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- [00:00]
A
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. Hi, I'm Raoul palace and welcome to my show the Journeyman where we travel to that nexus of understanding between macro crypto and the exponential age of technology. Today I'm on the road in New York City, but I want to do an intro for my next conversation because I think it's a really good one and considering the state of crypto markets, what's going on? Everybody wants to understand what's really happening, what's going on beneath the surface, why are things like they are? So I thought I'd draw on some expertise. Some expertise I like to bring in is from a hedge fund. I like to bring in hedge funds because they get paid to try and figure this stuff out and we get a peek behind the curtain of what they're doing and what really matters. So this week I've got a conversation with Ed and TJ from Paratexas Capital. It's actually a firm I'm an investor in via Exponential Age Asset Management, so I want to disclose that beforehand. But they're very thoughtful. They have deep understanding of markets, deep understanding of crypto and I think it's going to give us insight into what happened in 1010, what's really happening to the underlying structure of markets and where the opportunity lies ahead. Anyway, enjoy the conversation. We're living in a world of higher for longer rates, tighter credit and fewer places to earn real yield. And that's why figure's interesting. They're also giving away from $50 for opening and depositing $500 with them figure's the largest non bank mortgage lender in the US with over 19 billion unlocked on their lending platform. They're now applying that same institutional infrastructure to crypto backed loans and real world asset yield. If you're holding crypto figure lets you borrow against it at 8.91% interest with 50% loan to value giving you liquidity without selling, without triggering taxes and without stepping out of the market. On the risk side there's they use decentralized NPC custody to assets, say in segregated wallets and they've introduced liquidation protection to help manage downside volatility. And for investors looking for yield, democratized prime offers up to 8.5% APY paid hourly backed by real world private credit, real cash flows, not speculative token emissions. In a market where capital efficiency matters more than ever, Vigor gives you real options. Check them out using the 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. Hey guys, great to get you on Real Vision.
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B
Good to be here.
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C
Thanks for having us.
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A
So look, lots to talk to you about, but I think before we start, just introduce yourselves. We at xpam, my asset management firm, are obviously investors in you guys. Just so we disclose that, but just tell us what you guys do and then we're going to go back into the past and figure out how the hell you got here in the first place.
- [03:44]
B
Yeah, that's great. And I was told I have to read this. Before you begin, I want to note that the views shared during this podcast are our own. They are provided for informational purposes only and do not constitute and should not be construed or relied upon as legal, business, investment or tax advice.
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A
There we go.
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B
Perfect. All right.
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A
The issues of running a hedge fund.
- [04:04]
B
Yes, absolutely. So Edward Chin, I go by Ed, Founder and CEO of Parataxis Capital. We've been in the space for about seven years now. Our core funds business is multi strat as you described. We do manage assets on behalf of XPAM and we run us institutional assets at a number of our co mingle fund vehicles. We both come from traditional financial backgrounds. I spent a little over a decade as a TMT banker doing traditional debt equity M and A and what we recognized about seven years ago was that everything that you've been talking about, same
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A
as Richard Galvin did as well.
- [04:43]
B
Yeah, that's right. We've recognized what I think you've been talking about for years, which is the institutionalization and adoption of digital assets. And so what we wanted to do was to take a institutional approach as it relates to managing and provide a risk managed exposure to space. And so we have a number of commingle fund vehicles and SMAs that we run today. Quant systematic thesis driven and we even have a credit strategy as well. And one of the other things that we're in the process of doing is taking one of our management companies public through a de SPAC transaction with Silverbox Corp. So we'd be happy to talk about that as well, but I'll pause and turn it over to Tejas Naval, who's my co founder and cio.
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C
Yeah, thanks Ed. Ralph, really, really nice to speak with you again. Tejas Naval. I go by TJ Similar, similar background to Ed, except I spent most of my career on the trading side. I spent a little, a little over a decade at Goldman Ral.
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A
Did we overlap? No, we didn't.
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C
So I started in 2005 and okay,
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A
I left in, left in 2000.
- [05:53]
C
Okay. Okay. So what area were you in in. In the equity business. So equity program trading.
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A
Oh, with John Ashdown over in London.
- [06:02]
C
And so in the US side. So this is a different team but big, big business. Learned, learned a lot. I actually learned about bitcoin on a, on a trading floor at Goldman in, in 2012. The, the guy sitting next to me was an engineer and he was mining bitcoin telling me about it. And I think he made and lost some in Mount Gox. He helped me buy my first bitcoin. And for me as a trader, Raoul, when you come from the equity world, your edge really just comes down to your size, your speed or really any sort of inside information. You have crypto stick exact opposite your edges. Just by being an operator in a space, having relationships and being able to do things that even today some of the big banks can't do, that gives you some edge. And so for me as a trader, it was a natural progression in my career to leave traditional finance and join the crypto space full time.
- [07:03]
A
So you came straight into crypto out of,
- [07:07]
C
not out of Goldman. Spent some time in the ETF world after that and then in 2017 joined crypto full time. I was at a company called the Element Group, which is where I met Ed. I was building and running a hedge fund. Long, short strategy, trading bitcoin against various alts. Ed and I wanted to launch something together for some time. And this is one of those industries if you're good at what you do, you might as well try and do it for yourself. And so timing was very tough in 2018 with the bear market, so we decided to.
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A
Everybody launches a fund at the worst point. Yeah, yeah, without question. It's when all the money becomes available is always the worst point to actually start. Xpan, we launched November 2021. That was beautiful timing.
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B
Oh, wow.
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A
Oh, wow.
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C
We have stories around that, but yeah, I think the way we look at the world, Raoul, is that we're obviously believers in the growth of this industry, of this asset class, but we think the market is inefficient and ergo, a hedge fund that could take advantage of some of these inefficiencies and be opportunistic could build some edge and really build a big business. So, yeah, we can talk through some of our fund strategies, how we look at the world, but alternatively.
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A
Yeah, well, Ed, I haven't got your crypto story. So you're TMT banker.
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B
Yep.
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A
Which I feel sorry for you. I mean that's.
- [08:34]
B
It's brutal. It was brutal. I started Lehman Brothers in 2008 just as the Satoshi White Paper was being published. And so in hindsight I probably should have taken the offer at one of the other firms, but stayed on. Had a first look at bitcoin back in 2010 and I should have studied it a bit more. I decided to invest in high yield bonds instead. And that didn't really turn out too well, but like I said, spent about a decade. Ended my career at Credit Suisse in 2017 and right after the Element Group did a stint at Galaxy Digital. So I worked for Novo for there at Galaxy for about a year in his teaching.
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A
That was early days, right?
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B
It was, yeah. It was still at the old office below his family office. So it was a fun times, but it was clearly a bear market back in 2018 and so but TJ and I decided 2019 towards the end and actually going straight into Covid is when we actually launched our first fund. So we saw the implosion in the large lever liquidations happening on Bitmax Q1 of 2020. At some points wondering what we had got ourselves into, but just jumped in
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A
and we asked ourselves every day, being in this space.
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B
Yeah, that's true, but that's the origin story. And our business has evolved over the past seven years, I think.
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A
What did you start? What was your first strategy?
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C
It was multi strategy, but with the long biased.
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A
How many of you were there? When you say multi strategy, was it just two of you running five books or Something.
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C
Yeah, we had a momentum strategy, we had a thesis driven strategy, we had a non correlated strategy. And for us it made sense because we viewed the market as still pretty choppy and the ability to be tactical between different risk exposures made sense. It was also a different time when we launched all of our early investors, they wanted the upside, they wanted convexity, they wanted the outperformance versus bitcoin. And this was defi summer. So lot of really interesting projects coming into market, a lot of tokens that went from nothing to you know, billion dollar valuations. And so it was for us it's a very, very fun time to, to, to invest and to launch.
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A
Can we have those times back again please?
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B
Yeah, yeah, let's get a time machine. Absolutely.
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C
I love that. But, but, but what? That our, our, our thinking too was if we're running multiple strategies, should we come across a specific demand for a single strategy? It'd be very easy for us to port a single strategy into a standalone fund vehicle or standalone strategy. And so you know, we, I, I came from a, another fund where they were running one strategy, they were running the basis trade. And I think crypto is one asset class where it evolves at a much faster cadence than traditional markets. So an ARB may exist today, but it goes away and 12 months. And so if you're really pigeonholing yourself to one single type of return, you could be out of business in 12 months.
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A
So you started with a multi strat. And then how did it evolve?
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B
We launched our second fund after we launched our first fund. And so that fund was much more thesis driven, played not only spot markets but was heavily defined on chain focus there we played DEFI summer, the NFTs, anything and everything that wasn't the right fit for the main fund which was running us institutional assets. And a lot of this is in fact the other factors that have bearing here are how the assets custody, which counterparts are we trading against. And so these things in many ways constrained some of the trading strategies that we put on. But in hindsight after some of the blowups and all this counterparty risk, it was probably the right decision. So we launched that in late 2020. In 2021 we saw an opportunity within the private credit space in digital assets which basically don't exist. And you know, we saw the ABS deal that led in launch that got raided by S and P and we know Jeffrey slept that deal. And it's interesting to see regulated wrappers with bitcoin backed loans within that and getting a rating agency comfortable putting a rating on that. And so, but back in 2021 that pool of capital was not accessible at all. And so for us to be able to launch a private fund vehicle and bring those defi based yields and generate those returns on behalf of institutional investors was really, really interesting. And as you know, there's a ton of friction, there's a ton of switching costs and breakage. And so us as managers managing that risk and providing that return profile, I think we fill the void. And since then, you know, say 2022 to 2025, we launched a private mining business. At one point I think we had one of the, the larger private US based miners. And again for us we, we always think about is what is the thesis and is that thesis interesting? Number one, and then number two, what is the appropriate trade structure or wrapper to put that, put around that in order to provide that exposure. And so in the mining space there, there are, you know, interesting ways to buy miners and plug them in and generate healthy EBITDA margins on that revenue stream. But, but we raised capital like you did in November 2021 and we waited and we waited versus deploy. And when we saw these miners selling for 10 cents on the dollar coming out of a lot of these bankruptcies, whether it was blockfire, Celsius, that's when we put our money to work. And it's been a phenomenal investment for us. And so we have the core funds business but given we're so close to the markets, we, we're pretty opportunistic when we do see dislocations to basically raise either outside LP capital or to invest off our balance sheet to put capital to work. And the natural evolution of that given the BlackRock ETF and as more and more digital assets become regulated and have a regulated wrapper, was to think about how we could play within the regulated security space. Which is a reason why we did launch two digital asset treasuries in South Korea. One is bitcoin based, one is ETH based. We're looking at additional opportunities there because there really just isn't any product. And notwithstanding some of the distress and drawdown here in the US in the emerging markets you just don't have any product for an institution to basically put on exposure.
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A
Other DATs trading there as equivalent discounts or you know, no, they're trading at
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B
anywhere from three to five times right now.
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A
You're joking.
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B
Yeah. Because from the supply side perspective, there's no product, there's no proxies for somebody to invest through a private wealth channel. And so they can't buy spot BTC through their brokerage accounts. There are no ETFs, there's no Bitcoin miners, there's no coinbase out there.
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A
But they're huge retail traders in crypto.
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B
Absolutely. And from the demand side we saw the same thing. I mean there's reason why there's a persistent kimchi premium and why we continue to see crypto trading volumes exceed equity trading volumes in South Korea. And so it was a supply constrained market, which is the reason why we launched those products there. And folks can trade those products either on the Kozag or Cosby. And I think for that reason we do still see some of those healthy premiums kind of akin to what we saw with MicroStrategy five years ago.
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A
Super interesting. So I want to talk a little bit about some of the things that you'll know about is the ETF business. So tj, you came out of the ETF business. There's a lot of people writing, there's some interesting stuff about how ETF flows are potentially affecting price flows because of how the hedging is working. That basically they're increasing the size of the ETFs but all of the hedging is going through via the futures market. Because everyone's doing the arbitrary and you're kind of creating a false ish market from it. What do you think about the mechanism of the ETFs and whether it's, whether it's now because you've got in kind settlement now, haven't you? Whether that's distorting anything or not, or changing anything.
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C
Yeah, I think it has an effect when there's a windows heavy directional flow. So if everything is one way and the entire market is selling the ETFs for instance, because Bitcoin is selling off, that means market makers are on the other side. They're buying the ETFs in the open market. They may be facilitating ETF redemptions, but it means they're taking a significant amount of Bitcoin exposure via either futures, via the ETF itself or via even Bitcoin spot on their balance sheet. As I understand it, banks are still held to certain Basel III requirements. And the way Bitcoin exposure is haircutted, very, very different than traditional listed large cap stocks. So it can be prohibitively expensive to maintain a large amount of Bitcoin exposure when everything is one way. Because in a two way market you're, you're able to facilitate that type of order flow and you can kind of Keep your exposure to a minimal level. So that's one. So I think what that means is if you're a large market maker and you're held to certain regulatory capital constraints, your option, even if you're hedging the exposure via features, your options are really limited. So we have a, you know, a working theory that it's difficult for some of the market makers to finance positions and so they end up either redeeming themselves or actually selling that back that, that exposure into the open market. So whereas if there's a lot of sell pressure in SPY and that that type of position can be hedged and it can be maintained on a balance sheet. But I think when it comes down to, to IBIT or some of the other ETFs, I think that actually hits the open market purely because.
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A
Do you think that's the 10am selling thing?
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C
I don't, I don't know. I think there may be some, some market shenanigans happening there. I do think if you look at how IBIT for instance is the way they struck their strike their nav, it is, it's a VWAP of 3 to 4pm at the end of the day across I think, you know, three exchanges, Coinbase, Kraken and I'm forgetting who the third exchange is but on a low volume day that, that, that can be artificially moved in a single direction. It can be. And, and then, so I think there's, there's, there's some of that happening when flow is again directional in one way. But I think really, I mean, do
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A
you think it's like, I mean back in the day, early days of, of the S and P index Arb, for example, I mean people would move the, the, the print. Yeah, they would, they would basis points out of the trade. Right.
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C
Well that's what any index are and
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A
the option market's been like that forever.
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C
Program trading desk I mean that's, if you think about a large, the Russell rebounds, the MSC rebounds, a lot of volume happens in, at the last hour, hour of the day really in the last few minutes of the day. And, and, and you see very, very large price dislocations. That's what's happening. I think there's a little bit of that happening here with, with, especially when it's, it's, it's one way directional I think. I think again, I think it comes down to the ability to finance some of this exposure.
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A
And that plays directly into my thesis about what happened on 1010 because Binance's API to the market makers went down, right? You have no buyer, which is why what happened happened. You have stop losses, automatic liquidations. So now you have sell only and no buyers. Retail couldn't buy. We were all shut out. Everyone was trying to get in. Hedge funds couldn't buy. Nobody could get in. So yes, you could buy it on Coinbase, which traded at a different price. My guess is somewhere in the Asian exchanges, let's assume it's Binance, but could have been more. Somebody had to backstop the liquidity. And so somebody ends up with 10 billion bucks of all sorts of shit on their books. Now, their exchanges, their job is not to make markets, but it was existential. And that's what I feel like somebody got stuck with inventory. And I've always used program trading as the example. You know, Capital Group comes on, they want to do a huge program trade. It takes you a week to get out of. And you know, you're very systematic in how you get out of that risk. And it's an imperfect hedge because you can't just sell bitcoin against it because you've got a basket of alts and everything's moving around. So does that make any sense to you guys?
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C
It does when it happens in a traditional world. And the example I can think of is if you, if you remember maybe, maybe 12, 15 years ago, Knight Capital Group had an issue with some of their. And they ended up, I think some of their algorithms just, just, just, just went a, a And that was the
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A
flash crash, wasn't it? Yeah, yeah, 2014, something like that.
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C
Yeah. And so, and so I think a similar. And the market structure broke down momentarily and they needed a bailout. And, and effectively it was, you know, the market, market got behind that, but it was a very controlled process and there were, you know, you know, rails built into, you know, to ensure like what happened on 1010 didn't happen. I think crypto is a different beast altogether. It's, it's. I wrote about this in our end of your letter. It is the, this asset class is the purest expression of a free market, meaning there's, there's no when deleveraging or when there's a break in the market structure. When that occurs, the way the market has to find a clearing price is automatic. And it can be very, very painful, it could be violent. And that's what we saw on 1010 in a good way sometimes, especially with on chain leverage, you know, bad debt, can't live on balance sheets for a long time. But then you just see a Lot of volatility, I think. So what I. Long story short, 10:10 did change something in the market. If you were to graph the performance of bitcoin against the QS last year, bitcoin was outperforming up until 10, 8, 10, 9. And then all of a sudden, yeah,
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A
the market from that is, yes, we broke that, but it was also liquidity. Us liquidity was drained. And it was the same time the gold rally was happening, which takes a bunch of liquidity out and therefore SAS stocks and bitcoin, which, at the risk curve, the longest duration kind of got hit, but it was all.
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C
It all happened at once. Yeah.
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A
Ed, what was Your view on 10 10? Because I just felt like somebody got stuck with inventory and somebody spent two or three months having to unwind it.
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B
Yeah. So I'm in your camp, Robert. We lived through. We were launching our first font in March 2020, when everybody was max bullish at that time. And just given the leverage buildup, I think Bitmex basically had to shut down their trading engines at that point because BTC touched $3,000. But if you remember what happened after we cleared all the liquidations, the market just presumed to move much, much higher as the Fed was cutting rates. And to your point, liquidity was entering the system. I'm with you. 1010 what I would have expected. And we've seen massive liquidations over the course of crypto's history. The fact that it continued to sell off, it tells me that there was somebody that was left holding a large back that basically had to cut risk. And I think that those types of positions, especially with illiquid alts, you can't get rid of that in a week. That stuff takes weeks, if not months to basically move, move off the table. And so I think that coupled with the fact that to your point, liquidity was exiting the system, it was like the perfect store. And you talk about something that can have a huge damper on sentiment. It's seeing some altcoins wick down 99% and then five minutes later go back to the price that they were trading at. And so I think a lot of folks just were either liquidated or called it quits. And to your point, whether they were market makers or exchanges, they're holding a bunch of risk that they basically have to offload over the following months.
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A
Yeah, it was hard for people because anybody using any leverage at all got stopped out and lost all their capital. I mean, I never use leverage, but I know when it starts creeping in my mind, maybe I just Use a small amount. Right. How's this, how would this fall 50% from here? That'd be stupid. Sure, I can just double. And it proves it to you. And the issue is, is this game is actually a very simple game. Is like just don't get taken out of your positions.
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B
Oh absolutely.
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A
You're in a secular uptrend. It moves around a lot. Just don't lose control of your tokens at the basic level in your high quality assets. And what leverage does is allows you to be taken out of the casino with none of, none of your money. So you.
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B
Yeah, it's because you want to accelerate these gains that you know, are basically there because we do believe that we're early in the adoption curve. And you're absolutely right. In the attempt at accelerate it, you basically get taken out before you could even see and materialize the growth. We've seen it.
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A
So what's your thought on the market going forward? There's a lot of debate in the market about, you know, is there four years, was there a four year cycle? Is it over? You know, do we all just come back in October, November or how do you see the market right now? I think it's broadest level. We'll dig into other stuff in a bit.
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C
Yeah, I think if you're a believer of the four year cycle, you would have believed that the market would have had a blow off top in Q4, which it didn't. But I think what happened on 1010 changed the investor psychology for a lot of folks who were especially bitcoin whales who were probably likely to cash out over the next few years. I think a lot of those sales just got pulled forward in Q4 when they saw the market do what it did.
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A
And they've been huge sellers of calls as well, haven't they?
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C
They have. And it's not just the whales, traditional hedge funds as well.
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A
And the miners.
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C
The miners, I mean being long IBIT and short CME futures, very popular trade last year. And I think, you know, there was some hedge fund, traditional hedge fund pain, especially with the large multi strats in November. And I think there's a large, just a, the overall risk reduction in the third week. I remember this during Thanksgiving week. And the, the market was indiscriminately selling off every day. The moment it opened. I think that was just hedge fund deleveraging out of, out of the, the, the carry trade. So 1010 changed investor psychology lined up with the four year cycle. But if the four year cycle is true, that means in 12 months October of this, this year is when the market starts materially moving higher. I think that probably gets front run and you probably anyone who's on the sidelines waiting for that probably starts to try to front run that in over the summertime. But again we, we didn't see that blow off top. So from our perspective, I don't think there's any reason this to believe that we'll see a, you know, commensurate 70, 80% drawdown.
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A
But you think we're in a, that the market doesn't really recover until end of the year.
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C
No, I think there's a, there's a segment of more traditionalists in the crypto space that believe that, but they will try to front run the end of the year by likely deploying the summertime. But again the market, this, this, this was not leverage driven, meaning this was not, there was not a significant amount of over leverage driving Bitcoin price higher. This was structural in nature. With what happened on 1010, I think the environment's changed, especially with some of the products being offered in the credit space today. There is a significant amount of buying still happening in bitcoin through the ETFs. And I think what's happening right now, current times is just more of a short term reaction to what's happening in, in, in the Middle East. But if you were to tell me a month ago that you, you know, there would be a heightened conflict and, and Iran is, is, would be bombing, you know, all of their neighbors, I would have told you Bitcoin would, price would be taking a hit, you know, not coming off its lows and about to hit its 100 day moving average. So I, I, I think the market structure's changed considerably, you know, but again you're going to have the traditional investors that still believe in the four year cycle and we'll try to trade around that. But as more, more long term Capital enters the ETFs and some of the credit vehicles that Michael Saylor is putting out, I think that changes the, the, the overall composition of, of, of holders and we don't, so we're not, we're not of the view that the four year cycle is relevant anymore.
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A
Ed, if you got, if you got
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B
to go one step further and this is how I get myself in trouble.
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A
Good. We're looking forward to it.
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B
Yeah. I mean the four words that an investment professional should never say is this time is different. So maybe I'll modify it and say this time seems different. And what I mean by that is for the first time, there are pools of capital that would have never been able to access this asset class that now have access. And so if I think about that, the fact that you can put a regulated wrapper around something that exists on the blockchain, it's a game changer. And what that means is, and Saylor's proven this quite effectively, he was, I think, the number one issuer of convertible bonds back in 2024. I think it was like 25 to 30% of the market. The fact that he was able to tap insurance pool capital is like, that would have been unheard of. I mean, I think we were all cheering once the ETF was out there. And we're slowly seeing Morgan Stanley is launching their own etf, we're slowly seeing these wealth management platforms that have trillions of dollars of investable assets for the first time, not having to go through the friction of transferring funds to an exchange and being able to put on exposure directly to their brokerage accounts, I think that's a game changer. And if I think about gold as a precedent, gold was plodding along and doing well. But the moment you put an ETF wrapper around it, it did well initially. But if you look at the 5, 10, 20 year chart of the gold ETF, it's just been up and to the right. And so I think we're sort of in the early stages of the adoption cycle. I think the fact that folks have been creative and the fact that the government has been supportive in launching these regulator wrappers and securities for folks who put on the exposure that they clearly want to put on, you just have to look at the ETF inflows to see that. And the largest banks, all of our former employers, are trying to figure out strategies to either facilitate trading and custody for the institutional clients, or as it relates to their higher margin, stickier asset management, private wealth businesses to figure out how digital assets can be a portion of their portfolio. And we play a small part in that. On the active management side, given our focus on institutional investors like yourself, given the very strict requirements they have around risk volatility and return. But we're still early, which is what makes all of this really exciting. And that's the reason why it does seem different this time.
- [32:52]
A
Yeah. And for me, when I take those words, different this time because I'm also cautious of using them, you say what is different? Is it the element of the four year or is it the. I think the dominance is the business cycle and the liquidity cycle. So there has been no time ever that crypto has gone through an extended bear market while the ISM is rising. You've never gone through a bear market while liquidity is rising. So you've got the two biggest macro influences and we're trying to say, oh, they don't count. It's a mythical satoshi, brought a magical four year cycle from the gods, delivered it to us and it's going to work because we're all retards. It just doesn't make sense. Right, because when you look at the year on year rate of return of crypto, it's the same as the year on year, the same pattern as the year on rate of return of the nasdaq, of the S and P of oil, all of them. Because they're all cyclical assets driven by the business cycle.
- [33:52]
B
Absolutely. I mean, obviously TJ and I are focused on the market microstructure and trying to figure out fund flows and who's buying, selling and what, what is, what's happening in the options market. How does that have an impact on the broader market? You know, you're going, going back to your point about a lot of folks selling calls, a lot of our LPs on the BTC whale side or folks that are institutions that may have a core bitcoin position, their primary focus is this thing doesn't generate any yield. So outside of me trading it and, and you know, incurring taxes by trading in and out of it in order to avoid drawdowns or, or catch a trend, how can I generate yield on this? And so to your point, these new products as it relates to the microstructure, that's where we spend all of our time. But to your point, you overlay that with the macro piece. I mean, it seems like we're coming out of the aftermath of 1010. And to TJ's point, if you told me there was a war starting off in the Middle east and oil supplies were going to be curtailed, I would expect a 15 to 20% swoon of BTC easily. But we clearly haven't seen that. So the market is selling us something else right now.
- [35:02]
A
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. Yeah, I agree. So let's talk a bit about that. The structure of these calls, is that going to give Us any fragility, any acceleration points because everybody's a call seller. In terms of the call selling what time horizon are they selling? They kind of one to three month. That's where the market is one to three months.
- [35:39]
C
It's largely monthly as I understand it.
- [35:42]
A
And how far out the money it
- [35:44]
C
depends on what kind of yield you want. I haven't checked today but everybody wants to sell calls when generally when the markets found a local bottom historically even in the last cycle basis trade call overriding. Very, very popular trade when the mark right before the market found a bottom. So that's a signal for us. But you will hit a point, an inflection point where it doesn't economically make sense to sell calls because the yield is so low in.
- [36:21]
A
And if there's the concentration of strikes as well and the market moves through the strikes you get a lot of kind of a market maker buying of.
- [36:31]
C
Right? Exactly. Because, because of you know, you managing deltas and gammas. Yes. So there, there's, there's going to be some of that. I think, I think there still be a market for call overriding. I, I think, I think the yields will just compress just like the basis trade has compressed over time and it'll just be less attractive than you know some of the other, some of the other credit strategies that Ed was talking about.
- [36:53]
A
And what's the the basis trading futures like versus perps because perps is harder for people to do particularly us is do you see a large difference between the premiums and in perps versus futures?
- [37:08]
C
It's. There is a difference. I think it's more around the, the operational or the, the collateral requirements and some of the operational complexities. Trading with an FCM and trading and how much capital you would need to collateralize a short futures position with a regulated FCM versus doing it on chain with a perp exchange. Much cleaner, much easier. You can actually put on true leverage and lever up a basis trade. It's just a little bit tactically and operationally difficult to do with listed futures.
- [37:45]
B
And also the spreads aren't going to be lower on regulated exchanges for obvious reasons because you could have a tri hedge fund see that funding looks really attractive and they can basically put that trade on versus I can't imagine any SEC registered hedge fund is going to send a bunch of money to an offshore exchange to play funding for a couple of weeks and you can see
- [38:07]
A
it in who the biggest owners of the ETFs are. They're all the biggest multi strat arb funds or people with large arb books, because now it's easy for them. As you say, it's a spot etf. And futures, they've been doing that for decades.
- [38:21]
C
That's right, absolutely.
- [38:25]
A
There's a couple of other areas where this is all starting to the complexity of having the ETFs leading to the futures, the perps market, credit markets, options markets. The epicenter of all of that is microstrategies. And the complexity of that vehicle or the vehicles there. What are the hedging strategies that come off the buyers of that? Because again, it's a lot of the same players. What is actually. Because it seems to be touching all of these areas. Right.
- [38:56]
B
Well, I think when Bitcoin was going up and the MNAV premium was above two times, you basically had every convertible bond, hedge fund.
- [39:06]
A
That's right.
- [39:07]
B
And they're basically buying the convert and short of the stock. Now that the MNAV premiums come in a bit. Obviously Saylor is a bit more thoughtful as it relates to running his atm, but I think he has to get more creative with where the market is at and where you can basically price a deal and where within his capital structure can he basically slice off different types of exposures in order to provide that exposure? And so I think, like, if you ask me if I could get 10.5% to 11% yields and he's 50 years covered on that, I feel comfortable taking on that risk. But I think the massive hedging that we had basically seen, which we had seen this at some point, something should not be trading for $5 if it's worth a dollar. And so a lot of that premium has basically been arbed away. And I think he's again, tapping other parts of his capital structure. I think that's going to be a little bit harder to hedge outright because it requires a certain level of credit analysis. I don't think there's CDS that's available on microstrategy. But yeah, I think there's less hedging in that sense from what we saw, you know, say even 12 or 18 months ago.
- [40:24]
A
One thing I know to be true is that if you're creating yield,
- [40:30]
B
you're
- [40:31]
A
creating risk, particularly if there's no yield in an instrument. Right. And so I don't think it's microstrategies that blows up, but somebody on the other side of all of this somewhere, because he's creating gigantic amounts of this stuff in different shapes and forms that is always interesting to me is, okay, who, when the tide actually really goes out and liquidity disappears. We saw in 1010 just in US liquidity it blows up, right? So somebody's going to blow up. Then I'm going to add into the other complexity I'd love to hear your thoughts on this is Athena Skulls that scares the shit out of me. It's $14 billion or so and it's generating yield and it does it from the arb and stuff like this. The issue is at 14 billion they've got to be the largest player in the entire market. And I don't see them.
- [41:28]
B
So that's a question we always ask ourselves.
- [41:31]
A
I mean it's very, very big to generate yield and I don't know, somewhere within all of this I've seen this all before, a thousand times and somebody blows up and it's counterparty risk. We talked about it earlier on. We've all lived through this, right? We've all gone through it.
- [41:46]
B
I mean we just saw it as soon as. I'll share my thoughts first but we saw it as soon as three or four years ago. The question we always ask is when we look at a new defi pool or some new protocol that has a yield bearing component to it, the first question we ask is how do you generate your yield now in defi summer it was just massive inflation of printing new tokens and that work and the market was able to offer 80% yields until everybody started selling and we saw those tokens collapsed. I think on the more kind of structured side we spend a lot of time on whether or not the counterparty risk is real. And so to TJ's coin, if you're selling, if you're running a covered call strategy, you just have to feel comfortable that your counterpart is well capitalized and the counterparty is going to ensure that you've posted enough collateral. And generally I think that's okay. When we look at what happened Blockfi, I mean the notion that you could lend your Bitcoin at 8% and borrow against it, if anybody had bothered to ask, they should have asked how are you generating zeal? Well it's because they're turning around and lending it back out at 12 to 13%.
- [42:55]
A
But the issue is what we didn't know, and I learned this from Long Term Capital when I was at Goldman, is that there was only one customer, there was one borrower, right? So the entire book there was no. Or the whole street had no diversification because you had three arrows was the one player and I was, you know, when I was in equity derivatives we were all printing Money. In fact, everybody was printing money because of long term capital. But then we realized they were the entire equity long term volume market. They were the entire, you know, market in tons and tons of things and three hours was the same. And you know, that's what worries me in the yield thing is does it end up getting concentrated in one player?
- [43:39]
B
There is still some of that concentration risk out there. But I think that's the reason why I briefly mentioned this. LEDN printed a $190 million ABS deal. I think it was two times over collateralized and the average loan size was about 110k. It was rated triple B through the senior tranche. The mez piece I think was single B and there was a small equity slice there. But because that structure was rated, you basically had folks that would never touch a bitcoin backed loan deploy capital to the space. And so clearly that's a very small deal and it's just the first deal. And in many ways it's proof of concept. But I think that concentration risk will hopefully over time be somewhat dissipated as larger pools of capital. Whether they're private credit oriented funds, maybe even some banks at some point. But clearly any insurance company that has a mandate to invest in fixed income as long as it's rated at a certain level, they can basically deploy capital. And presumably once that capital starts flowing in, you're going to see much tighter pricing and the cost of funding move lower. Which means these other yield oriented offerings that are in the market are just probably going to be less interesting at some point. So but yeah, there's definitely concentration risk. I don't, I don't think we're back at where we were when it was clear that Genesis in 3:3 arrows was basically the entire market. One was lending to the other and the one was basically buying from the other. Thankfully we've, we've moved on from that. But yeah, I don't disagree with you that there are pockets of concentration.
- [45:12]
A
The other big thing that I think is going to help this market is this Clarity Act. What's your, what's your probability that this gets agreed? My working hypothesis is the crypto lobby were the largest donors to the Republican Party and Trump knows if he wants their money for the midterms, he's going to have to deliver this thing. So he's been hands on, on this, trying to get it done. From what I can gather, they kind of want to get it done in the next two weeks. Agreed with the banks and then it'll take a while to paper and stuff Any views on this?
- [45:50]
B
So we're not as into the weeds as into the workings of D.C. and so if it's two weeks, holy crap, I hope it gets done. Because from the demand side, what we see in our discussions with US institutions, whether pension funds or endowments or foundations, these folks, they have to report into their investment committees on any new type of allocation or investment. And as you can only imagine, to the extent that there's regulatory clarity around it, it's one less box that they basically have to check. And then we can start really, really digging into the investment thesis and the risk return profile and how are we going to manage volatility. And so I didn't know it was that soon. Some folks had actually said by end of last year and once I got punted, I just figured it was going to be put on the back burner.
- [46:40]
A
But yeah, because I think there's, there's a certain window of which it needs to get done before it really gets punted into the next year. I was speaking to, I can't remember somebody from Cynthia Loomis's office called me up and was talking about it. They're like, if we don't get this done now, it's six years. That was her opinion.
- [46:57]
B
Wow.
- [46:58]
A
It's like this is so crucial.
- [47:00]
C
I found it interesting that I think President Trump put out a tweet yesterday.
- [47:05]
A
That's right. I mean,
- [47:07]
C
Brian Armstrong was just in his office. Right.
- [47:10]
A
So I mean, I was in crypto in 2013, where I've gone through all the fucking wars. I never thought I'd see the President, United States forcing the banks to agree to sign a bill on crypto. I mean, what a world.
- [47:21]
C
Unbelievable. So I mean, I say greater than. Greater.
- [47:25]
A
Yeah.
- [47:26]
C
Greater than 50% chance it passes just given that, that sequencing and to your point, rat row like Republicans are going to be very focused on midterms this year and it'll be a very difficult year for them if crypto wealth, and I'd say traditional equity market wealth is not at an all time high.
- [47:44]
A
Yeah, I go with that. And also I know Scott Bessant. He was a long term global Macro investor subscriber. He's a fellow Macro hedge fund manager. I've knew him from when he was at Soros in London. So I knew him from the late 90s. He knows the game. We've got a Macro hedge fund manager running the Treasury.
- [48:01]
B
Absolutely.
- [48:02]
A
He speaks my language. We know what he's. It's going to be jam it with liquidity, run it hot, get the Stock market up, get the ism up, give people money, make people happy.
- [48:14]
C
That's right.
- [48:14]
B
Totally.
- [48:15]
C
That's right.
- [48:18]
A
Super interesting. So what else are you guys looking at for the rest of the year? The. One of the things that we haven't talked about that I think is really worth talking about is we've all talked about agents and you know, how agentic economy, blah blah, blah, blah, blah. But it really dawned on me and I wrote a long piece on it in GMI the other day was that we have wildly underestimated TAM for crypto. All of our mental working model is that adoption curve. Oh, we're at 650 million wallets according to the crypto.com thing. Use that as a consistent number and we'll get to 3 billion by 2030. Right, fine. And that's $100 trillion asset class, but completely wrong because we're going to add tens of billions of new economic participants into this space.
- [49:10]
C
That's right. So I'll approach that from a different angle. We noticed a Trend maybe about 18 months ago that traditional asset classes were starting to mimic crypto in the way they, they were pricing in information in real time. And so anything that was happening in the world was getting priced into stocks, bonds, commodities in, in almost in real time if, if the markets were open. Because I think of social media, the, the ability for data to disseminate very broadly and, and retail traders trading on short term information. So I, I think the market's changed and I think as AI becomes a larger factor in the investment process, you're going to see more and more of that. We actually, on a, on a, going off a tangent here, we actually began training our own model early last year to trade systematic macro away from crypto. It was just an experiment to see if we could train a model to think and behave the way we do as crypto managers, where we're forced to interpret real time information and make decisions in equity sectors, fixed income products and commodities and be very tactical and adhering to a really specific set of risk constraints. And so we were trading with some of our Prop capital, a book of ETFs that did very well last year, that we'll be spinning out as a standalone vehicle later this year. And the underlying tech is something that we capitalized and we've been monetizing on. So we do think that's a trend. It's something that will be more and more pervasive in our space. But we can see a world where the future of fund management is just AI's models talking to one another, trading against one another.
- [51:17]
A
It's obvious to me that that is the way it goes. I mean why have the cops running a hedge fund? Why have the cost of running Millennium? I mean Millennium is just an asset allocation algorithm and you've got a bunch of portfolios, all of that can go, you can collapse the whole thing down to almost zero cost and sort of instantaneous and it's definitely.
- [51:39]
B
Yeah, but to your point, AI agents, I mean it's clear that trend is not reversing and in order to.
- [51:46]
A
We've only just started it, right? We've only just started the X402 payment on, on base and then the A402 on SUI. And there's a few of these coming, the changes to, you know, how websites are going to work. The whole structure is set up for this.
- [52:03]
B
Yeah. And if you think about it, if, if crypto needed a use case and we, we have very, very various theses around different layer ones and stable coins. But if, if it ever needed a use case, it's basically prime for the, the agent age, basically because it, it is going to clearly be fully integrated into how, how that evolving economy works. And so obviously another tailwind for us, I, I, I think we're thinking about from the side is actually developing our AI agents to trade capital on our behalf, but on the other side, the native currency or asset, depending upon what that agent is expected to do, you just talk about adoption curve that is even factored in because the addressable market sharepoint has just increased.
- [52:50]
A
And I don't think people have really figured this out. They're like oh yeah, agents are coming, you know, there'll be a bit more use of my chain. They have no comprehension of the size of this thing over time. Oh yeah, because even if you're talking about oh yeah portfolio, you make a simple comment like oh well, all portfolios are going to be run by AIs, right? What does that mean? It's hard financial Rails are, I mean
- [53:14]
B
they're hard to grasp your mind around it. But I mean, I don't know. I mean, does each individual, do they have 10, 20, 30 AI agents at their disposal that are basically running.
- [53:24]
A
You won't even know. Yeah, we won't even know. I mean you'll have no idea. And that tells me because if you think about how GDP growth, trend rate of growth is evolved, it's basically population growth plus productivity growth plus debt growth. Right. You're about to completely change the population growth of the crypto economy, like hyper fucking Change it. Yes, they're smaller economic actors now, but this is like bringing China into the global economy. They were earning $1,000 a year and then they go to First World Wealth Productivity. Because now with performant chains, you can do this, you can do really interesting stuff. And smart contracts, you can do super interesting stuff. This is a step change potentially in what's coming. If I think about a mega narrative, this is it. This is the big one. The institutions coming, all of that. Great. But this is a step change narrative and we haven't had one of those for a very. So we have it. We've got the Clarity act, the institutions, and then we're going to 50x the population of Cryptoland.
- [54:41]
C
The AI agents are coming.
- [54:43]
A
The AI agents coming. So last thing before we go, tell us about the vehicle you were going to. You said you were going to create a public vehicle.
- [54:52]
B
Yeah, it's. All of our filings are on the SEC's website. We're taking one of our management companies, which is an asset manager, and it's a primary vehicle to basically put on a very specific type of risk exposure for US institutional investors. I think a lot of folks have seen what Saylor has done over the past six years. Some folks were early into Meta Planet. And notwithstanding I would say the pullback here in the US the emerging markets are still unchartered and we have an ETF here, most markets don't. And so to the extent that we can get product into these markets to allow folks to put exposure on, and we started with Bitcoin and ETH because those are the two largest, but South Korea is effectively an altcoin market. If you look at the trading volumes in digital assets on any given day, Bitcoin is not at the top. And so because of that, we wanted to get the two flagship vehicles out there today and they're both trading on the causdaq and anybody can basically buy, sell and trade that. And so we've made principal investments as well. We've raised a number of fund vehicles to basically provide that exposure for US based investors that wouldn't be able to put that on themselves. And our local management teams are out there executing.
- [56:12]
A
So you're wrapping all of these into a US vehicle. So then people get exposure to the opportunity set in Korea.
- [56:18]
B
Correct, correct. And then we put in a lot of our other kind of core hedge fund strategies as well. And so I think our view is to. We've seen the evolution of an asset class that was considered super alti at one point. I Mean, I think about real estate, it's institutional today, 20, 30 years ago it wasn't. You had a bunch of families or individuals that may have pursued commercial development. We've seen this with venture, it started with angel investors and it's become fully institutional private credit. And so we think digital assets, it's been validated with the BlackRock ETF and I think as the market grows we basically want to participate in that. And so if we could have a publicly listed alternative asset manager that could provide all different types of exposure, whether it's these new product launches into a market that we're very, very bullish on from a supply and demand perspective, but also trade stat ARP strategies within the digital asset space because we know there's an investor that wants that exposure. That's what we're doing for that vehicle.
- [57:24]
A
Super interesting. So you guys cautious or optimistic or wildly optimistic for this year? I'll never ask people price targets because it's just the worst thing ever. But so cautious, optimistic. Wildly optimistic.
- [57:41]
C
Wildly optimistic. Especially after the last week given the headlines, the geopolitical risk, the fact that bitcoin is still holding strong. Yeah, I think, I think we finish all time high this year. I think again the end of year
- [58:00]
A
rally if and is it an alts year. So does bitcoin dominance fall?
- [58:08]
C
I think momentum, the eth Bitcoin ratio momentum will tell us that.
- [58:14]
A
I think I'm not asking for how we look at it, I'm asking for your view. I, I, I, I think bank trader. Well you know, here's my bid office spread, you know. No, I want your view.
- [58:27]
C
No, this year I think bitcoin does
- [58:28]
A
better you Bitcoin dominance goes up.
- [58:31]
C
Yeah, I think this year I think, I think bitcoin dominance is, is a, is an oscillating trend. I, I, I again right now, end of year, I say yeah, dominance.
- [58:45]
A
So what you're telling people is we can't have nice things and nobody can have their old season and it's going to be tj. So Ed, what's your view on this?
- [58:54]
B
I mean do I want to be right or do I want to make money? And so like you, I'm super thesis driven and we spend so much time not only studying the underlying blockchains but using them every day in our investing activities. And I just see the functionality and what these things are able to do and accrue value. We need a bid Raoul. We need somebody to actually share that view as well. And so where do I think capital is going to form? I Think BTC is still going to be the primary pool, but a lot of these layer ones and the dapps that are being created on top of them. I mean if I think about hyper liquid and it exceeding Coinbase's trading volumes at a certain point, you just can't ignore that. Right. It doesn't matter what your view on bitcoin is or what the space is. If you see real adoption taking place in a certain area because there's real building and there's product market fit, that's unignorable. And again, if I think about a token like hyperliquid, it's had relatively strong outperformance, but there's still a lot of garbage in the space that needs to kind of get wiped out. And as when we think about altcoins, I think we have a thesis and because of the sums of capital that we're putting to work, we have to have a very strong thesis so that we can underwrite that for both the short, medium and long term. But most of the folks that may just start entering the space to the extent that there's an alt season, it's probably like looking at meme coins and these things that are going to flame out. And so I think how I think
- [60:34]
A
of it is earlier stage layer ones, application layer stuff that's got proven traction. I don't go that far out the risk curve, that's just a crapshoot at that point.
- [60:45]
B
So on that point I agree with you. I think it'll be nuanced and you'll see relative performance across the buckets and even within the sub segments within the buckets. But there will be certain alts that will absolutely outperform. If I think about what happened with
- [60:58]
A
privacy tokens, that's an interesting narrative. I think could be persistent.
- [61:03]
B
So I think we will see pockets of outperformance but in order for the entire alt complex to move out, I think we're generally alive because you and I are removing the 40,000 other tokens
- [61:15]
A
that are not like I didn't think about them. Yeah, yeah. It's just generally does others outperform Bitcoin? Possibly is how I think of it. Others on the tradingview chart. So you really are not going that far down the curve.
- [61:31]
B
Yep, yep.
- [61:32]
A
Cool. All right guys, well, really appreciate it. Let's hope that you're wildly bullish. Call. TJ is right. I think. I hope that you're wrong on your bitcoin dominance call.
- [61:41]
C
That's all. We'll see. We'll see.
- [61:45]
B
It's Been great.
- [61:46]
A
Yeah. All right guys, great to see you. Thanks a lot.
- [61:49]
C
Thanks Raj. Bye.
- [61:50]
A
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