Bankless - Merge vs. Macro with Travis Kling

Episode Date: July 20, 2022

Travis Kling is the founder of Ikigai Asset Management, and on today's State of the Nation, we're tackling the biggest trade of the year. While the global market fundamentals crumble, the Ethereum ecosystem looks primed to make history with a successful transition to Proof-of-Stake. What does this mean for crypto? How is a seasoned investor going to take advantage of a chaotic 2022? ------ 📣Rhino.Fi | Massive Mystery Airdrop https://bit.ly/3o9trRE  ------ 🚀 SUBSCRIBE TO NEWSLETTER:          https://newsletter.banklesshq.com/    🎙️ SUBSCRIBE TO PODCAST:                 http://podcast.banklesshq.com/    ------ BANKLESS SPONSOR TOOLS:  🌱 LENS | ACCESS CODE: WAGMI https://bankless.cc/Lens  🚀 ROCKET POOL | ETH STAKING https://bankless.cc/RocketPool  ⚖️ ARBITRUM | SCALING ETHEREUM https://bankless.cc/Arbitrum  🦁 BRAVE | THE BROWSER NATIVE WALLET https://bankless.cc/Brave  🌉 JUNO | BRIDGE FIAT TO LAYER 2 https://bankless.cc/Juno  ⚡️ ZKSYNC | THE LAYER 2 SCALING ENDGAME https://bankless.cc/zkSync  ------ Resources: Travis Kling https://twitter.com/Travis_Kling  Ikigai Asset Management https://www.ikigai.fund/  ----- 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://newsletter.banklesshq.com/p/bankless-disclosures 

You know, I think I feel a little bit like I just heard a long burst of machine gun fire. And I'm like looking at myself like, you know, did I just get hit by anything? Hey, Bankless Nation. We got an exciting state of the nation for you. An unstoppable force meets an immovable object. We've got two countervailing forces. We've got, in the one hand, the macro markets. In the left corner, macro. Looking pretty bad right now, all right?

Macro is still not doing the things we'd like it to do, looking pretty ugly out there. And yet, the backdrop, in the right corner, we have the merge, the Ethereum merge, which is uber bullish for ethie asset, for all of crypto. Already starting to get priced in. It's already starting to get priced in. And you can see that in the charts, kind of this conflict. Well, in today's episode, we will explore this dichotomy, the merge versus macro. We have Travis Kling on the podcast, who is a fund manager and also an expert on things macro,

and he's been talking about the merch a lot lately. David, what are we going to talk about today? Yeah, Travis, just like you said, focus on macro, macro expert, but also super aware of crypto and the crypto dynamics. He's also one of these, there's a growing number of these types of Bitcoiners that used to just be like solely focused in the Bitcoin ecosystem that have caused. the bug of the merge. So like the deflationary narrative of ether post-merge has like captured a few of these people. The sound money piece? The sound money piece. Yeah, exactly. The ultra-sound money piece,

Ryan, of course. So I'm interested in hearing that story, but just it's super convenient that we have this macro expert who also understands crypto, who also understands the merge dynamics. And so if there's anyone who can tell us which one of these, which side of this tug-of-war is going to win, I think it's going to be Travis. Yeah, I know who I'm written for in this too. Definitely over the right corner. I think this is a really overall, an interesting poll. We should put this poll out of the bankless Twitter account as this episode airs. Which is stronger. Yeah, which is stronger. The merge versus macro. Place your votes. Place your votes. David, we should also talk about rhino. They are sponsoring this message from bankless. And these guys used to be called diversify.

It's a decentralized exchange. But they have really changed their product. into something I am super excited about. I'm going to show a few things, and maybe you could explain this to me. So what are we looking at? What is RhinoFi up to these days? Why did they change their name and what are they doing? I think this is such an appropriate pivot. So Diversify used to be this hyper-scalable, decentralized exchange on a Stark X layer two. So super performance and highly optimized, but lost the composability. And so Diversify has rebranded to Rhinophy, which is a little bit of a multi-chain, multi-layer-to aggregator of many different parts of the Defi ecosystem. And they're really leaning into usability and U-X and trying to just remove as many different

complications of, you know, blockchain that they can. And so their liquidity is across many, many different layer twos. You can trade, you can swap, you can invest in liquidity pools, do basic stuff like send tokens on layer two. So it's a multi-layer-2, multi-chain dashboard, portal, war station. if you will, to do all of your defy things across all of the layer twos. Yeah, that's pretty awesome.

I'm actually going to check that out. It feels like they've taken the trade function that they've been so strong on and they just converted that into one app of many. This is like a home screen for all of your defy activity. So make sure you go sign up for that. And you can hear more about rhino.5. We'll include a link in the show notes.

And also, David, something about a mystery air drop that's coming with a chance to win 5K split between 50 wallets. So I like the sound of mystery airdrop, and you can find out more about that on rhino.5. Once again, link in the show notes. Also, we now have video of bankless podcasts in Spotify. So previously, video was only available on YouTube. Now they are available in Spotify as well.

So if you want to go check out bankless videos on Spotify, go to Spotify, search bankless, and you can view them there. David, what is the state of the nation today, my friend? The state of the nation is cautiously optimistic, Ryan. I think that will resonate with very many people, as we've watched, Eath, just rock it off of the floor. Like, skipped over the 1300s, skipped over the 1400s, straight into the 1500s.

And I think that's just, you know, the game of chicken is, like, who's going to press the buy button first before the merge? That game has definitely started to play out. And some people are definitely hitting the buy button ahead of the merge. I can't really think of any other explanation for that price action. We have the clearest dates for the merge of all time. And you can see that being reflected in the charts. The merge being derrisked.

It's actually going to happen in the face of a terrible, terrible macro setup. We have our last podcast with Luke was named the worst macro setup we've seen in 20 plus years. So we're going to go ahead and talk to Travis about that just in a second. Guys, we're going to get right to the episode with Travis. But before we do, we want to thank the sponsors that made this episode possible. Lens Protocol is an open-source tech stack for building decentralized social media applications. It is the new era for social media. We all have toxic relationships with our Web 2 apps.

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where you can play on-chain activities and receive a free NFT as a reward. Find out more by visiting the Discord at Discord. dot gg slash arbitram. You can also bridge your assets to arbitram at bridge.orgatrum.com. and access all of Arbitrum's apps at portal.arbitrum.com. In order to experience defy and NFTs, the way it was always meant to be fast, cheap, secure, and fiction-free. Bankless Nation, we are super excited to introduce you to Travis Kling. He's the founder and CIO. That is Chief Investment Officer of Ikegai Asset Management. Also recently launched a venture fund. We are here to talk about macro and the murder.

Travis, how you doing, man? I'm doing well. Thanks for having me, guys. Looking forward to this. It's great to have you. How are you feeling about things, first of all? Let's start there. Get your temperature check. It's our first question for everyone, because we're in the depths of a bear market, what people are calling this? Are you feeling bearish? How are you feeling in general? What's your vibe? You know, I think I feel a little bit like I just heard a long burst of machine gun fire, and I'm like looking at myself like, you know, did I just get hit by anything?

And not to not to make light of folks that lost a lot of money because that certainly has happened over the last couple months. But I've been doing this for a while now. So you're telling us you were in the bulletproof vest then. Not not exactly a bulletproof vest, but I just think, you know, every couple of years, this ecosystem, this asset class does one of these things where it just wipes a bunch of people out, and we just had one of those. And historically, those mark cyclical bottoms.

You know, history doesn't repeat. It rhymes. So there are nuances to this one relative to prior dumps. But, you know, now is definitely not the time to get Uber-bared up. And I'm not, you know, I think we're much closer to. a cyclical bottom. And, you know, we can argue about the specifics around price or time and the factors that go into that, which I'm sure we're going to talk about today. But, no, I mean, this two shall pass.

This technology still has a tremendous potential to make the world a better place. And it's still my base case. This is going to be the best performing asset class over, you know, three year, five, year, 10 year, probably 20 year timeframe. Yeah, I feel like as long as you don't have margin, right, which hopefully, like, lessons were learned previous cycles. And as long as you didn't lend anything to three hours capital, you're probably doing okay. And maybe you're actually excited about this dip buying opportunity if you have some powder dry and you have some like stable coins and dollar assets. Yeah. I mean, I can't believe this market gave me another shot on goal from 20K BTC and 1K-Eath, but that's where we are. And that's a tremendous opportunity. We went to triple digits. I didn't even think we'd see that again. I mean, I thought there was a possibility, but that's surprising on ETH. Yeah, just never say never in crypto.

That's a good rule to make sure you stay alive and stay in the game. I know in the first half of this episode, we want to get your measure on the macro markets because everyone has a vantage point on the macro markets. And right now in the state of overall confusion, just getting more and more perspectives as to where we are in this macro world is definitely super useful. just keeping on with crypto just a little bit more. There's this debate going on on crypto Twitter of the bottom. The bottom hasn't felt previous bottoms.

It didn't really feel in the same way that other bottoms felt. And so some people are saying like, oh, okay, that means the bottom's not in. Like we haven't felt Max Payne. We still need more liquidations. We're not totally done yet. We're just like there was, you know, the first wave of liquidations, which is three rows capital, but then there's more coming. And that'll be the actual true bottom.

And then there's other people who are like, it doesn't have to repeat. previous history, even though that's what people says that it has to do. I'm wondering if you had a perspective on this. Like, are we, do we, is there more Max Payne ahead of us or are you in the fan in the camp that, no, it doesn't have to repeat like every other cycle in history? Yeah, definitely doesn't have to do anything. Yeah, I mean, Bitcoin, just because it's been around the longest, speaking to that specifically, I mean, it, it can do things it's never done before.

it has, you know, recently done things that it has never done before and certainly could continue to do things that it hasn't done before. I'm not married to any particular view. I think now is an outstanding time to be dollar cost averaging into Bitcoin and Ethereum. And that's not financial advice. None of this is financial advice. But, you know, you may not get the bottom dollar, we could go lower from here or we could, you know, the low could already be in. But, you know, if you're just DCAing over the coming months here, I think you look back on that with any kind of medium, the long-term timeframe. And I'm pretty highly confident that's that's going to look like an outstanding decision to have been made.

So, okay, so let's roll into the macro markets because that's the place that's giving me a bunch of confusion, and I'm sure a bunch of confusion for the listeners as well, because the market just kind of seems to be stuck between, like, bearish or bullish, as we've kind of already indicated. It's bearish because the Fed might overshoot and cause a recession or worse, but it also could be bullish because they're about to pivot and, you know, turn on the money printer. You could be bearish because risk-gone assets are bad to have in a recession, or you can still be bullish, because even in a recession, where are people going to park all their money?

like you said, crypto is still going to be the best performing asset class of, you know, five, 10, 20 years. So, like, do you feel this like tug of war between bearish or bullish on macro or is it more clear for you? It's, I think the setup is pretty clear. What's going to happen is, is not that clear. You know, don't fight the Fed has been an adage that's been around for decades. It's all one trade, you know, has been around for over two years, I think, at this point. And I think neither of those have been more true than they are today. And they both speak to the same backdrop, which is admittedly a pretty creepy backdrop,

which is central bank actions in the current monetary regime have such an overwhelmingly powerful impact on all asset prices, that everything else is pretty much just an afterthought. And another kind of adage that I've been saying for a few years now is that Bitcoin loves QE and detests QT, loves quantitative easing, detest quantitative tightening. And I think you can expand that out into the crypto ecosystem broadly. And we're like experiencing the negative side of that. Every central bank on the planet pretty much is tightening right now. and trying to work off the excesses that came about in response to the COVID crisis. And all asset classes just have a really hard time with that.

Now, commodities have performed exceptionally well because of, you know, some specific reasons around the Ukraine conflict. But it was, you know, the fourth worst first half for the S&P 500 in the last 100 years. one of the worst starts for the bond market ever. And crypto got tagged there. And, you know, to be honest, it would have been nice if crypto had been able to decouple from that. But if you told me on January 1st of this year that the S&P was going to have its fourth worst start in the last 100 years, and then you asked me, like, what's crypto going to do?

I mean, I definitely would have told you crypto is going to get smoked. And there's some question to ask yourself about what a reasonable expectation of value accrual for any crypto is during a central bank tightening cycle. But if you just look at tech stocks, for example, I mean, Apple, you know, which is about as good of a store of value, I think, as you can imagine, you know, Apple's down, was down 30% off the top. tons of other tech stocks are down 50, 70 plus percent off the top. So it's not just crypto that is performed poorly. And then, you know, I think on top of that that macro tightening cycle, you had some really bad micro, you know, crypto-specific type of stuff going on over the last few months. And it's been kind of a double whammy. And now I think the setup, which seems to be, you know, I think, you know, I think.

pretty well understood is that the Fed is aggressively tightening to fight inflation. They just hike 75 bips, which they hadn't done in decades. They're going to go 75 bips at least again here next week. And they're trying to, in my view, they're trying to cram as many rate hikes as they can now before we either just slam into a recession or some part of the global financial market breaks to a degree that they're forced to respond to that. And that's not a great, it's not a great setup, but asset prices are a lot about expectations and positioning and rate of change. and the expectations are very bearish. The positioning is very bearish.

You're probably seeing a lot of, you know, percent of, you know, equity allocation versus cash is like all time low. You know, all these different positioning for traditional, for traditional asset classes, all these positioning metrics are completely wiped out. People are very, very bearish. And you don't need much rate of change. I think because of where positioning is to get things moving pretty aggressively off the bottom.

And it's a little nerve-wracking or uncertain right now because even though I think that set up that I just described, I think it's reasonably well understood and there's some amount of consensus around it. where it goes from here, there's still a high degree of uncertainty and disagreement around about how long is inflation going to stick around, what's going to be the pace of slowing inflation, specifically around energy prices and food prices and shelter prices. There's definitely disagreement there. And then I think the thing that makes it particularly nervous. racking is that this idea of like the Fed tightening until something breaks, which is a term that

gets thrown around a lot. Well, you know, what that actually means is that when something breaks, it means that like shit really hits the fan and prices go down a lot quickly. And my base case would be that, you know, crypto would perform, you know, quite poorly in that environment, along with equities and bonds and, you know, a bunch of other stuff, you know, a lot of currencies around. That would be a very dollar strengthening type of situation. And so, you know, and then it could be over really soon. And that would mark the bottom. But, you know, you could be in for some very acute pain in the near term.

And so, so the, you know, I think with this like wind sprinting of the Fed back to a neutral rate and you basically get there this month with 75 diffs tightening before the economy falls off. of a cliff, which it looks like it's already starting to or before something breaks in financial markets, you know, that puts them in a position to slow tightening at the September meeting and potentially pause before year end, which should be supportive for risk assets, supportive for crypto. And then now the Fed Fund's futures market is pricing in rate cuts by the spring of 2023, the Eurodollar futures curve is pricing in cuts in early 2023. So you're already talking about some of the deepest, most liquid markets on planet Earth that are implying that the fed's, you know, getting quite close to being done here. And so I think that's what I mean by

at the beginning of this conversation of like, be careful about getting too bearish at the bottom here because I think it looks like we're probably closer to the end of this than the beginning. And then I think the cat's out of the bag in terms of financial markets believing that nothing on planet Earth is going to move faster off the bottom than crypto when the Fed moves into that slowing or pausing environment. And I don't think there's never been wider agreement on that fact than there is right now. That's just nothing like 2018 or 2019 bear markets when the really large. majority of the world's capital, like had no idea what to think about any of this stuff.

Nothing's going to move faster off the bottom than crypto. I mean, we tend to agree with you, Travis. I want to run some thoughts by you, too, as we're trying to triangulate all of this macro stuff, David and myself, and I think the bankless community and all of the experts we talked to, you know, that line you said earlier of don't fight the Fed. What's ironic to me is like, isn't that what Bitcoin is doing? Isn't that the purpose of Bitcoin? Isn't that the purpose of crypto is actually to fight the Fed?

It's actually a bet that the Fed is going to keep the money printer hiring humming. It's actually a bet that quantitative easing cannot be stopped ever. And we might get cycles of quantitative tiding, but we're going to go back to quantitative easing. So we've had some people on the podcast recently, Lynn Alden, Luke Groman. I've read some posts recently by Arthur Hayes, too. I don't know if you caught his post that he put out last week. But the basic thesis is that even while the Fed might be raising interest rates, they're going to be put in a position where they're going to have to start the money printer printing again, some sort of quantitative easing or something else. Maybe this time the money printing will go to purchase the bonds of U.S. allies, like the euro or like Japanese bonds, for instance. And it could be the case that the Fed might. be saying on the one side, yeah, we're tightening our policy interest rates. With the other hand,

they might be purchasing bonds and like starting up, firing up the money printer and adding more to the U.S. Treasury balance sheet, essentially. And so like to me, where I've kind of come to in this macro journey in trying to triangulate among all of these macro experts is like a bet against crypto is kind of a bet that the Fed will stop printing money. Right? It's like if you think the Fed is going to print money this decade, you have no choice but to be bullish on crypto. And just because they're not doing that right now, this is just a temporary pause in a long cycle. Someone would say, if you look at it through history, maybe an inevitable cycle of a long-term debt cycle that needs to be unwound. And so the only way out of this is to actually print money this decade. And therefore,

you have to be decade-long bullish on crypto as an asset. How does some of these things align with the setup as you posed it and kind of your thinking here? I agree with a lot of that. I've never, you will never find me publicly anywhere saying that Bitcoin was like a CPI inflation hedge. It's a monetary inflation. heads, a monetary inflation hedge. It's a non-sovereign hard-cap supply, global immutable, decentralized digital store of value. I've rattled that off like 5,000 times at this point. And it's a hedge against central, you know, it's a hedge against irresponsibility from central banks and governments globally. And, you know, another way of saying that is that it loves QE into

test QT. We're in a QT cycle right now. But, you know, I, you know, I, you know, I, I have a high degree of confidence that that is very temporary. The market's telling you that it's temporary and that it's closer to being done than beginning. And that goes back to my point about, you know, going to move the fastest off the bottom. And I think it speaks to Paul Tudor Jones's moniker for Bitcoin being the fastest horse. And again, you can extrapolate that out, I think, to other. pockets of the crypto market that in a world where central banks are racing against one another

to see who can devalue their currency the fastest, what are they devaluing against? And crypto, you know, I just think it's pretty clear to me that crypto acts really well over a medium, long-term time horizon as a hedge against that. It's like it's an asset class. and a technology that like scoops an excess amount of that monetary supply inflation relative to other asset classes. And you can you can measure this by, you know, looking at like M2 money supply versus like, you know, the S&P 500 or NASDAQ or real estate or commodities or Ferraris or Rolexes or rare whiskeys or like you can just you know pick an asset class trading cards you can just pick an

asset class and i and and you know i just think crypto and you know this this pullback not withstanding but over a more medium term time frame i think it just looks like crypto uh is going to to scoop an excess share of that monetary supply inflation now to to your point about jgb's and European debt, I don't have much of a view there. I think it's possible. I think there's certainly the potential for there to be so much stress in the yen or JGBs or the euro or European debt where those stress levels get to a point there that the Fed does have to react in some way. I don't know exactly what that looks like. That would be on my list of things in terms of like shit breaking.

Like, you know, euros on that list. JGB's yen's on that list, right? Like overnight short-term funding rates is on that list. Treasury volatility is on that risk. Credit spreads is on that list. Those are the like skeletons in the closet that you want to look out for. Overall, when I look at what the Fed can do, what they're incentivized to do, what they

have done historically. all of that points to them kicking the can down the road. They're incentivized to kick the can down the road. They can kick the can down the road. They've kicked the can down the road for a long time before. And I get it. A lot of people have been talking about the early 1980s, talking about Volker. You know, like Jay Powell invokes the name of Paul Volker.

like it's, you know, George Washington or something like that. And I get that, but like, look at debt to GDP, where currently look at deficits to GDP, look at the market value of financial assets to GDP. And those three charts tell you that we are in an incomparable period of time. This is not the early 1980s. and like I just people talk about I know people talk about the 40s I don't I just I'm not so sure you can look too deeply into that long ago one because of technology but two just because this like don't fight the Fed like it's just it that has a strangle hold on this market to a degree that I think has never been present previously so you take all of that and and I like I don't think this. This is like the end. I don't think this is like the end.

It may be the beginning of the end, but I'm not even sure it's like the beginning of the end. I think it just looks like there's a pretty good chance. I think it's just like another can kick. And by the time these things actually come to a head, debt to GDP, deficit to GDP, financial assets to GDP, all this money printing that they've gotten us in this problem, it's not going to be boomers problems it's going to be our problem they're going to be they're going to be dead and gone and and and out the pasture um and but i also don't think that it's like that's not like 2022's business or 23 or 24 i'm not entirely sure it's this decade's business so um yeah i would be a little cognizant of being like chicken little the sky's falling you know right this second on for that really big for the really big for the really big for the really big big arc, yeah. I think the conversation of what is Bitcoin has been explored with more scrutiny ever since this, like, big crash.

And people, you know, the simple term that, like, gave rise to the 2020 through 2021 bull market was that Bitcoin was a hedge against inflation, because, of course, it was. It was the most obvious. We have, you have the hard cap versus the money printer. These things could not be juxtaposed any clearer. But then post this big 2022 crash, people have really just really, really questioned that narrative. And now people are starting to reframe these things. As in the common question was, why is Bitcoin going down when the Fed is fighting inflation, when it was supposed to be an inflation hedge?

Which in my mind is actually pretty simple. When, you know, the Federal Reserve is fighting inflation, they are simultaneously in fighting inflation hedges. And so, like, my mind has shifted towards Bitcoin isn't an inflation hedge. is something that has exposure to the anticipation of inflation. Like, it predicts inflation. And that's why you saw the bull, the Bitcoin bull market started the depths of COVID and run all the way up to the point where the Fed started at, like, raising interest rates off of zero.

And that, and they did that because, like, inflation actually did show up in the market. But Bitcoin started responding well before inflation actually appeared. And so it wasn't, it's not actually an inflation hedge. It's just this thing that anticipates inflation coming and therefore people buy Bitcoin. But then there's also like takes on Bitcoin that is a liquidity sponge, as in it will go up in number. The more liquidity there is. I'm wondering if you've gone through this introspection period, Travis, and what's come out on the other side as to like what Bitcoin actually is in this modern world. Yeah, I do agree that Bitcoin has taken the narrative around it, the investment case.

surround it has taken a bit of a hit. I agree with that. The, you know, it, it, it, it, it, it didn't act as an inflation hedge, but again, I'd never claimed it was going to, but, but other people did. There's the name, yeah. Yeah, um, uncorrelated asset that did not work. I mean, that thing like, I mean, it's just been, it was ticking with tech stocks on the way down, right? And it's, the correlation is, is still there. It's not as high as it was. a couple months ago. And I think the other thing that's potentially problematic for the investment case for Bitcoin is it's not entirely clear that it's going to, at least it hasn't really happened so far of like within the crypto ecosystem, sucking all of this capital out of everything else in a price decline. because if I look at BTC dominance right now, and I understand Bitcoin dominance has some,

it's a flawed metric because it has stable coins in there. But Bitcoin hasn't outperformed by like all that much relative to a number of other crypto assets in this price decline. And as we move up off of the bottom or, you know, whatever this bottoming process looks like, I mean, you can just see what ETHBTC has done just over the last like a couple weeks off the bottom for example. And so, you know, I think all of that puts, you know, I think the Bitcoin value proposition, the investment case in a bit of a tight spot here.

I don't think Bitcoin maximalists are doing themselves any favors in terms of the way that they're communicating with the market. They, you know, at least right now, I think you're probably doing more harm than good with some of the messaging or some of the quote-unquote marketing of Bitcoin that's going on, that is a bit problematic, I think. Over a very long, you know, over like this decade type of time frame and into the next, Bitcoin, for the last, I'd say, like, 18 months or so, Bitcoin is pristine collateral, has still been the investment case that,

makes the most sense to me over this like decade plus long period of time. And that's just going to take a long time. And treasuries are the collateral foundation for the global financial system right now. This is a debt-laden global financial system. And so, you know, the U.S. dollars is the world reserve currency, but treasuries are the collateral foundation for planet earth and um treasuries as an investment instrument when as a collateral instrument i think when you look out over a this decade next decade type of time frame they are challenged and so the world you know is probably looking around to see okay well like what else are we going to go to and people have been having a lot of these conversations lately as well too just in response with the with the

the Russian sanctions and, you know, what does it actually mean to own gold or own FX reserves in a bank? And, you know, do you really own those things free and clear? That, you know, that whole conversation. And I think Bitcoin is well positioned to, over the course of this decade and into the next, start to chip away at being pristine collateral. there's a lot of price volatility. That's going to need to calm down some. But, you know, there's been a lot of price volatility in treasuries over the last six or nine months as well, too. So it's worth looking at it within that backdrop.

So I guess I would summarize all of that to say that there is a, you know, there is a bit of a narrative challenge around Bitcoin right now to a, to a higher degree than. than has ever been present in the five years that I've been looking at this. Do you know, Travis, the way I would kind of summarize this is I think there's been a simple misunderstanding and the difference between the words inflation hedge and debasement hedge. And I would say something like Bitcoin, and I put ether in that category too, is not a hedge on inflation, never was. It's a hedge on debasement. And that is what's happening with quantitative easing.

So we're getting increased money supply at the base level. the money printer, go burr, meme. And anyway, that's a case that, like, the idea of debasement is not something that every day US dollar users see, but that is the operating force behind the scenes. But while we're on kind of the macro bear case, right, and how that might turn around, because there are some big headwinds on the macro side of things. Like, things still look bad. I think you're also probably predicting a recession ahead, as are we?

as are most people, so we'll see some of that. But then we also see some self-inflicted wounds in the crypto industry as well. And you were alluding to some of those. I wonder if we could just talk about that briefly before we get into the merge, because I think that is part of the context for why crypto is down so bad. And I'm going to share this tweet that you put out recently. This was when crazy stuff was happening in crypto as like as it is. But when it just started breaking on June 30th. You said, I've been doing these things for 46 straight months, and I've never seen one like this before. And this is a newsletter I think you put out for probably investors in your fund. June highlights. And it's full of these bullet points with all sorts of chaos,

Celsius going bust, three hours capital, doing a made-off style, likely committed crimes, knock-on effects, severely damaging most large crypto companies. We've got Voyager insolvent. We got BlockFi down bad. On and on and on it goes. Can I ask you, did this one catch you by surprise? What do you think of this self-inflicted wound? The crypto industry is kind of given itself?

I think anybody that's heavily involved in this market knew there was risk around centralized bar. lending platforms. I'm not sure if I ever talked about that publicly, but I do a monthly private Zoom call for all of our LPs. And in that context, I had been talking about this for like 18 months. And I always, I refer to it as shadow leverage. And it's shadow leverage because it's opaque, right? And you knew that there was some amount of undercollateralized or uncollateralized lending that was happening in centralized borrow lending platforms. But you didn't know to what degree. You didn't know, you know, what the overall makeup of that lending book looked like for any

given, you know, for any given centralized bar lending platform. But you knew that there was some undercollateralized and uncollateralized lending that was going on. and we had some scares around that in the March 2020 crash. The ecosystem was a lot smaller back then. But you had some scares. You had a couple small blowups or guys get into stress. But if you look at the price chart,

the price went up so aggressively off of the bottom that a lot of people ended up getting bailed out because, you know, your collateral value is rising in value. and, you know, we went through a little bit of this in the May 2021 price crash, had a little bit of stress there, made it out okay. But this whole shadow leverage concept, and it's like a daisy chain, because the other thing that for people that were, I think, deeply involved in this market, is you kind of knew that there wasn't a really, there wasn't really good communication about like firm A that borrow,

under collateralized from borrow lending company number one and then like well what did they do with borrow lending company number two and borrow lending company number three and it's like a daisy chain basically right and this is something that people had talked about you know whether it's behind closed doors or publicly people have been talking about this for a while and we like I said we almost got bit a couple times and then we got really bit right you got you got really bit and you just had this big you know, shadow leverage daisy chain unwind. And it started with Terraluna. It metastasized into Celsius.

It crescendoed into this, like I said, Madoff style blowup of Three Arrow's Capital that like, you know, a bunch of these court documents and stuff are coming out now. And they're just like straight out of a movie, right? Like literally like strange, crazier than fiction type of stuff. And this is like Wolf of Wall Street. stuff. I mean, just crazy, crazy stuff. And then knocking on to blow up or significantly damage virtually every bar lending business and crypto and multiple exchanges and hundreds of

projects and funds. And so we got bit, we got bit pretty bad there. Now, you know, I will say like, to sort of like, you know, pitch the name of this podcast a little bit. Defi did pretty damn good through all of this. And the sort of like purpose and the value proposition for defy, you know, I think

was relatively on display during all of this carnage. But there's no such thing as under collateralized or uncollateralized lending in defy. And if there wasn't

any of that that happened was centralized borrow lending platforms, then you would have talked about a totally different type of setup. It was the under and the un that caused how nasty the knock-on effect got. And, you know, I guess I would just say, you know, things generally worked the way they were supposed to. Even Darrell Luna, to be honest, if you, worked the way it was supposed to. and this shadow leverage daisy chain unwind certainly had defy leverage that was closely intertwined with it

but defy was not the cause of that of that unwind and it was the inherent opacity of those centralized bar lending platforms that enabled that under and uncollateralized lending that caused that blow up and you know i think you could imagine a world where crypto or dare I say the entire world you can imagine a world where

borrow lending happened all of borrow lending happened transparently transparently in defy and all borrowing was over collateralized and if you hit your liquidation level due to price declines your collateral was liquidated to save the lender and this is actually

you know that's like the foundational principle for centralized perpetual swaps like perps on centralized exchanges. That's how they work. Now there's exchange counterparty risk, some amount of that with perps. But I think you sort of with defy, you sub out exchange counterparty risk for like maybe like smart contract risk, for example. And I don't know, it might be wishful thinking to assume that the opacity of these centralized barred lending platforms is going to go away forever.

you know, these things have a tendency to move in pendulums. And right now the pendulum's over here in the fear section. And, you know, over the history of humanity just has this tendency to swing back the other way. And another tweet I had a while ago when I was thinking about all this stuff is like, if you looked at the win loss record of greed, you know, it's just a pretty stunning win loss record. So it might be wishful thinking to just assume that the opacity of the centralized bar lending market is about to go away forever. these things have a tendency to move in pendulums. And right now we're over here on the greed pendulum or on the fear pendulum, but greed has like an incredible win-loss record. And so it's probably a pretty good chance that eventually, you know, things leverage in crypto's tightened for a time.

That's already happened significantly. But that eventually it's going to widen back out. That's just kind of the nature of these things. And like, I don't know, do I believe that years or decades from now we will achieve? the transparency that an entirely defy financial world promises maybe i mean it could happen it would certainly be good for humanity because it'd prevent these sorts of things from happening again that have been happening for literally thousands of years um and i you know i don't know i would like to work on making that a reality uh but first we got to stop tripping over our own two feet i

right yeah the general take around defy is that it's held up so well because of the over collateralization which is of course true that extra 50% collateral that maker dow requires or 20 25% that compounded a ovary requires is just a huge extra buffer versus an under collateralizer or no collateral loan but i think it's really worth the extra emphasis that it's also the complete lack of transparency that is what allowed contagion with three hours capital because we could couldn't see them going to Voyager and getting a $700 million uncollateralized loan and also, you know, gambling with other Dow's treasuries and, you know, getting a loan, another a billion dollar loan from here.

Like, that lack of transparency is where so much of this contagion happened. And if, like, a number of these, like, lending entities, like, were more cooperative, which they wouldn't be because they're competitive, their competition with each other, if they were more cooperative, they would have been able to call each other up and being like, hey, do you have a billion dollar outstanding loan with Three Aero's Capital? Because they just asked us for one. And then all of a sudden we would have a little bit more clue as to the shenanigans that Three Arrow's Capital was up to. And so I do really think that transparency aspect of Defi is actually the more interesting part rather than the over collateralization. Any takes on that?

No, I completely agree with that. And I don't know if that means that there's going to permanently be more communication amongst centralized bar lending platforms. That would be nice. Yeah, I'm not exactly sure how that's going to shake out. Like I said, I think these things have a tendency to move in pendulums. And we're in a fear pendulum right now. But it's like, you know, the Fed's going to cut rates and start juicing QE again, not too long.

And, you know, Bitcoin's going to be knocking on the door of $100,000. And Ethan is going to be knocking on the door of $10,000. And, you know, there's probably going to be centralized bar lending desks that start leaking out undercollateralized and uncollateralized lending again. And then, you know, I don't know. Like I said, there's like a couple thousand years of human history that would, that would, you know, tell you to not bet against that. I feel like every 10 years, crypto gets Mount Gox. And so like a new generation gets Mount Gox, right? He's not your crypto.

And so it wasn't in exchange, but this time it was a centralized. There's more money. ...provider gave up our crypto. And then we got Matt Goxed. And we'll probably learn that lesson. This generation will be good. We'll be good. Another 10 years go by.

One per cycle. Another three arrows capital. Another, you know, Mount Gox. And we'll learn it again. This is history. This is humanity. Travis, in speaking of knocking on the door, we are knocking on the door of the merge.

It's just a few weeks away. Give it five, six, seven weeks away. What a transition. What a transition. Yeah, you like that one? So we definitely want to get your take on, just like, again, the tug of war between the macro bearishness versus the merge bullishness. And I actually do think, I'm going to tease this. The hyper-bull case is that macro actually flips bullish around the same time as the merge.

And so there's actually a world where this tug-of-war does not actually tug-of-war does not actually tug-against each other. It actually is two forces going in the same direction. The hyper-bull case for the Ethereum merge. But first, before we get to that, very exciting conversation that you definitely want to stick around for. We want to talk about some of these fantastic sponsors that help you go bankless. Juno is bringing crypto-friendly banking straight into your tracking account. With Juno, you can send money from your Juno checking account straight onto a layer two, like Polygon, Optimism, Arbitrum, and they have ZK Sync and StarkNet support on their way.

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Travis, you recently stated the ETH merge is the most significant event-driven catalyst that we have ever seen in crypto. Can you unpack this statement for us? Why is the merge so significant to you? Yeah, sure. I was, before I jumped on here, I listened to you guys podcasts, like, reasonably often, but I don't catch every episode. And I was sort of like scrolling through your past guests. And I think I'm probably like, you know, not nearly the best person to talk about macro. definitely not even close to the best person to talk about the EVE merge relative to the other

guests. I've got to like middle of the road on both of them, but I do spend a lot of time. But you can do both. Yeah. You can do both. And I do. Yeah. And also, Travis, I want to kind of hear your story at some point through this, because you have not always been bullish on ETH as an asset or the merge. And I want to hear like maybe even stepping back how you came to the tweet. the ethmerge is the most significant event-driven catalyst that we've ever seen in crypto. Yeah, and I guess it's, I am, I am very active in these markets on a day-to-day basis and have been for years. So I guess maybe that maybe puts me in a different category than some of your guests. But, yeah, so we launched the, we launched the Eiki Guy December of 18, the depths of the bear market.

The large majority of what we have done since then is systematic models-driven exposure to Bitcoin with the purpose of outperforming, just holding Bitcoin on a risk-adjusted basis through cycle. So like we build proprietary statistical models. You know, we, you know, try and kind of, you know, catch the meat of the big up moves and avoid the meat of the big down moves. you don't have to do that perfectly. Lord knows we don't do it perfectly. If you can do it reasonably well, as the months turn into quarters, you can kind of start compounding your outperformance versus just holding Bitcoin.

That's the large majority of what we've done over the last few years. We started getting away from that last year. And in terms of how our portfolio allocation of the hedge fund looked, you know, one thing that happened is we bought a little bit of salana and it turned into a lot of bit of salana because the price went up a lot. To a lesser extent, we bought a little bit of FTT and it turned into a lot of FTT because the price went up a lot. And our kind of systematic BTC portfolio allocation just started shifting some because of some of those movements. So in the summer of 2021, I started thinking about just the optionality of the different types of activity that were going

on on layer one smart contract platforms. There wasn't a lot of activity to speak of before DFI summer in 2020. And then now you had this like very tangible use case, an entire new sector with many, many billions of dollars of TVL that was locked up. And then in summer, summer 2021, when NFTs took off, now all of a sudden you had two use cases. So you could, you could own Ethereum and you got defy and you also got NFTs, which to me felt like owning Google stock and getting search and YouTube, or owning Facebook and getting WhatsApp and Instagram. And, you know, I actually, you know, I think tech stocks, the big ones are, you know, pretty good stores of value.

If you just look at their charts over a long period of time, the ones that have dominant market share positions. And I think, and I think that you ended up with just a lot of like pattern matching there. And that, that just started to change my view on how I was thinking about value accrual for smart contracts in general. And, you know, I think that this, this. And so I think, sorry, and then, so I was NFTs. And then gaming came along. Metaverse stuff came along. And Facebook changed their name to meta right around the time that a lot of this stuff

was, you know, getting increased traction in the crypto ecosystem. And so, you know, you started to have some tangibility on the, these different emerging crypto sectors that we've never had in crypto previously. And I think that just kind of changed my view on how the market was going to potentially think about value accrual for these smart contract platforms. So, Travis, that's what kind of changed your mind on sort of the value accrual, is really seeing that utility that you hadn't previously seen. like in 2018, Ethereum smart contracts largely had one use case, and that was the ICO.

My God, look what happened to ICOs. And, you know, coin offerings and tokens, one thing, but now we're seeing utility like defy and NFTs. Let me ask you specifically about the merch. Why do you think that is a specific catalyst for Ethereum? So does this kind of blend some of the best that you've seen with like the utility of smart contract platforms with the steady monetary policy of something like Bitcoin. And I'm not saying it's exactly like Bitcoin because it's not. It's its own separate thing. But 2018 Ethereum did not have the monetary policy assurances of 2022 post-merge Ethereum. Tell us more about this merge

catalyst. Why is that exciting? Why is it the biggest catalyst we've ever seen in crypto? To me, it's the digestibility of it. It's the digestibility of the merge. It's, you know, Ethereum is becoming yield generating and deflationary and, you know, quote-unquote, ESG friendly. And, you know, we can have an entire separate conversation about ESG. But I think we all know that it's a bohemouth factor in the markets currently and in all markets. and the mess that Bitcoin found itself in it with, you know, Elon doing the about face in May of 2020, you know, all of the ESG stuff going on with Bitcoin. Again, totally separate conversation about the legitimacy of those arguments that maybe we can just put that to the side for now.

But ESG is something people really focused on. So I think it's just that it's the digestability of it coupled with the. the willingness and ability for large pools of institutional capital to buy ETH in size. And that's just never been present previously. Like forever, for, you know, the large majority of the history of crypto, the vast majority of large pools of institutional capital wouldn't touch crypto at all. And then around 2020, specifically on the back, I think Paul Tudor Jones, you had institutional capital that was willing to start nibbling at Bitcoin to a degree that had,

you know, a higher degree than it had ever been present. But now from people that I talk to and from my understandings of what that institutional capital landscape looks like, there's just a willingness and ability to buy Eath that has never been been present previously. And so it sets up for, like I said, it's like the largest catalyst in crypto history. And to your point, I'll give the bear and the bull case here for ETH. There is a potential for macro to be so shitty that the merge catalyst is like delayed or sort of wasted because macro is just a very bad environment. Right. Like if the repo market is blowing up plus or minus a month from when the merge happens, like it just may not work all that well.

But I think the flip side of that is that, you know, if the Fed teases a slowdown at Jackson Hole at the end of August and then slows down in at the end of September with an indication that they're going to go on pause by year end. And then, you know, the market is pricing in rate cuts early next year, which they already are. and traditional asset class fund managers are staring down the barrel of, you know, three or four months left in the year. And they've had quite a shitty year because everything's gotten smoked, you know, the potential to sort of save your year by getting along some ETH. Like, that's just a, you know, that's a pretty compelling setup in my view just from like a market structure perspective.

And sorry, and then one more thing that I'll say, because most of that, I went on on Jason and Santiago's Empire podcast a couple months ago. And most of this stuff that I just said, I said on that podcast. But, you know, ETH got cut in half over that period of time, you know, since then and now. So you're talking about a price level that just a couple weeks ago, you know, people would have thought never would have happened or would have dreamed about. So the positioning around Eith is meaningfully more attractive in terms of there's just a lot less money. that's currently long it. And I mean, you're seeing, I mean, it's gone up 50% in a straight line over the last

week or whatever, right? So you're starting to see a little bit of that. As soon as, I mean, I think it came out of the, I guess, was it the last core devs call that they, that September 19th date, I think, got thrown out with a degree. And I mean, that was, I mean, put that tweet on a chart and it went up 50% of straight line since that. Right. Yeah.

The market definitely seems to be derisking the possibility that the merge will not happen. And generally speaking of ETH positioning, I mean, I think that we're all in agreement that the merge is a huge catalyst for just price of cruel inside of the crypto industry. But also there's this juxtaposition with the macro markets as well. And one of my favorite Twitter accounts out there at Ryan Schott Adams says, Ethereum is about to become the world's only deflationary monetary asset at a time of historic monetary inflation. What a contrast. I'm wondering, what do you make of this juxtaposition? Is this something that is like, you know, the secret handshake of everyone inside of crypto-twitter and just crypto in general that we kind of know this juxtaposition?

Or do you think this contrast of like ether, the deflationary asset during a time of super high sovereign debt? do you think that that contrast will land on people outside of crypto? I do I do think it will outside of crypto. Within crypto, you know, a lot of people got smoked over the last two months. And part of the ETH BTC underperformance was, you know, over the last couple months, was that it was like the only thing that people were still long, you know, for all the reasons that we just talked about. And people were fire sailing stuff.

or in some cases, you know, in a good amount of cases, getting liquidated. You know, liquidation is happening into a zero-bid environment, basically. But you've clawed a lot of that back already, you know, incredibly rapidly. And, you know, I just think the entry point for institutional capital just looks a lot more attractive here if you can get some of these macro tailwinds. Like, you know, if the Fed is windsprings, you know, if the Fed is windsprings, towards a recession and potentially some kind of, you know, market crash type of scenario institutional capital, I think, is going to have pretty limited interest in getting,

getting long, eth with that kind of backdrop. But if you can get some, you know, a path to a slowdown in tightening or specifically, you know, the biggest upside risk in my view for macros, some kind of credible treaty situation in the Ukraine conflict. And I don't mean to make light of that at all because there's, you know, tons of people that are dying. And I mean, it's just, you know, it's a really horrific thing. So I don't mean to talk about it just in the context of financial markets, but that's

the context of what we're talking about here. But if you can get some kind of credible treaty there, that's going to have this. setup of like commodity prices down. They've already come down. They've already come off a lot off the high, but like commodity prices down, tightening expectations down, inflation expectations down, equities up, crypto up. And that would be the backdrop for, you know, I think crypto broadly and Eth specifically to run tremendously hard if all of that kind of lines up and you end up threading the needle there. You know, I'm not saying it's definitely going to happen, but I think that is that is the setup. So Travis, let's, let's kind of close this out with our boxing match here of

like macro versus the merge here, right? And so in the left corner, we've got, we've got macro, things looking kind of ugly. Let's say that persists, because as much as, you know, we'd all like to paint the happy picture of, hey, you know, things are going to get better on the macro front. and maybe the Fed will turn some things around and start money printing and thread the needle. That might not happen, right? We might be set up for like a longer winter, and maybe that's kind of the base case. So in the left corner, we have that, macro looking ugly. But then on the right corner, we have the most significant event-driven catalyst that we've ever

seen in crypto, which is the merge, and Heath goes deflationary, becomes an internet bond, has all of those tailwinds of an ESG narrative. and deflationary asset in the backdrop of all the sovereign debt bubble that we're seeing all around us, who wins this boxing match, right? Does like, eith number go up if macro is really bad, but like the merge is really good? Or like, does it still get knocked out by the Fed? I mean, that's the rule that we've been told. Don't fight the Fed. And here's the eth merge in a boxing match with Jerome Powell, who's going to win? Yeah. I would not want to be, like if you, you knew, let's say you knew the repo market was going to blow up in September, I would not

want to be long anything. Cash. You'd want to be in all cash. Just the RR of that would not be compelling to me to be long. But again, I'm like, I don't want to come too much from a trader's, I don't know. That's like a very tradery way to answer that question. A lot of people don't think about their own exposure like that. You probably shouldn't because it's a really, really hard job. But if the macro is bad or, you know, getting even worse, I do think that Heath is going to kind of struggle to outperform and the merge catalyst is going to struggle to be realized just from a price performance perspective because of that macro overhang. But there's, you know, like I said, asset prices are about expectations.

expectations and positioning and rate of change. Very good. Here's what I'm getting in summary. So like if macro goes well, man, we are off to the races. Okay, the merge plus macro, moon. Like heads up, get ready for it. Faces will melt. If macro stays the same and the merge happens,

either maybe looking kind of bullish. Still pretty good, yeah. Maybe the worst news has been priced in. If macro gets hit hard, if it comes out of that, left corner swinging, it punches, ETH in the face, it'll punch every single asset in the face, then look out below, we're still probably, despite the merge, headed for triple-digit ETH, once again,

then we're going up. Yes, that eventually we're probably going up. Travis, thanks for that. Thanks for walking us through that. I remember reading some of your stuff from 2017 when you're first falling down the crypto rabbit hole, and definitely the token economic side was the part I recall that really grabbed you. So that's cool to return to your roots here. And I will say one thing,

you got the formula down, which is like you want to raise in 2021 that year and then deploy in 2022, right? So that's a good timing on that part, my friend, as well. Travis, thanks so much for joining us. I feel like we've got some great insight into macro in the backdrop of the merge. And it sounds like we're going to witness the boxing match in real terms over the months to come. So looking forward to being there on that. Risk and disclaimers, as Travis said, none of this was financial advice. It never is on bankless. Crypto is risky.

Eth is risky. The merge is risky. Macro is risky. Life is freaking risky, okay? But with D5 specifically, you could lose what you put in. But we're headed west. This is the frontier. It's not for everyone.

But we're glad you're with us on the bankless journey. Thanks a lot. Hey, we hope you enjoyed the video. If you did, head over to Bankless HQ right now to develop your crypto investing skills and learn how to free yourself from banks and gain your financial independence. We recommend joining our daily newsletter, podcasts, and community as a bankless premium subscriber to get the most out of your bankless experience. You'll get access to our market analysis, our alpha leaks, and exclusive content,

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