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Crypto: There may be 'more paper promises to bitcoin' than actual bitcoins, Avanti CEO says

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Avanti Financial Group CEO and Founder Caitlin Long joins Yahoo Finance Live to discuss bitcoin's 'halving cycle,' its competition with gold, crypto regulation, and the outlook for cryptocurrencies in 2022.

Video transcript

[MUSIC PLAYING]

ZACK GUZMAN: But first, we want to start our first block here in the show with a big Bitcoin call for 2022 as the crypto-- the top crypto in the space, Bitcoin slogs out of the gate to start the year, hovering around that $46,000 mark. Goldman coming out and saying that it could reach $100,000 this year, potentially somewhat on the horizon if it continues to steal share away from gold as a store of value asset. And before we get into all of that, I want to take a much more measured approach to Bitcoin here with one of the smartest minds in all of crypto.

Very happy to welcome back into the program, Caitlin Long, the CEO of Avanti, one of the few licensed and regulated crypto banks in the space. And Caitlin, you know, you and I have kind of been uneasy about maybe leverage in this space, lending in the space as we watched it grow, the fact that some of the larger players out there might actually be promising more Bitcoin than they have to customers. I mean, when you look at that what are some of the stories that investors should be watching I guess in 2022?

CAITLIN LONG: Well, first of all, happy new year to you, Zack. Thanks for having me on. Bitcoin as most of your guests will already know, goes through four-year cycles. And they turn-- that turns on something called the halvening, which is a halvening of the inflation rate of Bitcoin, it gets cut in half every four years. And then there's a distinctive cycle.

What we've seen in the previous two halvening cycles in the fourth year, which is exactly where we are in 2022, is a couple of interesting things. To your question, we've seen some intermediary failures. As Warren Buffett likes to say, it's not until the tide goes out that you see who's swimming naked, and the tide is definitely in right now.

But as you and I have talked before, there-- it's pretty clear that there are more paper promises to Bitcoin than there are actual bitcoins. And so if there were ever a concern about one of the intermediaries having gotten itself over its skis by promising more Bitcoin than it actually has, there is a chance that you see an intermediary failure, and in the fourth year of the previous two bull cycles we have seen intermediary failures, Mt. Gox in 2014 and Quadriga in 2018 being the most notable

ZACK GUZMAN: Yeah. And I guess the onus is going to be on us in the media or anyone who has a platform, to really explain the errors there aren't necessarily the Bitcoin blockchain at all, it would be people--

CAITLIN LONG: Right.

ZACK GUZMAN: --building on top or leverage there built on top of it. When you look at maybe some of the enthusiasm though, still it was a wild year to watch in 2021 as we saw institutions really enter the space. I mean, how do you see that maybe being the propellant you know, technicals aside, the propellant that continues kind of the story of crypto in 2022?

CAITLIN LONG: Well, boy, there's a lot more interest in it, especially from institutions. And obviously, also there's a lot more discussion about regulation. I think we will finally get clarity about regulation in 2022. And as you and I have talked also previously the president's working group, which is a consortium of federal regulators, not state but federal regulators, got together and made some recommendations in November. It's clear they have the power to implement them, the real question is, will they?

And the biggest recommendation that they made is that stablecoins must be issued by insured depository institutions of which there are none approved to issue stablecoins right now. So what happens to stablecoins? I've got to give a hat tip to Will Clemente who wrote an interesting piece that I read earlier this week about stablecoins collateralizing now 60% of Bitcoin futures contracts. So what happens if stablecoins-- if there's a rug pull from the regulators on stablecoins?

What happens to the Bitcoin futures market is an interesting question. We don't know that that's what will happen. But if you take the regulators at their word and understand that they have the power to implement what they said they wanted to do, then that has to be a risk that's taken into account for 2022 as well.

AKIKO FUJITA: Caitlin, it's Akiko here. Good to talk to you.

CAITLIN LONG: Hi there.

AKIKO FUJITA: And happy new year. I want to--

CAITLIN LONG: Likewise.

AKIKO FUJITA: --get back to that call or to that call from Goldman Sachs Zack just alluded to, this call for Bitcoin to reach $100,000 this year. Part of that thesis predicated on the fact that they believe Bitcoin can take market share away from gold about 50% as a store of value. Is that a realistic move or you think that's a pretty conservative estimate?

CAITLIN LONG: Well, it depends. I mean, certainly if past is prologue, then there is a potential. And to be clear, I can't give investment advice, not making predictions here. There is a potential for it to go even higher than that still.

And here I'll give a hat tip to Tuur Demeester, who put out a prediction in February of last year, almost a year ago that said, hey, what if we-- what if the 2013 cycle is repeated in this one? If that's the case, we top out at about 65,000, which is exactly what's happened so far, check. And then trade sideways that's about-- at about 45,000, check on that second prediction. And his third prediction was that by the end of the year that we'd get to 250,000. Again, I'm not making that prediction but I will say as an analyst prediction that certainly, so far two of the three have come to fruition. And that is again you know, history repeating.

ZACK GUZMAN: And it's interesting to see I guess a lot of attention being placed on the Goldman Sachs call because we heard the same thing driving kind of J.P. Morgan's price call. I think north of 140,000 last year in terms of same kind of metrics looking at how much the share of the gold market shifting over to Bitcoin would drive things.

Back on the regulation piece though, you know, we've heard also from Sam Bankman-Fried kind of predicting that a lot of those regulations will be coming down. I know you've-- you know, you've worked closely with Senator Lummis in Wyoming to kind of piecemeal some real good steps forward. I mean, how optimistic are you now that kind of those pieces are falling in place to where regulators really understand how to put some of the safeguards in this arena?

CAITLIN LONG: Well, it depends, I'm going to repeat, it depends, which unfortunately is the best that anyone can do at this point predicting any kind of action out of Congress. I'm more optimistic that Senator Lummis' bill, which she has previewed and will be coming out apparently shortly. I'm more optimistic that that has a chance of passing, at least parts of it because the administration has said that it wants to make some clarifications as well.

And then let's go back to what the bank regulators said that they plan to do. Again, if you recognize they do have the power to do it even though they said this was just a recommendation, they could implement this right away, which would potentially cause a number of the crypto players, including stablecoin issuers to lose access to the US dollar banking system if you take them at their word. And then the question is, will the administration say, hey, we don't want to go that far. And if so, will they open up the pathway to banks like Avanti, we are licensed but not operating yet. There are a couple of others that are knocking at the door to actually get regulatory approval to access the US dollar banking system.

Right now, the bank regulators have set up what could be a perfect catch-22, where they say everyone has to be a regulated bank, but they're not giving the bank charters an access to the Federal Reserve to crypto native companies. So it's a perfect catch-22. I suspect that we will, I agree with Sam, we will see clear clarity this year. And I'm eagerly awaiting the Lummis bill and waiting to hear exactly who co-sponsors it because that will tell you whether it has a chance of passing. And I think it's-- I'm more optimistic that it will pass, at least parts of it, as I said than others because I do think it's going to have some pretty hefty bipartisan support. So that might be something Congress will actually get done this year.

AKIKO FUJITA: Caitlin, beyond the US we have seen widespread adoption in places like El Salvador act as a catalyst for Bitcoin's price moves. And I wonder if there are particular countries that you're watching in 2022 that could really move the needle? I'd imagine emerging markets, certainly one that is likely to accelerate adoption but what are you watching on that front?

CAITLIN LONG: Well, yes, certainly, watching to see government adoption and especially central banks acquiring Bitcoin on their balance sheets as reserves. Zack was asking earlier about gold, there's no question that we've seen central banks accumulate Bitcoin but nobody has announced it yet. And that is part of the reason why in 2021 you did see a substitution of Bitcoin for gold. I think they are somewhat interchangeable depending upon the use and gold, of course, has historically been a reserve asset for central banks. Right now I don't think you see central banks wanting to announce that they're doing it but it does seem fairly clear that a few of them are.

And to your point, it is emerging markets that are the place to watch. Those are the ones, especially if they're dollarized like El Salvador. When they dollarize they lose what's called seigniorage, which is the right for central banks to capture the value of money that's printed. That's just the way central banking works. And the problem with countries that abandon their own currencies is that they don't get seigniorage and as the president of El Salvador correctly has pointed out, by becoming a Bitcoin miner, that actually allows the country to capture those seigniorage rights which it gave up when it dollarized. And I think you may see others following in that footstep. And again, it's more likely to be emerging markets than developed countries for sure.

ZACK GUZMAN: Yeah, we saw that kind of echoed from the president of El Salvador pointing more to maybe some of those Latin American countries also. Lastly, before we let you go, you know, there's been a long slog in waiting for a Bitcoin spot ETF. There are some people who are optimistic for it in 2021, I think we both knew that that wasn't going to happen based on what we heard from Gary Gensler. But 2022, new year, maybe new hopes, what are we thinking there in terms of that being a potential thing to look for?

CAITLIN LONG: Well, I've always said that's a double-edged sword. And haven't actually hoped for it. I think one of the times you had me on in 2021 we were talking about the impact of the ETF, there were a lot of folks predicting that the cash-settled futures ETF would dampen volatility in Bitcoin, and no it hasn't. In fact, it's actually increased the volatility and this is the double-edged sword I'm talking about, it definitely brings in the more traditional investors, potentially 401(k) plans, IRAs, where it's easier in a wrapped product like that to buy it than to buy the spot underlying as with any commodity there's-- Bitcoin is no different. But yes, it would be a double-edged sword. I'm not waiting with bated breath on that. I don't think that it necessarily helps.

And one of the reasons it's a double-edged sword, very few people read the fine print of ETFs but in every single ETF there is-- well to my knowledge, in every single ETF prospectus, there is a right for the market makers to go naked shorts and that's just to facilitate liquidity. And we've seen some runs on ETFs historically where market makers got again over their skis, back to the earlier point we were talking about where you see some intermediaries who may have promised more Bitcoin than they actually have in their inventory. And the great thing about Bitcoin is it is a finite asset that no one controls, not including, and most especially not including, central banks and governments.

And one of the interesting comparisons is to the gold market where in fact, actually, there is a clearinghouse controlled by the central banks and Wall Street. Between central banks and the LBMA, 90 plus percent of the collateral is really truly controlled by the banks, by the banking system broadly defined to include central banks. And that is never going to be true in Bitcoin, where 90 plus percent of it is owned by individuals. And so net-net, when and if-- back to close with the Warren Buffett quote again which I love, when and if that tide goes out I predict you are going to see some intermediaries running naked. Some of them are--

ZACK GUZMAN: Yeah.

CAITLIN LONG: --actually admitting it in their fine print, that this is what they're doing. And again the ETFs do exactly this and it creates a real risk. The difference is, though again, to use-- to give a hat tip to Trace Mayer who said Bitcoin is the apex predator of finance, nobody's making any more of it. And if there is no more-- if there isn't a clearinghouse to bail out a failing intermediary temporarily, then you can see some pretty wild moves. And I think eventually we will see that in Bitcoin. I just don't know if it's this year or not. I would just say caveat emptor to everyone, read your history, there's so much Bitcoin history for all of us to draw from.

ZACK GUZMAN: Yeah.

CAITLIN LONG: So that we do see history repeating itself.

ZACK GUZMAN: Yeah. We got 13 years now to look back on in terms of where this--

CAITLIN LONG: Right.

ZACK GUZMAN: --all began and you know, history does repeat itself to a certain extent. We'll see who's naked in 2022. But appreciate you coming on here to chat. The CEO of Avanti Bank, Caitlin Long. Thanks again, and happy new year.

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