← Tom Bilyeu's Impact Theory
Tom Bilyeu's Impact Theory
Crypto Revolution: Master Finance & Get Rich with Crypto | Richard Craib
01:36:12
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A
Richard Crabe, welcome to the show.
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C
Good to meet you, dude.
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A
I'm really excited to have a conversation about something that I've been trying to grapple with since, since the pandemic kicked off. I had trained myself to be good at making money, but never really understanding investing money and have watched the frustration build with people that feel that they're working inside of a broken system and couldn't really understand like what they were struggling with. And now once the pandemic hit and I began to see that I needed to look more closely at investing and all of that and what was going to happen to the world financial markets, I started to be unpleasantly startled by the things that I was finding in terms of how it's structured. And as a person that I would say is the future of finance and the way that you're approaching things with new Mirai is absolutely fascinating. Talk to me a little bit about what is the structure of finance.
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C
Well, it's for sure broken. I mean, and that's why there's so much energy and new ideas around finance. I mean, one thing I always ask people is like, what are young people doing? And young people today, you don't like meet someone out of college who says, my idea is I'm going to start a new bank or a new hedge fund even. And the reason is the barriers to entry are so crazy. And it's basically like controlled by, by regulation. And the regulation sounds nice at first
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A
because it's designed to protect people theoretically.
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C
You know, we all need protection. And then it creates like this crazy class of like compliance. People are sort of required to do anything. So I can't imagine what it would be like for sort of a 25 year old to apply for like a banking license or something like that. But, but it's the sad thing, it's got so, so bad that it's not even in anyone's. It's not even in anyone's affordance to even have the idea to do anything about it or try to change it. And. And that's where crypto is powerful, and things like numerai are powerful because it's. It's somehow making it possible for people to be involved in the financial system.
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A
So I have this thesis that I'm working on. I'd be very interested to hear what you think. So I hear this idea that basically there's all this tension happening between the generations. And the reason that the tension is happening is because the old guard is refusing to pass the baton to the new guard. But that doesn't strike me as the way that human nature works. And I think that people cling to power for every conceivable second. You have to pry it out of their cold, dead fingers. And I think that historically what happened was youth and vigor, like so much of the economy, was generated around being able to have a higher degree of stamina, do physically demanding jobs. And therefore the next generation was just able to beat the old generation on that. And now, as we go into an information technology economy, what you see happening is it's easy to get ahead of people because you understand the game better, and you can either do political moves or you can just be more knowledgeable. And so that allows you to hold on to power longer. And so that creates all this friction between the generations. And now what we're seeing is what I call fuck the man energy. And so we're getting this energy. You saw people with Occupy Wall street, but then Satoshi writes a white paper, and people that have been watching me for the last like six months have heard me say, like, this idea over and over. But this is really interesting to me. So Satoshi writes this white paper and creates digital value out of thin air. And people buy into this, and it creates this decentralized, democratized way to go about money. And it's now starting to spill over into other areas. But help me understand one. Is it just regulation? Is that the only problem that makes this fuck the man energy so strong? And what is it about decentralization that seems to be the cure to whatever the ill is?
- [05:12]
C
Yeah, it does seem like a lot of the energy in crypto kind of couldn't, maybe wouldn't be there if there were. If it just were incredibly easy to do normal business. So if it was extremely common for young people to start new banks or just people to IPO companies even, that's like Kind of weirdly rare. If all that was a little bit more possible, then it would be hard to imagine the world of crypto developing with so much energy. So I do think it's definitely related to regulation. It's also like a kind of. I think there's something going on with like technological literacy as well, where you, the way that the finance people talk about things like exchanges, it's like there's a lot of jargon. You don't understand it. You could never build something like this, we're much smarter than you kind of thing, when actually it's like 100 lines of code to write uniswap. And you can have digital assets being traded to in a decentralized way with no intermediaries at all. And so there's something about it where it's like, it's like people are realizing how bad it is and how easy to, to rebuild the whole, the whole financial infrastructure is just with, just with new technologies. And that's the sad thing. It's like when you're growing up, you kind of think, I remember growing up and watching the Internet entrepreneurs do amazing things. And I always thought, well, when I grow up, I'm going to use the latest technology to do amazing things as well. And somehow it's a little bit gray area to be using blockchain or even AI or kind of any gray area
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A
from regulation, from a regulatory.
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C
Yeah, you don't know what the US Is thinking about cryptocurrencies and, and any new systems that challenge old systems. And so it's like super okay to build a social network in 2006, but even if you can write a new stock exchange or a new bank or a new type of hedge fund, even if you can do it and you have done it, it's weirdly not. It's like not acceptable yet. You don't know whether the government's going to be like, wow, yeah, we want all this wealth to be captured by states, you know, or are we just going to ban it? And people like me came here from, I came from South Africa to be, you know, try to be like an Elon Musk of hedge funds or something like that. Right. And I, I thought this would be the place that would be definitely, very, very pro technology. But weird things are happening in the culture where it's. It's not. And I think it's bad. Yeah.
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A
Tell me more about that because. So I never expected to do a single interview where the words culture war were put together. Like, just did not think that that would Be something I would ever get involved in, not the thing I want to focus on. Like I'm about the individual. How do you empower an individual person regardless of where they were born, color, creed, nationality? Nothing. To me, none of that shit should matter. It's like, can you add value to the world? And if you can, you should be richly rewarded. And now I find myself where the ideas seem self defeating to the very people that are promulgating a lot of the ideas. So what do you see as going wrong? As somebody who could look at America one way when you were younger and now that you're in the thick of it, think, ooh, maybe some of these ideas aren't as useful as people are hoping. What is broken in the parsing of that data?
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C
It's something like a desire for a static society. They don't necessarily want innovation because it
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A
leads to uneven outcomes.
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C
It could be that, but it's also just if you're older, it's also annoying change to have things change and have to learn a brand new technology or something. So I think there's something like it's, and it's like it's fine if, if, if all you're doing is kind of a joke. That's why I think kind of like NFTs are interesting because it's like, it's like a joke and, and so it's like, it's like, can't be illegal because it's just art. And so the same people who I think so I have a friend who created an NFT project and he's like got a computer science degree, really good at machine learning and like he decided to make NFTs out of college. And it's like on the one hand that's cool sort of because it's like a protest art thing maybe. But on the other hand it's also like, is that the only thing that's not banned? Like if you can't sell shares in your, in your futuristic new bank or hedge fund or something on the blockchain, but you can sell pictures of cats or something.
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A
So we just did a big NFT drop and dude, the number of hours that I had to spend with attorneys trying to figure out like, hey, I want to make sure that I can keep supporting this thing, that the SEC is not going to come after me. Yeah, of course the first words out of their mouth are like, hey, this is just a big question mark.
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C
Yeah.
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A
Some of the attorneys were like, you shouldn't do it, there's questions. And so our job is to cya and so just, you know, don't. And then other people, you know, were far more thoughtful in their guidance. But it is so the thing that winds me up about the system now that I'm like really looking at it. So the old system worked very well for me. Right. I generated a tremendous amount of wealth. So while I was doing that, I, it seemed like everything was working perfectly. But then once I had wealth and I was like, oh, I want to do something with this. And then I needed to look at the way the system is made for somebody who isn't an entrepreneur, which is the vast majority of humanity, then I started to just be dizzied. And it started with accredited investor regulations. And I was like, wait a second, I am the dumbest investor of all time. But now, because I have over a million dollars in liquid net worth, I can invest. Like, it was so strange to me that the value of an idea or a company or whatever is captured long before an IPO, and it's now captured by VCs or, you know, who, all accredited investors. And so I remember the day that I learned about it. I forget who told me, but I was like, why aren't people rioting in the streets over this? Like, this is crazy. And that's crazy to me. And so to your point about NFTs, how do we get, how do we deal with that? What's like the path forward?
- [12:12]
C
Well, I mean, it's, it's so obviously bad that. And one thing that's kind of interesting, I think, is I, I do think there's quite a lot of research coming out on like marginalized groups, let's say, traditionally considered marginalized people are actually much more likely to be involved in cryptocurrency and any of these new things because in some ways the other stuff is clearly not available to them. So you could have two friends and can't invest in each other's companies and it's like crazy. It's so crazy. And I actually didn't know about that law either. I thought America was like, clearly, you know, the place to be for capitalism. And I met a young guy who was like 23 or something, and he wanted to invest in my company and he wasn't accredited and he was super smart, knew exactly what he was doing, but he couldn't invest and he had to, yeah, kind of figure out other ways to be involved. But that's. So how could you make, how could that any, anyone think that was a smart law to pass? And it's very much in the, in this framing of, like, protection, like, how can we protect people from themselves? And that's the opposite of the American value of, like, individual responsibility and being able to pursue whatever dreams you want to pursue.
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A
Going back to my question about, like, what do we think is broken in the culture? That, to me is a big part of this is I love the energy of wanting to protect people and making sure that they're safe. And you know that there's like, in, in business, number one rule is avoid a mortality event, right? So you have to learn to hedge your downside. So I'm going to try this thing, and if it works, we've got upside. But if it doesn't work, I've got a way to make sure that this isn't a catastrophic moment. So I get that, like, I. I can put on my, you know, my hat of giving them the benefit of the doubt. But at some point, you have to look at what is the result of that system. And if you're looking at the result of that system, it becomes pretty apparent that you've made things so hard that it's only people that can cross this incredibly insane threshold that are going to be able to take advantage of it. And so that is where this starts to really get wonky. But now if we take that hat off and we put on a cynical hat for a second, it's. It really starts to be outrageous. Of you've created the ultimate game to isolate people that don't know how to play that game. And then it creates this sense of overwhelm which shuts people down and then they don't engage. And so when the crisis, the COVID crisis kicked off, whatever we're filming this, like, 18, 19 months into it, I started having, like, some of the biggest brains in finance on. And I. I didn't know how to do those interviews to be helpful because I was trying to help the average person and I just could not get them to articulate. Like, how do you. You don't want to put the average person in a position where they have to understand what's going on in China and trade wars and stuff like that to be able to make a decision. How do you think of that? Like, as you look at. All right, we have. We're wearing our cynical hats for a second. We have this system that seems designed to isolate the average person. It is an incredibly complex system. I think that there is an answer that was presented, which I'll give my answer once you've had a chance to speak. But how do we help people in this new era, navigate that without having to just tear down the old system.
- [16:00]
C
Well, it is. I mean, I don't know. I mean, I. So numerai. We have a hedge fund and it's kind of. Obviously you have to be an accredited investor to invest. So anything I'm working on, probably not for the normal person, but it's not for lack of trying. It's just the way it is. So, I mean, but I do think that they are. I mean, there are more people, there are a lot of people involved in the stock market through things like robinhood and, and ETFs and things like that. So I don't think like, in some ways there is more access than ever. But then there's always like this underbelly story which is like, well, Robinhood's selling the order flow to Citadel securities and they're this huge entity that's kind of like done all this regulatory capture and stuff. But like, so it's every. That's what's sad. It's like every story you hear was like about financial inclusion. It's like something in the background that isn't. That's like the dark side of it. But then when it comes to crypto, it's kind of like weirdly public. You know, it's like there's every. Everything is on chain. You can see all the transactions. You kind of, you kind of know what you're getting into. And then when you have applications, like decentralized applications, you know that there are no intermediaries. And so there's something compelling about that to, for the normal person, however, it's sad that many of those things can't be what are considered securities. So you can't say, I'm going to make a company and my company is going to be on the blockchain and we're going to turn. We're going to make a thousand shares and sell the shares to people to fund the business. That is like completely illegal. And so people are doing things where they almost are told they're not allowed to make their blockchain projects valuable if it makes return really bad. And if you tell people it might go up really bad. And that seems strange that you're kind of pushing this energy into more and more things that aren't securities. Like, it would be better if some of these things could be more valuable or could have an open. They could do what they wanted to do. So it's, it's very hard, I would say it's very hard for, for people to, to navigate. And I Don't really have any personal financial advice, people.
- [18:43]
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- [19:42]
A
That's very wise since I'm sure that would get you in trouble. But I.
- [19:45]
C
Another regulation.
- [19:46]
A
Yeah, right. I think you actually though have your finger on the answer. It's interesting to me that you're doing it within the sort of traditional hedge fund world. But here is my core thesis I'm building. Literally, Impact theory is built on one idea. And that idea is if you, you want to scale in today's age, the fastest way to do it is to crowd validate. So I came onto this idea, which probably was self evident to people long before me, but it took me a minute because we're a studio, so we're trying to tell stories and in any creative endeavor you can expect a 1 in 20 hit ratio. And so as I'm thinking through that, I'm like, okay, we have to then start with the most inexpensive way to bring these ideas to the public. And then in the inexpensive version, you want to get the crowd to vote with their attention essentially on what do they like, what do they not like? And as they validate that, then I spend more money. So the, our value chain starts with what we'll call fan fiction. So it's just prose, right? Somebody's writing a story and people are either responding to it or not. It's often called light novels because it's not like, you know, Nabokov, where you know, it's like some really deep shit. It's fun stories, it's done serialized. So you know, maybe you do a few pages a week or whatever and people just tune in and every week they know they're going to get something. And so, okay, cool, if that's popping off, then you move it to a comic book. Then if the comic book pops off, then maybe you do short animation. If the short animation pops off, then you pitch to Hollywood and you do like the full blown thing. And so you've got this trail of value where you can point back and say, hey, Netflix, the reason you should get this is look how many people read the weekly thing. We've already got, you know, 100,000 people that read that every week. The comic book has a million people in it a week are our animated shorts, you know, have done hundreds of millions of views. So this is something that, you know, people are going to be interested to check out. Now you're going to have to explain to people exactly what numerai does. But the fact that you're essentially, and I don't know that you would use the word crowd validate, but you're using this intelligence of the crowd to create a totally new paradigm for approaching the market. And I think you've tapped into something that is universal, it will work everywhere. You just happen to be using it for finance.
- [22:02]
C
Exactly. I think you're right. That thesis is going to be completely right. This idea that you could make kind of communities and then those communities could have huge impact over the long run because they get bigger and bigger and bigger. Like think about the Ethereum community or something like that. And numerai is trying to do that. So basically the trad finance.
- [22:27]
A
What's trad finance? Traditional.
- [22:29]
C
Got it, got it, got it. It's like you have a lot of thousands of really bright people going into Wall street and you have thousands of sort of associated paper pushing kind of like imaginary bullshit jobs that we all know about. It's kind of a whole fake system. But you would think it would be worth it if they were good at their job. But it's more like 80% of fund managers actually underperform the market, don't beat their benchmark and they charge huge fees and they just keep getting money because it's often an agency problem. So a big pension fund will say, oh yeah, you guys have a bunch of our money and the pension fund gets to go to drinks with them. And then they slowly lose money over time, but they keep entertaining the guests, this kind of thing. And the people who are in the pension fund don't even know where their money is, so they don't have any agency to stop that problem. But anyway, numerai was the idea was, could we make a completely new kind of hedge fund where anyone could contribute ideas to the hedge fund signals to the hedge fund and the hedge fund would combine them all together and Trade a really smart model that had a lot more alpha than a traditional fund.
- [23:58]
A
So people are basically giving you, here's what I think is going to predict the success of a given stock.
- [24:05]
C
So yes, but it's a little bit more, it's very quantitative. So every model that is submitted on Numerai is a machine learning model. And so it's not really for everybody. It's not like you got to tell us your favorite stocks or something like that. It's much more complicated. So we give out a huge data set of thousands of features and decades of financial data and all the data is completely obfuscated, meaning no one knows what the data even means. Like if you looked at our data, it's like millions of numbers between 0 and 1. That's it. And you're supposed to do something with that. And people can't do anything with that data because they can't, they don't know what to do. It's too vast. It's too vast and there's too many features and they don't even know what the features mean. But a machine learning model can model any data set. Machine learning model can look at patterns in any data. Right. And so everyone is downloading our data and using machine learning models like neural networks or tree based models or anything they want and finding patterns in that data that no one else has found before and submitting signals to us on 5000 stocks in the world. And again, they don't even know what stocks they're predicting on. It's kind of complicated, but it works. And they're predicting on 5,000 global stocks and giving Numerai a deep edge over anything else that's been done before. Because we have by far the most models. If you take a big hedge fund like a Renaissance or Bridgewater or two Sigma, the number of people who are actually modeling data because they have a lot of compliance people and all those kind of things. It's like maybe a few hundred. And Numerai already has like about 4000 models that every week are submitted to Power our hedge fund.
- [26:11]
A
Yeah. So this to me is incredibly interesting. I don't understand though. And we'll come back around to the idea of just using the crowd validation. But machine learning, why doesn't a machine learn the same thing? Like why, why do all of these different models end up adding more value? I don't understand how machine learning works, to be honest.
- [26:36]
C
That's a good question. It's a very good question. So actually, if you think about one way to think about machine learning is that it's like fitting a line, so fitting a curve. So if you have an XY scatter plot of data, you can draw the line of best fit the linear regression. So would find the mapping between those two variables and find the line that fits the data the best. So for a linear model like that, there's always a right answer. So given any scatter plot, if you computed the line of best foot and I computed the line of best foot, we would get the same answer. And numerai, what we're doing is there's not just an X and a Y coordinate system, there's about 10,000 dimensions of the data. And. Anyone can model the data, so they can use any type of model. And so some many. What a neural network is, is a. It's a nonlinear model. So it can combine those features in all kinds of ways. And so the more features we give out and the longer the data sets, the more types of models could be discovered. And so actually, many of our users are finding things that are, that are really strange and might never be found by another hedge fund. But by having thousands of those unusual uncorrelated models, you can create a very, very high Sharpe ratio, which is like very high return per unit of standard deviation in your returns.
- [28:28]
A
So that I can see if I can understand machine learning at a really basic level. I'll give you the example that I, I saw a video of and fell in love with it and just think, this is so extraordinary. And I use it as an example of learning from your mistakes. But now I want to actually understand under the hood what's going on. So there's a game called Breakthrough, and it's like an old Atari game. And you've got a paddle and a little ball, and then you've got these bricks at the top. And the idea is to break all the bricks as quickly as you can, basically. And when the machine starts playing, the little paddle is just wiggling like mad. It clearly the machine doesn't even know what it's supposed to do. So I don't know if they told it get a high score. And so it's like, okay, like I know I can move paddle. And so it moves paddle randomly. The paddle finally ends up accidentally colliding with the ball. The ball then breaks something. Now the machine's like, oh, motherfucker, I see how this goes. And that now tries to hit the ball, and then it hits the ball and it starts getting points. Then one time it breaks through all the way on one side and. And now the ball Starts bouncing automatically at the top and automatically killing everything at the top. And the paddle doesn't have to do anything. So then the machine starts to optimize for how quickly can I break through one of the sides and get the ball to do this auto bounce thing at the top and break all the things? And so what is the person doing to explain to the machine? Like, is it giving it an incentive? Get a high score? Is it telling it wiggle the paddle? Like, what does it do so that then the machine can actually learn?
- [29:54]
C
Great question. And that's a great example of machine learning. So what's happening? There is. There are features, right? What do I mean by features? Just like at any given state, there's stuff to know about the system. And so you know where the paddle is and you know where the ball is, maybe. And based on the pixels on the screen, those can generate a bunch of features. And then you're basically fitting a model to those features and learning from experience.
- [30:26]
A
Are you teaching the machine that there is a good state and a bad state or a better state and a
- [30:31]
C
worse state in that particular game? I think they did give it the score and they just said optimize the score. And in a similar way, how sometimes these machine learning algorithms can become so good they have almost like an alien intelligence, like the way it breaks the. Breaks up into the top of the of break breakthrough it and just sort of like starts. It just becomes like, whoa, you're like perfect at this game. And I. My hope is that with Numerai, the, the longer we. We go on, the more alien and peculiar the types of trades we make.
- [31:14]
A
I'm trying to reach into your mind and figure out what you mean by alien. And I think it's this, that there's
- [31:18]
C
no emotion, there's no emotion. And there's. It's also unexpected. It's like, it's like a creativity that emerges and it's like, how. Why did you think to trade Tesla? Now everybody doesn't like Tesla or whatever. And then he's like, well, I don't know why, but the models have started to get really, really intelligent and do things where we're like, whoa, that was a good trade.
- [31:45]
A
This is so interesting. So I'm going to keep pushing on this. All right, so you're giving, you're telling the machine to look for states. I'm guessing if we're numero. Well, you're going to tell me that you don't know. I'm going to, I'm going to say things out Loud. I get that they're going to be flaws in this if I'm trying to come up with a numerai signal. So I'm saying here's the thing that I think will accurately predict what trade to make when that I have to tell the machine that's parsing that historical data, I have to tell it that there are certain things to value over other things. One of those, I'm guessing, is return on investment.
- [32:28]
C
Yeah, exactly. That's your first guess that you might want to tell it to choose to make return. So the target variable, the thing you're optimizing for is return.
- [32:40]
A
And where this becomes alien is that I think, ooh, actually don't optimize for return. Optimize for this. And it happens to give me a bigger return.
- [32:49]
C
Yes. In fact, we don't optimize for return. It's much more complicated because when the stock market, you're not just trying to choose one stock and, and put all your money in it and hope it goes up. You're trying to build portfolios. And in fact, with numerous fund, we don't really mind where the stocks go as long as the portfolio.
- [33:12]
A
Meaning I don't care if they go up or down. Yeah, most people don't know what a hedge fund is.
- [33:16]
C
That's true.
- [33:17]
A
Even so, I'm going to give you a definition of hedge fund and you're going to tell me how off I am. Here's what I think. So I try to make sense of the word hedge. So that most people think of the stock market is you choose the right stocks that are going to go up, whereas a hedge fund is going to be able to go in either direction because they're hedging something. So either if the stock market is going down, you could hedge. No, I actually think it's going to go up. Or if the stock market's going up, you can hedge and say, no, actually, I think it's going to go down. How close am I?
- [33:48]
C
That's correct. And yeah, most A market neutral hedge fund is kind of the purest version of a hedge fund, where every long position, every stock that's bought, there's also a corresponding short position.
- [34:02]
A
How doesn't that just always equal zero?
- [34:04]
C
It should. Yeah. That's what's cool. If you have lots of longs and lots of shorts and you bought them
- [34:15]
A
randomly and all along means is the value is going to go up and a short means the value is going to go down.
- [34:21]
C
Exactly. So you've got longs, you've got shorts. The expected value of that is 0%. And if you bought the. Because the basket of random stocks you're buying have an expected return of the market. So it'll kind of go up as much as the S and P if they probably got 500 random stocks. And then the expected return of the shorts are negative the market. And so together they make a portfolio that shouldn't move. And the, the trick is, what if you didn't choose randomly and you chose with intelligence, maybe you could have the risk of cash. Because it's just, if it's not supposed to move, you're taking the risk of cash, you're not taking the risk of the market.
- [35:11]
A
And I don't know what that means. You're taking the risk of cash, not the market.
- [35:15]
C
Yeah, so it means like if you have a hundred dollars and in your account and you go long $100 and short $100, you haven't spent any money. When you short a stock, you get money for selling it even though you don't own it.
- [35:34]
A
Oh, God, this gets so complicated. So I've, I've, thankfully, I've walked through this with my money manager and I think she wanted to punch me in the mouth because I, I was just like, I don't fucking understand this. But now I have a loose enough grasp. So basically, if I am betting, which you're probably going to hate that term, but if I'm betting that the stock market is going to go down, there's somebody else who's betting that, that it's going to go up. And so people are willing to buy my position and there's like, they're paying me to guarantee me to buy it.
- [36:09]
C
They are, they are making a little deal with a broker to borrow your stocks for shorting and they can borrow your stocks and then once they've borrowed them, they sell them. And so they're selling something they didn't, they don't own, but they will, they will return your stock later when, you know, whenever you need it.
- [36:31]
A
But somewhere in here we get into Wall street bets and how you can really fuck people up with shorts and stuff. Maybe explain that. Why? How does it end up being dangerous? Because I still can feel that my brain is confused and I've had this
- [36:44]
C
conversation like, yeah, no, it is, it is kind of confusing. So, yeah, that's quite weird. Like if you have a hundred dollars in your account and you short a hundred dollars of stock you get, you will have $200 of cash.
- [36:57]
A
In theory or in reality?
- [36:58]
C
In reality, yeah.
- [37:00]
A
How.
- [37:01]
C
But your because you, you borrowed stock from somebody, you just said, hey, can I borrow some stock? And they're like, sure, you have to pay us a little bit of interest, but like, you can borrow my stock. So now I haven't done anything. I've still got my hundred dollars and I've borrowed $100 of stock. And now because I have borrowed it, I'm also allowed to sell it. It's mine to do whatever I want with. So I sell it and then I get $100 of cash proceeds. So now I have $200. Have I doubled my money? No, because I have a short position. I have to return this stock eventually to the person I borrowed it from. And therefore, if that stock doubles, I will lose everything because I have to
- [37:43]
A
buy it back at the higher, I
- [37:45]
C
would buy it back at 200.
- [37:47]
A
So if the price actually goes down, then I was okay, because I sold it and I don't have to buy it back.
- [37:53]
C
You can return it at the lower price. So if it goes down to 50
- [37:57]
A
and it goes down and I got the vig on the Delta, I guess not even the vig. I got the Delta.
- [38:04]
C
Yeah. So that's how shorting works. And you can see why it's scary because there is no that legal.
- [38:12]
A
Like, this is complex shit. This is like really gambling, but this. So you're going to say something, I'm guessing, about the efficiency of markets.
- [38:22]
C
Yeah, I would, I would like to say something about that. But yeah, I mean, if someone knows something about a stock, knows it's going to go up, you want them to buy it because they're putting their, they're making the market more efficient because they're putting buy orders on that stock and it becomes more valuable. If someone knows something about a stock like it's going down, why shouldn't they be be able to express that knowledge in the market so that the price of that stock tends towards this?
- [38:55]
A
Because it's mean and it will influence people's perception. Now, I'm not saying you actually shouldn't be able to. You probably should. I don't know shit about it, but that would be one. That's one thing that freaks me out about shorts is if you're paying attention and people see, ooh, that person who I think is really smart is shorting it. Now my psychology flips and I think it's going down. And that brings us right to fucking Wall street bets where, where it's like you really can influence markets.
- [39:20]
C
Yeah, for sure. And I, I, there's maybe some questions about Whether you should be able to short and then also take out a front page ad in the New York Times that says this company sucks and everyone should sell it or something, which people do. I take it people do that kind of thing. And that's what was happening with Tesla. Even you'd had these kind of normie analysts on Wall street making up stories and trying to get Tesla to go bankrupt. And that would have been a very bad outcome for the world if that happened. And it was quite close. So then, you know, but, but yeah, it worked out in the end. So I would say that we, when we short, we're shorting like a very small amount of very small. And we're not, we're not actually not interested in the company losing. We're just interested in hedging our risk with a company that we think is like average. And so those are the companies we tend to short. And I do think there's a big questions about the sort of activist shorting where they're like, this company's a fraud, it's going bankrupt and they get huge positions, but thanks to markets, they've been killed already. So the Gamestop people killed those types of shorters. In fact, they shut down their firms.
- [40:42]
A
This is the craziest story of the last like five years. I mean, this is absolutely bananas. Walk people through that. I don't know how familiar my audience is with what happened with Gamestop and Wall Street Bets.
- [40:54]
C
Walk them through it.
- [40:54]
A
What is Wall Street Bets? Let's start with that.
- [40:56]
C
Well, I'll tell you a funny story, actually. I was coming back from South Africa, off to the Christmas and I was stopped by the immigration and they were like, what are you doing in America? What are you, what, what are you, what's your job? And I was like, I work at a hedge fund. And he just started laughing. He's like, did you, did you. Were you short gamestop? And he was just like laughing. He was so happy. He was like so happy that the hedge fund people were struggling under the. Whoa. The, the WallStreetBets thing. So it was a very interesting kind of movement where GameStop considered kind of a bad company, not many prospects and. But Reddit people decided they really liked it and kind of got together and pulled off this massive short squeeze where they knew a lot of people had shorted this company and they knew that the more the price went up, the more they'd have to cover their short. As in, you know, do what we just described, where you have to go out and buy it, buy the company that you don't even want to buy in order to return it back to the person you borrowed it from.
- [42:10]
A
And why can't you just wait for the price to come back down?
- [42:13]
C
Because you have some kind of risk mandate in your fund and you're. You maybe you have a deal with your investors where they say you're not allowed to have more than 30% in one name, otherwise, you know, we're going to pull the money or sue you. And so they maybe put 10% into GameStop short and then it went to 30. Suddenly it's 30% of their positions because
- [42:39]
A
the value would be so high for them to have to buy it that on the books. It changes the ratio.
- [42:45]
C
Exactly. Yeah. So it's suddenly this huge position and they have just a rule. They can't keep holding it even if they think it's going to eventually go down. They are their risk limits say they have to sell some. And so as an exit the position, so they end up needing to go into the market to buy the exact thing that they think is going down and that pushes the price even higher.
- [43:10]
A
That is crazy.
- [43:11]
C
Yeah. And so it was very interesting thing to watch because it was a bit of like maybe crowd. Crowd validation because it's like you have all these people and they're posting screenshots of their accounts on Robinhood proving that they're in and that they're diamond hands, they're not going to sell. And suddenly people like, maybe we can do this. And in this kind of distributed way, decentralized intelligence, they end up doing something that was actually very smart and, and did. And did cause big ripples in the hedge fund industry because a lot of the. Those stocks were. When that type of thing is happening, it affects all kinds of other stocks. So there was almost like a huge rally in these kind of junk stocks. And all the hedge funds are short the junk stocks. We even short some of them not GameStop, but some of them. And they don't know how to deal with that type of event. And it's almost like unprecedented. And so you had funds like one of Two Sigma's funds was down 8.6%, which is like one of their worst years, one of their worst months on record. And many, many other quant funds did terribly because of this. So it really did have the, a negative effect on the, on those markets.
- [44:42]
A
Okay, so what was going on there is so wallstreetbets is a Reddit sub. A subreddit. And so it's just a bunch of humans that are in A space sort of together, talking about, were they saying, hey, let's go. I believe in. In GameStop and I want to see it go up or, hey, guys, if enough of us buy into this, we can fuck over the hedge funds there.
- [45:06]
C
Yeah. It's hard to know what the sort of like, aggregate motivation was, but there were people who liked the stock. Like, even Michael Burry, big short guy, he owned it. He thought it was a bit undervalued at a time. This is why maybe it was on $4 or something. And then there are other people that came in and for their own reasons liked it. But then it started to become like, well, someone's posting that there's this huge hedge fund that has a huge short position, and all we need to do is to get this up by $50 or more and they will be toast. And we can literally take their money out of their fund into our Robinhood accounts.
- [45:53]
A
That. That is insane what you just said. We can literally take the money out of their accounts and put it into our Robinhood accounts. That's bananas.
- [46:03]
C
That's the short cover.
- [46:04]
A
Here's why I always encourage people to don't think about things. Think about the nature of things. Once you understand what's really going on, like, I could never have pulled that off because I don't understand it well enough. And because I don't understand it well enough, I can't think from first principles. And if you can't think from first principles, you can only follow. You can't lead. And wow, like, that is really, really fascinating. So this whole idea of distributed anything, we're moving into a really fascinating period in human history. And my mission has slowly become over the last 18, 19 months since COVID kicked off, getting people to recognize that we're going through something unprecedented right now, but in any moment of disruption is tremendous opportunity. I wanted to have you on the show because I see you applying that to an area where I know people have told you to your face, like, this isn't going to apply to finance, which you're really pushing back on, but going broader than finance. Why do you think there is. Why is decentralization as a movement? Well, one. Do you think it's inevitable and the future, and if so, why?
- [47:19]
C
Someone said to me that what decentralized thing has ever really worked? And I was like, what? Literally capitalism, that is a decentralized. That is the story of it. So it's like this idea that if you leave people to their own decision making and let them start things and create capital, it will just kind of do amazing things. And there was no central planner who called Elon Musk 15 years ago, 20 years ago, and said, you have to start an electric car company, please do it, we need it. No one. It was from him. And so you can have a system like the capitalist system, where you have amazing outcomes from people following their own instincts and motivations. But decentralization now means a lot like cryptos related stuff. And it's like, why is that decentralized? Well, no one's in charge. There's no one who can stop you from building a small set of instructions on the blockchain and have that become a very valuable piece of financial infrastructure. And that's so empowering for people. And to make it even more intense, why Crypto is a kind of hyper capitalism. Even if that thing is doing something wrong, like it's a little bit scammy or a little bit scary, there's no one who can stop it it. And so in the, in the, in the capitalist market in the United States, if a company is doing something wrong, they can just be shut down. But in crypto, it's, it's a more, it's more free, but it's also more dangerous for that reason. But the, the benefits so far seem to be outweighing the bad things. I mean, the good things on crypto are very good.
- [49:35]
A
What are the good things in crypto?
- [49:36]
C
Well, I mean some of the things like say Uniswap is a really interesting exchange and it's suddenly got. It's a decentralized exchange, has no intermediaries, you don't need to sign up to it, you don't need to kyc yourself, you don't need to do anything. You can just trade. And it's got some, some days it has more volume than Coinbase and it was started like, I don't know, 18 months ago or something. So there's that type of thing that. And it's also got no one working there in some way. So there's some coders who work at a company that sort of support the protocol, but the protocol's out there and it can't be taken down ever. Ever. So it's kind of cool.
- [50:27]
A
Yeah. This to me is. This is the closest I've ever felt. There's. There's two things I will say. There's two things that I'm like, you have to stop and look at these two things because it will change your life so profoundly that I've given my entire professional life to getting people to understand Two things. The first one I knew would be a thing because mindset. So that like changed my life. It took me from scrounging in my couch cushions to find enough change to put gas in my car, which is a real story to, you know, having serious success in business. And so I was like, whoa, this is teachable, it's repeatable, other people can do this. And now the other is, I don't know what word to shorthand it to, maybe decentralization, maybe crypto, I don't know. But the, the shift in cultural energy to things that can't be censored, stopped, broken, whatever, going outside the system, maybe that's it. And when I see what's happened like this, the number of people, in fact, I'm saying it now to everybody listening to this, you have to do your own research. I cannot see the future. This is not financial advice. I'm not a financial advisor. I do not know what the fuck I'm doing. So all I want people to do is look at it. And if they look at what's going on in crypto and they reject it, fair enough. Maybe you know something I don't and maybe my gains are short term gains. This is so possible. And I cannot stress enough that people need to do their own research. But now, having said all of that, what I want people, the reason I want people to do their own research is the rich getting richer is not a phenomenon I find interesting, even though I am wealthy. And so this, like crypto is playing out extraordinarily well for me. All I do is dollar cost average. I buy a little bit every day of what I'll call the blue chips, like the safest ones. Because again, I do not know what the fuck I'm doing. I do not spend my time.
- [52:21]
C
The safest ones are pretty risky already, ultra volatile.
- [52:26]
A
But like getting in there and learning about where all the cultural energy is flowing and at least looking at it like, otherwise, dude, this is going to be another thing where a small number of people who are in the know end up reaping all the benefits. And so I am so eager to get people to even forget, like crypto as currencies. Anybody out there who's contemplating starting a business understand why the culture wants that to happen. Because you can deploy that, as you have done with numerai, into a business, whether it's finance, whether I'm doing it on the studio level. This is going to happen everywhere. This is what I think is the inevitable future, which I'll sum up as saying this you have to find a way to tie the community into the success of a product and company. And if you fail to do that, you will fail in business, you will fail in finance, you will fail in everything. And it is. It's a transition that's happening so rapidly that there will be outsized success over the next. I don't know. I don't know if it's five months or five years or 50 years, I don't know. But it's happening so terrifyingly fast and it's absolutely thrilling. I'm having the ride of my life. Most businesses will not be able to switch from extracting value to giving value. And that will, I think, will decimate them and is exactly why there's huge opportunity in this moment of disruption. But I'm just so eager for people to really look at that.
- [53:59]
C
Yeah, it's very hard for people to get their head around that simple fact of like unstoppable or immutable technology. And because they've grown up in a world that is very controlled. So if you've had the experience of posting a picture on Facebook or something and then it gets reported for some violation and then you realize this isn't your profile page, this is like. And even they could change the design of the page, they could change what content is shown to your friends. You could be sort of shadow banned. And so if you think like that, you don't have any kind of relationship with any of the web. Two things that you've been involved with, like Facebook or Twitter or something, you're not in any position of real ownership. And that is what crypto changes. And that's very, very powerful difference. If you upload. And that's maybe what you're seeing with NFTs. If you can upload an image to your Facebook profile and everybody can see that image, that's extremely, extremely low value compared to if you can own that image or token that represents that image. One is worth nothing and some are worth $60 million on the blockchain. And so the difference between owning something forever and being this kind of like sort of like slave to a system is a very different mindset. And people. It's like one of my friends said, Fred Ursum, he's a co founder of Coinbase, we went on a hike a long time ago and like 2013 or 14 or something 15. And he was just like, I think people want to like own their stuff. And I was like, what is this guy talking about? He's like, I think people want to own their stuff. And I've always remembered that because that's exactly what it is. You. You don't. It doesn't feel like we own things anymore. Like, even if you own a house, it's like, somehow vulnerable to some government change of. Of the way they.
- [56:20]
A
Yeah, it's crazy. Like, I'm. I'm in my 40s. I shouldn't feel this way, but I do. It feels weird.
- [56:28]
C
Yeah. You feel like you don't own.
- [56:31]
A
Yeah. Like, it feels like there's just a lot of, like, meddling a lot of. And maybe it's just restriction, I don't know. But it. There is something really intoxicating about this idea of actually owning your.
- [56:43]
C
Yeah.
- [56:43]
A
And I've become way more enamored with virtual goods, which I would not have believed. If you'd told me this a year ago, I would have said, no, no, no. I'll always, like, I dig it. I get virtual stuff. I've always understood that. That's just made sense to me. But I would have thought that I would always value the physical more. And somewhere in the last 12 months, that changed.
- [57:03]
C
Yeah, that's an incredible thing to change. To feel like your relationship with your physical world is somehow fragile, but then your relationship with the digital world is actually fixed and permanent and doesn't need police. And so that's a very powerful thing to be aware of. And I do think you're right that over the next few years, people that don't get that quite right are going to be in a bad place. And I think even the big owners of the big monopolies like Facebook or Google or Twitter or any of those things, they. They are. They're totally aware at this point of this. Of this huge sea change. And they've built out a lot of relationships with the deep state. You know, basically, they've. They've joined the. The. They follow the party lines, but they are also run by, in some cases, entrepreneurs who maybe don't want to play that way forever. And if the Internet can be. Is going to be free, which seems like a thing that will continue in the United States hopefully, then all this crypto stuff is part of it. It's not like we can really have a free Internet and not have crypto. Either the whole Internet's free and kind of unregulated, or it's not. And it's. It's a very different game If. If the US Starts saying, well, no, you can't use this application, and what
- [58:39]
A
do you think will happen?
- [58:41]
C
I am very curious to see. I think it's going to be very intense the next couple of years. I'm kind of worried about, like some of my friends in crypto because there's a lot of good intentions and a lot of good, good actors in this space, especially in the United States. Like, the people here are nice. They're trying to make nice things. They, they're really wealthy. They don't. They're not worried about making money. They really do want to make something special, something new. And if the good actors get targeted, then it's like a particularly sad state. Like, if you like Brian Armstrong, founder of Coinbase, he, he had this situation where like he's like been fighting. Well, he's been talking with the SEC about these issues for so long and they've put so much thought into their regulatory policy and. But they, they keep getting kind of, kind of treated badly, I think, by regulators, you know, even though they're so clearly good actors.
- [59:53]
A
Yeah, this will be, it'll be really interesting. I'm worried about what happens if the US tries to clamp down on it. There's so much cultural energy pouring into it. And look, you used a great word earlier that crypto is it. There's a sense of danger to it. So I just had an experience this morning that was absolutely hilarious. So because there was a period of my life, an extended period of my life in my 20s, where every dollar counted in my life. And so I developed this real frustration when banks acted like my money was their money. And now that it's on a grander scale, I still have that sort of rage inducing mechanism. And just today I was trying to wire a non inconsequential amount of money. But first of all, they trapped it and so they stopped it. And I called them, tried to deal with it. Nope. They wanted me to go into a branch. I'm like, guys, I do not have time. A and B, Covid, no thank you. So not super keen to go into the bank. Let's just deal with this over the phone. They were, one, you have to stay on hold for ungodly periods of time. And then second, they were like, what? Why are you wiring the money? And that's like my red line. I'm like, that's none of your fucking business. Like, this is my money. I'll fucking wire it to whoever I want. Like, thank you for the protection. But like asking me what I'm doing with it, like that drives me fucking crazy. And so once you get into crypto and you see how easy it is, one, it feels a Little scary because you're like, I could send this to the wrong address and it is gone forever. Like, there is no getting that back. But the first time you send a payment and it's like 0.2 seconds, it is amazing. And so the reason I had to wire the money, not that I was willing to tell my bank this, not that it. Nothing bad, but I was trying to buy an nft and coinbase limits, right, the amount that you can send in any one day. And so that's an important thing to note is there are some parts of crypto that are centralized, and so you run into the same issues, but once you get into your wallet, you can do whatever the hell you want. So anyway, I was having trouble getting enough into my wallet to buy this nft. So I ping a friend and I was like, yo, I'm trying to get this. And he was like, cool, I'll send you the eth, then just wire me the money. And so the hilarity of it took him 0.2 seconds to get me the ETH, and it's taken me, like, four days and, like, battling with my bank to get him the money. I was like, oh, my God, this is so obnoxious.
- [62:32]
C
Well, it's funny you say this like, I. I just had this kind of experience. So for some reason, just because I made a. I. I sold some crypto that I had, not one that I bought a long time ago from a, like, a friend's project and sent some to my bank account, shut my bank account down, card blocked everything. And I was like, what are you guys doing? And I have, like, a private wealth person who's supposed to be, like, looking after my interests, and she's like, well, you know, we needed to do some kyc, like, Oscar, like. I'm like, what are you talking about? Like, you do know me. Like, me, I have been, like, at the bank for, like, 12 years. And now I'm like, I paid. I got my. An assistant who works for me, this guy Pedro. He had to draw money from a cash, mail it to me by FedEx to the hotel, so I could afford to, like, buy a cab to go to the conference that I'm going to. And, like, it's still in process. My Netflix is. I can't even watch Netflix. My PayPal's off, and I'm like, kind of a good citizen of the financial system, and I paid, like, a lot of taxes. And, like, fuck it, man. I hate it. I was just like, maybe I should just not get the card fixed.
- [64:06]
A
Oh, Dude, I've also been rejected from
- [64:08]
C
every credit card I've applied to. I have no credit.
- [64:10]
A
Why?
- [64:11]
C
Don't know. Probably because I'm South African. So yeah, it's actually terrible. And it's also this feeling of like oh wow, I'm actually powerless. Like if I move banks that's the next bank is under the same regulatory regime and has the same people working there shuffling the same papers and annoying their customers on purpose.
- [64:35]
A
Yeah.
- [64:36]
C
So I just don't think this is going to last. Like if it's that, if it's that hard to like use just to like my, to like I'm locked out of my Uber. It's like so crazy.
- [64:50]
A
That is crazy.
- [64:50]
C
What for?
- [64:51]
A
It will be very interesting to see. It feels to me inevitable that the, the decentralized web web 3 however we're going to think about it is going to happen that people are I hope going to be willing to trade some of the risk. And look, I am not looking for no regulations or anything like that. I had a conversation with Robert Breedlove and I was saying like sovereignty is a double edged sword. I don't want a hundred percent sovereignty. Like I like the idea that you know, the cops will show up if I've got an issue. I don't want to have to you know, deal with everything myself. So I'm certainly not that guy. But getting to a world where there are options where we can make different trade offs and it seems to me that crypto is the leading edge of that.
- [65:34]
C
Exactly. And I also agree. I actually, I don't think the, the US the story of the United States would, would have worked out so well without the sec. Like they did a lot of good clever things to make America like they do want to be the financial capital like of the world and they've done things that made a lot of sense. But I feel like somewhere around like 2008 or something they just started going just like into this insane direction where it seemed like is, let's just say 0.001% of, of transactions are, are. Are kind of sketchy. Is it worth wasting your time or my time as entrepreneurs spending six days a year locked out of their bank accounts so that you can like do your compliance. Like no, it's, it's absurd and it's up ugly and it's like not what, what we, we should be doing at all.
- [66:44]
A
Yeah. This is so companies, as I'm sure you know, they reach a point where the system you used when you were smaller stops helping you and so it's what I call the dragon begins eating its own tail. And I think there's that sweet spot where you want regulation, you do want protection. But then there comes a point where it starts being destructive and it's creating, creating more problems than it's freeing up. You're using a tactic in numerai that I think is part of the potential solution to this. Just staking.
- [67:15]
C
Yes.
- [67:15]
A
Talk about staking. Because you, I haven't heard anybody else say what I've heard you say many times and no one ever asked you a follow up question. So here we are, which is you've said not only is it working in numerai in finance, but I think that this would work across the entire Internet.
- [67:30]
C
Yes.
- [67:31]
A
So what is staking and why will it help?
- [67:34]
C
So staking is where you lock up some crypto assets, any coin, and because you've locked it up, you get some kind of benefit and you can unstake and get your stake back. And that simple mechanism is really nice in some ways. You know how like there's things on the Internet it's either free or paid. And I think like the middle of free and paid is like staking where it's actually not paid. It actually is free. You can stake and then unstake, but you can do things when you're, when you're, when you do staking. So for numerai, we had a really good start to the company, had lots of people join, amazing data scientists submit predictions to the fund. And after a while what happened was people realized, well, if I just make a thousand numerai accounts then I'm going to increase the chance of me having one model that's just lucky and then I will win the numerai tournament. And that's like a sybil attack, it's called sort of. And you don't want that in a system like this because we want to know you believe in your model. We don't want to have thousands of models just hoping to get.
- [69:02]
A
Because it just creates noise.
- [69:03]
C
It creates noise and we wouldn't know which models are good. And with staking we say, well, in order to make any money on numerai, you have to stake our cryptocurrency NMR on your model. And that is how you earn money. Like if your model performs well, you will earn more NMR tokens and if your model performs badly, we'll destroy some of your stake. And that simple mechanism of having the rewards be linked to the stake means you can still make go and make a thousand accounts. But which one are you going to stake or which is going to have the most stake? The one that you believe in the most. And that's this big problem that we solved where it's so easy to make a quant model that looks good. It's like it's got a good back test. It looks like it's going to work on the future. But with staking, we only pay based on if your model is going to work in the future. And we get you to say upfront, you put kind of skin in the game and say, I believe in this model so much, I'm willing to stake $100,000 on it. And, and that's.
- [70:20]
A
How does that advantage them to. Instead of doing $10, why 100,000? Do they get a bigger payout?
- [70:26]
C
Yeah, so their payouts are based almost like as a percentage of their stake. So if they have a kind of 2% correlation with returns or risk adjusted returns, they will end up having a stake go up by 2% or burned by 2%, if that's bad.
- [70:41]
A
Did you watch Squid Game? Yeah, this reminds me of the marble thing. How much did you bet? So you've got whether you were right, then you've got the. Oh, not that that gave anything away. But yeah, peeps got to watch Squid Game. So yeah. Okay, so how does this then carry across to the rest of the. The Internet?
- [71:00]
C
So. Because it solves the sort of spam problem. Like what if you could on your Twitter account, you know, the Twitter check mark. What if there was another check mark, the green check mark, which is just like the person who owns this account has staked more than $100 on their account. Well, what's the big deal? Like, why, what, what would that do? Well, it would make you, whenever you see that, be like, well, this guy's probably not a bot, because a bot army would never be able to afford staking all of them. And then you could, you know, and if you ever want to unstake, people would be able to see that on the blockchain and then you maybe lose your check mark or something. Something. So that simple thing, it's not like Twitter's now charging you to have an account or charging you for. It's actually not to do with Twitter, just like staking isn't actually to do with numerai. Staking is happening on the blockchain. And so when people stake, it's like a blockchain transaction. And so there's no intermediaries and we can't steal your stake or anything. Like that, because it's not an agreement with us, it's agreement with Ethereum, kind of. So I think those mechanisms could and will reach the broad web very soon and change the way we do things.
- [72:32]
A
Do you think that it has implications beyond just sort of validating who you are?
- [72:38]
C
It has it for any. Anything that you want to have seg on. So for numerai you. Actually, all of our data scientists are anonymous, but they're doing it to express something else. Their confidence and their predictions and anything that involves, like, proving authenticity or proving you're part of the crowd. I mean, even say the GameStop thing. Imagine you could make a stake on a blockchain that proved that you held GameStop and you weren't going to sell. And anyone could maybe see on the blockchain that if you did sell, that's the type of thing that's going to be able to happen where you could have collective contracts and be able to do incredible things. Once you have the proof that you're staking a lot.
- [73:30]
A
This is really interesting. So I was taking notes on you and what I wanted to touch on, and I was like, man, I oftentimes my intuition leads my ability to articulate why something feels right. Heard a lot of people talk about staking. I've never staked anything in my life, but obviously being in the crypto space, I hear it a lot. Hearing you talk about it, I was like, okay, that's a really interesting way to do it. When you're into crowd validation, you need to know that your crowd is validated and that people aren't able to mimic the crowd or be a bot in the crowd or whatever. And so I was like, wow, this is really interesting. As I think about trying to build out a studio and do it in a different way and use all these layers of crowd validation. I was like, ooh, there might be something there with staking. I don't yet know exactly what it is, but I can feel something tickling at the back of my mind that this could be useful.
- [74:21]
C
Totally. It's so useful to us. And I changed our business. There's so many businesses that I think couldn't exist without it, and so we don't even know what those are. But I think the idea of a crowdsourced hedge fund, it seems obvious that you should be able to have an Internet hedge fund. Like, there's an Internet everything. Why isn't there an Internet hedge fund? And the reason is you've never been able to get the contributors to that system to be Able to put skin in the game with. And we are doing that with staking.
- [75:01]
A
Talk to me a little bit about. So this whole idea of being a quant, it's so foreign to me. Have you just always been naturally drawn to math? Do you find math incredibly useful?
- [75:12]
C
I actually only really got into math in college. I just decided to get good at it because I realized there was so much of the world was written like in that language basically and you don't really get enough knowledge from high school and. But I was also always interested in stocks. My dad like gave me stocks when I was 8 years old and I just followed them and. And traded options when I was 15 and started.
- [75:45]
A
And our options, the same as shorts
- [75:47]
C
and options are even more funky than shorts.
- [75:53]
A
So what are options?
- [75:55]
C
It's where you have an agreement to buy something, a right to buy something at a future date at a certain price.
- [76:04]
A
Okay. So I can say, hey, if this goes down, it's like a limit order, except it is.
- [76:11]
C
It's just a right. So there's no obligation to.
- [76:15]
A
It doesn't happen automatically.
- [76:16]
C
Yeah. So you.
- [76:17]
A
And I'm paying for that, right?
- [76:18]
C
Yeah, you're paying a premium. Like an option premium. So what would the option to buy Google. Imagine the option to buy Google shares at $2 per share.
- [76:34]
A
Yes, please.
- [76:35]
C
That option would be like, yeah, I'm definitely going to exercise that option. And so that option would be very valuable. But then there's also put options which are. So that's a call option. And then there are put options that are making money when the stock goes down. So it's like insurance if the stock
- [76:52]
A
goes down that I have somebody who's willing to buy it from me at that price.
- [76:57]
C
Exactly.
- [76:58]
A
Are they just literally the reverse of each other?
- [77:00]
C
You have the right to sell the stock at that price.
- [77:02]
A
So I can only do a put option if somebody's done a call option at the same amount?
- [77:06]
C
No, actually they're different but. But usually there'll be calls and puts on the same asset. So let's just say why don't. What Google's trading at. But let's just say you had the right to sell Google shares at $100,000 per share.
- [77:23]
A
Somebody has to be guaranteeing that on the other side.
- [77:26]
C
So yeah, banks and things are kind of underwriting these options, really.
- [77:30]
A
Banks, an individual person can't do it actually.
- [77:34]
C
No. Because of how risky it is. It's quite hard to get the ability to write options. It's easy to buy and sell them, but it's hard to get the right to create them.
- [77:47]
A
So wait a second, it's easy to buy and sell them. There's only two sides to that equation. What's the difference between buying and writing?
- [77:54]
C
You're. It's like you're the counterparty of the, of the whole deal. Like, yeah, like if you and I buy and sell an option, it's basically at the exercise time. When you can exercise this option, someone's on the hook for that. So it's a bit like you and I are. If we, if there was an insurance contract or something that we had on a house, you and I can trade it, but we're still hoping that the insurance company is good on the, on the deal.
- [78:23]
A
It's like that, dude, this is why I think crypto is long term, just going to suck in so much capital. This shit is confusing. Now, I'm not the brightest guy around, but I'm also not dumb. And I find all of this extraordinarily difficult to wrap my mind around. Whereas when I looked at crypto, I was like, oh, this is very basic. It's arbitrage. This is like a currency. And so just like when I first got married, my wife is British. It was like, hey, if, you know she's got pounds in an account in England and we've got dollars, like you can sort of transfer them back and forth based on where the exchange rate is going. And if you think that's going to change, I was like, oh, cool. Like, I get that. So if I buy a pound today and the pound goes up in value compared to the dollar, then I'm laughing. This is amazing. That's at least like a far simpler thing. I just heard you explain it twice and I still don't understand, like how the writing of a put and a call and all that stuff. And look, I know I could buckle down and finally figure it out, but Jesus. Like, that is far more complicated.
- [79:27]
C
It is, it is complicated, but it's, but it's, it's a little bit like fake complicated. I mean, like, it doesn't need to be this way that we, we could have had these kind of options. Be something else. It's not like a, a deep thing to understand. So I think if you would it
- [79:47]
A
have been made as simple as, hey, I want to guarantee that I can buy if the price drops too. Because this is how, this is what I do on crypto, right? So I only, I limit buy all the time. I almost never buy from market value. So I'll say, okay, the price is whatever. If it drops, you know, $500, then cool, I'm in. Trigger a buy for whatever. But that means that somebody else has to sell at that moment. If no one's willing to sell, then I'm done. There's nothing I can do.
- [80:17]
C
Yeah.
- [80:17]
A
So is that the simplification of this whole thing or is there.
- [80:22]
C
Well, anything, I mean, anything can become a market. So, like that, the, the. It's still true that call and put options or anything has a market, and then people have bids and offers on that market. So once you get to the market points, it could be anything. And it's easy to understand. But yeah, with derivatives, it's just often a more leveraged, scary version of just buying the underlying assets.
- [80:50]
A
What is a derivative? This is a word I hear all the time. I've never gotten it.
- [80:54]
C
A derivative is kind of anything to do with anything based on the underlying stock.
- [81:00]
A
A put, a call, a short.
- [81:02]
C
Yeah, exactly. So an option was. Is a derivative of the stock. And it just means it's. Its value is derived from the price of, of the stocks, the price or the price of something else. And so all the, all kinds of derivatives in the, in the, in the markets.
- [81:21]
A
Want to go back to math for a second. So I am very sad that I didn't pay attention to math in high school. It doesn't come easily to me. And people who are like, oh, no. Like, it describes the world and it's beautiful. I believe it. I just, My brain, like, there is, there is an actual blankness. Like when I encounter math, my brain doesn't fire. Nothing happens. So if I, if I read a book, encounter a psychological principle, I see a painting, my brain sparks. But math is like an absence of something for me. And so I really have to, like, get in and try to anchor it around something so that I can sort of trigger my visual brain, if that makes sense, and then I can start to grasp the concepts or even break it into its constituent parts. So I found in high school, if I would force myself to go to the chalkboard, I would be able to figure it out because I was forced to go, okay, wait, here's where my brain goes blank. I don't understand this. And then the teacher would go, that's where you use this formula or whatever. Okay, cool. And I would just memorize that. And then it would. I could get it. But now that I'm in business, I'm like, holy fuck, I use math every day, and it's so important. But if you were talking to somebody who's 15, they're in algebra and they want to know why does this matter? Like, do you have an explanation?
- [82:43]
C
I think it definitely does matter and it's very important. But it's also, there's this interesting thing in culture. So I'm, I'm, I'm, I'm, I admire you for saying that you don't you have like a block of math. Because many people can become bad at math because they're too afraid of saying they, of asking for help or saying they don't understand something. Because there's something in our culture which is like if you're good at math, you're smart. There's like very related concepts which is just, I don't know, because of media. Like probably there were some movies that had like, yeah, like Rain man or something. I don't know. But it's not true. Anyone, I think anybody can do math and should do math. I used to tutor math to students. So I mean, why is it important? I think it's, it's, it is a type of, kind of a way of thinking, I think. But the, the sad thing I would say is that almost the entire of high school math is not real math. What do you mean? It's just, it's not to do with arithmetic which is, you know, what's your, what's, what's nine times nine or something like that. Like even in movies where they have a smart person, they'll solve something quickly and that's like an indication that they're good at math. But actually that's again a complete distraction from what like real math is, which is much more about constructing proofs. How can you show that two things that seem different are the same? And that type of thinking proof based math is very useful. So to any 15 year old out there, I would say try to learn some proofs.
- [84:31]
A
What are. I remember these happening but I cheated in high school, so I did not learn what is a proof.
- [84:37]
C
A proof is a set of statements that.
- [84:41]
A
But mathematical state, mathematical state, not like Timmy went to the store. It's yeah, X equals Y or some crazy.
- [84:48]
C
Yeah, but there could be some explanation and written component to it too. But ultimately the logic is so rigorous that step by step you get to the point where at the end of it you know that the statement is true. Not in the way we normally think about what's true, but in a deep, permanent universal way.
- [85:11]
A
Can you give me an example?
- [85:13]
C
Well, like Pythagoras theorem, you know the, you have a right angle triangle and A squared plus B squared equals C squared. I think that's it. And C is the hypotenuse of the triangle and A is one side and B is the other side. And that is important geometric result.
- [85:37]
A
And E equals MC squared. Is that a proof?
- [85:39]
C
That is a physics statement. But they would be proof to. That would lead to. To that based on other arguments. So. But yeah, I think it's a. It's, it's very nice to know things for sure, especially in this world. And that's one of the reasons I studied mathematics was because I was. I could learn all sorts of things about kind of the political fashion du jour from like say studying politics or something like that. But that would be almost like various kinds of propaganda in some way that might not be true. You know something. Yeah. Controversial like say something like human rights maybe not A not so so important as a concept or something like that. And those things change with time. Whereas with mathematics you are learning things that are going to be true in a deep and permanent and universal way. And so that's really nice, especially when you're trying to navigate the world that you can know. You can know a few things and they can be true in a deep way. And thinking back to crypto, there's some encryption proofs that show that why can't I just take the money out of your Ethereum address and put it into my address? Why? What is the thing stopping me from doing that? And it's mathematics, it's the way that the encryption works. So it's nice to know a few things like that for sure because a lot of people can be very confused when they put things in the same bucket. If you've heard of a website being hacked, why couldn't Bitcoin be hacked? And they're two very different types of systems and you wouldn't know the difference between them without thinking through the math of it.
- [87:47]
A
And I don't. Is there an easy way to explain?
- [87:52]
C
Well, the main thing is, yeah, with Bitcoin, it's just like it's on so many different servers and they are following this protocol and the. There's certain security guarantees that you get when you have a system that's distributed like that. Is it simple?
- [88:10]
A
And so there's a proof around the number of nodes that it's installed on by like how they parse that data. And so if you make a request that it knows up, we've got an errant request over here. And so mathematically, based on the number of cycles, it takes an average computer to run that equation. I'm Trailing off here, but, like, I sort of get how that would work.
- [88:39]
C
Well, that's the type of thing I think that is. That is worth at least knowing. At least knowing the nature of things can be different. And hearing that some. Some bank had their website hacked would not surprise me. But hearing that Bitcoin was hacked, it. It wouldn't even make sense. It doesn't make sense. I mean, I've heard you. You could lose your keys or someone could rob you and an exchange could go down, but Bitcoin protocol itself would be a lot more resilient to anything like that.
- [89:14]
A
Very interesting. Okay, so do we just memorize proofs, or is there a way to discover them?
- [89:21]
C
Yeah, people discover them. That's what real mathematicians do. At professors are trying to prove something that has never been proved before, that this equals this.
- [89:33]
A
And proofs, always about finding that two things are related or identical or that
- [89:39]
C
they are not identical, that they are different. Sometimes there'll be a conjecture that these two things don't equal each other or do equal each other. And if you could show it either way, it would be a profound outcome
- [89:54]
A
because then everybody else can just memorize it. And so now we've just sort of laid another brick in universal understanding.
- [90:01]
C
Exactly. Everybody then even, you know, 100 years from now in our Martian civilization, they could rely on that mathematics and. And use it for whatever they wanted to.
- [90:14]
A
Very interesting. Have you by any chance read Project Hail Mary?
- [90:17]
C
No.
- [90:18]
A
Oh, my God, it's so good. So this is, you know, talk about science that I can digest easily. It's written by Andy Weir, the guy that wrote the Martian, which is what triggered my thinking on that, and it's absolutely fantastic. And in the book he goes through, I say that it's math, not really, but he articulates science in a way that's fun. Like, hey, if, you know, the, you know, the pressure, the tensile strength of this material, and, you know, the. The amount of gravity exerted because we're spinning or whatever, then you can get this outcome. And it just makes math and science sound like, whoa, if you really knew these things, there are a lot of problems that you can solve in life you would not otherwise be able to solve.
- [91:02]
C
Yeah, exactly. And that's really important. You want to be like a magician. You don't want to just be following others. And by being able to build things is very valuable.
- [91:15]
A
Why do you say like a magician? That rings true. But I'm curious.
- [91:19]
C
I mean, you know, like, coming up with something from nothing, that type of practice, you can get from mathematics and other things like that because you, you're faced with a problem and you only have your mind to work with and other knowledge that you have. And if you can construct something and show it's true in some creative way, that is always going to be the same type of thing will happens in your real life too where you have to solve a problem just by yourself, with only the knowledge you have.
- [92:01]
A
Pretty sure I said this early in the interview, but that's why I certainly, I myself try to think from first principles and why I encourage the team to do it. Because if you can think from first principles, you really can do something original. But if you don't, you can't.
- [92:16]
C
Exactly. And it also is like a. You can rely on it even. And when you have when things are going badly because it's coming from a place of first principles. So one thing I often say about numerai is to investors or something, it's like if there were to be a hedge fund with all of the data, all of the best talent connected to it, and all connected with the perfect incentives through staking, why wouldn't that be the best hedge fund ever? Why couldn't that change the whole world? And so if you just think from those three basic principles, because we already have all three now it's very easy to predict the future when you have a few things to rely on. And then something could happen like an important employee quits the company or an investor pulls out or whatever. Let's just say something. In the operations of life, are any of those three things not true after that happens? No, they're all still true. And so you keep, you keep going. And I think it's extremely important to me when I look at investing in companies, not that I do it often, but to have a couple of those like first principles things because that entrepreneur is going to need them because it's going to be hard. But at least you can know that if the configuration of this project gets to that point that the first principles express themselves, then all you need to do is need is time. You need time to get to the right configuration.
- [94:09]
A
And do you have thoughts around that with entrepreneurship? So it's going to be hard. Are there other things that surprised you as you got into building companies that you know that somebody just starting out, they won't have thought of it yet?
- [94:24]
C
Yeah, I mean it's certainly. It is very hard. And it's definitely. It's like it's so hard, it's not even recommended. Like I don't want I don't think we need more entrepreneurs.
- [94:33]
A
Really.
- [94:33]
C
We don't.
- [94:34]
A
I don't know what, what is so hard about it that makes it not recommended.
- [94:39]
C
It's like very lonely kind of you, you usually if you come. So I'm always talking about kind of venture backed startups. I don't know what it's like to start a restaurant or something. It could be very different. But if you're doing a technology company, usually you're talking about something that doesn't yet exist and you're trying to get investors, employees and all kinds of people excited about this thing that doesn't exist. And then you go home after working extremely hard and you're like, oh, it still doesn't exist and I'm just here alone. And so it's very hard to continuously be kind of have this energy to keep something going. And with numerai, I mean we've had, there was this huge crypto crash in 2018 and areas and, and market neutral funds have had a really tough time. So there's been so many times where you would quit, but then the last two years it's like so glad we didn't quit.
- [95:50]
A
Why didn't you quit though? At the hardest part?
- [95:54]
C
Because I just knew I wanted to. Something I say to entrepreneurs is don't start a company unless you're prepared to make it your life's work. And that gets around so many of the problems that people have. Like they might start a company in an industry that they don't even like because they think, well, I'll just do it for two years and then I'll sell the company.
- [96:14]
A
Oh yes, I did exactly that.
- [96:17]
C
And then it's like not long term. And it's like, so if you have it in your game plan that you're going to be doing this for a long time, it changes your whole mind. You don't want to hire somebody who you don't really like because you know that you might have to, you know it's not going to work. And if you're expecting to work with them for a very long time, you'll hire better people and all your decisions will be much longer term. We've had so many things where there's so many opportunities to follow some, some new fashion or something and we've always had a lot of resistance to anything that doesn't make perfect sense for the long, long term. And that's such a nice thing to rely on too.
- [97:05]
A
I think that is very smart. Dude, this has been so much fun. Where can people follow along with you.
- [97:12]
C
So you can go to Numero AI is our website if you want to join as a data scientist. You can go to Numerai Fund if you want to learn about our hedge fund. And you can follow me on Twitter Richard Crabe or at Numerai.
- [97:30]
A
Nice and easy, man. Thank you so much for coming on. And guys, dude, I had so much fun researching him. As you know, I think there's something really happening in the world right now, and the way that he looks at it is incredibly, incredibly interesting and useful. Mostly done through the lens of finance, but highly encourage you guys to check them out. And speaking of things that I highly encourage, if you haven't already, be sure to subscribe. And until next time, my friends, be legendary. Take care. Peace.