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- [00:00]
Carlos Guzman
I think many people kind of realize on Friday that perps may not always be the strongest or safest instrument. Sometimes liquidity is reduced automatically before market makers can even react and reintroduce liquidity in the market, which I think once again adds into the whole perfect storm dynamic.
- [00:18]
Ram Alawalia
What do you think about Hyper Liquid? Is Hyper Liquid a winner or loser coming out of this? I'm optimistic and bullish now.
- [00:26]
Steve Ehrlich
Hi everyone. Welcome to another episode of Bits and Bips at the show where we explore crypto and macro colliding one basis point at a time. This is a very special episode just given what's happened in the market over the last almost 72 hours or so. Typically we're trying to decide what we're going to talk about. That's Trump Fed policy. None of that is an issue. Today we're going to discuss what happened on Friday, lessons learned over the weekend, and more or less how crypto is going to respond moving forward.
- [01:00]
Aptos Representative
Aptos is the no compromise infrastructure for global financial markets. Fast, reliable and 100 times more cost efficient than other blockchains. See for yourself why aptos is the chain of choice for institutions, users and developers alike at the Aptos Experience October 15th and 16th in Brooklyn.
- [01:20]
Steve Ehrlich
But first, just a few quick introductions. I am your host, Steve Ehrlich, high scribe of the Unchained Kingdom. I'm here as always with Ram Alawalia, the Maester of wealth leader of Lumita. And we've got two very special guests, so let's introduce them quickly. First we have Carlos Guzman, chief scholar of the Sea of the GSR Citadel. So welcome Carlos.
- [01:44]
Carlos Guzman
Hello.
- [01:45]
YQ
Love to be here.
- [01:45]
Steve Ehrlich
Carlos, why don't you just briefly tell us a little bit about yourself. I would imagine most of our viewers and listeners are familiar with gsr, one of the larger market makers in the space.
- [01:55]
Carlos Guzman
Yeah, sure thing. So I'm a research analyst at gsr. We're a big market maker across exchanges, centralized exchanges and centralized exchanges in crypto. Also big OTC desk and systematic OTC desk. And yeah, we partner with projects to provide liquidity and just also as a broader capital markets partner across advisory, help with treasury management and a bunch of other places in the space, including as a big investor as well. So yeah, pleased to be here.
- [02:25]
Steve Ehrlich
And we also have yq, Commander of the Roll Up Armies Adult Lair. And a special thank you to YQ for joining us because he's in Singapore where it is right now 2:30 in the morning for him. So YQ, welcome.
- [02:39]
YQ
Yeah, thank you Stephen.
- [02:41]
Steve Ehrlich
Okay, as always, but especially true Today, nothing that we say here is financial or investment advice. Please check out unchained crypto.combits and BIPS for more details and disclosures on that. And with that introduction, let's kind of just dive right into it. Everybody was getting ready for the weekend. I had some big plans. And then Trump decided to threaten 100 tariff on China due to export restrictions on raw earth minerals and all hell broke loose. Rahm, why don't we just start with you? What were some of your first thoughts and reactions?
- [03:23]
Ram Alawalia
Right, so on Friday around 10 or 11am Eastern Time, Trump shared a tweet saying that he would raise tariffs on China something like 100% or so. That caused a sell off in equities which up until that point in time were up something like 1 to 2% on the day. So you had a nice rally. And then so equity started to slide, closed down the day several points, three and a half points depending which index you're looking at. The volatility fear gauge index jumped 30%. And then digital assets also took a tumble. And within digital assets you had altcoins that were down 60 to 80% within 24 hours. And what happened there briefly, I'm sure our guest will unpack it for us, is you had forced liquidations that were done algorithmically, just autonomous code that was running and seeking to protect the network by liquidating positions. You had faulty oracle set up at exchanges that were pointing to the wrong reference spot data and kind of reminiscent of what happened with 1987 crash Portfolio insurance where you had a mechanism that was nominally designed to protect investors but actually had a pro cyclical phenomena. So it's this classic tale of a crypto speed running banking and markets history. You know, in 2021 it was rehypothecation with the blow up of Celsius and Genesis and these other lenders. So crypto learned that you shouldn't rehypothecate unless you're a bank with a lender of last resort and FDIC insurance. So here's the next lesson. It's really on the market side and the market side of things, although it's quickly recovered, it was really unfortunate the despondency that was out there. You had people that lost their life savings, they were acting in their minds prudently too. Dollar cost averaging over several years, but they were forced liquidated, they might have had some leverage. And this was all in the perfs market primarily where this pain was meted out. Spot market also of course had some volatility, but not nearly as Much as what you saw in Perfs and especially on Binance. So incredible couple of days. I think they're winners and losers coming out of all this. I imagine we'll get into who those winners and losers are.
- [05:50]
Steve Ehrlich
But yeah, well speaking of the winners and losers, I mean why Q you had a really interesting article on X. There's a lot of discussion. There's a lot of discussion I guess in the air supply. Was this a coordinated attack? Did CZ try to take out Hyper Liquid? But. But it looks like certain attackers, if you read the tea leaves the right way, they nuked in A or USD on on Binance led to a concentrated crash on certain tokens because of a window of opportunity related to Oracle's on that particular platform that then they were able to take advantage of on Hyper Liquid to the tune of I think $192 million and caused something close to $10 billion in liquidations on Hyperliquid. Can you kind of just walk us through that and in the ensuing time since you posted that, what have you learned that may or may not change any of your opinions or conclusions?
- [06:52]
YQ
Yeah, so as you mentioned, right There are a lot of coincidence like after I really dig into a lot of details regarding this kind of the biggest crypto liquidation event like regarding the timeline, right as Rhett mentioned but here I will just use Singapore time zone as the reference. So actually the market started to behave after this kind of announcement on the tariff news around like 5am in Singapore time on Saturday and then after that basically the crypto market started to behave like basically there are a lot of sort of shorts and basically the inter market plunged a lot until I sort of 520 if you look at the chart right no matter for the majors like Bitcoin eth or some other altcoins, right and basically drop like dramatically by this sort of 30%, 50% or even sort of 99%. I was somehow awake at that time. So basically I literally watching this kind of a waterfall drop for most of these altcoins and that is sort of like the first round of liquidation like from the other reports like some sort of also this kind of liquidity vacuum basically due to a lot of traders and market makers they withdraw the liquidity from it. And it's also because like the market reaction was huge and basically it also triggered no matter the CEX ADL on the auto deleveraging mechanism all these kind of like DAX purple decks like hyper liquid, this ADL. So then I sort of around is 5:43am Basically the USDE and WBETH and also BNSO started to collapse around night time around like sort of 16 million USD equivalent like sort of USDE dumped on the market. Of course there are multiple reasons, right? There's some reason I say okay it was caused by the first round liquidation and a lot of positions or collateral is basically not enough to cover the margin. So then sort of the exchange take over sort of their margin and start to dump on the spot market. So that caused the peg of USDE and after that because on Binance or some exchanges they use WBETH and BNSO as a collateral for their margin. So in that case further caused this kind of loop of liquidation until the next half hour or one hour the entire sort of market structure basically is completely off. And why we feel like it's not just single liquidation because there are two rounds one is like sort of these odds liquidation around is 520 and there's another further second round of liquidation including the depegging of usde around like 5:43 and 5:44. Yeah and beyond that why we like sort out in the posts all that sort of tweets, right? I feel like probably also can be a coordinate attack is because like around few days ago back in 6th October Binance announced like they will start to do some adjustment of this Oracle for the B and also WB and which will be conducted around like the 14th of October. It's just like so coincidence like flight just between these few days, right? And then like it's not. It's not just about the first liquidation of all coins but the second liquidation like directly target like sort of the three assets USDE BN so and also the WBETH is basically exactly sort of the assets like in the announcement. So that's why we feel like probably can be target a coordinate attack on it. And then in the third sort of article I mentioned, right Somehow it's related to this Oracle problem. We are quite familiar with Oracle for the Dax right? Compound RV and the things like for CEX especially for this specific case for example USBE insole and also WVET before the adjustment partial of this price index is associated with the spot price. So that's why in the second liquidation we can see that when sort of the price was down and and basically you you unless you have a lot of liquidity to buy it back otherwise you are the price down the Oracle I mean the market price down further. So it's really cost this kind of cascading liquidation. So that's one of the like reasons we feel like it can the root cost, maybe just about the.
- [12:35]
Ram Alawalia
Or there were large, there were large short positions placed prior to the sell off and you can see these chain like 100 million, 200 million plus short positions that also covered at the opportune time. So it does look suspicious. But you kind of get in your theory of it, which I think is a good theory by the way. It's very suspicious. Now the question is like, who would be the actor here? It seems like the core issue was that Binance was using its own spot order book to measure the collateral value as opposed to a third party Oracle that's taking the median of the bid ask spread across multiple venues weighted by liquidity or something like that. So you can get a mismatch between Binance's the spot prices on their order book, which they're using for risk management and margin maintenance, variation margin and liquidations against what the prevailing market is to your point. So if I build on kind of your theory, someone that understood the inner workings of this or just saw the announcement from Binance that they're going to change this. In a way it's like a zero day hack. A zero day hack is an exploit that you can take advantage of, but there's no patch. For now. This isn't a cybersecurity hack, it's a market microstructure hack. There's a gap in the market. So one alternative explanation is that when Binance announced that whoever had studied this structure, they knew they had a short window in time to take advantage of it. You combine that with Trump's news, it created the perfect window, especially going into the weekend when everyone's asleep and liquidity is extremely low and you can push a market. I'm in conspiracy tinfoil camp too on this one.
- [14:20]
Steve Ehrlich
It sounds almost something where it came to like a flash loan type type attack because there was no vulnerability that was exploited. As you mentioned, Rob, they went right through the front door and used publicly available information to take advantage of something. It gets tricky if, I mean, as we're all wearing our tinfoil hats. They're conspiring to drive down the prices of particular tokens and then doubling down by placing massive short positions at what happens to be Binance's chief rival. Like the first exchange that's really made Binance sweat in years. But we'll see.
- [14:56]
Ram Alawalia
Came out with an apology, don't forget, just to show their part of the story. They said, hey, we have a lot of lessons learned from this. And you might make the case that maybe North Korea was the perpetrator. I'm just like, they're still not clear. But anyway, go ahead.
- [15:09]
Steve Ehrlich
Yeah, I mean, it's one of those things where, I mean, like Occam's razor. What's the most likely scenario, most likely explanation, like, and why you even mentioned this in your. In your report? Like, there is a way to read all of these different clues and say it was not some sort of conspiratorial attack, but it was just a couple of opportunistic actors or just a perfect storm of events. But hey, it's always fun to wildly speculate, so let's do that as well. Carlos, I want to kind of get your point of view in here. It's really interesting. You're at gsr, you kind of pick yourselves as the capital markets partners, and I'm sure you do plenty of business at Binance. From your point of view, what was going on at that time and how does a company like GSR respond to something like this when it certainly appears that a lot of the more market neutral players were the ones at most risk during this acute period of time. On Friday.
- [16:10]
Carlos Guzman
Yeah, no, for sure. I think Friday was just a perfect storm of all these risks. I think you got. Yeah, I think right after, like Trump tweeted, you get like a big market dump and then just an incredible wave of liquidations in perps. I think we just have. We just seen lots and lots of leverage accumulating pers. And I think just like when markets are falling, I think the natural reaction, I mean, for biggest digital players like gsr, it's extremely important for us to take risk management extremely seriously. And I think many players bid that at the top. And we do that across many venues and across many different instruments. I think many people kind of realize on Friday that perps may not always be the strongest or safest instrument. I think, yeah, I mean, part of the story of Friday is learning about counterparty risk and exchange risk. So for instance, I mean, we saw a lot of people get liquidated on the long side. But then on the short side, once ADL kicked in to secure exchanges solvencies, many people's short positions also got closed, oftentimes at PNLs much lower than they would have expected. I think this has the potential to have realized pretty significant losses for funds running long, short strategies, funds running like delta neutral strategies. Market makers like gsr, obviously we run delta neutral strategies, but we're not only using perps. So I mean, fortunately for us, we were not majorly affected. But it can be the Case that other kind of big funds.
- [18:11]
Ram Alawalia
There was a rumor that you, you had a. The destruction of one or more of these market makers over the weekend. You would be the one of the first to know.
- [18:21]
Carlos Guzman
Yeah, I mean I've only seen rumors so far. Nothing really concrete or substantial.
- [18:27]
Ram Alawalia
Right.
- [18:28]
Carlos Guzman
But I think for, for market makers that took, you know, I mean. Oh, marketing are very much aware of like all these, all these mechanisms that can happen and take risk really serious.
- [18:38]
Ram Alawalia
What did GSR do? I know you're on the analyst side rather than you're on the research side rather than the trading side, but there were points on Saturday where the bid ask spread on assets were 30%. It's insane. Okay, put that into perspective. If you want to get into position, you're paying 30% more or 30% less. If you want to get out of position, there's no liquidity. And the other part is that the other kind of learning from all this is that I think a lot of people probably know this, but the fact that it happened all at once in this situation is that there's limited depth of order book the farther away you go from the prevailing market price. If you think about how Dexs work, like Uniswap for example, they use these concepts like bonding curves to create liquidity. Bonding curves is a fancy word for a math formula that describes a change in price relative to demand of one unit. In this pair relationship. That's it. Nothing fancy about that. And I guess that system worked. That system worked. But clearly if you're seeing a bid ask spread of 30 points wide, there's no one was providing liquidity then the market makers. It seems that market makers had completely withdrawn. And if you were trying to get involved and take advantage of that, you could, but you're paying through the nose just to enter the market.
- [20:10]
Steve Ehrlich
And actually I want to just build on that. Carlos, before you respond too, I think there's a bigger lesson here to learn. And for people watching to understand liquidity, especially for alts, I mean not the Bitcoin and Eth and Solana, but I mean, and I'm not even just talking about what acutely happened on Binance, but it's hard for people watching to understand order book depth, especially when exchanges and tokens employ market makers that do a very legitimate, play a very legitimate role in trying to maintain orderly markets. But something like this happens and like, like Warren Buffett says, you kind of see he was swimming with no clothes. Like how should people trying to understand what happened and at some point they're Going to get back into alts like what are some of the lessons they can learn to understand and make better decisions on. On where to trade and, and and avoid some of those. That slippage that Ron was alluding to.
- [21:11]
Carlos Guzman
Yeah, for sure. So I mean getting a bit into, into Ram's Point, it was Friday was extremely chaotic. I mean I think we saw a lot of exchanges also kind of start to not operate like fully well. Orders weren't executing, APIs weren't like fully working. I think we also like saw some UI issues. But I mean but what also tends to happen in these kinds of situations when there's like when there's a big market drop? Oftentimes liquidity is reduced as market makers are basic. Yeah basically managing risk or quoting wider spreads because oftentimes it's, it's without information on what exactly is happening, Market makers can't quite confidently quote at a certain price before you fully know. Okay, is this some sort of exciting as major event? Is this more related to the price of a specific asset before information really comes through, before things are clear and market makers can once again confidently start quoting prices. Market makers tend to look in periods of uncertainty and oftentimes this is just coded into bots and automated algorithms. So sometimes liquidity is reduced automatically before like market makers can, can even react and reintroduce liquidity in the market which I think once again adds into the whole perfect storm dynamic. So you're getting liquidations into markets that are getting much thinner in liquidity which leads to like further price drops which then leads to further liquidations into low liquidity markets. So yeah, this is all just vicious cycle that basically.
- [22:59]
Ram Alawalia
So this happened in the US equities market in 2011. There was a flash crash for those that remember. And the biggest Critique of the US Equity Markets after the passage of Reg NMS in 2007's regulation National Market System which was designed to create competition for the New York Stock Exchange and NASDAQ which were the then duopoly where transactions happen that Reagan Ms. Was passed to create competition. So you had the explosion of other exchanges like ARCA building on success of like Instant and Island Archipelago and dozens of other exchanges. And it also led to the rise of high frequency trading. Okay so the criticism was that Reg NMS created phantom liquidity. Phantom liquidity. What is phantom liquidity? So it's a fact that execution for US equity investors better today than it's ever been before in history. You can hit a market order, buy market order, sell on many stocks and you'll get a decent fill versus the slippage or the bid ask spread or different metrics to look at versus it was say 30 years ago where you're paying like an 8th and a 16th. Now you're paying what are called mills fractions of a penny. So now we've had a flash crash in the digital asset market and it reminds me of what we saw in the equity market back in 2011. So I think some people look at this very critically and say ha, look, crypto is just a bunch of nonsense. Well look, I mean this did happen in the US equity market too. There was also. There are examples in the US equity market where things like this happened. There are issues that have happened and then there's a market response. There's an investment infrastructure. Players learn and then the market heals and moves on.
- [24:54]
YQ
I want add a little bit like sort of stuff here because I've been crypto over a decade since 2015 and I have a lot of friends running liquid funds and also some of the they are traders either on the CEX or the sort of per decks. So right after this kind of crash I have a bunch of call with them. Some of them got hit. The thing is like as Stephen just mentioned, right. The thing is previously people feel like perp is super useful and they do hedging sort of the lungs, these kind of all coins and do short, sorry the long line sort of bitcoin and do short on altcoins for example long on bitcoin, short on dogecoin. But during the crash due to the ADL their short position was forced to close. So in that case there are no more sort of hatch and due to whatever reason glitches of the server, whatever, right? You couldn't put bees on time. So that sort of like basically during the crash any hedge no longer working. So what you can do at that time I basically try to hold all assets in spot. So that's why a lot of my friends after this kind of crash they told me that don't use purple hygiene anymore because another issue is still back to the Oracle issue. A lot of these CX dx they are using the spot price as a market price. And so as RAM mentioned, right. There is basically no liquidity during the crash and you can easily manipulate the spot price further liquidation from the other client tools. Whatever it further drop that sort of the mark price for perp. So in that case you can do hedge and you can only hold that sort of the assets beyond that is there like based on their feedback, right? Another thing they mention is like so basically the liquidity or the spreads on so CX or DX is not trustworthy as Raj mentioned, right? You can have some phantom or ghost sort of spreads and once there was a crash happening, right, it's basically all liquidity withdrawn. And like one thing like probably we can trust is the AMF because most of the LPS on chain and you can't like sometimes like the chain like sort of got stuck, right? You couldn't really withdraw the asset immediately so the liquidity just stick there. But in general I just feel like the main issue is still like we need more this kind of liquidity around this kind of crash of course is super risky, but I just feel like if we don't have enough liquidity basically around this kind of crash, there's so many places can be manipulated.
- [28:06]
Steve Ehrlich
Before we move on, we do need to take a very quick break so we can hear from sponsors who make this show possible.
- [28:13]
Aptos Representative
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- [28:59]
Steve Ehrlich
So YQ, just to follow up on what you said, and I want to get Carlos's take on this too. What can be done to improve liquidity? I mean obviously as the industry grows there should be more market makers, more traders, everything but especially for some of these long tail assets that I think it's fair to say we'll face these issues time and time again. Are there ways to better manufacture liquidity or is it more an issue from exchange execution that especially on the CEX side that they do a better job of stepping in maybe having bigger insurance funds or is it a matter of having more transparent ADL policies? I'm not sure. What do you guys think?
- [29:51]
YQ
So a few things I can sort of share because I'm also writing some other sort of articles, further investigation into some details of this liquidation event. So one thing I think for CEX or DX they should really carefully select sort of the assets into their spot and perp sections. Because for some of these assets, right, if they don't have enough liquidity themselves, they are super easy to be manipulated. No matter is sort of the spot price or this kind of the purple or the market price. The issue is not about just pure about liquidity since since this small asset, right, chosen by the cex, there are always a lot of these kind of whales, they want to make more so they want to manipulate the price. And in that case like if you sort of. Because a lot of users don't understand what kind of token it is, they just know there's a ticker, it's pumped and then they will just follow. So that sometimes really hurt. And beyond that, as Steven, you mentioned, right, the ADL ADL is not perfect everywhere because once ADL is triggered, that means it's already in the extreme situation and basically hygiene is no longer working. Either the ADL is for the long side or for the short side, right? The other side is not working. It's basically immediately you don't have the hygiene sort of opportunities anymore unless you really have a super powerful 24.7team sort of can really pull the bees immediately. So of course we need more transparency for the adl. For most of cex, the ADL mechanism is not transparent. We don't know what kind of mechanism they are doing. For example, for a lot of my trader friends, they don't know when their short position got closed. And then how about their long position? Can the long position got sort of closed simultaneously. That was not real. It's basically all their long position got liquidated instead of like adl. There's so many sort of uncertainties here and there. I just feel like there's multiple ways we can fix it. One is like probably like JSL or the other market makers, they should really figure out ways to provide enough liquidity during the crash. It will be a huge risk because you don't know whether market will recover and you don't know when is the best timing for you to pull bids. The second thing is we literally need to fix this Oracle issue. For CEX and dx for example, the USDE guy mentioned it's perfect fine off chain you can redeem Whatever, like $20 billion if you want. But the issue is like on chain side, the CEX side they have most of the volume. They have to rely on the spot price because people are trading, they don't have the direct way to redeem on chain. So that's another Oracle issue. We need to figure out the best way. Of course the ADL as you mentioned. Right. There's no perfect adl. Every exchange has its own adl. Some exchanges I learned Perp Dex, they don't even have adl. So you should literally be sort of responsible for your own sort of positions. Yeah, these are all the new things if you got purpose still very new. So I believe Ryan probably going to give more sort of sharing based on the Web2 experience.
- [33:34]
Ram Alawalia
I don't know if you can share that. See that Steven? So this is a post from a friend of the show, Chris Perkins. Chris is a partner at Coin Fund and he's part of the subcommittee that advises the CFTC on digital assets. The CFTC regulates US derivatives and cooling houses, including clearinghouses like ice, which is I believe the largest derivatives clearinghouse globally. So Tradfi has solved this problem. That's the headline statement. And the way it works is every clearinghouse is regulated to have five layers of protection and Chris lays them out here. So the first layer protection is called variation margin. So that's when the price moving against you, you've got a post margin to get back to acceptable levels of leverage as governed by the system. If you don't post margin then you get a margin call. Right? Another margin call. The second level is you seize the initial margin of the person that's borrowing. If they default and they fail the post margin, you seize that initial margin. Ideally that plugs the hole, but if prices are moving too much, then the clearinghouse has its own equity layer cushion so it can contribute to this as well. After that what happens is there's a default fund, it's not an insurance fund to default fund. And members of the clearinghouse contribute to this fund in the same way that banks contribute to the FDIC insurance fund. Those contributions are made via different mechanisms including like an assessment. So an assessment, as you pass the hat around, you say everybody pony up, we got to fix this hole. And then the last step is recovery and resolution. Right? That's another way of saying like a bankruptcy like process where you have an auction of assets. So after the demise of Long Term Capital Management, which people thought was a big hedge fund back in the day, the late 90s or so, books written about this, one of them on my shelf here, what they did is they looked at resolution processes for these assets. They have an auction for the process. So Tradfi solved all this. Now Chris goes on to say yes, another word, socialism. Which is kind of a funny, funny response here. That's actually I would call that, like, good regulation. That's good regulation. Now, to make that come together, you need some framework to govern these exchanges. Obviously, Binance is international. It's outside the scope of U.S. regulation.
- [36:27]
Steve Ehrlich
So we've spoken, I think, about two of the three big causes so far at some length. I mean, one, lack of liquidity or issues with liquidity. We've discussed some of the break the glass scenarios that exchanges have to go through and problems there. I want to just briefly touch on leverage too, because, like, all of this was. Was. I mean, that was sort of the stack of dry leaves or sticks that was able to be set ablaze. And there's some interesting narratives, I mean, going on. I mean, for one, I mean, what was it? Like, how much? Yeah, like $65 billion in open interest was news, which is a huge number. And this long bull market has kind of led to just a slow growth in leverage. But I'm also hearing too, about how some people were liquidated, even if they were only like 1 1/2x leveraged or 2x leverage, which may not. It's a big difference from being 30 or 50 or 100x. So I'm curious, like, what you guys think maybe, Carlos, you can, you can jump in here first. How should people think about leverage in. In crypto? What are some like. Like, how unhealthy do you think leverage was before all of this happened? And like, are there warning signs? Are there things that, that, that people can do so that. Or is it just gonna. History gonna repeat itself where leverage just creeps up and up and up during bullish periods until there's sort of. It's almost like, like, like burning acres in a. In a forest to allow for regrowth.
- [38:02]
Ram Alawalia
What.
- [38:03]
Steve Ehrlich
What do you think?
- [38:05]
Carlos Guzman
Yeah, I think actually my response kind of like ties into, like, what Ram was saying. I mean, I think part of the problem goes back to cryptos. You know, there's lots of speculators in crypto and degens, and, you know, I mean, that's. That can be largely fine, but I think that creates a situation where exchanges are incentivized to offer greater and greater leverage to attract. Attract speculators and provide, like, good. Well, you know, like the experience that they're seeking, which is, you know, high volatility potential to. To make a lot of money very quickly. But I think we've gone to a situation where exchanges offer a lot of leverage, and there's potentially a lot of traders taking on a lot of risk that oftentimes doesn't really come back and bite them in a big way until there's potentially a big black swan event. Or what happens is a lot of traders are taking leverage in ways that individually might seem rational. But then when there's a big market crash, you get a systemic risk where everything gets correlated because one person gets liquidated. But then that means the price goes down and someone else gets liquidated and that ends up liquidating everyone down to the people who didn't even take that much leverage and they thought they were in a safer position or they thought they were delta hedged, but even then their long position gets liquidated. So I think it's, it's kind of a coordination problem. I mean either there's going to be a behavior change where people might not take that much risk. I don't really count too much of that happening in crypto. Or we find ways to coordinate across exchanges to, you know, find ways of self regulating or finding some of these other mechanisms that can improve liquidity. One other thing I was, I was going to mention that could be a mechanism that crypto can explore is circuit brokers can like these can like provide a pause in trading while everyone just.
- [40:21]
Ram Alawalia
Like sorts on a permissionless 247 market though ideas by the way, they're all great. But this one, like.
- [40:31]
Steve Ehrlich
Yeah, I know circuit breakers have been talked about for years. I mean they're centralized exchanges. I can certainly understand it. But I mean, Carlos, I'm sure you know this as well as anyone. They're almost anathema in Texas. But I'm curious.
- [40:44]
Carlos Guzman
First.
- [40:44]
Ram Alawalia
Yeah, you can trade on your exchange, but then the spot price representing your collateral value keeps going against you. And now you're saying I have more risk. Right? Or you have a position on exchange A and a position on exchange B and they're hedging each other. You're doing some cross market arbitrage. Now you're frozen here. Could actually be creating risk. So I like the general concept, what you're saying, especially the self regulation. That won't happen unfortunately, but it's really what's needed. The NASD which preceded NASDAQ was a self regulatory organization that was born in the wake of all the scandals and nonsense that you saw in the pink sheets market in 1950s like a lack of standardized disclosure, conflicts of interest. So the industry came together, they formed the nasd, which subsequently evolved to finra. And finra, the board is composed of members of the buy side. I believe it's led by the former president of Bridgewater. That makes sense because the market ultimately is about serving investors. It's about investors investor. If investors are happy, then that means other things are working downstream. Focus on making sure investors are happy. They'll drive accountability in the right areas. There has been no self regulatory organization. There's no incentive for anyone to build one. They need to do that though, because if this were to happen in the US or in a regulated jurisdiction under a different administration, and if retail investors lost a lot of money, then you'd have the heavy hand of government come down and force regulation.
- [42:17]
Steve Ehrlich
Yeah, well, speaking of building on that, Rahm, I mean it's kind of interesting that this happened and we're having this conversation and I'm not ignoring the irony here that we're talking. I'm in Philadelphia, Rahm, I guess you're in North Jersey, Carlos, you're in Spain and yq, you're in Singapore. But we're having this conversation while the government is closed. And anyone who sends a message to the SEC gets a very nice reply saying we are not monitoring our email accounts right now until due to appropriations.
- [42:47]
YQ
But it's a subcategory card.
- [42:50]
Ram Alawalia
Well look, if you did email them, they still wouldn't respond. Stephen, come on. Nine months, fair enough. But nine months would go by and they would say we acknowledge your request. Can you get in line? And we don't know what your request said, but here's a form response, good luck and go to the sec.gov website and fill out another form. That's what happened.
- [43:09]
Steve Ehrlich
But anyway, point taken, Rob. But anyway, like we're in the middle right now of, of what appears to be intense negotiations notwithstanding, maybe actually a defi hiccup on the part of Democrats which perhaps, maybe is much more relevant now than even was a couple of days ago. But we're trying to negotiate market structure legislation together and this is a perfect example of why it's so critical and that the discussions about it have a lot more to do within. What kind of token is a security? What is a non security? I mean handoffs between the SEC and cftc, these types of resolutions when there's periods of acute stress like as ram, you were saying this was solved for the most part in TradFi. This was, I guess you can make an argument the worst day in crypto's history. So it's not the norm, but a lot of people lost. I mean I know that the $19 billion liquidation number doesn't actually mean $19 billion was lost, but. But this impresses the importance of getting regulation and I think also underscores how difficult it could be to get it done by the end of the year, which is what people want. I haven't read Clarity closely enough in recent days to understand exactly how this part fits into it, but I'm sure that everyone is talking about this and how it fits into the discussion.
- [44:40]
YQ
So there's just some extra stuff the crypto compared to 35 because Stephen just mentioned about, I thought about what are the matters we can apply, right? The thing is crypto, especially for perpetual, right? There's no clear definition in the U.S. i mean even Coinbase has a perpetual. But it's like five or 10 years of futures, you know, Right. It's something completely new. And then for this time I think one of the root cause causes is really about is we call cross margin or unified account. So basically all your assets are treated as a collateral when you open long or short positions. And that means even you open like sort of 1x long during this kind of market crash, right? It's basically everything, all your position, all your sort of assets in your unified account gone, even 1x. So because it dropped like 99% it's super crazy. And beyond that we also have something called this. I'm not sure whether you guys are doing some defi protocols. We have something called looping. Looping to get extra yield. For example, we deposit uidc, get the UID and then we basically we can learn UIDC and then we deposit usdc, get more USD and we do this kind of looping to get this extra apy. It's not like this kind of perpetual, it's a lending. But as you can see, right, we can get as much as high as 3 or 5x leverage because a lot of user treated like it won't depend, it's always one to one mapping. But in reality, like for example in this kind of market crash, right, it is no longer working. There is a lot of hidden averages here, here and there. Especially in crypto. There's a lot of new stuff. I, I think it's good like we can have some regulation but at the same time I, I think right now, immediately we need to figure out ways to really alert users like for all different risks they are sort of.
- [46:56]
Ram Alawalia
No one's using the. No one's reading the eula. The end user license agreement disclosure is not the answer to this complex question. When you have a user that's looking for 100x leverage as the primary value proposition on the perp, they're not like let me look at page nine of the disclosure, right? But what do you think about Hyper Liquid? Is Hyper Liquid a winner or loser.
- [47:17]
YQ
Coming out of this? At the beginning I feel like I can't say it's a win or loser. But out of this 19 billion I saw liquidation like 10 billion from hyper liquid. That's why from they call HLP is basically their Vault earned like $14 million immediately. So of course people think that it's good for Hyper Liquid but when you think about for the users. Right. A lot of my friends got liquidated due to the ADL mercanda. At the same time ADL like sort of stop. I sort of earn or loss for them but at the same time on the other side they're also doing hygiene. The other side basically everything got liquidated. So I think for users definitely is not good. But of course hyperliquid show that it's pretty stable during this event.
- [48:10]
Ram Alawalia
I think they're a winner. I mean Hyper Liquid. Yeah. What you're saying is like they made money. Unfortunately they made money through this high volume of transaction activity.
- [48:20]
YQ
Customers, their own users, their users.
- [48:23]
Ram Alawalia
But on the users again it's a derivative. So they're. There were winners and losers on that side. These are derivative products. So derivative that's a zero sum transaction. The unfortunate part is that their users were carried out and liquidated at the exact worst time. And it wasn't in their control that that's what makes us terrify. But there were, you could call it like responsible players that made good decisions but due to market structure issues they were liquidated. That's really the worst part about this story. But I do think that I still think they come out ahead as a winner here though. I think that's my view that I agree on your part. Anyone that was subject to this ADL issue is any user is a loser of course. But some exchanges like Binance took some reputation risk. They had to like they, you know, they gave out the statement. They said hey we apologize, we made this change. They said we have many lessons to learn. I don't think they had an apology. That might be an admission of liability. We have reflecting we have many lessons to learn and they've since updated kind of the Oracle mechanic works well I think.
- [49:41]
Steve Ehrlich
I think them paying $283 million is a certain admission of. Of something. But I know you mean ramen in like the legal sense. And, and who knows? I. I'm willing to bet there are plenty of other people that aren't included in that 283 million that might be looking at other forms of Recourse. And I'm curious, like, the phrasing, the winners and losers, because, I mean, Hyper Liquid certainly passed, I would say, a stress test. I mean, defi. Overall, I think did a pretty good job passing the stress test. But if we're defining winners, as somebody whose reputation was burnished, I find it fantastic. Yeah, it's. So, Carlos, let's look ahead and let's talk about what the market's doing today. I know we sometimes can joke about Taco Trump. He sent out a tweet on Sunday telling everybody to calm down. That is 100% tariff threat. Was. I'm not sure it was a joke, but that basically will figure a way out of it. And the market seems to be taking him at its word. Tradfi is up. Bitcoin, as we're recording, this, is at about 115,000 and change. ETH is back up above 4200. BNB is above 1200. And the market seems to. It hasn't obviously gotten back all of what was lost on Friday, but it's. It's certainly recovering. What are you seeing right now and kind of like, what are some of your expectations in the ensuing days, assuming that there's not another big shock?
- [51:10]
Carlos Guzman
I mean, I fully expect we'll see more of a return to normality. I mean, notwithstanding any further just chaos on the tariff side and that happening again. But it seems like over the weekend, the Chinese government kind of clarified that their announcement or, like, their restrictions, like rare earth metals exports, like, were like, kind of like potentially miscommunicated, communicated or misunderstood by the US Government. So we saw, like, the Trump administration kind of over the weekend also walking back the threats of 100%, like, tariff restrictions, which I think, like, really, really calm markets. So, I mean, I think we're with. With that past, which is. It's a little bit ironic because tariffs don't really have a direct impact on crypto. If anything, you know, crypto is an asset class that could be seen as a hedge against assets that are directly impacted by rising prices of imports, like, you know, a lot of equities and other assets there. But notwithstanding, we know crypto is highly correlated with equities. And I think the response was basically just a similar reaction to what happened in April and everyone just being very much primed to react negatively to tariff news. But I think it seems like things are largely back to normal on the trade side. I mean, there's still some uncertainty on exactly how the agreements within the US And China will play out. I think largely we have a lot of tailwinds in crypto. And notwithstanding, like those relationships, once again, you know, flaying, I think we can. We can expect the market to kind of keep recovering and. And get back to pretty much where it was.
- [53:09]
Steve Ehrlich
Ram or. Or w. Do you guys have any thoughts? I mean, one chart that I had been paying attention to was sort of like plotting, like, major stock indices with crypto, where, like, stock indices kept going up and setting new highs. I mean, it was even on set to do it again on Friday. And the crypto market cap had kind of been staying still, staying flat for a few weeks or so. And that kind of fed into, I guess, one of the concerns that I might have had that, I mean, crypto has been propelled by Trump administration. A lot of positive stuff coming, coming out of dc The DAT narrative, even though the DAT narrative and we've explored this ROM isn't everything it's cracked up to be because a lot of these big raises that we found don't necessarily represent net new buying. And perhaps it was a little bit of a facade. So perhaps like the market was sending us signals of weakness or skittishness in the event of a bearish stimuli, which we saw in spades. And granted it was accelerated because of the acute issues of finance and stuff that we discussed. But I wonder if this is going to be a warning sign for some additional retrenchment and hedging, even if the market sort of like, goes back on a similar path because people don't necessarily want to get. Get burned again. Like, I wonder if that's one of the bigger takeaways from what happened. Ram, you disagree? Go ahead.
- [54:31]
Ram Alawalia
Can I make my nothing burger comment?
- [54:33]
Steve Ehrlich
Yes.
- [54:36]
Ram Alawalia
Okay, so let me share my screen here first. I'll share the bitcoin real quick, and then we'll shift gears. Well, actually, so this is an interesting one. This is when I was at the Puerto Rican airport waiting for my flight home. As I'm. As I'm landing in Newark, by the way, that evening, my phone is blowing up. With Bitcoin down 5%, I'm like, I've just seen all this price. These are just notifications when broad price moves happen. Pretty wild. But I was at. I was at the airport in San Juan and they had tacos. And so I saw this place card and I wrote, trump's next move is on this note. If you zoom in, it says taco, taco style. So I think this is a great buying opportunity where we are tactically. Let me share another screen here. This Screen is the price of bitcoin. And what's happening is you have these bitcoin whales that are consistently selling at around 125k, right where this level is here. Okay, that's. That explains Stephen, the point you raised earlier, which is it seems like total market cap isn't rising while other asset classes are rising. So these whales are distributing at these levels. The question is how much supply is there and are they done selling? Now the flip side is this. Those people that are selling, guess what? They have a lot of cash, right? These are buyers. And what do they do here? This liquidation wick, they're buying, everybody is a seller. So there's ample liquidity. And you know, we, we bought into this liquidation are generally bullish, by the way. They're generally bullish. This is a massive, massive liquidation. And I think the lows are. In very simple terms. Are the lows in or not? Yes or no? Yes, they are. How, how far ago in the rearview mirror is it? Yesterday? Okay, so risk, reward looks pretty good. The risk is just beneath where I am. Reward is higher than that. But I think it's a tactic. I think it's a tactic. What that means is you have to recess some period of time later can be a week or a month or three months, and then revisit because you do have this selling pressure at 125k, probably from Bitcoin whales that are looking at the four year cycle, et cetera.
- [57:06]
Steve Ehrlich
Okay, so let's start to wrap up and kind of in that vein, Ram, I mean, I want to ask each one of you, like, what are one or two things that you're looking for in the days, weeks, months ahead, either good or bad. And it could relate to the market. I know there's a lot of discussion and speculation about who got blown up potentially. And sometimes it's not necessarily the first blow, but it could be the second. So, Ron, let's just stay with you. You can finish your thought.
- [57:34]
YQ
Sure.
- [57:35]
Ram Alawalia
Yeah. Look, I'm optimistic and bullish now. Think last week I closed off by saying, sometimes do nothing. You know, like where we entered last week, markets were overbought. There's indigestion needed. Things are priced for perfection in many, many areas. You had this clearing event on Friday that reset sentiment, reset positioning. People had the memory and trauma of tariffs and said, oh, it's back again. They hit market sell, they hit the bid. Vix jumped up 30%, which is real palpable fear. That's real fear. These are conditions that are similar to August 5th of last year at the culmination of Yenmageddon. Although different, it's always different. It was one day instead of a multi week event that kind of built up. So I'm bullish here. Tomorrow the big banks report like JP Morgan, the Bank of America prediction, they're going to beat their numbers again. Prediction. Consumer credit will be healthy and fine. Consumer spending will be going up year over year. You'll see record mortgage refinancings coming out of Wells Fargo. The consumer is fine and there's a lot of credit fear in the economy right now. If you look at like BDCs and private credit, private equity firms, CLO issuers, I think you're going to start to see those start to stabilize and rally. So yeah, I'm feeling pretty optimistic here. Earnings growth expectations for the quarter ahead are like 6%. We just came off a quarter of 12%. Year over year earnings growth. That's not going to stair stuff down to 6%. So people still have this PTSD. One other quick anecdote for you. I had a conversation with two friends in Switzerland this weekend. Their center left and they volunteered to me. They said, well, I own one stock and everything else is in cash. And there's a study that shows that if you ask people their political preference, it tells you their sentiment about markets and the economy and are we in recession or not? This stuff, the correlation is very strong. So like they have Trump derangement syndrome. That's what they have. They're friends, I love them, they're wonderful people. It's not a critique of their person. But you have to step outside your political views when you're making an investment decision. The point there is there's a lot of those people have cash. They're gonna have to chase this market higher. So it's another reason I'm bullish going into Q4.
- [60:00]
Steve Ehrlich
Got it. Carlos, let's go to you. What are you looking for?
- [60:05]
Carlos Guzman
I think high level on the market. I would echo rom. I think I'm very positive. I think unlike, I kind of think the four year cycles are sort of over. We haven't had a four year cycle going into a rate cutting cycle. I think this time is kind of really different. And crypto has a lot of tailwinds across, you know, regulatory adoption, things that haven't been true in the past. But I think the two things that I'm really looking towards in next few months just related to the Friday's specific events, I think one is whether there's any actual change in trader behavior. I think a lot of people got burned like really badly in Friday. I think most of these are have been crypto native traders in whales. I actually don't think it was a large number of like the new retail that had been onboarded into crypto. I think most of those traders for the most part trade spot. I think most of the people trading perps are a little bit more crypto native, more, you know, deep into the industry I guess I'm very curious whether we go right back into leverage building up in perps and people kind of behaving the same way or if this drives any change moves people towards either less leverage or different derivatives like options and different behavior there potentially. And the other thing I'm kind of looking forward to is just how exchanges react. I'm curious whether yeah, we'll see more coordination, potentially greater use of insurance funds, whether we'll see more insurance funds in defi. I think something that was kind of missing on some of these centralized perks exchanges, while they have some of these vaults that act as market makers and oftentimes step into do liquidations, they're not really insurance funds and oftentimes because of their risk limitations they won't take, you know, liquidations after a certain point and that's when ADL will kick in. I guess. I'm curious to see whether we'll see the rise of of insurance funds in.
- [62:14]
Steve Ehrlich
A bigger way and why kill.
- [62:18]
YQ
I. I still feel like it's a big hit on all the small retails traders, even some liquid funds, especially for all coins and builders. It will take a long time to recover because as you can see it's heavy, sort of 80 or 90% down for most of the altcoins. But they are more like the small businesses in crypto. So they are basically the blood to really support the entire emperor. For example, the major coins like to regain male adoption but for this time I just feel like a lot of these projects, builders and traders got hit a lot and it takes a long time to recover. And beyond that I feel like in the current crypto it's quite sort of on two sides, one side on the small altcoins. For them surviving is already super tough because it's very difficult to get liquidity, difficult to get users and difficult to get VC money on the other side it's like this crypto max 7 bitcoin eth and Solana XRP. They constantly got this Wall street money for dat and other things. So that's why if we look at the overall market cap right it doesn't change much because bitcoin eth their so called ratio much clear, much higher but the small ones become lower and lower. So I just feel like after days it takes a long time for these kind of small businesses to recover for the next few months or next one or two years. But for the big tickers or the major coins I think they will eat well from the Wall street and also the big institutions.
- [64:12]
Steve Ehrlich
Yeah, I agree with with all you guys said. I'll just add two quick things on my end before we wrap up. One, I forget who said it was either UIQ or Carlos. I'm curious how exchanges might reconsider listing procedures because especially for some of these altcoins, I mean they already have stated procedures. They want to make sure that smart contracts are technically sound that like the tokens themselves or blockchains aren't being used for fraud, that there is sufficient liquidity. But given what happened on Friday, I think it makes sense for some of them to reevaluate what that means. And two, we didn't get a chance to get into this too much but I, I think Lara is actually interviewing Guy tomorrow on on chain so she'll get into it. But it's really ironic that the defi or I guess the the perp dexes were saved because they hard coded the the price of of usde and I mean obviously we plenty of room for criticism for how Binance did it but just the idea that a dex was the one that centralized what the price was going to be and it saved them untold amounts of money. That's that's irony and I'm curious to see what that looks like.
- [65:24]
Ram Alawalia
You know that's a hack in a different situation though. Yeah, so that's a hack in the world where it actually does break the buck and then you stuff them with as much.
- [65:32]
Steve Ehrlich
Yeah, exactly. Exactly. So with that ROM as always, YQ and Carlos, thank you for for joining us for this really interesting and timely discussion. Thanks to everybody for watching and listening and we will be back next week with another episode of Bits and Beps.