The Pomp Podcast - 333: Jesse Proudman On Quantitative Investing In Crypto

Episode Date: July 11, 2020

Jesse Proudman is the co-founder and CEO of Strix Leviathan, a quantitative crypto hedge fund algorithmically trading digital assets. In this conversation, we discuss quantitative trading in crypto, the lack of institutional infrastructure, why prime brokerage is so important, and the power of narratives. ========================== The World Series of Trading (WSOT) is the first of its kind to bring the exhilaration of crypto trading competition to the global stage. WSOT believes in the importance of empowering traders who embody the passion and power for crypto trading. This bi-annual event aims to champion the spirit of competition, fair play, and cultivate camaraderie among crypto derivatives traders from around the world with the ultimate goal of creating positive change in the crypto space. This year’s prize pool is a whopping 200 BTC. Sign up here: http://www.bybit.com/wsot_warmup? ========================== The Trends premium weekly report helps you understand market trends poised to skyrocket and how you can pounce. Join the private network of 5k+ builders, founders, and investors spotting tomorrow’s trends. Expand your network, and discover the next big business idea before it explodes: https://trends.co/pomp/

What's up, everyone? This is Anthony Pompliano. Most of you know me as Pomp. You're listening to the Pomp Podcast, simply the best podcast out there. Let's kick this thing off. Jesse Proudman is the co-founder and CEO of Strix Leviathan, a quantitative crypto hedge fund algorithmically trading digital assets. In this conversation, we discuss quantitative trading in crypto, the lack of institutional infrastructure, why prime brokerage is so important, and the power of narratives. I really enjoyed this conversation with Jesse, and I hope you do as well. Before we get into this episode, though, I want to quickly talk about our sponsors. The first is the World Series of Trading by Bybit. The World Series of Trading is the first of its kind to bring the

exhilaration of the crypto trading competition to the global stage. World Series of Trading believes in the importance of empowering traders who embody the passion and power for crypto trading. This biannual event aims to champion the spirit of competition, fair play, and cultivate camaraderie among crypto derivatives traders from around the world with the ultimate goal of creating positive change in the crypto space. This year's prize pool is a whopping 200 Bitcoin. That's right. If you sign up and participate, you can win up to 200 Bitcoin. Sign up using the link in the description of this episode. Our next sponsor is Trends by The Hustle. The Trends Weekly Report is something that I've started reading and I really, really like it.

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Everyone's got $1. Go sign up for Trends. Two-week trial, trends.co.pomp. I'll see you on the inside. All right, let's get into this episode with Jesse. I hope you guys enjoy this one. Anthony Pompliano is a partner at Morgan Creek Digital. All opinions expressed by Pomp or his guests on this podcast are solely their opinions and do not

reflect the opinions of Morgan Creek Digital or Morgan Creek Capital Management. You should not treat any opinion expressed by Pomp as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of his opinion. This podcast is for informational purposes only. All right, guys. Bang, bang. Got Jesse here. Thanks so much for doing this, man. Pleasure to be here. Thanks for having me. For sure. So let's just get started with your background. Where'd you grow up? What'd you do before you got into crypto? Yeah, absolutely. So I'm a Washingtonian. Grew up here. Born in New York, but grew up in Washington. I've been a lifelong entrepreneur. So started the lemonade stands when I was a kid. When I was 13,

I started a web development company and kind of morphed that into what ultimately became a hosting company so this is sort of before cloud computing existed you had to run servers to run websites and i that was my business 2003 had started a company called blue box which ultimately became a cloud computing company raised about 22 million in venture and sold that company to ibm in june of 2015. it's a great exit for the investors for our team it was pretty exciting like we thought we were going to be a pretty influential part of the ibm cloud ecosystem and spent about a year and a and a half trying to integrate that product as a distinguished engineer into the broader landscape and quickly sort of realized I was pushing a boulder up a hill every day and having it roll

back down on me every night. So at that point, wanting to do something inside IBM, like I have a lot of respect for IBM as a company. They've been around for an incredibly long time. They've survived all kinds of technological change. Felt like I wanted to be able to try to actually help. And so I found a role at IBM Ventures and they were at the time trying to launch a blockchain focused accelerator. And so I helped them with the design of that. And so my job over 2017 was effectively to research the crypto space, become sort of the subject matter expert, but there couldn't have been a better time to have that be your focus. And it's a space I've been familiar with for quite some time. Nick Carey from blockchain.com and Eric Voorhees from ShapeShift,

we all went to college together in the same business class. So I've watched over their shoulders over the last couple of years as they've built their businesses in this space and was fascinated, but it takes a lot of intellectual bandwidth to actually dive in and understand what's happening here. And didn't really have that until 17. So spent a number of months there and was instantly hooked. Yeah. And so like, as you're starting to do that research, just like, where do you start? I think a lot of people didn't know anything about whether it's Bitcoin, crypto, blockchain, whatever kind of part of the industry. But they come at it from the retail perspective, right, is, hey, I go and I've probably heard about price movement or something

like that, and I start researching. When you're coming at it from, one, IBM, and then, two, is trying to actually create an accelerator, like, where does that research begin? And maybe walk us through, like, what did that process actually look like? Yeah, I really wanted to just understand what the landscape looked like, like, what were the companies, what were all the pieces? And that's the hardest part, I think, for anybody getting started here, because there's so much in this space.

And so obviously started with Bitcoin, trying to understand what the sort of the fundamental technology discovery was there that made Bitcoin and the blockchain underneath it sort of a distinct and unique technology. and then from there sort of branched out into the broader ecosystem 2017 was such a just absurd year in terms of number of projects number of of icos number of new technologies and so i ultimately became a sponge it's like any and all information i could get like podcasts blogs twitter telegram reddit like everything i could find and i i would just absorb on the accelerator side i think it was an interesting question like so many corporate accelerators are designed really to just sell sell that company's products so like microsoft has microsoft accelerator and the objective there is to sell startups azure cloud that didn't seem like a super interesting or compelling

initiative to me what i wanted to do was build goodwill in the startup community for IBM, and then in turn sort of have that benefit IBM down the road. And I thought IBM was in a unique position because they have all of the customers that these startups want. They're already IBM customers. But these startups don't have time to go out and vet, excuse me, the enterprise customers don't have time to go out and vet startups. So we thought there could be this really unique opportunity to matchmake between startups and IBM's customers and to go and figure out what problems those enterprise customers were having and find the startups that help solve them. So that was sort of the design for what we wanted to do. And to try to bring all that research

together, plus sort of vet and discover all of these IBM customer problems, that felt like an interesting product. Fortunately, the program in Q3 of 17, there was no funding, like the funding got cut. So we never actually got to launch it. But it was fun. Either way, we got to do the research, which was phenomenal. For sure. And so eventually you decide you're going to go and launch a fund. What was that thought process and kind of what was the impetus for going on the fund side rather than building another company? Yeah, it's a good question. So Q3 of 17 IBM comes back and says there's no money to launch this accelerator. They offered me a role working on Hyperledger, which is their private blockchain product. At the time, that just didn't seem like

an interesting initiative for me. I was more excited with kind of what was happening on the finance side of the space. And so I sort of concluded that I was going to leave and started to kind of look at what else was out there in the space. And so Q4 of 17, everything was on fire. Like everything was just bananas. And the exchange space seemed really interesting to me.

So I went and reached out to Coinbase and to Bittrex and a number of those folks about taking a product management role. But they could barely keep the platforms online, let alone hire or do interviews. It was so wild to think back at how fast everything was moving. And so I started to look at the space and form some conclusions around applicability of algorithmic trading, which I thought was a unique way to approach this space in particular. So this is from all the research I had completed over the summer, started to notice a few patterns like this is a space where there's real liquidity, like money is flowing in and out every day. But it's fractured across all of these exchanges globally. Right. There's no single place you can go and and have visibility into all the order books or all of the volume repairs that are trading. it's all over the place. The other thing that I found was really compelling is that all of the data is publicly available. And data can mean a lot of things, right? You have all of the data that exists on chain. So all of the movements of capital within the ecosystem,

that's all public. But you also have all of the trading data. So if I want to go to the NASDAQ and say, I would like a copy of every trade that occurs on NASDAQ, I will pay out the nose to get access to that data. And there's sort of a walled garden as a function of that. It's really hard to participate in that ecosystem. But in crypto, every exchange streams all of their data for free. So every time somebody buys or sells, that match is publicly available and I can collect it and I can analyze it. And so it felt like there was an opportunity to build a set of software that collected all of that data, normalized it into a consistent format because every exchange has its own nuanced data structures, and then analyze it and look for patterns.

And we've all sort of done this thing. You stare at these charts long enough, and you can visually see patterns in the charts. And so if you can visually see patterns, you can programmatically see them. And so I started to tinker kind of nights and weekends at the end of Q4 to see if I could come up with a set of software that would do exactly that. And by the end of the year, I think it was actually three days after Bitcoin's all-time high in December, I had something that I felt like was working and reached out to Sadie Rainey, my co-founder, and said, I've got this interesting idea. I think we should go build a

company around this. And so we did. We launched Strix Leviathan in January of 18. And the interesting thing here was really kind of looking at the broader landscape and the tooling that's available in the broader landscape. I had thought, kind of coming from the outside, that there would be providers, software tools, et cetera, that would solve many of the problems you would need to launch an investment manager. Think simple things like accounting tools, trade execution tools, portfolio management, risk management, like all of these pieces that you need to effectively run a fund vehicle felt like that would exist in the ecosystem. As we started to kind of map everything out at 18, we realized none of that existed. Like there were sort of piecemeal tools

here or there, but none of it was there in a kind of end-to-end complete way. And so that felt like the first big hurdle. We had to go build all of that to effectively operate. And so in March, we raised some equity capital from outside investors to build that software platform and spent much of 2018 kind of getting the groundwork built. And so first question has got to be, where does the name come from, right? Strix Leviathan, which uh i've had to pronounce over and over again so that i can now pronounce it uh where does that name come from that's not like a normal name that comes out of the hat it seems yeah it's there's definitely some meaning behind it so so strix is sort of an owl of the night and leviathan

is a sea monster sort of octopus type creature and so we thought about what we were trying to build with this business this is an industry that never stops right everything trades 24 by 7 And so the owl to us represented something that's always watching, always listening, sort of keeping an eye on what's happening in the market. And then an octopus is obviously sort of a multi-technical, big-brained, incredibly intelligent creature. So we wanted to kind of bring the symbolism of always paying attention and being able to multitask and respond with intelligence to the market. And do so in a way that kind of causes people to ask the question. Like everything in this space is block this or chain that, and it's all the same names. And we didn't want to kind of follow suit.

We wanted to say, oh, what does Strix Leviathan mean? Why did you pick that name? Got it. I love it. And what exactly is the thesis or strategy today? Yeah, great question. So cryptocurrency is a speculative asset class in our eyes. There's fundamental value in this market, but it's not shared amongst market participants.

So the reasons you believe Bitcoin are valuable are not the same reasons that other people believe Bitcoin are valuable. And we see that with models like stock to flow or the halving analysis that exists. Like everybody has their own opinion. So in our eyes, that lends itself to really being able to trade these markets in a systematic way. So we take all of the data we get off of all these exchanges. We run it through a whole different set of filters and algorithms, and we look for patterns and trends. And we move the fund long and short based on what those patterns and trends say. So it's an actively managed fund based on the patterns that exist in the data. Got it. And so how does that kind of change over time as you see times of very high volatility and then times of almost no volatility, right? I would argue over the last couple of weeks, there's been very little volatility. And then obviously, we saw earlier this year, literally in one day, the price dropped 50%. And then we saw a massive rally off the bottom. And so kind of talk us through how this type of strategy interacts with those different environments and kind of the evolution through a trading year.

Yeah, I love to vote, but there's a saying in voting where it's like hours of boredom followed by moments of sheer terror. And that's absolutely what trading crypto is like. So I think a lot of a lot of the work we've done and I think a lot of the challenge that people face is that they look at this space under the lens of time. Like, so they'll say, oh, in the last day, Bitcoin has done this, and I'll make my trading decisions based on that. Or in the last hour, the last four hours, these different things have happened. And that doesn't really work for exactly the reason you're talking about. Because in the course of 15 minutes, like over Mother's Day weekend, over the course of an hour, the price fell 15%, 20%. And so what we've done is spent a lot of time looking at capital flows.

How does money actually move through these markets? And we've designed a set of technology that allows us to say, in a given day, we expect this many periods of evaluation to occur. But in a period like March 12th, where you saw that 50% drop, we may target 12 candles in a day, but a day like March 12th, we may have printed 80 candles based on the amount of volume and capital that changed hands. So our objective is how do we elongate those periods of chaos and be able to make decisions based on what's happening there? And how do we sort of shorten the period of low vol? And I think it works really well in these markets because by far and large, these are trending markets. Over time, and they're reflexive markets, meaning as the price begins to move, it typically

continues to move. And it does that more often than not. So we do really well in periods of time where that trending behavior exists. And periods like the last six weeks where the markets really have been low vol, they've been range bounded, very choppy. that's where we struggle. But our belief is sort of over the long term, our ability to kind of play those very big movements and benefit from those very big movements outweighs and allows us to outperform in a broader sense the rest of the market. Got it. And I guess part of this too

is you guys are obviously able to capture a lot of data and do that analysis, but then you've got to actually execute the trades and do so, I'm assuming, in a pretty accurate, high frequency way if you so need that. Maybe talk a little bit about the infrastructure that exists outside of you guys and then what you've had to build internally to be able to execute such a data driven strategy like this. Yeah, this is one of the biggest surprises that I witnessed coming into this space. So we started off very early in 18 trading everything on exchange. And because everything is fractured, the liquidity on each individual exchange is pretty slim. You can't move significant amounts of money without experiencing pretty high execution costs or

slippage. So that wasn't going to work for us. So in 2018, we pivoted from trading on exchange to pivoting via what they call OTC. So these are other companies that effectively aggregate liquidity across multiple exchanges for you, and they'll provide you a fixed price and you can trade that way. So that, those OTC providers in 2018, everything was done over Skype. Like that was the formal way to do it. You got in a Skype chat room and you said, I want to buy a half a million dollars of Bitcoin, or I want to buy a million dollars of Bitcoin. And they gave you a price. And then you went in three other chat rooms with three other OTC desks and you all asked for the same thing. Everybody's giving you different prices and they're validating their prices kind

as the market's moving, it blew my mind that that was the accepted status quo. And hundreds of billions of billions of dollars move through the markets that way. And so that was how we traded for the first six or seven months. And then finally towards the end of 18 into the beginning of 19, we started to see a number of these providers begin to have APIs. So that meant that we could electronically connect our system into their system and get quotes without having to interact with people in chat but we only there was only one or two and it's sort of in in our business you never really want to have one or two counterparties you want to have a diverse set of people you can trade with so we thought about hey maybe we'll build a chat bot that'll like go and

talk to these people and like do the trading over skype through a chat bot and that just didn't felt clunky so we finally just sort of waited and eventually we got sort of four or five different counterparties that all had these apis and now all of our electronic our execution began on electronically. So when we say we want to go buy quarter million dollars worth of Bitcoin, the system pulls up all these streaming prices and then the trader on our team click a button and instantly lock in a price. And it's nice because it gives us, we know we're getting best execution across all these different providers. We can see all the prices in real time. We can see exactly what the sort of the cost to execute is. And it also tells us a lot about what's

happening in the market, how those prices are relative to what the spot price is in the market at any given time but the interesting thing so like that's the that's the spot side it's like being able to buy and sell coin the lending side is still done all over it's now moved to telegram right but if we want to borrow something we're back into telegramming like we need to borrow a million dollars of the bitcoin and like negotiating these rates and everything through through chat and so it's just it's a funny state of affairs with where we are you've seen companies like Togomi that launched under the premise of trying to fix that problem. But they never really, like we never got a full sort of true prime brokerage experience with APIs like that never

finally got launched. So it's just the state of affairs is it's a funny place. This industry is still so early. So help me understand, like what are the missing functionalities or features that you would expect to see in a true crypto prime brokerage that aren't there today, but would have a significant impact or create an inflection point for you guys in the way that you would want to trade? Yeah. So a lot of this also has to do with the fact that we are a US company, right? So many people, when they want to go long or short, they'll go on some of these international exchanges that are unregulated in the US, call it like the BitMEX or FTXs of the world and they'll they'll trade there we're a u.s onshore entity investment manager so we

we have excluded ourselves from those venues so and when we want to short the market we have to go and borrow coin and then sell it and then rebuy it and return the loan so it's just logistically complicated so what what we need to see and what this space needs to see is a prime broker that allows for spot trading, so being able to buy and sell traditional coin, and that allows for shorting the markets, being able to facilitate all the borrowing that you need to do to short the market all within one platform, and provide all of that with APIs so that it can be done electronically. And it's missing. I think a lot of that has to do with the regulatory work that's required to serve U.S. customers. I think it's just that there's too much regulation today

in the U.S. that makes it cumbersome for those companies to go through the effort, not knowing if they're actually going to materially see business show up once they've gone through all that compliance work. So the pieces are starting to be there and you're seeing companies kind of begin to focus on it. Certainly prime brokerage has been the hot topic over the last 60 days in this space, you've seen a number of acquisitions or announcements between Coinbase and BitGo and Genesis, all sort of focusing on that area, but there's still a lot of work to happen. Yeah. It's really interesting too, because it feels like people know that this stuff needs to exist. It's just, everyone's looking around the room like, hey, who's going

to build it? And some of that is time, right? And some of it is the large companies will eventually add some of that right you see coinbase kind of acquire to go me um and kind of full disclosure we were an investor there but then you also see a lot of kind of building in-house large companies um especially the international ones you mentioned but do you think that uh the funds in the space can ultimately get their heads around trusting new startups or kind of challengers in the space so you know somebody shows up uh they raise a couple million bucks and they say hey look we've built X, Y, or Z functionality that you just described, but they don't come with the insurance or the big brand name or the couple of years of track record or history. What does

that look like from a trust standpoint with funds that are managing millions, if not hundreds of millions of dollars? Yeah. It's also a liquidity problem. So you've got all of the issues you described and then you've got the liquidity problem. So anybody that's actively trading in this space, they're going to go to where the liquidity resides. And so the startups that exist, and we've seen this, like exchanges in 2019, that was the hottest thing. And there were new exchanges all the time. They all had different features and functions that they felt were going to really differentiate themselves, but none of them had liquidity. Liquidity begets liquidity. People go where they can trade. And so that's a big challenge. I think part of me

has been wondering about this for the last couple of months. I'm more concerned about where the customers are like the tagomi piece is a fascinating one to me because you had a pretty killer team and they raised 27 million dollars in funding at a pretty high valuation and like they built the product itself was good again kind of lacking some of that the liquidity and lacking some of the lending side but like it's structurally the product was pretty good and but at the end of the day i don't think that they saw enough revenue being walking through the door from customers to sort of be able to go raise that next round. And that's part of the problem. Like you look at this space, 2017, 2018, 2019, a lot of great teams raised a lot of money at very high

valuations. And that forces sort of the next valuation, the next raise to be really high. You got to have revenue to support that. And I don't know if the revenue is here yet for that many companies to be able to support the next round. So 2020, 2021 to me will be pretty fascinating. I think you're going to see sort of the cream rise to the top and companies like BlockFi who have been able to do phenomenal things with the capital they've raised and really grow customers and like drive revenue, like those types of companies that they're going to do very well. But people who have sort of built either copycat businesses or things that don't really differentiate in a meaningful way, I think you're going to have a really hard time kind of continuing

to fund their business. What happens there? Do they die or is there just consolidation from like an M&A front? I think we're going to see both, right? I think that the really good teams, and I think Togami is a great example, right? There's a good team, good product. You bring that inside of somebody else that has the legs to support it and to help that grow. I think you'll see that type of acquisition play out. I mean, it really, it reminds me of the cloud computing space when I was there with the last business, like the teams that raised too much money, they got bought and incorporated to companies like Red Hat and Cisco and sort of trying to help steer direction inside of those bigger companies, I think you're going to see the same thing here.

And so companies like Fidelity who are building their own things internally, that's going to be great. The tier two banks are going to realize, okay, we're late. We're late and we don't have time to go build. How do we go pick up the teams that know what they're doing? How do we pick up to the companies that have built functional products and kind of fill the voids that we have internally. And so this bill versus buy question, I think is going to play out in a material way. It's just a matter of when, sort of at what point does this become such a critical need at each one of these institutions that they realize they're late? Yeah, it's absolutely fascinating. And I guess part of this, I know you've got a lot of thoughts around like the

power of narratives. And so one of the narratives that you're talking about here is in 2017, you know, everyone's got their eye on kind of the horizon, but the horizon is at like a 45 degree angle or higher and everything's going up and it seems like the world's amazing. And so people go out and they raise, you know, tens of millions, hundreds of millions of dollars. In some cases, we saw people raise billions of dollars at very high valuations. That obviously puts a lot of pressure on people to one, deliver, but also to when the market then doesn't kind of go up forever. There's the economic pressure as well. What are some of the other narratives that you guys have paid attention to and you think are either important for people to be aware of or two, you think are actually driving some of the movements in the markets, whether it's the liquid market for crypto or the private markets? yeah narratives are really fascinating to me and i think everybody always wants to have a story for

why the price moved right and in an industry where where there is sort of that lack of shared fundamental value and the price moves in our eyes because because it's reflexive it started to move and people kept buying it and away it went and and then after the fact people come and they put the narrative on. And so like 2019 or 2020, this feels like it's been three years. 2020 has been a fascinating year and we've seen multiple occurrences of these. I mean, we started off sort of at the beginning of the year with this notion of the halving that was scheduled for May and how that was going to have significant impact on price. And we saw a lot of price action, positive price action in sort of Q1. We saw correlation with sort of the missile strikes

in the Middle East. We saw correlation with late last year in 2019, correlation with what they call it the Z-pump. So in China, sort of positive news in China producing pretty material movement in price. But this is all happening sort of after the fact. You're putting a narrative on a price movement that happened after it's happened, the interesting thing in my eyes is that because crypto, there are so many retail traders here, these narratives can sort of take on sort of a power of their own and help move price around, whether or not they're true or not. One of those right now that's pretty popular is this notion of the stock-to-flow model.

stock to flow model is a model of like a fundamental valuation model for bitcoin that effectively puts the the price of bitcoin at the end of the year above 50 grand per coin and so it gets people really excited right everybody's like yes like i i believe in this technology the price is going to go up because the model says it's going to go up and and so it creates this this really interesting challenge and stock to flow is an interesting one because the actual you look at the theoretical uh math underlying the model or the theory itself like it doesn't actually stand up to to analysis but it's exciting and so people share it because it's exciting and it gets everybody uh fired up it's it's getting people kind of participating in the

space and so these narratives like in our eyes we try to strip all of that out like we think and those those aren't effective ways to trade this space you know it's funny like travis surmiki guy who was listening to that show that you guys recorded he was talking about when they started there was this qualitative fund like trying to do analysis and pick these these big macro pieces and that's a big challenge because they're unpredictable like you you only know that that narrative powered the the situation after the fact and then when they switched to kind of this quantitative systematic approach things went really well like we we absolutely agree with that So these narratives become really meaningful after they're useless. They're good for articles. They're good for stories. They're good for sitting around the campfire and telling why things happen. But they don't really hold predictive power.

Yeah. You mentioned some critiques of the stock to flow model and kind of how it doesn't hold up to analysis. Unpack that a little bit more because I think a lot of people, they kind of hear one side of the story, again, because of the price and the excitement and all of that. What is the other side there? Yeah. So this is a really complicated one because you are taking a mathematical model that's already hard to understand and you're trying to dissect it and explain it in a way that people can get. I think that the easiest way to explain the summaries is to think about all of those statistical analysis

that you can go find that are sort of joke analysis, right? So you can look at divorce rates compared to purchases of margarine in Maine. And you can see that as purchases of margarine have increased, so have divorce rates. And so margarine must lead to divorce. Like there are unrelated variables and looking at them, You can obviously say that that's not accurate, but the statistics hold true and there's sort of high fit to the model.

A lot of what we see with stock-to-flow sort of fits that reality. So the first big issue is that there's a bunch of analysis using. So the idea is with stock-to-flow that scarcity is what drives value. that and gold is used as the example that the amount of new gold sort of produced every year as a function of all of the gold that is in existence is so small that you can't really impact you can't flood the market and thus sort of gold keeps its value and the argument is made that bitcoin is similar that with the known emission schedule and sort of the the flow the new coins that are mined and minted onto the network with every block, that that now at

this point is predictable and is small, and thus we can use that to drive value. And the reality is that gold, when you look at it both in real and in nominal terms, so inflation adjusted or not, the actual sort of stock-to-flow market cap value, so you take this number, this stock-to-flow number, and you develop a US dollar market cap calculation from it, it's had an $8 trillion range over the last 110 years. So it's not this clean number that you can do a statistical analysis on. And inflation adjusted, I think it's had a $6.5 trillion range. So in theory, if you're saying gold behaves this way, so Bitcoin should. Well, gold doesn't behave that way so like there's our first problem and so like at a very high level

when we develop a model we have a theory and if the theory is wrong it doesn't matter what the rest of the model says the theory that underpins it isn't correct we're now back to this weird statistical anomaly with margarine and divorce so that's kind of problem number one and then when you sort of dive into the rest of the model that there's other issues around sort of projecting future price using a linear regression. We've done a big blog post about it, and I could get you the link. We try to really explain it in simple terms. But again, the challenge is people become very religious about the model. We believe that this asset class is valuable. We think that Bitcoin will rise in price. That's why we're here. We all participate in this because we think

there's some distinctive characteristic about this asset that sets it apart from everything else. And we want to participate in that. We want to be outside the realm of the traditional financial system. But we don't want people to get involved in this asset class for the wrong reasons. We don't want them to follow a model blindly that says Bitcoin is going to be worth $50,000 at the end of the year without understanding the risks that participating in this asset class has. And that's our problem with that piece, that it feels like a marketing piece designed to

attract new capital into the space versus a true fundamental valuation model. that has predictive power. So you mentioned earlier that you guys watch capital flows. You've kind of articulated why the stock to flow model isn't one that necessarily you put a lot of weight on. What are the other signals or models that you guys do spend time looking on and looking at and also believe kind of carry more weight? Yeah, I mean, this is sort of the secret sauce behind everything that we've built and it's you know the challenging thing is that there is no one magical model that predicts price right things change all the time this is a dynamic moving industry and signal that may work for certain periods of time doesn't work for during other

periods of time so our objective of using this this software platform that we call octopus was to build what we call an algorithm factory like how do you go from that idea to testing to validation to production as quickly as possible. If you look at renaissance technology, one of the best performing hedge funds in the history of the world, they don't have a single model that they use, the single signal that they use. They have thousands of these signals that are just looking for little itty bitty discrepancies in the market. And that's our objective. How do you find each individual little thing? Because you're always eventually going to be wrong. At some point, the signal you found will no longer be valid and so making sure that you you are constantly

cycling through and identifying new discoveries that's that's the key and so this this octopus platform being able to to kind of interweave all of these different strategies became really important for us the other interesting thing and this is kind of what blows my mind about this space like most fund managers and in crypto are managing their entire portfolio in a spreadsheet I don't know how they do it, right? There's so many little knobs and variables you could turn. And so you think about like a broader fund, first you pick like what coins are we going to trade?

How many signals per coin? What's the allocation that are we going to have for each signal that fires? Like how do we determine how much capital to put behind everything? There's so many little knobs and levers and dials that can be turned. Like the spreadsheet manager,

like it scares me and so to have have that all kind of built into software uh that's been a big focus for us and we think it's a pretty big differentiator would you guys ever uh take that software and sell to other people like would you ever kind of productize it or is it just for internal use only yeah i mean this goes back it's the previous question i had like are there customers there to actually pay for it uh you know there's hundreds of funds in crypto i think call it 500 plus, those that are established with meaningful AUM that technically have the ability to pay. So most of the funds in this space are sort of in the $5 to $20 million range, right? At $5 to $20 million on a fund, you're basically covering, you break even on operational

costs. And so you're not going to go look to spend a bunch of money on software, which is why you end up with a spreadsheet. Once you're above that, the guys that are the $50 million to $250 million range, and there's not a lot of them, but they've already got their tools and technologies. That's already entrenched. And there's not a lot of incentive to switch. The switching cost is high. And so you're trying to effectively capture people that are new entrants to the space. But again, they don't have AUM. So it's really this chicken or the egg problem in our eyes. I think there's a bunch of other businesses that that software could power. Things like prime brokerage, things like pooled liquidity. And there's pieces of what we've built that are valuable in different ways.

So we're sort of doing some work now thinking through that piece. But also, I mean, if that's our differentiation, we keep it to ourselves to some extent. It's one way to really be unique in this space. Yeah, I love that. One of the last things I want to talk about is this idea of comparing crypto to frontier markets and obviously frontier technologies are all the cool shiny sexy things um that people get excited about uh crypto kind of fits in there sort of but also kind of doesn't when people think of frontier markets like how do you guys think about the overlap between those two uh really what end up being marketing terms or kind of uh descriptive terms um trying to describe various technologies and markets yeah frontier markets are an interesting

one for us. And we think there's a lot of parallels to some extent. I think one of the challenges in frontier, multiple challenges exist in frontier markets. You know, you have limited liquidity or unpredictable liquidity in these assets. You have a lot of fraud and theft. You have corruption, graft. Like there's all kinds of issues that exist there. And we see a lot of that in this space. I think that's one of the challenging things about crypto that turns a lot of people off initially is that there have been so many scams. There have been so many bad actors here that it becomes pretty difficult to kind of cut through the noise and figure out like nobody wants to be the sucker in the room. Nobody wants to be the guy holding the last bag. Nobody wants

to have their money stolen. And I think that's a scary proposition with this space. And it's a scary proposition with the frontier markets. And so one of the things that we feel is really important and that like a lot of companies have been working on is bringing legitimacy to the space like how do we how do we be more transparent as an industry how do we promote how do we have less memes and we have more sort of serious conversation like how do we how do we grow up a little bit in a way that begins to attract a different type of investor and it's sort of the same issue with the frontier markets how do you solve those liquidity problems how do you sift through all of the corruption and graft and theft.

So those parallels kind of map well. So for us, from our eyes, transparency has been one of the most important things. Like we look for counterparties that we work with that are transparent. We try to be transparent. One of the things we built this year is this whole investor portal

that allows anybody to log in and view all of their history. You know, we see countless funds that have been shut down by the SEC in the last year because they were straight Ponzi schemes. And they raised lots of money, right? It's shocking that they're able to pull that money in. And as an industry, we need to help stop that.

We need to identify those companies when we see them. We need to call out the obvious frauds and do more to promote this narrative that this is a serious industry that has lasting meaningful value and is different. And that's a challenge. It's not an easy thing to do, particularly in a space where where theft and risk of loss is so easy. Sure. What's the one thing that you've learned or your biggest takeaway since you left IBM and kind of went on this journey?

Yeah, I mean, it's the classic entrepreneurial challenge, right? I think I went into this thinking this is this is going to be so easy. And I think it's it's going to it was like this notion like, oh, second business. Like, I know all these mistakes that I've already made. I won't make those same mistakes. It's like absolutely true. I just made different ones. So like any startup, it's just, it's hard. And it's this game of grit and this game of survival.

And for me, what was fascinating here, like the technology side, I understand. I'm learning a whole new world on the finance side. And that's part of the interesting piece. It's like keeping your brain engaged and learning something new. I think as an entrepreneur, that's, that's the name of the game. You do this because you're a nonstop learner.

But yeah, it's just, it's startups are hard and it's every day is a reminder that, that you can have the highest of highs, the lowest of lows all in the same day. And you share what, what is the biggest mistake you've made that you're comfortable sharing? Oh yeah, that's a good question. You know, I think it's, it's been a focus issue. I think, you know, in 2018, for example, we had the opportunity to go build sort of a side, like a market making endeavor. And it seemed really interesting and it seemed lucrative, but it sort of took the eye off the ball of some of the other portions of our business. And it was a distraction ultimately.

and and so like that's the you know startup and particularly in an early stage startup where you've got small teams like focus is such a key element of what makes you survive what makes you successful and and it's it's easy to forget that particularly when when things are moving as quickly as they do in this space so at the end of the day it's pick pick the things that you can be really good at and you can be differentiated and focus on those and nail them and then once you Once you've sort of, once you've accomplished that, then you can start to go look at the ancillary pieces, but that focus is so key. Yeah, I love that answer. Before we wrap up, I always ask everyone the same questions.

The first being, what is the most important book that you've ever read? The most important book I've ever read, I would say it's probably the hard things about hard things. The Horowitz book, particularly as for an entrepreneur, right? I think everybody that has started a company goes through this period of time where things are really hard and they feel so alone and nobody ever really talks about how hard these things are. And that book I was having in the last company, I mean, the last company is a story in its own right. We were,

we were near bankrupt two or three times in the history of the company, like after we raised venture financing. Right. So I bootstrapped the thing for nine years. and and then within the course of 24 months we're near bankrupt twice and we pulled it out of the hat and sold ibm so like that's a success story but it was incredibly hard so in the midst of one of those darkest moments you're being able to pick up this book and hear one of now sort of the most famous entrepreneurs went through all the same stuff and that he's human that you're human that these emotions and the challenges are real like that was sort of a turning point that

that you're not alone as an entrepreneur. So from being able to continue to have that grit and desire to survive, that was really important. I love that answer. What do you think will happen to the Bitcoin price? You mentioned that it's really hard to predict, but you ultimately think it will go up. Anything that you can share in terms of the medium to long-term view that you guys hold? Yeah. I mean, we don't make price predictions. That's the beauty of this business and why I wanted to take the emotion out of it from day one. I thought it is more painful to lose money. And that's the challenge of the space, right? You have a space where 80% drawdowns are not uncharacteristic. And it's 10 times more painful to lose money than it is to gain sort

the same amount of money. So being able to sort of take that decision-making ability away from a human and put it in the hands of an algorithm felt like a great way to sort of solve that problem. I think in the near term, I think there are a lot of challenges this industry will experience. I think that the halving, which we've got sort of a sample size of two prior halvings to work from and two prior halvings where the mining industry was so fundamentally different. We didn't have industrialized mining on the scale we do today during either of the prior halvings. I think at the end of the day, this is all an experiment. We've got a lot to figure out over the next six to nine months, like, can the mining industry actually make

profit in this sort of new era? So I think there's a lot of interesting pressure there in the short run. And in the long run, I mean, we're in this really bizarre macroeconomic environment where the Fed is, I mean, like stocks trade like crypto altcoins did in 2017 right now. There is no grounding in reality into what's happening in the traditional financial market. And so at some point, that has to come back down to earth. And capital is going to get redistributed. And I think because Bitcoin is this thing that sits outside the traditional finance realm, I think it is well positioned to take some of that capital.

But who knows? Again, we're in this massive experiment. in our eyes sort of being able to play both sides uh both sides of that being prepared for for both equations really important for sure uh last question i have for you and then you get to ask me one uh it's a fun one which is aliens believer or non-believer i mean i think you have to be a believer like we are so infinitesimally small like we're this little tiny dot in this vast vast space to think that nothing else exists out there uh i mean that like psychologically that just has to feel incredibly lonely uh there has to be now the question is

why would they want to come here like it's a tire fire right now they're gonna be like whoa whoa we don't want to have anything to do with that but yeah i mean i think you you have to have believed that there there's more out there i mean we don't even understand what's on the bottom of the ocean like we have we have so much more to explore of our own planet let alone everything else that's out there i could not agree more i could not agree more i think that uh you know there's places in the world where there's literally humans who have never come in contact with other groups of people right i mean there's all kinds of crazy stuff going on just here but uh but the Aliens probably do exist.

One question you have for me to finish this thing up. Yeah, I mean, I think you're in a really interesting position. You talk to everybody about this industry, right? And I think for so long, sort of 2017 was the retail era. We had this drumbeat for a long time that institutional money was coming and that was going to save the space. But you're out in the field, sort of preaching the gospel of this being a differentiated asset class.

Who do you see being sort of the next interested party and why? Yeah, I think that the cat's out of the bag in terms of like what I'll call it the large asset managers. And I kind of look at it from two standpoints. One is there's people who have been trading liquid markets and they seek volatility. And historically, Bitcoin and other cryptocurrencies have provided incredible volatility. And so that just naturally they're interested. And these are people who normally, you know, I joke and say they don't care what the asset is, right? It's just all numbers on a screen to them. They're just looking for numbers that go up and down a lot. And the delta between that up and down is big. Like they think they can make money. And so I think that whole crowd, for the most part, like many of them are already in and the ones that aren't like, hey, there's volatility here and it's becoming more legitimate. And so they're kind of on their way, if you will. The big inflection point, though, I think comes from more of the institutional asset allocators. And so this is the pensions, the endowments, the foundations, the kind of all of those types of organizations.

And in that world, it's still mixed, right? You've got some people who are very convinced that, look, there's going to be something that happens here. There's just too many smart people going into the space and working on it. And so I need to kind of position myself accordingly, whether that's give money to kind of a more traditional asset manager I've worked with, like a venture capitalist or something like that. And they'll get a little bit of exposure in a fund that has all kinds of different disruptive and innovative technologies. Some say, hey, look, I want to go and actually just buy the asset myself. So how do I buy, you know, Bitcoin for my fund? Some people want to allocate to specific managers. And then some people just say, hey, look, like, I'm convinced that's going to be real. I just don't need to be the first person through the door. Right. I'm actually cool kind of being in the middle of the pack. in the middle of the pack's not showing up for another two to five years. And so I'm just going to chill. I'll do my learning now and kind of let everyone else go through the door first and then I'll go. And so I think that when you look at it, the people in that seat, any one of those four situations, they control a lot of money. I mean, they control literally trillions and trillions of dollars. And so naturally, you're going to see this kind of flow of capital on a macro basis come into this space. But also, I think that you're going to start to see the melding of the

lines or the graying of the lines. So somebody like Square is a perfect example where historically that's like a traditional finance company or a fintech company. And so people would look at that and say, hey, I want that in my public equity portfolio. I want it, you know, maybe my venture capitalists that made an early investment in it, whatever. Well, now all of a sudden, they've got a pretty big Bitcoin business. Right. And so, like, does that go in the crypto bucket? Does it not? How do you think about that? Which manager would you expect to have made an investment in the private markets? Would it have been a crypto business? Well, probably not because they didn't have crypto. You would have expected your fintech venture capitalists to do it. But in the future, we actually may start to see companies that aren't so black and white, right? You actually get a company that you could have your fintech VC investing in, you could also have, let's say, your crypto investor investing in, and then you might also even maybe have like a credit manager who's participating in some form, you know, that's not equity based as well. And so I think that that's the conversation that's happening kind of behind closed doors at the institutional level. It's just like, how do I think about this? What bucket does it go in? And if I am a believer that there's going to be value created here, like who in my portfolio of managers can get me that exposure?

And I think the people who end up kind of being early, right, doesn't mean you've got to be first, but people who are early obviously get most of the returns or kind of a higher opportunity for returns because over time it'll get commoditized just like every other asset has, just may happen in 10 or 20 years. Yeah, it's interesting. I saw that it was a gigantic pension fund that was down 11% in Q1. And we started to think about those types of returns. And they'll probably have made it all back in Q2 based on how the markets have played out. They'll be up. They'll be up on the first half of the year. Right. But yes, beginning to think about like, okay, if the traditional markets have lost sort of all grounding, like maybe we can begin to look at other things as well. It's a fascinating question. For sure. Jesse, listen, I really appreciate you taking so much time to do this. Where can we send people to find you or Strix Leviathan on the internet? Yeah, absolutely. So you can learn more about the Strix business at Strix, S-T-R-I-X, fund, F-U-N-D.com. I'm on Twitter at Jesse Proudman, just my name. awesome man listen i really appreciate you doing this uh you are on the the cutting edge of actually true quantitative trading and investing and i think that more and more people will

will eventually realize that removing the emotion uh out of the markets and out of the decision making ends up uh being quite a uh quite a time-tested strategy if you will that's what we think we'll see how it plays out we'll pretty soon we'll we'll do this again thanks so much for taking the time. Appreciate it, babe. Thank you.