Cycles Don’t End Before They Start | David Kalk & Pranav Kanade

Transcript

if money starts flowing into alts which it has not to date in this cycle and and maybe maybe won't but if it does the market structure is going to feel much different I I I think it is not an environment where Bitcoin necessarily will be outperforming in the way that it does I think there'll be a lot of new things to do and this this boom bus pattern that we've seen the fact that we haven't seen it is just a reflection of the fact that Capital has not Flo into alts I still think that Capital allocators more generally are preparing since the election to move into the space in a way that they were not before the potential for them to chase another move in the future I do think they'll be more prepared for that and that has the potential to be an environment where

alts do perform this episode is brought to you by ZK sync join the elastic Network today at ZK sync. iempire thanks to ZK sync for making today's episode possible all right everyone welcome back to Empire we have Prav from Vanek we've got Dave back on the show Dave from reflex of capital welcome to show guys thanks for having us yeah's up not you eating popcorn what are you eating over there candy no it's like this mouth uh freshener that Indian people eat that my parents gave me so nice it's it's not like gum it just digests interesting all right good to know noted noted noted um for man all right so I want to have you guys on

because uh I mean Santi and I had this Roundup that we were so this is coming out of Monday Santi and I had this round up on Friday and we were pontificating about markets and the unfortunate thing for Empire listeners is that Santi and I have no idea of what we're talking about so we figured we should actually bring on two people who actually know what they're talking about so maybe Prav I mean I'd throw this first question to you like just what is going on like you know bit Bitcoin hit is down to 75 or 80k I don't know the exact price of that we're recording at but you know it was 105 110 and then I opened my eyes and it's down to 80 uh you know Souls down 50% memes have gotten are down 80% like just what's going on in the market right

now yeah so I I generally kind of bucket these things into like these sub asset categories so I put Bitcoin its own bucket then I put sort of like the majors like e soul and call it like I don't know top five coins on coin market cap into one bucket and then I put alts in a bucket and I put memes in a separate bucket so like let's say there are four buckets out there um the altcoin we can we can start with the altcoin world which is the easiest one to start with which is we started talking about this issue of increasing Supply through vesting and low floats and those floats ultimately vesting BCS one into DPI and and needing to sort of sell some tokens they're vesting into

into a market where there's not enough demand for those tokens there's not enough liquid managers and Retail doesn't really care for these tokens um like that being an issue we started talking about that spring of last year I feel like people forgot about that issue post election so kind of everything went up and then that issue came back to the Forefront I would say probably early to mid December and so you've kind of just seen a continuation of that issue with alts and you guys have talked about it a fair bit sort of that low float High fdv investing no demand and liquid kind of issue um the meme coin thing to me looks a lot like the nft market um you know if I remember correctly the general top around nfts was when that apoin dropped and that kind of sucked a lot of

liquidity out of the market I remember a lot of people were buying the board apes and and these you know things around them for the AP coin drop and that was generally the last hurrah and it feels like a combination of the Trump meme coin and the Melania coin and now like the Libra thing is probably the thing that has people saying you know we're kind of good with this for now because ultimately again the same thing which is you have supply of meme coins constantly growing you have a certain amount of audience that wants to play the game once you run out of people play the game then you then kind of no nobody's making any returns and so they stop playing the game especially when they start to realize hey maybe this game is very unfair towards me the retail participant which is kind of what happened you know

post Libra right so that's memes and then the majors I think we all talked about what the issue with eth is salana has been the real winner and obviously with Solana you know you have kind of two issues one is the memec coin stuff that is dying and is primarily on salana and the other is this fear around FTX unlock so a confidence of those two things is probably driving that and then the last piece on bitcoin General view there is like you kind of ran out of incremental buyers right so something D David and I were talking about a few weeks ago is you you got this headline around uh a middle eastern Sovereign wealth fund disclosing they have a holding in ibit and you would have thought that's like one of the most

positive things you can see and when the price doesn't go up on that the realization is well like when price doesn't go up in good news you kind of run out of buyers so you have that and then you know I think David pointed this out to me last night and maybe I'll let David unpack this but his view is Trad five firms are probably setting up shorts in Bitcoin via the CM Futures I may be put an explanation but I'll kick it to you yeah I think the been looking at what's going on with the constellation of the basis trade and CM Futures and what's been notable is that the funding rate of the basis trade has come down which you know the strongest thing there is that um basically the the implied to

toay someone to go short the market has come way down so there's this long there's this large long in Futures contracts someone has to take the other side uh it can be an arbitrager who just shorts the future and goes long spot through the ETF or otherwise and does it purely to collect the yield or someone can come in because they want to be short and what's been notable is that the Futures outstanding position hasn't come down that much certainly not as much as the funding rate has come down so to me that reflects that someone's probably come in to short this market and I think the obvious exclamation on that is uh the momentum is just turned so we have some evidence that ctas and other momentum accounts kind of these cross asset futures-based funds who do Trend following um in every asset have

been active in crypto Futures contracts for some time and maybe increasingly large size so my guess is that they're uh they've been shorting the market over the last few days because um the funding rate has come down so much everyone's focus on the basis trade being unwind and whether that's a that's a spot trade or not um but I I think there's quite a bit of evidence that that's going on um and da is that for my simple trading brain is that basically just buy Bitcoin spot ETFs short the Bitcoin Futures on CMA CME and basically Farm the spread for like five or six percent and now now that's the normal so in in um I'd say in most most periods of time you have

someone who wants to be long levered on the future and then the only way to someone take the other side because for every long there of course has to be a short on the Futures Contract is to incentivize that person to come in and do what you just described so that's how I describe equilibrium of Futures in most environments in this case because the funding rate has come down it reflects that there's more of a a directional long and a directional short opposing each other in this case and so people don't often just go in directionally just short naked crypto I mean that you know that's a difficult trade the the what we do see is people who trade momentum or Trend falling so basically buy high and sell low and you know that works systematically very well in crypto uh there's probably a pretty

large short position that's been opened up uh in CME Futures and my best guess is that it's these types of accounts so it's replacing the basis trade like everyone's focusing on the fact that the basis trade has been coming off and and that's the ETF flows um what I'm saying is I think the person who's come in to replace them as the opposite side of the um the long trade is someone who's shorting BAS on a trend folling signal that's my best guess and that that makes sense for like two primary reasons right if you just look at the worst performing equities in the past couple of weeks it's all the things that did really well post selection um and all these things have a correlation people try trade these correlations and you kind of layer in the fact that Bitcoin stopped going

up on good news it it kind of all perpetuates which is people there's a reason to short it at that point how much of this is yeah go ahead Dave I was just say just to to kind of reinforce this um if you look at the the yield that was available kind of post election to come in and do this relatively risk-free basis trade ETF versus future short the future long the ETF it was paying you you know 10 11 12 13 14% yield and it's come down to about 4% AKA a level where uh a basis Trader doesn't care and so it hasn't come down there because the you know the long came off it came down there because someone in replaced it kind of took the other side in a way where the long is didn't

need to pay as high of a financing rate because there's a short willing to take the other side in a naked way yeah it's it's something I've been thinking about with um just as the market develops you basically I the first 15 years of crypto you had people who were buying this stuff because they genuinely believed and they believed in the ethos of the industry and they believed in the asset long term and probably in their pa as well they were uh allocated to bitcoin like they they were like bitcoiners right and then like the ethereum crowd came along and salon and now as the market develops I mean I would say the people putting on this trade in size I mean they don't give a damn if it's Bitcoin or Tesla or or some random penny stock whatever it's just an

asset that they can make you know six seven eight n%c how I might I might put myself in that bucket too but just to be 100% clear this person has car does not care at all they will look at these are just funding trades there's a trade that's the exact same thing in bonds there's a trade the exact same thing in some some Commodities the trade in in S&P physical or S&P futures they have a certain amount of balance sheet that that they can rent or or on their own balance sheet and they're just going to find the best funding trade the crypto funding trade this basis trade has been by far the best you know and so so they are willing to do large amounts of this regardless of what the underlying is um I think Wall Street has clamped down on how much trade they're willing to help

facilitate which has been a constraint at times in the past year since the ETF came out but for the most part yeah it does the underlying doesn't matter other than the fact that there is some different OS syncratic risk with custody and things that I'm sure that makes makes the yield that they want like sufficiently higher than than everything else this episode is brought to you by ZK sync in 2024 ZK sync took a step toward a multi-chain future by transforming from a single L2 into an ever expanding network of ZK chains the elastic Network to onboard the whole world into crypto many specialized chains must must be able to coexist work together and share liquidity institutions and Global Financial

leaders choose ZK sync for unmatched security scalable infrastructure better onboarding gasless transactions and privacy first design join Over 20 chains including abstract sofon and Kronos in the elastic Network today behind ZK sync is the ZK stack it is a One-Stop platform for building private blockchains on ethereum the stack solves all the typical privacy regulatory user experience and deployment concerns of blockchain without compromising performance or security join the elastic Network today at ZK sync.

iempire thanks to ZK sync for making today's episode possible Geet is a firstof its kind dpin protocol that's revolutionizing satellite navigation Services they're actively generating onchain Revenue that's growing 500% year-over-year by providing Precision location services that are 100 times more accurate than standard GPS on Empire we always talk about finding how crypto can power completely new business models and they're a perfect example of this they're already trusted by over 30 Enterprise customers across Industries including Automotive agriculture construction and even robotics the network is powered by its native token

geod and easily mined with their satellite Miner by setting up a base station you can get involved with this groundbreaking web 3 ecosystem learn more by heading over to geod net.com or just by hitting the link in the description of today's episode the best trade in crypto has not been funding or basis or you know trying to clip 11% or something it's been going long coins that 10x that's the best crypto trade um even considering all the volatility and the pullbacks that that is the best crypto trade the how do you think about the fact that I I'm putting quotes around this for listeners like Outsiders maybe don't know the narratives that drive the industry they

don't know the crypto Nativity let's say you're looking at like um I don't know the move ecosystem youve got movement and sooie and Aptos an outsider might say I don't know I'll pick the fastest one an Insider knows the games the teams that kind of stuff how do you think about like I don't know how do you just think about I think yeah one of the the last conversations that we had when I was on here was about this concept of like suppressing volatility and and the benefit of doing so in terms of unlocking new capital I think the idea is like 10x thing being the best trade you know that doesn't conform anywhere close to how most people the Mandate they have to to invest money and so it's important to recognize that not everyone

has the risk tolerance of Jason Antz um and you know some you can't lose more than 3% or 4% or 5% or you know the things have to be purely volatility adjust your returns for which crypto doesn't always screen the best so I think that you know yeah a mature Market is one where people have different allocation preferences and and they end up doing different things uh which is a good thing that's a healthy thing I mean right now we have a market which is not INE equally brm because so much money's Flo in to try to get the 10x and then there's no one for them to sell to because there's no one else who has a mandate to do to do anything else that maturation is not going to be a quick process but um uh a feature of it will certainly be large players who are just

doing various versions of Arbitrage or funding rates like if you think about where's leverage going to come from this cycle to the extent that the cycle still has run on it um you know this basis trade can be an important source of that uh and so you know that may not always be healthiest in every respect but um there will be different people doing different things Jason I was goingon to say like we always talk about the folks that buy a token or full port into a token and then they 10x that but I think there's probably an equivalent number of people that that buy a basket of stuff right like that maybe had an eth bag in 2017 and decided to buy a whole bunch of icos that didn't get a bunch of 10xs across

the portfolio and I think we always talk about the ones that get their 10x on one token but like there's a lot of people I think that get marginal returns or even like negative returns by doing too many different things and it's like I think part of it is like it's easier said than done um and I think you know one of the things I TR to do is sort of just look across the space and say what are the most likely 10xs and how do I generally try to size them so that even if a few of them work the net portfolio should work yeah yeah it's funny I I actually think this is the first time the first cycle where crypto natives did not really win like if you looked at the last cycle it was like I don't know if you just like bought some nfts and you

bought some def5 things like a and Unis Swap and maker and you bought some like l1s and you bought some l2s you kind of made money on all of them honestly L but this is the first cycle where you I mean you could have had a basket of 10 things and nine of them are down 80% and maybe maybe you caught hype or you caught Soul or you got you know whiff or something like that but yeah you could have could have lost money go um I I think this is something kind of wanted to discuss today so I'll jump in on that I mean I I I think we should be careful making terminal conclusions about what this cycle has like you know there's certain certainly some clear differences between this cycle uh and last one but I see a lot of um kind of like reflection as if

this is the end of the cycle and looking you know um saying that you know we're not going to have an allseason or or a period where people might be able to perform in the way that you described um you know I won't make everyone sit through my Ted Talk on on reflexivity again uh but you know as a macr Trader which is something I did for a long time you know the old school macro is trying to understand uh how the flow of money across asset classes can can lead to Cycles you know and there's different levels to that there's like these big liquidity Cycles there's uh economic Cycles credit Cycles but then there's like these more local credit Cycles like in emerging markets and one of the key to these Cycles is the flow of money and credit often plays

a very large role in creating the inflow and outflow of credit but the boom bus Cycles as a result are common because of how procyclical Leverage is and so reflexivity is this concept of this reinforcing relationship between higher asset prices you know stronger balance sheets and more credit let alone some of the other behavioral economic stuff that happen so I like to model crypto as its own closed economy and for alt in particular they're basically never in equilibrium you know Capital flows go from zero or you know to somewhat negative to to very positive in very short periods of time so it's very it's much more extreme than in an Emerging Market where you also have inflows and then a crisis and an outflow so I think this reflexivity Dynamic is is really

important to understand as it relates to the question of alt and whether we're going to have an environment where uh you know as you're saying the crypto native people are able to to outperform because I think if that feedback loop of inflow starts going again then Al you know ALS can basically go back to to going anywhere and maybe it's not going to be all alts you know there's going to be a bunch that are left behind there probably going to be a bunch of new alts um but yeah I you know it's pretty hard to see a full cycle starting tomorrow but I want to be very open-minded and flexible to the idea that if money starts flowing into alts which it has not to date in this cycle and and maybe maybe won't but if it does the market structure is going to feel much

different I I I think it was not an environment where Bitcoin necessarily will be outperforming in the way that it does I think there'll be a lot of new things to do and this this boom bus pattern that we've seen um I think the fact that we haven't seen it is just a reflection of the fact that Capital has not flowed into alts and then you can have the discussion of of will it and and I I I I still think that Capital allocators more generally are preparing since the election to move into the space in a way that they were not before they were not going to move in in December or January they're not going to come in and buy this dip because that's that's not how they act but in this like made a you know um double bubble or whatever you want to

call it something this like this reset that we are now experiencing right now the potential for them to chase another move in the future I do think they'll be more prepared for that and that has the potential to be environment where alts do perform so you know again doesn't mean one should be full boat of alts right now none of this is financial advice but I I remain pretty open-minded to things changing in a way in the future and then Capital actually flowing in a new way and then the crypto natives can can win and you know the people who come in late will probably lose let me let me add some around what you're saying there so I agree with you um although I thought we were going to come and like kind of argue with each other but we're just going to agree with each

other um which is two things like money comes into alt two different ways right uh retail goes directly and buys stuff on Exchange and and you know moonshot or whatever uh and allocators who usually don't open their own coinbase Prime account they would come through conduits like us or from some passive product if you're in Europe um in the US there's not that many passive products you can come through so yeah yeah so I it's hard to predict what retail is going to do I mean I think my best guess is if you ever go back to like things like steamy checks like that's when you'll get the really full swing retail in going to want to speculate on things and who knows I mean like you saw the headlines last month

which was um giving Doge dividends to people right um if take Doge cuts and give it out as dividends I mean I don't know what likelihood that is if that happens but that could be an interesting Catalyst on the retail side on the allocator side I think David's kind of nailed it because those people start to change their mind post elction they're usually afraid of coming in on a big draw down they need to see things normalize and I think two things are probably going to happen one like if you think about last cycle you had a draw down that was kicked off by the FED um and then you had all this hidden leverage right Luna blew up and then a whole bunch of things from the Luna blew up blown up like then permeated and and caused additional blowups over the course of the following six months but

if you don't believe something like that could happen I.E there is no hidden leverage and fraud and all this stuff underneath the hood then this draw down should stabilize at some point and while that stabilizes I do think you'll have a ton of positive adoption stories that you know people can relate to um so there was a great letter from stripe that was at a couple of days ago their annual report and they talked about stable coins pretty extensively and what they're doing there but you'll see products like that come to fruition right because when I talk to allocators the biggest question they ask me is look I see all just regulatory headlines but like why should I care about this like like like I understand chat GPT and AI because I touched the product but I still don't touch and feel any crypto product outside of Bitcoin so that

answer will become more clear as you go throughout the course of the year and as long as you don't have another sort of like deleveraging cycle I think the flows will come back this episode is brought to you by ZK sync in 20124 ZK sync took a step toward a multi-chain future by transforming from a single L2 into an ever expanding network of ZK chains the elastic Network to onboard the whole world into crypto many specialized chains must be able to coexist work together and share liquidity institutions and Global Financial leaders choose ZK kync for unmatched security scalable infrastructure better onboarding gasless transactions and privacy first design join Over 20 chains

including abstract sofon and Kronos in the elastic Network today behind ZK sync is the ZK stack it is a One-Stop platform for building private blockchains on ethereum the stack solves all the typical privacy regulatory user experience and deployment concerns of blockchain without compromising performance or security join the elastic Network today at ZK sync. iempire thanks to ZK sync for making today's episode possible Geet is a first ofit kind dpin protocol that's revolutionizing satellite navigation Services they're actively generating onchain Revenue that's growing 500% year-over-year by providing Precision

location services that are 100 times more accurate than standard GPS on Empire we always talk about finding how crypto can our completely new business models and they're a perfect example of this they're already trusted by over 30 Enterprise customers across Industries including Automotive agriculture construction and even robotics the network is powered by its native token G EOD and easily mined with their satellite Miner by setting up a base station you can get involved with this uh groundbreaking web3 ecosystem learn more by heading over to geod net.com or just by by hitting the link in the description of today's episode yeah the story can change really

quickly if uh stripe starts moving every payments company uh every payment onto stable coins those stable coins are running on base in ethereum and salana right the the pay the story can change very quickly what do you think about the idea that alts in my mind alts have not run for two reasons maybe three reasons I think one is people realize the games that were being played like the low float High FTV The Venture games that that kind of stuff two is people tried to predict the um they tried to predict the cycle and the cycle used to go Bitcoin flows into eth flows into alts flows into like nfts AK memes so now people said all the crypto natives said I know how this game is played let me just skip

to the end so it went straight to the memes the third might be that there are more ways to gamble on Bitcoin now so if you're retail you can just open up your Robin Hood account and basic I mean just you know play with options lever long 10x on bitcoin you don't actually have to like if alts were your lottery ticket you can play the lottery actually just on Bitcoin now what do you think about that idea um so I think on the uh it's a good list the the the games being played you know that people don't want to um you know everyone's fighting the last war I guess would be the the concept another one would be that it's really hard for people to um you know with those SCS come and do the

exact same thing so uh one of the reasons I think a lot of the existing alts from last cycle some of the biggest names may not perform is something like that exact reason and that will be a difference in Market structure here um but yeah there needs to be some new identity around the bet that people are making in crypto but I don't think that's impossible that that's around alts you know the potential for um uh a large institutional capital infl flow to happen into these names in particular like put the per not put it right there's retail money and institutional money the retail money I think is of a certain scale it's the institutional money coming in uh 20 3040 billion doar in a similar way as last

cycle they would come into do a very different set of things than than it's happened before and uh they might still have scars from last cycle but some of the Innovation on on tokens potentially you know with regulatory Clarity that still feels like it has some legs of making people feel like they're investing in tokens which maybe the more Equity like which I'm not sure is correct in the end but uh have tokenomics which are somewhat more productive and then it can feel like you're making a different bet still probably in in some of the Tok than the old token so again I want to make be mentally flexible that just because like the crypto people have decided they don't want to do one set of things maybe they'll be convinced to do something else later but the institutional money will come in for a certain set of

reasons and uh we shouldn't reflect on the last 12 to 18 months as a terminal state of this Market um and you know obviously that that money is never going to come into to memes you know to be to be pretty clear yeah and I also think retail hasn't come back to the same extent as it did last cycle I think there's a small subset of retail that's come back and you can probably observe that in some of the you know exchange volume data um do you think that's just because they've been burned one too many times or why why is yeah like yeah and I mean it's that plus I think yeah Bitcoin didn't hover above 100K for

long enough it's like I feel likeit yeah no I think I I personally think I think most of retail uh which again I think are are sort of you know folks that um got a lot of steamy money that compounded through the markets last cycle they haven't had the same experience so far um I don't I think the retail that's in crypto is somewhat playing defense as much as we think they're playing offense they're in my opinion they're trading meme coins because that's their quickest way to kind of hit 100x and and solve all their you know pain points in some ways yeah they're not investing I don't think like the investing retail is back and then the gambling retail is back I think you're right I think you're right Dave let's come back to one of the I think the the the big question on everyone's

mind it's like if you could only answer one one question in this podcast it's is the cycle over it's like that's the thing I think everybody is thinking about is and by the way not just Traders not just investors not just Traders you know every founder I know in all these founder group chats are saying oh you know I was going to raise later this year should I raise should I race and raise right now at maybe a lower valuation so I can keep my business going like everybody is thinking about this question so maybe just expand on your idea of like where we're at in the cycle are there still is the four-year cycle still a thing um Dave maybe you can start in Fr off I'd love to hear your take on this too yeah people have different ways of uh measuring a cycle

which I think requires some some Nuance I mean you have these like crazy people talking about Bitcoin having day like 500 or whatever um but you know there seems to be some progression here which is similar as in the past where Bitcoin has pulled a bunch of things up and then the question is can that momentum be catalyzed into other stuff I mean I think if you're measuring a Bitcoin specific cycle we may or may not have much further to go in price maybe still in time um not bearish Bitcoin by any means um but like if you were to focus just on the altcoin part of the cycle which is either just the next stage in the entire cycle or I think for a for someone who's focused

on convexity and upside in asymmetry it's like if you just were focus on that part of the cycle where those sorts of returns are possible you could say it hasn't it hasn't even started and so then the discussion is like will it start you know if you go back to Capital flows money has not flowed into the space yet you know a cycle is money flows in and money flows out often times the money flowing out is as perov mentioned credit Contracting very quickly block by sell cus but and like that's the intense selling which can lead to this depression on the other end but I don't see an inflow which has happened yet which makes it seem very premature to to specifically ask the question of is the cycle over as it relates to to altcoins um and you know I I think it's like it's very you know

right now it feels really bad feels like there's no momentum and anything like that it's hard to find exactly how the Cycle's going to start but I I I maintain that uh if momentum were to reset and and start to go in a positive way and then money started to flow in in a way that it hadn't that's the beginning of the cycle uh and so that's why I kind of try to add Nuance to the frame here because again if you're talking about like the fouryear cycle then yeah it might still or like use this baseball thing it could still be in in time like the seventh or eighth inning but that might only be the inning where the next stage where all coins perform actually starts and again it may just it may never happen like Bitcoin could just lose momentum and the money

may not actually flow I mean I I you know not Financial advice tend to think it will um but I think it's sort of the wrong it's like a premature question to be asking I I also think like look we might be in a world where we get micro Cycles in different pieces of the market right so um if you think we've kind of tapped at the number of people want to gamble like that's it is what it is that's not that that world is not growing right like the people that want to do sports betting there's a certain amount of people that want to do that same thing like people want to trade memes and like just gamble there's a certain amount of people that do that so let's say you tap that audience out then the audience that's left to come are going to buy

things that they think are useful products that there clear value and it can gather mind share and attention and has a good responsible good founder you can trust the whole thing like if you think that the next audience to come are the people that will buy assets like that where good assets they can buy and sleep at night type people then you will get micro Cycles in those types of assets because of like ual product Market fit yeah I think the yeah the micro cycle thing is is certainly another path and one that would feel distinctly different but it's the I think that the part of that question is like do we have are we just going straight down for the next six to nine months with like a you know minus

80 from here or like if you were to measure it from the uh something like the peak and and and that feels very very hard if you haven't had the inflow yet so the way I would differentiate between a mega cycle and a and a minicycle is it's more about like how much money flowed in on the way in which then I have very boom bust models for this asset class the more money comes in the more money that can come out so yeah it's like right now maybe it's only many cycles because only like Trace Amounts of money have flowed in putting Bitcoin aside I'm trying to really focus on the altcoin side of things of course money can come from Bitcoin into this stuff but yeah you can't have a major cycle outflow if you haven't had major cycle inflow so you

know a good Trader will just kind of respond to things how it evolves I'm open to minic Cycles or major Cycles but it's hard to get the outflow if you haven't had the inflow I guess would be the one David I'll give you the I'll give you the outflow though right the outflow is the 40 plus billion dollars of VC money was poured into preed seed stuff in 21 and 22 and those guys those VCS haven't raised another fund most of them since and they need to raise their next fund and so as they get vested they're going to sell because even a small markup and DPI is better than than no DPI because they have to they got to raise the next thing right so that's that's your outflow yeah and that feels um that feels like a like if

you were to measure the the supply and demand of altcoins for the last year that you know without inflows that's been this steady headwind that has led to you know really really um uninteresting kind of like arguably negative reflexivity price action uh we saw something a little bit different in and around the election where there was actually some leverage that built up and then came out very quickly over the course of this month that's like a real outflow I would say as opposed to just kind of like a trickle of an outflow which makes it hard for things to perform um I would say going back to 2021 it was probably block five cell this unsecured borrow that was re hypoth at around the

system which led to something really dramatic that's that's like that's a that that was an inflow which was retrenched very quickly and the pattern of that is just different than what we're describing with with these VCS I would say who you know they act in a much more measured way and the unlock schedules are more gradual so that it's one of the reasons why the thing may just never get off the ground but I'm not sure those guys will sell it all the way down to you know another down 50 from here Dave you talk about reflexivity what is the c list that kicks off I think of like uh reflexivity as just like a snowball where it's like this snowball starts rolling down a hill it gets bigger and bigger and crazier and crazier and everyone grabs onto it and wants to be part of the snowball

rolling down the hill what is um what is the thing that pushes the snowball down the hill what is if because I I thought it'd be November right I thought it'd be Trump getting elected that leads to good regulations which leads to institutions starting to allocate which leads to companies starting to adopt stable coins The Narrative gets big and like boom you've got a big picture that's still my my best guess so there's like the Tactical question of how do we get there from here but big picture I think I believe in what you said quite a bit and the point I was trying to make earlier was like the idea that Capital was going to flow in in December and January was just wrong so to the extent that a bunch of Leverage uh built up ahead of that you know 10 billion dollars of Leverage

whatever we think the number actually was uh that was vulnerable in the interim before the money actually came in so it was like leverage front ran the idea of that it didn't happen you know we basically uh reversed that entire move I'm still not sure that view is wrong you just have to be on the same time frame as the large as the large allocators now how do we get there from here I think there's a process because right now momentum is negative like you can kind of think of as reflexivity as uh being the dynamic underpinning momentum and so right now we're going from like arguably negative reflexivity to to one that's positive um so I I think that's a process which will take a bit of time and then you know it'll probably be a set of catalysts I mean it

could be some really great ones but it may just be some ones that initially are kind of small it could be a salana ETF you know no view on when or how that's going to happen but you know then the idea is that if you can flip momentum The Snowball Effect as you described actually starts working it doesn't have to be something major as like the Tactical Catalyst but the big picture of the election I think will fuel quite a bit of the dynamic supporting this allocation process um so it's still big picture very very important yeah my sense of this is that the thesis is still completely intact it's just that it wasn't like institutions woke up on you know the day after the election and said oh great now I can start allocating to these are

boomers right they take their holidays you know take like three weeks off for Christmas you know like we'll we'll kick off a committee in January okay we'll have our first meeting who's going to do what it's like it's probably second half thing in all cases and I think they made their decision in 2024 that crypto and Bitcoin is either real or it's not real so they're not just it's not like things pull it's not like Bitcoin pulls back from 100 to 80 and they're like oh never mind throwing away the strategy it's like this although it doesn't it doesn't help it doesn't help accelerate anything they will they will chase price but you know that's why it's probably like the initial snowball next time is one they're prepared more prepared to Chase and that's why something which seems kind of like a medium Catalyst within the big picture

bullishness uh can just get things going in a way that it could not in December I was going to say like the thing you'll probably also notice as you get through like the next couple quarters of earnings is you'll see more and more public companies talk about stable coins like the number of mentions of stable coins and earnings calls will just go up and naturally people will be like all right what is this thing why should I care and how do I get exposure to it yeah well said um perov what's your take on the cycle shortterm short-term View and long-term view I think the short term defined as like 3 to six months is purely going to be macro um like as in what's happening with growth inflation fed Cuts QE

QT tariffs all that stuff right and then those are things I don't particularly have a strong Edge in I don't try to predict but I think it just seems like that is going to dominate flows risk appetite all that good stuff so if you think if you're kind of on the positive side of that you know if you have a positive view on those things then um then then you know you'll have a good time in the next few months you know the opposite is true as well so I don't think crypto will live in an island for the next several months I think it's going to be driven by that uh I'm pretty optimistic on the other side of it especially on the side of stable coin legislation um I also think you don't necessarily need a market

structure Bill to pass through Congress to start to see movement on things outside of stable coins because I think thec and cftc can through rule making and through no action letters allow things to happen and and you will see more things happening there um it just makes too much sense so I think all those things will take time I think it's like a second half of this year story so I could see next three to six months being very choppy and people get chopped you know people try to trade it get chopped up whatever and then things look a lot better in the second half yeah we have all sorts of evidence over the last month that behind the scenes things are progressing uh within and around the market regulators and banking Regulators

so um I think all that feels firmly intact hey everyone earlier in today's episode I mentioned Petra a top non-custodial wallet developed by apps labs they just launched NN a new feature to access defi with just one click earn lets non- us users deposit usdt directly into Aries Market's lending pools to gain interest and rewards and manage it all directly from the Petra wallet Petra earn was designed to make dii more accessible for everyone you can manage your balance claim rewards and deposit directly from the app this is of course not Financial advice participating in defi carries risks to learn more visit

petra. apppp earn or by hitting the link in the description of today's episode hey everyone Jason here earlier in today's episode you heard me mention the weekly CIO Memo from bitwise in an industry as hectic fast and complex as ours it's incredibly hard to get an easy noons stream of what's actually moving crypto the memo comes from Matt Hogan bit wise's Chief investment officer he's been on the show before and he has this amazing ability to take the most complex topics and break them down with Clarity trust me on this one the bitwise weekly C IO memo is really worth the five minutes of your time check it out at bitwise investments.com memoire or just hit the link in the

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future of connectivity to learn more follow wallet connect on X and telegram or visit wallet connect. Network to stay ahead of what's next I think on the last episode you said we it's pretty you can't out macro the macro people right so you came from the I think it was like the interest rate swaps world and then you're trade you know running some books at different like hedge funds and stuff like that I forget the exact background but you know you're trading against all the big macro people it's tough to out macro the macro people but you did say it's pretty easy to out macro the crypto people so what's your what's your sense of just macro over the next several months and how how crypto folks should be thinking about it yeah and I it certainly feels like

the it's like the more attention that um like if you were to track the amount of macro discussion on crypto Twitter or something it's probably like a counter indicator we we can actually see it because we have this forward guidance podcast uh hosted by this guy Felix and actually when the like right now downloads are ripping because everyone's like it's super like a bunch of fear in the market like macro I just think of as bear porn it's like it's literally just people love to be like sell it all like go to cash you should never you should really never listen to a a macro Trader don't say that great podcast they're always way too bearish uh well You' say like if you had if you had such great

calls you wouldn't be doing podcasts all day right yeah well what are we doing here I don't I'm not sure um but I would say uh yeah to me the you know the the macro matters at the extremes I I have I model the Clos system of crypto as as very self-fulfilling and and so it's not like where did you know the you Michigan um consumer confidence survey come in today and you should trade crypto based on that uh it's mostly about is there going to be some large macro event which can catalyze uh the self-fulfilling nature of crypto to start a new cycle to perov point or or you know to to see to have an outflow if we had an inflow or you

know otherwise so that's kind of the bar which I like to focus on things and I do think it's it's hard to have a a strong view on on where we're going because there's so many cross currents right now and so I wouldn't um uh there's a lot of people with with stronger views than me actually uh I I'd say I'm most worried about economic weakness as it relates specifically to to fiscal and there's a few different channels on on how that could happen it could be because of Doge or it could be uh actually because of um some of the budget stuff that happens later this year but I you know I think um what's interesting is the way the budget math actually works uh there's this concept of fiscal impulse so it's like the

second derivative of of the deficit which matters for growth which is a first derivative of activity so so basically if the deficit goes from 6% to 5% you know that's commencer that's a 1% drag on GDP so it's not like if you run the same deficit as last year uh uh it it's no new incremental activity from last year if that makes sense so uh the idea that the deficit could go from where it is now to 0% is obviously just a disaster for growth so you know crypto people are like so um focused on deficits because I think Bitcoin played a large role in onboarding a lot of people to crypto where there's this focus on eliminating reducing deficits and

people celebrating the Doge thing but just from a pure macro lens um if some of these views are correct in terms of what it's going to accomplish uh it's obviously going to be super painful in the short term yeah how do you guys think maybe flipping from cycle conversation to like specific assets I'm sure you guys can't like talk about what you're buying and stuff like that but but how do but how do you think about like what to buy and um you know this Market's this Market's funky right cuz like you know some things are up Souls down 50% and Bitcoin so maybe let me start with actually one question Bitcoin dominance is at 61% do we end the year higher or lower for Bitcoin dominance go David you go first now nobody wants to talk when we

get into specific predictions yeah lower I'll take a prediction I think lower I think it's lower I think like whatever if you uh if you believe that altcoins um have the potential to go through a capital inflow LED cycle then of course it's going to be lower so probabilistically I would put a a greater chance of that happening than than not happening later this year so so that's true I mean I do think there's this uh perception at at this late in the stage of the cycle as measured of like there's the Bitcoin stage of the cycle we're probably in time at a pretty late stage of that where there's a very strong belief that Bitcoin can can be

the only thing you do in the space which feels very vulnerable to fomo making people feel differently and then a rotation out of Bitcoin into the rest of the stuff and then obviously like if you take a million dollars out of Bitcoin and put it into token 143 that that has like 20x the impact on token 143 and so it can really help fuel uh a Bitcoin dominance move lower even if Bitcoin doesn't go down like you know money comes in Bitcoin Bitcoin still grinds up to 120k which may not be a bad forecast over the course of this year and then if if the the money is fing into the rest of the stuff directly in and out of Bitcoin yeah Bitcoin Doms can go down quite a bit it's a lot of money that like despite the point just one last thing the point I was making earlier

about people doing the basis trade having different preferences I think there's a lot of money holding Bitcoin right now that is not in crypto to make 20% it's in crypto to do the Jason yanowitz thing 10 extra money or whatever and the best thing Bitcoin has going for is its momentum and so it does feel like very vulnerable to rotating if given a real reason to and Jason I think to your other question sort of how do you think about allocating investing in the space we've kept it generally simple which is let's own the bottom of the stack and let's own the top of the stack right so anything in between I don't really see like doing much in like anything that's too infra like especially in token form is is going to struggle

because the the most the most of the participation in the market today is still primarily retail and and the retail that the sleep at night I'm going to own this thing retail has like a very specific behavior and you kind of observe it from hyper liquid or any of the other ones that performed well last year the one common thread we saw across all of them was great founder like a Visionary founder great Community great product there's some moat around the products that's defensible and that project is able to increase mind share and attention like I think crypto is one of those things where every morning any participant in this market is woke up to like 10 other things that's trying to compete for their attention and capital and you need to be reminded every day

why you're holding the thing you're holding and you want to like continue to hold and maybe add to it right and there are very few projects that can do that while at the same time having a great product some people can play the tension game really well some people can build a great product but there not many people that can do both so when you find the guys that do both those tend to be good investments in my opinion yeah do you think that there's I think there's an idea that the historically these prices have traded on um on narratives and that maybe we move into a fundamentals driven it's kind of become a meme at this point it's like you know fundamental ORS um uh but you know you can kind of build these like models around these tokens and maybe the SEC lets you pass the cash

flow back to the token and boom you've got a nice pretty model that an institution likes what do you guys think about that thesis I mean I think that's kind of par I person it's like a waste of time U but also I think um that that approach still doesn't really work in like trafi as much either right like look at all the value investors that have just underperformed like the big tech stocks the longest time it's because like you know most people like as retail participation in all asset classes is generally increased and like you have in public equities you also have this indexing phenomenon but like in general I think more retail approaches it as like I like my iPhone and Apple seems like a good company I will look to buy

some Apple stock right that's they don't sit there and say all right I'm going to go build a DCF right now so I think that whole thing is like some like a a little bit of like the past now I think here's where the fundamentals matter especially in tokens in my view which is if a token can generate cash flows from people using their product and those cash flows can be used to essentially you know do a buyback on the token of some form then that creates a external source of inflow of capital to that token itself going back to like you know David's like outflow inflow model that creates theoretically inflows right so someone uses a DEX they're bringing Fiat to trade on that Dex they're paying fees from that Fiat they brought in that's the inflow and that is being used to

essentially buy the token back you know some buy and burn type thing so again as that as as so I think the fundamentals matter in that perspective which is it creates a new buyer which then results in that token outperforming everything else which then gives other people faith that this token might be one worth holding yeah I think that that probably the the best rebuttal to the current market critique of altcoin Supply would be to move in that way I'm not sure it's great for long-term sustainable economics or whatever but yeah I think like on the fundamental question PR's point is right the the value investing thing like when you think fundamentals you think of like Warren Buffett or something where you know we're trying to um look for

something like a PE ratio and I think the the form of actual fundamental analysis which probably works best here and in parts of consumer internet is people are just looking for Network effects and actually like straight Revenue um you know pre-revenue is better but whatever like revenue is uh uh um can get if it's getting in the way in that isn't a priority but uh one of the reasons crypto has this boom bus pattern is that people are just trying to own a piece of the network which is growing the most and a lot of times the that growth is episodic as a result to price going up and so basically have these price moves up so the network activity increases so people chase that and you know try to play for this to get bigger uh you know still have open

questions about how these tokens should be used to to arrive at something which isn't so boom bust but certainly right now the fundamental work the market is doing I don't think this will change even if you get like 10 more Traders coming from Millennium to to open liquid funds or something um uh is to to do something like just focus on Revenue versus floating market cap I think it's going to be more of the like where the which networks are growing the most in users or whatever metric you want post of the thing was like if you could only buy three assets right now what would you buy and um I try to do that like every six months because like it kind of tells you it gives you a sense of what people on Twitter like and it was the biggest basically the biggest

drop off of confusion between people basically it was like Bitcoin soul and E were like obviously mentioned a lot then it was sui and hype and then there were like 800 other answers that were just a hodg podge of like random tokens and usually like it's kind of you can start to form like a top 20 based on those replies so I've never it was like a massive drop off after those top five um how do you guys think about I like again I know you probably can't say like what you're buying and stuff like that but how how do you think about this question of like what to what to start buying it's interesting I think I think when when we're in um like it should be there should be more obvious answers The Narrative like for there to be uh like you shouldn't own all coins

until there's more obvious answers maybe it's a different way of of putting it and that's like the momentum characteristic here where it's not like you have to be super contrarian and find the answer before anybody else knows it the better trade sort of probability times magnitude would be to wait till the market has more consensus answers and then not feel like you need to play the PVP game anymore the the other conclusion around this cycle is that it's always just going to be PVP but if money's coming in it doesn't need to be like when you buy an Allco it's not because it's not because the only inflow to an altcoin isn't because someone sold another altcoin so there should be more persistent outperformers and if not yeah maybe you should just stick in the majors would be a macro view yeah I think I I do this exercise

with my team so so most times I think we're in the regime of it's already contrarian to being crypto so we don't need to necessarily be contrarian in crypto right like we're in this space it's already contrarian so we're just betting that this contrarian idea of crypto becomes less you know becomes more mainstream so that's starting Baseline then we do this exercise where we say if there's three things you can buy and not look for the next two years what is that and oftentimes that doesn't really change that much and we all kind of arrive with the same answers because we all kind of gen like if you just close your eyes and you're like I can't touch this like we all will probably answer the same thing um so those tend to be like sort of like core Holdings for us and then they periods of times

when like there are like these as I said micro cycles that happen right so in Q4 of last year you had the crypto AI cycle and we see a micro cycle happening we generally approach it with there'll be great shorter term trading opportunities where there's a ton of upside volatility and can we do some pattern recognition and capture some of that upside volatility and again just recognizing that like this microcycle might end at any point because a lot of it is you know vaporware and and things get overdone so right now I don't see an obvious microcycle so we just sort of focus on long term yeah yeah we don't we don't do the short-term stuff necessarily right what is your job just to tie this together sorry in the last because this is sort

of the conversation we having just a few minutes ago which is is there is it micro Cycles or is it big cycles and to me it's not like deterministic but like the if there's a greater amount of money coming in I think there will be things to do that aren't aren't micro Cycles like one day cycles or even one month Cycles like the AI agent thing so uh I want to remain pretty open-minded to the open the opportunity set shifting um some good sectors would help to reinforce the narrative to bring capital in but that's how the snowball Works brov what's your job is it to pick 10 to 20 tokens and you're trying to 10x like a couple of those is it to like do maybe I think what Dave was trying to say earlier in the episode which is um

upside but in a volatility range like what what is your how do you think about your job so I started with like you know who's my customer right my customer are the investors in our strategy um and then why are my customers taking my product which is the thing I do it's because they can't do this themselves and they want exposure to the space so um so so as in I say the space I say to folks you know crypto today is like a$2 trillion dollar asset class give or take I mean if you take Bitcoin and and stable coins out of it and even ethereum out of it it's come something like 600 billion or 650 billion and ultimately the $650 billion asset class is trying

to replace Global equities and Global fixed income over a very long time Horizon it will just take market share from those asset classes so the upside if the thesis were to play out is pretty massive and again that's all outside of Bitcoin do you want exposure to that if you do want exposure to that do you want it in you know sort of early stage Venture form or do you want it in liquid form and I think most people should pick both because I think there's great opportunities in both and and so if if these people have made all those choices AKA my customer um then my job is to give them the best risk adjusted returns so whatever that does that yeah Fair um Dave on the last time you were on here you said uh crypto is well you usually

in liquid markets you have a lot of efficiency and crypto is really interesting because it's very liquid but also very inefficient is are there any like um obvious inefficiencies you see in the market right now yeah I think there the the the greatest I mean there's like a lot of short-term inefficiencies I think that that requires a certain amount of sophistication and Technology to apply to them and um there's some pretty strong groups focused on on those uh the inefficiency I like discussing and is very obvious to me is related to the idea that most people in crypto are just doing some version of the same thing all the time so um you know a a venture capital approach certainly is just

trying to identify long-term winners but this concept of liquid Venture is also just trying to basically pick uh altcoins the entire time and to me there's uh a very specific time in a place to be trading all coins basically the Within These different regimes in crypto the boom bust and the period in between and I could characterize those by the nature of reflexivity you should just be doing something different like in each of these periods and the ability to rotate with from one regime to the next to rotate your portfolio uh in most asset class there's no edges to do that anymore like this old school macro approach of just trying to kind of uh find good convexity and rotate into those things you know that that doesn't

really work anymore in some part because there's so many different people trying and in crypto you have mostly people focused on like the next s seconds and then you have people focused on the next 10 years and not a lot of people in between re repositioning so I like that in efficiency um I think it creates quite a bit of opportunity for those who are focused on an old school macro time Horizon I'm here maybe we can end actually with something that has nothing to do with the prices of any of these things but actually it's something Dave you talked about on the last episode which I keep mentioning folks could should go listen to that um with Jeff from from bitwise but Dave you mentioned there are no um there are these superheroes of like macro investing and of uh hedge in the hedge fund World

there are these like superheroes they're these superheroes of the uh Venture space in traditional like web 2 investing and stuff and there aren't really those superheroes yet in in crypto and I think you T when I when I think about what you think about when you think about those superheroes it's actually has nothing to do with finding the right prices or anything like that it's co identifying cognitive biases talking about you talk a lot about like what am I missing what are my what are my emotions when I'm making this trade why is that the it's something that no I've never no no one else on you know five years of Hosting Empire podcast has ever talked about their cognitive biases their emotions and maybe that is a a signal of where the market is undeveloped but can you just talk about that yeah no I think I mean to be clear

I think there are some some people with excellent skills in the space on the Venture side um crypto you know that deserve quite a bit of recognition for uh performance so far I think yeah the the thing that um we haven't had a lot of quote unquote superheroes people who are very in tune with their biases and are able to use psychology as a strength in this market which is the skill I would say most inherent in a good Trader um you know I think it's like we it's sort of saying this the same thing as the last point about they're not being any focused on this time rizon I think

in this market in particular which is like the double black diamond of trading because of how it seems most real at the top and the biggest scam at the bottom and you know there's you have months like February of this year I think it requires a very healthy set of psychology and the only way I've ever seen that being developed is through a long career of trading you know it's like you just develop scars you understand that you can be psychologically weak at times you make a plan which acknowledges those weaknesses and incorporates them as part of your strategy to make sure that you're not putting yourself in in a potential sign of weakness so a lot of the the asset management on the trading side I don't see as having that experience there definitely are some people that are better than others in doing it not

everyone's made to be a Trader obviously uh but you know I believe that it's something that's you know if you look at commodity hedge funds it's just as volatile and the people running those funds have a certain skill set which uh is pretty unique so how do you think about emotions when making these trades like is there like do you have like a process you follow or I mean everyone's everyone's different so it really comes from a recognition of like uh when you when you think about all the potential things that could happen really solving for the one which you would be psychologically the weakest and either having a plan now around what you would do in that moment to kind of reduce the um the intellectual weakness on your decision- making or just set up

something set up a way where you don't you you don't enter that that position but it's really hard it's like you know some people uh if if the market goes 50% against them it's it you know they want to double down some of people want to want to get out and maybe you're supposed to be staying in you know so so designing a process around around that and you can figure that out for trading you go to the craps table and see you know what happens if you go back to the ATM after you lose all your money you know and whether that's a good decision or bad decision but uh having actually those experiences from Trading uh becomes pretty clear when you do this for a little while yeah perov how do you think about this um no David brings up a lot of good

points I was gonna put David's in words in David's mouth which is he looks at all these widgets and like they're completely unemotional about it which is the right approach I I was actually having a version of this conversation one of my team members recently which is him and I are very similar in the sense that um and i' I've slightly evolved and I'm trying to get him to get there as well which is we either love ideas certain ideas investment ideas or we hate certain investment ideas and it works in your favor when you love an investment idea for the right reasons and it goes against you because it gives you the conviction to add so there's a positive to that the the negative on the other side is like when you hate idea you often might give up on a bunch of

returns so um one of the things that I've worked on for a long time is is like when I hate an idea I actually want to go spend more time on it to understand why I hate it and maybe I'll end up loving it or at least liking it or realizing that it can generate a return I saw you do this last week with the with Mike yeah yeah he trying to learn yeah yeah I was just trying and I think that like just like that's that's that's been the approach we're taking which is like when when we hate something let's go let's really go spend time there because there there's something to explore and again just reminding ourselves that like we're in this for returns and not to be like you know tribal and emotional about something yeah yeah yeah people can

start there with respect to good psychology is not making this your entire identity that does not lead to rational thought well I think a lot of people are reflecting on that comment saying tough one for me but yeah yeah Mr Mr crypto over here yeah yeah there you go for no Dave thanks guys I appreciate the time all right see you later thank you [Music]