Crypto Needs An Andrea Pirlo

Soccer, football, whatever you want to call the game, it can be argued with substantial evidence that Andrea Pirlo is the pinnacle of cool.  The man has the accolades:  World Cup winner, Champions League winner, domestic club champion.  He has the look:  hair both unkempt and perfectly styled, immaculate beard, stoic and monotone expression.  Nicknames too: il Maestro, L’Architetto, and il Metronomo.  He owns a winery in Brescia, without Pirlo there is no party, and with quotes like these, a modern-day philosopher:

“I took a long, intense breath. That breath was mine, but it could have been the manual worker who struggles to make it to the end of the month, the rich businessman who is a bit of a shit, the teacher, the student, the Italian expats who never left our side during the tournament, the well-to-do Milanese signora, the hooker on the street corner. In that moment, I was all of them." "You won't believe me, but it was right in that very moment I understood what a great thing it is to be Italian. It's a truly priceless privilege.”

and

“If God exists, there’s no way he’s French.”

His playing style matched the unique nature of his personality.  Pirlo was not athletic in a traditional sense.  He lacked speed, size, strength, acceleration, and defensive skills.  In fact, Pirlo began his career in a more advanced position, as an attacking midfielder, and was thought of as too slow to maintain a starting position at the highest levels. Despite all of this, he adapted his game to suit his strengths, shifted his positioning (from the point of the midfield to the base), and consequently revolutionized midfield play through the creation of the “regista” role, a deep-lying playmaker specializing in rapid transition from defense to offense.

What were his strengths?  Pirlo boasted touch, balance, brilliant positioning and close ball control, extraordinary vision, and exquisite passing ability.  He played both with reliability and flair, available to receive the ball in dangerous defensive positions and poised to spring counter attacks with misdirection and redistribution.  He sprayed the ball across the field, splitting opposing midfields and defenses horizontally and diagonally, while also exploiting them vertically.  Pirlo did not fit into the traditional model of the game, so he invented his own style that molded the game around him. When you have a few minutes to burn, the highlights are worth it. 

Pirlo changed the entire tactics of the game in his new regista role, proving that a player was capable of dominating through brilliant transition play from tight defensive areas.  Whenever he collected the ball there was a distinct possibility that he was about to turn the key to unlock the opposing team, and though he appeared languid, that change could happen in the blink of an eye.  Pirlo caused reactions, and for that reason, we suggest an additional nickname for him:  il Catalizzatore, or the Catalyst.

At present, crypto seems to be waiting for a Pirlo of its own to ignite some positive market momentum and move from defense to offense.  Save a few, scattered one-off events, volumes and volatility have been mostly stagnant for the past six months.  Sure, there is plenty of rust to shake off post-2022 implosions, but the cyclical nature of markets suggests that we should push through it at some juncture.  The question is not of when but how, and there has been a steady emergence of positive news which could serve as potential catalysts.  Of course, timing those catalysts and the market is dubious at best, but as we move into Q4, 2023, let’s look at developments with the potential to stimulate growth once again.

Integration with Wall Street and Tradfi - ETFs, Tokenization, and Stables, Oh My

Wall Street/Tradfi adoption is crucial to expanding the market through the establishment of products with widespread availability, and positioning has begun.  While a Bitcoin ETF has not yet been approved by the SEC, approval seems to be a “when” not “if” situation.  Behemoths such as BlackRock, WisdomTree, Valkyrie, ARK, VanEck, Fidelity, and Invesco have submitted their applications and are betting on it.  Naturally, an Ethereum ETF is gathering steam behind the BTC version, with Valkyrie, ProShares, VanEck, and Grayscale as early applicants.  Why is this important?  ETFs will serve as a crucial bridge for institutional investors into the space, granting them a secure and regulated avenue to confidently venture into crypto markets and bolstering the reputation of the asset class.

Tokenization of assets - that is, the issuance of a digital asset on a blockchain linked to tangible things such as real estate, precious metals, art and collectibles - represents one of the best “real world” applications of blockchain technology.  Tokenization increases security, unlocks new assets to be traded, fractionalizes ownership (thus increasing participation), and enables real-time transactions with lower costs and greater operational efficiency.  Already use cases are taking hold in real estate, art, physical commodities (such as gold), and cargo.  JPMorgan, Goldman Sachs, Hamilton Lane, Deutsche Bank, and Siemens have announced the development of tokenization initiatives and that certain products will be tokenized. 

And then there are stablecoins, which maybe is cheating a bit since they are a token, but very specific ones that are pegged to a real asset, allow for store and transaction of value at low cost, and provide an on and off ramp into the market.  Stablecoins are fundamental to the stability and long-term resiliency of crypto markets (see Terra Luna collapse and fallout). Without growth in stablecoins there can be no market growth.  While stables such as Tether, USDC, and BinanceUSD continue their development and growth, traditional players such as Visa, PayPal and Shopify have launched initiatives to bring the technology to their users. 

Amid a bear market, technology and blockchain development has pushed ever forward and integration with tradfi has steadily increased.  With tradfi comes increased dollars, credibility, and mainstream adoption.

Regulatory Developments

We’ve addressed the regulatory atmosphere one or two times here.  The development of a fulsome regulatory framework for crypto in the United States - the most important capital market in the world - is critical, and we remain optimistic that it will occur.  That development will largely hinge on political dynamics, and two bipartisan bills, one from the Senate and one from the House, have garnered momentum.  The Responsible Financial Innovation Act drafted by Senators Lummis and Gillibrand along with the House’s Financial Innovation and Technology for the 21st Century Act introduce key legislation to provide that framework.  Politics move slowly and we are still some time away from achieving a fully defined structure, but pressure is mounting from both bodies of Congress and both political sides.  The proposed bills do not have to pass to be successful, but they must increase visibility and urgency.  By the way, regulatory priorities are often set from the top-down of a particular administration, and current polls suggest that the administration will change in the November 2024 Presidential election. 

While we wait for the US to catch up, the rest of the world is moving forward with clarity and enthusiasm.  Hong Kong, Singapore, Abu Dhabi, Dubai, the UK, and Europe are instituting real frameworks that allow for crypto participants to operate in a regulated environment.  There will be some kinks to work out along the way, but many attractive global jurisdictions are more open for crypto business than ever before. 

Lack of Tradfi Opportunity

Perspective is important.  Yes, we’ve been sitting in flat markets, but macro-economic conditions - from inflation to supply chain issues to Ukraine/Russia war - have been difficult in general and have created a tough tradfi investment environment.  Tradfi hedge funds posted a composite return of ~-4.25% in 2022 and are up ~3.4% through the first half of 2023.  That’s a lot of management fees being posted for very little return. 

Even in depressed markets, sophisticated crypto strategies (particularly statistical arbitrage, market making, and defi strategies) can generate relatively outsized returns.  Due to the 2022 washout, a reduced number of firms trading means that certain opportunities and spreads are less crowded than they once were.  And relative to tradfi opportunities, even muted returns in the teens are significant if achieved in a true risk adjusted fashion.  Money will usually flow to richer pastures, and as time passes, and provided there are no additional cataclysmic events, that crypto grass begins to look greener and greener.  Look for increased participation from family offices and high net worth individuals in search of increased alpha.

China Under Pressure

Behind the US, China has positioned itself as the second most important global capital market, one that is presently under extreme economic pressure.  China faces an aging population, slowing productivity, rising debt levels, high unemployment, trade tensions, a distressed real estate sector, and a devaluing currency.  Under such circumstances, investors will ordinarily seek to move to stronger currencies, such as USD.  Certain cryptocurrencies may offer viable alternatives due to strong cultural familiarity with digital payment platforms, broad internet access for the population, and low transactions fees (without taxes often levied against the purchase of foreign currencies).

Bitcoin Halving

 A bitcoin halving is when the reward for mining bitcoin is cut in half, and it takes place roughly every four years with the next halving scheduled for April 2024. Historically, halvings have played a pivotal role in influencing BTC’s price, often leading to increased scarcity and heightened market interest/attention. Many see halvings as the official end of the crypto winter and the start of the next bull cycle. As we approach the 2024 halving, there’s widespread speculation about its potential to act as a catalyst for another market rally.  Past trends have shown a tendency for price surges post-halving, but so far signals are mixed, even though enthusiasm is prevalent in the current crypto climate.  The graph below shows how prices have reacted to the three prior data points.

Source: Crypto.com

Industry Resiliency

The 2022 washout was painful but needed, like a violent storm to clear debris from the streets.  Unscrupulous and fraudulent actors were stripped bare and companies with unsound infrastructures were shuttered.  Of course, many good actors with good businesses were caught in the wreckage, which is a reality of volatility and rapid change in emerging markets.  However, those who have remained, survived, and continued to grow and to learn, are stronger for the experience.  It is tempting to focus on expansive growth, but this now must be balanced with robust risk management and operational infrastructure.  A hard lesson to learn, but a good one to be sure.  Innovation and progress persist from a brilliant coalition of dedicated participants.  While industry resiliency may not be a catalyst itself, it is necessary lifeblood for us to reach the positive catalysts and then to be better prepared to navigate the terrain in a better, more responsible fashion.

Conclusion

Just like in soccer (we mean football), the game dips into lulls and defense must be played until conditions shift.  With patience and as the field evolves, either through deliberate buildup or explosive breakout, the game transitions to a new cycle of possession and attack.  The best teams are patient in defense until that spark alters the complexion of momentum and play.  The Italian national team, AC Milan, and then Juventus counted on Andrea Pirlo to provide that positive catalytic reaction for nearly two decades.  In crypto we look to other sources that are becoming more visible by the day.

There are a few additional points to keep in mind.  It is not necessarily a single catalyst that will spur market growth; catalysts can reach a critical mass together and influence each other.  Some potential catalysts mentioned above may have little impact, while other may have outsized impact.  And of course, negative catalysts can rear their ugly heads and turn the pressure up the other way. 

At Valmar, we are feeling cautiously bullish.  We do not know exactly what, and we do not know exactly when, but we do know that markets cycle back again and that positive catalysts are stacking themselves on the right side of things.  Patience, time, and preparedness.  Pirlo might pass the ball your way any moment.