Mastering the Psychology of Crypto Cycles | David Kalk & Jeff Park

Transcript

you just have to sell in September 21 October 21 November 21 December 21 Jan 22 Feb 22 okay that's your period you got to sell something in that period because you realize the Cycle's cooked and then you buy a medium amount in the first three quarter of 2023 that's not picking a top and the bottom but the RH ticket is very clear I mean you you smoked the Buy and Hold why aren't we trying to just say you know this is a reasonable thing to try to do hey everyone we all know blockchain is changing the world but who's actually driving it I'm excited to invite you to the sixth edition of Meridian a web 3 conference hosted by the Stellar development foundation in London from October 15th through 17th get early bird tickets at meridian. stellar.org with

code block Works pod special thanks to Stellar for sponsoring us now let's get into today's episode everyone knows there's a massive shortage of top senior marketers in crypto and teams are constantly struggling to get their go to market done right that's why we're excited to have partnered up with Rena Partners the premier go to market advisory firm for early stage crypto teams get in touch with their team by heading on over to re nud partners.com or giving the co-founder Jeff a follow on X check out the links in the description below this episode is brought to you by Avalanche Avalanche is a leading network of blockchains giving some of the world's largest financial

institutions new use cases and business models while leveraging completely customizable infrastructure check them out it's core. appd discover you can explore avalanche's subnet ecosystem at core. appd Discover I was playing around earlier today really cool hey everyone Jason here before we dive into today's episode I wanted to tell you about your wallet's new best friend Harpy Harpy guards your digital assets 247 blocking sketchy transactions before they even happen but that's not the best part it's totally free secure your wallet for free at harvey. ire Link in the description now let's get into today's

episode welcome back to Empire we've got Santi we also have Dave caulk and Jeff Park joining the episode uh I'll give a little background on both of them but a little uh context on this episode so we uh recorded with Ry and tar the other day it was about um uh basically crypto is overallocated to venture under allocated to liquid um and we got a lot of good responses on that uh if you haven't listened to that episode you might want to listen to that then come and listen to this we're going to this is basically a continuation or a follow on of that conversation I think just this like o underallocation to liquid over allocation to venture something we're going to keep exploring on Empire Dave if you guys don't know him is the founder in CIO of reflexive capital and

then Jeff is head of alpha strategies and portfolio manager at bitwise so Jeff Dave welcome to the show happy to be here thanks for having us great um I usually don't ask this question because I uh usually it's um people either know the guest or it's a leads to a winding answer but I think it's a relevant thing to maybe ask to tea up this conversation with both of your backgrounds so Dave maybe we could pick on you uh because you have a very non- crypto very macro focused background folks like you know with Peter teal and Goldman and so maybe can you just fill us in on on your background and elaborate a bit more on reflexive yeah thanks for having me guys you know we've been talking about doing this for a while and last week was a

really good discussion so I'm happy to build upon that but yeah Jason I don't know how long we've known each other I don't know when did you and Jake become friends like elementary school or something yes yeah yeah the backstory is I have known Dave since I was about five years old so I'm really praying this this episode is a win for me if uh Dave doesn't share any embarrassing childhood stories questions yeah um cool so yeah you know I have a long trading background mostly in the macros space I started my career at Goldman on the inter TR derivatives desk in September 2008 um that's a really Market structure focused desk you you know you never really have to have a view on the fed you just take views on understanding what everyone else needs to do in the

market and so a pretty foundational piece of my experience I did that for for five years uh but then I went and joined Peter teal at his family office I became the macro fund CIO I was there for eight years and with Peter you know because it was Peter you learn it just different ways U of making money you know you learn to think for yourself that's really helpful in these competitive macro markets but I think has been also helpful when I've approached this new asset class like crypto um and just developed all the necessary trading skills of you know working on your psychology um being disciplined how to manage risk uh I left in Q2 of 2020 to help start common Health Asset Management um Adam Fischer had just left Soros where he was running

macro and he was restarting version 2.0 of his fund um and you know I've said this term macr fund you know that that means different things these days let's just Define it as a flexible strategy where you look at everything from a top- down perspective you see the regime and you look for just disproportionate risk award uh and so it's within that mandate in 2020 that we identified crypto as a macro asset and we set up some custom vehicles to get into this trade over the course of 2021 when we got to Q4 we listened to what the Fed was saying that uh the regime was changing and so our macro business focused on other stuff uh I personally tried to move on but I had really enjoyed this crypto market so much um and you know it's like macros really hard like you go from playing the

most competitive game to crypto which actually felt like the least competitive game and back to the competitive markets and that was unsatisfying so decided in that moment to uh launch a crypto business and to create some institutional crypto products and then about a year ago decided want to spend out with a full team to kind of reerrr and we start a reflexive capital if you had to summarize the thesis on crypto for you guys what is that Dave it's the most liquid inefficient market so typically liquid markets are more efficient you know that how big can Millennium and Citadel be in the markets uh crypto is a pretty large outlier to that relationship in that it's fairly liquid but it's highly inefficient and highly irrational um and that has to do with who the competition is you know the

there's not a lot of professional trading experience there's a lot of VCS there's a lot of retail and so I think there's quite a bit of edge that can be had in this market by being a professional and a and a risk manager uh and I would say like the the biggest marketing efficiency to me over my time Horizon is that I don't see anybody really adjusting their portfolios in line with these regimes and crypto you have these like very big regimes we should talk about why I think that is um but I think like if you're sober and you're Dynamic about this you can do so quite uncompetitively and I didn't have a chance to trade in the 90s or the two early 2000s but I think that's basically what it feels like today where if you get the the big rotations right it can

be so valuable in this asset class irations like going from Bitcoin to alts and selling the alts and and you know macro often times isn't an edge when when everyone else is doing it it's hard to out macro r Traders but you know it's pretty easy to out macro crypto people so basically just here because I think there's opportunities I won't see anywhere else uh Jeff before we go to you I want to focus on that because I why do you think that is like we have obviously Venture funds that they're like 10 years they're like we're just going to invest and then not touch it they have the luxury of doing that there but there's a lot of liquid funds but they all mostly roundtrip uh you know they're up multiples and then they give it all back mostly and then they try to

you know beat the watermark at some point which is where we are now but like what is it it's just the caliber managers is subar is uh they just don't listen like what would you attribute that to I mean I think a trading skill set and a VC skill set I mean you can argue they're not related and and you could argue that they're kind of inversely correlated like what you know trading is just about Psych ology it's about understanding your intellectual biases it's about um being disciplined uh the best traders that you know are oftentimes the most flexibly minded people so it's like price changes and they they change their mind and on one hand that makes them horrible investors because you know it's like something something moves and like they have no commitment to things from a long-term

perspective what makes a good VC it often times is something where you know you have some long-term thesis that grounds your activity in the space um but it makes you a bit too govern to respond to price in the correct way and then there's this additional crypto Dynamic where so many people in crypto like make it their full identity you know it's like almost like a cult right and and that is not the you know that's not a good starting point for you to make rational decisions when price changes so yeah I'd argue it's just um the the early movers in this space were were you know did not get into the space because they were Traders and to the extent that they did they're oftentimes focused on harvesting really really short-term inefficiencies Jee what do head of alpha strategies in pm at

bitwise mean and I think with the lens of that question being how how do you actually make money for bitwise absolutely so uh as you know bitwise is a leader in the crypto Asset Management industry primarily via uh the leadership of our Index Fund as well as our single token etps and I was brought on board about three years ago to augment those capabilities by offering actively managed strategies and solutions and so today we have most of our efforts invested in a multi strategy multi-manager framework in the Partnerships that we drive in acre some of the most unique orthogonal crypto returns that are possible in the arena uh from from my professional

background I've been looking at crypto uh professionally for now over seven years personally uh for 10 plus years and we are at this point where I think there's still a lot of dynamic changes happening at the core of the industry where recycle there are new uh implementations of even the technological capabilities that are possible between liquid and Venture and the blending there between historically uh one of the things I found really unique about crypto as Dave mentioned is the inherent volatility uh that is present in this asset class I actually happen to take the view that Bitcoin will probably remain a volatile asset given its monetary design as a as a

feature and not a bug and and that is a powerful thing because uh historically when you study uh the efficient Frontier of a modern portfolio Theory you're taught on two axis right the y- axis has return and the x-axis has volatility and you can think about investing in stocks and bonds and drive something worthwhile when those yields are not good enough the uh a new axis got introduced a z-axis and that z-axis is liquidity so people would say hey we got to make more money than what the public Equity Market will give you so we got to push out the liquidity curve so now you go out to do things in private credit private Equity Venture as we just talked about to drive that forward but what's really unique

about crypto is you can actually get liquid implementations with high level of volatility that we have never seen before to create something new in that Dot Plot that is exclusively the opportunity set for an active traded uh and liquid traded strategy by an expert Navigator yeah so Dave maybe you can walk us through just your thoughts on last week's podcast outline the points and would love to hear your take on on on the things that they outlined and I have a quite a bit of respect for both of last week's guests I've known Ray and Fallout tar you know these guys are asking the right question so hopefully this discussion just Builds on their arguments and tries to be forward-looking but there's not a lot of people in the space from my background and Jeff's background so the goal here

is to add perspective from a professional Trader and I think that presents an alternative thesis and pushes on some of their conclusions um so if I were to go you know I took some notes when I was listening to it and I'll outline I think four points and two of them you know I love and two of them will end up somewhere slightly different um but feel free to jump in if you think I'm mischaracterizing what they said the goal is not to do that weird debate thing where you mischaracterize someone um the overall introduction that there's the structural mismatch driven by an imbalance of too many Venture funds which means there's going to be alpan picking public tokens and that this liquid strategy could outperform Venture and they gave a bunch of great reasons for why this mismatch exists um but they then they transition that into this idea

that exceptions outperform and so in many ways if you're going against consensus then you're going to succeed love that point um and the way the way that this will reconcile itself is via performance so Managers from other asset classes AKA someone like myself um will see this opportunity and become liquid managers in crypto um there's this discussion of edge I really liked how it's important to find Edge in markets uh and a related discussion at finding people's strengths and not allow weaknesses so two Shar laid out four really good sources of edge information or access Edge analytical Edge which I think is the one a lot of people try to emphasize this psychological or behavioral Edge you know how do you manage emotions like let's just call that Trader Edge and then structural

Edge like you have a different mandate than everybody else and then there are two segments that I want to dive into and end up somewhere pretty different so so there's this discussion on all these previous attempts to suppress volatility and the general character of that of that discussion is that it's just too risky uh if you're trying to suppress volatility by trading AKA go between 100 zero and 100% long we've only seen that not work um and so the characterization is the managing risk actually leads to more risk and of course picking tops and bottoms is is very hard and when you look through all the performance over the years there's just no real evidence of that working and and the guess is that it's because human beings just burn out and then they

start to do stupid things like use leverage um you look in March 2020 there's all these examples of that and so the recommendation is just to absorb the volatility and have a long-term time frame uh and the fourth and final point was that markets are chaotic and so one shouldn't attempt to play the game of Market psychology it's too hard it's impossible um you know trading beta it's like it's you can't find patterns everything is already built into expectations and it might be very self-referential the market is more efficient along this AIS of beta of Market timing than the ad cratic Dimension and generally it's just hard to win with psychology and so it's easier to win with uh analysis so those are kind of the the main points hopefully I did a decent job of steal

manting them but anyone else want to add anything to their points and then I can go through some of some additional points that I have no keep going okay um so I had uh a few four four different points that I thought um you know I'll I'll add a strong view that I have which you know some part of some ways part of my thesis and then kind of discuss how that leads to a different conclusion then we can talk about it but the first one is that the market structure is just so different today you know the game has changed dramatically and all these historical analogies can I think they can be very misleading um I feel you know having spent a career studying how Capital flows can saturate opportunities basically money flows into something and then the opportunity goes away and then

maybe creates another opportunity that's what we're talking about right we're seeing all sorts of evidence of that in crypto but it leads me to believe that what will work over the last um what's worked over the last seven years in any respect shouldn't work nearly as well over the next seven years and so I I wonder how that's going to affect the go forward performance of liquid funds or um these hybrid liquid VC funds who are just applying a venture capital mandate to liquid tokens you know riding the cycle up and down because to me Venture style token probably actually competes with private Venture you know it's focused on the same sort of Edge and there's a lot of crossover in process for these VC funds in their ownership of liquid tokens and I think the the missing point is that it

was the lack of Venture as competition in 2018 and you know Santiago can definitely speak to this um which meant liquid or hybrid managers doing like the pure VC thing on liquid tokens that's why they had such good entry points and you fast forward to now you have like a much different Market structure right I mean to be honest Market structure is fake like let's just start there you have these big Venture funds they do these big rounds it means the TG price is like way too high and everyone's pointing to how complicated that is but as long as Venture funds are too big it's it's hard to imagine that they're not going to have like a very persistent impact on the initial token price and so we're seeing a very weak bid on this stuff um you know nobody can really sell anything until prices go down a lot but

even if these correct these things correct 80% so something launches at 10 billion and it goes down to two billion you know it's not a $20 million market cap entry and you can say like all the ranges are higher now but you still it should be a much worse entry point in a relative sense making any adjustments because of of these overfunded VCS and so the question is if your liquid entry points are much worse as a result of this um you know are you going to be able to absorb the volatility in the same way I mean s you mentioned like round tripping or whatever but like you know is this going to be the same game if this is the game that you're playing um you know to me you have to take these opportunities even further and see that the relative opportunity here is likely to pursue a

totally different mandate using a totally different sort source of edge you know pure liquid Venture token picking is not different enough of a mandate than the thing we're saying is is saturated so let's focus on let's do the coning thing like let's focus on a different strength a different source of edge which is actually everyone else's weakness and so you know an approach might be to own some liquid tokens help deliver the the returns associ with those these bull markets but be nimble and be flexible and own the new thing you know whenever that if it is owning the old things you can still own the old things bring you know trade each cycle independently bring most of the capital to the you know as much Capital as you can to the next cycle and play that game and just compound returns because I feel

strongly that if no one is recalibrating the portfolios in line with these much different regimes and the reflexivity you know those who try to do so will do so in a very very uncompetitive uh very very uncompetitive way so no one has any money to the bottom and if you're a fund you're either fully allocated you raise most of your money later in the cycle and you deploy later in the cycle at higher valuations and very few managers have the confidence either because structurally they can't or they are too afraid to look at their LPS in the eye and say I'm gonna hold cash yeah it's just they don't want to do it and either they're really bad their emotions get to them they need a they're chasing you

know when you have days that are you're up ripping 10% like holding cash is really [ __ ] hard you look like an idiot and most of your investors will call you up think of that scene in the big Shore and be like why are you not riding this bull marker you're an idiot y I'm redeeming as an as an example exactly I'm redeeming as an example um look at Jason from folus capital I was with him in breakpoint 2021 you had days where everything was just ripping and he was like I've just raised 75 million bucks I'm holding most of that in cash cuz I'm not of the mind that this is going to persist and I as an LP in the fun I'm like okay well you're going to get a lot of push back to that he held most of cash and looking back I think like he

was in a very good position throughout like you know the subsequent year to bid stuff where you were literally pennies in the dollar but like I can't think of other managers that were in that position I mean it's really hard to raise at the bottom and structurally we haven't even seen LP money come into the space you're not nothing is catching a bid it's all kind of retail PVP stuff uh and it's very volatile for that reason so I don't know what the solution to that is other than like raise a liquid fund y you know hold a lot of cash because it's like that TB like there's these moments like if you there's a

great analysis someone did like if you were to bid on days where everything is down like 10% or 15 there there are always days during any Market regime where you have that extreme ball have the money to bid on that day and if you do that time and time again most of the return profile is going to come from those days problem is no one has money in those days e get liquidated or they're [ __ ] in their pants fully allocated yeah it brings up a good point that dealing with the allocators makes all this hard like it's hard enough to you know man psychology and then you got to deal with your engagement with LPS and and for sure you have to raise money in the bull market and that's this whole reflexivity model but it kind of

actually takes me to my second point which is that you if you suppress volatility in an open-ended Fund in the right way you're going to bring different Capital you're bringing New Capital into this space they currently can't you know the current options don't work and so I I don't think we should you know the path is questionable but we should also shouldn't minimize um the effort you know we can get tens if not hundreds of billions of dollars to come into this spase if we create a product where you know it's not five to 10 year time frames it's like you have to re underrate thing every quarter and so if that's the if that's the Mandate the manager probably has a bit more Comfort rewriting the portfolio every day they still have to deal with their emotions the market going up like the Dr

and Miller thing whatever it's like you know you have to deal with the emotional reaction to other people making money but if if the market feels like bad risk award then you just don't have to be involved because you have a stop out whether it's an actual stop out or not you know this this down 80% just doesn't doesn't work and Jeff can speak to this to some very very large pools of capital you can argue they're bigger than the ones currently engaged in the space and so I just think like the equilibrium is there's both there's Venture funds who like they have to participate in the entire upside then there's funds who are risk managing this stuff maybe the returns are lower maybe they're not maybe the returns are lower but on much bigger notional and that's that's the only way you actually fix the market

structure it's not by doing liquid Venture in open-ended funds because then you're not bringing any new capital in to fill this out Jeff you obviously look at a lot of managers um at that vantage point that you're sitting on like when people come to you and say hey allocate into certain managers like what are they looking for and would this type of strategy resonate with people or are they saying hey I look at the returns of these Venture funds some of them were up 35x 20x because you know everything was up um if you've been invested over the last s years like you should have done that type of return but I'm curious like one how much appetite are you seeing and two like what is the strategy that gets the most amount of interest from these like allocators one of the policies if you will that I have

noticed over the years in communicating with uh allocators and investors is um when we when we compare VC to liquid strategies the bias that is built into there is to uh take an equity Centric valuation approach right this idea that tokens have value in the way that VC creates value ultimately deriving how equities are valued through dividends or profit share almost kind of hamstrings an approach that I think sometimes liquid VC itself can be a little bit insincere because we are are at a point where the nency of the Technologies make it quite hard to observe uh that that value cruel and

that is actually part of the the multi-prong challenge I I I believe uh at a top level crypto has a very uh inherently unique value capture framework and it rewards uh different kinds of capital contribution outside of financial Capital right equities you know it works because you contribute Financial capital and therefore you're a passive owner to the rights of those incomes but crypto is different there's actually ways in which rewards Capital contribution that come from other angles like social capital in the case of those who may find uh value in governance production capital for those who actually interact with those tokens to uh Drive Network effect and the income associated with

that endeavor or the human capital behind it as well I'm just CU like you pitch to an LP that he's going to laugh out of the room he's like I want a 30X I don't care if you're [ __ ] staking tokens or governance like I want to ride this puppy and I want the type of returns that people have been getting over last I mean that's hum it really comes down to that I'm not pitching I'm going to be active in governance I might say I'm going to be active on chain because that's where I'm going to interact and like be close to the metal and I'm going to be smarter than a guy that's just looking at charts and drawing lines on a chart but no one really like at the end of the day like I can agree that there's like not very

concrete ways to Value these things but let's face it like allocators are looking at this and saying I want that type of return that has been historically clocked they don't care about how you do it or or the type of strategy that you do it they may reward you for dampening ball in the in the in in the bare Market but a lot of these managers also new and don't have much track record to it none of them have been invested in a market environment with Rising rates either which is sort of kind of new the point though is like there's this skewed return profile like it's got disproportion recored and there is an allocator who the absolute returns you know it's more about returns within the volatility profile rather than stressing the volatility profile to

deliver the maximum returns and and so far the allocation process has been limited to people who you know basically think just like outlined and we haven't actually created return profiles because the volatility suppression has been flawed so far in a way to bring all this new money in and yeah I mean literally you could talk about there are people who want a strategy you know we have conversations with allocators let's take 80% of the money let's put that in cash and then with the 20% run run a crypto strategy like that you know people can't do this for themselves basically um but they want to try to access these screed returns associated with this emerging asset class um but it has to be in the right rapper otherwise it's just a total non-starter and so yeah well the

question for both of you is because you both interact with LPS like how attractive is that strategy because uh I would argue that historically most of it's been I'm an event like an allocator where I say is this coming from a hedge fund bucket or a venture bucket so you need to make it very clear for them where that's coming from you're like well it's kind of liquid Venture and they're like I don't understand that so they'll probably pass that's actually my point the liquid Venture thing it it's it doesn't actually solve anything it has to be a real hedge fund strategy with without the without the draw downs and so it is it's in the hedge fund bucket and and those people I think would you know they we just don't have the products yet to satiate their interest but they're clearly interested I mean the let's be clear the returns

associated with crypto in the bull market I've never seen anything like that in markets before like three to four sharp hundreds of percent we just no one has monetized that or structured it in a way for the hedge funds to do it so even through the pure risk-free lens that is interesting but you need to package that in a way which works for them and yeah so far the attempts at doing that have been like way too Reckless and um people have blown up and they've introduced leverage in the wrong ways and so there's this related question of like does that mean it's impossible or was it just the wrong people the discussion that Ray and were having was that basically the the psychological Edge is just way too hard I mean there is such thing as psychological Edge you know risk management can be a strength you know

it's like trading is all psychology it's it's about being open-minded it's about being intellectually Nimble and the key here is to to understand how to manage risk around various markets and trades you size things right you know you don't use leverage and as I you know been discussing like I think the VC skill set actually leads you in a worse position to do this um and I would I would argue like there's been a lot of people who've come from trafi before right I I would say like a someone who was on like a structuring desk at in the Investment Bank of JP Morgan like that's that's that also is not relevant for trading you know might still work out but that doesn't actually give you a head start to working on your trading plan and how to harness your emotions so again I would just like stress we shouldn't

judge the the Vintage of 2018 managers to reflect what real experience and real talent is capable in the space so I'm open to a lot of different outcomes um but I yeah I don't see many like real attempts at doing this in the right way yeah I mean the other thing too like the the investment vehicle rapper right matters L here because if we are comparing a beta Centric approach versus an liquid Alpha Centric approach with the fee burden that an open-ended structures create an annual crystallization scheme there are investors who are going to want risk management by definition if you have a closin fund that is Venture Capital Centric where uh the incentives are more

aligned in the distribution waterfall then there is a lot of patience but if you are going to charge fees annually and you have that experience of being up to 100 and then down 80 Etc where you know you realize you were net worse off than maybe the GP themselves those things are problems like those things create structural uh problems and I don't think it's totally unfair to then uh understand why some investors have chosen to avoid certain types of vehicles now as Dave said I think there's change that could come from new trading mindsets and new Financial ation that is happening in crypto today for instance we have the Bitcoin ETF now for the first time which means eventually

we'll probably have options on those ETFs and the ways in which traditional Finance trading tools will merge with crypto is going to increase more and more and there will be a path for more risk-managed trading Solutions but I but I do think addressing that up front as to having the right investment vehicle structure for alignment with your LP is a key question that uh there has been some disservice to uh in the past uh and one that I'm optimistic that we can actually address uh in the future like let's just say you had a PM who's worked at Millennium trading oil for like the last 20 years like you don't think that you think that guy's going to blow up trading crypto like I you know I just don't think we have the right data point

like trading is it's a special skill set like we you know we're not we're not being open-minded enough to they're being literal superheroes in trading just like there's maybe superheroes at at doing VC whether or not those people are in crypto or not I can't comment but you know it the it's definitely a hard asset class but I haven't I don't meet many of the people who have the discipline and have studied their emotional makeup to understand how to harness their own cognitive biases in a trading plan have you met anybody like that who's actually talking about doing that stuff well I can only comment on the conversations that you and I have on a a frequent basis like whatever no but I will I will jump in here because when

I first met you Yano introduced me and you know most of our conversations on a weekly basis like we started talking by-weekly like on on the regular and it was mostly about and it would always start with what am I not seeing what am I biases right now and I think that's like what you should be doing and I find that to be quite interesting it's never about hey you know a thesis specifically about like a I mean we talk about specific things but it's mostly like what am I not seeing and emotionally how am I managing that and I think that's like I think it's the most important thing I I I appreciate that I think the idea is like it's just there's different

sources of Edge and at this point the one that's most exceptional in crypto is likely the psychological Edge that tusar mentioned and again if you come from my background you see examples of that everywhere there's a survivorship bias so all the people have been in the business for 20 years like have that edge if they're doing this form of discretionary macro um and so I think it's just it's kind of in line with their views that over time these people will come in because the opportunity to do so if you can come in and be doing the most exceptional thing that should draw people in and that should be like the strongest version of their argument of trying to do something contrarian in the space because literally it's like the whole Space is capitulated it's like I've studied managers over the last seven years this can't be done so I'm

not going to try I'm just going to buy and hold right and and and there's all this cognitive bias in crypto that comes from buying and holding Bitcoin and ethereum right it's like I mistr this because I sold so I'm just not going to sell anything I mean you go back and you look at the peak in in 201 17 early first early 18 and then let's look at the top 50 assets then and then carry that forward to how did things perform like what was their performance between that Peak and the next peak in 21 45 of the 50 assets were down by an average of like 80% said differently you know it's not clear we still haven't found a lot of product Market fit it's not clear that these assets actually perform in the

next cycle and you could say this vintage is better than the last but you know I think it's um that's also been the complicated part of operating liquid strategy is that if you're doing the Buy and Hold thing you know okay maybe you're rotating into new stuff okay so let's go through the math you go down you go down 90% And then you rotate in the new thing and then that thing does like 100x or whatever so now you're still like net net up but you know Jason you asked this question on the podcast last time like isn't having a top down view the most important thing and it was kind of like you know they push back quite a bit but the rhythmetic is very clear and I think it's like it's it's the wrong mental mindset to think about specifically picking tops and bottoms

let's go through a slightly easier example you just have to sell in September 21 October 21 November 21 December 21 Jan 22 Feb 22 okay that's your period you got to sell something in that period because you realize the Cycle's cooked and then you buy a medium amount in the first three quarters of 2023 that's not picking a top and the bottom but the rtick is very clear I mean you you smoked the Buy and Hold yeah yeah right so why AR we why aren't we trying to just say you know this is a reasonable thing to try to do there's too much reflection on bitcoin etherum working as by and hold when almost nothing else has worked by and hold there's a few examples of this cycle that I think could work but it's like crypto is full of these you know it's a

graveyard full of these things there's so much to impact there like I'll start one thing most managers are too afraid to tell the oops I'm GNA hold Majors that yeah especially now with ETFs it was true before ETFs certainly now true right because it's like I'm holding a major I'm like well what am I paying you the reality is people are paying you to outperform sometimes that will entail holding cash or being on bitcoin or sitting on Salon or ethereum that's it most managers are not intellectually honest or have that relationship with RPS to write that [ __ ] letter in the quarter and say we are going to cash or we are holding just Majors I'm sorry I'm still G to charge you 220 because I'm going to hold your hand through this very difficult asset class yeah people are paying you for to

hold their hand on an asset class that is chaotic yes that's it you either believe in the manager or you don't that's it like and that's what I would tell people when I was managing other people's money I'm like there is going to be a time where you're going to question why I hold something that you can buy on coinbase and you have to be okay with that if not put in the [ __ ] notice yeah this happens in equities too by the way I mean like how much Apple Amazon Microsoft should people I mean if you had an Equity Fund you're supposed to own like three things over the last 15 years but like you got like talk about doing all this other stuff you know it's like over intellectual yeah okay it's like it's like how do I over intellectualize the discourse and sound

smart in my letters to justify du20 it's like no one cares just outperform yep again you raise an issue where just making it hard on people to do that they really do like most of and this is a great Point David I'm brought I'm glad you brought it up I have Liberty now because I don't care about because I don't manage I don't intend to manage other people's money but in my observations with a lot of other managers that I'm an investor in LPS bring on too many opinions of how the strategy should be run and put all these constraints and Covenants and like you can only raise so much and you can only do this and it's like guys candidly you either believe that this manager is really smart you're investing in the person let him let him cook yeah like just just get out of the way and unfortunately

most LPS and this was my disillusionment of being a a a public manager is that they'll just get in the way and they won't support you and so I think that's why I have been sourced it now and I just you know I'm able to be more Nimble and I don't miss that now I think if you're going to raise a fun now you want to have the most amount of Liberty to do whatever it is that you want and I think these are good points because it's they're not I I think I don't even take them counter to my arguments it just this is why it'll take longer you know it's like someone will raise some money in the bull market they'll build credibility over a longer period of time and then LPS might give them more benefit of the doubt but yes the

flexibility here is supposed to be the edge like if you take the strongest version of my argument it's like literally I'm going to be like the macro fund I'm gonna just find good risk reward and the rest of time like come back to to flat and if the best thing to own is Bitcoin we're going to we're going to own that but you know you're 100% you're 100% correct uh a lot of the liquid funds and I'm curious before you enter the space like you canvas like the market like the liquid funds there were some um a lot of them have blown up uh most of the markets still Venture what are coming into the space David you talked about investing being so psychological like crypto is a pretty tough Market I guess um but I'm curious like coming into the space you talk about certain

inefficiencies but like who would you say before setting up your fund was like doing actually interesting stuff in the liquid side um and who do you think is I guess like what's your Edge in liquids I guess yeah maybe it'd be helpful if I unpacked like an overall framework I have for the space I think it's quite helpful in this with this trading construct um so we called this F reflexive Capital this concept of Market reflexivity gets thrown around within crypto often but I think like really let's really unpack what it means uh it's this theory of market rate flexibity is based on a view that everyone has a distorted view of what's going on in markets and price can

heavily distort people's views in some part because price leaks into fundamentals and these feedback loops often occur where price goes up the fundamentals look better so people buy so then of course price goes up even more fundamentals look even better and people buy more and so this is a feedback loop right and you can think of it uh this fuel is overshooting it works in reverse and under shooting um you know boom bust I think is defined by these patterns and Market reflexivity is something that you can observe across markets but crypto is uniquely reflexive because you know for a number of reasons one there's there's no commonly accepted heris on how to Value this stuff so said differently price can go anywhere like if these feedback glps want to drive price higher it can literally go to

Infinity um many metrics that we Ed to track quote unquote fundamentals in crypto or understand activity in the space are directly impacted by Price you know TV like trip token price triples tvl triples um we often times are looking for uh adoption and network effects and many times people are just using protocols initially to reap the the initial rewards of doing so and so we often extrapolate that behavior but if token price triples the dollar incentive to come use the pro the protocol triples and so longwind way of saying like in the bull markets it seems like crypto is taking over the world and the bare markets it seems like a a total scam and so I I think these feedback loops are the most important thing to model in the space and really is the lens at which I look through everything

um and so for my process it's like let's let's try to understand the regime AKA what is the direction of reflexivity in the market and that shapes your view on everything else um so to get to your question you know when you think about uh an approach to trading um I haven't seen many examples of a return stream which successfully introduces having a macro View and helping people trade that market so you know your question is a good one because you know why should anybody think that they can trade this Market um when there's been few examples of of of it working so far so we can point back to your original question about maybe who was trying but but I would say there needs to be a certain amount of sobriety in this asset class

you know you kind of have to be one foot in one foot out to appreciate how powerful this reflexivity is and if literally your assumption is this is all that's going on like you can have some long-term views on crypto maybe it's going to be important long term but like let's do one cycle at a time and just through a macro lens try to identify how are these Dynamics making things seem good or bad and and nothing there's nothing idiosyncratic in the space right it's just it's all a reflection of these Dynamics the other thing is I think um there is when I talk to other managers Ian I mean it's it's easy to be like the eternally perpetually bull you know in this market because historically that's worked um I don't think we talk about enough

and maybe these are not funds you're just large individuals that have perhaps managed the risk much better to your point like I I think like you're never going to there's too much focus on like emotionally the it's very taxing when you sell something and then it rips on your face um and and then you just hold on to stuff that is going down because you don't want to take the loss what you I think it'd be better what I've appreciated is I think you're supposed to capture 60 70% of the side be comfortable with that and then manage a lot of downside and just protect the capital because you know there's going to be a day where no one wants to touch this thing okay reflexivity model here I don't I don't do the astrology around

the having I'll start there like I you know I think the having you know it's a meme or whatever but how this cycle has begun like previous Cycles is the Bitcoin goes up first and it creates this very important psychological shift that permeates like everywhere in the system like the crypto people are are activated they feel excited and that's like when the the reflexivity really starts moving so you have you have price and fundamentals reinforcing themselves so you know you're launching your token a year ago no one responds to air drops now it's like things are churning um but we haven't seen a large capital inflow and to me that that you know we've had some money come to bitcoin but into the rest of the space to me that's because the the current Outlets of that hot ball of money and you know I know

this is near and dear to Your Heart s we talked about this dog coins cat coins and last Cycles tokens right and the you know dog coins cat coins that's a stretch for institutional investors last Cycles tokens the basic characteristic is no one falls for the same bubble twice so it's very complicated to sell someone on last Cycles tokens as this is so important you need this in your portfolio again so until we have a new narrative about what's going on the feedback loop is really incomplete you can have price and fundamentals reinforcing each other but not the the real feedback loop or or capitals coming in to chase this stuff so I think sort of this move we've had since the start of Q2 is actually a pretty healthy correction because your favorite asset's probably not going to go away but it's like it allows for new

leadership to emerge to really get a new identity for the the crypto cycle and it I can't tell you what that thing is but the nice thing is if you have a real reflexivity model there's enough price momentum now in the majors that it just it should just be a matter of time before something happens and then that's when like the real cycle starts I can argue like it's whether you want to say it started or it's just the early stages of it um the The Best Is Yet To Come these discussions of it being late cycle you know we haven't introduced money at really high prices which is now vulnerable to a reversal like that's how that's how Cycles end you mean that's that creates the overhang of like a two-year bare market so we can't actually have that yet it's possible like Bitcoin just goes up for 12 months

and we never create anything new that is an option um and so you know for a strategy who can't underwrite large draw Downs generic strategy like that not commenting on my own like you're going to wait until until you see it and you're not going to make this hypothetical bet on like it's definitely going to be gaming because that that's how you run into a down 40 in Q2 and then you don't work for the allocators anymore Jeff you've been quiet in the background I'm curious you guys have an ETF there's everyone's tracking that how does that change the game like I think that the bull market is we're we're in a bull market I think uh I don't think that's been validated for a variety of reasons ETF and the impact that the US is Shifting less anti- crypto those two things are really important for the

cycle uh primarily an ETF but from a catching a bid perspective um like what have you observed from talking to large allocators like and how does that change like ultimately we need that money flowing to not just the ETF it needs to come on chain and bid this stuff so I'm tracking stable coin flows which are up on marginally moving higher but still not there nowhere near if we if we see we need to see that pick up substantially for the rest of the market B so I'm curious um have you seen any movement particularly in the US and like are those Wheels churning now for the next like three six months or nine months for

those allocators to invest in these funds I think for most of the investors we talk to bitcoin is an exceptional asset and does not represent the interest of the crypto industry at large um it is of course the leader and the face but it doesn't in my my opinion capture the ethos of the asset class as a whole so the Bitcoin ETF is is is a particularly unique uh Journey that jwise is on the ETF I think does transition that a little bit uh into the into the mainstream dialogue uh so we're optimistic to see the flows there in the ways that we can engage with investors that are different than the Bitcoin ETFs when I looked at the 13fs the first time it was filed post launch in January a

part of me was disappointed by the lack of diers Unity of institutional funds and Ras that would be found on that list and yet uh it makes sense because it's very hard to also pitch gold as a holding for a money manager uh it's it's a little bit of a niche construct it's not that it's valuable uh it is but it's not something that money managers are paid to hold ethereum is a little different because I imagine there is a world in which the likes of kotu uh and other uh Venture and Tech Centric crossover funds will find having a small allocation to eth as a bet on a big pie of the future of technology as a

platform could be justified as an investment mandate so the types of holders we might see in the next iteration of the 13fs will give us a window into the kinds of clients that it serves and and that's where I think we'll slowly start to make the transition into the next Frontier as we've talked about alt coins and all these other things things that are still perhaps a little bit nent in the ability to have captured uh durable return deliveries uh but I'm optimistic that EF is uh is serving on the era for that conversation to be had here at least at bit wise hey everyone Jason here just wanted to take a a quick break to talk about something exciting in the world of blockchain the Stellar development foundation is hosting their sixth annual

Meridian conference this October 15th through 17th in London it's a 3-day event where the brightest Minds in web 3 come together to discuss everything from tokenization to defi if you're a developer Builder policy maker or business leader looking to make an impact in transforming Global Systems through blockchain this is your chance to join the conversation you'll get to network with the forward thinkers who are defining the future of this space head over to meridian. stellar.org and use the code block Works pod for early bird pricing now let's get back to today's episode hey everyone we all know that there's a massive shortage of top

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their team by heading on over to re nud partners.com or giving the co-founder Jeff a follow on X check out the links in the description below this episode is brought to you by Avalanche Avalanche is a leading network of blockchains giving some of the world's largest financial institutions the design space to explore new use cases and business models while leveraging completely customizable infrastructure everything that Avalanche has been building the last few years has culminated in this moment where today you have institutions and developers able to essentially have Limitless possibilities with the chain they've enabled developers to build cross-chain swaps or create gaming environments where one subnet can unlock features in another or can use usdc as a native gas

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night and accidentally approve a shady transaction and it's too late to cancel it I know I've been there before well now Harpy's got your back it jumps in intercepts that transaction and takes your assets away to a vault that you control all completely free it works with all the major Wallets on ethereum Bas polygon and arbitrum head over to Harpy doio Empire and set up your free protection today that's Harpy iempire I promise you that your future self will thank you now let's get back to today's episode so how are you um I mean of course none of this financial advice and we talk generic terms but like how has I guess the last three or six months um been from a investing

perspective because it's not been an easy environment um and how what are perhaps some of the things that you've changed in like your mental model this cycle um that you think are have helped you or will help you kind of outperform yeah I can kick this off um there was a comment that also was made in the last podcast with tar where he uh mentioned that uh the the idea of one single manager that's so all-rounded that can do everything picking fundamental and trading data around it running Market neutral strategies all of those things as as a single manager is

is frankly impossible and so you should actually just go with the best manager for the best single strength that they could be known for I I agree with the with the former assessment which is essentially at the core of the underpinning of why we run a multim manager approach and I think the last six months gives us a little bit of the purview of that importance so the last six months we've seen the kinds of varieties of return that I think are offered by multi strategy format right you have the Bitcoin ETF allowing discretionary macr trading that someone like Dave with his expert mindset on reflexivity would no doubt capture as well as Trend strategies that are computer-driven also capture and then you saw that in March maybe high frequency trading strategies around the

kind of crazy uh Mania around meme tokens would have been the most interesting risk adjust reward at that point in time and then in April it actually shifted to I would say something that was happening in the defi landscape in Pendle and Athena and as Dave said uh you know tokens that CCH bids in this cycle versus prior Cycles likely different contenders and so the need for actively overlaying those kinds of Novel Primitives is really important you saw that same iteration again in May and June with the opportunities available within igen layer and the farming opportunities and the Partnerships with various avss so so to answer your question Santi I think that one of the virtues at least that we try

to bring upon here at bit wise's approach is to give investors a very broad set of comprehensive Suites to accessing each of these things including reflexive macr trading as a core component and possibly the most interesting component but one that also benefits from having a buffer around orthogonal return vectors in the liquid strategy as we Define it you know every Cycle's different and you know one of the difficulties in like fully systematizing any process is that your sample size is like one and a half like you want to identify the regime you have like one and a half Cycles you can look at we didn't have stable coins two cycles ago so how how can you systematize your stable coin indicator that you mentioned which I think is a

good one but yeah so you're trying to understand like flows into the space um and I you know so that's been probably the most important part of uh I think understanding where things have gone so it's it's you know the the difference in Flows In q1 versus Q2 was was dramatic and you know that's on the Bitcoin ETF side that's on the stable coin side as an indicator there but then this like this idea of um these unlocks that started really started picking up a Q2 I mean you demand slowed down at literally like the worst time and then you know had some of this technical selling in in late Q2 so yeah I think you know the market is still just in like a it's it's like a medium bet I guess is is what I would say there's there's a much better

game to be played at some point in the cycle if we get the reflexivity going um and so you know I think for a Trader who tries to calibrate like the quality of Bets with with the size of their risk taking you know it wouldn't have made sense to have been really 100% fully loaded this whole time um if you want to like preserve RIS like it's really it's like how do I increase my chip stack one day at a time to like play the Super Bowl which is still upon you know is still upon us so that's like an overall framework you asked a question about what I've kind of updated My Views based on the cycle I guess it was surprising in Q4 and then in q1 to some extent how much last Cycles tokens bounced so I you know we done quite a

bit of research showing that like most of these things are just going to die like they're just not going to be featured in the next cycle that was a view but this sub bounc hard and so I guess the question is like as the the hot ball of money crypto in crypto forms people just go buy their their old favorites and that can be good for like quite a quite a pump in some of the stuff but then since then I think the view has been validated that it can just you know this stuff will probably just go down forever like when something new emerges it's not going to pull this stuff up um in the same way so yeah it's still kind of employing like a fresh mind to to what the new thing will be and try to maximize that bet um and then

the second thing is like actually just how fake the market structure is now like how big of an impact these large Venture rounds are having on the overall Market structure when there's no new money coming in really and no new money coming in to buy that stuff of that valuation because how do you actually create like an asymmetric risk award argument around things that those valuations it's basically impossible my like first principle things everyone in crypto is here for the convexity so like you have to screen stuff through that lens at all times on that point around old coins I think the distinction and the Nuance is old coins with a healthy amount of circulating tokens there could be old coins that never unlocked and are just unlocking those have materially underperformed stuff like maybe defi

stuff that you know has been kind of Left for Dead even before rates were going up yeah that has caught a meaningful bid because you could argue there's arguably the closest semblance to any fundamentals um are in those tokens um and they're you know they have most of the supplies already unlocked and that's been absorbed and that's changed hands to people that are more in it for what does the next leg look like not so much you know if you're holding stuff that is just unlocking you're probably still up uh 3 to 6X and you're really trying to you know get above your waterm mark yeah and so you are indifferent and you're indiscriminately selling and you don't care if it's a 6X or a 3X or a 2X you just want to be in

the green to eat this year because you didn't eat last year Y and you got dpis and stuff and you got dpis and all that stuff and so that's the challenge like for me it's very simple I'd rather own stuff that I I I make less of the Nuance around is it new or old it's more of I think the Market's really woken up to this idea of like looking at like unlocks and you not all unlocks are the same I think you also can overlay that with secondary Market activity and interest but for the most part like it's been very challenging owning stuff that is unlocking worst factors has been unlocks I mean you know if you actually would have been running that systematically like that that I mean that's one of the cleanest trades I've

seen kind of doing the postmortem analysis I wouldn't go as far as shorting but yeah I would just um that's a that's a different discussion which we can have but um I would say yeah the reason I'm focused on this old stuff versus new stuff is the old stuff I think activates crypto people different like if this is about if the whole question here like how do we get a crypto like how do we bring in a few you know some tens of billions of new money to the space so one way is it just comes into Bitcoin and then the Bitcoin whoever sells the Bitcoin buys some of the old stuff but if we're actually talking about a conversation where you're going to need to get money to come in to buy something which gets non crypto people excited I I feel pretty

strongly that the old stuff is not inspiring in that way because the postmortem is that that was a bubble you know that was that was a scam like we saw that movie before um and so this is you know this is one of the reasons it's also really hard to get all the same short you don't have the overhang like like I would say in this category gaming tokens for instance you have axis of the world I would I haven't looked but like the chart has I mean it's rebounded quite a bit everything's rebounded a lot from the low I guess the question is um your your point is like people lost money on this because everything was down 80% but and so they'd rather not touch stuff that they've been hurt on

the the question more so is who's actually buying these things is it people that have owned it before or people that are just coming in new and saying my buddy I remember made money on axi last cycle so oh look it's down 90% this shit's on sale um or or is it like you'd rather own stuff that has like no emotional cache like it's just new no one's been hurt it's just kind of like new narrative new new met um or can you own both and you're just being more selective on the type of asset the question is what do you think the fraction of people is like in count not like asset weighted who actually made money last cycle like do you think there's more people that know someone that lost money on axi or made money on axi I mean maybe here in the Philippines

different story but like you know I'd say that the majority in count probably lost money and so it might work the other way where it's like my buddy lost money because he thought this was going to cure cancer and it didn't and so I want to be in inspired by something new um and then my my mind can go anywhere I mean this could this could be the thing this is it like we could take over like this is the the first real thing there's a question of like what actually gets people to be activated in that way like it's probably maybe has to be more tangible like dpin whatever blah but you can have that discussion but that that to me is when that is when that happens could be new token distribution mechanism could be regulatory impact but could be new sector as well that that

that will inspire money to come in because you just you need to think through the lens someone who is not in this little cult and they're like I need to convince them to be like I need crypto my portfolio again it's not you know and that's like that's a pretty high bar at higher rates and competing with AI and some of these things could change but right now it's certainly um we haven't found anything that's really close I was gonna add that I just saw a very comprehensive study on um various Factor models that are being used to uh think through those types of Dynamics it's probably one of the most intensely researched ones I've seen um and they try to use the F French model to think through things like momentum value growth Etc and run a pretty balanced empirical study running 100 Longs 100

shorts as a basket rebalanced weekly monthly Etc and you actually do get to see that the growth factor is one of the most persistent um Factor but when you actually dig a little deeper and try to understand where that risk premium is coming from what you find is that most of the p&l actually comes from your short basket you're not making money on the trading of the hundred Longs as much as you would like to you're actually killing it on the 100 short that you are consistently resizing and so I just want to add that context in the ways that I think we're talking about revivals of old coins the ways that uh it could be worthwhile uh and yet the vast majority over the last six years at least would

have been the incredible opportunity to bet on growth but in the other direction uh which I thought was interesting of course the other things you would have expected momentum very strong indicator um things that were not as strong how do you how do you quantify growth in this space this particular study looked at a variety of measures but the two that they landed on was tvl to market cap as a very crude measure uh as one and then the other one was growth in user uh weekly weekly user growth engagement uh and those are the two variables that they studied which of course tells you right of now it would make sense to you

that the things that rank poorly on those things would go to zero essentially uh and and there is the opportunity to make this is reflexivity and a i it's like literally okay we've we've screened some of these factors ourselves okay what works momentum works whatever what what also works is um you know new wallet creation or one of these fundamental metrics what works better than both those independently is when both are both are working you know that when you have both the momentum factor and the growth factor some fundamental I mean that's whether it's on the long or short side I mean that's been one of the best things we've seen I me for mem coins the most important thing is number of wallets how is that growing on a daily hourly daily weekly and and that's a leading indicator at least for me

right you know we wanted to go back to talking about like how do you identify the regime like run that run that sub strategy that'll tell you when something's changing right it's like you go back to you know if you have a constellation of like what's working in markets and then something stops working you know maybe it's not it's not about picking the literally the top that in those 20 minutes but like to to to to understand with on like a slow moving basis when something has shifted under the hood in the market in order to say okay this might be we might be in a really different new regime um that's one thing where Suddenly It's like the growth momentum things stop reinforcing each other or now they're really reinforcing each other in the in the negative Direction where you know all the users are literally gone because

price is going down you know that obviously if you're getting feedback that that's that's trades working you should change the regime from what it was working the other in the other way so you know we run some of this well I think it's a good idea to run some of this stuff too to help identify yeah where we're at so the challenge David with reflex sody I think personally for me is that I just one don't believe that I'm smarter than the collective market and I it's it's challenging because like my realization coming from traditional Finance Venture super competitive private Equity incredibly competitive and so you're of the mind that you you don't have an edge I'd rather think that I don't have an edge because everyone that I talk to that thinks has an edge either blows up

eventually or underperforms like you listen to Stan dren Miller like in the Sone conference he's incredibly humble he's like I don't know like markets change I I don't know and he's like the best performing investor of all time Trader and he's and he's like uncertain so why would I think that I'm like super certain even though I've been for 12 years but like I did have to recalibrate my thinking of saying hey most people actually don't do the work and are not very sophisticated which is what inspired you to come into the space which is is highly inefficient and you can have an edge if you do the work if you're looking at onchain stuff number of wallets that's an edge and a lot of managers are not like in the weeds I would think yeah I mean you're how do you balance that right that

preference but yeah I think it's it's literally just at the trading Edge you know it's like okay I used to trade macro I I had a thousand people at these big funds doing the exact same thing as me with with the exact same apparent Edge and so you know now it's like are you literally the best you know are you are you stand Dr Miller against these people and so then you bring that exact same Edge into the space and there's just no one else it's like not only is no one else imp playing that edge they're saying that this Edge isn't possible you know example of it obviously but the emotions kick in right so so okay everyone has em we're trading the we're trading the meme super cycle you're seeing wallet growth like week over week you're like okay I'm

going to I'm going to get behind this trade so you put in a position that's starts to slow down what do you do like there's two views in my brain one is memes will do well if we're in a bull market memes will do well they have done in every regime they've done well so okay so you have that long-term thesis for the cycle but then all of a sudden you're seeing wallet growth for a particular coin or just in general go down and flows go down do you cut all the position do you how do you how do you manage that because then these things with with the VA of these things in a weekly you can get destroyed man like re buing a position super difficult seeing other people make money also sucks so what do

you do okay so I'll be a trading coach now and you know I've worked with trading coaches my whole life like they're just therapists right the reason that there's not a a very specific answer is it's just it's all about your emotions right it's not that the best people don't you know less emotions I mean I have two kids like one's five and two they would have I would need to impose very different trading like the five-year-old probably isn't made out to be a Trader but I would say like you know the question is what it's it's having done this long enough to understand which emotions make have you make the most costly mistakes and then design a plan around them it's like it's not hiding from them it's like literally identifying them and then building a trading plan which works for them and so the answer could be you cut

some the answer could be you know you get it all together the answer could be you're selling all the way up because identifying that the information has changed in a way and making a really rational decision like you're too susceptible to thinking that memec coins are going to take over the world like you know I may have that problem whatever so you know it's all very personal but the key is like to do this for 10 or 20 years or whatever and then have a view of how you interact with it and crypto is different so you have to adapt all the stuff I mean it's more momentum than mean reversion and so different parts of your plan but this is this is the trade you know it's not based on pure analysis I'll tell you um my personal experience so so I've recalibrated a couple things this Cycle

One shifted My Views in terms of salana I may have not caught it at 8 but I sized it progressively more and more and I none of this financial advice but like changing that view of saying it was hard because sometimes when you don't catch the absolute bottom people are screaming at you like you're an idiot you had the opportunity to do buy a date now it's up 20 as was the best trade in size you could have done and you missed it so if you're a manager you're sitting there and you're like [ __ ] I get paid to be right very right and I just probably missed the best trade of the cycle what am I like what do I do and so then and then and then you're trying to you put on way more risk the catch up and we know how that ends for me this cycle if

I were to probably say one thing that I've probably done better than prior Cycles is just getting comfortable with that I'm not going to catch the upsolute bottom but I'm going to size it progressively and I apply it like defi summer as an example ex Le we were very early I was lucky in part um but even then you could have sized that trade like you had three to six months the market gave you three to six months to really put on that trade and like blow it out of the water but most people again were like too paralyzed to do that because they didn't take the bottom and so I think overcoming that emotionally is probably one of the most important things I totally agree and that's the mental flexibility thing and it's like I think if you if you app appreciate the momentum properties of this asset class

it's almost like the bottom is a worse bet than than the third inning right right because it's like very much like probility magnitude is much higher yeah you know it's like the picking the bottom thing it's just there's way too much focus on that you know catching the falling knife is a meme for a reason but anyway keep going sorry absolutely um the other one is like the the duration component like the long-term versus a short-term component um it it's tough right because you see an asset like you know uh you know say a particular meme coin they're down like I don't know 60% maybe 70% you're still way up but it's the the anchoring effect that is so difficult your point um so November 2021 rates start going up Market starts going

down um you as you alluded to earlier you had probably the market gave you again three to six months to get out mhm um my appreciation now with positioning we've talked about this in private conversations is I think the probably the most important thing is appreciating you're never going to take the bottom or the top but you want to be positioned in things that have a pretty big entry and exit door because you want to be able to get out when the fire starts or the flood starts and a lot of times the illiquidity is what kills you man and I think right what's the right discount rate on illiquidity I mean all these like all these instruments that are discounted exactly so I think like being comfortable of like yeah you might how far do you push out on the wrist

Spectrum but I think I think most people in the space have underappreciated how important liquidity is because liquidity dries up very quickly and comes out very quickly too and so I'd rather wait for liquidity to come in and maybe that's like where we are now right like I'm I'm not I'm probably not doing anything because things are choppy and like I don't know um I think in this environment like the more you overtrade like you're probably going to just lose my response which I only have believe is like maybe people don't actually want the liquidity like it's they actually appreciate it but they don't want it because then they have to trade it right I you know this this resignation this capitulation on on trading means like the the more I don't have to make

decisions the better yeah most people I mean venture capitalist in traditional markets have the best job in the world because they get told they they wait 10 years to be either told they're extremely right or wrong yeah uh but uh yeah I don't think you should run away from volatility I think you should run straight into it because that's if you it's it's a mind shift and as soon as you like appreciate that at least it's been helpful for me it's like all right well you wake up one day you see something down 20% you're like great it's something I like I'm gonna buy it I should be buying it but you need to have cash yeah and a plan and a plan yeah how often do you change your plan you know you can go through it every day and and update the information but I I think the

core parts of it are yeah they're supposed to be pretty well designed around you know your process and and the big picture of of what's going on um so it's like you update the information but in theory the plan is supposed to reflect you know your backwards looking like this is how I need to trade this to prevent making all the mistakes and avoid the pitfalls so that part shouldn't really change so like you're sitting today like this week is pretty important like you had the FMC like you're going to have rate Cuts but then you have the jobless claims today and like you know and then you have the predict you know Cala odd are going up but like we have an ETF and we have the US shifting like slowly from being super anti crypto to regardless of whether

Camala or Trump win I think it's just it's a shift it's an inflection point I think if you fast forward two years from now we're gonna look back and say holy [ __ ] it was an ETF and the the US kind of shifted gears I should have been long yeah well two years from now be down 90% already so maybe like 15 months true the question is like how much you respond to like this stuff um or you just you put on size and you just say is a narrative still the same if it is I'm not going to do anything I'm just going to maybe try to raise more Capital because I'm gonna I'm gonna lean into this trade for the next 15 months and I don't I shouldn't overthink it like we're in a bull market like I should be buying stuff and I'm

going to cost the average my way down if things trade sideways I think the void of competition is on like the one to one to three month time Horizon so there's like the shortterm you know I wouldn't say it's chaotic I would say the high frequency firms have done a pretty good job of noticing patterns and that's like really complicated to swing the stuff around on a daily basis I don't think there's that as much Edge in doing that but kind of understanding the big picture identifying the regime like that's probably the place where I think is least competitive um and so to answer your question yeah you would probably take somewhat of a longer term view but it's not like you would say I'm going to be 100% long altcoins because of all this stuff because you know it's still very complicated supply and demand in

the short term like you need you need to upgrade the regime to money coming into the space for so many things to perform and right now you can basically say that about Bitcoin Jeff you think uh if you had the choice to like go back to traditional finance and do like hedge fund macro trading would you like would you do it like knowing everything that you know now and how difficult this Market is like why bother like you could you could probably be living a better life not you know Market actually closes uh you know I it's a funny it's a funny question I think that the path that we're all on as promoting opportunities and liquid strategies uh is a noble one it's and it's it's a tough path but one

that is worthwhile I think precisely because of all the things we chatted about once you see what crypto can afford uh in the unique properties it delivers on not just the liquidity but its volatility and the scale out of global reach there's really nothing else I think uh macro investors will be more uh intrigued by in finding those profit opportunities I I I also go back to something that were taught early as investors something Harvard also uh preached upon in part of the endowment model is that to make uh extra return one of the ways to do it is to take more uh liquidity right take that liquidity premium and that's why Venture at some

level is a compelling Way To Think through that construct it's also why people believe you should be out compensated for private Equity versus public equity and private credit versus Public Credit Etc that may be entirely false Fang and Max 7 might have outperformed private Equity but but all that being said I think there's also this unique backwardation of a liquidity risk premum in crypto and that's why macr trading is so interesting and exciting like if I told you that the S&P 500 was not a 1015 ball index but a 70 to 100 Vol index the return premium you would want for Crypt VC would have to be hundreds more than what you would expect for traditional private equity and so if you think about that relative discount and the value Gap that exists for the

opportunity set within liquid versus VC you know I wake up every day compelled excited and and intrigued by all the all the ways to make money in liquid crypto I know we talked about reflexive global macr trading is one but as mentioned before there are so many interesting things happening here you know Millennium as a multi-pod model one of the most successful things they've ever done is an index rebalancing something so uninteresting to most people but something that was so profitable for a period of time where yes no one's going to invest in a single strategy indexing rebalancing hedge fund strategy but is it useful as a conduit of a bigger buildout of a multistat 100% so you know I agree with Ry in the podcast prior to

where like there is a lack of interest for investors to want Market neutral returns in crypto but that's because it's presented the wrong way you need that to be a part of a broader toolkit that push out the efficient Frontier and help deliver on the higher quality risk adjusted uh sortino ratio so I'm I'm enthus by that mission I wake up every day glad to do it uh especially privileged to be doing it at bitwise and so I'm super pumped to see where we go in the next few years about that institutional adoption yeah I keep referencing this book uh the missing billionaires and they raised like really good points around like how you think about like compounding your capital and how people fully like just don't appreciate that

and I think it summarizes a lot of like we've been talking about here it's it's that people try to play Too Cute on playing it perfectly because people are you know laring on crypto Twitter that they're so successful and super profitable trading strategies the reality is a lot of to your point David it's hard to make money um sustainably in the space and I think what may have worked in Prior Cycles is not working this cycle and it's most people like are really resistant to that change meanwhile there's like market makers and people that are running more Market neutral strategies that are clipping 17 18 20% a year like with really low risk smart contract risk or what have you and like the law

72 whatever your return is on a yearly basis like that's how many years it takes divide 72 divided by your return is however many years it's going to take for you to double your Capital the difference between 10% 12 12% 15 and 18% return is massive yeah when you think about doubling your Capital now do the math on the draw Downs yeah the math under you did it no I'm saying now do the math on the draw downs ex% and 80% is I mean whatever it's huge right because if you wipe out 80% I mean yeah the amount of return that you need to overcompensate so I think the the the Highlight for me is I think it's more of understanding it's like a second

derivative it's understanding yeah your emotions and controlling those and and not necessarily controlling just being aware of them and your biases and reflecting on that constantly to avoid mistakes uh knowing that you're not going to get it perfectly right and just being comfortable with that the second one I think is just appreciating how other people are doing or not doing exactly that MH you know for me salana it's clear to me that most people are resistant it's still not consensus trade because I observe these managers and a lot of them are trying to over intellectualize why it's not going to be a thing because they probably miss the and so like I'm trying to observe what how other people and how their emotional process is by virtue of like what they're tweeting what they're

saying in conversations public and private and and just kind of like using that as an edge if you will yeah one thing is is you know every Trader or whatever person who interacting with markets is a victim of their like their first succcess I've always observed this it's like you can never get away from your first girlfriend or whatever it's like um uh you know for me I was an inace Trader was like this steepener trade you know it doesn't really matter but for so many people ethereum was you know a king maker for them in one way or another and that leads to like a lot of inflexible thinking we'll put it charitably um and you know I don't want to discredit it but I'm just pointing

out you know not bearish the like whatever but it's like it's it's a trend that I've oberved quite a bit from coming into the space um to tie together a few of the thoughts myself like you're trying to do you know I think you know just building off this discussion from last week like the there's a really big relative opportunity here um buying and holding liquid tokens like trying to do the adventure thing is is an answer but I think there's probably a bigger relative opportunity which is to bring in some psychological or or Trader Edge and as a result what might happen here is you create an actual track record which can bring in a lot of new money to the space again this this untapped resource of people who look through this no big draw

Downs sharp ratio lens you know that I think that's the only way you actually fix this Market structure issue and it's probably not going to happen fast based on all the points you raised about why allocators will be slow to adopt but that's the that's the forward that I'm La interest in and it could be like five five to seven years away if I were to take a bet on on where most of the money comes maybe not this cycle but over the next subsequent Cycles compared to like the prior Cycles it's on this type of strategy as you have more TR you may be smaller this cycle but as you compound more track record I think the smart investors can't Overlook the fact that you dampen volum the downside and you captured most of the return on the upside whereas most managers round tripped and for an allocator to have to

explain that to their pension fund it's just not not tolerable for them it won't be yeah and not to add to the list but the contemporaneous like all the buy allocators have at this point are related to their engagement in other markets where yeah basically human beings can't you know Market time like we're not we're not paying people to Market time in stock pick anymore to to some extent and so you know there is this like 90s analogy but you're working your way up this wall of um bias where it's like okay I I need to like do it like four times okay well now it's like 2032 whatever so the Jee I'll let you add this but the perverse I guess the the counter to that is we've all heard hedge funds have underperformed the market they still keep getting a ton of

money and I think there's some element of psychologically the allocator is saying I'm not going to get fired if I get money to andreon Horwitz or to uh you know uh named hedge fund because that's what I'm supposed to do that's what Howard you know that's a mosc approach to portfolio construction and the reality is just punt the S&P yeah but you know it's it's people sometimes do decisions to justify their job not to agent problem right it's sort of like I I get paid to find good managers je have no disrespect and so it's sort of like I need to like allocate money to someone that charges me 220 when the reality is I could just invest in the S&P or invest in the you know index so you know that might be the challenge for this type of strategy but

but but even then I'm sort of reminded that like uh if you clock more than like 4X as a as a fund ventor call it you're like top tier like if you look at mbca data of vintages like you know the return profile of most Venture funds and hedge funds is like pretty bad like in in crypto you still you're not going to have probably the 20 to 30X vintages but you that probably comes down but even if you're clocking like 5x 6X you're like s tier yes so and the trading one is like if you're achieving a too sharp without introducing a bunch of counterparty risk or cyber security risk or smart like um you can actually feel like there's not

some weird risk transformation of of those things to create the returns like if you can achieve that like that you know that looks really good versus a lot of other one sharp things in your portfolio so yeah and and I would push back a little bit on like the the hedge fund narrative s that you have put on which is the reality is that uh as an industry it might have shrunk but the best keep growing and that's the name of that particular game if you're in the top desile or cortile you take mark market share so I have not yet heard of any investor who can't find a way to want more of Millennium more of Citadel more of deaw more Renaissance Technologies Etc so I would just contextualize the law of average here yeah is less relevant when it comes to

Alpha seeking Endeavors yeah no that's a really good point anything else guys I know it's been a bit of a chaotic discussion but I think a really good one um and I'm glad we had it um I would love to maybe explore this in a separate pod um of just maybe Decon I've had a pod talking about my mistakes um I'm not a Trader but I guess like the market forces you to be a Trader um um but I think diving deeper in the emotional side of trading would be super helpful I think for people that are I know our audience would appreciate it a lot yeah there's a lot of physiological things you can do too I mean you know there's there's plenty of literature out there and and

coaching to be had um is this a Wendy type of coach for everyone this watch billions Wendy roads Yeah Wendy there are Wendy roads out there in real life I I have a Wendy actually yeah think I had the same one actually but yeah you guys shared the same coach I think we did at one point I don't I don't use her anymore but I have other people she the woman who has like a 100,000 followers on Twitter that one I don't know but heavy physiological approach discl my Edge making sure your body's in a in a good place to make rational decisions at the point of making decisions yeah like I've done neuro feedback all kinds of stuff

like your breathing R your sleep like all these things are super important Dave Dave did you get better or worse at trading with kids uh I think it's been kind of neutral because you basically stop out of having a life otherwise and so you know like trade cpto and have your kids and whatever some people some people tweeted that that their their ability to manage RI risk has been put into a different perspective with kids and how they think about compounding and preserving Capital there's also literature like I'm more emotional about parenting than trading so you know it's like provided some perspective there too you know the terror what about dog coins I mean dogs are like man manageable volatility in the big

picture H anyway thanks guys anyways good this really good uh any parting thoughts Jeff or David where can people find you um you know recommendations on books closing thoughts um yeah don't don't have much of a public presence um but I I think uh there's quite a bit of of literature out there I think like to be inspired you go back and read some of these books about hedge fund managers in the 90s you know the markets Wizards book inside the house of money like this was a different time and then like crypto might be the Last Frontier right I mean okay there could be something new but the the the the ability to apply these things as human beings with like a weaker role of technology and no competition for

Traders I mean that it's a pretty inspiring they can be really inspiring reads um to work on these things but hopefully there's Edge that comes out of it isn't it true that most of the so Market wizard is a book a great book by the way every chapter is a new manager isn't the case that most of those managers blew up eventually so I think the often times it's describing like a 20e career or whatever so it's it's not like the 2018 22-year-old in crypto that blew up like 18 months later but it's like the the the landscape change you know it's like all these same guys have struggled to outperform and you have fewer examples of these types of guys these days because of the amount of competition technology and human beings again I mean there are only so many

examples these days of people who repeatedly outperform in macro and you asked jef this question like do you want to go back to old job I mean me personally I I will be humble and honest that this is big part of the reason that I'm here I mean it's it's night and day the competitive landscape yeah I Echo both of what you guys said Market Wizards was one of the books I was given to when I was a summer analyst that Moran Stanley on the trading floor there's two volumes actually both worthwhile reading as it teaches you a lot about the behavioral psychology of fear and greed as a predominant recipe for trading Acumen I think it's super relevant in crypto it's part of the market structure as it exists today that those two things are driving a lot of the liquidity gaps and skew and curtosis all in between so I I

I think it's a worthwhile read that I would Echo and recommending for all of our listeners for sure nice yeah and you know I would be for me it's uh cot therapy yeah seriously the best investment you can make you don't have to be sick everyone should be going to therapy it's like it's always nice to talk to someone that's not a friend it's not a family member you just like talk about these things it's super helpful yes trading coach I was also to add whatever you want to call it I was also going to add have children I'm sure Dave has not become a better Trader with kids because he's up awake all hours of the day 247 for the crypto cyes can TR we can do a full podcast on sleep trading and sleep okay so but

sleep you know what we should have by the way per let's have pav on because this guy first time I met him he's like get an eight sleep I'm like you're that kind of Shiller [ __ ] but I actually have gotten ate sleep this is not endorsement if they want to sponsor us great my sleep quality and hygiene's gone up order magnitude it's I it changed my life it's so important huge yeah awesome guys really good discussion well um Good Luck trading these markets it's not easy anyone that tells you it's easy is full of [ __ ] yeah so anyways great thanks for coming on thanks hey everyone big thanks for watching today's episode wanted to just quickly remind you about the Stellar development foundation's 6th annual Meridian conference this October 15th through 17th in London this is an

incredible opportunity to network with the forward thinkers who are defining the future of this space head over to meridian. stellar.org and use the code blockworks pod for early bird pricing [Music]