The Pomp Podcast - Ateet Ahluwalia, Managing Director, Coventure: Inside the Mind of a Crypto Quant

Episode Date: January 30, 2019

Ateet Ahluwalkia is a managing director at Coventure. In this conversation, Ateet and Anthony Pompliano discuss Quant Trading, the challenges with finding great data in crypto, and what the future of active management may look like. ----- Join the Off the Chain newsletter. Pomp's daily email analyzes the crypto market for institutional investors. Simply, it’s the best crypto newsletter delivered to your inbox every morning. No frills. No bullsh*t. Just everything you need to know in a 3-minute read. https://offthechain.substack.com/ ----- BlockFi BlockFi allows you to keep your crypto, put it up as collateral, and receive a USD loan funded directly to your bank account. They do loans ranging from $2,000 to $10,000,000, and they're perfect for helping you reach your financial goals of all sizes. Visit BlockFi.com/Pomp to learn more about putting your crypto to work without having to sell it. ----- If you enjoyed this conversation, share it with your colleagues & friends, rate, review, and subscribe. This podcast is presented by BlockWorks Group. For exclusive content and events that provide insights into the crypto and blockchain space, visit them at: https://www.blockworksgroup.io

What's up, everyone? This is Anthony Pompliano. Most of you know me as Pomp. You're listening to Off The Chain, simply the best podcast in crypto. Let's kick this thing off. Atit Aluwalia is a Managing Director at CoVenture. In this conversation, we discuss quant trading, the challenges with finding great data in crypto, and what the future of active management may look like. I really enjoyed this conversation, and I hope you do as well. Before we get started, I want to talk about one of our sponsors, BlockFi. These guys are doing really interesting work in crypto lending. What they allow you to do is keep your crypto, put it up as collateral, and receive a US dollar loan funded directly to your bank account. They

do loans ranging from $2,000 to $10 million, and they're perfect for helping you reach your financial goals of all sizes. You should visit blockfi.com slash pomp. Again, that's blockfi.com slash pomp. Again, one more time, type it in, blockfi.com slash pomp, if you'd like to learn more about putting your crypto to work without having to sell it, definitely do it. all right guys i'm here with the teat um thank you for coming thanks for having me perfect okay so we're gonna move through this like machines you ready ready what's your background uh i started um out of college at goldman sachs i was very lucky to be there uh from 2006 to 2012 uh from there uh went to blue crest capital uh and then from there went to barclays before coming to

CoVenture. I started actually in sales. Goldman rejected me a couple of times. And they're like, you know, if a spot opens up in trading and you're still good enough, we will move you over. And I was fortunate that the gentleman who ran the book before me, well, unfortunately, you know, he dropped a lot of money. So they put me and a couple of guys in there to run that book. And then over the course of six years, was able to put together a pretty awesome track record trading arbitrage, relative value, cross-asset, and doing so in a quantitative way in both spot and options. And then from there, at Bluecrest, I was running a global macro portfolio for a handful of years. Then they became a family office. And then going to Barclays and running

a macro credit pod there, trading index again in credit versus other asset classes. And then while I was there, a gentleman I worked with at Goldman for a handful of years, he said, I've invested in this company called CoVenture. The founder is this guy named Ali. I want you to go to an investor dinner on my behalf and really stir up some dust, get in his face a little bit and find out what you can about it because I've taken a reasonable position in some of their offerings and I want to know if I should add or not. Um, I went to that dinner. I did exactly, uh, exactly that. I got into an argument with, uh, two LPs, which are now my LPs. Um, and it turned out that, uh, you know, uh, he was, uh, his answers to risk management problems, his, his answers to how to grow the business, how to think about it, uh, how to deploy capital. Um, we're so solid that, um, you know, we got to know each other over the course of the next several months and year or so. And then eventually he had asked me to come on to run our active vehicles at CoVenture and Crypto. Very cool. Shout out, Ali. Let's go

back to Goldman for a second. You were there at a time where it's quite exciting and there was a lot going on. Talk to us about what you remember from working with what many people believe to be some of the smartest people in the world, kind of the culture and what some of your takeaways were from your time there so goldman was incredible i don't think it's necessarily the same way now but back then it was if you make money it doesn't matter what your age is it doesn't matter what your background is if you majored in anything at all they don't really care as long as you can make money in a responsible way uh you're in you're in the game and in a big way so it was probably the uh the single biggest blessing uh outside of my family in my life um i got to learn

every day from, you know, all sorts of people there, Wayne, Neil, Jahan, Monica, you know, Arun, all of these guys that were incredibly talented, um, that, uh, you know, really took my, it took something that I was passionate about to something that I could be good at. Um, and eventually that turned into, uh, you know, a lot of money being made on the book that I traded. Um, and that kind of formed a, the basis for everything I do now. So I don't know that like, you know, post-odd Frank, I don't know that you're allowed to take as big positions. I don't know that you're allowed to really go after it in the same way. Um, I don't know that you're measured on the same criteria, but back then it was like, how much money did you make? Was it

compliant? Great. That was, that was it. That was the entire review process. That was everything. And it didn't matter, uh, your age or anything else. What do you think, um, made Goldman different? Was it the intelligence of the people? Was it the culture? Was it something else? Like, like what made Goldman stand out to you in terms of the experience you had versus maybe somebody else? I just, I think that they, they're back then, at least like the focus was so strictly on, can you perform? Are you a performer? And if you are off you go, we really don't care. Like, you know, who are you affiliated with? What was the political connection there? You know, what were your rankings relative to your, it's like, no, are you making money? Are you thoughtful

off you go? And you have a seat at the table with everyone else, guys who'd been trading for 20, 30 years, um, you know, you get access to everything. They just, all they cared about, like they had one vision. It's like, let's get A to B. Let's not worry about the rest of the stuff. As long as you're doing it in a compliant way, you're, you're a guy. I think a lot of other firms worried a lot more about, um, a variety of other things that may have, you know, thrown them off course. But, um, you know, speaking from, from working there and a couple other spots, I can definitely say that they, uh, they really went after it, um, aggressively and they allowed you too, as well. It reminds me of a saying, uh, winners win, right? I mean, I can, I can list 10

traders off the bat from there that are now either running their own hedge funds, venture capital funds, managing money in a variety of different ways because of, you know, that, that kind of background. Yeah. It's crazy. Um, how'd you originally find out, hear about, or get involved in crypto? Oh man, I made a huge mistake. Actually. I, uh, I love when people start the story that way it was brutal actually i i thought they were like uh it this this shows age a little bit but i thought they were like sonic the hedgehog coins i'm like don't talk to me about this garbage seriously uh but then when the cypriot crisis hit you actually saw um with an endorsement from the eu a haircut of retail investors bank accounts like think about if you know the u.s government

reached in your bank account and just took half of everything you've worked your whole life to save that was endorsed by the entire European union. Uh, and when that happened, you know, I had hedges on in place. Um, I thought I'd make a bunch of money. I'm like, I'm going to clean up. This is going to be great. Cause when, when volatility is high, that's usually when I perform the best. Um, yeah, I was having a really good year. Um, and I thought I am going to just crush it. I'm going to, I've already beat the budget. I'm just going to smash this. Um, and what ended up happening is I didn't, I lost money on the hedges. Uh, I, I broke even basically. And it was really frustrating because when you expect something good to happen it doesn't even if it's neutral

that actually hurts more than losing um and so what ended up happening was i went back i looked at a covariance matrix i had that looked at all sorts of global macro assets i had plugged in data from bitcoin like uh you know price data and i actually saw that it was actually a much better hedge um did a little bit of research and it actually became a thing where western people when all else fails, when their government fails them, will actually trade this digital asset as a means to preserve and store wealth. And you see that today, Argentina, Venezuela, Zimbabwe, all across, you know, any kind of distressed environment. But back then, that's when I was like, okay, this is a really interesting, you know, macro kind of hedge. And then I forgot all

about it until a software engineer I know in London, who's incredibly thoughtful and intelligent told me that, you know, this is the basis for cheap trust. And that's what really got me into it. So I didn't really get heavy into it till early 2016. Because you've seen Bitcoin perform in what was a volatile kind of chaotic environment, what's your general thought process or framework you use to think through how Bitcoin would perform if there was another global financial crisis? That's a great question. It's two parts. First part is it's just a number on a screen, right? So you can't fall in love with the narrative. You can't tell me it's going to replace fiat and all this other stuff. It's it's a number on the screen. You have to trade it in a

quantifiable way. But the second part is I look at it. A lot of people tell me in the crypto community, they're really excited about a crisis because they're going to make a killing in crypto. And I think that's ridiculous, because if you look at the key crisis asset, it's gold. And if you look at 2008 and I only know this because I got torched on it, you know, I bought a ton of gold. And I kept buying it all the way down. But gold fell 38% in the global financial crisis, right? It wasn't a legitimate hedge in the true sense of the word. Why? Because people sold what they could, not what they wanted to. They sold liquid assets like the GLD ETF to meet margin calls in their debt funds and in other various places. So gold falls 38% along with the S&P 500

falling, you know, 60-ish percent almost at the trough. It bottoms ahead of the S&P and then goes on to triple. So in a global financial crisis, you know, liquidity gets sucked away from the most liquid things. And Bitcoin is actually, you know, pretty damn liquid. So people will probably sell that to meet other payments, you know, other things that they have to do. So I think it would have to get incredibly bad for Bitcoin to then outperform. I think rather than seeing a global financial crisis, if you really want to see Bitcoin outperform, what you really want to see is more liquidity pumped in the system. And if you look at the Fed's balance sheet, they've recently unwound from four and a half trillion worth of assets down just sub four

trillion. And people are saying they're out of bullets, you know, but really their balance sheet relative to their GDP is actually quite small relative to the European Union, relative to Japan, relative to Switzerland and some other major central banks that have been pumping for quite a long time. So Bitcoin actually performs better in that liquidity flushed environment. In a financial crisis, you really want to see a scenario where things get so bad that people want to trade any other asset besides dollar-denominated vehicles. And even then, you're probably better off buying cigarettes, right? That's the ultimate poor man's gold, right? Absolutely. All right. So, you've got this quant background, done a lot of trading across

different assets, different markets, and at different firms. What makes crypto so interesting coming from that background. Crypto is fascinating for me personally, just because if you look at the systems I employed in 2006, 7, 8, 9, 10, those systems are actually quite viable in crypto. You have an alpha hurdle here that's very unique to the asset class in terms of slippage due to liquidity, bid offer costs, exchange fees, what kind of volume can you get off? How do you trust those volume figures? That's the hurdle you have to overcome. But even despite that massive hurdle, you have edges that are just so dramatic that you have to get involved. So from that perspective, it's fascinating. I think the second piece of why

it's interesting to me is, you know, I remember in Goldman in 2007, I believe 2007, early 2007, they started moving people over into European distressed debt. You know, I asked my boss and my boss's boss, you know, why are you doing this at all? They said, look, we don't know when the market crashes, but you know, the higher ups are telling us, and it's clear that eventually things will turn around and we'll need a lot of people doing distressed. You know, you fast forward to the end of 2008, you've got 60 people in that unit. So from one to 60 guys and girls, um, they, it's not that they predicted it is that they were very thoughtful around risk management. Um, from a macro perspective. Exactly. And you know, when, when Jeff Curry wrote that, uh, you know,

oil to two 50 piece right before oil peaked, uh, in a way that they were moving guys out of commodities back into mortgages. After the GFC in 2008, they started moving guys over to Europe to help trade debt, help trade other asset classes, because the viewpoint was, okay, this is going to now spill over to Europe. And now you see, two years ago, they started moving people into cryptocurrency. And that, to me, is fascinating, because these people have a window, an insight into political movements, regulatory movements, things that I'm not privy to. and they seem to be trending in this direction so that to me is quite fascinating those are the upside or positive arguments for why a lot of the stuff is interesting from your

background what's the challenges with applying a lot of those quant strategies and frameworks to crypto today that's a great question so that's all we do on this podcast is do great great questions with mild answers um the most challenging thing is data uh you you have you know if i wanted to test the system on the S&P 500, I can look at the SPY ETF. So that's the ETF you buy in your 401k account when you want to trade beta exposure to the US economy via the stock market. I can go back to 1993. I've got 25 years of really rich data. So that's like whatever, 6,000 plus data points. In crypto, because it's not regulated or it's a light touch regulation, you have only really good data from January 1st, 2017 onward. So that's only two and a bit years of really high

quality data. If you drop the timeframe though, let's say to the 60 minute timeframe, all of a sudden you have 24 times as much data. You've got 8,000 plus data points. You can start testing different environments, different regimes, different price action patterns, different correlated effects. And you can treat it like you would a traditional asset class. So the data itself is very, very difficult, not only because there's a limited amount of it, but the second piece of that is it's bifurcated. There's no central order book, Like when you trade S&P 500 contracts or COCO contracts or whatever it might be, you have to go trade it on, you know, exchange X, Y or Z. And the prices are slightly different, but the liquidity is actually dramatically different across exchanges.

The other issue is with the data is, you know, if I ingest price data, a lot of times some exchanges won't have a trade, like even in 2017 between certain price points. So you're worried that they might make something up. Um, another difference is I've never been in any asset class where the exchange was the OTC market maker. That's a little crazy. Um, there, the incentives there are not exactly aligned with the investors. So you have to be very thoughtful around counterparty credit risk. Um, one of the things that I love about, you know, co-venture and where I work is when I came in, I said, you know, we have to build out a data offering. Number one is going to be data. Um, and we ran hard at that you know and uh now we have data from you know all the big exchanges and that's

critical to stay on top of that because the top 10 exchanges in the beginning of 2017 i think only two of them are left in the top 10 right now um and you really need to be on top of that because of you know issues with wash trading and and so as more and more quantitative you know experience or quant type um strategies come into crypto are we just in the beginning stages of what we see in like public equity market, where it's just a ton of high frequency trading, you know, algorithms versus algorithms. And, um, there's much less, uh, kind of room for the retail investor to have an edge. Or do you think that, um, one, maybe that doesn't happen or two. Yeah, it might happen, but it's a really far time, uh, time horizon. I mean, I think inevitably you'll

see a lot of high frequency. I mean, they're already involved, right? So there's a ton of the top high frequency players in traditional markets playing now. Um, I think that, uh, Yeah, it'll be on an accelerated growth curve relative to other asset classes because they had time to grow. So you think it happens faster? Yeah, I do. And I actually think that's good.

Why? It'll liquefy it a little bit more. Having more players involved, churning it around, it means that I don't have to spread an order via smart order router across 10 different exchanges. I can do it at one place. That means you'll have more thoughtful exits. The market's all about outs.

And if you only have one out, right now in crypto, we have spot. You trade spot here, you trade spot there. You might trade a future or a CFD contract or a swap. It's all the same swap exposure. What you need is deliverable and non-deliverable forwards, an options market, a structured products market, an ETF. All of these things will actually contribute to liquidity in space and open up a whole

host of additional quantitative strategies to trade. It'll also prevent some of the bad actors from being able to push it around as much. And that actually is net beneficial to the retail investor for two reasons. One, if they were involved in the space from an early stage, now they actually get to benefit from an influx of capital. So you look at a market cap of $100 billion, right? One basis point on BlackRock's $6 trillion is $600 million worth of assets. So it's 60% of the crypto market cap is one basis point of BlackRock's balance sheet.

Just think about that. So if you have more players involved in the traditional space, I know people get upset about that, but what that does is it liquefies the space. that natural source of demand should, in theory, bump up the price. And so if you're involved early, great. If you're involved a little bit later, then maybe you have more products, more vehicles to get exposure to the space as opposed to having to go through five or six different hoops right now. Well, let's talk about spot futures and swaps. So maybe just what is spot? What is futures? What is the swaps? And then we can talk about the pros and cons of

each. Sure. So spot is just the actual underlying coin itself. Bitcoin itself that you would hold in a wallet and self custody or custody somewhere else. A swap is basically engaging with a counterparty and saying, hey, I want the underlying exposure, the underlying economic exposure of Bitcoin. So let's say you and I engage in a swap and I buy one Bitcoin from you on swap. Then if Bitcoin goes up and doubles, you owe me thirty five hundred dollars. If it goes to zero, I owe you $3,500. And a swap usually is a terminated contract that we negotiate. And a future is very similar. Again, it allows you to get access to the underlying spot without owning it. And you can either cash settle it, where you and I, again, very similar to a swap, we agree to settle that

contract. One of us pays the other, depending on how the price moved at the maturity date. Or we can physically settle it. You know, I can buy a physically, well, not yet, but hopefully in the future a physically backed future and then if i want to get exposure to bitcoin we will settle it where no matter what the price is you deliver me the coin i deliver you the fiat and so why would you use each one of those like what's the pro or or the beneficial side each one of those instruments so that's very dynamic it depends on what jurisdiction you are because futures might have preferential tax treatment um so will cfds cfds and swaps will have preferential tax treatment in europe for example especially in england um it might be that you want to actually hold the coin

that you're holding it for your ETF. So you need to get exposure. So you're not just going to go buy, you know, X thousands of Bitcoin from an OTC desk. Um, and it could be just how the time horizon as well. So if I want to do a trade that lasts an hour, I really don't need to go source the Bitcoin, go through the whole thing unless the liquidity is better. So the price could be slightly different. The liquidity could be slightly different. So, you know, you're really weighing those factors. What's my time horizon, what's the liquidity of the underlying product and how long do I really need to hold it for in terms of tax reasons. And then what about on the futures and swap side? What's the downside to these instruments?

It depends who you ask. You know, the downside to a cash settled futures instrument is that, you know, you can create open interest out of anywhere. So, you know, the best example that a lot of people like to give is the gold market. So the gold market is a finite supply, but, uh, you know, I think a hundred times the annual mine supply trades in the futures market. So who needs to sell that much gold, right? Um, it, the idea being that it removes the supply cap argument of Bitcoin, there'll only be 21 million. And, you know, there's a million locked up in the original Satoshi account. And then you've got like an estimated four to 5 million that are lost. So the real supply is 16 million. Well, I mean,

when you really when you really look at it though if you have futures and i just decide one day to sell a gazillion futures well now the supply is actually dramatically increased so you actually want a physically settled future where you have to deliver me the coin not just exchange cash flows to keep in alignment the spot market with the cash settled futures market this kind of keeps that in check it's it's a it's a bit of uh it would allow order and less kind of weird games to be played in theory so today we've got kind of three types of ways to invest right that's a spot futures and swaps if you could make just wave a magic wand and create the market infrastructure the instruments um you know what does that look like right coming from

again, from this kind of trading and quantitative perspective, like what's missing and that you wish was there? I wish we had a fully fledged out options market. I think that the way that it's done currently, if you're a miner, you want to be able to hedge your cash flows. Miners would then sell calls because they know that they hold the underlying coin. And if it rallies, you know, 50% and we'll happy days, they're going to make that 50%. They're going to get called away via the call option. They get to collect premium in the meantime. Um, and that's a good for their business. Uh, if you're an exchange, your revenue only goes up when people trade period and end of story. Now people trade more when there's more volatility. So you're long

volatility. So you want to sell volatility. If you're an exchange, you might sell straddles or strangles. These three activities, the, uh, the exchange is selling volatility, the minor selling volatility, uh, maybe some of the original, you know, players that hold a lot of crypto selling, uh, certain volatility structures would dampen the volatility of the asset class as a whole, make it a little bit more palatable to traditional financial players. And, um, and that would help the ecosystem as a whole. It also helped you create interesting payoff structures. Like right now, if you buy, I think overnight, you saw it depending on the exchange. Ethereum is that was at one 26 dropped down to one 22. Uh, and then it drops all the way down to one 14, um, in a couple

hours. So if you have a bit of more dampened volatility, then that's going to allow a lot more people who are shy to, to get in the space. Cause a lot of people look at volatility and say, I'll stay away, but that's not risk management. Risk management is always a sizing question, not a volatility question. If it's volatile, take a smaller size. But to those people who don't agree with that, that, that thesis it allowed them to get involved, which again is, is only good for the retail player because it would in theory boost value. Well, and this idea of volatility and sizing is one of the things we talk about all the time institutional investors right is look if you've got something that's non-correlated or low

correlated and it's got an asymmetric return profile you could actually risk less capital and have a return that still impacts the overall portfolio performance than in maybe some other of your more speculative type investments precisely and and you know if you could do an option format where your downside was specifically limited to that premium you do that all day especially if you're a traditional firm right now if you're like well i'll put it here i have to worry about custody you have to think about this and I have to think about that. Uh, there's a million excuses people can use right now to not get involved. Um, but having a more thoughtful infrastructure in place would, um, I think would certainly be beneficial to the whole market. So you're bullish. I'm

bullish. Um, there's plenty of people who are, uh, but there's a whole subset of the traditional finance crowd, uh, that I think are probably, you know, they're on a spectrum from, Hey, I read about this on the headlines and what are these idiots thinking about all the way to people who really understand it, but think it's not real. Why do you think, or how would you answer the detractors who say, you know, this isn't a real asset class. This isn't going to survive. You know, all the things that you probably hear people say from that traditional finance background. Well, I would, I would argue this, like, it's very hard to get your mind around things that are different. Um, so before you had real goods, you know, I would buy a watch from you. I would

give you cash for it. That was a big deal. Um, you know, it was a, in the cash represented a physical asset. Now we have, you know, the internet and you have digital representations of that asset. You've got ones and zeros moving around in the computer, which represent your money. It's a digital representation of a, of a physical asset. And now you actually have a digital representation of a digital asset in the form of cryptocurrencies. And that's hard to wrap your mind around. I'd also say to people in the traditional financial world, one thing that's critical is examining your theories on forward scenario analysis. So if you had told me in 2008 that the S&P 500 would almost get to 3000 and in 10 years we wouldn't see a recession and that

everything would absolutely be on a tear, I would have laughed at you, right? And I would have gotten it totally wrong. I would have assigned like a 2% probability that turns out that's exactly what happened. So I'd have them think about the scenario analysis of why things actually happen and mistakes that they've made guessing the market. And if you've been in the market long enough, you realize that, you know, you get a ton of stuff wrong. You're actually in the business of being wrong, but acting responsibly when you are wrong. And then the other thing I would say is, you know, our traditional financial markets are not as strong as people think. The fragility there is just unbelievable. If you look at, you know, the flash crash we had, was it May 2010 or

11? 70% of the stocks that did no longer had a bid were ETFs. And why is that? It's because when one stock goes down, the bots that trade them back and forth don't know how to value the ETF. That's not their job. Their job is to make pennies over and over and over again. So you had a flash crash, right? If you look at something like companies that are in 200 plus ETFs, all the large caps, if there's ever an Enron type accounting scandal, a WorldCobb type scandal, how in the hell are you going to value all these things, right? And you're going to have a cascade effect across the ecosystem. And that's happened before, right? You've had these flash crashes repeatedly, even though the flash crash happened, you know, eight years ago. So that's one source

of instability. The other source of instability is, I mean, look at the leveraged loan market. I mean, even now it takes, you know, a week to five weeks to settle a trade, yet you have instant liquidity in the form of the BKLN ETF, right? People can trade that. Your mom, if she owns debt in her 401k, which she most likely does, may have access to junk bonds in the form of ETFs. She might have access to leveraged loans in the form of ETFs. And these things take a long time to settle, yet the people backing them, the approved agents that can make you a market in them, they have to take this settlement risk all the time. And were there to be an issue across one of them, you could see an extreme dislocation from NAV or net asset value,

the fair value of the underlying assets in that ETF. It could dislocate in an extreme manner. And you've seen that a couple of times, right? And so I'd say like, you know, the traditional markets aren't as stable as you think. We're just used to using them. And then the last thing I'd say is, you know, when I started using the internet, it was to send emails. And I remember how much grief I got, especially from my father in particular. He's like, you're going to send email to your grandfather, just write a letter, send a stamp. It's more personable. It's, it's more, it shows respect, uh, you know, and over time, I mean, I use it a thousand times a day. I know he does too. And so do my grandparents. Right. But, um, you'd be shocked at the things

you get used to, right? A lot of people don't know how the internet works, but they use it. They have trust. They have faith that it's there. Same thing with our traditional financial system. I believe in time, same thing with the Bitcoin and cryptocurrency ecosystem. So it sounds like you're describing a world where the traditional markets are actually much more similar to crypto than different. They are. Look, they're very similar. Crypto is just it's a it's just a few steps behind in terms of evolution. I mean, it's a 10 year old market, right? Like ask a 10 year old how much you contribute to your family. And I would argue it's 10 years since the inception of Bitcoin. But most of the other assets and definitely most of the infrastructure is five or less years old.

Yeah, precisely. And I mean, if you look at, if you strip out Bitcoin, like, well, this is another problem going back to the data is how many coins have, you know, more than a couple of years of history. Yep. Well, actually very few. Yep. Right. So I think that these markets are similar. It's just, if you look at an evolution chart, right? Like Bitcoin is just a few steps back behind, you know, the, the, the man or woman that is traditional financial markets that quote unquote fully evolved person. Um, and I think it'll get there in time. I mean, the one thing that would really accelerate that is thoughtful regulation. Once you get that, I think it takes off dramatically. And you can look, I mean, Fidelity's involved, Goldman's involved,

Bank of America filed the most patents of any traditional financial player in 2017. Alibaba's involved. People are involved, right? Even the detractors who talk on CNBC and say one thing, they're turning around and filing patents on everything they can blockchain related on the other side, or they're issuing special, like they're trying to put through ETFs and things of that nature. So, I mean, I think it's more of the cliche of actions speak louder than words, right? All right. Before we continue with this conversation, I want to mention our sponsor again, BlockFi. Remember, they do crypto lending. So you posted your crypto as collateral. They give you a US dollar loan and you can use the US dollars to do whatever you want. You should visit

BlockFi.com slash Pomp and then tweet at me that you went. If you tweet at me after you went to blockfi.com slash pomp maybe i'll throw you a like a smiley face or the fire emoji the fire emoji is the best remember go to blockfi.com slash pomp and i'll see you on twitter yeah well and also uh you know we talk a lot about capital inflow but we separate it into intellectual capital and financial capital right and uh the financial capital everyone you know it's pretty measurable you can go on all these sites and see hey you know what's the volume of this stuff and you can look on a blockchain and see you know how much is actually being settled on chain and all that but the intellectual capital it's incredible i mean how many you know really smart folks from

wall street from silicon valley or from somewhere else in the world who are well respected are rushing in to do anything whether it's build a company finance trade you know all kinds of different stuff i think somehow that gets lost i agree and like look only three years ago four years ago, around that time period, universities started offering really in-depth degrees in, you know, cryptography and blockchain and things of that nature. Now you're seeing some incredible young guys and girls devoting their time to this space. And when you have that influx of intellectual capital, it's very hard to stem that tide. Yeah. The other piece of it is as you get the intellectual capital coming in, there's a lot of trust and familiarity. I think that

capital allocators have with those folks, right? So I always give the example of if you take a founder who's previously built and sold a company for, you know, a hundred plus million dollars, and then they say to you, I'm going to go build another company. And this time I'm going to do it in this space. Immediately you ask yourself, if you're don't believe in blockchain and crypto, what does this person know about building companies in this space that I don't know? Or what do they believe that I don't believe? Well, precisely right. And you see people like Peter TL getting involved. You see, there's a lot of heavy hitters getting into the industry. It's Like, what do the people that set up some of the companies that I use on an everyday

basis, what do they know that I don't? Yeah. Who are the people who are usually ahead of the curve and why are they ahead of me in this? And again, it comes back to a size question. Even if you think, oh, this is garbage. Well, 50 bips of allocation, that's not going to hurt you. You're not even going to notice.

Right. So it, you know, we've gone around the country saying, just get off zero, right? Having zero exposure to the best performing asset class for the last 10 years, probably not the best answer. Now, is it 10, 50, 100, 500 basis? You know, whatever you want to do, there's a conversation to be had, but it can't be zero. I agree.

I mean, it's really a question of size. That's it. That's all it comes down to. And I think too, you know, a lot of people make this argument to me like, oh, where are the decentralized applications? We haven't seen any dApps. This whole space is just a joke. It's just like, you know, electronic gold.

I'm thinking, you know, what, how long did it take for the internet to really mature and bring about these data behemoths that end up being, you know, the top companies in the world. A lot of people are like, this reminds me of pets.com. And I'm, and I think I laugh because who bought pets.com? Do you know? I have no clue. Amazon.com bought pets.com. And that's the exact, like, it's not an Amazon. It's like a pets.com. And I'm like, really? Cause that's actually technically the same thing, right? You know, the most successful man in the history of mankind, Jeff Bezos, you know, he, he was, he, at the time he was laughed at for bringing books online. People are like, I just go to a bookstore. What's the big deal? But it is a big deal,

right? And it's, there are people that see it ahead of the curve and they get involved. And to that point, you see things like Amazon taking, uh, buying the rights to certain websites like Amazon crypto, whatever they bought. Right. Um, there are people that understand that this is disruptive. They see other industries getting disrupted and they want to get out ahead of the curve. It will take, it could take any different iteration that we're not even expecting or thinking but i do believe it's here to stay it's also funny when people ask about the what's the killer app or what's the you know the depth that works uh because the first application of this technology is massive it is a sleeping giant right and and i joke all the time about you know people

are actually underestimating bitcoin based on what we have today yes exactly so if you look i mean last year if i remember the numbers correctly it's like in 2018 there was over 420 billion dollars of on-chain transactions and people will say you know that's speculation it's this it's a whole bunch of stuff but it's still 420 billion dollars of on-chain transactions that occurred on something that a whole bunch of people doesn't believe has value exactly exactly and and again like how long did it take for for i keep going to amazon because it's you know one of the most important companies in the world how long did it take for that to go from online bookstore buying pets.com to having aws and revolutionizing the way every company in the world does business

right it's it's the place i spend most money on right so i mean look you and i've talked about this before right you know the the stats on amazon um it's drawn down what 90 percent uh in a given year twice yeah and the average thousand bagger whatever it is yeah two thousand bagger something like that well and the average annual drawdown of amazon for the last 20 years has been like 30 precisely and again that's a sizing question if you if you'd bailed you'd say well wow this stock got to from under fifteen dollars to you know over two thousand dollars at one point so let me ask you one more question before you get in the rapid fire uh for those retail investors that are out there who they don't have access to a bunch of quantitative strategies they don't have your

background uh one thing you say all the time is it's just numbers on the screen right yeah walk through how that applies to, you know, retail type folks that aren't managing money professionally, but probably should take a similar perspective into investing in assets. Well, the big risk is, you know, we all say, Oh, never put in any money that you can't afford to lose, where if it went to zero, you'd be happy and fine. And everything you wouldn't even notice problem is no one ever does that. They put in way too much money. Um, and they're not disciplined And the way that you can kind of require a discipline in yourself is to take a quantitative kind of viewpoint. And it could be a thesis for why price moves the way that it does.

When you're a trader at a bank, people think that you have all this information and you're always going to be right. You're always going to make money. They view it as like a casino with like some kind of house edge. That's simply not the case. Traders rise and fall all the time. They make and lose money all the time. And they're dealing with the same emotions that the retail traders dealing with period and end of story. Um, but what, what the great traders realize is it's a business of being wrong and it's how do you handle it when you're wrong? How do you quantify that? And so, you know, how do you stay calm in the heat of the moment instead of doing something that will end up costing you a lot of money? And the only way I've found to do that is to

understand the stats behind every action I do. So it could be as simple as every time price goes above the X period moving average I'll buy. And when it goes back below, so you can actually program that you can actually go through by hand. Cause before I could program, I used to do this by hand. Um, and you can say, well, every time it does that, it goes up 4% on average, the max, it's gone up as 17%. It wins 35% of the times and it's lost seven times in a row. Right? So it's about, does your emotional constitution allow you to stick with that framework that you've, you've kind of created that you think will work. And when you know the stats, you get humbled because you realize, you know, most of these things that I think are true are far from it,

or they're so difficult to implement. Given my emotional constitution, I should either hire someone to do it for me, or I should just not use the system whatsoever. So like the average hit rate, if you have a hundred ideas, I'd say two of them are any good. And then once you run them through the testing and you look at bid offer liquidity, you look at time and market, all the different KPIs, sharp ratio, everything, maybe one of them will make it through the net. So think about like how difficult that would be. But, you know, if you do take the time to do the quantitative analysis, you keep yourself on the right side of it more often than not. And you also allow yourself to do the right thing in the heat of battle. It gives you a tremendous sense of

calm. It's funny because, you know, coming from a growth background, one of these growth teams at Facebook, et cetera. I always think that the beauty of data is that you probably have the right idea, right? So, so if you come up with, you know, in that world testing, or you're going to go test 10 screens to see who clicks on what button the most, right? You actually come up with the right idea. You just don't know which of the 10 is the right one, right? Same thing in trading is you come up with, you know, 10, a hundred strategies. One of them is going to make you money. The hard part is figuring out which one. And it's interesting, you know, you said earlier, like, well, what happens if it's bot versus bot, algo versus algo, you know, that

definitely eroded several edges. I used to use in like the mid two thousands for sure. There's systems that I can't use again, by the way, they work quite well in crypto for now. Um, but also despite having a traditional financial marketplace that is dominated by algorithms, um, there's still systems at work that I use all the time. Right. So that, I don't think that's a detractor for using quantitative analysis, I actually think it's a good thing because it provides liquidity that allows you to kind of lower that alpha hurdle. Um, and I think for, for the retail trader, it's, it's, it's, it's hard out there, man. You have to watch CNBC and someone's saying something and they're doing something totally different, which I've experienced like on the

trading desk at Goldman. You know, one guy came through and was talking about how awful the UK was at that same time. His execution desk was calling up selling insurance contracts on UK government CDS. Um, I couldn't believe I'm like this guy saying one thing there, his execution desk is doing something totally different um you know you really can't trust people like that but when you have the facts like when you do the analysis around how often is this right how often is it wrong like to what degree is it right what are the kpis i used to analyze that you have the the raw facts um and it's very important to get to that stage because otherwise you're kind of competing with like the michael jordan's in the space like i mean i every day like if stanley

druckenmiller does a trade i can actually take the opposite side or do whatever but i'll only do something as ridiculous as that if i have the quantitative stats backing me up yep right somebody was making the argument uh it's probably three four months ago uh they told me they're a stock picker like talking about public equities and i said it's great i said uh you think that you've lost any edge or uh or disadvantage compared to the algorithms and uh this is a pure play retail investor who has no team no i mean just literally i read in the paper and i and i pick uh pick stocks and then he said to me uh there's plenty of investors who uh who pick stocks and he ratted off a couple of names in the back of my head i was thinking you realize those people

have such in-depth teams they're talking to thousands of companies a year they're doing incredibly deep financial analysis and yeah they're quote-unquote stock picking but the amount of work and uh effort and data analysis that goes into which stocks they pick makes you look like the biggest amateur in the world and you're probably getting just rolled over on on a daily basis and i asked them then i said well what was your performance last year and it got real quiet right and i think that's part of what's happening in crypto is there's a lot of people who they think that they can pick tokens right because they think that that's what other investors are doing the other funds are doing oh there's picking icos or there's picking tokens and it they don't

realize how much work goes into this stuff and how easy it looks but how hard it actually is yeah and i'll tell you like there's a lot of um a lot of you really have to be an incredibly intelligent person probably with a bunch of phds to be able to fundamentally value these companies and do it the right the quote-unquote right way um but if you quantify it you're basically admitting like hey look i am not as smart as warren buffett like there's there's no edge in trying to beat him for me. But if I use the statistical models to quantify the price action, then I have a decent shot of earning a very respectable return. It's a weird field because in law, I can't just go into the courtroom and represent someone or go into a surgical theater and say, hey, I'm going to do

open heart surgery today. You know why? Because I can. Because I opened up this special account at the hospital and they let me come in and do whatever I want. But in trading and financial assets, you're allowed to do that. And that is insane. It's not insane. It's wonderful. Let me be clear. But if you quantify the price action, you can think about what you're doing in a logical way. You can still get in a really, really nice return. And I think that people should kind of steer towards that because otherwise you get caught up in the, you know, Warren Buffett says that, you know, gold's a ridiculous asset, yet the guy owned 25% of the above ground stocks of silver. And I think 2001 it was, or 1999, because he's afraid of inflation because

Greenspan was cutting in the middle of the tech bubble. It's not what they say, it's what they do. And the only way to know what they're doing is to look at the screen, the price action and quantify it, right? Because people say a lot of stuff. Yeah. Look, it's facts versus opinions. 100%, right? All right. Let's do this rapid fire. What's the most controversial thought you have in crypto controversial thought i i think that uh most crypto currencies could go away except for bitcoin and we might have like two or three new ones we haven't thought of and in 10 years and we could have four four cryptos that really matter i agree with you so i don't think it's that controversial um but a lot of people don't like it when i say that yeah i was

just gonna say the twitter the twitter trolls will let us know uh what's the most important company in crypto the first traditional financial company that goes after it oh interesting okay no one's ever said that before that is it period end of story because when they're in they smell blood in the water and all the traditional financial companies are like we have to get in now so a lot of these companies aren't the first movers they wait for one of their peers to get involved and they're like oh they're involved there's money there i'll hire their their bench i'll hire a bunch of phds and let's go after it now um so as soon as uh as soon as fidelity's you know offerings up and running and really running hard. As soon as there's an ETF by a traditional guy,

that would be phenomenal because now you could put in 401ks. Now you can really go after it. If you could change or improve anyone regulation, what would it be? Oh man, just call them securities. Get it over with. Let's go after it. Let's trade it. Let the big institutions get involved. I get so much grief from people in crypto about regulation. I'm like, guys we need regulation without it this space doesn't grow without it it's this really fun area that has incredible potential but without the regulation it can't realize that potential because the big dollars don't follow and the big dollars need to come in so that guy with a phd wherever he is that's got a brilliant mind can get that funding to create that product and

you know then people in the traditional space won't complain about daps and things like that Yeah, I actually, and I've recently started thinking about this. I, for the record, do not know if I agree with this or not, but it's a thought that I've started to spend more time on is if you look at the like change the world technology, right? There's probably two to three applications that can really impact billions of people, right? Let's say Bitcoin is one of those.

They're already ruled on. We already have clarity. It's not a security. They've said that, right? So it's not going to get lumped in there. everything else the upside versus the downside of is it a security is it not is relatively you know small in in terms of if it's regulated as a security we're not going to get that much of an advantage or disadvantage and if it's regulated as not a security there's not the

disadvantage or advantage to that and so if we can get to the future faster and have more people participate in that future by having them be securities and we actually think that's what the rules are written as today we probably should move forward down that pathway and maybe there's some small improvements right so maybe we can change like you know accreditation laws to allow more people to participate or you know there's some things that we can do to make that world better but i tend to agree with you that it's just not as big of a deal as long as those you know two or three world changing applications of the technology we're already in the clear with those right they're not going to be you want to talk about world changing imagine you're in venezuela

and inflation's off the charts and you're basically whatever you've worked your whole life for it's it's valueless because you don't have the currency to back it you can't hold gold you can't do anything i mean that is a game that's a life-changing technology same thing in zimbabwe same thing in argentina same thing across various different countries so you talk about a game changing technology it's already here and it's not theoretical like we have the data to show that this is happening in real time in these jurisdictions and people not only buy into the narrative right they're actually voting with their currency and changing it into the digital currency i think too like a lot of people focus on you know bitcoin supplanting fiat which i think is um

what are the odds aggressive aggressive to say the least what would you say are the odds that bitcoin could become the global reserve currency was a probability uh negligible negligible because if you're a government you have like low single digits uh lower than that i'm talking about basis points of basis points for now like i'll change my mind as the facts change but like i mean i think what's interesting is how it'll change legal aspects of transactions so if i want to buy land in india agricultural land right now i i could there's a ton of red tape somebody else will forge documents say they own it too and now it's not my land because someone bigger stronger faster than me with more weapons than me is like no it's mine and you know what i'm gonna say

you know what you're right i'm just gonna go go back to texas or new york or wherever right so but if you had uh an immutable ledger telling you like yeah you own that it's gonna change it's gonna unlock that potential uh for growth and i think that's that i'm giving you one dimension of like a bunch of them yeah hundreds of dimensions that this is going to change on the legal back end. It removes the, he said, she said, it removes me having to trust my boss when he says, Oh, don't worry, I'll take care of you. It removes that because you've got contracts in place that are ironclad that, you know, they remove a lot of the wishy-washy-ness. What, um, what's the most important book you've ever read?

Reminiscence of a stock operator. Why? Because you see, you see a guy, um, turn nothing into something. You see him succeed in the stock market, um, against the pros. You see that learning process. You see him get knocked down several times go broke several times and still have the uh the confidence and wherewithal to get back up and succeed um and it shows that it's doable like it's done like this is something someone actually did um and it's it's really inspiring all right uh you could ask me one question in a second but uh what is the probability that aliens exist uh as close to 100 like the

asymptote right there like it's it's right up there how do you get there what is the mathematical equation or the framework you're using to get there you just take things to the logical limit like if you want to prove or disprove something what do you do in math you take to the limit of negative infinity or positive infinity we're in an infinite universe which all signs point to that being the case then you know you have an infinite number of trial and error situations well there you go have you ever thought about like how small you are in the universe yeah but only because i'm five nine yeah but like being five nine in manhattan in this earth which then is in this solar system right which is one of more than we know of right like that's pretty wild and here

here's here's a stat for you when i was in school probably when you were in school there's nine planets remember that like we went all the way out to pluto right so like supposedly pluto's not a planet and now there's over a hundred planets well there's also other objects rotating the sun on a different axis that people are really interested in right there's several of them so are they planets or not yeah they got weird names they got like letters five six yeah they got like letters and numbers you're like a math guy and you're smart so you'll get a kick out of this the time when i knew i wasn't a math guy was the first time i walked in a classroom and there was letters and numbers on the board i said oh man you guys got me i'm done that's awesome

um all right what one question do you have for me um what is your biggest fear for the crypto ecosystem biggest fear biggest fear i'm gonna answer with two um one we're all wrong because i think that it's less to do with loss of capital uh less to do with uh technology impact or anything like that and it is uh it would be a major psychological shock possibly fatal to a lot of people in terms of like their careers right if they believed so heavily in a future and in a technology and in something occurring and it came out that they

were wrong because i think that there's a lot of people who are putting an inordinate amount of time energy resources etc into this and there is an element of uh kind of cultish religion you know that type of stuff like you like you believe along with working on something and if it came out that blockchain and crypto went to zero like completely was did not work which is you know again very very small possibility but but still possible um i think there would be an a really uh bad psychological impact on some of the smartest people in the world and so because they would question themselves the next time they got excited about something Yeah. It took a chance. Right. Yeah. Yeah. So, so I,

it's something that I think about a lot. Obviously I'm like really, really, really, really, really deep into this. And so if that happened, like I think I would spend some time like, what did I miss? Right. And I'm not saying like, Oh, you know, I believed in five projects and two didn't work that that happens in every industry. And I don't think that would be a big deal, but I'm saying if like blockchain and crypto, the whole thing didn't work. I do think there'd be a pretty bad psychological impact. So that's one.

two is uh you know i go back to the gandhi quote right first they ignore you then they laugh at you then they fight you and then you win uh i think there's a lot of ignoring going on i think now we're starting to see uh some i don't even think we're at fighting yet i think we're at the laughing stage still right like ah ha ha you idiots all bought this in 2017 and then it crashed 80 you guys are so dumb right like okay that's fine like i think we should expect that anytime an volatile um but the fighting could be worse than any of us imagine right so i think like the the two probably most controversial things that uh that i spend time on are like one there's a higher probability than most want to admit they're actually

underestimating everything so like bitcoin for example i actually put the percentage of much higher that it could become a global reserve currency not because i believe that it will. Right. But because I think that if we are going to over-rotate on underestimating or overestimating something like that, we're all probably underestimating it. Right. So that's one. And then two is on the fighting side, anything that you and I think of as something that incumbents, whether it's governments, large financial institutions, you know, et cetera, would do to fight a challenger the people in those positions probably think things that are 10 times worse right right and because we think of what would they do within the rules and i think

they think about things like we would change the rules or we wouldn't follow the rules no one would stop us well you that's what makes financial markets a little bit tricky right with all the central bank involvement it's these guys dream up things that you would never like look that's another reason why i like quantitative investing right like you look at it and you're like well in zero interest rate world and negative interest rate world there's eight trillion dollars worth of negative interest rate bearing bonds like someone's being paid to borrow you're giving them money to borrow from you like that's insane and so everything you learn in college in an economics textbook well at least when i went to college is largely irrelevant because that was

never a thing um so yes they can change the game they often do it often persists longer than you think and it has consequences that you can't really even conceive of which is why you know i would like to again i what's the easiest safety valve it's having the traditional players involved have guys that have something to lose that wield power that are involved in the asset class that's how you get a partner like you you find allegiances in the most unlikely places for i'd say to some of the crypto loyalists and and you really do need their their their power on your side there's a a very unique balance between um being innovative being new uh being disruptive and they need to be uh legitimized and to be uh validated yeah right and and those i think that

walk that line well end up being the most successful right because you want to be disruptive to a point right because what you don't want to do is you don't want to disrupt people so badly yeah it actually they turn and punch you in the face yeah you know all kinds of stuff right and so you want people to think it's their idea you want to gradually let it's like the boiling frog thing uh whether or not that's true you want them to gradually get involved you don't want them to just turn around and feel like they've lost something because that's when people are at their most elite in terms of performance against you yeah and and the way that i think about it too is like so you know take bitcoin for example uh let's say that they really really

got threatened right like really badly uh and banks and and governments etc and they started saying oh man this is pretty bad what if they just bought up a very large portion of uh the bitcoin supply and destroyed well by definition they can't buy up all of it so can't buy it all but let's say they destroyed and i'm talking it's almost nearly impossible for them to do this but let's say they bought up 60 70 percent of circulating supply and they destroyed it some would argue oh that just makes it more rare right and drastically reduces the uh kind of total available supply and so therefore price would increase even more drastically and you know all these things i i think that would be pretty hard to overcome the problem i have with that argument

is you're telling me that the government's going to spend money which by the way it does not have to prove that they have a serious competitive threat and more likely they're just going to say oh you can't use it anymore so so i'm not saying that they're gonna do this i'm just saying that on the spectrum of things that they could do in response to some of this people don't even think about well why don't they just buy and destroy it right they always think about will they ban it will they actually um you know cut off the traditional financial system from the crypto you know system there's all kinds of things that we're already seeing them try to do but the idea that they would actually be a non-rational economic actor in order to stop it

right i haven't heard that many people talk about so we actually have a precedent for something similar okay i'm going to stretch here all right a lot um but you know when gold was confiscated from people in the 30s right the u.s government basically said you have two options you either give us your gold or you face a monetary i think the penalty was like 10 grand and i think uh 10 years in prison i might be getting those numbers wrong some penalty there's a there's a prison penalty there was a monetary penalty um and you're going to give us your gold and then they turn around and devalued it the the u.s currency relative to gold by 50 so they stole 50 of your savings so i don't think they'd buy it like they actually you know they did buy it but it was pegged

at the time um i think they would just confiscate in some way yeah like imagine if the penalty was you know you go to jail if you use it well you're probably not going to especially it's bitcoin which is very trackable right yeah it's wild to think about yeah i mean we can oh man tweet tweet tweet me and I T oh wait, we can't tweet at a teat cause he's not on Twitter. No, I am technically. I don't talk about it. I follow you. Will you tell us what your Twitter account is? If I remember it. Yeah. I think it's like, I think it's at a T a or at a T. I don't know. All right. We're going to put it in the notes at the end.

We're going to find your Twitter account and we're going to expose it. So you, you get some followers and then you have to start responding to people. Oh, that'd be lovely. All right. Tweet all of your ideas at a T and we'll get it going. In all seriousness, if you ever want to talk about quant financing or any of that, like you should actually tweet at me. Cause I talked to everyone about that. I talked to students. I talked to, you know, a lot of different groups of people about it.

Awesome. Oh, it's okay. So apparently it's at a T. And if you could spell that extra point, we pack nicely. All right, man. Thank you so much for coming. This is awesome. Thanks for having me. Thank you. I appreciate it. All right. You reached the end of the podcast. Congratulations. I appreciate you listening all the way to the end. You deserve a trophy. But before I hand out the virtual trophies, remember to go visit BlockFi.com slash Pomp. They're the crypto lending leader in the US. They do it in 45 states, interest rates as low as 8%, and you can use the US dollars funded

directly to your bank account to do whatever you want. You should definitely go visit BlockFi.com slash Pomp. You know you want to do it, so just do it. BlockFi.com slash Pomp. Hey, everyone. Pop here. If you liked this episode of Off The Chain and want to help us take crypto to the top of the Apple, Spotify, and other podcast charts, please do us a favor and rate, review, and subscribe. To review, simply go to the Off The Chain homepage, scroll down until you see the five blank stars. Taking 15 seconds to fill those stars in and leave a quick review goes a long way in helping us take the entire crypto ecosystem to the top of the charts. I appreciate you listening and see you next time on Off The Chain.

Thank you.