Fundamentals Are The New King of Crypto | Smac & Noah Goldberg

Candidly, I just, I don't really see why crypto is going to be the fastest horse. I think that crypto is kind of in a, not an existential crisis, but in a crisis of faith where people need to become more productive. Otherwise, it's not going to outperform market that is in general, like allocating resources more productively.

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All right, everyone, welcome back to Empire. Very excited about this. We have two of the best research-driven investors in crypto. We've got Smack, at Compound. We've got Noah from Theia. Noah, Smack, welcome to the show, guys.

Thanks for having me. Great to be here.

Yeah, thanks for having us.

0xResearch Telegram channel, favorite group that you're in? Second favorite? Where's the— what's the ranking?

Easily favorite, simultaneously biggest deterrent from my productivity.

Yeah, it's very chaotic. It's a very chaotic, uh, chat. I would say that That's what happens when Boccaccio runs the chat, Smack. Yeah, true, true.

Well, maybe we can just actually start. So you guys both run, or you guys both invest in crypto and other things. I think, Noah, you guys are more focused just on crypto. Smack, you guys are focused across crypto and deep tech and robotics and AI and a whole bunch of stuff. I'd love to just hear how you guys— we're recording this December 11th— I'd love to hear how you guys are positioned today. In terms of just allocation to things, long things, short things, really active and really excited about positions, or kind of taking a step back right now. Maybe Noah or Smac, I don't care who starts. I'd love to just hear how you're positioned in the book today.

I can start. Just for some context, Theia is a liquid fund and doesn't hold cash. So within that context, we can maneuver, but at no point will we ever hold cash or go short. So we're purely focused on being long-only fundamentals and really are just focused on the internet financial system. So I would say financials as a market segment within crypto. So it, it's quite a narrow mandate. I mean, I would say how we're positioned right now is we're pretty concentrated in are favorite opportunities. In general, our book is pretty concentrated. We never have more than 15 portfolio companies, but especially today, our largest positions both are larger than 10% of the book. I think really that's a byproduct of the current market environment in that like on the liquid token side, barring going into public equities, from a pure fundamentals perspective, you kind of have two places you can look. One is large cap DeFi, in which case there are, call it 10 to 20 companies that are producing revenue. Some of them have gotten to cash flow breakeven, some of them are still burning capital. And then there's the other bucket of, of like liquid venture bets where they're trading at venture valuations, call it anywhere from $10 million to $30-ish million. They haven't found product market fit. You generally know what product they're building. I would say that's kind of the attractive place as well. And then there's no man's land in between, and there's very few things that I think kind of fit within that bucket that are attractive. So yeah, I would say right now we're pretty concentrated, hold pretty few companies, and in general, the list of companies that we think are interesting, putting aside valuation, are pretty narrow today. I think partly that's a function of the lack of tokens coming to market. There are definitely some tokens coming to market, but it's nowhere near what it was in, call it 2021 or even 2022. So yeah, happy to dive further, but that's at a high level kind of how we're positioned.

Yeah, I think also just to provide a little context, so Compound, we are a, we call ourselves like a thesis-driven, research-centric investment firm. And so we're predominantly private across— I, I would say Noah said they're relatively narrow. We're probably far broader across, you know, crypto, traditional AI, ML, robotics, healthcare, um, a lot of like synbio and computational bio. And so our view is, since we're predominantly private investors, our positioning on that side is like kind of less relevant. Our view is that we should be consistently investing across the mandate or across the the life of the fund. And candidly, we are slower to deploy. So like the fund we currently invest out of is a 2021 vintage, which is, yeah, it's just, it's just been slower. The one before that was 2016 vintage. So it takes us 4 to 5 years. But, but we can kind of see a little bit, I would say, the types of companies that we're doing, making investments in changes kind of over those periods. I would say more recently, call it the last 12 to 24 months has been more bio and crypto. I think we've done less AI during that time just because of, you know, we're pretty disciplined on price. And so that you saw AI kind of blow out in terms of, I don't know, similar to crypto in 2021, like pricing just gets crazy. So yeah, we see a little bit of that. And then on the liquid side, we do liquid stuff in the fund, crypto tokens and Yeah, are fairly concentrated. I would say it's a part of our mandate, but I would say predominantly we're looking at like the private side.

Where do you guys fall out on the— because it sounds like you guys are pretty price sensitive. No, you mentioned valuations. Where do you guys fall out on the whole Hasib Santiago valuations debate? You know, tokens are down 50%, but like maybe they're still overvalued by 10x. Like, where do you guys fall on this debate?

I probably side more with Santiago if I had to choose between the, the two views. And I think that valuations historically in crypto over the past 5 years have been quite rich. Before that, you didn't really have cash flows to assign a valuation on, but if you're using kind of standard venture buckets as far as kind of seed at the $10 to $20 million valuation, Series A around 40, then things have always been rich. And then I think that earlier than 2021, there was good reason for it in that the growth prospects were quite high. TAM was pretty underpenetrated. Right now, I think that in the token markets, very few tokens are, or the teams behind tokens are going after business opportunities that aren't crypto native. And so they're segmented. Going after a crypto-native audience, which I would define as less than 100,000 active users, albeit those users are relatively wealthy. So the revenue that you can drive from any one user is pretty high, but the multiples historically have been quite high and the absolute valuation has been high. I still think there are occasional opportunities that are mispriced to the downside, but really what I think, or where we stand today is a function of total dollar that has a mandate to deploy into crypto versus total supply of opportunities that are justified by current price. And in 2021, given there's so much capital that was raised, it's just taken such a long time to kind of work off all of that capital by deploying it. And then now you see the marginal funds coming to market being half the size or even less than they used to be. But until that fully gets worked off, I think it's fair to assume that crypto is somewhat overpriced just on the byproduct of there being too much demand for this stuff?

Yeah, I probably, I mean, this is a little bit of a cop-out, but I do think it's kind of more of a, I don't think it's a science. I do view it as more of an art. And I actually like Noah's point. I kind of agree with, which is like the analogy of a snake eating, you know, pick your animal. This thing has to go through and it takes time to digest. I generally am of the view that any tokens worth buying or owning have to have some kind of like, you know, there's like this debate of cool, do you have to have cash flows? Do you have to have revenue coming back to it? Or is there a monetary premium? I think the monetary premium is like a difficult and dangerous game to play just because it's so intangible. And just personally, I don't like the idea, at least at the fund level, buying things that I hope other people will buy higher for. Like that particular reason. And I think the growth, like the hypergrowth that we saw previously, I don't know, we may see it again, but I think, I think it's difficult given like the amount of supply that you can kind of see that type of, at least at the price specifically to the price level.

Yeah.

Yeah.

Smack, smack. Tell me about this tweet.

Yeah. I think this is like something you see consistently. I see it like obviously on Twitter, but also within like group chats and people who I think are sharp, who will tell me like they can't get off this anchoring to, you know, whether they entered the market in 2018 or 2020 or whatever the year is, they anchor to like, well, during that time I saw this thing that doesn't really make money ripped this high. And then they comp that to like, cool, like, why can't the thing today get to that level? The industry is so much bigger. There's so much more capital here. Surely we can get to that level. And like, you see this across every type of asset within crypto. Like, the meme coin traders compare the meme coins to previous meme coins, and they say like, Doge in 2021 got to this, so surely this one can get to like X, Y, and Z. And you see it across like DeFi apps, you see it across L1s. And I think, I think it's, it's a, it's a good way to end up holding the bag. And it's also like, I don't think it's constructive because I think it flattens how market structure has changed since those things were happening.

Yeah. Does, how much, okay. So you guys had this, Dempsey posted Compound's like annual meeting here. I can try to pull this up. Here we go. And I watched like this 12-minute segment, it was really good. And we can link in the show notes. Part of this was talking about narratives and like narrative, how narratives progress through markets. And there was like fundamental-driven narrative or vibe-driven narrative or optimistic-driven narrative. I forget the— I forget all the different types of narratives that you guys laid out. How much do— like, I think the counter to what you guys are saying about cash flows is that It a lot, like a lot of the trade, not just in crypto, but in just markets today is a narrative-driven trade. Like the AI trade is just, I mean, we're all kind of lingering on like, what are, like, what are Jensen's earnings going to be? And like, is Sam going to smile in the next video? And that, like, that moved the market more than any, uh, you know, price-to-sales ratio ever will.

Yeah, I actually, I, I, our thinking internally has been over the last couple of years that actually traditional markets are moving more like these two, these two different markets are moving closer together. So crypto markets will over time look more like trad markets in the sense that the investor class will mature. There'll be more sophistication. It won't be, call it 100% narrative driven. It will shift towards something less than that. So like, I don't know if that's 70, I don't know if it's 80, I don't know if it's 50. And at the same time, trad markets have kind of moved closer to crypto where the narrative trade, like the narrative actually matters a lot more than 20 years ago when fundamentals maybe played a larger part. And you can look at kind of like the investor class shift a little bit where like fundamental value, kind of like value investing, let's call it, in traditional markets have gotten cooked over the last decade. And you know, these things are cyclical, you can argue, and maybe that comes back and today's the time to be doing that. But our view is these are kind of compressing. Actually, narratives matter more today because A lot of times they help you attract talent. Um, and you're seeing this especially on the AI side, where if you can kind of establish yourself with a narrative of, hey, we're the company doing this and we're the best company doing this, that helps you attract one, capital, and then two, talent, which is like how you can then ultimately build the massive company that like wins. It is an advantage in some ways.

Do you guys, or Smack, do you worry at all about, because you guys have studied narratives a lot, um, Do you worry at all about like narrative exhaustion? And this idea that, you know, in the founder group chats, and in like what you hear from, you know, investors are constantly telling founders like, oh, like, you got to get better at storytelling, or like, go tell the story differently, or like, go, go, go create a new narrative. It's, we've almost all become so obsessed with this idea of narrative that it's like, if everybody's creating a narrative all day long, does it exhaust? This idea of a narrative.

Yeah, well, I think the, the one caveat I'd make is like you have to also be right. Like, like, yeah, which is— it sounds like kind of flippant, but, um, like you do ultimately need to be, to be right in some sense. And like an example for me is actually I was like a Tesla bull for a long time, like years and years, because I was like, these guys don't sell car— like they're never going to sell these cars, X, Y, and Z. They have all these issues. But in reality, Elon did an admirable job.

You mean you were a bear?

I was a bear. I was a bear. Yeah, I was sorry. Yeah. And I like, he, that's like a perfect example of a company that kind of willed its way into the size it is today because of the narrative of he was constantly saying, yeah, we're doing this today, but we're going to do that tomorrow. And it helped him attract capital to the degree that like, okay, he built, like he's now built a massive company. And I think That's like one example of cool, this worked. There are tons of examples today where you see AI company launches, they have a video, they're like, hey, we're this, like, we're this, you know, kind of goes viral. And maybe we don't hear from them, or maybe we do. But I think like you have to be correct. So the narrative matters in some sense. But again, if you watch this video, like, they can collapse very quickly. Like you saw the Sam point of that. Yeah, this conversation, which was immediately the performance of everything around this trade, quote unquote, over that's been working kind of collapsed.

Hmm. Noah, how do you think about this stuff?

I've definitely spent much less time, um, thinking through all the, the factors around narratives, but at a high level, it makes sense to me, um, that narratives would have an impact on markets, although the lens that I view it from is more so that of the narrative's impact on fundamentals. And like, I think that in the current market structure, uh, tech companies can go from zero to being a $10 billion tech company relatively quickly if they have the right products. And in some cases, there's some minimum amount of capital required to get that product to market and bring it to the masses. And so being able to raise is partially a function of narrative. And so if you can raise capital from a good narrative, use the capital very effectively in a way that other people were not able to raise money to, to go after, then you've created a competitive environment where you're kind of set up to win. Um, so that's like the lens that I view narratives from, but it's not to say that—

but when you guys are like, when you guys are at Theia and you're sitting down, you have like an investor meeting and you're like, oh, okay, like, I think we should buy this token. Are you only looking at like a, I don't know, discounted cash flow of the future revenues of like, you know, Aave or something like that? Or are you thinking like, hey, like, actually, like, RWAs is a big thing. Like, maybe, you know, the like, what are the narratives of crypto this year? It's like stablecoins, like there's stablecoins, perps, and prediction markets. Basically, if you could, if you're building stablecoins, perps, or prediction markets, you could go, you know, fundraise on an idea, essentially, and you could go get users. If you weren't building in one of those spaces, even if your fundamentals were really good, because you didn't hit that narrative, your token wasn't going to do very well. So do you, you kind of have to think about narratives, right? Or no?

I guess it depends on how you're trying to make money. Yeah. So like for us, we're very cashflow oriented and it's not to say that we're focused on there being a certain multiple today. I think it is the kind of present value free cash flows and in theory the narratives are based in reality. So like RWA is, that's a really big growth opportunity. And so the growth rate I'm willing to assign to Aave, which is going to capture this narrative theoretically, is probably higher than I would, just looking at the traction it has today. So I guess the way that I, or if I were to like say, how does narratives work its way into Theia's investment process? It's not directly, but I definitely think that we try to think about things from a long-term outcome perspective. And given that a lot of the value is in the tail, I would say like the narratives indicate that the tail is fatter. or the right tail is fatter for certain businesses. So it's just to say, like, if we're trying to assess what's the free cash flow in 10 years from now, sure, it's going to be really wide variance depending on the success of the company. But the tail scenario for companies that have a narrative behind them that is based in reality that will just take a very long time to play out have a lot of value in that tail if they can hit it. So I just think like the multiple that we're willing to pay on companies based on their current cash flow, um, and like growth prospects is partially a function of certain growth prospects that I can't put a finger on today. It's not like I can look at Aave, drag rate on like the amount of Bitcoin that's being deployed on Aave, and say that's where the revenue is going to come from. You need to believe more than that. And so your willingness to believe something that you can't directly say how it's going to make its way into the revenue, because it's like a 5-year plus journey, is an important part of valuation and early-stage businesses, and we do our best, but that's how we kind of price it.

And it's from afar, it's funny also that I will say one thing related to this, which is the idea, you know, you said like, um, this year if you had been investing or you had been raising for stablecoins or prediction markets, um, you could raise money, and you know, otherwise it was very difficult and your token was probably not doing well. I think one of the things we see consistently is that even across the areas we invest in, the categories come in and out of favor. And so like, there are times where the crypto founders who are portfolio companies who we work with are kind of, you know, like nobody cares about crypto or prices are down and they're kind of looking around like, why am I, you know, why am I building this thing in crypto? That happened, like then prices come up, everybody wants to build in crypto and people who are building in, let's say biology or material sciences, like nobody cares about that sector. And so then those founders have this feeling of, Hey, okay, I have to keep building this thing that, you know, now nobody cares about the thing I'm building. And part of it is like, yeah, that's, that's kind of an inevitability, I think, of these rolling narrative, like kind of bubbles that exist. And part of it is like, cool, you have to be comfortable with management teams that understand that's going to happen and are comfortable with kind of those periods, like, it's going to happen, just is kind of an inevitability of building startups.

When you guys look at founders, either, you know, on the public side or smack on the private side, are you— has your, um, weighting for how good a founder is at storytelling, has that become more important to you over time?

I think it's super important, to be honest. Um, we actually give a, give a, a specific book to, uh, to all of our founders. Um, which is like around this idea of storytelling because we think it's, we think it's very important. Uh, it's one of the Pixar ones.

Oh, nice.

Like, uh, The Best Story Wins, I think maybe. Is that, I don't know if that's the one it's called. Um, and it's like, yeah, it's a short book, but it's like, it matters in the sense of, um, yeah, it matters way more today than it did, let's say, 10 or 15 years ago in our view. And so you can't, it's very difficult to build a you know, $10, $15, $20, $50 billion business. If you don't at least aren't aware of it and kind of cognizant of where you sit within the comp set that you're, that you're building a company.

Yeah.

I would say that like if a company doesn't have a long dollar value runway, then a founder's ability to tell a story is important because I think that's a good attribute to raising more capital. So that's definitely like one way that plays a role. And then I think the other one is maybe slightly different, which is how inspiring as a founder, like, are they able to attract high-quality talent that's willing to work for them because they believe in this founder? I think it's partially a function of their ability to tell a compelling story. Um, so yeah, I think that stories play an important role in how that actually plays out.

Yeah. Yeah.

You also kind of have to, you also kind of have to, I think it's important, like there is nuance in, in, in the sense that You do have to talk to different people different ways. Like, a founder is going to talk to an engineer they're trying to hire way different than they're going to talk to an investor that 6 months from now they might be interested in, in like pitching down the road versus a customer that is thinking about using their product. So like, you do— our belief is like, you have to be pretty tight on the way you want people to talk about your company because you are like you don't want other people to shape how people discuss like your company. Yeah, you should be the one doing it.

Yeah. Well said. 100%.

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Shifting gears a little bit, but it's a, it's a related topic. Smack, you tweeted this thing about, I'm interested to see how basically the tension between the old guard and the new guard or the new wave will play out. Maybe We could dig into this idea a little bit more and just would love to hear what you're seeing and why, why this is— I don't know why this tension is interesting.

Yeah, I think it's— this is, I think, a function of when I talk to much younger people who this has been their first cycle, for example, versus like, I don't know, somebody who's been around for 8, 10 years. And I think that there's I think there's a lot. I actually think there's things to learn from both of these groups. And it's just really difficult to get yourself out of whatever the market did the first time you entered. Like we, we have these kinds of biases that are inherently in your brain almost the same way, like where you, like what period of time you grew up in is going to affect how you think about anything. Like, you know, people who grew up during the Great Depression have, were less invested in the stock market. X, Y, and Z because of the experience they had when they were younger. It's kind of the same thing with crypto. What, like, the experience you first had, I think, shapes how you think about markets in general. And so, like, I just— it's really fascinating to me to, to see old guard people being like, oh, this is nothing, and subscribe to a 4-year cycle and subscribe to, you know, all of these things that they believe because there's like an N of 2 that have happened. And then newer people who I don't know, they just have a different view and they kind of look at those people as boomers in a sense. And it's just, yeah, there's a ton of tension. I don't like, I don't have a right answer of the way to look at it. I think, yeah, I just find it really interesting.

Noah, what do you think? You're smiling.

I honestly don't have a view. I was smiling because I was trying to think whether Icahn is a boomer. It's interesting. Like, it's 27.

I feel like you're a boomer.

You're a You're an old man's soul in a young man's body, Noah.

I think that's fair. I also have great hair, so that definitely adds to things. Um, but yeah, no, I, I definitely agree that there is a very different way that younger people or newer people in the market approach crypto versus old people in the space. Um, but yeah, I don't really have a strong—

How important do you guys think it is to have a view on industry, uh, as a crypto investor? How important is it to have a view on non-crypto related industries, robotics, AI, biotech, things like that?

I'd be curious what Noah thinks about this, to be honest.

I, I, I, I, I do have thoughts, but given that Theia is so focused on the financial markets, I think having a really good read on the public equity markets for financial services and just generally traditional fintech is important. Yeah, like if you're trying to make an investment based on how you think a stablecoin's going to scale over many years in the future, you probably have to acknowledge that you're competing against Stripe and other players. And I think also like understanding what's the take rate going to be for a stablecoin long term. Well, I think you could look at money market funds or you could look at other ETFs. And so it's all to say, like, I think a lot of the, like, ways that we think about valuation is partially anchored to the way that traditional markets are priced. So like having a view on how traditional markets are priced or what things traditional investors care about is important to, to our framework. But I don't really spend any time outside of just the financial market segment. And I don't think that there's too much relevance to us. But I'm sure there are like learnings from other industries that could play into how people think about crypto. But for us, it's really just focused on What are all the comps? And the comps extend outside just crypto, they extend it to the traditional financial services.

Yeah, I think that it's important for us on the private side specifically because like the public version of these companies trade at different multiples, right? So like a material sciences company, like, do you need to get, like, do you need to get to $300 million ARR? Do you need to get to $500? What are the multiples of the companies that exist today? And then when we're thinking of underwriting you know, a seed stage check or pre-seed check, we have to think through, cool, what exists today in the world? What do we believe? And like, what's a realistic multiple that this thing is going to need to exit at? And then back into like, okay, do we think they can get to this type of revenue number over this amount of time? And so like, that is important for us. For crypto, it's a little strange because of how insane some of the multiples are. Um, but I I do think it matters in the sense that I think it matters more almost on the liquid side, just because like, yeah, there are comps we can make to traditional companies in some respects. But I also think on the liquid side, it's a little bit more of— I still view crypto as kind of like a long-tail risk asset. And so you kind of, in my view, have to at least have some framing of what's going on in traditional markets if I'm to believe, cool, Crypto is some very long tail far out on the risk curve relative to like the QQQs, for example, or the S&P or some technology index, or even some of like the baskets of, I don't know, like the AI kind of trad companies that trade. So I think having some framing is helpful if you're super active in liquid markets, but again, that's probably also Matters, matters less for like Noah versus somebody who's trying to be more of a momentum trader, not like a fundamental bottoms-up trader or investor.

Smack, let's say the market just stays like really hot, like, or, or, or we pull back and we get a little, I don't know, bear market, and then, and then it rips again. Like basically the next time the market just giga sends, what do you think that— I think a lot of crypto people expect, all right, like I'll wait for that moment. Crypto will be the fastest horse in the race.

I'll sit on my Bitcoin and my hype and my soul.

Things will rip once the market goes full risk-on again. Do you— how do you think about that?

I'm not sure that that's true. I'm not sure that's the case. I, to be honest, this— the last probably 6 months, I would say, have been the time the most maybe unsure or the most I felt as if like the things can go either direction. So like, I think there's very credible arguments for both sides. I think if I was going to say, like, if I was going to say the bear case for why crypto won't do that is there's been at least some, some, like some of the things that are happening in traditional markets and liquidity are things that you would think are net positive for crypto, and the price action is not necessarily telling you that, which to me doesn't, doesn't mean anything, but it kind of makes my ears stand up a little bit. But I also am like, I'm not smarter than the market. I'm kind of just— I look at market indicators to try to understand like, okay, what is this telling me? They haven't necessarily said like crypto will be the fastest horse the next time. But again, like, there's, there's all that data around, like, okay, the, the, the best 10 days in Bitcoin dominate the returns for every year. And so it is pretty explosive. So I, I, yeah, I don't, I, I would say, I don't know, I, I don't have a good answer for that, I guess.

Yeah. Hmm.

I lean more negative than Smack, but generally share his views that I don't have a crystal ball. But I think in general, like, this is my bias as a person, so I'm open to that being the main reason why I've come to this conclusion. But I think that 2021 was very different as a cycle versus kind of this 2023 to 2025 period. That's not to say that the cycle is over, just kind of comping on a fundamental and sentiment perspective. I would say a lot of the past 2 years have been crypto being dragged up against its will almost where you have the traditional risk asset markets doing incredibly well. And then you had the Bitcoin ETF, which brought in a ton of new capital. And on top of that, MicroStrategy was continuing to buy more Bitcoin. And then the DApps came in for the other, uh, ETH and SOL assets, and then things ripped up further. And so I just don't see where the will of the market comes from to allow crypto to continue to outperform broader markets unless we're assuming that crypto becomes the broader market, just because there is a law of large numbers game. Like if crypto market cap is $2 trillion, not to say that it can't get to $10 trillion, but as it grows, it eats into other uses of capital. And although I'm optimistic about crypto being able to do things that are productive for society, I definitely think like taking a step back, it's been net relatively unproductive the past several years. So I just think that combined with the fact that the allocation to new funds is probably a net headwind versus a tailwind prior to the 2021 cycle means that you really need to believe that there's a very large buyer coming in that's going to lift crypto. And if it's not for a fundamental reason, then I think it's a money printing reason or central banks buying Bitcoin and I'm a bit skeptical of that narrative as well. So yeah, candidly, I just, I don't really see why crypto is going to be the fastest horse. I think that crypto is kind of in a, not an existential crisis, but in a crisis of faith where people need to become more productive. Otherwise, it's not going to outperform market that is in general, like allocating resources more productively. So I don't know, not to be too doomer, but that's kind of my bias on where we are in the market.

Yeah, I sounded maybe more bearish than I actually am. Like, I, I, I do believe that there will continue to be assets that outperform like in a tremendous way. I just think that crypto is no longer one big trade. I don't think it's similar to Bitcoin and then everything is beta to Bitcoin. I actually think we'll see way more dispersion. Most things should and will kind of just bleed and you'll see selective assets that just outperform and Yeah, it should be, it should be more difficult than it was years ago, in my opinion.

Smack, what do you think outperforms a basket of the majors, which today the majors are just the L1s, right? It's like SOL, ETH, Bitcoin. It's like, I mean, yeah, XRP, Cardano, like whatever the top 10 on like, you know, Bitwise's top 10 ETF or whatever they launched, like the top 10 on CoinMarketCap.

What outperforms that?

Like a basket of, let's call it Bitcoin, ETH, SOL, or a basket of, um, like the top apps?

Hmm. Well, one, I would say like, what's the time horizon? But two, I would also be like, I personally, like, I wouldn't— I'm similar to Noah in the sense that I wouldn't actually express— I would only express a view on a basket like that on the short side. So like, On the long side, I would say, cool, I want to own this 4 to 8 assets, let's say, in high concentration. And on the short side, cool, a basket of things so I don't get absolutely ruined on like one thing getting crimed up.

No, what do you— I'm guessing you guys think the applications outperform. Yeah.

I mean, what's going to create more free cash flow? I'm sure the applications, just because I think like the, L1 tokens are designed to maximize cash flow. They're playing a different game. So if we're comping from that perspective, yeah, I would go with the apps. But at the same time, like, because the top weighted tokens in Bitwise's index aren't based on fundamentals, they can trade at irrational valuations in a way that apps probably can't sustainably. So I think there's probably more upside on a basket of major assets than just an arbitrary basket of apps, but not necessarily for fundamental reasons, more so just because I think that money kind of gets allocated to, to beta assets when it comes from space, and those are the assets.

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Smack, you had this tweet about, um, He said, apart from actually using the products, the largest advantage that still exists in crypto today is the majority of participants still struggle to differentiate durable advantages that compound from ephemeral ones that decay. I thought, I thought there's a great post. Can you maybe just expand on what you were thinking here?

Yeah, I think when I— I don't know when, when was this, July? Yeah. So I think I was specifically in this part thinking about Hyperliquid because I remember seeing a lot of people talking about how it's just dYdX. And I think, I think a lot of those, again, like when we think of relative, almost like relative value, people do the same thing with relative applications or things that look like something else that they've seen. And I get why the comp is made and maybe it gets flattened on the timeline when people talk about it, but I do think that it one makes it like it actually provides opportunity in the sense that, okay, if you If you were using these things or you understand that, hey, this is actually different for these reasons, then you can say, cool, the credible— the best argument against this thing is actually something I don't believe. And so it can help you build conviction in the underlying position you have or you're building or whatever, because you say, cool, this is the argument against it. I don't actually believe that's true. And you can kind of build more conviction in what you're doing. At the same time, I think like It's very like, it's a lot of things in crypto have these fleeting moments where it looks like, wow, this thing's growing at an insane pace. These guys are monetizing in this way and people kind of extrapolate either on very short terms of like, hey, they made this much money in the last 30 days, they extrapolate forward and they don't look at, all right, like, what is this? Is this durable or is this like something that can be easily, um, like the pie can be easily eaten by somebody else who builds something adjacent to it or builds something similar. Like, how durable is that revenue? Which I think I would guess is probably also something that like the guys, Noah and the guys at Theia, are looking at around not just growth and like pace of revenue and cash flows, but also like the durability of where that thing sits in the stack.

What I've noticed is that the market has gotten smarter to some extent on its understanding of kind of business fundamentals. But it still isn't all that smart, or at least isn't focused on certain things. Like I would say anything past a year is not relevant to most people. Like it may make its way into price in certain respects, but for the most part, there are very few investors in the space that are thinking from multi-year period that are in the markets. And also the markets are not really being driven by fundamental investors at a very high level, just because dollar-weighted capital's in the hands of quant funds, momentum traders, passive funds, whatever it might be. So it's not to say like smart or not smart, but maybe not relevant to the market. But I'll give you one example, which is Hyperliquid. Great product, great team, everything great. If you thought one year forward, you would say, like, I think it was reasonable to be skeptical of the traction of Hyperliquid after the airdrop and say, if all the traders on the platform became incredibly wealthy, what would that lead traction to do? And I mean, I wasn't smart enough to realize they all are sitting on massive gains and are going to wait a year to get to long-term capital gains and then sell. But the point is, it's like that period of time that made these people as wealthy as they did. It's going to take them a lot of time to work off that capital, like lose it in the casino. And so the traction on Hyperliquid is going to go on for a year plus. And so if you're a fundamental investor like Thea and we're trying to ascribe valuation to Hyperliquid, I can't just put a multiple on its current cash flows because I'm not sure how durable they are, but I also don't have a strong view as to why they are or are not durable. I just know that there's this variable that in a year from now is going to show me whether I should have bought earlier or is going to completely kind decimate this business and the price around it. So that's where I see kind of a disconnect with investors, is that a lot of people point to traction that is not ephemeral— like Hyperliquid is not ephemeral traction— but at the same time, underrating to the at-peak NASDAQ pricing, it just doesn't quite make sense to me. Yeah, maybe I'm mid-curving.

No, I, I, I think I probably tend to agree with you. No, what's the state of like the liquid I feel like, you know, liquid token funds are kind of a new— this feels funny to say, but like a new thing in crypto, right? It's, you know, basically flows in the industry were dominated by two buckets for like 15 years. It was retail and crypto venture. And that was really like probably 98% of the capital that moved in the industry was, again, either crypto venture or retail. And like these liquid funds, you guys, Modular, Syncrasy, like there's, you know, there's a bunch now. Um, but, uh, it's kind of a new phenomenon. How have you guys, how have, like, how's that bucket performed? Like, how's it, how's it going? Like, we're kind of a couple years into this new, uh, yeah, new fund, new fund structure in crypto, right?

I think it's going well on an absolute basis for the funds cohort, but I think it's really been carried by the beta asset. Like, I would say there are very few directional liquid funds that are long only that have beat Bitcoin over the past 2 years. And so from that perspective, I would say the whole liquid fund complex has underperformed their benchmark. Maybe Bitcoin's the wrong benchmark, but the point is it's like I could have bought a top, like the Bitwise 10 Index and probably being the pretty large handful of liquid funds. So I don't know, I, I have mixed views on the state of the liquid fund market, but I would say right now, depending on what fund structure we're talking about, from a purely fundamental perspective, I think there is a— there are existential questions being asked about liquid funds in that if you're a fundamental fund, for example, there's a very narrow number of assets that you can hold in the pipeline of new tokens coming to market. It's not that big and a lot of the tokens still coming to market aren't really high quality. And so I think a lot of liquid funds right now have been, ever since probably the beginning of 2025, spending more and more time on public equities. You saw that with DApps and a number of crypto IPOs, but I think also looking at, for example, fintech companies like Square, Block is— Cash App is using USDC on the back end. Klarna is adopting stablecoins. Points. I think as this thesis plays out where finance uses blockchain technology, there's a lot of businesses or traditional businesses that are well positioned, have all the distribution to use this technology on the back end. That's not to say that they're going to be worth more in the future. Like there's a massive opportunity to invest in public equities, but it is to say these public equities have a different volatility profile and to some extent do not have the same direct correlation. And so when you're like creating a book, uh, as a liquid fund, you need to have some discretion over being in like fully invested in application tokens or L1s, um, or being invested in something else that has a different risk profile because there's benefits for portfolio diversification. So it's all to say, I think right now we're at a bit of discovery period for a lot of liquid funds where Funds are saying, okay, there is a somewhat narrow mandate that we're exposed to. The addressable market opportunity is growing, but not growing as fast as we'd like it to. And the ability to outperform just on the long side is difficult because there are very few tokens that have outperformed the beta. And so without a view that the beta's going to outperform, it's hard to say why just going long only liquid tokens is going to lead to a good outcome. But I think if you're bullish on the industry, it's a good strategy. But I think that you need to have a wide enough aperture of investment opportunities. And that's where I think liquid token funds are kind of today is determining what are the opportunities that we can fit in our fund mandate that are not just buying the current set of liquid tokens because the current set of liquid tokens is really just from 2020 to 2023, the companies that launch tokens and then Given that we're subject to venture math, 90% of those companies are going to churn over time. So we do need more companies to launch tokens in order to increase the net amount of capital that can be deployed.

I was going to say, it's funny because incidentally, part of the reason we started doing more liquid stuff a couple years ago was almost to Noah's point where we were bullish on the industry and we weren't seeing enough private founders who we could get conviction on to write private checks. And so we were saying, hey, like, we think this industry is growing rapidly and we want exposure to it and aren't getting enough on the private side because we're just not, we're just not finding conviction in builders. And so that was a little bit of the impetus for us to spend more time on the liquid side where we're like, hey, we should, we should own some of these tokens if we believe that we're going to see growth.

Have you guys thought about what activist investing could look like in crypto?

Yes, um, we've definitely spent time on it. I mean, it depends on which side of the activist investing spectrum we're talking about. Like, I think there's the, uh, hostile activism strategy, and then there's the one where you work with management to improve businesses. I don't think we want to go the hostile route because I think there's negative brand reputation that comes with it. Like once you're labeled like a hostile activist, it's hard to do things that are not hostile when you're an activist. So for example, like I think the risk-free value or whatever the RFE stands for, that trade where people went in, saw companies with tokens trading below book, and then kind of closed the company and got the cash out. That I don't think we'd be too interested in exploring. Whereas companies that need a lot of help, but the value of helping them can really re-rate the value of the company, that seems like an easy opportunity to justify. I wouldn't say we're necessarily activist investors per se, but we are active with our portfolio companies. We treat them almost like venture investments, and so we spend a lot of time with our companies. So if you define that as activism, perhaps we're activist investors. So that's kind of where we stand.

I kind of thought of you like— I know you're like, we work with our founders. I kind of view you— I know I view you guys a little bit as like activists in the sense he would—

he would say that he's a friendly activist.

Yeah, yeah, very convenient, right? Yeah, I don't know. I the hostile activism kind of, I think it's pretty fascinating. But I don't, I don't have, I don't necessarily have time to like, do that. But I, I wouldn't hate if it existed. I'll be honest.

I think it was Dean Eichmann is maybe working on something called like Markets Inc. I don't know if you guys have seen this. It looks like kind of active. I don't know. I gotta, I gotta, I just saw it on the timeline yesterday.

I haven't seen it. But yeah, I'll definitely look at it.

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Would love to get your guys' take on prediction markets.

I mean, I like them. I think that they're going to be an important part of finance in the future. I think that funds, regardless of whether they recognize it today, want to distill their investments or trades down to individual variables where when you look at investing in public companies, you're taking a lot of variables and combining them to a specific output. And so I think there's a lot of benefits to having the ability to speculate on individual variables and other non-security-like assets simultaneously. I think that's pretty consensus at this point. I lean pretty negative on the sports gambling aspect of prediction markets today, but in general, I think what Interactive Brokers is doing with ForecastX, allowing farmers, for example, to better hedge certain variance in temperatures, that makes total sense. To me.

Yeah, I, I'm— I think they're cool. I think that they are TBD on what are the markets that are most interesting. I think to Noah's point, like, some of the stuff where you actually have structural demand and, and they act as some kind of hedge for people is interesting. Those are markets that I think could grow, uh, especially as people want to express more precise views. But I do think they have an issue today, like, the top-of-book liquidity issue is, is real today. And it's not clear to me that the current structure is the final form of what these things will look like. I really struggle with the way that they work today, the binary nature of them, and just a lot of market makers don't— like, they almost don't want to get filled. Yeah. And they're kind of being— they're being incentivized to provide liquidity at the top of the book, but they, yeah, they, there's a, there's like a structural problem there in my opinion. And they can't rebalance, which is another issue, right? Like you can't, you can't rebalance into, you know, some other asset, like the losing side literally goes to zero. And so you don't have a salvage value, which I think also kind of distorts the market the way you, the way you do in with like normal spot or derivative markets. And so they quote in really small size, they keep wide spreads on long tail stuff. People don't really want to get filled. And so I think there's, I think they're very cool. Like I think they're going to exist and get massive, but I do think they have problems in their current form.

Do you have thoughts on Polymarket versus Kalshi?

Yeah, I mean, I think that the— I mean, again, like Kalshi to me has more depth, but again, their co-founder came out and said they have 20. So it's like, okay, that's, that's not great. But, but yeah, I don't know, like, it seems to me that they're both moving in this direction of like, predominantly the flow is sports, or the meaningful flow is sports. And I think, I think the market still needs to tell us, or has to kind of— the burden of proof is on the market to tell us what other things matter. Beyond sports and like elections or maybe economic data.

Yeah, maybe we can wrap, guys, by just thinking about like what— where you guys see price misallocations right now in the market. And like there's, you know, there's all these things happening, like it's, you know, end of year. It feels like AI narrative is maybe starting to roll over a little bit. It sounds like market structure maybe will come at some point in the relatively near future, maybe. So there's like things on the horizon that will impact prices of things. Curious if there are opportunities that you see that feel really obvious to you guys that maybe for some reason or another the market isn't seeing.

My general view is that if we all, which I assume we do, we work in crypto, if we all believe that this market is going to get larger, and you're going to see more sophisticated actors, then to me the obvious thing to be paying attention to is, okay, like, what is— like, what are the implications of that if true? Which I think, again, to the point of everything being one trade, that will— if that's no longer the case, then, then like, what does that mean? And to me it means people want tools and, and apps or protocols, whatever you want to call them, to express more precise views on the world. And so that means like, I want to be able to express a long view on a handful of assets. I want to be short a couple of other assets. I want to express a view on different timelines. I don't want it to be like, I'm long and let's go out the risk curve and be long beta, or I'm short and like, let's pick a couple things to short. So I think like people building things that actually allow more expressive opinions, uh, that stuff, that stuff I think is interesting. Um, yeah, that's, that's kind of like top of mind, at least for me.

I would say a few things. None of them are particularly actionable for, for your viewers, but, um, one, I think change in regulatory direction is incredibly positive, but as far as how that manifests in making money, I think it's a bit harder in that a lot of finance is antiquated and as a byproduct is charged much higher fees than it otherwise would if it was in a free market. And so I think, for example, like the interchange on credit cards is going to compress an order of magnitude over the next decade, and there's going to be a lot of opportunity from that. And so I think like the playing long financials isn't particularly interesting just because even if they're able to pivot to doing something within crypto, it's probably going to cannibalize their business more than the upside of doing something in crypto. But I think that companies that have good distribution, the cost to build financial primitives on their existing products, however we kind of define that, that barrier is coming down. And so I kind of feel like the big opportunity is probably somewhere in consumer. Um, and the example I'll give is on Starbucks. Starbucks, a lot of their revenue just comes from the fact that like they have a ton of customer, customer money sitting in their app that these customers use to pay for Starbucks, and Starbucks collects the float on that. I don't think it's crazy to expect that a lot of consumer apps that have some type of commerce can start to add other aspects within the financial markets that leads to real revenue opportunities. That's like kind of the opportunity I think people are missing here is that they're looking for financial or financial opportunities, whereas I think the opportunity is more so on distribution and someone that doesn't have financial primitives pivoting into offering something in finance.

Embed Morpho into the Starbucks app, basically.

I mean, maybe, but like, for example, Apple, I think Apple's like really used, they're well positioned to win just wallets in general. Like, I think Apple Wallet is probably the best-positioned wallet in crypto, even though it's not a crypto wallet today.

Yeah, yeah. I mean, yeah, I feel pretty confident that it will be at one point in the, in the not-so-distant future, I'd say. Noah, are there any, um, it's, I think you said you had 15 different positions roughly at any given point in time. Are you, I don't know if you guys talk about what you guys hold.

Yeah, I would say the one thing that— and this is another thing that I was going to bring up, and that we're like, I think is the biggest opportunity today, is fixing token markets. Like, I think we all know that tokens are broken in some respect, especially as investors. They're good trading instruments, but there's a lot of issues with investing in tokens. And given that there is so much capital dedicated to investing in tokens, they have a lot of reason to want these markets to be fixed. Otherwise, there is an existential risk for the business. And so I think whoever wins the kind of structuring tokens more efficiently in order to protect investors is going to make a lot of money. And that gets me into MetaDAO, which is a big position of ours. But in addition to MetaDAO, I think, for example, like Superstate, what they're doing from a very different angle, is approaching the same thing, which is we need to get high-quality assets on-chain and we need to be able to do that. And one of the ways that we need, or that one of the issues that comes from trying to do this is the bridging of the code versus the legal aspects. And so I think you could approach from a legal angle. I think you could approach it from the coding angle. I think you could approach it from both, but ultimately giving investors more protections in this market is going to lead to a big revenue opportunity. So kind of the ragtag space for tokenization or the crypto-native angle. So MetaDAO and other launchpads that are attempting to better give rights to the end buyers, those seem like pretty big opportunities that are in the market.

I think what's also interesting there is that, which I feel like we've seen for kind of a while, this idea of like pulling things on-chain, which is, okay, can we pull real yield, quote unquote real yield? On-chain, um, not kind of these looping things that are just like token emissions. And I think it's been a— it's definitely been a challenge for a lot of teams who maybe do have off-chain, uh, like origination platforms. So they have kind of like the structure set up to originate assets that have yield. They underwrite it, all these things. Um, and I think there's— it's, it's the on-chain demand has not been there in terms of like longer term, right? You have a little bit of mercenary capital who says, hey, I need this yield and I'll do it for the 3 months and, uh, these— this is what I want. And like that, I think, is holding back, um, it's holding back like any wave of these types of assets coming on chain. So like, to Noah's point, I think what Superstate's doing is good. I think like we need, we need a little bit of that kind of, um, institutional capital to get comfortable saying, okay, this is being done like in the background, and I'm just interested in being able to underwrite the actual risk that I'm used to underwriting, whether that's like a secured product or whether that's like structured credit, whatever the actual underlying asset is. Because I think, I think that's a space that actually can rip out a lot of costs, like smart contracts rip out a lot of costs in that area. And it makes businesses that might otherwise not have been profitable or possible like very much so and at larger scale.

Yeah. Let's wrap by talking about Smack. You posted about water the other day.

Yeah. Desalination. Yeah. Yeah, yeah. We may— I don't know. I got to— we got to— I got to talk to Dempsey, but we may post the pitch. I presented it at our AGM, so it was top of mind again for me. But yeah, I mean, look, I'm For us, it's like we gotta— we're thinking of, cool, what are like the weird spaces that are related to all the places we spend time? And water actually came up because of something Shelby was working on with Forever Chemicals. So went down a rabbit hole of, all right, what's the deal with Forever Chemicals? Okay, they're in all our water. What's the deal with like how we're purifying water in the future? What are the issues? The US unsurprisingly has a political will issue to get infrastructure updated, like physical infrastructure updated. So there's a bunch of cool tech that's improved over the last decade that directionally makes these things possible today. So yeah, yeah, water. I'm bullish on distributed water. Yeah.

Nice.

Well, Noah Smack, thanks for, thanks for joining the pod, guys. Always good to hear from you and Yeah, wishing you all the best.

Thanks for having me out.

Thanks for having us.