The leverage flush that changed this crypto cycle with Craig Birchall

Transcript

Maybe there's act there's nowhere near enough leverage in the system right now. Like I think it's actually people are way too riskoff and probably are licking their wounds. What's up everybody? It's LGD set here and welcome to the Milk Road Show, the daily crypto show where risk assets are allergic to silence and nobody actually knows where the floor is except maybe today's guest. Today is December 22nd and we are recording this on December 18th, a couple days in advance. And our guest today is Craig Bashers, head of lending and financing for the Americas at FalconX, where he helps institutions navigate credit, leverage, and risk across crypto, trady, and everything in between. If you've ever wondered how borrowing, structured credit, or not selling your Bitcoin actually works behind the scenes with

the people that have a lot of money, this is a guy to talk to. Today's episode is brought to you by Chain Link, which links web 3 to Wall Street. bridge send stable coin payments instantly simple global friction free and reserved ETFs the onchain equivalent of ETFs here he is Craig welcome to Milk Road man >> oh thank you I really appreciate it it's good to be on >> let's get right into it man okay it's a holiday week for everybody and there's no time to waste talk about what is what's been happening to us the last couple months uh and also what's going to happen in the new year um you've described or I guess I guess how would you describe the current state of crypto and risk assets and would you say that this current uh malaise is like a healthy reset or is this or is this a

deeper problem? >> Yeah, it's interesting because I think um there is part of this is macro which a lot of folks are going to go and and say that on pretty much uh you know any podcast any any paper. Um but it really is true in the sense that like we still do live in a world where uh Bitcoin and digital assets are going to have some degree of a beta to um you know tech stocks, riskier assets, the NASDAQ uh generally and um and what we've seen really is with sort of some of the concerns and uh the anxiety about the AI trade playing out recently um that has uh depressed markets uh a bit. Now I

think that the macro environ environment is actually broadly even just today um today yesterday is is starting to seem like it may be improving. Um so so that's good from a backdrop. Um but I think that also crypto specifically has also had its own idiosyncratic um issues. uh for instance, I think that crypto is is struggling right now even when equities may be uh um you know equities may be stabilizing or they'll go up and people will say well wait why is my Bitcoin still going down why uh or you know my alts or whatever it may be and part of that problem really is there was some fundamental um there was a

fundamental market shock that happened on 1010 October 10th with the liquidation a lot of liquidity uh dried up. A lot of folks got uh blown out on their uh leverage positions and not a lot of that has returned at least in that um uh in that scale and so liquidity in a sense has dried up in the market. Um and you've seen the debt trade at the same time. the digital asset treasuries have started to also kind of crest in the cycle of the um you know the peak euphoria at a point where a lot of them are trading at below MNAV and you know there's questions about um you know should there be consolidation you know what happens when they start to um you know be in a down cycle and it's

not always just up and up and up forever and so I think we've sort of between the leverage that was existing in the system on the exchanges and uh in the per markets and then the leverage that's kind of embeded headed in a sense with the digital asset treasuries uh on the side even if it should be a good environment for Bitcoin on any given day you may still have selling pressure and we saw that for many weeks after 1010 um uh so a long way of saying that I think that things are actually looking a lot better than they did a few weeks ago I think a lot of that has flushed itself out of the system um you know I have to be careful I say that and and knock on wood um but it's still there's questions as to okay does that mean that we're

going to be you know positioning ourselves for a big bull run you know going into the beginning of next year uh my hunch is probably not um but I think that I think that things will stabilize I do think interest rates will start to fall I think we will uh get ourselves back in but I think that for the most part this cycle is kind of sort of just waning and and in a bit of a waiting period this is the biggest year ahead for crypto AI and the macro But the real moves aren't in predictions. Join Milk Road Pro today to see our live portfolio, buy, sell signals, and the AI investing portfolio, which launches in January. The link is below. Wow, that's we haven't had that take lately that 2026 will be more of a muted year. Uh we've had a lot of bullish takes, but

based [clears throat] on a lot of the stuff that you said that rates are going to come down, more liquidity is coming into the system, and it's going to be a boon for risk assets. What's the case for a calmer year, let's say? >> Yeah. And and if we're thinking about all of 2026, I'm not, you know, necessarily saying that we're not going to see an up year in 2026 or even potentially a great year. I mean, I certainly know that our business is uh set to like we have very aggressive uh growth aspirations and and we think they're very achievable. So there is a lot of reasons to be bullish the broader ecosystem itself. Um, but I think from a market standpoint, there's concerns still about now the CPI numbers today, you know, maybe help or not, but

like there's concerns about stagflation in the [clears throat] broader market. Um, there's uh with Trump's tariffs and so there's questions about, you know, how far how hawkish, how doubbish are we going to be, the independence of the Fed is uh overall. Um there's questions as to the United States's growing debt burden frankly which means uh you know we're going to start to see there's there's a lot of skittishness and things that uh traditionally where you know folks will go into some of these more euphoric riskier bets. Um crypto tends to be one of them in the average investor's portfolio that isn't kind of embedded in our ecosystem. Um and uh and they'll kind of treat Bitcoin or ETH or

um Salana very similarly to um you know kind of a volatile venture investment uh or or a volatile really like SAS company investment and so when the other SAS companies are selling off then they will go and and and sell whether rightly or wrongly there's very big debate for why that may not you know that shouldn't be so correlated. Um but so I think like the the narrative for these tech stocks and for these sort of like um higher risk equity plays is is at risk because there's a lot of concerns still about whether this data center and AI trend can keep continuing as it is. There there's a lot of folks out there and

there's a lot of work that's been written about um you know is this entire data center play that everyone has been so laser focused on actually possible to even be profitable uh let alone like you know will it um you know will it end up being a great investment and now there's a one-sizefits-all argument where people have a lot of concern that maybe Google will end up just being the one that wins the AI trade uh and maybe it'll just be one or two which means that you don't really need all these other companies. You don't really need all these different data centers. And that also has a tangential effect because a lot of Bitcoin miners have pivoted uh to the HPC computing. Um now I would probably like you you could probably snapshot if

I went in and said that oh like the data center is going to slow down or something like in a year from now you know I'd look like an idiot. I don't necessarily think that that's the case, but I do think that a lot of investors are concerned that maybe that it not at these current valuations. And so all of that has a lot of institutional money that is now leaving these higher risk assets. Um and there's a lot of concern for the US economy and uh and where interest rates are going to go generally. And so that's created this very strange uh market environment where a lot of people um aren't sure what what the next trade should be. Um and a lot of people in crypto then follow along

but they also you know crypto is not always correlated. The correlations slowly decrease over time especially with Bitcoin as it becomes looked at as more of a a digital gold kind of reserve asset uh for some folks. But I think that um the the crypto ecosystem is suffering right now from well and may still suffer for a bit from just how euphoric things went uh this most recent cycle all of the buying like like it's very scary when we would be seeing DATs buying massive size every single day and prices are hardly going up. Uh it's not a good sign. Um and uh and so I think

and the Bitcoin miners are struggling a lot at these prices. Not all of them um but there's a decent amount of them that that are um and so you know it's kind of this like wait and see environment where uh you know no one's really like uh you know collapsing or getting uh and and we actually have seen people go a little more long in these past few weeks. A lot of people were kind of trying to take risk off the table. Well, now we've seen some people put some more risk on the table. Um, but you know, they're not sure like how what happens if prices fall a bit more, some more um uh some of these miners start to struggle um and uh the DATs continue to, you know, continue

to fall. You start to see some DAT selling or, you know, god forbid, you know, Micro Strategy starts selling and then you have some of these just other catalysts that could happen. Um, and like a lot of folks are seeing they're like it's it's just not worth it. It's it's actually we we know a lot of folks that may even just be saying in cash and going I'm not sure what the right play even is right now. Um especially like not trying to touch the alts because I mean I was with I was with someone the other day that was saying uh you know I can't I'm an alt investor. There's no there's just nothing I could do because every single day feels like it's down 20%. and then it's just down another 20% and down another 20%. So, you know, there's it's not a euphoric environment,

but I would say the last week or two has been a lot more optimistic to go into the end of the year than than I otherwise would have expected, you know, it to be. >> Listen, Craig, head of credit, you said some people are going long. Who are those people? who are who are those people that you know who are uh maybe you know taking a positive outlook in the short term and long term. >> Yeah. And I don't mean to be the uh uh the bearish guy either because I I think anytime that there's a conventional wisdom in something um you know it's going to be wrong to an extent and actually being a bit more of a contrarian tends to have its benefits. I think that crypto has some very there's some very bullish some very bullish

waves and some very bullish uh innovations that have been coming that have been a long time coming that are coming to fruition like kind of before our eyes. There was a uh a Twitter article the other day that was going around a lot because it was folks were saying, "Hey, is the DGEN DGEN phase of kind of this asset class going away as now it's actually becoming uh integrated into like actual real life instead of all of us coming and uh being sort of a part of the casino. Like for instance, there's a lot going on with the stable coins." Now there's arguments about should we have this many stable coins and maybe we you know we go into that later but the reality is uh payment

service providers card issuers that that is becoming something um it actually even is happening in some cases and a lot of folks don't even know and you know crypto is slowly starting to reach the masses in ways that the average person might say I don't do anything in crypto I don't understand it and don't even realize that it's slowly actually happening with the apps that they use on their phone with the credit cards that they use um uh at the at the bodega. And so that trend is really exciting to see. The RWA trend is expanding as well. Um and I know there's the classic institutional adoption. Institutional adoption, it's going to come. It's going to come at some point. I think the reality is institutional adoption has

been coming this entire time. It's coming. It's it's here right now and it's only going to continue to grow. And we've seen that with obviously we're in a much better regulatory environment. We're in a much better policy environment which I think has really really helped because now you have some of these US powerhouse companies, tech companies um but also financial institutions that feel a lot more empowered. Um are the banks going to start lending against uh you know um uh Cardano tomorrow? No, they're not. Um, but the fact that they're uh considering lending against Bitcoin, uh, the fact that they're lending against some of these ETFs coming from uh, JP Morgan previously and and seeing how the big banks operate, that is a massive leap

for those folks. Um and uh and a lot of these and then on the alternative side, the hedge funds, the private credit funds, those folks are interested in a way or already invested in a way that wasn't the case two or three years ago. We see a lot of folks that are now um going and uh trading derivatives and then maybe have uh have some spot positions um overseas or something like that uh in in kind of the in in another pot or in the broader ecosystem. And that wasn't something that that you really saw um a few years back. And so I think there's like a lot of trends that we just see every single day where I go, "Wow, when I came into crypto in 2020 or 2021, um it's, you know, people were

saying this was going to happen and it's happening." Like every day I go, "Oh, wow." Like this thing, this whole thing is actually like really coming together. That's really cool. And it's tough for someone in our position because go, damn, we need to be involved in that. Like we're going to miss out on this trend and then we're just going to be locked out forever because we're kind of watching the the financial system in some sense shift before our eyes. Um and uh so that's really bullish. That's like bullish to the technology. That's bullish the assets. Um, and uh, and honestly, if you're worried about the US dollar and you're worried about stagflation and things like that, that Bitcoin is actually a pretty pretty good investment. Um, so who is bullish right

now? I will say um outside of long only funds um there's u I would say it's probably strategic allocators um that have seen these cycles before and maybe are standing up new funds, have raised money, maybe have been sitting on the sidelines waiting for these opportunities. Um it's actually something our desk does too. um in these euphoric cycles, we saw it uh when I was at Galaxy in the 2021 uh 2022 era where you reach a point where actually you're looking at deals getting done and they don't make sense. Um and everyone's hunting for like the highest yields and

the highest possible returns and and you start to say this seems like we're getting a little out of hand. There's a a lot of there's a lot of smart money here in the industry that felt that [snorts] uh in this last cycle. Um and uh and I think those folks have kind of let this ride out. Um, our books positioning for instance, like we, it happens every time in lending where you start to like get the itch where borrowers come in and they want to risk your asset that they want to go post as collateral and uh they tell you all your competitors are going to do it and they're going to do it at this great rate and uh and you're tempted and you have to say no because it's almost as soon as that starts

happening then you end up in a situation where everyone else has either lost money or is de-risking and you're the one that still has a whole bunch of capital here on the side to be able to take advantage now. Now borrowers are saying well actually a higher rate is okay or um an investment is trading at a discount now which I mean there's there's buyers of alts for instance there's folks that are super bullish a obviously the hyperlquid ecosystem um there's like and go wow this stuff is trading at a massive discount and I'm going to go in and deploy capital kind of like Warren Buffett style when they see that happen as opposed to purely just kind of chasing the euphoria. Um, and and I don't really know. I mean, I

got to watch, but like I don't really know how much further down the market will go. It's just a question of how quickly and at what velocity does it go back up. So, if you're a fundamental investor in some of these um some of these projects that are revenue generating that are essentially real businesses um hyperlquid being one of them, uh then this may be a really good buying opportunity um based on based on your models. So, um, that that's the bullish case and, uh, and I think that that's how a lot of the VC funds, some of the liquid funds have been looking at it. Like, if they're going in, if they're deploying capital right now and they're not just hedging or kind of playing it safe, they're deploying it

all in assets that they see are on the fundamentals currently um, attractive as opposed to just, you know, a token that doesn't really do anything and [laughter] is a bit of a play. >> Sure. Tokenized financial products are the future, but there is a big sticking point. They all need to speak to each other. This is a tough problem to solve, but chain link does exactly that. It's the universal language for financial markets, linking Wall Street to web 3, banks to blockchain, and so much more. See how chain link is linking the world by going to milkroad.com/chainlink.

Stable coins are the biggest use case in crypto right now. But let's be real, using them on chain is still way too complex. That's exactly the problem Bridge is solving. Recently acquired by Stripe. Yep, that's Stripe. Bridge helps businesses send, store, accept, and launch stable coins instantly. Explore the future of global financial infrastructure at milkroad.com/bridge. So Craig, you mentioned that um yeah, a lot of the alts are are struggling and and you are bringing up some I guess kind of alts like Hyperlquid, but with with good business cases behind them and good reason to for their tokens to hold up because they have revenue and and they also use a lot of that revenue to buy back their token, which helps. Um, but clearly Craig, there's a little bit of a DJ in you. I can tell. I can see it

the way I can see by the way you talk. You know, you know, you know what's up in the trenches. Um, one thing we've been talking about lately on the show, we had Scott Melker on last week to and he kind of brought this up is that is the thesis invalidated for crypto, you know, is it at a point where it's like listen, this whole thing was supposed to be this indie form of money, right? That was the whole point of Bitcoin was to be like, listen, we can't rely on the major financial system anymore. let's create our own. And for several cycles, that's what it's been. And now look, look, look at us, man. We're this is a daily crypto show where we have people on like you uh who's a head of credit at a at a large company to discuss your views on crypto.

And you know, we have people like John Dagghastino, a head of institutions at Coinbase. You know what I mean? It's like that's or head of strategy for institutions. So it's like what are your thoughts there as somebody who clearly I feel like you really believe still in that fundamental of crypto being this independent form of money that's supposed to help us hedge against the let's call it the uh misappropriation of funds at times of the of the larger banks or of the of the you know of Wall Street let's say but yet here we are having conversations that clearly point to crypto being absorbed into that system. You know, I was never so far into that thesis where like this is this is kind of the realistic endgame and kind of always sort of has been uh

candidly in in my view and and taking a step back when I left JP Morgan and came into crypto and and uh was on the landing desk at Galaxy, I was more coming from more of a skeptic standpoint. we were we were having research papers all the time that uh would you know talk about how these things don't make sense and this doesn't make sense and why would anyone go do this but I was really interested because I knew that underlying technology you know and I'm going to sound like a total trifi person but it's like the distributed ledger technology um was very interesting the fact that these apps were developing on on chain the the advent of seeing stable coins work and I was like okay there's something to this industry, but I don't know if I believe

in the the whole sound money hypothesis and all that. I've and then being in crypto has also changed my view and brought me more onto the other side, but I've always also been anchored into knowing like like both sides essentially of the narrative. And and so, you know, when we'll be sitting with our onchain team and we will be with the most DGEN, D5 folks that you've ever seen and then the next minute, you know, you're on a call with a bunch of uh folks in suits from uh you know, from a Trafi institution. You you you keep yourself grounded. It's almost like watching MSNBC and then watching Fox News right after. It's like maybe what maybe what people should be doing. Um, honestly,

um, and I think I think where I've ended up on the whole thing is people are gonna, you know, hate me for this, but I've never been a Bitcoin's going to take over the US dollar, uh, you know, become the world's reserve currency in the near term, um, you know, kind of person. Um, however, unlike, you know, uh, the, you know, JB Diamond going out saying Bitcoin's a scam and things like that, Bitcoin is actually, I am, I'm I'm a subscriber to the digital gold argument, honestly. Um, and actually better than digital gold. I think it's a scarce asset that does have a utility. You can pay with it. There's very interesting things that you can do.

I know I know some folks that are really trying to work hard on really cool opportunities with Bitcoin scripting as well and like work on the lightning network. So don't get me wrong. Um but in reality it's a better version of gold, higher return profile obviously historically but also like it is an inflation because at its core it's a scarce asset. It's like a truly it's the most true decentralized, you know, kind of it's very unique in that sense and it's it doesn't have to give up because it hasn't given up on some of the core principles of decentralization.

Um it's it's kind of put itself in a place where it's not a great payment uh you know tool. It's it's gathered too much value at this point and it's uh and it's not that easy candidly to move around. um but it's become its own store like a a true kind of store of value whereas like the other assets and [clears throat] it was something like when I realized these are really uh venture software application layer like you know almost like investing in the internet um kind of a thing and it's but you realize pretty quickly when the first time you use DeFi where you're like whoa did I just place a trade did I just uh like what exactly ly did I just

do where I didn't have to do anything other than connect this wallet and go and I just move money back and forth and and now I have dollars over here and wait a minute I could just send those dollars into my Coinbase account and I can do all of this and it's a Sunday night or it's on a holiday and like the you you realize pretty quickly you're like wow this is actually really really cool like you were in a truly uh you're in a situation where you don't need a financial intermediary um and thinking back to, you know, when we were JP Morgan there's a time and a place for the financial institutions but you know do you always need them like you really don't do you need them to over you know lend to you over collateralized against

uh you know very safe assets well maybe in some circumstances but like not really like it a and compound and morpho have proven that you can take take that out of the mix and have a very efficient uh ecosystem. I I mean in a situation where borrowing rates, you know, on crypto are less than they are in trady. You you literally right now earn less to put money into a than you do putting it into a money market fund. It's extremely rare in in uh the crypto credit market.

It's extremely extremely rare. And so I I think that in the grand scheme of things, I'm bullish because of those things. However, where does it go from here? At a certain point, like we're done the incubation stage, like where where does it go? It's not everyone in the world is going to suddenly just start getting out of their bank and self-custodying and trading on Hyperlid from now on. Like it's just not going to happen. So like what you have to do is like at a certain point these things have to come in to the rest of the ecosystem and that's really what's happening right now.

>> It took us a long time to to even manage our money on the internet Craig. You know people were still like it doesn't feel like that long ago that you know you were going into the bank with your little booklet and your checks and now that seems insane to do unless you're making a major transaction like buying a house or something like that but otherwise like anything else like no way. Why would I ever go anywhere to deposit a check? Right. And I think that's kind of what you're speaking to is like it just takes a long time. Eventually, you could do those things, but I don't know if it's going to be on a on Hyper I don't think everybody's going to come in and start buying their groceries using Hyperlquid or any kind of application like that anytime soon, but they could use they could use stable

coins sometime sooner, right? Um so, so here's a question for you, Craig, maybe to wrap us out, and this is kind of looking ahead to 2026 because you know that's what we're starting to do here last couple weeks of the year. In your opinion, the people that you know, the funds that you know in general, is there still too much overexposure to crypto? And I don't mean in spot. I mean leverage or any other form of like we are still betting on the market and especially and and it's hard to gauge what is too much or too little, but given the context of the last couple months, a lot of flushing out, you know, and even even right now as we're talking, we're down on another little slide. Uh what are your thoughts there?

It's it's a good question and it's a question that every major crypto lender and really institutional crypto trading shop has been trying to figure out post1010 has been who blew up um who took a hit and how long is the unwind? When are we going to see this? I remember when three arrows and Luna um you know when that was all going on. fun time to be uh fun time to be in crypto as a crypto lender. Um it took uh you know it always took even FDA like six to eight weeks before you started to see dominoes start to fall. So um a lot of at least the folks the lending community is a fairly tight

one in this industry. It's not it's not the world's biggest group. We were all kind of sitting there saying we're just going to wait for a little bit here and just see what's what's about to happen. But I actually think like it's we've all kind of like made it pretty well. Like it's interesting. We've we've all sort of like been sitting here waiting for the bomb to go off and it hasn't really happened. It's like is the reality really just that you know bunch of folks got liquidated but they didn't get liquidated. Like it wasn't that bad. uh maybe a couple places blew up alike, [clears throat] but instead like you know as a side effect we just have a situation where actually I'd say there's really not much leverage at all in the ecosystem right now and it's created a

very very interesting time right now for asset managers and for folks in crypto credit because you have some of the cheapest interest rates that I've ever seen in crypto um for um definitely for stables but for anything. Um, like you get 1% right now putting ETH into A and you know that's part of that's the unbonding period, but that's insane. That's so much less than staking and people do it anyway. It's 1% because everybody's doing it. You uh you know why is how can you get away with 3 to 4% for USDT or USDC on onchain markets? Um like it it actually doesn't make any

sense. And crypto basis though is 4% too. Uh four or five percent that that'll go out. And so that those are all signs that actually maybe there's there's nowhere near enough leverage in the system right now. Like I think it's actually people are way too riskoff and probably are licking their wounds um to an extent where they're you know folks are like I'm not levering up for a while. I know a lot of folks are trying to just get capital in house, be a lot safer, go and make sure that, you know, we're good in a 70% price drop this time on Binance like before we get liquidated. And uh and so and you know, it's always a spectrum. It's it's like

crypto lending was way too risky where we turned down so many deals at Galaxy. Uh and and the same cycle happened this time. Uh just just a little bit less. Um and you know, you turn deals down, you feel like a schmuck and then something happens and everyone goes in the complete opposite direction and it ends up being too far there. Like there's a middle ground between lending completely unsecured with no with barely any idea on the financials, no idea which entity you're even facing, if that's the one that the balance sheet that you got, no asset verification at a rate that doesn't that loses you money. Like that was a real thing that was very very

prominent. A losing rate completely unsecured. Um all the way though to I'm only lending 200% over collateralized in triparty at a qualified custodian uh to an A tier borrower that I've collected all the financials under the sun to like that's not really right either. that that's and so um I think we've moved further in that direction at this point which uh is kind of actually interesting because when we did that in uh the last cycle it became a very interesting investment opportunity for the folks in the lending business as you came back to the middle um and so we're very we're certainly very excited but you know

things remain to be seen >> ETFs provide investors with a structured disciplined and diversified approach to crypto which is cool, but the world is moving on chain. We need a crypto native equivalent. That's exactly what Reserve's decentralized token folios bring to the table. Reserve ETFs are rule-based baskets of crypto assets packaged into a single token like Coin Market CMC 20, crypto's version of the S&P 500. Go to milkroad.com/reserve to find out what's on offer. [laughter] That's a good long answer to that uh question that I didn't even tell you I was going to ask you. So, thanks for answering that. Uh, Craig, I think we'll wrap up there, man. Thank you so much for coming on the show and thanks for all the the valuable slightly insider knowledge there.

>> Oh, well, you know, thank you for having me. Sorry for rambling. It's just uh it's a fun fun time to be here. It's Thanks a lot, LG. >> I like that. Craig thinks it's a fun time to be here. That's what that's what we want to hear is that up or down, he's having a good time and you and I guess you should be, too. [laughter] >> I bet you are. Yeah. Okay. Right on. Thank you, Craig. >> Thanks a lot. Views expressed in this episode are those of the speakers and do not necessarily reflect the views of Falcon X or its affiliates. The content is forformational purposes only and is not investment advice.

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