Bankless - 160 - The Smart Money is Here with Eric Peters

Episode Date: March 6, 2023

Eric Peters operates one of the largest institutional crypto hedge funds in the world. What do the institutions think of our little crypto asset class? Are they running for the hills? ------ ✨ DEBRIEF | Unpacking the episode:  https://shows.banklesshq.com/p/debrief-eric-peters    ------ ✨ COLLECTIBLES | Collect this episode:  https://collectibles.bankless.com/mint  ------ Eric Peters is the Founder, CIO of One River Asset Management–his fund has made some of the largest institutional investments in crypto ever..including one purchase of over $600 million in Bitcoin and Ethereum. When we think institutional crypto, we think Eric Peters.  His first appearance on Bankless was in October 2021…we brought him back to catch us up on the current institutional thesis for crypto. ------ 📣 RhinoFi | Makes DeFi Frictionless  https://bankless.cc/rhino   ------ 🚀 JOIN BANKLESS PREMIUM:  https://newsletter.banklesshq.com/subscribe  ------ BANKLESS SPONSOR TOOLS:  🐙KRAKEN | MOST-TRUSTED CRYPTO EXCHANGE https://bankless.cc/kraken  🦊METAMASK LEARN | HELPFUL WEB3 RESOURCE https://bankless.cc/MetaMask  ⚖️ ARBITRUM | SCALING ETHEREUM https://bankless.cc/Arbitrum  👻 PHANTOM | #1 SOLANA WALLET https://bankless.cc/phantom-waitlist  ------ Topics Covered 0:00 Intro 9:51 Still Bullish? 16:42 Was FTX Surprising? Institutions Reaction 25:14 FTX Red Flags 33:00 3 Arrows Capital 41:40 Philosophy of Investment Decisions  47:36 What Should Regulators Do? 58:20 Was Crypto 2022 Worth It?  1:04:30 Ego 1:09:54 Institutional Exposure to Crypto 1:18:40 Reports  1:24:04 Institutional Exposure to Crypto 1:30:05 2023 Macro Outlook 1:37:22 A Decade Later 1:40:37 Closing & Disclaimers ------ Resources: Eric Peters https://www.linkedin.com/in/ericpetersoneriver/  Eric’s 1st Appearance on Bankless https://youtu.be/NMPiGjxdH0E   One River Digital Assets Research https://www.oneriveram.com/research/digital-daily  ----- Not financial or tax advice. This channel is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. This video is not tax advice. Talk to your accountant. Do your own research. Disclosure. From time-to-time I may add links in this newsletter to products I use. I may receive commission if you make a purchase through one of these links. Additionally, the Bankless writers hold crypto assets. See our investment disclosures here: https://www.bankless.com/disclosures 

Your choice is I'm going to just sit here and try to work with the regulators to obstruct any innovation in the U.S. In which case, by the way, it gets pushed abroad and then the U.K. will do stuff in Canada and Switzerland and Dubai and everything. Or are you going to say, I got to start investing in this? And if you do invest in it, then you go to the regulators and go, we need some clarity because we're making big capital investments and we need to understand where you come out on this stuff. Welcome to Bankless, where we explore the frontier of Internet money and Internet finance. This is how to get started, how to get better, and how to front of you. run the opportunity. This is Ryan Sean Adams. I'm here with David Hoffman, and we're here to help you become more bankless. The institutions are still bullish. Notice the emphasis of the word

still. Eric Peters is our guest today. He operates one of the largest institutional crypto hedge funds in the world. Maybe an institutional hedge fund you haven't heard of because Eric Peters is not super loud on crypto, yet this is one of the biggest funds in its space. Our question to him today was, what do the institutions think of this crypto asset class, particularly after the crazy year 2022 we just had. Are they running for the hills? A few things to look out for. Number one, how did Eric avoid Luna and FDX? What does he think happened to three hours capital? Hedge fund that went completely bust? What smelled off to him about Sam Bankman-Fried? Number two, why Eric thinks shorting narcissism is actually the winning strategy, maybe the thing

people didn't do in 2022. Number three, regulation in the space. What should we do? What should the regulators do? How should we address this? And number four, Eric ends with this story about his fight with a bunch of CIO billionaires over dinner and what he told them about macro. David, there's some deep insights in this episode about investment, about crypto. Overall, it's pretty blown away with the way Eric and his fun have kind of grown in understanding of this asset class and of crypto. What were some of the things people should look for in this episode? I think the important thing to note the most is the difference in disposition between Eric as an investor, as an institutional investor, versus some of the gunsling in Wild West capital allocators that you find

in the crypto natives. There is a personality difference between these two types of archetypes, these two types of investors in crypto, because now they're in the same spot. Institutions are here. They've been here for a while. And Eric is an archetypes. of the institutional money allocator. And the disposition of these types of people are very different from the types of people that you see on crypto Twitter. Pay attention to those differences and how the word cadence comes up and these investment decisions. And I think really over time, the crypto asset industry will mature and start to look a little bit more like the institutional investors that we see today because the institutional investors of the Tradfi world,

they are built with guardrails, with rules, perhaps with more patience as to win to allocate capital. And I think as the crypto industry matures, it's going to start to look like that. And so as the crypto industry develops and matures, it's going to stop looking a lot less like the Wild West and start to look a little bit like what Eric is doing over at one river asset management. And so understanding these differences that is aught gap, I think is important. And Eric just gives age-old wisdom that's always going to be true, no matter what the asset class is or no matter what decade it is. And so understanding these perspectives of perhaps a more mature investment philosophy, I think is going to behoove you as an investor, even while we still remain on the frontier. It's also going to behoove you to stick around. After the episode, if you're a premium subscriber, tap into the debrief.

That is where David and I give our raw thoughts after the episode. Got a lot to talk to you about with respect to institutional investors and Eric's temperament. sorts of things. Also, of course, there are 100 editions of this episode that will be available on the day this episode is released. That is Monday. The minting starts at 12 p.m. Eastern time. So you can pick up an NFT copy of this episode as well. It's something that we started in 2023. Build your collection of bankless episodes. There'll be a link in the show notes for that too. Guys, we're going to go right to the episode with Eric. But before we do, we want to tell you about the sponsors that made this episode possible. In particular, we want to tell you about Cracken, which is our number one

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Bankless Nation, excited to introduce you to once again, Eric Peters. He's the founder, CIO of One River Asset Management. His fund has made some of the largest institutional investments in crypto ever. I'm talking hundreds of millions of dollars of purchases of Ethan Bitcoin. One I think was like 600 million. Something like that. Really big numbers. And when I think institutional crypto, when David I do, we always think of Eric. Last we chatted was October 2021. So a lot has happened since that time, Bankless Nation. So we brought Eric on to catch up about all things. Crypto. Simpler times back then. Simpler times. Eric, welcome back to bank lists. How are things in Greenwich? It's great to be back. And yeah, thanks for having me. I really enjoyed that first discussion that we had. And it seems like other people have as well. The Greenwich Fopat seems to have circled the world here. It seems to have lived in infamy. I can't seem to shake that one. But you know what? That was a great episode where I feel like you taught some of the crypto people about how institutions think. And I mean, we can't even pronounce the names of the cities where the largest hedge funds in the world are educated.

so it's clearly crypto-natives need to be educated. New bankless listeners, if you don't remember, our original episode in October 2021, I said something in the beginning to Eric, like, it's great to talk to you all the way in Greenwich, Connecticut. That is, of course, not how Greenwich is pronounced. And I since learned that.

I remember when you said that, it triggered an alarm bell in my head, but I'm like, oh, Ryan's pretty smart. He's probably what he's talking about. Ryan knows things. Yeah, no, it was a perfect metaphor Because I think I'm obviously, you know, many, many years older than you guys. But I think that our position of this industry really is kind of a bridge to more traditional

finance and crypto. And Grange is a pretty good place for, you know, for doing that. Yeah. It was the perfect intro. I was just trying to make an analogy in the intro, you know? Yeah. No, it was a great set. Perfect.

Classic. Yeah. Well, okay. Let's talk about what's happened since October 21. So that was a very heady time for crypto. Numbers had gone up quite a bit. let me just ask you your perspective on this. Of course, we're in a different market right now at the beginning of 2023. Are you still bullish on this investment class, Eric? Yeah, sure. Look, we've had a big

cycle and we've had the big down cycle. And I think, you know, when I think about markets just in general terms after having been a macro trader for a long, long time, I tend to think in terms of there's a certain cadence to markets, bull markets and bear markets. And when we last spoke, we were still very much in an aggressive bull market. We had not seen Fed tightening. We had not seen quantitative tightening. It was extremely unclear how committed the Fed would be to tightening financial conditions. You know, those were very heady days for this industry.

But what you saw, you saw a lot of the types of behaviors that you would tend to see in a, you know, a very aggressive bull market. And, you know, I think we, you know, touchwood, we have been. It's hard to say you're conservative if you've invested $600 million in Bitcoin, Eath, right? But I mean, we were broadly speaking, you know, relative to the industry. And then we've taken a pretty conservative stance there. And that has served us well in that we exited, you know, almost all of our risk in 21, that early risk, which was, you know, in return that capital. And so, you know, and then on this decline, I didn't expect it to be as deep as it was. But I didn't really expect the Fed to have moved as aggressively as it did.

either. And so I think now that, you know, we have seen really the largest or most aggressive, certainly one of the largest, most aggressive tightening cycles in U.S. monetary history. We've seen that over this past year. And, you know, there's another small rate hike today. And we're clearly kind of coming toward the end of this. There's not going to be another huge rate hike cycle. And so now we're, you know, we're in that phase where, you know, we can list all the different blowups that have happened. And you guys certainly have in your previous podcast. Those are all, you know, really well known. But I'd say, you know, even as recently as just the beginning of this year, we were at a place where I would have rated crypto as the top three most kind of bearish markets from a pure capitulation sentiment standpoint that I've seen in my career. And I've seen some I've seen some horrible washouts.

But, you know, there were people who actually who I respect who were saying Bitcoin could go negative. And, you know, like when you get to that stage, we're now at a place where cadence wise, you know, maybe some good things could happen. And I'm extremely bullish for the medium to long term. We'll talk about that, you know, I'm sure over the course of this time. But, you know, that's the kind of the long answer is, yes, you know, I'm grateful that we've kind of navigated this spare market. And it's really kind of a quasi-1929 market crash environment. I'm grateful as a firm and for our investors that we've kind of navigated well. We're also developing, you know, behind the scenes into it.

And I think that this next phase, I don't know when it will begin. And maybe it already has started, by the way. But I think this next phase will be very powerful because it actually will find have real institutional adoption, not just in the investments, but also kind of the technologies. I think that's a big deal. So many questions about this. One question, though, is the sentiment you said was one of the worst three that you've ever seen.

What are some of the others that are comparable to this? I should have added, I can't even remember the other top two. Like it was just, it literally was, you know, it was that bad. But if I were to think about certain times, like, for instance, I was trading in the 90s, I was trading the Deutsche Mark, which you guys don't even. I don't know, you don't even remember that there was one probably right. Pre-Euro, yeah, sure. Yeah, the Deutsche Mark versus the Italian lira, for instance.

And, you know, that was a time when it blew out of the exchange rate mechanism. That was when George Soros made his billion dollars in a day. You know, he was betting on sterling, but I was betting against Italy. And when it finally blew out, basically, the Italian lira got really weak. And you knew that that was going to create a ton of inflation. And, you know, there's a big translation economy like that. Once the currency gets really weak, the boni. yields jump. Everyone worries about a default. Inflation picks up, capital flees. And there was a general

sentiment that the Italian lira could literally just shift into absolute hyperinflation. And by the way, I was kind of caught up in that as well. I was in the right position. Had it not been for a really, you know, my boss who had great advice, we had a big client who actually wanted to sell just a ton of lira. And I could see that reflexive dynamic that could have just propelled it to just, you know, kind of becoming one of those stories of history where currency just goes to kind of zero. But, you know, I was kind of lucked out of getting out of that position with a client. But that's why it's like, it's just so clear of my memory of just how negative everyone was to the point that I was so negative that the only way I got out was because it was luck.

I mean, really. But, you know, there are times like that where, you know, in 08, you know, when the S&P got, or it was in 09, but when it got to 666 on the S&P, you know, it'd come off so far. but, you know, like people still thought, well, we don't know what's going on. It could go, you know, why couldn't it fall another 50% and why couldn't it fall another 25%? And so, you know, you have those types of markets where sentiment is just so horrific. And I think in crypto, I think the FTX thing was just catastrophic from a sentiment perspective. And so anyone who held any kind of hope that maybe this was primarily due to over leverage and primarily do to this tightening cycle, I think that they just capitulated post-FTCS are like, oh, my God,

and understandably, you know. Well, this is why so much we wanted to have you on, right? Because of this negative sentiment, Eric. And so, I mean, I think for some crypto natives that have been through previous cycles, I mean, like, you know, 2017, 2018-Barre cycle, Eath lost 95% of its value. That was pretty brutal. And there have been cycles before this, right, all the way back to, if you talk to people like Eric Voorhees, Mount Gawks, pretty brutal negative sentiment cycles.

But this one hit in kind of a different way, like a sentiment way. Part of the reason we wanted to catch up with you, Eric, is because I feel like this one hit maybe the institutional investor narrative in some specific way. And what I mean is this like this exchange, top three crypto exchange, sort of a multi-billion dollar, biggest billionaire in history under the age of 30 with a successful exchange and a fund. and some credibility. Parents at Stanford. Parents at Stanford and credibility in the halls of Congress and our governments. And I assume some credibility on Wall Street, this sorts of things. It turned out the whole thing was a fraud.

Like, you know, I know there's legal definition of the word fraud, but I think we can safely say, like, this whole thing was like a fraud. And crypto natives are used to these kind of, like, bare markets. But I was curious about the institutional sentiment. Like, are the institutions just look at it? at this and saying, my God, what a mess. These people are not professional. These people don't know what they're doing. We are getting the hell out of here. Has it scared the institutions away? And yeah, what was your reaction to all of this? Like, I was surprising for us. Was it surprising for

you? And what has been the blowback specifically for the institutional investors in crypto? So a few things. Was it surprising? I think the fact that FTCS was a fraud at the scale that it was. was surprising to me. But I think there were warning signs. And incidentally, we had no exposure to FTCS. We never did business with them. They didn't pass our operational due diligence for a variety reasons. We didn't invest in FTT. We excluded it from our index. Did you consider it? Yeah, because we had to. You know, when we build an index, it's built around a variety of objective rules. And so thankfully, those rules had ruled out both LUNA and FTT. And so, you know, I think that they're, so I didn't know that FDX was a fraud. I found a number of things really

interesting, you know, in a conference shortly before it happened. I knew that they were trying to raise a billion dollars. And yet, you know, Sam was speaking publicly that he was intending to potentially give a billion dollars to politicians over the next cycle. And he explained that he was looking to raise a billion dollars because he was going to do big acquisitions, which, you know, kind of coyly hinted could be something like Coinbase, which I thought was, you know, lacked any kind of credibility whatsoever. And so, you know, I think that, like, I don't really know Silicon Valley, but I know that some young people go to Silicon Valley and they make extraordinary amounts of money in a very short period of time if they built an app or a firm or a Facebook or this or that.

But I do know finance very well. And I haven't seen a 29-year-old make the kind of money that he supposedly had. But, you know, my view was that's just not a firm that we need to be associated with because I just don't understand it. You know, I'm not going to suggest that it's a fraud or he's doing anything illegal or any. I just didn't understand it. So something smelled off to you. Well, it is. I mean, you just, you know, I'd love you to list the top, you know, five guys or one guy in finance who's made, you know, whatever it was, $15 or $20 billion by the time he's 29. You're like there isn't a, it's not like there's a long list. There just is no, there's no, it's just to find that. So I think institutions, by the way, were broadly speaking shocked. I was very

surprised. It made sense to me that something hadn't been right. That made sense. But I thought it probably was something else as opposed to just a fraud. I think institutions, you know, it was deeply unsettling to them. Obviously, there had been a bunch of venture capital investors who had made significant commitments and that's got to be unsettling. It's not necessarily a strong indictment against them. I don't really know venture investing. So my understanding is, you know, you need to spread investments around. And if basically if everything that, if all of your due diligence was perfectly knowable, there would be no opportunity.

So the question is, you know, kind of what do you give a pass to? And so anyway, I think institutions just across the board were pretty unsettled by that. Definitely the fact that you'd met with so many politicians, regulators, et cetera, was unsettling. He's spoken at every conference that you could imagine. So, you know, it's such a high profile that it's. it is unsettling. That said, you know, from our perspective, we have not suffered from lack of inquiry about this space. Because when you think about an institution, it's like, okay, just think about kind of the game theory around this, which is not what investing is entirely about. But there's

an element to that, right? So let's say the firm, the institution that was deeply, deeply skeptical at the highest level about crypto. And then this happens, it's a high likelihood that you're just going to go, see, I told you so, this was just all a Ponzi and fraud and everything. And you're just not going to do anything. That's probably what happens to that institution. They're not that many institutions where there was such high conviction at the top. Most of them were more nuanced. So you probably have a bunch of young people in the investment committee who said, look, I think there are a lot of really interesting applications for these technologies. I think it's the future. I think we don't need to make a 10% commitment to it, but we should probably have 50 basis points or 100 basis points or 150.

And so we should do that. And so let's say you're that institution. And the senior people are like, it just feels very heady in 2021. And I think we're going to have a rate hike cycle. But let's keep doing the work, which they did. And now you get to 2022 or 2023 and the market's crashed. Okay. Now you can do one of two things.

You can say, you know what? We were a little skeptical. And now we know that this is worthless. And so now we're not going to touch it. there's significant risk for an investor because if you think that this has the potential to be part of the future of finance, which I think many institutions do, they don't know exactly how it will play. And you were fortunate enough to miss, which most of the big allocators did, by the way. Most hedge funds were involved. Most of the allocators were not, certainly not heavily invested.

And you miss that huge decline. And then you don't do anything. There's career risk there, too, by the way, because your job is. is to, you know, identify interesting opportunities, identify value, not do stupid things. But if you've bought after one of the greatest frauds in, you know, the last 10, 20 years, it's probably not, you know, and there's some basis for the investment that you've done a lot of work on which a lot of them have, then they're going to come. So we're seeing institutions who will be making allocations in this space to us this year.

And I'm really excited about it. And they're, you know, they're looking at all sorts of things, by the way. So, yeah, it's been a wild cycle to. participate in and be in a sense in the center of, but, you know, we're going to come out the other side. It's interesting to hear this perspective because it really illustrates, you use the word cadence earlier, a different cadence in the way that institutions make their decisions, do their research, and then make allocations. And I want to go back and ask you about, you said FTT, FTCX, and Luna as well was evaluated and just did not pass the bar, so there was

no allocation to it. One of the big stories of FTX was that it was the hot investment for so many VCs. Like I remember I've seen a few VC decks, all of them trying to like, you know, boast their returns because that's what they do. That's the game. And so many of them had FtX prior to the blowup, had FtX as like, look at the amazing investment we made. And they're turned into this like mimetic intoxication about Luna 2, Terra Luna 2, as well as FTX. It was the thing. It had this gravitational pull to so many in the crypto industry and both turned out to be just terrible mistakes in hindsight. But something about your vetting process at one river looked at Luna, looked at FTX, looked at FTT,

and said there's too many unknowns here. There's too many red flags. What's different about your vetting process and the cadence set to which an institution allocates a crypto? Why did that show up on your guys' radar as red flags when so many in the crypto industry fell for it. I really don't want to characterize this as like as we're really smart and everyone else fell for something that was fraudulent or because that's not the case. I think we're just very conservative in how we approach these things. There's certain general principles that I think

apply over time. The problem is they're hard to implement because at a certain part of that market cadence, there are behaviors and investments that are kind of difficult to resist. So I'll give you an example that in a minute. But specifically in the case of Luna and FTT, there are a number of quantitative screens that we run on all the assets that we put into our index. And for instance, something that it's not that it's a flag, it wasn't flagging bad actor activity or anything. It just was the free float was such that we weren't comfortable with it. You know, it's like if, you know, over time, if I invest in something, if over time, you know, and I try to think about things. And I try to think about things if I repeated this behavior 10 times or 100 times, would I make money? Would I not make money?

The reality is, even in the worst, like literally the worst investment, if you did that 100 times, there probably would be times that you might make some money for a period of time. And maybe you make a lot of money. But, you know, try to think about sample sets. So if you're going to be buying assets where someone owns a ton of them and they're not, you know, freely traded, and they can make the decision because they had too much leverage in their business or they just wanted to cash out or there was some type of regulatory shift that took place or there was a bad actor, which is what we saw. You know, when there's highly, highly concentrated ownership, you know, there are going to be

a lot of times where you're going to lose a lot of money, not a little bit of money. You're going to lose a lot of money. So that, you know, from a quantitative screen standpoint, there was that. I think with Luna, you know, Marcel Kazimovich, who's our. head of research and deputy CIO for our digital business is, you know, certainly one of the top few minds in crypto. You know, he had done a lot of work on Luna and had, you know, we didn't want to come out and aggressively say this thing could unwind, but we did publish something that implied that there are scenarios where structurally it wasn't, you know, it hadn't passed some

magical point where it had no downside. You know, there was a reflexive downside risk. in the construction of that. And obviously, that's what ended up happening. Didn't mean that it had to happen, by the way. It just meant that it was vulnerable to that happening. And if you think in probabilities, then you just, if it had screened, by the way, into our index, I think we would have had to take a serious look at that because I like to be on the right side of potential convexity and reflexivity in markets.

And I definitely don't want to be the wrong way around in that. So anyway, that was that. When you were talking about the cadence of behaviors in these markets, and I think it was a difficult thing for us. I'm proud that we resisted the temptation, but the defy yields that were available. So one of our products is a fund called digital income. And when we were all last speaking, I think that the yields available for over collateralized lending in this space, meaning, you know, you give me $200 million, a Bitcoin, I lend you $100 million. You park that in a third party custodian. And if the value of that collateral drops from 200 to 150, you either have to

top it up or I have the right to start liquidating that. In old school parlance, you know, traditional finance, that would just be a really boring tri-party repo arrangement. And for that, we were paid roughly a yield of 5 to 8%. Okay. Boring, but good entry point for investors who want to understand this space, you know, by the way, when interest interest is zero, five to 8% is great. The issue was, you know, you go to Celsius or wherever, and it's 20%. And we looked at that and we just said, look, it sounds, well, optically, that's a really high interest rate in a zero rate world, kind of like my comments about be skeptical of, you know, people who make money too quickly or things that appear to be too good to be true.

We looked at that and concluded that while those rates optically were high, they in no way compensated for the potential risk of investors in defy, as it was consistent. instructed. And so we just didn't do it. But, you know, when you're going and sitting in front of large institutional allocators and they go, so what do you think is interesting for me to do to kind of get started? We're like, well, we think digital income is pretty interesting. Like, the guys who just came in here are offering 20 percent yields and you're 5 to 8 percent. And you just, you know, naturally you, it's a lot easier to sound smart now. Like, you want to sound smart. And, you know, they're business pressures on you. But we did resist that temptation.

But I think those are, you know, that is how you build institutional credibility over a long period of time. That is how you build a track record. And sometimes you just have to walk away and say no. And recognizing that you have to take risk to make money. But anyway, there were other examples in crypto that were like that where it was just like you got sucked in or many people got sucked in who otherwise would have been more sober had it not been this kind of new technology. Sometimes you just have to walk away. Sometimes you just have to not get greedy about this. I want to ask you about another group from, you know,

our cast of characters in 2022 and get just your opinion on this. Three Arrows Capital, hedge fund. You guys are a hedge fund. You've been around hedge funds for a very long time. What happened there? What's your analysis of what went wrong at Three Arrow's Capital? When you look at that, do you see just a bunch of kids run money when, you know, they shouldn't have taking unnecessary risks.

Was there something else at play here? All right. Guys, I'm not agist, okay? So I'm not going to say it's a bunch of kids. And hopefully you're not going to say, you call me an old man or something. We honestly, so here's one impression I have coming out of this. Speaking of the kind of, it's not an ageist thing.

It's just like sometimes I feel like crypto people are too naive. and we benefit from wisdom that can be offered by those with more experience. But sometimes people in crypto are very quick to say, no, this time it's different. Your rules don't apply. And sometimes they're right. And sometimes they're very, very wrong. So please bestow your wisdom on us. I mean, have you ever seen this before?

What do you think went wrong with three errors capital? Okay. So I'll share with you my framework. for how I think about at the metal level most of these issues. And by the way, probably applies to FDX as well. You know, like certain over leveraged lossmaking enterprises or trades, if you have the wrong leadership that doesn't own up to their mistakes, it can lead to a fraud. It didn't necessarily have to start at a fraud. It could lead to a fraud because, you know, humans have big egos and we're frail and we're, you know, we have so many weaknesses that don't blend well with leverage and

losses and public humiliation. So, but I think the framework to think about this actually comes from Jay Clayton, who leads our advisory council. And he's written about this. Jay Clayton, former chair of the SEC. Yeah, correct. Yeah. Yeah. So Jay's fantastic. And so one of the things that, and he's written about this numerous times in his opinion pieces in the Wall Street Journal and has spoken about it, is that crypto is, a very, very unique financial innovation in that it was a retail first financial innovation that has reluctantly been accepted, maybe not embraced, but just kind of acknowledge or accepted by institutions. Reluctantly. Yeah. Right. So that's like a simple statement,

but the consequences are profound and I'll kind of circle back to how it affects three arrows or something. So I think what happened with crypto is that, you know, Bitcoin appeared, however you want to characterize it. It appeared. It was retail only. It kind of grew and grew. There are plenty of good actors and some bad actors early on. That ratio has obviously changed dramatically so that they're, you know, very small tale of, they're more bad actors in cash globally than there are in crypto, I'd say, albeit crypto gets, you know, a bad name for this. But at any rate, so that was kind of the progression. And what happened was, I think the institutions, they looked at the bad actors and something that objectively speaking was intended to kind of disrupt their business. And they just

said, stay away, stay away, stay away. We're not going to focus on it. That allowed the regulators to not have to focus on it because they didn't even really know who to focus on to regulate. And it was sufficiently small that crypto was just able to go through a variety of different cycles without a really strong regulatory focus and certainly without a regulatory foundation, right? And so when we got into this last cycle, just on a total, you know, assets, the market cap of crypto got very, very big, right? And so it dwarfed anything previously. And now it forced institutions to have to take it seriously.

They had spent enough time. There were enough people within their organizations that they started doing the work to understand how could this really affect our business? Should we be investing in it? Not just the coins, but the technologies. All of this stuff happened. But what was lacking was any kind of real regulatory foundation that would have happened if, for instance, financial innovation like CDOs, you know, the kind of the, all these bonds that have been packaged, these mortgages that have been packaged in 05, 06, 07, 08, and then kind of blew up the financial world, as bad as those were in the financial industry, they still had to be traded.

in regulated entities, there still were some sane people who had been around the block a number of times. And it still blew up, right? But now if you think about what happened in crypto with, say, three arrows or any of these other blowups, there were no regulators. Most of the people who were prominent did not have a lot of experience at that level of market cap with that kind of leverage. And there always are going to be some people who just absolutely swing for the fences. So I don't know the three arrows guys well enough. to have an opinion about why they made decisions they did. But I think it's, you would expect in a essentially a non-regulated market with people

who didn't have decades of financial experience without the kind of the checks and balances that happen in a lot of these large banks, organizations, hedge funds, etc. You would expect that there are going to be some really big blowups. And it's just the market cap got so big that when they happened, they appeared catastrophic. I think if you had taken those CDOs, right, if you had taken those CDOs, right, if you had taken those kind of package mortgage bonds and all that stuff, if that had started in the retail market in 05, 06 or something that hadn't been regulated, there would have been catastrophic.

I mean, maybe the bulbs wouldn't have been as big as had it been in retail relative to the Wall Street, but I think that they would have. I mean, just because there's just no, there's no infrastructure for checks and balances. So again, like, who am I to say someone's made poor decisions? I mean, clearly three arrows did. I just don't know what the motivation was, but it doesn't surprise me that you had these outcomes at all. Right. And we often say in the crypto world, we're speed running the history of money and finance. And one of the things that we're learning here is that human psyche is hard to control,

especially as it relates to markets that move very fast. Like, one of the crazy things about crypto is that we go through an entire business cycle inside of four years. We see the highest highs and the lowest lows inside of four years. And human emotions just can't really deal with that kind of speeds. And since crypto's so young, we don't really have the guardrails up that are in the traditional finance world that came from raw experience that when you don't have these guardrails up, you let emotions take control. So I do definitely take the point that like three hours capital started off as a totally legitimate prop trading desk. It's like work in the GBTC trade, very legitimate. And over time, like risk off trade. And same thing with Alameda research actually,

started off with these very reasonable trades that took on more and more and more risk because things always would go up in the first half of the blow market and there were no guardrails to manage human expectations. I think that's a pretty safe claim to make is that like, well, we just haven't learned how to self-manage ourselves. And that's why our institutions aren't that big because they keep on blowing up because they don't have guardrails yet. And Eric, there's a philosophic, maybe philosophical is not the right word,

but just like when I was asking you about FTT and Luna and FTCS, you gave your thought process and it was very much an attitude of this doesn't pass the bar. This doesn't pass. And it's more of a conservative approach. And correct me if I'm wrong, but it's like you really don't want to be wrong as an institutional money manager. Whereas like perhaps if I'm trying to put myself into the three-house capital shoes, they were really trying to be right. They made very specific targeted investments and really wanted to be right. They seem to not want to miss anything.

Yes, exactly. Yeah. And so I think perhaps what it means to be an institution with guardrails up and processes and rules, it's more of an inversion to unknowns and really not wanting to be wrong, whereas perhaps the more immature industry, the more immature investors, like, oh, I have to be right. I have to find the next alpha. Can you just see if I'm tapping into anything here? Like, can you elaborate on this kind of philosophy of how you make investment decisions? Yeah. Some of it has to do with time horizon. So, you know, if you have a short enough time horizon, you can convince yourself even the most speculative investment or even a fraud. If you could still be something where you could make money, if you've identified the market setup, the right momentum, the this, that, that, you know, whatever. If you have a longer term time horizon, which we tend to do, just not to say that we can't get into a trade and then reassess it because, you know, Powell makes a speech. you go, I think our premise was wrong and then we get out of it. But our time horizon tends to be longer term. And when we are doing something like constructing an index, our approaches, we want to construct an institutional index, which will serve as a benchmark for the institutions that we think are going to come into this industry. And it's important that, you know, many respects, we kind of honor the way that they would think about it, which is the way we think about it, which is to do

things like avoid assets where there's incredibly concentrated ownership. So it's not that we're trying to avoid being wrong per se. It's, I think that we're trying, it's a good question. It's a difficult one to answer. But I think to answer it, I would say that when you invest and trade for, I don't know, what am I? I'm 34 years at this stage. You see so many things that are good and you feel that euphoria. Like I described that Italian lira trade that I had. I don't know. I remember what it was like for my boss to pull me in office and say, we have our largest client who wants to sell the literally almost to the, you know, the million lira or whatever that you have and you can get out. And I was like, if they want to sell, I want to sell more because it's

like if like if that's what's happening, it's going down. Like I, I am self-aware enough to remember that it was euphoric to make that much money at such a young age. You know, I was in my 20s at the time. And I wasn't making, I wasn't making Sam Bankman free money. But like, you know, for me, that was a really euphoric period. And I remember how wrong I was and how those instincts were, you know, were wrong. But you can't read that in a book. If you experience those things and those emotions and temptations in yourself and you can

check yourself on that and you can somehow kind of navigate this. very difficult pursuit for a lot of years, there are certain principles that kind of bubble up. And I've mentioned some of them today. Like, if you see people who make way too much money at a really young age, you probably don't need to be doing a lot of business with them. It's a flag. It doesn't mean that they're a bad person. It's just there are a lot of things to do in the world.

You don't have to do everything in the world. You just have to try to do the things where you see the setup in such a way that it's really smart. a lot of crypto assets that you can buy. You don't need to buy the ones where there's incredibly tight concentrated ownership, which could be liquidated due to over leverage or liquidated due to bad activity or just because they want to. You don't have to. And so if you kind of line all those up and those are just like the filters that become, I don't say second nature, but you just know you're always going to run that through that filter. It's going to help you. And so, you know,

I don't know that that's wisdom. It's just, it's experience. By the way, it's experience for people who have really been beaten up too. You don't get to go through decades of this without having really bad experiences yourself, you know, and a lot of soul searching. But, you know, you're awarded in the sense that it improves your judgment if you're introspective and you're honest with yourself. Yeah, I totally agree. It's almost a privilege that crypto runs on such short boom, bust cycles because those that stay in crypto get taught so many lessons, lessons that sometimes I think in traditional finance really take decades to prove out. Like we get hit with it and sometimes we get hit with it young.

And that is an advantage in our investment career. This is how we level up through this kind of hard-fought knowledge and experience in the trenches. Eric, I want to go back to you something you were saying earlier about part of the nature of this crypto thing is that it's a retail phenomenon. And so regulators have been slow on the scene. One observation that I have, and I don't know if you agree with it. this or not is one of the things that held up pretty strong in crypto last year was actually defy. And I would say the reason defy held up strong is because it is regulated. And that might be counterintuitive to people. What I mean by that is defy is very much transparent and regulated

in code. A cool thing about AVE and compound is you can right-click and see all of the assets that back those particular positions. You couldn't do that in a Celsius. You couldn't do that in a block fly. It was a complete black box. One of the approaches I wish regulators would take in the space is to recognize that regulation can mean different things in this crypto space than it means in traditional markets. Regulation can mean regulation by transparent, auditable code that is publicly available. And so when regulators touch these markets, they need to take that into account. and they need to touch things in defy a little bit differently than in centralized finance. One of the takes David and I often repeat is, if it is centralized, then it should be regulated

by regulators, right? And I do think that is something that we missed, of course, on the CFI side of things, particularly with these CFI lending blowups. Let me ask you this. I know you're also plugged into this world. Jay Clayton is one of your advisors on the team, I believe. What are regulators doing about this? And I guess what's your take on this? What should regulators be doing? How should they address crypto markets? What would you like to see in the U.S.? So I'll borrow from Jay here in terms of a piece that he penned with the former chairman of the CFTC as well. So, you know, kind of have former SEC and CFTC chairman jointly published something. I can send you guys the link to it in the Wall Street Journal. Is this Chris John Carlo, the former CFTC? No, Tim Mossad.

Got it. Got it. And their prescription for what should be done right now is to, number one, just introduce sensible set standards. So provide guidance to centralized exchanges at a minimum for sensible customer protections. So, you know, like not commingling assets. Like all the, all the things that are just, you know, not too much leverage. Like don't run a fund alongside your exchange. No fraud. Right. Don't have inherent conflicts of interest. You know, set right next to one another. So those are all things that I think everyone could agree on. And I think everyone on certainly the three of us could agree, I think, on all those things, because they're just like, obviously that should be the case. The issue, I think, is that because that guidance hasn't been provided, there are plenty of actors, which include some bad actors, or certainly have, and a lot of them are gone, who just took the view that's like, well, there's no guidance, so I'm just not going to do anything. And I think the advantage of providing some guidance around saying, like, look, we're not sure how we're going to regulate everyone right now, but there's certain things that are sensible

for your business you should think about. So one of them is articulating kind of sensible customer protections for retail. That would apply to institutions as well, by the way. The other thing is really provide guidance around stable coin. Stablecoin is kind of the, you know, killer app in terms of this whole space. And I think that it's likely that private sector dollar stable coin becomes one of the most important innovations in global finance over the next 20, 30 years. By the way, are you surprised people in government don't actually see this, that this is actually the way to export the U.S. dollar? What's the U.S.'s plan, you know, to combat and to space race China's central bank digital currency? There's much more tightly controlled. Yeah, I think that

plenty of politicians do. And I think this FTC's debacle, it was a setback in terms of of timing, but I think we're going to get there. I think that there are plenty of politicians and regulators who we speak with, who they understand. And so I think if you do those two things, if you provide guidance around stable coin, you introduce standards for protection of consumers, and then you try to, this is what Jay advocates, you try to creatively think about how to apply that to defy, because it's not necessarily obvious from a regulator's perspective. Then you've gone a long way in terms of providing enough clarity to the good entrepreneurs and the good actors who say, okay, well, listen, I get it. So I'm not just going to get a random enforcement action.

I'm not suggesting that all that I think a lot of enforcement actions are not random. But you can say, if the SEC shows up, if the CFDC shows up, and I've done all of these things that they've provided guidance on well, I'm sure it's going to be a pretty good conversation to the point where it won't be a very long conversation, right? And the issue is there's cost to compliance there, which just means you're going to weed out the dodgy bad actors that never intended to comply and never intended to kind of really do the right thing or wanted to cut corners. So I think that that's Jay's what he's advocating and that over time, you know, as these assets mature and banks begin to embed them into their, you know, their trading and settlement processes and all of this stuff, like we'll get to a place where we'll buy time for healthy regulation and clarity. So I think that that's probably where we go. Unfortunately, we got to step back a little bit here. Is that the thing that's holding institutional adoption back still? Lack of regulatory clarity. So if we had this regulatory clarity, would you expect kind of a flood of institutional interest into this asset class?

I think it would accelerate, but I don't think it would be a flood. I mean, the institutions that we're talking to are kind of not U.S. taxpayers. They're pensions, endowments. So, you know, they're investing offshore. You know, they're very sophisticated investors. And their view, is that we don't know where this is all going. It's clearly not going away entirely. And that could mean a whole range of different financial outcomes in terms of what these assets are worth. And they're even open to maybe the assets aren't actually worth that much money, but the technologies will be. And so we need to kind of make sure that we understand these technologies. We have some position in these assets. We may have some position in trading strategies, some position in venture capital in this space. And if we do that, we're going to learn a heck of a lot. And we're not going to just be on the sidelines if this becomes what it could become. Right. So like if you look at Kathy Wood, right? Now, if you look at

her work, I mean, she has projections for massive levels of adoption, for huge market cap, for smart contracts annually producing, you know, God only knows how many billions of dollars in revenue, et cetera. And by the way, not far off, like 2030. Now, she's right or she's wrong. But if you're sitting on a huge endowment, are you really going to have literally no exposure to that space? It's not it. So I think that investors believe, here's what I, is this kind of safe thing to say, large institutional investors believe as a whole that if these assets become adopted by the large financial players in the U.S. and internationally, then what will naturally follow is some type of clear regulatory framework for them. That will happen because the pressure

will be coming from incumbents who just say, look, we need guidance around here. Otherwise, Coinbase is going to completely destroy our business. You know, if you're one of these custodians and like think about this world, which I think about a lot, by the way, think about a world where, you know, Bank of New York and State Street and all these custodians, they're great counterparties. We work with them in our business. They're wonderful people. They're huge legacy players. And imagine that Larry Fink in his call for every bond and every equity to ultimately get tokenized.

Okay, so you got the guy who's running BlackRock, the largest asset management in the world saying, that's what's going to happen. And you're one of these custodians. Are you really going to just let Coinbase absolutely completely dominate your world? By the way, Coinbase might dominate the world anyway because they're so far behind. But you literally, your choice is I'm going to just sit here and try to. to work with the regulators to obstruct any innovation in the U.S., in which case, by the way, it gets pushed abroad, and then the UK will do stuff in Canada and Switzerland and Dubai and everything. Or are you going to say, I got to start investing in this?

And if you do invest in it, then you go to the regulators and go, we need some clarity because we're making big capital investments and we need to understand where you come out on this stuff. So I think that'll be that mechanism. Well, that is the game theory of it, right? And I think you'll have some banks that try to stop it. But then other banks that break rank, I mean, Fidelity is doing incredible things in cryptocurrency. and they have for a very long time. If they break rank, then they certainly are whispering in the regulators' ears to push this forward. And so it becomes game theoretically an unsustainable position

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This may seem glib to say, but I feel like 2022 was good for crypto. It was actually healthy for crypto. And I just, the way I justify saying something like that, Eric, is the counterfactual of like, what would have happened if crypto got to $10 trillion asset class last cycle? Which, look, it got to three. I mean, could have happened. What would have happened if FTX had grown, you know, 5x, 10x larger? SBF had grown 5x more influential in Congress.

Look, he was passing, working on crypto legislation. We already know there were tens of millions, hundreds of millions of dollars in donations going to our Congress. What would have happened if Luna got that much bigger and then blew up? The counterfactual is actually scarier to me than what happened in 2022. And I wonder if that instinct is correct, given what you've seen in markets. Like, is it a good thing that we went through this? I guess it's a great question to ask. And I think, I think your counterfactual would have been.

been very scary to have had crypto create real financial stability issues for the global economy would have been devastating, I think, for crypto. And I think as it stands, there were some deep embarrassments and humiliations and everything else, but it didn't infect the broader economy and it didn't infect the financial system. And that's really important. And I think what it leads to is the regulators who have been kind of slow peddling this, they go, okay, this will be important to kind of continue to keep crypto separated from the main financial system. And I think that that actually, ironically, is a good thing for crypto because it's going to keep the traditional financial players for the next couple, few years at arm's length, more or less.

And it allow the younger, more, I think, I hate knocking anyway. The younger, more creative, now I'm being ages. the younger, more creative, you know, entrepreneurally minded people, too. I mean, these technology are so exciting. So I think a lot of good things will happen with that separation. That separation will make certain things more difficult, but I think it's better for the overall industry.

And I'd actually like to circle back just really quickly to something you said earlier, which is that, you know, maybe it's good that these cycles happen so fast because, you know, younger people or just people involved in these can really experience some of those trading lessons. And, you know, I obviously am biased because I've chosen this path in my career. And, you know, I often try to dissuade people from doing it just because I know how hard it is. And the only people really should do it are the people who I just have this dying desire to put themselves at risk, try to make reason, judgments, et cetera, et cetera. and the you know many if not most of the most introspective people who over time do not become egomaniacs

but you know get to know themselves well have done it because they've chosen a pursuit that really challenges them and it forces them to have to admit error it forces them to have to confront you know mistakes of greed or fear or anything like that and trading is an incredible venue for that And so if someone really wants to do it, then they should. And I think even of those people, not that many will be really successful over their careers. But even if they don't, I think they'll, you learn a lot more about yourself and certain life lessons that apply in all areas of your life through that pursuit and say, not to pick on being a lawyer, but like being a lawyer or, you know, being someone in a job where it's rare that you have to confront the fact that you really got something wrong. wrong. And you have to, you know, like, cut your losses, deal with that, deal with humiliation, turn to your spouse or your, you know, significant other and just like,

I really screwed up. And I think those are, as someone who thinks life is about learning a lot of these lessons. I think this is a great area to do that. And so I was happy that you said that I wanted to kind of swing back to that. Oh, look, Eric, this is what I love most about kind of investing. You just made the case for being an investor, right? Which is like, it is one of the only fields, maybe besides science. I don't want to put investing in kind of the level of science. Science is better than investing. Let me just say that. But there's an objective truth about it. Like, not many other fields do you get to find out whether you're right or wrong, like numerically. And the stakes are very, very high, aren't they? And I just, you know, your story earlier about you being

in kind of your 20s and the headiness of some of these trades and, you know, making a lot of money for yourself at that age and how crazy that is. Now imagine, too, what we see so often in crypto is you've got that and you've got kind of the money aspect and it's maybe even amplified to how much you can make in a very short period of time. And then you also have this like social media effect where you can actually be like a traitor god influencer. And this is what we saw. It's like fund managers like our friends with Piero's Capital being put on a pedestal.

And like I know just from being on Twitter, the way it can kind of warp your ego, right, and make you think things about yourself, either in the positive or negative, that aren't objective reality? Like, that's a double trip. Not only do you have the money, you got this whole, like, fame, ego, warp,

reality distortion field that's going on in social media. And I'm like, wow, that is a, you know, no wonder we have kind of the SBFs of the world. And what's so interesting to me is Eric, he got off on a bond, and what's the first thing he does?

He starts tweeting again. He opens up a substack, Right. It's just like there's something, I'm not a psychologist, but there's something in this that is also kind of amplifying the effects of some of these things. I think it's all tied with ego. Yeah, one of our investors and actually an investor with whom we made our first investments in crypto, his theme for last year was, which is just, he's a real iconoclast, one of the greatest investors I've had the pleasure to get really close with an awesome human being as well. But his theme for last year was basically short ego, you know.

I think in his investor letter, it was be short narcissism, you know, is what it was. That would have made a lot of money in 2022. Yeah. Yeah. And they, you know, I mean, they're a real money firm. And they, you know, they produce positive returns last year when everyone else is down a lot of money. So, you know, very impressive performance. But yeah, you know, that's, you're exactly right, you know.

Going back to that theme we talked about earlier where started in retail and then you just, you know, you don't have guardrails. You got a lot of young people. You got a lot of narcissism. And it's almost like unfair. Like how can someone who's, how would I've handled myself in my 20s? That Italy, you know, had someone who was a lot wiser who just was like, by the way, he was probably bearish on Italy too, but he could feel it himself. He's like, when I get this bearish, I got to, I just got to cover.

You know, I can come up with 20 reasons. And by the way, my boss just isn't a side. He was awesome. He was notorious for, you know, he'd come to the death. and he'd say, you know, I'm going to go buy a ton of dollar versus the yen or sell it or whatever. And I'm like, why are you doing that? He's like, look at this, you know, look at this report. And he'd set, you know, put it on my desk and it was two years old. But yeah, I had really good instincts, you know. So anyway.

Eric, I want to pivot the conversation a little bit back to a perspective that I think only you or a few people like you could have, which is institutional allocation, institutional exposure to the crypto world. There's what I'll call blunt. exposure, which is just perhaps buying ether, Bitcoin, just the most obvious things that are smart things to do, at least that's what I think, Bitcoin and Ether, but I'll be it blunt. And I'll think perhaps that's where institutions start. They'll dip their toe in the waters. Maybe there's even easier ways to get started with that. But that's kind of how we talked about when we interviewed you last October 2021. That was one of the first moves, you know, buying the blue chips.

I'm interested in to hear how this perhaps has developed, perhaps for one river, but also what you hear with other institutional strategies to get exposure to crypto. How has that developed over the last year? Has it gotten more precise? Has strategies gotten more specific? What's the progression of institutional exposure to the crypto world so far? Yeah, because one thing Dave and I noticed when we were thinking about talking to you today, Eric, is we went over to the One River website under a section you have called Research with the digital asset section and a few of kind of the articles that you've published here. And you're talking about some pretty detailed stuff here, right? You're talking about... When you cite Dankrad Feist as a source, I know you're down in the management level of research.

You don't go any deeper than that. Here's one line. Ethereum is prepared to store a new form of data. The change will carve out a special location for unstructured blobs, allowing layer two's cheaply, readily available space. This is exactly right. But this is like down into the firmware level of what's happening. I mean, this is tuning into kind of like Ethereum research calls. I didn't know that like, were at this level of analysis. And I don't know, just maybe you were doing this before and we just didn't see it. But it really feels like one river has kind of leveled up its game. And we're curious about that.

Yeah. Yeah. Maybe I look dumb, but I'm not that dumb. You know, if we're going to get into, if we're going to aspire to be the leading institutional asset manager in digital assets, it's not because we're just. You're not playing around here? Hey, you know, the Fed's hiking rates, so we should be short Bitcoin, I think, or vice versa. But yeah, so, I mean, we built out an amazing team, you know, under Marcel Kazumovich, he's deputy CIA and head of research.

And, you know, he was, I knew him for 10 years. I've always wanted to work with Marcel. He was the chief strategist for George Soros, by the way, through the 08 crisis and helped Soros. I mean, he worked direct. He was George's chief strategist personally and, you know, helped that organization navigate to a very positive outcome through that period. And his first crypto investment was, I think he bought Bitcoin in, you know, 2014, something like that when he was doing some work with the IMF about the nature of money. And no one wanted to look at crypto. And Marcel is incredibly curious human being.

And he just raised his hand. He's like, I'll look at that. And he looked at it long enough to say, I should buy something. So, you know, he's an incredible intellect and he's built out, you know, a team that does deep work in, you know, in all these assets. So you talked about defy and you talked a little about regulation through code, which I think is a really nice way of looking at it and an accurate way of looking at it. And, you know, kind of something that's really unique in this time and history because that kind of wasn't, that was never possible before. So stuff like that is fantastic from my perspective. I think our perspective on defy is that while that statement that you made is true, that the challenge for these markets will be that they still need to operate in a

world where anti-money laundering and bad actors and fraudsters, you know, where their lives are made difficult. It's not that you can't stop all of that because you never can. But anyway, so I think the defy, while it is regulated by code right now, I think that it's going have to figure out how to be accepted across the real developed market. So all the developed jurisdictions. So I'm not talking about, you know, some African or South American country that just, you know, doesn't have great rule of law or Iran or something. I'm talking about the parts of the world that really matter. Where the wealth is. Yeah. I think the combination of what you said,

together with some type of way of identifying the users of these protocols, is going to unlock the true promise of these technologies. And so our strong view is that that is going to happen. And so when we looked at Defi early on, which we obviously did, and I told you that we avoided it, we avoided it for a couple reasons. One of them was the returns relative to the risks were insufficient from our perspective. But also, our view is that because there isn't good AML KYC, or there isn't AMLKW in a lot of these protocols, our investors may end up with some type of medium to long term liability, probably

wouldn't be high. And we as an asset manager might have some liability for having participated in activities where we knew that North Korea could have been on the other side of a trade or, you know, whoever it might be. But what we did do and what our team here does do is really understand what is happening in this space much more so than I do on a, you know, I didn't write that report that you just described. I read it, but I didn't write it. And, you know, our view is that if we can take these technologies and we can adapt them to traditional financial markets and assets, and we can do it in a way

that's consistent with what we think the regulatory regime will require in the U.S. and Europe and Canada and, you know, all these various places, then I think we will have participated in, we will have done something I'd be very proud of, which is to kind of advance. these technologies and integrate them with traditional finance in ways where they really get used at scale. And so where we don't end up with, you know, with a big Wall Street bank that, you know, creates its own blockchain system that's this closed system. And, you know, by the way, that might happen. And that's not what I would like to see happen. And I think it would be a real compromise on the promise of these technologies. So anyway, that's, you know, when it comes to defy,

that's what we're doing there. I mean, it's fun. But it requires us to really, understand and know everything that's going on there. So we're not just doing that work to understand investing in the specific tokens, but we feel like there shouldn't be a firm out there that is more knowledgeable about this entire space than us. There just shouldn't be. Maybe there is. I don't know who it is, by the way, but there shouldn't be. By the way, when we made our first investments in November 2020, what I just said was unambiguously not true. You know, it was like we were not the most knowledgeable, but we're, you know, we're pretty darn knowledgeable now. I feel the level up. there must be a lot of listening to the bankless podcast or with the One River offices.

I hope so. Yeah, yeah. Sean Martinack is amazing. If he hadn't written that piece, it was, you know, he and Marcel probably jointly authored it. But you should definitely speak with Sean as well. He's amazing. Great stuff. Well, Ryan was going for the punchline that I was trying to get out of you.

But the question I was going to ask is, like, it gives me faith that some big institution can hire a team and charge that team with, hey, go understand crypto. Go learn about it. And then fast forward after learning and writing reports, you get a report on blob space. But I could have totally expected a report on IBM Hyperledger or how Terra Luna is fundamentally sustainable. Yeah, we've seen a lot of that. Or something like that. Like people get sidetracked when they go down the crypto rabbit holes.

And so to see a report coming out about blob space and how that means, like, Deuterium's got this new data structure is like... It's encouraging. relieving to me. How do you know? Because a lot of people get lost along the way of trying to write reports about crypto because it's their job to write a report. And so like their boss charges them with writing report. And so they go find something interesting. And then they see that this Terra Luna ecosystem has a bunch of like energy around it. And so they write a report on that. And they just want to make a report on what the boss wants to hear, which is that this thing is totally going to work. And so they write a report on that. How do you not fall into that trap and how do you actually come out with

a very detailed report on polynomials and blob space? First of all, you bring people on a team that are a lot smarter than you. That's rule number one. And then hopefully set the example of being just deeply curious. And I think it's easier for an asset manager to do that, by the way, rather than a research company because to your point, it's like, go right a report on this. there's just less skin in the game for, you know, people who are charged, whether they're on the cell side in Wall Street or just in a research firm, which is not to say that those people don't do terrific research. It's just that I think as an asset manager, it's kind of in our blood that if we're going to write something about something, we kind of own it reputationalally

and we might even invest in it or we might think about how to adapt that technology of something we're working on. And so that's it. And, One of the things that we did that I am proud of is that when I entered this space, we wanted to bring the best equity partners into the firm. And so Coinbase led that investment round. They've been amazing partners. Goldman was invested. Liberty Mutual Insurance. Offra, which is some ultimately Kuwaiti money, their pensions, and infinity.

We brought some really wonderful investors on board. And I think they have been curious to see how we're going to look at this space as well. well. And, you know, kind of the approach that I took was, okay, we're going to be in this for the long run. So we're going to raise a lot of money. So we raised a very nice chunk of equity capital so that we would be fundamentally sound, even in a crypto winner, which is not to say anticipated the depth of this decline. But I knew that we're going to be, even if institutions don't come as fast as we we hope that they do, we're going to be fine. And then we're just going to get really, really smart at this. And we're going to start developing. And that has been.

a really important thing. And when you have that longer term horizon, you can also just not rush into hiring people really fast. So there's this temptation. I was looking around, actually, when we were speaking last, there were all these firms that were doing these huge raises at silly valuations. And I was looking at them going, what are you even using that money for? It doesn't even make any sense to me whatsoever. And I think we discovered what a lot of them use that money for, which is, you know, lending money to Bitcoin miners. And, you know, now they're all over leverage and trouble and all the rest of it. And they, They hired way too many people and they've had to lay off staff.

We haven't laid off a single person here. And I say that we would if they weren't terrific. But we hired slowly. We hired the right people. And I've learned long enough that if you don't have really deeply curious people on your team who are introspective, why even bother? You're not going to, you know, maybe you succeed for a little while, but you're not going to really succeed. So we kind of wind all of those things up. And I think that, you know, the key thing is just getting ultimately, this is a very long answer to your question.

But it's like you have to get the right people. in the right culture. And that was what was most important to me. So I think I am really, we hear from a lot of people that we put out the best research in this space now. And those are great investors

that read a lot. So I'm very proud of the team for that. I'm not taking credit for it, by the way. But I'm very proud, you know, across the team. You can pass along our kudos as well. Like, we read a lot of stuff. And I was only skimming it. Now I want to go down the rabbit hole after I have time.

I would read this. I would read this. I would read this. I would read this, for sure. Good. That's a compliment. Thank you. I want to circle back. I think we skipped over the answer to this question. So I want to go back there one more time. Just more precise exposure to the crypto asset world beyond just like buying the blue chips, Bitcoin and Ether. Has anything developed in the last year that institutions really like as a strategy to gaining exposure to crypto?

So we've launched a trend following fund. So trend following is a strategy that's an important strategy for our alternatives firm, which is essentially, you know, buying when something's going up and selling it short when it's going down and trying to do that over. a broad swath of markets. There's definitely been interest in that rightly because it allows you to capitalize on some upside, albeit more muted, but also capitalize or at least at a minimum get out of the way, you know, on the downside. So that's an example. That's really focused on Bitcoin and Eath, although for certain clients, I think will broaden it out. There's not a lot of liquidity on the short side in some of these smaller tokens, as you guys know. And so there's certain constraints there. But I think over time, trend following in this space, just like it is, in alternative asset management is a huge, you know, it's probably 20% of the hedge fund industry,

maybe 25, somewhere in that zone. So I'm talking about a ton of money. I mean, I think that that will apply to these assets as well. And then for those investors who are investing in that, they're like, look, we invest in systematic trend following in our core asset allocation. And so maybe adding some digital assets would be an interesting diversifier there, which it is. We've had a lot of discussions about distressed credit. So when we were all speaking last, I had brought a fellow by the name of Doug Wilson, who is one of those knowledgeable people I know in energy markets, both in the markets themselves, but also direct investing in them, kind of taking energy companies through bankruptcy. He's lived through multiple cycles. He's not as old as I am, but he's,

you know, he's somewhere between you guys and I. And I brought him on to just understand everything there was about Bitcoin mining because I figured that's just foundational. It's kind of like, how do you invest in asset markets without understanding Fed policy? You know, like you need to understand the right foundational pillars for any market to really understand it. And so he came in, he looked at it. It was pretty cool. He was like, let's just go and buy some miners. We bought them. I think we paid the absolute high. I don't know. Maybe we paid 17 grand or 19 grand and, you know, shipped them from China or somewhere. And we plugged him and everything.

And they're like, okay, Doug said, well, let's send these to someone who can disassemble them and tell us what it actually costs to make one of these. And I think the number was something like $15 or $7,800. And then he read an Intel report that kind of had hinted that Intel is going to get in the space and break the doopoly. And so he came to me. He's like, okay, so here's mining. Mining is basically Bitcoin mining is going to be a shale gas boom bus.

and we're in the boom right now, and this thing is going to unravel in, like, historic proportions. Because unlike Nat gas and shale gas, those guys at least were forward hedging their production. In this case, the miners are actually holding on a Bitcoin because they're expecting to go up. And so, you know, it's been a market that we've talked to everyone, Doug and his team, have talked to everyone in the space. We're looking at all sorts of different distressed deals right now. there's some really attractive returns. I think some big institutions could even ultimately invest in mining facilities where they

create some of their own Bitcoin as opposed to buying it and then hold that on their own balance sheet as a way to accumulate, you know, cheap digital assets. So those are the things that we're seeing, I think away from our strategies. I think, you know, there will continue to be money that goes into venture, although a ton of money has already gone in. And so I don't know that they need any more money. They seem like I have plenty of commitments. And then trading strategies, you know, Brevin Howard.

has a 25% passive stake in our firm. And, you know, they have a terrific digital business and fund. And I think there'll be investors who probably invest in that multi-manager kind of higher frequency trading approach or however they define their strategy. It's not just that. I think it's a good investment product. But I think there'll be investors who do some of that kind of stuff, some trend stuff, some, you know, distress credit. And then they'll be ones who invest in our index. So, you know, I think investing in a well-structured index that, you know, Dodge the Luna, dodged FTT, for instance, is a pretty attractive proposition for a firm that's taking an agnostic view to how this is going to play out.

They're not Bitcoin maximalists. They don't necessarily think ETH is going to take over the world, but they think that these technologies will lead to a lot of value creation and having a dynamically managed index, which means that its composition changes over time will just mean that if they make an allocation to that, they're going to participate in the thing that really takes off if it's something that's very obscure right now or not even public in a way. So those are the interests right now. It's a really smart way to tackle this market, I think.

Yeah, the investor in me thinks that that's a really fun job, actually, to be able to manage a portfolio that captures all of crypto, yet still manages to miss the unsustainable stuff like Terra Luna. That sounds pretty fun. Eric, as we wrap up to a close here, of course, all of institutional appetite into crypto is really going to be determined by macro, macro, macro, macro, macro, macro, macro. It's kind of the dominating.

It's in everyone's brains, really. We've all learned in 2022 how important Fed interest rates in the macro environment really is. And I'm wondering, just overall, what is your take on the macro outlook for 2023 and how important is the macro story as it relates to investor appetite in crypto assets? I'm wondering if you could just, as we wrap up this conversation, Ty Bo on this with the macro conversation. Sure. You know, last year was historic, right, in terms of the scale and pace of that tightening. We walked into the beginning of the year and very little was priced in, and then we finished the year and it was just an extraordinary rate hike cycle. And that surprised you.

Yeah. I mean, I thought rates were going higher for sure. sure. The pace was, yeah, I didn't expect it to be the high. Actually, stories are always a little bit more fun. Let me tell you a story because this will encapsulate the Mac Review as well. So probably sometime, shortly after last time we spoke, I was at one of these CIO dinners. And I think I was the only CIO at the dinner. There were probably eight of us that wasn't a billionaire, which I'm not ashamed to say, but, you know, whatever. Like, give you a sense for the crowd, right? And so I was probably invited, by the way, because, you know, I was the one who'd made the most obvious commitment to these assets. So one of the total legends in our industry took it upon himself to be, I would say, verbally abusive,

but like we took each other on over our views, which I tend to do. You know, I don't really like sucking up. And even if other people kind of can't help themselves, I'm like, what's the point of going to a dinner if we're not going to really kind of, you know, throw some punches? Talk about anything. Right, exactly. So anyway, so we spent the whole dinner, you know, really combative. And, you know, most of these guys really were unknowledgeable about these technologies, these assets, et cetera.

You know, and they don't need to be. I mean, they're like, they got nothing to worry about. Their businesses are amazing. They're running huge amounts of money. And they've been incredibly successful. And they're kind of like, if it gets big enough and I have to worry about it, I'll worry about it later. I'll hire the right people or acquire the right teams. But we get to the, so this, the legend who was kind of the grandfather around, the patriarch of the table.

So I thought he was really anti my position. And my position was, look, I think that the policymakers have made a proactive choice to debase the dollar and unburdened themselves from these huge debts that we've incurred as a society and the entitlements that we have promised to our elderly. And it's not that inflation solves all those things. It's that coming to terms with those two things, the entitlements and the debt, while rebalancing the. the economy so that it can be dynamic again is extremely difficult and you're definitely not going to get there through austerity. You're not going to get there through tightening and putting the screws on and creating a depression. You're only going to get there through some combination of monetary embassment debasement slash inflation, which means running high levels of nominal

GDP for a long period of time with lower interest rates so that, you know, the real interest rate is essentially negative. And you're just going to pray for innovation. And that innovation could be AI. It could be nuclear fusion. Nuclear fusion is not around the corner. AI is kind of creeping up pretty fast. So like as a policymaker, you're just praying for human innovation because that's not coming from government directly. It might be supported by government. But that's that's my position. And so I was like, look, I think that the decision's already been made. I agree that there will be a rate hike cycle. but we're not going back to the years of 2% forever inflation. Okay.

Like that just is not, I'm telling you the probability of that is de minimis and the choice has been made. And so they will, okay, they'll hike, but they're not going to drive us into depression to kind of reset the system at 2%. Because at 2% doesn't work anymore, right? That's why we got ourselves in this position where post-COVID you had to put all this money and you had to do all this QE because we were out of balance, right? So anyway, that'd been my position.

And so this guy had taken issue with like everything that I was saying more or less. And then at the end of the dinner, he's like, okay. So he kind of stopped conversation. He goes, okay, so let me just make a prediction here. Okay. If Eric doesn't get stopped out, he's making all the money. Like that's what's going to. He's like, the Fed is going to hike.

It is going to be more than you think because every Fed governor that we speak with, you know, is his signal that they're deeply uncomfortable with how loose policy is. So these guys are going to hike rates. Okay. And then the economy is going to slow down. And Eric is right. Like there is no way out of this smoothly. So either they will overdo it and we'll have to have a huge stimulus or, you know, they'll come up with something different, but then they'll start easing again. And so I think that that's the right lens through which to look at this. I don't know if I will make all the money. Everyone around that table is going to be very, very well off for many generations. But I do think that

the framework of thinking that's like, look, we had to get through the tightening cycle and then we're not done with the tightening cycle. I think what we heard from Powell today was that we're now moving to 25 basis points. Maybe he'll skip a meeting here or there. Depends on what happens. But I think you're already starting to see, you know, the foot that's been on on crypto's neck just kind of eased off as we're getting toward the latter part of this tightening cycle. So I think this will be a transition year. There are a whole range of wild cards. There always are. I mean, like, Ukraine hasn't been settled. China reopening hasn't been settled.

I think they're, you know, we haven't yet seen what investors do when they start getting nervous about stocks if they do, by the way. And they look at, you know, short-term interest rates that are really high and then maybe they park their money there. So there are a lot of things that could happen here. But I think everything moves in a cycle. And we talked about maybe it's a good place to end on cadence. Like we're at that stage in terms of the cadence where not only we got through all the

kind of crypto-specific problems, but where we're through the, the really dramatic rate hike part of the cycle. And I think things are more favorable. I don't know that that necessarily means that we're right back to a big bull market. I kind of open mind into anything because I think cadence-wise, we've done an incredible amount of work to get people to utterly capitulate in this market. So it could be, you know, like we could be in a sustainable market now. So anyway, those are the thoughts. So most of the tightening has been done. There still might be some ahead, but most of it's been done. even in that world, we're not returning to a 2% inflation rate. We can expect more kind of debasement

over this decade. And we'll see this in various forms, stimulus, maybe other sorts of forms. That's your base case for the 2020s. Yeah, absolutely. I think in a decade when you guys still won't even, well, you'll be more than half much, but like, you know, in a decade when we're having this conversation again, I think when you look at the CPI index, it will be a lot. It will have moved at a pace that's well in excess of its historical, you know, one-a-half, two-percent kind of grind. So the dollar's always depreciating, right? I mean, there is, for as long as we've had the dollar, there has been monetary debasement. The only thing we're talking about is the pace at which it is debased. And by the way, sometimes people use that term in a derogatory way.

I don't. It's like, I don't know, the sky's blue. The dollar goes down over time. It's just how the system works. It kind of lubricates everything. It's fine. There are periods in history where it goes down at a faster rate than other periods in history. Hopefully it doesn't completely unwind. I think what happened this past year was the central banks looked at it and they just said, oh my God, if we don't do something, we could actually have a hyperinflation. We have to regain some credibility. So they've been working hard to do that, but they are not going to throw us into, you are not going to solve the economic challenges that this country is faced with, with our debt. debt, our need to invest in things like green energy, sustainability, you know, reshoring our

industries, rebuilding our military. By the way, I was just looking at it today. Our interest payments this year are basically the equivalent. They're forecasted by the CBO or the Treasury to be equivalent to our defense spending. And that money, we're not going to get out of those debt payments through austerity. We're going to have budget deficits that accommodate all of that money that needs to be paid an interest on our debt, which keeps going up. And like, that's how you just, you keep getting more, more money into the system. So I think that that will be the story of this decade. That's the big, big theme of this decade. And historically, when governments have done that, there's been a lot of volatility because you don't like, you don't go from this 2% flat line to.

It's like, okay, now we're just going to go to, we're going to pretend we want to, but we're going to accept two and a half and it's just going to be like that. It's like, it's all over the place. It'll be really exciting. I think it'll be great for crypto ultimately. And there'll be lots of lessons, Ryan, for all of us trading and all of your listeners, you know, punting around in markets, because, you know, it's going to be tricky, but it'll be fun. A lot of ups and downs, debasement as the base case. And I hope you told the billionaire sitting around that table all about the story of crypto and the work that you're doing. I'd love to sit in one of those conversations and hear what they really think about it. As always, Eric, this has been so much fun getting you on bankless

and regrouping. It's always nice to talk to someone from Greenwich there. You guys do such great work. I love listening to your pieces. I enjoy your kind of top 10 ideas recently. Yeah, I mean, you're just, you're going to have years or long on time of all sorts of new interesting things to talk about. So thanks for all the good work these years. There was a time, Eric, when I was worried Dave and I wouldn't have enough content for a podcast on a weekly basis. That was the first thing Ryan told me when I said, Ryan, were you need to start a podcast? He's like, what are we going to talk about? I've got about five episodes in me, and then what? And here we are. So I have 400 episodes in, yeah. Yeah, when I started writing,

I started writing my weekly piece in 2010. And I remember sometime later that year being like, I literally, I'm out of life experiences to kind of talk about and triangulate. And there's, you know, but yeah, stuff just comes up, man. It's good. It's good. And it keeps you sharp. Well, it becomes a compulsion and addiction. Maybe that's the stage David and I are in with podcasting. But Eric, it's been a lot of fun. Thanks for joining us. Thank you. Thank you. Action items for your bankless nation. You can listen to our last episode with Eric. This is episode 89, why institutions are bullish. Go catch that back in the archives. Also, We'll include a link in the show notes to One Rivers Digital Assets research section on their website.

That's where I was talking about some of the material that we mentioned this call. Of course, got to end like this. None of this has been financial advice. How dare you think it is. Crypto is risky. As always, so is ETH. So is Bitcoin. You could lose what you put in.

But we are headed west. This is the frontier. It's not for everyone. But we're glad you're with us on the bank list journey. Thanks a lot.