This was supposed to be the year that cryptocurrencies went mainstream. Instead, bitcoin collapsed by more than 30% starting in October, inflicting huge losses on investors who had piled into crypto exchange-traded funds at a record pace just months before. What drove that massive selloff? And is the long-term bull case still in play?

We sat down with Matthew Sigel, head of digital assets research at VanEck, who shared his view of the catalysts for this year’s “crypto mini winter,” along with the long-term forces he expects to continue driving crypto adoption.

Prior to joining VanEck, Sigel was a widely followed strategist at CLSA. He walked us though the drivers of the bitcoin selloff, especially the leverage-driven selling that led what he called the largest single liquidation event in crypto history. “There is more pro-cyclical reflexivity with bitcoin, and crypto selling can beget more selling,” he says.

In the longer term, Sigel’s bullish take focuses on growing worldwide applications for cryptocurrencies, the diversification that the coins provide against the dollar and other traditional currencies, and tie-ins with artificial intelligence data centers. Despite the plunge in crypto prices, “long-term investors are increasingly willing to stomach bitcoin’s challenging volatility, [which] is proof of how many other appealing features the asset must have,” he asserts.

Morningstar’s Jeff Ptak has warned that the returns investors could gain from crypto ETFs can greatly diminish due to mismatched timing and sales. Morningstar’s view is that cryptocurrency should constitute just a small slice of a diversified portfolio for investors who intend to hold onto it for at least a decade before selling.

Read the following excerpts of our conversation with Sigel.

Leslie Norton: We had a massive decline in digital currencies this fall. What happened?

Matthew Sigel: The crypto mini winter started with the flash crash of Oct. 10, when Bitcoin fell 14% on a Friday night and a Binance code error sparked the largest single liquidation event in crypto history. Arguably, the spark for this event was an advisory that day from MSCI to clients that they were considering removing Strategy MSTR from passive indices, although at the time, the proximate reason was a [Donald] Trump tweet promising to tariff China by 100%. This was not fundamental, in my view.

This deleveraging event ended up foreshadowing the peak of the speculative AI trade in late October, and then after Election Day, the narrative around electricity as a cost of living changed. Since then, the cost of capital has been higher on AI debt, and many of the bitcoin miners using bitcoin as their “cash cow” to fund AI pivots were forced to sell even more bitcoin to keep their leverage from getting worse and needing even more debt to fund AI. That’s how AI and bitcoin are connected.

There is more “pro-cyclical” reflexivity (meaning selling can beget more selling) with bitcoin and crypto because there is no central bank available to print more. It’s part of the appeal and the price to pay for a truly open monetary network.

Norton: Where are we in the longer-term bitcoin cycle?

Sigel: Since its origin, bitcoin has exhibited a pretty consistent four-year cycle. By that math, next year would be a down year, but history doesn’t always repeat. Given that we had a 35% drawdown from the peak to the trough late last month, the outlook is mixed. Bitcoin is a volatile asset. During the last downturn, from November 2021 to November 2022, the drawdown was 78% from the peak to the trough.

However, Bitcoin’s volatility has also fallen dramatically since 2022, since the [crypto] ETFs have launched. So if volatility has fallen by half, and the last correction was 78%, you can make a case that this correction or this cycle would be more like a 35%-40% drawdown. We have a wishy-washy short-term outlook.

Norton: What factors affect your short-term view?

Sigel: We look at bitcoin through three lenses. The first is global liquidity—money supply, the dollar. Especially since covid, bitcoin’s correlation with risk assets has been elevated. We’re not quite at 2022 levels, when bitcoin and the NASDAQ had a 30-day correlation close close to 0.80, but it’s elevated at 0.49. Also, while the Federal Reserve is cutting interest rates, liquidity has tightened for the AI trade, and unprofitable tech or bad-balance-sheet companies have underperformed.

Second, we look at leverage within crypto, which is often a predictor of forward returns. That used to be a retail phenomenon, but now institutions are also in this market through options on bitcoin ETFs and a more liquid futures market. When you get a lot of leverage added over a short period, that’s bearish for future returns. When you get rapid deleveraging, that usually wipes everyone out, resets the base, and it’s bullish. So on that metric, we’re pretty bullish.

The third lens is on-chain activity. You can look at the blockchain, see how many addresses are interacting with it, how many transactions people are making, what fees they’re paying to use the blockchains. On that lens, it’s weak.

Bitcoin's Contraction and Expansion Over the Past Decade

Norton: It has been 15 years since people started using bitcoin as money. What’s restraining adoption, and what would mainstream adoption look like?

Sigel: That’s changing. Vanguard and Wall Street wirehouses like Citi C and Bank of America BAC have joined Schwab SCHW and most discount brokers in offering bitcoin ETFs. Endowments like Harvard and Brown University have made bitcoin a core part of their liquid portfolios.

Sovereign wealth funds like Abu Dhabi and Luxembourg are building positions. The Czech central bank bought some in a test account. Twelve countries are now mining bitcoin to monetize energy and diversify their money supplies.

There’s also a natural demographic tailwind. Surveys show that young people look at bitcoin as digital gold and have a high intention to allocate in the future. Roughly 10% of the world owns bitcoin. It’s a de minimis percentage of sovereign wealth and central bank allocations. Gold is 18% of central bank assets. Bitcoin is about 65% of the digital asset market.

I look at crypto as an emerging market asset class. It’s really easy for Americans to conclude that they personally have no use for this technology, and therefore that it has no value. That’s a viewpoint of people who have never lived in a country with 10% inflation, capital controls, or a hyper-politicized banking sector. In America, we have a dozen different payment apps we trust. In many parts of the world, bitcoin can be a lifesaver in terms of preserving purchasing power. It also has a negative correlation to the dollar.

Norton: You mentioned this is a retail phenomenon. Is this for mom-and-pop investors, or just the ones who are digital natives? How about institutions? What kind of allocation belongs in a portfolio?

Sigel: Digital assets are a $3 trillion market cap asset class. Having a zero weight is an active decision. Everyone should have some allocation to digital assets. We typically advise a starting position of 1%-3%, dominated by bitcoin. For buy-and-hold investors, we suggest setting a target allocation, then dollar-cost averaging your way to that allocation.

Norton: Let’s talk about your fund, VanEck OnChain Economy ETF NODE. How is it different from other digital asset funds?

Sigel: Most crypto equity funds tend to be pure play strategies. There are only 20-25 pure-play crypto stocks, depending on how you count them, and they tend to be high volatility. They often have leverage, like Strategy. When you’re dealing with a cyclical industry and add leverage, you can end up with boom-bust environments.

Bitcoin had a 78% drawdown between 2021 and 2022. Many of the pure play equity indices had large drawdowns between the first quarter of 2021 and the fourth quarter of 2022. Strategy fell 89%, Coinbase Global COIN 91%, MARA Holdings MARA 96%. Several Bitcoin miners like Core Scientific CORZ went bankrupt.

When we talk to allocators and advisors, the biggest pushback to investing in this space is the volatility. So the fund takes a much wider approach, including any company that has a strategy to either make money or save money from the adoption of bitcoin, blockchain, or digital assets. We add in companies that are second-order beneficiaries, whose benefits maybe accrue more on the cost side than the revenue side.

For example, Shopify SHOP is adopting stablecoins across its merchant network, helping merchants avoid or limit the interchange fees from Visa V and MasterCard MA that eat into the margins of small businesses. MercadoLibre MELI in Latin America is doing the same thing. An IPO from this year, Figure Technology Solutions FIGR, originates home equity lines of credit on an open-source blockchain that they helped develop.

Uniquely, we have utilities in our universe. Many see bitcoin driving underlying load growth, and thus earnings per share. When bitcoin really washes out, we can use those as source of cash to add to our direct exposure.

Finally, we have 11% in VanEck Bitcoin ETF HODL. It’s our largest position. In this fund, we can own up to 25% of assets in crypto, but we have to own it via ETFs. The next three largest holdings are Bitcoin miners pivoting into AI.

Norton: Tell us more about the intersection between the bitcoin miners and AI.

Sigel: Identifying the intersection early has been the biggest driver of our returns. Electricity is the single biggest cost input for a bitcoin miner. The miners have done a very good job of going around the world and securing very low-cost electricity, because that makes the difference between making money and losing money in this sector. AI has a similar dynamic. A single chatGPT query can consume 10 times the electricity of a simple Google search.

These miners realized that the value of their electricity contracts and their energy infrastructure is higher when serving the AI end market than serving the bitcoin end market. Many have begun to repurpose their Bitcoin mines, which are essentially data centers, to serve the AI and high-performance computing market. It does take some additional capital expenditures. Shares of the bitcoin miners that have been most aggressive in making these pivots have outperformed the most.

I’m conscious of the risk in these companies, because most of them don’t have great balance sheets and need capital to fund these pivots. It’s a matter of position sizing.

Norton: Let’s talk about your longer-term outlook. You think Bitcoin could reach $2.9 million per coin by 2050. This month, the price per coin is around $92,000.

Sigel: By 2030, we think bitcoin could reach half the market value of gold, so depending on the price of gold, it would mean $500,000-$600,000 per coin. Over the long run, we assume that bitcoin will make up 2% of central bank reserves. Central banks own gold at an 18% weight, so 2% is modest. We also assume that 5%-10% of global trade would be denominated in bitcoin. That’s already starting. Russia and China are reportedly settling part of their energy trade in bitcoin.

Our overarching view is that the euro, yen, and pound are almost guaranteed to lose market share either to bitcoin or other currencies over the next couple of decades, because currency values are highly correlated to long-term GDP growth. The population dynamics in those currencies are pretty lackluster. Will they lose share to the Chinese renminbi, the Indian rupee, or the Russian ruble? Or will they lose market share to bitcoin?

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