161 - The Smart Money is Here | Eric Peters

Transcript

your your choice is I'm gonna just sit here and try to work with The Regulators to obstruct any innovation in the U.S and in which case by the way it gets pushed abroad and then the UK will do stuff in Canada and Switzerland and Dubai and everything or are you going to say I got to start investing in this and if you do invest in it then you go to the regulators and go we need some clarity because we're making big Capital Investments and we need to understand where you come out on this stuff welcome to bankless where we explore the frontier of Internet money and internet Finance this is how to get started how to get better how to front run the opportunity this is Ryan Sean Adams I'm here with David Hoffman and we're here to help you become more bankless the institutions are still bullish notice

the emphasis of the word still Eric Peters is our guest today he operates one of the largest institutional crypto hedge funds in the world maybe an Institutional hedge fund you haven't heard of because Eric Peters is not super loud on crypto yet this is one of the biggest funds in its space our question to him today was what do the institutions think of this crypto asset class particularly after the crazy year 2022 we just had are they running for the hills a few things to look out for number one how did Eric avoid Luna and FDX what does he think happened to three hours Capital hedge fund that went completely bust what smelled off to him about Sam bankman freed number two why Eric thinks a shorting narcissism is

actually the winning strategy maybe the thing thing people didn't do in 2022 number three regulation in space what should we do what should the Regulators do how should we address this and number four Eric ends with the story about his fight with a bunch of CIO billionaires over dinner and what he told them about macro Dave there's some deep insights in this episode about investment about crypto overall is pretty Blown Away with the way uh Eric and his fun have kind of grown in understanding of this asset class and of crypto what were some of the things people should look for in this episode I think the important thing to note the most is the difference in disposition between Eric as an investor

as an Institutional Investor versus some of the gunslingen Wild West Capital allocators that you find in the crypto natives there is a personality difference between these two types of archetypes these two types of investors in crypto because now they're in the same spot institutions are here they've been here for a while while and Eric is is uh an archetype of the institutional uh money allocator and the disposition of these types of people are very different from the types of people that you see on crypto Twitter uh pay attention to those differences uh and how the the word Cadence comes up and the disinvestment decisions and I think really over time the crypto asset industry will mature and start to look a

little bit more like the institutional investors that we see today because the institutional investors of the tradify world they are built with guard rails with with rules with perhaps with more patience as to when to allocate capital and I think as a crypto industry matures they start it's going to start to look like that and so as the crypto industry develops and matures it's going to stop looking a lot like a lot less like the wild west and start to look a little bit like what Eric is doing over at one River asset management and so understanding these differences the the is Art Gap I think is important and Eric just gives age-old wisdom that's always going to be true no matter what the asset class is or no matter what decade it is and so understanding these

perspectives perhaps a more mature investment philosophy I think is going to behoove you as an investor even while we still remain on the frontier it's also going to behoove you to stick around after the episode if you're a premium subscriber tap into the debrief that is where David and I give our raw thoughts after the episode got a lot to talk to you about uh with respect to institutional investors and Eric's temperament all sorts of things also of course there are 100 editions of this episode that will be available on the day this episode is released that is Monday so you can pick up an nft copy of this episode as well it's something that we started in 2023 build your collection of bankless episodes there'll be a link in the show notes for that too guys

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was October 2021 so a lot has happened since that time thankless Nation so we brought Eric on to catch up about all things crypto simpler times back then simpler times Eric welcome back to bankless uh how are things in Greenwich um it's great to be back and uh and yeah thanks for having me um I really enjoyed that first discussion that we had and uh it seems like other people have as well um uh that that faux pas the Greenwich faux pas seems to have uh circled the world here it seems to have lived in infamy I can't seem to shake that one but you know what that was a great episode where I feel like um you taught some of the crypto people about how institutions think uh and uh I mean we

can't even pronounce uh the names of of the cities of some of the largest you know where the largest hedge funds in the world are educated so it's clearly can can you get the okay so the first two haven't had new Bankers listeners if you don't remember our original episode in October 2021 I said something in the beginning uh to Eric like uh it's great to talk to you all the way in Greenwich Connecticut uh that is of course not how Greenwich is pronounced and uh I've since learned that when you said that it triggered an alarm Bell in my head but I'm like you're like oh Ryan's pretty smart he probably knows what he's talking about those things yeah yeah it was a perfect metaphor because I think I think I'm obviously you know uh many many years

older than you guys but I I think that our position in this industry really is kind of a a bridge to traditional more traditional finance and crypto and Greenwich pretty good place it was the perfect intro I was just trying to make an analogy in the intro you know it was yeah no it was a great intentional classic yeah um well okay let's talk about what's happened since October 21 so that was a very heady time for crypto uh numbers had gone up quite a bit um let me just ask you your perspective on this of course we're in a different market right now at the beginning of 2023 are you still bullish on this investment class Eric yeah sure um it's uh look we've had we've had a

big cycle and um we've had the big down cycle and I think you know when when I think about markets just in general terms after having um been a macro Trader for a long long time I tend to think in terms of there's a certain Cadence to markets bull markets and bear markets and when we last spoke we were you know still very much in a in a an aggressive bull market um we had not seen fed tightening we had not seen quantitative tightening um it was extremely unclear how committed the FED would be to tightening Financial conditions and so um you know those were those were very heady days uh for this industry but what you saw you saw a lot of the types of

behaviors that you would tend to see in a you know a very aggressive uh bull market and um you know I think we we um you know touchwood um we have been conservative it's hard to say you're conservative if you've invested 600 million dollars in Bitcoin youth right but I mean we were broadly speaking you know relative to the industry and then we've taken a pretty conservative uh stance there and that that has served us well and that we exited you know almost all of our risk in in 21 the early risk um which was you know in return that capital and so you know and then on on this on this decline um I I didn't expect it to be as as deep

as it was um but I didn't really expect the FED to have moved as aggressively as it did um either and so I think now that we we you know we have seen the large really the largest or most aggressive certainly one of the largest most aggressive uh tightening Cycles in in U.S monetary history we've seen that over the this past year and you know there's another small rate hike today and we're clearly kind of coming toward the end of this there's not going to be another huge rate hike cycle and so now we're you know we're in that part we're in that phase where you know we can list all the different blow-ups that have happened and you guys certainly have in your on your previous podcast those are all you

know really well known um but I'd say you know even as recently as just the beginning of this year we were at a place where I would have rated crypto as the top top three most most kind of bearish markets from a pure capitulation sentiment standpoint that I've seen in my in my career and I've seen some I've seen some horrible washouts but you know there were people who actually who I who I respect who were saying Bitcoin could go negative and you know like when you get to that stage where we're now at a place where Cadence wise you know maybe some good things could happen I'm extremely bullish for um for the the medium to long term we'll talk about that you know I'm sure over

the course of of this time but but you know that's the kind of the long answer is yes I am uh you know grateful that we've we've kind of navigated this bear market and it's really kind of a quasi 1929 market crash environment I I'm grateful as a firm and for our investors that we've kind of navigated well um we're also developing you know behind the scenes into it and I I think um I think that this next phase I don't know when it will begin and maybe it already has started by the way but uh I think this next phase will will be very powerful because it actually will finally have real institutional uh adoption not just in the Investments but also kind of the Technologies and I think that's a big deal so many questions about this it's one question

though is the sentiment you said was one of the first from one of the worst three that you've ever seen what are some of the others that are like comparable to this I should have added I can't even remember the other top two like it was just I mean it literally was you know it was that bad but if if I were to if I were to think about um if I were to think about certain times like for instance I was trading um in in the 90s I was trading uh the Deutsche Mark which you guys don't even you know I don't know you don't even remember that there was one probably right yeah the Deutsche Mark versus um the Italian lira for instance and um you know that was a time when it blew

out of the exchange rate mechanism that was when George Soros made his his uh billion dollars in a day he you know he was betting on Sterling but I was um I was betting on against Italy and when it finally blew out basically Italian lira got really weak and you knew that that was going to create a ton of inflation and uh which you know there's a big translation economy like that once the currency gets really weak the bond yields jump everyone worries about a default inflation picks up Capital flees and there was a general sentiment that the Italian lira could literally just just shift into absolute hyperinflation and by the way I was I was kind of caught up in that as well I was I was in the right

position had it not been for um a really uh uh uh you know my boss who had great advice we had a we had a big client who actually wanted to um wanted to sell just a ton of of Lira and I was real you know I I could see that reflexive uh Dynamic that could have just propelled it to just you know kind of becoming one of those stories of of History where currency just goes to cut a zero um but then you know I was kind of lucked out of getting out of position um with a client um but I just but that's why it's like it's that's just so clear in my memory just how negative everyone was to the point that I was so negative that the only way I got out was because it was

luck I mean really um but there you know there are times like that where you know in 08 in you know when when the s p got or it was in no 9 but when they when it got to 666 on the S P you know it had come off so far but you know like people still thought well we don't know what's going on it could go you know why couldn't it fall another 50 and why couldn't it fall another 25 and and so you you know you have those types of markets where sentiment is just so horrific and I think in crypto um I think the FTX thing was just catastrophic from a sentiment perspective and so anyone who held any kind of hope that maybe this was primarily due to over leverage and primarily due to this tightening cycle I think that they

just capitulated post FTX you're like oh my God and and understandably you know well this is why so much we wanted to have you on right because of this negative sentiment uh Eric and so I mean I think for for some crypto natives that have been through previous Cycles I mean like you know 2017 2018 bear cycle eth lost 95 of its value that was pretty brutal and there have been Cycles before this right all the way back to you talk to people like Eric Voorhees Mount gox pretty brutal negative sentiment Cycles but this one hit in a in kind of a different way like a sentiment way reason part of the reason we wanted to catch up with you Eric is because I feel like this one hit maybe the Institutional Investor narrative in some specific way and what I mean is this

like um this exchange top three crypto exchange uh sort of a um you know multi-billion dollar you know biggest billionaire in in in history under the age of 30 with a successful exchange and a fund and some parents credibility the parents at Stanford and credibility in the halls of uh Congress and our governments and I I assumed some credibility on Wall Street this sorts of things it turned out the whole thing was a fraud like and I you know I know there's legal definition of the word fraud but I think we can safely say like this whole thing was like a fraud and um crypto natives are used to these kind of

like bear markets but I was curious about the institutional sentiment like are the institutions just looking at this and saying my God what a mess these people are not professional these people don't know what they're doing we are getting the hell out of here has it scared the institutions away and uh yeah what was your reaction to all of this like I was surprising for us was it surprising for you and what has been the blowback specifically for the institutional investors in crypto um so a few things was it surprising I think the fact that it was that FTX was a fraud at the scale that uh that it was

was surprising to me um we but but I think there were there were warning signs um and uh and incidentally we we had no exposure to FTX who never did business with them they didn't pass our operational due diligence for a variety of reasons um we didn't invest in ftt we excluded it from our index so I think that did you consider it yeah because it's you know we we had to um you know when when we build an index it's it's built around a variety of objective rules and so um thankfully those rules had ruled out both Luna and ftt um and so

you know I think that I think that they're so I didn't know that it that uh FDX was a fraud I found a number of things really interesting um you know in in a conference shortly before it happened I knew that they were trying to raise a billion dollars and and yet um you know Sam was speaking publicly that he was intending to potentially give a billion dollars to um to uh politicians over the next cycle and he explained that he was looking to raise a billion dollars because he was going to do big Acquisitions which you know kind of coyly hinted could be something like coinbase which I thought was you know lacked lacked any kind of credibility

whatsoever and uh and so you know I think that um I I haven't like I don't really know Silicon Valley but I know that some young people go to Silicon Valley and they make extraordinary amounts of money in a very short period of time if they built an app or a firm or a Facebook or this or that but I do know Finance very well and I haven't seen a 29 year old make the kind of money that um that he supposedly had and it didn't but even so I you know my view was that's that's just not a firm that we need to to be associated with because I just don't understand it it's it's I'm you know I'm not gonna suggest that it's a fraud or is anything illegal or

anything I just I just didn't understand something smelled off to you well well it is I mean you just if you could you know I'd love you to list the the top you know Five Guys or or one guy in finance who's made you know whatever it was 15 or 20 billion dollars by the time he's 29 you know like there isn't a that's it's not like there's a long list there just is no there's no it's just you don't you don't find that so I think that um I think institutions by the way were were broadly speaking shocked um I was very surprised um it made sense to me that something hadn't been right that made sense but I I thought it probably was something else as opposed to just a fraud I think institutions

um you know was deeply unsettling to them obviously there'd been a bunch of venture capital investors who had made significant commitments and that's got to be unsettling it's not necessarily A strong indictment against them I don't really know Venture investing so my understanding is you know you need to spread Investments around and um and if if every if basically if everything that if all of your due diligence was perfectly knowable there would be no opportunity so the question is you know kind of what where do you what do you give a pass to and so so I anyway I I think institutions just across the board were pretty unsettled by that definitely the fact they've met with so many politicians Regulators Etc um was was unsettling he's had spoken at

every conference that you could imagine so you know it's such a high profile that it is unsettling that said um you know from from our perspective we you know we have not suffered from lack of um of inquiry about this space because when you think about an institution it's like okay just think about kind of the game theory around this which is not what investing is entirely about but there's an element to that right so let's say you're let's say the firm the institution that was deeply deeply skeptical at the highest level about crypto and then this happens it's a high likelihood that you're just going to see I told you so this was just all a Ponzi and fraud and everything and you're just not going to do anything

that's probably what happens to that institution it they're not that many institutions where there was such high conviction at the top most of them were more nuanced so you'd probably have a bunch of young people in the investment committee who said look I think there are a lot of really interesting applications for these Technologies I think it's the future I think we we don't need to make a 10 commitment to it but we should probably have 50 basis points or 100 basis points or 150 and so when we should do that and so let's say you're that institution and the senior people are like it just feels very heady in 2021 and I think we're going to have a rate hike cycle but let's keep doing the work which they did and now you get to 2022 or 2023 and the markets crashed

okay you now you can do one of two things you can say you know what we were a little skeptical and now we know that this is worthless and so now we're not going to touch it there's significant risk for an investor because if you if if you think that this is has the potential to be part of the future of Finance which I think many institutions do they don't know exactly how to play and you were fortunate enough to miss which most of the big allocators did by the way most you know hedge funds were involved most of the allocators were not certainly not heavily invested and you missed that huge Decline and then you don't do anything there's there's career is there too by the way because your job

is to you know identify interesting opportunities identify value not do stupid things but if you've if you've bought after one of the greatest frauds in you know the last 10 20 years it's probably not you know and there's there's some basis for the investment you've done a lot of work on which a lot of them have then they're gonna they're gonna come so we're seeing we're seeing institutions who will be making allocations in this space um to us this this year and I'm really excited about it and they're they're you know they're doing all sorts they're looking at all sorts of things um by the way so yeah it's it's uh it's been a wild cycle to participate in and be in you know in in a sense in the center of but

um we're coming you know we're gonna come out the other side it's interesting to hear this perspective because it really illustrates uh you use the word Cadence earlier a different Cadence in the way that institutions make their decisions do their research and then make allocations uh and I I want to go back and and ask you about you said ftt FTX and Luna as well uh was evaluated and just did not pass the bar so there was no allocation to it uh one of the big stories of FTX was that it was the hot investment for so many VCS uh like I remember I've seen a view a few VC decks uh all of them trying to like you know boast their returns because that's what they do that's the game and so many of

them had FTX prior to the blow up had FTX says like look at with amazing investment we made and they're turned into this like mimetic intoxication about Luna too loot Terra Luna 2 as well as FTX it was the thing it had this like gravitational pull to so many in the crypto industry and both turned out to be just terrible mistakes in hindsight but something about um your fetting process at One River looked at Luna looked at FTX looked at ftt and said there's too many unknowns here there's too many red flags okay what's different about your vetting process and the Cadence at to which an institution allocates a crypto well why

did that show up on your guys's radar as red flags when so many uh in the crypto industry fell for it um I I really don't want to characterize this as I as we're really smart and everyone else um you know fell for uh you know something that was fraudulent because that's that's not the case I think I think we're we're just very conservative in how we approach these things there's certain general principles that um that I think apply over time the the problems they're they're hard to implement because at a certain part of that market Cadence um their behaviors and Investments that are kind of difficult to resist so I'll give you an example that in a minute but

um specifically in the case of Luna and ftt um there are a number of of quantitative screens that we run on all the assets that we put into our our index and um for instance something that that it's not that it's a flag because it wasn't flagging um bad actor activity or anything it just was the the free float was was such that um we weren't comfortable with it you know it's like if if um you know over time if I invest in something if if over time you know and I try to think about things if I repeated this Behavior 10 times or a hundred times would I make money would I not make money yet the

reality is even the worst like literally the worst investment if you if you if you do it if you did that a hundred times there probably would be times that you might make some money for a period of time and maybe you make a lot of money but I you know try to think about sample set so if you're gonna be buying assets where someone owns a ton of them and they're not you know freely traded and they can make the decision because they had too much leverage in their business or they just wanted to cash out or there was some type of regulatory shift that took place or some like or there was a bad actor like which is what we what we saw you when there's

you know when there's highly highly concentrated ownership uh you know they're gonna be a lot of times where you where you're going to lose a lot of money not a little bit of money you're gonna lose a lot of money so that you know from a quantitative screen standpoint there was that I think with Luna you know Marcel kazumovich who's our head of research in Deputy CIO for our digital businesses um you know certainly one of the top few Minds in in crypto um and uh uh you know he had done a lot of work on Luna and had you know we didn't want to come out and and aggressively say this thing could unwind uh but we did you know we did publish and something that

you know implied that there are scenarios where the structurally it was you know it hadn't passed some magical point where it had no downside you know there there was a reflexive downside risk in the construction of you know of that and uh you know obviously that's what ended up happening didn't mean that it had to happen by the way it just meant that it was vulnerable to that happening and and if you think in probabilities and you just you know we were um if it had screened by the way into our index I think we would have had to take a serious look at that because I um I like to be on the right side of potential um convexity and reflexivity in markets and and I definitely don't want to be the wrong way around in that

um so anyway that was that when you you were talking about the Cadence of behaviors in these markets and I think this was this was a it was a difficult thing for us um I am I'm proud that we resisted the temptation but the the defy yields that were available so one of one of our products is is a fund called digital income and um when we were all last speaking um I think that the yields available for over collateralized lending in this space meaning you know you give me 200 million dollars a Bitcoin I give you I lend you 100 million dollars you park that in a third party custodian and if the value of that collateral drops from

200 to um 150 you either have to top it up or I have the right to start liquidating that in Old School parlance uh you know traditional finance that would just be a really boring tri-party repo Arrangement and for that we were paid roughly a yield of five to eight percent okay boring but good entry point for investors who want to understand this space You Know by the way when interstates are zero five to eight percent is great the the issue was you know you go to Celsius or wherever and it's 20 and we looked at that and we just said look it sounds Optical well optically that's a really high interest rate in a zero right World kind of like my comments about be skeptical of of you know people who make money too quickly

or things that that appear to be too good to be true we looked at that and and concluded that while those rates optically were high they in no way compensated for the potential risk of investors in you know in defy in in it as it was constructed and so we just didn't do it but you know when you're going and sitting in front of um large institutional allocators and they go so what you know what what do you think is interesting for me to do to kind of get started like well we think digital income is pretty interesting like the guys who just came in here are offering 20 yields and you're five to eight percent and you just you know naturally you it's a lot easier to sound smart now

like you want to sound smart and you and you know their business pressures on on you um but we we you know we did resist that temptation but I think those are you know that that is how you build institutional credibility over a long period of time that is how you build a track record and sometimes you just have to walk away and say no and recognizing that you have to take risks to make money um but anyway that's um uh there were other examples in crypto that were like that where it was just like you got sucked in um or many people got sucked in who otherwise would have been more sober had it not been this kind of new technology sometimes you just have to walk away sometimes you just have to not get greedy about this I want to ask you

about another uh group from you know our cast of characters in 2022 and get just your your opinion on this uh three arrows Capital hedge fund you guys are a hedge fund you've been around hedge funds for a very long time what happened there what's your analysis of what went wrong at three arrows Capital when you look at that do you see just a bunch of kids run money when you know they shouldn't have taking unnecessary risks was there something else at play here um all right guys I'm not ageist okay so I'm not gonna say it's a bunch of kids and hopefully you know you call me an old man or something um we honestly so here's one impression

I have coming out of this speaking of the kind of it's not an ages thing it's just like I sometimes I feel like um crypto people are too naive and we benefit from wisdom that can be offered by those with more experience but sometimes people in crypto are very quick to say no this time it's different your rules don't apply and sometimes they're right and sometimes they're very very wrong so I please uh bestow your wisdom on us I mean have you ever seen this before what do you think went wrong with three hours capital Okay so I'll share with you my framework for how

how I think about at the mental level most of these most of these issues and by the way probably applies to FTX as well um you know like certain certain over leveraged loss making Enterprises or trades if you have the wrong leadership that doesn't own up to their mistakes it can lead to a fraud it didn't necessarily have to start at a fraud it could lead to a fraud because you know humans have big Egos and we're frail and we're you know we're all these we have so many weaknesses that don't blend well with leverage and losses and you know and in real in public humiliation so

um but I think the the framework to think about this um actually comes through uh or from uh Jay Clayton who's our uh leads our advisory Council and and he's written about this former uh chair of the SEC yeah correct yeah yeah so um Jay Jay's fantastic and so one of the things that uh and he's written about this numerous times in his opinion pieces in the Wall Street Journal and has spoken about it um is that is it crypto is a very very unique Financial innovation in that it was a retail First Financial Innovation that has reluctantly been accepted maybe not embraced but just

kind of acknowledge or accept it by institutions reluctantly yeah right so but that's that that's like a simple statement but the consequences are profound and I'll I'll search I'll kind of circle back to how it affects three arrows or something so um I think what happened with crypto is that you know Bitcoin appeared however you want to characterize it it appeared it was retail only it kind of grew and grew there are plenty of good actors and some Bad actors uh early on that ratios obviously changed dramatically so that they're you know very small tale of bad they're more Bad actors in in cash globally than there are in crypto I'd say

um albeit crypto gets you know a bad bad name for this but at any rate so that was kind of the progression um and what happened was um I think the institutions they looked at the Bad actors and something that objectively speaking was intended to kind of disrupt their business and they just said stay away stay away stay away we're not going to focus on it and that allowed The Regulators to not have to focus on because they didn't even really know who to focus on to regulate and it was sufficiently small that that crypto was just able to go through a variety of different Cycles without a really strong regulatory focus and certainly without a regulatory Foundation right and so when

we got into this last cycle just on a total you know assets the market cap of crypto got very very big right and so um it dwarfed anything previously and now it it it forced um institutions to have to take it seriously they had spent enough time there were enough people within their organizations that they started doing the work to understand how could this really affect our business should we be investing in it not just the coins but the Technologies like all of this stuff happened but what what was lacking was any kind of real regulatory Foundation that would have happened if for instance in uh Financial Innovation like cdos you know the kind of the

um all these these these bonds that have been packaged these mortgages that have been packaged in host in 050607 08 and then kind of blew up the financial world they as bad as those were in the financial industry they still had to be traded in regulatory in regulated entities there were there still were some same people who had been around the block a number of times and it still blew up right but now if you think about if you think about what happened in crypto with say three arrows or any other blow ups you you had there were no Regulators most of the people who were prominent did not have a lot of experience at that level of market cap with that kind of Leverage and there

always are going to be some people who just absolutely swing for the fences so I don't know the three arrows guys well enough to have an opinion about what why they made decisions they did but I think it's you would expect in a in a essentially a non-regulated market with people who who didn't have Decades of financial experience without the the kind of the checks and balances that happen in a lot of these large Banks organizations hedge funds Etc you would expect that they're going to be some really big blow-ups and it's just the market cap got so big that when it happened they they appeared catastrophic um I think if if you had taken those cdos right um if you had taken the those kind of

packaged mortgage bonds and all that stuff if if that had started in the retail Market in 050607 hadn't been regulated there would have been catastrophe I mean I don't maybe maybe the bulbs wouldn't have been as big as had you know um had it been in retail relative to the Wall Street but I think that they would have I mean that just because there's just no there's no infrastructure for checks and balances is so I don't again I like who am I to say someone's made poor decisions I mean clearly three hours dead I just don't know what the motivation was but it doesn't surprise me that you have these outcomes at all right and we often say in the crypto World we're speed running the history of money and finance and one of the things that we are learning here is that human psyche is hard to control

especially as it relates to uh markets that move very fast like one of the crazy things about crypto is that we go through an entire business cycle inside of four years we see the highest highs and the lowest lows inside of four years and human emotions just can't really deal with that at that kind of speeds and since crypto's so young we don't really have the guard rails up that are in the traditional Finance world that came from raw experience that when you don't have these guard rails up uh you let emotions take control so I do definitely take the point that like three hours Capital started off as a totally legitimate prop trading day desk like work in the gbtc trade very legitimate and over time uh like like

Risk off trade and same thing with Alameda research actually started off with these very reasonable trades that took on more and more and more risk because things always would go up in in the first half of the bull market and there were no guard rails to manage human expectations um I think that's a pretty pretty safe claim to make is that like through all we just haven't learned how to self-manage ourselves because we don't and that's why our institutions aren't that big because they keep on blowing up because they don't have guardrails yet and and Eric's there's a there's a a philosopher maybe maybe philosophical is not the right word but just like when you when I was asking you about ftt and Luna and FTX uh you gave your thought process and it was very much an attitude of this doesn't pass the bar this

doesn't pass and it's it's more of a conservative approach and it's and correct me if I'm wrong but it's like you really don't want to be wrong as an Institutional money manager whereas like perhaps if I'm trying to put myself into the three rows Capital shoes they were really trying to be right they made very specific targeted Investments and really wanted to be right they seem to not want to miss anything yes exactly yeah and they and so I think perhaps what it means to be an institution with guard builds up and processes and rules it's more of an aversion to unknowns and really not wanting to be wrong whereas perhaps the more immature industry the more immature

investors like oh I have to be right I have to find the next Alpha can you just um see if I'm tapping into anything here like what can you elaborate on this kind of philosophy of how you make investment decisions yeah um some of it has to do with time Horizon so you know if you're um if you have a short enough time Horizon you can convince yourself that even the most speculative investment or even a fraud if you it could still be something where you could make money if you've if you've identified the market setup the right momentum the this that you know whatever um

if you have a if you have a longer term time Horizon which we which we tend to do just not to say that we can't get into a trade and then and then reassess it because you know pal makes a speech and you know I think our premise was wrong and then we get out of it but our time Horizon tends to be longer term and when we are doing something like constructing an index our approaches we want to construct an Institutional index which will serve as a benchmark for the institutions that we think are going to come into this industry and it's important that in many respects we kind of honor the way that they would think about it which is the way we think about it which is to

do things like avoid you know avoid assets where there's incredibly concentrated ownership so it's not that we're we're trying to avoid being wrong per se it's I think that we're trying um it's a good question is it difficult one to answer but I think it's if I if I to answer I would say that when you when when you invest and trade for I don't know what am I I'm 34 years at this stage you see so many things that are good and you feel that Euphoria like I describe that Italian lira trade that I had I remember what it was like for my boss to pull me in the office and say we have our largest client who wants

to sell the literally almost to the you know the million Lira or whatever that you have and you can you can get out and I was like if they want to sell I want to sell more because it's like if that if like if that's what's happening it's going down like I I am self-aware enough to remember that I was it was euphoric to make that much money at such a young age you know I was in my 20s um at the time and I I was making I wasn't making Sam banquet free money but like you know for me that was a really euphoric period And I remember how wrong I was and how those instincts were you know were wrong but you have you can't

you can't read that in a book if you if you experience those things and those emotions and Temptations in yourself and you can check yourself on that and you can somehow kind of navigate this very difficult Pursuit for a lot of years there are certain principles that that kind of that bubble up and you know and I've mentioned some of them today like if you see people who make way too much money at a really young age you probably don't need you know to be doing a lot of business with them um you know it's there it's a flag it doesn't mean that they're bad person it's just there are a lot of things to do in the world you don't have to do everything in the world you just have to try to do the things that where you see

the setup in such a way that it's really smart there are a lot of crypto assets that you can buy you don't need to buy the ones where there's incredibly tight concentrated ownership which could be liquidated due to over leverage or liquidated due to bad activity or just because they want to you don't have to and so if you kind of line all those up and you and and those are just like the filters that become I don't say second nature but you just know you're always gonna you're always gonna run that through that filter it's going to help you and so you know I don't know that that's wisdom it's just it's experience by the way it's experience for people who who have really been beaten up too like you don't you don't get to you don't get to go through Decades of this without having

really bad experiences yourself and um you know and and a lot of soul searching um but you know you're awarded in the sense that if it improves your judgment if you're introspective and you're honest with yourself yeah I totally agree it's it's almost a privilege that crypto runs on these such uh short boom bust Cycles because those that stay in crypto get taught so many lessons lessons that sometimes I think in traditional Finance really take decades uh to prove out like we we get hit with it and sometimes we get hit with it young and that is a uh an advantage in our investment uh career this is what this is how we level up through this kind of hard fought um knowledge and experience in the trenches

um Eric I want to go back to you something you were saying earlier about uh part of the nature of this crypto thing is that it's a retail phenomenon and so Regulators have been slow on the scene one observation that I have and I don't know if you agree with this or not is one of the things that held up pretty strong in crypto last year was actually defy and I would say the reason defy held up strong is because it is regulated and uh that might be counterintuitive to people what I mean by that is D5 is very much transparent and regulated in code a cool thing about Ave and compound is you can right click and see all of the assets that back

those particular positions you couldn't do that in a Celsius you couldn't do that in a block fly it was a complete Black Box one of the approaches I wish Regulators would take in the space is to recognize that regulation can mean different things in this crypto space than it means in traditional markets regulation can mean regulation by transparent auditable code that is publicly available and so when Regulators touch these markets they need to take that into account and they need to touch things in defy a little bit differently than in centralized Finance one of the takes Bank lists uh Dave and I often repeat is if it is centralized then it should be regulated by

Regulators right and I do think that is something that we uh we missed of course on the C5 side of things particularly with these C5 lending blow-ups let me ask you this um I know you're also plugged into this world uh Jay Clayton is is you know part of uh one of your advisors um on the team I believe um what are Regulators doing about this and I guess what's your take on this what should Regulators be doing uh how should they address um crypto markets what would you like to see in the U.S so um I'll borrow from I'll borrow from from Jay here in terms of um a piece that he penned with the former chairman of the cftc as well so you know kind of have

former SEC and cftc chairman jointly published something Giancarlo the former no um uh Tim Assad got it um and their their prescription for what should be done right now is to number one just introduce sensible set standards um so provide guidance to centralized exchanges at a minimum for sensible customer protections so you know like not commingling assets not like all the all the things that are just you know not too much leverage like don't run a fund aside your uh don't have don't have

um inherent conflicts of interest you know set right next to one another so those are all things that I think everyone could agree on and I think everyone on certainly the three of us could agree I think on all those things because they're just like obviously that's that should be the case the issue I think is that um that because that guidance hasn't been provided there are plenty of actors which include some Bad actors or certainly have now a lot of them are gone who just took the view that's like well there's no guidance so I'm just not going to do anything and and I think the advantage of providing some guidance around saying like look we're not sure how we're going to regulate everyone right now but there's certain things that you should really that are sensible

for your business you should think about so one of them is is articulate being kind of sensible customer protections um for retail um that would apply to institutions as well by the way the other thing is is really provide guidance around stable coin stablecoin is is kind of the you know killer app in terms of this whole whole space and I think that um it's likely that private sector dollar stable coin becomes one of the most important Innovations in global Finance over the next 20 30 years but by the way are you surprised people in government don't actually see this that this is actually the the way to export the US dollar right like what do you

what's what's the US's plan uh you know to combat and to Space Race um China's Central Bank digital currency which is much more tightly controlled yeah I think that I think that a lot plenty of politicians do and I think this FTX debacle it was a setback in terms of timing but I think we're going to get there I think that there are um plenty of politicians and Regulators um uh who we speak with who they they understand and so I think if you do those two things if you if you provide guidance around uh stablecoin you introduce you know standards for

protection consumers and then you try to uh this is what Jay Advocates you try to um creatively think about how to apply that to D5 because it's not it's not necessarily obvious from a regulator's perspective then you've gone a long way in terms of providing enough Clarity to the good entrepreneurs and the good actors who say okay well listen I get it so I'm not I'm not just going to get a random enforcement action I'm not suggesting that all that I think a lot of enforcement actions are not random um but you but you can say if the SEC shows up if the cfdc shows up and I've done all of these things that they provide guidance on well I'm sure it's going to be a pretty good conversation

to the point where it won't be a very long conversation right and the the issue is there's cost to compliance there which just means what if you're going to weed out the dodgy Bad actors that never intended to comply and never intended to kind of really do the right thing or wanted to cut Corners so I think that that's uh that that's Jay's what he's advocating um and that over time will will you know as these assets mature uh and Banks begin to embed them into their you know their trading and settlement processes and all of this stuff like we'll get to a place where um we'll buy time for for uh healthy regulation and Clarity so I think that I think that that's

I think that that's probably where where we go unfortunately we got you know set back a little bit is that the is that the thing that's holding institutional adoption back still lack of regulatory Clarity so if we had this regulatory Clarity would you expect kind of a flood of institutional interest into this asset class I think it would accelerate but I don't think it would I don't think it would be a flood I mean the one the institutions that we're talking to um the institutions that we're talking to are kind of not U.S taxpayers they're you know their pensions endowments so you know they're investing offshore you know they're they're like they're very sophisticated investors and they're um their view is that we don't know where this is all going it's clearly not

going away entirely and that could mean a whole range of different Financial outcomes in terms of what these assets are worth and they're even open to maybe the assets aren't actually worth that much money but the technologies will be and so we need to kind of make sure that we understand um these Technologies we have some position in these assets we may have some position in trading strategies some position in venture capital in this space and if we do that we're going to learn a you know heck of a lot and um and we're we're not going to just be on the sidelines if if this becomes what it could become right so like if you um if you look at Kathy Wood right you know if you look at her work I mean she

has projections for massive levels of adoption for huge market cap for um smart contract smart contracts annually producing you know God only knows how many billions of dollars in Revenue et cetera and by the way not far off like 2030. now she's right or she's wrong but if you're if you you're sitting on a huge endowment are you really going to have literally no exposure to that space that's that's not it so I think if I think that that investors believe here's here's what I this is kind of safe thing to say investors believe large institutional investors believe as a whole that if these assets become adopted by the large Financial players

in the U.S and internationally then what will naturally follow is some type of uh clear regulatory um framework for them that will happen because the pressure will be coming from incumbents who just say look we need guidance around here otherwise coinbase is going to completely destroy our business you know if you're one of these custodians and like think about think about this world which I think about a lot by the way think about a world where you know Bank of New York and State Street and all these custodians they're great counterparties we work with them in our business they're wonderful people they're huge Legacy players and imagine that Larry Fink and his his call for

every Bond and every Equity to ultimately get tokenized okay so you got the guy who's running BlackRock the largest Asset Management in the world saying this that's what's going to happen and you have and you're one of these custodians are you really going to just let coinbase absolutely completely dominate your world I I by the way coinbase might dominate the world anyway because they're so far behind but you literally your your choice is I'm gonna just sit here and try to work with The Regulators to obstruct any innovation in the U.S and in which case by the way it gets pushed abroad and then the UK will do stuff in Canada and Switzerland and Dubai and everything or are you going to say I got to start investing in this and if you do invest in it then you go to the regulators and go we need some

clarity because we're making big Capital Investments and we need to understand where you come out on this stuff so I think that's that'll be the that'll be that mechanism that is the game theory of it right and I think you'll have some banks that try to stop it but then other banks that that break rank I mean fidelity is doing uh incredible things in crypto and they have for a very long time if they break rank then uh they they certainly are are whispering in The Regulators years to push this forward and so it becomes game theoretically an unsustainable position to be anti-crypton trying to block it that might work for a period of time but but not forever I I want to ask you kind of another comment because we've been talking about uh 2022 as a setback right but you've been in a lot of markets

um this may seem glib to say but I feel like 2022 was good for crypto it was actually healthy for crypto and I just the way I justify saying something like that Eric is like counter factual of like what would have happened if crypto got to 10 trillion dollar asset class last cycle which look it got to three I mean could have happened what would have happened if um FTX had grown you know 5x 10x larger SPF had grown 5x more influential in Congress look he was passing working on crypto legislation we already know there were tens of millions hundreds of millions of dollars in donations going to our

Congress what would have happened if Luna got that much bigger and then blew up the counterfactuals actually scarier to me than uh what happened in 20 to 22. and I wonder if that instinct is is correct given what you've seen in markets like is it a good thing that we went through this um I think it's a great question to to ask and uh uh I I think yeah I think you're counter factual would have been very scary um to have had to have had crypto create real Financial stability issues for the global economy would have been devastating I think for crypto

um and I think as it stands there were some deep embarrassments and humiliations and everything else but it didn't it didn't infect the the broader economy and it didn't affect didn't infect the financial system and that's really important and I think what it what it leads to is The Regulators who have been kind of slow pedaling this they go okay this will be important to kind of continue to keep crypto um separated from from the Main Financial system um and I think that that actually ironically is a good thing for crypto because it's going to keep the traditional Financial players for the next couple few years

at arm's length more or less and it allow the younger more um I think uh I don't mean I I hate knocking anyway like the more more younger more creative now I'm being ageist um the younger more creative you know entrepreneurly minded people too I mean these Technologies are so exciting so I think a lot of good things will happen with that separation that separation will will make certain things more difficult but I think it's it's better for the overall industry and I I'd actually like to Circle back just really quickly to something you said earlier which is that you know maybe um it's good that these Cycles happen so fast because you know younger people or just people involved in these can really experience

some of those trading lessons and you know I obviously am biased because I've chosen this path in my career and you know I I often try to dissuade people from doing it just because I know how hard it is and the only people who really should do it are are the people who I just have this dying desire to put themselves at risk try to make reason judgments etc etc and the you know many if not most of of the most introspective people who who over time do not become egomaniacs but are you know

get to know themselves well have done it because they've chosen a Pursuit that really challenges them and it forces them to have to admit error it forces them to have to confront you know mistakes of greed or fear or anything like that and trading trading is an incredible venue for that and so if someone really wants to do it then they should and and I think even of those people not that many will be really successful over their their careers but even if they don't I think they'll you learn a lot more about yourself and certain life lessons that apply in all areas of your life through that Pursuit than say not to think I'm being

a lawyer but like being a lawyer or you know being being someone in a job where you're where it's rare that you have to confront the fact that you really got something wrong and you have to you know like cut your losses deal with that deal with humiliation turn to your spouse or your you know significant other and just like I really you know I I I I screwed up and and I think those are um as someone who thinks life is about learning a lot of these lessons I think this is this is a great area to do that and so I was happy that you that you said that I wanted to kind of swing that this is what I love most about kind of investing you just made the case for being an investor right which is like um it is one of the only Fields maybe

besides science I don't want to you know put investing in kind of the the level of science science is better than investing let me just say that but it's there's an objective truth about it like not many other fields do you get to find out whether you're right or wrong like numerically and the stakes are very very high aren't they and I just you know your story earlier about you being in kind of your 20s and that the headiness of of some of these trades and you know making a lot of money uh for yourself at that age and how crazy that is now imagine too what we see so often in in um in crypto is you've got that and you've got kind of the money aspect and it's maybe even Amplified to how much you can make in a very short period of

time and then you also have this like social media effect where you can actually be like a traitor God influencer and this is what we saw it's like fun managers like the the uh are friends with Pharaoh's Capital being put on as pedestal and like I know just from being on Twitter the the way it can kind of warp your ego right and make you think things about yourself either in the positive or negative that aren't objective reality like that's a double trip not only do you having the money you got this whole like Fame ego warp reality Distortion field that's going on in social media and I'm like wow that is uh you know no wonder we have kind of the sbfs of the world and what's so

interesting to me is Eric is he got off on uh a bond and what's the first thing he does he starts tweeting again he opens up a sub stack right it's just like there's something I'm not a psychologist but there's something in this uh that is uh is also kind of amplifying um the effects of some of these things I think it's all tied up with with ego yeah one of our um one of our investors and actually the investor with whom we uh we made our first investments in crypto his theme for last year was uh which is just he's he's a real iconoclast one of the greatest investors um who uh you know I've had the pleasure

to to get really close with and uh an awesome human being as well but his theme for last year was um um was um uh basically kind of short a short ego you know like B I think it was I think the I think it is investor letter it was um be short narcissism was you know was what it was and so I would have made a lot of money in 2022. yeah yeah and they you know I mean they're a real money firm and they you know they produce positive returns last year when um everyone else is down a lot of money so um you know very impressive performance but but yeah you know that's it it you're exactly right you know it's it's that's going back to that theme we

talked about earlier where started in in retail and then you just you know you don't have guard rails you got a lot of young people you got a lot of narcissism um and uh it's almost like unfair like how can someone who's um you know how would I have handled myself in my 20s that that Italy if I hadn't you know had someone who was a lot wiser um who who just was like hey by the way he was probably bearish on Italy too but he could feel it himself he's like when I get this bearish I gotta get I just gotta cover it you know I I could come up with 20 reasons and by the way my boss just isn't a side he was he was awesome he was Notorious for you know he'd come to the desk and and he'd say

you know I'm gonna go buy um a ton of uh dollar versus the Yen and uh or sell it or whatever and and like why are you doing that he's like look at this you know look at this report and he'd set you know put it on my desk and it was two years old but yeah really good instincts you know so um anyway learning about crypto is hard until now introducing metamask learn an open educational platform about crypto web 3 self-custody wallet management and all the other topics needed to onboard people into this crazy world of crypto metamask learn is an interactive platform with each lesson offering a simulation for the task at hand giving you actual practical experience for navigating web 3. the purpose of metamask learn is to teach

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of the first to access the multi-chain beta there's a link in the show notes or you can go to Phantom dot app waitlist to get access in late February Eric I want to Pivot the conversation a little bit to um back to a perspective that I think only you or a few people like you could have which is um institutional allocation institutional exposure to the crypto World um there's what I'll call blunt exposure which is just perhaps buying ether Bitcoin and just the most obvious things that are smart not to say not smart like smart smart things to do at least that's what I think Bitcoin and ether but albeit blunt um and I'll think perhaps that's where uh institutions start they'll dip their toe in the waters maybe there's even uh

easier ways to get started with that but that's kind of how we talked about uh when we interviewed you last uh last October 2021 so that was one of the first moves you know buying the Blue Chips I'm interested to hear how this perhaps has developed uh perhaps for one River but also what you hear with other institutional strategies to get exposure to crypto how has that developed over the last year or has it got more precise have strategies gotten more uh more specific anything what's the progression of an Institutional exposure to the crypto world because one thing um Dave and I noticed when we were thinking about talking to you today Eric is we went over to the one River website under a section you have research called research looked at the digital asset section and a few of kind of the the

articles that you've published here and you're talking about some pretty detailed stuff here right you're talking about when you cite dank red Feist as a source yeah I know you're down in the basement level of research you don't go any deeper there's here's one line um ethereum is prepared to store a new form of data the change will carve out a special location for unstructured blobs allowing layer 2's cheaply readily available space this is exactly right but this is like down into the firmware level um of what's happening I mean this is tuning into kind of like ethereum research calls uh I didn't know that like funds were at this level of analysis and uh I don't know it just maybe you were doing this before and we

just didn't see it but it really feels like one River has kind of leveled up its game and we're curious about that yeah um yeah maybe I look dumb but I'm not that dumb you know if we're going to get into if we're if we're going to Aspire to be the leading institutional asset manager in digital assets um it's not because we're just you're not playing around here like it's like hey you know the feds hiking rates so we should be short Bitcoin um I think uh or vice versa you know so um but yeah so I mean we built out an amazing team um under uh you know under Marcel um uh kazumovich who's Deputy CIO and

head of head of research and um you know he was um I've known him I knew him for 10 years I I I've always wanted to work with Marcel he was the chief strategist for George Soros by the way through the 08 crisis and helped help Soros um I mean he worked directly he was George's Chief strategist personally and you know helped that organization navigate to a very positive uh outcome through that period and um his first crypto investment was I think he bought Bitcoin you know 20 13 20 you know 2014 something like that when he was doing some work with the IMF um about the nature of money and no one wanted to talk about no one wanted to

look at crypto and Marcel is incredibly curious human being and he just raised his hand he's like I'll look at that and and he looked at it long enough to say I should buy some so um you know he's he's pretty uh he's an incredible intellect and he's built out you know a team that um that that does deep work in you know in all these assets um we're also building out you know we're we've taken we are taking um so you talked about D5 and you talked a little about regulation through code which I think is um I think is a really nice way of looking at it and an accurate way of looking at it any any you know kind of something that's really unique in this

time in history because that kind of wasn't that was never possible before so it so stuff like that is is just fantastic from my perspective um I think our our perspective on D5 is that while that statement that you made is true that the challenge for Crypt for these markets will be that they still need to operate in a world where anti-money laundering and Bad actors and fraudsters you know where their lives are made difficult it's not that you can't stop all of that because you never can um but but it anyway so I think the defy while it is regulated by you know by code uh

right now I think that it's going to have to figure out how how to be accepted by Across the the real develop market so all the developed jurisdictions so I'm not talking about you know some African or um South American country that just you know doesn't have great rule of law and or Iran or something I'm talking about you know the real the the parts of the world is yeah I think that they're um I think the combination of what you said together with some type of way of identifying the the users of these protocols um is going to unlock the true um promise of these Technologies and so our V our strong view is that that is going

to happen and so when we looked at defy early on which we obviously did um and I told you that we avoided it we avoid it for a couple reasons one um one one of them was the like the returns relative the risks just were insufficient from our perspective but also our view is that um because there isn't good AML kyc where there isn't AML in a lot of these protocols our investors may end up with some type of medium to long-term liability probably wouldn't be high and we as as an asset manager might have some liability for having participated in activities where we knew that you

know North Korea could have been on the other side of a trade and uh or you know whoever it might be and so but what we did do is and what our team here does do is really understand what is happening in this space um much more so than I do on a on a you know I didn't write that report that you just described I read it but I didn't write it um and you know our view is that if we can take these Technologies and we can adapt them to traditional financial markets and assets and we can do it in a way that's consistent with what we think the regulatory regime will require in the US in Europe and Canada and you know all these various places then

I think we will have participated in and we will have done something I'd be very proud of which is to kind of Advance these Technologies and integrate them with traditional Finance in ways where they really get used at scale and so we don't end up with you know with a big Wall Street Bank that that you know creates its own blockchain system that's this closed system and you know I I by the way that might happen and I that's not what I would like to see happen and I think it would be uh you know it would be a real compromise on the promise of these Technologies so anyway um that's you know when it comes to to defy that's that's what we're doing there it's it's pretty I mean it's it's

fun but it requires us to really understand and know everything that's going on there so we're not just doing that work to understand investing in the specific tokens but we we feel like there there shouldn't be a firm out there that is more knowledgeable about this entire space than us there just shouldn't be maybe there is I don't who it is by the way but there shouldn't be and um you know but by the way when we made our first um investments in November 2020 what I just said was unambiguously not true you know like we were not the most knowledgeable but we're you know we're pretty darn knowledgeable now I I feel the level level up there must be a lot of uh listening to the bankless podcasts or at the one River offices uh yeah I hope yeah you should come you should yeah

yeah Sean martinek is is uh he's he's a amazing uh if he hadn't written that piece it was you know he and Marcel probably jointly authored it but you should definitely speak with uh Sean as well he's he's amazing well Ryan was uh going for the punch line that I was trying to get out of you but the question I was gonna ask is uh like when it gives me faith that some some big institution can hire a team and charge that team with hey go understand crypto go learn about it and then fast forward after you know learning and writing reports you get a report on blob space but I could have totally expected a report on IBM hyperledger or how Terra Luna is fundamentally sustainable or

something like that get sidetracked when they go down the crypto rabbit holes uh and so to to see a report coming out about blob space and how that means like data ethereum's got this new data structure is like it's really encouraging and I'm I'm how do you how do you know because a lot of people get lost along the way of trying to write reports about crypto because that's their it's their job to write a report and so like their boss charges them with writing report and so they go find something interesting and then they see that this Terra Luna ecosystem has a bunch of like energy around it and so they write a report on that and they just want to make a report on what their boss wants to hear which is that this thing is totally gonna work and so they

write a report on that like how do you not fall into that trap and how do you actually come out with a very detailed report on polynomials and block blobs base um uh first of all you you bring people on a team that are a lot smarter than you that's that's rule number one um and then hopefully you set the the example of um of being uh just deeply curious you know that as a and I think it's easier for an asset manager to do that by the way rather than a research company because you know to your point it's like go write a report on this um there's no um there's just less skin in the game um and for you know people who are charged whether they're on the sell side

in Wall Street or just in a research from and which is not to say that those people into terrific research it's just that I think as an asset manager it's kind of in in our blood that if we're going to write something up about something we kind of own it reputationally and um we might even invest in it or we might think about how to adapt that technology as something we're working on and so um that's it and uh you know we one of the things that we did that I am proud of is that when you enter this space we wanted to bring the the best Partners uh you know Equity Partners into the firm and with so coinbase LED that investment round they've been

amazing Partners Goldman was invested Liberty Mutual Insurance you know um offra which is some ultimately Kuwaiti money um their pension system like and and infinity we brought some really wonderful investors on board and I think um that you know they have been curious to see how like how we're going to look at this space as well and you know kind of the approach that I took was okay we're going to be in this for the long run so we're going to raise a lot of money so we raised it you know very nice chunk of equity Capital so that we would be fundamentally sound even in a crypto winner which is not to

say anticipated the depth of this decline but I knew that we're going to be even if we don't you know even if institutions don't come as fast as we hope that they do we're going to be fine and then we're just going to get really really smart at this and we're going to start developing and um and that has been you know that has been a really important thing and when you can when you have that longer term Horizon you can also just not rush into hiring people really fast so there's this temptation I was looking around actually when we were speaking last there were all these firms that were doing these huge raises at silly valuations and I I was looking at them going what are you even using that money for does this doesn't even make any sense to me whatsoever and

I think we discovered what a lot of them use that money for it's just in you know lending money to bitcoin Miners and you know now they're all over leveraged and trouble and all the rest of it and they they hire way too many people and they've had to lay off staff we haven't you know we haven't laid off a single person here and and I I say that um we would if they weren't terrific but we hired slowly we hired the right people and I and I I've learned long enough that if you don't have really deeply curious people on your team who are introspective why even why even bother you're not gonna you know maybe you succeed for a little while but you're not going to really succeed so we kind of lined all of those things up and I think that you know the key thing is

just get it ultimately it's a very long answer your question but it's like you have to get the right people in the right culture and and that was what was most important to me so I think I'm I am really we hear from a lot of um a lot of people that that we put out the best research in uh in this space now and uh and they're you know those are great investors that read a lot so I'm I'm very proud of the team for that I'm not taking plans for it by the way but I'm very proud uh you know across the team you can pass along our Kudos as well like we read a lot of a lot of stuff and that when I was I was only skimming it now good that's a compliment thank you yeah I want to uh Circle back I think we

skipped over to the this the answer to this question is I want to go back there one more time just more more precise exposure to create the crypto asset World Beyond just like buying the Blue Chips Bitcoin and ether has anything developed in the last year that institutions really like as a strategy to getting exposure to crypto so we're um we've launched a trend following fund so Trend following is uh is a strategy that we um it's an important strategy for our Alternatives Farm which is essentially you know um buying when something's going up and selling it short when it's going down um and uh trying to do that over a broad swath of markets um there's definitely been interest in that because um rightly because it allows you to

capitalize on on some upside um albeit more muted and but also capitalize or at least at a minimum get out of the way on the so on the downside so that's an example of um that's really focused on bitcoin and Heath although for certain clients I think will broaden it out just there's there's not a lot of liquidity on the short side in some of these smaller tokens as you guys know um and so there's certain constraints there but I think over time Trend following in this space just like it is in alternative assets uh asset management is a huge you know it's probably 20 of the hedge fund industry maybe 25 so somewhere in that zone so I'm talking about a ton of money um and I think that that will apply to

to these assets as well and then for those investors who are investing in that they're like look we invest in systematic Trend following in our core asset allocation and so maybe adding some digital assets would be an interesting diversifier there which which it is um we we've had a lot of discussions about distressed credits so when we were all speaking last I had brought um I had brought a fellow by the name of Doug Wilson who is um the one of the most knowledgeable people I know in energy markets both in the markets themselves but also direct investing in them kind of taking energy companies through bankruptcy he's lived through tons of well tons multiple Cycles he's not as old as I am but he's

you know he's somewhere between you guys and and I and um I brought him on to just understand everything there was about Bitcoin mining because I figured if we don't unders that's just foundational it's kind of like how do you invest in asset markets without understanding fed policy how do you know like you need to understand the right foundational pillars for any Market to really understand it and so he came in he looked at it um he it was pretty cool he's like let's just go and buy some miners we bought them I think we paid the absolute High I don't know maybe we paid 17 grand or 19 Grand and you know shipped them from China or somewhere and we you know

we plugged him and everything and they're like okay Doug said well let's let's just let's send these to someone um who can disassemble them and tell us what what it actually costs to make one of these and I think the number was something like 15 or 1700 bucks and then he read a he read an Intel uh report that kind of had hinted that Intel is going to get into space and break the duopoly and so he he came to me he's like okay so here's here's mining mining is basically Bitcoin mining is is going to be a Shale gas boom bust and we're in the boom right now and this thing is going to unravel in in like historic proportions because unlike unlike uh not gas and Shale gas those guys at least

were forward hedging their their production in this case the miners are actually holding on bitcoin because they're expecting to go up and so you know that it's been a market that um we we've talked to everyone and Doug is Doug and his team have talked to everyone in the space we're looking at all sorts of different distressed deals right now there's some really attractive returns I think some big institutions could even ultimately invest in mining facilities where they create some of their own Bitcoin as opposed to buying it and then hold that on their own balance sheet as a way to accumulate you know cheap ass cheap digital assets so those are the things that um uh that that we're seeing I think away from from our strategies

um I think they'll you know they'll continue to be money that goes into Venture although a ton of money's already gone in and so I don't know that they need any more money they seem like they have plenty of commitments and then trading strategies you know Brevin um Brevin Howard has a 25 uh passive stake in our firm um and they're a you know they have a terrific digital um business and and fund and I think there'll be investors who probably invest in that multi-manager kind of higher frequency trading approach or however they Define their their strategies not just that I think it's a really a good investment product but I think there'll be investors who do some of that kind of stuff some Trend stuff some you know distressed credit and then the ones who invest in um in uh our index so you know that

there I think investing in a well-structured index that you know dodged Luna dodged ftt for instance is a pretty attractive proposition for a firm that's taking an agnostic view to how this is going to play out they're not Bitcoin maximalists they don't necessarily think eth is going to take over the world but they think that these technologies will lead to a lot of value creation having a dynamically managed index which means that its composition changes over time will just mean that if they make an allocation to that they're going to participate in the thing that really takes off if it's something that's very obscure right now or not even public in a way so those are those are the interests right now the really smart way to tackle this Market I think yeah the the investor in me thinks that

that's a really fun job actually to be able to manage a portfolio that captures all of crypto yet still manages to miss the unsustainable stuff like Tara Luna that's that sounds pretty fun Eric as we uh wrap up to a close here of course all of an Institutional appetite into crypto is really going to determine be determined by macro macro macro macro is kind of the uh the dominating uh it's in everyone's brains really we've all learned in 2022 how important fed interest rates in macro the macro environment really is and I'm wondering just overall what what is your take on the macro outlook for 2023 and how important is is the macro story as it relates to investor appetite and crypto assets I'm wondering if you could just

uh as we wrap up this conversation typo on this with the macro conversation sure uh you know last year was historic right in terms of the scale and pace of of that tightening we walked into the beginning of the year and very little is priced in and then we you know we finished the year and it was just an extraordinary cycle I'm not surprised you yeah I mean I thought rates were going higher for sure um the pace was uh yeah I I didn't expect it to be that hot actually I'll tell you um stories are always a little bit more fun let me tell you a story because this will encapsulate the mac review as well so probably sometime shortly after last time we spoke I was at one of these um

CIO dinners and uh I was the I think I was the only CIO at the dinner there were probably eight of us that wasn't a billionaire um which I'm not ashamed to say but you know whatever yeah like give you a sense for the crowd right and so um I naturally was I was probably invited by the way uh because you know I was the one who'd made the most obvious commitment to these assets so um one of the total Legends in our industry uh took it upon himself to um be I would say verbally abusive but like we we took each other on over our views which I'm I tend to do I you know I don't really like sucking up um and and uh even if other if other people kind of can't help themselves out I'm like what

what's the point of going to a dinner if we're not going to really kind of you know talk about anything so right exactly so anyway so we spent the whole dinner it you know really combative and you know most of these guys really were um unknowledgeable about these Technologies these assets Etc and they you know and they don't need to be I mean they're like they got nothing to worry about they their businesses are amazing they're running huge amounts of money and they've been incredibly successful and they're kind of like if if it gets big enough and I have to worry about it I'll worry about it later I'll hire the right people or I'll acquire the right teams but we get to the um so this The Legend who was kind of the the grandfather around the

patriarch of the table um so I thought he was really anti my position and my position was look I think that the policy makers have made a proactive choice to debase the dollar and unburden themselves from these huge debts that we've incurred as a society and the entitlements that we have promised to our elderly and it's not that inflation solves all those things it's that coming to terms with those two things the entitlements and the debt while rebalancing the economy so that it can be dynamic again is extremely difficult and you're definitely not going to get there through austerity you're not going to get there through tightening and

putting the screws on and creating a depression you're only going to get there through some combination of monetary basement debasement slash inflation which means running high levels of nominal GDP for a long period of time with lower interest rates so that you know the real interest rate is essentially negative and you're just going to pray for Innovation and that Innovation could be um it could be AI it could be nuclear fusion nuclear fusion is not around the corner AI is kind of creeping up pretty fast so like as a policy maker you're just praying for human Innovation because that's not coming from government directly it might be supported by government but that's that's my position and so I was like look I think that the decisions already been made I agree that there will be a

rate hike cycle but it's it's we're not going back to the years of two percent forever inflation okay like that just is not I'm telling you the the the probability of that is is de minimis and and the choice has been made and so they will okay they'll hike but they're not they're not going to get they're not gonna drive us into depression to kind of reset the system at two percent because the two percent doesn't work anymore right that's that's why we got ourselves in that in this position where post code you had to put all this money and yeah do all this QE because we were out of balance right so so anyway that had been my position and so this guy had taken issue with like everything that I was saying more or less and then at the

end of the day it's like okay so they kind of stopped conversations Okay so so let me just make a prediction here okay if Eric doesn't get stopped out he's making all the money like that's what's gonna happen so he's like the FED is going to hike it is going to be more than you think because every fed Governor that we speak with you know is his signal that they're deeply uncomfortable with how loose policy is so these guys are going to hike rates okay and then the economy is going to slow down and Eric is right like there is no there's no way out of this smoothly so it either they will overdo it and they'll then we'll have to have a huge stimulus or you know they'll they'll come up with something different but

then they'll start easing again and so I think that that's really the I think that that's the right lens through which to look at this I don't know if I will make all the money everyone around there is gonna do around the table is going to be very very well off for many generations um but I do think that the framework of thinking that it's like look we had to get through the typing cycle and then we're not done with the tightening cycle I think what we heard from Powell today was that we're now moving to 25 basis points maybe he'll skip a meeting here or there depends on what happens um but I think crypto you're already starting to see the you know the foot that's been on on crypto's neck just kind of eased off as we're getting toward the latter part of this this

tightening cycle so I think this will be a transition year there are a whole range of of wild cards there always are I mean like Ukraine hasn't been settled China reopening hasn't been settled I think they're you know there are we haven't yet seen what investors do when they start getting nervous about stocks if they do by the way and they they look at you know short-term interest rates that are really high and then maybe they Park their money there so there are a lot of things that could happen here but I think um I think everything moves in a cycle and we talked about maybe it's a good good place to end on Cadence like we're at that stage in terms of the Cadence where not only we've got through all the kind of crypto specific problems but we're we're through the the really

dramatic rate hike part of the cycle and uh I think I think things are more favorable I don't know that that necessarily means that we're right back to a big bull market I kind of open-minded to anything because I think Cadence wise we've done an incredible amount of work to get people to utterly capitulate in this market so it could be you know like it we could be in a in a sustainable market now um so most of the tightening has been done there still might be some ahead but most of it's been done even in that world we're not returning to a two percent inflation rate we can expect more kind of debasement over over this decade and we'll see this in various forms stimulus maybe maybe other sorts

of forms that's your base case for the 2020s yeah absolutely I think well I think in a decade when we're all um when uh you guys still won't even well you'll be more than half much but like you know in a decade um when we're having this conversation again I think um when you you look at the CPI index it will be a lot it will it will have moved at a pace that's um that's well in excess of it's historical you know one half two percent kind of grind so the Dollar's always depreciating right I mean we are there is for as long as we've had the dollar there has been monetary debasement the only thing we're talking about is the pace at which it is debased and so and by the way

sometimes people use that term in a derogatory way I don't I'm just it's just a it's like I don't know the sky's blue the dollar goes down over time it's just how the system works it kind of lubricates everything it's fine there are periods in history where it goes down at a faster rate than other periods in history hopefully it doesn't come completely unwind I think what what happened this past year was the central banks looked at it and they just said oh my God if we don't do something we could actually have a hyperinflation we have to regain some credibility so they've been working hard to do that but like they're not they are not going to throw us into you are not going to solve the economic challenges that that this country is faced with with our debt our

need to invest in things like green energy sustainability you know reassuring our Industries rebuilding our military by the way like our I was just looking at today our um our interest payments this year are basically the equivalent they're forecasted by the CBO or the treasury to be equivalent to our defense spending like so we you know and and that money we're not going to get out of those debt payments through austerity we're gonna we're going to have budget deficits that accommodate all of that money that needs to be paid an interest on our debt which keeps going up and like that that's how you just you keep getting more and more money into the system so I think that that will be the story of this decade that's the the big big theme of this

decade and historically when governments have done that there's been a lot of volatility because you don't like you don't go from this two percent Flat Line too it's like okay now we're just going to go to we're going to pretend we want to but we're going to accept two and a half and it's just gonna be like that it's it's like it's all over the place um so that I think that's it'll be really exciting I think it'll be great for crypto ultimately and um and there'll be lots of lessons Ryan for um for all of us trading and uh all of your listeners you know punting around in markets because it'll it'll you know it's gonna be tricky but it'll be fun a lot of ups and downs debasement is the base case and uh I hope you told the billionaires sitting around that

that table all about the story of crypto and the and the work that you're doing I'd love to sit in one of those conversations and hear what they really think about it um as always Eric this has uh been so much fun getting you on uh on Bank listen and regrouping it's always nice to talk to someone from uh Greenwich there you guys do such great work I I uh I love listening to uh to to your pieces I I enjoyed your uh your kind of top 10 ideas um recently and uh yeah I mean there's just so you just you're gonna have you're gonna have years or long on time of all sorts of new interesting things to talk about so um thanks for all the good work there was a time Eric when I was worried Dave and I wouldn't have enough content for a podcast on a weekly

basis that was the first thing Ryan you loved me when I said Ryan we need to start a podcast he's like what are we gonna talk about I've got about five episodes in here and then what and here we are so I I have the 400 episodes in yeah yeah when I started writing I started writing my weekly piece uh in 2010 and I remember sometime later that year being like I literally I'm out of life experiences to kind of talk about and triangulate and I there's you know but yeah stuff just comes up man it's good that's good it becomes a compulsion and addiction maybe that's the the stage uh David and I are in with podcasting but uh Eric it's been a lot of fun thanks for joining us thank you action items for you bankless station Nation you can listen to our last episode with

Eric this is episode 89 why institutions are bullish uh go catch that back in the archives also we'll include a link in the show notes to one Rivers digital assets research section on their website that's where I was talking about some of the material that uh that we mentioned this call of course gotta end like this none of this has been Financial advice how dare you think it is uh crypto is risky as always so is Heath so is Bitcoin you could lose what you put in but we are headed west this is the frontier it's not for everyone but we're glad you're with us on the bank list Journey thanks a lot hey we enjoyed the video if you did inkless HQ right now to develop your crypto investing skills and learn how to free yourself from Banks and gain your

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