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

you just have to sell in September '21, October '21, November '21, December '21, Jan '22, Feb '22. Okay, that's your period. You got to sell something in that period because you realize the cycle is cooked and then you buy a medium amount in the first three quarters of 2023. That's not picking a top and the bottom, but the arithmetic is very clear. I mean, you smoked the buy and hold. Why aren't we trying to just say, you know, this is a reasonable thing to try to do?

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Happy to be here. Thanks for having us.

Great. I usually don't ask this question because I usually— it's people either know the guest or it leads to a winding answer. But I think it's a relevant thing to maybe ask to tee up this conversation with both of your backgrounds. So, Dave, maybe we could pick on you because you have a very non-crypto very macro-focused background. I had folks like, you know, with Peter Thiel and Goldman. And so maybe can you just fill us in on your background and elaborate a bit more on Reflexive?

Yeah. Thanks for having me, guys. You know, we've been talking about doing this for a while, and last week was a really good discussion, so I'm happy to build upon that. But yeah, Jason, I don't know how long we've known each other. I don't know. When did you and Jake become friends? Like elementary school or something?

Yes.

Yeah. The backstory is I have known Dave since I was about 5 years old, so I'm really praying this episode is a win for me if Dave doesn't share any embarrassing childhood stories.

Yeah, I guess that was all— those are the questions. Yeah, um, cool. So yeah, you know, I have a long trading background, mostly in the macro space. I started my career at Goldman on the interest rate derivatives desk in September 2008. Um, that's a really market structure focused desk. You, you know, you never really have to have a view on the Fed. You just take views on understanding what everyone else needs to do in the market. And so a pretty foundational piece of my experience. I did that for, for 5 years, uh, but then I went and joined Peter Thiel at his family office. I became the macro fund CIO. I was there for 8 years. And with Peter, you know, because it's Peter, you learn it just different ways, uh, of making money. You know, you learn to think for yourself. That's really helpful in these competitive macro markets, but I think has been also helpful when I've approached this new asset class like crypto, um, and just developed all the necessary trading skills of, you know, working on your psychology being disciplined, how to manage risk. I left in Q2 of 2020 to help start Commonwealth Asset Management. Adam Fisher had just left Soros where he was running macro, and he was restarting version 2.0 of his fund. And I've said this term macro fund, that means different things these days. Let's just define it as a flexible strategy where you look at everything from a top-down perspective. You see the regime and you look for just disproportionate risk-reward. And so, it was within that mandate in 2020 that we identified crypto as a macro asset, and we set up some custom vehicles to get into this trade over the course of 2021. When we got to Q4, we listened to what the Fed was saying that the regime was changing. And so, our macro business refocused on other stuff. I personally tried to move on, but I really enjoyed this crypto market so much. And, you know, it's like macro is really hard. You go from playing the most competitive game to crypto, which actually felt like the least competitive game, and back to the competitive markets. And that was unsatisfying. So decided in that moment to launch a crypto business and to create some institutional crypto products. And then about a year ago, decided I wanted to spin out with a full team to kind of re-underwrite the mandate, make sure we get the cycle right. And we started Reflexive Capital.

If you had to summarize the thesis on crypto for you guys, what is that, Dave?

It's the most liquid inefficient market. So typically liquid markets are more efficient, you know, that how big can Millennium and Citadel be in the markets? Crypto is a pretty large outlier to that relationship in that it's fairly liquid, but it's highly inefficient and highly irrational. And that has to do with who the competition is. You know, there's not a lot of professional trading experience. There's a lot of VCs, there's a lot of retail. And so I think there's quite a bit of edge that can be had in this market by being a professional and a risk manager. And I would say like the, the biggest market inefficiency to me over my time horizon is that I don't see anybody really adjusting their portfolios in line with these regimes. And crypto had these like very big regimes. We should talk about why I think that is. But I think like if you're sober and you're dynamic about this, you could do so quite uncompetitively. And I didn't have a chance to trade in the '90s or the early 2000s, but I think that's basically what it feels like today, where if you get the, the big rotations right, it can be so valuable in this asset class. Rotations like going from Bitcoin to alts and selling the alts. And, and, you know, macro oftentimes isn't an edge when, when everyone else is doing it. It's hard to out-macro rage traders, but, you know, it's pretty easy to out-macro crypto people. So basically just here because I think there's opportunities I won't see anywhere else.

Uh, Jeff, before we go to you, I want to focus on that because I— why do you think that is? Like, we have obviously venture funds that they're like 10 years, they're like, we're just gonna invest and then not touch it. They have the luxury of doing that there, but there's a lot of liquid funds, but they all mostly round trip, uh, you know, they're up multiples and then they give it all back mostly. And then they try to, you know, beat the watermark at some point, which is where we are now. But like, what is it? It's just the caliber of managers is subpar. Is, uh, they just don't listen. Like, what would you attribute that to?

I mean, I think a trading skill set and a VC skill set, I mean, you can argue they're not related and And you could argue that they're kind of inversely correlated. Like, what, you know, trading is just about psychology. It's about understanding your intellectual biases. It's about being disciplined. The best traders that you know are oftentimes the most flexibly minded people. So it's like price changes and they, they change their mind. And on one hand, that makes them horrible investors because, you know, it's like something, something moves and like they have no commitment to things from a long-term perspective. What makes a good VC It oftentimes is something where, you know, you have some long-term thesis that grounds your activity in the space, but it makes you a bit too stubborn to respond to price in the correct way. And then there's this additional crypto dynamic where so many people in crypto, like, make it their full identity. You know, it's like almost like a cult, right? And that is not the— that's not a good starting point for you to make rational decisions when price changes. So Yeah, I'd argue it's just the early movers in this space did not get into the space because they were traders. And to the extent that they did, they're oftentimes focused on harvesting really, really short-term inefficiencies.

Jeff, what does head of alpha strategies and PM at Bitwise mean? And I think with the lens of that question being, how do you actually make money for Bitwise?

Absolutely.

So as you know, Bitwise is a leader in the crypto asset management industry, primarily via the leadership of our index fund, as well as are single token ETPs. And I was brought on board about 3 years ago to augment those capabilities by offering actively managed strategies and solutions. And so today we have most of our efforts invested in a multi-strategy, multi-manager framework in the partnerships that we drive in accruing some of the most unique orthogonal crypto returns that are possible in the arena. From my professional background, I've been looking at crypto professionally for now over 7 years, personally for 10+ years, and we are at this point where I think there's still a lot of dynamic changes happening at the core of the industry, where every cycle there are new, uh, implementations of even the technological capabilities that are possible between liquid and venture and the blending there between. Historically, uh, one of the things I found really unique about crypto, as Dave mentioned, is the inherent volatility, uh, that is present in this asset class. I actually happen to take the view that Bitcoin will probably remain a volatile asset given its monetary design as a feature and not a bug. And that is a powerful thing because historically, when you study the efficient frontier of a modern portfolio theory, you're taught on two axes, right? The y-axis has return and the x-axis has volatility. And you can think about investing in stocks and bonds and drive something worthwhile. When those yields are not good enough, a new axis got introduced, a z-axis, and that z-axis is liquidity. So people would say, hey, we got to make more money than what the public equity market will give you. So we had to push out the liquidity curve. So now you go out to do things in private credit, private equity, venture, as we just talked about, to drive that forward. But what's really unique about crypto is you can actually get liquid implementations with high level of volatility that we have never seen before to create something new in that dot plot that is exclusively the opportunity set for an actively traded and liquid traded strategy by an expert navigator.

Yeah, so Dave, maybe you can walk us through just your thoughts on last week's podcast, outline the points, and would love to hear your take on, on, on the things that they outlined.

I have quite a bit of respect for both of last week's guests. I've known Ray and followed Tushar. You know, these guys are asking the right questions. So hopefully this discussion just builds on their arguments and tries to be forward-looking. But there's not a lot of people in the space from my background and Jeff's background. So the goal here is to add perspective from a professional trader. And I think that presents an alternative thesis and pushes on some of their conclusions. So if I were to go, you know, I took some notes when I was listening to it and I'll outline, I think, 4 points, and 2 of them, you know, I love, and 2 of them will end up somewhere slightly different. But feel free to jump in if you think I'm mischaracterizing what they said. The goal is not to do that weird debate thing where you mischaracterize someone. The overall introduction that there's this structural mismatch driven by an imbalance of too many venture funds, which means there's going to be alpha in picking public tokens, and that this liquid strategy could outperform venture. And they gave a bunch of great reasons for why this mismatch exists. But they transitioned that into this idea that exceptions outperform. And so, in many ways, if you're going against consensus, then you're going to succeed. Love that point. And the way this will reconcile itself is via performance. So managers from other asset classes, a.k.a., someone like myself, will see this opportunity and become liquid managers in crypto. There's this discussion of edge I really liked, how it's important to find edge in markets, uh, and a related discussion at finding people's strengths and not a lot of weaknesses. So Tushar laid out 4 really good sources of edge: information or access edge, analytical edge, which I think is the one a lot of people try to emphasize, this psychological or behavioral edge, you know, how do you manage emotions, like let's just call that trader edge, and then structural edge, like you have a different mandate than everybody else. Then there are two segments that I want to dive into and end up somewhere pretty different. So, there's this discussion on all these previous attempts to suppress volatility. And the general character of that discussion is that it's just too risky. If you're trying to suppress volatility by trading, aka, go between 0% and 100% long, we've only seen that not work. And so, the characterization is that managing risk actually leads to more risk. And of course, picking tops and bottoms is very hard. And when you look through all the performance over the years, there's just no real evidence of that working. And the guess is that it's because human beings just burn out and then they start to do stupid things like use leverage. You look in March 2020, there's all these examples of that. And so the recommendation is just to absorb the volatility and have a long-term timeframe. And the fourth and final point was that markets are chaotic. And so one shouldn't attempt to play the game of market psychology. It's too hard. It's impossible. Um, you know, trading beta, it's like, it's— you can't find patterns. Uh, everything is already built into expectations and might be very self-referential. The market is more efficient along this axis of beta, of market timing, than the idiosyncratic dimension. And generally, it's just hard to win the psychology, and so it's easier to win with, uh, analysis. So those are kind of the, the main points. Hopefully I did a decent job of steelmanning them, but anyone else want to add anything to their points, and then I can go through some additional points that I have.

No, keep going.

Okay. So I had a few, 4 different points that I thought, you know, I'll add a strong view that I have, which, you know, some part of some ways part of my thesis, and then kind of discuss how that leads to a different conclusion, then we can talk about it. But the first one is that the market structure is just so different today. The game has changed dramatically. And all these historical analogies, I think they can be very misleading. I feel having spent a career studying how capital flows can saturate opportunities, basically, money flows into something, and then the opportunity goes away, and then maybe creates another opportunity. That's what we're talking about, right? We're seeing all sorts of evidence of that in crypto. But it leads me to believe that what will work over the last— what's worked over the last 7 years in any respect, shouldn't work nearly as well over the next 7 years. And so I wonder how that's going to affect the go-forward performance of liquid funds or these hybrid liquid VC funds who are just applying a venture capital mandate to liquid tokens, riding the cycle up and down. Because to me, venture-style token picking probably actually competes with private venture. It's focused on the same sort of edge. And there's a lot of crossover in process for these VC funds. In their ownership of liquid tokens. And I think the missing point is that it was the lack of venture as competition in 2018. And Santiago can definitely speak to this, which meant liquid or hybrid managers doing the pure VC thing on liquid tokens. That's why they had such good entry points. And you fast forward to now, and you have a much different market structure, right? I mean, to be honest, the market structure is fake. Let's just start there. You have these big venture funds. They do these big rounds. It means the TGE price is like way too high. And everyone's pointing to how complicated that is. But as long as venture funds are too big, it's hard to imagine that they're not going to have like a very persistent impact on the initial token price. And so we're seeing a very weak bid on this stuff. Nobody can really sell anything until prices go down a lot. But even if these things correct 80%, so something launches at $10 billion and it goes down to $2 billion, it's not a $20 million market cap entry. And you can say like all the ranges are higher now, but you still— it should be a much worse entry point in a relative sense, making any adjustments because of, of these overfunded VCs. And so the question is, if your liquid entry points are much worse as a result of this, um, you know, are you going to be able to absorb the volatility in the same way? I mean, Santag, you mentioned like round tripping or whatever, but like, you know, is this going to be the same game if this is the game that you're playing? Um, you know, to me, you have to take these opportunities even further and see that the relative opportunity here is likely to pursue a totally different mandate using a totally different source of edge. Pure liquid venture token picking is not different enough of a mandate than the thing we're saying is saturated. So let's focus on— let's do the contrarian thing. Let's focus on a different strength, a different source of edge, which is actually everyone else's weakness. And so an approach might be to own some liquid tokens, help deliver the returns associated with these bull markets, but be nimble and be flexible and own the new thing whenever that— if it is owning the old things, you can still own the old things. Trade each cycle independently. Bring most of the capital, as much capital as you can, to the next cycle and play that game and just compound returns. I feel strongly that if no one is recalibrating the portfolios in line with these much different regimes and the reflexivity, those who try to do so will do so in a very, very uncompetitive are, uh, very, very uncompetitive way.

So no one has any money to bid the bottom. And if you're a fund, you're either fully allocated, you raise most of your money later in the cycle, and you deploy later in the cycle at higher valuations. And very few managers have the confidence, either because structurally they can't, or they are too afraid to look at their LPs in the eye and say, I'm gonna hold cash. Yeah, it's just they don't want to do it. And either they're really bad, their emotions get to them, they need a— they're chasing, you know, when you have days that are— you're up ripping 10%, like, holding cash is really fucking hard. You look like an idiot, and most of your investors will call you up. Think of that scene in The Big Short and be like, why are you not riding this bull market? You're an idiot.

Yep, I'm redeeming.

As an example. Exactly, I'm redeeming. As an example, um, Look at Jason Yanowitz from Folius Capital. I was with him in Breakpoint 2021. You had days where everything was just ripping and he was like, I've just raised $75 million. I'm holding most of that in cash because I'm not of the mind that this is going to persist. And I, as an LP in the fund, I'm like, okay, well, you're going to get a lot of pushback to that. He held most of cash. And looking back, I think like he was in a very good position throughout, like, you know, the subsequent year to bid stuff where you were literally pennies on the dollar. But like, I can't think of other managers that were in that position. I mean, it's really hard to raise at the bottom. And structurally, we haven't even seen LP money come into the space. You're not— nothing is catching a bid. It's all kind of retail PVP stuff. And it's very volatile for that reason. So I don't know what the solution to that is other than like raise a liquid fund.

Yep.

You know, hold a lot of cash because it's like that Taleb, like there's these moments, like if you, there was a great analysis someone did, like if you were to bid on days where everything is down like 10% or 15%, there are always days during any market regime where you have that extreme vol, have the money to bid on that day. And if you do that time and time again, most of the return profile is going to come from those days. Problem is no one has money in those days. Either get liquidated or they're shit in their pants, fully allocated.

Yeah, it brings up a good point that dealing with the allocators makes all this hard. Like, it's hard enough to, you know, manage psychology, and then you got to deal with your engagement with LPs. And for sure, you have to raise money in the bull market, and that's this whole reflexivity model. But it kind of actually takes me to my second point, which is that if you suppress volatility in an open-ended fund in the right way, you're going to bring different capital. You're bringing new capital into the space that currently can't— the current options don't work. And so I don't think we should— the path is questionable, but we also shouldn't minimize the effort. We can get tens, if not hundreds of billions of dollars to come into the space. If we create a product where it's not 5 to 10-year timeframes, it's like you have to re-underwrite thing every quarter. And so if that's the mandate, the manager probably has a bit more comfort re-underwriting the portfolio every day. They still have to deal with their emotions, the market going up, like the Druckenmiller thing, whatever. It's like you have to deal with the emotional reaction to other people making money. But if the market feels like bad risk-reward, then you just don't have to be involved because you have a stopout, whether it's an actual stopout are not. You know, this, this down 80% just doesn't, doesn't work. And Jeff can speak to this, to some very, very large pools of capital. You can argue they're bigger than the ones currently engaged in the space. And so I just think like the equilibrium is there's both. There's venture funds who like, they have to participate in the entire upside. Then there's funds who are risk managing this stuff. Maybe the returns are lower, maybe they're not. Maybe the returns are lower, but on much bigger notional. And that's, that's the only way you actually fix the market structure. It's not by doing liquid venture in open-ended funds because then you're not bringing any new capital in to fill this out.

Jeff, you obviously look at a lot of managers, um, at that vantage point that you're sitting on, like when people come to you and say, hey, allocate into certain managers, like what are they looking for? And would this type of strategy resonate with people or are they saying, hey, I look at the returns of these venture funds, some of them are up 35x, 20x because, you know, everything was up. Um, If you've been invested over the last 7 years, you should have done that type of return. But I'm curious, one, how much appetite are you seeing? And two, what is the strategy that gets the most amount of interest from these allocators?

One of the fallacies, if you will, that I have noticed over the years in communicating with allocators and investors is when we compare VC to liquid strategies, the bias that is built into there is to take an equity-centric valuation approach, right? This idea that tokens have value in the way that VC creates value, ultimately deriving how equities are valued through dividends or profit share, almost kind of hamstrings an approach that I think sometimes liquid VC itself can be a little bit insincere because we are at a point where the nascency of the technologies make it quite hard to observe that value accrual. And that is actually part of the multipronged challenge. I believe at a top level, crypto has a very inherently unique value capture framework, and it rewards different kinds of capital contribution outside of financial capital, right? Equities, it works because you contribute financial capital and therefore you're a passive owner to the rights of those incomes. But crypto is different. There's actually ways in which rewards capital contribution that come from other angles, like social capital in the case of those who may find value in governance, production capital for those who actually interact with those tokens to drive network effect and the income associated with that endeavor, or the human capital behind it as well.

I'm just curious, like, you pitch an LP that, he's going to laugh out of the room. He's like, I want a 30x. I don't care if you're fucking staking tokens or governance. Like, I want to ride this puppy and I want the type of returns that people have been getting the last— I mean, that's humans. It really comes down to that. I'm not pitching, I'm gonna be active in governance. I might say I'm gonna be active on chain because that's where I'm gonna interact and like be close to the metal. And I'm gonna be smarter than a guy that's just looking at charts and drawing lines on a chart. But no one really, like, at the end of the day, like, I can agree that there's like not very concrete ways to value these things. But let's face it, like, allocators are looking at this and saying, I want that type of return that has been historically clocked. They don't care about how you do it or the type of strategy that you do it. They may reward you for dampening vol in the bear market, but a lot of these managers also knew and don't have much track record to it. None of them have been invested in a market environment with rising rates either, which is sort of kind of new.

The point though is like there's this skewed return profile, like it's got disproportionate risk-reward. And there is an allocator who— the absolute returns, you know, it's more about returns within the volatility profile rather than stressing the volatility profile to deliver the maximum returns. And so far, the allocation process has been limited to people who, you know, basically think just like you outlined. And we haven't actually created return profiles because the volatility suppression has been flawed so far in a way to bring all this new money in. And yeah, I mean, literally, you could talk about— there are people who want a strategy. You know, we have conversations with allocators. Let's take 80% of the money, let's put that in cash, and then with the 20%, run a crypto strategy like that. You know, people can't do this for themselves, basically. But they want to try to access these skewed returns associated with this emerging asset class. But it has to be in the right wrapper, otherwise it's just a total non-starter.

And so, yeah, well, the question for both of you is, because you both interact with LPs, like, how attractive is that strategy? Because I would argue that historically most of it's been I'm an event— like an allocator will say, is this coming from a hedge fund bucket or a venture bucket? So you need to make that very clear for them where that's coming from. You're like, well, it's kind of liquid venture. And they're like, I don't understand that. So they'll probably pass.

That's actually my point. The liquid venture thing, it doesn't actually solve anything. It has to be a real hedge fund strategy without the drawdowns. And so it is, it's in the hedge fund bucket. And those people, I think, would, you know, we just don't have the products yet to satiate their interest, but they're clearly interested. I mean, let's be clear, the returns associated with crypto in the bull market, I've never seen anything like that in markets before, like 3 to 4 Sharpe, hundreds of percent. We just, no one has monetized that or structured it in a way for the hedge funds to do it. So even through the pure risk-free lens, that is interesting, but you need to package that in a way which works for them. And yes, so far the attempts at doing that have been like way too reckless, and people have blown up, and they've introduced leverage in the wrong ways. And so there's this related question of like, does that mean it's impossible, or was it just the wrong people? The discussion that Rangers were having was that basically the psychological edge is just way too hard. I mean, there is such thing as psychological edge. You know, risk management can be a strength. You know, it's like trading is all psychology. It's, it's about being open-minded. It's about being intellectually nimble. And the key here is to understand how to manage risk around various markets and trades. You size things right, you know, you don't use leverage. And as I, you know, been discussing, like, I think the VC skill set actually leads you in a worse position to do this. Um, And I would, I would argue like there's been a lot of people who've come from trad fi before, right? I would say like a someone who was on like a structuring desk at in the investment bank of JP Morgan, like that's, that's, that also is not relevant for trading. You know, might still work out, but that doesn't actually give you a head start to working on your trading plan and how to harness your emotions. So again, I would just like stress we shouldn't judge the, the vintage of 2018 managers to reflect what real experience and real talent is capable in the space. I'm open to a lot of different outcomes, um, but I, yeah, I don't see many like real attempts at doing this in the right way.

Yeah, I mean, the other thing too, like the investment vehicle wrapper, right, matters greatly here because if we are comparing a beta-centric approach versus a liquid alpha-centric approach with the fee burden that an open-ended structure is create an annual crystallization scheme. There are investors who are going to want risk management by definition. If you have a closed-end fund that is venture capital centric, where, uh, the incentives are more aligned in the distribution waterfall, then there is a lot of patience. But if you are going to charge fees annually and you have that experience of being up 200 and then down 80, etc., where, you know, you realize you were net worse off than maybe the GP themselves. Those things are problems. Like, those things create structural, uh, problems. And I don't think it's totally unfair to then, uh, understand why some investors have chosen to avoid certain types of vehicles. Now, as Dave said, I think there's change that could come from new trading mindsets and new financialization that is happening in crypto today. For instance, we have the Bitcoin ETF now for the first time, which means eventually we'll probably have options on those ETFs and the ways in which traditional finance trading tools will merge with crypto is going to increase more and more. And there will be a path for more risk-managed trading solutions. But I, but I do think addressing that upfront as to having the right investment vehicle structure for alignment with your LP is a key question that there has been some disservice to in the past and one that I'm optimistic that we can actually address in the future.

Let's just say you had a PM who's worked at Millennium Trading Oil for the last 20 years. You think that guy's going to blow up trading crypto? I just don't think we have the right data points yet. Trading is a special skill set. We're not being open-minded enough to— there being literal superheroes in trading, just like there's maybe superheroes at doing VC, whether or not those people are in crypto or not, I can't comment. But, you know, it, it's definitely a hard asset class. But I haven't— I don't meet many people who have the discipline and have studied their emotional makeup to understand how to harness their own cognitive biases in a trading plan. Have you met anybody like that who's actually talking about doing that stuff?

Well, I can only comment on the conversations that you and I have on a frequently— on a frequent basis.

I'm not even talking about myself, like, whatever.

No, but I will, I will jump in here because when I first met you, Jano introduced me and, you know, most of our conversations on a weekly basis, like we started talking biweekly, like on, on the regular. And it was mostly about, and it would always start with, what am I not seeing? What are my biases right now? And I think that's like what you should be doing. And I find that to be quite interesting. It's never about, hey, you know, a thesis specifically about like a particular— I mean, we talk about specific things, but it's mostly like, what am I not seeing? And emotionally, how am I managing that? And I think that's like, I think that's the most important thing.

I appreciate that. I think the idea is like, it's just there's different sources of edge. And at this point, the one that's most exceptional in crypto is likely the psychological edge that Tushar mentioned. And again, if you come from my background, you see examples of that everywhere. There's a survivorship bias. So all the people have been in the business for 20 years, like, have that edge if they're doing this form of discretionary macro. Um, and so I think it's just— it's kind of in line with their views that over time these people will come in because the opportunity to do so. If you can come in and be doing the most exceptional thing, that should draw people in. And that should be like the strongest version of their argument of trying to do something contrarian in the space. Because literally, it's like the whole space is capitulated. It's like, I've studied managers over the last 7 years. This can't be done. So I'm not going to try. I'm just going to buy and hold, right? And there's all this cognitive bias in crypto that comes from buying and holding Bitcoin and Ethereum, right? It's like, I mistraded this because I sold, so I'm just not going to sell anything. I mean, you go back and you look at the peak in 2017, early '18, and then let's look at the top 50 assets then, and then carry that forward to how did things perform? What was their performance between that peak and the next peak in '21? 45 of the 50 assets were down by an average of like 80%. Said differently, it's not clear. We still haven't found a lot of product-market fit. It's not clear that these assets actually perform in the next cycle. And you could say this vintage is better than the last, but, you know, I, I think it's, um, that's also been the complicated part of operating Liquid Strategies, that if you're doing the buy and hold thing, you know, okay, maybe you're rotating into new stuff. Okay, so let's go through the math. You go down, you go down 90%, and then you rotate into the new thing, and then that thing does like 100x or whatever. So now you're still like net net up. But, you know, Jason, you asked this question on the podcast last time, like, isn't having a top-down view the most important thing? And it was kind of like, you know, they pushed back quite a bit, but the arithmetic is very clear. And I think it's like, it's, it's the wrong mental mindset to think about specifically picking tops and bottoms. Let's go through a slightly easier example. You just have to sell in September '21, October '21, November '21, December '21, Jan '22, Feb 22. Okay, that's your period. You got to sell something in that period because you realize the cycle is cooked. And then you buy a medium amount in the first 3 quarters of 2023. That's not picking a top and the bottom, but the arithmetic is very clear. I mean, you smoked the buy and hold.

Yeah.

So why are we, why aren't we trying to just say, you know, this is a reasonable thing to try to do? There's too much reflection on Bitcoin, Ethereum working as buy and hold when almost nothing else has worked buy and hold. There's a few examples of this cycle that I think could work, but it's like crypto is full of these great, you know, it's a graveyard full of these things.

There's so much to unpack there. Like, I'll start one thing. Most managers are too afraid to tell their LPs, I'm going to hold majors. That, especially now with ETFs, it was true before ETFs, certainly now true, right? Because it's like, I'm holding a major. I'm like, well, what am I paying you? The reality is people are paying you to outperform. Sometimes that will entail holding cash or being on Bitcoin or sitting on Solana or Ethereum. That's it. Most managers are not intellectually honest or have that relationship with their LPs to write that fucking letter in the quarter and say, we are going to cash or we are holding just majors. I'm sorry, I'm still going to charge you $220 because I'm going to hold your hand through this very difficult asset class. People are paying you to hold their hand on an asset class that is chaotic. Yes, that's it. You either believe in the manager or you don't. That's it. Like, and that's what I would tell people when I was managing other people's money. I'm like, there is going to be a time where you're going to question why I hold something that you can buy on Coinbase and you have to be okay with that. If not, put in the fucking notice.

Yeah. This happens in equities too, by the way. I mean, like how much Apple, Amazon, Microsoft should people— I mean, if you have an equity fund, you're supposed to own like 3 things over the last 15 years, but like, you got like talking about doing all this other stuff, you know, it's like, they over-intellectualize.

Yeah.

So it's like, it's like, how do I over-intellectualize the discourse and sound smart in my letters to justify a 220? It's like, no one cares. Just outperform.

Yep. Again, you raise an issue where allocators are just making it hard on people.

They really do.

Like most of— and this is a great point, David. I'm glad you brought it up. I have liberty now because I don't care about— because I don't manage, I don't intend to manage other people's money. But in my observations with a lot of other managers that I'm an investor in, LPs bring on too many opinions of how the strategy should be run and put all these constraints and covenants and like, you can only raise so much and you can only do this. And it's like, guys, candidly, you either believe that this manager is really smart, you're investing in the person, let him cook. Just get out of the way. And unfortunately, most LPs, and this was my disillusionment of being a a public manager is that they'll just get in the way and they won't support you. And so I think that's why I've insourced it now. And I just, you know, I'm able to be more nimble and I don't miss that. Now, I think if you're going to raise a fund now, you want to have the most amount of liberty to do whatever it is that you want.

And I think these are good points because it's— they're not— I don't think— I don't even take them counter to my arguments. It just— this is why it'll take longer. You know, it's like someone will raise some money in the bull market, they'll build credibility over a longer period of time, and then LPs might give them more benefit of the doubt. But yes, the flexibility here is supposed to be the edge. Like, if you take the strongest version of argument, it's like, literally, I'm going to be like the macro fund. I'm going to just find good risk-reward, and the rest of time, like, come back to, to flat. And if the best thing is Bitcoin, we're gonna, we're gonna own that. But, you know, you're 100%, you're 100% correct.

Uh, a lot of the liquid funds— I mean, I'm curious, before you enter the space, like you canvass like the market, like the liquid funds. There were some, a lot of them have blown up. Most of the market's still venture. What are coming into the space? David, you talked about investing being so psychological, like crypto is a pretty tough market, I guess. But I'm curious, like coming into the space, you talk about certain inefficiencies, but like who would you say before setting up your fund was like doing actually interesting stuff in the liquid side? And who do you think is— I guess, like, what's your edge in the liquids? I guess.

Yeah, maybe it'd be helpful if I unpacked like an overall framework I have for the space. I think it's quite helpful in this with this trading construct. So we call this fund Reflexive Capital. This concept of market reflexivity gets thrown around within crypto often. But I think, like, let's really unpack what it means. Uh, it's— this theory of market reflexivity is based on a view that everyone has a distorted view of what's going on in markets, and price can heavily distort people's views, in some part because price leaks into fundamentals. And these feedback loops often occur where price goes up, the fundamentals look better, so people buy. So then, of course, price goes up even more, fundamentals look even better, and people buy even more. And so this is a feedback loop. right? And you can think of it, uh, this feels overshooting, it works in reverse, and undershooting, um, you know, boom-bust I think is defined by these patterns. And market reflexivity is something that you can observe across markets, but crypto is uniquely reflexive because, you know, for a number of reasons. One, there's, there's no commonly accepted heuristic on how to value this stuff. So said differently, price can go anywhere. Like, if these feedback loops want to drive price higher, it can literally go to infinity. Many metrics that we use to track quote-unquote fundamentals in crypto or understand activity in the space are directly impacted by price. You know, TVL, like token price triples, TVL triples. We oftentimes are looking for adoption and network effects, and many times people are just using protocols initially to reap the initial rewards of doing so. And so we often extrapolate that behavior, but if token price triples, the dollar incentive to come use the protocol triples. And so, long-winded way of saying, like, in the bull markets it seems like crypto is taking over the world, and the bear markets it seems like a total scam. And so I think these feedback loops are the most important thing to model in the space. It really is the lens at which I look through everything. Um, and so for my process, like, let's, let's try to understand the regime, aka what is the direction of reflexivity in the market, and that shapes your view on everything else. So to get to your question, you know, we think about an approach to trading. I haven't seen many examples of a return stream which successfully introduces having a macro view and helping people trade that market. So, you know, your question is a good one because, you know, why should anybody think that they can trade this market when there's been few examples of it working so far? So we can point back to your original question about maybe who is trying. But, but I would say there needs to be a certain amount of sobriety in this asset class. You know, you kind of have to be one foot in, one foot out to appreciate how powerful this reflexivity is. And if literally your assumption is this is all that's going on, like, you can have some long-term views on crypto, maybe it's going to be important long term, but like, let's do one cycle at a time and just through a macro lens try to identify how are these dynamics making things seem good or bad. And, and nothing— there's nothing idiosyncratic in the space, right? It's just, it's all a reflection of these dynamics.

The other thing is, I think, um, there is— when I talk to other managers, I mean, it's easy to be like the eternally perpetually bull, you know, in this market because historically that's worked. I don't think we talk about enough, and maybe these are not funds, you're just large individuals that have perhaps managed the risk much better. To your point, like, I think like you're never going to— there's too much focus on like emotionally, that it's very taxing when you sell something and then it rips in your face. Um, and, and then you just hold on to stuff that is going down because you don't want to take the loss. What you— I think it'd be better— what I've appreciated is I think you're supposed to capture 60-70% of the upside, be comfortable with that, and then manage a lot of downside and just protect the capital. Because you know there's going to be a day where no one wants to touch this thing.

Okay, reflexivity model here. I don't, I don't do the astrology around the halving. I'll start there. Like, I, you know, I think the halving, you know, it's a meme or whatever, but how this cycle has begun, like previous cycles, is the Bitcoin goes up first and it creates this very important psychological shift that permeates like everywhere in the system. Like, the crypto people are, are activated. They feel excited again. And that's like when the reflexivity really starts moving. So you have, you have price and fundamentals reinforcing themselves. So, you know, you launch a new token a year ago, no one responds to airdrops. Now it's like things are churning. But we haven't seen a large capital inflow. And to me, that, that, you know, we've had some money come to Bitcoin, but into the rest of the space, to me, that's because the, the current outlets of that hot ball of money, and, you know, I know this is near and dear to your heart, Santiago, we talked about this, dog coins, cat coins, and last cycle's tokens. Right. And the, you know, dog coins, cat coins, that's a stretch for institutional investors. Last cycle's tokens, the basic heuristic is no one falls for the same bubble twice. So it's very complicated to sell someone on last cycle's tokens as this is so important, you need this in your portfolio again. So until we have a new narrative about what's going on, the feedback loop is really incomplete. You can have price and fundamentals reinforcing each other, but not the real feedback loop where capital is coming in. To chase this stuff. So I think sort of this move we've had since the start of Q2 is actually a pretty healthy correction because your favorite asset is probably not going to go away. But it's like it allows for new leadership to emerge to really get a new identity for the crypto cycle. And I can't tell you what that thing is. But the nice thing is, if you have a real reflexivity model, there's enough price momentum now in the majors that it just— it should just be a matter of time before something happens.

Months.

And then that's when the real cycle starts. I can argue whether you want to say it started or it's just the early stages of it. The best is yet to come. These discussions of it being late cycle, we haven't introduced money at really high prices, which is now vulnerable to a reversal. That's how cycles end. That creates the overhang of a 2-year bear market. So we can't actually have that yet. It's possible Bitcoin just goes up for 12 months and we never create anything new. That is an option. Um, and so, you know, for a strategy who can't underwrite large drawdowns, generic strategy like that, not commenting on my own, like, you're going to wait until you see it, and you're not going to make this hypothetical bet on like, it's definitely going to be gaming, because that, that's how you run into a down 40 in Q2, and then you don't work for the allocators anymore.

Jeff, you've been quiet in the background. I'm curious, you guys have an ETF, there's— everyone's tracking that. How does that change the game? Like, I think that The bull market— we're in a bull market, I think. I don't think that's been validated for a variety of reasons. ETF and the impact that the US is shifting less anti-crypto. Those two things are really important for the cycle, primarily in ETF. But from a catching a bid perspective, like, what have you observed from talking to large allocators? Like, and how does that change ultimately we need that money flowing to not just the ETF, it needs to come on-chain and bid this stuff. So I'm tracking stablecoin flows, which are up on marginally moving higher, but still not there. Nowhere near. If we need to see that pick up substantially for the rest of the market to catch a bid. So I'm curious, have you seen any movement, particularly in the US? And are those wheels churning now? For the next 3, 6 months or 9 months for those allocators to invest in these funds?

I think for most of the investors we talk to, Bitcoin is an exceptional asset and does not represent the interest of the crypto industry at large. It is, of course, the leader and the face, but it doesn't, in my opinion, capture the ethos of the asset class as a whole. So the Bitcoin ETF is a particularly unique journey that Bitwise is on. The ETF, I think, does transition that a little bit into the mainstream dialogue. So we're optimistic to see the flows there in the ways that we can engage with investors that are different than the Bitcoin ETFs. When I looked at the 13Fs the first time it was filed post-launch in January, a part of me was disappointed by the lack of diversity of institutional funds and RIAs that would be found on that list. And yet, It makes sense because it's very hard to also pitch gold as a holding for a money manager. It's a little bit of a niche construct. It's not that it's valuable. It is, but it's not something that money managers are paid to hold. Ethereum is a little different because I imagine there is a world in which the likes of Coatue and other venture and tech-centric crossover funds will find having a small allocation to ETH as a bet on a big pie of the future of technology as a platform could be justified as an investment mandate. So the types of holders we might see in the next iteration of the 13Fs will give us a window into the kinds of clients that it serves. And, and that's where I think we'll slowly start to make the transition into the next frontier, as we've talked about altcoins and all these other things that are still perhaps a little bit nascent in the ability to have captured durable return deliveries. But I'm optimistic the ETH ETF is ushering in the era for that conversation to be had here, at least asset-wise.

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So how are you? I mean, of course, none of this financial advice, but we can talk generic terms. But how has, I guess, the last 3 or 6 months been from an investing perspective? Because it's not been an easy environment. And What are perhaps some of the things that you've changed in your mental model this cycle that you think have helped you or will help you outperform?

Yeah, I can kick this off. There was a comment that also was made in the last podcast with Tushar where he mentioned that The idea of one single manager that's so all-rounded that can do everything— picking fundamental and trading data around it, running market-neutral strategies, all of those things as a single manager— is frankly impossible. And so you should actually just go with the best manager for the best single strength that they could be known for. I agree with the, with the former assessment, which is essentially at the core of the underpinning of why we run a multi-manager approach. And I think the last 6 months gives us a little bit of the purview of that importance. So the last 6 months we've seen the kinds of varieties of return that I think are offered by a multi-strategy format, right? You have the Bitcoin ETF allowing discretionary macro trading that someone like Dave with his expert mindset on reflexivity would no doubt capture, as well as trend strategies that are computer-driven also capture. And then you saw that in March, maybe high-frequency trading strategies around the kind of crazy, uh, mania around meme tokens would have been the most interesting risk-adjusted reward at that point in time. And then in April, it actually shifted to, I would say, something that was happening in the DeFi landscape in Pendle and Athena. And as Dave said, uh, you know, tokens that catch bids in this cycle versus prior cycles, likely different contenders. And so the need for actively overlaying those kinds of novel primitives is really important. You saw that same iteration again in May and June with the opportunities available within EigenLayer and the farming opportunities and the partnerships with various AVSs. So, so to answer your question, Santi, I think that one of the virtues at least that we try to bring upon here at Bitwise's approach is to give investors a very broad set of comprehensive suites to accessing each of these things, including reflexive macro trading as core component and possibly the most interesting component, but one that also benefits from having a buffer around orthogonal return vectors in the liquid strategy as we define it.

You know, every cycle is different. And, you know, one of the difficulties in like fully systematizing any process is that your sample size is like 1.5. Like, you want to identify the regime, you have like 1.5 cycles you can look at. We didn't have stablecoins 2 cycles ago, so how can you systematize your stablecoin indicator that you mentioned, which I think is a good one. But yeah, so you're trying to understand like flows into the space. Um, and I think, you know, so that's been probably the most important part of, uh, I think understanding where things have gone. So it's, it's, you know, the, the difference in flows in Q1 versus Q2 was, was dramatic. And, you know, that's on the Bitcoin ETF side, that's on the stablecoin side as an indicator there. But then this like, this idea of, um, these unlocks that started really started picking up in Q2. I mean, you demand slowed down at literally like the worst time. And then, you know, you had some of the technical selling in, in late Q2. So yeah, I think, you know, the market is still just in like a— it's like a medium bet, I guess, is, is what I would say. There's, there's a much better game to be played at some point in the cycle if we get the reflexivity going. Um, and so, you know, I think for a trader who tries to calibrate like the quality of bets with, with the size of their risk-taking you know, it wouldn't have made sense to have been really 100% fully loaded this whole time. Um, if you want to like preserve risk, like, it's really, it's like, how do I increase my chip stack one day at a time to like play the Super Bowl, which is still upon, you know, it's still upon us. So that's like an overall framework. You asked a question about what I've kind of updated my views based on the cycle. I guess it was surprising in Q4 and then in Q1 to some extent how much last cycle's tokens bounced. So I, you know, we've done quite a bit of research showing that like most of these things are just going to die, like they're just not going to be featured in the next cycle. That was a view. But this stuff bounced hard. And so I guess the question is like, as the, the hot ball of money crypto— in crypto forms, people just go buy their, their old favorites, and that can be good for like quite a, quite a pump in some of the stuff. But then since then, I think the view has been validated that it can just you know, this stuff will probably just go down forever. Like, when something new emerges, it's not going to pull this stuff up, um, in the same way. So yeah, I still kind of employing like a fresh mind to, to what the new thing will be and try to maximize that bet. Um, and then the second thing is like actually just how fake the market structure is now, like how big of an impact these large venture rounds are having on the overall market structure when there's no new money coming in really, and no new money coming in to buy that stuff at that valuation because How do you actually create like an asymmetric risk-reward argument around things at those valuations? It's basically impossible. My like first principle is saying everyone in crypto is here for the convexity. So like you have to screen stuff through that lens at all times.

On that point around old coins, I think the distinction and the nuance is old coins with a healthy amount of circulating tokens. There could be old coins that never unlocked and are just unlocking those have materially underperformed. Stuff like maybe DeFi stuff that, you know, has been kind of left for dead even before rates were going up.

Yeah.

That has caught a meaningful bid because you could argue there's arguably the closest semblance to any fundamentals are in those tokens. And they're, you know, they have most of the supplies already unlocked and that's been absorbed and that's changed hands to people that are more in it for what is the next leg look like, not so much You know, if you're holding stuff that is just unlocking, you're probably still up, uh, 3 to 6x and you're really trying to, you know, get above your watermark.

Yeah.

And so you are indifferent and you're indiscriminately selling and you don't care if it's a 6x or a 3x or a 2x. You just want to be in the green to eat this year. 'Cause you didn't eat last year.

Yep. And you got DPIs and stuff and you got DPIs and all that stuff.

And so that's the challenge. Like for me, it's very simple. I'd rather own stuff that I, I make less of the nuance around, is it new or old? It's more of, I think the market's really woken up to this idea of like looking at like unlocks and not all unlocks are the same. I think you also can overlay that with secondary market activity and interest, but for the most part, like it's been very challenging owning stuff that is unlocking.

Worst factor has been Unlocks. I mean, you know, if you actually would have been running that systematically like that, that— I mean, that's one of the cleanest trades I've seen, kind of doing the postmortem analysis.

I wouldn't go as far as shorting, but yeah, I would just, um, not—

that's a different discussion which we can have. But, um, I would say, yeah, the reason I'm focused on this old stuff versus new stuff is The old stuff, I think, activates crypto people different. Like, if this is about— if the whole question here, like, how do we get a crypto cycle? It's like, how do we bring in a few, you know, some tens of billions of new money to the space? So one way is it just comes into Bitcoin, and then the Bitcoin— whoever sells the Bitcoin buys some of the old stuff. But if we're actually talking about a conversation where you're going to need to get money to come in to buy something which gets non-crypto people excited, I, I feel pretty strongly that the old stuff is not inspiring in that way, because the postmortem is that that was a bubble, you know, that was, that was a scam. Like, we saw that movie before. Um, and so this is, you know, this is one of the reasons it's also really hard to get all the same shorts.

You don't have the overhang. Like, I would say in this category, gaming tokens, for instance, you have Axies of the world. I would— I haven't looked, but like, the chart has— I mean, it's rebounded quite a bit. Everything's rebounded a lot from the low. I guess the question is, um, your point is like people lost money on this because everything was down 80%, but, and so they'd rather not touch stuff that they've been hurt on. The, the question more so is who's actually buying these things? Is it people that have owned it before or people that are just coming in new and saying, my buddy, I remember, made money on Axie last cycle, so oh look, it's down 90%. This shit's on sale. Um, or, or is it like you'd rather own stuff that has like no emotional cachet? Like it's just new, no one's been hurt. It's just kind of like new narrative, new, new meta. Um, or can you own both and you're just being more selective on the type of asset?

The question is, what do you think the fraction of people is like in count, not like asset weighted, who actually made money last cycle? Like, do you think there's more people that know someone that lost money in Axie or made money in Axie? I mean, maybe if you're in the Philippines, it's a different story, but like, you know, I'd say that the majority in count probably lost money. And so it might work the other way where it's like, my buddy lost money because he thought this was going to cure cancer and it didn't. And so I want to be inspired by something new. Um, and then my, my mind can go anywhere. I mean, this could, this could be the thing. This is it. Like, we could take over. Like, this is the the first real thing. There's a question of like what actually gets people to be activated in that way. Like it's probably maybe has to be more tangible, like DePIN, whatever, blah blah blah. You can have that discussion. But that, that to me is when that is, when that happens, could be new token distribution mechanism, could be regulatory impact, but it could be a new sector as well. That, that, that will inspire money to come in because you just, you need to think through the lens of someone who is not in this little cult and they're like, right, I need to convince them to be like I need crypto in my portfolio again. It's not, you know, and that's like, that's a pretty high bar at higher rates and competing with AI. And some of these things could change. But right now, it's certainly, we haven't found anything that's really close.

I was gonna add that I just saw a very comprehensive study on various factor models that are being used to think through those types of dynamics. It's probably one of the most intensely researched ones I've seen. and they try to use the Fama-French model to think through things like momentum, value, growth, et cetera, and run a pretty balanced empirical study running 100 longs, 100 shorts as a basket rebalanced weekly, monthly, et cetera. And you actually do get to see that the growth factor is one of the most persistent, um, factor. But when you actually dig a little deeper and try to understand where that risk premium is coming from, what you find is that most of the P&L actually comes from your short basket. You're not making money on the trading of the 100 longs as much as you would like to. You're actually killing it on the 100 short that you are consistently resizing. And so I just want to add that context in the ways that I think we're talking about revivals of old coins, the ways that, uh, it could be worthwhile, uh, and yet the vast majority over the last 6 years at least would have been the incredible opportunity to bet on growth but in the other direction, uh, which I thought was interesting. Of course, the other things you would have expected— momentum, very strong indicator. Um, things that were not as strong—

how do you— how do you quantify growth in this space?

This particular study looked at a variety of measures, but the two that they landed on was TVL to market cap as a very crude measure, uh, as one. And then the other one was growth in user, uh, weekly, weekly user growth engagements. And those are the two variables that they studied, which of course tells you, right, now it would make sense to you that the things that rank poorly on those things would go to zero, essentially. Uh, and, and there is the opportunity to make—

this is reflexivity in a nutshell. I mean, it's like, literally, okay, we've, we've screened some of these factors ourselves. Okay, what works? Momentum works, whatever. What also works is, you know, new wallet creation or one of these fundamental metrics. What works better than both those independently is when both are working, you know, that when you have both the momentum factor and the growth factor, some fundamental measure. I mean, that's whether it's on the long or short side. I mean, that's been one of the best things we've seen.

I mean, for meme coins, the most important thing is number of wallets. How is that growing on a daily, hourly, daily, weekly? And, and that's a leading indicator, at least for me, right?

You know, you want to go back to talking about like, how do you identify the regime? Like, run that, run that sub-strategy. That'll tell you when something's changing, right? It's like you go back to, you know, if you have a constellation of like what's working in markets and then something stops working, you know, maybe it's not, it's not about picking the literally the top that in those 20 minutes, but like to, to, to understand with on like a slow-moving basis when something has shifted under the hood in the market. In order to say, okay, this might be— we might be in a really different new regime. Um, that's one thing where suddenly it's like the growth momentum things stop reinforcing each other, or now they're really reinforcing each other in the network in the negative direction, where, you know, all the users are literally gone because price is going down. You know, that obviously you're getting feedback that that's, that's trades working. You should change the regime from what it was working the other, in the other way. So, you know, we run some of this. Well, I think it's a good idea to run some of this stuff too to help identify Yeah, where we're at.

So the challenge, David, with reflexivity, I think personally for me is that I just, one, don't believe that I'm smarter than the collective market. And I, it's challenging because like my realization coming from traditional finance venture, super competitive, private equity, incredibly competitive. And so you're of the mind that you don't have an edge. I'd rather think that I don't have an edge. Because everyone that I talk to that thinks it has an edge either blows up eventually or underperforms. Like, you listen to Stan Druckenmiller, like, in the Sohn Conference, he's incredibly humble. He's like, I don't know, like, markets change. I don't know. And he's like the best performing investor of all time. He's a trader. He's a trader. And he's like uncertain. So why would I think that I'm like super certain, even though I've been in the space for 12 years? But like, I did have to recalibrate my thinking, saying, hey, most people actually don't do the work and are not very sophisticated, which is what inspired you to come into the space, which is it's highly inefficient and you can have an edge if you do the work. If you're looking at on-chain stuff, number of wallets, that's an edge. And a lot of managers are not like in the weeds, I would think.

Yeah. I mean, you're—

but how do you balance that?

Right. But yeah, I think it's literally just that the trading edge, you know, it's like, okay, I used to trade macro. I had 1,000 people at these big funds doing the exact same thing as me with the exact same apparent edge. And so You know, now it's like, are you literally the best? You know, are you, are you Stan Druckenmiller against these people? And so then you bring that exact same edge into the space and there's just no one else. It's like not only is no one else employing that edge, they're saying that this edge isn't possible. They're, you know, true example of it, but it's different, obviously.

But the emotions kick in, right? So, so, okay, everyone has emotions. We're trading that, we're trading the meme supercycle. You're seeing wallet growth like week over week, you're like, okay, I'm gonna, I'm gonna get behind this trade. So you put in a position that starts to slow down. What do you do? Like, there's two views in my brain. One is memes will do well. We're in a bull market, memes will do well. They have done in every regime, they've done well. So, okay, so you have that long-term thesis for the cycle, but then all of a sudden you're seeing wallet growth for a particular coin or just in general go down. And flows go down? Do you cut all the position? Do you— how do you, how do you manage that? Because then these things, with, with the vol of these things on a weekly, you can get destroyed, man. Like, rebuying a position, super difficult. Seeing other people make money also sucks. So what do you do?

Okay, so I'll be your trading coach now. And, you know, okay, thank you. I've worked with trading coaches my whole life. Like, they're just therapists, right? And the reason that there's not a very specific answer is it's just, it's all about your emotions, right? It's not that the best people— I don't have emotions, you know, less emotions. I mean, I have two kids, like one's 5 and 2. They would have— I would need to impose very different trading. Like the 5-year-old probably isn't made out to be a trader, but I would say like, you know, the question is what— it's, it's having done this long enough to understand which emotions make— have you make the most costly mistakes and then design a plan around them. It's like, it's not hiding from them, it's like literally identifying them and then building a trading plan which works for them. And so the answer could be you cut some, the answer could be, you know, you get it all together, the answer could be you're selling all the way up because identifying that the information has changed in a way and making a really rational decision— like, you're too susceptible to thinking that meme coins are gonna take over the world, like, you know, I may have that problem, whatever. So, you know, it's all very personal, but the key is like to do this for 10 or 20 years or whatever, and then have a view of how you interact with it. And crypto is different, so you have to adapt all this stuff. I mean, it's more momentum than mean reversion, and so different parts of your plan. But this is, this is the trade, you know, it's not based on pure analysis.

I'll tell you, um, my personal experience. So, so I've recalibrated a couple things this cycle. One, shifted my views in terms of Solana. I may have not caught it at 8, but I sized it progressively more and more. And I— none of this financial advice, but like changing that view of saying it was hard because sometimes when you don't catch the absolute bottom, people are screaming at you like, you're an idiot, you had the opportunity to buy it at 8, now it's up 20, as it was the best trade in size you could have done and you missed it. So if you're a manager, you're sitting there and you're like, fuck, I get paid to be right, very right, and I just probably missed the best trade of the cycle. What am I— like, what do I do? And so then, and then, and then you're trying to— you put on way more risk to catch up, and we know how that ends. For me, this cycle, if I were to probably say one thing that I've probably done better than prior cycles, is just getting comfortable with it. I'm not going to catch the absolute bottom, but I'm going to size it progressively. And I apply it like DeFi Summer as an example. We were very early. I was lucky in part, but even then, you could have sized that trade. Like, you had 3 to 6 months. The market gave you 3 to 6 months to really put on that trade and like blow it out of the water. But most people, again, were like too paralyzed to do that because they didn't take the bottom. And so I think overcoming that emotionally is probably one of the most important things.

I totally agree. And that's the mental flexibility thing. And it's like, I think if you, if you appreciate the momentum properties of this asset class, it's almost like the bottom is a worse bet than than the third inning, right?

Right, because it's like very much like—

probability times magnitude is much higher. Yeah, you know, it's like the picking the bottom thing, it's just there's way too much focus on that, you know. Catching the falling knife is a meme for a reason. But anyway, keep going. Absolutely.

Um, the other one is like the, the duration component, like the long-term versus short-term component. Um, it's tough, right? Because when you see an asset like you know, uh, you know, say a particular meme coin, they're down like, I don't know, 60%, maybe 70%. You're still way up, but it's the, the anchoring effect that is so difficult. Your point, um, so November 2021, rates start going up, market starts going down. Um, you, as you alluded to earlier, you had probably— the market gave you again 3 to 6 months to get out. Um, my appreciation now, positioning— we've talked about some private conversations— is I think the probably the most important thing is appreciating you're never going to take the bottom or the top, but you want to be positioned in things that have a pretty big entry and exit door because you want to be able to get out when the fire starts or the flood starts. And a lot of times the illiquidity is what kills you, man.

And I think, yeah, what's the right discount rate on illiquidity? I mean, yeah, all these like, so all these instruments that are discounted Yeah, exactly.

So I think like being comfortable of like, yeah, you might— how far do you push out on the risk spectrum? But I think, I think most people in the space have underappreciated how important liquidity is because liquidity dries up very quickly and comes on very quickly too. And so I'd rather wait for liquidity to come in and maybe that's like where we are now, right? Like I'm, I'm not, I'm probably not doing anything. Because things are choppy. And like, I don't know, um, I think in this environment, like, the more you overtrade, like, you're probably going to just lose.

My response, which I only half believe, is like, maybe people don't actually want the liquidity. Like, it's— they actually appreciate it, but they don't want it because then they have to trade it, right? And you know, this, this resignation, this capitulation on, on trading means like, the, the more I don't have to make decisions, the better.

Yeah, most people— I mean, venture capitalists and traditional markets have the best job in the world because they get told— they wait 10 years to be either told they're extremely right or wrong.

Yeah.

But yeah, I don't think you should run away from volatility. I think you should run straight into it because that's— if you— it's a mind shift. And as soon as you like appreciate that, at least it's been helpful for me. It's like, all right, well, you wake up one day, you see something down 20%, you're like, great, it's something I like. I'm going to buy it. I should be buying it. But you need to have cash.

Yep.

And a plan.

And a plan. Yeah. How often do you change your plan?

You know, you can go through it every day and, and update the information, but I, I think the core parts of it are, yeah, they're supposed to be pretty well designed around, you know, your process and, and the big picture of, of what's going on. Um, so it's like you update the information, but in theory, the plan is supposed to reflect you know, you're backwards looking like, this is how I need to trade this to prevent making all the mistakes and avoid the pitfalls. So that part shouldn't really change.

So like you said today, like, this week's pretty important. Like, you had the FOMC, like, you're gonna have rate cuts, but then you have the jobless claims today, and like, you know, and then you have the predict— you know, Kamala odds are going up. But like, we have an ETF and we have the US shifting, like, slowly from being super anti-crypto to— regardless of whether Kamala or Trump win, I think it's just, it's a shift, it's an inflection point. I think if you fast forward 2 years from now, we're going to look back and say, holy fuck, it was an ETF and the US kind of shifted gears. I should have been long.

Yeah, well, 2 years from now, you'd be down 90% already, so maybe like 15 months.

True. The question is like, how much you respond to like this stuff Um, or you just, you put on size and you just say, is the narrative still the same? If it is, I'm not going to do anything. I'm just going to maybe try to raise more capital because I'm going to, I'm going to lean into this trade for the next 15 months. And I don't, I shouldn't overthink it. Like we're in a bull market, like I should be buying stuff and I'm going to cost average my way down if things trade sideways.

I think the void of competition is on like the one that 1 to 3 month time horizon. So there's like the short term, you know, I wouldn't say it's chaotic. I would say the high frequency firms have done a pretty good job of noticing patterns, and that's like really complicated to swing the stuff around on a daily basis. I don't think there's that as much edge in doing that, but kind of understanding the big picture, identifying the regime, like that's probably the place where I think is least competitive. Um, and so to answer your question, yeah, you would probably take somewhat of a longer term view, but it's not like you would say I'm going to be 100% long altcoins because of all this stuff. Because, you know, it's still very complicated supply and demand in the short term. Like, you need, you need to upgrade the regime to money coming into the space for so many things to perform. And right now you can basically say that about Bitcoin.

Jeff, do you think, uh, if you had the choice to like go back to traditional finance and do like hedge fund macro trading, would you Like, would you do it? Like, knowing everything that you know now and how difficult this market is, like, why bother? Like, you could, you could probably be living a better life, not— yeah, market actually closes.

Uh, you know, I— it's a funny, it's a funny question. I think that the path that we're all on as promoting opportunities and liquid strategies is a noble one. It's, and it's a tough path, but one that is worthwhile. I think precisely because of all the things we chatted about. Once you see what crypto can afford and the unique properties it delivers on not just the liquidity but its volatility and the scale at a global reach, there's really nothing else I think macro investors will be more intrigued by in finding those profit opportunities. I also go back to something that we're taught early as investors, something Harvard also preached upon in part of the endowment model is that to make extra return, one of the ways to do it is to take more illiquidity, right? Take that illiquidity premium. And that's why venture at some level is a compelling way to think through that construct. It's also why people believe you should be outcompensated for private equity versus public equity and private credit versus public credit, et cetera. That may be entirely false. Fang and Max Seven might have outperformed private equity. But all that being said, I think there's also this unique backwardation of the liquidity risk premium in crypto, and that's why macro trading is so interesting and exciting. Like, if I told you that the S&P 500 was not a 10-15 vol index, but a 70-100 vol index, the return premium you would want for crypto VC would have to be hundreds more than what you would expect for traditional private equity. And so if you think about that relative discount and the value gap that exists for the opportunity set within liquid versus VC, I wake up every day compelled, excited, and intrigued by all the ways to make money in liquid crypto. I know we talked about reflexive global macro trading as one, but as mentioned before, there are so many interesting things happening here. Millennium, as a multi-pod model, one of the most successful things they've ever done is in index rebalancing. Something so uninteresting to most people, but something that was so profitable for a period of time where, yes, no one's going to invest in a single strategy indexing rebalancing hedge fund strategy, but is it useful as a conduit of a bigger build-out of a multi-strat? 100%. So, you know, I agree with Ray in the podcast prior to where like there is a lack of interest for investors to want market-neutral returns in crypto, but that's because it's presented the wrong way. You need that to be a part of a broader toolkit that push out the efficient frontier and help deliver on the higher quality risk-adjusted Sortino ratio. So I'm enthused by that mission. I wake up every day glad to do it, especially privileged to be doing it at Bitwise. And so I'm super pumped to see where we go in the next few years about that institutional adoption.

Yeah, I keep referencing this book, The Missing Billionaires. And they raise like really good points around like how you think about like compounding your capital and how people fully like just don't appreciate that. And I think it summarizes a lot of like we've been talking about here. It's, it's that people try to play too cute on playing it perfectly because people are, you know, LARPing on crypto Twitter that they're so successful and super profitable trading strategies. The reality is a lot of, to your point, David, It's hard to make money sustainably in the space. And I think what may have worked in prior cycles is not working this cycle. And it's most people like are really resistant to that change. Meanwhile, there's like market makers and people that are running more market neutral strategies that are clipping 17, 18, 20% a year, like with really low risk, smart contract risk or what have you. And like the law of 72, whatever your return is on a yearly basis, like that's how many years it takes. Divide 72 divided by your return is however many years it's going to take for you to double your capital. The difference between 10%, 12%, 15%, and 18% return is massive. Yeah, when you think about doubling your capital.

Now do the math on the drawdowns.

Yeah, and the math under— you did it?

No, I'm saying now do the math on the drawdown. Exactly. 20% and 80% is— I mean, whatever, it's huge, right?

Because if you wipe out 80%, I mean Yeah, the amount of return that you need to overcompensate. So I think the highlight for me is I think it's more of understanding. It's like a second derivative. It's understanding, yeah, your emotions and controlling those and not necessarily controlling, just being aware of them and your biases and reflecting on that constantly to avoid mistakes, knowing that you're not going to get it perfectly right and just being comfortable with that. The second one I think is just appreciating how other people are doing or not doing exactly that.

Mm-hmm.

You know, for me, Solana, it's clear to me that most people are resistant. It's still not a consensus trade because I observe these managers and a lot of them are trying to over-intellectualize why it's not gonna be a thing because they probably missed it. And so like, I'm trying to observe what, how other people and how their emotional process is by virtue of like what they're tweeting, what they're saying in conversations, public and private. And, and just kind of like using that as an edge, if you will.

Yeah, one thing is, is, you know, every trader or whatever person who's interacting with markets is a victim of their, like, their first success. I've always observed this. It's like you can never get away from your first girlfriend or whatever. It's like, um, uh, you know, for me, I was like, intraday trader is like this deep inner trader, you know, it doesn't really matter, but for so many people, Ethereum was, you know, a kingmaker for them in one way or another. And that leads to like a lot of inflexible thinking, we'll put it charitably. And, you know, I don't want to discredit it, but I'm just pointing out, you know, not bearish Ethereum, like, whatever. But it's like, it's a trend that I've observed quite a bit from coming into the space. To tie together a few of the thoughts myself, like you're trying to do. You know, I think, you know, just building off this discussion from last week, like, there's a really big relative opportunity here. Um, buying and holding liquid tokens, like trying to do the Venture thing, isn't an answer. But I think there's probably a bigger relative opportunity, which is to bring in some psychological or trader edge. And as a result, what might happen here is you create an actual track record, which can bring in a lot of new money to the space. Again, this untapped resource of people who look through this no big drawdowns, Sharpe ratio lens, you know, that I think that's the only way you actually fix this market structure issue. And it's probably not going to happen fast based on all the points you raised about why allocators will be slow to adopt. But that's the, that's the forward that I'm much interested in, and it could be like 5, 5 to 7 years away.

If I were to take a bet on, on where most of the money comes, maybe not this cycle, but over the next subsequent cycles, compared to like the prior cycles, it's on this type of strategy. As you have more, you may be smaller this cycle, but as you compound more track record, I think the smart investors can't overlook the fact that you dampened vol on the downside and you captured most of the return on the upside, whereas most managers round-tripped. And for an allocator to have to explain that to their pension fund, it's just not, not tolerable for them. It won't be.

Yeah. And not to add to the list, but the contemporaneous— like, all the biases allocators have at this point are related to their engagement in other markets where, yeah, basically human beings can't, you know, market time— like, we're not, we're not paying people to market time and stock pick anymore, to, to some extent. And so, you know, there's this like '90s analogy, but you're working your way up this wall of, um, bias where it's like, okay, I, I need to see you like do it like 4 times. Okay, well now it's like 20, 32, whatever.

So The— Jeff, I'll let you add this, but the perverse— I guess the counter to that is we've all heard hedge funds have underperformed the market. They still keep getting a ton of money. And I think there's some element of psychologically the allocator is saying, I'm not going to get fired if we give money to Andreessen Horowitz or to, you know, named hedge fund because that's what I'm supposed to do. That's what Howard, you know, that's a Muskwood approach to portfolio construction. And the reality is just punt the S&P. But you know, it's, it's, it, it, people sometimes do decisions to justify their job, not to principal-agent problem, right? It's sort of like I get paid to find good managers, Jeff, no disrespect. And so it's sort of like I need to like allocate money to someone that charges me $220 when the reality is I could just invest in the S&P or invest in the, you know, index. So, you know, that might be the challenge for this type of strategy, but But, but even then I'm sort of reminded that like, uh, if you clock more than like 4x as a, as a fund venture, call it, you're like top tier. Like if you look at MVCA data of vintages, like, you know, the return profile of most venture funds and hedge funds is like pretty bad. Like in, in crypto, you still, you're not gonna have probably the 20 to 30x vintages, but you, you, that probably comes down. But even if you're clocking like 5x, 6x, You're like S-tier.

Yes. And the trading one is like, if you're achieving a 2-sharp without introducing a bunch of counterparty risk or cybersecurity risk or smart con— you know, like, um, you can actually feel like there's not some weird risk transformation of, of those things to create the returns. Like, if you can achieve that, like, that, you know, that looks really good for a lot of other 1-sharp things in your portfolio.

So Yeah, and I'll push back a little bit on like the, or the hedge fund narrative, something that you have put on, which is the reality is that, uh, as an industry it might have shrunk, but the best keep growing. And that's the name of that particular game. If you're in the top decile or quartile, you take market share. So I have not yet heard of any investor who can't find a way to want more of Millennium, more of Citadel, more of D.E. Shaw, more Renaissance Technologies, etc. So I would just contextualize The law of average here is less relevant when it comes to alpha-seeking endeavors.

Yeah, no, that's a really good point. Anything else, guys? I know it's been a bit of a chaotic discussion, but I think a really good one. And I'm glad we had it. I would love to maybe explore this in a separate pod of just maybe deconstruct— I've had a pod talking about my mistakes. I'm not a trader, but I guess like the market, forces you to be a trader. Um, um, but I think diving deeper in the emotional side of trading would be super helpful, I think, for people that are— I know our audience would appreciate it a lot.

Yeah, there's a lot of physiological things you can do too. I mean, you know, there's, there's plenty of literature out there and, and coaching to be had.

Um, is this a Wendy type of coach for everyone that's watched Billions?

Wendy Rhodes? Yeah, there are Wendy Rhodes out there in real life.

I have, I have a Wendy actually.

Yeah, I think I had the same one actually, but yeah, yeah, I know you, uh, you guys shared the same coach.

I think we did at one point. I don't, I don't use her anymore, but I have other people.

She's the woman who has like 100,000 followers on Twitter.

That one.

I don't know, but heavy physiological approach.

I just disclosed my edge.

Making sure your body's in a, in a good place to make rational decisions at the point of making decisions.

Yeah, like I've done neurofeedback, all kinds of stuff, like your breathing rate, your sleep, like all these things are super important.

Dave, did you get better or worse at trading with kids?

Uh, I think it's been kind of neutral because you basically stop out of having a life otherwise. And so, you know, you can trade crypto and have your kids and whatever.

Some people, some people tweeted that their, their ability to manage risk has been put into a different perspective with kids and how they think about compounding and preserving capital.

There's also like, okay, I'm more emotional about parenting than trading. So, you know, it's like provided some perspective there too, you know.

What about dog coins?

I mean, dogs are like manageable volatility, uh, in the big picture. Uh, anyway, thanks guys.

Anyways, good chat. It's really good. Uh, any parting thoughts, Jeff or David? Where can people find you? Um, you know, recommendations on books, uh, closing thoughts.

Um, yeah, I don't, don't have much of a public presence. Um, but I, I think, uh, there's quite a bit of literature out there. I think like to be inspired, you go back and read some of these books about hedge fund managers in the '90s, you know, the Market Wizards book, Inside the House of Money. Like this was a different time and that like crypto might be the last frontier, right? I mean, okay, there could be something new, but the The ability to apply these things as human beings with like a weaker role of technology and no competition for traders, I mean, that it's a pretty inspiring— it can be really inspiring reads to work on these things, but hopefully there's edge that comes out of it.

Isn't it true that most of that— so Market Wizards is a book, a great book by the way— every chapter is a new manager. Isn't the case that most of those managers blew up eventually?

So I think the— oftentimes it's describing like a 20-year career or whatever. So it's, it's not like the 2018 22-year-old in crypto that blew up like 18 months later, but it's like the, the landscape changed, you know. It's like all these same guys have struggled to outperform, and you have fewer examples of these types of guys these days because of the amount of competition, technology and human beings. Again, I mean, there are only so many examples these days of people who repeatedly outperform in macro. And you ask Jeff this question, like, do you want to go back to your old job? I mean, me personally, I will be humble and honest that this is a big part of the reason that I'm here. I mean, it's, it's night and day, the competitive landscape.

Yeah, I echo both of what you guys said. Market Wizards was one of the books I was given to when I was a summer analyst at Morgan Stanley on the trading floor. There's two volumes actually, both worthwhile reading, as it teaches you a lot about the behavioral psychology of fear and greed as a predominant recipe for trading acumen. I think it's super relevant in crypto. It's part of the market structure as it exists today, that those two things are driving a lot of the liquidity gaps and skew and kurtosis and all in between. So I think it's a worthwhile read that I would echo and recommend for all of our listeners.

For sure. Yeah. And, you know, I would be— for me, it's go to therapy.

Yeah, seriously.

The best investment you can make. You don't have to be sick. Everyone should be going to therapy. It's like, it's always nice to talk to someone that's not a friend, it's not a family member. You just like talk about these things. It's super helpful.

Yes.

Training coach.

I was also going to add, whatever you want to call it, I was also going to add have children. I'm sure Dave has now become a better trader with kids because he's up awake all hours of the day, 24/7 for the crypto cycles.

You can trade all markets.

We can do a full podcast on sleep, trading and sleep. Okay, so, but yeah, sleep.

You know what we should have, by the way? Let's have Pranav on, because this guy, first time I met him, he's like, get an Eight Sleep. I'm like, you're that kind of shiller. Yeah, shit. But I actually have gotten an Eight Sleep. This is not endorsement. If they want to sponsor us, great. My sleep quality and hygiene has gone up order of magnitude.

It's—

I mean, it changed my life. It's so important.

Huge.

Yeah.

Awesome, guys. Really good discussion. Well, good luck trading these markets. It's not easy. Anyone that tells you it's easy is full of shit.

Yeah.

So anyways, great for coming on.

Thanks, guys.

Hey, everyone. Big thanks for watching today's episode. Wanted to just quickly remind you about the Stellar Development Foundation's 6th Annual Meridian Conference this October 15th through 17th in London. This is an incredible opportunity to network work with the forward thinkers who are defining the future of this space. Head over to meridian.stellar.org and use the code BLOCKWORKSPOD for early bird pricing.