The Wolf Of All Streets - Bitcoin is better than Gold with Ari Paul, CIO of BlockTower Capital

Episode Date: April 22, 2021

One of crypto’s most trusted voices of reason, Ari Paul, is gifted with the ability to stay neutral and logical while many others swing wildly between euphoria and depression. Although Paul remains optimistic towards Bitcoin, he understands that it fundamentally, and existentially, still has some growing to do as it morphs into the ultra-secure network many believe it will become. Furthermore, he knows that if grandma can't easily navigate and trust the system, it isn't truly ready for the masses. The truth isn't always easy to hear, but in this episode, Paul offers one of the most holistic and logical views regarding Bitcoin and the crypto space. Follow Ari Paul: https://twitter.com/AriDavidPaul In this episode, Melker and Paul discuss a range of topics including: The Coinbase listing breakdown Exposure to exchange tokens Bitcoin’s existential risk Billion-dollar slippage Bull market phenomena Trusting grandma with crypto Coordinated Bitcoin attacks Fragmented crypto liquidity Uniswap rug pulls The natural trend towards consolidation Ledgers in a safety deposit box ---- NEXO Try Nexo’s full-suite, instant crypto banking service, featuring: Savings accounts with up to 12% interest on crypto, stablecoins & fiat, Flexible crypto-backed credit lines at just 5.9% APR, An exchange with 75+ crypto and fiat pairs and best-price guarantee, All this and more wrapped up in a single Nexo Wallet. Start banking at https://thewolfofallstreets.link/nexo or download the app on Google Play or the App Store. ---- Legacy of Dead This episode was brought to you by Bitcasino. The worlds leading Bitcoin-led online casino and crypto-centric gaming destination. Wager your way into a world of opportunity, with the ultimate Fun, Fast and Fair crypto-casino experience. Deposit, wager, and withdraw in real-time with a host of top cryptocurrencies, including Bitcoin (BTC), Ethereum (ETH), LiteCoin (LTC), Tether (USDT), TRON (TRX), Ripple (XRP), and more! Use the promo link https://thewolfofallstreets.link/Bitcasino, to unlock your 200 FREE SPINS in the Legacy of Dead Promotion. –––– COSMOS Visit https://thewolfofallstreets.link/cosmos to learn about the Cosmos Hub and how the $ATOM can connect every blockchain. Cosmos is the port city connecting chains like Bitcoin and Ethereum to ensure your liquidity on any chain can be used anywhere. Find new staking opportunities, applications, or build your own parachain at cosmos.network. https://thewolfofallstreets.link/cosmos --- If you enjoyed this conversation, share it with your colleagues & friends, rate, review, and subscribe. This podcast is presented by Blockworks. For exclusive content and events that provide insights into the crypto and blockchain space, visit them at: https://www.blockworks.co ---- Join the Wolf Den newsletter: ►►https://www.getrevue.co/profile/TheWolfDen/members

What is up, everybody? I'm Scott Melker, and this is the Wolf of Wall Street's podcast. Ari Paul is a voice of reason in a sea of emotionally exuberant traders and investors in the crypto community. In a time where copying and pasting other people's ideas is very widespread, Ari's complex and creative analysis using real metrics has proven to be a huge help for millions of Twitter users and investors, definitely myself included. He has an extensive background in derivatives trading and institutional investing and is currently the chief investment officer of BlockTower Capital. So he's speaking from a place of authority. It's my goal today to have Ari elaborate on some of his most notable analysis and hot takes and

have him share what he's currently looking at as an investor and where he believes the market's headed. So Ari Paul, thank you so much for taking the time to come on the show. Thank you for having me. I appreciate the kind words, but very much still think of myself as a student of this incredibly fast changing industry. It can get very ugly the day that you don't, I think, in my experience, probably a responsible and reasonable approach. So once again, you are listening to the Wolf of Wall Street's podcast, which airs twice a week. I talk to your favorite personalities from the worlds of Bitcoin, finance, trading, art, music, sports, and politics. Anyone with a good story to tell. This podcast is powered by BlockWorks, the fastest growing media company in the digital asset space. You can visit blockworks.co for access to the highest quality information in the space. I promise you will not be disappointed. And for all things me,

you check out thewolfofallstreets.io. Now to get right into today's episode, we're finally seeing Bitcoin breaking out of the range that it's been in for forever, seemingly, which is a month. But in the crypto world, that's like 10 years, of course. And we're recording this, people won't know, but just in advance of the Coinbase direct listing. And I'm curious if you see any correlation there between the movement or if you believe that the Coinbase listing will have much effect on price for the market as a whole. I don't have strong opinions here. This is something we certainly, like my investment team, have been talking about this every day

and trying to kind of develop theses around it. There is at least some buying of Bitcoin that's been happening in anticipation that this will be a bullish event. So like a conversation we've been having is, well, does this listing actually produce immediate buying? So I think it is definitely a bullish kind of fundamentally bullish on a long-term horizon in the sense that it legitimizes the space. It's going to create some wealth for a bunch of Coinbase people and early investors that will probably eventually go back into crypto. It does produce publicity for the industry that the margin, I think, increases signups, more retail buying.

But most of those effects are not instantaneous. You know, and for example, like the investors who are in the VCs who own a good chunk of Coinbase, they don't get their cash right away, right? Even if H16Z liquidates their position, it takes a while for that cash to actually hit the bank account of the investors and for them to then buy Bitcoin. So the bearish argument, which I'm not really making, it's just a possibility, is if all these people have bought Bitcoin into the listing and anticipation is going to be bullish, but then the listing doesn't produce immediate bullish

follow through, does that cause a retracement, right? Do some of those levered longs then unwind? So that's one possibility. It's definitely going to be a patent valuation that comes out. People don't have a good idea where like basically we have early indications that largely come from prediction markets so uh poly markets prediction market that as of I think I last looked two days ago they were they were forecasting 75 billion valuation FTX has a market and and theirs was at like 120 million at the same time so very widespread even between two betting markets. So no one really knows when this thing's going to come out. If it comes out wildly above expectations at like $150 billion,

I think that will be bullish the whole space. If it comes out below $75, that's probably at least short-term marginally bearish, which is going to be disappointing. But both of those I actually don't think would be very very long term effects. Like if it comes out at 150, that's more of an indication of interest than it is a cause. And similarly, if Coinbase comes in at 70, that may just mean that there's more appetite for the assets than for the equity. So I wouldn't put a ton of weight on it, but as a short term trader, we'll certainly be focusing on it. Well, even when they reported their earnings recently, very, very well-timed about a week in advance of the direct listing, of course, even they alluded to the fact that they're largely, you know, tailing the price of Bitcoin and the bullishness of the space, not leading it, right? So it sort of alludes to what

you just said. I think that there's a lot of people who are sort of mistaking, you know, what can happen with Coinbase could largely affect price or not realizing that maybe what's happened with Bitcoin is why we're here today with Coinbase. Agree completely. Yeah, so that makes sense. And like you said, maybe as a trader, it's an exciting event. There could be some volatility and there could be that sort of buy the rumor, sell the news aspect to it.

But I think as an investor, it's going to be completely forgotten in a month. Agreed. There may be a bigger impact on some other assets. For example, exchange coins have done very well recently. Part of that's fundamental. Exchange is all their record signups. They're all have incredible volume, which generates cash flow fees and all that uh but also there's been a bit of a catch-up trade in exchange coins with the idea being well coinbase is valued at 120 billion why shouldn't finance or ftx or whatever be valued you know um so those points are probably more directly impacted in a more meaningful way by um right because like if you're an investor in ftx or finance coin or kobe you don't really know what that coin should be worth. So this is kind of a third party giving you a value associated with metrics. So probably more impact there, but

yeah, limited over. And DEX is similar, same story, right? So people are looking at Uniswap and saying, why is Uniswap valued at 100 billion? So I think you'll also see potentially DEX is more directly impacted by the valuation. Yeah, BNB is a unique case, I think, in itself as well, because they launched the DEX, even though we can argue whether it's decentralized or not till the cows come home. But they launched PancakeSwap, which is doing larger volume than Uniswap. And obviously, BNB behaves like Ethereum and gas. So I think that it makes a lot of sense, even standalone, why maybe Binance Coin has done so exceptionally well with that use case and the utility. But like you said, a lot of it is just catching up. So do you guys, I'm curious, are you guys exposed to

exchange coins? Is that something that you can discuss? I mean, what kind of assets are you looking at yourself? Yeah. So we're active traders. We go in and out of positions potentially very frequently. So I'm usually averse to talking about specific positions, partly just because it can be almost misleading. Like everything I say at this moment can be totally true. If your viewers see this in a week, like I might have totally changed my view.

I mean, the space changes so fast that an asset I like, maybe I'm right and it goes up 5x by the time people see this. Maybe I'm wrong and I changed my view, right? With that said, with that like disclaimer out of the way, at this moment, we have little to no exchange point exposure, but that's not a long-term thing. We were in them heavier. We participated in the catch-up trade as kind of, frankly, a consensus crypto fund manager trade. It worked well for us. We just recently took profits on it. That's not a bearish call on the coins. It's just no longer have a view at the moment.

Yeah. Even as a retail trader, I was buying BNB and I sold it at $600 because I wanted to sell it at $600. I don't really care. Right. Obviously, it's sort of a different mentality as a trader, clearly, than an investor. So you had a tweet that went exceptionally viral recently. I don't have it in front of me, but obviously the gist of that tweet was that the disproportionate upside in Bitcoin has somewhat eclipsed and that potentially it's not going to be the best and most obvious trade moving forward.

I agree with you. So it's something I would definitely love to hear your views on and hear you expound upon. As an investor in cryptocurrency, it's an amazing experience. For everyone who's in the industry or even watching it, we're watching an industry kind of grow up in front of our eyes and achieve a different level of maturity this is still a very young Mason industry in all regards but we've gone from like to use a VC analogy you know Bitcoin in 2014 let's say when I bought my first one felt to me like maybe a series that maybe investment in the sense that it wasn't even clear what the use like there was

debate within the bitcoin community about the use cases and the product market fit right is this going to replace is this competitive credit cards because there's no chargebacks is it a payment rail is it um and and everything else in crypto i do the seed stage uh what we've seen happen like when i was investing i basically didn't really have conviction in crypto until 2016. I had been buying earlier, but I didn't really believe. It was more like, oh, this is a trade in my portfolio. In 2016, I really found conviction. And the framing of my conviction was not that Bitcoin specifically will take over the world or Ethereum. There's a clear value proposition here. DeFi and NFTs and digital store value will take over the world.

Maybe it'll be the assets in front of me. But I very much viewed it as a VC bet with 100 to 1 asymmetric outside. It was like, so my view in 2016 was Bitcoin was 50-50 to die in 10 years. And that still makes it the best investment I've ever seen. Because if it dies, OK, I get a zero. If it wins, I get 100x plus. That's an amazing investment, right? So where we are today is it has been de, I get a zero. If it wins, I get 100x plus. That's an amazing investment, right? So where we are today is it has been de-risked a bit, but in my view, not that much in the sense that I kind of took for granted that we'd see what we've seen, which is I was pretty confident

we were already on the path to institutional adoption, that as long as nothing went wrong, this would kind of unfold the way we've seen. And the existential risks are unchanged in my view, which is that proof of work consensus proves fundamentally broken in the face of much more sophisticated attacks. That's probably the number one, frankly. I'm not predicting that. I'm just saying that's the biggest risk in my view of existential risk. So today, maybe I'd say Bitcoin is 30% to die in the next decade. Not that big of a change from 2016. So the difference is really on the upside, which is, you know, in 2016, when Bitcoin was a thousand

bucks, my view was it doesn't need to win to get to a hundred thousand. It just needs to get to kind of where it is today. It just needs to get more adoption, more people thinking it could win, just, just kind of more people discovering it and it gets 100x. Well, now we're not there yet, but we're nearing a point where it actually has to win. It actually has to work at scale. It actually has to solve the problems that currently face it that make it more usable. So for example, like we need layer twos on Bitcoin that work and Lightning isn't quite there yet today. And by work, I don't mean that it doesn't literally work. I mean, there works at scale with reliability, where it's actually a solution for Bitcoin's kind of limited scalability.

Or it might be lightning, it might be one of the other, there's many, many projects that are now working on building out Bitcoin functionality and scale and all that. So, you know, what's the upside today? You have people like Michael Saylor and, of course, many of the Bitcoin OGs who think it could be global money. It could have a hundred trillion dollar market cap in 20, 30 years. My view on that hasn't changed since 2016, which is maybe I'm skeptical. I'm not saying it can't happen, but that's not a bet I would make in a binary sense. To me, the odds of that are less than 50-50. So at the moment, I think we likely have another 10x ahead of us at some point in the

next 5-10 years. And that would be kind of reaching gold. At this point, it would be a bit more than gold. And Bitcoin isn't gold, it's a better gold. It's a better store of value. I think it takes a bit of the market share off for banking. But if you think the upside is, call it 10-20x, that's just a very different value proposition than thinking it's a hundred X to a thousand X. Yeah. And I saw the comments and people took it as bearishness, but it's when you explain it obvious like that and say, listen, I'm saying it's a 20 and not a hundred. That's not bearishness. It's being reasonable. But to what you said, you talked about obviously the issues we all know that exist with scaling and layer twos.

What if none of that is ever solved and it just remains the better gold? Because gold is also not portable, right? So if we're just talking about the digital gold argument and the store of value, what if people just take it off exchanges and hide it away somewhere and just continue to hold it. And there's minimal supply and there continues to be demand. Is that enough? It's not. So that's interesting framing. I think so.

The technological problems are all clearly solvable. So in a literal cryptography and engineering sense. So we now have interoperability. Like you can now take you can do atomic swaps, for example, where you can effectively transfer Bitcoin onto Ethereum chain and vice versa. So everything is fundamentally solvable. They might be hard problems that take five to 10 years of engineering work and UX work to make it usable, but it is solvable. I guess there's two. One is that developers in the community are so slow at solving these problems that something eventually comes along and eats Bitcoin's lunch. So that's one risk. I actually don't view that as terribly high because demand for Bitcoin is so high today. There's so much institutional buy-in that there's so much tension on solving these problems today, which you didn't have a few years ago.

There was no financing for it, no funding. So there's that. I think the bigger risk is that the problems are solved in a short-term way that creates existential kind of collapse risks that creates kind of, you think like very, very similar to financial markets that solve risk transfer with like CDOs, and then actually create a scenario where you just have a massive blow up of the whole system. So for example, if let's say, let's say we use lightning to scale and in four years, you know, banks are sending billions of dollars back and forth on lightning and lightning is, and let's say a background of the Bitcoin security model, let's say a meaningful percentage of minor revenues come from lightning indirectly settling on Bitcoin fees. This is a very far fetched example off the cuff. So, but you know, basically a part of the whole Bitcoin ecosystem, including its security model, comes to depend on a Layer 2 scaling solution, and that Layer 2 scaling solution fails, well, it doesn't kill Bitcoin, but it could functionally somewhat similar to like…

I think in 2008, if the Fed hadn't stepped in, we would have had global depression. If not for kind of crazy intervention, we would have had kind of the unraveling of everything. And it's not that banks would cease to exist fundamentally. Probably every existing bank would be bankrupt. So it's not necessarily that Bitcoin literally dies, but it could functionally, where then you have a 10-year crypto depression where people don't trust anything. And that does create the room for a new incumbent to come in with kind of a blank slate. Or not a new incumbent, sorry, a new talent to come in. Yeah, I mean, I don't think that's so far-fetched. I think that makes perfect sense. But it's interesting, you kind of pointed to the structural risk as the biggest risk in your mind when you, you know, it was 50%, now it's 30%, some kind of

sophisticated attack. That's actually not what people talk about these days. They almost have, they say Bitcoin is the most secure network. That's it. And it seems like everyone else has sort of disregarded any security issues, at least from what I see in these interviews that I do. And now everyone's sort of moved on to the regulatory risk and the governments and those things. So it's really interesting to hear you talk about, you know, there being that structural risk or an attack, because it seems like most people have put that in the rear view and view Bitcoin as fundamentally secure. It's actually very frustrating to me in that it's almost taboo in the sense that basically the people who have any understanding or have done any work on Bitcoin

game theory and proof of work consensus, and it touches on some of it is pure kind of game theory, but some of it touches on engineering issues. So like the whole big block, small block debate, one element of it was, does it encourage minor consolidation centralization, having bigger blocks? And that's a very detailed engineering question of around network latency. So you have, so some of this involves multiple fields. Some of it is kind of a pure game theory question. There's very few people who've spent real time on this and have kind of the acumen or, or, or just metal models to, to evaluate it.

I actually don't think you need formal game theory training or high level math you need, but you do need to have some framework for thinking about it. The people who can basically refuse to, and I've been personally frustrated with this, trying to engage with them, where I basically say, guys, tell me why I'm wrong. Like, tell me what I'm not understanding here. And they can't. It's not that they, like, have the answers.

It's more that it's obviously very, very unattractive, not just financially. Right. If you have giant Bitcoin backholders and ecosystem players who are hugely bought in, they have every incentive for people to just treat this as fully secure. And then the other side though, is psychological comfort. If you have all of your net worth in Bitcoin or in the crypto ecosystem, you want to like, it's so uncomfortable to have this idea that this whole thing could actually

be built on kind of a faulty premise. So people don't want to talk about it. Yeah. I could take that a step further and say, even if you're not overexposed, there's reputational risk that people carry. And in my opinion, viewing this market and the way how strong the tribalism is and the way that maximalists react to any attack, even if it's reasonable, as you said, to me, it seems more like they're more worried about their reputation or being wrong than they would actually be about the asset failing. Totally agree. Although what's strange to me, frankly, was a surprise was even in private. So I get why in public the Bitcoin influencers have to say,

this is sound money, it's secure money, blah, blah, blah. But even in private, there seems to be, I don't know if it's a lack of intellectual curiosity or just they want to avoid the cognitive dissonance, but they don't even disagree. So I'll walk through the biggest concern that I have briefly. So all of the early discussion of proof of work, Satoshi was a very, very thoughtful person of persons. And there were early, early debates about the game theory and skepticism and criticism. But none of the early discussions incorporated one key thing which is the ability to short sell so if you think about the way satoshi initially pitched proof of work the idea was that the thing that secures bitcoin is real-time electricity cost it's that

miners have skin in the game because they're paying for electricity that never made any sense because some cost doesn't doesn't secure future value and electricity is repurposable. So if I have to spend four hours of electricity to attack the Bitcoin network for four hours, that is very, very little of a security. The real thing securing Bitcoin for most of its history is some cost of hardware. So miners today probably own roughly call it $12 billion worth of basic mining equipment that is not repurposable. That's a economic cost and value that cannot be used for anything else. And so the owners of that equipment are only incentivized to attack Bitcoin if they can make more than $12 billion. I'm oversimplifying a little bit, but this is kind of directionally

right. And so there's two issues. One is, can you make enough money attacking Bitcoin and make back your hardware costs? And two is, can you coordinate? Right. So there is a hard coordination problem here. What none of the, everyone who's ever done real work on the math, at least within the Bitcoin community, not like academic kind of financial types, they neglect that you can short sell in size. And because you couldn't, right?

So in 2010, you couldn't short sell 10% of Bitcoin's market cap. Today, that still keeps Bitcoin somewhat safe. So you cannot establish $100 billion short Bitcoin position today, functionally. We trade Dorotas every day and we have pretty good insight into kind of like what you can actually do in the market. And like you can easily establish a $10 billion short today, $20 billion gets hard, $30 billion would be harder, and it kind of scales up exponentially, getting harder and harder to find ways to kind of get that marginal short on. But as this industry becomes more mature, that's going to start looking more and more traditional.

It's routine in the equity and commodity world that people can short sell 50% of the entire market cap of an asset. With a mix of of spot shorting derivatives, whether it's something like CBS or options or swaps, right? All sorts of comments someone made to me today was now that Coinbase is going to be publicly listed, puts on Coinbase or a proxy for puts on Bitcoin, and it just gives you another avenue to monetize and attack on the Bitcoin network. That's not a huge one. If Coinbase listed

100 billion, maybe you can establish a $20 billion short on it within a couple of years. So it doesn't, you know, we're not there yet. I actually think most of the game theory attacks I've come up with would work on Bitcoin today, but they're getting very close, scarily closer. They're within an order of magnitude today. So my concern would be, well, okay, two versions of this. There's the economic actor and the state actor. The hard version, much, much, much less likely this happens, is that, say, a giant hedge fund with $200 billion says, here's our three-year plan. We're going to construct ASIC factories. We're going to buy up existing ones.

We're going to buy enough manufacturing capacity that over three years we can build 51% of ASIC hash power. We're then going to establish a massive Bitcoin short position, and then we're going to mine empty blocks. And what the Bitcoin community says is we'd fork them off the network. This conversation gets very detailed. I'll try to keep this really concise, but it turns into a subtle conversation about how valuable is Bitcoin if Bitcoin has to continually change its proof of work. If you have to fork off the network, then the security isn't there. Right.

And as soon as you fork once, the security of the network is now extremely low and the cost of attack is extremely low. So then you have to fork again in two months on the next attack and again. So it's a basically it introduces a world where Bitcoin is constantly forking off attackers. And how viable is that? How would that work? So that's if it's a economic actor, it's a heavy lift. It's probably a multi-year plan. But if it's a state attacker, it's free. So all China has to do to get 51 percent hash power is you go to every mining farm today with a gun, use bribery, coercion, or hacking.

And the hacking part is real too. So a few years ago, Bitmain had backdoors in some of their ASICs. Basically, all Bitcoin ASICs are manufactured in two factories today. How hard would it be for a state to have two operatives in those factories and ensure that there's a backdoor in there? And the backdoors are not catchable. The Bitmain backdoors found six months after the fact by luck. So these are not really catchable in real time. So the point is, there's a lot of attack vectors where a state could coerce hacker bribe to get existing hash power. Another scenario is that in the next bear market, when price, from whatever level, price would decline at least, say, 40%. What that means is most hash power on the network becomes uneconomic. It's then sold OTC at fire sale prices. So basically after a Bitcoin crash, buying up 51% of hash power becomes fairly easy because purely economic miners has zero value for

it. But if you're willing to mine at a loss because you're going to make a hundred billion dollars on a short, that hash power is very valuable to you. So it becomes easy to acquire lots and lots of hash power, basically at a massive discount. So interesting. Yeah. Taking advantage of miner capitulation in that scenario. And you laid out a first scenario where basically the loose math was you have to be able to make $12 billion because that's the cost of ASICs and miners. Well, as price continues to rise, if that number does not rise as dramatically, that becomes easier and easier at scale, right? Because this becomes a $5 trillion market cap or $10 trillion market cap, but that equipment goes from 12 to 15. I don't know what the scaling is, 12 to 20. Yeah. We'll see. How fast does the mining equipment scale with the price? And that's

a complex, there's an engineering element to that question. To be clear, I'm not predicting that this will happen. I view it as it's a very, very clear incentivized attack vector. We know there's people around the world who want to make money. We know there's states that don't like that impose capital controls and go aggressively after things that undermine state sovereignty and state money printing. Most countries around the world for counterfeiting is punishable by death, because that's how much states care about their ability to control their money supply and to have seniority rights. So the point I'm making here is just there are known, clear, relatively simple attack vectors that appear to be incentivized that I have yet, I cannot find or think of clear answers as to why they're unlikely to happen. So not claiming it will happen. I wish people smarter than me would seriously engage on this because it might be that Bitcoiners can, it might be that there's steps we can take to proactively prevent this. Sure. It seems like you would naturally want to protect it as much as

possible by thinking about the downside as well. But that's really interesting because, you know, even if they don't take it by force, you know, if the Chinese don't show up with guns at every minor and take them over, there's also regulatory paths where, you know, they can do effectively some of the same things. I don't think they can attack or take over the network, but they can sort of make it very unattractive, as you sort of pointed to earlier. Peter Thiel just made the comment that was taken wildly out of context that, you know, China could weaponize Bitcoin. Not what he was saying, if you read the entire thing. But I mean, do you believe that regulation is still a huge threat? Not for Bitcoin in the Western world.

I'm very curious to see what happens. My thesis on China for literally like 10 years was they would roll out central digital currency and then ban everything else, including gold, fiat, paper money. Because once a country has the ability to have complete control and transparency over its monetary supply at the individual level, that's so much power. Why would you allow people to have tools to circumvent that? Right. And if you're a surveillance state and a totalitarian state like China is, I mean, the answer might be because you have a constitution. That's why you're not going to prevent it. Right. But for China, you know, so my assumption and I have no special insight here. I'm not claiming this will happen, but my assumption is that within five years, China will ban Bitcoin, or at least they will ban using it outside of extremely tightly controlled

and regulated channels. The only reason I think they wouldn't do that is if Bitcoin just isn't relevant. So if Bitcoin isn't a meaningful source of capital flight for Chinese people out of China, if Bitcoin isn't being used to fund Hong Kong dissident groups, if it's not being used to undermine state sovereignty, China might just not care. It's kind of like in the US, there's a lot of psychedelic drugs that are not illegal. And they're not illegal because they just never caused a problem that would get legislators to think about them. If no one ever dies or commits a crime on some drug no one's ever heard of, you just don't bother making

it illegal, right? So laws generally arise in response to problems that the state faces, or hopefully that their citizens face. So we'll see. We'll see. I'm very curious. I expect a good chunk of the world to ban Bitcoin at some point in the next 10 years, if Bitcoin is successful. Right. Kind of a catch 22. The better it does. Well, I don't think the bans will kill it. So, I mean, if let's say, you know, the country's closest to banning Bitcoin, major countries are India and China today. If India and China ban Bitcoin, that doesn't kill it. It causes potentially a temporary price decline, maybe a sharp one. But I actually don't view that as an existential risk to Bitcoin. And at this moment, it looks almost impossible for the

US to ban Bitcoin in the foreseeable future. So not only would it require legislation, that legislation is probably unconstitutional. It's not even clear if the US government can legally ban Bitcoin. Coin Center, who are a great legal team that do crypto lobbying, they've made a bunch of arguments that basically the US government can't. And these are like sober, sensible arguments. At the very least, if Congress passed a law banning Bitcoin, it would get tested in the Supreme Court at a minimum. And under current legal theories, it seems unlikely that they could find a way to actually ban it. What they can do that's painful is just increase AML-KYC type rules, increase…

Make it impossible to- They can make it unpleasant and painful to run a crypto company, but as an individual, you're unlikely to care about that. As an analogy, we can use drugs again. You didn't have marijuana companies 20 years ago because you couldn't operate one legally, but plenty of people smoked pot. It? It kind of did as an individual, it mostly didn't matter that it was illegal. I say this as a privileged white guy, so I know there's a big distinction.

There are plenty of people in jails for marijuana consumption, so I don't want to dismiss that, but there is this distinction between individuals doing illegal things every day and no one cares and one bats an eye. It's regulated companies that actually have the most legal paywalls. Guys, it's time to wake up and go earn some money.

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upcoming tournaments using my personal URL, thewolfofallstreets.link slash BitCasino for a special incentive. Feel the force with BitCasino and the Tesla promo. Guys, this is so cool. For the first time in history, rather than a company or project sponsoring the podcast and newsletter, a grassroots community is doing it. The Cosmos community is extremely passionate and active. And because of that, cool things like this sponsorship can happen. Their Atom token has been absolutely on fire and solidified itself as a top 50 coin by market cap. And the Cosmos platform has so much in store. Now, if you don't know about them, Cosmos is effectively the port city connecting chains like Bitcoin and Ethereum to ensure your liquidity on any chain can be used anywhere. One of the things I'm most excited about is their new DEX,

which is coming out, which will connect to any blockchain. So you can swap ETH, ERC20, BSC, or any other token with Atom Plus. This DEX will have order books just like any centralized exchange. So it'll feel familiar trading just like you do anywhere that you've traded before. This is a first. It's never existed until now. You need to absolutely check them out at the wolfofallstreets.link slash Cosmos, C-O-S-M-O-S, and see everything they have going on. If it is quote unquote banned or they make it difficult or they effectively ban the on and off ramps, which is really what we're talking about, or make it extremely difficult, then you come back to actually needing to be able to use it at scale, right? So you say that they can't ban a user, but what good is my Bitcoin if I can't get it to dollars and nobody accepts it, for example?

Totally. So I think we may at this point already be past that point in the crypto ecosystem. So we now have DEXs. Something that is a little bit lacking today is the ability to trade Bitcoin on DEXs. Right. Most of the DEXs are Ethereum based or Binance Smart Chain based. That problem is being I think it's close enough to solve that we're probably past the point of no return. There's already wrapped Bitcoin on Ethereum, of course. The solutions there are all perfect. They're either trusting, they either use a trusted third party company that's like a regulated custodian, or they use game theory and engineering that is a bit

untested at this stage. But if in, you know, I think it's very likely that in a year or two, we're going to have trusted solutions to atomic swap Bitcoin onto Ethereum and access DEXs. And then even if every company can offer fiat on ramps and on ramps, we're probably at a point there where there's enough economic value in that ecosystem. And you're going to have some countries that haven't banned it, that there's still value there and you can still use Bitcoin, maybe not as a day-to-day payment rail, but as a store of value. I mean, as an analogy, Swiss banks are hard to use, right? It used to be you had to fly to Switzerland. Now you can do things remotely, but there's still, there's this friction, but there's still $30 trillion in there,

you know? So the state can impose friction. And in the earliest days of Bitcoin, that friction might've killed it. It might've just failed to get network effects because the UX was so bad. I think we're past that point. Yeah. I mean, it's also my opinion. I don't know how it works at that level, but the Michael Saylors and Elon Musks of the world, I feel like they make a phone call before they start exposing their company to Bitcoin. They've probably got a guy or some access to some information that would lead them to believe

that there's no immediate risk that the asset that they're publicly gaining exposure to is going to be banned? Well, certainly, and we're pretty in the leads on this. Like when the stuff was happening last December with Mnuchin, we were daily having conversations with regulators and kind of insiders and trying to understand. And I can't say we did anything to shape the policy, but we were talking to the people who were. I mean, a lot of the kind of more, I don't want to name names because I don't know what they would want me to say. But, you know, some of the giant Bitcoin holders who come from traditional finance, these traditional finance billionaires who also have a billion dollars in Bitcoin, they were personally talking to Mnuchin and Treasury Department officials and trying to steer them towards the best possible regulation. So I feel like I can say with a good deal of authority

that there's currently no discussion of anything that comes close to a crypto ban. The opposite, the SEC is now run by Gensler who taught blockchain at, I believe it was what, MIT. MIT. He's unambiguously pro crypto. I mean, and Dempster may end up being viewed as a villain in our industry because he does believe in enforcing existing security laws. And so he may go after DeFi and go after a lot of ICO type projects. But it's not about banning

crypto, just about enforcing the laws around how you're allowed to sell crypto to other people. It's enforcing laws like that. It's not banning the assets and saying, hey, if you want to sell this asset, you have to follow applicable laws. Same with FinCEN, same with the Treasury Department. They have no desire currently to ban cryptocurrency at all. It's all about applying existing AML KYC type infrastructure to prevent crypto from being used to finance terrorism, that kind of thing. So this is not a concern imminently. But, you know, who knows what could happen over four, six, eight, 10 years with different

people running the government, with different regulators, with a different social atmosphere. Sure. At some point, I assume we're going to get a major populist pushback on crypto wealth where, you know, we had in 2017, you'd like the New York Times article, like Bitcoin grows, everyone's getting hilariously rich and you're not. And now we're seeing with the environmental stuff, there's a little bit of a populist backlash against crypto as a whole as being very environmentally unfriendly that ties into social inequality and wealth inequality. I think that's going to get much worse. There's no easier target in the world than the crypto rich

in terms of people you want to hate. Right. It's a large it's frankly a lot of mostly young white guys who got rich very, very quickly, most of whom I'll call it unearned. Meaning you have some entrepreneurs who literally built a protocol right for them. The vast majority of people who got rich on Bitcoin and Ethereum basically clicked a button and then just were smart enough to not click the sell button for a long time. And the idea that 10 of those people should be among the 20 wealthiest people in the world is going to create some pushback, right? I'm not saying it should, I'm just saying I think it will. And that could eventually lead to more adverse loss. Yeah. I mean, I think that that's a reasonable way to view it. What's interesting is that you said that there's these billionaires who we know are billionaires, but we don't know, let's say, that they're actually billionaires in crypto. And we've seen sort of a lot of little light waves of hearing about it underneath the surface, I think, and it's bubbling. And a lot of my friends on Wall Street are now starting to talk about it. And I've found them, they're like, yeah, my, you know, like a guy at a hedge fund is like, yeah, my boss just told me he bought crypto in 2014. And I've never heard him mention Bitcoin ever, you know. So do you think that there is a

somewhat massive exposure to the asset already that we're just not hearing about? Because obviously it's not a public company or someone who has to report it? Yeah. It's very hard to guess how it's kind of interesting. It's very hard to guess how much wealth someone has if they made it in crypto, because you have a bunch of Bitcoin OGs who maybe at one point had 5,000 Bitcoin, but let's say they sold half every time at 2x. Well, by the time it got to $100, they didn't have much left. By the time it got to $1,000, they had one Bitcoin left, you know?

So there's a lot, there's some Bitcoin core developers that people think have almost no Bitcoin because they were just selling on the way up. And then you have other people who, you know, just put $10,000 into Bitcoin in 2010 and haven't touched it and now have, I can't do the math on that in my head, but now have $2 billion of Bitcoin, you know, and they haven't been involved, they're not public, they've never written a line of code in their life. They just put 10K in and haven't touched it, you know? So it's so hard to tell, you know, and the volatility in the space, the timing, if you, you know, I mean, just in the last three years if you sold 19k bought 3k and hold today and held to today meaning if you time the 2017 top or bottom um you have one result and if

you did the opposite even if you were a believer in a holder but you just mistraded it you end up with like 10 of the wealth today right so even if you were in at the same time bought at the same time your trading is a little bit different you end up with 10 of the wealth of the other person so incredibly i mean month to month, like when I talk to other crypto fund managers and we talk about returns and results, it's incredibly hard to anticipate what another crypto trader or investor

earned in the last month, even if I knew their positions at the start of the month. Because sizing matters, right? Like if I and another investor both liked mobile coin a month ago, but I sized it at 5% of AUM and they sized it at 50%, well, the asset was up 7x in a month. That leads to such a wildly different ending wealth outcome. Yeah, that makes perfect sense.

I'm just curious how many of these guys that have never talked about it who are public figures and are billionaires are actually exposed. And I think we'll start to hear about it more, I would imagine. Yeah. So I'm curious, we talked a lot about network risk. And I know that you've talked about in the past, the general issues of security. I'm wondering, I guess you as a fund manager, but also as an individual in the crypto space, how much do you think we've solved the problems of personal security when it comes to crypto? I always argued certainly in like 2017, that was the biggest barrier to entry. Your average person doesn't want to be their own bank. And certainly an institution doesn't want to have their Bitcoin in a ledger, right? They needed custodial solutions, things like that. How far do you think we are along that path to where

this becomes an asset and you don't wake up every morning going to check and make sure that you still have it? Yeah, we've made great strides, but it's still a long way to go. So on the institutional side, Coinbase has been getting checks from people like MicroStrategy on their custody suite. You've got Anchor Labs, Fidelity that are regulated trusted custodians um that's obviously my i'm a big belief that this is less of a technological problem and more of a social perception one which is how do you get comfortable trusting anchor labs or coinbase as a custodian so i can tell you like i did hundreds of hours of work underwriting custodians

for where we want to custody our assets we caught their paper with anchor labs on the technology behind it and i felt like i had an amateurish understanding in terms of actually being able to underwrite the cryptography the hardware of software and social engineering you know their tech microstrategy didn't do that tesla didn't do that that level of and i'm saying i didn't do enough right um so the reality is we gain trust in technology just over time empirically we We don't question, we don't evaluate the trustworthiness of a car by evaluating the internal combustion engine and like grilling the engineers. We just kind of trust it works.

So we're close on that. I think we can say that's done once like State Street offers crypto custody, which they'll probably do by like acquiring Anchor Labs or something like that. And it's not about tech improvement. It's just about adding that brand right and maybe some trustworthiness insurance on that on the individual side in some ways it's harder so um i've been disappointed to me the personal storage solutions have not really changed much since 2017. you're still looking at like wallets, which are mediocre. I've used many of the popular hardware wallets.

They break constantly. If you initialize four ledgers and you keep them in a bag that's airtight, watertight, two years later, odds are two of them have malfunctioned. Now that doesn't mean you lose your money if you back up your seed, but then how do you back up your seed securely? So you can maybe put it in a safety deposit box, but then you're trusting a bank with all your money and not just the bank. You're trusting every bank employee, right? Anyone who opens that safety deposit box has access to all your money.

So and then you can come up with creative solutions, but there's nothing that's like a standard, simple tell grandma to do this and she doesn't have to worry that her life savings are safe. So I don't, yeah, I think it's actually still a pretty big problem that is more a UX problem than anything else. The technological primitives are all there. It's assembling them in operationally easy and user-friendly ways. Then clearly there's a philosophical problem as well, because if you're a hardcore Bitcoiner, the whole thing obviously is short the bankers, long Bitcoin, be your own bank, all of those sort of memes that we hear. But your average person wants nothing to do with that. And if we want the space to grow and you want mainstream adoption, effectively, you have to want banks to custody individuals' crypto. At least for now. Eventually, we may have trusted decentralized solutions that

look and feel like a bank app that we may get there. We're not there yet. I mean, yeah, at the individual level, individuals just custody with Coinbase or Binance or their exchange of choice and are happy with that. I mean, Coinbase, I don't know the latest numbers, but they have something like $140 billion. And no, I'm not exactly right on that but somewhere in that vicinity just i mean 140 billion dollars of crypto is sitting at coinbase so clearly users trust coinbase more than they trust themselves and that is a systemic risk that is a problem for any proof of state network like if therian transitions to proof of stake um it's a real problem if a huge percentage of all eth is owned by one or two or three exchanges.

Those exchanges then control the network. So, you know, and there are ways to work around that at the protocol level. But no, I agree. These are still hard problems that still need a lot of improvement. Yeah. And that 140 or whatever number it is, billion that's sitting on Coinbase, a lot of those people have SMS text authentication on their account and get SIM swapped and it disappears anyway. So regardless of what Coinbase does or how secure

it is, people don't know to take the basic minimum steps. So to me, you still have this problem where you're your own greatest point of weakness for security. Yeah. And you can't really take full responsibility for that in the sense that are we going to ask every individual to evaluate the ledger hardware to literally, like I'll tell you something that I do every time I receive a hardware wallet is I literally open it up and I compare the chip that I see to the chip schematic provided by the manufacturer. Well, that's not foolproof at all. All it does is prevent very simple man in the middle attacks, but that's already crazy, right? Are you really going to ask like grandma to be looking at chip schematics? And that doesn't even solve the problem.

Or ask her not to buy it on Amazon where she's used to buying things where it you're trusting a third party, period, because you're trusting the ledger company is manufacturing trustworthy hardware, or you're trusting the software where, you know, like how many people are actually can evaluate the cryptography behind anything, right? You can't. So you're trusting a kind of general consensus that the cryptography actually keeps your money secure, the hardware, the software, or whatever keeps your money secure. And that functionally works.

Over time, we build up this web of trust where we have trusted experts, we have trusted brands. And where it leads to problems, where it breaks, is when you end up with extremely concentrated systematic risk that blows up. So Coinbase is a problem because so much money has been entrusted to them. And I'm not saying it's a mistake. It's just if something ever goes wrong with Coinbase, that will break proof of stake protocols. They'll simply break, right? Because a single thief will now control the network.

And even for proof of work protocols, it'll be a fundamental problem. So I think this is like an existential challenge for humanity. We face this whenever we talk about too big to fail in finance right like so if this was the debate in 2008 it was the core problem here is we had a few financial institutions that were too big to fail should we fight to have many more smaller financial institutions but then there's the argument that competitive forces drive consolidation and if u.s banks are small and foreign banks are large u.s banks are just going to lose because there's economies of scale so there's this natural trend towards consolidation over economies of scale and beneficial ones too. Do we want to ask grandma to evaluate 50 different

hardware manufacturers or do we want to be able to say there's two trusted brands in the industry? Just trust the trusted brands. So to me, this is not a perfectly solvable problem. We'll just iterate our way towards a workable solution. It's interesting. I'm curious your position on DeFi. So there's a lot of people who are obviously maximalists about it and say it will replace the current financial system. I personally don't believe that at all. I believe more that it can be a parallel system that offers a small percentage of the population another option or an opt- out. What are your thoughts on DeFi moving into the future? I mean, we know that it's immature now, but do you think that it can get to a point where

it becomes a legitimate contender to legacy financial systems? Yes, I think so. Legacy Financial offers a lot of different services. Some of those are more at risk than others. So like I think one of the lowest hanging fruit for DeFi to basically not fully replace, but to take massive market share or exchanges. And that's what the market's pricing. So if Coinbase listed 100 billion, it would be more valuable than NASDAQ and the two largest

exchanges combined. It'll be more valuable than NYSE and CME and Philadelphia exchange combined. Exchanges, and I think that's Coinbase, but I think there's no reason why DEXs won't eat the majority of exchange market share over the next 20 years. I think they are an order of magnitude improvement along multiple axes. The idea that you can have 24-7 instantly settled trading, total transparency, lower fees and lower costs, and no geographic. A really weird thing about the securities markets is they're effectively geographically isolated from one another. If the same stock is listed in China and the U.S., you actually can't arbitrage it. In the U.S., we trade Chinese ADRs.

It's not even cases where the same exact security will trade in the U.K. and the U. US, and you need to be basically a prime broker to be able to actually arbitrage. So there's just huge improvements from the DEX model. And we're going to have tons of iteration on that. I'm not saying the existing DEXs are perfect, but there's so much experimentation on different market making models and things like that. So I think it's very plausible that in 20 years, 80% of all exchange volume will be on DEXs. Not 100% because

centralized players will find ways to carve out niches for themselves like curation. For example, Hayden, the founder of Uniswap, posted something like, Nisei offers whatever it is, like 5,000 stocks. Uniswap offers 36,000 trading pairs after three years of operation. And I responded, and I don't mean that this is a criticism at all. He's done amazing work. Uniswap's great. He's a smart guy. It's not a criticism, but I responded that the NYSE's value proposition is curation. It's always been possible to list more easily and cheaply elsewhere. The NYSE, that's not a bug. That's a feature, right? The whole idea of NYSE is we are a stamp of approval.

We do diligence on any company that lists with us. You can invest with confidence. Any company with us, sure, it might lose money, it might fail, but we've at least done some level of screening to weed out the frauds. Uniswap doesn't, right? People get rug pulled on Uniswap every day. People fall for explicit scams on Uniswap every day. So there's always going to be demand for curation and and there'll always be demand for

centralized curation to some degree um other services are very different so what's a good one that is much more centralized um you know deal making like investment banking um you know we may someday see some of that happen in things like DAOs, but you're never going to fully replace an entrepreneur and an investor meeting over dinner, forming a relationship, a strategic partnership, sharing ideas. And, you know, that's never fully automated. There's fundamental value in the human relationships. So like investment banking, I would say would be one of the later things to get disrupted. I mean, the most basic level, though, the very fact that you can earn yield in DeFi and you can't in your bank, I think, is the greatest value proposition, personally. It is, although banks can offer that. So actually, I don't view that as a differentiator because banks are looking at this and Coinbase is looking at this where you put your money on Coinbase and then Coinbase will get the yield for you.

So they already do this, right? If you have USD dollars as USDC on Coinbase, they pay you a yield. And I actually don't know what Coinbase is doing on the back end, but easy to imagine a centralized institution offering customers yield on deposits when that institution is then on the back end, DeFi yield farming. So it's not there. It's just the U.S. Would I as an individual prefer yield through that centralized intermediary or via something like urine finance, which is basically a decentralized hedge fund? Right. It's kind of like like a framing is like we're an investment firm that aims to do strategies. There's now decentralized strategies that we're competing

with. Right. And I actually think this is going to be direct competition. I think to some degree, some types of hedge funds are going to be directly competing with DAOs and with projects like your finance and already are. But that scope of that competition is going to grow, but it never ends completely. So similar to how passive market vehicles like you can now get exposure to some quantitative strategies in exchange-traded notes, commoditized. You can get option sell up yield strategies that are basically selling out of the money options every month in an ETM now, basically paying just a management fee. That used to be a two and 20 hedge fund strategy. So the same is going to happen in crypto, but there's always that next frontier requires active management, ongoing involvement, and that you're going to be betting on a team

to execute for you. Whether that team is using a hedge fund structure or a DAO structure, you're going to care that you know the team that's allocating your money for you. That makes sense. I was speaking more for just your average person who says, my Bank of America bank account is giving me nothing, and I can go on Voyager, BlockFi, Celsius, Nexo, you name them, and get 9%. They don't obviously understand the risk. Worth noting, though, those yields are not sustainable. So there's two sources of yield in DeFi, neither are sustainable. One is inflationary rewards, right? Where a project is minting new tokens and airdropping it. And the other is basically there's massive,

people today are paying 20% borrowing US dollars in a crypto ecosystem. And they're doing that because they can take that money and arbitrage perpetual futures and the futures curve. And that arbitrage is there because speculators are so bullish on crypto and willing to pay 50% annualized to get leveraged betting money. None of that lasts forever, right? All of that is a temporary bull market phenomenon. So it's not that DeFi doesn't provide higher yields existentially than CeFi. It's a quirk of the momentayscale arbitrage, you know, the grayscale premium, which has since disappeared. And now it sounds like, as you're alluding to, there's sort of this cash and carry trade that seems to be the big trade now

where, you know, buy spot, short the future, and, you know, it decays in between and you basically can't lose while that exists. I mean, yeah, but again, nothing you need to defy or crypto about that. That exact same thing can happen in centralized finance if there's enough bullish spec like the analogy here would be like if people are buying game stop calls at 500 ball you can you can earn a multiple hundred percent return selling them and hedging by buying spot so it's it's just a function of speculators willing to pay that yield. And that is nothing, from my perspective, that has very little to do with DeFi. DeFi does allow lower friction, more efficiency, instant leverage.

DeFi allows many amazing things, but higher yields are not existentially one of them. Right. So it's basically a temporary phenomenon because you have a platform that's willing to do it for you and you can just park your money and not think about it. But eventually those either disappear, as we saw with Grayscale or your average, you know, yeah, I mean, that that that makes a lot of sense. So I'm

curious, when you guys are, I think your average person doesn't know how a fund trades or how you know, you really move your money around or what kind of, you know, not necessarily what kind of assets you're trading, but what kind of strategies you're using? I'm curious, at a very basic level, how do you guys manage these huge positions? I mean, you talked about the fact that someone can get a $20 billion short on Bitcoin and it becomes more difficult at $30, $40, $50. How does that work at scale from the institutional side? Yeah. So while real volumes are pretty amazing today, there's definitely at least $10 billion a day of real Bitcoin volume. It is everything in crypto is a little bit less liquid than the numbers suggest because it's such a momentum driven market. So like from personal experience, if we're taking the opposite side of the trend, infinite liquidity, right?

Like if Bitcoin's rallying and you want to sell a billion dollars, no problem. If Bitcoin's rallying and you want to buy a billion dollars, you may have to push and you want to do it quickly in, let's say, an hour. You may single-handedly push the price up 5%, maybe more, depending on how much self-suggested liquidity there is. So part of that is fundamental of the assets. This is such a fundamentally momentum-driven market because it's all network effects. There is no liquidation value, right? There's no, this isn't like, um, like Benjamin Graham, uh, you know, cigar butts, like with Walmart, for example, there's some price where even if you're not an equity investor, you say, this is a buy, right? Like I could literally buy the entire company and just sell off its real estate and I make money. So there's some price where new pools of capital

come in as buyers of last resort, even if they would never normally be equity investors, because they're just like, this is such a screaming buy and I can't lose money on this because I literally liquidated the bankruptcy. That doesn't exist for crypto. There's no floor. If Bitcoin falls to $1,000 and stays there for three months, I would actually say it's likely to die. And that's a whole complex discussion, but maybe it's a great buy speculatively but but it's not a valuable investment right these basically the more valuable bitcoin is the more valuable it is because the more security is the more network effects the more liquid and vice versa so that means that people are rationally largely momentum traders in crypto um and that means you don't really have this kind of broad market making that exists in traditional markets where you have buyers and sellers of,

same thing on the sell side, right? So there's some price where we can all look at Tesla and every institution would sell it. If Tesla was trading at, you know, a $5 trillion valuation, every institution would take profits. They would say, this is so clearly overvalued. I can't be sure it won't be higher tomorrow. But but you know, whereas in crypto, that's not true. The people who are convicted become more convicted as the price goes up rationally. So right. Bitcoin at 60 K may be a higher conviction bond than Bitcoin at 3,500. It's a more secure network. It's more valuable. It's closer to being usable as global money. So because of that,

yeah, because of that, basically trend following liquidity is very minimal. To put some hard numbers to it, if you wanted to trade $10 million in Bitcoin, instantly, no problem. You might need access to a few different exchanges. So one issue with crypto is liquidity is very fragmented, right? There's no single crypto exchange with more than 25% of volume. So when we trade, we route orders. Well, we'll do it in a lot of different ways. It depends on the asset and the time frame. But typically, we're using a smart order router that will send orders to eight different platforms. So that's the premise.

But you tend to get very similar fills if you use a good OTC desk, like a Cumberland, a Galaxy, a Genesis. That's what they're doing. They're routing to every platform, and they're giving you a price plus five or ten basis points so if you want to do 10 million bitcoin you're probably going to pay 10 15 basis points to do it no problem if you're doing 100 million you're going to have a little bit of slippage under most market conditions maybe uh if you're trying to do it over an hour maybe 50 basis points slippage maybe one percent but still the price is real. You're going to get your a hundred million, maybe less a million in fees. If you're trying to do a billion,

it's questionable. You know, then you're talking about maybe moving the price 5% or even 10% yourself, depending on how you execute. And beyond the billion, it's purely speculative. Can you actually sell $10 billion today? You can, but you might end up selling the last piece of 40,000. It depends on the market conditions. Everything I just said applies to every other coin, just magnified. You just change the dollar amount. So on a small cap coin, if you have a coin with $100 million market cap, it may trade,

actually trade $50 million a day. The minute there's an impulse one way or the other, the minute there's a clear buyer or seller, all that liquidity is gone and it feels like there's no liquidity at all. Yeah. The walls get pulled. So that said, how do you then determine which of these smaller assets are worth trading and going out of your way to obviously be able to gain that exposure without moving the market and experiencing those things? We just have to adjust sizing and timeframe. So if I'm doing, like, I'm not doing the one hour trade in small cap name, right? So on like, literally, the way we think of it is just a function of slow vision edge. So we'd say, okay, like, we won't look at a small cap unless we're

targeting at least a 50% gain, right? It's just not worth, because generally, like we have to do at least a few million dollars of a bet for it to move the needle. And if something's a small cap name, we're unlikely to be able to do a few million bucks without moving at 5% ourselves. So we routinely move assets 5%, 10% even ourselves on the small caps to get into and out of positions. And that's fine if you get a free X out of it, right?

You gave it 20 slippage you're the 200 return on it you know um that is an amazing thing about crypto that there are these huge dis economies of scale that benefit the small investor right so in traditional markets um there's something i think about a decent amount in terms of like structuring an investment firm basically like there's kind of two types of strategies to oversimplify you have strategies that you can only do at big scale. So, for example, corporate bond investing. You really can't do it with less than $50 million because the bite size is $1 million

per bond. And if you want to diversify your portfolio, if you want to be an active trader, you really can't do it with $5 million. You need to create a big portfolio. And there's other types. When I was at Suspender National Group, I used to trade natural gas strips. A single contract would be $80 million notional. And this was a very volatile asset. So you really couldn't trade the trade I was doing. You really needed a quarter billion dollars or you just couldn't do these kind of relative value trades. Right.

And then you have trades like, for example, trading S&P 500 futures on momentum in the newer version where there's no economy of scale. You don't need bigger size. Bigger size only hurts you. You just have more slippage. So in traditional finance, what typically happens is for the non-scalable strategies, the strategies with diseconomies of scale, people do them in prop shops and they get to keep, say, 50% of what they kill. That means you take home 50% of your profits, which you know, of course, I'm saying that for the, you know, and then stuff that's scalable, that gets run in something like a hedge fund or bank vehicle, and the trader only gets to take home five or 10% of what they make. And that feels unfair. But those are strategies that that trader couldn't do

without a bank balance sheet. And so yeah, you're only taking home 5%, but maybe you're making $300 million profit on a $3 billion book, 5% of that is still pretty attractive. So all of crypto today, with rare exceptions, is the prop for a model. It's stuff that you can't scale or that you're giving up value to scale. That makes it very hard to run a crypto investment firm because it's a lot of fun to be retail. What's that? It's a lot of fun to be retail what's that it's a lot of fun to be retail yeah no absolutely because if i find a great crypto trader if basically if someone's a great crypto trader today and they've been in the industry for a couple years they should have some money of their own like even if you started with 10 000 if you're if you're a

great crypto trader you should have some a little bit of money of your own and you get infinite leverage from exchanges, right? You can go 100 to 1 leverage. So it's not like I, so someone with 3 million bucks can be running easily a 5 or 10 million dollar portfolio. And how do I incentivize them, right? If BlockTower is only collecting a percentage of what we earn, and I can only give an employee a percentage of that.

So that's a real challenge. So one thing we're very focused on is like, how do we find those economies of scale? What structural advantages can we get? And so one example is borrowing costs. So because of our brand reputation, professionalism, and relationships, we're able to, we have a lower cost of capital than basically anyone else. We can get non-recourse loans, for example, we can then deploy into DeFi or curve rates that are, you know, I'm not saying it's higher

than other funds in the industry or anything, but it's higher than you as an individual can get. Higher in terms of, more attractive, I mean, like lower cost of capital. Another thing is like exchange fees, right? We can negotiate lower exchange fees than you can get as retail.

We can negotiate non-recourse loans. We can, but those are few and far between. I would say retail in some ways has advantages over us. Yeah. And so what you described with the Bitcoin trade, obviously at those different levels of scale, doesn't that make it sort of laughable for when people talk about Apple, Google, Facebook, sovereign wealth, endowments, you name it, right? Doesn't it make it basically too small for them still? I mean, what market cap do we need to be at where those numbers change and these guys can confidently know that if they had to exit quickly, they'd be

able to do it? Yeah. So I think the way this plays out is what we've seen, which is people gradually buying bigger and bigger slices and bigger institutions doing it. And then the market cap rises and then the next wave buys. It's a it's a it's a kind of a funny catch 22 that you're like, this asset class is too small to be investable. I'm going to wait for it to 10x or 100x and then I'll buy it. Buy it higher. But that is how people think. And I have to say, actually, I always laughed at that. I always like mocked that.

I fell for it with NFTs. So I've been extremely bullish on NFTs for five years. And BlockTower, me as a firm, have been bullish on it. I had one of my analysts spending half his time on NFTs and gaming for the last four years. Even when there was very little to invest in four years ago. I was a huge believer this would be a huge opportunity set. And a year and a half ago and a year ago, I was looking closely at the space and spending time. And I'm like, I just don't see how BlockTower

can deploy $50 million into this. I just don't see, it just, I see huge opportunity for an individual. And I made the mistake of, we did write some checks. We did have some investments, but nowhere near what we should have had. I made the mistake of what we should have done is said, let's buy a basket, like actually a trade I thought about doing and I didn't do,

that is one of the worst mistakes of my trading career, because I seriously consider this, was buying a basket of CryptoPunks a year and a half ago. And it was like, this won't be operationally that hard. We don't need to be like super smart. I'm just very confident CryptoPunks is one of the seminal NFTs is going to do very well in the coming NFT boom. Why don't we just, you know, even if we put a million bucks in, if that 10X is, it's not a huge win for us,

but you know, that's worth doing. It'll take us a few hours to assemble a basket. And I didn't do it because I was like, if I can only put a million bucks into it, it's not worth my time. And, but I was so bullish on it that I thought that I was very confident that they

would at least 10 X and they've done much better than 10 X. But, um, so I, it is a fallacy, this idea of like, I have to wait for this market to be big enough. Um, the reality is they should just get it in size and smaller, but I, having made that mistake myself, I can understand it. Well, I know that we are unfortunately up against it against time, uh, up against it on time here. Cause I feel like I could ask you about a thousand more questions, but so where can everybody keep up with you after this

and, uh, follow you and, uh, obviously follow what you guys are doing at BlockTower. Uh, I, I am too present on Twitter at Mari David Paul. You and me both, buddy. I think that's a, that's a problem, uh, across the industry for all of us. Well, thank you so much for taking the time. Really, really insightful and valuable content. And I can't wait to share it with everyone. And I'm definitely gonna have to have you back down the road because like I said, there's a lot more questions

I'd like to ask. Sounds good, Scott. Thank you. Thank you. Bye.