BTC vs Bank Crisis: Unpacked w/ Jeff Dorman & Raoul Pal

I think it's huge um I think it really is a big deal and it also comes down to understanding kind of investor behavior and workflows which is why we're so bullish on each Jeff Doleman good to see you back my friend great to see you thanks for having me so a lot happened since we last spoke and you know you've been around the block a while and seen a lot of this before what's your current state of affairs top level in the crypto markets how are you thinking about things first and foremost I mean I think a lot of people thought that I was a anti-bitcoin for for a number of years because I haven't talked about it much of you know Bitcoin up until the last three months really has been pretty boring certainly relative to the growth of stable coins and D5 and nfts and layer twos and other areas uh within the ethereum ecosystem but this year has been a hundred percent Bitcoin and for real reason right I mean I think the last time Bitcoin in my opinion was interesting was only because a few new people were buying it right like you know some a few corporations like Tesla uh you know big fund managers like you know Paul Tudor Jones back in 2020 but there was nothing really new to The Narrative of Bitcoin up until this year but I think this year you know whether you just look at a graph of the you know Regional banking ETF kre versus Bitcoin or you just think intuitively about why Bitcoin as a bearer asset is so important and this has been Monumental in my opinion I mean this is this is the biggest a full-blown Bitcoin narrative that that we've seen in you know certainly five years yeah I I never forget I mean I first got into Bitcoin having gone through exactly this in the European crisis 2012. and realizing that there were no Bearer assets and your money was not a better asset either and that's when I discovered Bitcoin and here it is in the United States playing out and Europe as well with credit Swiss going under with people starting to realize the true value of what this is all about yeah and I mean I remember very vividly that that you know that Friday uh I think was March 10th um obviously people here at ARCA we you know for the whole entire weekend we were talking about where are our assets safe between you know the different brokerage accounts we had the different bank accounts stable coins everything that was related to what was happening and and to the to the fed and the FDIC and and the treasury's credit they worked very quickly and swiftly to stop what could have been much bigger but even just that three to four days I talked to five small business owners that had nothing to do with digital assets over those four days and they were legitimately asking me like am I going to be able to make payroll what's going to happen when the banks open on Monday and that's a really scary feeling for people and I think prior to March most people would rank in terms of just pure safety of assets they would have had U.S bank accounts at the top right and then probably below that would be uh you know money markets and brokerage accounts below that would be cash under your mattress then stable coins then you know something like Bitcoin I think post the events of of the you know the first two weeks of March there was a real re-rating there and clearly Assets in a bank account is just not number one anymore even though again you have implicit if not fully explicit um insurance now from the government it still doesn't feel safe especially when you know that you're earning nothing on those assets relative to what you can earn in a money market stable coins don't even feel all that safe right because most stable coins are backed by assets in a bank and you never know when that's going to be shut down so you have to start re-ranking like if I just want to hold on to my assets and know that I have them I think number one is now a money market in a brokerage account right combination of uh segregation of assets as well as just the sipc protection and number two is probably Bitcoin um just in the sense that it is yours nobody can take it away from you it is a bearer asset and I think you know it's naive to think that all of a sudden small businesses are going to put all their assets into Bitcoin and try to make payroll that way that's not going to happen but small businesses are made up of people and the individuals who had to go through those three and four harrowing days are starting to think about you know what I do want some of my money in Bitcoin I do want protection from a random Bank closure or you know who knows when a bank will be let to fail without depositors being made whole so that re-rating process is real and the explosion of not only bitcoin price which is Bitcoin narrative coming out of that March 10th and subsequent bank failures is real yeah although the issue Still Remains it's too volatile to use as money per se um but what it does do very well is protects against the outcomes which are more Central Bank printing you know it does a very good job with that it obviously didn't do a very good job with regular kind of Supply demand lead inflation but did a you know it does an extremely good job every time the balance sheet expands for sure and I think the right way to think about it from a price standpoint and you know look there's a lot of digital assets that you can value very easily using traditional methods right A lot of them have revenues a lot of them have cash flows you can do DCF analysis you can do a comparable comps analysis you can't do that with Bitcoin that's that's there's no way to Value Bitcoin that way the way to Value Bitcoin is probably more using Black Shoals and thinking about Bitcoin as a long-tailed call option and if you think about the inputs of Black Shoals well one is time well Bitcoin is a Perpetual call option so right there it has a lot of value another one is volatility well obviously there's High volatility so that's going to be a an input into a higher price and then of course you have interest rates and even though interest rates are higher interest rates historically are still very low there's a reason that we we think about Bitcoin as a long-tailed call option for a one-day situation where maybe you don't feel at all safe with your money or with your Banks or with your governments and you know of course here in the US that's not as big of an issue even though it's starting to pop up right now but across the world that is a huge issue and when you think about Bitcoin in that framework um about it being a long tail call option on some form of uh Anarchy in the future it's worth something and how much that's worth I don't know if it's 500 billion or a trillion or 5 trillion but it's definitely worth something and I think to your point it's not money but it is a protective asset it is something that you can sit on and know that in a world where I feel unsafe with my other assets this one is still going to be there and it's still going to be worth something yeah I've always thought of Bitcoin as a call option on a future Financial system it's like you know the the probability of of it being in the money every time you see instance like this goes up which is you know exactly to your point you know as soon as you see more outcomes that devalues money overall the more probability that Bitcoin has a much higher value in the future a much larger role to play and we're certainly seeing that I think you know another big thing that I think played really into the Bitcoin narrative um which is still probably a bit misunderstood was shutting Russia out of the Swift payment system and saying that all of the treasuries they hold are basically worthless yeah you know so we've seen record Central Bank buying of gold and we know that several central banks have been or central banks or Sovereign wealth funds have been acquiring Bitcoin because it in this world it's they need something like this a true Bearer asset for sure and it's not even it's not just even the value of money I would also say it's the value of confidence there's two real indications of a lack of bank and government confidence right now right one is clearly what bank stocks are doing I I think there's a lot of hypocritical Notions out there saying you know digital assets have no intrinsic value well then you think about well what exactly is the value of a bank Equity Bank Equity is basically the combination of your confidence in the CEO when he or she says that no no everything's fine you know don't flee uh and two is how much profits they can earn on fake money that isn't actually there when they need it right so when you think about what bank Equity is I mean there's been 120 billion dollars of equity wiped out of just the failed institutions alone from Credit Suisse and Silicon Valley Bank not to mention all the losses from the other Regional banks that are still at least right now a solvent going concern but Bank Equity is kind of a farce right it doesn't really it's not really there um because the profits are built up on confidence and that confidence can go away in 24 hours um so one you have clearly a loss of confidence in banking alone as indicated by all the deposits that are fleeing as well as just the equity but two is Sovereign CDs you know I know some of this is aided by uh uh you know the charade in Washington right now around the debt ceiling but still USA CDs has been blowing out all year but so has Sovereign CDs in in most other uh uh developed as well as Emerging Market countries and when you think again of Bitcoin as some sort of a call option on that future well that future includes a loss of confidence in both Banks and governments which we are seeing through the financial markets of sovereign CDs and Bank stocks that inherently makes Bitcoin more valuable and I think you know this is truly a pretty efficient and rational Market response thus far this year I also think you know we've all been monitoring the the debt ceiling and it looks like it's going to come down to something like 2011 where it got to the wire and a lot of people are suggesting maybe this time is worse and there is going to be a default it's a technical default of sort Janet yellen's given us the kind of dead date by about the first of June others suggest maybe it's July because there's some delayed tax payments to California to come through but I just can't help but think that is incredibly positive for Bitcoin if you see anything close to a potential default it because it creates as you said a complete lack of trust of the system because you can't price any Financial instrument at that point yeah for sure and actually this this might be a little bit too uh Bond math nerdy but for those who understand the credit default swaps Market too you know don't forget that when you own something like USA CDs even if there is a technical default there still has to be the the recovery value of the bond and historically you know U.S treasury bonds are you know usually trading near par but because of the rise in interest rates over the last 18 months there's plenty of USA bonds treasury bonds that are now trading at 75 80 cents in the dollar because they have low coupons and that's the price you have to get to get to that you know three four five percent yield across the curve which means that there's a lot of hedge funds now who own USA CDs who are going to try to make noise and push for a technical default because you can actually make money on it given the cheapest to deliver bond in the 70s and 80s so not only the political pressure but also some Financial pressure from some of the funds there's a good chance that you do see if not an actual technical default certainly a lot of much more noise around that and anything as you said anything that starts to decrease that confidence is going to be a boon for Bitcoin so what the hedge funds what are buying these kind of off the Run bonds or whatever it is and then buying the CDs yeah the lowest dollar price bonds the cheapest to deliver bonds versus the CDs and you have so many bonds that are trading in the 70s and 80s because of those you know half percent one percent that's what's pushing the CDs up yeah it's expects looking for this particular out potential outcome especially especially one year CDs right that's why one year CDs is blowing out much more than five year CDs because we have that trigger here with the debt ceiling and a chance to make a killing if all of a sudden that CDs that's trading at 30 or 40 basis points all of a sudden starts trading at 20 points on the uh on the dollar because of those low cheapest to deliver bonds well I hadn't I hadn't realized that but I mean again this whole shenanigan regardless of how it goes just shows the problem of the existing system there's just there is no real way out you know the only real way out is run negative real rates or debasement of currency ongoing yeah it's it's I mean you know something that we've been you know obviously yourself as a macro investor uh as well as just you know anyone who's been spending any time in the debt and Equity markets for two decades I mean we've been talking about this for a long time right there's nothing tremendously new with regard to the the the the long-term thought that there's no way out but I think we've always sort of given the government and the benefit of the doubt that yeah well they'll just do this forever they'll print forever but now that you have inflation on top of that it starts to lower that probability of how do you just print your way out of this and I actually saw a great chart from um from Deutsche Bank uh earlier this week that I thought was amazing they said that so far in 2023 um the FDIC has taken over four U.S banks with combined assets of 560 billion which is two percent of GDP if you go back to the great financial crisis or even the Savings and Loan crisis or even the the the the depression in the 30s we're talking about four banks that made up a two percent GDP the great financial crisis there was 500 bank failures that made up about two percent of GDP in the Savings and Loan crisis in the uh early 90s it was over 2 000 bank failures that made up two percent of GDP and if you go to the Great Depression it was 10 000 bank failures that made up about six percent of GDP so I think the takeaway for me there is is shouldn't we be a little scared about what the wider implications mean that four failed banks in 2023 have assets relative to GDP rivaling what hundreds or even thousands of failed Banks had in the last three banking failures that's terrifying right and that just shows you just how big the financial system has gotten plus how big the government has gotten right because all to that all the great financial crisis was was a transfer of private debt to public debt so you have the biggest governments we ever had the biggest financial institutions we've ever had yeah that's kind of terrifying and certainly you know lends itself to why there's a cohort of people and growing every day who are starting to believe in Bearer assets like digital assets hi everyone Ralph's mentioned crypto it's really my Flagship show it's where I interview the best guests in the world people you never get on another show I think it's the best show in macro crypto and web 3 combined in fact that's what it does it covers everything but really it's all about the revolution in web 3 and crypto and I'd love it if you got it every week in your inbox all you have to do is just click on the link below pop in your email address and you'll get notified every time it comes out and you don't miss anything as you take my journey into the exciting New World of crypto and web3 thanks yeah and the next shooter drop is a longer term one which is yes right now with the inverted yield curve and everything else it's a nightmare and we'll probably see more Banks go under I mean you know at the time of chatting I mean yesterday was another ugly day in the banks and doesn't feel like it's going away yet until the FED cut and steep in the yield curve but we've still got this issue of commercial real estate stuck on these Banks as well and that's a long overhang that's not going away I mean so few people actually go to the office anymore uh you know I went to a big asset management firm in New York's office last week it probably seats 400 people there's probably 20 people in the office and they're like oh yeah well people come in two days a week I'm like yeah but you don't need a 400 person office I mean go go into any wee work right now they're empty right and what does we work wework is usually small businesses who have only a few employees or it's uh you know the regional employees of a big company I mean they're empty right now there's just no there's nobody who goes to these offices and you figure you bring up a really interesting point too about the commercial real estate because I think what's really interesting to me about this year or really the last 18 months is it's a complete inverse of what we saw in 08 right in 08 it was large Banks failing this now it's the small Regional Banks um and you know it was uh uh consumers and Regional Housing that failed in 2008. now that's as strong as ever right everyone has locked in low mortgages or and and you know really has no reason to move because they work from home it's the commercial real estate that's going to get uh annihilated here because that's a real secular shift right people don't go to the office anymore I'm I think that's a big misnomer I mean you know a lot of people have been talking about oh just wait till unemployment wait till you know people have to start selling their houses at Big losses like nobody's gonna have to sell their house because nobody has to move for a job anymore you can work from anywhere so it really is that commercial real estate and and I don't know what the trigger is uh in terms of when that stuff has to start getting marked to Market and when you start to have the The Faults there but that's that's a huge secular shift that's not going away whereas you know you look at some of the the Regional Bank you look at some of the treasuries that Banks own that are you know Mark to Market at Big losses I think that will reverse right those are par instruments but you know that's not really a secular shift so much as that's just a financial Market shift but the commercial real estate is a secular change and I don't know how you combine how you combat that we kind of saw it in Europe and it ended up on the ECB balance sheet they basically took any old as collateral you know old chewing gum rappers old cigarette boxes anything and they said we'll lend you against anything and we saw that in Europe and I think it's just the same outcome and there's no other way around it apart from to shove it on the central bank balance sheet because if not the whole banking system is insolvent and there's no lending left yeah and especially you know based when we just talked about a minute ago with how big the banks and the financial institutions and the government balance sheets already are I mean this is as you said there's just there's no way around this it just keeps making it bigger and bigger and bigger and and and scarier in my opinion um I remember that somebody mentioned in Europe though because I remember that you know in in 2011 2012 when every hedge fund were sending their best guys to Europe with like a huge fishing net just waiting to catch all these defaulted loans at 20 cents on the dollar and none of them came out they just said nope I know you think it's worth 20 cents a dollar but I'm going to Market at par because the government is basically allowing me to use it as collateral so I guess that's where we're headed exactly right and you know I look at um liquidity as probably the biggest driver of asset prices because of I think this debasement mechanism and you know we build a liquidity indicator at Global Micro investor and the NASDAQ is 97.5 correlated since 2010 and Bitcoin is 87.5 correlated and it's only lower because Bitcoin has the exponentiality every time you get a bull market but I mean that's staggering yeah and you have more of a firm reference than I do on that like what what were those numbers 20 years ago or 30 years ago I mean is it is it this is something that we've never seen before if they didn't use the balance sheet so then you had M2 but M2 is actually the predominant driver of earnings as opposed to price so the whole world changed in 2008 as everybody reset interest rates at zero I mean the entire world did and so you've got this very cyclical cycle that actually matches the Bitcoin cycle because Bitcoin was birthed at the same moment everything's got identical cycle which is basically the global government's debt refi cycle and it's between their two-year bonds and their five-year bonds that creates this three and a half year magical cycle um and so that is what changed everything and then what we found is every time we get to the lower part of the cycle the interest payments are mathematically work this out the interest payments for that period of three and a half years ends up being the amount of QE it's almost perfect the only difference is when they have to intervene directly into the banking system because that goes direct onto the bank balance sheet so they're just monetizing the interest payments of the government and they're all doing it so I I backed all out all the maths the Japanese started it first obviously I think the whole Accord came together in 2012 when Europe went under but it's Europe Japan the U.S the UK Switzerland it's all the same they're all doing the same thing so it's like oh wow so they're just monetizing interest payments and that's the entire grade of the balance sheet not to mention interest payments are you know going to be triple what they were three years ago now with the rising raids so I I mean they have to get interest payment sounds part of my core thesis is you know the title you make monetary policy now the faster you can cut it by end of the year when many of these payments start coming due it's like it's it's madness out there and this just shows the the mess that we're in and the value of why digital assets and why you and I first got into in the first place is is is writ large everywhere here yeah I think that's you know it's sitting here in the U.S um you know I've spent a lot of my time in New York in in La specifically but um you know there's this sense of of Doom and Gloom um because of how the regulatory environment is in the US and making it seem as if you know everything um is shut down but I think um as as you you and I both know like globally that's just not the case at all right if you live in the U.S you're thinking digital assets crypto it's over because all you hear about is these just you know one after another regulatory actions from the SEC or the cftc or you know the White House directly but globally you're seeing still just a tremendous amount of people doing the exact same thing that you and I did seven eight years ago which is they're seeing like there is no end in sight here and I want to get involved either as a developer or as an investor or just as a um an owner and what I think is really interesting about 2023 as well is that you know pretty much all you had to do so far this year as an investor was just fade consensus right the consensus going into the beginning of the year was that digital asset investing is dead amongst FTX and the regulatory Crackdown and a string of high profile bankruptcies and of course that's been wrong right the condenses view from a macro perspective was higher rates for longer a drop in stocks and an imminent recession and obviously that's that hasn't happened thus far the consensus heading into even the banking crisis would be that this would be bearish for all risk assets including you know Bitcoin and other digital assets and that of course isn't true and you know equities have actually held up pretty well and certainly had a massive rise in Bitcoin and other uh crypto assets um and then you know consensus view which I mentioned earlier was that Bitcoin was largely dead and it was you know it was uninteresting relative to the other digital assets and then that of course has been completely wrong given big his performance this year and even ethereum right you go into what everyone expected into the uh Shanghai chappella upgrade just last month um you know the the consensus was that ethereum was going to fall because everyone was going to unstake and sell all their ease and of course the opposite happened which is um you know because you are increasing the liquidity of staking it actually makes people it makes it more attractive to steak and you're seeing an increase in new stakers relative to Old stakers withdrawing and selling so um you know I think those two things are really interesting there's a consensus last year was pretty much dead right right every macro investor had the best year ever last year because it played out perfectly whereas this year consensus has been dead wrong and on top of it the digital assets specifically really starting to show up how Global this industry really is right every time there is something in the U.S that fails or that goes bankrupt or that uh has regulatory issues you're just seeing a perfect substitute somewhere else in the world take over um you know that that volume or that transactions or those people yeah I mean I I look looks at this and I went back and I've seen that London is making a lot of noise about what it wants to do here and I went back and looked at the history of London as a financial center post the rise of the us as the world Reserve currency and after the they left the gold standard the U.S had currency restrictions so the UK started the global FX Market because before then there was no flex market right because it was all Pinter gold London already had the gold market so then they bring the FX Market it becomes the biggest Market the world has ever seen then the US restricts liquidity to the global system the UK develops the euro dollar market so the euro dollar market grows out the 70s and explodes in the 80s and 90s um and then the next part of the equation was the global derivative Market the the U.S regulated the banking system and didn't give them red cap abilities to use OTC derivatives so London took it and exploded which is why most of us worked part of our careers in London half the hedge funds in the world were based in London and so even like Goldman's headquarters was really London because you know same with Morgan Stanley same with Jason Morgan everybody was based in London and I'm just looking at this again thinking well the US is doing exactly the same thing once it fills its monetary system is under threat it tries to shut down the borders and everybody just moves over to London or you know whether it well it's most likely to be London and then you have the off centers of Singapore Hong Kong you know other European centers so it's just as you said you can't stamp this out I mean this is a a global phenomenon it's a cockroach and you you can't kill it and you're seeing it right I mean obviously the big the big headlines were coinbase and Gemini opening up their non-us derivatives exchanges this week but but even beyond that I mean you know we have a venture fund here at Argo and additional to our our liquid investing funds and every single one of our portfolio companies um is thinking about how do they get how do they move out of the U.S and into Europe or or Asia and pretty much everything from a new standpoint that we're looking at investing in is overseas now as well I mean it is just a you know if the US government's goal here was to say hey can we get on the same list as Iran and Cuba and North Korea and just be on the Do Not Touch list like congratulations you've succeeded because that's that's how it's being treated here um you know nobody wants to touch the U.S when it comes to crypto and digital assets and you know that may have worked 50 60 years ago in the sense but but now it's just too easy to move it's too easy to cross borders and to your point there's precedence of you know just moving out of the US into Europe and other areas as the financial Hub so you're not really shutting anything down you're just moving it that's right and you know the why the UK works it's so easy for any for coinbase to relocate to London because the star everybody speaks English it's a rule of law it's a you know it's a very no understandable culture that everybody's familiar with it's like it's no great shakes I mean if you went to half the staff at coinbase said Hey Joe fancy a three-year stint in London they'll take it yeah for sure um so it'll be interesting to see how how I mean obviously you'll have a new Administration potentially um so a lot of what's happening right now could get completely reversed um but but we you know we're we're seeing it feeling it every day I mean there is just complete apathy here in the U.S and it's the exact opposite everywhere else you go and how difficult are you finding it with banking it's I mean you know those four or five days in March were certainly difficult just because it came out of left field and you know I think you know we're big enough now that we've had redundancies in place here at ARCA I think a lot of other bigger companies have had redundancies as well but certainly for smaller um uh uh companies and funds it was difficult um I would say that you know again there is pretty much perfect substitutes in everything in this industry right there's perfect substitutes for stable coins there's perfect substitutes for exchanges and they're a perfect substitutes for banks it may take some time to get a new banking relationship up and running but you know there are plenty of banks looking to fill the void of silvergate and Signature Bank here in the U.S uh and certainly abroad there's no issues so um it's it's operationally a headache and certainly time consuming but it is certainly not a death note the other issue the industry I think still faces is the concentration risk of the derivative markets of binance I mean it's like 70 of the entire marketplace now it's good coinbase is set up now you know setting up and there's a few others but there's there's a big gaping hole still after FTX are you seeing any movement there yet well you know there's a big reason why we're invested in DUI DX and GMX which are two of the largest decentralized derivatives exchanges so if you look at um you know uniswap now often does as much spot volume as coinbase right I think the last two months they've actually done more than coinbase making it the number two biggest exchange and that's a decentralized exchange just for spot not for derivatives so two years ago the total decentralized spot volumes was about one percent of total volumes today it's closer to 15 percent uh decentralized derivatives is right about one percent right now in terms of the total amount of derivatives on decentralized exchanges versus you know binance and other centralizing stages so I think you're going to see the same trajectory right in the last two years spot volumes went from one to fifteen percent on decentralized exchanges and I think you're going to see the same thing in derivatives it's going to start to move towards decentralized exchanges and dydx has about 65 market share I think GMX has another 15 or 20 percent so those are the two big horses uh in our opinion um so I think you know there's no question that too much concentration too much of a monopoly is not a great thing um you know that's that's uh you know that that is the that market share up for grabs is going to be there for someone right it's not going to stay at Finance forever binance may continue to grow but it's market share overall it should go down as other competitors whether decentralized or centralized come after that piece of the pie yeah it just makes it an opportunity for everybody once you but if you're back in the right horse there's a lot of money to be made because there's a huge imbalance of market share that needs to be addressed absolutely and I think too you know this this is a sort of a little bit off topic but I don't know if you saw um it was just yesterday or the day before there was a huge Wick uh High I was like on bitfinex I think Bitcoin traded at 56 000. obviously that's not representative of the price um but I think that's really interesting as well is that because this is such a global industry with such low barriers to entry is that you will always see you know again in some of the developed Nations it's much harder to get a license it's much harder to get up and running but but elsewhere in the world it's pretty easy right it's low barriers to entry a few lines of code and all of a sudden you can beat up and running this is always going to be a very fragmented industry you know even if you have the finances or the coinbases or the unit swaps or the dydx is having a majority of the market share the lower you know the the the the the the other side of it is that you're going to have 50 60 100 competitors taking the you know bottom five or ten percent market share and it really resembles the corporate bond market a lot um you know if you think about how Corporate bonds trade or even you know Emerging Markets even to some extent treasuries but really more corporates or you could put munis in there as well you have 50 60 70 broker dealers all quoting a price and then all of a sudden one small you know bucket shop or third tier Bank all of a sudden a broker has a different market right so maybe there's you know 50 guys making an 80 bid 82 offer on a bond and all of a sudden sudden one guy has 90 bid 92 offered you're like wait a minute is that manipulation or is that price Discovery and it's the same thing right that's what somebody did at bitfinex the other day they said okay liquidity is really low right now I'm going to run this up at bitfinex at 56 000 see if I can get some of the arbs and Bots offside and see if I can make other exchanges and other market makers start to raise their prices higher and reset price and I think you know most of the people who trade digital assets come from an fx background or come from a Commodities background but the real real estate realistically it trades more like the corporate bond market which is incredibly fragmented liquidity lots of weird price discrepancies happening in different jurisdictions and different currencies um and and I think that is actually a really a good thing right it it sort of shows that you're never going to have just a real Monopoly because there's just always going to be this fat tale of smaller and there's also simply not enough hedge fund or you know primary capital in the space compared to the traditional markets at 3 trillion there's just not enough participants to really make the markets efficient yet which is another huge opportunity you and I've talked about this it's another huge opportunity because it's it's inefficient all over the place and that void will be filled too right I mean a lot of a lot of the bigger players in the space who were doing a lot of that Arab and a lot of that you know quote unquote fast money type um uh uh uh trading to close some of those inefficiencies a lot of them are the ones that went under right from you know your alamitas and you know that there's already big funds across the globe that are starting to uh fill that void and get into that space so you'll always see attempts to bring that market efficiency in um but you'll also always see these anomalies in one off because of the fragmented Global nature of this of this industry how are you moving on we'll come back to Bitcoin in a bit but how are you thinking now about the eth staking yield I think you and I've talked about this in the past I think it's a now we've got liquid staking we've got a liquid money market curve out to a year I think people don't understand how big a deal this probably is I think it's huge um I think it really is a big deal and it also comes down to understanding kind of investor behavior in workflows which is why we're so bullish on Eve because if you think about there's four reasons to hold eth right one is you're holding it on an exchange as collateral for trading futures or options right if you're doing that you're probably the staking rate isn't going to affect you all that much because you're using that eth as a productive asset and you need to continue to use it number two is you're utilizing it in D5 applications again as collateral so that's not going to affect too much three is you're keeping it in a wallet just to be used for gas that's not going to change right so the first three use usages of eth are not going to change at all because of staking but the fourth one does change and that's anybody who holds it passively as an investment and that includes funds that includes individuals historically you've earned zero on that ease and now you can earn somewhere between four and seven percent depending on on the participation of stakers and and and and and uh how that fluctuates that basically means that you know you know the rule of thumb as an asset manager it's never earn nothing when you can earn something right not notwithstanding the risks of who you're staking through in any of the operational risks but if you can earn something versus or nothing you generally try to earn something right that's you know half the entire financial industry is just built on that float concept right there which is you know if I can delay payment for even 12 hours I can earn some yield on that 12 hours so the right thing to do is not compare each staking rates to treasuries because that's not relevant right it's not like people are going to take their money out of treasuries to own a volatile asset like eth just to earn the yield but you need to compare it to the passive yield of earning nothing versus earning something and that basically means that if you look at other proof-of-stake networks most of them are 50 to 70 percent staked right now whereas eath is about 15 I think that rises to 50 60 over the course of the next couple years and when you couple that with what you're saying about the curve and having an actual um uh uh you know whether it's through Structured Products or just through you know duration mismatches this is going to basically be the risk-free rate in crypto you know that's how people are going to think about it yeah and I think everything can be benchmarked against it which helps everybody tremendously because everyone will be full with you know Celsius and everything else they didn't understand the difference in yields so this can be you know your it can be eat plus as how we price yields which I think gets really interesting yeah and 100 and even though the lending Market is a shell of what it was you know post post the events of last year from Celsius to block five to FTX and Genesis you know centralized lending is largely dead right now but decentralized lending you know on compound and Ave and maker is still flourishing and when you bring to it now this component of a yield curve where it's like well you know what is the difference in a rate between borrowing for three months versus nine months versus 18 months and is there going to be a curve built in there and can you do a little um you know quasi net interest margin banking with duration mismatches um it's going to get really interesting and there's a lot of companies and projects out there that are trying to take advantage of it and and you know again you look back two three years ago at you know D5 was barely off the ground stable coins were barely off the ground nfts were barely off the ground and now those are a staple of what we think about in terms of you know the growing Industries Within digital assets Structured Products and rate Arbitrage and curves might be where we are two three years from now I mean this might be a full-fledged Financial Market in two or three years well you know having been you know I I grew up I grew up in the derivative market and I look at this and you see an asset that people want to own and you see it has a yield and the volatility is pretty much at its low so you get the ability to take the yield and buy options and so you can create guaranteed products or or Define risk products or enhance return products which was the explosion in the European derivative markets and the Asian derivative markets in the 90s onwards and I kind of Road part that wave and I look at it now and I'm like in three years time or two years time or one year's time we'll see a ton of these things you know you know 80 guaranteed funds 90 guaranteed funds or accelerator funds all of that stuff yeah I mean I was I was one of the earlier traders of credit default swaps back in you know 05060708 and it was the same thing it was like people didn't really understand them at first it was a very kind of Niche one-off thing and then you know by 0809 it was like you know everybody was trading them and everyone understood how to price the curve and you know how to think about uh uh uh you know the different uh derivative instruments so it's the same thing like you know again I don't know if it's six months away or six years away but there's no question that there's real time money and and investor interest in in coming up with these different uh Structured Products and derivatives around uh eth interest rates yeah I mean I've had lots of people write to me saying you know X head of all trading at Goldman right so means like oh we've setting up a shop we're going to do some of this stuff you know there's a there's a lot of activity of people who are seeing it because they've seen it before and they're like oh yeah I can make some real margins and some real stuff so it's fascinating to go on back to bitcoin there's another change that's happened which is ordinals how are you thinking through that I mean the Bitcoin Community was completely split by what you're using it not for ultrasound money where you know it's the Hallow ground and now people are trading jpegs on it yeah I mean so we we have a full a team here dedicated entities and and these guys are incredibly smart and even they don't fully understand and grasp everything that's going on with Bitcoin ordinals yet just because it's so new but from from my standpoint more at a higher level um you know just thinking about marketers thinking about Finance one is just amazing right here's this asset that's been around for 11 years it's basically been defined by the fact that there's literally nothing to do it's just a pet rock it's just this asset that is a you know Bearer asset that is a potential protection against you know uh Sovereign and banking craziness one day and all of a sudden out of nowhere here come these nfts and inscriptions and I was like that's amazing that an asset that's 11 years old that basically did nothing new or Innovative for the entire time is all of a sudden this just happens and it becomes a a real market so from that standpoint it just to me it just opens up the creativity again of just how many times this industry has just evolved if even Bitcoin can still evolve um it's it's fascinating now I don't know I certainly don't have a um I have no uh uh issues with Bitcoin having other use because I know I know it's you know some of the people in the Bitcoin Community are up in arms saying this is not what Bitcoin was meant for for me I'm just looking at purely from a creative standpoint I'm thinking this is awesome you know anytime you can introduce a new very to something it increases the value and increases the use cases so I personally have not uh you know I was certainly understood and was involved personally as well as through our ARCA funds in ethereum nfts and through a Solana nfts I have not touched the Bitcoin nfts yet because it's a little too complex for me and I don't quite understand it yet but I'm fascinated by it I'm too much of a boomer to try and navigate that so everyone says it's quite difficult so I'm like I'll leave it to somebody else yeah let it get easier and and a little more straightforward before I use it but I think it's incredible and I'm excited um uh to see and also just you know little things can snowball too right just the amount of Bitcoin transactions that are happening um as a result of this um even though it's a little bit of a flash in the pan when you see it it does increase interest in Bitcoin it increases developing power and Bitcoin so it's like you know you see how a little thing like this can then snowball into something much bigger as well which is also why we're all here right we want to see the creativity and the masterminds of of developers and how they think about how to use these Technologies so what other layer ones are you interested in Solana's been a great story from it's completely dead to you know one of the best performing assets this year um but what's on your radar screen what are you looking at that's interesting for sure before yesterday I want to go one back one more thing pop to my head on the Bitcoin ordinals is um yeah what I'm really interested in is is you know take it take a dollar bill for instance right dollar bills have serial numbers on them but you never think about that right you're never like oh that one with the five zeros on it is more valuable than the one with the three sixes um you just assume that a dollar is worth a dollar I do I am fascinated with what happens with with Bitcoin ordinals in the sense that you know if if ever if some of you know the lowest the lowest denomination of a Bitcoin is a Satoshi if if some satoshi's have a you know a a basically an nft on them through through the ordinals and others don't are you going to start to get to a point where it's like I'm gonna trade you one Bitcoin for one Bitcoin but I actually think that Bitcoin is more valuable than this one because of what's on there almost like uh you know an old Spanish coin that you find in a treasure chest like I I'm not sure where that heads but I think that's fascinating as well and I think from that standpoint I do understand why there are some in the Bitcoin Community who don't like this because if you want to if you want to think of Bitcoin as this truly fungible asset and now all of a sudden maybe there's that hint of something being more valuable than others it's it could get really really really interesting fascinating I haven't even thought through that yeah so let's talk about other layer ones layer twos what are you looking at that's interesting to you yeah so so the the way that it was described to me by a shout out to Nick Oates who's one of our great research analysts here at ARCA but he always thought about if you think about what a layer one blockchain is it is in the business of selling block space that's what it does so in 2021 when you had the real rise of all these alternative layer ones it was because there was more activity going on because of defy and nfts than the ethereum blockchain could handle basically there was more demand for Block space than there was Supply and as a result you need to increase the supply of block space and where did that come from it came from Solana it came from Avalanche it came from Phantom even Terra Luna you know prior to exploding um and then you go into 2022 and the opposite happened which is all of a sudden activity ground to a hole right nfts became less interesting defy rates were no longer as interesting because of the collapse of all the lenders and all of a sudden there was a dearth a supply you know there was a a lack of demand for Block space and a ton of supply and that's why basically ethereum came back to the Limelight and the other layer ones kind of fell off and instead it gave the ethereum layer to blockchains a chance to really grow and and and and and improve so that the next time we get this big demand and for Block space you may not need these alternative layer ones because you have all the capacity you need and all the throughput on ethereum itself so from that standpoint that's really what we've been looking at is is there a layer one blockchain out there that doesn't compete with ethereum but rather finds a new Niche right can flow become the you know Sports blockchain can Chili's become the sports blockchain now that it's converting can um you know something like Solana become the nft blockchain can um you know I know uh you look at all these different ones and you think about maybe business development is more important than technology that's my view as well it's all about understanding a clear narrative exactly and once chain if if is everything then you need to stand for something to compete right and we could get to a point where ethereum just is becomes the security layer for everything but you have these little niche blockchains especially with things like Cosmos and IBC when effectively there's no barriers to becoming your own layer one right dydx I mentioned earlier as one of the decentralized derivatives exchanges they're becoming their own blockchain right they're going to be building on the cosmos ecosystem and become their own chain I think eventually that's probably we were like a uniswap heads as they become their own chain right you need to create a value for these tokens and the way to create value for these tokens is for them to become the gas token and the security token for the network so I think because it's so easy to become your own layer one you're going to see hundreds if not thousands of these competitive layer ones and each of them is going to have to have their own actual Niche whereas ethereum is sort of like you said has become sort of everything um you know I tell I tell investors that they're like you know five years ago if you wanted to invest in just blockchain it was kind of hard to figure out what to do should I be invested in Bitcoin or what's this Ripple or Stellar or all these other things now it's pretty clear that if you just want to be like a generic if you want to if you want to generically tell someone I'm invested in blockchain ethereum is the way to do that yeah and you get a yield and you get a yield right ethereum touches nfts it touches D5 it touches stable coins it touches pretty much everything right if you want to generically have exposure to blockchain it's not Bitcoin it's ethereum these other layer ones are not going to compete with that they have to find a niche it has to be sports or gaming or you know Avalanche is trying to Corner the gaming market right so I think you know that's going to be a big thing is which one of these guys wins the business development race to partner with enough developers and Studios and whoever who are going to build a specific type of project on their blockchain that's why Chile is you know I mentioned Chili's a couple years ago I remember on one of our uh talks back when it was trading yeah last things Alex Dreyfus quite a lot you know I'm full of that I mean that's what's so interesting to me is like you look at all the competition in digital assets that's the one token in project that has no competition they just own they own that space they own the sports landscape and if now that they're building their own channel I think it goes live next week with their own you know Chili's 2.0 chain like that could become the layer one blockchain that anybody in sports and entertainment uses so we'll see how it all plays out but that's what I'm looking for we're looking for the ones that can actually carve out a niche and have some sort of marketing presence more so than a technological presence yeah I think that's right because in the end it's about Network adoption the technology there's some limits to what we actually need there'll be some that'll have a technological breakthrough and it becomes easier to let's say put video files on chain or whatever okay fine there'll be a niche for that but I think you're right um looking you know I personally think that we're in crypto Spring right now and you know we can just continue it usually is a bit choppy first and then it it gets very interesting next year when you're looking forward what are the kinds of areas of activity do you think we're going to see a Resurgence so obviously we've talked about defy and you think there's opportunities there and actually the collapse from last summer will have caused more money to be invested into um into defy and solving some of these problems what else nfts feels like it needs a new change of narrative yeah I think nfts is real though but but not necessarily in terms of jpegs and monkey pictures and things like that I think you're going to start to see the decentralized identities become a big deal by the way when you talk about jpegs and monkey pictures that was my board ape in the background exactly at the right time I love it I love it um I I think that's where nfts really get interesting is you know you think about gaming for example or gaming is obviously trillions of dollars uh in in the web 2 world and you have a ton of Studios um starting to think about a web 3 component to that and that all is going to include nfts right the idea of instead of skins on fortnite actually becoming your own ownable asset that's a tradable asset that's a huge huge evolution of where nfts are going to be headed right I mean you know you you look at something like Madden right that and there's a new season of NFL Madden every year and if no matter how much Sweat Equity you poured into the old season nothing ports over to the new season you have to start over what if you can start porting over some of the teams that you built or some of the players or what if what if I want to put LeBron James in in an NFL game right maybe I build up my NBA 2K and I want to take that asset over to another game um you know I think there's things like that that are really going to be the next gender the next real evolution of nfts and on top of it I think kind of real world nfts as well meaning like this is something that's about that's always I've always thought about is let's say I go to a doctor for a regular just checkup right and then three weeks later I get hit by a car and I go to an ER that's totally different network they have a totally different idea of who Jeff Dorman is right one sees the healthy profile of Jeff Dorman and that and the other one sees this emergency like what if you could have your health records as an nft and you can just very easily update them yourselves and you own them and you can give them out when as you need or what if you're on Channel activity becomes your decentralized identification instead of walking into a bank to get a loan where immediately they're judging you whether they think they are or not they're looking at your skin color they're looking at your um uh ethnicity they're looking at um you know whether you're male or female they're looking at you know whether you're uh you know big or small I mean they're looking at everything and making an opinion whether whether subconsciously or not on whether or not to approve a loan whereas what if it's just your activity on chain becomes your identity and it doesn't matter who you are or where you come from it's just you know you have this proof of who you are that just stays with you forever so I think those kind of nfts is probably the next wave less sexy and less price appreciative as we've seen in the initial form of nfts but certainly much more practical and and much more long-lasting yeah ticketing is the other big one for me yeah ticketing and coupons too I mean you know what about your Bed Bath and Beyond 20 off coupon that you get every week in the mail I mean that becomes an nft you know you spend it and you use it and you move on yeah I mean that whole rise of web 3 loyalty programs you know using nfts as a structure an architecture to do that I think is you know I still speak to a lot of big Brands and they're not phased by anything that's happened all they're saying is I can get closer to my customer and cut out middlemen and I can create loyalty yeah 100 and um I think it goes beyond a corporate brand I mean there's been a lot of success stories there right from from Nike to um you know Reddit and Starbucks who are doing it but I think it even goes beyond corporates I think the next wave is um and there's a lot more to do in corporate for sure I mean you know everything with airline miles and you know anything with subscriptions things like Netflix Disney all that stuff but I also think you probably go beyond that it's probably universities and municipalities as well I mean think about think about if New York City had a real token where anytime there was a surplus in the New York budget it could be dividended out to token holders anytime you needed a new park or project you could you know instead of doing a General obligation Bond or a you know some other form of of fundraising you could just issue a token to fund a project and maybe if you're a token holder you get you know better access to the parks or a cheaper fare on the subway or maybe a fast pass at LaGuardia or JFK there's all kinds of things you can do with that universities too right think about just the way donors and boosters work at universities you know what if I have what you know my my son is 10 my daughter's six what if when they were born I could have bought you know Harvard coin and if they go to Harvard 18 years later I could redeem that for tuition and if they don't maybe I can you know trade it for Yale token or Stanford token I think there's so many things like that that haven't even been thought about yet even your degrees Yeah they should be nfts right because yeah 100 and you can and these can be sold bound exactly yeah I mean there's just so many different things that we haven't even scratched the surface on I think partially just because you know the regulatory environment is certainly stifled hold some of the Innovation but also you know as you as you know like there's just not really any investment bankers yet in this space that are found have found a way to be paid for Consulting and coming up with these ideas right you know I started my career in 2000 on Wall Street and you know I sat next to some of the most Innovative product designers and creators ever that were all coming up with new ways just like you talked about the derivatives boom right there's always people trying to financialize things and thinking new ways to do it you haven't seen a lot of that yet in kind of corporate and municipalities and universities just because there's nobody who's figured out a way to get paid from that but eventually they will you'll find a way and it'll just be an explosion of use cases of nfts as well as other you know fungible tokens so final question for you I mean we're both bullish of this space By Nature so that's not that's not helping anybody really um anything you see on the radar screen that isn't an underpriced risk I mean there's a lot of risks we all know about but is there anything you think you know people should just pay a little more attention to that um purely in terms of downside risk or upside risk as well both my upside risk is either staking plus um burning means that there's in a bull market you might end up with no Supply which is I think could be a real problem and I think options yeah way out of the money options next year probably wildly mispriced and the other risk to me is the big binance option because the derivative Market if that goes it takes a while before hedge funds and other participants can spin up new counterparts to absorb it I think in terms of underpriced underpriced upside risk it's probably the court cases right you have Ripple versus the SEC you have grayscale versus the SEC and you've coinbase versus the SEC and I don't think you're going to get summary judgment I don't think you're going to get settlements in any of these which means you're going to court at some point it might be 18 to 24 months away but you are going to go to court with all these cases and once it gets into the hands of a court anything can happen right first of all we don't know if it's going to be a jury trial or if it's going to be a a bench so anything can happen and I think you could see I I think the especially here in the U.S everything Regulatory and legal is just being viewed as worst case scenario if you get any sort of a positive upside surprise out of any of these Court rulings I think you could just see an explosion higher Ripple could be soon right I think so I think it looks like the the judge is not going to pass summary judgment then therefore it is going to go to a trial that's that's our understanding so I don't think it'll be that soon but that should be the sooner of all those three so I think that I think that's a real upside risk um in terms of downside risk my biggest one is simply that we're just wrong on the impact of this technology um you know yeah that would be bad that's that's the biggest one to me is that you know it's like I I you know I I just got back from Italy I was there on on vacation for a week and you know I had a usdc wallet ready to go looking for all these different where places where I would use it and I was like there's just nowhere to use it like people aren't really interested in transacting on a daily basis with something like usdc um you know I think we all think eventually actually t plus one t plus two t plus three settlement is crazy and eventually everything should be t plus zero which would be a blockchain but maybe we're wrong maybe there's reasons for t plus one t plus two that you know these financial institutions just are never going to get to real you know uh instantaneous settlement so I think that's the biggest downside risk is just that it's just you know this isn't as impactful as we think it is that would be a multi-trillion dollar error of human judgment for sure it's quite it would be quite weird but you know yeah these things well I don't I think that would be the largest industry ever to have failed yeah I think I think so I mean you know again we're talking about what is you know you said what's underpriced you know to me that would be underpriced and I guess we would say that by a lack of growth of the ecosystem in this next cycle let's call it that so if we're not seeing adoption grow at the rates that we doesn't have to be of past Cycles but if it's disappointing in its growth then we've got questions to ask yeah exactly and I think that's you know to your point to your question of what is the you know risk that isn't priced in like to me that's just the one that's not pricing that's what I spend a lot of time thinking about like I'm constantly I'm just making sure even if it's just incremental I think in 2020 2021 it was very steep in terms of the adoption the growth it's still gradual it's still happening I'm looking for anything that makes it look like it's just not happening I haven't seen it but to me that would be the the risk um that scares me the most because I I don't care if this takes two years or 20 years or 200 years like it to me right now it seems obvious that this is a the future and I don't care about whether or not I was right on the timing necessarily but if I'm just wrong completely on the thesis that's something that is you know a difference it'll be embarrassing yeah Jeff fabulous conversation as ever uh great to see you and let's see how this next year plays out should be an interesting one I think likewise I always enjoyed talking to you thanks for having me yeah fabulous now as ever fabulous conversation with Jeff so much to catch up on he's always got great perspectives on how to see the world I did like his answer to well what's the biggest risk is like well we're all wrong and the whole Space is not that valuable um I think that's that's a very honest approach to take um but it was just very interesting to hear Jeff who's been you know deep down the rabbit hole of so many other projects is you know focusing on bitcoin saying Hey listen the abuse case has not gone away and it's proving itself I thought it's very interesting and as ever Jeff's thoughts about the Evolution how the Define markets and new decentralized exchanges are growing I think that's very interesting I think there's as ever a lot going on in the space and I think it's going to look vastly different in two years time than it does today let's just hope the adoption keeps going up because if not we've all got it wrong hey Visionaries thank you for tuning in for more free crypto content like this head over to realvision.com forward slash crypto you'll get early access to the most Brilliant Minds in the space to cut through the noise get in-depth analysis and get you ahead of the curve with unbiased insights

Channel: Real Vision Crypto

Views: 13,150

Keywords: Crypto Investing, Real Vision Crypto, BTC, Crypto, Crypto Currency, Ethereum, Bitcoin, Blockchain, Digital Assets, Alt Coins, Crypto Asset, Crypto Adoption, Altcoins, Decentralized Finance, DeFi, raoul pal, real vision, web3, nft, nfts, nft collector, nft art, nft artist, ETH, Raoul Pal & Jeff Dorman: Bitcoin & the Banking Crisis, jeff dorman, realvision, crypto podcast, CIO, Arca, bullish, bullish on bitcoin, btc bull run, btc halving, bank crisis, financial crisis, adventures in crypto

Id: IKw4ACOU-B4

Length: 58min 16sec (3496 seconds)

Published: Mon May 29 2023