Two Prime Blog

Crypto’s First Big Test — A Q&A with Two Prime COO Alex Blum

In the last few weeks, COVID-19 has been spreading rapidly around the world, disrupting markets and industries all over. In the last few days, the coronavirus has resulted in a freefall of the U.S. economy, shifting the recession debate from “if” to “how bad is it going to be?” Since the birth of Bitcoin in 2008, this is the first time the crypto asset class is being tested against the traditional markets. In a Q&A, we asked Two Prime COO, Alexander S. Blum, who has spent the last seven years leading crypto investment and blockchain startups, about how the crypto markets have been reacting as the global markets teeter on the edge of recession

Looking back at the past week, what does the performance of the crypto market tell us about how investors view crypto as an asset class against the traditional markets?
AB: “Let’s first distinguish between BTC and the crypto market. The crypto market generally is too small and manipulated to really treat as a store of value. BTC however, has actually lost much less than the S&P 500 or oil over the past few days. While governments prepare to print more money and cheapen the existing supply, BTC remains a scarce asset with an upcoming diminishment of flow. As compared to gold — the ultimate protective asset during market crisis to many — BTC has roughly lost around the same value over the past few days. Compared to recognized safe haven assets, BTC has been performing on target as a store of value. This is all amidst the sell off of massive amounts of illegally stolen BTC from the Plus Token ponzi scheme, which dumped 13,000 BTC from their wallet yesterday. It’s easy to confuse the signal with the noise here. If we can curb ponzi schemes and further legitimize BTC, we will see it continue to behave as a safe haven asset.”

As the traditional markets fell, so did the crypto markets. From an outsider’s perspective, it would seem like the traditional markets and crypto are highly correlated. Does that still make crypto a risk-on asset?
AB: “For most, crypto is still a speculative asset. In times of duress, it’s unsurprising people will liquidate and move into traditional, trusted assets. That being said, continued stressors on the economy and the upcoming mass printing of new money will further validate the need for safe haven crypto assets that aren’t manipulated by governments. Governments have a limited tool set of financial strategies to manipulate macro level market trends. We can only cut interest rates and taxes for so long and when the set of tools have diminished, we will truly see the value of crypto as a safe haven asset.”

Cryptocurrency analyst PlanB has been widely discussing their “stock-to-flow” model, stating that the BTC price is at a healthy range. What are your thoughts on this model and do you agree with the analysis?
AB: “Stock-to-flow is a measure of where bitcoin should go based on its existing supply — the stock — versus the “new” bitcoins that enter circulation. And according to stock to flow models, we are still within healthy ranges. It’s not really up for debate. It’s a mathematical fact. That being said, the model does have it’s limitations as it eventually predicts ridiculous levels of prices for BTC that don’t seem within reason. I suspect that the diminishing ratio of stock to flow will eventually reduce its effects as other market factors gain in influence. This can include derivative products, changes in mining behavior, and as other cryptocurrencies become legitimate alternatives to BTC.”

What worries you the most about the current downturn in the markets?
AB: “Whenever there is a market downturn and the market inevitably goes back up, we witness a transfer of wealth from the poor (who are selling off to cover expenses) to the wealthy (who have cash to burn and can “buy at a discount.”) For those such as Warren Buffet, who has $130 Billion USD of cash on hand, it’s a shopping day whenever the market takes big dips. Who loses out? The regular person who believes in the market, not selling their stocks in a panic, and is holding their money in the market. It’s a shame. That being said, I believe a similar dynamic on a less institutional scale will occur in BTC, with those who have weak hands or need cash selling off in panic as the wealthy buy up more. This is not necessarily a reflection on a correlation between traditional and crypto markets but a pattern of economic inequality pervasive in many dynamics globally.”
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