How to Trade Crypto Cycles with Raoul Pal

Transcript

Between what's happening in technology and crypto, this is the greatest macro trade of all time and it's not over yet. It is economically the most disruptive force we've ever seen. It is a nuclear bomb when it comes to deflation. People just have no comprehension how big this thing is. How do you allocate your capital between the two? This year it's been technology stocks. Last year crypto massively outperformed. So, what do you hold over an extended period of time? A bit of both. This episode is brought to you by Zashi Wallet. You'll hear more about them later in today's episode. Nothing said on Empire is a recommendation to buy or sell any investments or products.

This podcast is forformational purposes only, and the views expressed by anyone on the show are solely their opinions, not financial advice or necessarily the views of Blockworks. Our hosts, guests, and the Blockworks team may hold positions in the companies, funds, or projects [music] discussed. Welcome back everyone to Empire. We have a very special guest. Couldn't have timed it better. Uh Rahul Paul, welcome to the show. You need no introduction. You've uh obviously run Real Vision. You've super sharp on your macro takes, very involved in crypto these days. Uh what's going on?

>> Well, there seems to be quite a lot going on, but nobody can explain it. You know, there's, you know, where we are today. What day are we? on the 20th of November talking today and markets puking and it's been in that weak trend. You know, I've been looking at this for a while and and there is this mismatch of liquidity that's happening at a macro level that's causing a lot of the issues we're seeing right now. And that is, you know, without getting in too deeply into the weeds of it, basically because of the government shutdown, the Treasury built up its general account and has not been able to really drain it yet. And there's no offsetting buffer because the reverse repos drained and we've got QT going on. So we've got this kind of sucking of liquidity out of the system that really has affected the highest

risk assets further out the curve and crypto is is that technology has been kind of volatile because of the same reason but it's been held up somewhat by buybacks and also held up by the general generally I think 80% of all fund managers were below benchmark um because they'd missed tech because all the way through they said tech's a bubble AI is a bubble AI is a bubble and they've missed the whole move and so that's dramatically affected performance. So they've been performance chasing which kind of meant that NASDAQ outperformed for a period of time but it's this liquidity thing. Liquidity we found in our work at global macro investor using the total global liquidity um explains 95% or 97% of NASDAQ's price movements over time since 2012 and 90%

of bitcoins. So it is the most single most dominant macro factor and most of the explanations lie therein. >> Yeah, look it's a great read. I mean I want to go front and center. Nvidia reported earnings. You know Jetson Huang is equally as important as Jerome Pal these days. They beat earnings. Um expectation was 54 55 billion. They came in at 57. Guidance for next year was very strong. Stocks down today. question in investing is how much are things priced in like the MAX 7 most managers even though they may have been underperforming. It's been still a pretty good year for most folks. Are we just in a general deleveraging riskoff cycle? People going into the holidays,

they want to take profit, you know, collect carry for the year or is there something else going on in in a 2026? Is is is there a broader kind of macro concerns that you have? So on the macro side, the business cycle which is the main kind of driver of of everything has been very subdued for the for this entire cycle and that's been driven by the high rates environment and the liquidity environment. Um if you on a forward-looking basis understanding all of the fiscal stimulus that's coming plus um um liquidity stimulus that's coming and the probability of rate cuts coming the the chances are the business cycle is going to be a lot stronger

going into the election year. Don't forget we've got Scott Bessant running the Treasury. He's an ex- hedge fund manager. He understands this game very well. Um, so I think on a forward-looking basis it looks great, but what you've got is this liquidity air pocket that means that there's not as much money around. So the people's propensity to take money off the table is higher. People are nervous. I mean, we've seen the fear index in equities be down at like eight, >> which is insane considering the market's barely off the highs. So it shows you there's some pervasive sense of fear.

And so any movement in the market kind of gets exaggerated very quickly. >> Um and I think you know after the nidi Nvidia earnings people just want to quickly take money off the table. And as you say next week's a US holiday week things start calming down as well. And if you've had a decent year you do want to protect it. >> But normally end of the year is usually pretty strong and considering they've got to drain somewhat of the TGA to pay for all of the employees they furled etc. there's a reasonable amount of liquidity that will come into the economy over year end.

>> Yeah. Before we jump into 2026, I want to get your read on crypto. You talk about it it being a pretty directly correlated to flows. Um, you know, Bitcoin has erased gains for the year. The stock market's still up. What's going on there? I mean, do you worry about, you know, that is is crypto just reacting before and ahead of the stock market or is there something more kind of specific to the asset class? No, I mean crypto there's two different levels. One is go back to its liquidity. So liquidity has hit crypto more than anything else. Um and that is the the Fed net liquidity that has shrunk. So it's hit that. But then we've got OG profit taking we've seen. So um that continues. Uh and that kind of makes

sense. and you've got this pervasive opinion that the four-year cycle is what it is and therefore you must sell in November and go you October, November and go away and come back in, you know, 12 months time. So that there's that pervasive feeling and then there's I think somewhere there is some damage that was done during the the October the 10th flash crash in crypto. Now, I don't know if there's a body there, but my guess is the balance sheets of some of the market makers are impaired. So, it means that they can't provide as much liquidity as they have done, which exaggerates price moves. Um, I think that probably makes sense. We're also seeing some unwinding of of the token

holdings by the DATs because of the construct that they've got, they buy back their equity. So, you know, that's ugly and that will probably continue if price action continues like this. So, you've got this supply going on, less liquidity around um because of the Federal Reserve and the Treasury and less liquidity in markets because of impairment after October 10th makes it just feel not great. >> Yeah. Do you feel like you're getting paid enough to go far out in the risk spectrum? You know, crypto is at the farthest end of the risk spectrum. You know, it's been tough in crypto. Even though, you know, if you weren't in Bitcoin or a select few names like Hyperlid, you would have really been down for the year, right? I mean, some of these alts haven't even recovered

alltime high. You talk about traditional hedge fund managers, you know, kind of catching up to the max 7. How do you think about that into, you know, just being in crypto? Is it just only Bitcoin? Is there a room in a portfolio for for alt and something else or is it just not the right time to be going out and far in the risk spectrum? >> So for me it depends on your time horizon. I mean I don't look at it in year on uh year-to-year gains. You look at it full cycle gains. Full cycle for me is the business cycle. So it's not necessarily the four-year uh you know Bitcoin cycle. So you look at the the gains over the cycle and over time they compound. So here we've had a year which has been pretty lackluster. It's gone nowhere at Bitcoin level, but at Bitcoin

level means that everything below that has underperformed. And I get it. It feels terrible. You know, I've been lucky enough most of the way through. I mean, I haven't been in Bitcoin all cycle. I've managed to outperform it via just having the right ass allocation. You bought Salana at the lows and then switched into Sooie when it had its run. Um, and it's given a bit back, but generally that's worked fine. Um, I'm not a big fan of going too far out the risk curve. um you know I have this whole don't [ __ ] this up thesis and a lot of it is every time you think you're really being smart out the risk curve your probability of success is pretty small so I tend to stick with layer ones generally um because it's definable I understand the metrics understand what

drives them um and then you know if I look at my my wallet of shame from when I've allowed myself to FOMO in on stuff you know I allow myself up to 10% my portfolio to do that I probably never even get to 10% % because it's just not my comfort zone. If I look at it, every single trade I did lost money. >> What's What's been your worst trade? >> Um I the um I think I've lost near 100% in smoking chicken fish, which was like one of the memes that I held and I had a reasonable size position in it. Um and I thought I can't get out of it because it's just going to nuke the market anyway. So I wrote it up, wrote it down.

But you know, I treat it like a call option. I knew it was the the highest probability chance it was going to be a zero. >> But, you know, you also don't really understand markets until you participate in the elements of it. You need to get a feel for what it's about to understand what memes are about, how DeFi works, that kind of stuff. So, to have a bit of capital that you know you're going to nuke >> to learn is a very good thing to do. >> Yeah, education as an investor. I it's a good way to I've certainly made my fair share. Talking a little bit about L1. I mean the the key the real key thing and I tell everybody to do this is like that should only be 10%. or less then it it doesn't matter and just leave the rest

to do its thing >> right yeah I certainly agree with that talking a little bit about L1's look that that thesis that trade has been very wild since the inception of crypto like the infrastructure layer you know if you were early in Salana early in Ethereum early in sooie say pretty much any reasonably valued and I say that with air marks just because you talk about metrics I would be curious to understand you know I I put out a blog post over the weekend talking about like how do we value these things and of course the bare market sharpens the mind right and and so I'm curious how do you think about investing in in a layer one even like Ethereum at 400 billion it's only cranking out one to two billion of of fees you know two to 400 times revenue

seems widely overpriced certainly not a value buy in my mind um there's people that are calling you know Ethereum is going to go to trillions I don't really see it um h how do you think about that inf like that L1 L2 trade that you talk about. >> So I think using uh discounted cash flow models on crypto misses the whole point of what they are and I think it's a it's a fool's errand to do so. These things are um are priced off metaf's law. Same as Amazon was, same as Google, same as Tesla, same as pre meta. They all traded at massive valuations in early stages because it's not about the cash flow. It's about the growth of the network itself. the the value that the network absorbs. So how

do you value at the simplest level? How do you value um a network? It's the number of active users and the total value transacted per user. So that's the way you can normalize every network down to that. And when you do so, it actually makes sense of all the valuations of the chains. It's actually really interesting. There's a few outliers within it. Um things like Kadano will be an outlier um because there's very little economic activity on the chain. There's quite a lot of holders but they're not super active. But generally speaking, sort [snorts] the networks by that it works perfectly. So once you understand that, you know what grows the network. It's adding actual real active users that are persistent over time and the amount of economic activity. So if

you think of a system like Ethereum, Ethereum you also count the layer 2s because the layer 2s are activity built on the same network. And so once you start looking at this you understand Ethereum's value. So the question is with Ethereum is will more value be transacted on Ethereum in 3 years time two years time. Probability is yes because of the financial system stable coins and all of the things we're seeing. Are there going to be more active users? not sure because you know it's not necessarily retailbased um and so therefore you can still have the same number of active users but massively increase the amount of value transaction on the network so yeah I think um Ethereum over time probably

does grow significantly in value >> on that point I mean 816C put out a great report talks about the active users on chain that number hasn't really grown as much because you know it's we're sitting at 40 million active users on chain across all networks the vast majority are in the Ethereum broader ecosystem. On that point, you know, casino churn, it's almost like we're valuing these networks um as if they were enterprise recurring revenues. Uh but they're really not. I mean, the casino is very cyclical. And and so again, like I I hear you. Just to put some measure to that, OpenAI likely IPOs at a trillion. It has 800 million users um that are sticky. only economic value

transacted on OpenAI right now is subscriptions. >> Correct. >> That is not that's not a network model yet. They will unleash it and it will go to obscene valuations when there is economic activity happening on the network. May maybe to put a finer point in the question. Would you rather own OpenAI stock or Ethereum, ETH or Suie or say or you know something? >> I would I would rather own a um currently I would still rather own crypto because the rate of growth of the the total value being transacted is increasing significantly over time. And so knowing what we know which is once the clarity act comes we will see a lot more economic activity coming on chain

from the financial system. Okay that tells you there's a lot more juice to be squeezed out of this orange. [snorts] Um while open AI they're going to have to figure out a business model that works um outside of just subscriptions if they want to be valued like a network. You know the reason Google got so rich is because they are truly a network model. >> Yeah. As it relates to monopoly, you talk about Google like unclear. Do you think that these networks like the network effects you have to believe that they have um capture value capture in terms of attention of your Facebook um and the incremental user ads value the L1 L2 value leakage you could argue L2s

are going to capture most of the value. It's like it's like they're capturing federal tax as a state, whereas Ethereum should be capturing the vast majority of the revenue, but it's not. >> Does it does that make the United States more or less val valuable to have lots of states generating revenues and economic activity and their own set of laws? It generates more value. >> It it does. The US federal government captures 30% of the of the tax dollars and the states capture anywhere from zero to 10. So even like you have a city like New York, the New York state captures a lot of tax revenue.

>> Yeah, but you're just thinking tax revenue again. What is the value of the state of California? Um when it comes to it, it's the business activity that happens within the state of California and that's not necessarily all tax because these companies are global. You know, they run their taxes through Ireland and all of this other stuff that they do around the world, but the economic value of California is gigantic. >> Yes. Um, so it is different because you got to look at it like a network. >> In that case, would you rather own, you know, like a real estate in San Francisco? It's would you rather own an application on top of Ethereum like a or some of the DeFi protocols, some of the deepen protocols versus the underlying, you know, L1, L2 token?

>> Again, I'd rather own a network than I would a cash flowing business. cash flowing businesses compound at certain rates of growth and it's it's generally not proven to be the case that they outperform a network. I mean networks have been the enormous breakthrough that we've had since about you know since 2000 from the internet. Um and the ability to scale networks is unprecedented. The value of cruel there's no surprise that all of Mag 7 basically is a network. They're all network stocks. And so I still think that even though it looks attractive to use discounted cash flow models to look at cheapness of DeFi, you just won't make as much money over time because of how a network multiplier works. And I know that's kind of counterintuitive to

most people. >> Yeah. I mean, I think the the other argument here is look, it's an easy thesis to understand. You know, people have done well in the ma, you know, the infrade and if you're fund manager and you were early in that, you would have done phenomenally well. But now you're seeing applications like Poly Market really pop off. You know, it's it's it's probably the most breakthrough application we've had in crypto as an early investor. You know, it's 15 billion valuation relative to Ethereum's 400. Again, playing this exercise of what would you rather own? Again, would you rather own Poly Market stock or would you rather own Polygon because it's deployed on Polygon counter to most people but or or Ethereum?

You know, I don't discount the applications layer and the applications layer of again, I'm going to go back to the same thing. What Poly Market is is a network. Why? Because they're embedding it everywhere on everything. So, you've created a growth dynamic within Poly Market that makes it really quite attractive. Um, so I like the applications layer, but it's much harder trade, right? You have to have a VC mindset. You have to understand what you're doing. Maturity at the applications layer, there's very few.

So, we've got some DeFi maturity, Ave, Uniswap, not being great stewards of capital over time. >> Um, Poly Market's uninvestable unless you're a private market investor. >> Um, a lot of the ones that launch tokens, the token economics nuke them to start with. Um, and it doesn't help. So, it's not been an easy trade to get the applications layer, but as you're rightly suggesting, at some point the applications layer becomes more profitable, the infrastructure layer, but I'm not sure we're there yet. >> Yeah, I'm not trying to overly rationalize to your point like something like Cardano, right? I mean, it has no revenue and you know, there is a mimetic component. I mean, Bitcoin, I think, is quite different and I love your take on that. You know, it's it's pretends to be

digital gold and nothing else, right? doesn't pretend to be doesn't you're not going to value it off of fees and the same with the you know you don't value gold off of fees right non-existent however you know when you're trying to be NASDAQ on the blockchain or the world supercomputer at some point it catches up to you right I mean and and so you have to deliver the question is is the network being underpriced overpriced or fair value versus the activity that's in place generally I found that they generally trade fair value to in general they trade fair value to activity. So then the question is is activity going up or going down on that network over time. Um and it becomes that's the simple bet

which is you know because they're these are networks with tokens the token number tells you the story generally when and last point on this before we move on but when I when you think about like activity and value capture shouldn't it eventually show up in fees like if you have me and you have fees generated like it's directly correlated with the amount of users that number hasn't grown so like if you don't have more users and I get institutions ions might be coming. There is an argument where someone like Stripe is launching their own blockchain. So, does that totally derail the thesis that the network effects you're going to have in Ethereum are just non-existent because it's open >> infrastructure that someone can copy and capture for themselves?

>> Um, yes. I mean, that's a risk. I mean, it's absolutely a risk. It's absolutely a risk with marketplaces and Amazon. It's absolutely a risk with Uber and cars. It's absolutely a risk with everything. So, you know, our job as investors is to assess the probabilities of that risk at all times. >> You know, what what you know, networks that look like they're going to succeed often don't. Uh, and that's not I mean, that's that's our job. That's literally our job is to figure that out is, you know, what is going to be persistent over time.

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>> You talk about 2026 potentially being a good year with rate cuts and potentially more liquidity in the system. Um, when you think about overall kind of portfolio construction, how are you positioned kind of going into next year? Crypto probably is a good part of your portfolio, but on a relative basis, do you feel like you're, you know, getting compensated enough or are you more interested in other parts of the market? You know, just credit, bonds. >> So, there's two parts to this. One is how I'm personally positioned and number two is how let's say the global macro investor or real vision pro portfolio is positioned. You know, I'm more risk-seeking. I'm pretty much 100%

crypto and I'm comfortable with that and I've been that way for years and years and years and years. So, I don't really worry about that. But generally speaking, the portfolio has been split between crypto and tech um since December 2022. So, we managed to get most of the lows or around the kind of lows period and have held those positions through and through. Um, adding in stuff like solar um and a few other themes within it. Um, and because I'm a business cycle investor, that's how I think about about it. I won't really change that until I see the business cycle peeking out. Um, and that's generally how it's worked for me over time is extending your time horizon

actually increases your returns. Um, as opposed to, you know, worrying about the next three months, six months unless you're you're hitting a cycle peak or top or bottom. >> Going back to the business cycle that you keep talking about, like, you know, you look at you hear earnings from companies outside of the AI space, you know, Chipotles of the world that give you a good read on on what's happening in Main Street. It's not great. Sentiment's not great and fundamentals there are not showing up. um how does that compute into your thinking you know um >> it's exactly what the ISM is telling us the ISM survey has been below 50 the entire cycle it's the lowest it's the longest period of below 50 ISM so that's I no real economic expansion

um in history now and so that is exactly the K-shaped recovery because what we've got is this massive capex boom going on in the hyperscalers and the AI space um some government spending and then other than that the economy is pretty flat. Um so you're seeing it everywhere. You know it from everywhere. It's one of the reason why retail haven't come in crypto because they don't have any disposable income. You know real wages are still pretty low. Economic activity for most businesses is not great. Um and this is the thing that Scott Bessant's been talking about is how do you increase main street activity and that is what has to happen. And that's the rate cuts. That's that's taking taxes

away, you know, not paying taxes on tips and things that run the basic services and the basic economy of which most people live in. So, you know, I think you the read of, you know, Chipotle or whatever is dead right. Um, and that is what I think the Trump administration will focus on to get to try and get the midterms through and that I think they really understand this game. >> Yeah. um since most of your portfolio or a lot of it is continues to be in crypto or has been in crypto for a while. Um, you know, we've seen the that phenomenon crop up. Um, there has been some force selling from some dads.

Um, how do you think about that? I mean, could could that pose some systemic issues like continued force selling just given the structure of a lot of these DATs? Was not not not your typical micro strategy. It was just more precarious. Um, what's your read on that? I I never liked the DATs to start with because a a lot of the incentives are not aligned. So really it allowed people to get exit liquidity on positions that were locked up and stuff like that. So that I didn't like. Uh over financialized structures always make me nervous. These look like closed end funds and they can trade at discounts for whole periods of time. But then you got this issue with you know they sell the underlying to buy back the shares and we're starting to see that and I

think you know that can continue in a down market. I think these things trade like per premiums or or or futures premiums. Um so they go they have negative funding over extended periods of time when the market's like this and the dynamics are not great. So you know if we love the runup because of the dats we're buying you're going to love the rundown as they're selling. Um, it's a it's a bit of a mess and um I I'm surprised the market allowed this to happen, but how they allowed it to happen was a was not a great way either because these things were bought by hedge funds.

They they bought the pipe >> and [clears throat] they just took out they'll take a 5% turn in a month, walk away, it's a 60% annualized return. They don't care. But what then you dump it and then there's no there's no bars of this stuff. So then they go to a discount and then these people are then forced sellers. So it's a mess. Should never have happened. >> Yeah. Yeah. You know, you wrap an illquid asset into a a a a equities, it's it's still an illquid asset and it it dries up really quickly. >> Yeah. I mean some of these will end up doing well if they manage to become ecosystem investment funds that have can capture forward value but selling shares to buy more of the underlying cannot just be an entire business model

>> right yeah no that's absolutely true at some point for particular dad a lot of these like forward strategies and whatnot have said we're going to utilize DeFi we're going to earn some sort of cash flow on valid validating or staking a lot of it's not there and you couldn't have sat there and justified any premium to NAV um for essentially a very liquid asset. You know, a lot of these were locked tokens, right? >> Yeah, that's right. Now, it's different if they'd set up VC vehicles that have longerterm time horizons that could add added value on top, but you know, they haven't they haven't added a lot of value yet.

>> Yeah, I think some of the best investors constantly reander their their thesis, right? And as you think about this cycle, we've seen probably gone the all the headlines that you could have dreamed of, right? You have even JP Morgan launching a deposit token on public infrastructure base last week. You have Larry Frink to Stripe to pretty much everyone just enter the space. This idea that crypto is a scam is no longer in question and you know there's only very few people that argue that that discount the potential. What's different? Like what are you rewriting this cycle? uh we characterize this as the institutional cycle. What are some of the KPIs, key things that you're looking at when you're underwriting your thesis again and again and like hey >> well because my thesis is entirely built

on liquidity and network adoption. So that is what I always testing. Um so you know is something wrong with that thesis and the variability around the correlation to liquidity is driven by these other factors. You know who's the buyer, who's the seller and why basically so I concern myself less with that and more observational when it comes to that. But the real question is is the thesis right about liquidity? because if that explains 90% of the price movement of Bitcoin, I need to get that right because it's the single most dominant factor we've ever had in financial markets. So that's why I spend all of my time thinking about that. And then you overlay on top is is my asset allocation right? I.e. is the network that I'm betting on or the the token I'm

betting on, is it having the growth that I'm expecting from it? because if not you you need to have a serious conversation with yourself about you know do you have a bag holder bias do you have all of those things so really I spend my entire time testing those two hypotheses is my ass allocation right and my allocation to the asset class right which is based on the liquidity thesis >> yeah on that double clicking look ETFs have been a huge liquidity influx um it's slow down you know essentially when we saw that huge selloff in October you saw a massive outflow S um does that you know you had record you know you had a lot of ETF flows coming in Bitcoin hits

an alltime high it's down to you know off its high particularly Ethereum has struggled even though you've had an ETF even you have the Tom Lees of the world really go out there and raise billions of dollars do you sit there and say gosh like we couldn't even hit all-time highs we couldn't really break past that for Ethereum And you know even with this you know new mechanism of an ETF and do you do you sit there and question maybe there's something else here that you know again liquidity is there but prices are not moving in the direction that you want.

>> So again liquidity has been relatively lackluster so far this cycle versus every other cycle and that's given us relatively lackluster prices. Um, so I don't really have an issue with that. If I overlay uh, US total liquidity on total market cap of crypto minus Bitcoin, it's pretty much identical. So, it's telling us liquidity has not gone to new highs yet. So, crypto hasn't gone to new highs. And that's total liquidity, not rate of change. Um, so yeah, I don't really it's not something that's concerning me in that respect, I think.

>> Yeah. you know, and also people don't realize that enormous amounts of those ETFs is actually just arbitrageers. So, they hold the spot and sell the the semi futures. Some are doing the per, not many do the pers, but that trade is gigantic. Um, and that's where a lot of the volume comes from. So, the total actual buying by institutions and retail significant. But again, if we go back to the business cycle, people's free cash flows in the normal world outside of tech have not been great yet, right?

>> And so therefore, you can't recycle those cash flows into markets. And so if my thesis and the business cycle is right, we will see that rise significantly. If it's wrong, we won't. >> Yeah. You're basically saying, you know, rate cuts, the Trump administration is going to be very focused on fixing that coming in next year. More cash flow into Main Street. that should really drive like fundamental inflows, stick your inflows to the asset class, not just this re like hedge fund arbitrage game that you've seen in Dats and ETFs. >> Yeah, agreed. There'll be real investment because people have kind of positive cash flow which they don't really have right now.

>> Yeah. And by the way, you overlay the fact that we're in a very positive way positive regulatory environment. So crypto, you know, when you do have that excess cash flow, there's it's not only easier to express your positive view on crypto in the public markets, but it's also, you know, from a regulatory standpoint, you can see more and more businesses, more folks just kind of and we've seen exactly the same phenomena happening in VC markets. Outside of the AI bet, VC has been slow in raising capital. And the reason being is a people are still trapped in previous vintages and not being able to get out.

We're start starting to see that free up, but there's just not enough money around. So, we're not seeing um you know huge inflows from family offices, etc. into VC. We're not seeing it into the hedge fund industry either. And it's the same issue. There's still not enough liquidity around for people to reinvest in the sorts of rates you would normally see. >> Yeah. Just putting it a kind of wrapping up the discussion of the business cycle, what are the main things that you track? you talk about, you know, this manufacturers's index. Any other things that you're really paying close attention to as you think about constantly rewriting your thesis?

>> So, we probably track in real time about a thousand charts of which we break down the business cycle to forward forward indicators, lagging indicators, um, and and, um, and indicators that indicate where you are today. So when we look at we look at a whole bunch of different breakdowns and rates of changes and all of that. So the work we do on this is huge but all the work we do starts with the very top level is demographics is the driver of everything. We overlay demographics with things like debt to GDP labor force participation rate debt to GDP. All of these things show exactly where the economy is and why over the extended period of time where trend

rates of GDP growth are. Then it shows that all of this excess debt is being financed by liquidity debasement of currency. Then you come to okay where you are in the business cycle. What's forward looking for um liquidity and forward-looking liquidity is financial conditions. Financial conditions lead liquidity by about 6 months. Um and that's giving us a forward-looking lead on that. So we follow that very closely. Our financial conditions index is uh kind of a regression of the dollar rates and commodities. uh that leads well. Then we've got the global liquidity. So that's of all the regional liquidities based on both the um the government liquidity and the M2 numbers plus their

um bank liquidity. So we map out all of that. Then we map out all of the business cycle elements which gives us forecasts for where inflation's going to go, where the business cycle itself is going to go, um what's driving those. So we do kind of a huge ton of work on that. Then we lo overlay all the asset prices onto it. So we then look at okay what are the asset prices pricing in right now. So gold is pricing in current financial conditions. So it's actually leading versus um let's say Bitcoin or the ISM. So that we kind of do this kind of multiwork from multi-deade secular trends down to where we are in the business cycle you know >> on a regular basis >> going into the year um you would have

read a JP Morgan report say hey look at some point we're going to mean revert you've had pretty good couple years in the public markets in in you know in crypto at some point you got to mean revert whether you look at the earnings of the S&P you know they're above the historical average that at some point normalizes and comes down. How do you think about that overlaying this? Yes, we likely get rate cuts. Yes, the Trump administration will be very motivated focused election year. How do you um I mean at some point gravity plays its part.

>> So last time I checked the equity market's been in a secular bull market for the last hundred years. So so at a basis there is no cyclicality unless you're a commodity trader. Fact. Secondly is when earnings come down or markets come down or valuations gets repriced. It is always when rates are going up or liquidity is being withdrawn. So it never happens when liquidity is entering the system or or or rates are coming down. So that is the business cycle element of what drives the business cycle is the financial conditions start tightening that starts tightening growth and eventually that happens. We're not at that stage yet. So yes, of course, valuations come back down. Valuations over time keep rising as well, much to everyone sugar in that

don't understand it. But that's driven by the fact that P versus E, the P is driven by debasement. So the as you lower the denominator, the P keeps going up, but E is basically GDP. So if you look at the the entire earnings of the stock market, it's basically got to be GDP growth, right? roughly um and then or nominal GDP P growth but P grows by debasement and that's currently 8% a year on average. So the P of the market keeps rising which is why everyone keeps saying everything gets more expensive but it's actually explainable and you can normalize those factors and it's not wildly expensive but by the end of this cycle I'm sure it'll be more expensive and then you'll get the period of time

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>> I appreciate your long-term investor. You have a great tweet recently. It says, uh, look, you need to follow the don't [ __ ] it up rules. Um, take a long-term view. Um, you know, it is a secular trend. Crypto, it is a new asset class, still very reasonably early. Um, you know, you talk about, you know, these 80% draw downs, which are very normal in crypto. Do you think that we're in that environment where we peaked in terms of Bitcoin, we're going to go down to, you know, 50k levels, 40k levels, or or is this just sort of like a a corre minor correction on what is more of a longer term trend here? like do do

you do you think we'll continue to see these type of draw downs in crypto? >> So those draw downs again are driven by liquidity and bitcoin is the um you know crypto is the most affected by liquidity of all of the risk spectrum of assets. Um so it tends to go down. It's also an earlier stage you know network adoption model like Amazon went down 95% in its first cycle stuff like that. um over time uh networks as they get adopted have less volatility because there's more economic activity and less um and it tends to be stickier over time. So my guess is the next time we have the liquidity down cycle which I think is more likely to be 2027 um we will see less of a draw down in Bitcoin than it was previous cycle and

we've seen that pretty much every cycle that it's had less of a draw down. my first cycle, I think Bitcoin was down 87 and a half percent back in 2013. Um, and then it was down less in the next cycle in 2018, whatever. So, it kind of fits to me that over time, but when you go further out the risk curve, so if you've got a newer token that's smaller, it's going to fall 90% as they always do. Um, so I don't think that changes anytime soon. It's just the question is is are we starting it now, which is what some people think because they think that the fouryear cycle in crypto um is the most dominant factor. And I would say no, it's driven by the debt refinancing cycle. So, it's just two different ways of looking at it. And you know, from what I can see, we've got 10

trillion of debt to roll over the next 12 months. If you're rolling 10 trillion of debt, you're going to need some liquidity to do it. So, in which case, it's hard for the market to go down. What you're saying is it's a business cycle. Don't over complicate it. If you believe that's going to be continue to be strong, crypto should continue to be strong. And so >> at basic level, yeah, if the if the business cycle's okay, crypto is going to be okay. And if they're tightening conditions, the Fed usually tell you like we're going to tighten rates, it's usually a pretty good flag that liquidity is going to come out of the system. So, you know, you can keep it as simple as that.

>> Yeah. Um, how often do you reposition your portfolio on the margin? >> I the last time I changed an asset allocation in my own personal portfolio was 2024 when I switched Salana for Sooie. >> Mhm. >> And then I'd done any other trades since then. um you I've added um I've added risk or added money into the trades, but no, I so I I barely trade. I barely trade. The other side of the equation is I've spent a lot of money um allocating to digital art uh which I is

a long-term investment thesis of mine. So once, you know, when crypto prices are strong, I take some money off the table, put it into long-term >> art holdings, which I think uh are going to be an interesting longerterm investment. That's like a 10-year bucket. But so yeah, I I really really don't trade. >> I used to I ran a giant hedge fund and I traded a lot. And I I I realized when I set up Global Macro Investor back in 2005, the reason I left the hedge fund industry was because it made no sense to be having using a monthly P&L to trade macro risks, which are by definition several years.

>> And so um I went to prove that that is the case. And it's proven to be the case that you just extend your business cycle and marry it um your investment horizon and marry it with a business cycle, your returns compound. Or if you're in a strong secular trend, you don't do anything except buy when the market goes down. >> Yeah. Let's talk a little bit about portfolio positioning because I think that's where a lot of people really screw up in crypto especially, which is you get really excited about this secular trend. It's reasonably early. You see a lot of the potential and then you go all in. you know, 100% of your portfolio is in crypto and then 20% draw downs, you're paralyzed, you're freaking out, you don't have more money to deploy. You talk about taking profit, like a lot of times you can get the

thesis right, but if you get the structure wrong or the positioning wrong, you're going to put yourself in a really bad position to do dumb [ __ ] along the way. And so you're going to again likely going to [ __ ] it up. Um, how do you think about like overall portfolio construction and structure here? So my journey in this is a decent journey which was when I first did it. I had a decent sized bet in 2013 when Bitcoin was 200 and I wrote the first kind of macro strategy piece on how to value Bitcoin back then. It was a decent size but not that big.

So and I wrote it off and said listen this is a highly speculative asset. It could go to zero or it could go to $100,000. And that was my thesis back then. Um, and it went up 10x then fell 87 and a half percent and you know I wasn't phased because it's like I'm in this trade for an extended period of time. I ended up selling out in 2017 um and then saw the cycle the downside of the cycle and then by the time I got back in again in 2020 um I grew my position size significantly. So, it was a much larger part of my liquid net worth. And then by

the time we got to 2022 lows, I'd then gone to pretty much 100% of my liquid net worth because I'd learned how to manage the volatility psychologically. I also have cash flows because I have businesses that generate cash flows for me that allow me not to require the use of that capital in short term. That's what's happening to people is their time horizon shrinking and their need and desire for instant gratification is increasing because it's becoming harder and harder to buy a house or to have kids or do anything. Right? So, it's it's really shrunk people's time horizons and the instant gratification which is why leverage and speculation are becoming a normal part of life now

for most people. And so that makes it very hard to have conviction in something where you actually need the money to put a deposit on a house or down payment on a house or whatever it is. So you can't be risking all of that. So yeah, you know, I own my houses, so I I don't need to worry about that. So I'm in a stronger position. I get it. >> So you're either young, just extend your time horizon and just keep piling money into it over time. or if not, you have to shrink your trade size if you can't sleep at night. Yeah.

>> I mean, yeah, nobody likes it when their portfolio goes down 50%. But, you know, if you're in crypto, you better get used to it. Uh because it's part of it. And as long as you're not too far out the risk curve, you basically have to say, is this thing I'm investing in this network, is it going to survive? Does it have Lindy effects? And um is it likely to grow over time? >> Yeah. If you can honestly answer that and prove it by showing some work that you've done that the network is vibrant, >> then you'll do fine. But most people don't do any of that stuff. They just hear a tip on Twitter or YouTube and end up buying some [ __ ] token because somebody once said this can go to the moon.

>> Yeah, it's really a great take. Look, probably the best advice there is have uncorrelated sources of cash flow that allow you to fund your lifestyle so that you don't freak out that you can, you know, you should be liking an asset once it goes down 20, 30, 40, 50, 80%. If you liked it at 100K, you're going to love it at 20K. Make sure you have money then and there to deploy into the in into the trade. And um >> I mean even that I've got wrong recently because you know cash that I have is in a bank here in the Cayman Islands. I got to get into a crypto account. There's days it takes to sort that out and I didn't keep it in stable coins

>> and I should have done that because you know crypto opportunities come really quick. You know when 10th of October came and some things were discounted like 80% because of a flash crash I couldn't do anything about it. It took me 5 days to get money in the market. And so even at that level, you you need to set yourself up well for these kind of opportunities. But you're right, primary importance is income. >> Yeah, >> it always is. And then you want you want to cover your Maslov's hierarchy of needs at first. You know, make sure you can afford somewhere to live. And then depending where you are in your life, that percentage of your earnings that you put into your investments.

>> Yeah. Yeah. Charlie Munger says something great which is rule number one uh don't lo don't lose money. Rule number two uh don't forget about rule number one and then he also said never interrupt the compounding. So if you can >> see that's that people don't understand because they think don't lose money is like stop losses I can't lose a single penny I'm never going to have a draw down. It's not that because you can't compound without volatility of returns and compounding actually requires you to buy lower at lower prices over time. So, you know, my personal P&L in crypto because I put a lot in in 2022 >> was at all-time highs before the market

was. But people don't understand that that when you should be looking forward to the draw down if your idea is I want to invest in this particular thing over over an extended period of time. Um and we've seen that you know Tesla investors have done very well from doing that. >> Um they have fundamental belief in the stock. So when the stock is down they buy more over time and they really compound wealth. >> This episode of Empire is brought to you by VanX onchain economy ETF node. If you feel like you are constantly missing alpha, never have time to scroll through crypto Twitter, Node is for you. Node is actively managed by an experienced team with years in both trady and crypto.

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Thanks to Uniswap for making today's episode possible. As always, investments in blockchain technology involve risk terms and conditions apply. >> Maybe transitioning the conversation a little bit into AI just because it computes into everything that's going on. You know, the vast majority of the public markets has been AI focused. Um, what is your kind of thesis, current thesis on on AI? >> So, I spend because I do so little trading, I spend and I've got all the framework in place for the macro stuff that I do. I spend most of my time thinking, reading, doing, writing about AI.

And so this is the the greatest discovery humanity will ever make and the last discovery humanity will make. >> Say more. >> Well, after AGI comes, it is not us making the discovery. It is it. >> Mhm. >> Right. This is the scaling of intelligence to infinite. Infinity. it. Intelligence is what we have been paid our careers for.

Our intelligence goes to zero in value over time. Doesn't mean we go to zero in value, but that particular aspect of what we do. Um, so it is the most profoundly disruptive technology the world has ever seen. It is of civilizational level importance. of the importance. It is the largest game of nations we will ever see played because nobody can allow the other side to win this. So more than nuclear proliferation, this endlessly scales and so you know I know people didn't like it when Sam Alman talked about government backs stops.

There is absolutely a backs stop. There is not a single way the US or China would allow their industry to not succeed. So that's how big this is. >> It's a it's it is economically the most disruptive force we've ever seen. It is a nuclear bomb when it comes to deflation. People just have no comprehension how big this thing is. >> Yeah, I would agree with that. Uh you talk about US China and the political aspect of of AI. We've seen hyperscalers and the amount of huge capex going into just energy resources. China is building the most amount of nuclear um reactors way more than the US. How do you think about that? You know, if you have a

if you have a good reliable cheap source of energy, it will be a prerequisite to own and be a leader in this AI revolution in that. Do you agree with that? If so, how do you think about who wins here and how do you ultimately translate that on an investable thesis? So almost the fundamental principle of the universe is to convert units of energy into units of intelligence. Literally everything we do and everything the planet does is basically that. So there is a flywheel here and the flywheel is very clear. It's energy, compute, intelligence creates more energy, more compute, more intelligence.

This is the spinning flywheel of all of evolution and everything to do with this technology. So when you're looking at the different elements of the flywheel, we've got Nvidia and others working on the compute side, but we know that that's not going to get us to the next level. We're going to go to whether it's biological compute or quantum compute or a combination of the two. That's where we're going and we're seeing signs of that. On the energy side, that's our most pressing need right now. We can manufacture enough chips, but we don't have enough energy because you're going to stress the grids.

So again, we go back to this is the most important race of all time to win. So look what China did. Yes, they're building nuclear, but they scaled more solar in 12 months than the entire solar supply of the rest of the world. They're telling you what the fastest source of energy is. The fastest, cheapest source of scaling energy is solar. The most efficient form of energy is nuclear.

>> Mhm. >> But nuclear takes the South Koreans are the fastest to build nuclear plants, they're about six and a half years. But once you once you add planning permission, everything else, it's still a eight or nine year cycle, right? So if the US says, "Oh, we're going to just rely on nuclear, we got 9 years, not enough energy." So it has to be solar first. So solar is the only thing that you can scale fast enough. You've got the battery technology to be able to now reduce reliance on the grid. You're not removing from the grid entirely. What you're going to do is take, >> let's say, 60% of the new energy requirements off-rid. The grid will supply the rest. Then it's natural gas.

So you can get a natural gas plant up in about 2 years. So natural gas, so solar first, you can get that going in 12 months or less. You've got then natural gas behind it, but you need to be near pipelines. If not, you got to lay pipelines. Planning commission could take years. So this is why Texas is hyperscaling energy right now because they've got plenty of sunshine, plenty of natural gas, uh, and low regs. Um, so that's and then nuclear comes behind it, but you have to start that nuclear thing now because you need it for 10 years time because there's no way you're going to p power something moving towards ASI uh without a combination of nuclear and the sun. I mean, I'm a big believer in the Cardartesef scale anyway, which is

99.9% of the entire gravity of our so of of our universe is our sun, you know, of our solar system for sure. So all of the energy held within that is more than enough for our needs. We just need to figure out the technology to harness it. >> Yeah. You need it's complimentary, right? Solar has been good to complement the fragility of the grid and then you have nuclear to just be a more reliable powerhouse, but it takes longer. But given overlaying all that and the conversation around AI and you talk about you're mostly invested in crypto, but you have some pockets of technology.

How do you think about the ratio of one the combination of the two thesises crypto and AI and then more so the proportion by which you kind of position your portfolio. >> So AI is not the most easily investable theme really. You know we've got hyperscalers but you're buying other cash flows in other parts of the business. So it's not it's not a clear bet yeah Nvidia but you know it's scary to be in a very very crowded big bet. Um I get it. It's a great trade. I have no issue with that. But the nexus of AI and blockchain is huge.

We're basically blockchain is the technology rails by which all of this will operate. It's the new layer to the internet. As we've roll out millions and then billions of agents. Agents again need payments. They need payment for what? Energy and compute. The same flywheel. So the energy and compute costs need to be paid. And maybe there's a profit margin if they're set up as businesses. and the instantaneous requirement for payments requires blockchain rails. Um, also in a world of such deflationary forces, you need to have the ability to have scarce assets, right? Because in a digital world, nothing is scarce. So, blockchain solves digital scarcity, which is a really important factor as we become

increasingly digital. So, these technologies are incredibly important. Um, and they interact together. How do you invest in it? your job is to basically look at one chart versus the other and say what's going to outperform over time. Um, and it has been, if you look at it, Bitcoin has outperformed or the NASDAQ has underperformed Bitcoin by 99.97% since 2012. So, it's been a one-horse race right now. I call it the super massive black hole. Will that always be prevalent? Maybe not. Um, but it's very difficult. There are some clear winners that have done better. So Nvidia has done well over that time, stuff like

that. So again, all I do with that bet is this is all the same thing. The world is about to become more digital tomorrow and these are the two mega horses in that race. How do you allocate your capital between the two? Depends on your risk profile. Um and depends on, you know, what has got the relative kind of attention, thrust or momentum at any one period of time. This year it's been technology stocks. Last year crypto massively outperformed. So what do you hold over an extended period of time? A bit of both.

>> Yeah. Um I know as we look to wrap up, I'd like to get your thoughts on just general profit taking and what computes into your mind around that. And you know, [snorts] >> so generally speaking, I'll profit take um towards the end of the cycle. Now there's always a risk that you don't get that right. So how I try and think about it is to reduce the psychologically psychological stress and maybe your stress is you take what's known as lifestyle chips off. So well before the end of the cycle when you're sitting in some nice profits, you just force yourself to take some off and that can fund the lifestyle things that you might need that you will regret not having

later if you miss the cycle or you decide to run it through the full cycle through the downside as well, which I've done most times because I prefer to do that. Prefer to buy an ad in lows than trying to time it. Um so lifestyle chips is important. Nobody can dictate when you should take your lifestyle chips off, but you kind of know how your P&L feels to you and how upset you'd be if the cycle had ended then. >> Mhm. >> And that's that psychological barrier you need to get through and lifestyle chips. Let's say you take 25% or 30% off. Stops regrets.

You might have regrets of taking money off early, but it's never the worst thing to have done. Um, and if not, if you want to take more off, like I'd take off significantly more risk or tell people to take off more risk once the business cycle's peaking because that's when returns go down. Um, will I do that or not? Yeah, I'll probably reduce some risk. Um, but listen, this is the between what's happening in technology and crypto, this is the greatest macro trade of all time and it's not over yet. So to try and get too cute with it is hard and I'm able to stomach the volatility and have the cash flows to do it. So I don't need to do it. But for other people, yeah, just manage that

risk because it's not easy. >> Yeah. Well, look, this has been a phenomenal discussion. Well, I don't know if there's anything else you'd like to touch on before we wrap, but uh yeah, a lot of really good advice here for folks and keep it simple. It's a business cycle. Follow the business cycle. Try to understand it. Go study it. >> Yeah, that's right. And it's worked forever. I mean, you put the year-on-year rate of returns of the S&P against the the uh ISM over the last 100 years, and it's just obvious. >> Yeah. >> Um >> ISM. So, so basically, if you're going to write an algorithm is ISM below 50, add ISM above what is it 60 75?

>> We have call it 50. Anything above 5758? >> Yeah. Sell. >> Just sell or start taking profit. Start >> start lifestyle chips. >> Yeah, >> that's right. >> Keep it that simple. And it and it does work. I mean, just do that as an asset allocation model. It kind of works. >> Yeah. Well, great great to have you on. Anything else you'd like to add before we wrap? >> No, all good. Um, yeah, if you want to find me, obviously everyone knows where to find me on on X or on Real Vision, so look forward to it. >> Amazing. Well, what a treat, world.

Thank you so much for uh for your thoughts and uh looking forward to maybe having you 2026 or 2027 before the business cycle is over. >> Yeah, exactly. All right, good luck out there everyone. >> Thank you.