Fundstrat Global Advisors VP Digital Asset Strategy Sean Farrell joins Yahoo Finance Live to discuss the moves in bitcoin and ethereum, how the U.S. dollar and Fed policy could affect cryptos, and the outlook for the digital asset market.

Video Transcript

BRIAN CHEUNG: Sean Farrell is over at Fundstrat, global VP of digital assets, as well as Yahoo Finance's David Hollerith joining us for this conversation on this Friday morning. Appreciate both of you taking the time here. Sean, give us a little bit of color in terms of what's happened with Bitcoin this week. As we were just talking about, it broke through $25,000 earlier in the week. It's had a pretty sharp fall just in the last day or so. What's happening here?

SEAN FARRELL: Yeah. Hey, Brian. Hey, David. Thanks for having me. So red candle overnight can largely be attributed to the German PPI numbers that came in. We see the euro 10-year spike. I think it's up 10% right now. US 10-year is up 4%. So the dollar and the euro both are looking stronger. So that is one headwind for cryptos and wider, broader risk assets.

But that's also coupled with just, I think, some technical exhaustion because we had rallied off the bottom. If you look at bitcoin, we rallied from around $17,000 to $25,000 unabated, and ETH and some other larger alts rallied even more intensely. So I think it's a combination of both those factors.

Plus, we're dealing with-- it's the middle of August, so it's a relatively low-volume environment. So generally speaking, it doesn't take too much to swing the market in either direction.

DAVID HOLLERITH: Yeah, Sean, we had a call yesterday, and your comments have held up pretty well since then. The market is sort of tipping this direction. But just to go over where we've come from, you mentioned that August can be a period of low trading volumes. That's what we've seen in crypto. This last move seems like it's derivatives-led in terms of the liquidations. What are you expecting for the next two weeks in terms of where the market might go?

SEAN FARRELL: Yeah, next two weeks, I think we're still pretty overweight on ETH and some larger-cap alts. I think right now, speaking specifically to crypto markets, we're still overweight on ETH and larger-cap alts, largely due to the impending merge and the positive catalysts from that event. But also, we still continue to see a lot of underwater investors in the bitcoin ecosystem fade a lot of the rallies in bitcoin. And it's really not getting the same support from buyers that we're seeing with ETH.

And with regards to broader markets, as we discussed yesterday, it's going to be a time that investors are going to want to stay on the balls of their feet because we have Jackson Hole coming up. I'm sure Jerome Powell is going to have some very tactful words after everyone had interpreted his last FOMC statement as overtly dovish.

And then we have the most monumental CPI print to date a couple of weeks after that. So at Fundstrat, we think inflation is rolling over, so we're generally constructive on these events. But as I said, you want to be attentive heading into any of these macro events.

BRIAN CHEUNG: You know, Sean, it's an interesting point that you bring up with the Fed's meeting in Jackson Hole next week. There's no policy announcements expected, but of course there'll be a big speech. But I'm wondering, is what's happening with bitcoin even today hinging very strongly on what's happening on the bond yield side of things?

I mean, you're seeing massive spikes in bond yields just this morning. A lot of that could be part of the same story with expectations that the Fed is going to continue to hike interest rates here despite market expectations that maybe they've priced in the terminal rate here. How much do you think that narrative weighs on where crypto goes?

SEAN FARRELL: Yeah, Brian, you're absolutely right. If we look at macro variables and which ones are the most closely aligned with the poor performance of Bitcoin, the strength of the dollar correlates pretty tightly. So that is certainly something that we have our eyes set on. And it could definitely affect the flows into and out of the bitcoin network.

However, internally, we're seeing a lot of positive signs that inflation is rolling over. We surprised to the downside last CPI report. Certainly, a sample size of 1 is not indicative of a larger global macro pattern. But all of the soft data that we're observing certainly speaks to softer inflation going forward.

DAVID HOLLERITH: And Sean, the topic of bond yields is kind of interesting too. As you pointed out with September, we've got all these macro-driven events and then the Ethereum merge. And one thing you had pointed out to me recently was the staking yields from Ethereum, how a lot of people were thinking about that. I think the less crypto-native aren't as aware of it. Can you explain what that expectation is?

SEAN FARRELL: Yeah, so I think we had discussed the positive tailwinds for Ethereum price, the price of Ether due to the changing dynamics of the flows. So right now in the proof-of-work system, the cost of mining a block in the Ethereum network is a lot higher than it will be proof of stake, reason being is that in a proof-of-work network, you need to pay for very expensive hardware. Your electricity costs are 10x higher.

And so you have a lot of operational costs that need to be invested in order to mine the next block and receive a block reward and then a portion of those transaction fees. Thus, a large percent of-- A, inflation is higher. Nominal inflation in your network is higher in that circumstance because you need to have a higher block reward as of the total circulating supply to incentivize miners to participate in validation-- in mining, rather. And also, you just have a lower margin for miners because you have to sell ETH to pay for OPEX.

As we transition to a proof-of-stake network, these miners. now called validators, are going to essentially lock up their capital. And they don't have to pay for as expensive hardware to validate these blocks. Plus, the nominal rewards for these miners is decreased because you don't need to incentivize them with as great of a yield. And also, you won't see as much selling pressure from these miners, ideally, because their opex is substantially lower.

And so you have a combination of these lower yields. They'll come down from about 4% to 1% inflationary rate. And you couple that with less of a need to liquidate a lot of their block rewards, and you have this changing in flow dynamics where it's very similar to a bitcoin halving, which has been a catalyst for bitcoin in the past. But it's 34x the impact from a supply perspective.

BRIAN CHEUNG: Right, yeah. Some moderation, for sure, happening in that space. Fundstrat's VP for digital asset strategy, Sean Farrell, as well as Yahoo Finance's David Hollerith, appreciate the conversation. Have a great weekend.