Bankless - Trading the Merge | Arthur Hayes

Starting point is 00:00:06 Welcome to Bankless, where we explore the frontier of internet money and internet finance. This is how to get started, how to get better, how to front run the opportunity. This is Ryan Shaw and Adams. I'm here with David Hoffman, and we're here to help you become more bankless. Guys, we have a special guest, a long-sought-after guest here with us today on bankless. Arthur Hayes, he's a crypto trader of traders. Now he's particularly bullish on the ETH trade. He's going to tell us why. A few things to look out for during this episode.

Starting point is 00:00:35 Number one, why is Arthur a trader anyway? How does he approach the market, the crypto market? We get inside his head. We ask these questions. Number two, why Arthur thinks fiat inflation is a near certainty. We talk energy. We talk debt. We talk demographics. Finally, we get to the ETH trade. That's number three. Arthur says it's the most obvious trade he's ever seen in crypto. And he's been here a lot of years. Is the merge priced in? That's the question we ask him. We also ask, what's more? powerful. The merge or macro markets, he answers that question too. Finally, we get to why Arthur is still alive in crypto when so many other traders have gotten lost along the way Arthur has survived. What are the secrets to surviving in crypto as a trader? David, really fun episode. Arthur's just great to talk to. He has an incredible clarity of thought as well. And I love the way traders think. To me, they always seem. like professional athletes at some level where a lot of this is obviously data and science, but some of this is just art and raw skill, the ability to navigate markets, kind of like a

Starting point is 00:01:45 surfer catching waves. Yeah, he's not a trader that looks at like lines on a chart, right? I don't think I've ever seen Arthur Hayes draw a line on the chart. He is strictly looking at more macro, more zoomed out influences. He's looking at the words of the central bank. He's looking at the fundamentals behind the Ethereum merge. And he's cross-referencing all of these data points, which, as a non-trader yet somebody who makes like content about these same subjects, I can actually like really understand. Yeah. Rather than be like, oh, that little like charty chart thing points this way.

Starting point is 00:02:15 Like no, that's not how Mr. Hayes thinks, no. What's funny, I know we just set him up as a trader, right? And he definitely is a traitor, right? But like, also I find much more in common with him. Maybe this is because he's trading on kind of a month to years-long cycle than a lot of the TA traders or even the narrative traders that I know in the space. Did you feel that too? Yeah.

Starting point is 00:02:34 No, I definitely felt that for sure. It's like thesis-driven trading. Right. Thesis-driven trading, which is like something I can really get behind of all kind of trading out there. Arthur, of course, he was the CEO and co-founder of Bitmex, which was a derivatives exchange that was extremely popular back in the early days of my early days of crypto. And even before I got in 2017 to 2019, it had the vast majority 90% of like all volume on like Bitcoin derivatives. There's a story there where BitMex got into trouble for not doing KYC. That's not the story that we cover here on the podcast. We are strictly focused on ether, the merge, macro markets, and just some other crypto stuff as well. So this is what we

Starting point is 00:03:15 focus on here in the show. Guys, if you want some of David and myself, our thoughts after this episode, I've got a lot of thoughts to talk about David with you. Always too. You got to stick around for the debrief, premium subs. You can get that now. You can access that now. And of course, that is where David and I unpack the episode that was. It's our raw unfiltered thoughts for the Bankless Nation, there'll be a link where you can go premium in the show notes. All right, let's get right to our conversation with Arthur. But before we do, we want to tell you about the fantastic bankless sponsors who made this episode possible. Rocket Pool is your decentralized Ethereum staking protocol. You can stake your eth in Rocket Pool and get our Eith in return, allowing you to stake your

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Starting point is 00:06:21 fiction-free. Bankless Nation, we are super excited to introduce you to Arthur Hayes for the first time on bankless. Arthur Hayes is a crypto-O-G. He's a trader. through and through. Discovered Bitcoin in the early days, 2013 or so, co-founded Bitmex in 2014, became crypto's dominant derivative exchange. More recently, both David and myself have been binging on Arthur's content because he's become one of our favorite writers. He's got a lot to

Starting point is 00:06:47 say about macro, a lot to say about crypto, and even more recently, the Ethereum merge, the ETH trade. That's what we're going to be talking about on bankless today. Arthur, how you doing? Excellent. Thanks for having me. Can I just like kick things off and ask you, so why are you writing so much? You seem to have a lot to say, and I'm wondering, because I know you're a trader, right? So there's got to be some sort of, you know, we could say it's altruism. Maybe there's a piece of it that's education and altruism. But are there some other incentives at play here? Is this about kind of building a brand? Is this about you're just excited about a specific trade? You want to get the word out. I think somewhere you talked about how

Starting point is 00:07:24 writing helped you clarify your thoughts, too. Why are you writing so much? So I think that that latter thing you said about clarifying my thoughts is probably the most important thing for me, right? Because I manage my own money. I really enjoy doing it. I think it's an intellectually stimulating exercise, especially when you get to have opposing views to other people. So you're discussing them. Obviously, it's me versus many from my blog because it's not actually a two-way conversation. But obviously, people post comments on Twitter and other social media platforms to see you hear what people think about what I've written. But at the end of the day, if while you're trying to put together a cogent argument that's going to be read by, you know, a few hundred

Starting point is 00:08:04 thousand people across the world. You don't want to sound stupid. You want to make sure that your facts are correct. You want to make sure that your logic is correct. You want to make sure that you're evaluating all the different ways in which you could be wrong, such that you have confidence in what you think should happen in the future if you're right. And I think if you approach it in that respect, your trading decisions will become a lot better because it's not just, okay, let me just go put this trade on, and I'll find out, you know, in a minute, a half an hour, a year, a month, whatever their time rate is, if I'm right or wrong, I'm going to put this trade on, and I'm going to write about it, and then the whole world

Starting point is 00:08:43 can see me for what I've done and critique it. And I think that is, it's scary in some respects, right? Because you don't want to have, like, miss some fundamental thing. Somebody points it out to you in the first five seconds of reading your piece, you're like, fuck, I didn't think of that. That, like, just completely invalidates everything I've been saying. I shouldn't have put that trade on. Let me go, you know, log back into my trading account and like reverse everything I just did. So that's exactly what you don't want to happen. And I think by spending the time to write and to open yourself up to criticism by anyone with an internet connection, you become a lot better thinker and I think a lot better investor. By the way, have you ever written something

Starting point is 00:09:24 where you did that, where you got some feedback? And you're like, oh, rewind. undo? Maybe it's more internal, right? So I had an idea about, you know, maybe it was a particular subset of coins that I was bullish about. And I had a position on writing and I was like, okay, I may write about this. This is why I like them. And I started writing and I'm like, hmm, it doesn't really sound so good. And then you start thinking about that doesn't really fit with my overarching thesis. I think I got this wrong. And then I'll go back and I'll read out the whole thing. I remove it from my essay and I'll be thankful that I actually want to do that exercise because, no, maybe you can be right in a particular time frame, but if you don't

Starting point is 00:10:04 believe in your position and at least for me, I'm not trading on a very short time frame. So I tend to hold things for, you know, months, years because I can and I have that luxury of doing so. You have to be able to suffer, you know, like this weekend once you eether down like 30% or something like that, something, you know, pretty substantial, right? You actually have to have conviction in your idea, a conviction in your future prognosis. And if you haven't spent hours writing, at least in my respect, then how can you look at the market and say, okay, my market to market is down 30 or 40 percent, whatever it is, doesn't really matter. But I not only believe in the trade, but maybe I'm going to consider adding more to the trade because I think

Starting point is 00:10:44 this is a good buying opportunity. And so I think if you approach it in that respect, it's a very useful exercise as an investor. Some people in the Twitter sphere have speculated that you actually have a ghostwriter, but I'm guessing a ghostwriter just because of the absolute just like torrent of content coming out of your medium blog. But I'm guessing if you had a ghostwriter that would invalidate almost everything that you just said, huh? So there's no ghostwriter behind the scenes. I have a research analyst who really helps me fact check certain things. He'll go and do a deep dive on a particular subject. If we're writing an article about something, he'll go get me a bunch of facts that I want instead of me. I'm going on the internet and do that myself. He'll make some graphs for me.

Starting point is 00:11:22 And so he saves me a lot of time in that respect. And if I want to talk about certain facts and figures, he'll be able to go and get them from me. So I do have a research analyst. He's extremely valuable and saves me a lot of time. It helps me write more. The reason I've never subscribed with Arthur has a ghostwriter thesis, because I feel like you have a particular voice that's really hard to mimic. Like, it's pretty unique and pretty, like, honestly, entertaining. I don't feel like I'm working when I'm reading one of your pieces, which is kind of fun. I'm learning, but I'm not working. But you mentioned before that you're a trader, and that's why I said in kind of your bio. I think of Arthur Hayes, like part of your legacy as a trader through and through. But you also

Starting point is 00:12:00 mentioned that like your holding period is, you know, months, sometimes years as well. Can I just ask the question of like, why are you a trader? Why not just buy and hold? I mean, you were here from the early days, right? A lot of people have had a lot of success, obviously, in crypto. And, you know, some of the most successful people in crypto from a returns perspective of just bought and hold. Why do you trade instead? So that's just my mentality. I think buying hold works for a certain mentality, especially crypto, I'd have to say you probably have to be a little insane. And that's not a dig at certain people. If you look at some of the longest term holders of Bitcoin, they've held it when I went from a, you know, a few cents to

Starting point is 00:12:39 imagine you bought Bitcoin and it was worth a penny. And it was worth a dollar. You're 100x. You're like, fuck, I killed this trade. And then, you know, 10 years later, it was $60,000, right? How much conviction did it take for somebody to hold an asset? I don't care what it is. You have 100 times yet you believe it's going to go higher. That's not me. I don't have that mindset.

Starting point is 00:13:02 I approached crypto when I first, you know, discovered Bitcoin. I was like, wow, I'm an arbitrage guy. I sit at work where I used to all day long and I try to make a few basis points, selling features contracts and buying stocks. And I did that for five years. and it'd be a knockout trade if I made it in a percent on a trade. And yet I come into crypto, I log onto something to change. And I'm like, whoa, my P&L is 200% annualized for training by just doing the simplest trade,

Starting point is 00:13:32 selling a futures, and buying cash. And that's what I started doing. You know, obviously over time, I came to believe more in Bitcoin and the whole ecosystem and whatnot. But when I approach it, it's okay, I understand this trade. I understand derivatives. This is this new, you know, ecosystem. But fuck me, this is an amazing trade. And I take the risk of believing in Bitcoin or not out of it.

Starting point is 00:13:53 And so that's probably where I come at it from. And obviously now I have much more capital to play with. I can become a long-term investor and doesn't really matter to me if the price goes to up 50% or whatnot because I've segmented that particular part of my portfolio. I know what it should be doing. I'm perfectly happy with the volatility. And I don't want to sit at the computer screen all day doing trades. I'd rather write, read a book, do it,

Starting point is 00:14:16 thing. So, you know, to be a, you know, trader on a short time frame is extremely difficult. It takes a lot of dedication and it takes a lot of time. Arthur, as a trader, what did you see in crypto that struck the light bulb? As in like, oh, I want to trade here now. What about the crypto industry or crypto thesis, investment thesis or be it whatnot attracted you so much? The fact that, you know, it takes an internet connection, you log on, you start trading. So you have a whole, this whole spectrum of humanity. And because it's, you know, money, right? Money is completely fictitious. It's a mental construct of socialized humans. There is no intrinsic value. So it's very religious. So you either have people who hate it or people who love it. And those are the best

Starting point is 00:14:59 kinds of markets because you're in extreme volatility as you move from the greed and the fear emotions and you don't have anything intrinsically to base it off. It's not like you're buying and selling property or like something you can hold in your. your hand. There's nothing. It's literally somebody or some organization posted a paper on the internet and said, here is a piece of software. Let's mine this made up currency and look at where we are now, you know, trillion, three trillion, whatever you want to call the total market cap. And you have everybody who thinks this is a complete scam to, you know, this is the way that we should be organizing human affairs using code as law and whatnot, right? So these two spectrums,

Starting point is 00:15:38 that's what you want to trade. You want intense volatility, intense beliefs, because you're going to catch people on both sides where wrong. People will believe too much in the upside, believe too much in the downside. And as a trader, you want a highly volatile asset to trade, because I think that's extremely interesting, at least for me. I think it's interesting that your answer begins with, well, crypto is super religious. But I don't really see you as having picked a crypto tribe, right? Like, you're not a bit corner, you're not really Ethereum. You're a trader. Have you ever been compelled by a particular tribe in crypto, or like, how have you navigated these waters? I think everything in life is nuanced.

Starting point is 00:16:13 It's like thinking that in markets, right, nothing goes up or down in a straight line. It's a wave. And so while there might be a camp that's particularly right in a long term, you know, I think Bitcoin is obviously the shining light benchmark asset, the purest form of money in our ecosystem, probably one of the best designed currencies in our ecosystem. But it'll go a few ups and downs. Some of the coins are outperforming at some other times.

Starting point is 00:16:39 Bitcoin will outperform at other times. And so if you're in this, you know, okay, I just buy a whole Bitcoin and that could be your life. And that's completely fine. And that, you know, to me that's not that interesting. I'd like to try to, you know, trade around. So it also is interesting out there. You know, Ethereum obviously has captured my interest. And there's a lot of other new things that people can develop using Bitcoin, Ethereum, and some of the other early projects as a substrate to just bring their creativity to it and see what they can create.

Starting point is 00:17:08 Yeah, what's really interesting. I think Arthur is, well, you may not have a kind of like a specific tribe, like, you know, Bitcoin Maximilist or something or either maximalist or something like this. I do think you have a very pro-crypto thesis. Like your thesis is that crypto is going to appreciate relative to almost every other asset and certainly relative to like fiat-based assets. Maybe that's where we want to kind of pick up the story. If we're sort of unpacking Arthur's brain here, you wrote an article recently I really enjoyed called a samurai a knight in the Yankee. And the samurai, of course, is Japan. So the central bank of Japan, we've got the knight, which is the EU and the U.S., which is kind of the Fed,

Starting point is 00:17:49 Jerome Powell and company. And they all, the beginning of this article, they all meet at an inn. And they discuss what they're going to do, what each of their kingdoms are going to do about this great bear, which is, I think the analogy is Russia that's kind of attacking the kingdom and wreaking havoc. And the scourge of the bear, which is inflation. How are the samurai and the Knight and the Yankee going to quell inflation for their respective kingdoms? What tools do they have to bear? And so the article begins with this discussion. Can we talk about that for a minute?

Starting point is 00:18:20 Sure. Because I feel like if we're going to dive into macro, we've got to hit the subject of inflation. From your perspective, what is the cause of inflation right now? I think there's two causes. There's one cause of, okay, you know, maybe we'll back up a bit, right? So, World War II ended. United States didn't really have any, apart from Pearl Harbor, the contiguous in the United States was not damaged.

Starting point is 00:18:46 Europe, destroyed. Russia, destroyed. China, destroyed. Japan, destroyed. So you think about the major industrial powers pre-war War II, most of them were in shambles. And then in-rides, the U.S. to the rescue and says, hey, Europe, here's this Marshall Plan. Here's a bunch of money, but alone you, some money. rebuild yourself, didn't really do so much for Russian China.

Starting point is 00:19:09 Japan was essentially a pseudo-American colony for a few years. They exited that, and they were on our way to industrializing as well. And America said, hey, guys, build yourselves back up. And guess what? We'll open our markets and you can sell your excess stuff to us and we'll buy it. And that worked really, really well for, you know, 30, 40 years. And as a consequence of being the global reserve currency, you know, America had to open up its capital markets.

Starting point is 00:19:37 And post the 70s, when America went off the gold standard, had to become more financialized. And I think you have two big trends that sort of made the, you want to call labor, the right of workers or their percentage of income that they earned secularly in decline, and that was women in the workforce and China. So you have all these new people who want a job, who can have a job. And obviously the wages go down. And so corporate profits go up. Great for corporations.

Starting point is 00:20:07 And so, you know, and then you have technology, the internet, computing. And so stuff just gets cheaper for most people. Energy, we get better at extracting oil and natural gas, other hydrocombers of the ground. That gets cheaper as well. We get more efficient in our economies. And so that lasts from, you know, 1980s until probably, you know, early 2000s, 2010. And then we get to the COVID here. where, you know, we think that, okay, we've conquered this energy thing.

Starting point is 00:20:36 We're going to become green. And we're done with fossil fuels and we're going to go wind and solar and whatnot. And then we have a pandemic, which we do about once every hundred years, right? Spanish flu. Now we have this one debatable, you know, severity or whatnot. And obviously, a lot of people die, which is very sad. And what did they respond with? We're going to print a bunch of money and hand it out to people.

Starting point is 00:21:00 Now, U.S. did the biggest, you know, M2 and the U.S. was a lot of, 40% from my 19, from 2019 or until current. And everybody else did, you know, something similar. And so we have this monetary aspect. And so we said, hey, people, here's a bunch of cash. We're going to hand it to you. Go buy stuff. And so people bought stuff.

Starting point is 00:21:19 They bought a lot of stuff, especially in America, you know, stimmies, right? Maybe they went to their Robin Hood account and they bought GameStop or they went down to their auto dealership and they bought a new, you know, pickup truck or whatever. So we have inflation because people have a lot of, money. And then, for whatever reason, you know, West, U.S. and EU-S.-ledged NATO and Russia have a little, you know, falling out over this whole Ukraine issue. It's irrelevant whose fault it is or right or wrong doesn't really matter. And the response was, hey, we're going to kick the biggest

Starting point is 00:21:53 energy exporter in the world, and that's what Russia is, whether that, and that's, you know, crude, natural gas, fertilizers, and some foodstuffs, where we say, you know what, fuck you, we're going to take your money, we'll freeze it. We don't want to trade with you anymore. Okay, cool. And so now you have real inflation of energy and food, because when you remove the biggest exporter out of the global equation, you make things more expensive.

Starting point is 00:22:18 So not only did we give people a bunch of money to buy stuff, we also have a particular block of countries that said we're not going to trade with the biggest energy exporter. And so you have that, those costs going up. And so I think you have two horses in places. There was the monetary aspect of printing too much money. And then there is, we're going to upend global supply chain. So it's just more expensive to get energy from where it's produced to where it's consumed.

Starting point is 00:22:49 And unlike, you know, Bitcoin, when you build a gas pipeline or you drill oil wells, you have a destination in mind of where it's going to go. And so to reroute oil and natural gas from. Europe to buyers in Asia, India, and China, it's not the easiest thing to do. And I think, you know, Zoltan, Posnar, how are you pronounce his last name, that Credit Suisse has written very extensively about it's not that easy to reroute these commodity flows. And that is structural inflation. And there's nothing, you can raise up to risk rates to 30% if you want to use the Fed. That's not going to build an oil pipeline. That's going to get the oil from where it's produced to where it's consumed. And that's the problem. So I think we have two pillars of this, you know, inflation. your problem. Now, yes, you can solve the monetary one by, you know, raising the industries, cutting up the quantity of money. But unless the West wants to reengage with Russia and say, you know what, sorry, we'll buy your stuff again, then that other structural part of inflation is still there. And it's not as if we have another China or another half of the population

Starting point is 00:23:52 that we're going to add to the workforce to make things cheaper to produce. And so you said this later in your article, kind of the conundrum or the predicament for the samurai the night in the Yankee is like, is this. They have a whole bunch of debt that they eventually have to inflate away. You said this. I will argue that the only solution left for any governments of countries that are not productive, which includes these countries, is to pay back their debt loads by inflating them away. And so that you think is the eventual outcome for all of these countries.

Starting point is 00:24:25 And maybe that's what inflation actually is. It's the process of these governments inflating away. all of their debt. Can you talk about kind of that endgame scenario for the central bankers and why you think that is the only solution left? Well, it's not the only solution. There is another solution. It's just one. So my opinion in my view is that the role of the central bank is to protect debt-backed asset deflation. And if you're a bank, that is game over. Because what you do as a bank and it's pro-cyclical is that housing is the easiest example, banks lend against houses. because the house is so expensive, the majority of people can't afford a house without financing.

Starting point is 00:25:05 Therefore, the value of the house is entirely dependent on how much financing is available. And that's great if the prices are going up because the bank lends money against the house. You can get financing. Therefore, the asset grows up. The bank's loan looks healthy. You make your payments. Everything is great. But what happens when the asset price goes down?

Starting point is 00:25:26 Well, it makes us, oh, no, I don't want to lend against his asset anymore. And so by restricting lending, you actually cause it to go down even further. And it's pro-cyclical on the downside as well. And this negative feedback loop, and, you know, anyone who owned U.S.T. and Terra understands these a little bit better now is something that the central bank is there to protect. And in the 1930s in the Great Depression, the lesson let a lot of these bankers learned was that the Federal Reserve and other global central banks, they took the austerity path. They didn't step up and give the Fiat money to protect the banking system from cleansing all these loans.

Starting point is 00:26:04 And that is the cause of the depression. And we never want to do that again and let the banking system essentially fail. So every time there's a little hiccup where the banks overextended themselves, we're going to say, you know what, don't worry. We'll back you up. Here's some more Fiat credit cash. We can print it. Don't let the loans go down. Don't extinguish the credit and get back to a healthier standpoint.

Starting point is 00:26:24 So we've been doing this since the end of the Great Depression. And so we've gotten to this to this point in human civilization and the arc of human civilization where we don't, unless someone's going to discover a new form of energy that's going to be extremely productive, it's not like we have another 100x improvement in the use of energy in our economy. So then how are we going to pay back all this debt? And it's not as if the most productive developed economies, their population they're growing. They're actually falling because as people get richer, they have fewer kids. So there isn't this population in the future to pay back all this debt. So yes, they could shrink the economy to the level of which the future projection and energy uses demands. That'd be pretty painful.

Starting point is 00:27:08 And their constituents, the banks would all go bankrupt. Or they can inflate it away in the global population or citizens can pay for it. So you have two options. And so my view is that because central banks are there to protect. the banks, acid books from falling, they won't choose the option of deflating the world economy to a more sustainable level, which would be extremely painful. They will inflate it away, which is what most governments do when they face this conundrum. And this is not a new problem. Every major civilization faces the same issues. You run out of cheap, plentiful energy,

Starting point is 00:27:43 whether that's slaves, oil or wood or coal or whatever it is, and you resort to inflation. This phrase structural inflation is the first time I've heard that. And like my understanding, just to check it, is that we used to have this global economy that was all plugged into each other. And then we had this like war in Europe that decoupled the fiat currencies of the West of Europe and the United States from the energy supplies of Russia. And I think America is kind of hooked into Europe because there are political allies. And so their desires or our desires to a decent extent. But then when Europe gets unplugged from Russia because they stopped buying Russia's energy because Russia invaded Ukraine, something that pissed off politically Europe. All of a sudden, we like decouple the energy backing to our Fiat dollars. And now like there's a systemic like demand for energy that can't be supplied by the market because that market is broken. And that creates structural inflation, which is aligned with all of the banking system with what you just said, which is that we can't allow for too much deflation because then it'll cripple the whole thing.

Starting point is 00:28:50 So your natural conclusion is like, well, we have the separation of fiat currency and energy in the Russia versus Europe, plus this systemically financialized economy that can't go down or else it goes to zero too quickly. And so therefore, your conclusion is that like everything inflates. Was that a fair summary? Yeah, I give it a bit more nuance. And U.S. isn't a better position than Europe because the U.S. is a net energy exporter, I think. Right. Yeah. I don't know if someone can check me on that.

Starting point is 00:29:21 Has a lot of land feed itself. Europe maybe can feed itself. Cannot function at the industrial level. And let's forget about everything Europe except for Germany and France. They're the only that matter. They cannot function without cheap energy. Germany especially cannot function without Russian gas. And we're seeing that play out in real time.

Starting point is 00:29:43 Was it German producer prices? I don't know, 40% year and year in the last print or something ridiculous. Trade balance is negative. Some of the biggest industrial giants in the world are contemplating, shutting down these facilities. And these are not, and I am not a chemist or, you know, I've ever built anything at this scale. But for my understanding of these very complex systems, it's not as if you flip the off switch. You know, three months later, everyone goes, okay, sorry, Russia, we'll take your oil again, and we'll take your gas. And you flip the switch back on, and the next day it turns back on. It's not, one of those things. So if it goes off, it's going off for a while. And so that is, I think, the problem of Europe. Now, U.S. is, I think U.S. will have a structural inflation. Will it be, you know, crippling? Probably not because, you know, geopolitically, it actually has enough stuff to, you know, feed itself and has enough energy. Europe is in a different situation. The question that I posed in that article was, okay, what's America's resolved to help all their ally?

Starting point is 00:30:45 Are they willing to print money to hand it to Europe so that Europe can hand it to its citizens to smooth over the cost of energy? That's the question. Similar with Japan. Japan's a net energy importer. They're only starting to now think about restarting the nuclear reactors. And so if Japan is going to be the U.S.'s staunch ally, which essentially is facing China that contain China from a naval perspective, can the U.S. let Japan go its own way? or are they going to come and support Japan because I think Kuru Dissan in his recent, I think he was at Jackson Hole. He said, I'm going to continue the policy of real care control and cheap interest rates way below the rest of my peers at other central banks because I believe inflation in Japan is transitory.

Starting point is 00:31:33 That's what he said in so many words. He's going to continue running this play where the yen is going to get weaker and weaker and weaker. energy costs are going to go up and up and up unless politically Japan is allowed to buy Russian energy. I don't know. So the U.S. has a decision to make how much they want to support their allies. And this decision has to come by this winter. I was seeing a chart like just last week for like a German megawatt hour and like the price chart for that. It's up like three X in the last like six months or something. And so like there's already very expensive energy in Europe. Some of my European friends were talking about like, you know, even in the summer, energy prices and energy contracts

Starting point is 00:32:13 are already like super elevated. And so it seems to be like we're not going to be able to get past the winter here because this is when Europe gets really, really cold. And that's when energy goes from a nice to have to like, I need this to survive. And so like, are you kind of focused on like this winter as like a big, this moment when a lot of these decisions must be made? It will have to be made. It's just the outlet will be anger from the populace. And so if you Russell is going to come to the rescue and save the political construction of Europe, where you have Brussels making all these decisions based on their ideology, which is at odds with the average person who is going to have a lot harder time feeding and heating themselves this winter. Either they'll express that in elections, Italian elections, or September 25th. We'll see how those goes. Or are they going to express those in a more probably peaceful protest, violent protest, what have you. And so when it's hard to eat and when it's hard to eat your home, you go out in the streets

Starting point is 00:33:14 and we'll see what happens. So Europe, Japan, increasing inflation. Of course, there's inflation in the U.S. too. But you introduced kind of this prospect of the U.S. helping, right? The Yiki riding and kind of saving the day. What form would that take? Is that sort of like the Fed purchasing Japanese and Euro bonds? Is that what that looks like?

Starting point is 00:33:35 Yeah. That could be one way. The Treasury is authorized to do this. They've done it in the past. They can go out and they can purchase the bonds of ECB, well, that Euro member's issue and the BOJ issues in Japan. Not the BOJ, the Ministry of Finance in Japan. Or the Fed can stop raising rates.

Starting point is 00:33:57 It can go back to easy money. The dollar is, I don't know, 20%, 15% something. Something meaningful over the last, you know, 12 to 18 months. that's very bad for Europe and Japan because energy is priced in dollars, therefore their import bills go sky high. So by, you know, Powell continuing to bang on the thing, I'm going to be Paul Volker, I'm going to raise rates and break inflation. Well, your colleagues across the pond, whether it's the Atlantic or the Pacific, they don't have those options. if ECB stops buying the bonds of Italy, Spain, Greece, Portugal, then those countries won't be on the euro. But on the other hand, they need to raise interest rates to combat inflation.

Starting point is 00:34:42 They can't do both. They've kind of fucked either way, unless somebody with the global printing press can come and save them. But let's a political decision. I don't know which way it'll go. But, you know, if these are the allies of the U.S. and essentially do, what they're told by the U.S. political establishment, then the reciprocal action would be, well, you've got to help us survive politically because politically the Euro project will not be able to survive if the ECB goes in a long without any help from America, in my opinion.

Starting point is 00:35:15 So, okay, so the setup that you've just described is this. So the U.S. doesn't want Europe or Japan buying energy from Russia, right? They don't want that for geopolitical reasons, war in Ukraine, etc., right. So we've got that. And yet, if they stop buying, which they have, energy from Russia, then they're faced with this rampant inflation, which causes domestic issues, domestic turmoil, citizens revolt kind of thing. And so the way to alleviate that is for the Fed to ride in or the U.S. to ride in and to start purchasing bonds or decrease its inflation rate. But in doing that, then you maybe cause more of an issue in the U.S. with inflation that. we already have, and then the U.S. gets its own political instability, you know, population revolt sort of

Starting point is 00:36:03 issues. And we all know the U.S. is not exactly a stable place, or at least certainly not as stable as it has been in the 1990s in the early 2000s in the 2000s era. So it's like we've got all of these counteracting forces, some of which are, I guess, just raw physical like energy and the price of energy and that sort of thing, many of which are geopolitical. And it almost feels like the central bank is kind of taking a backseat to like the secretary of state and like geopolitical issues. So that is the landscape we find ourselves in right now. Oh yeah. I would agree. And again, there's a decision tree. What and what do the politics dictate for those in charge? And there's no easy solution here. Can we talk about another difference, I guess, a subtle difference between,

Starting point is 00:36:45 you know, Japan and EU and the U.S. and that is demographics. And you just hinted on it. But there's like this tantalizing, you know, two liner in your article. When you live on a farm, children are free labor. When you live in an apartment, children are expensive conversation pieces. I thought that was funny, cleverly put. I got it from Peter Zeheim. I've heard you say that before, too. But it's this point that as countries mature and become economically more advanced, they start to have less children.

Starting point is 00:37:13 And the EU and Japan are in a far worse place than the U.S., but even the U.S. is starting to have far fewer children. And not repopulating your population, that is deflationary from an economic output perspective. And so that's a problem too. Can you reflect on that a little bit? Yeah, sure. So I think at the end of the day,

Starting point is 00:37:33 we're all a product of the baby boom. This is global across most of the developer post-World War II. Everyone had a bunch of kids. And we promise at least in the U.S. to stay in the U.S. contract, it was, hey, kids, go out, work really hard, and spend all your money. Because the U.S. government's got you back when you get old. And, you know, when you get old, we got Medicare, Medicaid, Social Security, and we're going to take care of you.

Starting point is 00:38:02 So don't worry about it. Go out, buy the new car, get the starter home, then move up to the next home, get the ski house in Tahoe, get the beach pet on the Hamptons, get the boat, do all that stuff. Don't save your money because the government's got you. And so the third rail of U.S. politics is health care spending. I don't care if a Republican or Democrat, there is no chance that you will be reelected if you vote against old people and their health care because it was a promise. And the placid promise made to the boomers, this is how it's going to go when you work really hard and do what you're supposed to do.

Starting point is 00:38:37 Now, unfortunately, they didn't have enough kids to support them. And their kids aren't making enough assets, right? The boomers have all the assets. They have, what, $35, $40 trillion of financial assets, the millennials, are probably one of the worst off generations, and I don't know what the Gen Z situation is. Gen X is just not that big, so it doesn't really matter. And so, like, who's going to take care of all these old people? Who's got the money to take care of?

Starting point is 00:39:04 We're all the nurses. We're all, you know, we're sitting here on Zoom or I forgot what the name of this app is. We're all computer desk jockeys. We're not doctors. We're not nurses. We're not janitors. We're not, you know, cleaning people's, you know, feces and urine as they die in a hospital. that's what we need because we have the oldest, the biggest generation and the wealthiest who are

Starting point is 00:39:26 going to die over the next, you know, 20 years. And there's not enough stuff and people to support that happening in a way that's going to be affordable. And so that's the real problem. And so as the workforce is aged, the Central Vegas responded by printing money to keep the acid prices high. Everyone feels rich. Stock market's still, you know, doing well. Obviously, it's down a bit. Still, you know, it's doing better than it should if you think about the fundamentals. And I think that's a real issue. And I think I pointed at sign of my article, a very crude chart of a very, very long period of time. It looks like the central banks are just printing money to cover the fact that the labor force is declining.

Starting point is 00:40:08 And they don't have any other way. You just can't create people. You can't create 18, you know, 18-15-year-old workers just because it's re-election time. I mean, you need more people to pay taxes to support the old people. It just doesn't work like that. You know, a baby takes nine months. It takes 18 years and come 18 years old. True.

Starting point is 00:40:28 So, yeah. The math does check out on that one. I did it myself. The Brave browser is the user first browser for the Web3 internet, with over 60 million monthly active users. And inside the Brave browser, you'll find the Brave wallet, the secure, multi-trained crypto wallet built right into the browser. Web3 is freedom from big tech and Wall Street.

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Starting point is 00:43:13 well, at the end of that, we're printing money. So, like, not only is, like, the same conclusion, no matter, like, what part of this conversation we want to start always the same. It also just feels, like, really messy. And for, like, a whole entire, like, industry of crypto people, I think a decent number of them are these cohorts of people that were like, you know what, I don't want in my life politics and mess. You know what? I want something really simple and really objective, something like code is law or something like this. And so I'm wondering of like this is a little bit of to like why you are somebody who's a trader, but specifically a crypto trader. Like is this why crypto for you is like, well, every single point of like conflict in

Starting point is 00:43:53 the real world ends up with a federal bank or central bank printing money. And it's also just like politically messy every step of the way. And it seems to be like crypto is just this really elegant antagonist to both of that where we have these monetary policies that are codified by code. And, you know, it's not messy. It's actually quite interesting. There is much less political surface area on all of these things. And that makes this thing like a much more just intellectually curious of a industry to be in. Is this like the juxtaposition between these two industries? Is that why you're here?

Starting point is 00:44:22 I think it's just one of the first times, oh, okay, if we think about transitions in monetary technology, if you want to call it that, right? Double entry bookkeeping, that was what, I don't know, 16th century Italy, somewhere around there, Medici's. Yeah, that's right. something around there. You have the printing press, major technical laws of advance, printing money, right? Paper money, big thing.

Starting point is 00:44:49 You have the telegraph, communications, you know, being able to communicate value across the world. That's kind of like Bitcoin. So you have these big, you know,

Starting point is 00:45:00 and you have the, obviously, the computer, right? And so, you know, we're moving forward in the way that money and technology interfaces.

Starting point is 00:45:07 And we don't consider these things, technological advancements, but they are, and they were back in the day, if you had a telegraph and the other bank didn't or the other trader didn't, you had better information and you made better decisions. And so I think crypto is part of politics. It is monetary. If you try to deny that and think it's just, okay, I'm just going to put some code on a piece of paper,

Starting point is 00:45:32 then you're kind of missing the point. We're reorganizing how we interface with each other socially. with this money thing, and we have a new piece of technology, the computer, in the internet, and cryptography, and we're expressing it in a different way. And we're expressing it in Bitcoin, Ethereum and all these new things that people's minds have been able to create because the physical constraint of, okay, I need to build this massive building. I need to have a bunch of people with guns to guard this fictitious thing we call money, because that's how we, you know, and gender trade amongst each other,

Starting point is 00:46:08 well, I can just code up some lines, put things up on the internet, and if enough people like what I've done, then I've just created value. It's the first time in history that, you know, anyone who wants to learn a little bit of code can literally create their own currency. Never before in the world could you ever do that.

Starting point is 00:46:26 And so it's extremely powerful. I think we're unleashing human creativity. I'm like, okay, this is how we've done things, you know, for the last hundreds of thousand years in terms of social finance, there's another way to do it. Is it going to be more successful or not more successful? I don't know.

Starting point is 00:46:41 It's up to the quality of the stuff, the people involved, and how we react to different stimuli. And so I think that's what's supremely interesting. And as a trader, you want to be at the forefront of new technology because you want to have the better tools versus the other competitors

Starting point is 00:46:58 because that's how you become a better trader and you have better results. Yeah, so your answer really just boils down to just, a new frontier of digital technology and financial technology. And so, you know, the frontier means like I get to front around the opportunity, of course. We say this line every single bankless podcasts. But I'm wondering if like this mess that we're getting into with this war in Ukraine and like our conflict with China and just overall the politically chaotic state that we seem to

Starting point is 00:47:24 find ourselves in. Do you think that that once we're done with all of this, whatever that means, whenever there's like a new normal on the other side of the Ukraine war on the other side of just like the winter here, when we do find that. ourselves in a new normal. Do you think that crypto as an industry will kind of be elevated in the sense that people will kind of see its merits for what it was? Like, oh, every single central bank's printing money. Like, well, like, there's this Bitcoin thing. It's got the 21 million units. Maybe it's not so crazy after all. Like, how do you think the political landscape changes once we're through all of this mess in terms of crypto? Does crypto have like a main center stage role

Starting point is 00:47:58 to play here? Or is it still just kind of like, well, it's like the frontier of technology. And so it'll survive under its own merits. Like, how do you think of these things? idiosyncratic personal thing, right? Everyone around the world lives in a different system. It's a different country. He has different rules. Those countries are going to react in different ways to, you know, this new global conflict that's going on and this new world order that's being worked

Starting point is 00:48:21 out and this whole messy process. Hopefully we're not all, you know, ashes and some nuclear conflagration. That's what I hope. And, you know, depending on how a particular, country handles it or what's the adversity that

Starting point is 00:48:39 they're facing, crypto may be something that's used or maybe not something that's used. It may completely demonstrate its value or be

Starting point is 00:48:48 completely useless. Imagine if you're in a country that decided the best course of action would be to just shut off the internet and shut down

Starting point is 00:48:57 the electricity grid. You know, we're just going back to burning wood, go back in your hut, right? Is crypto really going to be

Starting point is 00:49:04 useful for you? you, how are you going to charge your cell phone? Right. So I don't think you can make a blanket statement and saying, like, crypto is going to demonstrate its value. It might demonstrate its value for a particular set of countries under a particular set of circumstances, but it also might be completely useless depending on how things turn out. But for you, so for you as a trader, what do you denominate your value in? Is it the dollar? Is it the yen? Is it the euro? Is it Bitcoin? Is it ETH? Is it something else? I probably need to create a screen for this, but I guess my thesis is it's oil.

Starting point is 00:49:36 At the end of the day, everything I do is predicated on a oil, let's call hydrocarbons, right? My whole existence is predicated on the hydrocarbons. Sitting inside of an air-conditioned apartment, hydrocarbons. I'm talking to you on a computer powered by electricity hydrocarbons. Bitcoin is mined using electricity hydrocarbons. I go to the supermarket to buy my food that's flown all around the world so that I can consume whatever veggie or piece of meat that I want to have, hydrocarbons. The fertilizer used to get the yields that we need, ammonia, potash, all these different things, hydrocarbons. My car, hydrocarbons.

Starting point is 00:50:18 So everything. I want to go travel and I get on the plane. Jet fuel, hydrocarbons, right? Everything, our whole life. And so your ability to maintain a certain standard of living dependent on your use of hydrocarbons is the gold standard. It doesn't really matter if you have Bitcoin dollars, gold, yen, euros. If I can't buy enough hydrocarbons to have the lifestyle that I want to live, then I don't have the right mix of investment, investable assets. And that's all that matters to me, at least.

Starting point is 00:50:46 And so your denominator is energy. We had this podcast with Joel Mnagro from Placeholder. And you really defined capital in capital is this thing that can influence and change the state of the world. But I think if you really just boil down to it, that's kind of what energy is. And so your denominator is just like the things that can change the physical atoms of the world. And that just gets really, really meta really, really quickly. It's like the cost of moving atoms. Yeah.

Starting point is 00:51:11 Yeah. Yeah. I mean, our entire human civilization is just we take the potential energy of the earth, which took the potential energy of the sun. and we convert it into action. And that action is our economy. And through those actions, we build things. And so that's all we do. And the money, money, the best forms of money is just a representation of pure energy

Starting point is 00:51:32 because energy is not money, because energy is useful. We want to store energy. Storing oil is hard. When storing natural gas is hard, storing Bitcoin is easy. If I can't go in my basement and go store, some oil that I need to use next year, but I can store Bitcoin because Bitcoin is basically pure energy that's spent to solve math problems. Okay, I'll take the Bitcoin. Or, you know, the dollar is, you know, the U.S. military's ability to go get oil from around the world and

Starting point is 00:52:03 deliver it to holders so that they can buy things. Okay, they may be able to hold some dollars or maybe I'll hold some euros or maybe they'll hold the RUB because the RUBel has vast stores of energy and they're willing to sell it to the world for the RUBel. So at the end of the day, I just want to own claims on energy, and I don't want those claims to depreciate over time. I don't want there to be a billion dollars for a billion barrels of oil, and then 10 years from now, it's $10 trillion for the same billion barrels of oil, right? Unless my wealth has gone up by that much, then I've actually lost energy purchasing power, and that's how I like to think about things.

Starting point is 00:52:41 So you want your store of value to be the thing that preserves the value relative to hydrocarpins? Basically. And that could be a portfolio of assets, but it's not necessarily just Bitcoin and Eith. It could be a whole portfolio of things. Correct. Interesting. That's the first time I've ever had that perspective. It says in Arthur Hayes original, or is that borrowed from somebody that you respect?

Starting point is 00:53:01 No, I mean, I think it's just reading about different things and trying to like go into the real. What is this piece of paper or this, you know, bank credit that I have? What does it actually represent? Well, it allows me to go and request. something of value from somebody else. And they're going to give me their time. They're going to give me something that they own. And they're going to take this piece of paper that's fictitious.

Starting point is 00:53:23 Or they're going to take this Bitcoin that's made up. Or they're going to take this shiny rock. And they're going to give me something of value. They're giving me their time. They're going to give me essentially their energy output. That's what money is. And because I can't store oil as an individual or even if, you know, it's very hard to do at a major scale as well.

Starting point is 00:53:43 That's why we have money because money makes things easier. because we all had to like carry around a little barrel of oil like hey hey guys you want to give me an hour of work here's a little barrel of oil okay cool I mean what's so interesting to me about all those different like things that you select for your store of value relative to like um it's ability to retain value against hydrocarbons is it really depends like on kind of the settlement guarantees of various things based on how the world pans out like if we go full dystopia like post some world war three event, right? Like, ain't none of those things going to matter because we might not even have electricity. We might be back to, like, fire. You know what I mean? And like, we're way back in time. But if maybe an individual country breaks down, their global banking system breaks down, then maybe IOUs that you held in that fiat currency or in that, you know, kind of that, the banks in that country, then those are no longer good. So it feels like you have to keep on shifting your portfolio

Starting point is 00:54:41 relative to events that are happening around the world and to plan for different possible scenarios from bad cases all the way to kind of like best cases where there's no new world order and the world continues to function as normal. Absolutely. Anyone who says that they have the solution and never changes is selling you dog shit.

Starting point is 00:55:01 Now I can't help to put on my ETH cap and notice that like ETH, we call this gas and actually when you make a transaction on Ethereum, somebody's CPU actually heats up and expends energy to run that computation. And Arthur, you're all of your, not all of your articles, but all of your crypto-focused articles lately have all been focused on ETH. So can you give us, after we've gone through like macro and what you denominate in,

Starting point is 00:55:24 can you give us like, why are you so hyper-focused on ether right now? So I think, you know, I obviously made this call about the Fed pivoting and maybe it happens, maybe it doesn't. And I've got a recent essay that I posted, I cobble together this liquidity index and shown how it's very well fit in terms of Bitcoin goes, how the dollar liquidity goes. And, you know, it's very, very difficult to forecast the politics behind what the central bank is going to do in a short period of time, like over the next, you know, year. I mean, I have a very strong view about what they're going to do over the next five to 10 years, inflation, inflation, inflation, you know,

Starting point is 00:56:01 default by any other mean called default. But that doesn't help you today. However, this EF thing is interesting. We have the number two currency that's going to from proof of work to proof of stake. Now, whether or not that's a good thing, it's irrelevant. But the structural fact is there's less issuance of it. It's the only currency of this size that's doing this switch. So it's not like we care about what Solana is doing or Cardano is doing or any of these other L1 competitors. It doesn't matter.

Starting point is 00:56:30 It doesn't about whether or not ETH processes more TPS than the other competitor. It's here's an emission schedule and an inflation schedule and a value. We know what it's going to be afterwards. we know it's almost impossible for you to pre-trade this situation. The flows are just going to be the flows similar to the Bitcoin-Having. We know how Bitcoin-Havings have panned out over time. So I love this trade because that can be wrong on the Fed and still make money, in my opinion, in Ethereum, because the structural flows are dramatically changing in such a way that it gives, I think,

Starting point is 00:57:09 the price enough upside to overcome possibly a negative macro environment. And that's the only trade that I see right now with that sort of setup, and it's a one-time thing. And, you know, assuming that it actually happens, and whether it's September 13th or 15th, whatever the date is, and it's successful, then the flow is stark. And we see, you know, are we going to be in over the next few months? Okay, issue rates reduces.

Starting point is 00:57:35 Let's see the impact on the price. There is an economy. You can say that the transactions have gone down a lot since the boom and defy from, you know, last summer, last fall, whatever, but it still has the most TVL. It still has the most activity. There are still people using these applications. They're going to be using these applications today. They're going to be using these applications in October after the merge. And so we can sort of come to an idea of like what that's going to look like. And this is the only, you know, we have some stakes in the ground of things that aren't a political decision by a bunch of people that we have. no influence over. That's why I love this trade, because I can be wrong on everything else and still be right. So you love this trade because you can be wrong on the Fed. You can be wrong on Ethereum even winning. Like another competitor could blow past it in the future. You could be wrong on just about every other point in like the thesis, but it doesn't matter because this is a structural change. It's a one-time event. And the flows are fundamentally changing. And that's kind

Starting point is 00:58:34 of like guaranteed as long as the merge is successful. And so this trade is like, a no-brainer in your mind. Yes. Okay, well, so if it's a no-brainer, why is it priced in? Or is it priced in already? I don't think people believe the merge is going to happen still. And I also, like, absolutely. I don't even, I mean, I can't sit here and tell you that I think for, you know,

Starting point is 00:58:54 100% that, okay, they're going to switch to proof of steak and the thing they're going to blow up. I don't know. What do I know? I'm not in the trenches, like, you know, been in a fibrium developers since 2014 and built this thing, right? And if you've been around long enough, if you've heard the talk about proof of state, I don't know, five, six years? Six plus, yeah.

Starting point is 00:59:10 Forever. Five, seven years, whatever long. He's been talking about it since you started to put Ethereum. Has it happened yet? No. Right? And so your default response is, okay, show me. Show me proof of state.

Starting point is 00:59:22 Show me that it works. Show me that all the different applications functioned just as they did before. Show me that there's not going to be some bug that you didn't think of. Some edge case that's going to blow up in your face. And you're going to require a hard for it to go right back to proof of work. Show me. you can't there's no there's nothing that's going to prove to me that's going to happen until it actually happens and I think a lot of people are of that opinion and I think that's a rational way

Starting point is 00:59:47 to believe it especially as someone who was a former tech CEO nothing's ever shipped on time never never works as it's supposed to and I know that 100% certainty I recently wrote an article rebutting a bear case for the merge read a merge was overhyped argument and one thing I've been thinking about is like how much does the state of the Ethereum merge actually permeate to the rest of the crypto markets. Now me and Ryan, like some of our friends are working on client teams for the Ethereum merge. So we're very tapped in, right? This is the thing that we almost like know the most about. And me, Ryan, Anthony Sizzano, a few other of the Ethereum like second layer around the core devs are all pricing in like a 95% chance that the merge goes perfectly fine. And then I've

Starting point is 01:00:31 realized as you get further away from these people like the odds of the merge going well, in their opinion goes down and down and down. But I can't really find like a cohort of the crypto industry that is waiting with like cash on hand and saying as soon as the merge goes through and it's successful

Starting point is 01:00:49 I'll buy. Like either you're a bitcoiner, you don't need that. That's the point. They don't need that. If there is so much usage, if there's a hundred units of uses today that needs to pay gas. Right? And now they're not selling as much of

Starting point is 01:01:05 thing of the gas token, but there's still 100 units of demand to use the apps. It doesn't, you don't need any new buyers. You just need the usage. Okay, so the whole idea of like a sell-the-news event is like, traders going to trade people with a speculator on the merge. You're saying that that's just irrelevant because of the actual fundamentals of the merge? Yeah, okay, sure. You could be, you've got to sell the news and maybe the price goes on 20%.

Starting point is 01:01:25 Okay, but unless you're telling me that the number one repository of defy applications is going to stop. And even from today's levels, which are depressed, it's going to be. go down 95, 95%, then what you're telling me is there's a certain demand to pay gas, the supply goes from 100 to 10, some of the 90%

Starting point is 01:01:45 down, whatever the amount is, right? Erego, demand is greater than supply, the price has to rise. Unless you're telling me that DFI usage and DAF usage go fall off a cliff with the issuance amount as well. If you're not saying that, then you're saying that the price,

Starting point is 01:02:04 the demand is at the Mars. is greater than the supply. Therefore, the price has to rise, in my opinion. So, Arthur, if the merge isn't priced in, then, like, what should the price of Eat be? Like, what's your target price for Eat? Right? Like, a range is, like, I mean, I've bought calls, and I think I've said this in my essay, like 3,000 strike calls. I think that's the largest strike in terms of open interest on derivate right now. So I think that's, if you want to talk about where the market's really expecting, everybody's trading that strike now. Let's call 3,000. By end of year. That would be my hope.

Starting point is 01:02:35 And that's almost like in your mind, that's almost regardless of what happens to the Fed, what happens in, you know, kind of crypto markets, what happens with a company. Of course, the Fed can influence that lower. But for EF to stand still, the, you know, well, maybe the Fed's going to raise rates to 20% overnight. I don't think that's going to happen. But at the end of the day, if there's a certain amount of demand and the supply isn't there to meet it, the price goes up. And it doesn't matter if the cost of dollars is 4% or 25%. And that's why I like the trade, because there's nothing to do. about the liquidity constraint of the dollar, which a lot of crypto is a liquidity play on the global

Starting point is 01:03:12 reserve currency because that's the system that we're rebelling against. We're saying this is a bad way to do things. We have a better way of doing things. But everybody's assets are in dollar. So if the cost of dollars goes up, then it kind of makes it more difficult to put into this new thing. This isn't about liquidity. Arthur, you've been in crypto for like 10 years now, right? So you've seen a few happenings. You've seen more than your fair share of, like, different trade type opportunities. Is this kind of different? Like, what's different about this?

Starting point is 01:03:40 What's the magnitude of this? I mean, I think you've called this like a once in a lifetime opportunity, but like kind of akin to that. I'm paraphrasing your language here. But like, is this pretty unique? I think this is the only, like what maybe you guys are probably deeper into this than I am. Like, tell me another coin that's moved from proof of work to proof of state. doesn't exist. Especially one that has, what's it called, like $200 billion of market cap or whatever it is, right?

Starting point is 01:04:06 Right. So that is, it's a one-of-one sample size. Right. Yeah, that's my big argument as to, like, why you can't really, like, traders are going to trade, but you can't, like, price this thing in ahead of time. It's never been done before. And it's so, like, systemically about the value of the asset, about, like, reducing this issuance of ether, that, like, people that think that traders are going to trade this

Starting point is 01:04:30 and sell the news event. Like, it's just too big, it's too big for that, especially in a bear market. You'd have to be able to forecast the amount of transactions on the network. Yeah. To a very, very specific degree. And then you'd have to pre-trade that, right? You'd have to trade those flows and be able to trade them post-pre-imposed the merge. That's if you'd be trading.

Starting point is 01:04:49 And that's a very, very hard thing to handicap, right? What's interesting is this entire argument is, like, all based around flows. It's not based around narrative. But do you think there's a narrative element? So, like, finally, after five years, proof of stake finally ships and the merch goes well. They actually did it. You wrote this post on reflexivity. Does that, you know, come into play here?

Starting point is 01:05:09 I think the reflexivity is more on the price to flows, to developer activity, to users using the app. That's different. But obviously, there's going to be a proud of narrative, like, okay, they pulled this very, very difficult technical thing off. I think we'd be in a much different sort of narrative construction. if this merge event didn't follow on the heels of the entire credit part of the crypto ecosystem blowing up. Right. So imagine the bullishness of just the average trader if they hadn't just lost all their money to Terra and three euros. And it's not just a retail punter.

Starting point is 01:05:42 It's, you know, the biggest hedge funds, the biggest lending nest, they all got, they all got smoked. Right. And so are you really going to be like, oh, yeah, I need to go like cap in hand and my investors and raise a bunch more money when I guess proof to have no risk management policies and go buy this ether thing when they when the dude's been talking about proof of stake for the last six years but hasn't done it right please give me some more money investors I'm like get the fuck out of here wow yeah so you're just saying like the appetite for the merge like got into this base and bought the nfts market in 2021 they just don't want to hear it like oh do you guys the merge is so bullish you got to buy eth and all these people are like yeah they're like I don't care just like he told me to buy luna like yeah yeah yeah yeah yeah yeah Yeah, show me. They show me. Like, it's tech. It's hard.

Starting point is 01:06:26 Everyone knows tech is hard. Tech ships late. They have this date. Does anyone really believe it's going to have? I know you guys are close to it, but even me, right? I've been writing about this, but I can't go out there and definitively say, yes, September 13th or whatever the date is, that's the date. I have all this confidence.

Starting point is 01:06:40 I have no confidence. I have no idea. I think it will be around that time. But, again, I'm not a very technical person. And I've been around this. And I'm too jaded. What are the mechanics behind? this. I think one of your posts went through a few different approaches. Like, obviously,

Starting point is 01:06:56 you could go spot and purchase, just go Long-Eath. You mentioned, you know, some derivatives plays. Maybe there's some option plays here. What are you seeing when you look at ways? As soon as you move away from spot and you start adding leverage and optionality, possibility of liquidation, financing, because everything trades at a premium discount to the underlying value, you add a concept of timing. And so you have to have a view on the timing and have a very confidence in the timing. So unless you have a very good view on the timing and have confidence in the timing, whether that's the 13th of September or it's going to get to late if you have in October or whatever it is, right? You're going to pay for that timing. More time buffer you

Starting point is 01:07:36 want to have, the more money you're going to pay. The more exact you want to get about the timing, the less you pay and the more upside you have. And so it's a dial. And it really depends on your confidence in the team's ability, you know, assuming that it happens, when does it happen? Right. Okay. And then how long does the positive reflexive loop? Are you giving yourself enough time for that really to kick in? Or are you saying because it happened, then traders are going to front run the reflexivity

Starting point is 01:08:04 and push the price up well before it flows come in. So you have to make all these decisions. But it's not that straightforward. So the easiest is obviously a spot. But then again, you're not going to have leverage and you're not going to get the big juice. But if you're willing to take those bets, then you have a really good timing to it. You've touched on a debate that we've had on the show before is like how long does this thing actually take to price in? And some people are in the months, not years camp, as in like one, two, three months after the merge,

Starting point is 01:08:35 you actually start to see those structural flows that favor ether actually show up in the price. And others are like, it's going to take years for this really to like, first, the miners still have all their supply that they need to sell. And, you know, there's just a bunch of noise that the structural flows has to cut through. did you have a take on the timing of how long it takes for the improvement of the economics of ether to take to actually show up in the price? Not really. I really done enough work on it. I mean, I think you have to have a very, apart from the miners and now they're going to dump their ether or not. It's okay, you have to forecast a level of usage of the network. I have a very good idea of what that's going to be, because that's going to say, okay, how much, what's the gas fees are going to be that are going to be not offset by inflation, therefore the price goes up. That's your, that's what you're trading. What if I told you that the current gas prices, which like it's been averaging 10 to 12 for the last like months or so, was like the bottom of gas prices? Would that make you more bullish or is that kind of like what you've already priced in? I mean, that will make me more bullish.

Starting point is 01:09:34 But again, there's there's so many conflicting factors. My reason why I chose a December strike, you know, it's obviously liquid. So that's end of year. in fourth quarter, people usually, things either go up a lot or down a lot in the fourth quarter, this human nature, right? And cycles. And then at the end of the day, they will have proven that they could get a very difficult technical thing done. And that speaks volumes to the quality of the team.

Starting point is 01:10:02 It doesn't matter what that technical thing is. The fact that they were able to do it is very bullish. And that this is a narrative construction in the thing. And so, you know, just finger in the air, put your number out of my ass. and, you know, just go for it. That's my favorite kind of analysis. All right, one last question on this train. Earlier, you said it's your favorite trade

Starting point is 01:10:23 just because you'll make money, in your opinion, regardless of what macro does. Like, even if macro shits the bed, like the merge is still bullish enough to get you in the green. Why do you think that the merge is more powerful than macro? Or is that what you're saying? No, I am saying the merge is more powerful than macro. If you're reducing this,

Starting point is 01:10:40 inflation supply by 90% of the supply that's being emitted by 90%, you guys correct your set numbers right or wrong. That's about right, yeah. And the price of ETH is already down 90%, whatever it is, from 5,000 to 800. We had the macro crash. We had credit collapse because we increased dollar liquidity. This is just classic, you know, emerging market. This could be 1998 in Asia.

Starting point is 01:11:03 This could be Russia. This could be, you know, LDC crisis. This could be tequila crisis. This could be pick your crisis over the last two or three hundred years of finance where you had too much money chasing too few good opportunities from my credit perspective. Crypto is 100% rhymes with that ethos. We had the flush of all the leverage from the system in my view. So we've taken, we've done the hard thing in the macro.

Starting point is 01:11:30 So, okay, maybe the price could go down another 50% to 800 or whatever to the lows that we had during the credit collapse of, you know, Powell gets his new epiphany. He's just going to go take rates immediately above inflation. That's not what he said. He said, we're going to continue with the pace of the rear rolling, which is, you know, maybe it's 75 basis points in September, maybe another 15 November, another 15 December. That's still not 9%. Volker took rates up to 22%. He said he doesn't want to be Arthur Burns, Fedshared during this before the 70s.

Starting point is 01:12:01 Arthur Burns took short-term rates in the U.S. above inflation. He's neither Arthur Berners nor did Paul Volker. He's Jerome Powell at the rate he's at, which is below inflation. and he's not telling the markets that he's going immediately to, you know, eight and a half on the short-term rate, just like that. So I think, yes, the pessimism is warranted, but I do think that reducing the supply of ether emitted to the market by 90% on a discrete date while still having the demand to use a network, even at these depressed levels,

Starting point is 01:12:32 exceed that, to me, outweighs the macro impact, especially since I believe that a lot of the pain has already been taken on the macro side. Two things that are really interesting about this bullcase for the ETH merge that you've just given. One is that we just gave the bullcase for ETH. We haven't mentioned DFI or NFTs like as a positive catalyst once. And I'm curious your thoughts on those like those sectors, defy and NFTs. And secondly, I'm curious about this transformation, maybe like a conversion process for you personally on ETH the asset. Because I remember back in 2018, was it? These were dark times in the crypto market. One of many

Starting point is 01:13:08 dark times that we've all been through together in crypto. But double digit shit coin. I don't know if that was a post title, Arthur, but you definitely got credit for calling for calling ETH to double digits at a time when, like, that was inconceivable, I think, for Eith Bulls that we would drop down to double digits. And sure enough, we did. Also extremely offensive. It was painful for my bags, Arthur. And yet, that's exactly what happened. And this was, you know, happened in March of 2020 during kind of the COVID drop. We went down below 80 on some charts, definitely into the double digits for ether. But from double digit shit coin to now Arthur is five ducking digits bullish on ether the asset. So tell me about that, but the transformation of you, Arthur Hayes becoming an evil.

Starting point is 01:13:58 And then also, tell me about defy and NFTs. Does this feed into your thesis at all? So, I mean, when I made that call on Ether, it was already going down. It had peaked at what, 1400. and it was on its way down to, you know, its first real cycle, right, going down 95% or whatever, similar to Bitcoin. And there wasn't defy in the way in which we know it today, right? There wasn't a uniswap, dominant. There wasn't Avey. There wasn't compound. It wasn't a whole ecosystem of people building the new financial primitives to disintermediate the cartel of trust, what I like to call it, of the traditional finance ecosystem.

Starting point is 01:14:34 That wasn't around in 2018. We had the promise of maybe something like that someday somewhere, right? And we just had this ETH thing and people were like, yeah, smart contracts. And we had the ICO fallout and, you know, no more Chinese market to sell these things than two. So, yeah, it was a completely different environment to make that call versus, you know, when I went along, Ethan, you know, right after your crash in March, which was, I forgot who had sent the chart around. And the market cap of Eath was less than all of the assets. applications that it's supported. So either you believe that Ethan's complete dog shit and has zero value and therefore

Starting point is 01:15:13 these apps are going to go down and go like that, you know, even when they're already down 99% most of them from, you know, a lot of them when they issued in 2017 or, hey, this EF thing is really, really undervalued based on what it can do. So I took the undervalued, you know, side of things and did very well on that call. and I think subsequent to that, we had the D-Fi summer explosion, you know,

Starting point is 01:15:38 TVL, it's what, 200 billion at its peak now, it's about an 80 or 90 or 60, I'm not whatever it is. It doesn't really matter. But it's way harder than it was in 2018, which is basically zero. So I think we're in a completely different environment.

Starting point is 01:15:51 And again, the trade on ETH that I'm bullish about has nothing to do about the stuff on top of it. Unless you're going to tell me that all the stuff on top of it's going to stop working today and no else you're going to use it. Then, okay, I'll admit,

Starting point is 01:16:02 then who cares about it? let the merge. There's no one to spend the money on gas. Arthur, we were just talking earlier about kind of retail getting absolutely massacred over the last few months, certainly. Retail and institutional. Let's not say that like these people know anything, but more than the dude sitting in the basement, a dude or woman sitting in their basement. They know absolutely the same. You believe that's true that there's no such thing as smart money? At least smart money doesn't wear a tie. Maybe we'll say that. I mean, there are smart money managers and there's probably only a for love gun, right? You know, the Soros's, the Drucken Millers, the Paul Tudor Jones,

Starting point is 01:16:36 these types, you know, they're, you know, geniuses into what they do, you know, very methodical, but most everyone else is a Muppet who manages money. They sit there, you know, they went to the right school, they wear the right clothes, they talk the right way, and they get allocated money, and that's the game. And that's perfectly fine, nothing wrong with that. But to call them money managers and stewards of capital is doing that sort of concept of disservice in my opinion. And so a lot of people who got massacred didn't think they were training. They made the same mistake that everyone else made. I mean, I'll use terror as an example.

Starting point is 01:17:14 Everyone's like shitting on Doquan for, you know, being this evil person possibly. As an outsider looking at, I don't know anything about the guy. I never played at once. And as an outside observer, terror I was written about in a white person. paper. They told you exactly what's going to happen in this scenario. The death spiral. It's there. The math is there. No lie. People didn't read the white paper. And then they're surprised they lost for their money. And that's the retail person. And that's the institutional money manager went out there and told people you can give them a 20% yield with infinite sharp ratio because

Starting point is 01:17:48 there's no drawdowns ever. Right. It's the same trade. So again, and then crypto, at least I don't really see much of a difference in terms of institutional. Yes, there's some very talented traders, very few of them, who can make money in all different circumstances and have very good risk management. But again, I don't see, I wouldn't denigrate retail as saying that they don't know anything. And there's all these smart people who are institutional who manage money who know better. That's a fallacy. I got to say what's interesting is like probably six months ago, if someone were to publish a list of the top 10 well-known crypto traders, right?

Starting point is 01:18:24 I don't know entirely who would be on that list. I do know that your name would probably appear on that list. But I also think at the time, Three Ro's Capital would definitely appear on that list. Suzu and Kyle could be number one. Yeah, probably as number one. You're still here. Many of them are not here.

Starting point is 01:18:43 How? How do you last throughout multiple cycles as somebody playing the crypto trading game? Like for me, it's like I don't dabble much in crypto trading, so I'm kind of buy and hold, right? Like invest in things go long. that sort of thing, very low margin, if any margin. So I've got that survivability. It's not that hard as long as I'm willing to not sell, which does require some amount of skill. But as a trader,

Starting point is 01:19:06 you can get completely wiped out on some of these cycles. I mean, at the end of the day, it's all about position sizing. I mean, again, I don't know anything more than what's been published in the press about few arrows, but to me, they made the wrong trade. They didn't size the positions correctly. You know. I've been wrong on a lot of things. I don't have to be right. But as long as I'm right on a few things, but my positions,

Starting point is 01:19:29 my sizing is the way it needs to be on things that I done right on, then net out, net net, I'll be okay. And so, again, it's all around a position sizing. And I don't really manage other people's money. And I'm not trying to be a hedge fund and, you know, trying to make a business out of this and all that sort of stuff. I wouldn't say it's apples, apples of apples in that respect. Arthur, as we look beyond the merge and this trade kind of place,

Starting point is 01:19:54 out, right? Ether goes up. We're all super happy. We have more money than we did before. Hooray. What's next after the merge? Or do you actually plan on keeping Ether as like your store of value at least for the foreseeable future? I guess we'll see. We'll see how that pans out, right? Because let's say if just zooms ahead, right? Again, nothing goes up or down in that's right wine. And so at the end of the day, do you harvest some of those profits back into Bitcoin, which is, again, my true money in the crypto sense, ether is a commodity. It's not money, in my opinion. That's in my technology. Bitcoin is money, the only money in crypto. And so do I harvest profits if they exist back into Bitcoin and wait for whatever the next new thing is?

Starting point is 01:20:38 because at some point the trend or the price in either will be over will overshoot the intrinsic value, whatever that intrinsic value is or how you define it. And at that point, then it's time to move on to you go back to your monetary base asset. And you look at the landscape and you make a decision and where to go next. Arthur, Bankless listeners will know that I'm like pretty bad at math. So I'm hoping you can help me with this one. Can you remind me what 1D equals? One D. This is some kind of NFT insider game.

Starting point is 01:21:12 I think you guys are just playing right there. Arthur, it's been awesome to have you. I'm just curious, what do you spend your time on these days? What's kind of a day in the life of Arthur? Aside for more writing, which I assume you're now addicted to, as good writers often get addicted to publishing great articles and trading, what else you spend your time on? I read a lot of books.

Starting point is 01:21:33 I like sci-fi. So read sci-fi, I read economics books, read random fiction, play tennis, work out a lot, do a lot of yoga. Yeah, and then see what becomes interesting. But yeah, it's been a lot of my day reading. And I like to have that time to, you know, I like being a writer. And the only way to get better in writing is read people who are better than you at it. It sounds like a good life, certainly. All right, where can people find your blog and get access to some of your writing?

Starting point is 01:22:01 Medium, Crypto Hayes. That's the place where all my articles are published. They come out whenever they come out. And, yeah, Twitter, obviously, at Crypto Hayes. It's my Twitter handle, and I'll publish links to all of my articles on that as well. Awesome. This episode absolutely delivered. Arthur Hayes, Bullish on the Merge, giving us a tour to force on the forces at work in

Starting point is 01:22:24 macro. It's been awesome to have you on the show. Thanks, Arthur. Thanks, guys. Bankless Nation, some action items for you today. We'll include a link to Arthur's articles at CryptoHase. medium. You've got to check out. Samurai and Knight and a Yankee. I mentioned this in the episode. We'll include a link directly to that. Also, read some of Arthur's articles on the ETH merge.

Starting point is 01:22:43 Max Bidding is one of them. ETH Flexive is another one. Include a few links. And of course, just a reminder, you can also become a premium subscriber. So right after Arthur logs off, David and I are getting on for an episode. We call it The Debrief, which is our episode after the episode, you can stick around and catch that episode if you are a premium subscriber. You want to upgrade, become a premium subscriber, click a link in show notes for that. As always, risk and disclaimers, all this stuff is risky. Crypto is risky. You could definitely 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.

Bankless - Trading the Merge | Arthur Hayes

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