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Impending inflation and decentralized finance are helping Bitcoin’s price surge: Chainlink Co-Founder

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Bitcoin continues to have an incredible run after the cryptocurrency crossed $19,000 this week. Chainlink Co-Founder Sergey Nazarov joins Yahoo Finance Live to weigh in on the outlook for the crypto market.

Video Transcript

AKIKO FUJITA: Welcome back to Yahoo Finance Live. Bitcoin taking a bit of a pause today after the incredible run up that we have seen. Trading, though, still above that $19,000 level. It has been an incredible run for the cryptocurrency, up more than 150% this year. Some big name investors, like Paul Tudor Jones and Stan Druckenmiller, backing Bitcoin.

Let's bring in Sergey Nazarov. He is the co-founder of Chainlink, joining us today. And Sergey, we're going to get into all the news about how PayPal and Square have sort of become the new whales in the market. But just walk us through what your company does first.

SERGEY NAZAROV: Sure, what we do is enable something called smart contracts. Smart contracts are the more advanced version of Bitcoin's technology that applies the highly reliable financial products approach of Bitcoin and other blockchain systems to the global financial markets, to insurance, to trade finance, to eliminating fraud from gaming, to fixing fraud issues in ad networks. So Bitcoin in and of itself is an asset, but there's a technology behind that asset.

And that technology can do much more than generate bitcoins, and it can do much more than even generating other tokens, some of which other people might have heard of. It's actually able to make all agreements, all digital agreements, highly reliable. And generally speaking, people value the reliability of their agreements because that is what underpins whether they get followed through on.

So what we do at Chainlink is we bring the technology that powers Bitcoin to the derivatives market, to the global financial industry, to trade finance, to insurance. And the same benefits that people get from the reliability of Bitcoin as an asset or as something that can't be controlled by other people to their detriment is the same type of value that people should be able to get from all of their financial products, their insurance, global trade finance, the supply chain. All of those kind of technologies will eventually be underpinned by the same technological principles that make Bitcoin uniquely useful.

DAN ROBERTS: Sergey, Dan Roberts here. Because of what you guys do, you are in a unique position to comment on, you know, the institutional interests here, which has obviously grown over the last couple of years. You know, mainstream Wall Street institutions have appeared to warm a little to cryptocurrency, certainly at least to blockchain, if not to Bitcoin. With regard to the current price rise, which is not just in Bitcoin but a lot of altcoins, I mean, what do you think has been the biggest factor?

Because what I like to say is, it's never just one thing. You know, people are making a lot about PayPal getting in, Square investing in Bitcoin and allowing customers to buy and trade it in its Cash App. But it's been a lot of things. You know, Akiko mentioned some of the big Wall Street names that have now said that they have a little bit of their portfolios in Bitcoin. What do you ascribe the current price surge to?

SERGEY NAZAROV: So I think there's basically three key factors. The first-- and they vary between the average consumer and the institution. One of the key factors for both the average consumer institution and the institution is impending inflation. So impending inflation is something that is more and more on people's minds. And inflation as a mechanism to devalue assets leads people to seek safety.

That seeking of safety leads them to look at alternatives. Because the modern global financial system is not very well set up to help people combat inflation, whereas there are alternatives, such as Bitcoin, that are. I think this is one of the things that probably drove PayPal, a very consumer-centric company that does a lot of research about consumers want, to give a very limited real estate in their application for the acquisition of crypto assets by users, right? So I think inflation as a general idea is pervading both consumers and institutions.

The more advanced in the second category of concerns that people have is monetary policy generally. So I think there's a set of concerns around, is modern monetary policy feasible? Is modern monetary policy connected with reality? Is being off the gold standard connected with reality? Are the dynamics around money printing scarcity, you know, and all these other dynamics connected with basic economic realities?

That's more on the institution side. And the hedge against that is Bitcoin, right? So that, as a hedge, you basically have the alternative of gold, and you'd have the alternative of Bitcoin. And the adoption there is really evidenced by the amount of custody solutions that banks are adopting. So in order to give your users, as an institution, access to cryptocurrency, you need to have a capability to custody it. You need to have an ability to hold it.

And you're seeing a massive adoption of custody solutions by banks, which basically is a precursor of, if I'm spending millions of dollars to have the ability to give people access to cryptocurrency, that means I'm probably going to do that. I'm probably going to give them access to that. And I think what's really happening on the institutional side is a lot of those custody implementations are getting completed, and they're following through on their plans to use those implementations of being able to take custody of cryptocurrency as an institution.

I think the third and final force that's a bit underappreciated is something called DeFi, decentralized finance. And in a, you know, high-inflation, low-yield environment, like the one that we're experiencing, I think the ability to get yield is extremely attractive. The global bond market, the global treasuries markets, a lot of the global financial system is based on people essentially seeking and finding reliable sources of yield.

The yield that people can get in the traditional financial system today is, you know, well below 1%, in some cases, below 0.1%. It's in all-time lows with inflation on the horizon. The yields that people can get into decentralized financial ecosystem are anywhere between 1% and 8%. So what that means is not only do I have an asset that can protect me against inflation, if I have a more advanced view of monetary policy, I have a hedge against an inversely correlated hedge against monetary policy, modern monetary policy theory that I might not agree with.

And I have a way to store my assets in a way that generates yield, while the global financial system can only give me 0.1% yield. So I think those three factors are serious driving forces that are kind of really at the start of their pressure around this dynamic.

AKIKO FUJITA: Yes, some important takeaways there. Sergey Nazarov, the co-founder of Chainlink. Good to talk to you today.

SERGEY NAZAROV: Thank you.