Forbes Exclusive Interview with Grayscale's Head of Research: This Rate Cut Is Different—Bitcoin's Outlook Is Promising
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Forbes Exclusive Interview with Grayscale's Head of Research: This Rate Cut Is Different—Bitcoin's Outlook Is Promising
Cutting interest rates against the backdrop of a soft landing would weaken the dollar and boost Bitcoin.
Navigating Web3 tides with focused insightsBy Steven Ehrlich, Forbes
Translated by Luffy, Foresight News
Zach Pandl, Head of Research at Grayscale
Zach Pandl is the head of research at Grayscale Investments, the world's largest crypto asset management firm. Forbes recently sat down with Pandl for a conversation in which he shared key insights on the outlook for the crypto market over the remainder of the year. He offered interesting perspectives on the market turmoil seen in August and how future Federal Reserve policy could shape markets. He also discussed his views on cryptocurrencies—what assets may outperform and why others might struggle.
Forbes: Let’s start with what happened in August. At first, yen carry trades unwound, followed by about a week of panic. Then markets rebounded. How do you view all this?
Zach Pandl: Last month was a turbulent one, but it can actually be divided into two distinct phases. From late July to August 5, there was a rising sense of panic; then from August 6 onward, we’ve been in a recovery phase. Most major asset classes declined, though many have since returned to their early-August levels. Some markets haven’t fully recovered, including carry trade strategies in money markets (a focus for investors earlier this month), Japanese equities, and Ethereum.
Certain markets performed well in early August and remained resilient through the second half of the month, such as bond markets and non-U.S. dollar currencies. The yen, Swiss franc, euro, and pound all appreciated during the month. I believe the dominant theme across this volatile August has been falling interest rates and a weakening U.S. dollar—a trend that will likely influence Bitcoin in the coming months.
Forbes: Do you think this panic was a one-off event? If markets are shaken again, would we see a similar reaction?
Zach Pandl: First, looking back at early August, I strongly feel that focusing on Japan and the yen somewhat missed the point. Even for professional macro investors, Japan is a complex and often confusing topic. The real driver behind the sell-off was an accumulation of fear. Several U.S. economic data points contributed to this, most notably the rise in unemployment during the first week of August. The magnitude of the increase in U.S. joblessness has historically only occurred during recessions. Economists refer to this as the Sahm Rule, named after economist Claudia Sahm. This doesn't necessarily mean a recession is inevitable, but statistically, patterns like an inverted yield curve and rising unemployment are consistent with past downturns. The reason this hit markets so hard is that prior to August, the prevailing belief was that the U.S. economy would achieve a soft landing. Last year, fears of recession were high, yet the economy held up well, reinforcing confidence in a soft landing. So when unemployment rose, many investors began to reconsider the possibility of a downturn. We’ll need several more months of data to confirm whether the labor market stabilizes. That said, some aspects of the market reaction were surprising, particularly in equities volatility. The VIX surged to levels comparable to extreme events like the pandemic, the 2008 financial crisis, and the collapse of Lehman Brothers. It briefly topped 65 intraday during the first week of August before closing the week in the low 20s. Many other indicators, such as high-yield bond spreads, saw similarly sharp reversals. Overall, markets likely overreacted in the short term.
Forbes: Let’s now turn to cryptocurrencies. I’m interested in whether you see a divergence emerging between Bitcoin and other cryptos. For example, Ethereum ETFs haven’t achieved the same level of success as Bitcoin ETFs, and there’s growing concern about Ethereum’s prospects. What’s your take?
Zach Pandl: Right now, it’s clearly Bitcoin’s moment. Bitcoin’s dominance across the broader market is increasing, and the ETH/BTC price ratio is declining. Will this continue? I believe it will, at least in the near term, due to several strong tailwinds for Bitcoin—favorable macro conditions, expectations of Fed rate cuts, the presidential election, and growing demand for Bitcoin ETFs. Together, these factors create a highly supportive macro environment for Bitcoin. As a result, its dominance may rise further in the short run. That said, altcoins performed well last week, and parts of the market are beginning to recover.
Compared to the successful launch of Bitcoin ETFs earlier this year, Ethereum ETFs have been underwhelming. Still, trading volumes for Ethereum ETFs are substantial. Excluding Grayscale’s closed-end fund conversion into an ETF, inflows into other new products have been solid. So I wouldn’t say Ethereum ETFs have performed poorly.
As for Ethereum’s long-term outlook, I’m certainly not giving up on it. Market pessimism largely stems from ETH’s performance this month. In my view, that weakness is technical in nature. In May, when the SEC approved 19b-4 filings for ETFs, leverage in Ethereum futures on CME and perpetual contracts began rising—and kept building through August. Then, coinciding with macro triggers like heightened fear and the Sahm Rule signal, broad markets sold off. Ethereum got hit especially hard because it had accumulated large long positions ahead of the event.
To me, ETH’s recent underperformance is primarily a technical issue, not a reflection of problems within the Ethereum ecosystem. I’d emphasize that Bitcoin and Ethereum are fundamentally different assets, requiring different investor education. Bitcoin and Ethereum ETFs open access to crypto products for a new set of investors and financial advisors. But they represent entirely different categories within our Grayscale crypto industry framework. Bitcoin is primarily a monetary asset, while Ethereum is a smart contract platform. Both are blockchains, but serve different functions. I believe the educational journey for Ethereum is longer. It underpins smart contracts, decentralized applications, tokenization, stablecoins, and DeFi—that complexity may explain why demand for Ethereum ETFs is growing more slowly than for Bitcoin.
Forbes: Another big difference between Bitcoin and Ethereum is that Bitcoin doesn’t face competition from networks like Arbitrum, Optimism, and Base. Especially after Dencun, using these networks has become extremely cheap. Does this affect Ethereum’s current situation?
Zach Pandl: Crypto investors should apply principles from traditional securities markets—like understanding competitive dynamics, whether in monopolistic or competitive industries. Bitcoin dominates its space with little meaningful competition. In contrast, while Ethereum leads the smart contract platform sector, it faces intense competition from numerous rivals. I believe these competitors present important investment opportunities and hold value. Perhaps in segments where Ethereum faces stronger competition, a more diversified investment approach makes sense. That said, we firmly believe in network effects—the idea that a few dominant blockchains may emerge over time, rather than hundreds or thousands of small ones. Under network effects, investors and users benefit from networks with the most capital, applications, and developers. Today, Ethereum remains that network. It leads in network effects, and despite fierce competition in this space, I believe Ethereum is well-positioned to maintain long-term dominance.
Forbes: Why do you think now is the ideal time to launch an Avalanche product?
Zach Pandl: Every smart contract blockchain involves design trade-offs, and it takes years to determine which designs prove most effective at attracting users and generating fee revenue. But I believe Avalanche has established itself as a robust and functional platform. It’s mature enough that we consider it a legitimate and compelling option for investors. On a near-term catalyst basis, Avalanche may play a role in the tokenization of real-world assets. Over the past few years, Avalanche has been used in various TradFi tokenization proof-of-concepts. In my view, real-world asset tokenization is just beginning. We’ve seen tens of millions invested in some of these projects, with participation from major financial institutions—but we can’t yet predict how this will unfold. I believe Avalanche’s hybrid infrastructure, combining permissionless and permissioned elements, may be ideally suited for certain tokenization use cases. Now is a reasonable time to reevaluate this network.
Forbes: Solana has emerged as the third most popular blockchain after Bitcoin and Ethereum. Yet much of the activity on Solana appears to replicate what already exists on Ethereum and other chains. What’s your view?
Zach Pandl: Solana delivers an excellent user experience. For newcomers to crypto, few experiences are as simple and enjoyable as downloading the Phantom wallet and starting to use Solana—it’s fast and inexpensive. In that sense, it’s been highly successful at attracting new users. I also believe Solana has solidified its position as the third major blockchain. However, I don’t think user experience alone creates a durable moat. Ultimately, lasting value will accrue to Layer 1 platforms that integrate into the largest real-world use cases—where major corporations and industries choose to build. For Solana, that remains an open question: Will tokenization happen on Solana? Will large consumer companies like Sony or Disney build on Solana?
Forbes: What are your thoughts on DeFi?
Zach Pandl: It’s difficult to discuss DeFi without touching on the U.S. election and crypto-related politics. The Biden administration has pursued a regulatory approach that, in my view, hinders innovation and adoption. Its stance on DeFi has constrained market development. (Editor’s note: In April, the SEC issued a Wells Notice to Uniswap, signaling potential enforcement action.)
For DeFi to succeed further, we may need a shift in regulatory approach. A Republican victory, especially control of the Senate, would give Republicans leadership of the Senate Banking Committee, potentially influencing appointments of officials overseeing the industry. I believe DeFi is core to crypto—it’s one of the primary use cases for smart contracts. But to achieve broader success in the U.S., it needs to integrate with traditional financial assets in some way. And without clear regulatory guidelines, that integration isn’t possible. So we’re waiting for greater regulatory clarity to allow DeFi to thrive fully.
Forbes: Now let’s talk about artificial intelligence. To me, the link between crypto and AI has always seemed somewhat tenuous. Many AI tokens tend to move in tandem with Nvidia’s stock, but the fundamental connection appears shallow. What’s your perspective?
Zach Pandl: Blockchain technology can connect with the AI industry through several specific channels. First, infrastructure provision. Shared compute networks are a good example—they’re already operational and still in early stages. Intellectual property and deepfakes are another critical challenge—one of the most difficult issues posed by this new technology. I frequently use generative AI tools in my work; with them, I no longer need a research assistant. But I know that when I pay for these tools, the revenue doesn’t flow back to the original creators of the training data. Protecting intellectual property is therefore crucial, and public blockchain technology can provide detailed provenance about data sources. Again, these projects are nascent, but I believe they hold significant potential for synergy.
Then there’s the broader category, including Bittensor, which aims to use blockchain to build AI from the ground up in a decentralized way. I find that vision impressive. Bitcoin demonstrated the value of using decentralized computer networks to create a monetary system. Projects like Bittensor aim to apply the same principle—harnessing the power of decentralized communities to build machine intelligence or AI on the internet, creating an open system where anyone can contribute to or use the technology without going through a central authority. Anyone who has lived under restrictive monetary systems, capital controls, bank failures, or hyperinflation understands the value of an independent, open monetary system like Bitcoin.
I believe that as more people adopt generative AI tools, they will come to appreciate the need for an open architecture—not controlled by any single government or corporation. That’s exactly what projects like Bittensor are trying to achieve.
A broader point we make is that as more investors scrutinize the fundamentals of AI tokens and try to understand them, their correlation with AI trends will gradually diminish. Worldcoin rises because Nvidia rises—but there’s little fundamental logic behind that. In some ways, crypto remains an immature market, and high cross-asset correlations are an example of that. As the market matures, these correlations should decline.
Forbes: What are your expectations for the rest of the year?
Zach Pandl: We’re quite optimistic about Bitcoin’s fundamental outlook, driven by three positive forces. First, Bitcoin ETFs are bringing in new capital. Second, the political environment for crypto in the U.S. is improving. There are still uncertainties, particularly around Democratic Party positions, but overall, things appear to be moving in a favorable direction. Third, the Federal Reserve is cutting rates amid a healthy economic backdrop. I think this last point is particularly important—and possibly overlooked. Typically, the Fed cuts rates in response to a recession. This time, rate cuts are happening because the Fed has successfully won its long battle against inflation. These cuts are a sign of mission accomplished, which is very different from past cycles.
Rate cuts amid a soft landing are quite negative for the U.S. dollar, but positive for assets like Bitcoin. Taken together, I believe we’ll test new all-time highs in the coming months. The main risk right now is the health of the U.S. economy and whether it can achieve a soft landing. That’s the consensus among most economists today, but we need to closely monitor labor market data. If unemployment continues to rise and layoffs begin to accelerate, we could enter a period of economic weakness, during which Bitcoin, tech stocks, and many other assets would typically weaken in a cyclical manner. My view is that a recessionary period would be an excellent time to accumulate Bitcoin, as it would likely be followed by loose monetary and fiscal policies—similar to what we saw during the pandemic. But if the U.S. labor market deteriorates further and the economy slips into a brief recession, we could face downside price risks. That’s the primary risk over the next six to twelve months.
Forbes: Do you have any contrarian views? Are there other projects or tokens worth watching?
Pandl: First, crypto is becoming an essential component of most investors’ portfolios. Much of my time at Grayscale is spent educating investors on how to understand this asset class—the fundamentals of blockchain technology and the statistical properties of the assets themselves. This is a contrarian view in broader financial markets: crypto should have a place in nearly every investor’s portfolio, except perhaps the most conservative ones. Even from a liquidity standpoint, I believe crypto serves as a diversifying asset.
Second, and perhaps a contrarian view within the crypto community itself, I believe that in some respects, blockchain tokens are less risky than equities. Cryptos have different sources of volatility, but on one dimension, they are less risky: they have no liabilities. Public companies can fail because they carry debt that must be serviced by revenues. Blockchains generally have no such liabilities. They generate revenue, activity, and have communities of users—but no ongoing obligations to pay debt. So when people talk about the risk of public blockchain tokens going to zero, I think that’s misleading. We’re often surprised to see even relatively unsuccessful projects persist for long periods.
What I want to stress is that our analysis of public blockchain tokens is still in its infancy. There are few traditional financial analysts publishing research on how to evaluate these assets. Even basic concepts, like the liability structure of crypto projects, remain poorly understood. So I feel fortunate to be writing about these topics in what I believe is still a very early-stage market.
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