The Breakdown - Travis Kling on Why Elon’s BTC Buy Was the Biggest Story of the Year

Episode Date: December 28, 2021

This episode is sponsored by NYDIG.  On this episode of “The Breakdown’s” “End of Year Extravaganza”, NLW is joined by Travis Kling. Travis is the co-founder and chief investment officer of Ikigai Asset Management, and discusses the shift in institutional involvement in the crypto space.  Find our guest on Twitter: @Travis_Kling Enjoying this content?   SUBSCRIBE to the Podcast Apple:  https://podcasts.apple.com/podcast/id1438693620?at=1000lSDb Spotify: https://open.spotify.com/show/538vuul1PuorUDwgkC8JWF?si=ddSvD-HST2e_E7wgxcjtfQ Google: https://podcasts.google.com/feed/aHR0cHM6Ly9ubHdjcnlwdG8ubGlic3luLmNvbS9yc3M=   Join the discussion: https://discord.gg/VrKRrfKCz8   Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW NYDIG, the institutional-grade platform for bitcoin, is making it possible for thousands of banks who have trusted relationships with hundreds of millions of customers, to offer Bitcoin. Learn more at NYDIG.com/NLW. - “The Breakdown” is written, produced by and features Nathaniel Whittemore aka NLW, with editing by Rob Mitchell, research by Scott Hill and additional production support by Eleanor Pahl. Adam B. Levine is our executive producer and our holiday theme music is “Spike The Eggnog” by Two Dudes. The music you heard today behind our sponsor is “Dark Crazed Cap” by Isaac Joel. Image credit: Britta Pedersen-Pool/Getty Images Entertainment, modified by CoinDesk.

Whatever the odds you would put on Tesla buying a billion and a half dollars on the balance sheet in 2021. In 2020 or 2019, somebody gives you odds on that. I don't want 50 to 1 on that or whatever. And then it happens. And then somebody said, make me odds on the likelihood that two months later, he completely reversed his course and sh-s all over Bitcoin on Twitter after he bought a billion and a half dollars worth of it. What an unbelievable thing to have happened to do that. about face.

Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the Big Picture Power Shifts remaking our world. The Breakdown is sponsored by Nidig and produced and distributed by CoinDesk. What's going on, guys? It is Tuesday, December 28th, and we are back with another episode of The Breakdown's End of Year extravaganza. And today I have a guest that I know you always love having on the show. It is, of course, the one and only Travis Kling. Travis is the co-founder and chief investment officer at Ikigai Asset Management. He has been in the traditional hedge fund world, the crypto world, and he's been in crypto for a while. I mean, this is a guy who built his

firm in the midst of a deep bare market and has made it work. Travis is known for his incredibly fired tweets and his incredibly fire takes, and I'm glad to be able to bring a few minutes of those to the show today. Let's waste no more time jabbering and get right into the conversation with Travis Kling. Travis, welcome back to the breakdown, sir. How are you? Here we go. Glad to be here. Doing well. Rapping up the year. Well, that is what we're here to do. We're here to wrap up the year that was. Look forward to the year to come. And so let's kick it off with the big kind of overarching starting question. What do you think was the biggest crypto story of 2021.

CPI, actual goods and services, housing, wages, asset price, inflation. Yeah, that's pretty

reasonable starting point. Yeah. Yeah, I think it was the dominant feature. The level of speculation that you saw

in various different asset classes is all kind of interrelated to all that. And yeah. So let's actually get into that. So this is the kind of transcends the kind of economic story and crypto story. Obviously, this is a huge kind of justification coming into this year. The anticipation of inflation was a huge part of the thesis for institutions coming to Bitcoin. It's obviously something that you guys, you know, were seeing, were kind of connected to.

And then it actually happened. I mean, how did you see the kind of institutional thought process or, you know, investors from other sectors change the way that they were looking at Bitcoin or crypto over the course of this year as the inflation story played out differently kind of on a macro scale. Yeah, within great question. Within crypto, the delineation between, I mean, if I was, if you could just wrap a bow around it in one sentence, it would just be the decline in BTC dominance over the course of 2021. And thinking through how asset price inflation, that's driven by speculation the way that flowed out through to ALTS and, you know, ETH specifically relative to BTC, which is obviously, you know, a massive, massive outperformer.

And then the other layer ones, that is, that is connected to macro. I know some people don't view it like that, but I've always viewed it like that, right? Like that is a function of doing $120 billion a month of QE when you don't. don't really need it all that much. And that's, that is a function of what happened to M2 monetary supply. That's a function of the fiscal policy deficits that were, they were running on the, on the political side. And, and, uh, it was, it was just the dominant theme of the year. What do you think about this sort of popular or getting more popular narrative of, uh, well, Bitcoin's just kind of a high beta risk asset at this point.

You know, Joe Wosenthal from Bloomberg loves trolling the Bitcoin community right now with this on Twitter. What's your take on correlation with Bitcoin and stocks as we've seen it play out over the course of the year? Yeah, I mean, it makes sense the moniker the fastest horse. Like on a macro asset scale, I mean, Bitcoin just showed that that was the case. and the way it played out was close enough to Paul Tudor Jones's view that he wrote about in May of 2020 other than he missed the gold one. You know, like his other, you know, big investment to try and protect himself was on the gold side.

And that hasn't played out that well. But it was, you know, and some of that I do believe was because Bitcoin stole so much of the spotlight and the relative flows that would have gone to gold. but through this year, it's just it's all one trade. I've been talking about this for a long time. It's all one trade. And it looks like maybe the direction of the trade is about the kind of change here upcoming. And then there's all this speculation of, you know, how much tightening can we actually do before things start breaking. And what's the kind of political appetite for letting things.

be very broken for very long. So this is something you've tweeted. I've actually, I think one of your most kind of quoted themes from me in recent months. Your thesis, it seems, is that of course there's going to be some amount of politically political showmanship style base level tightening, you know, in order to not be seen as doing nothing. But there's a very limited band of what they can actually do practically speaking. Is that a fair summation of kind of what you think? Yeah. And I think I'm always careful to say,

I don't think anybody really knows. So in terms of what can they specifically do. So saying something like there's no way you can hike three times in 2022 and three times in 2023, you're going to break the whole system. It's going to be a collapse. I mean, there's a decent chance that happens, but I don't know that for certain to be true.

Instead, it's more like look at what they have done, look at what they're incentivized to do, look at what they have the capability to do, and then try and put the pieces together more like that. And we just had the longest, you know, pre-COVID, we just had the longest, least aggressive economic expansion in U.S. history. And the constituents that matter for politicians and by way the Fed, which has been politicized, which is to say old people to have a lot of money, that period of time was really good for old people that had a lot of money. And so they would love to run that playbook back again. And so if we can get on some kind of like slow economic grind higher

on very gradual interest rate increases and see if you can put together another, you know, decade of grinding like that, they're pretty incentivized to do that. It's just there's reason to think that they're going to run that, try and run that same playbook again. And the last thing I'll say on that is that the political side of this is hard to, that's a complicating factor that is hard to exactly get your head around entirely because you have to try and put yourself in the mind of what the Democratic Party thinks about inflation relative to kind of midterm elections. And like, is there some chance that they may be already kitchen sinking the midterm elections because they know they're going to lose them and they're playing for 24?

so they're trying to hand over a shit economy, you know, come next year. It's a little tinfoil hatty. It's not impossible. But these are going to be, these are some of the key factors. It's going to be like the key factor to watch, in my opinion, for next year. I'm super interested. I'm working on a show for the beginning of January. That's 12 big picture power shifts that I'm watching in 2022.

And midterms is actually one. I think it's a meaningful, meaningful question. NIDIG sponsors this podcast and they are helping banks, corporate treasuries, and fintechs integrate Bitcoin into their products and balance sheets. See why Bitcoin means business at nidig.com slash NLW. That's nydig.com slash NLW. What's something that happened this year that you would have never seen coming? You would have never predicted.

I got to say that Elon buy. I got to say that, I mean, a billion and a half dollars of public balance. sheet, Tesla, like, poof. I mean, I think it's the biggest thing. There's people that hate me for this, but like, I mean, it's the biggest thing that ever happened to Bitcoin, in my opinion. Interesting. So let's take into that because this is, this is fascinating because it felt like that in February. And by April, when they started to kind of retrace a little bit, it felt a lot, not like that. So what's your thinking now, you know, you're seven months on from that, eight months on from that. Why does it stand up like that for you?

here's a great actually i'm going to reframe the question so whatever the odds you would put on Tesla buying a billion and a half dollars on the balance sheet in 2021 in 2020 or 2019 somebody gives you odds on that you know i don't want i want 50 to 1 on that or whatever and then it happens and then somebody said make me odds on the likelihood that two months later he completely reverse his course and sh-s all over bitcoin on Twitter after he bought a bill million and a half dollars worth of it. What would you price that? A thousand to one, five thousand to, like what, I mean, that what an unbelievable thing to have happened to do that, that about face. And what the underlying drivers for that were, dude, I don't know if we're

ever going to know. I don't know if we're ever going to know exactly what the setup was for how that happened. When I, when I rank, I never talk about that without talking about the China ban because for me there's no way to unlock those two things. And the way I have it in my head, there will always be together. And I don't know if we're ever going to know if they were actually linked. If Elon knew that was coming, there is a body of evidence. I think you could put together they would say there's a pretty decent chance. Elon knew that China was going to come with something pretty heavy-handed. I mean, again, it's a little tinful of Hattie, but like, I mean, I've talked to people that think the same thing.

So, you know, but overall, the Elon situation, you know, I think we learned something about figureheads and Bitcoin through that experience. And he did this really weird, you know, the punctuation of that. There's aspects of that whole story that felt very manipulated. And the way that it was, it was punctual. by the B word conference. And that whole thing. And it was just sort of over.

And then we did an all-time hide, whatever that was 90 days later or something like that. It's a little, you know. Yeah, the B-Word Conference was a really interesting aspect of that story. I think the like, my sort of base case for that was Kathy calling up Elon and being like, get the fuck on the stage. You got, like, it's time. Thanks. Remember, you know, 2016 and 2015 when everyone thought I was a lunatic for standing by you, but who knows? I think it's super interesting. I also want to go to another point, though, which is, so, you know, connected to the China ban, that obviously was this huge momentum shift for this market cycle. And I think, you know, at least to me, it feels pretty clear that Bitcoin looks a hell of a lot more resilient coming out of both of those, those, twin kind of fuds and not just fuds, but like actual serious sort of threats and shifts the way that

it did, how much different does this cycle go if Elon doesn't kind of retrace on his environmental, with his environmental stuff and Bitcoin doesn't ban it right then? I mean, is that the moment where we get that parabolic up swing that's like actually kind of unhealthy, you know, followed by a much bigger crater? Like, is there an argument that actually it worked out in such a way that we, I don't know, even broke out of some of the cycle kind of pattern that we'd been in before. What do you think? It's a great, man, a great point. I forgot how good you are to interviewing. I haven't talked to you in a while. I forgot you were the man at this. It's, so I guess the first thing I'll say is

whenever the China thing got cleaned up the way it did and they threw the kitchen sink at it, and you heard about all the miners leaving and hash rate decreasing and popping up in other places of the world and banning the traders and seeing the volumes die on, you know, we look at it from a trading approach as well, too, seeing the volumes die out on OBE and OKX and what that meant for relative open interest market share and different things like that. When I saw the way it looked like that was getting cleaned up, I go, oh, this is worth a trillion dollars on Bitcoin's market cap, just this, like higher. Like to, the way this just got de-risk, it's worth at least a trillion dollars. And we haven't seen that entirely. You know, you kind of saw that play out,

but that, that, that plays out over five years the way that that got de-risk. And, you know, what would have happened if, again, it gets so tinfoil hatty, man. Like, it's like, what would have happened if Elon didn't, you know, if the China band never happened and Elon didn't do his reversal and you get maybe a couple more S&P 500 publicly traded names that buy it on balance sheet. I don't know. I mean, one thing that I've learned this year from a trading perspective is Bitcoin gets sluggish over, you get a 60 handle on that thing.

And it just, you know, the supply that comes and the, you know, demand that's sort of ready to eat it up in the 60s, like it just thins out up there. and, you know, that may change for a number of different reasons. And at some point, the way these things have a tendency to work, you just run out of people that are in the mood to sell in the 60s. And that may take a year. You know, I don't know, you know, who knows what Bitcoin's going to do next year. But a blow off top for Bitcoin is something that I really struggle to see ever happening again.

It's not my base case. It's my low conviction, medium conviction base case that Bitcoin will never blow off again. that is a whole show we're going to put a pin in that one and come back to it i think it's we can do an entire show on on cycle theory i think it's fascinating but i do want to i you know i want to kind to cover a couple other aspects of the industry because you know you came into this space you you were fascinated because you were effectively watching all the iCO shit went fully down the rabbit hole as that was i mean starting to peter out but there was still a hell of a lot of people from outside looking in who are like racing to catch a piece of that. And you immediately

went straight to Bitcoin, you know, at like not kind of peak of lack of, you know, trough of popularity, but certainly before we had done the whole fully sloughing off the skin of the ICO movement, right? So this is a long way of setting up that you've had a long term kind of interest in and conviction around Bitcoin. You've watched that for a long time. You've, you know, you built your company in the bear market. And now, you come into 2021. And in addition to everything we're seeing with Bitcoin rising and hitting all-time highs, there's all these new things. NFTs, layer one battles, you know, crypto gaming, metaverse, all this stuff comes up. Where are you at the end of this year kind of coming out

on all that stuff? You know, what has surprised you? What's interesting? What do you think, you know, is kind of, you know, for the dustbin of history, you know, what do you see going into 2022 on sort of the rest of the crypto space? Yeah. I'll give you a. maybe a quick minute on historically kind of some of the things we've done at Ikega and then maybe what the outlook looks like. So launched the fund three years ago, December 2018, spent a handful of months, probably five, six months before that building, thinking through investment strategies, you know, launched it right after the crash in November of 18. And we were

kind of qualitative first. fundamentals driven with some kind of side quantitative work that we were doing. This term, quantum mental gets thrown around a lot. And we had sort of a qualitative first quantum mental approach to deploying capital in the market. That was when Phil Bonello was still working with the shoutouts, Phil. And he and I did a ton of qualitative work together. and I couldn't figure out a way to generate attractive risk adjuster returns like on a repeatable, consistent basis with qualitative research. And like sometimes that would work and sometimes it wouldn't work.

I'm talking, this is talking about first half 19, right? So pretty challenging market environment. And I couldn't figure out how to how to do that. And so through the quantitative work that we were doing with Hans taking the lead there, shout out as Hans. we came up with a quantitative approach to trading Bitcoin that it looked like we could really outperform holding Bitcoin by a good amount with this quantitative approach. And we were trying to figure out a way to generate attractive risk adjusted returns and get the business scaled up.

And so that was the move that we went decidedly towards into September 2019. And from September 2019 forward, we outperform holding Bitcoin by trading Bitcoin. and we did our jobs well. And then we added ETH to the systematic approach in April this year. So we kind of started trading ETH systematically earlier this year as well, too. And then the vast majority of our capital was deployed into this kind of systematic strategy. And then a couple of things happened this summer where we bought a little bit of Salana at the beginning of the year. And it turned into a lot of Solana because the price went up a lot.

And to a lesser extent, we bought a little bit of FTT, and it turned into a lot of FTT because price went up a lot. And then all of a sudden we had this portfolio that was, you know, not the vast majority of it in this systematic, you know, kind of models driven BTC and ETH strategy. But we weren't in the mood to sell Salon and we weren't the mood to sell FTT. And in the meantime, we were seeing more and more things on the some of the emerging crypto sector side of things that was increasingly more compelling to us. And we had spent a lot of time in Defi. And we're kind of struggle. This is in late 2020, first part of 2021. We're struggling kind of to find super compelling value accrual in Defi.

When you kind of drill down into where a lot of the yields came from, the sustainability of those. And, you know, smart contract security type of stuff. Anyway, so we were a little hesitant on that. But then when we missed like the whole Axi Infinity move, we made, you know, a negligible amount of money in Axi Infinity. But after the price ran up a lot in May, we really started digging into what was going on there and what caused that and, you know, play to earn and scholarships and, you know,

the innovation that's happened there. and what the outlook for some of that kind of broad direction might be. So we've been pretty compelled by that since this summer and have been spending a lot of time on it. It's a little bit of our portfolio right now. Not a lot of it. There's not a ton of the publicly traded stuff that we're finding super compelling, especially if you kind of look at the market cap on it. But the innovation is completely undeniable.

And it just looks to us like it's probably the top of the second inning of a sector that's going to go be a big deal, you know, both in its importance on society in general. And, you know, in the investment returns in kind are going to end up being, you know, we think a big deal as well too. And it's also this metaverse situation, you know, even before Facebook changes named a meta, It was pretty apparent how the centralized versus decentralized side of this whole thing, how it was just going to be a very clear fight, right? And you were seeing what's happening in Fortnite and various other different, you know, all kinds of computer games where people were doing more and more hanging out, less and less gameplay, that kind of thing.

And you saw little old decentralized alternatives that, you know, Decentraland and you're like, okay, what are we doing here? and but then you know Facebook goes and changes their name and now I just think that it's crystal clear that there is going to be a competition here for for decentralization versus centralization and it's going to be a fight that's going to be worth fighting I think it should be illegal I'm reflecting that to put you in an interview that that's capped at 21 minutes but that's the constraint that I set myself for these end of years. So just going to close out on one question. We'll have you back soon to talk more about all this sort of stuff. There's so much more that we can dig into. But what's one prediction

for 2022? I mean, you've got half of the answers to your questions have had predictions too, but let's put a capstone on it. Let's see here. Bitcoin will decline at least 50% off its top and will increase at least 50% off of its bottom. All right. I like it. Now the question is just when you make people rich. All right, Travis, it's always wonderful to have you on the show. Appreciate the time and happy holidays to you and your fam.

We'll do it again soon, sir. I said it at the end of the episode. It should be illegal to have Travis Kling on a podcast, but only for 20 minutes. This is a wrong that I promise that I will write soon, But until then, I appreciate Travis for taking some time from his holidays to join us for the show. And I appreciate you guys listening. Until tomorrow, be safe and take care of each other.

Peace.