Crypto adoption will be real-use driven

INVESTORS NEED MORE ASSURANCES THAN ‘PROOF OF RESERVE’, SAYS SWISSBORG CO-FOUNDER

Has the ‘crypto winter’ chill receded just a bit? Some streaks of sunshine have burst through, with Bitcoin prices making some gains from near doldrums. Even then, the decisive full-fledged turnaround is yet to emerge.

In a parallel world, more crypto trade exchanges have come under scrutiny, brought on by their own excesses. And FTX’s fallout is still a painful echo for the industry, with investors feeling the pain acutely.

So, which of the cues should crypto investors take? Faith that Bitcoin and others will recover, eventually. Or be spooked forever by FTX into staying far away from crypto?

Anthony Lesoismier is cofounder and Chief Strategy Officer at SwissBorg, the crypto platform. In an interview, he gives an unvarnished update on where the market stands – and what investors, current and future, should be on the watch out for.

■ Before the latest bump up, there was a Steep drop in crypto trading volumes. Is it going to be a long time before retail investors return in some strength?

Asset price formation is not binary; it does not go up and down in straight lines. Asset prices tend to follow clear trends for certain periods, followed by periods of uncertainty and indecision.

Markets do not switch instantly from light to darkness. Instead, price formation behaviour can be seen as a switch with three positions - bearish, indecisive, and bullish.

We are clearly in a crisis (bear/correction market) where there is a low appetite for risk because retail investors feel lost and desperate. Prices are disconnected from their fundamental values due to extreme pressure on liquidity. In these market conditions, asset prices may remain volatile, but the probability of making a profit over the long term is high.

There is a positive asymmetric risk/return opportunity. Nevertheless, we believe we are at the end of the c and we will soon — in around 6 months begin the recovery phase.

Retail investors are hurt, they have lost money, but we are still early. We expect that as soon as prices start their recovery or give a more positive signal, a new wave of adoption will bring sufficient money to drive prices to an all-time high.

Until now, the main driver for crypto adoption has been speculation. As the technology matures, we expect that the new wave of adoption will be driven by real-use cases (gaming, digital identity, etc.), which give a natural, less correlated to price dynamic, continuous demand.

The crypto market volume is not the only one affected by the current adverse macro environment. Traditional markets see a negative trend in retail trading volume in the last quarter of the year.

Perhaps that’s why TradFi players are up to taking part in the game. We already see global TradFi institutions like JP Morgan, which has developed its own digital coin — the JPM Coin for its interbank transactions; Goldman Sachs has been offering its clients access to Bitcoin futures trading; Citigroup has been experimenting with blockchain technology among others.

In this period of crisis, there are typically accumulating distress assets that would be later on resold to retail investors in one manner or another. We believe that we can see the retail volume picking up.

Many say that the issue now is more about a domino effect, one trading platform after another showing cracks.

We believe the worst is behind us. The next possible Black Swan is Genesis Capital following the recent news about the CEO of Gemini stating in an open letter that Digital Currency Group, which owns Genesis, owes Gemini $900 million.

There will be very few actors left after the events of the past 6 months, the market is very clean and lean.

■ ‘Proof of Reserve’ was supposed to reassure investors – has it?

Proof of Reserve has temporarily reassured investors but it is only solving one part of the problem. The piece that is left is Proof of Liabilities, the exchange’s liabilities which are the sum of outstanding crypto balances due to its customers.

Transparency and visibility from the customer’s end are required from crypto exchanges, something we take very seriously. SwissBorg gives complete transparency on Proof of Assets and is working on a trackable Proof of Liabilities at any time in real-time using blockchain technology, creating new norms to restore trust among centralised exchanges in the wake of the recent FTX incident.

■ Do you see crypto/Bitcoin prices at a point where retail investors have no choice but to hold?

Currently, Bitcoin is in a historic ‘buy’ range in terms of Market Cap/Realised Cap. This was only seen three times in the past decade: January 2015, December 2018, and March 2020. (Market Cap/Realised Cap compares the actual market cap against prices last transacted on-chain. It provides a cost basis for each Bitcoin to its current price.)

■ At the UAE level, do you expect further tightening of rules on reserves, other liquidity parameters, etc?

Yes, we expect that the constraints pushed on centralized actors by the Regulation of Virtual Assets and Dubai Virtual Assets Regulatory Authority will tighten to make them more accountable for their operations.

Nevertheless, we believe that an increase in regulation usually rhymes with increasing barriers to entry. In our opinion, the only approach that can create a positive outcome for both startups and regulators is a firm commitment from regulators to develop technology that implements compliant constraints and open source it to startups to bootstrap their growth while creating a strong level of resilience for the fintech world.

This is especially important because fintech in the country is ranked first globally in terms of potential to grow.

■ If trading volumes drop further, how would your platform make up for the shortfall?

At SwissBorg, we are a cryptocurrency wealth management platform and we have designed products such as thematics, one of our flagship products, and ‘SwissBorg Earn’ that show resilience even during high market volatility.

Thematics are baskets of cryptos that are automatically rebalanced (we trade for the user to optimise) and where the components are reviewed every 3 months by our team. This fits well as our user base consists of more investors than traders and they believe in the long-term thesis of cryptos.

As 95 per cent of coins are dying (going to $0 and will never recover) after less than 6 months, therefore it makes it extremely difficult for anyone to invest in the long term. On the contrary, with thematic, we cherry-pick the best cryptos for which we can give a 10-year guarantee.

We help to create a long-term investment thesis for crypto, because a portion of cryptos is the Amazon, Apple, and Facebook of tomorrow. Usually, with exchanges, this is very hard to navigate, but with SwissBorg it only takes one click.

We are currently developing features such as Dollar-Cost Averaging (DCA), which involves purchasing set amounts of stock at regular intervals, regardless of the price. This is a time-honoured strategy, popular in TradFi, to build wealth with crypto assets.

This will help users to progressively accumulate quality crypto assets (such as Ethereum) in a non-invasive manner.

We expect that as soon as prices start their recovery, a new wave of adoption will bring sufficient money to drive prices to an all-time high.”

Anthony Lesoismier | Co-founder and Chief Strategy Officer at SwissBorg

■ Any chance that the spread on Bitcoin/Crypto transactions would tighten?

There are two aspects to this question: Exchange spread between crypto and Bitcoin

The liquidity on altcoins (alternative cryptocurrencies to Bitcoin) has greatly improved in the past five years, most of the Top 100 cryptos can now be exchanged with a bid/ask spread below 10 basis points versus Bitcoins.

Bitcoin dominance

We believe that in the upcoming cycle, Bitcoin dominance will fade out, especially since the technology is maturing and we anticipate to switch from a ‘fat protocol’ narrative to a ‘fat app narrative’, like on the internet. In this narrative, Ethereum (ETH) will become the leader, especially since ETH is now a deflationary asset.

Currently, ETH is touted as the ‘ultra sound money’, essentially a type of money that has a stable value (due to controlled supply).

■ In this period of crisis, there are typically accumulating distress assets that would be later on resold to retail investors in one manner or another, says Anthony Lesoismier.