The AI Rally Keeps Growing, While Circle Reinvents Crypto

Transcript

Hello everybody. Welcome to Bits and Bits, where we explore [music] how crypto and macro collide one basis point at a time. Today we're here to discuss the latest stories in the worlds of both crypto and macro. But before we begin, a quick commercial break. >> If you've been loving Bits and Bibs, [music] don't forget that the show is transitioning to its own feats on X, YouTube, and your favorite podcast player. If you're not [music] already subscribed to Bits and Bips on its own channels, go there now and hit that subscribe button so you can keep up with our twice weekly [music] live streams and macro meets crypto breakdowns. Bits and Biss will only be on the Unchained feed for a few more weeks, so subscribe [music] today to be ready for launch.

You can get all the links at Unchainedcrypto.com/bitsandbs. >> All right, everybody. As always, I am your host Austin Campbell, high scholar of zero knowledge group. Here with my co-hosts Ram Alawalia, maester of wealth, leader of Lumida, and Chris Perkins, the golden hand of 250 digital asset management. So today, given where the market has gone, we're going to start with the Iran ceasefire wobbling but not yet completely falling down.

Where did things stand? On Sunday, President Trump said Iran's response to the US peace proposal is quote totally unacceptable and says the ceasefire is quote on massive life support. This is day 73 of sparring between these two nations. Israel hit Lebanon overnight. Iran's IRGC warned the US against further ship attacks. And Thran's counter via Pakistan was ending the war on all fronts, Lebanon included. recognize Iran's sovereignty over Hormuz, release frozen assets, lift sanctions, and provide compensation for damages. As a backdrop, Operation Project Freedom was paused May 6th after

great progress, quotes. Uh, six small Iranian boats were blown up in earlier exchanges. Overall, there have been a number of voices on this. Uh, some of the folks in the Atlantic, a left aligned publication in the US, say Trump is losing the war. The longer Hormuz stays contested, the more Iran wins by simply not collapsing. With the idea being as per Luke Groman, Iran doesn't have to beat the US militarily. They just have to beat the US Treasury market. A counterpoint to that is the current framing of Iran as running out of storage for oil. and that while oil spike scenarios still aren't priced in, the Iranians are now

apparently dumping oil or burning oil to free up storage capacity, essentially we are in a place where the bid for hard assets is the tell, but we're also in a contested war of call it market forces between the two groups. So Rahm, I want to start with you because if we're talking the economic impacts on the market, I want to ask you one, what are we seeing right now? And two, what signals are you watching to make sense of what's going on? >> Sure. Well, well, first off, just reacting to Luke's comment around uh around trying to outlast the Treasury market. That's a nothing burger. Well, here are two opposing concepts. One is

the bubble is in sovereign debt globally. There's way too much sovereign debt. Governments are spending beyond their means. At the same time, there's no better sovereign debt market than the United States. It is backed by military. The Treasury and the Federal Reserve can choose to print money if they want. There's no better place with earnings growth and productivity growth and AI. And the demographic issues we face are far less than what you see in Europe, Japan, Asia, China. So that's not it. the the debt markets are fine. Uh that's one.

Number two is this conflict trade for doesn't matter. You could even say there is no ceasefire. The US Navy just took out six boats. >> It's just messaging and positioning. The position is we're not going to escalate any further. >> But like Marco Rubio said, if you shoot at us, we'd be stupid as a country not to shoot you back and we're not a stupid country, which is a sensible policy consistent with not escalating. So I think this is remains much ado about nothing. It's a rearview view mirror kind of issue. Markets have recalibrated uh around the situation. Oil will be higher for longer. Um it's not great if you're an emerging market economy, but even emerging market countries are

rallying like South Korea is at all-time highs due to the memory bid. China has a bid now also. Um and I expect you'll see a resolution to these issues soon. Chris, what do you make of all of this? I know you keep your eye on the rates market and US markets as well. >> Look, I I think markets are very very very resilient and yes, they were shocked. Anytime there's a geopolitical event, you know, markets respond violently sometimes and they bounce back and then ultimately you find this stasis. I feel like the the near right now the impact the day-to-day impact of what's going on in the street of Hormuse is kind of moving back back in the queue

a little bit as other market forces take over and are driving our markets higher. Uh what are some of those forces? Like I'm I can't I was at Milkin last week and and I can't understate the amount of optimism there is around the stimulus that's going to go into building data centers across you know blue ship work blue collar workers etc like across the board there is a race uh the capex that we're seeing what 800 900 billion this year it's not going to zero next year this is going to result in more and more stimulus um that's kind of offsetting whatever noise effectively it is around Hormuse and and markets are shrugging off um oil markets right now despite the fact that energy is going to be at an

all-time premium. So very resilient markets, very resilient crypto markets. What I'm looking at right now is is uh the upcoming summit in China with with Trump and all this stuff is going to kind of come together. I think Rahm and I we disagree. I think you believe that China is actually coming out on top with everything going on in Hormus. I think that China is realizing that they're materially exposed in the energy markets and the US kind of has I don't want to say a trump card uh no pun intended but they've identified a very critical vulnerability for uh the Chinese economy um with with the oil that and and yes ultimately energy markets will rewire but I don't think China's in a good spot right now uh because the US is sitting

on all that oil coming out of Hormuz uh and I think Trump is going in there I think feeling uh like he has some leverage Um, and he's also bringing a whole bunch of American business men and women to try to do deals. And so the good news there is that all focus is back on stimulation, stimulating the economy, getting deals done, the economy, the economy, even trying to appeal to the onshore economy by bringing American um, business folks into that region, which is traditionally brutal to operate in. I don't know if you guys have ever done business in China, but as an American businessman, when I used to go into China, like it's very very hard to make money. It's very hard to open up those markets, you know, after everything you have to do to

establish an onshore presence. So, that'll be interesting to see see what comes out of there. Um, but markets remain resilient, crypto remains resilient. Um, and the institutionalization that we're seeing across the board, I mean, all of us are all dressed up today. Like, it's institutional era, right? >> Yeah. I'll tweak. I'll say Sencom turned the corner when they initiated the blockade like we've talked about. >> Yeah. >> Up until now it was incoherent and China was trying to broker peace deals. Putin was trying to broker peace deals. Chinese tankers were leaking through that since that moment by SenCom which we talked about which I also said was like that was that move made a lot of sense. Now China is on its back heels and now like things are looking pretty

good for the United States. I mean, IRGC took over a tanker this weekend, except it was a Chinese tanker. I mean, you can't make it up. They got the wrong tanker. Like, what's going on here? Theatrics. Like, what's what is this? >> Yeah. So, I think she's going to probably put some pressure on Trump and be like, "Dude, like, we got to we got to solve this thing." Trump's going to say, "We got to get the the enriched uranium out. Like, we can't have a nuclear armed Iran. It ain't going to happen." And if I learned anything through all this is that I agree. uh if the Iranians had nuclear weapons right now, it would be a completely different show and a much d it would it would be much more dangerous. So like I appreciate that as you know the mission that needs to be accomplished. We're not

there yet and I'm hopeful that maybe uh coming out of out of the summit with China we can thread the needle and find a way to to to mitigate that threat. >> I wonder what the ask is of China. Like at the very least I'd say China's ambitions to retake Taiwan in the next three to five years are moot between looking at what's happening in the Straight of Hormuz and the ineffectuality of the IRGC and that Russia has now reportedly lost at least 350,000 soldiers and US sanctions power still effective.

So, you know, what's the ask is going to be, hey, stop the industrial espionage, stop cyber attacks. They'll keep doing that anyway. Um, you know, maybe there's some negotiation around around tariffs, I suppose, you know, but but Trump is in consiliation mode. He's talking about buying stocks today and he's looking at a bsentennial coming up. >> So, he wants conflicts to bed. He wants to project order also going into midterms. I don't think he's trying to make a new fight with China.

>> No, I I think midterms are in focus. The 250 anniversaries in focus. Those those coincide nicely for him. I just got invited for my to my first party in DC uh this week. I mean, it's going to be quite a lot of fanfare uh as this comes to pass. But you're right, China is um they're in a tough spot. Uh Xi Jinping has gutted his military uh leadership. Uh the one guy who had combat experience is no longer there. And prior to that, they thought they would be capable, the PLA would be capable invading Twilight in 27. Now with some of the challenges around energy, um not to mention our US submarine forces showing that it's uh it's still in business. U it's it's

tough. Um, so he's probably going to want, you know, if I'm him, I I do the calculus and say, you know what, maybe I can get this guy to do a deal and, you know, we can we can accomplish many of our objectives without violence and force. And what does he want in return? Um, that's probably what they're thinking about. I would also say as we're looking at the geopolitical landscape, Rahm, to your point about the blockade, it's not just the physical blockade that's happening, but you know, Treasury Secretary Bessant has been talking about this, but the efforts of the US Treasury to run a financial blockade have been increasing.

I think it has escaped the notice of the news so far, but Fininsen just issued updated guidance today on all the things they're doing to detect like front companies and sanction evasion by the Iranians that they've been learning in real time throughout this conflict. And if you look through there, it's a litany of two different things. One is front companies being used to disguise shipping activities as people are trying to run a shadow fleet to get oil out of Iran. part of why we now have a physical blockade. And the other one is front companies being used to disguise digital asset activity and the Iranians using digital assets to try to evade sanctions so that they can get money into the country and out of the country. And it

is very clear that the US in conjunction with the physical blockade is now attempting to run a monetary blockade on Iran as they're choking down on all these financing sources. So I think one of the leverage points because this comes into play with China as well. China wants to buy oil including from Iran and they want to do so at non-elevated prices. If the United States is willing to just keep their boot on the neck of the Iranians that is now something that Trump has created as leverage that he can trade with the Chinese in addition to Chris exactly as you said we need the uranium out of Iran. We need the ability to ensure security in the region. The other thing

that really caught my eye about the Iranian demands, back to why I'm looking at the market implications of this and thinking we're going to remain and call it moderately higher for longer with oil, is the idea that we can recognize sovereignty for the Iranians over the Strait of Hormuz is not something that their neighbors are cool with anymore. Like that is not just the United States and Iran bilaterally negotiating, right? like the Saudis, the UAE, the Iraqis, the Omanis, everybody is going to have views here after what just happened. And by the way, shooting missiles at your cartel members is not a great way to preserve a cartel. So, I think one of the other things I'm looking at with markets and Rahm, you're leading to something I

wanted to ask you is I think the median view is that this conflict will not be fully resolved for a while and yet the market is ripping anyways. So, I want to ask you, what is it about the animal spirits and sentiment change that's leading things to run this hard? >> It's just AI. The entire market is explained by AI. AI pixel shovels, AI infrastructure, names like Micron and SanDisk and CN and Lumenum and industrials linked to it. That's it.

It's been extraordinary. The movement you've seen like Micron which is doing a 10x in public markets as a large cap security is unprecedented. It's extraordinary. And you can make the argument that Micron is still cheap at a Ford P of eight times. And South Korea also has been running. That's it. It's like uh you know you've seen those movies where the tsunamis is coming all the water drains from the beach and you can walk deeper into the into the ocean. That's what's happening.

It is it is really extraordinary. The last time I saw this was when Nvidia rerated in May through July of 2024. The capital is just flowing from everywhere else, doesn't matter what else into this theme. and you've got record call option activity, record 3x levered ETF activity and uh yeah, it's it's a truly extraordinary market phenomena that we're seeing overall. I mean, look, it's a bull market. That's the main takeaway.

Like what matters? It's a bull market. That's the main takeaway. And it's creating opportunities elsewhere in the market, too. The main risk you have is whipsaw risk, right? And everyone has anxiety, right? If you own semiconductors, you say, "Am I supposed to sell now because I went up 80% in three months? Or if I don't own it, do I buy now because nothing's working except AI?" It's max anxiety, max frustration, max FOMO, max fear. You know, the the market's an extraordinary animal here and it is just put everyone in a vice with this with this semiconductor rally. Semis are now 18% of the S&P. It's never been higher as a

market cap. >> The last time we had this record was 11% in 2014. >> Well, all right. So, this leads me to two schools of thought that I've been watching. One, I'll phrase it this way because this goes around on uh Twitter as a quote sometimes is not enough people are emotionally prepared for this not to be a bubble. Right? We'll put that on one side. [snorts] On the other side, the last time we saw price action like this concentrated in a single sector in the United States was probably 2000. And we all know how that ended. So Chris Rahm was talking. I'm going to throw this one to you. If you had to pick between one of those two archetypes, which one are you?

>> It's not the same. Um, you know, back back in the crisis, we were making bubbles were being made about things without utility. It was um engineering on top of engineering. Um I mean I was there and there was just a lot of just I guess I see more fundamentals here and I see more fundamental innovation here. AI is changing our civilization as we know it. It's unlocking democratization of knowledge. It's it's going to facilitate new innovations across every single discipline. So, so there's real fundamental value here and there is an absolute arms race and again we're seeing the United States take the lead

again which is which is another reason why we're outperforming not only with AI we're outperforming with energy and everything else and it's all correlated but like all things in markets you end up going to extremes at a certain point I don't know where we are in that cycle just yet we will go to an extreme there will be it will pop like we had the same thing with the dot bubble where man this is amazing technology it's going to change the world. And it did. Like look at us now. Look at us now. But near-term it did hit a bubble. Look, I I I still think that you I still personally think we're on the trajectory up because the amount of investment that's going into infrastructure and and and we're still coming up with new innovation after new innovation uh in real time. So I don't

think we're through it yet. >> This is not a bubble. See a lot of people talking about this. It's it's also very clearly not a bubble. just the anxiety. We're not going to live through the docom era because people have lived through the era that are still managing money today. Also, markets markets learn like the valuations in the docom era were truly nutty. Like the globe.com went public and on the IPO day went up 600% in a day. There were companies like Geio Cities that went public. The bankers didn't know they were taking public. There's stories around that. and JP Morgan. Um, yeah, these are real businesses and you don't have the dark

fiber issues of the dotcom era. So you could say GPUs of the dark fiber now. It's like the the analogy. The difference is back then the dark fiber is being so overinvestment by telecom and ventureback startups. Here [snorts] are the primary spender are the most profitable companies in the world. Number one, two increasingly governments. And those profitable companies are showing a return on that through their cloud business. Like Google's cloud business grew 60%. Microsoft's cloud business grew 40%. So they're making money on that. There are counterparty questions around open AI, but Meta just assumed a a contract. They stepped in there say, "Hey, we'll take

that data center lease." So the demand for compute is so high uh that it's hard to see how you see the capex cycle breaking down anytime soon. >> Yeah. The other thing I think we're in an interesting era now because of the lack of regulation. It allows for innovators and startups to jump in. Uh but you're starting to hear more and more about regulation. I think that those scared a bunch of people. Um, and to the extent that we start seeing regulation in the future, maybe not this administration, but the next, who knows, it's going to be a huge consolidation force where in my experience, once you have a regulation, the big are already really big. The big are going to get even bigger and there's going to be even

more consolidation. So, I'm hopeful now that we see a couple of these startups bust through uh before they're they're absolutely put out of business through that fixed cost of sorry guys, you have a new model, you have to get it approved. Oh, but mine's already approved because I, you know, I've been doing it for five years. Um, that's what I'm working on. >> I know Chris, you were on the venture side probably your current role. Uh, maybe doing venture now here, too. But here's a fun fact for you. There are 63 unicorn AI labs, billion-dollar valuations, like thinking machines, founded by the former CTO of OpenAI.

Ilia's got one. None of them make a penny of revenue. >> So, there is a bubble. It's just in private markets. Public market investors have exercised far more discipline. And yes, in public markets, there are issues too. Like Caterpillar is not worth 35 times earnings, right? It's private markets. That's where the bubble is. Um the other fun fact for you is that the number of these LLMs that are in Europe is zero. It's zero. I'm trying to ask like which is a scarier fact that we have 63 unicorns that don't make any money and not have penny revenue or that Europe has none.

I'd rather live in the former. I'd rather have the the innovation born by venture capital investors that are subsidizing the public good for everybody else. Hopefully they'll make money on that. I doubt it. >> Amazon didn't make money till it did either. Right. Well, another theme from 2000 though and actually one we've talked about with blockchains before too is that the value may be large but are we attributing value acrruel to the right people because Rahm to your point open AI may be stepping away from contracts. We may have a number of model companies that are currently unicorns that don't have clear pathways to revenue but that doesn't mean they're not creating value.

It may just be that they're not creating value for their shareholders. They're clearly creating value for Nvidia, for Intel, for Micron, for SanDisk. And they may also be be creating value for the people who are going to distribute those things like the Apples of the world. They're creating value for Google and Microsoft and their cloud businesses. So to me, I think you've got to ask two separate questions investing in this market. Question one is where is the value creation overall? Is AI writ large a bubble? Do we have the right number in aggregate? But number two is then have we allocated this correctly? Like is it in the right companies? And I will tell you I am much more skeptical of number two than I am of number one. If that

makes sense. >> Yeah. Yeah. The capital is going to capex receivers as capex payers and their capex. That's the dividing line. >> The capex payers, these cash flush companies and and governments and the capex receivers, they're the semiconductor uh complex. So they're they're the they're the winners. But that'll shift too like at you know it's 18% of the S&P now. Usually when you start to see headlines like that it's time to look in other pastures. You know when technologies share uh of the S&P hit its level in 2021 and Q4 that was at the same time that was exact same time to rotate.

>> Yeah. So, and there are significant bargains elsewhere and you haven't seen the AI enablement layer really activate or get rewarded yet, right? You're going to need you're going to need companies like the Axenturers, these consulting companies to deploy their their professional services arms to just integrate and retransform workflows, do the process mapping that AI can't do that you have to have highly regulated governance on these AIs. is the AI policy controls and now you just saw recently Microsoft rolled out their AI agentic solution. So they're they're coming after Claude, right? Claude is in the pole position. They leaped open AI.

Uh Microsoft has all the IP from OpenAI and they just rolled out an Agentic AI framework that has what enterprises need. They can lock down an agent. They can permission it. They can wrap a policy around it. They can, you know, the AI agent might or might not have a certain data. They can revoke it at the enterprise level. That's actually how enterprises operate. If you look back to the late 90s, first there's Netscape Navigator. We had that moment with the launch of Chat GPT a few years ago. Then Microsoft showed up at the browser a few years later. The big guys always show up later, but they don't stop. And it doesn't matter if their form factor is late or it's not as effective. They know their customer well and they're integrated well. So they have a, you

know, that's an example. There's opportunities that are still out there where I think they're still attractively priced. >> All right. So on that note, before we get on to other things that may be attractively priced, we have to take our break here. So we're going to take a quick commercial break and we'll be right back. Who in the group chat has the absolute worst sports takes? You guys, it's got to be me. I don't even watch sports unless it's a global event. But Coinbase is giving me a chance to outpredict a pro basketball coach for a share of five Bitcoin. And honestly, I'm built for this. I have beginner's luck, energy, and absolutely nothing to lose.

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offered through Coinbase Inc. and Cardless, Inc. cards issued by First Electronic Bank. Bitcoin back rates are based on card holders assets on Coinbase. So, speaking of things that may have value, let's talk about stable coins and let's specifically talk about Circle and ARC. So, today news came out about a $222 million token pre-sale at a $3 billion fully diluted valuation. A16Z was leading at 75 million. And the investor list is a roll call of tradey people. Black Rockck, Apollo, ICE, not

the ones deporting people, the parent of New York Stock Exchange, SBI, Janice, Stanchart Ventures, General Catalyst, so on and so forth. Circle is the first publicly listed company to run a token pre-sale. Uh stock is unsurprisingly up on the news. And as a reminder for people, what's ARC? ARC is an EVM compatible L1. USDC is the native gas token and the test net has been running since October 2025 with hundreds of millions of transactions and BlackRock, Visa, Goldman, AWS, even Anthropic have been testing out there. So, Arc is circle's way of owning the stack as opposed to using Ethereum and Salana for

settlement and Coinbase for distribution. So, there have been a number of voices around this. Circle is saying ARC is the economic operating system for institutional finance. Um Maxwell Albbright from B6Z says the internet infrastructure USDC runs on today wasn't built with big institutions in mind. That's where ARC comes in. And so what I want to throw to the crowd and Chris I'll start with you with all those names on the cap table. Is this going to be the institutional rail that finally works and brings people in or is this another call it private chain deadend but with better PR if nothing else?

>> Yeah, super fascinating announcement today. And if you're playing bits and bits bingo, uh we had Rahm already bash Sam Alman say nothing burger Austin talk about stable coins. I guess I got to be bullish now. Um, but I I I think that this was super interesting because all these TRA firms are investing in a token, not in private equity. That's how I read it. And what this does is it normalizes token investments and it legitimizes them as as investment activity for the for the for the TRD folks. And to do that, they have to have a lot of infrastructure. Um and and so that that that's one thing to think about, but perhaps the most interesting thing is how to think about value

acrruel going forward. This is a public company and it's now issuing a token. We haven't seen the base token yet come out of Coinbase, but you have investors, right? And typically you're out there selling your equity to investors. Now we have a public company that's selling a token to investors. And so how does the value acrruel work going forward if you are an investor token versus equity and yes as venture capitalists we do this we've done this for years and years and typically we're not you know sometimes you're like hey I don't know if it's going to acrue to the equity I don't know if it's going to acrue to the token maybe going to have warrants in one you know we'll figure it out because it could go in either direction it's such an early startup but gosh now you see a

public company company company where you have to really think about that now where do we go from here like super interesting there. I want to get Rob's take. I want to get your take, Austin. But then like you're also seeing a part of a company um monetizing itself. And if you step back for a second, you're like, "Okay, so so this public company, it's got this chain. I can buy the token. I can buy the equity." You know, where do we go from here? Are different business segments going to start issuing tokens? Are there going to be prediction markets on individual segments underneath the corporation?

Absolutely, they're going to be. I don't know when and how, but I mean, I think ultimately super bullish for crypto because you're seeing big investors coming in and buying tokens. I mean, I I've known venture capitalists for years and years. They're like can't do it only do equities. Haven't really figured out the token thing. But really want to get your your guys take on value acrruel and and how you think about this through a public equity lens. nodding my head there. Yeah, I agree. I think that's the number one question. What's the flow of the economics through these through the equity and the token? You know, it's also interesting as Circle stock went up 15%.

>> Yeah, >> it went up like something like four and a half to five billion dollar. So, as of today, it's got a free lunch on this, right? They created $3 billion of value out of issuing this thing. And then their market cap also went up. So it reminds me like in the docom era if you guys remember 3Com it had like a a subsidiary that was worth more than the hold. We're not there yet but you know what used to happen is you'd have a tracking stock and a tracking stock would represent a subsidiary of the organization and then the public markets could measure the value of subsidiary by looking at the tracking stock and then eventually they do a spin out. So that's the closest analogy to uh what we see here. Uh it's it's a big win for Circle

overall. I mean like they they were able to >> create something from nothing, get investors to back it. Uh you know, so if anytime you can pull that off, it's a win. I I I do I don't know what the flow of the economics uh looks like yet. Um we you know, is there any attachment to the stable coin revenue on this at all or just a a a wholly separate blockchain? Because as you know, Coinbase has a perpetual exclusive right >> on the stable coin revenue attached to this. I wonder I assume that's still intact. There's no there's no change there.

>> Yeah. Is Coinbase reiterated that this week or like oh yeah, we've got this contract in perpetuity in case anyone forgot. >> But like like why is this equity going up? I mean like I think if you were to step back like wait a second, they're launching a token that's that's completely going to be dilutive to to the equity. But no, the market's not saying that. Why is the market not saying that? >> All right. So, when I was looking at this, I have two potential theories around this. Theory one, because we used to see this in the dotcom bubble, is just people are wrong. You kind of have people preferring the stock who are betting the value acrruel is there and people preferring the token who are betting the value acrruel is there. And one of those two groups is wrong and

there's some sort of spread trade between these two things to pull them back to par. I think the other theory that you could have around this and Rahm you kind of alluded to this is an expectation that ARC will not remain within Circle that the idea is if this thing is going to work and become payments rails on a standalone basis it probably can't be controlled by the issuer of the payments instrument if we look at Visa as a good example I will remind everybody that original issuers of cards were spun out of other entities and then became the card networks. They did not become the card networks housed within the original entity. Discover

similar story of being spun out of something and now reacquired ironically uh by somebody else. But the idea here is if both of these valuations are correct, that has to be the market pricing future growth into ARC that is beyond what circle is currently doing, which seems to rely on an expectation of it being spun out and created into its own thing. Rahm, to your point of is this a tracking stock where they would intend to like move this thing out into the world as its own business unit. To me, that's the only way these valuations are coherent to both be going up like that.

[clears throat] >> There's no So, there's no dilution to Circle because there's no um uh economic uh claim on Circle through this kind of ARC spin-off. Uh but there's still so much more to see. Like, are blockchains back again? The interesting thing is people are more focused on this transaction, the mechanics of it, and who got involved than what the heck the thing does, right? Like what is the value? We're focused on the financial engineering. >> Yeah. >> Right. And and you know they're gonna this will be you'll see more of these. You know Chris alluded to base spin out.

So this becomes the next magic trick >> of crypto. Sailor introduc us to financial engineering. People got the bug. How can they create value out of thin air? This is what's happening now. >> Well I don't think it's value of thin air. I think there is a narrative here and and that narrative is distribution. Right? If you look at Circle, um they've been heavily reliant on Coinbase for its distribution since its inception. And maybe the market's saying, "Well, wait a second. Via Arc, there's going to be an entire new class of distribution away from Coinbase. This is how they solve and to generate that additional distribution of their core asset, which is USDC, and that value acrruel back to the equity." that that's what the

market's saying today is that this is the this is the first step in in a in a grander distribution strategy that we know circle needs. >> So it's a stable coin settlement layer. Has anyone dug into exactly like the target customers value prop how this comes together? Obviously they have their own stable coin. So they have a are they going to be Switzerland and neutral here which is what you should be if you're sediment layer or they gonna have a preference this is back to my point on why I think there may eventually be a spin-off here right now obviously it preferences USDC because you can use USDC as the gas token I have not seen and by the way ARC folks correct me if I'm wrong but I have

not seen the ability to use any other token as the gas layer on ARC so that is preferencing USDC there But Rahm, you are correct that in the long run, if you want these other big institutions to use it or it to have a shot of replacing Mastercard or Visa or even just ACL, etc., you're going to need to let people use their own stuff. Like the value prop of hey Chase, hey Bank of America, hey city, why don't you give up your entire NIM to use our fast payments chain is just not there. The answer from those people will be thanks but no thanks.

We'll keep the NIM. So again, back to why these things have been spun out. If you said, well, yeah, but what we've really got is a 247 past like fast payments infrastructure and JPM, you can put your deposit token on here. City, you can put a deposit token on here. BA, you launched a stable coin, you can put that on here, and everybody can trade those against each other and clear them in some way. Now we're talking, but that starts to look like the blockchain version of the card networks. >> Yeah. It's more competition for all the blockchains.

>> Yes. >> Where do you want to position here? It's more competition for Ethereum. It's more competition for Canton. Canton's looking at that and say, "Hey, look, we already locked up this market. We're going to use our own chain." Notably, there were no strategic investors from Wall Street in this deal. It was West Coast VCs. So, they're probably going to take a more disruptive, you know, attack angle as opposed to kind of co-opt um, you know, the intermediaries. But on the distribution, I think it's a great point. How will they, you know, Coinbase is the distribution layer for Circle right now? The people have to log in, they have to on board, convert. So, what does that look like? They're, they

have a B2B capability, of course. My old firm, Cross River, I built a crypto business there. we helped circle move money and they have a B2B sales team. I suppose they'll build that out further. So there's, you know, a lot more questions here, but you know, it's it's intriguing. You know, it's like as if Andre Horowitz woke up and kind of willed the crypto bull market back to life. They're like, how do we how do we just make something happen here? Let's call up circle. We got a new blockchain. It's a proprietary deal they just manufactured.

Well, they just raised a $2 billion fund, so there's definitely LP interest out there if if you're a 16Z. >> No community participation though, right? So, it's a if you're a retail investor, you got left out in the cold on this. Now, the move would have been own circle stock, I suppose. >> Yeah. Yeah. >> Is that it? >> Yeah. If you That's right. If you own Circle Stock, you benefited today. >> So, right. So the so the decentralized investing via the meta masks and the walls don't doesn't matter the game just in public markets. Now there's going to be I mean this is back to the point of clarity and the SEC writing the rules. There's going to be increasing convergence between

securities markets and token markets as we move forward because a lot of the existence of token markets was because they couldn't get into securities markets because of Gensler. So, I mean, on that note, let's talk about something in securities markets. So, Coinbase had a pretty rough week. Um, on Monday, they announced a 14% headcount cut, about 700 people. Um, Brian Armstrong was talking about restructuring the firm to player coaches and AI native pods, five layers max below the CEO. Allegedly, non-technical teams pushing code. But on May 7th, the Q1 print was a big miss.

394 million net loss, revenue of 1.41 billion versus 1.52 estimated earnings per share of minus a buck 49 versus 27 cents positive. Spot trading volume was down 37% quarter-over-arter. And then just to add insult to injury, there was five plus hours of offline for trading on Friday thanks to an AWS US East failure uh which Armstrong called completely unacceptable. So that was the AI pitch and then there's skepticism around it. Derek Thompson is saying, "Is Coinbase the test case? Is this a productivity revolution or just earnings pressure layoffs dressed up in AI?" Um,

people are saying Coinbase seems to have a hard dependency on AWS regardless of what their CEO is saying. And Greg Eisenberg says every public company will run this playbook in the next 12 months. Coinbase just got there first. I want to ask you guys as we start here. Um, and Chris, I'll start with you on this one. So, institutional people watch Coinbase. A lot of people use them. They do have a real business, but the cyclicality is intense just like for investment banks. So, as somebody who's seen cyclicality and seen layoffs before, do you think this is really AI or is that window dressing on just the cyclicality of the business model?

>> Yeah. Uh I guess this means that the bull market for alts is about to kick off because what we've seen is every time there's a, you know, major Coinbase layoffs, that's really the kickoff of the next cycle. So, um, no, look, I I think we're seeing this nar narrative hit all of tech and they're saying AI AI I'm going to I'm going to, you know, chop my workforce. Um, but the data is telling us that AI is actually leading to a lot of new jobs. And so maybe that you're seeing cuts here for for various reasons. Um, but you're also going to see a rewiring and I think a lot more hiring of different skill sets as we restructure companies with this new technology um, in mind. I'll also note that we've said this in the past and and I don't like to talk about individual

stocks or tokens on this show. U but what are we seeing out there? Spot businesses are are very brutal businesses. Um you saw it in Tradfi. Equities uh fees go to commissions go to zero over time. It's very very similar for uh tokens. Spot trading goes to zero. Really hard to have a business there. Derivatives, however, are much more interesting business. I'll note that, you know, Coinbase did uh acquire Derabit. Um, so that's something to watch. But when I'm going to step back and I look at the entirety of the macro picture, there are are a lot of things going in favor of some of these incumbents and it really comes down to clarity. Now, Clarity Act is coming into

effect. We think about 60some percent chance if it gets done. Um, you're going to see a lot of regulation follow. We're getting some regulation to follow either way. And my point that I made earlier today, regulation forces consolidation. Generally, the big become bigger. That that that head start that they have becomes a moat once the regulation is entrenched. And so, as we see, you know, clarity come into effect, I think incumbents, many of the incumbents, including Coinbase, stand to benefit from it. Um, because you see consolidation. Um, and look how many other folks can do what they can do across all their different business lines. I mean, years and years ago, they

were a spot business and like so credit to to Brian and team for diversifying, you know, across the board um, derivatives, custody, and everything else. So, interesting things going on. It's not the last you're going to see of it. You'll see more of it uh, as as we move forward. But again, um I still think it's a really constructive setup. Um particularly as we're looking at at the crypto space as a whole. >> Yeah, I agree. It's constructive. We're in the break and I I brought up like, hey, look, I think all season might be here, guys. So, uh I mean, a lot of opportunities that are very constructive. I mean, digital assets have held up even with memory stocks rallying. I'm not sure that Coinbase really had that brutal a week. The stock

was up 7% today. When companies cut headcount, it boosts earnings. That's the key thing. So, it's actually bullish. If you're a shareholder also, they've got recurring revenue from the circle relationship and they reiterated that it's forever. Uh they inked a good deal there. That's good. The main you know competition for Coinbase is the rise of all these ETFs and the DATs which create uh an alternative method to trade with security and they make a lot of money on transaction fees. So that that's the the bare case.

>> I don't I don't know Rob because they're making custody on the back end too. The fees on transaction fees are so much higher than on custody which is more >> they were commoditized. Yeah, >> they were >> I'm just trying to present both sides of it. >> But this this is the problem that Chris is alluding to which we've seen over and over in markets which is Morgan Stanley is coming in now with lower fees on things. Others are going to follow behind that. Spot fees trend to zero on average over time in markets and that leads to spot being profitable for two groups of people. Group number one and a good example of this business model is somebody like Schwab which is people who could actually monetize the funding like the interest rate of assets on the

platform. So Coinbase Rom to your point around the circle deal could move to something that looks more like a funding business and probably be fine. Number two is derivatives as Chris said, right? Like it's you move away from the spot market and keep the spot market to facilitate derivatives trading and then you make money on those, right? Like I will remind everybody it's ICE, the derivatives exchange that bought the New York Stock Exchange, not the other way around as we've mentioned before. And so I think either Coinbase really needs to up their game in derivatives markets or funding markets or both or the beatings will continue until stock price improves.

>> The right positioning for Coinbase is to position against Robin Hood and position as the successor to Charles Schwab and own the customer in a crossasset class holistic experience where you have your banking and your investing and payments. That is really the only correct answer. There a lot of ways to make money. Talked about several of them. But the positioning in the public markets is what's going to drive the valuation. And they already have the reach. They're securing a banking license. They're investing in the app.

So that that's the right move. [snorts] But people see it. People see it, right? I'm running after that opportunity at Lumida. I've got an app. It's already better than the Coinbase app and the Robin Hood app. don't have trading enabled. Coinbase will realize they should buy the business for under a billion while they can. Uh but that's the move that Coinbase should focus on is how do you occupy that position? How do you have a lock on the customer with an integrated product offering >> the buy or sell securities? So Chris, I know you have a hard stop at 4:30 and I'm gonna lob the ball up on the last one for you that I know you wanted to talk about, which is >> at the end of consensus. The official

Consensus Miami afterparty was held at 11, uh, Miami's Bitcoin accepting strip club with lines around the block, hours long waits, and a Bloomberg headline of crypto industry throws lap dance party in middle of bare market. Um, by the way, the North American Bitcoin Conference had an event there in 2018, which Bloomberg's original the industry has a problem piece came from. Same venue, same article, eight years apart. Somebody put a having joke in there somehow. Um, so there have been several critics here. Haley Lennon, Bitcoin Barb, Amanda Wick. Um, Kelly Kirk Boss has said it's a venue that accepts

Bitcoin and defended it. But Chris, I want to throw this to you. How does this look for the industry? Why are people doing this? And what is going on? >> Yeah. Like I feel like in crypto, we we we keep like learning these lessons from the past and it's like we ignore the lessons of of of of history. Um, like we talk about derivatives markets and yeah, I'll get to strippers in a second, but like derivatives markets, you know, people like think because you have prediction markets like the the laws of market manipulation and abuse don't apply. Well, they do. Um, I remember my first day of Lehman Brothers back in 2006, associate class. They like marshaled all the associates into this like pristine room and out comes Joe

Gregory drinking a tab. He used to drink tab. You remember that? It was weird. and and um and he's just like the first thing he said was no strippers like and I was like what the heck did I get into here like I hear I have at like Lehman Brothers and that's the first thing that they said and and like that era was back in the 80s or whatever and like in my entire career in Wall Street I don't remember once ever like you know going going near that kind of stuff because the markets matured and I feel like now we are in like this is not how you get to institutionalization and we're in an institutional era. Um, so look, I I think there's going to be a lot more due diligence amongst some of the brands

whose names were featured and my sense is is that they didn't even know in many cases that of the affiliations and they're like, "Okay, a free branding for the after hour, of course." And so I think, you know, brands brands are real. Brands are very important and I think you're going to see a lot more due diligence. This is not the first time we saw it. remember we had like s people eating sushi off off of models or something like in in uh ECC a couple years ago. >> Wasn't that wasn't that >> I don't remember. But um it's time it's it's time for the industry to grow up. Um and yeah, I I feel I feel like some of those marketers probably had a really bad day because they didn't realize what they had done.

>> Consensus just got a lot more visibility. They're that's true. they're quietly saying, "Hey, bad news is good news, but we won't do it again." Uh, I agree on Chris's points around the maturity of the industry. Um, you know, it's one thing for a sideshoot event with a protocol that uh wants to make that decision, but it it's kind of odd for consensus to make that decision, right? >> Yeah. It shouldn't have been official. I don't I don't think that I don't think it's good business, frankly. Like that's that's the point is like if you're trying to appeal to institutions, you're trying to appeal to mass market, probably not the best business decision.

Um people can do what they want to do. Um but maybe not a great business decision here. >> All right. Well, on that note, Chris, I know we got to stop. It's 4:30 for you. So for everybody, as always, thanks for joining us for this episode of Bits of Bit. We'll be back in one week to discuss more about how the worlds of crypto and macro are colliding. [music] Till then everyone, >> thank you for watching and hope you enjoyed this episode of Bits and Bips. Just remember, nothing we say here is investment advice. And please check unchanged crypto.com/bitsandbips for more [music] disclosures.

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