Animal Spirits Podcast - Talk Your Book: Is Crypto Dead?

Starting point is 00:00:00 Today's Animal Spirits Talk Your Book is brought to you by Grayscale. Go to Grayscale.com. Learn more about their whole suite of crypto ETFs and also their new research project called The Stack. That's Grayscale.com to learn more. Welcome to Animal Spirits, a show about markets, life, and investing. Join Michael Batnik and Ben Carlson as they talk about what they're reading, writing, and watching. All opinions expressed by Michael and Ben are solely their own opinion and do not reflect the opinion of Redholz wealth management. This podcast is for informational purposes only and should not be relied upon for any investment decisions. Clients of Britholt's wealth management may maintain positions in the securities discussed in this podcast.

Starting point is 00:00:44 Welcome to Animal Spurts with Michael and Ben. Ben, I'm going to ask you the same question that I opened the show with with Krista. I think, you know, her answer was not surprising. But be honest, pretend nobody's listening. Is Bitcoin dead? No, because every time someone says it's dead, then it comes roaring back eventually. That, to me, is the most bullish thing about crypto and agri. And it's history is the fact that every time it feels like it's dead, it's not. No, it's interesting. It's $62,000 a coin. Right.

Starting point is 00:01:12 I mean, I know it's well off the highs and we're in a bull market and it feels like it's dead. Or, you know, if you bought it at 120, you're not feeling so great right now. But five years ago, I don't know what the price was five years ago. You would have taken this five years ago, or maybe, let's call like late 2000. If you just said Bitcoin's are going to be at 60, the market cap of crypto is going to be over $2 trillion. You would have said total success. Right.

Starting point is 00:01:35 Right. But yes, the goalposts, they always move and it was higher. Obviously, you don't think Bitcoin is dead. This is a painful period, though. I feel like every new crypto winter is a little more painful than the last. No, I don't think it's dead. But also, I have no idea what the next catalyst is. And I don't see, like, a lot of excitement out there.

Starting point is 00:01:55 I think the next catalyst is higher prices. And I'm like sort of kidding, but not. And the question is what leads to higher prices? I don't think it needs much. Just no more sellers. Again, I'm like getting back to like, you know, caveman markets here. But the fear of missing out can never die. That is the reason why this is the most emotional of all asset classes.

Starting point is 00:02:20 And I say that when it's going up, it just feels like an unstoppable, unbeatable force. Every time it goes into a bull market. And every time it's in a bare market, It's like, oh my gosh, what were we thinking? It just the emotions are amplified. I think the 24-7 trading and all that stuff kind of changes a little. It's kind of funny. Do you think that the ETF has like pulled crypto back a little bit to be more like a regular market vehicle,

Starting point is 00:02:43 where it matters more in market hours than outside of, like it used to be outside of market hours matter, way more for crypto. Well, I don't remember what you were talking about, but we pulled forward everything. Your theory of we pulled forward everything. Were you talking about crypto with that? or something else? No, but I'm happy to lump it in. All right, well, lump crypto in because we pulled forward a lot of demand. The ETF was highly anticipated, and now we're digesting whatever, you know,

Starting point is 00:03:09 we're obviously on the aftermath of that. So no more stepping on the toes of our conversation with Krista Lynch from Grayscale. Krista, it's great to see you again. Thanks for coming on. Thanks for having me. All right, I'm going to start with the softball. We're recording on Monday, July 13th. Bitcoin is at 62,000.

Starting point is 00:03:28 well well well off its highs. I think it hit 120 or something like that last winter. No, not even. Oh, wait, hold on a sec. What am I looking at it? Whoops, that's the wrong chart. This was last, I'm looking at two-year bonds. It's stuffing on your bonds. This was, it was last spring, I believe. Was it last spring? That makes sense. Yep. Yeah. Okay. So last spring, all right, anyway, it's out of favor to put it mildly. So let me ask you this. Is Bitcoin dead? No. So I guess I'll start off by saying that, We at Grayscale have long-term conviction in the asset class. And there are... I was just checking.

Starting point is 00:04:05 I mean, I would hope that we do, but we do. And there are going to be these bumps along the road, especially with a relatively volatile asset class like crypto. And while it can be disconcerting to be going through one of those phases, there are a lot of really positive things that are happening underneath the surface. So I'm sure we'll get into these a bit more. but for me, the biggest area of focus in the past few months has been infrastructure build, and you don't necessarily see immediate price appreciation as a result of that,

Starting point is 00:04:36 but there is real investment going on in the blockchain infrastructure itself. So I think that's very promising. We have seen some areas of excitement in certain altcoins. We'll probably get into those as well. But altcoins that are showing real utility, again, going back to that intersection between, crypto and traditional assets that infrastructure connectivity, hyperliquid being one of them, Canton being another one. And so I do think that while things have not necessarily been exuberant for Bitcoin and other digital asset prices, it's still been a time where we can find pockets

Starting point is 00:05:16 of optimism and continue to build behind the scenes for when the time is right. What is it about the psychology of this asset class that maybe I'm off here, but it seems like when things are going well, it feels like nothing can stop crypto, and it's just going to go to a million. And when things are going badly, it just feels really bad like, oh, no, now it's going to zero. Why is it so heightened in this asset class? It feels different for some reason that it's like a runaway freight train of momentum in both directions whenever that happens. Yeah, it is really fun to be in the space when things are up and to the right, like you said, and it can be quite the opposite when they're going in the other direction. I think it is a relatively nascent asset class.

Starting point is 00:05:55 there are keep in mind a lot of people who originally got involved with crypto and were really not embraced, you know, by the mainstream. And so I think that when it is having moments of positive price appreciation, I do think that a lot of investors who have believed in the asset class for 10 plus years, you know, they're really, really excited and feel validated. And I think that leads to some of this sentiment that you described. Now, in the past few months, it's become a little bit more stable. And I think that that is something that speaks to the maturity of the asset class as we've gotten more investors that are, I would say, diversified in their interest in crypto that ranges from institutions to individuals who have gotten involved in the asset class

Starting point is 00:06:43 through things like the ETPs. So you will notice in this most recent downturn, it hasn't been as precipitous as in the past when you might have seen 10 plus percent drops in one day. This has been a relatively steady decline, and it is stable where it is now. So while we would love to see prices higher, it's not this crazy turmoil that we were kind of used to in other periods of downturn. I think one of the reasons why it feels particularly bad. Well, there's a bunch. Number one, it feels like AI sucking the oxygen out of every room. And there is a real talent exodus from crypto to AI. And I think that's probably way in the past at this point. That's, not happening now. It's already, it already happened. But the other is that you see the stock market

Starting point is 00:07:29 right near an all-time high. And to see crypto, not just Bitcoin performing this way, it feels crappy. Now, the get out of jail free card, and that might be the wrong expression here, but in terms of like, well, why is Bitcoin performing this way? Tell me if I'm reaching here. You might disagree. Bitcoin has software or its code or whatever. And software, and software, is no longer eating the world. The world is eating software. And the equity of a lot of software companies has been doing really poorly. And if you look at a chart of Bitcoin versus the ETFs, IGV, for example, it looks pretty similar. Maybe it's not that that confusing or that big of a mystery, why it's in a bare market with the stock market at an all time high.

Starting point is 00:08:23 I really like your point about AI. There was definitely a period of time where crypto was the hot topic. It was the, I would say, alt of choice for those who wanted to get involved in the most percolating topic of the day. And again, going back to that point about maturity of the asset class, crypto is still very new for many, but it is not as novel as it was before the ETP is really allowed mass adoption of it. And, and AI did for a period of time kind of take that place. So I do agree that from an investment standpoint, we are competing with the likes of AI. Of course, crypto remained something that is relatively new and nascent, but it has come so far in a very short period of time in terms of mass adoption. And your point about looking at some equities as well,

Starting point is 00:09:17 I think we do look at a number of macro indicators for crypto, and I never really thought we'd be talking about the CPI print tomorrow in the context of Bitcoin prices, but we are. And so I think that it is true that there are more competing investments out there. But like I said, the fact that we continue to build for crypto to actually be something contributing to the back-end infrastructure of how we run the banking system, that's not going to ultimately manifest in price appreciation overnight. But I think that it is more fun. fundamental, more real value add that we are now putting this asset class to work for. Do you think that it's fair, the comparison people are making between Bitcoin software stocks?

Starting point is 00:10:02 It seems like it's, I don't know, Michael, you can correct me from wrong, like an 18-month window on the charts. And like the lines do kind of go in a similar direction. But that relationship wasn't there before. So I don't know if this is just people just dumping tech stocks and Bitcoin is kind of lumped in there. like, do you think that it's a fair comparison, or do you think this is just kind of a coincidence? We could see the move in sympathy. This has been something that I would say forecasters have looked at before, and oftentimes people are trying to find the most correlated area of the investment universe to try to interpret

Starting point is 00:10:37 or predict what digital asset prices are going to do. I do see alignment with the software thought process, but I think Bitcoin and other digital assets mean so many different things to so many types of investors that it's hard to pigeonhole it into one specifically. Now, of course, for some, like I mentioned, this kind of infrastructure build theme does align a lot with software. But of course, there's still the conversation about store of value. To me, I think that there's a lot of new developing financial products that are leveraging blockchain solutions. Like if we get into hyperliquid, I think we'll probably talk about perpetual futures. That's one area where we see the

Starting point is 00:11:17 crossover between traditional finance and crypto-native investment rails. And so I think that, you could argue that that has software ramifications, but I think it also has financials elements to it. So I don't necessarily put it in one category squarely, but I think the rationale certainly makes sense. But I really lean back on the digital asset space can mean so many different things to so many different investors. And we continue to see that evolve in a myriad of ways. So, all right, let's talk about the other stuff. I mean, my opinion for what it's worth, I don't think Bitcoin is dead. I think that it is hard to see the next catalyst to the upside. Like the ETF was very, very, very obvious, which is why, in my opinion, prices did what they did

Starting point is 00:12:08 anyway. But all it takes is a little bit of momentum. And I don't know what the spark is for higher prices. but it almost doesn't matter because higher prices be at higher prices and people will think, oh, shit, it's going to 250. I don't want to miss it. And, you know, whatever. The story will follow. So that's my two cents. All right, Hyperliquid.

Starting point is 00:12:27 Ben, what's the guy's name that writes for Colossus that writes those profiles? Domcuk, right? Domcuk. What an awesome piece, good Paul, on Hyper Liquid and the founder and what they're doing there. And it was a fascinating story. And hyperliquid for people that aren't aware of what it is, is it's a blockchain-based exchange. where it's open source, you could list anything, you could do, there's a lot of flexibility into what can go on there, and it's a marketplace. And so, for example, SpaceX, before it became,

Starting point is 00:12:56 before it went public, was trading on hyperliquid. And I think that in the 24 hours prior to the IPO, don't quote me on this, but it did 150 million dollars of items, like real numbers. And that gave you a very good look into where SpaceX was going to IPO. And then there's crude oil futures, which obviously got a lot of attention during the weekend when the markets were closed. And these perpetual futures are having such an impact to the point where it's moving equity markets like CME and CBO and a lot of these companies are getting impacted to the downside in a way that is kind of amazing. Like we're talking real established players with real market cap declines.

Starting point is 00:13:39 So what is hyperliquid and where do they fit into? the broader digital asset story. Yeah. So like you mentioned, Hyperliquid hosts this decentralized exchange where perpetual futures are traded. I think you gave a great... And a perpetual future is, I'm sorry, just for people like, what the hell are you talking about? Yeah, I think you gave a great overview. But to go drill into the perpetual future itself a little bit more, this was historically

Starting point is 00:14:04 a crypto-native trading tool. It's a future that rolls on a daily basis. So it does not reach a terminal point where it's settled, like a traditional future. would be either in cash or the underlying exposure. Perpetual futures were historically something that were used for underlying crypto exposures. So Bitcoin, Ethereum, so on and so forth. And they were very popular amongst crypto-native traders. A lot of leverage. Yes, they are. You can use leverage. Exactly. You can get a lot with a little. A dollar goes a long way. Exactly. Probably why they were so popular amongst crypto trading, the crypto trading community.

Starting point is 00:14:41 but as you mentioned, they have become an opportunity to also trade traditional underliers. So I think that Hyperliquid got most of its attention with the traditional trading community initially during the events happening in the Middle East, which were generally over weekends or other times that U.S. exchanges were closed. The hyperliquid perpetual future on oil became a way for investors to take risk off the table or put risk on the table at those times. and in particular oil being highly impacted by the activities going on in the Middle East, it really got a lot of attention. This wasn't like a little thing. Like there was real dollars and it actually worked.

Starting point is 00:15:23 And like institutional capital, there's not like a couple of dudes in their pajamas trading this. Exactly. And over the course of the ensuing weeks, we then saw perpetual futures on very, very traditional exposures like the S&P 500. And so your comments about SpaceX, to me, as you were saying that, it really really resonated as an ETF person. We always say that ETFs have historically been this way to have price discovery when underlying markets are closed. But we're now finding that these perpetual futures are another enhanced way to have price discovery when markets are closed. And so that, that spirit

Starting point is 00:15:58 is really actually quite similar to what ETS did for markets 10, 20 years ago. And I think that, you know, the threat or perceived threat that perpetual futures might have on some traditional providers, they're really paying attention for that reason. I think that this is a tool that traditional traders have really caught onto. And we now see some of the traditional providers who did not historically have perpetual futures in their offering, filing to potentially be able to bring them to those venues as well. So for the people who aren't familiar with hyperliquid, explain how the blockchain is involved here? Like, what's the point of how does the blockchain help facilitate this? And just a follow up with that. Like, what blockchain are they using? Do they build

Starting point is 00:16:39 their own? So the token itself can be used to, I'm not going to get into the weeds too much here because that's not my area of expertise, but the token itself is involved in the listing of these perpetual futures. And of course, there's correlation between the use of the decks and the value that those tokens provide or represent. And so offering this venue has been a huge value add to the traditional and crypto-native trading universe and then a way to capture or express our theory. And so thesis that that is going to continue to grow is on investment in the hyperliquid token itself. And so we actually did just launch an ETF on the hyperliquid token. We work very closely with the hyper liquid, I would say hyperliquid community to help. When did that happen?

Starting point is 00:17:25 We launched it maybe about three or four weeks ago. And what is the ticker? It's HYPG, HypeG, as we like to call it colloquially. But we worked closely with the community of hyperliquid holders and developers, and they actually helped seed our fund, which was very, very exciting to see the community actually participating in investing in our product. So there is, Ben and I were talking about this a couple of weeks ago. There is obviously a lot of anger, apathy, maybe is the right word about like what's happening in Cryptoland. Like the vibes are down bad, as I could say.

Starting point is 00:18:00 But there really is a lot of things that are happening. New York Stock Exchange is getting involved in tokenized assets. assets, you're seeing a lot of the gigantic incumbent banks building their own and maybe enhancing the current rails and the networks that they run on. So if you fast forward five years where blockchains are powering a lot of the things behind the scenes and consumers don't really see them or interact with them, they're just there, how would the value accrue to investors? It could be awesome for end consumers, but grayscale as a crypto company, you want, you know, you have products and you want your investors to make money.

Starting point is 00:18:38 So how does the value accrue to the tokens that you offer to your investors? So a couple of things. I think on a token point specifically, we do generally see price appreciation in the token itself as the underlying technology is adopted. So if we go back to the hyperliquid example, if you look at the price of the hyperliquid token over the course of the weeks and months that these perpetual futures were getting a lot of activity in the news, there was a big spike in the price of hyperliquid the token. So I do think that the correlation generally follows, but now broadly, investors are also going to

Starting point is 00:19:11 benefit from the efficiencies that we're able to build with these infrastructure benefits. So this is less of a direct capture, but for example, if you bank on traditional rails and we are able to use stable coins or other digital native concepts in order to move cash around more efficiently, we are all also going to benefit from lower frictions, lower costs to implement and execute these daily activities that we engage in, and ultimately that should bring better value to us, the user of the end technology. Now, how do you capture that in a unique specific token? I do think that can be a challenge.

Starting point is 00:19:53 And so something that I personally like to look at is a crypto index that's able to capture the return of multiple tokens instead of. of trying to guess which one is going to be the one that really has the best capture of this overall improvement that we're building for the universe. So I personally think that crypto overall will benefit from this type of investment. It is hard to pick individual tokens, but that's why you can also lean on a digital native issuer like Grayscale, who's kind of doing that work for you by selecting which tokens we bring to market in ETP form. And you can always fall back on a crypto index ETF because it will capture a broad swath of the ecosystem, again, selected.

Starting point is 00:20:36 What's your index ETF? It's ticker GDLC, the grayscale coin desk crypto five. And we've measured that that actually gets investors about 90% of the returns of the crypto universe through that one ticker. How has everything weighted in there? Is it market cap or are you guys discretionary? It's market cap weighted. So it is heavily Bitcoin and Ethereum. But I think that that is, again, representative of the market cap weights and also will help an investor achieve the experience of the crypto market broadly with three tokens beyond Bitcoin and Ethereum majors making up that tail. So the other infrastructure play, I guess, is stablecoins that people are excited about.

Starting point is 00:21:15 Explain how what the idea there is and how stable coins can fit into the whole financial market ecosystem. Yeah, so I think stablecoins are a great illustration of where things could go and how quickly they could go there within the next few years. If you think about how markets were reacting to stable coins, which are, in my view, effectively tokenized dollars or tokenized fiat, just a couple years ago, people were not super excited about this. It seemed sort of boring from most of the traditional practitioners that I talked to.

Starting point is 00:21:45 Of course, more crypto-native users were more bought into it. But these days, you hear of big banks investing in ways that they can send collateral that way. They can move money around the bank using stable coins and so on and so forth. And it's moved from being a topic that was either kind of ho-hum for the traditional user base and exciting for crypto-native to being exciting for all. And when we think about that trajectory, I think we're kind of in that phase of a few years ago for tokenized equities and tokenized real-world assets, where a lot of traditional practitioners are saying, okay, we're talking about this, but where is the value add. And I think that we're really starting to see some of those elements come through,

Starting point is 00:22:28 much as we did for stable coins where it wasn't immediately clear, but we're now starting to reap the benefits. And so I think that we're going to see a similar path for tokenized equities, tokenized real world assets, where we start to really see the value coming through and we see exponential investment and buy into really implementing these as things that we do on a routine basis. Grayscale was famously involved early on the crypto allocation for regular investors. For people that didn't want to go to Coinbase or another platform and open the wall and go through all that whole thing, if they wanted crypto in the brokerage account, they bought GBTC. And because it functioned like a closed fund, because it was a closing fund,

Starting point is 00:23:15 it traded a big premium and there was a lot of conversation in the market around what would happen with the ETF and all that sort of stuff. Well, there's another player in town that is getting a lot of attention. And that is strategy. And Michael Saylor has been a vocal, maybe the vocal evangelist for Bitcoin. Sell your kidney if you have to, never sell your Bitcoin. He actually tweeted that. And so he created this digital asset treasury where the idea was he could buy Bitcoin faster than he can dilute the shareholders earning this Bitcoin yield and it worked really well on the way up. And it's not working so well on the way down to the point where he created another funding vehicle, a preferred stock stretch where he thought it was a cheaper

Starting point is 00:24:03 way of getting to the capital markets. And anyway, a lot of gobbly go. But now we're on the other side of that, and he actually needs to sell some Bitcoin to fund some of these dividends. You don't need to speak on behalf of the entire crypto community, but I'm curious to get your maybe anecdotal take on how people are responding to his involvement and how important he is, because a lot of people were saying he was the only buyer on the way up now that he's not buying. Forget about selling. I'm not saying that he's going to need to be liquidated or anything extreme like that, but there's just one less whale buyer in the market. Can Bitcoin rally with that? Maybe it's a question. Yeah, a couple thoughts. So I think ultimately what he has built has created more buzz around Bitcoin,

Starting point is 00:24:44 where we're talking about it right now. As a responsibly run strategy and a way that brings Bitcoin access to investors, I think that there's nothing wrong with it. It's just a different slaver of Bitcoin access with leverage and other features. Now, the fund did actually sell some Bitcoin last week. And I think oftentimes when we see Stelling, sometimes the market picks that up and has a number of different interpretations of it. Two things I would say on that topic. I think that they generated enough cash to pay their dividend for, I think, 17 months. So we view that as stability of their setup. I think that the selling of Bitcoin was a responsible move in that case. But from a supply demand perspective, of course, it does put more supply in the market. And as you alluded to,

Starting point is 00:25:33 if you're selling them, there's less demand for Bitcoin from that vehicle. Now, Bitcoin ETFs were also having a period of outflows at that time. I think in the month of June, they had maybe over a billion dollars in outflows from the products collectively. Of course, we don't love to see outflows, but we were pleased to see the, I would say, orderly nature of how the market consume that. So in addition to Bitcoin outflows and outflows from other products like digital asset treasuries, the market was really able to consume that in a very stable manner.

Starting point is 00:26:06 Now, our two products in the Bitcoin and Ethereum landscape are low-cost Bitcoin and Ethereum mini products, BTC and ETH, actually gathered assets during that phase. So we were quite pleased to see that although the overwhelming direction of travel was out of these products, we were actually still able to gain assets from what we believe to be long-term holders who are very compelled by the low fee of those products. So for investors who are really long hold, it appears that they are still getting involved in the space as we measure by assets into those two funds, even though there might be other reasons why less sticky holders are getting out of the funds. And that does create supply demand challenges, as you alluded to. But again, it was a very orderly period. And so I think that it speaks to the fact that all of these products have been able to weather that downturn. And of course, like we talked about earlier, it's always more exciting when things are. up and to the right, but there are going to be periods of time when things are not as rosy, and making sure that these products can function in both environments is very important.

Starting point is 00:27:13 I asked Michael a couple weeks ago kind of what happened to Ethereum, because I think the story three or four years ago, there was this idea that it's essentially like you're buying the internet in the early days, right? If you could have invested in the actual infrastructure of the internet, that would be like investing in Ethereum. And the whole idea of smart contracts, I think Ethereum to a lot of people almost made more sense than Bitcoin, right? Like, it seemed like the more intelligent version of Bitcoin. Now, Ethereum is struggling even more than Bitcoin now.

Starting point is 00:27:44 Why do you think that is? Do you think Ethereum is just kind of like the silver to Bitcoin's gold and that it's just more volatile? Like, why did some of the ideas behind Ethereum still not quite take hold yet, like you would have thought maybe five years ago? The way you described Ethereum is actually why I was, originally that was the first token that I bought for the same reasons that it had these programmable

Starting point is 00:28:06 elements. It's got the smart contract components. But I think that there had been some concerns about the long-term project plans for token, I would say for Ethereum specifically. And that's why it maybe lost some buy-in along the way. Now, over the ensuing months, we have seen that reverse and I do think that it is going to ultimately gain some of the exuberance that it had before. But it has been a period of challenge for the investor base because there have been some questions about what is its path forward. How is it going to operate in the coming months and years? And like any nascent technology, those things need to be sorted out for the investor to have confidence. But it is still a massive asset base. It is the second largest token. And, it is certainly something we consider to be a blue chip of crypto. Can you talk a little bit about like the, you talk about like the plans behind it in the community and like, how important is that?

Starting point is 00:29:05 Like they're, because there actually is a face of Ethereum, Vitali versus Bitcoin not really having someone. Like how important is that in terms of like what the code means going forward or whatever? Yeah. I liken it to ourselves as a crypto builder. You know, when you have clarity about the path forward,

Starting point is 00:29:24 you always have more confidence, you have more willingness to invest resources, and you are able to develop a more long-term plan. And so I think even if there is active conversation about how things are going to ultimately be structured, during that time when there are question marks and unknowns, a lot of people stay on the sidelines. And that's exactly how I think practitioners feel right now, especially as we look towards whether or not the Clarity Act will be passed. And I think you can liken that to how some investors were looking at the path forward for Ethereum during the time that there were a lot of question marks hanging around what was going to be the future. But I think we have moved past that to some extent or to a large extent. And so it's less of a relevant or less of a real-time concern. But there was a period of time when a lot of crypto-native investors were less excited about Ethereum, oftentimes for those types of reasons. Krista, for people that want to be greedy when others are fearful, how do they learn more about Grayscale?

Starting point is 00:30:27 So grayscale.com has a ton of resources. We actually just launched the stack, which our head of research posts on pretty frequently. And also the Grayscale Institute is a new educational resource that we rolled out with a lot of good videos and other opportunities to connect with us there. All right, perfect. Thank you very much for coming out today. We'll see you next time. Thanks so much. See ya.

Starting point is 00:30:49 Okay, thank you to Chris. Remember, check out Graceville. Check out the stack, their new research project. It's gracecale.com slash the hyphen stack. Email us, animal spirits at the compound news.com.

Animal Spirits Podcast - Talk Your Book: Is Crypto Dead?

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