Crypto's Moment: They Swung, They Missed | Roundup

Transcript

all right everyone welcome back to another episode of bell curve before we jump in quick disclaimer the views expressed by my co-hosts today are their personal views and they do not represent the views of any organization with which the co-hosts are associated with uh nothing in the episode is construed or relied upon as Financial technical tax legal or other advice you know the deal now let's jump into the episode all right everyone welcome back to another bell curve Roundup podcast you got Michael's one and two Vance and you know fellas welcome oh we all agree that this is now officially a macro pod and we can stop talking about all this magic internet money nonsense and talk about it on the streets we can uh we can get

back to talking about crypto as soon as crypto has some news to talk about see I didn't want to Pivot this into a macro pod I wanted to Pivot this into a Bitcoin pod I think it's uh T-minus two months until Vance is a bit corner no [Laughter] like I think this is one of the craziest macro weeks of all time so it's it's all right that we talk about macro a little bit just like we have show notes for this and I was looking at them and there's stuff about European banks in there I just have no idea how to handicap any of that you're our European banking expert we're dependent on you for this for the analysis here I mean I think that I think the more interesting

thing is is starting with like we had a full weekend where our friends were without potentially their money you know friends portfolio Founders portfolio companies whatever um and that was that was pretty interesting it feels like you know even though the situation has resolved you know that was uh like one of the goal posts for okay now we're in a recession everyone everyone is like okay it's on you know once bang starts failings like that's that's when it kind of gets indisputable and so that was one experience over the weekend that I thought was interesting the other one was the usdc d-peg and like we should talk about this a little bit more but I I think the defect is like the feature of the system you know like compare someone at Silicon Valley Bank not knowing if they're gonna

get zero or a hundred having no liquidity over the weekend having to meet payroll versus someone had a bunch of usdc you know sure it did get a little dicey for 12 hours but the fact that you're able to de-peg realize that there's reserves in there and then it repegs that to me is a validation of the system it doesn't you know like the fact that one of the underlying banks failed doesn't make me think any differently of usdc it makes me think that they need more Banks and to the announcement that they put out yesterday they don't have bny melon is or primary uh cash custodian and so I think the net of a lot of this stuff is some banks failed yes uscc depeg yes like the UCC DPAC was a feature in my opinion but I think also operation choke point is is kind of like backfiring like

sure you killed all the regional Banks now it puts the onus on the largest banks to be the Arbiters of does this industry survive or die and it looks like you know so far they've given us a little bit warmer of a reception than I would have expected otherwise so that's kind of what I think about it can you guys walk us through what I mean you were like all of our friends lost their money what what what did the weekend look like to you guys yeah so I mean the this has been like talked about Ad nauseam so not gonna spend too much time on it but Silicon Valley Bank was the the dominant bank for tech companies uh biotech companies Venture firms basically the entire entrepreneurial landscape that is um you know quote unquote Silicon Valley

also just as a side note I think calling it Silicon Valley Bank was probably one of the worse things that could have happened given this situation and you know just the narrative about bailing out or fixing or backstopping Silicon Valley Bank is never going to play nicely um even if you know in reality most of the bank deposits were from companies that are less than 100 people um that I think you know that that narrative flew underneath the radar which I think you know probably should have been more pronounced um the the net net of it is this bank was the 16th largest bank based on Bank deposits had over 200 billion dollars of Bank deposits on its balance sheet at time of FDIC receivership uh 90 plus percent of that was uninsured Bank

deposits which means that every every account that you have has a 250 000 FDIC Deposit Insurance because most of these were companies that were using these accounts as literally places to keep the money that they just raised until they have to make payroll that was most of what this use case for this bank was uh or it was you know lines of credit but it was you know banking services built for early stage companies uh which means that you don't have the flexibility of being a publicly traded company or something the size of doodle where you've got 10 different banking partners and you've got a hundred different bank accounts that you're using for different use cases depending on the business lines or the use cases you know that you need to be

you know storing or sending money and so you had a lot of the concentration risk of Silicon Valley Bank um in a lot of these tech companies and you know making payroll is one of the largest it's sorry it's one of the highest things on the preference stack if you fail to make payroll it's it's potentially even higher than most of the debt that you would raise that that would be a liability that you have on the balance sheet greater than basically the the available value that's uh or assets within the company itself so when you can't make payroll you effectively have to shut down operations and not making payroll was something that we were looking at for a lot of companies or a lot of our friends

companies uh if they weren't going to be able to receive payment within you know an order of like a week or two so it got to be pretty dire especially when nobody really knew what was going on the narrative at the time was is the Silicon Valley and we're not going to bail out um you know the the Silicon Valley fat cats and you know in in reality I think it flipped um one of the interesting points that I think is worth calling out and this was talked about I think by tarun um earlier but Elizabeth Warren seemed to change her tone very rapidly over the weekend and I think you know part of that had to do with the fact that Silicon Valley Bank bought Boston

private which is one of the larger providers of credit to the biotech ecosystem in Massachusetts which is obviously a constituency of Elizabeth Warren and so the second that it turned from oh I need to you know I'm not going to step up kill the bank that is servicing Silicon Valley into oh my constituency is going to be directly impacted and this isn't just Tech this is biotech and this is entrepreneurship and growth you know tone really changed pretty quickly so I think you know the outcome is a lot more positive but basically from Friday until Sunday afternoon nobody knew what was going to happen on Monday I actually have a legal question about that just about so if a company can't make payroll

just obviously people like getting paid so it's very distressed distressing for a company when that can't happen but is there a legal event that triggers and is essentially like a default on the bonds yes exactly payroll is a protected asset uh for employees and if you're not able to I mean there are things that people have done historically where it's like Hey listen just wait this out with us like we'll pay you in a month we'll pay you 1.5 times what we're going to pay you in a month um but you have to go employee by employee and make those um make those deals specifically I went to dinner on Saturday night with a buddy whose company had 100 of their assets including like even their credit cards in svb and um

it depends on which state you're kind of hq'd in but you most boards have to get board Insurance because if you don't get payroll as an employee you can sue the living hell out of you out of your board of directors so that's what he was they were I mean he was obviously worried about making payroll but they were they were worried about lawsuits actually coming from employees too especially in a state like California yep yeah thank God Jason kalkanis stepped in our savior our Lord and savior did you guys see the clip of him on on YouTube dude the histrionics just incredible like what that's kind of the funniest part like yeah Silicon Valley Bank like in my mind I think of it as a bailout just because

when you're a bank and somebody comes to withdraw and you either don't have the money or you have to get shut down you know like generally someone has to give you the money for you to restart operations someone has to bail you out but like that kind of doesn't you know fully understand the context of where their balance sheet was was which was in a bad place but like you're not looking at zeros you're probably looking at like 60 to 90 recovery in time with people getting a 50 dividend the next week like that was like one of the first things that was known but just the histrionics continued and I think that is part of what you know a drove a lot of the response you know unironically in some ways and B you know force a lot of other Banks to have the

same deposit Run problems but yeah it's uh it's it's very interesting to see people either think of this as a bailout or something that like you know the Federal Reserve is way overstepping their their jurisdiction on um I think it's frankly a little bit about I I think it's tough so just to play Devil's Advocate there I think it's tough to call this a bailout um in the sense of like historically a bailout in my mind and this is like definitionally we can we can talk about semantics but um bailout implies that you're having the taxpayers flip the bill for this and in reality what this is is all the other Banks who put into the FDIC every year

they have an insurance fund and I think it's a total of like 100 billion dollars in the Insurance Fund and that is what they're using as the short-term liquidity to be able to safeguard these assets for a year so basically the the payers of this loss are are all the other Banks so all of the systemically important Banks you have to pay Pro rata into this thing so JPMorgan is probably the largest payer I think uh of of covering you know the bill here but you know it is it is kind of different in that it's not going to be something that's borne by the taxpayer so I don't know maybe some answers to semantics but it does feel like it's very different from what we've seen historically from bailouts I think the other thing that's important to note as well the way the

bailouts happened in 2008 that protected Equity shareholders as well right so everyone kept there I mean you took massive hit but you know people kept their Equity value the management kept their jobs you know there were gigantic bonuses that were paid to these people I think you know basically svb is a Wipeout on equity and a lot of people lost I'm not actually sure what's going to happen to everyone there but I assume a lot of people are going to lose their jobs and any like the stock sales of the CEO I think that's going to be clawed back and I think it's sufficiently punitive to not you know create an environment for moral hazard which is the worry when it comes to bailouts so I'm kind of in that camp as well that I I think it's sufficiently punitive that I don't think people are going to look

at this and say yeah we can be as risk-free as we want I think what's interesting now is like in my mind just the whole wasn't that big in Silicon Valley Bank like say in an alternate universe we were just forced to work it out amongst ourselves I still think the recovery percentage would have been extremely extremely high juxtaposed that to crypto where like Celsius and FDX claims are trading like 10 to 20 cents it's it's just like a different ball game in terms of you know how severe the situation was versus what the histrionics were and what like the general cultural response has been and now you look on CNBC and just like interested to hear your guys perspectives but Tom Lee this morning threw in the towel on being bullish like he is one of the most permeable guys that you can possibly find there's

literally nobody bullish anymore people are thinking this is a large-scale banking crisis and I would probably put odds on that not being the case see that's interesting I feel like I could I feel like now I I'm feeling more bullish now than I have been in the last several months I feel like what this event did is it maybe turn the feds uh desire to keep hiking rates up and turn it around well so let's clarify bullish on what bullish on the U.S economy or bullish on asset prices asset prices what's the prices right exactly yeah but that's been in that case for a while right it's like bad news is good news bad news for the economies good news for asset prices and vice versa yes but it's like it's so dispersed now so like

let's talk about three different parts of or three different types of investors Wall Street guys super bearish they're in the camp of this is the beginning of 2008 this is going to get really bad there's going to be a credit freeze and there's like some data that would suggest that is the case where yesterday sent and dare tried to sell a billion dollars worth of subprime auto loans and you know they make these loans and then they cut them up and Syndicate them there were no buyers on the other side it was supposed to be led by Citigroup so they just shut down the bond sale maybe it does like turn in like this large credit crisis frankly like we're not the people to probably make that call so you have those people then like think about tech people like traditional Web 2.0 people I think there's some excitement there

that you know things are going to be moving in a more positive direction the FED might be more of a tailwind and and certain things and Michael and I were talking about this yesterday where it's like 10x next 12 months Revenue things don't really work at that multiple but if it's like 12x or 13x like a lot of these growth companies start to be like public company candidates so like they're marginally more bullish but people have been deploying a hundred billion dollars in adventure backed companies for a decade like there's a lot of stuff that you need to sort out in that industry before you can really have like a wholesale this is going to be a good thing type Vibe and then in crypto like crypto just seems to be the sponge for all the excess liquidity where like people say that they're going

to print two trillion and crypto prices as if that's going to go you know at least partially to them you just don't have that same Dynamic kind of anywhere else I would say we're now the most bullish probably relative to anybody than we have been in the past two years like think about last year everyone else was relatively like the real economy is okay but crypto is is gonna you know really take a dive and that was true now it's the opposite there's another variable here too which you know Tom Lee obviously notable because he's a he's a crypto fan and integrates the crypto economy into his analysis of where he's a bullish perspective or a bearish perspective but the one thing that he focuses more on is the global equities markets and I think as you look at the

this in terms of what's going to happen for equities let's assume that we start to head into you know more of a banking crisis this is just the start it's not the end and we start to see actual cuts and and I saw somewhere I think um by end of 2023 uh some of the forecasts are that there's actually going to be three to four Cuts let alone you know increases like they're a net net three to four cuts by the end of this year and that is you know pricing in a pretty serious recession a pretty serious you know change of pace for for the economy and the way that economy and assets can relate is when you start to see earnings actually deflate relative to you know the price to earnings expectations maybe the price to earnings ratio or or the

price to revenue as fans was saying 10 to 12 hours Revenue um maybe that goes up you know those metrics go up but when revenue and earnings decrease more so than the multiples going up you're going to start to see a deflation in asset values as well um so I I generally think like you can't say General bullish or bearish perspective you have to talk about which subset of the markets or which subset of you know the equation you're really referring to I think bullish crypto is definitely the sentiment coming out of this neutral equities depending on how earnings and and revenue growth can can persist a lot of these companies have been taking the the preemptive Cuts you know you talk about Salesforce meta

Google everybody's making the cuts uh as if you know this recession was coming from it from a year ago um probably bullish bonds as well just given that you're going to be able to see you know prices come back with decreasing yield or decreasing interest rates I mean wouldn't it be funny if like Silicon Valley Banks Bond portfolio the one that's underwater right now actually becomes closer to par if if yields you know go back down um and so I think generally like there are different subsets that we have to talk about but it does look like the market is pricing in that this is just the the start not the end so this this graphic here by the way it's a little bit out of date um it you know it's from earlier this

week March 13th so even a couple days ago but this is basically showing what fed funds Futures was pricing in uh based on three different time periods 27th of January uh the 8th of March and then the 13th of March and you can see how much it's just a very uncertain market so basically back in at the tail end of January you know there was a certain path for for rates which you can see in that black bar you know then just about a month later you see the the gray bars here and the market was pricing in I'm much more hawkish you know trajectory for rates this was after Powell kind of gave his speech and now you can see from this week the Mark has drastically readjusted and basically the thinking is you know this is kind of

what Jason was saying and I think this is what the market is trying to figure out is are the are the is the stress in the banking system enough for the Federal Reserve to take its foot off the gas and just because you know you brought up you know Liz Warren I mean she tweeted something out basically intimating that Powell had pushed things too far and for whatever you think about Liz Warren I think she's actually a pretty good Zeitgeist of where the political opinion is sort of at um and I I think this is this is going to be the challenge for for markets is like inflation is still relatively hot although PPI came in week this week which is a forward-looking indicator CPI was like dead at expectations so then it's like does the stress in the

banking sector outweigh you know still a six handle on CPI and that's the question that I think markets are trying to look through and no one really knows I completely agree I think you know the evaluation here is what's going on uh versus you know the inflation what's going on in the banking crisis what's going on with inflation um and you know it's not the perfect Benchmark in any way shape or form but we tracked the internally at framework we look at the FED now or the the now casting from the Cleveland fed um they've been overshooting expectations for the last three months and um right now the you know as of today March 16th um Now cast for uh CPI is I think 0.3 uh month over month and that's really what

matters so you know it does look like March is going to be softer guys can we pivot to talk about ustc because I want to get your asses uh take on that um one thing that's been interesting is like you saw a lot of the large funds start dumping uscc um so then Mike and I are having a conversation about like okay for for a lot of these institutions that maybe have like tighter regulatory risks and like uh larger compliance teams are they like almost legally I mean legally they can hold it but like are is usdc worth the risk of holding now um and like are they will they maybe for a firm that used to hold 20 usdc like do they just say it's not worth it like we'll go to you know from 20 to 2 usdc

and just hold the rest in a in a bny account in cash what what what's your guys's uh like second order impact takeaways from from this usdc debegging I think most of the large holders of uscc are hyper profitable market makers within crypto and so I would be surprised if they just said you know we can do this with less units of usdc um I honestly don't think the long-term impacts will be that big they resolved it quickly they resolved it in a weekend they had a new transactional bank and then had a new cash custodian by Monday that's like pretty impressive just from a risk and operational standpoint and Jeremy alaire is on uh CNBC and he's you know pleading his case and it seems

increasingly clear that the banking system is turning towards crypto not against it like I think they tried to basically kill crypto with all these Banks I've said this before I think it's going to backfire um so I'm I'm like pretty you know like we hold a lot of usdc we hold UCC personally um we're definitely not selling our exposure I think you could see that Capital come back on chain in the form of you know maybe things like ondo t-bills or different real world assets there's also the point where you know yields are not where they used to be like that's not going to be as big of a selling point going forward and so I that's not a usdc point but like things like makers you know printing dime giving it to different uh

custodians to buy t-bills that's probably not going to be that interesting a strategy in the next year or after the next like why do you personally or why does framework hold usdc when you could just put it in cash what is like what is the reason I mean what type of cash bank account cash coinbase USD uh if you put in the bank account you have to transfer it back you know like banking is as you know right now is a little bit touch and go like not super excited to put more money into Regional Banks um I think there's a lot of reasons why you would want to hold usdc right now I think this weekend has kind of made usdc the de facto Bank of crypto right now because like if you're you know an average startup or a company and your

money's in signature or Silicon Valley Bank or silvergate it's probably safer to just have it in usdc relative to those options at this point and just one one clear point of clarification you know like we are as we talked about a qualified custodian with the SEC which means that or sorry we are a registered investment advisor with the SEC we have to keep our assets we are definitely not a qualified custodian um but the the difference there is you know keeping keeping money in a bank account is fine that's definitely a qualified custodian um keeping usdc within coinbase prime or Anchorage also satisfies the qualified custodian role

um as at least as of now um if we were to not you know be holding assets in the Prime account or in the in the qualified custodian account that's totally different and so now it's a question of like okay what's the safest place if if we have issues with banks over the over the level of 250k you know where's the best place to keep it and and so that that I think is you know a tough question to answer especially when you got you know a regulatory obligation to uh you know to the SEC so there there is a lot of like you know interesting kind of game theory that we've been thinking through as well safest place to keep it is in tether didn't you see it was Rock Solid whole weekend didn't even move kind of crazy how that

happened I think uscc has gotten a lot stronger as it was oldest this weekend not weaker yep and just to like I know we're talking about uscc I I completely agree um I think the Deep aging was in was an anomaly but was also a feature not a bug as we talked about the the other thing that I think is worth talking about that kind of got swept up in this whole process is is the closure of signature I agree with you yeah I agree with you on that and you know I don't necessarily I I have not at least uh to date worn a tinfoil hat on this podcast uh yet but

uh my tinfoil hat perspective is um and it came out today Reuters said that they had two sources suggesting and uh that whoever buys Signature Bank is going to have to agree to not continue the crypto practice once they buy the bank and the whole rumor over the weekend was or on Sunday was why are you targeting the number two largest crypto specific bank which had sidnet which is the equivalent of the silver data exchange Network where you had real-time payments in and out so that that was number one um and then Tom emmer today actually had a very interesting perspective which he shared which was the same time that Senator bank was

closed the U.S or the the Fed was talking about how the fact that they are going to be releasing the FED now payment Network later this summer and is this a case where you have the government competing against the private sector for the service that they're going to be providing for instant payments so fed now is going to be instant payment settlement with US Dollars supposedly and usdc was and and the payments that are happening in real time within the crypto ecosystem are were facilitated by signature uh as well as silvergate before that happened but kind of an interesting perspective just to think well is this something where it was a targeted attack on Signature Bank

um blockchain Association I believe has already filed a foia request um so we'll ultimately get to the bottom of this um and I just thought that it was really interesting to see confirmation of the rumor that the crypto bank or the crypto business at the bank seems to be the exact component that was in the crosshairs here this seems like a classic move from our government where they're like yeah like we're gonna release fed now you're never going to have to talk to a banker again and none of your wires are gonna get flagged again it's going to be just like usdc it's like no it's like not the same thing at all being able to have permissionless payments versus having slightly faster ones if that is the case that is such a Folly just to Pivot to a little bit of crypto stuff as well it looks like we have a

date for Shanghai April 12th April 12th nice walk group scoop let's go that's phenomenal the the last point that I would just on the Signature Bank thing um there is one of the one of the members of the board was a guy named Barney Frank and Barney Frank is one of the guys who is in right in the name Dodd-Frank which was the sort of sweeping regular regulatory overhaul that came to the banking system after the great financial crisis he was on the board of signature and he intimated that he didn't understand why signature got closed and just just as a differentiator for how signature got treated versus other banks that were you know had their

stock trading in a distressed way which credits whis is still doing but you know First Republic wasn't made to close down right it's what's happening there is that first of all deposits were guaranteed at svb and and then it looks like First Republic there are reports today we're recording this on on Thursday but it looks like they're going to be acquired by a larger Bank and that's it feels like that's what should have happened with signature so it's it's kind of unclear why this was just closed right out of the blue without with no explanation what is that is that five now six what's the count signature Silver Valley First Republic I guess Credit

Suisse would be five I mean it might it's really not clear I don't have my tinfoil hat so I can't say listen I I think uh it feels like all of the tea leaves are pointing in One Direction and I also think that they try to take a shot we found other Banks and banking partners and this business is going to go somewhere it's not like oh you turned off the bank in like the business dies we can't find another one it's like we've got backups and we've got a lot of others that are waiting to take over the deposits I mean what was what was the number that there was uh 15 billion dollars of additional deposits into Bank of America uh like when when all this

went down like someone's going to want to take on that business and uh and so I you know I'm gonna take a shot that's not miss do you guys read the New York mag article with Barney Frank yeah did you read that article I already have you I've read part of it I mean it's worth it like they I mean they never admitted that signature was insolvent they claim that signature didn't give them sufficient data which was the reason they wanted to nationalize the bank like it's just it's just a bizarre it's like you don't you don't shut down the bank uh by not because they didn't provide sufficient data signature was a publicly traded company no he admitted he said that signature was ready and able to open on Monday and

that it probably would have been fine it was like why what are you saying so if you're a shareholder in that company like what what do you do do you ban to the other in former class action and I didn't assume oh yeah yeah for sure yeah I mean it is kind of funny that like I I did read that part about the bad date or the sloppy date or whatever it's kind of just like are you guys really keeping all this [ __ ] in like Google spreadsheets or something like this this is kind of like Alameda I know like yeah a Google spreadsheet of my balance sheet I do have sympathy for Barney Frank but he also was very anti-crypto and then his Pro crypto bank got confiscated by

Regulators like I'm sorry that that didn't work out for you but you kind of had some bad karma you guys want to talk about the announcement of the announcement the biggest uh the biggest crypto news to happen in the last seven days yeah well we you know talking here obviously about the orbitrum airdrop so there was a video that got released that confirmed what a lot of people already suspected uh that there's going to be an airdrop for arbitrum and I think that's scheduled to go live uh the the target dropped it would be March 23rd so next week on the total supply for arbitrim is going to be 10 billion um and the airdrop the allocation is

1.15 billion for the airdrop so 11.5 percent um and then I think there's a there's some amount that's also allocated to uh there's one point one percent that's going to be allocated to Dows like Dao's uh you know protocols that built on top of um on top of arbitrum and then there's a good portion that's allocated to kind of investors uh the team and the community or the treasury the treasury rather any any like it's hard it's hard to know because we don't know valuation yet any any just thoughts on I guess how the uh allocation was structured and the announcement the announcements or whatever I I think uh you know it's always kind of funny when

you go back to think about like where did just like common um business best practice best practices stem from and you know like you think about a four-year investing schedule for most employees at companies like where does that come from uh it happens to come from like it's some weird like employment rule that that just became like commonplace anyways what I'm trying to get at is um somehow for some reason uniswap decided to to do an airdrop for 12 and it seems like the new Norm is that give or take 12 to the community or two like users in a retroactive airdrop is the is the norm of like what people Target now um like that was my first reading of

this I was like without even looking at it it's like oh let me guess 12 airdrop and of course that's what it is um so I think that was kind of one of the interesting points but yeah I mean it's going to be really interesting to see how they distribute it I think um op just has like a direct competitor compare person to arbitrum had a pretty novel way of like not only just like the Toten distribution but also the token um governance model um so I'll be very curious to see kind of how this all plays out in in um uh in relation to that but um yeah I think it also be great or is it all like immediately tradable

no I don't think so not the uh not the reason that's allocated to the team oh I'm just talking about ear drops the the airdrop itself I believe is I don't know if the Dows are or how that would work um kind of the same thing for op where you had to like submit a request for op distribution to the the Dow treasury that was building on top of optimism uh but I think the airdrop to users will be printable immediately I mean number one huge wealth creation event if it's ten percent of the supply and it's probably going to trade between you know who knows if it's optimism I guess it'd be like one to one and a half dollars that's 1.5 billion dollars of wealth creation right there and let's see if it

stays there um that'll go into reinforcing the crypto economy it also just paints a huge Target on these l2s back like everyone is going to launch an L2 if the prize is 10 to 20 billion dollars like it kind of makes sense I have a question for you guys that I'm quite sure I'm going to end up looking stupid on but I'm gonna ask it anyway um I'm trying to think through like one of the big differences it seems like to me with the funding model of a protocol versus the funding model of let's say an early stage startup is the sequential series of equity raises versus on like uh the launch of a token you just have one like some number that's you know into Infinity so we were talking the

other day about like circulating Supply or market cap versus fully diluted valuation and I'm trying to like reason this out in my head because one of the differences here right is the what they're essentially trying to do with the fully diluted valuation is you're trying to because you're only doing a capital ways one time you're basically trying to parse out right like this is the amount of capital that I'm gonna need to raise over the total course of the life of this protocol as opposed to with a company you'd be like all right I'm gonna raise 10 million dollars in my series a maybe at 100 million dollar valuation and then I'm going to raise 20 million my series B 200 million dollar valuation isn't ultimately like pick some period in time but the fully

diluted valuation would be like whatever the valuation is at your series D and then like the total amount of capital that you raise do you see what I'm saying it's I'm trying to like reason this out but how do you guys kind of think about that it's just a weird I've I've tried to think about a lot but it's it's difficult to to wrap your head around we've only seen one protocol live through the whole life cycle of raising capital in a fixed Supply token and getting to a point where the network is profitable and either the protocol is complete like you don't need continual rounds of funding so you're not like continually depleting the in this case the ethereum foundation's treasury or you have the asset be so profitable that you can stake it and earn yield and it

doesn't just dilute everyone out you know in perpetuity and so like we've only seen this happen once and this is kind of why at least I think that if you're going to be a protocol you need to have like an end date where either the maintenance costs go down significantly or you don't need to iterate on the protocol anymore but you know like I think the the Crux of your point is how did they just print 20 billion dollars it's only you know 10 circulating what happens to this money um we've seen very very very few successful cases of people being able to over time grow into these valuations on fundamental metrics it's not impossible and I think we're going to see more people do it as we find out what the right playbooks are to Michael's point

about where do best practices come from um but you know especially for these l2s and we're an investor in optimism who's a competitor but like the value capture angle not the same as ethereum it feels like a remnant of Bitcoin honestly right like that's that's why we all do these token these hard caps one-time launch um or fixed Supply launches um and it feels like a remnant of of just bitcoin's 21 million cap um but I think it's something that folks should probably actually reconsider is like does it make more sense to raise like a traditional you know series a series B B series C instead of just doing one one big drop at as high of evaluation as possible but

but but like fundamentally or like tactically how would that happen because you basically have a tradable value for this I mean it oh because once you really want the token one time then you have a then you have then it's liquid then it gets priced and then you can't yeah I see what you're saying what what you see people do is they bail themselves out with inflation if it's like if you need additional tokens okay they go back to the treasury okay the treasury gets approached by somebody okay we're gonna sell more so like you do have a lot of the corporate model that exists in web 2 in web3 but like we've really never run an experiment where an early stage company prints a 20 billion full of digital valuation gives two billion to the community and then tries to build the

activation to bring them onto the L2 because like that's really the reward you get for doing this is your dexes get tvl your games are incentivized to come there you can spin up a studio an incubator like but it's a finite Advantage because you're fully diluted and circulating are going to converge one to one eventually and you better have utility profitability or something to keep people interested in the project um but that is like probably a two to four year down the line thing that they'll have to go through because once the investor is unlocked and once the team unlocks you know everyone's on equal footing um and that can and it has changed a lot of the Dynamics of these networks over time that that to your point might is one of

the things that we evaluate a lot which is if you're if you're looking at the value of a uh sorry if you're looking at the market cap uh versus the total fully diluted value those are two very important metrics to look at just because when you have 80 of the supply that still has or in this case 87 percent of the supply that still has to be unlocked that's a major variable that you have to deal with you have to account for and that's something that you're going to have as you know a changing of the the market dynamics of that token you know over the lifetime and and like the prod so like eth was the first one to get to default profitability and and basically the need to you know if there was some maintenance do it but like it wasn't

sucking all the resources out of the protocol via dumping tokens the next ones that are doing it are all the D5 protocols like I can't express how good it is to see all the d5gs maker synthetics uh curve um uniswap Lido like synthetics what do you think going to be profitable this year Michael like they made I think 2 million in fees last week and there was a lot of liquidations and fees and volume Lido is probably going to get 50 to 100 million unit swap we'll see if they turn on the fee switch maker I'm like a little bit more suspect on because they're just like taking you know printed internet money and giving it to people to buy t-bills with but like you're starting to see the second generation of companies figure this out after ethereum and I think that is like wildly positive

because that's like when you saw ethereum kind of like re-rate to bitcoin back in I think like 2020 because it was like 0.03 for a long time it was because the network had fundamentals so I'm hopeful that that continues and it's awesome to see the first generation of people that are like really die-hard D5 people actually making real businesses out of it good good to see synthetics specifically good nice all week for synthetics it's been a comeback and like [ __ ] bumpy and you know crazy and like we were one of the first protocols to get remember the Korean Won hack Michael someone printed a trillion dollars of Korean won on synthetics and tried to hold the protocol hostage this was like four years ago I gotta get a screenshot of this and like this is the first time

it was like the world was ending but there's been so many twists and turns and do you remember when people were finding the Oracle but now it's like the system's fast it's cheap it has a lot of different pairs it has perps it has it's powering options like the the real Die Hard people that when the niches are gonna absolutely do phenomenal like one awesome to see and just to hammer this point home here's a prediction um I I think where D5 1.0 uh was all about TBL what we're gonna start to see is that D5 2.0 which which has yet to really kind of Hit the fever pitch is uh all gonna be about cash flows and re-rading two cash flows is going to be a really important market efficiency

that you can compare it against ethereum ethereum will be the you know the Benchmark essentially but you're going to look at Lido you're going to look at me here you're going to look at synthetics uniswap and compare cash flows on cash flows and I think a lot of the like D5 llamas and token terminals are already moving in this direction as like the best point of comparison but I think that that becomes the new metric of of uh D5 2.0 now this might vary uh you know protocol to protocol but the the metric that I've sort of heard used there is one to pay attention to is the dollar produced per dollar of tvl that you have for it so for every dollar of TBL that you have how much revenue are you able to produce off of it then you subtract the operating cost and that's

your your cash flow this depends if you know it's really like a metric that you're looking for it should just be cash flows right and if they're super inefficient cash flows like a bank like something that looks like a bank well we would just get valued at like a book value or like a lower multiple but well I I think Mike you're right and you can compare those but you can only compare those across different business models like you can't you can't compare derivatives exchange to like a lending protocol because those are going to have wildly different tdls but the cash flows may be the same just like a Lido staking protocol versus a a GMX like those are just going to be two very very different ecosystems with different metrics but the one that you can measure is what's the cost what's

the fully diluted market cap and what's the cash flows yeah well the um when you uh just one clarifying question actually when you say cash flows you know what exactly are you describes that net profitability or like or because cash flow to me means like dollars in and out net profitability net of incentives so like you look at things like synthetics like there really are not that many incentives driving the growth and like I'm not going to pick on any other individual derivatives exchanges but like if you look at some of the other ones like it's like incentives on many days are higher than what the fees they're generating are yeah so like that's the other thing you really care about especially as you know to our earlier conversation a lot of

these incentives wind down as the circulating and full included market caps converge like those are just very expensive dollars to to now allocate to growth programs and things like that so I've got a question for you because the reason I uh maybe I've heard this this particular metric like the amount of tvl that it takes to produce one dollar is because I'd be looking at kind of scalability of the business because let's just take a business where like let's just say TBL is like directionally the driver of how much revenue protocol can generate if there is a protocol that has a billion in tvl and you're able to generate you know let's say 50 million dollars in Revenue that looks very different to me than the same business that generates 50 million in Revenue but

you need 25 billion of tvl in order to do that because to me as an investor I'm like geez like there's just a limited amount that that Revenue stream can really scale then totally but but that's kind of like saying okay let's compare Apple's top line revenue with doodles and apple you've got to factor in the actual address margin of the physical products that they're selling whereas Google gross margin is going to be 80 or like let's compare that with the gmv of Airbnb and say okay like you've done a Marketplace Dynamic net revenue is going to be whatever Blended like 18 19 of that gmv whatever their fees are but like you see like you have to take each individual business model and say okay

let's break it down and compare apples to apples um and yeah sure like Google is probably one of the best business models ever invented in humankind because of the the fact that you have an 80 gross margin that's going to be a component of this evaluation process as well do you guys want to talk about the billion dollar CZ investment a little note that he dropped oh wait sorry actually one one thing to to mention as well is uh in addition to the airdrop arbitrum actually announced first of all that there's going to be a dow and then there's they also announced something called arbitrum orbit so so arbitrum orbit is basically their solution for that will allow developers to build layer threes on top of arbitrum which I think is is pretty like this

this I mean we talked kind of about uh we've talked about the app chain thesis and idea uh we've been covering it in this last season of bell curve as well but this seems like a something that looks kind of similar actually to the op um optimism sort of solution of these like app chain type environments so we've had so many projects look at coinbase and arbitrum and be like that's what I want to do make an L3 on coinbase or use the op Bedrock stack to or sorry use an L3 on arbitrum or use Bedrock op stack to build on coinbase like it feels like that is now the path of least resistance if you want your own app chain just like the tooling is that good not that you know anything else is happening but

um for Cosmos and tenderbent like those are still nine month 12 months development Cycles from what we can tell so you know these products are just going to go to where it's easiest for them to build and it looks increasingly like it's going to be yeah Mike you you just did a whole I mean seasonal app chain thesis like how are you thinking with Arbitron op stack coinbase coinbase is base like how do you think about where where apps want to build I think it just depends on on what's important to you I do still think like that the thing that you get on in the cosmos Arena that you you can't get building on like in a layer three or something like that is you get full sovereignty right so when you own everything from the nodes uh that the validators all the way up to the app

like you control every every part of of that um so you own a lot of flexibility I think that the challenge there is you don't have a natural or obvious source of distribution that's kind of the challenge and then you're also you make the entire stack of your products subject to governance which in some cases can be really good but it's also a lot of surface area of governance and one thing that like to be honest I am still kind of thinking through is maybe this was kind of Json with you and I explored in season two but it's like maybe governance is really optimized to only you only be very good for one very thin layer of decision making and then there

are going to be companies that build products like wallets like maybe you know what I mean because like a company is much more centralized um and it makes sense that a company might build a wallet but maybe you want the underlying Financial architecture underneath that to be decentralized and less prone to uh you know have you know perceived neutrality or or not be able to be impacted by governments that might not like how the how the software functions so real-time news update uh same seems like uh 30 billion 30 billion dollars uh coming from 11 different banks are going to be deposited into First Republic Bank so probably not going to be a sale but

gonna be a backstopping maybe or just a partnership where 30 billion dollars is going to flow into First Republic as new bank deposits from other Banks it's basically like it seems like everybody's getting together and just like locking arms and being like we got this these These are these are weird times though because like bailing out I saw a Silicon Valley Bank tweeted out today or yesterday they're like there is no single safer place to keep or transfer your deposits than svb now we're fully insured with no limits and no caps so actually technically they're kind of right because they have unlimited FDIC insurance right now um they are 100 correct yeah it's just a weird I

I was all for like bailing them out or backstopping whatever you want to call it but like now the unintended consequences I don't know I saw Brax did that like 200 million dollar thing with them like something about that just feel I'm like ah there's no consequences like you just you oh what what are you what are you talking what are you talking about no I mean keep in mind like the so management team is out they're all fired they're gonna get their bonuses and their stock sales probably clawed back you got Roe on on Meet the Press or wherever he was this morning talking about doing that you've got an entire Wipeout of all the bondholders all the stockholders they're they're completely fleeced down to zero like what you're effectively saving here is uh you're trying to have some

residual value for the employees at the company who were not the ones making the decisions to maybe have a continuation of this business everybody else who had deep incentives to be aligned with the future progress of Silicon Valley Bank itself they're gone I I actually think that you know like it's a it's a contemplation that we had which is like we have bank I mean we're looking for other Banks and we're working we have probably three or four banks for each one of our different funds Silicon Valley Bank was one of them but if we had to put assets somewhere it's kind of a weird perverse situation to to your exact point it now has 100 FDIC Insurance just seems like weird Market incentives that svb is now the safest Bank in the United States

right now I've got I've got another the honestly this situation makes me ask a question but it's a different one which is If the Fed and the FDIC are just going to backstop everything why do we need a commercial banking system why do we need we're just going to follow the two-year treasury we can just use that like we can if we're doing layoffs in fact like I think we should streamline a lot of the financial infrastructure as well it's just I I honestly the libertarian side of me would have preferred no bailout um the part of me that has startups and and you know had money in Silicon Valley Bank obviously preferred that but they've created this knock-on consequence where like we had to bail out the banking system in 2008 you know what happens if we need to bail out the

Federal Reserve when all these Banks start failing it really is like this moral hazard type of scenario where Ken Griffin was saying that you know we shouldn't have bailed them out it wasn't that bad they could have sorted amongst themselves maybe that is true it wouldn't have led to this feeling of like cool we have like the permanent bank backstop now but what happens if that ever goes the other way also keep in mind this this implicit bash stop only lasts for 12 months it's not like this is a Perpetual forever thing temporary government just like the reverse repo facility that was the temporary government program 10 years ago just for the one package of covet stimulus that we needed that led to four more like for sure sure they're going to be reducing the size of the fed's

balance sheet any day now any day for sure they can't walk I think that's that is the point though they they can never walk any of this stuff back once once I mean this is a this is this is a private company that's gonna have to find a private solution and if they don't there won't be any incentive to continue on and backstop this this business not to mention like who and who in the right mind if there isn't a future outcome here and isn't searching for other employment opportunities that currently works there yeah but like these problems are going to continue to happen like I was reading this report that said the uh Social Security and pension and many of the pension plans are expected to be insolvent in nine years assuming no recession that is

going to happen in four years like you can't just keep kicking the can down the road you need to solve the problems before they happen or else you're just going to get this thing where everyone perpetually gets bailed out and that is like the scenario where eventually you do need to backstop the FED but with what by diluting the American shareholder holders of the currency that's right you know cutting Federal programs backstop like or or not like you know you're not going to do that so I don't know maybe that's just like to do but I think it's you know like the supply of money is going to increase if this is going to be the tax that you take with every single crisis and that's why you know like crypto is is uh like that's why I feel good these are the things that as a

fund manager you wait for you know we raise the fund things really kind of fall apart you really get a shot at something that's low and then the FED starts to ease like there are so many qualifications and caveats that you can put around it where if the economy really falls apart that that's bad but this is kind of the setup that you wait for even though it's full of like moral hazard and a lot of these institutions going the wrong way in my opinion at least I have a um uh can you guys uh give us your opinion on because obviously when when things were falling apart over the weekend with Silicon Valley Bank uh crypto is ripping uh and this is the charger sort of led by by Bitcoin and Bitcoin pump is basically just pumped since I think I don't have that

chart in front of me but since Saturday it's been on a tear and it's right around 25 000 uh now um I say Bitcoin has been leading because Bitcoin has been yeah I think it's been the most printed it seems to move first and the eth BTC ratio is going the other way for the first time in a little while um can you maybe just talk about like why you think crypto reacted the way that it did is this a macro story or something else original narrative the industry was built on and you have a Resurgence of that you have all the applications adoption brand distribution all that progress you've made in a decade plus and it's like you know we've already been through our version of you know hell last year like that's when we we really took it on the

chin like Luna and FTX and Celsius and Voyager and now it's like we were kind of first people in makes sense that you're going to be first people out and on the East BTC ratio I just think frankly at Shanghai I don't know how much Supply comes online but the threat of that coming is is enough to Spook the market and Susie is blind and I think he likes Bitcoin more than you frankly the uh not to maybe speak to specifically this but I think you know just like forecasting out um one of the questions we got from one of our LPS who happened to be in the office yesterday uh was like what's the Catalyst that like sends this back into a bull market like what are the things that we're looking for and um you know one of the things we talked about was just

frankly eth being over like today the second that you get that what it does is it creates this reflexive flywheel of like okay the value effect or the wealth effects of like okay now it's the the primary Capital asset you know things like Lido are priced in terms of eth so you're going to have more Revenue that's flowing to those types of ecosystems people are paying for things in eth and historically we've seen the the quantity of eth as eth goes up spent in the ethereum ecosystem increase as eth goes up uh and so I think there's also this element of like once you de-risk and move past some of these big you know overhangs like Shanghai or you know Mount rocks or any of the things that we have on the horizon for 2023 like there there will

be you know a real big you know kind of like realization that we've moved past all the risks the banks are blowing themselves up interest rates are probably coming down you know unclear about future prospects of the global or just U.S specific activities like where is you know a good place to put some cash right now okay to the answer's point maybe it's the place that got literally hit the hardest in 2022 and is showing the greatest signs of life right now in terms of activity and revenue and cash flows that we've been talking about so I think you know the I would actually say I was kind of surprised that it didn't move more over the weekend um but but I think the reason why it could be just the fact that we're waiting for some of these d-listings it's a good time to be in crypto good

time to be alive and in crypto because you know you forget but like all of the people got taken out last year like yeah one of the funny parts of the of the of the rip was like suzu was back to Bull posting like some of it like I feel like I'm just not smart enough to get but like some of it just seems like indecipherable just like gibberish but he's back and I think that uh that tells you something we've had enough time now where he's failed started a new company and come back like I think enough time has been The Penalty Box not for him specifically but like for the industry writ large yeah he's got some more time

I don't know what yeah yeah but I've been blocked I wasn't being supportive enough in this time of need listen not gonna lie like the other element that I I think will be a huge just de-risking equivalent moment is the second that we finally get resolution to this whole FTX SPF lawsuit mm-hmm breathe that is of a trial too where is Sam Trabuco where is he you have to just imagine that the sea in his in his yacht I um

I don't know all of that needs to resolve we need to get to the point where like that is fully put to bed and then I think also like picture SPF over the weekend like everyone thinks I'm so bad like look at these [ __ ] Banks you know they're blowing up now not gonna save them but I'm sure he like fell through he came out yesterday and he's like FTX should cover all of my expenses related to my trial so I feel like he's like he kind of tried to seize this opportunity to to like come back in and say a little thing founder victim you know like just like he's trying to get it tonight can I expense this can I expensive no it's too expensive yeah Michael at that point that you were

making when when eth is above 2K or whatever I do think a lot of what drives the the kind of Mania in crypto during the bull cycles is kind of like good old-fashioned money illusion actually like if you kind of denominate a good part of your Investment Portfolio in eth and suddenly that does a 10x I mean you're sort of playing with like Casino chip it's the same effect that you get when you go into a casino right you win a bunch of money and that's why they convert it into chips because it doesn't seem real right this is every anecdote that you hear about people are okay buying their nfts in when it's denominated in eth but as soon as you see the dollar price it's like awful you know it's like turn off my screen I think that's what drives an enormous amount of the reflexivity mind if you

really just compare head to Vegas this weekend by the way so yeah I was gonna say I will uh I'll let you know how those chips fare for us um no it's the abstraction principles but I was I'm not trying right right yeah thanks for comparing my it tokens no no that's not what I uh psychological effect that's what I meant um Alice would you be would you be sus did you say we were staying at Caesar's Palace would you be sus there's only one person hey it's the wind baby it is it is that's the best and that's and that's where we're staying um I think the uh the other element here is just like there's the psychological

effect but then there's also just like the capital effect we're actually starting to see some of these you know narratives and Promises of D5 1.0 shifting into D5 2.0 that we've literally been waiting for for three years now actually come to fruition we're like you want to trade X Y or Z great there's that you know there's like legit betting markets for Sports on chain now that have like serious liquidity like there there are like financial services that exist left right and center and it's not just major it's not just uniswap it's not just spot trading anymore um like there is a full-fledged Financial ecosystem that you can access now if you have eth or if you have you

know assets in that environment DJ and Spartan once called for a three-year bear Market not once many times and he would he even have a progress bar where you would update like you're in month four of the 36 month bear Market when you're in month four that's a tough thing to hear from d-gen Spartan and like it's pretty crazy but it honestly was about three years from like the first hype cycle of 2020 and comp and synthetics and Ave to present day in 2023 we've kind of lived through the ups and the downs but now it just feels like they're figuring it out so one of the one of the challenges with that particular time frame is I think it's

pretty easy I'd be curious like how you guys talk about things internally at framework like I think it's pretty easy to you can go to someone and say hey I know it sucks right now but just like eyes on the prize like one year from now or nine months like things are going to get a lot better like three years is just a long period of time you know that's uh so I just be curious about how you guys talk about that or message things internally or like how you've like motivated people through bear markets basically well not everyone's gonna make we take them to Vegas not everyone's gonna make it it's the first one you know in the Venture business you're lucky if 10 in traditional VC work out in in crypto it's more like I would say 30 40 just

there were a lot less startups to back um are you talking about portfolio companies like are you talking about employees at framework kind of both kind of both I mean like we tell people like if you're the number one in your Niche you can still be a billion dollar company even at the depths of the bear Market even if it gets 50 worse but you know the laws of gravity still apply to everyone you need to have a product that has product Market fit you need to be able to both create and extract value from it for yourself um and a lot of it is just like frankly like the grind of coming in every single day trying to make it work banging your head against the wall iterating hiring people firing people feeling good feeling bad but like at the end of the day if you don't have like that founder

energy of like I'm gonna crush this thing come hell or high water it's just probably never going to work out and so that's one of the things that we look for and try to filter for is people that can work with us in that way and you may not start with the same business that you finish with you may not start with the same team that you finish with but like there is usually a path if you're willing to grind um and that's mainly the the sentiment and you know I think the motto generally around timing is like give it a year if it looks bad it's probably not as bad as it's going to be but if you give it a year things are a good good chance that they're going to look a little bit better and that's enough to hopefully get people going

the other thing I'd totally agree with everything man said the other thing I'd add is like okay let's take DJ and Spartan's three-year projection he made that I think in like 2021 and uh you know that's kind of he made it like kind of at the height of of you know I think it was summer 20-21 is when he started talking about this um and so you know what we're really talking about here is summer 2024 where he's identifying okay that's the end of the three-year bear Market well he was right for the first year and the first year was just about you know and sure he missed a lot of the pump at the end of 2021 but he was right about there being a dump in 2022 and you know it definitely is this the tweet I mean it definitely is

um uh yeah basically like the the point I'm trying to make is um there are also this there there is also this effect in markets where markets will frontrun you by a year so like the outcome of whatever it is that's gonna happen is actually going to get pulled forward because markets are going to react faster so like if it's a 36 month process what you're really talking about is like 24 months and you know if we really take the math and figure out where we think things are going to be like probably this summer we're going to move past a lot of these de-risks and and I think you know we're looking good yeah I'm I I'm with you it's I mean it's depending on your sector in crypto

honestly it's kind of been a bear Market in D5 for even longer than 2021 I mean beginning of 2021 you can go all the way back to so not everything needs to perform you know in a totally correlated way and I to Vance your point I have the same framework in my head like crypto crypto is like the Ernie early warning you know Bell that was like hey ding ding ding uh liquidity is going to be drawn out of the system and I think it does a pretty good job of sniffing out when it's going to come back as well I'm not saying it crypto always has to trade like that but I think that's how it trades today so that's what I think you saw over the weekend too like I think everyone kind of woke up and had the same thought like oh fed is basically done you know maybe

they can do a 25 basis point hike next week but you know he's not vulchering 50 basis point hikes into the market anymore like that is that is over even higher for longer if you think about that is pretty bullish that's like it's because there's not many there's no more hikes at least like the market can look through uh you know higher for longer I think pretty easily so I I'm feeling good if they cause a recession and inflation is zero and rates are five percent people are gonna be screaming bloody murder freaking out like higher for longer I don't know forgive me for like not trusting these people but I I just don't trust them and for for the record like this is the exact same thing that happened in 2019.

crypto bottomed in December fed there was trouble in the repo Market in January February fed pivoted stocks bottoms basically when the fed pivoted and then you mean in 2018 then 2019 yeah 2018 then 2018. yeah but like this this happened the last time people are like what do we do now same exact scenario I you know hopefully there's not a pandemic around the corner but it seems like we're following a preset Playbook at this point the variable to track I'll say it again the variable detract the Cleveland fed now forecast of inflation if inflation continues to head in the

direction that it seems to be heading I think everything is going to work itself out we in the next year we're going to see sub two percent inflation like dude everyone's so spooked right now it doesn't matter if you're working construction or technology or retail inflation is basically over my opinion all right team this is a fun one we'll see you next week foreign [Music]