On The Brink with Castle Island - Jeff Park (Bitwise) on Digital Asset Alpha Strategies (EP.602)

Episode Date: March 12, 2025

Jeff Park, the Head of Alpha Strategies at Bitwise Asset Management joins the show. In this episode we discuss: The latest developments at Bitwise, including the firm's Alpha Strategy division. Yield strategies in the digital asset ecosystem. Stablecoins and how the idiosyncratic opportunities that active managers are pursuing. MicroStrategy Thoughts on market structure and digital asset policy. To learn more about Bitwise visit their website.  You can also follow Jeff on X.

Today on the podcast, I sat down with Jeff Park, the head of Alpha Strategies at Bitwise. Jeff is one of the sharpest minds for the market space within digital assets, and I was happy to have them back on the show. In this episode, we discussed the evolving landscape for digital asset alpha strategies, talked about the regulatory landscape, micro strategy, and much more. I think you'll enjoy this one. So without further ado, here's my conversation with Jeff Park at Bitwise. Matt Walsh and Nick Carter are partners at Castle Island Ventures. All of these expressed by them or the guests on this podcast are solely their opinion. and do not reflect the opinions of Castle Island Ventures. Guest and hosts may maintain positions in the assets discussed in this podcast. You should not treat any opinion expressed by anyone on this podcast as a specific inducement

to make a particular investment or follow a particular strategy, but only as an expression of their personal opinion. This podcast is for informational purposes only. Brought down by bad mortgage investments, Lehman, which has 25,000 employees, will be liquidated. The federal government loans American International Group, AIG, $85 billion. This is a different kind of market, and the Fed is asleep. The federal government is stepping it to stabilize Fannie Mae and Freddie Mac, the two mortgage giants that have been threatened by the housing crisis. The Bank of England has pumped 75 billion pounds more to Britain's ailing economy with a new round of quantitative easing. And it print a couple trillion dollars and all of a sudden people start to worry.

So out of this worry, we have something called a Bitcoin. Bitcoin. Jeff, well, thanks so much for joining us today on the podcast. We were just saying before we hit record, it's three years for you into Bitwise. So probably feels like it's been 10, but congratulations on your three. year anniversary. Thank you, Matt. You were there with me since the beginning of this journey, and I know you're slamming away and busy as I am, but the good news is we're both busy for all the amazing reasons to be excited about, perhaps not as being busy for all the things

we have to navigate the past three years. So, super pumped to be here. Well, I'm excited to chat with you, and definitely bit wise, we're obviously investors, and so full disclosure there, but you guys have been completely cranking. Obviously, the ETF business gets a lot of the headlines, but fill us in on just what BitWise is up to, where are the lines of business, and then maybe dovetel that into what you're specifically building? So BitWise, believe it or not, today is over 100 people. That may sound like small numbers to some folks in the tech space, but in crypto asset management, I think that is incredibly formidable. And it shows you that the investment we've made into the firm for the past seven, eight years now has come to fruition. We also manage about $10 billion plus

an assets, which is in itself a milestone as a U.S. crypto asset manager. So it's been great. It's been really exciting. Last year, we made our first international foray to pursue the European market through the acquisition of ETC group, which is exciting. And we also have made a footprint into the frontier of on-chain solutions with the acquisition of a testant. So the long-term vision of BITO-wise has been the same as it always has been from the beginning, which is to help investors access the most interesting opportunities in the crypto arena. Most of it will be in the traditional infrastructure that you and I know. But we do believe in the future. there will be tons of things to do on chain. And that is actually something I think that is super

interesting at the intersection of some of the alpha-centric work that I get to contribute to at Bitwise as well. That's awesome. Well, I'd love to double click on that Alpha strategy. And how do you guys talk about what that actually is? This obviously is a little bit of a newer business relative to the beta products that were launched originally and have gathered so much AUM over time. But how do you guys think about that world on the Alpha side? So Alpha is in many ways a journey that many crypto investors experience over time as to the kinds of exposures they seek when they first enter crypto. Initially, you'll find most people allocate into Bitcoin and other beta-centric exposure to learn about crypto. And as they go down

the rabbit hole, they realize there's actually a lot of complexity and really interesting things that are happening underneath the hood that can also harness unique properties of crypto that can be orthogonal to the price action of crypto itself. So we have a lot of different things at Bitwise where we try to enthuse that alignment. You know that we had the chance to chat about the inaugural effort three years ago having launched around a multi-strategy effort where we harness a variety of alpha-centric opportunities within the crypto market structure itself. And there are other investors today now where they realize, hey, Bitcoin is really a big number at 100K, where the assets themselves dollar denominated are quite significant to actually just hold it in cold

storage in a way that it is not useful. So there's also interests in folks who are saying, hey, we have a bunch of Bitcoin and we actually want to earn something off of this. What can you do for us? And that's alpha because we're talking about yield on top of the price section that is Bitcoin denominated, which can be added to the total portfolio return. So here, the thing that I am really just enthused about from day one and even more so today is that many people, people come to crypto to get exposure for the price action. But really, another way to get exposure to crypto is actually the volatility underneath it. If there's one single property that makes crypto so uniquely harnessable for different kinds of yield opportunities that doesn't match

what other traditional assets provide, it's volatility. So we have a lot of volatility, optimization, income-oriented strategies that we also look to offer to our clients. And most excitingly, we are actually also launching a suite of options income strategies in an ETF format at the end of March as well. These will actually cover your beloved crypto equity's names, where we believe there's also the same opportunity that you can optimize to earn a volatility premium off of some of these crypto equities like micro strategy and Coinbase and the miners, etc. That's awesome. I'm excited to see that launch. Would love to just maybe talk a little bit about the yield that you're talking about and how you bifurcate the available universe of where you might

access that yield in terms of the type of instruments. And also curious if you've looked on chain and if anything is interesting in that category in terms of accessing yield. Yeah, absolutely. So there's three broad categories as I define the sub-strategy taxonomy of yield when it comes to Bitcoin. The first is what many are already familiar with at some level, which is lending. So lending historically could have gotten a bad reputation for having been involved in liquidations in the past where there were issues as it relates to custody. But the reality is we're in a new era where there's going to be more services offered in a regulated format that allows proper lending. And Bitcoin obviously is an asset for which there's need for capacity to borrow. So the unlocked ETF actually has accomplished that some investors may not realize is that,

that ETFs for the first time allowed Bitcoin investors to participate in the lending market without taking custodial risk. You no longer had to think about lending your Bitcoin to an exchange like Coinbase or FTX, etc. You actually just had regulated ETFs in which you could participate in the securities lending market without any custody risk. And the future is that it's going to merge at some point where those standards will have to comply for token holdings as well. And so today, if you are able to find the right infrastructure, the right agreements in a way that protects you from these remote risk events, there is an opportunity to earn yield, whether on a rehypothecated basis or not

on a rehypothecated basis, that is better than zero. And that in itself should clear the hurdle for the desire to be outside of cold custody if you believe you've set up the right structure. But what's really interesting is when you add more features around the financial utility of Bitcoin itself from that market. So the next thing that I feel most people into it is, again, volatility harvesting. Bitcoin volatility is not only high, but it's also really unstable. And actually, Bitcoin Wall doesn't behave the ways that traditional investors are used to, where they imagine if the price of a stock goes down 20%, you usually imagine implied volatility would explode to the upside and vice versa. And what you actually observe in crypto is that

none of these relationships are that sticky. In fact, I might even point through the last three weeks where you were seeing Bitcoin essentially go down in price, but implied volatility also went down in that same period. So that's an unusual relationship. But it also means there's a lot of opportunities to be able to make prescient bets about directionality within volatility itself. So if you're able to do those on some longer term tenors, you can actually earn high double-digit type yields where we are not taking a lot of risk in the assignment of those Bitcoins being called away from you. So, for example, today, you could actually sell about a $110,000 strike on Bitcoin that expires in basically three weeks, end of March, and you can get double-digit return.

And there will be investors who say, hey, Bitcoin's at 85 today. If I have the chance to sell it at 110K in three weeks, I'm happy to do it. And it's not, I'll be 10%. It's not a bad trade. So those things I think are becoming more possible. It's becoming made more aware. And I think the fact that Sab 121 being repealed, permissioning now the likes of Goldman and others to come into this space to offer these types of services to institutions with a face that they're familiar with, will mean that it's going to accelerate.

We're just going to see more people who want to do things with Bitcoin. And that's why I think having an alpha component within the comprehensive framework of offering crypto-related investment advisory is key because Bitcoin is, still the story for institutions at large. And it is, I think, a trend that is going to continue. That's awesome. Well, I'd love to talk a little bit more around how the regulatory landscape has changed. So you mentioned Sab 121 going away. Obviously, even having the ETFs approved before the change of administration was huge. But now we're looking at a stable coin bill. We're looking at hopefully a market structure bill. How is that actually changing your world in terms of who you're

seeing coming into this market and what options might be available to you in terms of the infrastructure to actually run these strategies. So on the ETF front, the ability to imagine diversifying custodial partners is in itself something everyone has been wondering about for a long time now. And SAP 121 was going to accelerate that because the traditional entities that were not allowed to participate will now be able to come in and offer services. There's other factors around ETFs for which there was some concerns as to the near-perfect state we would have to achieve, one being that in-kind contribution and redemption would have to be permissible outside of cash. And those things will start to be in motion with regulatory adoption in the direction that you're alluding to.

There's, of course, complexity behind it within the definitional scope of broker dealers. But that is one that I think is moving along. The other, of course, is staking. It's not relevant to Bitcoin, but the reality is most other proof-of-stake tokens have a component of income that is not being captured efficiently by the current U.S. ETF structure, whereas the global ETF structures actually do provide staking income. So if the U.S. wants to be competitive and on a level foot, this is something that is also on the top of the agenda. But broadly speaking, stablecoins, I think, is the most interesting thing that is happening this year. And it is, I think, being underestimated by most of the community at large, how quickly it's going to happen.

And you pay attention to this as closely as anyone, but the reality is it's going to, it's going to, be more likely the thing that is at the top of anyone else's on the legislative front that will make a splash in the coming, let's say, three to four months. And the opportunities there for alpha strategies is actually pretty extensive as well. Because if you think about what alpha strategies do, ultimately, it is market making at the core of having some exchange structure for all kinds of assets in which stable coins is a big component of crypto-tam. So if you think about new stable coin protocols coming to life where there might be associated yield around some of the incentives to participate into a new ecosystem, such as an air drop,

for example, the ability to participate in that stable coin economy in an alpha-centric way is just going to become larger. And then on top of that, you add financial primitives like a pendle where you can actually strip away the PT and YT in a way to capture that air drop premium and lock in that discount factor means you can actually start trading some of the more esoteric value captures, even though it's just stable coins. Yeah, that's fascinating. You're actually taking the rest of a risk, but the stable coin economy is just going to give you a lot of alpha opportunity for those who are able to navigate it. So when we talk about

things like lending or selling calls on things that are liquid and I guess already to some extent understood by the market, that leads me to believe you're going to have more traditional entrance. But when you start talking about something like a pendul, it just seems like it's going to be years before you have the more traditional asset managers and fund managers coming into this market. What do you think this is going to look like over the next few years? It feels like there's almost a levels game here within the crypto economy that you need to step up the levels in order to actually understand where some of these opportunities are. Yeah, I agree. And I continue to think this is why there is a huge moat for asset managers that are crypto native at heart and is

able to tackle some of these frontier opportunities with the institutional rigor that it demands from an operational perspective. We talked about lending and fall harvesting, but the third thing we hadn't mentioned was what you alluded to on-chain opportunities. So if you think about Maple, for example, where it's creating a new primitive of a lending market in a transparent way that is relatively vanilla,

the idea of posting Bitcoin collateral in a over-collateralized fashion to earn a yield. There are private placement hedge fund structures that try to do this strategy for you, but there's literally no, liquidity, there's no transparency, even though I'm sure it's well-intentioned, and it just doesn't really have all the superior qualities of a defy protocol. So the other way to earn yield off of crypto assets is being able to participate in these new primitives where you're able to

earn a yield off of assets just like Bitcoin. Unable today, you could earn double digits, just really lending stable coins against that borrow pool. And those types of things will be still, I think most accessible to crypto-native organizations like Bitwise, where we actually have to spend a lot of time worrying about the regulatory constructs and things we may or may not want to touch. But if any window opens for the ability to participate, chances are we're going to figure out before anybody else. Because it's all we do. It's all we focus on. We know exactly when Anchorage rolls out their QC offering to a D5 protocol token that you may never have heard of and when it gets whitelisted. And having the ability to be a

front mover in those types of opportunities is, I think, part of the alpha capture that we were trying to share with our clients in a very safe, regulated, and an efficient matter. The past few weeks have been really interesting to just be a participant in this market where everything is going right on one dimension, where you have the SEC has come in and taken immediate steps. Hester Pereson, Markioua, have been very front foot oriented in terms of dropping some of these lawsuits and putting out the request for comments and really trying to work with the industry to get past the last four years. But obviously, asset presses are just whipsying and down only, and people seem very depressed in some level. So what's your take on just what's going on here?

It's fascinating because I feel when we tried it last, it was, I think it was maybe two weeks before FTX imploded, Matt, when we recorded our first episode. And that was the beginning of the regulatory challenges that the industry would face. And as you've said, we've emerged on the other side where it is actually more open than it ever has been. So you would think there should be euphoria in the market around opportunity set, and yet the sentiment on Twitter and generally with all-coin price action hasn't reflected it. I have a reason to believe why this is the case. And one of the reasons I think is because the crypto market, this cycle,

has fundamentally changed versus prior cycles because of the launch of the Bitcoin ETFs. So what do I mean by that? What I mean is historically people traded altcoins in a way to think about getting levered exposure to Bitcoin beta with a lead-life relationship to the Bitcoin bull market. So Bitcoin would be performing and then the all-coins would generally follow in its euphoria as well. And that would be a way to move your Bitcoin house money wings to DeFi protocols or all coins and get more levered capture. That capital flow at some level became muted in 2024. in 2025. And the reason is because the financialization of Bitcoin itself allows you to stay in the sandbox of Bitcoin risk with leverage. The Bitcoin Options Market, for example, got approved last

year and as of December, now we have a regulated Bitcoin options market. So if you actually want 10x beta on your capital outlay, you can actually just trade Bitcoin options. You can trade out of the money long-dated Bitcoin options and replicate a similar exposure without the dirty basis risk of all coin, whether you may or may not be able to anticipate the relationship and the correlation. You also, of course, have seen the rise of micro strategy, which is single-handedly the vehicle that institutions are using to express Bitcoin risk with risk preferences along the capital structure. So all of these traditional securities like options markets, micro strategy, the 2x levered micro strategy ETFs, if you will, when out to the mix, is sucking the capital

of risk appetite away from all coins. because these exist now where investors can chase the same thrill of taking high beta bets without having to take some weird basis risk on trading a narrative token that they may not feel like they are inside the ability to navigate. And for that reason, I continue to believe that most of the interesting opportunities to generate alpha is going to come discretionarily from the ability to navigate Bitcoin. That makes sense. And so let's talk about Bitcoin.

How do you think about Bitcoin over the past few weeks? Is this just a global macro asset trading on tariff news? How do you conceptualize the movements here? Because you have to imagine now, a lot of the flows that came in last year is through the ETFs, that there's a percentage of investors whose pulse is more in sync with traditional markets than historically when what may have been a little bit more detached from the regular trad-fi market participants. So we have to assume that's the case. And when you do that, there's a few assumptions that come with it. The first is that these investors are generally looking at Bitcoin as a relative opportunity cost versus something else. In the past, if you're a Bitcoin

investor, you were not necessarily doing that. You were just in Bitcoin. And that was your trade. But now you have the BlackRock clients of the world, the Bitwise clients of the world, who's actually thinking about Bitcoin in a broader context of portfolio construction. So what happens is when the volatility of non-crypto assets rise beyond expectations, the implied holding opportunity cost of Bitcoin also has risen. What I mean is if you're buying Nvidia and Apple and Bitcoin and all of a sudden Nvidia goes down 30% and you think Nvidia is actually a better value capture in which the margin of safety is now improved because it went down 30%.

Chances are you're going to sell Bitcoin to buy Nvidia that you think it's this. located because the volatility went up. So what we're seeing at some level is that rising volatility of non-crypto assets does suck away capital to stay within the Bitcoin complex as well. And that is one of the reasons why I think that it has behaved this way in a more correlated way where gold, for example, has been immune. And the reason gold has been immune is because even the gold and Bitcoin might share the same thesis, gold is not volatile. So the impetus to trading Bitcoin as a volatility expression is not nearly as cute for gold investors. And that's, I think, one of the reasons why gold has outperformed Bitcoin in this particular window, not because people

are necessarily making a bet on gold's unique properties versus Bitcoin as a store of value for its movement of now. There's technical dynamics as well with what has been observed in the Bank of England, with gold in general, needing of a borrow market. But the broader picture being the people that are selling to buy Nvidia, they're not going to sell gold to buy. they're going to sell the other volatile thing that is no longer as useful as Nvidia is volatile, which is Bitcoin, and that's what I'm going to sell. That's a really interesting lens on it, and that makes a lot of sense. Earlier in the conversation, you brought up micro strategy, and I think I've told you before

that you are the person I look to to just tell me what's going on with micro strategy. I feel like this thing started as just a public filing that we are going to put some Bitcoin on our balance sheet and has just changed into much more than that, obviously. This is packaging of financial instruments that some people haven't seen in quite a while. So how do you explain what micro strategy is actually doing to investors that are asking you for input? I think of micro strategy as essentially the all coin of TratFi. It's a good frame on it. It's got this unique feature where it has volatility that looks a little bit different than Bitcoin.

For example, yesterday a micro strategy I think was up like 10%, and Bitcoin was up maybe one. So you already see that micro strategy behaves a little bit differently, more akin to all coin behavior that tri-fai investors can find access to. The other unique property with micro strategy really is that there's demand for it because there are still some retail investors who are not allowed to buy the Bitcoin ETF. Unbelievably, I believe there are still some brokerages that will not permit you to buy the BlackRock bitwise Bitcoin ETF, but they'll let you buy micro strategy. So there's going to be a demand for that from a structural perspective.

But the part that I think is just most compelling for the institutional audience is that the capital structure itself is diverse enough that you can trade relative value in a thoughtful way to extract alpha that is more than just trading Bitcoin's directionality. So as you may know, Micro Strategy has fairly simple capital structure, but a lot of different instruments at the very top being the converts. But now actually there's a preferred equity piece in between and above the common equity. So there's actually a buffet of which micro strategy security is your risk preference expression. And because everyone comes in with a different risk preference that is not related to how the other securities are priced, the person who can look at all three can find arbitrage opportunities. I think that is also the reason why micro strategy, the options market, the convert markets, and its size has actually become the biggest out of any single security.

I think there was a day last year when micro strategy stock volume exceeded Nvidia on a daily basis, which was a historic thing. And the reason is the financialization of Bitcoin is the most interesting thing for most people to find exposure to. And again, we mentioned there's a 2x leverage ETF. There's also the covered call ETF that has been released by certain peers. So there's essentially a lot of financialization around Bitcoin via micro strategy that has created a very interesting market. And is there any end in sight to Sailor's ability to raise capital if Bitcoin keeps on going up? He doesn't have the Silvergate loan in place anymore where it was a cash loan

against Bitcoin collateral and he could have gotten liquidated at a certain level. It seems there isn't much of a risk of a liquidation in any way. So is this something that could run for a while here? It's a great question. There are different levers that now Sailor has built for the vehicle to access to capital markets. For the longest time, the ATM of its equity offering was perhaps the most scalable one in which any time it was trading at a fairly rich premium to what the valuation framework should permit, then you can actually dilute it to raise more capital to buy more Bitcoin. The convertible bond issuance is slightly different in what their investors are seeking to accomplish in the end, which has a little bit more of some context dependence to where the absolute

yield curve is, as well as the volatility of Bitcoin. So it's not directly a reflection on the price of micro strategy that creates an outlet. And then most interestingly, the preferred equity is actually the most detached from the price action of Bitcoin in itself. The preferred is actually the security that gets the least amount of attention, as I can tell, but I find it by far the most interesting piece in the puzzle of its capital structure. And the reason is the preferred equity is non-callable. You know that most preferred equities are issued by bank entities for red cap purposes, and they have a call where essentially when yields compressed to a level in which it is not efficient, the banks will call it and retire it early. But micro strategies doesn't have that. Instead,

what it has is a convertibility feature into a common out a 10 to 1 ratio. But what this actually means is that as long as interest rates are at a level where it's pretty high, then you can earn that yield for a very long time. And there's nothing that the issuer can do to retire the note. The only path to ridding it is conversion to equity. So the preferred equity has actually multiple ways to win, which is number one, rate duration. So if you feel that interest rate today is too high at 4.2, 4.3,

and it may go down to 2% in the next two years, the principle of this preferred equity will be double. It's trading 95 today. It's going to go to 200. just on rates duration itself, because again, there's no expiration. It's a perpetual security. So you'll make money when rates go down. If Bitcoin goes up a bunch, then you do have the call option to convert it at a 10-to-1

ratio. So then you do get the upside of micro-stratageys of participation. So you also win if Bitcoin price goes up irrespective of yield. So you have the security which allows you to win in multiple ways where there's a relationship between Bitcoin price and long-term rates. But in the event that it doesn't materialize where rates go down, but Bitcoin doesn't rally, the prepped equity is actually the one that's going to outperform all three. So I find it to be the most interesting security.

I think it makes so much sense for someone to use that as a way to hedge their exposure, in fact, to Bitcoin. If you had to imagine two security you wanted to own in the Bitcoin complex that was going to behave differently, I would say you should buy the preferred equity and Bitcoin. And that as a 6040 portfolio is pretty compelling. And actually, I think it would have shown you the last two months. The pre-equity went from 80 to 100, and now it's, I think, around 95. So it's done well, and Bitcoin obviously has gone down.

So that's a great uncorrelated portfolio right there. Modern portfolio theory 60-40 with a crypto flavor. That's really interesting. I hadn't thought about it that way. But it's a fascinating capital structure. Do you think that this is a model that more than one company can run in a specific geography? Obviously, you have other companies that are putting Bitcoin on the balance sheet, but definitely not as aggressive as this,

but there is a playbook that Sailor has put out there and you see some of the miners are starting to do it. How many of these things will the market support do you think? I think you nailed the key word, which is per geography. I do think that there's going to be a champion, a jurisdictional winner, if you will, across different markets where their micro-strategy equivalent will be the winner eats-all.

As you see in Japan, for example, a meta planet is micro-strategy, and they are participating in a winner-eats-all market of being the dominant source of liquidity. So I do think there is a moat there with scale, mostly because capital is while abundant, one in which the more you offer, the more pricing leverage you have. So if you're trying to issue large convertible bonds, you can go after large pools of capital that only micro strategy can permit on their balance sheet because of its market cap in a way that smaller companies just will not be able to issue those kinds of sizes.

The credit market tends to thrive on size. That being said, I do. think more companies are still going to adopt the Bitcoin treasury standard of buying Bitcoin on their balance sheet? This, I think, is irrelevant of trying to become the next micro strategy. It's just a natural way that companies are realizing how they might want to create some hedge with their treasury. And it's actually really smart. I was talking to a friend of mine who actually just recently became the CFO of a public company. And I was telling him, the first thing you should really consider is you should buy some Bitcoin on your balance sheet. And the reason you should do it is because even though you're a billion-dollar market cap company,

there are people who might be short-selling it for different reasons that has to do with secular issues with the sector you're in. But if you own Bitcoin on your balance sheet, you actually become a little bit unshortable because there's a little bit of that exogenous risk that a PM has to underwrite, that they don't want to underwrite. They might think this business is crap,

but I don't actually want to short something that owns Bitcoin, and so I'm not going to short it. So the EV of a CFO in creating enterprise value by owning just a little Bitcoin is actually strategic, regardless of whether you think Bitcoin's going to go up or not. And I cite Tesla as a great example because Tesla once upon a time was a heavily shortened name. And you can actually track the day that it offered to share that it had Bitcoin on its balance sheet, the short interest actually collapsed. And it is because there are no PMs or sell-side research that's going to underwrite price targets when Bitcoin

is the underlying thing that they're not going to be able to control. So if you believe most companies are going to adopt crypto at some level on their balance sheet, they're going to participate in the Bitcoin economy regardless. So one of the products that Bitwise is bringing to market is the Bitcoin Standard Corporation's ETI. This is really an exciting product category for us because much in the way we believe that indexing is a great way to get diversified exposure to crypto, we actually think that buying a basket of crypto-owning public companies is actually going to be a secular tailwind as well. These are companies who are embracing ideologically what the next generation of consumers want and the ability to build off of that brand base in itself could be powerful

regardless of whether you become the next micro strategy or not. And I think you've seen some of that with these smaller companies like a Rumble or heritage distillery. And because of this, indexing to some approach of these smaller cap companies to have more beta to Bitcoin upside capture than perhaps micro strategy can because of its size, to me, that feels equally compelling. If you're especially a small retail investor where you're trying to, again, find that all coin, that's going to give a 30x run-up rather than a 10x, and that's going to be a rumble versus a micro strategy calculation. That's really interesting.

I hadn't thought about it on the short seller front, but that reminds me of what overstock did, not with Bitcoin initially, but do you remember back in 2015, 2016, they had some dividend that was payable in a... Was it T0? It was a token format. T0 was doing it for them. And the shorts got out of the way because they couldn't secure a locate on the underlying dividend stream.

And I don't know how that ended up turning out. That seemed a little bit of a shortcut from a regulatory perspective. But it's the same concept if you just put Bitcoin on the balance sheet, albeit it's very clearly legal. Yeah. Essentially, it could be an incredible weaponization of your treasury, but also it can be a defensive armor. Bitcoin can do both, which is such a unique property for any corporate.

a treasurer to consider to have on their balance sheet. So outside of the Bitcoin market, it'll be interesting to me to see what type of new innovations get introduced once you have a market structure bill. If you think about the ideas that we've all been pitched over the last few years, a lot of them are really interesting technological ideas that look like they would have to be securities, at least for some time to actually work. That have to raise capital. Some of these things have concepts of revenue shares built in that probably would trip how we test if that's still the framework that we're going to end up using here. But I would argue that there's been a lack of innovation for regulatory reasons on the fringes here. And I don't know if that means

that these things end up being security tokens or if they end up being commodities at some point in the future. But it's clear to me that there are a lot more ideas than there are companies that exist right now building some of these things. How do you think about that opportunity set outside of Bitcoin. It's a fascinating question and one where we have literally no precedence to imagine what classification these assets deserve. On one hand, even just removing from the lens of how we tell us, which we're all familiar with, is that historically, commodities by also definition don't generate dividends. Gold doesn't generate dividends. Oil doesn't generate dividends. actually cattle do because they give birth and that maybe is a dividend.

So cattle futures maybe have some dividend implied in it. But the reality is commodities don't generate dividends. And I think that's the most challenging component of the security classification, even moving away from the nature of an investment contract offering versus what the underlying asset represents. Once there's income associated with these assets, it really bridges a line that we just haven't explored. So I think that is going to be the big thing that the regulators will have.

to really think through, even away from governance, even away from the shared purpose of profit motivation. How do you deal with a commodity that distributes, which is something that just hasn't happened before? At the same time, we know that most of the investment world really likes distribution. Actually, the only way to think about applying any kind of valuation methodology unless you're trading macro assets for the sake of flows is trying to value those streams of cash flow. So when there's clarity around this being a permissible activity, the great unlock and jump function that's going to happen is that there's going to be new classes of investors who are going to be able to tolerate these assets as part of their investment strategy. So I always share

the example of equities where there's a whole journey of equities. So you know, it starts with venture, it starts with maybe a pre-seed and eventually it gets to CREC and maybe it goes to then a crossover fund, which is actually a hedge fund that owns private for the IPO and then an IPO and then the stock gets passed to your hedge fund that's trading liquid and then maybe it goes into an active mutual fund and then maybe it goes into an ETF one day and then maybe it ends up as someone's IRA. And that's the journey of a stock. And what you see is every step along the way, a new investor comes in because the stock has matured for the calibration of their risk preference.

And you need the ability to graduate assets along that risk preference. The problem with crypto and all coins in general today is that there isn't a concept of graduating along the risk curve. It feels almost as if it's all just one contained system because there's no new investors coming in with the idea that, oh yeah, this has now been the risk because XYZ and now I can own it at this cost of opportunity capital. So I call this the permanent capital vehicle effect. Part of why the ETFs are really important and will continue to be is because ETS bring that class of investor. It brings in a new investor who is actually thinking about crypto as a permanent capital allocation. And you're going to then see these alt coins graduate

into having ETF offerings, hopefully with something sensible from the perspective of being revenue generating, that will allow the types of investors that we have wished upon for years, but now there having been no regulatory clarity can be possible now than it hasn't been before. It's going to be really interesting to see how that evolves just from the allocator lens, because on one hand, you wouldn't want to value these things based on cash flows if you're the team. The team would not want that because there are on a lot of these things that are very richly valued, they don't have a lot of cash flows. So what is the tam that some of these projects are going after? Is it non-sovereign store of value? Is it global internet money? Or is it something that looks like a commodity with cash flows associated to it? And I think that's still a big open question, a lot of these categories within is just what is the token actually competing for? Just because it is money-like does not mean that we're going to have 300 different internet monies. Absolutely.

This is why at the core, crypto really feels like a commodity more than a security today because it trades like a commodity. It trades based on market demand and supply in ways where the valuation is mostly driven by the marginal buyers and sellers. And that's what commodities ultimately represent. There's no concept of value associated with that in the way you're describing. Yeah, I think that is a big component of how people are going to think about assessing crypto. It's also why I think at some level, Ethereum has been challenged and why Solana has been able to

escape a little bit outside of that narrow valuation framework. Part of Ethereum's journey has always been that they were going to be valued like a DCF because of their disinflationary nature of the way that they were going to bring upon fee burns. And if you make investors subscribe to that view and you pound the table that this is the valuation methodology, well, you better hold them to it because they're, think of it that way. And what you saw actually is that it was very challenging to imagine these things are actually underwritable and stable. So once there were no fees associated with it in the ways that people expected after layer two scaling, the whole thesis broke apart. So that was almost a disservice,

actually, from the Ethereum's effort of trying to brand itself as something that ultimately wasn't going to grow into. Whereas Salon, I think, was a lot more cleverer because they have the great advantage of having marketed two things. One, very, very, very big tam. So they basically will go and say, we are in everything. We're in, as you said, D-PIN, we're in financing different payment streams, we're in telecoms, we're in Dex's, we're basically in everything you can ever imagine. And that creates a huge tam. And then they say we charge very, very, very little for every consumption. So when you multiply a very, very big number to a very, very small number, the humans cannot possibly comprehend those calculations. There's no calibration possible on any valuation methodology.

So you get to have the ability to just walk both advantages of big tams and very little fees, but not have to narrowly define what that is. And that's why I think Salana trades still today more like a macro asset, because it is trading on the belief of what it can be, not what it is. Ethereum is the classic stuck in the middle, not competing for sound money, or at least big parts of the community aren't competing for sound money. And then just an inferior operating system, I suppose, to some of the new entrants that have launched after the launch of Ethereum. And it's that decentralized operating system category is just going to be a lot more competitive than the digital gold category over time. So you probably see more churn in that set, but a classic corporate strategy problem for a non-corporation over at Ethereum these days. Well, this is why I'm so bullish for Bitwise and with our on-chain solutions with a test-in, because the common mistake I think people also make with non-Bitcoin crypto assets is that it's this thing you just buy and stuff it under your mattress and it goes up in value, kind of like Bitcoin does because it looks more like gold.

And yes, gold actually is useless. So you stuff it under a mattress and it's fine. But most of these technology-centric protocols are actually meant to be useful. You're meant to use these things to bring some productivity gains at large. for which you are rewarded. So to actually manage those crypto assets, it is inevitable that the future has to be on chain. So what I end up seeing is that even the ETF price action on the eth asset might have gone down, those who have been able to navigate earning the opportunities for that cost of capital,

much like our alpha strategies that Bitwise has last year by participating in the restaking theme and participating in eigenlayer and the Pendel Athena interoperability to actually do things where you're earning off of the Ethereum backbone means their cost basis is actually lower than the person who did nothing with it. So if my cost basis of my eth is lower than the person who had it under their mattress, my inclination to sell it is obviously going to be higher to monetize it because I've just increased that gap. So structurally, if you don't use these assets, you're at a disadvantage, which is why the future is on-chain. And that's why Bitwise is going in, offering those on-chain solutions for most of these assets, for which much of that value

accrual has to exist in that framework as well. That's awesome. Well, I think that's a great place to leave it, Jeff. This has been a lot of fun. We have to do this more often. I always love picking your brain. Where can we send people to learn more about Bitwise? I can always check out our website, Bitwiseinvestments.com.

We're also prolific on Twitter. So you can find me, Matt, Hunter, anyone else, and we're always available to chat. Definitely. You guys are in the must follow category. So thanks for everything you're doing for the industry. Keep it up. Thank you, man. Lovely to see you. Thanks for listening to another episode of On the Brink with Castle Island.

To find out more about Castle Island, visit castle island. Visit castle island.vc. To listen to all of our podcast episodes, please go to On the Brink dashpodcast.com or just click on the tab in our website. Thanks for listening.