Bitcoin should rebound on 'the sheer weight of institutional money' coming in: LMAX Group CEO

LMAX Group CEO David Mercer joins Yahoo Finance Live’s Akiko Fujita, Jennifer Schonberger, and Zack Guzman to discuss cryptocurrency trends, bitcoin, and stablecoins.

Video transcript

AKIKO FUJITA: Welcome back to Yahoo Finance Live. We've got Bitcoin and Ether bouncing back slightly after entering bear market territory. But the big question here, is there more downside to come with the broader volatility we've seen? Let's bring in LMAX Group CEO, David Mercer, joining us from London to discuss. We've also got Yahoo Finance's Jennifer Schonberger joining in on the conversation. David, it's great to talk to you today. You've pointed out the fact that we've got recent volatility. That's led a lot of institutional investors to say, is there a major correction coming? What have you seen in the trades? And how much more downside is there?

DAVID MERCER: Lucky enough, they don't ask me to predict the price of the asset. But look, you've got to remember, this is now a very resilient asset class. So if you go back just to March 2020, this asset traded in the 3,000s. So Bitcoin alone was up 50% last year. So, you know, this sell-off is to be expected in what is still quite a thinly traded and small asset class within wider capital markets.

So look, there might be a range. You could definitely see this-- Bitcoin and so on trading in the 30,000s again. But just the sheer weight of institutional money that's coming, and if you speak to anyone, every bank out there, every asset manager has a strategy for crypto, for DeFi. So just that sheer weight of money means that medium-term or long-term, you should just see the price pop from here.

JENNIFER SCHONBERGER: David, Jennifer Schonberger--

DAVID MERCER: In terms of trading, I mean, you're seeing-- what you're really seeing is, you know, risk traders are adjusting, just like everything else, right? You have all this inflation news coming in. There's some risk-off sentiment. So there is a bit of a correlation between crypto assets and stocks, the rest of capital markets today. But I think when you look more medium and longer term, you're looking at the fundamentals of crypto. And that's just driven by supply and demand, which just basically mean the prices should increase, And. Trading volumes should go to the moon, effectively.

JENNIFER SCHONBERGER: David, Jennifer Schonberger here. You mentioned correlations. Since the onset of the pandemic, we've seen a strong cor-- stronger, I should say, correlation between stocks and crypto. The IMF out with a report this week on that, saying that it sort of negates some of the diversification benefits for crypto. And it increases the risks of contagion between asset classes. Your thoughts on this?

And secondly, given that we just had the highest reading on inflation in 40 years, does that change the mindset for investors here and create an inflection point in the correlations and sort of rethink crypto as a store of value again?

DAVID MERCER: Interesting. Look, so there's no doubt that crypto is not immune to this risk-off sentiment and the thought of higher interest rates. So certainly you've seen that correlation over the last quarter. So, you know, if stocks get sold off, then crypto's going to get sold off. The best example of that was right at the start of the pandemic again, when all risk assets got sold off. You know, oil traded below zero. And, you know, everything took a hit. Crypto, crypto went all the way down and traded in the 3,000. So that's where we are at the moment, hence the sell-off you see in Bitcoin from, say, 64,000 down to the mid 40,000s.

But I mean, the evangelists out there would tell you that Bitcoin, especially as a store of value, is an inflation hedge. Now that assumes one thing. That assumes the price goes up, which assumes another thing, which is the supply and demand argument works, which means that more investors enter the space. So if the ecosystem was not to increase, if the same players were in the market in a year's time as are in it today, then definitely, you're going to have contagion.

But I'll tell you one thing. I mean, there are 90 million Bitcoin wallets today. There are 4 billion bank accounts. There are none of the major banks actively trading crypto today. They will start to trade it. So you're going to have more wallets. You're going to have more institutional money. And basically, you're going to have more demand than you have supply. So that should aid the inflation hedge argument. And I think then, the correlation, if you like, with stocks will start to diverge again.

ZACK GUZMAN: Yeah, and there's-- I mean, obviously, there's a lot of assumptions that a lot of people are making. And you can look at Bitcoin and the rest of it. And obviously, those might continue to maybe break as we look at some of those further into DeFi, as people look at those as more software plays rather than maybe a digital gold play like they're looking at Bitcoin now.

But David, when we look at maybe some of those assumptions, I think it does kind of set up questions, and to build on Jennifer's, questions around how some of these risks do grow if the larger institutional players dip more than just a toe into crypto. And we've already talked about leverage built into some of these markets as well. What that contagion risks look like when you have maybe institutional or systemically important institutions kind of in crypto, what it looks like because of the liquidity in Bitcoin and maybe some other cryptos, too, not necessarily like cash. So I mean, how do you see maybe that playing out if this does grow to what a lot of people are hoping for, how some of those risks could not just grow but exponentially grow?

DAVID MERCER: I think they'll grow, but let's put it into perspective, shall we? There are $200 trillion of assets in custody today, so traditional finance assets in custody today. The total market cap of crypto today is $3 trillion. So if you imagine that 5% of the real money of, you know, pension funds and asset managers is invested in crypto going forward that's $10 trillion. That's about the same market cap as gold.

So, sure, there'll be a price pump in all crypto assets, and Bitcoin specifically. But it's still a pretty limited contagion compared to the weight of money that will be invested in stocks, in bonds. So, you know, I think, in fact, the diversification should be a good thing for portfolios, rather than being muddied by a potential contagion.

JENNIFER SCHONBERGER: David, you're talking about risks. We're talking about contagion here. I want to ask you about regulation. Do you think that we need a global set of rules to govern cryptocurrencies? Where do you see the biggest gaps here, and then maybe from there, sort of the biggest dangers? And specifically on stablecoins, you know, here in the US, we're very worried, regulators are very worried about runs. And the Biden administration has recommended that only banks be allowed to issue stablecoins. Your thoughts on regulations?

DAVID MERCER: So I think it's a lofty goal to have global regulation in any asset class. Ultimately, it's driven by nation states. So but look, I think regulation is a good thing. I think you need to split it into two. You need to split it into retail regulation and wholesale regulation. Certainly, we should be protecting retail or private investors from assets that are new or assets that they may not understand, certainly in the way you protect retail investors against leverage, for example, in the US today.

So regulation should be a good thing. It's good to raise the bar. And then we know all the participants in the market are adhering to the rules. But what I would say is that on the wholesale side, everyone just wants a framework. You know, we want to know the rules of the game. So, just some clarity. There's a lot of argument about is a certain crypto asset or a token a security? If it's a security, it's fine. There's a well-trodden path to that regulation. I think we can use existing regulation. Likewise, if it's a bank account, if it's a brokerage product.

So let's try and adapt and adopt the frameworks that already exist. You know, I've seen some of the comments this week and the last from the Biden administration about regulating stablecoins. Again, you know, if you're issuing money, there probably should be some sort of regulation. But again, the framework is there. And I think that's a first on the hit list, if you like, of US regulators and policymakers.

Again, I'm going to go back to the size again and put this in context. You know, the stablecoin market was about $130 billion. Things of that size don't necessarily warrant regulation. So they're not in a hurry. But regulation will generally be a good thing. And my personal belief is that we should adopt the existing frameworks.

AKIKO FUJITA: Well, David, that is a whole other conversation. We're going to have to have you back on the show again soon. David Mercer, LMAX Group CEO, joining us from London today, alongside Jennifer Schonberger.