U.S. politics could have lasting influence on crypto prices, says CoinDesk Indices' Andy Baehr

All right, Andy, let's just start with the markets overall. Obviously, that huge milestone for Bitcoin last week had everybody talking. And regardless of the pullback today, I've had all kinds of people over the weekend asking me about that $100K Bitcoin, sort of how far it extends into other cryptocurrencies. And I think you're a good person to ask that too, because of the CoinDesk 20 index. Based on that index, what are you seeing out there? How deep does this rally go? What's the momentum looking like in the crypto market? It's despite Bitcoin's kind of champagne moment last week of hitting $100,000, which, of course, a lot of folks celebrated. The CoinDesk 20 index has outperformed Bitcoin since the day before election. It almost doubled during the month of November since the election. And that says a lot. More and more people are using it. Every time MicroStrategy comes up, every time this idea that corporate balance sheets might hold Bitcoin as an alternative source of store of value comes up, this is all part of adoption momentum. Bitcoin probably has the least to gain from any regulatory changes. It's very well regulated already. It's classified as a commodity in the United States. We have futures contracts, options on futures, ETFs, options on ETFs, options on ETF indices, wide availability on centralized exchanges. So Bitcoin's story, and when it really comes down to what Bitcoin is fundamentally, is about more people being able to own it, understand its value proposition. And so that adoption momentum is key. Several of the president-elect's comments, whether he is appointing the crypto czar or just talking broadly about what his administration is going to be like, are clearly pro-crypto and pro-Bitcoin. That helps. So Bitcoin's done great. CoinDesk 20 almost doubled. You saw a resurgence in names like Ether and Ethereum, mainly because there is more future for things trading on Ethereum, which would bring up volumes and help Ethereum out. Stablecoins, part of the meme coin market, NFTs, but also smart contracts. The innovation and the growth side of crypto is either going to trade or clear on Ethereum. And that kind of woke up Ethereum after it having a pretty sleepy kind of summer. The rest of the CoinDesk 20 names, which are the top names in crypto, experienced what were almost surprising resurgences. XRP, XLM, Uniswap, Cardano, Hedera, just all the way through the list. All the names were up, some of them multiple times. As things stood by the end of November, more than half of the CoinDesk 20 names had doubled or better during the year. So separating those two is important. Bitcoin is about adoption momentum. The outlook, the better outlook for a regulatory pavement on which the digital asset industry can operate is really what about the other coins momentum is about. That kind of half answer is my next question, but I want to still pose it because I'm curious your thoughts on it. I think a lot of people were worried about altcoins having this rally and whether it was tied to FOMO and greed or whether it was something more sustainable. It sounds like you think it's something more sustainable. It's this idea of adoption. Talk a little bit more about that. How do you differentiate between some of the past rallies we've seen, which has sort of come back down and something more sustainable in these altcoins? Sure. It's funny because I was looking last night and I think you read this in the piece that we put out that looking at monthly returns of kind of major tokens ever since the fall of 2022, the depths of crypto winter. And usually these spikes have happened at times when either regulatory victories took place, like when the ripple case against the SEC was resolved back a summer ago, which seems like a long time ago, or when things appear to be changing so much that both the talent concentration, the capital formation concentration, and the business concentration outlook looks better. And that's where we are right now. I think definitely there were some classic, classic crypto names that rebounded. Cardano is a great example. Ripple is a good example. That confounded some people who may only be looking for the latest, greatest thing. But we have to remember that the United States has been under this very kind of compressed, repressed, suppressed environment for growth and innovation. To the extent that people who have hung on with these mature platforms can move forward is an encouraging sign. This is also, this is not on thin volume either. Our new colleagues at CC Data pointed out that in November, global spot and derivatives exchange volumes exceeded $10 trillion for the first time. So this is a rally built on a lot of volume and a lot of momentum. Now, does this mean that those individual tokens are poised to take over the Web3 world? Will Ethereum's recent rally demonstrate that it is the be-all and end-all for smart contract platforms? We don't know. It is very hard to pick individual winners. It's very hard to pick individual timing. We always feel that way. So we generally think about their impact on the index and what the index's objectives are. Something I've been wrestling with is just how much US politics has played a role in this latest rally. Because I feel like for years, we've been talking about here on Crypto World that crypto is apolitical. It's global. No one country can have an outsized influence on the industry or markets. It seems like that's less true than ever. Am I wrong on that? Is that a good thing or a bad thing? Help me make sense of that feeling that I'm feeling right now. Right. It's great when you go around the world and you look at different jurisdictions and you meet with regulators. I've met with regulators in Hong Kong. I've met with regulators in Dubai and in Europe. They have dedicated digital asset regulations, which you kind of need as an industry grows up and you want to operate in a place where the talent lives, where the capital lives. You need rules for capital formation. You need rules that help you define what your business is going to be and how it's going to be regulated. We are always saying crypto wants better regulation, not no regulation. An apolitical stance is fine so long as the rules are clear. Crypto will have to, like any other asset class, sustain both Republican and Democratic administrations into the future. I'm almost looking at this as crypto's 1933 moment. When the Securities Act passed in 1933, it established exactly what securities were and what they weren't. It provided clarity. It was landmark. It basically began the equity parts of capital markets and their interaction with the public. That was very good. At the time, it may not have felt excellent, but now it feels foundational and we still refer to those rules every day. Having good, crisp regulations that are neutral to the industry that are fair and usable is critical. That's been part of what's suppressed over the last couple of years. That's what the industry has really felt. That's the environment that we appear to be exiting from. That's why the spirit seems to be a little bit more constructive. Let's stick with politics. We got a bunch of news out of the next Trump administration that's been driving that influence that I've been talking about. SEC pick of Paul Atkins was seen as good news for crypto. We've got David Sachs as a crypto and AI czar at the White House. Let's start with the SEC and talk to me about what that change there would mean for crypto markets, why people are so excited about it based on what we know so far. Sure thing. We should remember even before we get into the SEC, the US is a little bit hamstrung. One of the things that we didn't solve after the financial crisis in 2008, 9, 10 was reconciling the dual nature of the CFTC and the SEC. There were plenty of times when I was back in an investment bank when it was really difficult to tell where one regulator was going to be responsible for the swap you were about to execute and not the other. There were rules that you had to check. There's definitely some ambiguity there. With a new asset class coming in and the CFTC de facto regulating Bitcoin and Ether by having futures contracts on them, it leads to this metaphor I've been using of two outfielders racing to catch a fly ball and colliding with each other, the ball lands on the ground. We have to solve that problem by either establishing which of the two or is there going to be a third digital asset regulator? Other countries have dedicated digital asset regulators. That's the first thing that we've got to fix is the ambiguity. Because again, for capital formation and defining what your business wants to do, you have to know who your regulator is and what the rules are going to be. There can't be any squabbling. With respect to the SEC, I think the first thing the industry wants is to stop the bleeding, right? Put a tourniquet on this. And to the extent that some of the enforcement actions that were aggressive, assertive on the SEC's part to sort of start to clamp down on those because they were seen as an overreach by the industry. Certainly when the SEC comes in and surprises a company with an enforcement action where there aren't any rules that would have pointed to or predicted that outcome, that's difficult. And that does not attract talent. That does not attract capital onto these shores. So I think to the extent that some of those might have been elective, we would expect the new SEC commissioner to at least review those if not put a halt to them. Other things will take much longer, right? It's pretty clear that chair-elect Atkins understands digital assets. He's been involved. He also was an SEC commissioner from 2002 to 2008. So he's likely to respect the process. He'll be intelligent on both regulatory and crypto matters when he speaks to legislators. So that's just about the best outcome that we have. And we'll have to see how much of that regulation actually ends up residing within the SEC or not. But we feel as if we're kind of playing with a fair deck now. And to go to your point there, I mean, there are a lot of questions about what regulation will get done in this next term. We've got this crypto and AI czar, David Sachs, who is supposed to take up the charge of figuring out crypto regulation. And to exhaust your baseball metaphor a little bit, Congress is the coach there, right? To clarify what each player is supposed to do. What is the priority for this crypto czar? What should we expect from that role? And what do you think it means for markets? It's great. The president-elect has been very clear. I think when he went to the Bitcoin conference in Nashville and felt the warm emotional embrace of the crowd, that helped harden up his belief that this was compatible in alignment with his movement and his belief set. But we can't expect the president of the United States to be thinking about crypto all the time. Having an expert on AI and on crypto, one who hears a lot of voices and is able to speak intelligently about these things in the room is going to be very helpful to help create priorities, help keep updates kind of detailed and not colored by previous biases or things like that. So that's very encouraging. Crypto czar in and of themselves is, look, it's a voice that's informed. It's a voice that gets heard when decisions are made. That's what we want to happen. So the president will continue to talk about Bitcoin, one would presume and one would hope. The crypto czar will do the same. Again, for Bitcoin, that helps our adoption momentum, right? When you hear that Michael Saylor is visiting other boards and trying to convince them to add Bitcoin to their treasuries, this is a decision that has to be made. This is a yes or no. And a lot of that yes or no is going to be based on safety, on support, on the institutionalization of Bitcoin. So it's a matter of when, not if, to the extent that that can be accelerated by the US government kind of voicing support that it's monitoring Bitcoin and that it feels that it's a useful asset, along with Larry Fink saying the same thing and others in the industry. That just helps accelerate this adoption momentum. For other digital assets, think about stablecoin legislation, right? Think about things that could happen in Congress in the next 18 months. Now, you may think, well, what does stablecoin volume do for me? Well, stablecoins have to trade on a layer one, right? Maybe on a layer two. So this is going to impact Ethereum. This may impact other layer one blockchains. Of course, again, you don't necessarily have to pick which one's going to be the winner, but you want to understand that those things have to trade on a blockchain. Those blockchains will see increased volume. That will mean increased fees, and that will mean increased demand for their native tokens. And just to end on a very big question, so I'm apologizing ahead of time. You laid out how much politics is influencing the crypto market right now and how many questions around regulation, around these agencies there still are. To that end, how long do you see US politics still influencing the market at the level that we're seeing right now? Because we still have to get a lot of these names confirmed. We still have to see what kind of bills make it through committee onto a floor vote. There are just so many questions right now. So is this our life for the next two to four years that we're going to be watching politics and looking at price moves and saying, all right, what's happening on Washington to drive that price move? I think there are going to be moments of elation like we've had over the last month, and there are going to be moments, maybe even seasons of frustration. So we can't assume that we're going to keep rocketing off. I think even if you look at the markets over the weekend and today, they've softened a little bit. We've had an incredible run for a month as the market repriced in this new future. You're exactly right. That legislation will take a long time. Stopping the bleeding and I guess having some existing projects come out of hiding for maybe reduced fear of actions coming in their email unexpectedly, that will probably help. That's probably the best short term thing. Again, for Bitcoin, all you need is mentions and comfort. There were still some editorials in various publications after the 100,000 mark saying, well, we told you so then and we're telling you so now, stay away from this thing. So as long as there are naysayers and side eye and eye rolling, you know that there's more adoption momentum ahead. For the other digital asset classes, I think the thing to watch is going to be how much talent is coming back on shore to the United States. That's key. How much capital is going to be reinvested into projects in the United States? And how soon will we have more kind of investment opportunities for retail investors who don't want to trade on crypto native exchanges? In other words, if I want something in an IRA that has diversification or in an ETF form or a fund form that's easy to purchase, how soon am I going to be able to get that? Because what's most important is that most 5%ers, most people who are spending 5% of their time allocating to digital assets are not going to pick tokens and they're not going to pick timing. They deserve something like the QQQ of crypto to help get them exposed to the market, but not necessarily devoted so much that they have to try to pick individual winners.