The Derivative - WTF ^%$# is Happening With Crypto??

Episode Date: May 20, 2021

We’re talking with two ‘in the crypto weeds’ traders/asset managers, Ben Upward of Synchronicity and Gary Basin, about crypto’s -30% one day drop, coinbase, the most surprising (& scariest) things about the recent crypto crash, size and action in futures, options, and non-futures, “what if” bitcoin had blown up, the right to a free market, bitcoin as beta?, new Bitcoin offers (like bitcoin micros), the negatives and positives of volatility in the space, leverage upon leverage upon leverage, bitcoin as a portfolio diversifier, a VC model, Portnoy picking, risk metrics, and the future costs of production for cryptocurrencies. Chapters: 00:00-02:28=Intro 02:29-15:12=Bitcoin falls -30%, what broke? 15:13-26:30=Bitcoin Futures & Unstable Bets 26:31-39-50=Farming, Staking, Embracing Volatility 39:51-53:30=The crypto hype machine, and new tech devaluing old coins? Follow along with Ben Upward on LinkedIn and Gary Basin on Twitter at @garybasin. And last but not least, don't forget to subscribe to The Derivative, and follow us on Twitter, or LinkedIn, and Facebook, and sign-up for our blog digest. Disclaimer: This podcast is provided for informational purposes only and should not be relied upon as legal, business, or tax advice. All opinions expressed by podcast participants are solely their own opinions and do not necessarily reflect the opinions of RCM Alternatives, their affiliates, or companies featured. Due to industry regulations, participants on this podcast are instructed not to make specific trade recommendations, nor reference past or potential profits. And listeners are reminded that managed futures, commodity trading, and other alternative investments are complex and carry a risk of substantial losses. As such, they are not suitable for all investors. For more information, visit www.rcmalternatives.com/disclaimer

Thanks for listening to The Derivative. This podcast is provided for informational purposes only and should not be relied upon as legal, business, investment, or tax advice. All opinions expressed by podcast participants are solely their own opinions and do not necessarily reflect the opinions of RCM Alternatives, their affiliates, or companies featured. Due to industry regulations, participants on this podcast are instructed not to make specific trade recommendations nor reference past or potential profits, and listeners are reminded that managed futures, commodity trading, and other alternative investments are complex and carry a risk

of substantial losses. As such, they are not suitable for all investors. Welcome to The Derivative by RCM Alternatives, where we dive into what makes alternative investments go, analyze the strategies of unique hedge fund managers, and chat with interesting guests from across the investment world. I think embracing the volatility is one of your points, and I think that's a good thing to do. I mean, there's opportunity in the volatility, and you're seeing it today. You know, if you can be protected to an extent and not have all your chips on that table, and we

don't know if this is the bottom or not, and it very well might not be, but just to have the flexibility to take advantage of that, whether you're a long-term investor or you're providing liquidity, like Gary said, in a pool, and maybe you've been able to hedge some of that delta or permanent loss that's there and you're clipping fees. There's just, there's a lot of opportunity in this space because of the volatility and because of some of the uniqueness of this liquidity providing opportunities that are essentially a different or a newer form, I guess, of yield. Hi, everyone.

Welcome back. We got one of our what the f*** pods today. Crypto made new down 50% lows sometime early this morning. Rallied most of the way back, but went to grab two of the best crypto guys and market maker guys I know. Ben Upward of Synchronicity and Gary Basin of GaryBasin.com of what of what else um so we're going to talk what happened today what the overall landscape's looking like um so let's just start uh Ben start with you give a brief little background sure hey everybody um I uh I founded Synchronicity in 2015 as an alternative shop. We got into, we felt like we were pretty lakered in this space. We got into the digital asset space in 2017 and launched a private fund

and been running that ever since. And that's our main focus. And obviously there's been quite a bit to look at on the screens today. But yeah, looking forward to the discussion and uh and hearing what everybody else has to say as well hi i'm gary um i've been tracking crypto space for since about similar time like 2016 um i helped start a project called reserve and um i'm not full-time in the space currently, but I track it pretty actively. I do some VC investing

and trading on my own, both on centralized exchanges and DeFi. Your outfit for the pod is all the crypto credentials you need. Yeah, in Miami too. Yeah, and so you're down in Miami, but went to school in Michigan Ben's over in Michigan um you got any Michigan connections there very possible I grew up in Farmington

so it was like 20 minutes from Ann Arbor yeah okay I grew up in Birmingham so yeah nice close pretty close just a couple of mid- Midwestern boys here talking crypto. So let's keep going with you, Gary. Like, what was the most surprising thing you saw today? What stuck out to you? Actually, I think most surprising is I didn't see any major, like, protocol failures, like in DeFi. I think a lot of people would have expected some cracks to show

and like, you know, down 30% plus each day. But like everything pretty much worked. There was no like major failures. Like there was liquidations, obviously, but like I didn't see any stablecoin D coin dpegs i mean tether traded like a penny off or something so that was uh that was most surprising i mean all the centralized exchanges going down not not really surprising um yeah so i saw it right like coinbase was down couldn't trade for a little while and you're saying like multiple multiple of them were down

i think almost all of them other than ftx and what what is what causes that it's just volume of it's just like internet volume and they don't have enough servers or something yeah i mean i i think basically all of them um ftx maybe i'm not as confident and are built on like basic technology. That's kind of a generation behind traditional financial exchanges. So they're not really good at handling load. They're just not really that scalable. So yeah, like too many people trying to access it, too many orders going through the system and just take it down. Right. Ben, how about you?

What was the coolest thing or most frightening thing you saw today? I mean, there was a lot going on. Gary's right. You know, it wasn't too surprising. We've seen this in the past in terms of the centralized exchanges having trouble with the loads. And, you know, we didn't pay too much attention to the deck space and the decentralized space today. We were probably a little bit more focused on the future side and trying to use that to hedge some of the positions we had on.

So I guess, you know, CME held up fine. Obviously, it's a different animal. Cash settled. The future's there. I mean, I think one of the things that we've been looking at that, you know, we do traffic in those CME options and the Bitcoin futures options. And it's a great tool to have. But, you know, I think if we had a wish list, one of the things that we'd really want would be for more liquidity in those options. You know, I guess rightfully so for part of the day when drops were really happening in the morning, very fast and very wide.

You know, a lot of the market makers, I think there's only a handful on the options side where it basically kind of disappeared. And so there's ways to work around that for us, but it would be a whole lot easier for us and nicer if, you know, we could get a bigger cadre of market makers in the CME options, the big CME options for Bitcoin. I mean, there's reasons why that doesn't happen. I think part of it is the margin requirements versus the other places they can quote and provide liquidity like there a bit for example so i think to the extent that you know cme is able to eventually drop their margins a little bit and have the fcm follow suit

that would be really helpful to us and helpful to them to try to steal some of the or try to get some of the market share away from from the of the world where, you know, for us as a U.S., you know, NFA-based entity, it's hard for us to access those foreign markets, which definitely, you know, would be a lot nicer for us to be able to access that liquidity in times like that. So that's one of the things that didn't surprise us, but I think one of the things that we really hope that, you know, during the next, you know, whether this is over or not, I don't know, but, but during the next period of stress, it would be nice to, to have,

to have some more market making capability. What's the size that you're seeing it both in the futures and the options over there at CME? I mean, there's enough size, unless you've got a really, really big amount of AUM in the actual futures, the Bitcoin futures. We just started to look at the minis today a little bit, just out of curiosity to see. The micros?

Sorry, the micros, the micros the micros right um and i only looked at the book once or twice my partner was looking at it most of the day but um you know i think what you saw there was sort of like half of the big contracts i think it was like 25 micros aside is sort of what we were seeing the market make quote there but generally in the futures and the bigger Bitcoin futures, there's generally enough liquidity there. It's just on the option side, you know, depending on the time of day. And, you know, when we saw guys go in and out or if it was the same market maker,

maybe just putting up two aside and like 800 wide. So, you know, that makes it a little bit tough. First of all, when he's not, you know, when there's no one quoting. And second of all, obviously, when... And then, Gary, what were you seeing on, like, the non-futures, right? Non-centralized exchange. How wide was it? What was the volume like? I wasn't actively watching well so most of it is not uh

um limit order books right it's like amms so um the volume was obviously very high yeah um i mean that was actually funny like one of the uh it's like, yeah, even though the black blocks, black rate is very slow. It's like very reliable. So if the, um, if the web servers are up, you can go pull up a quote and, you know, see the most recent trades, um, in a way that you can on these centralized exchanges. Um, but in terms of, uh, I think the interesting thing was they, even the perps held up, like the on-chain perps,

and the ETH, like Lido, like the ETH staking protocol also like stayed pegged and, and, um, and liquid as well. So, uh, I think it was probably one of like record number of liquidations. Um, but everything stayed functional and you could trade the whole way through.

And talk me through, like if, if we were having a different conversation right now and it really all blown up, like what would that have looked like? Like some of those would have totally unpegged like give me yeah what what did that have looked like i think the risk that that some people must be aware of is that um you you can wipe out some of the protocols if they run out of collateral. So, I mean, like any collateralized lending protocol, you get liquidations that if they became under collateralized,

then somebody's losing money, right? So the first pool is the protocol itself, if they have some kind of emergency fund. So, I mean, like in an extreme scenario, you can imagine DAI, which is backed by ETH loans on Maker. They could run out of collateral and then DAI de-pegs. So depending on how quickly it dropped, some percentage of DAI would basically not be redeemable

for a dollar and then a lot of stuff I think would unwind. Right, because then people would just be running for the exits of like, give me any price to get out of the next one in the chain. Possibly. Yeah. Yeah. And then you, the other interesting thing, I think part of the reason why you get such, such vicious, uh, swings in crypto, especially to the downside is you have real

time margining in a way that you don't really like real time margining and settlement in a way that you don't have on in traditional markets, you know, for better or worse. So with something like that, um, I mean, I, I know Maker is interesting because they actually delay it an hour. Their liquidation price for the CDPs is published an hour in advance. So it's not at the block rate. It's a little bit delayed, but it's still pretty close to real time. And so if you're running up against margin calls, you're getting liquidated in real time,

which obviously exacerbates the selling. So you could imagine like, you know, really extreme unwind that builds on itself and you could end up with like no bid and some of this stuff. You know, like Ethereum. There was a good tweet thread of like, this is what a free market looks like, right?

Instant liquidation and people running for the exits and no, nobody like stepping in to provide that liquidity necessarily. Which wasn't all that bad. Yeah. Ben back over to you. So, and maybe actually, I'm going to go back to you, Gary, for just a second and give us some of these definitions of what you've been thrown on. So AMM is.

Right. So kind of like the first generation of centralized exchanges or central limit order books. I'm sorry, decentralized exchanges or central limit order books on chain. So you would like submit an Ethereum transaction transaction to like place a bid place an offer and like they could match um and those are not very well not a good fit for blockchain because it's expensive and slow um amms are kind of a new way to do the decentralized exchanges where um you create a like a swap market for an app for between two assets basically. So the market maker creates a pool with like two assets,

like A and B they it's, you know, whatever ratio they deposit into that pool between A and B is defines the initial price. And then liquidity takers can come in and provide a, an exchange for B or provide b in exchange for a at some like fixed uh some fixed like swap rate effectively so basically just a pool there that you can access versus having to go out into the universe guys were some of the earliest users of the futures there why why do you think other people or have they been hesitant to move into that space and to say

hey this is a good hedge um and what what are you seeing as the premiums there to the spot and then explain if you can just how the futures work if some of some of the people don't know exactly how they work not futures in general but how the bitcoin futures work yeah i mean i think the the biggest distinguishing factor of the bitcoin futures especially relative to some of the other futures out there um are just the fact that they're cash settled. And then like I mentioned before, the margin requirement, which is there for all different kinds of futures.

But for Bitcoin, because of the volatility and because of the unknownness of the asset, both the exchanges and the futures commission merchants started off with really high requirements. And I think to the point I was making earlier, that's definitely discouraged a lot of the market makers who tend to be global in nature from providing as much liquidity as they do

in some of the foreign markets, foreign-based markets that have much lower margin requirements. I think that being said, the CME Bitcoin futures themselves, the big contracts, I think you've seen the statistics. The market has been growing, liquidity has been growing, and I think for the futures themselves it's pretty good and it's definitely still handy for us when we invest because there still is a benefit to not having to put up 100% to buy something. So even if the margin rate's at 35%, that still gives us a lot of flexibility in how we control our excess cash and our collateral. So there's still big benefits there i think for us like i said before it's just if we could get a little bit more um

uh quoting and some more participants um which i think will eventually happen yeah and the options that would be big and we are interested to see what the micros do i mean i think the whole notion of of bringing um you know making it much more accessible to retail you know because a big contract right if they're five bitcoin and um you know back when it was uh 50 000 a day or two ago or whenever that was um you know you're talking about,000 notional contract and if you have to put up 35% of that that's a big big amount for especially for individuals obviously so you know this notion of

one time I could go on Robinhood or wherever and buy or Coinbase and buy right 500ths of a Bitcoin or something yeah yeah right and so now that you've got the micros, that product should compete much more directly

to an extent in theory with the BitMEXs of the world or some of the other perpetual contracts on some of these other exchanges that people have been using for a long time. And then what do you know off the top of your head that the futures traded a premium, right to the index price to the spot price? Typically, yes. And there has there has been a trade there that, you know, a number of our colleagues, I think, have been trying to access in one way or another. There's actually a there's a front end out there called Paradigm that does a really good job to be able to capture that in terms of the it's in a contango curve so the the forward

you know the front month is is cheaper back months typically um and there is quite a bit of premium some people do it by actually just owning the spot and then selling the future against it and waiting for those to converge into expiration so there you know there definitely is a trade there and whether it's on the, the CME, you know, some of the perpetual markets have better or worse depending on the timeframe trades are the same essentially phenomenon where they can do the same thing. And I think actually Arthur Hayes wrote about that from BitMEX. He had a pretty good post on that a month or two ago.

And just this trade that essentially, depending on when you put it on, I mean, you could get anywhere from 20% to 60% annualized type of returns by just, you know, essentially buying the spot or near month and selling some of the out months. I mean, there's risks to those trades because it doesn't always converge the way you think. If you get in late, you know, it's like any spread trade that you put on in a commodity for example. I mean there's risk to it.

It's not a free lunch but there is that opportunity there. There's firms actually that are trying to package that into structured products which depending on how you manage your money, whether it's for you or if you're managing money for other people, could be potentially attractive even to pay sort of the vig that those providers would put on their products.

Is that like some of these big firms we're seeing like Morgan Stanley and Goldman like coming out with, or was it Wells I saw today coming out with a Bitcoin product? They might be. I know, gosh gosh i can't remember which one it was one of the bulges that was um doing like a non-deliverable forward which actually was out there when we started um investing in 2017 there was a group called terra exchange that was that was doing a non-deliverable

forward um i think it'll obviously be much more successful with the bullish bracket. But this is actually a product I know from a group up in Toronto called FRNT that put together an Ontario Securities Commission-approved structured product to trade that. So I don't know the ins and outs of it, but essentially they priced it like a zero coupon. And then in theory, Gary, I'm going to throw it back over to you. In theory, this type of volatility is sort of good

for this kind of farming and yield, all this kind of stuff, or no? In theory, you can get bigger premiums on some of these option plays and whatnot if the if the volatility is higher or do we need some sort of base level of of value in order for that to happen yeah i think it depends on on what you're what kind of trade you're putting on i mean obviously if you're trading back and forth well it's good because there's going to be more dislocations um if you're if you're uh like providing liquidity in an amp um it's kind of a depends if you're hedged or not so if you're uh just from the from the liquidity provision standpoint more volume is good because you're um or more volatility more creates more. More volume is good because you collect more fees.

The catch is you're going to have delta exposure if you're, for example, providing liquidity in an AMM because you're long both of those assets in the pool. But you can hedge those. You think there's a bit of like the GameStop gamma delta hedging phenomenon that's gone on that drove prices so high and that cascaded down in this scenario as well? So that as there's more and more people making those markets and trying to make kind of non-directional bets and just earn yield that they need to delta hedge and that'll drive the price further? Yeah, it's a good question.

I don't think that there's many people short vol. I don't think there are any structural levered vol sellers. It's just a good way to get your head blown off. You'd have to be some sort of crazy to be short short this fall right yeah um so and and interestingly like from all the all the data i've seen on on just the leverage in general especially like even the centralized exchanges like the margin contracts and the perpetuals um like the leverage is actually decreasing into this which was interesting um like over the past uh month or so i think so um yeah like i i don't sorry go ahead i was just gonna say what are both your thoughts on like the amount of leverage we're talking about in the whole system i don't even know how a good way to quote that would be Is it 5x, 10x, 50x? Any thoughts there? I haven't seen a good overall measure.

I was kind of interested in it. I didn't look too hard. But it should be measurable. I mean, you have the open interest on all the perpetuals. You have the amount of outstanding margin contracts. You have the on of outstanding like margin contracts. You have the on-chain like borrowing. So I think you could probably come up with a number. I don't have a sense that there's like a lot of the large holders are leveraged. I think there's a lot of small holders, you know, playing around with like 20X, 50X, whatever.

And they get stopped out pretty quickly um well it seems just from my perusing fin to it that it's like that's the big scare right of like this is leverage upon leverage upon leverage and as soon as it unwinds it's going to kind of blow up the whole ecosystem um but sounds like you're saying and not so much like the big players are just gonna they're holders for the main part and they're gonna be there yeah or they're just not that levered i mean with with assets that are this volatile like you can see even like a minor day would wipe out most highly levered players so i think it's just like short short terms smaller can be larger specs but um relative to like the amount of size coming into the market for longer

term positions, I don't think it's that significant. I think, I think you tend to see leverage like tremendous amounts of leverage build up in markets that are kind of the opposite that are like calm perceived as more stable, like safer bets. And so speaking of unstable,

like what, what was the carnage on all the quote unquote shit coins today? I loved you on Pirates of Finance of like, well, then you create your fake thing. So all these fake things, for lack of a better term, like what was the carnage there? Were they blown out

or was it in line with everything else? I'm sure some probably had some particularly nasty days, but just like glancing at like the top 100, I mean, most things are down more than Bitcoin. Like Bitcoin was quite strong relative to almost every other asset. But like, I mean, I think they all kind of took similar types of hits, like 20 to 40 percent. And then, Ben, for you, of like part of your success for your fund and for moving forward would be kind of mass adoption, right? By institutional and kind of pushing prices higher. Is that fair to say?

Do you think this set that back? Do you think like these pensions and endowments that were like, okay, maybe we should put two to 5% in Bitcoin or like, well, hold on, this thing lost 50% in three months. Should we reassess those plans? Yeah, that's a good question. I mean, that's the question that we kind of love to answer, I guess, for our fund. You know, I think just in general, our investing philosophy is always a little bit more on the conservative side, even in this space. And so we always take the view that we're looking to try to protect the downside as much as we can. And there's numerous different ways we do that. So I think, you know, yeah, it's a good question for these bigger investors to be asking. And I think that's what makes this so interesting to us, this space,

is because there's just an ironclad, in our opinion, case for active management. You know, I think if you look at the traditional markets, which I grew up in on the mutual fund side, you know, it's pretty difficult for active management to really provide a ton of additional output in most cases in the traditional world. So I think here there's so much movement and i think if you if you understand risk and understand how to manage that there's huge opportunities um you know i think i think one thing that we always look at no matter what market but particularly for this market is we try to look at breaking beta down between upside and downside beta which

which sounds pretty simple and it is not difficult, but I think just going through the exercise and realizing that, you know, like Gary was talking about just earlier, you know, today, some of the things that we watch, not necessarily that we own, but some of the things that we watch, we're down 60% versus USD, you know, at different times during the day, with Bitcoin down maybe 20% on the day or 25%. And I think, you know, you just have to constantly look at those risk reward ratios and say, hey, the downside ball is 2.5x. But, you know, when these things are really running like the past six, seven months, some of these coins can make you know 10x while bitcoin goes up 1x and so you're saying you look at like a portfolio of coins not bitcoin and assign

a beta related to bitcoin so basically like yeah exactly okay soTH has a, maybe that's a bad example. It might be around the same, but maybe it's 1.2 beta to Bitcoin and all the RAND is like 3.5 or something. Exactly. And then it just depends on, you know, there's differences like on the downside versus the upside, right? Like when things are really cooking, Ethereum cannot perform. So I guess to try to, that was sort of a roundabout way of answering your question. But I think, you know, what we've really noticed is, and I'm sure Gary would say the same thing,

like, you know, these new entrants come in every year, every year and a half, or every six months, and everybody goes through the same learning curve, right? So whether it's an institution or an individual, they learn about Bitcoin, they have the aha moment, they get really into it, they go out and they buy Bitcoin, and then they start learning about Ethereum. They look at the coinmarketcap.com and say, what's this other thing that's got the huge market cap?

And they start learning about Ethereum, and then they become just really amazed at what Ethereum can do. And so you see these patterns come in. And I think, you know, what we saw over the last month or so is this huge dispersion, obviously this month too, between people finally catching on. I think a lot of the new entrants catching on to what's different about Ethereum versus Bitcoin and sort of all the possibilities that there are out there and you saw this huge Dispersion of performance. I mean at one point this month. I think theory was up. I don't know like 50

Percent or something like that and Bitcoin was down 10 or something if I have that right so You know that actually reminded us a lot of at the end of 2017 and beginning in 2018 there was a similar similar divergence there. But I guess, you know, this is a long-term thing. I think the institutions that have already come in are, you know, they dip to toe. And so I don't think institutions like that are necessarily going to freak out over, you know, a dip to toe. And so I don't think, I don't think institutions like that are necessarily going to freak out over, you know, a month like this. I think they'll learn a lot

more about what makes the market tick and get comfortable with it. But I think the bottom line is that what they should understand is, you know, with great reward potential comes, you know, substantial risk. And so you have to size positions accordingly i think in my brain i feel like as an allocator i would go to like cool i don't care whether it goes up or down i want to access the volatility or i want to access the yield that this volatility provides or the yield that these different dispersions provide so it's like right seems to me like if you're buying like if you're going into a lending personal lending uh the name is escaping me you know what

I'm talking about one of those platforms where you're accessing all it right you don't care that the one guy's doing a car wash and the other guy's doing a llama farm or something you're just doing like micro lending and getting the the yield back so to me as you get all these more and more and more coins maybe that's what it morphs into I don't't know. Any thoughts on that? I rambled for a bit there, but. No, I mean, I think embracing the volatility is one of your points. And I think that's, I think that's a good thing to do. I mean, there's opportunity in the volatility and you're seeing it today. I mean, you know, if you can be protected to an extent and not have all your

chips on that table and, you know, we don't know if this is the bottom or not. That very well might not be. But just to have the flexibility and to take advantage of that, whether you're a long-term investor or, you know, you're providing liquidity, like Gary said, in a pool, and maybe you've been able to hedge some of that delta and permanent loss that's there and you're clipping fees. There's just, there's a lot of opportunity

in the space because of the volatility and because of some of the uniqueness of these liquidity providing opportunities that are essentially a different or, you know, a newer form, I guess, of yield, really. Gary, anything to add on to that? Yeah, I think that's the part that especially people from like traditional finance backgrounds tend to latch on to because it's so so relatable um I would say that like I still think getting at like the asymmetric beta um point that Ben brought up like I still think majority of the opportunities still ends up being like being that long at least like being that long the right assets obviously um which is

partially why I think you see some of these uh these other opportunities like the like the futures carry and stuff like that um it's just like the money in the space when when it sees okay i can make 30 40 annualized putting on this basis or i could spread that risk capital across 10 projects and like a few of them might 100 100x i mean like you're you're they're taking that asymmetric upside and so far it's paid off it's just it's been way more attractive so wait but so you're arguing against like doing some of the yield stuff and saying if i spread it out against 10 bets maybe one of them as a is a like more of a venture capital model yeah that's i i find that more attractive myself but i mean like it's part of a portfolio right it depends on

depends on uh obviously like those aren't going to be perfectly correlated um depends on your your risk appetite like in general i see most crypto exposure as like a call option for me okay yeah um but like a yolo call option like or just like hey i can do this for a relatively small amount of my net worth and the the potential rewards are huge yeah I mean it started as a smaller amount of my network substantial well bad hair two weeks ago two weeks no he makes a good point though and we talked about this too. For us, it's probably more of a collateral issue, but we have the same discussions here about, hey, great, we can park some stable coin. If we want to be really traditional, we could park it at a block five, for example,

and we could make it at like a block five for example and you know we could make a nice you know eight percent but you know if if the choices between that and in putting it into a new project that we've researched a new coin that we've researched that you know could potentially return so many multiples of that as long as we're comfortable with the risk side of the equation it's it does make it difficult for us because we do have a view similar to gary and in the sense that you know we're longer term looking we'd like to take advantage if we can of these periods of stress and volatility and i think you know we're able to do that from time to time but yeah it's um there there is look there's a lot of opportunity i think the d5 space is

going to continue to grow um But there is a lot of risk, even an 8% yield. I mean, if you understand, and I'm sure Gary knows this much better than I do, we're just starting to get into it. But if you understand part of how they're able to offer those rates, you know, part of what they're doing. It's like an unsecured loan, right? That should be maybe like 60% or something. Yeah, I don't know what the right, I don't know what the right number is for it. I mean, maybe, maybe it's priced correctly. Maybe it's not. It's, it seems like maybe it's, it's not quite, but I don't really know. What I do know is that, you know, part of, it's not just in that interest margin business, right? Like there's some demand from funds like ours and from other,

other players out there that are looking to borrow bitcoin and looking to borrow some of these other assets like market makers to to put on short positions or just to spread coins around to different exchanges so they have you know they have uh inventory there to be able to make these markets efficiently um from an operations standpoint so there is there is demand but there isn't enough demand um out there to to pay the rates they're paying. And so, you know, part of the part of how they're making that difference up the way I understand it is, they're actually going in and taking part of the capital that you deposit there as a depositor. And they're actually going out to these DeFi protocols and, and trying to clip these, you know, 30, 40, 50% annualized rates by providing liquidity or, you know, quote unquote, yield farming

and getting some of the reward tokens back. And, you know, when times are good and the reward tokens are going up too, I mean, there's like these added kickers. And so it's... Right. So yield farming in a down 50% over three months, it won't really work, right? Because you're getting those reward tokens that lose money.

So then you don't get a kicker you can add to the yield. Yeah, I guess your kicker goes away. But Gary could probably talk more about it. I mean, you're making the fees. If you're able to to hedge the delta as he calls it or the impermanent loss um you know maybe maybe it is a good strategy to down market if if if you really know what you're doing um yeah yeah i think if if you uh there's like, depends on what assets you're dealing, for example.

But I mean, staking is the simplest case, right? Like, let's say there's some protocol where you're getting a bunch of bonus tokens for staking. I mean, like, again, the simplest case is if you're staking stables, you don't really have any downside unless it de-pegs. It's just the opportunity cost of those stables so now you're getting reward tokens um and explain staking real quick so i put i have a hundred thousand dollars i put actual a hundred thousand dollars into this i stake one of the stable coins basically i backed that yeah so you would you're like depositing um something a stable would be one example into a smart contract so you're taking the smart contract risk um you still you still have risk if the stable goes you know

depegged yeah but in exchange for doing that staking that smart contract's rewarding you with with some kind of um like governance token or some kind of bonus token and yeah in a bear market those things are losing value but they're still worth something right so maybe like you thought you'd make 50 now you're making 20 annualized but still something and then coming back to both you kind of this vc model of okay, I want to pick the winners. But to my understanding, right? And this is widely simplistic, but like, Ethereum is better than Bitcoin, right? And Aave is better than Ethereum, like they keep improving, right? Improving the transaction speed. So you just view those as each is a little different and doing something different? Or are

they improving upon, you know what I'm getting at getting at like in theory you could launch it when a million of these things are launched and they'll be improving the technology gets better every time like doesn't it devalue the previous batch yeah i think there's like been a constant debate about where and how value accrues in the long run um i feel like over the past few years it's been a combination of like hype and narrative yeah i wanted to get to that next right if like yeah if the 10 winners or you're trying to pick one huge winner out of the 10 and it's just because it got hyped by portnoy or something right is that is that, is that legit or do you care? Yeah. And is that dangerous and bad for the space overall?

Like if that's the only benefit is coming from things getting hyped. Yeah. I think there's, there's kind of two. And if you're really good, you can do it both ways. Like one is trying to pick the, the hype winners. And like, that's a lot of these chains. Like if you're looking at like Cardano or something like nobody's using Cardano, but it's just got a lot of hype. Um, I think, I think there's definitely an alpha and being able to predict what other people are going to, you know, get excited about and buy. Um,

it's a different skillset than the other one, which is like predicting which products people will use and, and accrue value because of that. So that would be like Uniswap is, I think is a good example. It generates lots of fees for the, for the LPs using the actual product. So it's got real volumes, got real usage. Currently those fees aren't accruing to the governance token holders, but they could like vote in, you know, a dividend effectively. So I think if you were able to predict that, like, okay, AMMs are going to become really

popular. Uniswap has one of the better products. It's got a lot of traction. Like you could have made that bet. And that comes back to like early on promotion for Bitcoin was right. Like this, imagine if you could have invested in the HTTP protocol right so you're kind of saying like some of these things are the actual protocols that transactions are getting made on and earn a fee from that protocol being used yeah exactly which is sort of weird to

me it seems like that's not the whole holder fin twit present right of like we're changing the world and fiat's dead and crazy right it seems like totally the opposite like no we're just as bad as the investment bankers and creating something we're going to make a a big on on each trade does anyone have a problem with that no i don't have a problem with that i don't i don't think you can like eliminate like business organizations i mean they might look different but and then i gotta bring up elon any thoughts there is he good for the space bad for the space you think he's playing this totally just you think they have a big map in their boardroom of like

okay we're gonna promote it here we're gonna there, we're going to buy it back here. Any thoughts, Ben? I mean, it's pretty hard to figure it out. I think we definitely know that there's influencers like him that do matter in the short term. I think the way we sort of try to come to a conclusion about a guy like that in scenarios like this. It's just that, you know, we're taking a longer-term view. If something that he does in the short term creates an opportunity for us, good or bad, you know, we'll definitely evaluate that like we would any other opportunity,

typically with, you know, a healthy dose of technical analysis. You know, obviously the market, we saw the market topping, or I should say we saw signs that the market could be topping in the short term before Elon sort of went haywire with some of this. Yeah, but yeah, twist of the knife. I think one of the things that we were looking at was actually some of the. Yeah, but yeah, twist of the knife. You know, I think one of the things that we were looking at was actually some of the mining stocks,

some of the equities that started to act pretty poorly, I'd say. You know, while Bitcoin and the rest of the space were still doing quite well.

That kind of gave us a warning. There were some other things on the momentum side that we look at that also piqued our interest. And then obviously just, you know, just looking at the run up over the past six to seven months, nothing ever really goes in a straight line. I mean, even lumber's come off a little bit, right? So it's... You touched on something interesting there. Like, do you both, either of you view Bitcoin as like a new, not so new anymore, but just a new risk metric, right? Of like, when it's going up, risk is on, people are willing to put on risk, not just in crypto, but across the spectrum.

And like this sell-off is a symbol that risk is coming off and people across their portfolios are de-levering all right and then there's also the interesting twist that the basically the bitcoin sell-off drove losses in the nasdaq and drove like actual real economy stock prices moving lower um so any thoughts on will that keep getting more correlated of crypto prices with stock prices or do you think that's just because kathy woods coming in all this stuff is happening with uh people trying to invest in big in crypto without actually buying the crypto i'm not sure there's a hard question sorry yeah i don't i mean i guess the the cop out answer is i'm not sure if there's enough data yet to really to really be able to tell um what the correlations are i mean

i think i think that's one one data point now basically yeah i mean like if you look back to really be able to tell what the correlations are. I mean, I think... We've got this one data point now, basically. Yeah. I mean, look, if you look back to March of last year, 2020, a lot of Bitcoiners and others in the space were very disappointed that I think what they were really wanting was a one-for-one negative correlation between Bitcoin and the traditional markets. So when there was all the turmoil over the lockdowns, et cetera, in March, that were really, you know, taking quite a hit out on the equity markets.

Bitcoin basically, you know, followed suit, or you could say it vice versa, but whatever, it was pretty simultaneous, where they both went down for at least Bitcoin for really only a day or two, actually, before it bottomed. So, you know, I think the whole notion of the lack of correlation, I think we're getting to the point where there's, you know, enough data to see that, at least from the beginning of Bitcoin until now. And I think that's the important thing. I think people confuse a lot of times non-correlation with negative. I mean, sometimes in the short term, there's going to be correlation. I don't think that that should be that surprising.

But I think you do have a point there that, look, I mean, there's some definite weakness in tech on the equity side and the things that we look at in the momentum structure side are definitely signaling there's some problems there now. You know, whether the printer gets turned back on and the Fed steps in, those are all variables to take into account. I mean, wish we had a crystal ball.

You know, I think Bitcoin definitely, I've seen it. We've seen different periods where it's led the other markets. So could this be one of those times? It could be. Yeah, I think short to medium term, logically to me it seems like it becomes more and more of a risk asset um so like i think we've seen the correlation kind of go up over time um from like none to maybe now there's like some um and like i would expect that to continue for a while i think i could i could make an argument for why there's some point in the future Bitcoin could be negatively correlated to like risk on. And it, you know, maybe it becomes like a

stable store of something, but I don't, I think we're pretty far from that. Right, more like gold, right? That's the dream. And then two more things before I let you go, I gotta take my son to his baseball game. But like in oil markets, right? Like oil at $40 or no, let's say oil at, yeah, oil at $40.

Like the Canadian flats are no longer profitable or deep sea drilling in Gulf of Mexico is no longer profitable, right? And oil at Saudi Arabia can still get it out of the ground for 20. So like cost of production so does there do you feel like there's any similar thing in bitcoin price like if it gets down to 15 000 all these projects are no longer profitable or something like that is that a stretch yeah i think that there are prices where miners will shut off. They're pretty low compared, like, I mean,

it's in the single digit thousands of dollars for Bitcoin. Like, so I think right now it's, you're not going to see much, like you might see a little bit less investment in new hash rate. But also remember like the difficulty adjusts so I think in general like we're in a secular upswing and investment in crypto and and that means mining as well yeah I'm thinking of more of like just for like venture money coming into this space now like I see what you're saying but also of like at above 50 000 there's people are taking meetings below 20 000 like you're not getting the meetings anymore yeah i think that's like a whole other can of worms where right now like most of the

venture money is is like recycled in the space so it's a lot of these active trading and market making firms that are making money hand over fist and and they just like recycle it back in. So for them, it's like not so much the price level is just volume. Games of those kind of firms? Yeah, like CMT, three arrows, Alameda, I mean, they're, they're kind of the go to for anyone in the space, because they know it, they're gonna give you money on like a handshake and like, I'm not even a zoom meeting. Sometimes there's no real due diligence. And like they're hyper bullish on everything basically. So it's like the perfect capital partner. If you just want to get,

get some VC and go. And then my, my last thing is my pet peeve of all these tweets that such and such athletes going to get a hundred percent of his salary in Bitcoin. Can can can you guys both this with all that for the listeners right the atlanta falcons don't have a pot of bitcoin that they're paying right wallet to wallet paying the athlete aren't they really just saying like this athlete is going to take whatever he gets paid and convert it immediately into Bitcoin? Anyone have an issue with that? Yeah.

I don't know how they do it. It just makes no sense. No, they're not paying him in Bitcoin. Well, I've seen... The answer is I don't know either. But, I mean, some of the franchises, and who knows, have tried to say that they'll accept bitcoin for i don't know i guess season tickets or you know luxury boxes or something so i guess in theory i don't think the math would add up but you know they could theoretically right theoretically

pay that to some of the players and yeah but the question is the same either way like if the players get paid in bitcoin somehow, are they immediately converting? Obviously, they're their own business, so to some extent they've got to pay bills, etc. So they're going to convert some of it at some point. Yeah, I guess it's headline making. Like 15 years ago, it would have been like, such and such decides to get paid 100% of his salary in government bonds. Like, no no he's

just buying you know he's putting it in a savings account um anyway guys any last thoughts before we jump it's all good um well thanks so much for coming on hopefully we uh stabilize for both of you and your personal investments and your businesses. But it's been fun to watch from afar. And we'll have you guys back on again sometime. Thanks, Jeff. Thanks, guys. Take care. See you.

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