CNBC Pro Talks: Grayscale's Zach Pandl on bitcoin's rally and the crypto market's setup for 2025 12/31/24
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Welcome to another edition of CNBC Pro Talks. I'm Tania McKeel, in for Dominic Chiu this month. 2024 might just go down as the year crypto went mainstream. We got the first spot Bitcoin ETFs to hit the market in the US. We got the latest Bitcoin halving, which, for those who don't know, is an update to the network that happens every four years and cuts the reward paid out to Bitcoin miners in half. That historically starts the next bull run for Bitcoin.

Also this year, we witnessed a major about-face in the relationship between digital currencies and US politics. A presidential candidate took stage at one of the largest crypto conferences of the year and pledged to take a friendlier stance to the industry. That candidate, Donald Trump, later went on to win the November election. Amidst all of that, Bitcoin soared from $42,000 on January 1st to just around $100,000 as we filmed this in the second to last week of December.

So what does all of that mean for where digital assets could be headed in 2025? Well, here to help me make sense of crypto's performance this year and what to expect next year is Zach Pandol, the Managing Director of Research for Grayscale. Welcome, Zach. Thank you so much for joining us. Pleasure to be on with you. Thanks for having me. Before we get into a recap of this year for people who don't know you, Zach, you've been following crypto for years. Talk about your background and how specifically you made your way to this space.

Well, thanks for that. Yes, I have the same kind of journey that many people have where you start to learn about Bitcoin and then fall down the rabbit hole, as they say, into all the other dimensions of crypto. But my particular story is I started my career as a macroeconomist working on Wall Street. I started doing economics research at Lehman Brothers, which most of your viewers would have heard of.

covering the Federal Reserve, covering the bond market. And I spent almost 20 years doing that type of work at different Wall Street banks, including most recently at Goldman Sachs, where I ran a variety of strategy groups, including currency strategy. And it turns out

that Bitcoin is very straightforward to fit into the framework that we were using to analyze other currency assets, whether it's the euro, the yen, the Chinese yuan or whatever. Bitcoin is a macro asset, an alternative money system that competes with these other currencies. And so as we began to really understand Bitcoin more and incorporate it into that process, I personally became convinced that of

all the assets I was evaluating and trying to make judgments about, that Bitcoin had the brightest future, that it was the asset that I was most convinced would deliver superior returns

over the next five to 10 years. And I wanted to make a bigger bet on that asset and on the crypto asset class. And so I was very fortunate to find my way to Grayscale where I run research here. Grayscale is the largest asset manager in crypto.

And the type of work I do is very similar to what I used to do on Wall Street. We analyze markets. We analyze the valuations of these assets. The only difference is the assets are grounded in this novel breakthrough technology of the public blockchain. But otherwise, the process and the client service that we do around these assets is very similar to the work that I've done for 20 years or so in the industry.

All right. So let's go back to crypto's performance this year. You heard me lay out some of the catalysts for this year, particularly for Bitcoin, ETFs, Trump. What would you say was the biggest driver for this 2024 rally among those? Or is there anything that I missed that you think also helped drive gains? Well, I think that's an excellent list, but maybe I would highlight something not on the list first, and that's just the broader

market and macro backdrop. It was an excellent year, not only for crypto, but for many other assets. The NASDAQ, the S&P 500 also had solid years of returns. And so that was largely because the economy

avoided a recession, the so-called soft landing outcome, which there was a lot of debate about when we started this year. I had my own doubts, to be honest. But the economy avoided a recession, had a soft landing. That was very good for assets. And despite that, despite a good outcome for the economy,

the Federal Reserve was cutting interest rates. And so that macroeconomic environment is the kind of thing that's going to be good for Bitcoin, good for Ethereum and many of the other assets in our market.

Now, as you said, the crypto asset class has had lots of its own unique drivers that have added to that and why it's been such an exceptional period of return, why crypto has outperformed even these other high performing assets. And I think the election and the ETFs are really the key thing.

And let me just say, I think there's, of course, some specifics around these. There's the inflows that we get from the ETFs. There's the policy changes that we're going to get from the next Congress. I'm happy to talk about all that. But I think that both of those things together mean that there has been a huge change in perception around the crypto asset class from where we were, say, at this time last year. This is now a mainstream asset.

incorporated in many types of portfolios because of the ETFs, talked about, will now be talked about regularly at the White House among officials that are setting our regulatory policy. And so crypto is here to stay. I think we can be confident after the last year that the digital assets industry, Bitcoin, the crypto asset market has a permanent place in the United States. And that's something that U.S. investors are

are fairly engaged with already and will increasingly be in the future. So I think, you know, it's the macro environment. I'd say that was very important. And it was these two events, the breakthrough of the ETFs and the election that really have changed the perception around crypto and reduced the downside risks for the industry compared to where we were in years past.

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I was actually going to ask you if Bitcoin is mainstream at this point. And so since the answer is yes, let's touch on those ETFs that kind of kicked everything off this year.

Because I think that the question is sort of what now? So let's focus on the ETFs. Tell me about the adoption. This was such a success of a launch as far as ETFs go. 100 billion under management, and I should mention Grayscale is an issuer of one of the largest funds, GBTC. So from where you sit, how should we be thinking about the adoption of ETFs so far?

Well, as you say, it's been a huge success this year. And I think partly that reflects that these things were such a long time coming. The first applications for these products were in 2013. And for a long time, Grayscale was running really the only product that provided U.S. investors with regulated access to Bitcoin in a registered vehicle through our GBTC product. And now it's a full-time

market with lots of issuers, lots of competition. And these products have seen huge inflows already. And I would like to sort of touch on a couple of things. The first is I'd say it's end investors. It's new investors that were excited about Bitcoin, that have done their homework over the last several years waiting for the ETFs to arrive and were ready to go, ready to go on day one when these products launched. That was part of the investor base.

Part of the buyers are hedge funds and other sophisticated investors that are using long-short strategies with the ETFs. I think that's something to be aware of, that like other ETFs, this is not just a buy-and-hold instrument. Sophisticated investors use ETF products and lots of sophisticated products.

strategies. And today, a popular one with Bitcoin is long the ETFs and short the Bitcoin futures. This is something known as a basis trade or a carry trade, but that's been very popular. So I think those are the two big adopters this year. What we haven't seen just yet is availability of these products to

all different types of platforms to financial advisors out with their clients. There still is a long way to go in that process and it's both education

Some people have done their homework on public blockchain technologies over the last few years, but many people still are cracking the book for the first time and understanding these topics for the first time. And there's also just delays with some of the institutional structure around these products. Home office platforms need to do a due diligence process before they incorporate Bitcoin fully into their model portfolios. That's something that I'll see over the coming, I think,

I think you'll see over the coming year. So myself, the Grayscale Salesforce, you know, we're some of the people that are really on the front line of this process, educating investors about the asset class and these new products. And I can tell you it feels very early, even though the products were very successful this year. I still think we're in the early innings of adoption of the ETF. And I anticipate that 2025 will see comparable inflows.

that we saw in 2024, which was also a very big year for these products.

We haven't seen consolidation among the ETFs yet. You did say it's early, but it is interesting. There are quite a few in the market. I want to say 10 or 11. And it does seem like there are some obviously more popular ones. Brayscale got a nice head start. Obviously, BlackRock and Fidelity have a big flashy name. And then there are some who...

Some issuers who I think are maybe more appealing to more of the crypto native type, you know, of the crypto natives who are interested in a Bitcoin ETF. But why haven't we seen that consolidation among ETFs yet?

Well, that's just the nature of the game in the ETF market. And we see similar things playing out in other asset classes. There's definitely an interest to open products, to experiment, to see what works, see where there's investor demand, and then sometimes deprecate those products later if they haven't worked out.

Fortunately, at Grayscale, as you say, we had a huge head start with both Bitcoin and Ethereum. We've introduced many versions of both of our flagship ETFs. So we have some of the largest but also the lowest cost products in the market with our many versions. And we've been very pleased with the adoption of all those products this year. So I'm sure the nature of the competition will shake out over the next couple of years.

Grayscale has been in the crypto asset management business for 11 years. This is all that we do. We have a large range of products covering the largest asset, Bitcoin, and then many other assets for accredited investors looking to explore more deeply into the crypto market. So we're competing with all of those firms that you mentioned. We're excited with adoption so far. We're going to continue to.

announce new products of different structures over the coming year. And we're going to be in this game as long as there's a crypto asset class to participate in. Come to the Pima Medical Institute open house January 14th through the 16th, and you'll find more than a path to your career. You'll find your true potential, and you just might find yourself. Save your spot at pmi.edu.

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I want to talk about Ether and then I want to talk about the Ether ETFs. And actually, maybe they're the same thing, but it's up nearly 50% this year. So that's nice. But it has been the big underperformer compared to, you know, its competitors, Solana. But even, you know, compared to Bitcoin or compared to MicroStrategy or, you know, the CoinDesk 20, which is something that we track, which tracks the overall crypto market.

You know, I've been, I've heard it called the middle child of the year and the problem child. And it just seemed like there was a point there in the summer doldrums where investors really kind of lost their interest in ETH. You and I have talked about this. I had investors say that, you know, it didn't make sense anymore. They didn't see the investment case. So what happened with ETH this year and where do we finish the year with that asset?

Yeah, that's a good set of metaphors. Maybe I would use that Ethereum is going through its awkward teenage years. It's grown to six foot five and it's still figuring out how to gracefully use all its limbs in coordination.

So what happened with Ethereum this year is there was a major upgrade in the spring to really change the game for Ethereum. This was something that was a long time coming, but for your listeners that follow crypto more closely, they'll be aware of this, but Ethereum

went through a scaling strategy in which more activity will take place on layer two networks, alternative pieces of software that connect to the Ethereum blockchain and where more and more of the economic activity takes place today.

And that has led to a huge increase in the growth of the Ethereum ecosystem. There's more users and more transactions touching the Ethereum ecosystem than ever before. But it has this awkward teenage aspect for it. It raises questions of what happens to the layer one?

What does it mean for the token? How does the layer one accrue value? And how does all this compete with the many other high performance blockchains out there like Solana? How does it compete with other store of value assets like Bitcoin? So these are all quite relevant questions.

Look, I would say that the idea that Ethereum has lost its investment thesis is very surprising to me. This is one of the most important pieces of new technology in the world and maybe the most important open source software project of all time. It is a behemoth.

by far the largest network in crypto in terms of applications, in terms of users, in terms of value interacting with smart contracts. So Ethereum is still the category leader, even though it is facing tough competition. The question for next year is going to be, what does its advantages mean as the regulatory environment is changing and as other mainstream institutions, Wall Street banks, for example, begin engaging with crypto?

Ethereum is really the natural place for those institutions to start because it has a certain regulatory clarity, because it has ETFs, because it has a longer track record than many other things. So I think what you're going to see next year is more traditional finance integration with crypto. And I think that that process will begin with Ethereum.

That tokenization projects will begin on the Ethereum layer one. Payments projects maybe will begin on the base layer two coin bases, layer two platform, which connects to the Ethereum blockchain. So I'm incredibly excited about the outlook for Ethereum. I do think that it faces stiff competition and I think that that's very healthy.

the smart contract platforms, crypto sector. This market segment is the most important piece of the ecosystem in some way. It's where all the decentralized applications live. And so it's important that we get the best infrastructure as possible. And Ethereum may need to make some changes in order to compete effectively with that space. But it's an incredible investment opportunity. And I think

One of the things that you'll see over the next six months is more Wall Street embrace of Ethereum, and we'll see what that means for price performance.

But bring that back to what you were saying earlier about the education opportunity when we were talking about Bitcoin ETFs, because something I heard which was so interesting was that institutional investors, and you saw this when the ETH ETFs launched in July, you saw that nothing really happened and then it really took off those ETF flows after the election. But something that I was hearing a lot was we don't understand the use case of

Whereas with Bitcoin, it's very clear. It's digital cold. It's a store of value. And I thought that was so interesting because it wasn't that long ago that the investment case for ETH made more sense to people. It was like an app store for Web3. It was something, you know, a little bit more comparable to the Internet. You could build applications on top of it. So...

So I hear, you know, with Trump 2.0, I hear the optimism and the excitement and, you know, the opportunity to get all of these use cases that start with ETH off the ground. What does that transition look like for you? And what is the education gap that we need to fill there?

You know, I have personally been surprised about that as well. Before I was working in this space, I was in working, engaging with institutional investors. And exactly as you say, for many institutional investors, the Ethereum use case and sometimes clicks more easily. It is a revenue producing asset. It hosts applications. It has users. It can be thought about.

Along the lines is other frontier technologies like a social media stock, for example. So institutional investors, I think, get that. The ETFs are broadening crypto exposure to a much wider range of investors. And what I can tell you from my on the ground experience is that those investors are more intrigued by the store of value theory.

thesis that Bitcoin offers, at least as of today, than the smart contract story or Web3 story that Ethereum, Solana, or all the other smart contract platforms will be engaged with. These investors very often know about some of the applications. They know about PolyMarket.

They know about stable coins. They know about decentralized finance and tokenization. But they may not even be aware that those things live on the Ethereum blockchain. So that's the nature of the education process. And really, we're starting at ground zero.

And I have been very surprised about that. I thought that maybe before I was out in the world engaging so many investors on Ethereum that there was a better understanding of how this technology works. But I can tell you it's not the case. So investors need to...

learn more and also sometimes try these tools for themselves. I think that that'll be the thing that really opens people's eyes to the technology is a tap to pay with stable coins on your phone.

or engaging with prediction markets like PolyMarket, using browser extension wallets. Many people have not had this experience yet. And as that happens, I think there will be lots of aha moments about the importance of something like Ethereum and how central I expect it to be in how we engage with web-based applications in the future. I think anyone who has gone through that process knows

realizes that the way we interact with applications on the internet is not going to be the same in the future as it is today. And Ethereum is still central to that story. But many more people need to have that experience, and we just haven't had that mainstream breakthrough yet. I think it'll happen over the course of the next 12 months, but that remains to be seen. And I'm certainly doing my part to bring investors that education.

So to wrap up the 2024 focused part of this conversation, what has sort of the theme of the cycle been so far? You know, we hear a lot about utility. I know that politics was a big one and there's this whole sea change that's going on. But outside of politics, you know, there's always some kind of innovation that emerges from a bull market. Hope we had that yet.

I think maybe you may be unsatisfied with the answer, but I think the answer is this cycle has been about Bitcoin. That the Bitcoin investment thesis has been accepted by many, many more investors. And why are they coming around to the Bitcoin view? It's both what Bitcoin does and what it offers, the technology, but it's also just looking at the world around them.

Looking at inflation, looking at geopolitical conflict and the changing politics and priorities in the United States. All of these things

are raising questions about the future of US dollar, the future of macroeconomic stability in the United States and an interest in alternative stores of value like Bitcoin. So for me, the cycle so far has been about Bitcoin's success as a store of value. Bitcoin is going to be around for a long time to come. I think that's the thing that we secured in 2024.

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