Host: New York morning trade, we are looking at Bitcoin hovering right below the flat line, right below 82. Can the stocks come after the crypto major briefly fell below 80,000 on Thursday, wiping out nearly 1 billion in leverage? That's, well, this week we did get two hotter-than-expected US inflation reports, and although Bitcoin has rebounded from the lows of 2026, the macroeconomic pressure is heating up. Geopolitics, as well as fears of persistent inflation, are front and center. And overnight, in terms of that, you had Kevin War and his fireside chat at the IMF gathering in Bangkok. We did not get anything about inflation, but at the same time, we are looking at that for a rate hike at the October meeting lower than yesterday. Joining us to weigh in is Thomas, chief economist at Kraken. Well, Thomas, good morning. Thank you so much for joining us. It has been quite the week. So given all the economic data that we have seen this week, as well as that commentary before the media blackout, how will the remaining 2026 decisions impact crypto?
Thomas: Sure, thanks for having me. With Bitcoin specifically, what I've noticed over the last couple of months is a recoupling with a lot of other macro asset classes like equity and even crude oil to suggest that Bitcoin is acting a little bit more sensitive to macroeconomic conditions. And when it comes to interest rate outlook, one of the things that I've noticed is that any day you have CPI reports, PPI reports over the last couple of days, for example, you see a pretty outsized move in Bitcoin to negative news, that being that you had hotter prints and you saw Bitcoin react negatively as a result. And so Bitcoin has been increasingly sensitive to changes in near-term interest rate expectations. However, notably, I think for the October meeting specifically, we've seen some fairly consistent pricing, a high expectation of a hold. I believe it was closer to 85% as of this morning that there's not going to be a hike. But by year end, the expectations still tilt very much in favor towards a rate hike. I believe the odds were around 80% and have been consistently that high over the last month or so. And so I do expect that near-term interest rate expectations are having a genuine impact on Bitcoin price.
Host: Yeah, and this week risk was back in the spotlight, and with so much macro uncertainty out there, tell us what this does for the traditional four-year Bitcoin cycle. Is it still relevant?
Thomas: Sure. Yes, so we're kind of in this sweet spot when it comes to Bitcoin in the cycle patterns. If you look at the prior three market cycles for Bitcoin, historically, you've seen Bitcoin prices trough in a bear market about 12 to 13 months after the prior corresponding all-time highs. We're just passing the first anniversary of last year's $125,000 all-time high for Bitcoin. So from a timing perspective, we're in that sweet spot that a lot of long-term crypto investors have remained sidelined waiting for this moment to come back in in the fourth quarter of this year. However, the price trajectory of this cycle has been very different. We're only about 35% below the prior all-time high, whereas in prior market cycles, the drawdown was between 75% and 85% from their corresponding all-time highs. So this is a much milder cycle, and I think a lot of long-term crypto investors are having to decide whether they want to buy into the price signal or they want to buy into the timing signal. However, I do believe personally that the maturation of Bitcoin as an asset class and the market structure around that should make market cycles much milder going forward. And one proof point here is that in prior market cycles, you didn't have things like the Bitcoin ETF. And then when I look at the Bitcoin ETF specifically, it's been one of the largest buyers of Bitcoin over the last 2.5 years, over $60 billion of Bitcoin purchases, for example. And importantly, since the all-time high last year, we've seen that 91% of the cumulative net flow all-time high that came in October of 2025, we're already still remaining 91% at that level of that high-water mark. So we haven't seen that kind of a significant drawdown, only 9% relative to price drawdowns of 35% to 50% year to date. So in that sense, I do believe that the market structure does provide evidence for why the cycle pattern should change dramatically from prior cycles. But for long-term crypto investors, this is still a very meaningful signal.
Host: Yes, and speaking of which, I do want to expand on this because we are heading into the final weeks of 2026 as we count down to the new year, and it seems as though we're always looking ahead to catalysts. And all of us were waiting for this week's inflation figures, both CPI as well as the unexpected heating up in producer prices. But the inflation figures also triggered a wipeout in terms of leveraged long positions this week. As long as inflation does keep elevated and also Treasury yields higher, how would you say the crypto market is exposed to further downward pressure?
Thomas: Sure, I mean, absolutely it is the case. I believe that changes in interest rate expectations do have an impact on Bitcoin, that a higher trajectory does have an impact on risk assets, inclusive of equities, but also Bitcoin. I do think that when it comes to catalysts that people should be aware of, we're right now in an environment where Bitcoin's correlation with other macro asset classes, in particular equities, is very high. It's over 0.5 over the last 30 days, and that's near year-to-date highs, closer to 0.7, that we saw earlier this year. And it's relevant because we have earnings season coming up. So when you think about the catalysts that I personally care about most, it would be the next couple of weeks, particularly from hyperscalers and AI companies. Are we going to see continued confidence in earnings growth, but also their CPE guidance? A stable equity market, in my opinion, is important for crypto price today. I also think that the election is going to play an important role because we've seen a lot of news, a lot of reports around the possible escalation of conflict right before and after the midterm election, and I'm referring to the US-Iran conflict. And that has a big impact on energy markets, downstream impacts on inflation, downstream impacts on interest rates and Bitcoin as a result. So those are the two most important catalysts that I see impacting crypto from the macro side over the next several weeks. And it really all stems from that kind of view on how these things interconnect with interest rates, monetary policy, and therefore Bitcoin.
Host: A lot to keep our eyes on in terms of both monetary policy as well as fiscal policy as we count down to the midterm elections. But before I let you go, Thomas, I do want to get your take on MSCI considering a new rule that would exclude operating businesses from its equity indexes, specifically targeting companies like Strategy. So if they do get dropped from these benchmarks, how big of a threat is forced index selling to the financing model behind Saylor's Bitcoin treasury?
Thomas: Well, fortunately, when it comes to MicroStrategy, I can't deny that they've played a very important role from the demand side of Bitcoin over the last several years. They are the largest net purchaser as a single entity year to date. I believe they've purchased over $13.5 billion of Bitcoin. However, much of that purchase activity came in earlier this year. They've actually been out of the market substantially or significantly over the last several months, and it's been one of the most inactive periods for them since the last bear market cycle. And so in the current present moment, I actually don't see MicroStrategy as the price setter or the trendsetter when it comes to marginal demand. It's more coming from ETF flows, if anything else. And so their exclusion from the MSCI index, all things equal, may have an impact on their price-to-NAV multiple. If we see deterioration in that, then it may be the case that they're not going to be a reignited marginal buyer. But again, they haven't been a marginal buyer in a meaningful size in several months now, since I believe May. So it's been almost five months that they've been significantly out of this market. Now importantly, even if they are excluded from MSCI and even if you see a reduction or deterioration in their price to NAV, it is important to also recognize that they've substantially increased the creditworthiness and the credit profile of the company. They have over $5 billion of cash reserved for paying dividends for the foreseeable future on their preferred equity securities. They also have an additional cash buffer to handle any kind of near-term debt payments or requirements, the first of which doesn't even come until next September at the earliest. And so I do think that the exclusion may have a marginal impact when it comes to their price-to-NAV multiple, but it doesn't significantly change the marginal demand profile today from either a buy side or a sell side.
Host: And Thomas, one more question before I let you go. So of course we're looking ahead to the midterm elections as well as the Fed meeting in December, but I do want to get your take on some trends that you're watching, not just in Bitcoin but also across digital assets, that you think will move the markets in 2027.
Thomas: Sure. One of the things that I've noticed that's been really interesting to see is that we've actually seen a pickup in performance from different sectors within the crypto industry. In particular, DeFi has been an outperformer over the last couple of months, even surpassing performance in equities as of last week on a year-to-date basis. And one of the things that's critical to learn or to see is that we've had some events like Robinhood launching their own stock tokens platform, which leverages platforms like Uniswap. We also saw last month the announcement from regulators, particularly the SEC, on proposed rulemaking for innovation exemption for tokenized equities. And these are having an outsized impact on DeFi protocols in particular that are reaping some of the benefits. And so we're seeing that price signal play out in terms of expectations that this is a hot area for potential growth. We continue to see companies announce programs around stablecoins and tokenized equities. And on tokenized equities specifically, we continue to see a lot of growth, including our own xStocks platform, which is around a billion dollars of AUM and about half a million unique addresses that have interacted with our products. And that launched just about a year ago. And these products are continuing to be a very bright spot of growth, I believe tripling year to date in totality when it comes to assets under management. But importantly, there's still a very nascent group within the crypto sector, representing only a few billion dollars when you look at the single-name exposures. So a lot of bright spots, but very early days, and we're already seeing some recognition in the price signals, particularly on the DeFi side with respect to things like tokenized assets, stablecoins, and equities in particular.
Host: Well, Thomas, I appreciate you joining us this morning. There are a lot of moving parts when it comes to what's happening in crypto as well as digital assets. I appreciate all of your insights as well as all of your perspective today.
Thomas: Thank you very much for having me.
