Freedom Money Ep7

Today on the podcast, we have a very special guest. Kaushal Patel is here from AUM Alpha. Welcome to the podcast, Kaushal.

Thank you so much, Kevin. Thank you. The company is pronounced Om Alpha, the cosmic sound and alpha. So it's a play on words. It's AUM and Om together, so both make sense.

Interesting. Uh, I would have never guessed that. I always think AUM like assets under management, but I like, I like your approach better.

It's done to get the best of both worlds.

Perfect. Um, maybe if you can just introduce us a little bit to your— with your background and specifically your, your journey to Bitcoin.

Perfect. So I first time stumbled upon Bitcoin or blockchain in 2015 where I think back then we still had a few of those online free-to-play games where you could mine Bitcoin for free, and it seemed like a crazy thing back then, and I just wished I'd actually sat and played those games for hours on end. But that's when I, in 2016, I had this desire that I need to get into this asset class. And back then I was still in school, so I didn't have funds, so I really had to convince my my parents to get some money to invest into Bitcoin. And thankfully, my father came from a tech background himself, so he understood it, and we put some money in there. And then, you know, 2016-17 was some insane years, so we made like crazy returns. But the money was so small, it was like totally play money, so we didn't really understand— we, we didn't really get, uh, the profits that we were looking for, but we understood that this thing is here to stay. And that's when the market tends to burn you, isn't it? So in 2018 or late 2017, we doubled down heavily. And then in 2018, the market stank like crazy. So then we bared the brunt of it. We lost the principal and we lost the profit and all of it. But it made me understand that we are in a financial revolution and I need to start reading about this. So obviously, as most of the people who've been orange-pilled, I read the The Bitcoin Standard, and then I started reading a lot on Crypto Twitter, or Crypto X now. And then as time passed by, on 4th March 2020, India lifted the banking ban on digital assets, which meant that banks could now deal with crypto exchanges, with crypto companies, and it was a very big decision back then. And 3 weeks later, the world went into lockdown and the money printer started in the US. So there was a lot of liquidity that flowed in, a lot of, uh, people interested in the space, but people sitting at home with not much to do. So that's when a lot of friends and family came up to me and they were like, why don't you take a couple of thousand dollars from my side and invest it into Bitcoin for me? And that was a time where I also fell in love with altcoins and I started investing a lot into them. And it was also a phase that taught me just a year later in 2022 during the Terra Luna crash that the only digital asset which is worth holding for the longer period of time is Bitcoin. There's nothing else. Like if someone told me today to transfer my entire net worth into a single asset, it would be Bitcoin, and then I could go to sleep for 10 years and not be worried about it. Altcoins and other digital assets are great for short-term to mid-term trades, but it's not something I could actually hold for a longer period of time.. And then that process from COVID through the lockdown took me to your 2023 where I decided to set up a formal advisory structure for a lot of HNIs looking to invest in digital assets. This was also coinciding with the time where rumors began that BlackRock was planning to file for a Bitcoin ETF. And then as you know, the rest is history. I think crypto today is institutionalized to a large extent. And every HNI investor in the world, including how— regardless of how traditional they are, knows about Bitcoin. And in India specifically, I would say maybe 1 to 2% of them are now actually starting to take active exposure to the asset class. And that sort of company helps with helping them take the exposure, allowing them to understand when to enter, when to exit, which exchanges to use, and what risk management techniques to adopt.

Thank you for that, Kishal. Um, in terms of, in terms of the company mission, you mentioned again dealing with high net worth individuals. Um, it sounds like it's in an institutional, uh, custody setting. And so I just want to understand, um, the trading— is it still altcoins and Bitcoin? Is it long-term focused, short-term focused, or a A bit of both.

So we are focused on the longer term. Like, most of our investors have a 12-month lock-in minimum, so they can't withdraw their funds in the first 12 months, else they end up paying an exit fee. Uh, we do not hold altcoins for a longer period of time. It's mainly Bitcoin, but we do actively trade alts. Alts are a great hedge when the market goes down, and they are also a great multiplier of wealth when the market is going up. So we focus on derivative trading, but we don't take any leverage. So if someone has a portfolio of, say, $50,000, we invest only $50,000. We don't 2x leverage it and invest $100K. This ensures that we don't see any liquidations across our portfolios. Every position is an investment, it's not a trade. And yes, it is in an institutional setting. We only deal with KYC'd FIU-registered exchanges in India. And for our global clients, we only deal with the exchanges that are compliant in their local jurisdictions. And because of a lack of regulatory clarity in India currently, we do not have the right to start a fund or a hedge fund for crypto. So what we do is the clients provide us with their API keys, and that's how our advisory services, uh, move on and they get executed within the client's account itself.

Got it. So, I mean, you mentioned you've been doing this, I guess, since 2020. You mentioned you set up the fund initially.

2020 was when the company was set up formally. In 2020, I was doing this on a more informal, personal basis.

Got it. And, and so I'm just curious what, you know, what specific challenges you're building towards now? I know, you know, as a business owner, there's always things, priorities, things to get done. Is it a case of adding more clients, or are there additional services you'd like to offer the existing clients? What's the plan from here?

So I would say the immediate goal for us is improving our communication. Ever since October, the markets have been bloody, and they've been in a bad situation. But our average portfolio is down, I would say, and our average portfolio is down from September only by around 25%, which may seem like a lot, and it is a lot. But if you compare it to the crypto market at large, Bitcoin is down 50%, most alts are down 80-85%. I think we have generated that alpha even on the downside, and our slogan says, uh, decoding crypto, delivering alpha. So our communication as to how this market works and how we have not been able to secure the funds entirely, but we outperformed the market, is something which we needed to pay attention on. And the second thing towards which we are working on, and this is in heavy collaboration with the local crypto exchanges in India, is to create mutual fund products for crypto. So for the legal sense of the term, it's not a mutual fund, but it's a pooled basket where 100, 200, 2,000 people come and invest their funds, whether it's $100 or $10,000, and we manage that together only through spot investments, similar to how a mutual fund operates. And people can also SIP into the product, which is a systematic investment plan, where they can decide that on the 2nd of every month, $100 will automatically be deducted from my cash balance into my investing balance. So that also allows you to DCA into your investment, which we manage.

So you could just buy at 10 AM every day?

Yeah, you can buy at 10 AM every day, you can buy at 10 AM every 3 months. It depends on how you want to do it.

So, um, just to clarify, is it, is it the total portfolio of the client you're managing, or just specifically the crypto assets? And then do you have limits in terms of how much is invested in Bitcoin versus altcoin versus, uh, other coins?

We, we manage only the client's digital asset exposure. So I, on average, I've seen that Indian HNIs, family offices, are investing anywhere between 2 to 7% at max of their investment portfolio into crypto. And within that, we have a 60-40 framework where 60% is invested into spot assets for the longer term and 40% are invested into Perp futures for either hedging the spot positions or for short-term, shorter-term trades, you know, like seasonal. Within this, we have a strict rule that we at max hold 10 positions for spot and futures at the same time. But even 10 is a higher number. Generally, we don't cross 6 or 7. And I have seen that the portfolios tend to have anywhere between 30 to 60% Bitcoin at all times.

$30 to $60. Okay. And do you have— I, I, I really want to get into some market stuff, but before I do that, I just want to get the full picture of everything. But so, I mean, you mentioned in India the regulatory regime is maybe uncertain. Uh, you know, I've spoken to people there who have concerns with KYC and, you know, providing information and then having tax authorities show up at their house when they have like, you know, one Bitcoin on an exchange. Um, are, you know, are the regulatory challenges— like, what is the regulatory structure? And then do you run into regulatory challenges?

Uh, so yeah, sorry, that's it from your end?

Specific to India, I suppose. Yeah.

So, uh, let me be clear, the regulatory challenge is the largest challenge I face or anyone in crypto in India faces. That being said, I don't entirely agree or buy that if you are purchasing Bitcoin with a KYC account, the tax authorities will show up, because that's not true. What has happened, let me explain it to you. Um, our government or our central bank got a whiff of crypto back into 2012-2013, where they issued a circular saying this is illegal, but they didn't really take much action. Then after the bull run in 2017, in 2018, there was a blanket ban on crypto, and it was executed through the banks, which said that no bank should provide on-ramping or off-ramping services to any company even remotely dealing with crypto assets. And our industry body appealed the ban in the Supreme Court, and it was overturned on the 4th of March 2020. Then from 4th of March 2020 up till the 1st of Feb 2022, we lived in a state of regulatory uncertainty and limbo. Where a lot of people made a lot of money because it was a— I think it was one of the most bullish times in the history of crypto. But people did not know how to pay the tax on, on it. So someone was income, someone was paying corporate tax, someone was paying capital gains tax. There was no clarity. And on the 1st of Feb, the government passed a special taxation known as Virtual Digital Asset Taxation, which identified that whatever you earn on digital assets, there's a flat 30% tax on it as you realize your profits. And they also created a tracking mechanism for the same in the form of a TDS, where they deduct 1% from your trade every time you sell, and then they refund that back to you at the end of the fiscal year. Another issue with the tax is that you cannot offset your losses. So if my portfolio is worth $10,000 and at the end of the year it's worth $5,000 but there was one trade in the year where I made a profit of, say, $500. I still pay 30% on those $500 even though my portfolio is down by $5,000.

Wow.

Yeah, so it's a very stringent, unfair taxation, and it's been done on purpose to discourage young investors from investing in an asset that the government believes is highly speculative. Now I tend to agree that it is highly speculative, but in the last 3 months, if the world has proved anything, is that all assets have become speculative. I mean, crude oil today fell by 19% in 20 months, and silver fell by 42% in late January, Feb, in a matter of a day. So what is not—

I'll put it out that it might not be because it's highly speculative, but it may be you know, some freedom tools where people can, you know, move away from state money that can be printed at will. And so if you want to have some cover, you say we're doing this to protect people for their own good. And, you know, governments, uh, you know, as well-intentioned as they are, can continue to try to protect people from their own good, um, you know, there's markets that function and work when we remove government from them. And we can see that in those situations, you know, adoption is just moving along as you would expect. And it's just, you know, it's really remarkable. It's a consistent message I get across all podcast guests that, you know, there's always some type of regulatory, you know, roadblock in their path that other industries don't really need to deal with. And, you know, I, I'm just interested to see how it pans out because I think ultimately, you know, if you're providing people technology that improves their life, eventually once they understand that, they're going to want to improve their life. And, you know, now, now we're kind of seeing this, uh, come, come to its head. So now, sorry, do you want to add anything there?

Yeah, I actually want to add a very important point, and that is how I see regulation going ahead. So the biggest issue that crypto poses to the Indian markets is that it's denominated purely in, in the dollar, and if the government opened up the guardrails, so much money would flow out of the country into the dollar it would destabilize the rupee, and it's, it's, it's a real risk. I understand why the government is doing this. The— on the contrary, the government actually cannot regulate the industry, cannot control the industry, because on-chain trading continues regardless. I mean, um, how do you regulate the internet? You maybe block 50 URLs, but then everyone accesses them through VPN. And the unregulated crypto markets in the country where people are buying and selling P2P without official exchange in, in between, and I can see this on record, is very high. And I do not see any way to prevent that anymore. So there needs to be a regulation which prevents this and also promotes the market, which is possible. But the reason the government is also waiting to do this, very honestly, my opinion is that they're waiting for the Clarity Act to pass in the US. And most large economies are waiting for that because the— what— when it comes to financial markets, everyone follows Wall Street and what US banks are doing. I mean, majority of the Indian banking system has taken inspiration from the US banking system. So once there is the Clarity Act in the US, I think there will be some kind of, uh, um, regulatory pressure environment created in India to have a bill passed. And that being said, the government only acts when a lot of people get involved, and the markets have been very unsupportive, due to which a lot of people have exited crypto, at least temporarily.. And when a lot of people start making money again, that's when the government raises its eyebrows and it's like, okay, we need to regulate the space. If you ask me, I think regulation is around 12 to 24 months away.

Yeah, I absolutely agree with what you're saying. I mean, I live in Costa Rica and there's no regulation here. Cryptocurrency isn't even mentioned in really any legal documents. So you might as well be trading shells on the beach. 2 countries north, you have El Salvador, and they have obviously a different crypto regime. But I do, you know, I do wonder how independent they can run that if their objectives were substantially different than the US. And then, you know, I definitely get the sense everybody, you know, all the countries in the Americas are looking, you know, for that leadership from the US. And You know, we'll see what comes of it, but I think with, with everything, when you get the lawmakers involved and the people with deep pockets like the Jamie Dimons of the world get, you know, to have a big say in how these things are distributed. And so, you know, it's kind of one thing if we, we had these politicians who are out doing these things in our best interests as opposed to for, for special interests. And, and I mean, you can see it in, in the whole discussion. So I have no opinion or idea on how it's going to turn out because, you know, time will tell, I suppose. Do you have any insight?

No, I mean, I, I agree, time will tell. But, um, while from a business point of view Om Alpha is currently— its wings have been clipped and it's a, it's a pain to onboard a client and manage a client and things like that. For a, yeah, for an individual trader, things still remain the same. I mean, most individual traders have moved to non-KYC exchanges, have moved to decentralized exchanges. And as much as I would happily pay tax on my profits if there was a real fair structure in place, like equities in India are taxed at just 12.5%, the profits. If you do short-term trades, it's 20%. So even if I have to pay 20% and I could set up my losses, I'd be happy to pay tax. But most of the people are forced to trade overseas. So this is— so that's something definitely. I mean, the government knows about it. I think it's just not a priority at the moment, and it will become once probably Bitcoin is 140-150K.

Yeah, we are The next question I've written down is kind of what's next in the space, but before we kind of get there, I want to dive deeper because, you know, there's kind of this theme we're talking about regulation, right? And, and, uh, the name of the fraud podcast is Freedom Money, and, you know, we have these two worlds where, you know, we have this technology that, you know, we can effectively separate state from government, much like, you know, in some places church and state, you know. And we saw an evolution of society as a result of maybe, you know, different, different groups being able to be heard and, you know, information and technology being able to be passed on to people. Uh, you know, we're at this stage in this revolution where, you know, we're still kind of burning the witches and putting people in jail if they, you know, promote freedom or technology. How do you see that resolving itself? I mean, I'll just say this, like, to me, once the technology exists, it seems pretty inevitable that it's going to find its way into the hands of people. And so, you know, should people not be allowed to do certain things, have self-custody, transact in peer-to-peer ways, or Do we need to live in a world where every single financial transaction is surveilled and reported and potentially censored by the government?

Technology precedes regulation, regulation precedes technology. This is like the debate always in the world. I think technology always comes first. And if you could— how you said how secularism came into play, where you could actually separate the church and the government, that, that's an ideal situation if it happened to financial institutions. But that's only possible when you don't have poverty in a nation. And in a nation like India, where more than 50 million people are dependent on the government for their basic food, it's very difficult to separate those two things. So I think just the way in the internet we have a regulated version of the internet, which is all your listed companies— Meta, and all of them listen to what the government says. We also have a slightly less regulated, slightly more free version of the internet in the form of, say, Telegram, where the founder is ready to go to jail to maintain the privacy of his users. Or, um, you know, VPN-based services, proxies, firewalls. There's a part of the internet especially powered now through stablecoin-based transaction that works outside of the current global financial system. So I think initially we have this regulated crypto and unregulated crypto, and then eventually maybe they merge and it moves away from the government. But I mean, I don't know, and I don't even know if, uh, how long this kind of a thing would take. Like, probably it could take decades for something like that to play out.

Yeah, it's, uh, you know, if I like getting the crystal ball out and trying to figure out— I mean, so let's maybe just focus on the market a bit. I think the audience probably likes to focus on that. I try to get away from it because it is what it is and I don't control it. And so I'm just curious, I mean, with everything that's happened— I'll start by saying this— by everything that's happened since October 7th or whenever this initial dive in the crypto world took place, it seems to me that there is continued selling pressure on Bitcoin, which leads me to believe that some centralized third party is impaired in such a way that they need to unload their position. Now we're kind of at the lows, still sitting at the lows, nothing really moving higher. I can see, you know, adoption increasing, uh, you know, more and more investors including it in their portfolio. How do you kind of explain the price action of the last, I don't know, 6 months?

This is a very interesting question, and I wish I had the correct answer, but I'm going to take the most time here and explain to you what I think. So firstly, let's get to the blame that we are putting on a centralized player, and I think that's justified to an extent, but only to an extent. There have been reports last week that Jane Street has been forced selling digital assets especially Bitcoin, through multiple naked shorts on the ETFs because Jane Street is an AP. It's, I think, one of the only 5 APs in the US, and they have the ability to do so. And Jane Street is also currently being tried for being one of the key, uh, proponents of the Terra Luna crash back in 2022, which was definitely— I, I knew something shady would come out of it. I just didn't expect a name as big as Jane Street to be involved. That's one thing. Second thing is 10.10. There was blame laid on Binance for doing something fishy and wrong and causing the 10.10 crash. And then there's another theory that there were a couple of large hedge funds based in Hong Kong who had to essentially liquidate their short positions, due to which they— there was a chain reaction which followed and caused massive liquidation events. These are the centralized blame. There is also another aspect to it. There are a lot of older crypto whales who are very happy that Bitcoin finally reached $100K and they were sitting on billions of dollars worth of unrealized profits. And there was a little distaste amongst them that the crypto industry, which was supposed to revolutionize finance, is now being run by crooks. Where— because they do believe that most of Wall Street is a crook, or the president of the US and his sons running an entire crypto company and being able to manipulate the market, launch meme coins and all. Something didn't sit right with them and they are like, let's just take profits. This is another factor that played in as well, for sure. And the third factor which I believe that played in— I'm not going to go into the 4-year cycle right now because a lot of people think, oh, the 4-year cycle just played out. But the 4-year cycle only plays out if Bitcoin does not create a new high this year. If Bitcoin somehow goes to 126K before the end of 2026, the 4-year cycle is broken as well. So there's also a lot of people who, uh, realize that— especially I believe this— that liquidity in the world has been very, very bad since 2022. You take any numbers, the way the interest rates went up, liquidity a terrible, terrible time. The central bank, especially the Fed, started dropping interest rates maybe a little bit too late. And by the time they started dropping interest rates, stagflation had come in, where the economy had already weakened and they needed to drop the rates. But you had a new president who brought in tariffs, and tariffs set out to be an extremely inflationary tool. After tariffs came geopolitical conflicts like the one we see right now in Iran, which is again an extremely inflationary tool. So I mean, I wouldn't want to be the chair of the Fed right now because he's dealing with an economy that's not doing that well. Just NFP data came out and it was expected to have added 50,000 jobs to the economy, but it subtracted 90,000 jobs. You understand the disparity there. So on one side, the economy is not doing that well, unemployment is rising, and on the other side inflation is rising as well. So what do you do in such a situation? So the little liquidity that was left in the world, it was finding the next best asset to go to. When Trump won the elections, everyone thought it's Bitcoin, and they all plunged into it, and Bitcoin found the high. There was a supercycle of meme coins for like 3-4 months, and that was another issue, that everyone came to crypto only to get rich quick. No one wanted to invest in the fundamentally strong assets. Which is why everyone burned their hands in a matter of 6 months. Then whatever little liquidity remained continued to go to the usual suspects, which was any company remotely dealing with AI. And if you remove the AI-centric companies from the S&P 500, the S&P 500 has actually been performing terribly over the last 2 years as well. In fact, so many companies are down in the last 2 years. Years, but the index is doing well only on the weightage of 7 or 8 companies. So this is a situation altogether. Now, my opinion going ahead is cautiously bullish, and it will become, I think, strong— more strongly bullish in the coming couple of months. I feel most of the selling is over. I think we may have one more leg down if the war escalates to a zone which we don't expect, or if the S&P corrects by another, say, 7 or 8%. Crypto will have one more leg down, but I think that's the point for now, for maybe the next couple of years. I mean, unless we have a Black Swan event, of course. I believe the new Fed chairman who comes in in May is going to prove good for the markets. Apart from that, I also believe that the Clarity Act will pass sooner or later. I'm sure it's going to pass this year. I just hope it happens or say June or July. Once the Clarity Act passes, I don't think there's any regulation in the world so far that will asymmetrically impact crypto as much as the Clarity Act. And so much institutional money in the largest economy in the world will have their doors flung open to enter crypto markets. And the crypto markets are so small, I mean, we're not even $3 trillion anymore. We are less than that. We are less than $2.6, $2.7 trillion. $4 trillion, if I'm not mistaken. So even if half a percent of American financial markets find their way to crypto, we are directly going to $4 trillion again. And if 1% of their flows find their way to crypto, we are crossing $4 trillion. So that's— so if anyone has an outlook and they don't— they have spare cash that they don't need for maybe 12 to 18 months, I think Bitcoin is a blind buy at this this point. And if you are the trader and you have that ability to take some risk, then maybe wait for— perhaps, but I wouldn't do that. I think I'd invest at least 50% of my funds into crypto, Bitcoin moment. And the last thing about the markets that I will say— I think we're also closing into our concluding time— is that this entire mindset of investing investors like a16z and others that launch an altcoin listed on Binance, do some marketing, have a $10 million budget, and all of the VCs will exit with $15 to $20 million personally. That entire business model, thankfully so, has gone to the dogs, and only projects which are actually solving something in the real world continue to do well. And also real-world assets will continue to do well.

Yeah, I mean, for You touched on a great point, a couple. That part you just mentioned about the altcoins and, you know, airdrops and everything like that. I honestly can't believe that business ever existed, right? And that business just takes away legitimacy from the space entirely. Quickly, and the other point you said just about opportunity cost, I think rates are, you know, gravity in financial markets. You know, there's still plenty of room for rates to come down. I don't think, you know, I think they frankly don't even care what inflation is. They turn off the numbers and make them what they want to be to support printing money. It's absurd. But last question I want to come back to is if you have any advice for builders in this space.

So I'm going to steal a quote from CZ, and everyone may have their opinion on him. I think He is one of the most important people in crypto, but he always said that all you need to do is survive till rest of the world catches up. So back in 2020, when I started doing this, most people, including my own family, said that you're going to go to jail, like you're doing something illegal. Then in 2022, when we made money, people are like, oh, he's just lucky. And then when the markets crashed, they're like, I told you so. And then when BlackRock launched its ETF, and now that— I mean, who imagined that JP Morgan would accept Bitcoin and Ethereum as collateral on your personal commercial loans? I mean, we have reached a point of extreme adoption. So, and still there are disbelievers, there are naysayers. People now do believe that Bitcoin is an asset to stay. They just believe that there are better assets out there. 5 years ago, people believed it wasn't an asset to stay, and 5 years before that, people believed that this is just a scam. So I think in another 5 years, people, everyone will have some kind of Bitcoin exposure, at least the accredited investors. So it's just a game of patience and determination, that's all.

Yeah, I, I think you're right, and I— it's great to hear you say that. Patience and determination, that's, uh, I need— that's what I need for, for the rest of this year. Um, I really appreciate you taking the time. Joining the podcast. Uh, I hope to do it again, and we'll certainly be in touch. Um, so thank you for your time.

Thank you so much, Kevin. Thank you so much. Looking forward to chat again soon.

Sounds good.

Take care.