← Raoul Pal: The Journey Man
Raoul Pal: The Journey Man
Inside a DeFi Hedge Fund: Risk Management in a 24/7 Market ft. Evgeny Gokhberg
01:08:16
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- [00:00]
Raoul Pal
Today's episode is brought to you by Abra. Abra aims to provide individuals and institutions with a secure way to control, manage and grow digital asset wealth. From a separately managed account, Abra helps his clients get exposure to crypto and crypto financial products like yield and lending through one full service platform. If you're looking to gain access to additional liquidity, Abra has one of the most competitive loan products in the market. You can borrow against Bitcoin, ETH and Solana at up to 50% loan to value. Rates are in the 4 to 6% APY and and are open term. You can continuously draw down against your collateral as the price appreciates. Abra has other strategies to add yields and their team is happy to help align your portfolio to your risk profile. Reach out today and get a complimentary consult in your portfolio. It's worth seeing if they can help you manage your allocation, reach investment goals, manage risk and add additional yield. Go to realvision.com abra and tell them I sent you. Hey everyone. As you know on this podcast I bring the best guests in the world at that nexus of understanding of business, macro crypto and the exponential age of technology. If you're enjoying the show, a quick five star rating goes a long way. It helps us grow and keep these conversations coming with the best guests in the world. Thanks a lot. Hi, I'm Raoul Pal and welcome to my show the Journeyman where we journey to that nexus of understanding between macro crypto and the exponential age of technology. Now most of you watching this know that crypto has been difficult in recent times and really we want to try and understand what's going on, what it all means, but also learn from somebody who's in the trenches as a hedge fund manager running a large portfolio in crypto. So today we're going to speak to Evgeny from RE7 Capital and we're going to get a good idea of really what's going on right now and what it means for us. Before we go to the interview, I just want to remind you today's episode is brought to you by Fine Figure. If you believe Bitcoin in long term, the worst move you can make is selling it just to access liquidity. That's why you should check out figure right now. Figure offers crypto backed loans at 8.91% interest with a 50% LTV so you can unlock capital without creating a taxable event or giving up your Bitcoin exposure. Figure's the largest non bank mortgage lender in the US with over 19 billion unlocked on their lending platform. Now they're letting Bitcoin holders borrow against their Bitcoin instead of selling it. Security matters here. Figure uses decentralized NPC custody, meaning your Bitcoin stays in a segregated wallet, not rehypothecated, not pooled, and not sitting on an exchange balance sheet. They've also rolled out liquidation protection to help borrowers during sharp market drawdowns. And if you're stacking sacs and also want yield, democratized prime lets you earn up to 8.5% APY paid hourly, backed by real world assets, not yield games or token inflation. They also have a $25,000 sweepstake happening until February 20th. Hold your Bitcoin, unlock liquidity or put your capital to work. Check out figure using my link below. Join me Raoul Pal, as I go on a journey of discovery through the macro, crypto and exponential age landscapes. In the Journeyman, I talk to the smartest people in the world so we can all become smarter together. Evgeny, great to see you on Real Vision.
- [03:28]
Evgeny
Thank you for having me, Raoul.
- [03:30]
Raoul Pal
Yeah, this should be fun. I'm looking forward to this. So as ever, I'd love to get your story how the hell did you get here today? And then we'll talk about what you're up to and then we'll talk about markets and all the things people want to hear.
- [03:41]
Evgeny
Yeah, out of all the stories you usually get here is probably one of the boring ones. You know, I started Tradfi in London about 15 years ago in a hedge fund as an analyst and then eventually as a junior PM doing equity long, short, global macro, which was very exciting. And then I kind of transitioned into banking. Spent quite a few years in UBS and Deutsche bank doing multi asset portfolio management in the wealth management business. And obviously, you know, the pace of working within, you know, European banks is limited by what you can do. So I started searching for something more intense and dynamic. Came across across Blockchain, which got me quite excited because when I learned about Bitcoin in the, you know, when I first heard about it was probably 2012 and I thought it was a Ponzi scheme, so I ignored it. Then I saw blockchain. I was like, oh my God. It's like you can like rebuild the bank and make it so much better. That that's interesting. And then I just started very methodically going to all the meetups and I was lucky to join an Ethereum meetup where Vitalik was speaking.
- [04:45]
Raoul Pal
When was this?
- [04:46]
Evgeny
This would have been 2015, 2014, 2015. And I was like, okay, I don't understand anything that he's saying, but this is really clearly a genius, so I need to learn and figure it out. So spent, you know, about a year learning, then start investing. Then back when enterprise blockchain was a thing and felt like a legitimate way to earn a living, joined a startup doing supply chain traceability for diamonds and other things, that was a pretty wild and exciting experience, but eventually gravitated back towards markets. So DeFi in 2019 started playing with it personally. And then pretty quickly it became clear that there is something new that can be created. Something very unusual when it comes to investment strategies. And then I launched my firm a bit less than five years ago and fast forward to today. You know, haven't slept in like five years by the virtue of being, you know, 24, 7 addict when it comes to on chain activity. And yeah, now I'm here running a bunch of different strategies, deploying capital on chain.
- [05:57]
Raoul Pal
Why RE7 Capital? Why the name?
- [06:01]
Evgeny
Yeah, that's a great question. So that's a chess reference. It stands for rook to e7. When making the decision to quit a pretty comfortable banking live and launch something new in the wild in Defi as a defi yield investment firm five years ago felt pretty scary to say the least. So it was kind of a deeply personal choice. And at some point I got blocked because I needed to fill in file paperwork and I didn't have the name of the company. And when I was a kid, I used to do chess professionally. So I started kind of drawing on that as an inspiration. And I remember that there was a story that always inspired me whereby there has only ever been one skipping that has ever died undefeated. And I was like, okay, well let's kind of dig into that. So I started looking through, you know, records of his chess games. And then I kind of thought, well, how did he become the world champion? And I saw, you know, the record of his game and his final move in his final game was rook to E7. And having made that move, he has become the world champion. So I thought, okay, well that's what I want to inspire towards in my industry, in my domain. And then I also thought that, you know, it sounds pretty cool because you can kind of play with it and you like, you know, it's like reset and resets rethinks, like reset finance, that sort of thing. And that's how it started. Then there was an additional kind of deeply personal connection for me because when you play chess professionally, you keep like a physical notebook where you Record all your moves. And when I was a kid, my dad showed me a notebook that belonged to my great grandfather who played against that guy, and they scored a tie. I don't think I would even try to play against the world champion. It will be very embarrassing, but a little bit of inspiration doesn't hurt.
- [07:57]
Raoul Pal
So what strategy did you start with
- [08:00]
Evgeny
when you started building market neutral defi yield? And what that means in practice is think of it as a hedge fund. And all it does, it collects dollars, converts these dollars into stable coins and parts of these stable coins somewhere in the blockchain earning yield. We don't care about the direction of the price in that original product. We don't care about designing a trading strategy. We don't care about Treasuries, macro, geopolitics, or whatever else. We care about blockchain platforms not going bust through software attacks and hacks. My thinking was I want to run an investment firm in the space, and no one goes into the space to make 15, 20% a year. We'll come here no matter how disciplined we try to be, for much more aggressive P and L. But it was very scary for me to base the business as a foundation on something that's extremely volatile. So I thought it would be great as a foundation to have something that's market neutral, that's very reliable and consistent, and then build on top of that. And in the early days of defi, you could have parked your stablecoins in pretty simple ways and earn, you know, 30, 40% a year. And as I was thinking about it, I was like, okay, it's pretty interesting for two reasons. One, it felt very different from, you know, arbitrage and quant strategies, whereby you're not really trying to exploit market inefficiencies. What you're really doing is the same thing that the Medicis were doing in Florence and JP Morgan has been doing in the US economy. You're stepping in to provide liquidity into the ecosystem. That's what banks do. And in this universe, the role of a bank is outsourced to anyone in the market. So anyone with a wallet can do what we're doing, maybe with less sophistication, but they have access to the same set of opportunities, so that if you can step in into the ecosystem very early on, you become a structural player, like a banker to the industry, in a way, which is pretty cool. And then the other element, which I found very exciting, was this was the first time in kind of my professional history of looking at pretty much all asset classes that have ever existed where you can have a structurally different and unique risk return payoff cycle. Sorry, profile. And I don't mean the asymmetry of returns, I mean the source of risk. Our source of risk is random software platform on the blockchain getting hacked. Now that risk may be high or it may be low, but it's completely uncorrelated from stocks, bonds, BTC and anything else in the world. So you get paid to take software risk and I've never seen anything else like it. So I thought this could be an opportunity to create something very new and very different that has never existed before as a risk return payoff profile. And that was the main inspiration.
- [11:05]
Raoul Pal
And how do you then go and measure that risk? How do you know what, what the risk is of an exchange getting hacked? So, or do you just run a diversified basket to assume some default rate?
- [11:19]
Evgeny
Well, diversification always helps, but it's not enough. So when I was playing with this back in the day, defi was wild, wild west. You know, you're getting 30, 40, 60% of the year and then you know, every third platform is getting hacked. So great as a hobby, but maybe not very reliable as a product. So what I was thinking is if I can figure out the risk management framework, then I have a product. If I can't figure it out, then it's basically a hobby. So then I started thinking, because I've never studied software or computer science, I'm kind of a finance person. So I can like, well now I can use cloud code, but back then I could have like typed hello world. And that's pretty much it. So I was like, okay, well I don't understand anything at all. How do I, how do I approach it? And then I started thinking, well, what is my risk return profile? I put my stablecoin in DeFi. I earn money every second. And then one day, which could be tomorrow or in five seconds or in five years, I can get wiped out with one event, I. E. A hack. And I realized it's like selling a boot option, which is how credit works. You get paid and then one day your counterparty can go bust. So I thought, okay. To a non financial person, lending sounds like a horrible deal. Because I borrow from you, I pay you back with 5% interest or I default. That's not great. Minus 100 plus 5. But in reality what you can do is you can diversify, you can run risk and you can assign a level of risk rating. So with that I created a framework where like, okay, can we actually categorize all vectors of attacks that have ever existed on the blockchain. When it comes to hacks, can we create a checklist in like a form which you fill in and then you say, well, you fill in a form and someone scores 100 out of 100, 50 out of 100, 0 out of 100, then you say it's triple H will be CCC. And then you run a very diversified portfolio. So that was the hope and inspiration that the framework like that would work. We even published a paper on this a few years ago and I'm surprised that no one actually copycatted that. And I was thinking with the same mindset as a fixed income manager would, where you have an index, investment grade bond index, for example, and the index pays you X and it has an annual default rate of yes. So that spread is what you earn. So then if you're giving money to an active manager, that spread has to be bigger, right? So the same return, lower default or whatever other combination of factors. When we started in defi, the annual quote unquote default rate, ie hex, has been double digit 10 to 15%. It gradually came down as the industry became safer. So now it's maybe, you know, two, maybe three, maybe five depending on the year. And we have lost about 20 basis points a year to Hex. So we've been able to push that metric down by like 20x plus whilst delivering double digit yields, meaning the strat, the framework works. And that's how we got to it, because we realized that audit firms who are out there, they're trying to label something as green, right? You're building a platform, you're paying a lot of money to auditors and you want to communicate to the world that you've been marked as green. But world isn't binary and risk isn't binary. So in our minds, we do our research and we look for red. If we find red, it's out. If it's not red, it's not green, it's yellow. And then there are 50 shades of yellow. And then you diversify accordingly and hopefully you achieve a more sustainable outcome.
- [15:00]
Raoul Pal
And so you're not doing like cash and carry arbitrage yourselves, you're just, you're lending to defi.
- [15:07]
Evgeny
Overall, we start with, in what scenario are we okay to lose money? We are okay to lose money if a defi platform is hacked. That's kind of our starting point within that we can do whatever we want as long as we only lose money in that scenario. Meaning if there is a great platform where I can put my eth and earn a bunch of yield. I will gladly use my stable coins to buy eth. I'll short the perps, I'll earn the cash and carry whilst also earning yield from the defi platform. Or I will make the market between a stable asset and a non stable asset and run a trading bot that hedges out my impermanent loss and kind of the delta risk. But ultimately it's all about picking a defi platform that gives us very high yield on a risk return basis.
- [15:53]
Raoul Pal
And are you finding the market still relatively starved of capital so the yields are pretty decent? Or are we seeing more capital coming in? Or have we not seen the institutions and others coming in yet?
- [16:06]
Evgeny
Last year alone there's been over a thousand new defi platforms that went live. I don't think there's been a thousand new defi yield funds that went live. So we exist, our capital is a commodity and there is a supply demand profile for that commodity. The DeFi TVL has not really grown since 2021. The number of platforms however, has. So people are still starved of capital. And I think that's a very structural feature because cost of innovation is basically as close to zero as it gets. Right. If you have a laptop and cloud code, you can fork any defi protocol right now. And with a little bit of venture financing you can do a lot. But in order for someone to launch a fund raise money and provide that liquidity, that's pretty hard. And there are quite a few hurdles out there. So for the foreseeable future, we believe that supply demand will continue to be kind of in the favor of allocators, although yields are highly cyclical. So frankly, what affects our P L more than demand for demand invariance is a cyclicality because in the bull market you can, you know, buy eth. Well, buy a stock, you make 2 or 3% and then you make additional 20 by shorting. That's it. You don't even need to take any defi risk. And in the bear market, you know, you won't make anything. So there is cyclicality to these returns, but all in all it still feels like a favorable environment.
- [17:34]
Raoul Pal
And do you diversify across blockchains as well?
- [17:40]
Evgeny
Absolutely. So we take three layers of risk. We're holding an asset, maybe it's a stablecoin, maybe it's something else. So what if the stablecoin we're holding is bad? So that's risk number one, the platform is the second risk and then the chain itself. And we have had cases where as in not we, but we as an ecosystem where chains collapsed. Right. Terra, There have been some other chains which are relied on a specific bridge. There was a case with Fantom back in the day where the whole chain relied on a bridge which was governed by multisig and then allegedly police raided someone's house in China and the chain collapsed. Like we don't want to have that risk.
- [18:20]
Raoul Pal
And so what's stopping the giant pools of capital, whether it's the banks or whether it's Apollo coming into the space and kind of crushing the returns, they just not have the sophistication or it's still too small for them. Why has that not happened yet?
- [18:37]
Evgeny
It's a process, right? So we have been speaking to institutional allocators for a long, long time and they're definitely becoming more open minded and more receptive to this. But it's, it's just a very different world. So before, you know, before Trump, you know, is it really okay for a large, you know, US institution to deploy capital on chain? Is it worth the risk? Not really. Usually when we speak to all the usual subsequents in the traditional world, what they would be telling us, they would be saying, listen, we run a multi billion dollar business, how much can we really deploy on chain? And whatever the number is, the P and L we generate from that is not worth exposing our core business to existential risk. So this is changing now and they're becoming more open and some of them prefer to deploy through players like ourselves. Gradually, however, we're clearly seeing a convergence of CEFI, DeFi and TradFi, where with a Coinbase app, you want to borrow against your coins, your request for loan goes on chain through different vaults, for example, Morpho, you source that capital and then that capital can be provided by the market by ourselves or by someone who is a traditional institution. So over time I think that convergence will definitely happen. And then the question is, you know, does DEFI growth materialize further? And given that nothing has really grown on chain beyond, you know, pump and hype, it's tbd, but they're not quite there yet and the skill set is not transferable.
- [20:15]
Raoul Pal
Right.
- [20:16]
Evgeny
If you've been a brilliant trader at Citadel and you want to launch a clone firm, market making on chain, you'll probably do very well. But you've been, if you've been analyzing, you know, Coca Cola bonds and now you have to start analyzing, you know, hacking risk, there's probably quite a bit of adjustment.
- [20:36]
Raoul Pal
It's not an easy business for people to get into what kind of returns does, does this strategy kind of do versus a traditional fixed income sort of arbitrage strategy? I mean, they use leverage, which is slightly not comparable, but where does it stack up in the return profiles of hedge funds across asset classes? Is it attractive?
- [21:04]
Evgeny
So non financial advisor, obviously. But the way to think about it is the returns of strategy like this are, like I said, cyclical. So when I talk to traditional allocators, I tell them that. Imagine that, you know, I'm running a kiosk at an airport NFX kiosk and tomorrow there is, you know, Olympics and a billion people go for me, the day after tomorrow there is Covid and no one is going through a kiosk. And then on the third day it's just business as usual. Right. So in the bull market, you can get historically, you know, 25 to 30% returns.
- [21:41]
Raoul Pal
That's with no leverage, correct? Yeah.
- [21:44]
Evgeny
Then in a humble market, you get, you know, 15ish. And then if it's, you know, a Lehman moment, depending on how well you do, you can get, you know, five to 10. So that's kind of the, the framework and the way to think about the, the yield profile of strategies like this.
- [22:02]
Raoul Pal
And people who, you know, people are running funds, diversified funds, who have big drawdowns in this space. That's probably because they're running concentrated risk. So they've got one large event, the FTX style event, and then that hits them. The idea is to have enough diversification that you don't get hit by a single event.
- [22:25]
Evgeny
That's certainly our approach.
- [22:27]
Raoul Pal
Right.
- [22:27]
Evgeny
If you think back to the fixed income metaphor, you could absolutely have fixed income managers who are running very concentrate books. And sometimes it goes well, sometimes it goes poorly. Or you can take the different philosophy. Our philosophy has been that we accept that defi is what, six years old? That's frankly nothing. And we've operated for more than five years out of those six years. So from day one, we've operated with the assumption that there are lots of unknown unknowns. Therefore, we at the very least have to diversify. But more importantly, structurally, when you pour your heart and soul into building a firm, you don't want for it to disappear because one guy, God knows where, decided to rug an exchange or something terrible happens to a specific blockchain. So our philosophy has been that no matter what blows up in the world, we want to be at least flat on the year in the green. And that starting philosophy sets very hard caps on how we operate.
- [23:34]
Raoul Pal
Interesting. And then you've built other Strategies as well now. So that was the start, the foundational start was let's have a nice kind of yield looking product that is stable and secure, moves around a bit, but not too much. What came after that?
- [23:49]
Evgeny
The second logical thing was us thinking that well, we operate within the sector and we think as fixed income analysts. Ish. And we kind of understand this platform. So let's launch a second strategy that thinks as a long only small cap equity investor, I. E. A directional fund which goes along altcoins rather than the majors with an intention to beat the benchmark.
- [24:14]
Raoul Pal
And as a disclaimer, expand. My asset management firm is an investor here, but we're doing it as friends having this chat because Evgeny's really interesting person. But carry on.
- [24:23]
Evgeny
Thank you. Yeah, exactly. So yeah, that was the intention that at least back in the day when the market wasn't bleeding every day that seemed like a good idea. And the thinking was bitcoin stands alone as the story of digital gold. And everything else in our mind is basically a story of software businesses. Someone is selling you the story that we're the next App Store, we're the next Linux, but making money and we're the next Robin Hood and so on and so forth. So we thought, well, basically you have an ecosystem of small cap. Liquid ventures is glamorously called in our space. Right. Two or three year old companies which are liquid, that is they're still venture stage but you can hopefully get the same upside as venture funds would, but in liquid fashion. And we, we timed launch pretty well because we, you know, my firm went live in 2021 and I was very anxious to not do too much too quickly. And also the market was feeling, you know, a bit, a bit hot. And we went live pretty shortly after, after ftx which was kind of by design and you know, captured a pretty good run over the last few years. And then obviously last year has been, you know, very brutal for everything directionally, directionally deployed. But we remain very kind of resolute in, in our view that these assets are definitely not worth zero. And we believe that we're going like. I feel that altcoins are going through a massive cleansing exercise where what percent like we have, I know a million coins right now, maybe more. 99.9% of them should be worth exactly zero. And, and that's absolutely fair. And when I talk to you again, I talk to allocators and they tell me, well, 99% of assets should be worth zero. The industry must be broken. And I ask them, imagine if Every single startup in Silicon Valley would have been publicly listed on day one.
- [26:21]
Raoul Pal
Yeah, it's horrific.
- [26:24]
Evgeny
Just imagine the drama, the noise and everything else. And that's kind of what we're experiencing. But it's very clear. You know, you ask, you know, you use a case study of, you know, a company that generates, you know, half a billion a year of free cash flow, uses all of that money to buy back its stock, and has, you know, 2 billion of cash. And you ask traffic people, how would you value that business? You know, you get pretty high numbers. And, you know, we know that in our space, you know, someone, something like Palm trades at very distressed levels. So that was our second strategy. Knowing it's, you know, very volatile, but we're willing to take that volatility in exchange for, you know, asymmetric upside. And that's been our second product.
- [27:06]
Raoul Pal
And so when you're in the liquid space, how are you analyzing stuff using like discounted cash flow style analysis, so equity analysis, or you using more VC style, You know, where's the total addressable market? Is it getting network effects? How do you think that through when you're analyzing stuff? So a quick break in your regular programming. If you're serious about your future, grab my free report called prepare for 2030. I think you've got five years to make as much money as possible. And this guide will help you navigate what's coming. The link is in the description. Download it now.
- [27:42]
Evgeny
The reality is that I think it's super hard and I think like, it also keeps changing as a function of the market regime. And over there, you know, we kind of, we have two buckets in our portfolio where one of them is thinking of something as an established business. And we. DCF doesn't make any sense in our space because you know what, what I even writes as a token holder, that's still a little bit questionable in some cases. And you're at the kind of, you know, will of the market. But we look at something, we pay a lot of attention to technicals because the space trades on technicals, you know, where are we in the macro cycle? Where are we in the crypto cycle more broadly, where are the majors trading? Because if, let's say, let's use a random example, let's say you're bullish, you know, Palm dot fund on the back of its fundamentals. But, you know, if Solana is crashing through the floor, there's not much you can do, right? So we kind of stuff top down and then we merge it bottom up, whereby maybe Something looks like, let's say the cycle is great and there is a chart that looks amazing. But fundamentally it's like three guys, you know, shilling their coin at conferences. That's just not the game we have the energy to play. So we try to look at fundamentals, which frankly is not very hard given that everything is on chain. Like you look at something like AAVE, it's, you know, fundamental. KPIs are doing this and the price is doing that. So if you see a business like that and you believe that trajectory is sustainable and you know the founder and you believe the founder is high quality, then you have these alligator jaws and at some point they have to close. And as long as you don't use any leverage, then you don't get stopped out on the way. And then there are more speculative things. So you look for esoteric small things where you put them in your portfolio with the expectation that they'll be worth exactly zero because these are venture style bets. But if you write it, say 50 or 100x and then you try to manage this in parallel and we have had our fair share of disappointments as well as quite a big share of wins as well.
- [29:50]
Raoul Pal
So you're kind of running a barbell of concentrated risk where you've got something measurable that's understandable, that has some network effects and is not correctly priced according to your view, taken into account the macro and the cycle and everything else. And then you've got the other side, which is more power law driven, which is like, we'll have a basket of this stuff because, you know, we like the opportunity set. We don't know which ones are going to work and let's just let it work out, play out.
- [30:19]
Evgeny
That's exactly right.
- [30:20]
Raoul Pal
And do you then trade around a lot or you tend to set it, forget it, or as a combination of the two.
- [30:27]
Evgeny
So, you know, our approach has evolved quite a bit over the last few years. We spent a lot of time trying to optimize. Now let's say there is a category and there are two players in the category, you're holding one, you're seeing gallery starting to outperform. So you try to be smart about it and in some market environments that works very well and then in a bad market that works very badly. So we have shifted to a completely different approach where as long as everything is holding structurally, that is on a technical level, on a fundamental level, and we have a good line of communication with the team to make sure that there's no hidden skeletons in the closet, then we'll just keep holding it. And if there is something else that's outrunning it, so be it. Because we came to a conclusion that in this market, which is extremely unforgiving, is better to be very, very patient and not trade around these things because you're trading in a very P2P environment and the odds, it's not a sustainable way of delivering P and L. It's
- [31:35]
Raoul Pal
really not easy to run kind of altcoin risk. It's just a very difficult thing. But when it works, it really works. And you have to have a lot of patience because it tends to work in very concentrated periods, potentially generally late stage cycle. Yeah, you can be lucky with some things in the middle. We've had the hyper liquids, we've had the sui, did well, pretty well for a while, we had a bunch of those. But really you need the last part of the cycle to kick in.
- [32:05]
Evgeny
Exactly. And when I was back in my tradfi days, I remember looking at a data point, if you were long S and P, from let's say 1980 to whatever it was, like 2015 at the time, and if you would have missed top 10 days in the market, what's the impact on your P and L? And that was very, very substantial. So just 10 days out of 30 years. And in crypto, I don't think anyone can capture that. And I remember very well the days in 2020 and 2021 where if you're not in the market on like specific three days, you miss out on half the P and L. So I think it's very important. And I think the main reason why people get stressed out in the space is the sizing issue. I think it's very important to walk into this with your eyes wide open and be very clear about your expected var and level of risk is because if someone comes to you and says this is a trade where you can lose 80% of your money or 10 exit, okay, yeah, that's great, you can just size it accordingly. But if people think that, oh my God, I'm going to lever up and gamble my way into freedom, but that obviously doesn't work.
- [33:14]
Raoul Pal
And do you tend to think of your portfolio in terms of the full cycle or do you move around more than that, or is your mental framework is we need to capture the full cycle gains of this, so we think
- [33:32]
Evgeny
we want to optimize for the least number of actions, so when we're putting on a name, we want to hold it till the end of the cycle
- [33:40]
Raoul Pal
and then we may Change your view and take it off.
- [33:43]
Evgeny
Exactly. And then we will stop holding it if something breaks, whatever it might be. But our preference is not to over trade, because again, like, when I think back to my, you know, almost 10 years of being in the. In the crypto investing game, time in the market beats timing the market.
- [34:01]
Raoul Pal
I mean, I've said, I keep trying to explain this to people endlessly, but they're like, why didn't you get out here and do this? I said, that's not what you do. The actual way to compound gains is do nothing. You know, at a simple, you know, for a retail investor, like, hold a basket of Bitcoin. Ethan Solana, do nothing. They think they need to, you know, every big drawdown, oh, my God, it's gone down 30, 40%. It's just noise. What you're trying to do is where you bought it and where you sell it at the end of the. The cycle.
- [34:33]
Evgeny
And I think that's where a structure of philosophy comes into play, because we think, we truly think of these things as liquid venture.
- [34:41]
Raoul Pal
Yeah, right.
- [34:42]
Evgeny
So if you're making a venture investment, you at least should be making with a view that you will never see your money again unless things work out on the liquid side. You have the temptation and the pressure of choice because every day you're not selling something is equivalent to you buying and re underwriting that every day. And it's the same thing we've seen with stocks, obviously, but here it's much more extreme due to insane leverage and volatility and just the kind of the ethos of the space. But all the smartest people I've met in this. In this industry, they delivered P and L without getting anxiety attacks by being very calm and very patient.
- [35:25]
Raoul Pal
Yeah, I just think FOMO is one of the biggest destroyers of returns. I see it time and time and time again, and just not doing anything is generally the better way of doing things. So what the fuck is going on in the market? We're recording this on February 4th. It's a shit show. I mean, you and I caught up in Dubai talking our theories through some of this, which I still think is probably right, but it's still. I mean, I still think it's liquidity related, but who the hell is selling and why?
- [36:03]
Evgeny
I. Well, I think if. If we knew, then, you know, the world would be a different place. But, you know, it's really hard. Like, looking back, it's easy to say, you know, that, you know, October 10th and, you know, CZ or, you know, whatever broke the market and we're paying the price. Okay, fine. Then you know what's happening over the last few weeks? Well, maybe it's you know, like you, you mentioned in, in one of your, you know, posts recently that you know, U.S. liquidity is going down, having deviated from the global liquidity. So maybe it's that, maybe it's a shutdown risk, maybe it's people getting worried about quantum, which I don't think is really the case. And like I've spoken to some traffic people who are holding ibit and they're like, oh, what do you mean quantum risk? Like I'm sure you guys.
- [36:54]
Raoul Pal
Yeah, exactly.
- [36:58]
Evgeny
Honestly, I don't understand and so the way how we're thinking about it at this point because I feel the market is beyond understanding right now. You can have conspiracy theories that you know, some exchange went bust on 1010 and now they're like somehow dumping the inventory. But like who knows? And like you just don't know. So we're taking a very different approach where we are just zooming out completely. We're looking at multi year, multi cycle kind of charts on btc, Ethan Seoul in absolute terms and relative terms. And then you know, BTC versus Nasdaq, BTC versus Gold. By the way, if you look at BTC versus Gold, it's at the bottom of a multi year channel. So we're looking at those things and where everything is testing its critical levels. So over the last year I probably said 10 times that you know, this is the bottom. So I will not be saying that ever again.
- [37:55]
Raoul Pal
But I've been there too.
- [37:57]
Evgeny
It's not unreasonable to assume we're closer to the bottom than to, you know, a bottomless pit. So therefore, as long as we keep holding these levels then you know, there is hope that we, you know, we can have something positive happen this year. And if we just break through these levels then, then it's going to be, well, very, very bleak. But what's giving me hope is the market is behaving very differently from let's say a year ago. So a year ago Bitcoin is down 1%, SOL is down 3 and your average altcoin is down 15. And then it's very scary to be holding alts because you're just getting destroyed every single day. It's like negative convexity. You get, you know, you pay to wait, which is horrible. But now you know, well, firstly there are some names which are actually doing very well and they're up even though bitcoin and everything else is down. But obviously there's like two of them, so, you know, you can't do much with that. But lots of alts are actually not breaking down on a relative basis versus BTC.
- [39:04]
Raoul Pal
That's right. It looks like I use others on TradingView versus Bitcoin or Toad, and there seems to be some stability or outperformance coming below the surface. It's kind of like how I think about this as well is it took a while for the Russell 2000 to start performing. And it's the same thing. It's small caps versus the majors. It's the same process driven mainly by the same business cycle, as far as I can tell. And it feels like the signs of something reversing. There's. Yeah.
- [39:37]
Evgeny
And kind of that's the hope we have. But realistically, like every week we're approaching. We're literally at critical levels. Right. I mean, Solana, you know, broke down 100 and is now like at 92 as we speak, which is beyond my understanding. So, yeah, I'm curious how you think about these levels because, you know, do we do a stop loss at some point? Do we just keep holding? That's I guess, the tricky question. But so far, when you look at, you know, there was a great print on ism and, you know, we need good ISM to actually have, you know, what we need to have. I'm not a macro expert, but I don't think that we need to, you know, panic, sell on the back of who's going to be the new Fed chair. If anything, it's probably the opposite. So if everything is this cheap and this distressed, why would you sell? And, you know, this is, I think, where, interestingly, you know, asset allocation comes in. Because if you're already fully invested, you're like, maybe I need to just get out before it goes even further down. But then if you're not invested in the space, this is when you start allocating. Because blood is not just on the streets. It's up to your kneecaps, quite literally.
- [40:47]
Raoul Pal
So, yeah, I mean, you know, as you know, I use my macro framework, liquidity framework, all of that. And all of that is looks great. Yes. We need some more liquidity in the U.S. the shutdown's just ended. There's still a bit of part of it, there's still a little bit left. But really, they've announced the funding. It all looks fine. We've got Besant telling us he wants to hypercharge the economy. Why the ISM is important is because that's economic activity and that means people have more money and they invest in riskier things and it's all there. The levels are at key kind of levels. The technicals for me, I use a lot of demark indicators are bloody close. Not on the weekly charts, but on the daily charts. But you don't necessarily need the weekly charts to stack up. We've got the potential for this clarity act to get through. Looks like they're really fighting to get it through because don't forget the crypto crowd were the biggest donors to the Republicans. So they owe them something. So they owe them this. So on a risk reward basis it feels like it's a good trade. Yeah, I'm fully invested and you know, for me how I play it, because I don't think this is the end of the cycle because it's not the end of the macro cycle. So that would be weird. So I just don't do anything. And if I get more cash in and I can spare the cash, I just keep adding because over time, if you think that tomorrow is going to be more digital than today, blockchains will have more value over time. And you don't have to go wildly, far out the risk curve to capture any of that. And so therefore it just doesn't worry me, but it worries everybody else so much about the ups and downs because I understand people's hopes and dreams are in this whole trade.
- [42:33]
Evgeny
Right.
- [42:34]
Raoul Pal
It's a lot more than just an investment.
- [42:36]
Evgeny
Well, it's a lifestyle and it's like Ethan Solana are lower than where they were five years ago. So there are people who bet their careers and lives on this, ourselves included. And it's not fun. But what really amazes me is the disconnect that we have between the fundamentals and the price. So with my partner who we're running this fund with, we run a very simple exercise we looked at last year. We picked what we believe to be quality defi platforms and like, okay, what's the average growth in revenue over 2025? And it was on average for that basket, about 30%. And what is the price performance for that basket? It's roughly minus 50%. So that feels a bit weird. And then every day you have more stablecoins launching more banks and traditional institutions using on chain products more integrations, more, more, more. And yet that doesn't seem to matter. So it's like fundamentals are completely disconnected from the price. Which then brings me back to, you know, maybe it was as simple as, you know, October 10th, just structurally breaking something in the market. And maybe it's taking longer than we hope to recover from that. It's just very hard to explain it otherwise.
- [43:58]
Raoul Pal
I had a weird thing happen to me. I was writing Global Macro Investor over the weekend and a client of mine who's a pretty well known hedge fund manager sent me an email, said, you know, should I buy the bottom in software stock in SaaS companies? And I'm like, well, you know, Claude code Claude, you know, blah blah, blah, blah, blah. The answer that the narrative, right, the market narrative. I said, I'm not sure. Let me go now, let me go and have a think about it. And if we think the narrative in Bitcoin is 10, 10 broke things, blah, blah, blah, then I overlay the charts and they're literally identical. And I'm like, okay, this is telling me both narratives are wrong and there's another dominant factor that's causing this. So I spend a bit of time with AI chatting through this and thinking through it. And the answer was U.S. liquidity. And because what had happened, and this is my understanding of this as US liquidity because of the complications, everybody's heard me talking about all of that. Because of the TGA rebuild and no reverse repo and then the shutdown, US liquidity shrunk. These two SaaS or software and crypto are the furthest out. They're the longest duration assets of all. So what happens is they get hit because the marginal liquidity is not available. There's still liquidity in the system, which is why NASDAQ's going up, blah blah, blah. Or NASDAQ stopped going up, but there's still enough momentum in the market. And then the one key variable that changed a lot was gold. So gold starts going up, it's a big asset and it sucks in attention and capital. So the marginal assets get hit and so nothing else makes sense. If SAS stocks and Bitcoin are identical charts. So therefore it's not an esoteric thing, a single factor individually to those things. It has to be something bigger. So that's what I got to with that is maybe all of our narratives are wrong. It's explained by there's simply not enough money in the space right now to maintain that it's the same. If you think through the altcoin space, there's not enough money for the million altcoins for them all to run. So what you end up with is some runners and a whole bunch of stuff that doesn't ever perform. And so that's because there's not enough liquidity. If you Put a trillion dollars of liquidity into Bitcoin, into crypto, tomorrow everything goes up because then there's enough liquidity. It's as simple as that. Right.
- [46:42]
Evgeny
And what needs to happen for that US liquidity to come back and become the marginal buyer?
- [46:48]
Raoul Pal
So firstly it was this shutdown because the TGA has been, they wanted it at 850 billion which is high anyway it's at 900 and something billion so there's about 100 billion too much in it already versus what they wanted. But they've had to hold it because of the shutdown that's going on, that's just ended. So that should start withdrawing. So that's fed net liquidity going up. We know the balance sheet is also growing. So then, okay, now we've got a tailwind. The next step is the issuance of bonds and bills and who absorbs them. So they've just changed the ESLR which is the risk weighting on Treasuries, reduced it which means the banks can buy more Treasuries. Today they announced the funding schedule. It looks like because of how it's structured they're not going far out. The yield curve they're keeping to bills, they're, there's about 150 billion of extra liquidity coming from that. The difference is now because they've changed the regulatory requirements the banks can do more with those bonds. So they will recycle that capital and create money because the banking system can print money in its own right so it has a multiplier effect. So that starts really kicking in in sort of March, April, May, but we've got the TGA beforehand then we've got the fiscal stimulus, we've probably got some rate cuts so it feels like it's all there but it just needs to happen. Meanwhile the Chinese are extending their balance sheet. They've been the driver of global liquidity. So that's good. So the conditions are in place. Are we going to get a nuclear bomb of liquidity? I don't know but I know that the banking system will re leverage it. The big thing is if Steve Miron gets through what he wants to do which is reduce all risk weighting on government bonds for banks so that means they can really, they can create 5 trillion of leverage and that's a big deal because a it goes through to Main street because they lend money that gets the ism screaming higher. The business cycle recycles capital through the system finances the capex spends that are required for all of this data center build outs and all of that. But it also creates money, M2, all of that. So I think that's what they're going to try and do. And Scott Besant knows he has to have liquidity if he wants good markets. And the market's showing you right now that it doesn't have enough liquidity. Nasdaq's been sideways for two months now, three months. Everything feels a bit heavy. The gold traders gone now for. For the time being, it. And it will never suck in as much capital again. Even if gold takes to new highs, it won't get that amount of attention again where it sucks in everybody's attention. I mean, you and I know every single crypto trader became a precious, precious metals trader.
- [49:45]
Evgeny
That. That's exactly right. And then also there is this anxiety on, you know, AI CapEx, AI spend, which is, yeah, further pushing. On one hand, it's further pushing down kind of the risk appetite. On the other hand, it means that someone will look and say, well, I invest a lot in AI. I should probably go back to crypto a little bit. And maybe that helps as well.
- [50:06]
Raoul Pal
Yeah, I think so. And I think there is a. We tended to see when gold peaks, gold generally is in line with financial conditions, which leads everything. So gold tends to peak and then bitcoin really tends to perform. Now if it's not a prerequisite, but it's kind of of that. You know, what you'd like to see is the ism going up, liquidity increasing, gold sort of topping out. And that gives you generally what the structure is. Then you want to see what you mentioned before, altcoins starting to stabilize versus the majors. You want to see bitcoin dominance coming down, all of those signals. So it feels like they're very close to a lot of this right now.
- [50:48]
Evgeny
Yeah. And the only thing that's causing anxiety on my side, it feels we've been very close for a while and then yet every day we're just getting kind of breaks.
- [50:59]
Raoul Pal
Yeah, I mean, it's surprising to get Every day the market's down 6% and I've not really figured out who the sellers are of all of this. It's fine to have no marginal liquidity, but who's the seller and why? I don't understand. I mean, there's obviously a lot of players in the market. I hear it's a lot of miners. Miners who are switching to data centers. So they're switching use case and therefore they just liquidate their bitcoin. Because there seems to be a lot of selling coming from The Middle east and Asia, China. That's what I hear. But who knows, right? Everyone's got their own theories right now.
- [51:39]
Evgeny
Yeah, yeah, exactly. And then, I don't know, over the last 24 hours we have this kind of coordinated push where people are hoping to cause a bank run on Binance, which. Well, firstly, I don't think they'll succeed, but secondly, it's not like they're helping anyone. But maybe that is partially it as well. It's just very unclear. And as per usual, we will only know in retrospect. But then everyone has to make decisions today, waiting for the explanation later.
- [52:09]
Raoul Pal
And what do you think for people watching this? You think people should just be closer into the risk curve right now, so stay in the majors and wait for a better signal if you're in the market. I mean, how should people think about it? Or should they be broadening out a bit? Because this is the opportunity set.
- [52:29]
Evgeny
It's very hard, right, because everyone has their own. As a classically trained kind of, you know, banker, it all starts with risk tolerance.
- [52:39]
Raoul Pal
That's right.
- [52:40]
Evgeny
And allocation.
- [52:41]
Raoul Pal
So, like, people don't understand risk tolerance until they have a 40, 50 drawdown.
- [52:46]
Evgeny
Well, until they can't sleep, basically. Yeah, exactly. So kind of my personal approach is, okay, like, how much am I willing to lose? Right? So if, let's say there's an asset that I think in the worst case scenario can go down 80% and I'm only willing to lose $80, then I should only invest $100 and no more. Right? So then if someone has invested already and obviously most people unfortunately have in our space, then it's very hard. And then the question is, you know, how do you go after, or, you know, around that? How do you manage that? And just thinking logically, I remember in 2017, I said no to most ICOs because I thought that ETH is like the NASDAQ and all of those things are like small caps trying to outperform it. And I missed out on a lot of winners. But on average it's been okay. And my thinking hasn't really changed where I feel, you know, we have the benchmark, which could be a basket of EthBDCSoul, for example, and you can just hold it and go to sleep and know that most likely it's going to be okay in the end with a long enough time horizon. Or you can try to be more active, but then you need to realize you need to manage it more actively and you take idiosyncratic risk. Right. So you may Say that instead of holding, you know, Ethan Sol, you want to hold Sui, for example, for a variety of reasons and in a specific market environment, it will do phenomenally well versus the other ones. But then you will wake up one day and you know it's going to be down more than the majors because it's higher beta. And then you need to be able to ask yourself, you know, why am I still holding this?
- [54:31]
Raoul Pal
That's right.
- [54:32]
Evgeny
Keep holding this further. And then if you can't answer, why am I still holding it? You will most likely sell at the worst possible time.
- [54:39]
Raoul Pal
Well, because people also confuse why am I holding it? With price action.
- [54:44]
Evgeny
Exactly.
- [54:45]
Raoul Pal
And, you know, you have to ask yourself, has something changed in my assessment of this? Is it acting in line with where it should be on the risk curve? You know, you look at it, if Bitcoin's down 30%, ETH's going to be down 45, Solana is going to be down 55, Sui will be down 75.
- [55:03]
Evgeny
Right.
- [55:03]
Raoul Pal
That's the normal risk curve. Is it doing anything different to that is the question you have to ask yourself as well. Or if not, it's just. It's beta.
- [55:12]
Evgeny
Exactly. And then, then, you know, people would need to spend time thinking about it. Then they need to adjust for the fact that they'll be wrong. Let's say 50% of the time, which means to run a portfolio end and an end which usually should lead to the conclusion that, you know, just take it easy. Unless you're highly specialized or, you know, well trained. But that's not how people operate in crypto, naturally. So I think it all starts with asking yourself, you know, what are you like, if whatever you're holding goes down by X, are you willing to bear that? And then even more importantly, on the way up, is it likely to make new highs or is it going to go down 90% and then double from there? Because that's another complexity. And I feel unless we get a Covid bazooka, then it's reasonable to assume something good to happen to the majors and the quality assets. But if something hasn't made a new high since 2017, it's like the death spiral. It'll probably make lower lows and lower,
- [56:20]
Raoul Pal
but you know what they're all going to do? They're all going to look at the chart of zcash and say, it's possible. That's what happens. Right? You screw your whole thinking because you're like, look at zcash. This could do it.
- [56:34]
Evgeny
And that's the main challenge with the space because we've seen so many people get wildly, you know, well off on the back of taking very large, very concentrated bets. Yeah, obviously we see the survivorship bias. Right. There is this, you know, Twitter thing, coin fashions, where people, like, anonymously write their confessions. Oh, yeah, and you read that it's like, it's pretty, pretty bleak what people actually experiencing. So there is this temptation, you know, it's like there is, you know, there's this joke that the worst attack on education came from the Zuckerberg story. Because now everyone thinks, if I am a dropout, I'll be a billionaire. Great. That's not really how it works.
- [57:24]
Raoul Pal
And it's also the survivor bias is, let's say you get a room full of people who've had a good career, they got a million bucks in investment portfolio. One guy happened to buy ethereum at the ICO. He's now a multi billionaire. There's 10 of them who did other ICOs, and they all went to zero. You don't see those stories. You just see the one person who got it right.
- [57:51]
Evgeny
Exactly. And that's why, like any coach or, you know, psychologist would tell you it's important to look within and understand what you're willing to live with. Because ultimately, you know, we all need to acknowledge that, you know, we might all be wrong and maybe we've just been delusional for 10 years and none of this makes any sense. And like, you need to be able to survive in that scenario. It's very nice to have a story where you go, you know, all in, you know, you're back to the wall and it's a dramatic story of how, you know, you kind of, you make it, but life is not as dramatic. And you, you know, if I don't remember who's one of the Twitter Personas said that, that, you know, if you don't manage your risk, then the market will manage it for you.
- [58:40]
Raoul Pal
Exactly right. So final question for you. Do you think is this the. I know it's a weird question when Asset Bitcoin's down 40% or whatever, but is this a bear market or is this a mid cycle kind of weird thing? What's your mental framework?
- [58:57]
Evgeny
So that's a great question. So we try to think in cycle terms and then we're looking for a signal that the cycle is broken, tell us we're in a different regime. And last, well, last 12 months, 13 months now, have been absolutely brutal. And, you know, an average altcoin is down 80% and the majors are down a lot. But if you actually zoom out and you look at the relevant macro indicators and you look at the majors, it doesn't look broken. It looks like we went through a very sharp correction within the bull market. This correction has then been extended in both duration and magnitude. But at this point, it doesn't feel right to say that the whole thing is broken and you need to get out because it's going to be two years of pain. That may change tomorrow if we go down more and more and more and more. But as of right now, it just doesn't feel like stuff has broken.
- [60:08]
Raoul Pal
Yeah, I agree. If you just look at the monthly chart of Ethereum or something like that, it just looks like it's a sideways consolidation since 2021. There's nothing scary on that chart. When you zoom in, everything looks super scary, but when you zoom out a lot, it's like, doesn't look that bad at all. Yeah.
- [60:34]
Evgeny
And then you have some other names which are either holding very well or are making, you know, higher highs even in this environment. And then I think we need to take a step back. You know, I had an interesting call from one of my LPs around Christmas. And, you know, he's kind of invested on the long side and he's kind of thinking whether he should, you know, increase. And one of his questions was, evgeny, do you think the industry is going to die? And I'm like, why are you even asking that? And he's like, well, when prices are down 80%, that's usually a signal that something is collapsing. And I was like, well, actually, stable coins, banks, blah, blah, blah, blah. And he's like, oh, wow. Because that person is not in the space at all. And he's like, oh, I just looked at the market, I assumed everything is dead. So the question we have to ask ourselves is eth worth zero? Is pump worth zero? And if it's not, then we don't know what it is because we can't do a dcf. Not really. But we can have a mental model. Right? Can you, if you really believe. Well, the data is telling us that a trillion dollars of tokenized assets could exist on Ethereum in the near future. Could the security value of the network be lower than that? Doesn't really make much sense. You can argue both ways, definitely. But it's not unreasonable to assume that this is an opportunity rather than assigned to abandon all ships.
- [62:13]
Raoul Pal
Yeah, that's how I see it as well. All right, my friend, fascinating conversation. Thank you. Hopefully people have got a lot out of this and let's see where we go from here. I mean, I remain bullish. It was a pretty shitty year last year, but it is what it is. And I think it's as you and I spent a lot of time talking about, you've got to have the right mindset and understand what risks you're taking and what your actual risk tolerance is. I mean, those of us, the longer we've been in this game, the more risk tolerance you have, you have the ability to take absurd risks. I mean, I've had two 87% drawdowns in Bitcoin alone and I'm having a decent sized drawdown in SUI right now. Well, drawdown from peak. I'm still up on the trade. But yeah, I mean, this is how it goes and it's not an easy game, which is why there are big returns when it works, because it's not bloody easy.
- [63:08]
Evgeny
That's exactly right. And yeah, let's see where we are tomorrow.
- [63:12]
Raoul Pal
All right, my friend, good to see you.
- [63:14]
Evgeny
Thank you all.
- [63:16]
Raoul Pal
So let's see how the market develops. I think the opportunity set remains as is and that things will continue back on the normal path and a lot of this noise in markets will be just that noise. Anyway, I'll see you next time. Good luck out there. Today's episode is brought to you by Abra. Abra aims to provide individuals and institutions with a secure way to control, manage and grow digital asset wealth. From a separately managed account, Abra helps his clients get exposure to crypto and crypto financial products like yield and lending through one full service platform. If you're looking to gain access to additional liquidity, Abra has one of the most competitive loan products in the market. You can borrow against Bitcoin, ETH and Solana at up to 50% loan to value. Rates are in the 4 to 6% APY and are open term. You can continuously draw down against your collateral as the price appreciates. Abra's alternative other strategies to add yield and their team is happy to help align your portfolio to your risk profile. Reach out today and get a complimentary consult in your portfolio. It's worth seeing if they can help you manage your allocation, reach investment goals, manage risk and add additional yield. Go to realvision.com abra and tell them I sent you. You obviously enjoyed the episode because you're here with me at the end. But listen, don't forget to go to realvision.com join and grab a free membership. It's an incredible community packed with alpha, great investment ideas. And the research that you need to help you unfuck your future. So get started now. Go to realvision.com forward/join
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