Q3 Trend Summary | Bloomberg's Interview with SBF, Discussing Five Major Aspects of the Future Trends in Cryptocurrency!

FTX founder Sam Bankman-Fried recently sat down for an interview with Bloomberg, discussing the topic "Ideals vs. Pragmatism: The Future of Cryptocurrency." For cryptocurrency investors, after a year full of dreams and a tough Q2, it may be the right time to talk about ideals and realities.

As a rising crypto unicorn, FTX has ventured into many areas within the crypto space, including not only exchange services but also DeFi, payments, and even carbon neutrality strategies. This interview covers cryptocurrency price volatility, the potential of the crypto industry, regulatory oversight, ESG and carbon neutrality, the future of Bitcoin, and institutional trends.

High Price Volatility is a Consensus-Building Process

The price volatility of Bitcoin (or cryptocurrencies) has always been criticized.

In May, the CFO of PayPal stated that due to its high volatility, PayPal would temporarily not allocate cryptocurrencies in its assets; last month, the world's largest investment bank, Goldman Sachs, reported that Bitcoin's high volatility makes it unsuitable as a "long-term store of value" or an "investable asset class."

SBF pointed out that the pricing of any financial asset relies on market consensus, and high price volatility is a characteristic of emerging assets. However, as assets mature, the market will gradually form a consensus, so high volatility will not change until the market defines cryptocurrencies.

"In Q1 this year, the prices of crypto assets rose significantly, and many people believe this is due to the entry of large financial institutions into the ecosystem. In fact, after talking with many large financial institutions, even if they don't know how to explore yet, they all express a desire to participate in the crypto industry in some form."

SBF stated that if you only want to trade stably on the blockchain, you can choose stablecoins, but if you want to invest in assets as a store of value, you cannot demand that these assets be "very stable" because that goes against the efficient market hypothesis.

Price Consensus May Be Lacking, But There May Be an Exploratory Direction

SBF continued to state that the potential of cryptocurrencies and blockchain may be reflected in payments (especially international transfers) and the application of smart contracts.

Indeed, over the past year, many industries and institutions have begun accepting Bitcoin (or cryptocurrencies) as payment, including electric car giant Tesla (now rejected), real estate leader Caruso accepting Bitcoin as rent, MLB's Oakland Athletics, and NBA's Dallas Mavericks.

The real game-changer may be the entry of payment giants. PayPal opened up cryptocurrency payments in Q1 this year, allowing its 29 million merchants to accept cryptocurrencies, and VISA announced in March that it would include Bitcoin in its payment network. Mastercard believes that CBDCs are the future, but they are also collaborating with Gemini Exchange to launch crypto financial cards.

During the Q1 earnings call, PayPal CEO Dan Schulman stated that opening up crypto payments and trading is the company's key growth driver. Among cryptocurrency users, over 50% open the PayPal app daily, showing a significant increase in user engagement. PayPal's revenue this quarter was $6.03 billion, a 31% year-on-year increase.

On the other hand, exchanges are also starting to roll out their own payment systems. Binance recently announced the launch of Binance Pay Beta, allowing merchants to accept over 30 cryptocurrencies. FTX also announced "FTX Pay" in May, providing external tools for merchants to embed into their websites for "one-click payments."

Sam said:

"For many people, electronic transfers seem easy but are somewhat self-deceptive. Once we talk about cross-border payments, it usually takes several days, with fees possibly in the hundreds of dollars, and many online transfer services do not support cross-border remittances, requiring a visit to the bank to transfer funds."

SBF believes that crypto payments may be a better "value transfer method," and over time, the systems and peripheral services of cross-border payments will become more complete.

Another potential exploration target is "smart contracts."SBF stated that executing smart contracts on the blockchain, allowing programming languages to automatically execute commands, arbitrate, and complete instant delivery and settlement, is a cool concept.

Interestingly, although many people consider blockchain applications like DeFi to be very speculative, the total value locked (TVL) in DeFi has not decreased significantly since the price drop in May.

According to a report by Arca Crypto Fund, although the native tokens of many DeFi protocols have fallen in price, the TVL has actually increased. For example, the AAVE token price dropped by 60%, but TVL hit a record high. Yearn Finance's YFI token dropped by 50%, but earnings increased fourfold compared to Q2 and Q1.

Overall, after the significant drop in May, the TVL of DeFi protocols remains at a high level, and the user base of the infrastructure has not decreased. In fact, May was the month with the highest DEX trading volume in history.

Countries Clarifying "Cryptocurrency Market Regulation Framework"

The Chinese government has recently strengthened its regulatory efforts, including issuing mining bans in Inner Mongolia, Xinjiang, Qinghai, Yunnan, and Sichuan provinces, with Inner Mongolia even considering including miners in the social credit blacklist. Furthermore, major Chinese banks have been summoned to crack down on cryptocurrency activities and prohibit them from providing related services.

SBF believes that this round of regulation can be divided into two directions: cracking down on leverage trading and cracking down on mining.

It is important to note that the focus of the Chinese government's crackdown is not on cryptocurrencies or digital assets themselves, but on exchanges that provide leverage (cryptocurrency derivatives) and Bitcoin miners, which is closely related to China's monetary tightening policy.

Over the past year, the extremely loose monetary policies of central banks around the world have led to the appreciation of the Renminbi exchange rate, stock market gains, and increased housing prices. The speculative atmosphere has also increased private financing rates. Given this situation, once the Fed starts tapering and raising interest rates, the outflow of funds will put China's economy in trouble. Therefore, starting from Q2, China has begun a series of measures, including reducing the M2 money supply, bringing Ant Group (a private financing channel) under regulation, and of course, cracking down on the crypto industry.

SBF stated that governments worldwide are clarifying their regulatory attitudes towards the crypto industry, and this is a process. As cryptocurrencies gradually enter the mainstream, governments are trying to inform everyone about their stance and regulatory requirements for cryptocurrencies. For exchanges, it is necessary to clarify the future policies of various countries.

He emphasized that it is fortunate that FTX is an international exchange, with no single continent accounting for more than 10% of total revenue; however, for exchanges that operate in a single market, this period may be painful.

Another regulatory focus is the energy issue of mining.

Building a "Green" Crypto Industry

Since 2021, the energy issue of Bitcoin and cryptocurrencies has begun to surface. SBF believes that although many people use cybersecurity as an excuse for energy consumption, considering the "transaction volume" on the Bitcoin network, the energy consumed by Bitcoin transactions is not in the same league as other payment networks, so the energy issue is definitely a problem that the crypto industry has to face.

Fortunately, many competing public chains have adopted Proof of Stake (PoS) consensus, and Ethereum will gradually transition from Proof of Work (PoW) to PoS this year. However, the network is not the only place with an energy issue. SBF stated that as the crypto industry expands, crypto companies must gradually become greener, whether by speaking out on environmental issues, achieving carbon neutrality as much as possible, or in other ways.

SBF previously provided a "carbon neutrality math formula," which is essentially that if you spend $1 in transaction fees on the blockchain, you donate $0.0026 to Cool Watch, achieving carbon neutrality. This formula has already been used by the BitMEX exchange.

"We want to minimize our impact on the environment, whether it's speaking out against deforestation, achieving net-zero emissions, or other methods. Making the crypto industry more environmentally friendly is reasonable in future economic trends. In fact, FTX has already committed to achieving carbon neutrality by compensating Cool Watch at least."

In fact, not only FTX and BitMEX, One River Asset Management, with assets under management of $2.5 billion, has submitted an application to the U.S. SEC for a carbon-neutral Bitcoin ETF, offsetting the carbon footprint of Bitcoin assets in the fund by purchasing carbon credits. The newly applied ETF will follow the same approach.

The Future of Bitcoin: Becoming a Reserve Asset, Trading on Layer 2

What about Bitcoin's energy issue?

The Bitcoin Mining Council (BMC), founded by North American miners, previously announced survey results showing that over 20% of the network's hash rate uses renewable energy, with an estimated 56% expected in Q2. The Cambridge Centre for Alternative Finance (CCAF) also estimates that about 39% of Bitcoin's energy consumption has reached carbon neutrality.

Brett Winton, Research Director at Ark Invest, even stated that Bitcoin mining could promote the larger-scale use of solar energy combined with battery systems to expand its economic scale.

If Lightning Network, PayPal, VISA, or wBTC on Ethereum are considered as another Bitcoin network sidechain, SBF believes that Bitcoin transactions will migrate to sidechains. Additionally, he also believes that future payments may be dominated by stablecoins, with Bitcoin becoming an asset for "value storage."

"If your goal is just to trade dollars on the blockchain, stablecoins will be your answer; but if you want to store value as an asset, Bitcoin (or other cryptocurrencies) will be your choice."

In conclusion, SBF emphasized that the innovation in the crypto industry is severely underestimated, and many people think the concept of DeFi is good as a "complementary tool" for banks. However, this is only the future we can currently see. In fact, if DeFi is massively applied, we will see a different landscape.

He used Netflix as an example, originally intended as a supplement for DVD rentals but inadvertently discovered that online streaming of movies and TV shows is the real future, with many exciting documentaries and TV series now being original content on Netflix.

"It can be seen that many financial technology companies are trying to enter the blockchain industry, and what we (the blockchain industry) are doing is disrupting traditional finance. I believe these fintech companies need to seriously understand and integrate these technologies, rather than being surprised and reactive when we launch products."