culture, um, dismisses this too much and is not responding appropriately.
Um, do you have thoughts on that? Well, I think it's a great question. There's certainly some parts of, of the Bitcoin development community that is taking this seriously.
But I do think there was a, a large group that sort of thought that this is something we can deal with down the road when the technical solutions to deal with it have improved and are more tested, and if we try to resolve this problem right now, we might do more harm than good.
And that was maybe even correct. I'm not like-- I'm not an expert on Quantum, so I don't know when it will be a imminent threat.
But I can believe that a reasonable person thought this threat is far enough down the field that we shouldn't focus on it now because we'll have better solutions to it as we get closer. That's like a rational...
The, the point where that becomes irrational for price is when this narrative takes hold. So, I-- it sort of sucks that sometimes narrative can dominate reality, um, but I think that's what's happened here.
Well, at least, at least the people who think it's urgent and pressing, who may be right, because again, I'm not an expert, have become loud enough that now Bitcoin Core needs to respond. That's, that's sort of my view.
It's almost self-reinforcing. I wanna go to new narratives. You had a great piece on crypto narratives. Most of it was like crypto broadly, not as Bitcoin-specific.
One of the points which I thought, which I thought was really interesting is on the narratives of revenue. To me, this is pretty clear that like crypto has had a revenue problem. Like we have tokens that go up.
What-- like what value does this produce, which is re- which is reflected in revenue. But we see like, you know, things like hyper liquid, crazy revenue for, for that chain or company.
But I look at Bitcoin, and I, I wonder how this might apply to Bitcoin because I look at Bitcoin's on-chain activity, which is de minimis right now. It is stark.
And I wonder if you have thoughts on this revenue thesis as it applies to Bitcoin. Are these maybe apps or products built in the Bitcoin ecosystem? Is it Bitcoin transaction fees itself?
Am I pushing too much on this issue and trying to make it something that you didn't mean to? What are your thoughts? Oh, I love that question. I'd love to hear your view on it.
From my perspective, Bitcoin has this unique escape from the revenue meta because it's positioned as a store of value.
And that's why you see-- to get into the community arguments, that's why you see Ethereum wanting to be a store of value, because even though it's the leading platform for stable coins and tokenization, which is an incredible competitive position, even though it is the leader there, it likes to like position itself as the follower in store of value.
It's very weird to me. But the reason for that is that store of value has such an easier valuation thesis, right?
If you're going after the gold market and Bitcoin is six percent of it, it's really easy to argue it should be twenty-five. If it's twenty-five, it's a million dollars a coin in a decade.
Like, that's-- it's, it's super easy. So I think Bitcoin largely escapes from the revenue meta, whereas everything else needs to align with revenue. I think it's a bigger deal for them.
But it's very possible that the concept of Bitcoin security budget becomes a really big deal in the same way that Quantum became a really big deal, right?
People were mumbling about Quantum a few years ago, and now it's pressing and urgent.
People have been mumbling about Bitcoin security budget and the lack of activity and the lack of fees and the lack of revenue for a while.
It would be easy to see that become a big deal, particularly as, to sort of implicate myself, ETFs become effectively a layer two for Bitcoin that sucks transaction activity off chain.Um, r-right.
I, I could see this become a thing.
So that's where I think Bitcoin should think about revenue, is to avoid, like, a quantum repeat on security budget, and I think that's a legitimate concern that could bubble up at some point. You know, I...
You know, this, this makes me wonder about, like, you, you posit these narratives for broader crypto, and I look at Bitcoin has a very strong store of value narrative, digital gold narrative.
We've, we've done very well at codifying these. But are there other narratives for Bitcoin beyond those, and what do you think those are? Oh, totally, yes.
So the, the, the, the, the other narrative, which I always describe to institutional investors as sort of a slightly out-of-the-money call option, is that we're moving into a multipolar world where people are weaponizing their currencies.
It's easy to imagine that in that world, in five years, in 10 years, maybe in three years, a portion of the world will want a apolitical currency to settle transactions in.
And we've seen sort of small efforts at this, right? Between, like, Russia and China and others. I think that that is a major use case. So a lot of people are like, "When am I gonna buy coffee with Bitcoin?"
Basically never, at least in the US, 'cause the tax treatment sucks. Yeah. And existing payment rails are super easy. But will the world, in a real multipolar world, want a non-political currency to settle transactions?
I don't think that's far-fetched.
It's certainly not far-fetched if you imagine yourself going back 10 years in time to 2016 in Bitcoin and asking yourself, will the Harvard endowment and the Abu Dhabi Sovereign Wealth Fund have large positions in Bitcoin?
That seemed absurd. It actually seems easier for me to go 10 years forward and imagine the world settling a significant number of transactions in an apolitical currency.
And Bitcoin's the only one that you can do that, because unlike gold, you retain custody of Bitcoin through settlement, and that's, like, a huge differentiating factor.
So yeah, I think that's the second real narrative to me for Bitcoin. There may be others, but those are sort of like store of value, apolitical currency for international transactions, seem the obvious ones to me.
Last question. No crypto podcast these days is complete with talking about AI. I feel like I'm just always trying to fend off, like, [laughs] AI questions left, right...
But it's a fascinating, now integrated conversation. You wrote about AI phi, agents won't use bank accounts. Pretty compelling. Very cool idea. This is really hyped on, on crypto Twitter right now.
Uh, do you think this... I don't know. I go back and forth. You know, it, it sounds cool, but I have a hard time believing they just won't use dollars. Maybe they'll use stablecoins. What are your thoughts?
They might use stablecoins, they might use DeFi rails, some of them might use Bitcoin. But all of them are more likely to use crypto than not.
And I think actually everything that happens in crypto, outside of scams, benefits Bitcoin, for what it's worth. So growth of stablecoins I think benefits Bitcoin, 'cause it puts you in the neighborhood.
You need a wallet, a wallet is proximate to Bitcoin, you can hold it direct. Like, so I, I think it's, I think it's positive.
The way I would imagine the AI phi story, if you know that classic tech chart of, like, it goes up and then you go into the trough of disillusionment and then the phase of enlightenment or whatever the terms are.
We're in that first up on AI phi, so we're in, like, the initial hype bubble. For sure we're gonna go into the trough of disillusionment at some point, because it's going to take a while for this to reach scale.
But I think the, the reason I would pay attention to it is, A, it would be nice to have a narrative to push us out of the bear market, and this is one of them.
And long term, I think it's extraordinarily true and actually has big implications, 'cause I think it means transaction activity is, like, 1,000 times bigger than we think.
Uh, DeFi is, like, 1,000 times bigger than we think. And for sure if you just abstract, like, is an AI agent gonna be more open to Bitcoin than the average human? Yes. Right?
Like, apolitical, digital, verifiable, limited. It's easy to see that being a part of the market. And so I'm, I'm bullish on it, but this is a long-term play. Matt, thank you so much for coming on the podcast.
Really appreciate this. It's early morning for you, but by the time people hear this, they will be on their second coffee. Thank you so much. Thanks for having me.
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