(Kitco News) - Optimism is high that 2024 will be a breakout year for cryptocurrencies as an asset class as the anticipated launch of the first spot Bitcoin (BTC) exchange-traded fund (ETF) is expected to open the floodgates that have been keeping trillions of dollars in institutional money out of digital assets.
While some have speculated that the months of news coverage are making the launch of a spot BTC ETF a bigger deal than it needs to be, saying that the large money managers that are interested in crypto are already in the market, Will McDonough, chair of Corestone Capital, said he sees a high level of demand that he anticipates will eventually result in Bitcoin surpassing $100,000.
McDonough first dove into the world of cryptocurrencies in 2017 by creating the smart contract adjudication protocol on the Ethereum network. At the time, he saw the irreversibility of blockchain transactions as one of the main obstacles to blockchain adoption as “corporations are used to being able to call an 800 number to halt a wire in case something goes wrong.”
“That’s just the nature of a centralized infrastructure,” he said. “So when I threw myself into the decentralized world as somebody that has a pedigree and a background in real-world, truly centralized, big operational structures, that was the window of opportunity that I defined and pursued.”
As for where the majority of big businesses are focusing their attention when it comes to blockchain, McDonough said, “Ethereum's the main chain. That's where all the innovation's occurring.”
When asked if he is seeing a growing interest from institutional investors and other large players, he said, “Big time.”
“I've been down some serious rabbit holes over the past six years, and I field a lot of calls from traditional hedge funds and longtime friends who work at big banks because they know me as someone who can translate, having lived in both worlds,” he said. “I focus their attention first and foremost on Bitcoin. I also try to make sure they pay attention to Ethereum because it's not only the second largest asset, but it's the operating system on which a lot of the innovation is occurring.”
“To them, that's an altcoin, and they don't know how to spell it, they don't know how to say it, and that's okay,” he said. “It’s about gradually getting them more and more comfortable with the fact that Ethereum is a main chain. I know there’s great innovation on Bitcoin, but in my opinion, Bitcoin will be seen as a store of value ledger, while Ethereum is going to be an operating system like iOS that the iPhone operates off of, on which innovation is going to occur.”
McDonough said that when he speaks with investors about crypto, he tells them they should have some exposure to Bitcoin because it’s a fixed-supply asset. “It's a depleting supply asset, and it's easy for people to understand, but I really encourage people to learn about Ethereum as well – to think about Ethereum as investing in a Microsoft-like IPO.”
When it comes to broaching the topic of layer-2 (L2) networks that operate on top of Ethereum, McDonough said “It depends on who I’m talking to.”
“I have gone down the rabbit hole of zero-knowledge proofs and scalability solutions to voluminous transactions on Ethereum, and L2s are doing a good job of that, and they’ll be where the real breakthroughs will occur,” he said. “But if you’re doing the trickle down of how do you get to an L2, you’ve got to start with an L1. And that L1 is a theory. And so if L2s are written such that they can communicate cross-chain, cool, but when you're thinking about funneling people into crypto, Bitcoin is the top, Ethereum's next, and L2s are going to solve issues at the execution level.”
“But when you are talking to an institutional investor, getting them to just associate Ethereum as a network and an operating system on which applications are built,” is the primary focus, he said. “The visual of the iOS of the iPhone makes it easier for them to get. Also, many institutional investors have invested in Apple over the past decade because of their app store, and the operating system is built to make it easy to build apps, to talk to each other, and that is an easy association for them to understand. L2’s are a little bit complicated for true big bank people.”
Marketing crypto to the masses
As Kitco Crypto has discussed with other analysts and investors in the field, McDonough reiterated the view that one of the main issues facing the crypto ecosystem is poor marketing.
“The beauty of Bitcoin is its simplicity,” he said. “And I think that the more you tell people about innovation on the Bitcoin blockchain, the more it harms us. If you can focus people on Bitcoin and the fact that there are only 21 million, it's divisible, but you can't make more of them,” that’s a strong selling point. “With the documentation showing that there are millions of lost coins, a fixed supply, and decreasing emissions over time, that makes it something that anyone who took Econ 101 can get. If you believe there will be more demand tomorrow than there was today, that is price appreciation.”
Simply stated, “It's just a digital asset that has a fixed supply,” he said. “And there are several different metrics that will add to the demand over time. It's really the only investable asset that has a truly fixed supply.”
That’s what makes it so attractive as a store of value, McDonough said.
He noted that he saw a discussion on Bloomberg where they started talking about Ordinals – which are inscriptions that can be put on individual satoshis, the smallest unit of Bitcoin – and thought that was the wrong audience to be talking to about that subject.
“They were saying that the NFT craze is back, but all I could think was ‘Don’t confuse these people with that stuff, focus on Bitcoin,’” he said. “It’s just a ledger. It’s a store of value. X translates to Y translates to Z. Chain of title. Let’s focus on those things because that’s the terminology that they understand.”
“Once they understand the basics of Bitcoin, then you can start to introduce Ethereum,” he said. “From there, you have to slowly take them down the rabbit hole over time, starting with L2s, and then zero-knowledge proofs and other scalability solutions. From there, you can get deeper into specific narrow use cases.”
“It's almost like a grade school,” he said. “Kindergarten is Bitcoin. You don't go to first grade and introduce Ethereum until you’ve shown proficiency in kindergarten. Once you’ve shown proficiency in Bitcoin, you’re ready for the next level. Eventually, you will be educating them on after-school programs, like meme coins and CryptoPunks.”
“But our problem is when we're watching Bloomberg and they're talking about CryptoPunks, we're losing,” he said. “When we're talking about Bitcoin, and we're talking about an ETF, those are words that people are starting to be comfortable with. Let's focus that audience on that message.”
As far as crypto having a marketing problem, McDonough said “the reality and beauty of it is that there is no centralized operation to get the messaging right, and that’s part of the value arm. What do you think it would be worth if there was actually a concerted effort to communicate what Bitcoin is by buying a billboard in Times Square?” he mused.
At this point, for most people in the U.S., Bitcoin is more of a speculative asset, but in other countries without a reliable banking structure, it has a lot more value, he noted.
“People in those countries are not programmed to think about the traditional rails on which our banking systems are built because they don't engage with it on a daily basis,” he said. “So if you say to somebody, ‘I can send you money on my phone, person to person,’ somewhere like El Salvador, they get it immediately. Whereas you say that to a guy on Park Avenue in New York City, they’re like, ‘Why do I care? I can call my banker, they’ll send a wire, so I don’t need this thing because I have systems that work just fine for me.’”
“They don't know about 24/7 and don’t really care about it,” he said. “When you are speaking to that demographic, you map the conversation around the non-stop printing of money. Fed goes brrr. You ask them if they are still happy with the fact that they have a million dollars in cash in the bank that will be worth $990,000 tomorrow, and $980,000 the day after because of rising supply and static demand, versus the static supply and rising demand that you have with Bitcoin.”
“So the way I get through to people, which I said on Squawk Box six years ago, is by telling them that Bitcoin is a fixed supply asset, and all you have to believe is that more people are going to want it tomorrow than want it today,” McDonough said. “Ground-zero, freshman year, Econ 101, supply and demand.”
He noted that the DeFi tech that he built previously was designed to speak the language of hedge fund people.
“We were tracking things like earnings multiples and on-chain transaction volumes. That’s how hedge fund people speak,” he said. “‘Amazon Prime Day was huge. This quarter is going to have good revenues. I’m going to buy the stock because the stock trades on a multiple of revenues.’ That is leading the witness to a conclusion that they can digest.”
“So if I can use tech to highlight what the transaction volume on Bitcoin and Ethereum is, and lead the witness to the understanding that Ethereum is where all the innovations are occurring, it's like asking, ‘Are you going to buy a Google phone or an Apple phone, while also recognizing that 97% of the apps are built for Apple?’ They are more likely to buy Apple,” he said. “Because they want to be where the innovation is occurring and where the usability is highest.”
Another development that is helping attract the institutional crowd is the growth of private blockchain networks, McDonough noted.
“They are digital ledgers that are not fully decentralized and are permissioned,” he said. “That's a good way to introduce people to the technology. Engaging with a digital ledger in this manner is doable for most. From there, they can get more familiar with things like permissions and nodes, which allows them to decentralize gradually.”
“But you can't kick down the door and say, ‘You should move your accounting system to the decentralized Ethereum network that operates on North Korean hardware,’” he said. “They’re never gonna get there taking that route.”
“The ironic thing is that the more that many of the large organizations understand decentralization, the more they’re going to like it,” he said. “It's just about getting them there gradually, and not forcing it down their throats by saying you can only use blockchain if it is fully decentralized.”
They will also be the ones that fund future developments, he noted.
“That’s why I think the on-chain, private chain, and permissioned chains are good,” he said. “If you want to go fully darknet, faceless and nameless, you can. But that’s not for everyone, so we don’t need to push that.”
He likened people pushing full decentralization for everything to environmentalists who lay down on highways in an attempt to get people to stop using internal combustion engines. “We’re not going to win that battle,” he said.
Instead, he advocated for “gradual adoption.”
“You start by pushing hybrid cards. You still have gas, so buy a hybrid,” he said. “It’s almost like Bitcoin needs a hybrid. You can’t just go all green and then be stuck trying to figure out how to plug your car in while on a road trip in the middle of America. Imagine if Ford did something like that. ‘Hey, no more gas cars, no more diesel. Forget gas stations, find a plug. No service contract, no 800 number, no dealership.’ That’s the equivalent of what decentralized blockchains are to people who are completely unfamiliar with the technology.”
This is where a spot Bitcoin ETF will be a game changer, he said.
“What the ETF is going to do, to a greater degree than has already been achieved, is solve the custody problem. Solving the, ‘not my keys, not my coins’ debate,” he said. “Circling back to corporate adoption being limited by the single fail of who’s holding it and who’s validating the transaction, most of them aren’t comfortable holding wealth on a zip drive, so having a good custody arrangement will be big. With a Bitcoin ETF, I will be able to see my holdings in my Schwab account below my Apple and Amazon holdings, which will simplify the process of holding crypto for a lot of people.”
“When I want my parents to buy Bitcoin, they’re not going to open a Coinbase account,” he said. “They’re not going to download a Rainbow wallet. That’s never happening. So let them buy the ETF and see it in the ledger they are comfortable with – their Schwab or Robinhood account. Then they would be more comfortable with it and be open to learning more details.”
Spot BTC ETF applications
Pivoting to the topic of the spot BTC ETF applications filed with the SEC and the recent amendments that added a cash redemption model, McDonough said that the updates could see the applications approved by Jan. 10, as many analysts are predicting.
“You've seen the SEC capitulate a little bit lately, and it appears that they're going to approve them all at once, which is fair,” he said. “I think it's the right way to do it. But I do think companies like Fidelity and BlackRock will see the biggest uptake because they are the most recognizable and trusted names.”
“The legacy ETF providers will do well because they have existing distribution and their products are registered with all the big banks,” he said. “It will be challenging for firms that are just in the business of Bitcoin because the demographic that trusts them is on-chain. The demographic that trusts Fidelity is the demographic that's going to buy this Bitcoin ETF, so all the asset flows are going to be to the big players and that's fine. It's still numbers go up, it’s still buys.”
When asked if he thinks the hype about billions to trillions of dollars waiting on the sidelines for the passage of an ETF is real, McDonough replied in the affirmative.
“I think it's real,” he said. “I think there'll be a little bit of an offset with the Grayscale deal because I think people are starved for liquidity there. So that should create some selling pressure, but that's healthy just to create volume. So I think there'll be a lot of Grayscale sales just because people are so in the money on that investment and they'll just be happy to have access to it. But I think it's going to be huge because of the custody obstacle that many people have.”
“People didn't want the futures ETF,” he added. “If people aren't comfortable with futures, fine. If people aren't comfortable with custody, fine. But if you now have a BlackRock or a Fidelity-listed Bitcoin ETF, I think a lot of investors are going to say, ‘Hey, buy 1 percent of that, but give me 3 percent of that. Let's see what that thing does.’”
“That might be interesting,” he said. “And it's just as a diversification tool that allows people to easily make Bitcoin a part of their portfolio. And it's an alternative investment that I think finds a seat in a lot of portfolios that otherwise would never make the leap of custody or opening up new accounts on crypto exchanges.”
Factors driving Bitcoin price higher
When asked if the approaching halving would have a notable effect on Bitcoin price since the block reward is only dropping from 6.25 BTC to 3.125 BTC, or if the recent gains are primarily being driven by the ETF hype and greater awareness, McDonough said it all comes back to Econ 101.
“When anyone that wants to chart it or speculate on where demand figures are going – all of Wall Street, all investing, is: numerator, denominator, how many shares outstanding, are there more buys today than sells?” he said.
“Let's just talk about Amazon. Amazon's price is what someone is willing to pay for it today. And that's usually driven by whether there are more bids than there are asks, which causes the price to go up. When there are more asks than there are bids, it goes down,” he said. “So it's quite efficient, but as Warren Buffett says, ‘It's a voting mechanism, not a value mechanism.’ It's not like the stock market trades at 20 times earnings, so whatever your earnings are, your price is 20 times. That is not how it works. The stock market is: are there more bids today than asks? What's someone willing to pay for this today? And usually, if those metrics are close, that drives some buy and sale activity.”
“So, the whole history of Wall Street and price discovery is numerator and denominator of bids versus asks,” he said. “Is there more demand than there is supply? If there are more bids than there are asks, that is more demand than there is supply, so price goes up.”
“When you introduce Bitcoin as a fixed numerator and volatile denominator, just that alone takes 50 percent of the variable that Wall Street had to predict away,” McDonough said.
“Returning to Amazon stock, if I said to you, here's what the demand will be tomorrow, and here's what the supply is going to be. Do you speculate that the demand is going to be higher or lower than that? That would make Wall Street's job so easy because right now they have to predict both supply and demand.”
“So if you take one unknown variable out, not only do you make one of those variables fixed, but you technically make it depleted,” he said. “And when you layer in new market entrants like an ETF buying physical and you layer in the halving, those are just Econ 101 supply and demand metrics. And the ETF also introduces new buyers.”
“That's a setup that any trader would dream of,” he said. “Whether it's Amazon, Apple, or oil, it doesn't matter. It's just supply and demand, numerator and denominator. Bitcoin has removed the variable of the denominator and defined it as depleting, which is only positive for price activity.”
Bitcoin price in 2024
When asked if he had any predictions for Bitcoin price in 2024-2025, McDonough said, “I would be surprised if it doesn’t hit $100,000 in the next 12 months,” just based on the factors outlined above.
“Just looking at what happened in the last cycle that had none of these things involved, it could get crazy,” he said. “Wall Street doesn't love volatility, and Bitcoin will trade higher than it should, and it will fall back. But the more you zoom out and look at the fact that people who are currently holding aren't selling anytime soon, and new entrants to the market don't own any yet, so they're all new buyers, this means you have a very tight supply.”
“You have people like Michael Saylor and these big shops that are saying, ‘I'm buying and I'm never selling,’” he noted. “That’s just taking supply out of the market, and that sets up for significant price activity. So it is not crazy to predict that Bitcoin will cross $100,000 in the next 12 to 18 months. It's not a leap at all.”
One final variable that could see Bitcoin, altcoins, and numerous other assets hit new highs in the years ahead is continued money printing by central banks, he said.
“Covid really empowered the government to print money as if they were doing that to protect us, and a lot of that kept things on the rails,” he said. “But the sheer volume that they created in the last couple of years is scary, and never in the history of man has that number gone down where someone said, ‘Now that we're on sounder footing, we're going to put some of that back or retire some of that. It has never happened because the system's not built to do that.”
“So it’s scary how far away from a reserve currency the U.S. dollar has become, it’s scary how many market participants have a finger that can start the printing press, and our issue is that our whole election cycle is driven in two, and four-year increments, so none of our politicians have the determination to make decisions that might not work in the next two to four years,” he said.