AI Is Winning the Capital War Against Crypto

Transcript

The black hole of AI, SpaceX, and IPOs is sucking all of the oxygen out of the room. It's just too much uncertainty for most investors. Are they going to allocate to crypto when there's a 50/50 chance of a negative regulatory shock in the next 2 months? Or are they just going to buy AI stocks that hit new all-time highs every day? As long as Micron and other AI stocks trade like memecoins with explosive unprecedented growth, I it's going to be hard to attract liquidity to crypto. If you look at the digital asset treasury companies, they've purchased half of what they did last month and then unfortunately the ETFs broke their two-month streak and now we're back to negative outflows again. Hype has done very well. Tron has

done very well. Zcash has done very well. I actually expect that will persist as people rotate in part out of the majors into these new idiosyncratic [music] areas. >> All of us who are fundamentally oriented people have been waiting for this time for for [music] many years. They're looking forward to the day when people will start looking at fundamentals and that's something that's going to drive price action more than before. >> [music] >> Nothing said on inflection point is a

recommendation to buy or sell securities, tokens or any other assets. Nor does it constitute a solicitation or offer to invest in any fund, product or financial instrument. This podcast is forformational purposes only. The views and opinions expressed by hosts and guests are their own and do not necessarily reflect the official positions or views of their respective employers or affiliates. Hosts and guests may hold positions in companies, funds, tokens, or projects discussed. Hey everyone, welcome back to Inflection Point. I'm joined as always by David, Michael, and Matt. Hey guys, how are you doing?

>> Doing okay. [laughter] >> It's brutal out there, but excited to be on the pod. >> Yeah, lovely. um like as as we're recording this, we I'm looking at the um BTC chart and we've just hit the 67K mark. We might reach below. There was this there's been this question for past for the past couple of weeks if the bottom is in and I I don't know maybe maybe those odds are looking at 50/50 right now. Um how you guys how you feeling Matt? I know you talk about this a lot.

>> Yeah. Well, I don't know if if we're going to trace below uh 60K. We'll have to see. But but the sentiment obviously is difficult in this market. I think there are a couple things going on. You know, one is the black hole of AI, SpaceX, and IPOs is sucking all of the oxygen out of the room. That's definitely a piece of it. Uh two, I think crypto is coming to grips with the fact that the Clarity Act is unlikely to pass. And so as we wait for that like moment to get past that, it's just too much uncertainty to allocate. I think crypto is becoming a contrarian investment. It used to be a momentum driven investment which sort of rides along on narrative and vibes. Now we're becoming a contrarian investment that

looks for fundamentals. Um I don't know. I think it's going to be tough sledding for a few more weeks until we get the Clarity Act uh behind us. >> That's interesting that you say that. So you think it's unlikely that clarity would pass? I I think it's I think it's possible. I think it's possible, but if you look at the polyarket odds, they're now down right right around 50%. Uh the insiders in DC that I talked to are more pessimistic than that. I was just listening to a panel where uh two insiders put the odds between 5% and 30%. Uh they seem pretty connected.

There's, you know, increasing tension between the GOP and the Trump administration. and there's continued tension between uh Democrats and the Trump administration. We're getting closer to the midterms. It's just not a spectacular lineup. It could still happen. At this point, I think it would be a positive surprise. But the more important thing is I think it's just too much uncertainty for most investors. Are they going to allocate to crypto when there's a 50-50 chance of a negative regulatory shock in the next two months? or are they just going to buy AI stocks that hit new all-time highs every day?

Uh, I think they're pushing the easy button of just buy the AI stocks, holding off on allocating new capital, and the only people who are allocating capital in crypto are looking for the idiosyncratic projects like Hype uh that have strong fundamentals and and the money is rotating either into there or out and into AI stocks. >> Yeah, I agree. I think the market factor here we're just out of favor um I think it happened many times and these things come in and out uh will eventually come back but to Matt's point you have AI and all the derivatives right so there's AI there's compute there's memory there's energy everything that is related to the AI theme uh there's there's massive

interest for these things uh maybe one thing here and there defense uh prediction markets and herbs right hyperlid is doing awesome and and there are a few crypto tokens that uh are finding product market fit and have the right tokconomics that are doing great. Uh but I think crypto in general is a little bit out of favor. Um one stat that I follow every week and I think I said it a couple of times here is that if you look at like for example Bitcoin trading uh spot trading activity as a proxy to how much uh interest there is um in in in in Bitcoin and and maybe even crypto more generally. We are renewing multi-year lows. I think just a few days ago uh between spot volumes on

a 7-day moving average basis was the lowest since like October 2023. That's like since before the spot ETFs launched. Um if you look at the CME uh which is a place where I look for like demand for leverage and uh especially in the more mainstream segment uh the CME basis is under 5% for the 30-day constant maturity uh um on a 30-day concept maturity basis which is also very low. I mean very few times in the past three to four years we were there.

I think we're just a little bit out of favor. We know these things shift. Maybe we need to wait for these three giant IPOs uh to come out and maybe get all the unlocks and all of that and then attention will shift back. But I guess for now uh we'll probably just going to continue to chop >> as long as Micron and other AI stocks trade like memecoins uh just like with explosive in unprecedented growth. uh it's going to be hard to attract liquidity to crypto which usually had a monopoly over uh over explosive growth. Um and and so I think what we're seeing right now is um a lot of interest in AI. Um a lot of

people that want uh asymmetric upside think that the place to get it is in the AI stocks and they're not wrong right now. Um we'll see what happens after the three IPOs this year. I think that I think it is relevant from a macro discussion even with respect to crypto to be talking about these three IPOs and what they're doing potentially to the market um and what uh they portend thereafter. But for now, I think um it's just a rough regulatory climate. Um I think the news is not particularly great as you guys have said. I am still more bullish on clarity passing than you are, Matt. Um, I'm still optimistic. Um, I

don't really I haven't really seen any news to make me move away from my opinions over the last couple weeks that clarity has a, you know, a a a greater than, uh, not chance of passing. So, um, unless there's some real news that comes out that persuades me otherwise, I think it's still headed in the right direction. But um without clarity um or at least with the like you said Matt to your to your point which is very well taken regardless of whether clarity passes or not the in uh the the the fact that clarity is still not clearly going to pass is keeping capital on the sidelines. Um, and for as long as there's uh indecision on whether or not

clarity can pass, um, I think capital is not going to be flown into crypto as as much as we had we had hoped. >> Yeah. >> Yeah, for sure. >> Exactly. Let's assume clarity passes. >> Um, do you think that would be enough to change the let's say trajectory of the market? Would that take us away from this 70 to 80k price range Bitcoin is in or would all the other things going on to overwhelm? >> I think you mean 60 to 80k you know um uh no I don't think it it alone um but it maybe it's necessary but not sufficient I think is the way I

would consider it. I do think it's keeping institutional capital on the sidelines. Again, that question, do you want to allocate when there's a 50-50 chance of a big negative regulatory event? Uh, put that into AI world. Imagine there was a 50-50 chance of like harsh government restrictions on AI and new model releases. I think that would uh stunt the flow of capital into that market as well. Um, so I think it's necessary but not sufficient. I think you need to get past these IPOs. Um, you know, I I think uh you need more progress on stable coins and tokenization.

I I think the the the new crop of winning crypto assets will probably be different than the old crop of assets. I do think you're seeing a rotation or a maturation or a shift in the market. Um, but I do think we need to get through clarity before sort of the uh we turn the page to the to the to the next part of the year. Yeah, I I do. I mean, we're talking about AI sucking the energy out of the room. And here, I'm just going to pull up on screen a little tangible examples of this. So, if you look at the digital asset treasury companies, they've purchased half of what they did last month. And then unfortunately, the ETFs broke their two-month streak and now we're back to negative outflows again, which is I don't know. I tend to look at

um ETF, BTC ETF inflows and outflows as my sentiment gauge. It's been my new sentiment gauge since their launch in 2024 and again not a promising sign here. And then we also have just looking at the whale balances and obviously some of this will include some of the larger institutions but whales have largely stopped accumulating and are still adding towards the cell pressure and you know there's this regulatory overhang that you mentioned Matt but then also if we just look at the month of May where I did a 10day rolling correlation to NASDAQ S&P 500 and gold right and pretty similar correlations with all But you know it it kind of looks flat but mind

you this is between one and negative one. So that you know in the middle here we see you know we see it's weak correlations and in high correlated in the middle of the month and the problem with this was that the high correlation came when the rest of the market was facing a downturn and then the low correlation came when the rest of the market was in an uptrend. So the diversification benefits of Bitcoin tend to be out of favor like for the m for the last month and you know it has instances of this. It's actually sometimes it can be negative to add to your portfolio depending on what the makeup is the rest of your assets are.

And [snorts] then I also looked at Bitcoin's correlation to other assets and we we talked about hype last week and we you know we we briefly mentioned it again this week and this chart is showing that you know on a 60-day rolling correlation window more crypto native assets ETH Solana Unis swap they have a higher correlation to Bitcoin and then when Bitcoin goes down you know we're looking at the market right now it's below two um Solana's below 8A whereas hype um VVV which is an AI um a private AI chatbot and also with a crypto token and cards which is you know real world collectibles. These assets are not only all up yet to date but they're also not correlated to Bitcoin

like the rest of the market. So still providing that diversification hedge while also you know giving an upside taking over that that sharp ratio um that maybe Bitcoin was known for for being a standout provider of. Um, and it's interesting because, you know, I've I've been waiting for a long time for the market to kind of bifocate. Um, because I, you know, I did want owning multiple crypto assets to diversify the portfolio and it's happening now, but unfortunately it's happening with Bitcoins in a downtrend, but it it's still, I don't know, another sign of the maturation of the market and maybe of Bitcoin too.

I I think though like this snapshot while informative Mark is a little bit uh it's it's a it's a little bit misleading, right? Because hype has been doing some episodic big things lately. This VV is sort of brand new. It's got a lot of interest. Um it would be it's equivalent of comparing you know Bitcoin and ETH and soul to a brand new token launch and saying oh wow these are not correlated like they will become correlated over time I suspect like all cryptos >> interesting go ahead David I think I think David and I may have a different

view but go ahead >> yeah I I guess maybe it's a hope uh but I hope they do not Because the interesting thing about things like FBV, let's use just hype as the foremost example, is that it has a very different value acrruel mechanism. Um, and and I know Matt has been saying this, I'm sure with the Hype ETF launch, when you talk to an investor about Hype, they can they can understand it like they understand a company, maybe an early stage company, maybe a growth stage company, but there's a revenue component that they can model. there's a a a a net income that will translate into a buy pressure for the asset. Uh so so it's very much like looking at a company while Bitcoin

is very much looking like a global macro asset, global macro commodity. And I would say that things like Ether somewhere in between. That's that's the hard part in crypto valuations that we don't know exactly where to place ETH. We know it's somewhere in between these two things, but we don't know exactly where. But I I hope that the market starts to differentiate pure commodities from pure cash flow generating assets. The the middle will remain model. I I I agree with that. That's a big valuation open question that we'll have to answer.

But I I hope that the extremes will will get more differentiated. >> Yeah, I think I think we definitely will see them more differentiated. I think hype is a good example. Uh I agree because the value capture mechanism gives it a different way of approaching value. It also services non-crypto assets. A significant part of its trading revenue is X crypto. Um I think I think it's unlikely to have a high correlation with Bitcoin. To the extent that it extend uh overlaps from a fundamental perspective, there's some degree of cryptowide regulation that would impact it. Um, but I think it's going to be a pretty idiosyncratic performer and I suspect we're going to see more idiosyncratic crypto assets in

the future rather than less. In fact, you know, I was looking at uh like a one-mon heat map of the returns and all the majors were down, but there were isolated crypto assets that have done very well. Hype has done very well, Near has done very well, Stellar has done very well, Tron has done very well. uh you know uh what uh Zcash has done very well. These idiosyncratic drivers um I think are doing well. I actually expect that will persist as people rotate in part out of the majors into these new idiosyncratic areas. Um so at least for the foreseeable future I think the correlations will be relatively low.

>> I I to be clear I think that the hype uh disentangling from Bitcoin will continue for the foreseeable future. Um I hope that it starts to trade um apart from Bitcoin. Uh but hype is just a protocol, right? It's a better run protocol than most and um it is a very unique value prop. But there are other protocols that have tokens that should on a fundamental basis have traded apart from Bitcoin over the last five years. You know, I'm perennially frustrated with Uni token that it has never really broken out from just trading exactly in line with Bitcoin um and with exactly in line with Ether when it has a totally unique value

prop and it has I think um more characteristics that look more like a business than um a blockchain and yet it still trades largely in line with or historically has with uh with the majors. So, I'm I'm not giving up hope on that. Um, I think the market needs a lot of education on the uniqueness of hyperlquid and other assets that um are that can be modeled more like businesses than blockchains. But um I don't have I don't see any reason why um over time right now um the market is going to look at hyperlquid or other unique new protocols any different than they have

in the past >> right I mean I think the argument would be the forcing function on value stocks is that the revenue and valuations just get too low right that's why value stocks eventually bottom and find a floor and be contrarian investments and and go up I think the difference between hype and unis swap top. They're both very interesting protocols, but the value capture mechanism in hype is so uh so complete that you get this forcing function evaluation much sooner than you do on something like Uni where the value capture mechanism is improving over time and I think could continue to prove over time and I suspect is undervalued by the market but is it yet more of a leaky bucket than it is in the hyperlquid ecosystem.

>> Yeah. Yeah. And and I think you have a good point, Mike, in that uh all of us who are fundamentally oriented people have been waiting for this time for for many years and and and and it's been kind of elusive. I'm I'm sure Mark and all his friends at Block Works Research. They're looking forward to the day when people will start looking at fundamentals. Uh and that's something that's going to drive price action more than before. Um, I I totally understand that this is something that has been a long time coming and kind of always a a future a long-term future thing. Um, yeah, I don't know. Hopefully, we're in a tipping point. I think hyperlquid somehow struck a nerve. Um, today there's just a a report on on the Wall

Street Journal talking about hyperlid as kind of the new uh trend in Wall Street and folks are looking I I mean there there is a confluence of factors here, right? There's the 247 markets for trading things like co on weekends, the preipo markets now maybe uh with the uh HIP4 uh the the prediction markets part u I I don't know we'll see how these things move. I I feel like hyperlquid cross the chasm and maybe they will take some of the other assets with them and people will start to get interested in these other uh these other interesting things that exist in crypto as well. But yeah, let's see. I I agree with you. It's been it's been a long time coming. I >> mean, Hyperlquid is the one big bright

spot um in an otherwise cloudy uh gray area of crypto right now. So, I don't want to I don't want to imply that um I'm not very bullish on Hyperlid. I am. Um I think what it's doing is phenomenal. I do think though that um ultimately uh it it's the it's really a it's less about hyperlquid, more about just the market. Can the market really understand the differentiated uh value prop of Hyperliquid? >> 100%. >> You know, I do think, you know, something like Uni maybe for now should trade like a beta asset like like how I would see Coinbase doing because, you know, higher prices leads to more trading, higher fees, especially when

meme coins come around with higher take spread. And then maybe something like hype and this is what I'm going to say for other protocols too but something like hype starts to differentiate because of this you know real world assets tokenized assets and it has a a diversified revenue stream that a lot of other crypto protocols don't have not to mention you know not to mention HP3 HY4 prediction markets you know you know Matt's Matt's tweet about it becoming a neo bank uh you know similar to the Robin Hood model again so that kind of differentiation and I do think another another sector which is getting some of some love, but it's also very hard to price fundamentally is privacy. That's why we've seen like rail gun and Zcash

and a lot of these other protocols really rise on it and VVV as well and and it's weird if you can compare them to some of their counterparts, you know, maybe you compare Zcash or Litecoin kind of the same thing and then you see what the premium is. Now we're starting to kind of maybe some have some kind of value like some kind of way to calculate what the monetary premium on privacy is with with the rise with the rise of this narrative. So I think it's interesting from that perspective but maybe it's still a little bit too early to actually put some robust statistically significant numbers behind it.

Um David wanted to talk about >> go ahead Mike >> I've wanted to talk about Zcash for for a while now actually um and privacy um I think this is definitely something that we are looking at and something that's really quite fascinating um and in part because uh institutions have been demanding for a while now that they need more privacy layers within crypto. Um, but to make here's here's a simple way of thinking about here's how I think about Zcash.

Why did Bitcoin not become uh a primarily a uh system of payments? Um why did it shift to a uh a system of of value um a store of value? And I think the one of the main reasons is like they didn't have a privacy layer. Um, if you're going to be really a payments network, you need some sort of privacy. Um, or else it's going to be pretty easy to track where you are and what you spend money on. Um, Zcash comes in in a very sim it has a very similar tokconomics as Bitcoin, but is um a privacy uh network. And so I think that this could be the next big it's already

becoming but I think it could be the next big meta in crypto. I think it's solving a real problem not only in crypto but um but in payments. That said, there are question regulatory questions, right? Um, on the one hand, it's ironic that institutions are calling the loudest in my experience for privacy and yet on the other hand, they are the most uh they are the most bare uh they are the most reticent to do anything that regulators will say um is is not above board and regulators certainly do not want um untraceable money. So uh I think there's a definitely a an interesting debate that we will see on this in the coming months

and years. Yeah. The the one interesting thing is I feel like the interest in things like Zcash is coming from a different place very different place from where the hyperlquid interest is coming from right the hyperlid is definitely getting mainstream with ETFs and all those things. I I don't know if maybe it's a little bit too much or my bubble or the circles I'm in, but I think a lot of the Zcash interest is coming from very cryptonative people like even like VCs and folks expressing exactly what Michael is saying, right? That maybe this is the next big madeup. Um yeah, we'll see. Uh the main question I have here is whether privacy is a feature that a blockchain should have or if it's

the product, right? Or or whether it is the main thing. and and I guess we'll we'll see if other blockchains will be able to include uh privacy features. What is the pet dependency on that? So yeah, definitely an interesting topic. I I I agree. I think it will continue to gain importance at least as a narrative point. >> Can I just can I just add the one thing I if you look two years ago at Hyperlquid, it was also uh most evangelized by the crypton natives. Yeah. Right now it is now it's broken into the mainstream. So most of the uh protocols, networks, tokens that we love and we talk about every day originally were pushed by um by the cipher punk

cryptonative uh segment of the market. [snorts] >> Yeah, I think that's right. Um look, I think as I've said this before, but I I think as suit corners like me drag Bitcoin into the light, it makes more room for privacy assets. And Zcash is tiny. Is it at $10 billion right now? Uh, Bitcoin's $1.3 trillion dollars. Could it be 10% the size of Bitcoin to serve that sort of uh pirate corner of uh of the crypto universe? That doesn't seem absurd. That's that's a lot bigger than it is today, right? Um, so you have to think that that Bitcoin will continue to move into these institutional channels, right? The largest holders are going to be Micro Strategy and Black

Rockck. um uh that's going to make more and more space I think for things like like Zcash. I actually think it's as simple as that. I think the corporate privacy payments service is going to be done on sort of the quasi corporate chains um that are emergent. But I think Zcash, Monero, that space, I'm generally bullish because I think it's fraction of the total sort of store value money market in Bitcoin in crypto is smaller than it probably natively should be. Maybe it should be 5%. Maybe it should be 10%, probably shouldn't be 1%, which is closer to where it is today.

>> Yeah. I mean, I'm not I'm not a Zcashiator, but I'm going to say some stuff. Um, I think Bitcoin I think Bitcoin is a store made it to a store of value instead of cash because it's just too expensive to be cash. It it was too inefficient of a network for it to be actual used like any kind of fiat currency around the world. And I do think that if it were to hit that scale, Zcash should encounter the same problems too. And which is why we're still even to this day looking at more like a private store of value. And then I see, you know, a lot of popularity with, for instance, the Canto network where their privacy is, it's not like it's cryptographic privacy. It's kind of like, as they would say, trust me, bro, privacy, right? It's just not everybody can see it. It's it's it's only a select

few. And I mean, in some ways, Bitcoin did have that with the lightning network where maybe only the hops would see it along the way, but I digress. So with this like pseudo privacy I think you know obviously the institutions want that even if even if it is a trusted third party because they're very well much used to doing that and so I I I I don't see why if you know for instance Aztec an ethereum solution or maybe a solution on Salana not from the protocol itself but a layer on top of it if that can add privacy why is and you can wrap your BTC or if you believe ETH is a store of value or you name your asset If you can use a third-party privacy protocol, a decentralized privacy

protocol, why not just you then you choose your own store of value asset? Why do we need Zcash? >> Yeah. No, I think I think that's exactly the point I was saying about privacy being a feature or the actual product. Uh I would go even further than that. Maybe privacy is something that is going to be solved at the wallet level and not necessarily at at the blockchain level. Right? There's there's a bunch of wallet products that provide this type of functionality today. Okay, I think Crayun is one example. There's another one called Henghol. So these are basically privacies that you can even include a KYC layer and once you're be once you pass that KYC fil filter, you are within this this private network. So maybe it's not even going to happen at

at the blockchain level. There's a lot of questions here. I'm 100% sure that privacy is going to be a theme, how it's going to be solved and how the market's going to adopt it. I think it's Yeah, that's that question is still very much open. I agree with you. >> Yeah, my gut is the people who care about AML KYC and such aren't aren't going to migrate to Zcash. I don't think that's the lane it's choosing. I think it's choosing the like the cipher punk. Uh that's not an option. Privacy at the core sort of lane as opposed to privacy as a a product solution which is maybe more subject to to regulatory capture and investigation. Uh I could be wrong but that's my sense of where the the movement in the community is towards uh

these privacy originalist uh assets privacy at the core assets. I think the wallet solutions are very interesting. I'm glad you brought those up, David. Um and that could be the solution to privacy. I think there needs to be though blockchains like Zcash um and other privacy networks out there that provide uh you know Zcash uses ZK snarks. Um it's it's permissionless privacy. I haven't seen any wild solutions as far as I know that that you're not still trusting some sort of central intermediary to to safeguard your privacy. So um now that said permissionless privacy is difficult

because um at least in a permission privacy layer you can AML KYC all the participants and then anonymize them thereafter. Um in a permissionless privacy uh regime you're not going to be able to have AML KYC guarantees. So um that's going to be that's going to be the challenge. >> Nice. Um David, I know Anchorage put out a piece. We were talking about BT BTC. Let me see if I could pull it up in the screen here. Um I thought it was very interesting comparing looking at the options market and how it's changed and relative to I guess the S&P 500. Um yeah. Um what what what is the insights?

What are the takeaways from this? >> Uh yeah. Oh, awesome that we're covering this. Uh yeah, no for sure. So this was our first long form uh piece. The idea here is to dig deeper into whatever trends we find interesting either on crypto as an asset class or as a technology. Uh this first one is very focused on Bitcoin options. Uh it's a long paper. I would uh invite everybody to read it at the Anchorage website to go Anchorage resources and research. You're going to find it there. But um basically maybe a couple things to highlight here and and the chart you have on Mark shows this very well uh which is basically the reason why everybody's talking about Bitcoin

options today or a lot of folks in the market are paying attention to options. Options are growing and and I think they're still somewhat underlooked as a piece of the the as as part of the Bitcoin market. uh the top panel here on the chart you are showing uh for those who are listening uh I'll I'll describe it in a little bit more detail but it shows the open interest for durabit and IBIT options and this is this goes like over the past five years and you can see that this market has literally 10xed uh over the past four years or so and even over the past two years it has probably five or sixxed uh in a big way driven by derbit that has been growing but also on

the back of IBIT options. This these have been the two main engines here. Just to give you a sense, uh today open interest in options sits at around $60 billion. And just to compare, if you add all the Bitcoin per right, Binance, Bybit, uh, OKX, Hyperliquid, all of them, if you add all the dated future contracts, things like the CE, if you add all of the open interest from those Bitcoin futures contracts, you're talking about something around 40 to 45 billion. So, options are already bigger than futures in terms of open interest.

Um, which is not crazy to think about. We all know here that in traditional markets uh equity options markets are like five to 10 times bigger than futures. Um today in crypto options are like 20 to maybe 30% bigger than futures. So I if that uh ratio holds we probably still have room to to grow even further. Uh but this this is becoming a relevant market and I think a lot of folks should start to pay attention to this. Not only because options are a great instrument for you to express views that you can only do through this uh but also because just from reading the tape and reading the markets, these options flows are starting to become uh interesting and they're starting to

impact the Bitcoin spot price in a way that they haven't just a year or so ago. Uh but the main theme of the report is on covered call selling and we're we're talking about how u a lot of folks are paying attention to this. Uh reeling back to the point we were discussing the beginning of the podcast especially when the Bitcoin price action is down or flat. Uh one strategy that makes a lot of sense is just to sell options uh against the uh uh an already existing Bitcoin spot position. And if that uh option is not assigned, you basically just collect the premium. So it's kind of a way for you to collect a synthetic yield type of uh stuff on Bitcoin. And what we did in the report is to do a

comprehensive analysis just to try to show what these yields look like, what are the main factors, how consistent they are, uh why they are there, what are what are the structural reasons. Uh in in in in many years ago, when when was that Matt? Maybe four or five years ago, uh Matt and I published one of those uh Bitcoin in a portfolio type of reports just trying to show what happens to a portfolio when you add a certain amount of Bitcoin and you vary a few parameters. What I try to do here was the equivalent of that for for options using covered call selling which is the most u simple and straightforward strategy. Uh yeah, just to uh I feel like I've been talking for too long, but

just to finish here on uh here you can basically see what is the volatility risk premium on Bitcoin, which is the light purple uh area here versus S&P and the QQQ. So what you can see is that Bitcoin has two to three times more volatility risk premium versus these traditional assets. meaning that even though Bitcoin is volatile, the options market prices it even higher than that. So if you're a patient investor and if you're operating in a safe corridor here, if you're choosing the right parameters, doing the right risk management, you can harvest that premium. Uh I was actually surprised at how consistent and meaningful this

yields can be if you apply relatively simple uh risk risk parameters. So yeah, that's basically the gist of the report. uh take a look uh anchorage.com you can go to resources and research and you can find more about it. >> I would just add it's a must readad you should read it. Uh I think this is a huge part of of the crypto market. This is the best paper I read on it. So uh highly highly recommend it. >> I'll third it. Um question I have for you David. Um cuz I had the opposite takeaway from your paper which is that retail is going to struggle with this given the fact that um you know I think you use the phrase throughout uh you know picking up pennies in front of a steamroller. Um and unless and like one

of the key takeaways I had was that you know over time most people selling call options are not actually beating the market uh for Bitcoin. Can you can you explain that a little bit more? Uh yeah, no 100%. And the uh collecting pennies in front of a steamroller is definitely a thing for covered call selling. You're literally selling volatility. So you're collecting these premiums, but every once in a while, and this once in a while means whenever the price of the underlying bitcoin rises significantly and suddenly, you incur large losses. So it's kind of an insurance writing type of strategy. Uh the point I want to highlight is this is an active management strategy. So you probably

need someone who understands these things, who is very capable doing it. You probably need a desk that has good execution too. So like this is not a strategy that is that simple to implement. And that's why uh like firms like Bitwise, right? Bitwise has uh Matt will uh can talk more about that. But Warden and his team, they have a whole awful strategies uh team that implements these types of strategies for investors. So I I fully agree with you. It's not something that everybody should do and um I I try to put this in in in the paper uh in in a few different sections.

Uh it's something that you have to be careful. You need to know uh what are the deltas, what are the expireies, what are the the the regions you want to play in. Uh you probably need to have some good market uh regime filter just to try to understand more or less whether Bitcoin is likely to rip higher significantly or not. And if it does, you need to have exit mechanisms that allow you to leave before this thing's ripped too much and and incurring large losses. Fully agree with you. Uh it's not a simple strategy. The paper is is long. It's a 45th page paper which kind of reflects how how many factors are at play and how complex these strategies can be.

>> I I also had a follow-up question. um you know wi with the popularity of covered call strategies I I thought it was interesting that actually since the start of the year there was a huge dip off there and I and I and I also wanted to ask that's part one is like why why are we seeing a reduction in it even though it's supposedly getting more popular now is it just from liquidations but then also secondly you know we're looking at a here anchorage shares is a long-term average rate of around 65% % versus the S&P which is around 37%.

For a healthy structure of the Bitcoin market, do we do we want this to remain around the long-term average or should should this be trending lower as it is now anyway? It it's a great question and I think it reflects a little bit the maturation of the Bitcoin options market because in the beginning if you looked at Dere bit let's say two years ago or so basically the option market was a bunch of DENs buying out of the money call options and just trying to get a symmetric upside. Uh that was basically what the Bitcoin markets uh options market was. Uh over time we started to see some more sophisticated strategies.

So folks looking for downside protection, uh folks looking for like yield strategies, uh some pure volatility trading, calendar spread, like all all the gamut of sophisticated option strategies you can find. And I would say that as that happens, you're probably going to see more of a balance between calls and puts because puts starts to be used for some of these more sophisticated strategies. But to your point, Mark, um if you look in the spy or QQQ markets, it's usually twothird puts and one-third calls. Uh the Bitcoin market is basically the opposite. It's twothird calls and one-third puts. So, we have probably a long way to go to

drift into market average. I honestly don't think we'll get there anytime soon because I still think that this chase for Bitcoin as symmetric upside will will continue to exist, right? as as Bitcoin is still an emerging asset, but I think we'll continue to see this number drifting. Uh, but I don't think we're going to get anywhere near what we have for the QQQ or SPY options. These these markets are obviously very mature. They're in the trillions of dollars in terms of open interest each. So, they're uh still a long long route for us to get there.

>> Okay. Nice. And and my last thing that I'll just touch on this, I find it's also very interesting that we're comparing the volatility and the ratio of a single asset Bitcoin to that of 500 [snorts] assets or a thousand assets, right? It's sometimes it's kind of misleading. It kind of makes Bitcoin seem a lot more volatile. But then again, I when I look at the S&P 500, it's probably the most volatile has ever been in it history for an extended like over the past, let's just say since co. So I I I will note that there are assets within the S&P 500 that themselves are more volatile than Bitcoin and you know maybe when looking at premiums that's a more clean comparison there 100%. Uh the thing I would highlight though is that what we

were seeing that chart is the difference between the volatility implied by the options market and the actual volatility realized. So even I mean a lot of these traditional assets you are right uh I actually had an earlier version of that chart including like Tesla and Nvidia and and you would see some of those volatility risk premiums a little higher than the index but they still don't match bitcoins. Uh the question here is a lot uh what the options market is pricing versus actually what is getting realized versus the actual volatility level of the underlying asset. Those are slightly different things.

100%. >> If if if we have no other comments on Bitcoin or the market, oh um I wanted to bring up something that we I think rarely and I don't know if we've ever really talked about in this show before in any kind of detail and that's Ethereum. Um and specifically there's been a lot of um discussion surrounding let's just call it let's call it the um exodus from the Ethereum Foundation. So, a few prominent names have actually left the Ethereum Foundation this year, just in the past few months. And obviously, price isn't doing well. ETH has a high beta to Bitcoin, but you know, even outside of that, even the past couple of years, it's down on a fiveyear, six year

time horizon. There are a lot of memes comparing the price of Ethereum since 2020 to the price of bananas and showing you that Ethereum is underperforming massively. Um, I'll just pull up on stage here because I kind of wanted to discuss this first. The um the the the profiles who have left the Ethereum Foundation in the past few months and we've had some big names including the executive director Tomas who only stayed for one year in his role. And then probably a couple of the others is Tim Bo who maybe some of us know who is very a very prominent member of the Ethereum Foundation very outspoken a lot of conferences a lot of the messaging came

through him but you know what what do you how are you guys thinking about this? Maybe maybe Matt you can kick it off there if you're having these discussions at all. I don't know if anybody's interested in this >> in terms of in terms of the Exodus the Ethereum Foundation Exodus. Uh yeah, I think I think ETH is going through uh something that it goes through periodically, which is uh sort of re-evaluating what it is and what what it wants to be in the world. Uh this is not the first time that this has happened with Ethereum and every time it happens, you see the price suffer until it finds its new footing. I think that's what's happening here, right? We had a very aggressive market oriented version

of the Ethereum Foundation. Now we have um a version that's focused on crops and wants to be a smaller player in the in the space. Uh I do think this is slowing down interest uh from the more crypto expert part of the world. It isn't slowing down interest from traditional uh financial investors who just want to allocate broadly to the space. This is more inside baseball than they care. But I think for people who are cryptonative or quasi cryptonative, this sort of crisis of confidence and uh decision about what ETH wants to be when it grows up is is is definitely weighing on the market.

>> Do we think this this focus on crops as I mean I feel like it's always been >> Yeah. Yeah. Matt. >> Well, I I I mean I actually think ETH has a fundamental decision to make which is uh whether it's trying to be money or whether it's trying to be a revenue generating chain. and the community consensus seems to be that it wants to be money. Um that will lead to a number of uh very specific design decisions going forward and um and and I think there are people who are pro that and skeptical of that. It could make the other decision which is the decision that ultimately block won't be fully commoditized and there'll be sort of uh rent seeking capabilities on specific

parts of blockspace with the rise of stable coins and tokenization. It could be a revenue focused chain, but that would lead to very different design decisions and attract a very different set of investors. And I think it's a pretty fundamental choice with long-term ramifications. Uh I'm not sure the ETH community is having that discussion headon in the way uh I would love for it to have it headon, but I think that's much more important to me than what's going on at the Ethereum Foundation, which as Vitalik said owns 16 basis points of ETH. It's really, you know, is it going after this or is it going after that? It can't really go after both. Uh, and it leads to very different design decisions that lead to very different

outcomes. Um, and I think until it figures that out, I think it's going to be stumbling around. I I fully agree with Matt. Could not agree more. Um I think in the short term ETH will probably vary just with just these idiosyncratic macro factors but in the long run I think the value acrruel mechanism needs to be clearer. Um I would even go beyond uh if Ethereum wants to be money they probably need to get away from the Bitcoin shadow because I don't think Ethereum can become commodity money like Bitcoin is. It's just it's just a whole different asset.

uh maybe it's just some sort of quasi money commodity, maybe it's u a financial asset like treasury is, but I think they need to to to get away and separate themselves. Uh there's a few narratives I see here and there to be honest. Things like ultrasound money, right? Yeah, we're commodity money. We're like Bitcoin, but we have lower issuance. I believe some of these things don't don't make a ton of sense to be honest. If they want to go the money route, I think they need to figure out exactly what being money in an Ethereum context means. And it should ideally be something different from what it means to be money in a Bitcoin context, which is this censorship resistant, very strong monetary policy, sound money type

of asset. There's other types of monetary assets. There's other types of commodities that are interesting that are not necessarily money. And I think Ethereum needs to look more into those type of assets than to Bitcoin. Yeah, it's also wild to me that Ethereum wants to look up at Bitcoin being money instead of looking down at the others where it's the leader on stable coins and tokenization. Uh it's like Michael Jordan wanting to play baseball. Very strange to me. Um and uh and but but I agree with David. It needs to define what it means to do that. Um you know, if that's the direction it wants to go.

I'm not sure it's the right direction, but if that's the direction it wants to go. >> I've always been opposed and confused by the ultrasound money thesis. Um, it never made sense to me um for a couple reasons. One, Ethereum is not a money platform uh necessarily. It is a operating system, a decentralized operating system. two is framing it that way. I think can justify a 100x multiple on uh price to earnings basis as opposed to just a a a payments platform or a money a money platform. Never made sense to me. Um third is ETH being money uh seems to be like the

least cool thing about ETH. like the Ethereum being a tokenization platform, a protocol platform, a a marketplace for like infinite amounts of different applications. That is what is exciting about Ethereum. So I think the ultrasound money thesis was not the right direction. Um and I think it uh I think it's already died to a large extent. Another point is this. Um, when assessing what is going on at the Ethereum Foundation, um, just like assessing what's going on at any blockchain's foundation, the first question you have to answer is how important should a foundation be to a

blockchain? Um, and I think it's a nuanced question because or it requires a nuanced assessment because I think different protocols or different networks at different stages in maturation rely in greater or lesser degrees on their foundation. So newer blockchains like Hyperlid, I think the foundation needs to play an outsized role. Ethereum now is coming up on 10 years. Um, I long for the day where the Ethereum Foundation doesn't really matter at all and I actually think they're doing a great job to ma to ensure that that is a reality. Um, now the if they don't matter that much to

the future trajectory of the of the blockchain, then the best thing they can do is just not make bad news, right? That's like their number one goal. Don't make bad news. Um, now that doesn't mean that they can avoid it at all times. the recent departures from the Ethereum Foundation, those are going to make news no matter what. I think that that news would have been a lot less uh toxic if uh Ethereum's ETH's price action had been a little bit better over the last couple years. So, I think this really reflects more of a stagnant price than it does any real fears that the certain members that have lost the that have left the Ethereum Foundation are going to result in Ethereum as a blockchain being less usable, less valuable, less

of uh Ethereum. Uh I just I just don't see any individuals even Vitalic playing as much of a role any one individual playing as much of an outsized role in Ethereum um as um as uh the commentary suggests. >> I don't know if you guys agree or disagree with that but um I I agree with it. I think it's um I think it's good that the EF is actively trying to diminish their role because in recent years I have not necessarily agreed with their positions and you know I've spoken with some uh members within Ethereum Foundation this year last year

and it seems like um it seems like the core the core members wanted were leaning a little bit more towards crops and oification versus thinking about it maybe like maybe a labs entity would or if this was a business where we're looking at you know management you know we're looking at execution like for instance if I was an EF something I would have prioritized a long time ago is account abstraction a one of the reasons why I started using hyperlquid and never switched away from it is because of it was oneclick trade I I didn't have this pop- down box where I have to sign the sign the transaction then accept it and then you know they removed all of that complexity away and it just made it seem like a regular app

which was which is what you know I knew that everybody thought the endgame for these protocols would be and Ethereum did have uh different ERC's to this effect but it never actually materialized and I think it's because the AF did have an outsiz role prior in the history of this asset and that was never on their priority list so you know I'm I'm I'm looking forward to maybe handing over the reigns to the likes of maybe an Etherealize or even like a Bitwise and you not like necessarily as one kingmaker, but all of these different institutions that are already in the space are probably very knowledgeable and have this go to market experience and are talking to investors and clients and know what they want. I'm looking forward for them to having a more outsized impact on the market.

>> Yeah, I love that. Agree with that. >> The one thing I would add here, fully agree with that, Mark and I would even add the deaths, right? You can think of Sharp Sharp Link and Bitmine like a lot of these companies could have a role to play in being kind of stewards of Bitcoin as an asset especially in the crypto treadf. So yeah, fully agree with that. >> I I'm I'm going to have to hop. Uh I appreciate you guys. Uh but we should talk more Ethereum. Uh >> okay. See you. Yeah, >> mistakes were made right um over the last couple years um at the highest levels of Ethereum. I think what will go down is probably the biggest mistake was

the L2 thesis. Um you know L2s cannibalized the L1 to a large extent and as a result it moved a lot of the otherwise bustling ecosystem of engineers and founders to build L2s and to move their products to L2s. Now, that makes sense only in a world where the L2s are paying more money um to the Ethereum L1 than the L1 would have otherwise received if those apps lived on the L1. That didn't happen. In fact, they did the opposite with protodank sharding. They uh essentially made it almost free, not free, but very cheap for L2s to settle on the L1. Um I think Vitalik even acknowledged that that was

a mistake recently which I think was a big revelation and since then you've seen a lot of investment a lot of uh interest flow out of the L2 um area. Will it go back to the L1 or will it go to other blockchains? I think that is a big a big question. >> That's interesting. Um, I definitely think we we we'll we'll have a a deeper conversation on this, especially when Matt is back to because I I wrote a report a couple months ago about why L2s were Ethereum's biggest failure and also its biggest success. So, I' I'd love to to dive into that a little bit more. Um, >> depends on how you define success there,

but I I'd like to hear that. Yeah, absolutely. >> Yeah. Yeah. It's it's definitely not based on price, right? It is a little bit more of a longer term longer term play. Um but yeah, so we're coming up on time there. Um any any last thoughts, Michael, David, you want to leave the listeners with? >> Um I'm I'm what I'm looking at this week is to see the fallout of of strategies Bitcoin sells um and what what sort of commentary there's going to be continue to be around that. I think they've gotten uh some pretty bad press recently um on selling. I think the market obviously did not like it. So, I want to see how that that turns out because that could

definitely impact their strategy if the market punishes them anymore for it. Um that could definitely impact their their strategy going forward in a big way. >> Yeah, I think we could there's probably two things that have been calling my attention over the past few days. One is the MSCR sale. I think the market is a little bit exaggerating. Uh and and we can talk about that. Uh we actually kind of discussed it because this is not something entirely new. Uh Michael Sailor had already suggested that would be some sales, right? And we did a good chunk of an episode maybe two or three weeks ago exactly on that. uh this 32 bitcoin sale for $2.5 million was a very

small glimpse and maybe a signal or maybe a message uh towards that direction. Uh that's definitely one thing. The other thing I um I think maybe we should spend more time on maybe next week uh is on the CFTC effectively opening the door for per contracts futures uh per in the US. Uh they did it in two ways. One was to allow Koshi to have perpetual futures contracts in the US, something still pending regulatory approval but ongoing. And the other would be to is to allow a Coinbase affiliate to start offering access to international uh options and uh per futures contracts to domestic

investors. I think that was a big deal. Uh we we're all here uh excited about BERBs. I think it's a very central part for example of Hyperlquid story. But beyond that, right, BBS are a new financial instrument that I think allows you to do some very interesting things. They have been forbidden in the US for a long time and we just now saw maybe the the beginning of the the the approval of BBS in the US, which I think is a very exciting development, too. >> Yeah, 100%. Those two CFDC announcements were huge. We didn't get enough time to discuss it today, but definitely tune in next week for that. So, David, I'm going to put you on the spot here and have you wrap up the show. Um, uh, tell our

audience to, you know, follow and do all that good stuff. So, take it away. >> Awesome. Thank you everyone. I hope you had a good time. I hope you had as much fun listening to this as we have uh, doing these chats. Uh, if you find value in this um, in this inflection points, hit subscribe uh, and share this with everyone you think could find value from this. Thank you very much, Chan. We'll see you next weekend. >> Awesome. Cheers, everyone.