Grayscale's Head of Research Zach Pandl

Zach Pandl is head of research at Grayscale Investments, the world's largest crypto asset manager. In this discsussion, he provides an important perspective on what to expect throughout the year. He also had some very interesting insights into the market dive that happened in August and whether something similar could happen again as the Fed tries to remove its restrictive posture on the economy. We also move into his thoughts on crypto, which assets are poised to outperform, and why others may struggle.

Forbes: Let’s talk about the last month. In the beginning, there was the unwinding of the yen carry and panic in markets that followed for about a week. Then markets rebounded. How do you process all that?

Zach Pandl: It was a volatile month, but it really needs to be divided into two periods. One from the end of July to August 5, which was a period of growth scare. Then the period from August 6 to the present, which was a kind of recovery. Most major asset classes declined, but many of them ended up approximately where we were when we started the month. Now some things declined and didn't fully recover, including carry trade strategies in currency markets–which was a big focus for investors at the start of the month–Japanese stocks and Ethereum.

Then, there were some things that performed well in early August and then continued to perform well in the second part of the month. Those were bond markets, high-quality bonds as a whole, like U.S. Treasuries and closely related assets, and non-dollar currencies. So the yen, Swiss franc, euro and British pound had gains during the month. The lasting themes, I think, coming out of a volatile August are lower rates and dollar weakness. I think that has implications for Bitcoin in the months ahead.

Forbes: Do you think this scare was a one-off or will the market experience something similar if it gets spooked again?

Pandl: I'd like to say first that I feel fairly strongly that the focus on events in Japan and the yen is a bit of a red herring when we're looking at what happened in markets at the beginning of August. Japan is a challenging subject even for professional macro investors, and I think often the source of confusion. What I think really happened was a true growth scare. There were a few pieces of U.S. economic data that caused that, but the most important was the increase in the unemployment rate in the first week of August. The U.S. unemployment rate has now increased by a magnitude that has never occurred outside the context of recessions. This is something that economists call the Sahm rule after economist Claudia Sahm, who labeled that statistical regularity. That doesn't mean we necessarily will have a recession, but the data are telling us that we are seeing some of the statistical regularities like an inverted yield curve and a rising unemployment rate that are consistent with recession.Why that had such a big effect on markets is that a soft landing was a very strong consensus prior to this month. There were fears about recession last year, but the economy held up well and so it became an increased consensus and increasingly priced into markets that soft landing was assured. So the rise of the unemployment rate increased the perceived odds of recession again for many investors. It will take a few months of watching the data to ensure that the labor market isn't deteriorating further. That being said, some of the things that happened in markets were surprising, particularly in equity volatility. The VIX index increased to a level associated with really extreme market events in the past like Covid, the 2008 financial crisis and Lehman Brothers bankruptcy. That probably tells us something about market microstructure—the ability of broker-dealers to manage inventory of equity volatility and manage their client's demands around a period like that. But it was remarkable. The VIX index rose above 65 intraday in the first week of August and then ended the same week in the 20s. Many other indicators, like high-yield bond spreads, had a similar reversal. So in summary, we had substantive economic news, but probably a market overreaction to that news in the short run.

Forbes: Let's turn to crypto. I'm interested in whether there’s a bifurcation coming between bitcoin and the rest of the market. We haven’t seen the same type of runaway success in ether ETFs that we did with bitcoin ETFs, and there are some concerns about trends on Ethereum, like lower usage numbers, lower fees, and it's becoming inflationary again. What are you seeing?

Pandl: First off, in some ways it really has been a bitcoin-dominant period for a while now. Bitcoin dominance is rising across the market, the ETH/BTC ratio is falling. I think it is fair to say that we've been in a bitcoin-led period. Will that continue? I think over the very short run, it may because there are so many positives lining up for bitcoin. In particular, the broader macro thesis, the Fed rate cuts, a contentious presidential election in which one of the major party candidates may call for dollar weakness, where both parties have not had a record of fiscal sustainability, and where we've seen all this demand for the bitcoin ETFs. All those things together I think, are a very positive macro environment for bitcoin. So bitcoin’s dominance is running relatively high, and I think could increase somewhat further over the short run. Although, as you know, altcoins had a........

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