The Wolf Of All Streets - Ethereum Shanghai Upgrade Explained | Altcoins To Rally? David Duong, Tom Dunleavy, James Butterfill

Episode Date: April 13, 2023

►►THE DAILY CLOSE BRAND NEW NEWSLETTER! INSTITUTIONAL GRADE INDICATORS AND DATA DELIVERED DIRECTLY TO YOUR INBOX, EVERY DAY AT THE DAILY CLOSE. TRADE LIKE THE BIG BOYS. 👉 https://www.thedailyclose.io/   ►►BITGET GET UP TO A $8,000 BONUS IN USDT AND GET MASSIVE DISCOUNTS ON TRADING FEES! 👉 https://thewolfofallstreets.info/bitget    ►►NORD VPN  GET EXCLUSIVE NORDVPN DEAL - 40% DISCOUNT! IT’S RISK-FREE WITH NORD’S 30-DAY MONEY-BACK GUARANTEE. PROTECT YOUR PRIVACY! 👉 https://nordvpn.com/WolfOfAllStreets   ►►COINROUTES TRADE SPOT & DERIVATIVES ACROSS CEFI AND DEFI USING YOUR OWN ACCOUNTS WITH THIS ADVANCED ALGORITHMIC PLATFORM. SAVE TONS OF MONEY ON TRADING FEES LIKE THE PROS! 👉 http://bit.ly/3ZXeYKd  ►► JOIN THE FREE WOLF DEN NEWSLETTER, DELIVERED EVERY WEEK DAY! 👉https://thewolfden.substack.com/   Today's guests: David Duong (Head Of Instituitional Research at Coinbase), Tom Dunleavy (Former Senior Analyst at Messari), James Butterfill (Head Of Research at CoinShares). Follow Scott Melker: Twitter: https://twitter.com/scottmelker   Web: https://www.thewolfofallstreets.io   Spotify: https://spoti.fi/30N5FDe   Apple podcast: https://apple.co/3FASB2c   #Bitcoin #Crypto #Trading The views and opinions expressed here are solely my own and should in no way be interpreted as financial advice. This video was created for entertainment. Every investment and trading move involves risk. You should conduct your own research when making a decision. I am not a financial advisor. Nothing contained in this video constitutes or shall be construed as an offering of financial instruments or as investment advice or recommendations of an investment strategy or whether or not to "Buy," "Sell," or "Hold" an investment.

The Ethereum Chapella upgrade is live and Ethereum has gone up since cracking $2,000 today, of course, after just recently seeing Bitcoin break above the psychological level of $30,000, which begs the question, is this a bull market and where are traders and investors going to be deploying their capital in Bitcoin or in altcoins? And is that even a good idea in the face of a potential global recession? I've got three of my absolute favorite guests and yours, Tom Dunleavy, David Young, and of course, James Butterfill. These are the best analysts we've got in the game, and we're going to talk markets. Let's go.

What is up, everybody? I'm Scott Melker, also known as the Wolf of All Streets. Before we get started, please subscribe to the channel and hit that like button. As I said, a lot happening in markets. Of course, today we have PPI, 473 Fed governors speaking and contradicting each other. PPI, API, CPD, PPL. I don't know, man. A lot of things happening in markets and they are all generally forgettable about three hours after they happen. So we're going to go ahead and hopefully focus primarily on crypto and give you guys the big picture. As I said, I have three of my favorite chips today. Tom Dunleavy, James Butterfill, and David Young from Coinbase. Gentlemen, Ethereum, right? Do we think that we're now

cycling? You know, I always make the joke here that you could kind of have fallen on your head, ignored all of the macro recently, just followed the Bitcoin four year cycle and then seen how Bitcoin then cycles into ETH down the line and right back into Bitcoin. Are we doing that again? Is it time now to look at Ethereum? David, I'll start with you because I know you're looking at this pretty closely. And of course, Coinbase offers the staking, which is a huge part of this. Yeah, I think that the factors that drove

the performance of Bitcoin were somewhat unique to Bitcoin insofar as what I think happened in March, for example, had to do with one, the amount of people who are looking at the banking turmoil and saying, I need an alternative to the financial system. Two, I kind of am looking at Bitcoin because I'm not sure about the regulatory status of all the other non Bitcoin cryptocurrencies out there because of what Gary Gensler said, because of the New York Attorney General's kind of case. And then, you know, there are a lot of technical factors that I think attributed to that, you know, from the like, you know, short gamma squeeze higher that we saw, as well as I think this is an important one, the stable coins kind

of situation as well, because in fact, we saw a lot of conversion from stable coins into Bitcoin primarily, but also into ETH and some of the other altcoins. That dominance ratio has dropped pretty sharply. I mean, we saw that around the bank term oil was around 14.5%. That came down to around 11%. So a lot of what's in the crypto ecosystem has already kind of been spent. But I think that the ETH Chapella upgrade has been a more idiosyncratic event. And we've been kind of on this side for a while now. We've been saying that we don't really see a lot of ETH selling pressure, which is distinct from the amount of ETH supply hitting the market. We were somewhere in the order of $100 to $170 million per day going into a market with trading

volumes around $8.2 billion a day. And we thought that 1% could easily be absorbed and we could actually see some recovery, especially if the market environment is good. And we can kind of get into the macro in a little bit. But so far, the macro environment is actually pretty amenable to what's going on in crypto. And I think that could last through the end of the month. David, just to add on that a little bit. So I generally agree. I think we're in a positive ETH environment. The one thing that I think is slightly troubling is we do have a validator queue that is filling up. So almost 800,000, only a certain percentage of that can come out per day, 60K or so. So as you mentioned,

it's only 1% or 2% of ETH daily supply. But we have Binance enabling withdrawals, I think in April, Lido coming up potentially in May. So we're going to have sort of net ETH sell pressure at the margins for the next, call it, one, two, three, four months. And that needs to be replaced with buy pressure. So where does that buy pressure come from? I'm not sure yet. I think there's a lot of people who are going to see this move to 2K and start to purchase in, but we need net new incremental buyers. I like the potential upgrade or the potential addition of Hong Kong into the world markets as a potential new net buyer in the summer and going forward. But right now, I think ETH is going to be challenged just at the margins for the next few months. I'm excited to see that a lot of people are still net depositing right now, if you look at the ratios, up and above what is being withdrawn.

So good to see so far, but I think we still have to watch that for the next few months. Tom, real quick, James, I know you're about to jump in, but Tom, you literally tweeted this morning that 70% of the ETH being withdrawn is from Kraken, where people literally have to withdraw because of this SEC and staking. It's pretty crazy. Exactly. Yeah. So right now, the only people are withdrawing are the people who literally have to. So you're going to see a lot of other folks, you know, maybe withdraw at the margins. But, you know, once that queue gets wound down, I think you will see sort of net inflows going forward. You know, but for the foreseeable future, you're going to see these additions of, you know, not only Lido, but Binance

and others who, you know, will start to withdraw. So for the next few months, I think it's just something to watch. We estimate around 10% of validators could leave. That would take between three to four weeks for that queue to sort itself out. But it's also worth considering the people that want to stake, the staking queue as well. And we have to look at the imbalance. And I think there'll be an equal amount of demand. What's interesting this year from our perspective, well, last year from like an institutional investor perspective, Ethereum, it wasn't great. We saw $400 million of outflows in exchange traded funds.

This year so far, actually, Ethereum's seen $23 million of outflows, which is actually similar to kind of Bitcoin. But so we've not seen this institutional participation yet. And I think partly was clients, I believe clients are looking at Ethereum and saying it's offering a yield now. I think a lot of ETP providers are going to take a little while, like the next month or so, just to sort out all the legal infrastructure around the yielding, how that yield component of Ethereum will be distributed, etc. So it might take a little while, I think, to see that demand pick up from an institutional perspective. Is it important to point out also that withdrawing doesn't mean selling?

I think there's this assumption that people think if you withdraw from the contract, that means that you're no longer staking, you intend to sell, and there's a million other things you can do with your ETH, and you just might want to have the security of having a bit of it out of the contract, right? Yeah, you can do with your eath and you just might want to have the security of having a bit of it out of the contract right yeah you can do the partial withdrawals and you could if you have enough stakers you could take do a whole load of partial withdrawals and create another validator that's quite possible you could um there's a lot of interesting liquid staking derivative options up and above lido so rocket pool you could stake with their upcoming upgrade with only 80 and you know if you have 32, now you can do four validators and you could get on the other side of that, a nice cut of the other validators you're supporting. So there's a lot of other models

that make sense up and above just staking directly in the beacon chain. And I think that liquid staking, as Tom kind of mentioned, is going to be a really big area of growth. And I don't think people are actually recognizing how important this is. Like this could become one of the next big cash and carry trades of the year because people are going to be looking at this and saying, hey, maybe actually I can hedge out my ETH and actually just capture the rewards part of this equation without having to, you know, deal with potential beta risk

to the rest of the market. And I think that that's something that we're going to see more and more develop. And Tom's right. You know, like maybe some of these stakers saw more capital efficient means somewhere else. I think Rockpool is definitely a good example of that. And so, again, not all of this is going to be hitting as actually selling pressure. Some of that could just be unstaked and be moved to other places. You can't include that. And the entry queue, meanwhile, I think is going to continue growing because there were a lot of people who didn't want to make that tradeoff between liquidity and reward. Now they don't have to. I think many of those people have been waiting for this event in order be able to get their money out at the most simple level, right? I mean, I'm not going to stake into this until it's been proven that at some point, whenever that is in the future that I want to, I'll be able to withdraw, which is why I've sort

of made the point. This was always a bullish event in my eyes because who was staking 32 ETH without that guarantee, unless you were truly like an Ethereum maximalist or you truly understood this. I mean, this was the most crypto native passionate people who were willing to do that in the first place. Now everybody else will actually consider it. But what's really encouraging is we've seen since the merge, we've seen the number of validators increase quite substantially. So it's not just something since the merge or since two years ago when it was first available. People have been consistently starting

to stake even when they couldn't unstake until now so i think that's a really encouraging thing and in fact there are more stakers validators than there were of ethereum miners which is really encouraging for network because i think that was a big problem after the merge that it might become a lot less decentralized and that's not proving to be the case. This is really encouraging. Yeah, it's true. And I do think that right now we're seeing around 15% of all e-supply actually is staked. Many people kind of make that comparison of like, oh, but the average L1, that's around 65%, which we're not getting 65%, guys, by the way. I just want to contain expectations on the side like i think it's completely plausible to see 25 to maybe

30 percent of actual eth supply actually being staked up here because just the natural organic level of like eth usage probably precludes you going from much higher levels but that's a substantial increase from where we are and if like we see that that is still going to be a bullish long-term kind of move for eitherTH, probably even just through 2023. I think it might. Would we even want to see 65%? I mean, would we even want to see 65%? I feel like Ethereum is used for so many things.

People obviously trading NFTs and within DeFi utilizing it at 65%, it would effectively become exceptionally boring. Practically, it's not possible. The technology actually doesn't allow it to be quite honest with you like actually Vitalik wrote a really good piece on this uh probably like six months ago I want to say like but like he went through why like this would be throttled anyway like you couldn't have a number that high maybe it's it gets the number of validators is equals the kind of roughly the risk-free rate so if you look at treasuries and say, well, people have this option of buying Ethereum as a higher yield,

and eventually the more people that validate, that yield will come down to something close to risk-free rate. And it'd be very interesting, I think, to see these dynamics play out over the next few years, to see how that yield kind of sort of balances it out based on other alternative yielding assets. And the more validators you have actually come in, the lower the yield actually becomes.

And it takes time to get these validators in, just like it takes time to get them out. You couldn't have it jump up 10%. It would take a year or two even to get to 30%. So it's going to take a lot of time, even if we want to approach those higher numbers. And I think this is what makes it really interesting, the fact that it's self-balancing and it is really truly the first digital asset we have with a negative

net issuance so you have the burn etc and that ultimately is you know this has been the problem you know i think many people misunderstand with many crypto assets the way they are almost bribing people to come and join their network through offering a yield and printing more to offer that yield. But Ethereum offering this negative net issuance, which is almost unique, I think it makes it particularly attractive, particularly from an institutional investor perspective. And what is the yield currently? Three and a half? Go ahead.

No, I would say I would just kind of point out that even though like, you know, Tom's absolutely right. Like as you increase the number of validators in here, you reduce the actual base reward programmatically. Like you still have to keep in mind that there is going to be other opportunities for people to pick up yield. I mean, Eigen layer is in test net right now, but that seems like it could come up fairly soon. That could probably tack on another one percentage point, one to two percentage points on top of that, if you start securing middleware layers, for example. So that's something we also need to keep in mind, that that's also going to throw off the balance in terms of new validators looking to enter this queue. What's the expectation, James? Can I ask you my note? What's the expectation

right now for the first year APY on ETH? 3.5-ish? I i mean that's what i was seeing it's 4.2 i'm seeing a um ethereum.org at the moment that's not bad i mean yeah i mean you have to balance this out to other alternative assets people might be considering now and there are other people in the crypto network that might not be exposed to this in the same way but you've got to think, well, what other assets can I get that offer me an attractive yield? You can get US treasuries, for instance, but there's a big risk with what's going on with the Fed that they continue to decline in price. And yes, the yield might get more attractive, but I do think Ethereum will have its moment at 4%. It's a lot of clients of ours are becoming increasingly interested because of this

yield component. But it's also if you're already in the system, and you're already, if you already were holding ETH, and you weren't staking, for example, like, yes, you're right, like the alternative is I can put 5%, I put 5% into a CD right now, like lock up for a year. And that's not bad considering the, you know, forward looking like earnings of stocks, a year. And that's not bad considering the forward-looking earnings of stocks, for example. So I'm not denying that. But if you aren't staking and you're holding ETH, you are diluting your position by not doing so. So that's something I think you also have to keep in mind for the people who had already bought this, but maybe aren't doing anything with it. Yeah, that's a great point, David, because if you are investing in a CD,

you are getting US dollars as your return, which, you know, you could argue is inflating away at some nominal rate. If you were getting Ethereum, you were actually getting that yield in Ether, which is deflationary, which actually could accrue more to your bottom line. But you also have to have a bet on the asset as well. I just say I think that the price is also going to rise yeah i mean the other effect is if ethereum once we get the shot once sharding occurs towards the end of this year and the tps will be so high transactions per second per second will

be so high we could see a lot more l2s come to use the Ethereum infrastructure and it become incredibly popular, which is obviously their goal. But the downside to that from an investor perspective is the yield could fall quite substantially because of that. Do we know what the average cost basis is for people who are staked? I believe that on average people are underwater, but I don't have the actual numbers. At what price did people stake on average? Around 45% of people are in the money, but yeah, a little bit over half are underwater and the rest are break-even. That makes perfect sense.

That probably changed slightly overnight, but that was- Yeah, I was gonna say, now that that was true at 1900, might not be true at 2000, right? So, go ahead, Dave. No, no, sorry. No, it's around those numbers. Yeah. And James, so I wanted to ask you, you talked about sharding and obviously transactions per second. Is this

starting to take some of the shine off of the faster L1s if we start to see that happen? I mean, it feels like we're back in the sort of Ethereum narrative again. The numbers say no. I mean, if you look at Arbitrum and Optimism, which obviously operate on Ethereum, they're becoming increasingly popular. Ultimately, I don't think it matters for Ethereum in the end, whether it's Arbitrum or Optimism or something operating on Ethereum

or the Ethereum native network itself. But yeah, I definitely think if you look at, take Solana,ana for instance really interesting network there a lot of really heavy marketing a couple of years ago talking about the speed at which you could transact the cost of transactions etc but suddenly ethereum will be able to do this it's i feel in a way it's solved the bitcoin or i say the bitcoin charm really the trilemma for any cryptocurrency really in this this sharding idea. So it's massively powerful and I think it could become heavily at the detriment to smaller sort of competitors like Solana,

which has had many other problems, particularly in terms of uptime over the last year. Can somebody dig deeper into sharding, Tom? I mean, do you any of you just so people in the audience know, because I think a lot we kind of take for granted that people understand all this vernacular. But I mean, even James, if you want quickly before Tom jumps in just to discuss what that is and when that's likely coming. So the problem with the Bitcoin trilemma is obviously you can't have high security network speed and decentralization. You can't have all of them. So the idea with sharding was instead of getting every computer to do every single process, every single transaction,

you get small randomized sets of computers to execute these transactions. And that allows for scalability and up to a million transactions per second theory. Go ahead, Tom. Yeah, no, that's a great point. I think as you create more L2s and you have these different stacks that are building through the OP stack off of base, you're going to have L3s that are very use case specific as well

that could really scale the system, provide all the differentiation that a new network could want, very similar to something you'd see on Cosmos or other chains. So I think Ethereum, as it continues down this roadmap, is going to just eliminate the need. If you're a new chain, what's the impetus to go to Cosmos right now? Right now, it's essentially you can customize your chain any way you want, right? You can do that on an L3, and you can have the benefits of the biggest settlement layer in Ethereum. What I think is almost more interesting is this new primitive that we're building off of Bitcoin. Bitcoin is an even bigger settlement layer.

If you're starting to use stacks and starting to think about all of the things that Ordinals opened up know l2 is on bitcoin and using that as a settlement layer i think it'd be even more interesting going forward and be a bigger competitor and have that bitcoin ethereum back and forth that we were thinking rather than almost rotating back into the alt l1 season uh i just roll my eyes because i can't even imagine the misery of crypto twitter in this community if we really get to the point where they're legitimate competitors because i think bitcoin obviously bitcoin development is excited exciting in theory but you're not seeing the smart contracts they're uh being utilized in the same way as ethereum i don't think that they'll necessarily catch up but if they did my god this will be the most miserable place on earth this is the interesting thing about um uh bitcoin versus ethereum ethereum has that leadership well whereas bitcoin doesn't really have leadership

in the way its code is directed. And I think that's good and the bad. The leadership suggests it's more centralized than Bitcoin, but the good is that they can really progress initiatives like sharding and the transaction speed, et cetera. And I think that's quite a merit for Ethereum in some ways. But I think a lot of people are starting to see the differentiate between Bitcoin and Ethereum. Bitcoin is But I think a lot of people starting to see differentiate between

Bitcoin and Ethereum. Bitcoin is much more of a store of value, whereas Ethereum is more like Amazon Web Services, but a decentralized version of it with a currency rolled into it. Yeah, I'm comfortable keeping Bitcoin the store of value and keeping those properties of it. And, you know, and to Tom's point, yes, I think there will be some elements where you'll see Bitcoin uses a network to perhaps like not be the asset that people are using as a payment, but maybe facilitating, say, stablecoin payments on the Lightning Network, for example. So I'll just pay Bitcoin to kind of move that. But I don't think it's going to be a replacement for what ETH represents. I think ETH represents to me still a future state of crypto, like how it's going to be the significance of ordinal descriptions or any of the other developments we're seeing on there right now. But to me, it's still very much like if anything, the banking crisis we just went through solidifies more the case for Bitcoin as store

value and how important it is to have an asset that sits outside of the traditional financial system. But, you know, also, also yeah i think uh you know we see james kind of talking about what's going to happen with eip 4488 and 4844 which i think are going to be meaningful in the cancun fork but i would just kind of contain like you know those things facilitate the l2 landscape which is very important when we're talking about ethereum versus the rest of the l1s because what is really relevant to dank sharding is obviously speed, but it's really like the data availability layer, what's going to happen, for example, with new data types, when we create a blob to actually, you know, allow L2s to actually have cheaper fees and store like something on the blocks outside

with the regular block. Like those are things that i think are going to be significant because previously the reason why we wanted all these other all l1s was because we're like oh it was too expensive it didn't have enough throughput well l2s are solving for that problem i think the big conversation we're going to see in the future is what is the value proposition of l2 relative to the base layer i think that people have only just started considering that yeah i tend to agree and the thing i mean it's important to remember as much as all this thing I think that people have only just started considering that. Yeah, I tend to agree. And the thing, I mean, it's important to remember, as much as all of these things could or maybe be built on Bitcoin, this is what Ethereum was created for, right? And I think that there will be such cannibalism in the Bitcoin community over attempting to do that, that it will stifle the progress, even if they're trying.

I mean, have you seen how much controversy there is over ordinals and stacks in general? I mean, we now have like sort of Bitcoin maximalist communities within the Bitcoin maximalist communities fighting over what should happen there. You don't have that on Ethereum because it was built purpose for this, you know, the purpose built for this. But then that said, I mean, I have for the first time ever a client say to me he felt Bitcoin was a safe haven during the banking crisis. I've never heard anyone describe a client state to me that it's a safe haven asset. And for me, that was a seminal moment to hear that. And we're starting to increasingly have conversations with clients around this point. Is that why?

Go ahead. In your mind, is that why Bitcoin went from, you know, 19,000 to 30,000 effectively when we saw banks start to collapse or was it the liquidity rushing into the system that got everyone excited? I was astonished how many clients suddenly changed their mindset on Bitcoin following that event. I was, you know, it was something we've been talking about and it being very different to equities, for instance. But now I think we're really starting to see that. James, what are those allocations looking like for clients? Are they saying, hey, I just want to dip my toe in the water or, hey, I'm actually considering 1, 2, 3, 4, 5 percent?

And is it just Bitcoin? Is it Ethereum and other assets? How are those conversations progressing? There's a really broad spectrum. So you've got the guys that are quite crypto savvy and might have four, five, six percent in their portfolio, but a lot are still very much in that. I want to dip my feet in the water. There's a reputational risk of me owning Bitcoin, that kind of problem still.

But that seems to be going away. And I think what's happening with the banking crisis has really helped that element of problem still but that seems to be going away and i think what's happening with the banking crisis has really helped that that element of it i mean we've got an upcoming uh seminar in lagana where we're speaking to our clients and i think they're all deeply interested to for us to demonstrate how different bitcoin is to other alternative assets i mean don't forget like in the traditional investment world people have got 60 40 portfol portfolios. That's 60% equities, 40% bonds. And they know that the two are quite correlated sometimes. And bonds are in a 40-year bull market.

It's ending now. And they need to look at alternative assets. And a lot of the traditional alternative assets don't really offer any kind of diversification compared to Bitcoin. And I think there's a gradual acceptance of clients that that's starting to happen. Gold is $ 22,050 dollars right now i mean we're you know it's uh we're definitely seeing people move away from gold this has been rising over the course of the last month and i think that when we talk about correlation especially last year for example i mean this was a year where we were seeing celsius

3ac like ftx blow up and the correlation was, I don't think for the reasons that people necessarily understood that correlation doesn't necessarily point to the causation of what's driving these performance kind of moves. And now that we're seeing correlation drop from like, it was like end of year, like 60%, for example, down to around 25, 20% right now. I mean, it just shows you that there is diversification benefits. Like, if you look at the systematic risk factors in a 60-40 portfolio, for example, if you include Bitcoin in it, and you don't have to include a large

allocation, you put, like, 1%, 2% in that portfolio, like, that increases your, like, exposure to diversified, like, things that aren't the beta of stocks, aren't the beta of bonds. And I don't think people understand that.

Like there are real, like if you look at the residual error of adding Bitcoin to a 60-40 portfolio, it expands dramatically. Like, you know, it could increase by like three, four percentage points by adding like something like Bitcoin into that portfolio. Yeah, David, I think that's a great point. And especially for institutional allocators, you need to have more of a time series and more crises to show that Bitcoin

actually can be a better part of a more diversified portfolio. And this banking crisis was just a little piece of that. But every time we have one of those, it just adds more and more to the story and gives more confidence for people to actually say, hey, I could probably put 1% here and I feel a little bit safer and I could see the diversification benefits actually in the numbers. And I reduced that reputational risk that James was talking

about. And this problem with central bank monetary policy, particularly the Fed and Europe, is not going to go away. I mean, they still remain remarkably hawkish. They're still an inflation problem. And, you know, you hike rates, you carry on breaking stuff, basically. And it's hard to see a solution to this. And I think that's going to really play into the hands of both Bitcoin and Ethereum, actually. And in answer to your question earlier, Tom, about, you know, are they exploring other things?

I think it's predominantly Bitcoin and Ethereum and not much else at the moment. I think it's a big stretch to step outside those two because they're just getting their head around those two, first of all. Yeah, I think it's really important to point out that you don't need to believe that Bitcoin is going to go up to put it in that 60 40 portfolio. You just have to be convinced that it's going to offer some sort of idiosyncratic movement or risk that it won't do exactly what the other things do, right? I think people get very confused there. The holy grail of risk management is to just have diverse portfolio where things don't all move the same. So even having something that you just believe is untethered is worth that 5% or 1% or 2%. Ari Paul from Blocktower had a great thread on it years ago that was really pretty convincing. It's really the holy grail because it's very hard to find

something like that. Yeah, people moan about... Behind me, variance optimization, like that's Markowitz's principles of like portfolio diversification. That's really what you want. That's absolutely right. And people moan about the volatility of Bitcoin. And I think you can deal with that problem through regular rebalancing. If you just let the portfolio, your Bitcoin position, if you bought a 4% position, just let it drift,

not adjusting the weighting, then the volatility can become a bit of a monster. But you can, if you really want to, particularly from an institutional investor perspective, deal with that vol problem, you can you know if you really want to particularly from an institutional investor perspective deal with that vol problem you can you know say rebalance every quarter and that dramatically reduces the maximum drawdowns it actually improves the sharp ratios that's the risk adjusted returns if you um if you regularly balance you know so you can a standard 60 40 portfolio since 2015 would have given you a sharp ratio of 0.48. If you had a Bitcoin, it would almost

more than doubled it to 1.15. That's a 4% position. So on a risk adjusted basis, regularly balancing, et cetera, really, really helps. And I think what James said too, regarding central banks, what they're doing, I think it really resonates with me because I don't think we've seen the end to the current banking turmoil, by the way. If anything, we've just the end to the current banking turmoil, by the way. If anything, we've just further increased the amount of centralization pressure as all these depositors and regional banks have moved to larger banks. We haven't necessarily taken any of that problem away because rates are still very high. And on a market to market basis, like granted, many of these larger banks have better capitalization ratios because they've been forced to, whereas there were some lenient changes that supported some of the regional banks

from having to do that. But still, you know, we're seeing like five point three trillion dollars worth of money in money market funds, for example, like this is creating huge pressure on like reverse repos. That position is now above $2.2 trillion. Bank reserves are therefore much slower. It's still possible in the months ahead that there's going to be a credit crunch. And I don't think that many people have anticipated this. We seem to be very comfortable with the idea that, oh, yeah, the Fed came in, they rescued us.

But I don't think it's over by a stretch. Yeah, that's a great point, David. I think if you look at the reverse repo facility combined with the TGA, the Treasury General Account, the Fed's accounts at the Treasury, you see those draw down over the past month or two, providing more liquidity into the system. There's almost a one for one correlation with the recent rise we've seen in risk assets. The Treasury General Account and the Reverse Repo Facility only have so much money in them. There's only so long we can keep doing that. So right now, that's what's propping up markets in my mind. It's a liquidity flow argument. And as we go into a more global world and we continue to add other countries that are meaningful on a global stage, China's liquidity situation matters. The ECB's liquidity situation matters. The Bank of England's liquidity situation matters. And China has also been pumping more liquidity into the system. So

you have China liquidity being positive, US liquidity being positive. That's what's really supporting markets right now in my mind. If those things turn, you're going to see some real fireworks at the end of the year, especially if you have looming earnings recession, credit crouch potential. I mean, all of these arguments really just lean into Bitcoin, but I still have trouble on the longer tail of assets because I think those could really struggle in a really hard risk off environment. Oh, yeah. And as the US government, you got to pay the bills.

And we're rapidly going through that TGA balance right now. On June 5th, when we pretty much exhausted all of that, if we're dealing with the risks of higher recession, if we then will deal with the real debt ceiling issues, that could potentially lead to a

more volatile market at that point in time. For the time being, I agree with you. I think that this is why I'm more optimistic over the next few weeks well i have real visibility over uh because i think the liquidity at least for the time being is still there and you know like there's still some positive seasonality effects as well but yeah we got earnings starting tomorrow so let's see kind of what happens there i mean people have such memory i mean they have the memories of goldfish, right? It's been three weeks since a bank collapsed. So all of a sudden, every armchair economist thinks another

bank can't collapse because we've survived three weeks. Meanwhile, Jamie Dimon came out and said, this bank crisis is not over, right? And we talked about the CEO of JP Morgan. Of course, then I think he got a call from Yellen and changed his tone. Warren Buffett yesterday said the banking crisis is not over. It's Warren Buffett, right? So you have to expect that there's going to be other shoes here to drop. And just because it's been a couple of weeks, this isn't. All the Fed have done is just kick the can down the road.

I mean, that's ultimately what you do with QE. And the most recent sort of bailout program, it's the same thing. It's hard, actually, I think think to tell exactly when you kick the can down the road like this how long it will be till it'll kind of all go pear-shaped again and it could be a little while it could be six months before things start to go get ugly again but it will at some point and that's why like when my pa i just huddle bitcoin because i i don't want to try and time these things i I think it's very hard to do that. But we know we all know, particularly in the Bitcoin community, things can't continue on the way they are from central banks.

But I think something that was really meaningful yesterday was the Fed releases its minutes after it does its statements and they actually indicated they are seeing a recession in the back half of the year. And this is a Fed that has been overly cautious with anything they've released in any public statement. So for them to even indicate that they see a recession coming is, I think, should have alarm bells going off in folks' heads. I think it's like Bitcoin as well, though. Yeah, go ahead, James. Yeah, I mean, I think what Powell is trying to do is either let an inflation spiral happen or break the economy. And what he's actively saying now is, yeah, he wants to break the economy.

He would rather that than an inflation spiral. It's a pretty grim kind of thing. And I think if you look at those two situations, actually, either way, it's quite good for Bitcoin. In an inflation spiral period, then being a fixed supply asset price in dollars is actually very good for Bitcoin. But if we have a recession where it's an omission that central bank monetary policy is really not working, that I think is very supportive for Bitcoin too.

I did think the scenario would play out this year, but in our outlook, we wrote the central bank dilemma at the start of this year. But I thought it was more likely to happen in the second half this year rather than now. And it's fascinating. It's just happened all so quick in such a short period of time. I'm happy to take the Bitcoin is bullish in any scenario argument. I think our audience will like that, but I actually tend to take the Bitcoin is bullish in any scenario argument. I think I think our audience will will will like that. But I actually tend to agree with you. I think it makes a lot of sense. But I do think that, as David said, I mean, the recession is coming.

Right. And so, Tom, you and I were sort of debating this before. I said that I think right now we have the makings of a good environment for altcoins, right? I think that Bitcoin dominance has reached sort of a top level that we've seen over the last few years. It's now stable. There's a bit of confidence above, you know, 28,000, 29,000. And ETH has now a narrative. So I could see in the short term a trickle down into altcoins. But you quickly pushed back when we were talking about it before saying exactly what you did before. The long tail in a recession is going to suffer, which I think is important to remember timeframes, right? Because I think we could both be right. I was talking about over the next couple of weeks, and I think you're talking about over

the next couple of quarters. So sorry, James. I think it's a little bit of what David and I were mentioning before, and then also what James was saying. So the liquidity picture right now is very positive in the broader macro environment. One thing that I find concerning, not only sort of incremental ETH sell pressure, but also stable coin supply within the crypto ecosystem. So that is crypto liquidity has been continually declining, and we haven't seen that pick up. So, you know, in the shorter term, I think if the macro liquidity conditions feed into crypto, feed into the meme environment, that we can continue to go out to the long tail of assets. I could totally buy that in the next few weeks. But, you know, the next quarter onwards, I think it's going to be really challenging to have a lot of those go forward. I do think Bitcoin, as James mentioned, is a positive asset to own in almost any of these environments. And this is coming from someone who has almost never helped Bitcoin, almost exclusively Ethereum and other assets. So I take that for what you owe. But sorry, James, you were

going to say something. Yeah, I was going to say I'm not a maximalist. I'm a pragmatist, I like to say for Bitcoin. But I would say that I think if you look as we go into recession, if you look at a lot of the altcoins, they're more growth style assets. They're more sort of solutions to certain things, tech solutions to certain things. That's slightly different to Bitcoin, although it is a form of tech solution. And growthy type things tend to suffer during recession. And one of the other things we've been looking at is GitHub dev community. So Electro Capital's done some great work compiling a repository,

looking at all the different ecosystems. So take Solana as an ecosystem or Ethereum, et cetera. And you look at all the repositories, you add up all the devs. And what we're finding is if you look at developers, they are leaving the smaller altcoins to a lot greater extent than they are in such in the much larger coins in ethereum so the bigger the bigger tokens are

basically holding on to devs a lot better than a lot of the smaller ones you know if you have a token where all the devs are leaving it's really worrying you know this was a good way of figuring out if ethw do we even remember that now was ever going to work because they're only ever two active devs you know it's never going to work if that's the case and i think what we're seeing that you know we've seen like a 89 decline in some of the smaller altcoins dev a user uh user developer sorry developer databases basically essentially and then 99.9 percent in price so yeah for when you go dead past like the first few hundred things are so incredibly dead but to some extent i kind of feel like a period of creative destruction was needed in this space

and i don't like how it was forced upon us in some ways by some of the developments all last year but the deleveraging that we got in 2022 was necessary in a lot of ways many of the projects that weren't going to make it at least now we know aren't going to make it um and the ones that are are going to be a lot more resilient and going to actually build out the future ecosystem that the space needs like i i need real use cases to be built out and developed. You know, like I don't need like every person who has like an idea to just kind of come up and get funding from a VC.

Like I need them to be much more thoughtful and say, actually, you know what? Have you thought about your treasury in this space? Have you thought about how your development path, what's your upgrade? You know, like I need those questions to be asked. So in a lot of ways, yes, like the outstanding number that James kind of mentioned seems a little bit daunting and somewhat scary.

But I think in a lot of ways, what's happening is a lot more progress in this space and perhaps, you know, a lot more thoughtful development, which I think was going to be necessary over the long run. They're all. Let's be real. The launching in 01 has been nothing but a cash grab. It's been easy, right? I mean, Aptos took time to develop. They basically took the tech from Meta and they said, okay, let's add a few things. And great, we can get, what, $6 billion valuation now?

I mean, ZUI is going to be the same thing. Many others are going to be the same thing. I am a bit concerned we're going to see that with L2s, with how easy it is going to be to build on L2s and then launch a token and then have a similar narrative because it seems like it's almost easier than building an L1 it's just going to be building the communities around it attracting the developers as you mentioned James so I don't know it's going to be an interesting one going forward but sorry James go ahead. I mean there are some token zombies as well so you know if you look at a lot of these tokens and you speak and the ceo speaks and they say yes um uh when i i saw these problems with bitcoin so i decided to create this new token that solves all these problems that bitcoin is deficient in that is like a very

common mantra uh in in the crypto community um and quite often those individuals became very wealthy with Bitcoin and are using those funds now to sustain those protocols. A lot of them still have very deep pockets and can sustain. It's like flogging a dead horse. They could carry on sustaining that protocol for many years to come probably

in denial that it's never actually going to work. And that's why I actually think, yeah, looking at these kind of fundamental things like active developers and commits, et cetera, is a really helpful way to understand generally how active the communities are. Right, and that'll show us which projects are likely

to be the phoenixes rising from the ashes, as David sort of said, and the ones that are likely to be relevant in two, three, four years. I agree with everything, as David sort of said, and the ones that are likely to be relevant in two, three, four years. I agree with everything, David, that you said, that we've sort of had this liquidation event. We've flushed out all the bad projects. But then you get crypto GPT raising $10 million at a $250 million valuation because they put GPT and crypto in the title. And it makes you wonder if we're just going to do all this crap again.

I still haven't done my homework as to whether what they claim they raised is actually what they actually raised, because that's also an important distinction. Like a lot of people make claims that they like, they, they raise that amount, but I'm like, but yeah,

you know, like I think there's, there's still going to be, there's going to be fringe things like that that are going to occur that, for lack of a better term, as Tom kind of referred to, are cash grabs. But, you know, like outside of that, I think that many of the projects that we see still in this, and, you know, like Tom was kind of alluding to ZK EVMs, for example, EVM equivalents of apps just kind of running on an L2, like natively to like the base layer. I think stuff like that is going to be transformative and we haven't yet discounted how that's going to work because we're just getting ZK EVMs, a technology we thought was going to be like one or two years away,

like right now. So I think it's a very interesting time to be in this space. Well, we see, I don't know'll be there people's opinions on this but if we see more zero knowledge work will we see the advent of more miners again because it's quite uh cpu intensive and we could see some some of it repurposed it's um it's an interesting challenge technical challenge i think the zero knowledge proofs. Yeah, I mean, we don't know what's going to actually work, but it's nice to see, as Dave said, it's sort of happening farther in advance than we expected. Can we talk about eToro and Twitter? Did you guys see this news this morning that eToro and Twitter are going to be integrating

when you click on a cash tag on Twitter, it'll give you full charts and data from eToro and then you'll actually be able to theoretically trade through Twitter. I know it's a total pivot, but I just kind of passed my news feed again. I'd wondered if that was just Elon Musk having a bit of fun. I didn't know. I haven't taken it seriously just yet.

I think it's real. Elon's goal was to have the everything app, right? He wants everything in Twitter and on Twitter. So this is the part of, hey, let's kick off people who are going to Substack. Let's, you know, ban links to other platforms or devote them. But, you know, let's integrate finance. And hey, he paid $40 billion for Twitter, so he can kind of do what he wants. But, you know, I think there are a lot of people who natively would find that option appealing right that's why there's options on trading view to trade and you know click through easier it is the the one click button the uh you know the more you're going to have people trade through it but um you know i'm interested to see what else he keeps adding if he's really going for the other thing out and how does that work out from a regulatory perspective from the sec how happy would they be with this? I mean, that suddenly gets a whole lot more complicated when you

sort of add bolt-on investment components to your platform. My assumption is that he's going to, at least the narrative will be that he's punting all of that onto eToro, right? That effectively he's just funneling through an API or something into eToro, and if you

actually want to trade, you go and KYC with eToro sign up there and it's based on jurisdiction and such. I mean, it really is. He's basically just funneling a massive audience into their platform, right? I have no idea. That's just my conjecture, but there's literally no way like anonymous cartoon Twitter accounts are going to be able to trade through Twitter without going through KYC in the United States. That would be absolutely absurd. So I just do think that, though, this is like a meaningful development for the market in any way, shape or form that people on Twitter will be more encouraged to trade or invest. Or do you think that this is just noise again? My view is I'd rather just wait and see on this one. I think it's, I mean, I suppose

Facebook was trying to do the same thing, weren't they, or Meta, you know, and similar sort of thing. It's going to happen on several different platforms. For me personally, I think this is a challenging one to invest in until I start to see some credible data suggesting that it's actually working.

I have no interest in trading through Twitter. I have no interest in trading through Twitter. And also the whole onboarding process is very complicated for people. Even if they have to go through eToro, et cetera, I think it could be quite challenging for them. That's why I'd rather wait to see the growth. Maybe there will be big growth in this. I'm open-minded on it, why I'd rather wait to see the growth. Maybe there will be big growth in this. I'm open-minded on it, but I'd rather wait rather than bet on it. Yeah. Pivoting back to L1s and L2s,

do you think that we could actually see some of these bigger name L1s get washed out now with this L2 narrative that we've all been discussing here? I mean, I'm sure a few of them will exist, but there's quite a few L1s and competitors. I mean, Tom, you specifically mentioned Cosmos there. But I mean, do you think that we could literally just see a massive consolidation into two or three, even one or two? Yeah, I mean, my bet is why, again, are you, why are you betting on any of these other L2s when all the, or Alt L1s when the security is on Ethereum? So you could use Cosmos as a testing ground

and then move over back to Ethereum. You know, you can move over to Solana and then maybe move back to Ethereum. The only interesting use case that's really hit outside of the Ethereum ecosystem have been sort of order books on Solana and a few other ecosystems. I think Say is trying it on Cosmos

that Ethereum really hasn't been able to solve for. Outside of that, you know, if Ethereum is as fast and as cheap as everyone wants it, as James and David mentioned, by the end of the year, why are you even worrying about these other ecosystems? Unless there's functionality that you can't get on Ethereum, which it seems like a real time order book is pretty much the only thing right now that I can see that you can't do on ethereum and maybe you end up with very niche ecosystems or very niche tokens that specialize in one specific thing and are really excellent at that maybe it's those are the ones that really survive and those that are just almost clones of ethereum end up not working so well and that's i think that's that's quite likely is that sort of the multi-chain world view where, you know, you have like a metaverse chain or an NFT chain or a DeFi chain and very specialized? Is that sort of what you're alluding to?

Like maybe the metaverses get built on Solana, but everything else is sort of on Ethereum. Yeah, definitely. Without naming any other, some chains that are really starting to excel in NFTs and others in gaming. And I think that's perhaps where they're not getting their identity from that specific sector of the crypto community or gaming community or art community. The challenge continues to be on the UX side. They're like, how many wallets do you want to hold? How many gas tokens do you want to hold? Do I have to migrate to this chain and pay in this token?

It just becomes an absolute headache for folks to sort of manage all of those different things. Yeah. I think they eventually. With the VM, for example, like, you know,

if you're competing with like, like how could you possibly compete with everything that has now happened? Like the merge, I think basically proved that, you know, for the most part, this is a network that has a real upgrade path

and that is highly achievable. I mean, in a way that probably pre-merge, we had questioned someone's community. That's no longer the case. And, you know, yes, there are actually... I'm not going to say that all all-tell ones are going to go by the wayside because we don't,

but we certainly will question whether we need all this block space. But some of those things are unique. Some of them have different consensus mechanisms. Instead of like, you know, proof of stake, it's proof of history or proof of time and space, whatever. Like maybe that is the case. Or as, you know, James kind of mentioned, maybe some of these are very specific. One that will just do gaming or, you know, Avalanche might have a subnet that actually just deals with institutional investors.

Something like that, I think, could definitely be the way forward for these things. But I don't think we're in the world where, for example, we were previously a few years ago into the FAT protocol thesis that anything like that, that sat on the L1, like the L1 itself would accrue the most value. That's no longer the case. I mean, it seems very much like it's the FAT application thesis that is going to win out just like it was in the Web2 world. I was a big fan of that thesis. I mean, the interoperability and development in that area was going to be all that mattered, that we were going to have, you know, 10 chains doing 10 things. But then we just basically spent two years seeing every bridge hacked, right, and realized that interoperability is extremely difficult.

And so, I mean, that sort of funnels down to wanting to do as much as you can, I think, on a single chain secure environment, which is what James was talking about. If you have the security, it's kind of difficult to be convinced to go elsewhere. Yeah, I mean, money's locked up. I'm sorry, sorry, go ahead, James. No, I think there's also this, you know, people talk about Metcalfe's law, the bigger the network becomes, the greater the value is, et cetera.

And I think you can have a network that is dysfunctional, but has the most users and you could argue compared to some other networks ethereum is still dysfunctional but they're going to fix those i expect by the end of this year but it still has those dysfunction but it has a massive network a bit like bitcoin does and that that gives it a massive massive advantage over all the others people just want to coexist in that same that same network and as a consequence just for that it's a bit like the us dollar you know from a fundamentals perspective you shouldn't own it but at the moment at least everyone still trades in it you know so

um and i think ethereum is in some ways a bit like that but getting progressively better not progressively worse. Yeah. The one thing that I think is not happening on Ethereum that Solana in particular is doing, though, is mobile. There's no mobile inroads at all on Ethereum. So Solana has this whole Solana mobile stack. They're doing this phone thing with Android, and it sounds stupid and silly and whatever. But right now, across crypto,

we're competing for real-world use cases and trying to find one. And, you know, what, 50% of people access, you know, their phones more than they use their desktops. I mean, if Solana can find something on mobile and developers are actually able to build something there, I think that gives them an outside chance of having an interesting use case that other chains aren't developing. I'm sure Ethereum will, you know, or theereum community will make inroads there at some point but i think that is interesting that salon is the only one actually targeting and building and giving developers access to that whole segment that's totally unexplored right now and that's the advantage of having that more defined leadership isn't it you can think about these sorts of things whereas ethereum i think although it has a fan

ethereum foundation it it's not thinking about specific devices, things like that. And, you know, so I do. But there's always that balance off between being decentralized and or being very centralized like Solana is. Why do we think that people mocked the idea of the phone, Tom? Because, I mean, that's a really serious partnership. It's one of our main sort of protocols, making a major commitment to mobile. And we all know that mobile is the future, as you talked about. I mean, why was that so laughable?

I mean, everyone's gut reaction was, seriously? Seriously, we're doing this? Yeah, no, we haven't even solved the, you know, the computer on-chain stuff. And we're going to go over to the mobile, like, come on, what are we doing here? No, I think people just like to make fun of Solana, especially the, you know, there's too many tribes right now in crypto, as you hit on earlier. There's the Bitcoin maxis. Now there's the ETH maxis. I mean, I don't think there's like any alt-chain maxis, but it's just like, if you're not in my tribe and you're doing something that's different, like, let's rail on you to get some Twitter points.

I think that's, you know, solely what it is right now. But actually going to your point, James, Solana is more decentralized than people think. We did some research when I was still at Masari, actually looking at the underlying individual nodes across the board, and then looking at also the servers where each one of those nodes were held, the geographic locations across the board. And Solana after Ethereum is actually, you know, the most decentralized protocol, which is interesting because I think people think hard, you know, big validator requirements, you know, very centralized.

But, you know, under the hood, it's actually looking across a few metrics, more decentralized than other protocols. So, and that just comes because it's been around since 2020. And it's actually around since 2020 um and which you know it's actually been the darling of investors in terms of fund flows outside of ethereum and bitcoin it's one of the most popular i'm just looking at the assets inflows year to date it's one of the top ranking assets i think the only other one higher than at the moment is short bitcoin to

see more inflows. Everything else, including Bitcoin, Ethereum, has seen the most inflows year to date. So, you know, clearly there are a group of investors that really believe in this, institutional investors. Talk about short Bitcoin being the leader there. What does that tell us? Well, for now, but it's not been the best trade, funnily enough.

It seems that people have made real mistakes in terms of adding short Bitcoin positions. A lot was added at 20k a Bitcoin. And so they are really hurting, right? Yeah, I'd say a 50% move to the upside is pretty bad when you're shorting with some sort of leverage. They're probably gone by now. I would say they're either liquidated or stopped out. You would have to imagine. And there's a lot of people who have the theory that the reason we really went from 20 to 30,000, not that there wasn't bullish sentiment or anything, but was this sort of sucking out of liquidity from all the banks, no rails for people and basically, you know, wider spreads and market makers making less of it. David, you probably see it. I mean, I even read that, you know, $100,000 order on Coinbase was giving like two and a half times the slippage on this move than they were before all these banking rails sort of had been removed. So is part of this just that we're getting like much easier moves through the

order book and much easier flow because there's so much less liquidity? You know, liquidity, I think, is leading to some gappier moves. And I mean, it's not just in the U.S. where the regulatory environment, of course, gotten more onerous. But even outside of this, like we saw, for example, Binance got rid of their zero fee trading on Binance on Bitcoin, for example. And that was a pretty big factor. You know, like you can just even see the liquidity chart just on that platform alone.

It was like like amazingly, it's like just just a sharp line down. And so, yeah, I think that has contributed to some of the moves that we've seen as well. But, you know, like last month, the March 31st or whatever the end of month contract was for on the option side, like that open interest was like 37 and a half percent of the total open interest of all the contracts. Like that definitely contributes to some of the like short covering move that I think we've also seen. And it sounds like to kind of James point like that could be contributing to what we're seeing right now as well james does that mean we should have more fuel to go up even from here though if uh they're really adding their shorts with not well if if people were liquidating their short positions we would see it we've not seen i mean there's short positions i'm looking at earning etfs right so um and they're not leveraged they're just just one for one. I think what to me just highlights that people are holding on for now, at least, but at some point, they're going to capitulate. But definitely, yeah, there's been short squeezes and other areas in the market, which were absolutely in this low volume market really added to pushing up an acceleration price recently. Now here we are at the end.

And listen, we had the title Ethereum to lead the market. It sounds like everybody here is pretty bullish on Ethereum. So I think that that can be the sort of consensus view and the summation of what happened today is that Ethereum continues to follow their roadmap and continues to successfully have these upgrades. And I think that the market is going to react and that that's where primarily

we're going to see a lot of the building. I think we'd all agree. Guys, thank you so much. Loved having all three of you. You made my job really, really easy because you guys have a lot to say. I should have just literally shut up and not said anything the entire time, probably.

Everybody, their Twitter accounts are in the description. So please go follow Tom, James, and David. Although, David, you never tweet, right? No, not really. I post a lot on LinkedIn, but I never tweet. Follow him on LinkedIn if you can find him. Otherwise, everybody, I will be back tomorrow morning doing the news and you'll see all three of these guys

in the very near future. Thank you, everyone. See you tomorrow. Thanks, David, James, Tom. Nice to speak to you. Thank you. see you tomorrow thanks david james tom let's go