The Pomp Podcast - #1418 Jeff Park | The INSANE Bitcoin Super Cycle Thesis

Starting point is 00:00:00 What's up everyone? This is Anthony Pompliano. Many of you know me as Pomp. You're listening to the Pomp Podcast, which is my effort to find the most interesting people in the world and sit with them for hours while I ask questions in an effort to learn. So it would mean the world to me if you would subscribe to the show on your favorite audio platform, watch episodes on YouTube, and tell your friends and family about the podcast. My goal is to help millions learn from the world's most interesting people. So let's get into today's episode. What's up, guys? Today, we have Jeff Park. He is the head of alpha strategies at Bitwise Investments, and he brings the heat. You're going to love this episode. Jeff explains

Starting point is 00:00:39 why ETF options that were recently approved are going to be such a big deal. He's got nuanced opinions as to why he thinks that Bitcoin will continue to be more volatile, both on the upside and the downside. And he explains exactly where we're headed. And then on top of it, we describe why Bitwise recently bought two companies, what he expects to see in public markets. Could there be active ETF management on the way for crypto assets? And then we get into the nitty gritty details as to how traders on Wall Street are using things like the ETFs or the ETF options and what it means for you and your holdings of Bitcoin or other crypto assets. I always enjoy talking to Jeff. He's incredibly intelligent and you'll see immediately what I'm talking about.

Starting point is 00:01:19 Here's my conversation with Jeff Park. Anthony Pompliano runs Pomp Investments, All views of him and the guests on his podcast are solely their opinions and do not reflect the opinions of Pomp Investments. You should not treat any opinion expressed by Pomp or his guests as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of his personal opinion. This podcast is for informational purposes only. Today's episode is brought to you by Domain Money.

Starting point is 00:01:47 I love talking about money, but I'm not a financial professional, so I don't offer one-on-one coaching or advising. But in order to get ahead, you need someone with expertise to work with you one-on-one and provide personalized advice. The decisions you're making now will significantly impact the rest of your life. The more time you waste not taking the steps to get a plan for your money, the harder you make it to achieve your goals. That's why I've partnered with Domain Money to pair our community with flat-fee certified financial planners. That's right. They are CFPs. They can actually give you advice, and they can help you level up your money game.

Starting point is 00:02:20 Don't get left behind and head over to domainmoney.com slash POMP to book your free strategy session to help you get started. That's domainmoney.com slash POMP to get started with a CFP now. Go check them out. And just like any other major financial decision, it's important you understand what the service is and if it's right for you. So make sure to go see the important disclaimers at domainmoney.com slash legal. That's what the lawyers told me to say. Now go check them out. Domainmoney.com slash POMP.

Starting point is 00:02:49 This episode is brought to you by BetOnline. Do you like making a profit from sports betting? Well, set yourself up to take home the most profit possible using crypto to fund your sports betting, casino, and poker account at BetOnline.ag. You can avoid costly transaction fees, get your payouts lightning fast, and do it all securely and anonymously with the highest deposit and withdrawal limits in the industry. If you want to get in on the action, do it the smart way with crypto at BetOnline.ag. Head to the website, sign up with promo code POMP100 to get 100% bonus on your crypto deposit

Starting point is 00:03:22 today. If you go and you deposit, they'll give you 100% bonus if you use promo code POMP100. Bet online. The game starts here. Betonline.ag. Go check them out today. All right, guys. Bang, bang. I've got Jeff here. Jeff, I thought a great place to start when the options got approved for iBit, for the Bitcoin ETF. I came out and I said, I think volatility is going to go down. There's going to be more people involved in the market. Within seconds, you're making me look like a fool. You tweeted out, you said it's going to be like the super cycle. We're going to go way up. And you had this great thesis. And so I want to talk through kind of the pros and cons of these options getting approved. And so help people understand

Starting point is 00:04:01 why is it that these options are so unique compared to maybe options that have been encrypted before? And then how do you see this playing out and their impact in the market over the coming months and years. Yeah, Anthony, thanks for having me on. A pleasure to be here with you and would love to have this chat with you in an open-ended format. So thanks for the invitation. The first thing I just want to step out and define is volatility in itself. I think volatility can be a word that is a catch-all for the way people want to enthuse a certain feeling behind it. But there are really two ways I think about the dimension of volatility. One is, of course, the concept everyone's familiar with, which is the rolling average of standard deviation of returns.

Starting point is 00:04:38 But there's a greater nuance to this number, which is that it's a static snapshot that doesn't represent the distribution of outcomes that are possible as well. So when I think about risk, I often think about not just a static snapshot of a rolling window, but also the distribution of probable events that are possible within that risk spectrum. And then thirdly, the severity of that risk event, which actually does matter in the construct of volatility and the impact that it can drive. And I think all of these concepts come to life when we talk about options, because options are ultimately path dependent financial instruments that create leverage in the system. the thing that i'm so excited about with etf options and i think what most people underestimate

Starting point is 00:05:27 is not that different from how people used to say the spot etfs would be irrelevant because we already have all the ways to access spot assets by coinbase and other regulated exchanges that the etf itself is a nothing burger uh and of course we all learned this is wrong it is by far the most successful etf launch in the history of the united states and so there's a lesson here which is sometimes fixing the conduits for financial wrappers for access matters a great deal. And for derivatives, it's even more profound. So the first thing that I point to is the essential removal of counterparty risk that is permitted in the regulated financial systems as operated by the CFTC and the OCC and of course, the SEC. I've had a few people who tweeted back

Starting point is 00:06:17 saying hey jeff this is irrelevant because don't you know we already have ledger x we already have derivative we already have these functioning exchanges that have brought crypto derivatives to life so this is actually irrelevant and it's simply not true because the occ has a clearing mechanism in which you essentially get a chance to remove the counterparty risk in the ways that crypto has not ever perfectly solved offshore in the ways that regulated investors want it for but But there's actually a more important second point here, which is the power of cross-collateralization. So things like Darabit is ultimately serving one asset for one kinds of investors. You can only really trade crypto.

Starting point is 00:06:59 But you and I both know that the beauty of a very well-run margin system comes from the ability to cross-collateralize. The idea of bringing other non-correlated assets into your collateral pool to then build a different model of what those maintenance margins could look like. And here, this is profound, right? So maybe to bring in the context of how a crypto native investor might talk about things in the ways that we talk about security, Bitcoin layer two, right? The new thing that people are really interested in is how do we maybe borrow the security budget of Bitcoin and build a separate layer one that benefits from the security provided by Bitcoin? Huge unlock that is possible in the same way that I would say cross-collateralization is permitting that for Bitcoin options in a regulated space. The idea that you can post your GLD ETFs, your gold assets, as part of the pool that can serve as a collateral with haircut to then put on Bitcoin leverage is simply not possible on Derbit. It will not be possible on anything that services just crypto assets.

Starting point is 00:08:14 And that is, I think, one of the most important thing that people are missing that long run, we are creating a new margin framework that is going to be much more efficient and much more diverse in ways to bring a lot of things that hasn't happened before. Right. So do you think that these options will simply just magnify the move? So if Bitcoin spot is going up, the options, you know, can kind of magnify the severity of the move, same thing on the way down. And so it's kind of a pro and a con depending on the direction of the market. Or do you think that there is something structural about the way that these options are traded, maybe another asset classes where, you know, it's 80% kind of long 20% short, and so it should kind of help the price of Bitcoin over the long run? Like, how do you look at kind of directional impact and then the severity of those moves with these specific instruments?

Starting point is 00:09:04 Yeah, this is a great question and one that appeals to drawing upon my memories of starting my career as an exotic derivatives trader at Morgan Stanley. For any well-functioning and liquid market, you want organic buyers and sellers to create natural demand and supply, right? This This is, at the core, what synthetic markets can do as long as there are natural participants that are hedging or speculating on specific needs for their mandates. So taking a step back, with derivatives, you have the chance to buy options or sell options, and you'll have a variety of participants that take one side or the other. historically most of the options taking endeavors have been speculation oriented except for maybe the purpose of bitcoin miners who actually do think about insurance that comes from the ability to sell calls which may be then covered as a covered call strategy and i mentioned this point

Starting point is 00:10:05 because covered call strategies may be actually the one way in which to take your argument that volatility comes down in this space. If you imagine the world where only those who own the assets are selling calls against it, and therefore you're not creating net leverage into the open interest on the other side where the buyers are taking leverage for, then that is a possible world model in which options are volatility reducing. But here's the other thing. Volatility tends to come from dealer activities as to how they choose to hedge the option risk that they've underwritten. So in other words, whether dealers are short gamma or long gamma is an important critical determinant as to what kinds of market environment and exuberance might be created in

Starting point is 00:10:55 that environment. So if I find that dealers are essentially long gamma because they are only buying options on the other side of bitcoin miners that's volatility reducing because again the hedging activity of long gamma makes it such that there's mean reversion in the market the real powder keg goes off when dealers are short gamma how do dealers become short gamma well the other side has to be long so now we're talking about people who are buying calls and buying puts And those create short gamma in the system. This is really the interesting thing that we have to think about.

Starting point is 00:11:34 Who are the people that are going to be participating in these things where they're buying options? You can imagine folks are buying calls to have the ability to take leverage to the upside. You can also imagine people are buying puts where they're actually thinking about hedging their risk a little bit more.

Starting point is 00:11:49 To be honest with you, I don't think we've seen a lot of that endeavor including existing markets today. But that is one venue of it. And so what happens is when dealers are then short gamma, they have to basically run their hedging portfolio in a way that is adding volatility to the system. This gets a little bit technical, but what it ultimately means is that the dealers in their hedging activities have to continue buying when the spot market goes up, or they

Starting point is 00:12:19 have to continue selling when the spot market goes down based on the hedging portfolio that required by being short gamma so very practically speaking they're adding fire to the fuel the thing that i wanted to add to this is about bitcoin specifically and why it's so special versus other assets that we know in the traditional system most financial assets exhibit a feature called the volatility skew this essentially means that people demand volatility to the put side being more important and valuable and expensive than the call side because people like insurance and insurance is inherently more valuable than speculation and actually most stocks would demonstrate this you see stocks that plummet

Starting point is 00:13:06 one day because of bad events but you rarely see stocks go up like crazy without there being specific catalysts so you live with this risk of the black swan events to the left almost every day but not so much on the right. Bitcoin is different. Bitcoin since its inception has the highest leptokurtic distribution that you could ever imagine on the long tails of the left side and the right side. It melts up just as much as it melts down. And so this creates what is called more akin to a volatility smile, where upside volatility is actually just as expensive,

The Pomp Podcast - #1418 Jeff Park | The INSANE Bitcoin Super Cycle Thesis

There aren't comments yet for this episode. Click on any sentence in the transcript to leave a comment.