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Kraken strategist talks top crypto trends, NFTs, bitcoin volatility

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Kraken Digital Asset Exchange Head of Business Operations & Strategy Thomas Perfumo joins Yahoo Finance Live to discuss the top cryptocurrency trends, counterfeiting in the NFT space, and bitcoin volatility.

Video Transcript

[MUSIC PLAYING]

- Well, if you thought 2021 was an interesting year in crypto, buckle up. Because 2022 may deliver some headlines well beyond what we saw last year. And of course, so one of the stories was the outperformance from some of the altcoins out there relative to what we saw Bitcoin. Even on an up year still getting outperformed by a margin of about 4x, 5x, depending on which ones you're looking at, much more if you go further into the DeFi space.

And for more on what to expect this year, very happy to welcome in here with us one of the heads in terms of operation and strategy of America's largest crypto exchanges. Thomas Perfumo, Kraken Digital Asset Exchange head of business operations and strategy, joins us here, alongside Yahoo Finance's crypto reporter David Hollerith.

And Thomas, I mean, when we look at it, I don't know if it's fair to say that you can expect a lot of the same things to carry over in 2022. But it doesn't seem like the trends are really going anywhere. So talk to me about what you expect to see.

THOMAS PERFUMO: Yeah, so I mean, obviously, you never say never with crypto. Things go pretty wild in this industry. But I think the most important takeaway from the report that we released, the Crypto in Review 2021 by Kraken Intelligence, is just this constant uptrend with respect to things like adoption metrics, seeing this enormous proliferation of new applications and services on smart contract platforms. And we saw it in the tremendous growth on DeFi where you have hundreds of billions of dollars of total value locked in collateral, NFTs, billions of dollars of artwork, and thousands or even millions of people starting to engage in digital art networks and stuff like that.

So for us, we're a little less focused on the price action. We think that that tends to be very choppy. But all the signals underlying it are still continuing to trend positively.

DAVID HOLLERITH: And Thomas, David here. By your analysis, NFTs proved to be the highest growth sector by far. Your-- the report also highlighted, too, that the space has plenty of issues that sort of need to be addressed in the coming years. You mentioned security and counterfeiting and storage hosting. And just to sort of take one of those details, how do you think counterfeiting in the NFT space can be addressed, and sort of what have you seen in that regard?

THOMAS PERFUMO: Yeah, it's interesting. In terms of counterfeiting it's pretty juxtaposed in the sense that NFTs by their own nature, in some ways, are not counterfeitable. And so it really it has to do with serving UI/UXs that are able to verify the authenticity of an NFT by using-- they're leveraging the strength of blockchain information to do so. And so I think this is more of just a presentation issue and making sure people are familiar or understanding that when they interact with an NFT or they're going to purchase one, that they are doing so directly from an authentic source like a creator or an artist, for example.

We had issues with hacks and whatnot in the industry, historically speaking. This is as simple as you being able to manage your own Bitcoin balance in your wallet. And we're seeing a lot of these kinds of phishing attempts and whatnot targeting people who are in the NFT space, who are relatively new to crypto. And so these are people who perhaps have never touched crypto in the past. And we saw this years ago, as well, in 2017, 2018 when you had all these new people enter the space.

And so naturally speaking, I think the industry is going to continue to mature as people become more familiar with how to safely engage with cryptocurrency and services like ourselves at Kraken helps serve experiences that provide better safety for consumers in a mass audience.

- Thomas, you mentioned you're less focused on the price action. But I'm looking through your report, and you say that Bitcoin could climb to as much as $142,000 but fall to as low as $26,300. That's a pretty broad range. Can you walk me through that?

THOMAS PERFUMO: Yeah, and I'll be-- I just want to be very clear. We don't provide any kind of price targets. What we try to do is expand on perspectives. The information that we were sharing there was really trying to provide some technical analysis that people are interested in seeing. Bitcoin is an asset that has trended exponentially over the last few years, and over its entire history, actually. And people just naturally don't think in terms of exponential terms.

And so when you think about this industry you have to understand that there is plenty of volatility. I think one of the things that we were trying to demonstrate with respect to that kind of technical analysis is that not only is it a volatile asset, but the risk-reward in some ways is something that we are trying to present as-- Bitcoin we think still has plenty of upside. And there is some level of downside, but it's multiples less than what we think the upside might look like.

- Yeah, what's interesting to-- you know, to kind of watch play out, I guess, more recently has been kind of this break in correlation between Bitcoin and the rest of the other assets in DeFi. I mean, for an investor out there, that would be a dream come true. That'd be kind of what's not been the case for years in crypto.

I mean, how do you see that evolving, I guess, as people kind of understand the use cases here and they get built out to show-- all right, these things are definitely not at all the same.

THOMAS PERFUMO: Yeah, I think it's just a natural progression or maturation of the industry where we're starting to really see that these applications don't have to correlate with one another. And so Bitcoin still continues to hold that top spot when it comes to thinking of it as a store of value. This is also true in the case of institutional investors who are not crypto native players.

However, within the crypto industry itself you have extremely different communities that are engaged in things like DeFi or NFTs. And their activity, in many respects, is not at all correlated with Bitcoin. And so I think that this is just a maturation of the asset class, broadly speaking. It's good for people using the networks. It's good for people who are interested in getting exposure to this asset class. Again, to your point just being able to access different cryptos in a way that creates a more robust portfolio with uncorrelated assets. It's great for everyone.

And so I think it's just a natural progression, again, of this proliferation of just different use cases of crypto and seeing the adoption trend that way in a totally uncorrelated basis.

DAVID HOLLERITH: And Thomas, it seems like Bitcoin can mean a lot of different things to a lot of different people. But it seems like one of the main sort of stories of, like, what the asset is used for is sort of, you know, a store of value in emerging economies. That's sort of what we've been seeing lately.

And I thought it was interesting in your report, you know, you hit on countries and governments that have sort of put BTC on their balance sheet. And we talk about El Salvador all the time. But you know, they're actually fairly small on the list compared to, say, Bulgaria, you know, and the Ukraine and Finland, even. So I was sort of curious about that, to ask you. And then given what we might expect this year in terms of governments adopting Bitcoin or putting it on their balance sheet.

THOMAS PERFUMO: Yeah. I think the best way that I can provide perspective on this is that with any kind of frontier technology with the S curve, you're always going to start with that earliest adopter. And they tend to be the most important, because they're the ones that are really showing the public case for whether it's beneficial to them or not.

And so what we've seen, at least on the government standpoint, is El Salvador taking this very strong position. We want Bitcoin to be part of our economy, part of the interaction we have with our citizens. And what's fascinating about that is it is a country that I think is well prepared to adopt crypto in a meaningful way.

So for example, it was a dollarized country historically. It is a smaller country. And so they're able to move not only much more quickly, but much more creatively as well. And that's just, in my opinion, going to create a really nice test case for how governments can use cryptocurrency and introduce the-- really, in effect, the idea across the world to the extent that other governments see the same benefits.

We've also seen this not just in the case of legal tender, but other governments-- Kazakhstan, for example-- who are looking at Bitcoin mining as a way of growing economic activity within their country. So there are different applications for how governments are getting involved. And starting at this level is a great start in the first place. We wouldn't have thought this would happen five years ago. So it's awesome to see.

- Yeah. And Thomas, just lastly-- I know you don't get into price here. But you know, when we're trying to tease out some of these more in the weeds crypto projects to watch this year, I mean, it's been the L1s that really got away with things in 2021. All the hype was there, whether you look at a LUNA, the Terra LUNA project, or you look at Avalanche or Solana even.

I mean, when you look ahead-- early on in the year, I was calling some attention to ATOM and FTM. I mean, when you look at how these things are being traded, though, I mean, what are maybe some metrics you're watching to say, all right, some adoptions actually coming to some of these chains? Or maybe in the trading activity you see as well in terms of the diamond hands-ism, if I can create that word, around people looking at it?

THOMAS PERFUMO: Yeah. I think for us, again, like, we're really focused on on-chain signals to the extent that we can find them. We do publish a monthly on-chain report that dives into some of this activity. And what we're really looking for are activity, things like unique addresses holding the crypto. How many people are engaging on on-chain transactions? What is the level of transaction activity, transaction fees, et cetera?

But most importantly, all of these metrics are going to be a signal for demand in the network itself and what it provides. On the supply side, just seeing the growth in terms of applications built on it. So a lot of the DeFi applications, for example, on Ethereum are being ported over to different layer one solutions. And they might be tweaked just slightly to increase the relevance of that application or just increase the utility it provides.

And so I think you're going to want to look at both. Not only the signal of people using these chains, but also the signal of just applications and developer communities building around these chains. Because that's going to really create that kind of network effect growth that you want to see to the extent that the networks are providing value.