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- [00:00]
A
Every account is going to become a wallet. Every wallet is going to become an account, right? And like distribution will remain king. It's been king to date and it's going to remain king. How long is it going to be before we start trading Ethereum rates against SOFR or against short term interest rates? You know, why not? You know, that's called the basis trade.
- [00:20]
B
Basis swap for the losers, the retail investors of the token. Somehow this money has got to come from somewhere.
- [00:27]
C
Who's on the better side of that transaction though? Where are you looking at like on this deal? Are you looking at Fortress, Citadel and Galaxy and saying I want to be on their side of the table? Are you looking at Ripple and saying, damn, they cut a great deal?
- [00:40]
B
Welcome to Bits and Bips, where we explore how crypto and macro collide one basis point at a time. I'm your host, Austin Campbell, High Scholar of Zero Knowledge Group, but I'm here with my two usual co conspirators, Chris Perkins, the Golden Hand of Coin Fund, and Rahm Alawalia, Master of Wealth at Lumina. We're going to discuss today the latest stories in the worlds of crypto and macro. I'm going to try to get Chris angry about market structure and we're going to see how that goes. But please remember that nothing we say is investment advice. Check unchained crypto.com bits and bips for more disclosures. And in general, don't take advice from podcasters alone. Before we get started though, here's a quick word from sponsors who make this show possible.
- [01:27]
D
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- [02:07]
B
So, getting started here today guys. We're going to start with our favorite topic as ever, which is the market and macro. So we've titled this little one is the Era of Ever Falling Interest Rates Over. And I'm going to start by saying in a literal sense, the answer there is almost certainly yes. Mainly because like Chris, myself, Rom all lived and traded through a Time period where rates were descending to zero over a roughly 30 year period. And once you hit the zero floor, very strange things start happening if you try to go further. So I like our odds of not going lower than that. But why do I ask this? What is going on? One Fed has a December meeting where they are likely to cut rates again. I believe the market odds of a rate cut are now into the high 80s. And yet when you look inside of the Fed, the views of officials there are deeply split. You have labor softening, but services inflation has been sticky. There are still some concerns about tariffs, valid or not. And as a result, although I think the decision to cut as expected, what the Fed forward path is maybe less so. Some people are saying there's still significant inflation risk. Lyn Alden is out saying that bond underperformance may now slow. We don't have the tailwind of lower rates pushing equity and housing valuations higher even as we have some degree of debasement and gradual printing. We've seen situations like that in the US before. We can talk about consumer sentiment quite frankly near historic lows right now, even though high income households appear to still be spending. So Rahm, I want to start with you. You think about the markets a lot. What are you making of all of this?
- [03:50]
C
So if disinflation continues next year, you could see a path for lower rates both on the short and the long end. Right. So markets right now expect one more rate cut in April of next year. Markets are notoriously wrong about rate cut expectations by the way. So that's just a line in the sand that's been put out there.
- [04:11]
If you have more negative data. And again we talked about the Rorschach test last week. I don't think the data is actually that negative, but people perceive it as negative. You mentioned labor market weakening. People have been talking about labor market weakening the last two years in a row and markets are going higher and we have more net employment. So. But people will find a reason to cut. They can, they can do that. Long end rates could drop. If you see more disinflation, a lot turns on tariffs. And right now we're easing back on tariffs. One of the biggest drivers of inflation has been having to reshore and rebuild supply chains domestically in the United States, which by definition have a higher cost structure than China overseas. Otherwise it would have been built here. So you know, I think in the, for the near term like the 10 year probably is where it needs to be. Those are the two competing pressures. I think you could See rate cuts exceed the market expectations next year though.
- [05:07]
A
Rob, what do you think about oil? Oil looks has been relatively contained from a price perspective. Contributes obviously to any kind of inflation print. What role does oil have in all this and how are you thinking about it?
- [05:20]
C
I'd be bullish on oil commodity price. I mean like you said, oil hasn't really rallied. It's on the lower end of a range. It's somewhere in the 58 to $60. And the demand for energy is only going up. The demand for all forms of energy is going up. There's a lot of demand for natural gas and that will create a bid for oil. So I think consumer is strong. We're seeing more travel and leisure, we're seeing airline demand go up, we're seeing cruise line demand go up. People still like their internal combustion engines. And around the world you're seeing on average central banks cutting rates which is stimulative. That also will create a bit for oil. Electrification is taking too long. We don't even have the transmission grid, much less the electrical energy capacity to transition away from oil. So I think you're near the lows on oil.
- [06:13]
B
How much of that is going to be a bottleneck for AI on infrastructure build out? Rom, like as you said, the energy grid actually may turn out to be the binding constraint for some of that. What are you seeing on that?
- [06:24]
C
So it's the number one binding constraint on AI. It is access to energy. That's why CoreWeave wants to buy Core Scientific. That's why you have GE, Verona and and Cummings and Schneider stock prices growing up because they build these natural gas turbine systems. So yeah, that energy is the constraint on AI adoption. Nuclear is too far away in the future. It's a great story. You know small modular reactors, they sound great in theory but they're just too far away in the future. Like natural gas has to be the answer to that.
- [07:03]
A
You still think Japan's a big nothing burger? I mean rates are still high. They're major oil importer now that the Prime Minister is making some noise around China like where are we? Where's your head in Japan right now?
- [07:16]
C
The yeah, to your point the now rates in Japan are going up. At the same time the US dollar has this graceful rally so that the liabilities which are denominated in yen haven't caused a scenario where money managers are upside down on a carry trade. This is different than August of last year where the liability essentially the borrowings were increasing just as the value of their assets were decreasing. And this is a slow moving target. Do people see it? Everyone's talking about it. People talk about something a lot. As my favorite word, become the nothing burger.
- [07:53]
A
There you go, There it is. I was just down at the trading desk earlier and was like, hey, what are the market makers saying? Liquidity in crypto markets very low right now. I think part of that is the pause before the Fed decision comes out. But I also think it still has to do with just the destruction that we saw with retail. In 1010, retail has not popped back yet. The market makers themselves got hit pretty hard. I know a bunch of them were raising capital. I don't know, I don't want to speculate what it's related to, but it still seems like liquidity across the crypto space is contained. The other thing that we're watching very closely is basis because remember, this is the cycle we believe, where retail ebbs and flows. Retail's ebbing a little bit. Institutions are coming in and the first institutions to walk through the door, obviously it's very hard for them to go long assets. Now the regulatory stuff's handled, but it's just a two. It's just the assets are too volatile so they have to trade the basis. And what we're seeing now is, we're seeing basis is tightened. And if your basis is close to the risk free rate, trust me, there's probably better places to drive yield. And so that's been one of the other challenges that we're seeing as basis has come in. So, and in the context of this, this greater retail ebbing that we continue to see institutions slowly marching forward, how.
- [09:14]
B
Much divergence are we seeing though in, in what we're saying by like retail here, Chris? And what I mean by that is if you look at altcoins and meme coins, which were pretty retail driven in crypto, certainly the price performance there has been the sound of a sad balloon deflating over the past few months. But on the other hand, how are we feeling about some of the retail favorites in call it more traditional markets? Like if you look at the palantirs, right, like the sofi's of the world, I guess I'd ask the two of you, are we starting to see retail in general get worn out or retail specifically in crypto get worn out?
- [09:50]
C
That's a phenomenal question. I think it's retail and crypto is worn out. I think retail and equity markets reminds me of the David Goggins meme. Maybe we can share a screen.
- [10:00]
B
You know, sellers are exhausted and that it's just gogging.
- [10:07]
C
They had a one and a half billion dollar financing. Do you see stuff like last Friday knock was on 6% on Friday and Monday it's down 80 bips. Right. Like every dip is being bought by retail investors. So the dips are shallow. And a lot of it's also because, you know, institutional investors remain offsides going into year end.
- [10:32]
A
But that's the beauty of convergence. Right now retail is looking at, okay, what are my opportunities in either equities, crypto or somewhere else. And so as quickly as they move out of crypto into traditional tech, they can as easily come back because again, a lot of those barriers are now being limited.
- [10:50]
C
Yeah, I agree, I agree. It's all moving to one platform. Which advantages these super apps that can trade everything and the more things that get tokenized. It's interesting to question who's the winner in the long run. Is it these crypto natives or is it tradfi that just kind of co ops the system? Because you've got digital assets going to tradfi and then tradfi is going to wrap with tokenization.
- [11:17]
A
I think this cycle you're going to see the empire strike back a little bit. Right. Because you have the crypto people building into tradfi and when the Trad 5 and they're moving, they are building, they're building into crypto and so, and they have a lot of scale, they have a ton of distribution. They are a very, very viable force. And so like we're going to talk I think a little bit later about some folks that are learning how hard it is, you know, to go toe to toe with those incumbents. But yeah, like, I think that they're, they're well positioned. You know, convergence isn't like, is an equal and I think we're seeing like a lot of the trad folks moving in.
- [11:52]
C
I agree. Do you need all these fancy new wallets when you can access the asset through your traditional brokerage account? I'm not sure that you do. So. Yeah, no, I agree. I think convergence advantages the incumbents who also know how to build an amazing user experience.
- [12:09]
A
But not all the incumbents.
- [12:11]
B
Yeah, well, yeah, okay, so some of.
- [12:13]
A
Them are fighting back.
- [12:15]
B
We'll leave out IBKR as user interface. Sorry guys, I love you but you know, it's terrible. All right, so question that. Or actually let me, let me give a little bit of a framing as I think about this then is one of the things that I've been watching for a while is this idea that we're going to tokenize everything. And therefore all of the crypto native platforms are going to win. And I get the appeal of that argument to a crypto native because you're like, well, we've had a hard time getting distribution. We're finally getting these things moving. We're finally having like, show up, look, even like, you know, funds and maybe stocks are going to be tokenized. On the other hand, doesn't this just inspire, like, literally like JP Morgan and Fidelity and Fanguard and Schwab to build wallet infrastructure to handle this stuff and then once they integrate it, all the unique, special things that you thought you were doing in crypto are just in your Robin Hood app. So like, to Rom's point, why do you need anything else? Because here's. But here, I guess, is the provocative question, are there brokers or banks in the United States that on a standalone basis have more customers than all of crypto?
- [13:24]
A
Do you know the answer to that already?
- [13:26]
C
I mean, for sure. I mean, all the major money center banks fit that bill.
- [13:31]
B
Yeah. And so it leaves me in the point of are we so sure crypto is going to win that engagement?
- [13:37]
C
I agree. And Stripe acquired a company that does wallet infrastructure as a service on a white label basis. So if you're a big tech company that isn't with the times, you just rent it. We saw this in FinTech 1.0 in 2015, where you had these lenders come out of nowhere with a better user experience and their first round of neobanks. And then one to three years later you had other fintechs emerge, which were the arms dealers that rented the software to the banks and the banks upgraded. Those are players like Encino and like Blend Labs on On Mortgage, for example. So I agree. I think the Empire Strikes Back thesis makes a lot of sense. Saw that movie on the plane ride back from SF this weekend, by the way. What a great movie. So good.
- [14:24]
A
There you go. But, but I do think there's a. There's a really big arms race amongst the incumbents and they're either going to have to build or buy or partner. A lot of some of them can't buy because they're under consent orders and they're in trouble with the regulators. So that brings you to partner. And I think this is dance partner season, right? What capability do I need? Do I need a wallet? Do I need a layer two? Do I need a stable coin? Who's my dance partner? Because if I can't build it fast enough, my competitor is. So I gotta find a dance Partner to get to market as soon as possible. That's net positive for the crypto startups because the big guys are coming in and they're going to need that tech and someone who can move quickly, more quickly. I'm seeing it everywhere. Like, we just saw the even. Even. I guess it's. It's not startups, but like the Kraken Deutsche Borsa announcement, right? Like, who's my dance partner? It's happening everywhere. This is dance partner season.
- [15:17]
B
Ironically, it'll probably favor, like, crypto entities that have not launched tokens, if we're talking about partners in M and A as well, because that reduces the amount of, like, grit that you need to get into one of these partnerships. Look at the wave of acquisitions, right? Like, look at Stripe with Brid. Look at the potential BVNK acquisition. Right? Look at what Ripple has been up to Find me. And I'm not saying that like I necessarily agree with this approach, but find me any project with a significant token that has been acquired by a mainstream traditional financial entity.
- [15:53]
A
Yeah, to date, for sure, it's been challenged, but I think that that is, you know, these are. We could talk all day around the difference in valuation between equity and tokens and utility and this and that. I think that that scarlet letter is kind of a thing of the past. Where I do think in the future, maybe we'll have a prediction episode where we're going to talk about M and A with someone with the token. But again, I don't think it's just M and A. I think it's partnering. It's, hey, give me your tech, I'm going to white label it, and off we go.
- [16:26]
C
Yeah, I mean, we might be just entering a world of hyper competition. You look at all these payments companies including PayPal, I Serve, and Global Payments and Visa and MasterCard, they're all substantially lagging down or near 52E lows. They haven't performed at all. Stripe did a good job just staying private, and they're just doing expensive acquisitions with their private kind of fake valuation. And I think the question is, well, who owns the customer relationship that's going to actually capture value? Goes back to the point that Allison was raising around these big money center banks. Don't underestimate their ability to do that. Then the other question is, what about these super apps? These super apps recognize that opportunity and then recent regulation has made it easier, including from SEC chair Paul Atkins, for them to get after us. So they do. The super app thesis is still a very interesting thesis to bet On I.
- [17:21]
A
Was just going to add. And the super account thesis, right? Every single bank account you go into, name it. Why shouldn't you have integrated crypto functionality to be able to transfer at low cost, to be able to mint and redeem stablecoins, to be able to trade anything from spot to derivatives to fx? It's also like the user experience is going to change, I guess. Do you think that the wallet becomes that super app or is it the exchange? Every account is going to become a wallet. Every wallet is going to become an account. Right. And like distribution will remain king. It's been king to date and it's going to remain king.
- [18:01]
B
On that note, going from something that's rapidly changing to something that actually turns out to be not changing too much. Let's talk about bitcoin prices for a moment. If you look at the options market there we're basically seeing Bitcoin being stuck between 80k and 100k near term options. Interest is heavily concentrated in the late December expertise. It's not extremely spread out. Is all of this just waiting for the Fed decision or people signaling maybe to what Rahm was saying earlier? There's some retail fatigue here and Bitcoin is becoming institutional and relatively normalized here. What is going on with that market?
- [18:40]
C
Did you see Larry Fink's comment, by the way, over the weekend? Some of our sovereign wealth funds are, are nibbling, so there might be a floor at 80. He says they're nibbling at the 80k level. I thought that was an interesting observation. You know, you are seeing higher lows start to form on bitcoin. It's behaving well. Certainly behaving well. Right. You had a, you know, a liquidation a couple weeks ago and so. Yeah, I mean it's, you know, does it break past $125k in the near term? No. I still remain of the view that it's a, you know, you, you sell rallies. But it looks okay so far. I think your, your point on the Fed is a good one.
- [19:20]
B
Right.
- [19:20]
C
If the, if the Fed has a hawkish cut and says the, the path of policy from here is one more cut in April, that's not going to help crypto. That won't help bitcoin specifically. Okay, yeah, I get a lot Clint on that.
- [19:33]
A
Yeah, so. So bit bitcoin has this very unique identity. It's digital gold on one hand and on the other hand it's a frontier risk asset, very sensitive to near term rates. Gold has been around for 5,000 years as a store of Value. And I think when people are really fearful now.
- [19:53]
If you're maximizing your fear, do you choose gold or do you choose bitcoin? Probably gold. And that's what we're seeing. It's not that you don't think that bitcoin's going to be digital gold in the future. It's more like, well, wait a second, I'm really fearful. I'm going to just park it in gold for now and see what happens. So I think that's part of the issue.
- [20:14]
B
So I'm going to actually challenge something Rahm said previously and steel man, an argument and I want to see if we can get into a fight here. So Rahm, if we're agreeing with this paradigm for bitcoin, are we essentially going to see, call it a 1970s style replay in US markets in general, that is to say a world where the Fed cuts, some people get happy, inflation picks up, the Fed goes back to hiking. People, people get sad, jobs start to fall, prices go back down, the Fed gets mad, they cut right. And so on and so forth. Like bitcoin has been very range bound. But do we think there's a world that we could be living in for, call it 2026 where actually that range boundness infects, call it the rest of markets where we're going to see rates being range bound, we're going to see inflation going back and forth, we're going to see asset prices going back and forth on the same theory. Or am I being crazy and like AI is great going to save us and drag us up into.
- [21:12]
C
That's the number one counterc. Comp. Counterfactual narrative. Is this a replay of the 70s? They can't cut spending, they're lowering rates too early. You reignite inflation, as you eloquently put on, you get into a cycle of this happening again again. Right. But no, I don't think that's happening though.
- [21:32]
B
Right?
- [21:33]
C
Yeah, inflation is on the mend. You don't have an OPEC style energy crisis. Energy plays a much smaller role in the economy in any case and productivity growth is here. So labor markets aren't very tight either. Overall things are fairly constructive. You're still essentially at all time highs and consumer confidence is at the lows. Is at the lows and it's at the lows because people have PTSD and anxiety and most that's coming from politics and geopolitical risk and headlines and televised news and social media, which people are just doom scrolling their way down to a low. Consumer confidence number and that creates a wall of worry and that's actually bullish many, many people. I was talking to an RIA last night, money manager and he said he has a, like a, essentially like a therapy couch where a client comes into his office and they, one of them was just sobbing about this, their perceived state of the world. And here we are like markets are essentially at all time highs.
- [22:42]
B
I want you to know, Rahm, I had a student I won't name who, who proposed to be starting an RIA at one point where here is the business model of the RIA on the front end. We're going to take you in, we're going to talk about risk tolerance. We're going to construct your point portfolio. We're going to do all the services. Like we're going to get everything set up and then we're going to send you out whenever you call us back. Before you can talk to anybody on the investment side again, you have to talk to a therapist first.
- [23:07]
C
I like that.
- [23:08]
B
Right. Where it's like most of this is like emotional agitation. And so what we're going to do is talk to you and be like, what is going on? Are you upset? What's going on in your life? Tell me what comes to mind when I mention your mother. Right. Like all of those sorts of things and then see is there a real financial thing going on here or have they just been doing uh.
- [23:27]
C
One of the, the biggest tells when I was at Merrill lynch was when people had to stay late and they ordered pizzas and they were holding their clients hands like that was the time to buy stocks. So I, I think sentiment is really dower right now and if you look forward a year, 26 will be very good. You know, this is a, it's, it's a wall of worry driven by politics. You know, you probably do get a premier midterm drawdown. But you, you buy that.
- [23:54]
There'S, there's a lot to like, there's a lot to like out there.
- [23:57]
B
It's hard to observe as an outsider, but I think the single best predictor of buying moments in US financial markets is when stable value funds and 401ks start to see significant inflows. Right. Because that is like the last domino is people panicking so much they're reallocating.
- [24:15]
C
Their 401k and even like Chamath, you still obsessed about these Max 7 stocks. I'm waiting for them to fall over and they don't because they keep generating earnings and they keep going up. And now we're Talking about AI deepening in other parts of the economy. Now we're seeing venture capital funds and private equity funds do AI roll ups, which is an explicit way of allocating capital to sectors of the economy to drive AI adoption and yet more productivity growth. And we are still in the early innings of that, getting some motion.
- [24:48]
B
All right, let's do our last little segment here before we might have to roll one of our sets of ads because I know Chris wants to do this one in particular, staked Ethereum. So BlackRock submitted an application for a staked Ethereum ETF. It would sit alongside the existing 11 billion ETH vehicle, but specifically give the investors exposure to the staking reward rather than plain eth. I have a few follow on points, but I'm going to pause there to say Chris, what does this mean? How much are people currently giving up by having an ETF that just like holds? Ethan does nothing with it.
- [25:24]
A
Yeah, it's, I've always said this. I, I think that the current ETH ETF product is an awful product because if you're, if you're an investor, if you're a long term investor, or any investor for that matter, why would you buy into a stock if you don't get the dividend? And we don't like using that analogy because Ethereum is not a security, it's a commodity. But it has a natural organic yield. We capture that. The rate that we use is called Caesar. It's a nice yield. It's around a 3% yield, it's around a 2.5% real yield. It performs very nicely when you look through a real yield lens vis a vis treasuries and stuff like that. So why would you ever buy an asset without its yield, without its organic yield? The problem with ETFs to date is that it's really hard to give those that yield to your customers if you have daily liquidity like ETFs have to do. And the issue that you have is that you just can't bond and unbond Ethereum. There's a queue, there's a line that forms depending on demand. There were some issues in the ecosystem with a particular validator that Q blew out to a couple of weeks, like three weeks, maybe more than that. And so if you have daily liquidity where you have an investor who wants to redeem that ETF and take back their cash and you have that lockup where that Ethereum is bonded and you can't get it out, that forms a liquidity conundrum. And so what do you have to do is typically you have to find ways of having contingent liquidity. So just in case. And if that contingent liquidity is not staked, well, you lose yield if you use an LST or you use a different type of yield generating asset. Is that what you're signing up for? So it's been this humongous conundrum and frankly that's been one of the big drivers of the dats. The dats don't have to worry about this on this daily liquidity. It's permanent capital. They can stake, they can restake, they can do all different types of things with more flexibility. But look, the pure total return Ethereum exposure is something we know is necessary. It's necessary and happening. You know, we're also talking to some of the dads, hey, why don't you issue notes, you know, that give you total return eth? If you can't issue equities, there's lots of things to do. It's just a really hard problem. Glad to see BlackRock is working on it. I would really like to see the yield that they end up delivering because they have to figure out how to, you know, mitigate that contingent liquidity. But it's going to be a better product and I'm excited to see it launch.
- [27:54]
B
So I'll hop in and say there are some. Well, there's two angles to go here actually. Let's start with one that I've written about before, which is I wrote a paper not too long ago actually with some of the folks at Jito foundation about liquid staking tokens on this exact topic. And the conclusion is basically as follows. One is that the design of your liquid staking token actually really matters in this context, Chris, I think for the exact reasons you're talking about, which is you need to be able to get in and out of the liquid staking token well enough that people arbit to the value of the underlying. And then two, it needs to be tradable. I think in that case LSTs, especially as the market gets like better, will demonstrate that you're not going to leave what like a 2 and a half, 3% yield on the ground here. You're actually going to be able to earn that and still keep things relatively liquid. Now again, not all LSTs are created equal, so there's some grit on that statement that is not a generic endorsement of LSTs but well constructed ones I think address this problem. Also buried within the absolute dungeon level depths of the 1940 act there's something called interval funds for those of you who have not run into those things before. That is not an open ended fund. That it is not a closed end fund at the extremes. Rather, it's a thing that you have to telegraph that you're going to get out of and you can get out of them. It's either quarterly, semiannual or annually. I feel like that's another good vehicle for staking because then, Chris, to your point, if you need to unstake, you're going to know both when and probably in what amounts long before you have to do it to fulfill the investor like redemption requests. And in a world with futures, even if the unstaking queue takes time, you can take the price risk off the table in the interim and get everything out. So I'm very excited about this one because I think that's a market structure improvement fundamentally. The problem with the ETF that does nothing, as you can see from the screen, is you're leaving percentage points of yield on the ground. It'd be like buying a T bill and not getting the coupons.
- [29:54]
A
Yeah. And people are like, oh, it's too small. Nobody cares about the yield. They do particularly like, let's talk about basis trading if that's what they're after. Like a lot of these institutions are yield hunters. Let's talk about futures as well. If I'm putting on the spot versus futures trade, would I rather have a future on spot or future on total return? I would rather have a future on spot plus yield because it's going to generate me more yield. So these yield games are just getting started. You're going to see an entire suite, I believe, of futures that are going to follow as well, because it's all about the yield.
- [30:28]
C
I agree, Chris. I know you've been focused on this topic for several years now, so it's amazing to see it come to life. How do you see yield from staking trade in equilibrium with like short rates from the Fed? Should they be in equilibrium? Am I thinking about that the right way or how do you look at that?
- [30:47]
A
Should one be a great question, Man, I've been thinking about this constantly. Like this goes back to the crypto ethos, right? Like we are obsessed on this podcast in the economy with what a couple of folks are going to do and what decision they're going to make in a couple of days. There's nothing more centralized and closed than what the Fed does. And that generates like the downstream impacts of that closed decision has a massive impact on everyone. And Anyone almost in the world. Because rates drive everything. You turn on Bloomberg in the morning. They don't talk about companies so much. I hate to break it to you. They talk about the Fed because the Fed drives the economy. Well, guess what? Some of these rates have been manipulated in the past. Like Libor. We saw what happens and how they can get out of hand. We all lived it. Now along comes crypto and along comes proof of stake. And what do we have? We have decentralized rates. These rates, it's essentially the heartbeat of Ethereum we're looking at. Solana and others have the same. You'll see other rates there shortly. But they react. What do they react to? They react to things like how active the network is. The more active it becomes, the more that the priority transaction fees go up, the rates goes higher. Fascinating, fascinating. Decentralized rates. They also will control and have a massive impact on these economies. Like we talk about blockchains as nations. Nations have a Fed, they have.
- [32:15]
The Fed. Well, they also have rates. And these are the rates of the blockchains. It's a really interesting time. Rates are a $700 trillion industry, just fixed versus floating. They're only getting off the ground now. It's going to be massive. And they're everywhere. Everywhere. You have sofr, which is, you know, one of the standard rates. Now that we have that replaced Libor, you can have an ETH rate or Solana rate or another proof of stake rate avalanche, etc. Anyway, I digress. Like I think this is one of the most fascinating parts of crypto. Underdeveloped, very institutionally focused. Because retail doesn't really trade rates institutions. That's all we really do. No offense to anybody out there, but as the market's institutionalizing rates trading, basis trading, like how long is it going to be before we start trading Ethereum rates against SOFR or against short term interest rates? You know, why not? That's called the basis trade, basis swap.
- [33:06]
B
I would also say as you look at these markets and we think about the potential forward path to go back to our previous TradFi vs crypto native debates, one of the unfortunate truths for a lot of crypto natives is some of the biggest, both efficiency and trading gains are going to come from bringing rates markets on chain, not equities markets. Like they have both larger volume and way more broken market structure. Like interest rate swaps is an example I love because I used to be at J.P. morgan. I have a book that trades 247 and I'm going to end up Long in Europe and short in Japan on the exact same trade, posting collateral on both sides, creating unique risk. I would love to be able to just net that on one open access platform. And then I'm getting margined on European hours over here and Japan business hours over here, which is even worse. So 24, seven margining unbreaks, all kinds of stuff in that markets Like Chris and I have talked on here about her stop bank failing before as well. Right. Like getting rid of overnight gap risk. And so that's an institutional only game for the most part. If you're not familiar with it, don't understand it and you work in this space, if you learn nothing else from this pod, understand that you're blind to like 70% of the market volume and the stuff probably with the biggest economic gain.
- [34:25]
C
More and more it sounds like Ethereum is becoming tri chain.
- [34:29]
B
Right.
- [34:29]
C
Just listening to both of you guys talk about this, it sure sounds like it here. The grades that I agree with all the, the statements.
- [34:37]
A
But I, I, I, I think that the thing Ethereum has going for it is that it has 10 years of history without outages. And if you're, you're a risk manager at any bank, if you're trying to get something through your risk committees and there's like, I don't know when I got like crypto futures approved at Citi had to go like they're like 60 people and it's, and you just take it off the table if you're like, hey, it's got 10 years of history. And that's what the regulators like. I don't think that, that Ethereum is the end game like necessarily. I think that, you know, Solana is going to be what Solana says it wants to be, which is the decentralized nasdaq. Right. They're trying to do something different than Ethereum.
- [35:13]
C
I don't want capital formation, for example.
- [35:16]
A
For they're working capital formation, they're working on. Ask Anatoly. I'm the decentralized nasdaq. Speed, speed, speed, speed. Right. I think they're going to be awesome at it. You've got other chains that are looking to compete with Ethereum modularity as a layer one like an avalanche or somebody else. So Ethereum's edge is its modularity and its age. It's 10 years old. That's my sense. And I think it's a first stop.
- [35:41]
C
I think that's right. You know, the other comment that SEC Chair Paulkins made is that, you know, he lamented the fact that you don't have 7 to 8,000 public equities. And that's what you had 20 years ago. And it's been a one way arrow headed down due to companies staying private for longer. Like the, the idea of having a company like Stripe that who knows what it's valued at 85 billion, 100 billion or Android 80 billion as a private company, it's just unfathomable historically. So yeah, I can see these chains start to become capital markets for individual investors and this is where the SEC needs to focus. Like what is the disclosure regime, what are the standards to ensure alignment including vesting schedules, et cetera. And how do you make it distinct from what an S1 filing is? And you know, are peekaboo compliance requirements going to apply in this world? And if not, then what is this distinction between this market and how you offer in this market versus a traditional market? So there's still a lot of wood to chop on the SEC front to address these issues, but it's a big opportunity.
- [36:55]
A
Yep.
- [36:56]
B
Well, I was going to say I'll hop in here and say we're going to roll the ads, but before the next segment because ram, I did not pay RAM to say that, but he has transitioned us perfectly to the next segment.
- [37:08]
A
Awesome.
- [37:10]
D
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- [39:00]
B
All right, so Ram, on the topic of capital raises that may not have disclosed everything, let's talk about Ripple. So Ripple raised 500 million at a 40 billion valuation. Investors included Citadel, Fortress, Galaxy, Pantera and more. But the deal apparently included protections where investors have the right to sell shares back to ripple after three to four years at a guaranteed 10% annual return. Investors also have liquidation preference, meaning if something happens with bankruptcy or sale, they have payment priority. And there are a lot of people who've been looking at this and saying 90% of Ripple's value came from the XRP in the first place. So what is going on here is, is this. What's the right way to say this? Is this really raising money? What is going on? How should disclosure work?
- [39:52]
C
Yeah, this is interesting. That's called structure. Liquidation, preference and a coupon and the ability to put back all that is called structure. So in a clean deal, you don't have structure, meaning you have a priced round. Everyone's in the same boat. And what it shows is that the valuation cleared at this price is because of the structure. So as an investor, count me in on that deal, by the way. Okay, can I get involved? Like a kind of half joke? And I've looked at the analysis or not. But.
- [40:28]
If you're Fortress, it's heads I win, tails you lose. Isn't that my worst case is I say, hey guys, here you go and you owe me for having lent you your capital. Fortress is a very sophisticated lender. Some might say like aggressive or predatory. Maybe I'll use more capitalistic terms like aggressive, I guess. And I was always wondering, like, why did Fortress do this deal? Now you answer the question. Why Fortress did this deal? That sounds like a pretty darn good deal. Why does Citadel do the deal? What was strategic for them? They're going to go make a market somewhere. Why did Galaxy do this deal? Well, they're a prime broker. They should be involved, right? Ripple owns Hidden Road. I think every player in that name has some strategic angle to this. So that's not a clean valuation. Is one takeaway. You don't want to own common stock in that deal.
- [41:22]
B
Yeah, to me. So, Dan, as a former fixed income person, I look at this thing and I'm like, wait a minute, didn't I just lend them money at 10%, get a bunch of warrants on top of that? That's kind of how that thing feels. If I have the right to put that back in three or four years.
- [41:37]
C
This ultra headline and hype, that's clearly what happened here. Chris, what's your take?
- [41:43]
A
Ripple right now is going through a transition just like the rest of the crypto industry, right? It's pivoting from XRP army, solely retail driven to institutional. Going to get out my rlusd any distribution through a prime broker. So it's part of this greater theme, right? And.
- [42:06]
To excel in that new environment, it goes back, you have your nothing burger thing. Dance partners, man, they need dance partners, right? You need liquidity providers, you need other major institutions that are going to help propel and accelerate this transition and into the institutional space. Right? And so, you know, economics aside, hey guys, I got dance partners. We're going in institutional. I have my business model. I'm going to everyone, Everyone and their mother is going to have RLU USD which is growing before you know it. And everyone's going to use Ripple prime ex hidden road. Because I'm go, I have a, I have a vision and I'm getting after it. So like that's kind of how I see it.
- [42:47]
C
I hear you. I agree with your dance partner thesis. Building ecosystem, them get liquidity providers get a balance sheet. Who's on the better side of that transaction though? Where are you looking at like on this deal? Like, are you looking at Fortress, Citadel and Galaxy and saying I want to be on their side of the table? Are you looking at Ripple and saying, damn, they cut a great deal. They're going to break out here and get emerging markets dominance and stablecoin.
- [43:13]
A
Does Ripple need the money?
- [43:15]
C
Oh, they ra. They raise money.
- [43:18]
A
I don't know. You know, partners is your point. Yeah, I think it's a partner. I think it's more of a strategic round for both parties. I think it's a strategic round for Ripple. I think it's a strategic round. I think the other guys are getting some beautiful economics.
- [43:34]
Is this different than we've heard the rumors of people paying to have big institutions use their blockchain? Paying $50 million or $25 million, it's different, but it's still about partnership in my mind. And yeah, I get the deal. Terminus may not be awesome if you're. But, but who are the, you know, the Ripple shareholders.
- [43:54]
B
Right. Well, I was going to Ask are the losers the retail investors of the token? Like somehow this money has got to come from somewhere.
- [44:02]
C
This is called a convex deal. Your downside is you make 10% each year. Your upside is that you a call option. I'd rather own that than. And it's coming out of the equity claims supporting this deal, which are primarily retail investors. Am I reading that correctly? Just off the cuff analysis. That's what it looks like to me.
- [44:26]
B
Well, I guess that comes back to. Do you think the majority of the value of the equity is the value of the token and that they will essentially be selling more tokens to finance this deal? Which is kind of the question I was asking. I mean we saw for instance recently on a smaller scale a similar set of claims around undisclosed side deals for Barachain. Right. And the reason this all comes back into play for me with the SEC is how much do people need to know about this? Like, should you have to disclose this if you have a token that you've been selling to retail?
- [44:57]
C
I think it goes back. Chris, to your point, I like this theme. The empire strikes back. I mean the empire here is Rice. Citadel is here.
- [45:05]
B
Like these are firms have been around.
- [45:06]
C
For decades and they're extracting their pound of flesh.
- [45:10]
A
And they're smart and they're sophisticated. They know exactly the amount of talent at these shops. These guys know what they're doing.
- [45:18]
C
Galaxy got in the club, which is interesting. Right. I mean Galaxy is investment bank. It's a kind of a new investment bank focused on digital assets. But it got in on that deal which is notable. Like that's the player on the table. Look, there's strategic value there. But like Citadel, I get Fortress, I get. You need a balance sheet. Galaxy doesn't have a balance sheet. Right. They can't do market making.
- [45:44]
A
They market make.
- [45:45]
B
Yeah, but I was going to say not at the scale of Citadel or.
- [45:47]
A
No, not at the same scale.
- [45:50]
But what do they have? They have an asset management arm. Right?
- [45:53]
C
Right.
- [45:55]
They need to box out Goldman Sachs and JP Morgan, which are watching from the distance and they're looking at that deal that just got done and they're saying what role do we have to play in this category and how did Galaxy get involved in that? Why did we not get involved? Presuming that they chose not to get involved. Right. The other players are hard to swap out. Like Fortress. It makes sense why Fortress? It makes sense why Citadel is there. Galaxy got in there. So kudos to them, by the way. Again, it's a good deal on the surface. I'd want to be on that side of the table. But notable that the investor, other investment banks weren't there.
- [46:29]
B
I mean I'll, I'll hop in to counter that a little bit by saying like, look, I still talk to management at some of these banks. I think the reason they're not in these deals right now is that in many cases literally they don't know how. Like I would tell you, I don't think many of them were fully aware of this deal or the implications or how to value the thing. And certainly you probably had a few bankers or traders who were. And then you go talk to a risk person and the kind of questions you're. I'm honest to God, the questions you're still getting in 2025 from risk people at some of these big banks are things along the lines of where does bitcoin have its bank accounts? And isn't all of this money laundering? And it's like there's just a crippling.
- [47:11]
C
Well, if you want to see money laundering, go to Art Basel Miami where I was last week.
- [47:16]
B
Again.
- [47:18]
I put it right next to where's Bitcoin's bank account? Which should tell you what I think of that question. But like real talk, I don't think the banks have the talent stack right now to execute on this for the big US Banks. And it's going to be a crippling problem for them a little bit. Like, you know, when the Internet shows up and Internet commerce becomes a thing, all of the firms that are just like, ah, we're not going to do it. We'll just, we've got, you know, one 22 year old kid, you handle our e commerce strategy. And all of those are like, you know, selling.
- [47:45]
C
That makes sense to us and that makes a lot of sense. Yeah, no, I agree. They're, they're still in the catch up mode. Yeah.
- [47:53]
B
All right, well, let's talk about a firm that I think has gotten the punchline for a moment, which is Citadel. They wrote a letter recently around defi oversight and I'm going to be honest here, threw a few punches at some of the defi people. They urged the SEC to treat some, many defi protocols like regulated exchanges or broker dealers if they trade tokenized equities, that, that or tokenized securities. And that is an important caveat. Like I do want to be clear to everybody that nothing Citadel said here impacts Bitcoin. Right. Or something that is clearly a commodity. They bluntly excluded those from this letter, but they did say these systems may likely satisfy the definitions tied to exchanges or broker dealers and that current securities laws should regulate those kinds of things and that it would be dangerous. Exact quote. To give broad exemptions to Defi. What do you guys make of Citadel showing up here and starting to make these arguments?
- [48:55]
A
I guess I can go. I've had a number of private conversations with them, and they've been very consistent in how they see the world. They really don't care about what the silly little crypto industry does with its fun little tokens, like go crazy. But they draw the line in equities. And why, like many incumbents, things are working for them in the current market structure. Right? They're the kings. And so if you're going to disrupt an industry, there's a lot of work for them to do. And there's other folks nipping at their heels and other folks that have been maybe more active in the crypto space for the last four years. We know the names. And so this isn't just applicable to Citadel and equities. We're seeing in the futures markets where some futures exchanges are saying, you know what? I got to figure this out. I'm going to go do a deal with Polymarket. And others are trying to destroy Defi as they're talking to members of the Ag Committee. So everyone's making a decision. Do I move forward or do I fight it?
- [50:00]
Look, I will be honest with you. I've dealt with Citadel for many, many, many years. There is incredibly sophisticated, smart. There's a reason why they are who they are. They're very good in D.C. probably the best in the world. And so they're formidable. And you know who's on the other side of this? Well, it's the Internet, capital markets guys, right? The guys that are trying to put everything on chain. I go back to first principles, and the thing that I would like to see us solve for is the fact we have a huge problem, you know, we have a huge problem with public markets. Rahm, you've been talking about this the whole episode. 81% of companies in the United States with $100 million of revenue or more are private. That is awful. Right? There is an article, I think the Wall Street Journal yesterday tweeted about it, where, like, military folks are, like, piling into crypto and tech stocks. Like, if you are not part of the club, you cannot get into private equity that boxes you out of the most exciting companies. So what do you do? The only thing you can do is go into crypto because you're allowed to Long winded way of saying, you know, I would like for us to solve for that 81% as part of any deal that struck.
- [51:11]
B
But.
- [51:11]
A
But right now it's. It's the Empire Strikes Back.
- [51:13]
C
Yeah. Overall, I mean, yeah, I concur with what you're saying there and that yes, the Citadel is a force of nature and they're extraordinarily well capitalized and they've been wrapping themselves around infrastructure wherever they get a shot. You know we talked about Ripple a moment ago, but remember like the EDX Exchange, there's a consortium a couple years ago, they're part about. Part of that also. Yeah. One of their leaders is an investor in the primary on chain decentralized prime brokerage. Like they're taking a shot where if you can. Kind of makes me wonder like where is jump? Where is gsr? Where are the other market makers? I don't like their policy approach though. They want providers of what they call defi systems. So in my view treating as a centralized system to be regulated as an ATS alternative trading system. Reg. Ats which obviously would allow them to participate. I'm not sure that's the right regulatory framework for all of this. So these are very hard questions to. Like I haven't looked at the policy around this. I don't know if you guys have studied this.
- [52:20]
My instinct is that Regats. Not instinct. I know Regats does not make any sense for something with the word decentralized finance. This is a different framework.
- [52:32]
B
I mean I was going to say I think I wrote a paper about this with V. I think the problem that we have here from an SEC perspective and where I think their job is going to be very difficult if.
- [52:44]
C
They intend to do it properly.
- [52:45]
B
Properly, is that some of the fundamental central assumptions that were made in the 70s coming out the back of the paperwork crisis that we built. Band Aid on Band Aid on Band Aid on Band Aid on Band Aid on top of is that we essentially have undermined some of those. Like in the 70s we ended up with something like DTC because the coordination problem of all the transfer agents working with each other was too great. Right. Like you can't have 80 bilateral phone calls going when all you've got is a landline and you can't move the mail fast enough to clear everything. So everybody immobilize your physical shares in a single location and let them trade off that. Okay, good. Only now we've got, you know, a decentralized open access ledger where everybody could observe the movement of shares in real time. So we're back to the world where maybe the transfer agent, eg. Issuer, could itself be the legal record. And then at that point. Point, what are we doing with like this ATS the f. What? Right. Like so you. Yeah, it's like if you've been sailing and so you've got all of these rules around building ever more interesting things on your cruise ship and all of a sudden you like get to land and can start building on land. The possibilities and ruleset are completely different. You're not building like the 92 story Super Tall on a cruise ship. It's just not happening. But. But you could in New York. They just did down the street from me in Brooklyn. So, you know, I think you end up in this world where a lot of the fundamental assumptions are different. Like another one for the SEC folks in the crowd. What is the definition of decentralized clearing as we currently would think about it in like Mark. And that's like a brain and pushing for KYC too.
- [54:28]
C
Like stablecoins are on KYC and stablecoins and DeFi go hand in hand. Defi is like the balance sheet for stablecoins. So there's just an incongruity with existing legislation.
- [54:41]
A
Yeah, it's very simple in my mind. You have tech and you have people, right? In the old world, people and companies built tech and they're accountable for that tech and they control the tech. What defi allows us to do is to build tech that is decentralized that anyone in the world can use. The stablecoin example is perfect. Right? A stablecoin issuer has to KYC the person or individual institution to whom they issue that stablecoin. Right. Once you have it, you're responsible. If you send that asset to North Korea, you got a big problem. Right? But that's how. That's how the world works. And so look, I think what it comes down to is taxonomy the definitions. How do we define what is decentralized? And then, damn it, you need to police the activities and the behaviors of the people that use the technology. Right. Computers and cell phones, people do really, really bad things with them. Guys, I hate to tell you, but we don't try to destroy them. We go after the people. The transfer agent thing, Austin. Brilliant. Right? People don't understand what these Internet capital markets can do and how disruptive they are. We used to take securities, we used to lock them in the box and then issue these tokens. That whole. The whole box is gone.
- [55:56]
C
Right.
- [55:57]
A
The transfer agent is tracking who owns what the amount of savings you can, you can provide industry participants. Not to mention the fact that if you could open this up to anyone with the Internet, huge opportunity with the right disclosures. So I'm super bullish on the space. I'm sure it'll get sorted, but it's going to be a fight.
- [56:15]
B
No. And I think, Chris, to what you're saying, it's one of those if you have a transaction where right now we go through nine intermediaries, the rules are set to think about how do we make those nine intermediaries better. They are not set up to think about what happens if five of those intermediaries just vanish because we straight up don't need them anymore. And that is, I think, the brain twisting that happens. And where like on one hand I understand Citadel's point, which is we built a whole business and we've optimized it in light of the current regulations. But there's a greater societal point of like, why do those regulations exist in the first place, guys? Should we not fix them? That I think there will be a reckoning here. And just like real talk, somebody's economic interests are going to get totally wiped out here. Because if you built a much better mouse trap for this Rube Goldberg machine and somebody goes, no, no, no, I can just build a pro button and you press the button once the toast comes out, like all the people operating the Rube Goldberg machine if like lost their check.
- [57:13]
C
Yeah, I know. I, I agree. Like, this is genuine innovation. The idea that a civilization enables one person to lend to another person without an intermediary and do so in a fully secure basis secured by encryption is something we've never seen in history before. This is genuine innovation. Applying regats to defi is contradictory to the point of the innovation.
- [57:41]
A
Yeah, the, the reg that I'm watching is NMS and the nbbo, right. Which is a national market standard, the national best bidden offer. So if somebody executes an equity that gets routed to the best price. And on the surface it was like, of course that makes sense. But it also, I encourage you guys to read Flash Boys if you haven't. It talks about how people can improve on that price slightly. It's very hard. Like there's generally conflicts between the NBNO and decentralized finance because everything is so decentralized. That's what I'm watching. I want to. It's going to be really interesting to see how that gets sorted.
- [58:15]
B
I mean, part of the reason for the NBBO thing was that it's a black box, how your broker executes your stuff, right? Like, you just put the order into like Schwab or Fidel or Robin Hood and then magic happens and you get shares and you don't know what's happening. So they could easily be scalping you. In a decentralized system where everybody can see the execution price, the other venues and the path you took, you have a different level of transparency there. And so again, back to like, part of the reason for that rag was a problem that no longer exists. So do we still need the. I. I think. I guess I would just say this and we'll probably leave it here because we're out of time. I think it's a way more complicated problem that people on all sides are giving it credit credit for because we're going to have to rethink some fundamental assumptions.
- [59:01]
C
Wouldn't mind if Citadel was subject to NBBO to ensure that there's fair price, best execution standards that are held because right now you have a lot of market makers RB ING1EXchange off the other. NBBO would deliver better execution to investors. So I think I'm supporting that to your point. It's just complicated.
- [59:23]
B
All right, well, on that note, nothing terribly easy is usually worth doing. So here we're just going to have to embrace the difficulty and the suck of that process. All right, everybody, thanks for joining us for this episode of Bits and Bips. We will be back in one week to discuss how the worlds of crypto and macro are colliding. So until then, everyone take care.