The State Of Crypto Derivatives

Transcript

You can also think about all these different types of things that exist in crypto as all of them having some sort of optionality embedded in them. And if you can manage a book correctly across all these different instruments, and by the way, not just in crypto, there's like IBIT options now, right? There's MicroStrategy options, there's Coinbase options, things like that. Throw it on a book, manage it, you know, in an intelligent way, that's how a lot of dealers make money. This episode is brought to you by Scale, the next evolution in layer-one blockchains. Explore the gas-free ecosystem at scale.space/ecosystem and follow their journey on X at Scale Network. Thanks to Scale for making today's episode possible. I wanted to take a moment to tell you about Focal by

FalconX, the AI-powered insights engine built for institutional crypto. By leveraging AI, Focal empowers institutional investors to streamline research, anticipate market shifts, and make sharper investment decisions. You'll hear more about Focal later in the show. Nothing said on Empire is a recommendation to buy or sell any investments or products. This podcast is for informational purposes only, and the views expressed by anyone on the show are solely their opinions, not financial advice or necessarily the views of Blockworks. Our hosts, guests, and the Blockworks team may hold positions in the companies, funds, or projects discussed.

All right, everyone, welcome back to Empire. Very excited about this one. We are in person at the new Blockworks studio. We have Josh Lim and we have Sheleng joining us. For those who don't know, they are probably the two best people in the world to be talking crypto options, crypto derivatives. Sheleng was a prop trader at UBS and Merrill, CIO of Ledger Prime. Josh was at Galaxy, Genesis. I'm sure I'm forgetting some of the backstory, but these two guys went on to found Arboles. Arboles recently sold to FalconX, and they're doing some cool stuff at FalconX. I'll let them share the story. So, Josh, Shilang, welcome to the show. Thanks for having us. Yeah, likewise. Yeah, yeah. You guys like the new studio? It's beautiful. Yeah. Good.

Got to plug it. Got to plug it. So, reminder, go buy your tickets to Permissionless. So, Josh, I thought it'd be interesting to hear, I mean, you guys were at the heart of the last cycle. Uh you were Genesis, Shilang Ledger Prime, which then sold to FTX. Uh so, I would say you guys were in the heart of the last cycle and then then the heart of the the blowup, I I think, um with with FTX and then Genesis was obviously providing a lot of leverage. Um I would love to just hear your guys' story of like just that journey coming out of 2022 bear market. How you guys started found like founded Arbelos and the journey to, yeah, selling selling the business. Yeah, for sure. I think um we've obviously told the story a lot to um one-on-one, you know, with investors

and things like that, but I think yeah, this is probably the first time we kind of talked about it publicly on a podcast. Um we were both kind of in front-row seats, right, for the chaos of 2022. Um Shilang more in a buy-side seat and myself more in a sell-side seat. Um and we took a lot of lessons coming out of it, right? I think um we were both kind of privileged to have a lot of connections in the space and just having been a trading counterparty to a lot of the major um hedge funds, asset managers, um even protocols in the space, right? Um what we saw coming out of 2022 was just a proliferation of correlated risk across the board, right? At the end of

the day, it didn't really matter if you thought you were running a lending book uh with, you know, different kind of credits in that book or if you thought you were running market risk or if you thought you were running the basis trade. Um everything boiled down to just market beta in a sort of a correlation one environment on the downside. Um and so, you know, that was kind of a big flaw with the market structure in the last cycle. You know, it was just it was just very, very concentrated in a couple of large books. Um and the types of risks were also very correlated without a lot of um even across like different dealing desks, everyone had the same counterparties, you know, the same types of uh loans, the same types of like uh

structures, uh trading structures and things like that. So, yeah, we we thought about it a lot in terms of just what would need to change to support the next, you know, leg of growth in crypto um to bring in more institutional counterparties that come are coming in from TradFi. And, you know, frankly, it's kind of we started Arculus without really having the full picture of knowing that there would be this ETF launch with uh Trump coming back into power and sort of reshaping the regulatory landscape here, but all of the things that we thought might play out kind of actually did, right? In a very short time frame.

Um and so, yeah, I think the the main things that we were betting on are basically there's going to be a a huge demand for more transparency and trust in the ecosystem, right? What does that mean? That means um working with counterparties that are more highly regulated or sort of operate um on chain in a sort of auditable way. And um there is still a need for centralized dealing counterparties in our industry that um can provide flexibility and sort of creativity and structuring know-how for different types of trading you know strategies or um hedging structures and things like that. But, also like those

entities need to have a lot of integrity in terms of how they implement um you know, counterparty credit uh you know, you know, diligence and how they sort of like enforce margin rules and things like that. Those were kind of the key things that came out of um DeFi, right? Like last cycle, like DFI was very very uh well insulated from a lot of those issues because of those rules. The rules were so stringently enforced and you know, they have to be because they're encoded into different lending protocols and things like that. So, that's kind of what we thought. I was like, we needed to build some new firm that could operate sort of like a DFI protocol but with the flexibility and the creativity in to offer like bilateral trading and C5. So,

that was the genesis of Arbolus. So, like can you I know I know you guys are more private individuals. I feel like you guys don't go on too many podcasts and stuff but I I haven't really heard the story from your view of just I mean selling and I mean the the bear market was tough for everybody but for you guys I can't even imagine what it was like going through that. Can you maybe on the more personal side like what was it like going through this? Yeah, so you know, the origin of kind of the tie up with FTX was Ledger Prime at the time. The genesis of Ledger Prime was it was part of a holding company called Ledger Holdings which also owned Ledger X, a CFTC regulated derivatives exchange. It was kind of the first, you know, actually licensed derivatives exchange from 2017 which was

kind of the first in the US. Yeah, yeah. Yeah, so it's I mean consider that they actually got a license that that early is is kind of a miracle in retrospect given you know, where we're at today and how much like hoops we've jumped through. But as a result of that, FTX you know, wanted to acquire the holdco for the Ledger X license, right? Which would have enabled to directly clear in the US as well as serve retail in the US. And so, we were part of the acquisition there. Obviously, we continue to run the business independently with our own LPs but obviously in 22 because we're wholly owned by FTX as a result of their kind of collapse, we were part of the unwind and subsequent you know, bankruptcy. And

I think Josh mentioned a lot of great points in regards to just you know, serving counterparties and and the state of the market. Uh I think what I kind of noticed was um especially running like a quant market neutral fund and just how many other funds, even though they were market neutral or quantitative, also collapsed as a result of FTX. Um in retrospect, you kind of look back at the market and and realize that you know, a lot of the high returns, like despite, you know, even if you were, call it market neutral, delta neutral, a lot of returns really was just kind of, you know, masked as counterparty or credit risk, right? Or regulatory risk. Uh like if there was no risk from a platform or regulatory or anything, like the returns probably would be, like, in

theory, the expected returns would be lower, right? Because, you know, traditional market participants would be able to come to the market and kind of squeeze those returns out. Um so, in retrospect, a lot of market neutral funds, you know, collapsed as a result of, you know, counterparty and and exchanges etc. Um and so, I think, you know, coming out of the other end, uh there's two ways to fix it, right? One is kind of top-down, you know, we create a new firm, enforce um the proper, like, procedures and and rules in place in terms of how we guide ourselves to serve our counterparties, right? Uh but I think also there's a solution from an infrastructure perspective as well, right? And I think the two sides of it converge where, you know, there's kind of the subjective uh way

where we enforce it ourselves, but then you build these kind of DeFi primitives and and rails that really kind of are binding and and enforced it from the, you know, bottom up, right? And and I think uh that was kind of the genesis of Arrakis, um but also everything else is currently being built um within crypto as well, right? It's It's all these kind of like DeFi prime brokers or DeFi rails um that are trying to enforce uh that uh from like a kind of Yeah. Josh, you mentioned it was all one one trade back then, and maybe in the at the time we didn't realize it, like everyone was doing different strategies.

Is it uh So, so the market's obviously developed back in the markets back in Bitcoin's at an all-time high and that kind of stuff. Is it still when you look at the market, is it still all one big trade? I mean, I think right now, this has always been true about crypto, right? It the trade is sort of understanding the flows of retail capital and kind of what is the next rotation. I think what's different about this cycle is money is pretty bifurcated between what is crypto proper like on chain versus what is in equities and sort of tried five market instruments that can sit outside of crypto but still have market exposure to crypto. And those pools of capital capital are very

distinct and don't often mix, right? Um If you think about the ETF as a a way for capital to get into crypto, it generally comes in and it stays in that box. I mean, sure there's redemptions and things like that, but once it's deployed into crypto, it or let's say even Bitcoin it goes into MicroStrategy, that's just going to stay in a box forever and it doesn't really come out. It doesn't come to play in alts and other things like last cycle, right? And and there's other sort of elements of last cycle that were particularly unique, right? Like the the proliferation of just unsecured lending, right? And um Unsecured lending through the forms of Genesis, BlockFi, Celsius, and Nexo and folks like that. through

CeFi lenders which which allowed for a lot more leverage and sort of I I think a lot of the um rally in all coins, right? Like in that in previous cycle the 2020 to 2022 cycle was driven by a lot of those lending facilities and and sort of like the the availability of credit that allowed these things to sustain like very high valuations effectively. So there wasn't necessarily as much sell pressure when you could borrow against it or or you know, people could borrow more cash to leverage into it. Um Yeah, and and and also I I guess one other thing is there is now a lot more focus on fundamental value, right? So, there's

there's like a lot more concentration like Bitcoin dominance is like mid-60s, right? There's a lot more focus on things that have durability that are going to be survivors of this cycle and next cycle and store value narrative is a very strong one. But, you can also see just sort of this this winnowing effect of just winners become very dominant, become like you know, 10, 20, 30 billion dollar protocols and then everything else just sort of is a slow bleed like all these alts, right? If you look at any chart, it's very painful for a lot of people who are kind of token selecting investors.

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always, investments in blockchain technology involve risk. Terms and conditions apply. So, I want to do kind of a state of the market and I I want to just get you guys' take I mean there's all these interesting things happening in the derivatives market. Deribit just sold obviously. You guys are doing some interesting stuff with FalconX, Hyperliquid. Like there's all these very interesting elements in the market. Before we do that, I am an idiot when it comes to the derivatives market and just uh trading you know, an active trader and stuff like that. Can one of you guys just explain the derivatives market? Um including like what are the different types of things that are being traded like forwards or options or swaps or perps, things like that. And then uh

also importantly, what are the type different types of funds that are in the market? Like showing I think you guys are or you you I don't know if you currently do it but run or have run a delta neutral fund. How is that different than some of the liquid funds which is different than the dynamics of the VC funds? So there's these two big questions, right? The different types of derivatives, the different types of funds and then we can get into I think state of the market. Makes sense. Yeah. Well, derivatives is just as a category, it's um instruments, financial instruments that have reference some other asset, usually a spot asset like Bitcoin for Bitcoin the price of Bitcoin in dollars, right?

You can write a call option on this thing which means you get an asymmetric payout which if Bitcoin goes up, you make money, you make a lot more money and if it goes down, you don't lose money. Right? Um so that's the very basic building block of um any kind of option structure is that sort of asymmetric payout. Um you can also trade things that are purely linear. Um everyone's familiar with perps that trade on um Binance or OKX. Uh perps are linear instruments that have some sort of embedded funding rate. So to keep that position open, you have to pay an ongoing cost. Um and so the the sort of two main levers in pricing these uh any kind of derivative is the forward price. So it's sort of like how

much will it cost you to hold a position open for a certain period of time. And then the other element if it's non-linear, if it's sort of like an asymmetric payout is the price of optionality. So it's the implied volatility is what people call it and it's just sort of where does the mark the market price risk, you know? How does the market value um where does it think that an asset can move in the next, uh, you know, X number of days? If if the market thinks that, um, Bitcoin can move a lot because there's a bunch of catalysts on the calendar like, you know, tariffs and, uh, Fed meeting and, you know, maybe potential large buy from MicroStrategy, things like that, then the range of outcomes for a Bitcoin

price is very wide and so implied volatility is going to be high and the price of options will be similarly very high. And the implied volatility is just a way to sort of normalize that idea. It's like you look at cuz you can trade, um, derivatives on kind of anything, right? Like anything any maturity, any strike. You could buy a 100,000, you know, 110,000 strike call on Bitcoin, but you could also buy like a 200,000 strike call on Bitcoin, um, if that's your price target. And so to normalize all these things, you sort of back out like this idea of how much is the market pricing into the volatility at each of these, uh, strikes. So, that's like a a basic idea. I'd say this, like, Shlomi and I have been in this market for a long time. Um, I think

we actually met each other and sort of started doing business together because of the options market. Um, and now more than ever it's become like this huge growth area in crypto, right? Like everyone is sort of thinking about, um, all the dealers in the space, right? They We everyone kind of wants to grow their businesses. This is sort of a key growth area. Um, it used to be you could just, um, when I was at like Galaxy and Genesis, you could just start a very vanilla business where you just sold options and you, um, you know, you you trade with one hedge fund that's looking to get a long exposure into a catalyst and then you trade with like a yield fund that's looking to sell it, uh, an option just to collect some premium. And now it's much more complex. So to your question,

it's like what are what are people doing? It's really everything you could do in TradFi and more. Um, a good example would be there are agreements that uh, people execute when they get listed on exchanges, right? So, like a new token launches on an exchange, you might enter into agreement with a market maker where they provide liquidity on your token on decentralized exchanges in exchange for some kind of right, so an option effectively on the token. And a lot of things in that happen in crypto have this sort of embedded optionality. You can also think about things like MM pools. MM pools have that sort of non-linearity of if you hold if you put in, you know,

like $100 of USDT and $100 of Bitcoin wrapped Bitcoin in a pool. Um depending on the price of Bitcoin, your exposure is going to change, right? On each of those assets. So, um you can also think about all these different types of things that exist in crypto as all of them having some sort of optionality embedded in them. And if you can manage a book correctly across all these different instruments, and by the way, not just in crypto, there's like I bet options now, right? There's MicroStrategy options, there's uh Coinbase options, things like that. Throw it on a book, manage it, you know, in an intelligent way. That's how a lot of dealers make money. Yeah, and what what And before we get into funds filling, why have perps taken off is why are perps so so so dominant?

Mhm. Um rel- cuz you said, you know, now in crypto we have everything else that TradFi has. I actually think we have more than what TradFi has because of the perps market. So, maybe you can touch on perps for a second. Yeah, I mean, perps are just the easiest and you know, sort of the lowest friction way for people to get access to crypto, right? It's the reason I think originally they existed is because crypto is a fully funded products that So, like originally when people wanted to buy Bitcoin, they had to go and send a wire to Coinbase and then wait a couple days for it to hit and then use those dollars once it hit the exchange to buy Bitcoin spot. Um there was clearly a need to actually get pre-funding and leverage um before cash

hits. Um and this is this existed even in the very early days with things like BitMEX. Um and then beyond you know, once we got into kind of the the post-ICO bubble in 2018 and sort of the next cycle, like it became much more of an a way to get leverage for retail users across all of the different assets to trade. You want kind of one easy place to take risk and that place was often Binance perps, right? So, it's it's easy, it's linear, it's very easy to understand how do you how to trade it.

Funding rates are not very straightforward, but it's sort of an afterthought for a lot of people when they put on the risk, right? It's just like the price is going to go up either 20% or it's not going to do anything and my funding cost is, let's say, you know, whatever, half a percent. So, it doesn't really matter. I'm not thinking about the funding cost. that I'm paying is you know, minuscule compared to the the 10x that I'm making on my And and that's that's you know, that's changing, right? Like that convexity profile of crypto is no longer as much there in this asset class. So, Well, we'll get back to that in a second. Shall I do you want to talk about And I would quickly add that like, you know, um yeah, with like perpetuals, there's no like expiration, you don't have to worry about strike risk, roll

risk, and all these things. It makes it a lot easier, right? And perpetuals as a primitive has existed previously even with like CFDs basically, right? Um it's just illegal in the US, but uh I wouldn't be surprised with the current administration that perpetuals as a concept does you know, become legal in the US in some form and we might see you know, perpetuals in other asset classes outside of crypto um soon. Do you think perps will come to just the traditional capital markets world? I could see that, definitely, yeah. Yeah. Yeah. Um but yeah, going to funds, um I would say broadly, there's kind of two categories, right? There's kind of your venture and then there's your liquid, right? Within liquid, um there's probably three-ish uh categories. There's your quant market

neutral, delta neutral funds. Usually like systematic, algorithmic. There's your directional kind of like discretionary or your kind of systematic stat arb discretionary funds. Um Uh and then there's kind of a third primer that's emerging where I would call it like on-chain asset management, right? Where you kind of have uh DeFi based using like DeFi rails to do a lot of like traditional, you know, hedge fund strategies, right? Um Ledger Prime previously and and currently, I mean in C, generally, you know offers a couple categories, right? One is just your quantitative, you know, market neutral fund. I think that's pretty easy

to sell. You know, we are trading crypto, but honestly, we could be trading anything with, you know, that that's inefficient, right? And and our our selling proposition is highly inefficient asset class with a lot of opportunities compared to like traditional stocks and and other assets. Um I think in the longer term, what will ultimately happen with crypto funds and strategies is it's going to be like any other asset class, right? You're going to find crypto as a pod or as a vertical or a strategy within like the Millenniums, the Citadels, etcs of the world. And, you know, right now historically, you've had these like directionally long biased funds that

you know, 2017, 2018, 2021 had done well, but I think this previous cycle have done not as well, right? And I think as traditional institutions enter the space, as fundamentals start to matter more, I mean crypto begins to trade more like a traditional, like almost like a long short kind of equities like product in a lot of these traditional like funds, right? Um So, I think we as a fund is position ourselves to start touching non-crypto assets as well, right? We're starting to touch like MSTR or derivatives of these crypto-native equity companies.

Um and I think ultimately it's going to be one, you know, as Josh mentioned, like one pool of capital. And crypto itself is not just going to be, you know, crypto crypto, but actually like crypto on, you know, various traditional like rails and platforms. Where Where is uh where is the most inefficiency? Actually, which part of the crypto markets would you say are efficient now? Like bit like Bitcoin. Like you can maybe you can argue Bitcoin's an efficient market now. I don't know if you'd say that or not, but how far out on the on the risk spectrum do you have to push to find the inefficient markets in crypto? Or where where are you Just tell me about how you think about inefficiency in the crypto markets, though.

Yeah, I think um you know, back in '17, '18 like it was inefficient in terms of just like centralized exchanges, right? You could like buy something at Bitstamp, sell on Coinbase, like and wait like 15 minutes and the price would still be like very different and you can, you know, arbitrage it. Now that really doesn't really exist, right? Uh you might be able to find that on DeFi, right? DeFi in some ways, given just a you know, numerous L1 chains that are launching. Uh like cross-chain arbitrage still kind of exists. Cross um DeFi CeFi arbitrage exists to a certain extent. So there there are inefficiencies there. Um I think also just defining um what the threshold of inefficiency like is. Uh as the space gets more like regulated, as you know, platforms and counterparty

credit risk decreases, I also think from allocator perspective, um the expected like return or hurdle rates for allocators also you like comes down as well, right? And so inefficiency isn't necessarily like 30, 40, 50% anymore, but, you know, more so, you know, starts to resemble like more traditional kinds of returns for at least the quantitative and and market neutral type of funds, which are more like in the teens, right? Um which yes, it's more competitive, but, you know, this bring comfort and more capital to the space. And so everyone's kind of playing with like a little larger pie, right? Um yeah. Yeah.

Now I feel like maybe have our base set below us right now. Josh, do you want to give us a little um state of the market? Um, you you had a post back in maybe mid-May where you were saying like uh Look, quick observations from all-time high like crypto led by BTC inflows from corporate treasury buyers has room to go higher. Macro outlook beyond Bitcoin is less rosy, but Bitcoin likely to benefit from bond market turbulence catching up to gold's Q1 move. You had a long thread on that. You know, that's about a month ago. Curious to get your current take at you know, state of the market. Yeah, yeah. I mean, I think the most exciting thing right now is that um there are a lot of rotation trades happening, right? Between all ones and um a lot of it is being driven by the

fact that so much capital has There's like these We talked about this earlier. There's these different domains where capital can exist, whether it's like in equities or in crypto. And actually to to your earlier question about where the most efficient parts of crypto today, I mean, it it might actually be in the equity space, right? Like all these new um like pipes and SPAC deals that are happening and the and the stocks like move pretty dramatically whenever things get announced like there. Um, but yeah, I mean, to to to your point is like we can isolate three different things that are that are happening like immediately right now, right? There's this sort of um public markets. There's vehicles like Circle IPO. There's a bunch of fundraises happening um around

um these sort of private deals in public stocks. Um, they're all being used to fund corporate treasury purchases, right? And you know, we've all seen a couple of these major ones, Bitcoin, ETH, Solana. Um, there's going to be more and more of these, I think, in the in the pipeline. And what we're seeing is there's a lot of money coming out of both trad-fi pockets and crypto pockets go to fund these new uh vehicles. Um, in crypto proper, there's um things like the plasma sort of word word by the way, "crypto proper"?

Crypto proper. It's like where we all live. Yeah. It's like not the tradfi people, but us. There's there's like the the um plasma TVL deal, right? Like they filled like $500 million in what? Four three four minutes? story with that deal? Well, it's it's uh the way it works is you commit um stable coins into um a like a vault that unlocks when mainnet launches for plasma. Plasma is a um kind of a chain that is intended to support uh tether transfers. And so um if you pre-commit to it, you know, you will receive at the end basically a call option. So, this is another one of these things. You get You get a call

option to buy um into the plasma tokens, which are called XPL tokens at uh $500 million valuation. And I think based on comps, what people think about, you know, what what this type of network could come out at, it's probably, you know, depends on your assumptions, but let's say like three four X or something like that, probably more, right? Um so, that's the upside for locking up your tokens. And this is this is exactly what we're talking about earlier. It's like pricing derivatives. It's pricing how much is the cost of capital over that window of time versus what is the value of this option that I'm getting.

And um yeah, now now everything in crypto is like that. It's like that risk reward analysis, and you have to model everything out. It I mean, it used to be, right? Well, last cycle, people would just do these deals, and there would be so much upside in these deals that you would really wouldn't have to model it out that much. You'd be like, "Well, I just know like this is All right, if I can angel into this thing or do the series A and pre-token, yeah, 6 months before the token goes live. They're doing a TGE. Auto 5 X. Auto 10 X, honestly. Yeah. Like the convexity and the sort of like because you have access and you know like nobody else has access, it's like pretty obvious. The opportunity is pretty obvious. And the narrative is pretty obvious. All that kind of stuff. Now,

it's like, all right, this is a $500 million deal and it's open to the public on fair entirely equal footing for everyone. So, now it's incredibly efficient. Money just comes in very quickly. And, you know, there are there are no real really back room deals or anything like that. It's just everyone gets the same terms. Um another a good example of this would be like this this raise around um like pump.fun, right? So, that's happening right now. That is a liquidity drain for the entire ecosystem as well because people are reallocating from other assets in their portfolio to deploy into this.

Um there you know, there haven't really been any um meaningful announced details yet, but um it's it's one of these things that we see a lot. Like basically between ETH and SOL and um a bunch of these newer L1s that are launching, people are constantly kind of rotating trying to figure out what the next catalyst is. So, it's it's incredibly efficient now as a market. Yeah. So, you're saying it's incredibly efficient, right? So, okay, let's let's talk more about these liquidity drains. So, the liquidity drains were probably um you've got the public What what do we want to call them? SPACs, pipes, meme stocks, whatever you want to call them.

So, that that's one bucket of liquidity where capital and by liquidity drain I think you mean like you've got capital allocated and then you're moving that capital into these new buckets. So, it's draining all the draining all the capital. So, you've got those things. You've got the pumped up fund billion-dollar raise or whatever the details are. You've got Plasma TVL 500 million. Um you could probably bucket Circle in there, right? I think people are longing Circle stock as you can see by the charts. It's up like 4x. Um what are the other uh I guess two-part question and should I take this to a um but A, any other liquidity drains that you guys see either now or coming up?

And then B, what is the impact that this has on the entire rest of the market? I mean, we just had four four assets. There's 4,000 other ones. What does this do to the rest of the market? Yeah, I'll maybe take the second part. Um I think like what one is, you know, what you're seeing the public markets in many ways it's kind of similar to like what we've seen in crypto like ICOs and what you said earlier about oh, you get in at the ICO price and you know, you're going to make money cuz like the the rush right now is you getting at the NAV price for like these like treasuries basically, right? And you know that well, you assume that it's going to trade at a premium to NAV.

Uh like SBET or some of these other ones. Um and the game in some ways isn't like different, right? Like if you are kind of someone that can subscribe directly and and getting at NAV, you know, it's trading at like 5 6X Right, there's a there's a fight right now to get into these things cuz it's almost Now, we'll see like once money on them in the Well, once it actually like registers and you know, unlocks and and sells, like I'm sure the premium's going to collapse, right? But um you know, some of them are still like even after the unlock basically are holding up to, you know, their premiums, right? So, in that sense like the game hasn't changed too much. It's just kind of rotated to like a public um platform.

And the second thing I'll I'll say is um even like this morning, right? Like Fetch.ai announced like this five, you know, this is via public vehicle that announced like a 500 million intention to basically create like a Fetch.ai um public like vehicle, right? And so, uh even though it's like you know, perhaps different pools of capital in different vehicles, that money ultimately does hopefully like make its way to crypto in the in the sense that it it is supposed to like buy like, you know, Fetch like tokens or other vehicles that are popping up are intended to buy Ethereum or other like crypto native tokens. So, you know, even though it is it is different, um it does support like crypto valuations and like we've been

complaining, you know, this cycle that there is no alt season, right? Like there hasn't been an alt season. But maybe this is something that does trigger, you know, certain parts of the ecosystem like in alt season to coins that the market deems as, you know, fundamentally valuable enough for traditional public money and capital to actually, you know, back and and get behind. This episode is brought to you by Scale, the next evolution in layer one blockchains with a gas-free invisible user experience, instant finality, and robust security. Scale allows for limitless scalability and has already saved its 50 million users over 11 billion dollars in gas fees. Scale's

high throughput, zero transaction costs, and powerful web three infrastructure make it the ideal platform for gaming, AI, and other high throughput apps. To explore the gas-free ecosystem, visit scale.space/ecosystem and follow their journey on X at Scale Network. That's Scale spelled with a K. Thanks to Scale for making today's episode possible. As always, investments in blockchain technology involve risk. Terms and conditions apply. Uh I I think I followed, but just to double-check, the you're saying the alts that could run are the alts that the uh traditional capital markets would deem good enough for like a public

vehicle like this. So then if you're if you're a a token or you're you're a team with the token, the number one thing that you should be trying to do right now in your opinion, it sounds like, is to go create one of these public vehicles. Yeah, I mean, I wouldn't put it that way. I would put it as your number one goal should be build a product with utility, right? That has durability and appeal to long-term investors. of one of these teams, the number one tool should not be go get listed on Binance. I mean, the the old things, right? Go get listed on Binance. Go get the KOLs on YouTube. You know, there's all these games, right? Now the game is go create a treasury company.

Is that right? Effectively, yeah. I mean, there's still like now we spend our days talking to like bankers and lawyers and stuff like that, right? But there's there's a lot of nuances now that you have there's complexities to think about like how long does it take for shares to get registered? Um because you need it to be registered before they're tradeable in the secondary market, you know, there's questions like what are the things that are um allowed to be in a public vehicle. Can you put things like that look like securities in a public vehicle and have it be majority, you know, that one asset? Um Or is like a D5 token like you like actually accumulate the necessary tokens to put into a vehicle to be like

D5 or reals, right? Like probably not, right? And and you know, I mean all these things have also operating businesses attached to them, right? And those things need to continue to operate in order for these listings and share registrations to become valid. So, um you know, there there's a a big focus and and this is actually a good thing, right? The big focus is you you buy some a large amount of some asset and you actually have to deploy those assets to productive use, which means you might, you know, stake them or you know, run a validator, run a node, um operate the network actually, create value for the network and for their users and for other people in the ecosystem. Um it could also be things like how do you generate value for as as one of these corporate treasury

vehicles? Like you could source tokens at a discount from locked, you know, um people who have locked their assets. are the recent deals I've been seeing is you're basically um you're not actively buying, you're almost a buyer of last resort, right? So, you're um You know, actually it's cuz I was with uh one of the funds who's doing a lot of these and I was like, you know, kind of being the mid-curve guy, being like, "Yeah, super risky, whatever, they're going to blow up." And he's like, "Well, not not if you do this structure where you're essentially buying." It sounds like you're the uh you're sitting there waiting for VCs who maybe want to like lock in a return. You're saying, "Look, if you want to sell it at a 50% discount, I'll take that off your hands." And then you're essentially it's an almost an auto 2x.

Uh so. Yeah. Um what what is the risk as you guys see it in these structures? Um well, definitely like counterparty like credit risk, right? Like essentially can cuz these are usually locked for 6, 12, 36 months, right? Um if they're not like smart contract unlocked, then there's potentially like counterparty credit like legal risk with this, right? Um a lot of the funds are doing this also from a yield What what is that? Say more about the credit risk. Um well, like these are legal contracts, but like or or from the foundations, right? But like in theory um if it's not actually, you know, coming out unlocked from like a like a predetermined like smart contract and you require a foundation or a company or something

to actually send you the tokens in the future, um potentially like they might not deliver the actual like tokens um as they say they will in you know, a year or two years or three years, right? So, there's counterparty risk with some of these uh like discount or treasury deals. It depends on who you're buying them from, right? Like if you're buying it directly from a foundation, probably less so. If you're buying it just from a random early whale or investor, like he or she could literally just disappear, right? In theory. Um so, the structure of how it's done, like are you delivering up front the premium uh for the tokens? Is it, you know, kind of held in triparty, etc.? I think it does help mitigate that um in a certain way, but um it's definitely not like risk-free from a

counterparty perspective. And then the second risk like like funds like ours that are doing these deals uh from a delta neutral perspective, right? You know, sometimes we'll buy discounted and then we'll just hedge it with perps and lock in the difference and kind of make this yield. Um you're you're in some ways you're you're kind of just naked short um on the exchange, right? And so, let's say the token goes up in price 50% or 100% or more, your short leg requires more and more collateral um to maintain basically that hedge. Uh, and so, you run the risk of getting like actually liquidated, um, on the short leg, uh, for example, if, uh, you know, the token continues to like appreciate before you actually get Cuz you have to keep adding more and

more and more collateral, and then you might run Okay. Um, so, after three arrows blew up, uh, Su Su and Kyle gave an interview on Bloomberg, uh, on the GBTC trade. And if you guys were I don't know if you guys remember that interview, but they defended their strategy, and they said it was impossible to predict the reason that they blew up is not because they did anything wrong, it's because it was impossible to predict that so many other people would follow them into the trade. So, the trade got too big, essentially. Is there any similarities with Kyle and Su saying, "Look, we were just doing this trade. We didn't realize this trade would grow in size by 100x." Any similarities with that in 2021, and maybe you could replace Su and Kyle with

maybe Saylor or someone else here? Any similarities or or different different structure? I mean, I'd say like there's a difference in leverage, for sure, right? Like, I think, um, you can see the cap structure of MicroStrategy. Um, it's public. You see how much debt debt they have. Their debt's equity is, um, far less than, you know, some of these levered trades, these basis trades from last cycle. Um, that's one consideration. I mean, the other consideration is that these are, um, companies, right? They So, they're companies with like shareholder rights and governance processes and things like that. And so, you you could see a situation where some of these companies trade at a discount to their NAV, their holdings. But, what happens in traditional markets when that happens,

right? Like, the companies go out and they sell those assets and they buy back shares. back the stock, right? Yeah, or or somebody else comes in and does a takeover. They just buy the company, and then they have majority voting rights, and then they liquidate it or something like that. that's interesting cuz I don't know if you guys saw what Morfo did the other day, but they came out and there's like they basically said there's only going to be one token and there's this problem in tokens where you have no legal rights, you have no claims, you don't know if a company's going to launch a second token. There's all these issues, right? So I actually wonder if the reason all that investors love these public companies is cuz you're actually putting the it's actually the legal framework of a company around the token.

I think it I think so, right? Like if you think about it, it's actually a lot easier to operate in crypto as a venture firm that's holding sort of like a promise of upside in the future in terms of like either equity or token warrants or something like that than it is to be like a liquid fund where you have to you're taking you're constantly taking like operational risk and you're custodying assets that could get hacked, you know? So yeah, I mean there's there's something to be said about this sort of simplicity of just having shares in your Robinhood or your Fidelity account right? Yeah, I've always kind of had the thought that like I know there's been a lot of fight about like whether, you know, crypto tokens, etc. like securities or not, but I kind of think like uh it's not necessarily a bad thing if

like all these a lot of tokens are just deemed securities and just fall under security regulation cuz I think actually does create a set of rules that everyone can kind of follow by and abide by and there's a pool lot very large pool of capital on the sidelines in the securities markets that historically haven't been able to touch crypto because it been kind of like a undefined asset class and if they actually are just deemed securities and that in theory that pool of capital can actually flow into crypto and participate um within the asset class and maybe that's the pool of capital that's needed to ultimately support like prices and everything else, right? How do you what inning are we at to use the overused like uh you know, inning one through nine here? What inning are we at specifically with the SPACs? Like I mean

yeah the treasuries. I mean I I think we're early to mid, you know, innings. I think basically um there is a pretty healthy pipeline of large deals. Like we we think there's only going to be a handful of really credible teams, like operators, and um you know, the the bankers and the sort of like investors into these deals. Um the marquee investors are only going to pick like, let's say, four or five more of these things. Also, like there is this phenomenon where there's generally like one of these things that's like the the chosen one, right? Like the blessed sort of uh vehicle for a particular asset.

So, for like ETH, it's maybe it's the one where Joe Lubin is on the board, or, you know, like that that that sort of thing. And so, there can't be like that many, and or there could be, but they just won't necessarily be the the one that people have at top of mind to invest into. So, the ones that have the sort of like brand power and um have the sort of retail like reflexivity and meme meme staying power, like those are the ones that people will allocate into. And um yeah. So, so maybe there's like four or five more big ones like that on new assets.

Um there's going to be a lot of small ones, like maybe, I don't know, 50, I guess I would say. And then, if you if you want to put uh sort of you're asking like what are the risks, right? We talked a little bit about the leverage and things like that. Like You you guys saw the blow-up, right, of the last cycle? Like what what blows that what Yeah. Blows this up? Yeah, yeah. So, the So, we thought about this, too. Just the downside risks are basically there could be sort of fatigue, like fatigue for these like public equity deals, and um crypto, let's say, flatlines, and all these things trade at a small discount to um to NAV, right? So, in that case, like if that happens, then what really needs to support uh all these assets back to NAV

is, you know, ex- more capital coming in. So, just stability in price action, more capital to come in, people maybe being able to borrow it to sort of put on this trade and hold it until it becomes back comes back to par and and above. And I think there is a lot of precedent for this. Like people have seen how the best trade coming out of the last cycle was just buying GBTC at 40% discount, right? Or even even MicroStrategy traded at a discount to to NAV coming out of the the bear market. So, people are sort of now conditioned to this idea that these types of instruments have beta like a levered beta to Bitcoin or Ether or whatever the underlying asset is. So, they can't I mean they can trade below

NAV but if there's any, you know, people are going to position long these things to capture like upside going back. And then, you know, worst case, they can do some kind of M&A or some kind of like shareholder activism to sort of reduce that that discount. My prediction on this is that yeah, what ends up blowing them up is two is two things. One is the Bitcoin ones don't they it becomes too easy to launch these things. So, they you know, one of the things that you need to do to get these things off the ground is have a marketer and a financial engineer, right? And Saylor is a genius cuz he's both of them. He's a financial engineer and he's a marketer.

But you need like like Nakamoto has David Bailey. 21 has Jack Mallers. Metaplanet has Dylan LeClair. Like you need the marketer, you also need the financial engineers. And the folks that are I'm just seeing some of these fund raises come in where they don't have a good marketer and the financial people are maybe B league, not A league. So, they're going to I think probably get over over levered cuz that'll be the only way that they can compete. Specifically on the good assets, I'm talking Bitcoin, ETH, and stuff like that. So, that'll be over leveraged. The other one will be um just two like kind of sub par assets. Like, you know, we start pushing past like the top 20, you're looking at like the 30, 40, 50th best thing on CoinGecko. Like that's not that's not a good asset that should be a public

company. I do think what will happen though is there won't be as big of a blow up as you know, whatever three arrows, stuff like that because the A, if you trade below NAV, you'll just you'll you'll rebuy the shares, but B, I think Saylor will just come in and like specifically with like the long tail of the Bitcoin ones, Saylor will just buy up the Bitcoin ones. And they also should stop fraud, right? It's not straight up fraud, like You stop too. That is a good point. Um Okay, so maybe fourth or fifth inning for these things? Third, fourth, fifth inning?

it's like a global asset class, like you recently there was that Brazilian like Bitcoin vehicle also, right? So like you're going to you start to see these vehicles not just in the US, but also in like large developing countries a lot of capital, right? Anywhere that doesn't have a Bitcoin ETF will have one of these. Yeah, like Korea or Indonesia or something, right? Like these are like already in the works, so. Yeah. Um are you would you basically fund any one of these that came across your desk that you could get into? Not, you know, indiscriminately, but Yeah, I mean, no, not indiscriminately at all. Not not blindly, but No, but mostly I mean, I'm like if you guys I mean, we were all in the market then, like the 2020 the 2021 angel deals.

Right right. You could almost blindly do those and make money. Right. How similar is it? So they I mean, these things have a much better liquidity profile, like everyone knows, right? So it's like they depending on what kind of deal it is, if it's a SPAC or a PIPE or something else, like they have shorter windows to liquidity. So it's actually mitigates a lot of the risk that you're talking about, where it's like you you have these long duration or even in some cases it's like uncertain duration you know, basis trade and you're trying to get it, you know, capture some premium before it collapses. In this case, it's like you know, you know, it's going to be a short window, like even in some cases like a month or so, right? So that that's just inherently like a lot

less risk for people. Um yeah, to your to your question of just like how do we think about these things and and invest in them. I I think for us it's like we we actually have a different motive here um and I'm speaking more as a sell-side person. Like our motive is actually to help provide the clarity to these vehicles and partner with them um and work with them on things like custody and staking and things like that. And so that's a lot of the times when we do work with these things and we make some kind of strategic investment, it's just purely for alignment on those fronts.

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is 100% focused on doing one thing better than anyone else, giving Bitcoin holders a secure, transparent way to unlock liquidity without selling. Click the link in the show notes to find out more. As always, investments in blockchain technology involve risk. Terms and conditions apply. Okay, it's third, fourth, fifth inning of the corporate stuff. Where are we at in the cycle? And maybe we can get more meta and say is there even a cycle anymore? Um to me it's starting to feel a little little toppy. Um but I'm curious how you guys think about it.

Yeah, I mean definitely I think this cycle uh speaking to earlier like it's a little different, right? I I I think like it's clear that Bitcoin has kind of already reached like escape velocity. It's attracting a ton of capital. I think it can definitely continue to just, you know, keep going whether it's from nation states or corporate treasuries or um you know, crypto native you know, qualified funds. I think like it's it's reached that area where it's not necessarily just like another cycle and you know, then we're going to have like an altcoin cycle. Like there's way too many coins uh now to actually have this like concept of all cycle all coins will go up indiscriminately like like previous cycles. You know, the idea that it's like eighth, ninth cycle and everything's going to go down like at

the same time. Um I I think it's a little like um different this time, right? Like it's not going to be some uh fraud or major collapse. Hopefully not um that like brings down both alts and ETH and and Bitcoin and everything else. Um so I I think like Bitcoin to some extent has decoupled from um you know, the kind of traditional crypto native like um markets. Mhm. Um switching gears a little bit from market. Um what was the impact of the I'd love to get you guys' take on the Deribit deal?

And um if that's like how how that integrate if you guys think that's going to work really well and you're like I know you guys compete against you know folks like Coinbase, but I'd just love to get your take on the Deribit deal. Yeah, I mean I I guess we kind of kicked off like this this series of large uh acquisition deals. Um and it's a lot of it has been either in the kind of the prime broker space or the derivative space, which is great to see, right? I think that's You guys really were the first I think so, yeah. It's like January January 2019. Well, we salute you.

Yeah, I mean I think that the long-term impact is um there's going to be more consolidation in these venues and I think part of it is um depending on what vertical you're in, like you might be targeting your crypto native uh market participants or you might be let's say like CME, you're targeting tradfi institutions. It It is almost like a winner-take-all phenomenon happening where if you have are the most liquid venue for derivative instruments and most people in the world have collateral with you and are on board with you, then there is really it is a moat. Like you you there's no there's very little reason for market participants to go and take that collateral somewhere else to a new venue and start seeding that venue and then

start uh you know, talking to everyone else and be like, "Hey, will you come to this venue and so I can trade with you?" That's a very hard, you know, cold start problem. Um so, there is this, you know, there's a lot of value in the Deribit franchise and you know, we we love the team there and it's great product and yeah, I mean I I think from a crypto native perspective, they have they have the a lock on that, right? Um now, we we are seeing because of the things you mentioned, like you know, a lot of people are in the space trying to do everything, right? So, everyone has sort of like competitive angles with everyone else. Like we are seeing a lot of new venues trying to emerge and see if like, "Hey, they can can we take market share from this sort of disruptive event uh in

the market, whether it's like dealers like us or new exchanges that are launching or launching specifically option products. So, we're excited to see that too because there is a lot of innovation, right? There's innovation from the perspective of new instruments like new types of um payouts, new types of asset underliers. There's innovation from the perspective of like risk risk management collateral management margin rules and things like that just to make sure that you get the most capital efficient experience that's safe for all of your users. There's also just differences in how how these things are structured. Like some of them are designed to be sort of like membership type models where you have a certain a

small subset of very large market participants that's driving all the liquidity and some of them are very sort of like, "Hey, we just market to retail. Anyone can participate. If you want to participate as a dealer, you can as well, but we're here to kind of service like small people who want to trade options." And I have a lot of thoughts on this. Like I might my my main thinking is right now in crypto because of what we talked about in perps earlier, it's very hard for the retail angle in options to break out. Like Because perps are so dominant, it's tougher on us. much easier to get leverage in perps as a retail user. Right. So, then why would Coinbase pay 2.something billion for you know, Deribit had 80% of the options market and had for a long time, right?

So, why would they pay 2 billion? But but Deribit is an institutional exchange. I get ironically, right? That's like people don't think about it that way, but it is actually where a lot of the risk gets transferred within crypto native world amongst like the large dealing institutions in crypto native world. A lot of the risk transfers are happening on Deribit, surprisingly. Is it Why is it Say more about that? Well, they they've invested a lot in sort of building out that infrastructure to allow these sort of like block trades to happen. A big part of it is a company called Paradigm, which is a technology platform that matches off, you know, Not not Paradigm the fund, Paradigm Not the VC firm. Um different Yeah, like a technology company that enables two counterparties who have Deribit

accounts, or you know, they also service like other exchanges like um uh Bybit and things like that, where you can you know, you can meet and trade a large block in one shot. So, you're not necessarily trading on the order book on Deribit, which if you're trying to do large size, like you're going to move the price dramatically if you try to do on the order book. Mhm. Yeah. Um why doesn't uh I'm surprised FalconX hasn't tried to buy uh Paradigm? Yeah. Um well, I think like we're a as a as a business, right? We are um focused on participating in these markets. So, it's it's it's harder to want to own the platform.

harder to like be a good partner to all of these venues if we're also running like a competitor venue. run it. Yes. Okay, that makes sense. Um so, fast forward 3 years. So, right now Deribit own owns 80% of the options market. They have for a long time. People have tried to compete with them. It's never really worked. 3 years from now, now that Coinbase owns them, will they still own 80% of the market? 80% of the crypto-native market, are you saying, or just general like crypto options or roughly the numbers I've seen is they own 80% of the crypto options market. Yeah. I mean, I I would say, and we've already seen a trend move a bit, not necessarily cuz it's taking market share, but I think the pie is expanding is obviously IBIT options um as a percentage of all, call it, like

options related to crypto being traded, um like gaining kind of like market share, right? So, I do expect at some point, you know, IBIT options volume notionally to surpass like crypto Bitcoin like Deribit options. Doing just IBIT options alone? Well, I IBIT IBIT is basically Bitcoin, right? So, like IBIT options volume versus Bitcoin like Darabit volume, I would expect I bet it to to overtake it. Can we talk about just the ETFs actually for a second? And um Uh we had uh who was it? We had an episode with Pranav from VanEck and uh Dave Collum from Reflexive and we're talking they're talking about just the kind of

basis trade in the ETFs right now. Um can you guys just I don't know how much you Yeah, how deep you guys can go on this, but like ETF basis compression, margin challenges as the ETF scale, like long-dated vols and forwards. Like just tell me tell me your Give me the update on what's happening with ETFs as it relates to the derivatives market. Um yeah, you can talk about derivatives, I'll talk about maybe just the basis, but like um some of our even our LPs are like very traditional multi-billion dollar funds. Uh and they've been been doing kind of the ETF basis trade themselves for many many months or even longer.

what what that trade is? Yeah, so effectively they're you know like subscribing and getting exposure to uh basically I bet, um posting that as collateral with their traditional like prime brokers, and then using that as collateral to basically do like the CME um basis trade where they're selling like CME uh futures, right? And so they're collecting that roll down in in futures uh as yield. And then they're able to do this on highly in a high-level way where it's call it like four to six to even seven X leverage. And so, you know, if they're borrowing at call it SOFR plus 2% and the CME rate is, you know, maybe 10% call it, right? Uh and they leverage

that maybe you know, five, six, seven times. Uh effectively they can get, you know, in the teens even like 20 percent like returns annualized in certain environments, right? So, that this has been done for a while and you know, whenever you you see like, "Oh, Millennium owns a billion plus dollars of I bet or whatever." Like basically like a lot of times they're actually just doing the uh like basis trade. just a snapshot in time. Yeah. That's when I saw um I won't call him out, but one of the big like ETH influencers um was like this fund just bought $600 million of ETH, and I know they're a delta neutral fund.

Yeah, like praxis or whatever. Right, praxis, yeah, exactly. So. All right, so you ETF, sorry, I interrupted you. Yeah, yeah, yeah, and then I don't know if Josh wants to talk about like the derivatives effects, yeah, options effects. Yeah. Um so, the the sort of long-term impact of um more capital going into IBIT and CME and so basically this capital is chasing yield, right? And the capital is the way the yield is generated is by supplying cash to the market for people who want to take leverage, right? So, it's like why why do the futures trade above spot price? It's because there's more demand for people who want to go long, and they're they're willing to pay a premium to go long. So, as more and more people deploy into the basis trade, it's it's

um balancing off that demand, and so the basis naturally compresses. What does it mean for all of us, right? Um well, this this trend is probably still at the early innings, if you think about it. Um a lot of the kind of credit desks out there um that were around last cycle, they're much smaller this cycle, right? Like those credit books were, let's say, 20 to 40 billion dollars in size last cycle, and now, you know, everyone is maybe running like a billion dollars of size maybe at most in in in crypto-native world. In in TradFi, of course, those numbers are increasing um as these funds put on the basis trade in in billions of dollars of size.

Um additionally, on that side of things, you're kind of seeing like um the TradFi prime brokers willing to uh margin against the ETF shares. And so, as as that becomes more prevalent, it's basically supplying even more cash into crypto and even reducing the cost of leverage even more. So, I mean all of these things means like the forward basis should really continue to compress except for situations where there's a lot of short-term demand for leverage. And so, it's like when you get these big spot rallies just kind of spontaneous, you know, very compressed and large gap moves higher all the basis spreads widen out a lot, you know, on Bitcoin, on ETH, on alts.

And that's compressed like a lot faster. But yeah, people come in a lot faster and just slam that down. Um Are is that coming in faster because these are just like like this is not manual, you know, me saying like, "Oh, this this on Binance in 2017 is different than the price on Coinbase. Like, let me manually move this over." These are all just algorithmically traded right now. now you can just put into Athena, right? Like, and basically, you know, you beat it like that. thing will just do it. Yeah. Um Yeah, and then I mean, the other part of your question is what does it mean for options, right? So, it's it's it's kind of the same effect, right? Long-term vols in Bitcoin and ETH are at almost like historic lows.

Um the last time they were this low was uh 2023 Why is that? summer because it was post crash and nobody wanted to touch Bitcoin. Why Why is it depressed right now? Yeah, so right now like the question that everyone's asking is why we're at all-time highs, which means like we could potentially be in a situation where crypto enters like a price discovery era again. And so, you that should result in higher volatility, but why is like long-term implied vols at near record lows, which for Bitcoin it would be like in the mid 40s uh for 6-month vol and further out. And the answer I think is because of this.

Like, there's a lot of capital now looking to deploy market neutral into crypto and trying to extract yield. And as the basis compresses, they're also looking at things like selling options. So, selling longer-dated options on crypto via things like structured products, which are very common in uh in equities, right? You you, you know, you take some high vol stock like Tesla or something like that and then you do a structured note where you sell options on Tesla and you generate a coupon like a a steady coupon try for doing that. Same thing like people are starting to do more of this on Bitcoin and ETH. So, all of long term vols are compressing because of that.

Interesting. Um can we talk about trade ideas? Yeah. Um actually before getting into trade ideas, what do you guys think of Hyperliquid? And I guess it could be a trade idea because Hyperliquid is obviously ripping, but would love to just hear your thoughts on Hyperliquid as a platform and you know, it's been like the first real thing to maybe compete with some of the centralized exchanges. So, how do you guys think about Hyperliquid as a platform? I mean yeah, I think it's a great user experience. Um there has been obviously other platforms like dYdX, Vertex, others that are of similar nature, but obviously we've seen Hyperliquid be kind of the clear winner this cycle, right? I think like parts of it is obviously just a technology. You know, team comes with like this trap

I would understand how like a matching engine should work, how to like control for latency, things that like you know, institutional traders and investors and firms care about. But also I think like they have a like this this kind of like market making product as well, right? Whether it's kind of like HLP or just like internal market. I think like they've been able to provide liquidity early on internally better than call it like the more um the right? And so from the get-go they were able to provide a better user experience not just from you know, the front end etc., but actually from the liquidity sizing spreads which is like really really important for a platform to kind of like bootstrap

from like zero to one. I have a dumb question. Why is it Why was it problematic when FTX or Binance or some other firm had internal market makers? Um right, remember that was always that was always a thing. It's like oh, they're they're market-making like Alameda's market-making on the platform. They can just snipe you. Like why was that so problematic? But it's but now it's a that was a con. Now it's a pro if Hyperliquid has market makers. I think they're doing it in a more transparent fashion, right? You can kind of see like the positions that they're hold like trading that the trades are they're doing the liquidity they're providing. I mean obviously, you know, there's still improvements to be made, but I think they're at least doing it in a much more transparent fashion than the historic like BitMEX is where FTX market making does. Mhm.

Mhm. Um you think they sustain? As a platform? Do you think they get I think I'm assuming you guys would say yes. Do you think that they can be a real competitor to some of the bigger perps platforms? Yeah. Yeah, definitely. Yeah. I think so, yeah. I mean it's because so much more activity is on chain now. It's like people think about how do I hedge my impermanent loss risk, let's say, or you know, some exposure to something that I don't want. Um it's a lot easier to just go through on chain venues, right? Um like we have different parts of the firm at FalconX and some people are exclusively focused on centralized exchanges and some people are exclusively focused on like on chain

activities and like that part of the it's like they want to keep it self-contained, you know, that that kind of makes sense. Um so, yeah, I think there's going to be more just natural secular growth from that, I would say. I think they've really copied like the playbook of things like BNB and FTT pretty well, too. Just sort of the exchange tokens that um to incentivize early users and build community and everyone sort of made money on the token, right? Um and it's um it's one of these things where they have like a good buyback model. It's uh it's clearly generating revenue because there is like strong um user adoption and loyalty. So, yeah, it it's it does have

seemingly like a lot of staying power and they they they have a lot of um um tricks up their sleeves still, right? Like they have a lot of new products launching, new teams building on it, and uh yeah, that that is it's it's kind of the runaway success of this cycle, I would say, right? Yeah. Yeah, and it's a you know, still a little bit of regulatory arbitrage, right? I think like it's become harder and harder to onboard with like Binance and OKX and and other crypto-native exchanges that historically have been easier, and and so, you know, Hyperliquid obviously you can just plug and play basically, right? And it's a much better startup experience than like having to onboard, you know, with the other crypto like platform. Yeah, yeah. Um okay, let's talk trade ideas. I want to hear you guys' uh trade ideas. Maybe we can bucket it into

uh more like durable value plays, things that you feel a little more confident on, and then we can push push out on the risk spectrum. Um durable value, Josh, how would you think about these? Yeah, I think a lot of the fundamental guys that we trade with um are starting to uh think about, you know, which tokens have, you know, features that are supportive of long-term value creation, and those features are generally like user bases that are willing to pay fees, and and obviously create revenue for the protocol. Um that revenue should be used in some way to buy back tokens or to be distributed in some way to holders. And so, all these things together create an environment where these tokens

um can accrue value and um become an important part of like a a portfolio that is using real metrics that you would use in in TradFi, right? Like price-equity ratios and things like that. So, yeah, things like um I think the ones that we see a lot these days that people are talking about are more like lending protocols because they're stickier, um they're less cyclical from a volume perspective. There's obviously tokens associated with exchanges like hype and things like that, but lending balances and sort of collateral tends to stay on one platform and you know things like Ave, right? Obviously it's had a huge run up with ETH.

On SOL it would be something like Camino. We're seeing things that are more the crossover between C 5 and D 5, things like Syrup from Maple. These are all things that you know people are more actively trading and sort of applying a lot of those like TradFi, you know, financial metrics, ratios and things like that. Yeah. Okay, so on-chain credit bucket would be one. Yep, that's right. Um still think those have room to run? I mean I think so. It's it's it's all a matter of like you know people are pricing on a relative basis to each other. So it's sort of like people pick the ones that they think are cheap.

Yeah. Starting to see you know some uncollateralized like on-chain credit lending as well now, right? Like Wildcat has gotten like pretty good success um lending to you know trading firms but on a completely uncollateralized basis, yeah. Yeah. Wildcat is the winner, mute. Um Lawrence is saying um SOL vs. ETH on a relative basis, how do you think about this trade? Yeah, this one's a hard one because there's there's two dynamics, right? There's a bunch of new inflows into ETH from institutional capital from the equity deals, the corporate treasuries.

There's also these catalysts happening at the foundation and sort of a rethinking of their long-term strategy and all that. Um and they're clearly like doing a lot of investor relations to towards TradFi, you know, banks and stuff like that too, business development efforts to get people to deploy things on ETH mainnet. Public vs. permissioned like type type activities. Um and then on Solana, I think you know, the other side of it is Solana's been dominated more recently by meme coin activity specifically like the pump.fun activity and so um and a lot of the sort of speculative fervor has migrated to perp platforms, right? Um like Hyperliquid. So, I think

on the in the Solana side of things, like they are um really thinking hard about how to kind of like get exposure to a lot of these things um on on the Solana ecosystem um and maybe, you know, think about uh more more kind of uh utility-driven like financial DeFi applications rather than necessarily like purely on the meme coin side of things. So, yeah, that it is uh it's sort of a very difficult ratio to trade because of that. man, Josh, how would you uh which I know that you are, how would you uh I mean, I'm generally Yeah, yeah. Yeah, I I generally think like Solana has um probably room to run. It's really pulled back a lot in the last couple days. I think a lot of it has just been like

people this rotation trade. Like people are selling things that they own to get exposure to new things. So, It's all ETF money that will definitely yeah, revert. Yeah. Yeah. Um What is Okay, so we've got I'm assuming you guys are long hype. So, hype So, maybe in in the SOL versus ETH trade, you've got SOL. We've got on-chain credit. Um what's another basket you guys are excited about? I think um something that we're not like actively trading, but I do think at some point is just uh kind of like Circle versus Coinbase like relative value, right? In terms of like evaluation.

Um obviously, like when Coinbase initially IPO'd and ran up to like $400, insane valuation, same multiple. We're kind of seeing the same thing with like Circle, but um ultimately, it feels like the Circle-Coinbase like valuation ratio probably is unsustainable, right? Like, you know, if you're taking like they are linked in in some sense, right? And if you're taking kind of I think uh I think like Raoul Pal had like a good post about this, but like if you're taking like the if you strip out like the the kind of like Circle business from like Coinbase's, you know, valuation, you're left with like 2x net revenue or something uh for like the Coinbase business itself. Like everything else, which like doesn't really make sense, right? And so right now Circle is trading almost like a meme in some ways, right? But

I do think at some point that ratio probably like normalizes. Yeah. What do you think about these I mean Bullish just filed to go public, Gemini just filed. There's probably five to seven other folks that we know that are coming soon. How do you guys think about trading these? Cuz Circle felt like a big I mean uh we won't get into valuation now, but like yeah, so I mean maybe you you just touched on it briefly, but like all right, I could see the next company going public and nobody cares about the valuation and nobody's looking at the balance sheet or anything or the P&L or anything like that. They just say, "Okay, Circle just ran up, you know, 4x.

I mean, I'm going to catch I missed that one, catch up trading catch up trade and chase this next one." Decent I mean, that's like the left bell curve thesis, but how how do you guys think about that? I agree. I mean, I I think like I would Yeah, from a trader perspective, that's exactly what I would do. Yeah. Yeah, I mean, it would take a lot to knock us off this trend. Like it would take like crypto selling off, you know, 30% or something like that. But right now it's like it's just people hot money chasing this the the latest It's the the CM CMS hot ball money is back, it feels like. Yeah, if if the hot ball money is definitely back and it's in public equities.

Yeah. And and every time one of these things launches and is successful IPOs and is successful, then there's more money to put into the trade. Right. Yeah. Um right, everyone who did Circle now has more money, they want to chase that trade again. Uh what about tokens? I mean, so on-chain the only tokens you've mentioned so far, maybe we've got SOL, we've got Hive, we've got on-chain credit. Anything else that is interesting? I mean, I think AI has been a persistent theme, right? So um the the kind of like picks and shovels play for AI is is something like a Worldcoin. So the idea being that, you know, identity is more and more important in a world where um you have less certainty about who's human and who's who's AI, right?

Obviously, more or less cycle of project launch, but nowadays, just given how often you see Sam Altman and OpenAI in the in the media, and the valuations associated with his businesses, it's sort of like a natural way to get beta for it. And like in crypto, you know, people treat these tokens as effectively equity, right? Just a way to get exposure to the theme. So, yeah, I think we're seeing a little bit more of that and So, you're saying Worldcoin as a proxy for OpenAI, basically. That's right. That's right. Why wouldn't that have run like why why what would change? Cuz it hasn't run like that so far.

Yeah, I mean I I think it's just there's a ton of supply, you know, like that that's will continue to be supply. Yeah, that's right. That's right. I mean, it's it's uh it's something where um if it becomes more they like they need to actually um if they deliver a lot more against their sort of like product roadmap, right? That that could reignite that narrative for them. What about meme coins? Yeah. I mean, I think both of us are pretty well both of us are pretty bullish on on the pump upcoming ICO, right? And I can't speak for Josh, but I think, you know, us as a firm, we're planning on participating in the, you know, pump ICO. And and so Do you participate privately or like let's say someone's an Empire listener and they're listening to this, they're like, "Oh my god, I

feeling and Josh are smart guys. He's bullish on the ICO on the pump ICO. I want to participate, too. Is there a way what's the how do they participate in that?" Um I think there's kind of the venture, private, and the public deal for the the pump offering, right? I think for the public offering, you basically have to KYC through like an exchange. And basically just like subscribe through the various exchanges that pump that fund is is working with and distributing their their tokens, yeah. Yeah. Nice. Um Yeah, memes. I mean My thought on memes are they're just a levered way to get exposure to the underlying L1, right? Um or the gas token. So, I think basically

that that's that's how most people trade them in my view. Um we think it's like a pretty efficient way to get exposure for funds uh who like to play a different narratives. Um you know, for for SOL, it's like you just you just pick like the top mind share type memes, you know, things like farm coin and and SPX. Um those are the ones that we see a lot of people just like actively Yeah. um get into as a way to you know, like if you think for instance like SOL is going to be stuck in a range for a while, but you just want leverage without committing a ton of capital to it, then that those are the assets you buy. You might sell SOL actually to buy those things because if there is enough move, then you'll get a lot more beta there. Yeah. Yeah, one of the things

that's been interesting about this cycle is that the things that you think would perform well, Right. the consensus trades have worked. Yeah. Right? It's like what's what's gone up? SUI? I mean, everyone knew like everyone was calling for SUI going up. Like I feel like if you talk to a lot of crypto natives, like SUI was in their portfolio. Hype has gone up. SOL has gone up. It's like kind of the obvious trades. Um do you think this continues? Yeah, well, I mean, hype hype went up and then hype went down a lot, too, all right? So, it's I mean, hype is a little bit of its own beast cuz it's so reflexive, right? Like people made a lot of money from the airdrop on hype and um they're also trading on hype because they traded on hype and now they continue to trade on hype. And when the

market goes down, they have to sell the hype to Sure. put margin on the exchange, right? So, that's um there's a very reflexive element there. Um I think yeah, I to your point about like these trades all working, I think it's just how crypto is, right? It's like basically you need to take a view and you need to hold it over a long term time frame. Like if you trade short time frames, it's very hard to have alpha. Yeah. Like long term alpha. Yeah, but at the different I don't think the last cycle was like this cuz there were the things rotated. There was a new narrative that things would rotate into. Like you would DeFi summer, you could have like I I made this mistake. I held a lot of the DeFi summer things and then the market rotated to NFTs. And if you didn't

rotate with that, you were down 90% on your Uni and Ave and stuff like that. And then NFTs, if you didn't rotate out of those into metaverse, right? You missed then you you you were down on those, too. So Yeah, I don't know. I don't know. We'll see what happens. Um well guys, I know we're at time. This is great. Shai Lang, Josh, thank you guys. Congrats on the acquisition again. Um we didn't even talk FalconX, but obviously you guys are doing a bunch of cool stuff. So people are trading, they should reach out to you guys. And um yeah, appreciate the time. Yeah, thank you. Thanks.