Market Contagion | stETH fallout | Celsius & 3AC Liquidity Crises | Santi's Investment Strategy

Transcript

this episode is brought to you by bitmex the og crypto exchange that is back and better than ever you'll hear more about bitmex later in the show [Music] all right everyone welcome back to another episode of empire i think we will probably have a lot of newcomers to the show um first-time listeners to empire i'm really excited that you guys are tuning in for this podcast um we are today we have uh this is kind of the structure that i'd like to go through today on this episode we usually do these weekly roundup episodes where we kind of cover the last week we're going to zoom out and just cover the last couple of months in crypto um starting with boom one how did we get here like what the hell has just happened over the last couple of months

so we're gonna start with how did we get here next we're going to going to give a little bit of an overview on like steath state deeth lido because i think that's actually important to the conversation uh surrounding the next two topics celsius and three arrows after covering celsius and three arrows we'll get into talking about contagion okay the big question on everyone's mind is like what happens next what are the different things to fall funds companies people individuals what happens from here that will tie us into the next big question of have we seen rock bottom yet uh which obviously ties into what everyone wants me to ask santiago are you buying yet santi have you pulled the trigger and then we can zoom back out to tie this conversation together what will we see in the next few months

santi how's that sound to you sounds great cool uh have you listened to that stanley druckenmiller john collison uh episode amazing no okay amazing you did you did okay so one of my favorite stories in there is druck and miller basically saying just his story of how he played the uh him and soros actually played the dot-com bubble right he was short when the market was was was longing he went long when the market started to turn he went like he literally top ticked it he said by an hour uh he basically made all the wrong calls he made like back to back to back wrong calls was down 18 then went up like 40 then went down 18 and at that point it was like maybe

march of 2020 or like 2020 or of 2000 or 2001 and he basically said screw it i'm done i'm throwing in the towel he goes to george soros and he says i'm walking away he tells his investors you can have your money back if you want it you can pull your money out of the fund and he goes to africa for three months with his kids and um man i'm excited that we got you back on this episode this is your first episode in a couple of weeks and you too are back from africa you have pulled a drunken miller you've had some time to think you've had some time to decompress so hopefully your thoughts are uh as insightful as uh druckenmiller's you up for the challenge that's a tall order i'm still in africa so maybe this will inspire me to be more like him which by

the way i zooming out as an investor um i really i really look to soros and drunken miller as kind of like i ascribe to that kind of type of philosophy and frameworks more so than perhaps any other investor out there so how do we get here the markets let's look at some of the data today santee the university of michigan consumer sentiment index just cratered from 58 to 50 the lowest level ever since that data collection began in the 1970s the fed raised interest rates uh by 75 bips uh on wednesday the largest rate hike since 1994. cpi rose to a new high up 8.6 year-over-year the two-year is at 3.27 the highest it's been since 2007 15

years the dow has been down 10 of the last 11 weeks this is the first time this has happened since the great depression uh average gas prices in the us just crossed five dollars for the first time ever gas is now up 63 on the year i think that's record levels uh gas levels um in the united states markets and crypto are in a free fall eth is near 1 000. uh bitcoin is near 20k the total crypto market cap is below 1 trillion again crypto feels like it's in free fall now below early 2021 prices how did we get here my friend well it's a really interesting question i mean i think like a lot of investors you would have asked like at some point there was going to be a day of reckoning on like when you have seen central banks

print money the way that they have um and and the market kind of react to that you know everything was up everything was hitting all-time highs and you know you read just a disappoint another type of investor that has kind of been like a canary in the coal mine this is like howard marks from oaktree super really good investor really good credit investor and macro investor like stan druckenmiller and you look at his letters and over the last like 10 15 years he's been saying like this has to stop at some point uh ray dalio again the market cycle like people the challenge of an investor is it's not so much that you understand that market's going to come down and crash at some point and need to correct and reverse like and revert to the mean it's timing that and understanding when that's going to happen um i think

broadly speaking look i'm not a macro guy there's people that are much more sophisticated than i am but i think like certainly the the war in ukraine uh was a big catalyst to detonating kind of what has been you basically invade the breadbasket of europe and that's going to have a whole host of things including energy prices have gone up through the roof especially in europe um because you know russia controls a lot of the natural gas it flows into europe and europe has been largely uh neglecting nuclear energy right uh france supplies a lot of nuclear to other countries but you know germany has cut down nuclear alaska over the last decade and so um you know obviously that contribute energy contributes a lot to cpi um and and food prices as well food prices are up over 30 year-over-year because i

mean this year alone because you know ukraine and russia supply 10 of the world's calories number one fertilizer i think that has been a big detonator when people see that kind of inflation then i think it's it it it kind of boxes central banks to do something and when you rise rates it sort of has this cascading effect once you write you know you rise rates the way that you have i think the central banks have been like trying to catch up they're reacting to this stuff as opposed to getting ahead of it um and then that's what has triggered a lot of this right when rates rise and people start this you know we just anything that is risk on anything that you know is like stocks and farther

on the risk spectrum including crypto collapses pretty dramatically because you know your discount rate's much higher and so natural evaluations fall yeah so the fed is is getting pretty intense here right they're rising they're raising rates they're selling off assets from their balance sheet asset prices are crashing inflation is not budging there's an economic contraction in q1 it feels like the entire situation is a complete mess i think a lot of folks um like oh geez and crypto saw saw knew it could get this bad but nobody knew how quickly it could happen and i think for me um i've just been really honestly surprised by how fast and how brutal this bear market has has been actually um and i'm kind of saying why

was i so surprised by this i feel like it's always like this but i'd be curious to get your take we knew we could have a bear market we knew prices could fall 80 90 but this specifically feels really really intense to me i'm curious to get your take on that i mean i've always told people like you know with the narrative around crypto has always been it's an uncorrelated asset class and i never believed that um i just i just thought that it it's more of a technology bit than it is a hedge on macro um and looking back i was reflecting and said well yeah sort of like over the years you've had crypto crashes but it's always been under an environment where the fed has printed a lot of money you've been in quantitative easing and so a lot risk assets inherently you've done

very well since the global financial crisis in qe started and so look can bitcoin and specifically bitcoin and other hard assets be a hedge against inflation and it is going to take decades for bitcoin ossify as like this non-sovereign store value um ever i do believe that every cycle that we survive it hardens that perhaps more um but it's not we're not at that point yet i mean it took all centuries for people to like describe some sort of value to that uh to this scarce metal there's scar more scars metal is there it's a terrible semiconductor you can't store it easily you can't transport it easily

but cultures love gold and it has become this social construct of value um but it took like centuries for that to happen uh i think it is possible for bitcoin to like get there um but you know it's tough to like tell someone that this is going to be an uncorrelated asset class i think you just sort of assumed this is like a very high asymmetric bet on technology it can have a lot of interesting properties across you know the way that governments operate the way that we coordinate as humans the way that we organize as societies businesses but it's gonna take time right and like you know i feel like we need to be really patient here um i'm not to be fair like i'm more calm now than i

was in other cycles in 2018 and this is more personal for me because in 2018 like i had a thesis but it wasn't as solidified um and i was like reflecting on like how did i sort of miss um like i guess the extent by which in which you're saying that how do we get this far and this quickly and i think it's just one thing candidly and i would be interested to get your perspective which is like it's just rising greats like we've never this is new right and i haven't invested in a rising rate environment and i tweeted about this like a month ago i said now is sort of the time that a lot of us are going to understand how good of an investor we are because when you know we've just never

been in this paradigm and just to reference one thing you said earlier which i would encourage everyone to go watch that interview with stan buckle miller is he's like i'm very humbled by the market it's like a new it's a new environment it's really weird and i think people are in this process of understanding how to play that and if someone like stan i'll say this and i'll stop talking if someone like stan talking that come out comes out and says i don't know what to do i'm kind of like on the on the sidelines which i think he was shorting the market i think he's now on the sidelines at this ie cash or neutral if someone like that something like that is is

doing that then you just sure as hell know that everyone else right now is bracing for impact and just wants to survive and so when that happens it's just a indiscriminate sell-off across everything you're like i just want to be able to live to see another day right i mean if someone like druckenmiller who says i think his specific point is that you can't when you don't when historically over the last 30 years when he doesn't know what to do in equities he pivots over to bonds right he you can't do that today um and i think it's just a really difficult situation right we've the structural macro flows of crypt are are against crypto right it i think it's just uncharted territory for crypto right now and i think the the fight i think uh maybe as chris burniske said this the the fight going on in

markets is so much bigger than what's happening in crypto right now uh we have a multi-decade macro shift we have potential stagflation we have world war three what it feels like within in ukraine we have famine on the horizon it feels it's it's we've never invested in crypto like uh through this kind of period in 2018 and 2019 i was talking to some folks at block works about this uh that was a tough period for crypto but in general global macro like that was fine you know so that was fun um and again like um well one last thing i'd say is um i i felt that we were gonna dip below a trillion market cap crypto um i saw some pretty negative skew on the downside um my initial

target was 1500 b uh 25 000 btc i revised that down to a thousand e 20 000 btc uh can we go lower probably always like again like you know it's very complicated uh market that we're under um but you know i i think like you don't want to be a hero in this market like i i i haven't i still feel that there's downside um particularly because i've said that the biggest challenge that we have in industry is self-sabotage and we've seen a lot of that recently uh bear markets just break things that haven't worked a lot of the [ __ ] out there uh and and right now you're coming and

testing that very clearly we can get to this much more later the episode celsius three arrows a lot of things when these when bear markets kind of come they're great in many ways because people become much more scrutinizing of things and become much more aware and critical of things that haven't been working and we're seeing that very clearly maybe to some like over extent like people now like creating a lot of fun on like the tether foot is back on like um everything that people like every thought that you can imagine comes back on now right uh which there's something fear states people people revert to the past in fear

states right they're they're they're blinded by fear and they're kind of unable to think clearly about their theses which i think is you were saying your mental framework is so different than 2018 because you've it probably ties back to you have a very strong core thesis now that you've told me over and over and over again and maybe in 2018 2019 maybe you didn't have it as much and so yeah i have a feeling just from our telegrams you're still seeing the future very clearly right now because you have those theses i think in times of euphoria though uh people think they might see the future clearly but uh when when markets turn you you you lose that those theses really quickly and and we saw this right like in the outcome of the uh bear market of 2017 or 2018 2019 uh tokens right tokens were not real it was

like tokens these things are scams uh it's all about like equity in companies right that was like the what came out of the 2018-2019 uh bear market which was wrong right we were just too early with tokens and in the bear market before that it was blockchain not bitcoin came out of that bear market and you'll probably see something in this bear market uh something around either nfts probably maybe dows actually people will probably revert back to saying uh dows are not real like companies not daos is probably the new blockchain not bitcoin um but but but again like the thesis is right it was just too a little too early so i want to go back to something you said earlier and look i've seen some people being very critical uh recently is uh which just goes to this idea of

like what do we miss like a lot of vc's were super bullish and now people come out and parade and say oh you know we saw this coming like you know things can't be this way and of course we were going to correct and look i want to be like this is why i don't like to give predictions i i i want to remind people like don't confuse optimism about this technology about this movement with also on the other side of your brain reasonable valuations and the challenge with crypto is that you really kind of don't have a consensus around how to value crypto assets and so it is doubly challenging to and plus it's a liquid venture asset

class so like at on top of the whole confusion and panic in the market on top of that a new asset class where people don't really know how to value in true price discovery including bitcoin like yeah of course you are you should be always prepared to see this kind of drawdown in these assets including bitcoin 90 80 can we go down further to 500 east 2008 absolutely it's not out of the question why because i mean it is just very challenging times and but that being said i am still very optimistic and my long-term thesis

about this space has not gone away in fact i think it reinforces that like these periods are important to go back to a drawing board and say listen down governance is is a theater it's not working we need to be way better at understanding how these things operate like look at the rot like the rari um kind of tribe discussion look at the merit circle and ygg discussion those are going to be interesting precedents to say how do we actually operate dows is this like is this a very loose form of llc it's all [ __ ] or are we actually creating the new llc for the internet you know look at d5 i think d5 has been very orderly like the liquidations happening at d5 the celsius i think now people understand okay wait

a minute if i can't like if i can't audit my collateral if i i don't understand how my funds are being used whether it's lehman brothers bear stearns celsius darabit whatever then yeah we should be kind of more critical of that and then it reinforces the need for d5 and so in many ways like i just want to remind listeners that like i'm very bullish about this technology but the challenge is narrative's always gonna have fundamentals i think i've always said that and i will stand and that's why i went to cash largely you know in november december and i've been going to cash because i'm just sitting in cash because i do see more opportunities coming this way when there's pain in the market but i don't want i'm not trying

to be a hero i am trying to like you know be in a position of strength to back really smart teams and over the last couple weeks i continue to deploy i continue to invest in early stage stuff that's my lane that's my niche that's my edge but public markets including e stocks everything to me i don't feel like i have an edge and i'm not eager to like jump in there yeah yep all right i'm obviously gonna ask you the question of are you buying but we're gonna wait to do that make people sit through us talking about three errors in celsius and and staked ethan because i think it's really important to the

conversation and then we'll get into where we see the bear markets i actually want to start with steath because i think it's really important to both the celsius situation and three arrows so i'm going to do my best to try to describe what's going on with with steath and this like proverbial peg even though it's not really a peg and i'd love for you to correct me where i get this wrong so basically to understand steeth i think you have to understand lido lido provides this liquid staking service users are able to lock up any amount of eth for validating purposes and when they do that they receive the the steath token st eth which can then be as often you get the steath token and then you re-hypothecate that in d5 to earn yield across a d5 each teeth is redeemable for one eath

after the merge but importantly not before the merge right so steath is backed one to one by staked eth on the beacon chain uh and this eath is illiquid until a post-merge hard fork um historically right steve and eth they trade one-to-one um thanks to they've got a very deep liquidity pool and just like general sentiment that these are quote unquote like pegged assets right what happened though is um when tara the whole tara and luna situation happened people basically began to question assumptions acro across crypto and um uh one of those was steve is like should there be a peg of steath to eth and people started to just look at liquidity and actually what happened is

the the curve steep pool uh steep to eath pool lost over 80 percent of its liquid eat in just a couple of weeks and so that makes people start to a quest to really question the assumptions right people started to realize that these aren't actually one-to-one pegged assets you've got a liquidity premium or maybe discount if you want to call it that you've got lido risk you've got risk of the merge getting delayed liquidity dried up on curve as people swapped their steath back into eath and so the so-called one-to-one peg even though it really isn't a peg uh began to break and today it's trading at 94.94 steve to eat so just a quick overview there because i think it's really important um how did i do there well it's great look full disclosure i'm

an investor in light i was uh the student investor lido uh so you know obviously i have some bias but that gives me some perspective you're absolutely right look it's not a pig every state teeth is back and fully collateralized by eth um the issue though is these things should have never traded uh at par like you know naturally there should be in the liquidity discount right because you're taking it's a time value money right like okay there's some vital incentives that kind of compensate for that but if you look at other uh other other derivatives or like other state eth kind of uh and i think this is anchor and a few other like state count i think there are other in the market i think binance is another

and these are all traded uh in to some degree uh at a discount um and that's it's like it closed it's not like a closing mutual fund but it's kind of like that right you look at gbtc discount like these things should have a discount um because you know you're taking some risk um and and like you know there's an opportunity yeah yeah i think that's a really good person and yeah and so like you know again like it traded you know at par for a long time uh when it first launched it kind of like awesome like was pretty volatile like around like this 90 cent range um uh and but now of course as people are for sellers and they want liquidity

especially in these market conditions alameda celsius or big holders of state teeth now of course they've been needing liquidity which we'll get into later in the episode then yeah it you know these that puts more downward pressure and you see it trade at a lower discount yeah i mean i think what a lot of people under i think what i just said about steve just the overview is a widely understood thing i think maybe the less understood phenomena is that lido to gain market share needed steath to be widely adopted by these d5 protocols and to have it adopted by the protocols it was really helpful if it was one to one right this and and it was historically one to one what happened is these d5 protocols set their risk parameters and just funds

also uh set the risk parameters as if one eth equals one steath right so then funds and also companies like the celsius of the world took out these massive levered or just really massive positions as if one's teeth equals one eath and that's where really [ __ ] hit the fan um and what's happened is that the market has realized that yeah steath is seath is a function of uh everything that goes into pricing a token right desire like supply and demand it's it's the volume and liquidity of the market like how well can the market handle sell pressure uh it's the likelihood of uh maybe smart contract risk it's the likelihood of a successful or a delayed merge right these all go into the price of light though so or excuse

me it lives too so we talk about themes and narratives a lot this is perhaps one of the most important things that people need to understand people get into trouble and to do two things one of them is a mismatch of assets and liabilities right this direct this idea right uh celsius was yield farming had perhaps staked eth and you have depositor money when people want you you know when everyone wants their money you can't redeem it then it becomes a problem right and so as an investor you always need to be very cognizant of what are your liabilities what's your debt position versus your assets right and if there's a mismatch in duration then you got to be really careful around how you manage that and very few people

can do that over an extended period of time successfully lehman bear stearns there are literally skeletons in graveyards along the way throughout history uh and the second point is tied to this is leverage you you in an asset class as volatile as crypto you know it's a difference between speculating and gambling you we are all speculating here about the promise of this technology at some point will be truly revolutionary but add on top of that leverage and you are just literally counting your days because you know you are putting so much risk of not being able to see that day exactly exactly let's talk about celsius

um because they are an example of something that got impacted by steve celsius i have a feeling most people know what it is it's a uh i kind of hate this term but it's a cfi app right it's not a d5 protocol it's not a centralized it's not like a jpmorgan or bank of america company it's a centralized crypto company that that uses defy um and uh it gives users access to like trading high yield deposits unstable coins and crypto crypto back lending they had raised a ridiculous amount of money for lack of a better term they'd raised over 850 million dollars of venture from different pension funds i think some sovereign wealth funds some of the best venture firms um at one point they custodied nearly 30 billion dollars of funds for almost 2 million customers so

these are these are these are really big numbers right almost 900 million a venture raised almost 30 billion of uh of aum almost two million customers these are really large uh numbers how this happened we how everything that we're seeing in celsius happened here's my kind of explanation as i understand it celsius has been operating almost more like a d-gen hedge fund than a bank or like they're like a bank on steroids basically what they've been doing so here's what celsius does is they take deposits they issue on and off-chain loans um so they might issue like off-chain loans to different market makers or hedge funds they might issue on-chain loans into different d5 protocols and then they keep the interest rate on the spread right so if they let's say they advertise um

five percent on usdc deposits which i think at one point they were doing what they then do is they might swap that usdc uh into like ust and then put that into anchor and make 20 on the ust uh and at one point there and then they keep the 15 spread at one point they had i think it was over 500 million dollars of exposure to uh ust on anchor um so here so here's what happened and like they have celsius has been known probably more than block by more than any of the other lenders for taking risk right last december they had they admitted losses related to the 120 million badger dow hack and i think a lot of people looked at that and they're like wait a minute my money is i'm a celsius customer like my money's

in badger this badger dow thing which is like this new protocol like okay that's a little weird but it was the bull market so people didn't think much of it anyways moving forward here uh luna failure likely started a lot of the trouble that we see today with with celsius right there's rumors that they had exposure like i mentioned of up to a 500 million dollars of usc on anchor um but they had also did that with different stable coins and and eat as well right so let's this is kind of how it ties together with steath for each deposit celsius was promising between six to eight percent in interest with a lot of that is likely earned from staking rewards on uh through steath right but the biggest issue is that assets held on the beacon chain are completely locked up right you

can't unstake those for now so like obviously like we talked about lido solves that problem through this liquid derivative asset called steath uh steep was trading at one to one celsius probably in the risk parameters said that it was trading at one to one uh because it needs to match its assets to its liabilities in a bull market that all works out right all is good in a bull market but with the liquidity crisis and the bear market the steep to eath ratio technically not a peg began to slide now celsius customers eat deposits and swapped a liquid staked eath assuming it would trade one-to-one with with eth now it's trading at 93 cents and celsius had over 500 million dollars worth of uh worth of steath which starts to become a

really concerning position if the merge gets delayed uh because obviously then they can't redeem it for eth um and so here like basically you just had this cascading uh fear in the market crypto continues to fall depositors lose confidence they want their funds back celsius has illiquid assets trading at 93 cents on the dollar liabilities like you mentioned greater than assets people more and more people lose confidence the cycle continues uh it just came out celsius is a 400 million dollar leveraged rap bitcoin maker position that they have to keep toggling up to avoid public liquidation prices all all that comes to a head when uh mashinsky and celsius announce that they are freezing withdrawals from celsius so there's a lot more to talk about here

but that's kind of the summary what do you make of this whole position uh and and just unfolding of celsius here santiago uh well i thought that was a great summary i think like a lot of this started to kind of unfold when they lost uh i want to say i was trying to pull up the numbers and we can references but they lost a lot of money on on on ust on anchor um and so it was it was was it 500 million or i thought it was like 176 million maybe that was state count because there was also a hack on something i might be wrong but anyways they've they've been pretty degen um on their yield farming strategies historically um

to as you say play this spread right to go after capture more yield of them promising their depositors and so that is that kind of level of risk-taking at some point came to to hurt them uh they lost a lot of money in a lot of these hacks i mean d5 is still very risky right and so when you're putting that amount of money on chain uh without insurance um and that you know ultimately they started losing money for customers i think like that they probably hoped that they were going to be able to absorb that over time you know and kind of like pump that that obviously um came um became much more of an issue when

all the spots started and people started like trying to withdraw their funds layer on top of that the liquidity kind of this mismatch of assets and liabilities uh it was a classic bank run uh right i don't know for a fact that they're insolvent i think obviously they became really close to being liquidated uh on chain one of their vaults on maker uh they fixed that i think there's a rap bitcoin um kind of the liquidation price of that is like really close like it was 22k it was i think it was 25 i think the liquid liquidation price is like 17k it's 17 16k now yeah they were they've repaid that and so they their health score kind of went pretty pretty like close to being liquidated that's a big position right like they

celsius has the i think it's the largest wrapped bitcoin vault on maker there's uh the last i saw i might have this wrong but i think it's like 24 000 wrapped bitcoin so uh what's the what's the math on that 24 000 times like what's bitcoin at today 242k or something so i think it's 22 times 24. yeah it's like it's 150 or 500 yeah 500 so yeah yeah yeah that is a massive position yeah it is look i mean i think um um i if you're a customer i don't know they they haven't resumed withdrawals uh is my understanding but uh yeah i mean i

never have used celsius i would encourage most people to kind of look at this and if you have assets there hopefully you can get them out but it further emphasizes this idea that you know you want to be in control um and and the premise of d5 has always been you need to be able to audit your collateral 24 7 365. like if you put your money in ave and you you want to you want to borrow against your collateral you want to head you want to short you want to do whatever you can always being you're always you can always audit that position and control it right if you repay your debt you can always get your money back like that and look again the criticism of d5 has always been it's it's over collateralized and i get it right

this is not very efficient uh but still i mean i think like it is transparent and just fully collateralized and like you know over collateralized actually and and so this is again just uh the the challenge with crypto's always been that people don't feel really comfortable like being their own custodian they don't want to manage their keys they want to put it in an app and most people feel really comfortable with that and so yeah it's just an unfortunate situation i hope they survive because i mean they have a lot of customers and so if you're liquidating all at once all of those customers i mean pretty bad for the industry like a lot of people just don't want to come back

so hopefully they survive and they do better you know risk management whoever is running risk and these strategies uh needs to seriously reconsider what they've been doing uh but yeah i think it's a good reminder for folks that when you see six to eight percent yield you're like oh celsius offers 68 yield but my bank of america account offers only 0.01 percent yield you're like no-brainer to put it in celsius there's risk every time you see apy right and so uh i think there's kinds of associates users sorry there's two kinds of users of celsius i think or maybe there's more but there's like two archetypes one of them is people that understand what you just

said which is yeah i understand they're doing some crazy stuff but i'm just going to play this and it's not going to be me i'll i'll be able the music will stop but i'll be able to like i'm not going to be the last sucker and i'll be able to get my money out right i know people that have been doing that and they knew the risks and there's another type which is more inherent like the luna situation which said hey no like this is it should be fine right like you know to have no idea of the level of risk that exists still at the smart contract level for d5 um and unfortunately celsius is not your typical bank now again banks and global financial crisis have this issue too and so the volcker rule and all this stuff that has been implemented since is

trying to mitigate and address like the capital reserve requirements and they constantly get tested bags are heavily regulated and audited today constantly for this reason but celsius has gone is not or has pretended to not be subject to the same level of scrutiny and regulation as traditional banks now of course now this puts into question should celsius be regulated should these c5 apps be treated the same as banks and candidly the answer is probably yes actually yes now you can argue that there might on the on the margin that could be treated to some extent somewhat like there could be some exceptions but i am not i'm of the mind that

they should be treated like banks because anytime you're you get depositor money and you're controlling that then you should be subject to the same of scrutiny than a bank i'm not sure i okay so there's two things there one is the point that you made that like this is not that much different than what what banks do um yeah i mean i think there's a tradify analogy here to this firm called mf global which folks in finance would who were around pre 2008 2009 would remember them they had 42 billion aum there were a massive derivatives in commodities brokerage firm that basically just went belly up there they were basically taking customer funds and making bets on

european bonds that those bets didn't work out and they went belly up um from from my understanding or there's like long-term capital management is obviously the really famous analogy as well uh in terms of the in terms of the regulation side i mean i think it's just important to remember that yeah celsius is a c5 company they're not a d5 company so okay so let's say yes you regulate celsius do you also regulate compound and ave with those same regulations no no for the reason for that i'm going to agree with you for the for the very precise distinction that compound and ave are smart contracts they are not controlling your funds

they they can't uh you're always in control of your funds now they can liquidate your funds based on certain parameters but very specific set and rules of a smart contract that what you should focus on for ave and compound is this idea that the smart contract the immutability of a smart contract meaning you want to have the certainty that stani robert and co and teams cannot change the smart contract to at some point be able to modify that and control your funds and as long as that is true meaning truly immutable code then then i think you that that level of guarantee is enough

to not regulate it like a bank i think that's a good point right okay they they may be able to pause change certain parameters to protect user funds to implement certain changes but never control your funds never kind of like sweep your wallet right and so as long as that's true that's how you make the distinction between celsius i centralize financial applications and institutions and providers to decentralize applications and programs it was crazy seeing machinski tweeting the day before they basically announced that the withdrawals were frozen i think he was tweeting at dudis um

that celsius with the withdrawal freezes are fud we have enough liquidity our job is to fight tradfi together i guess this is the natural thing that you do and the banks were doing it in 2008 2009 saying that or 2007 2008 like saying that they were fine too but i guess that's all you can do when there's about to be a bank run but man that was that was not a good look no i mean look i have my reservations i pass on the seat round i'm at the team early on and i just i just didn't give you a hunch empire is brought to you by bitmex with the launch of their spot exchange bitmex is running an insane promo right now we wanted to give you the inside scoop here's the deal for the next two months users who trade 250 worth of crypto on

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today sign up for an account bitmex.com what happens from here with celsius so there's rumor let me let me share some of the rumors i don't know if any of these are true there are rumors that uh alameda or dcg might buy up some of the distressed assets there are rumors that well i guess nexo who's celsius's competitor uh is making a public offer um uh there's i think they hired citygate or excuse me citigroup to advise on financing options they brought on like a top law firm to advise on possible solutions tldr i mean they have 10 billion dollars of there are about 10 billion in

customer assets and celsius only about a billion and a half are accounted for in public celsius wallets so when you talk about this mismatch of liabilities to to assets there is a clear mismatch there um what do you think happens with celsius just occasionally they might like all those assets might be like sitting with genesis and a few other like folks funds even that are doing yield farming strategies so like it's going to be hard to do a roll up on chain uh but no i agree like no true there's 500 million with with makers you got to add up all those correct okay um but look i mean hopefully they've sort of found someone to provide a backstop and like inject some liquidity you know i'm speaking this i don't know for a fact that they're like

totally insolvent like i'm not prepared to say that um they might be just facing i don't know what the buffer is of what their requirements are i don't know how much depositors are in queue um i think slowly progressively they start allowing and hopefully they reintroduce the ability for users to withdraw funds to some extent and maybe offer them an incentive to like keep funds in the platform uh and commit to like keeping them for a couple months and giving them some incentive with celsius token i don't know they probably will do this i'd be as a user i would be probably like not very encouraged by that and just try to get my money out um around the speculation for dcg you got to remember that barry is a restructuring lawyer i think and so he pro and on top of that dcg obviously is

front and center been trying to get approved in etf to like fix this idea that like gbtc thc all these different like mutual funds those are mutual funds they're trading at a pretty big discount um and so they might absorb that because they can probably more easily absorb that dc as a huge balance sheet and a venture portfolio so they probably might be able to so the scenario is someone and i just heard i just saw on on twitter i'm not sure if this is true that the existing investors probably will not give celsius more money like this is like the canadian like pension fund probably is not going to inject more money into celsius i doubt that that scenario is is gonna happen uh can celsius find another like equity investor like borrow like

maybe that's scenario one and buy more time um and hope that the market corrects and they scenario two is that they somehow short the market and then they're able to back back back the coins and then like you know you you're in a much better like financial spot or but yeah hopefully they don't go down for the reason that uh you know i don't want to see all these users uh be in pain um more so than they've seen now the value of their holdings go down because of the market um so yeah i don't know i think i think there are probably four if if if the assets don't match the liabilities there are probably four outcomes one is external funding from existing investors that's probably off

the table like you just said second is a big loan um the third is an acquisition right like nexo came along and proposed to take over their assets or they go bankrupt i think those are really the only four options so uh yeah i'm also rooting for celsius and yeah they've 1.7 million customers i'm really rooting for them i hope i'm rooting for the customers of celsius i'm rooting for the customers i'm rooting for the customers yeah exactly yeah i i'm rooting more for defy and and so you know but yeah let's talk about three errors um yeah you give me your overview on three arrows who they are what they do kyle and sue how long have you known these guys what's your background with rios i

i've had limited interactions with sue and kyle um i know their story i mean they were they started uh both i think in in japan they're like fx like traders and then they set up shop in singapore and started with proprietary capital meaning their own capital uh i'm pretty sure that they haven't raised from external capital um for like three hours proper and i would classify them as as traders not necessarily like like very like market makers traders i think that's their dna and they grew up to a point i think up

to 18 billion um in kind of aum again not this is all kind of piecing together information it's not very like uh i i don't know for a fact but like assume that they grew to multiple billions uh and they are very important players and a couple of strategies one of which has been kind of playing this like grayscale premium uh historically like gbtc thc some of these instruments have traded at a premium and you could have like a very popular strategy was to capture that premium like like be kind of neutral and just capture the premium these have now traded a very steep discount 20 30 percent and so that is um

that has obviously impacted them and others in the market um they also of course have invested uh in a number of other funds including defiance capital this is arthur's fund they kind of seeded that starry night capital which is an nft fund um and and from their balance sheet they've invested in a lot of rounds like dydx and a few others right they've been and they're an important player in the market on the venture side on the trading side and they use many different providers and there's a lot of connectivity in the ecosystem with three arrows because they have such a big balance sheet um uh and of course so like hopefully people

understand like this is a very big entity in in crypto they play on a number of protocols uh a lot of other organizations have exposure to them uh some of which have come out publicly uh recently to kind of talk about the situation that's going on um i started hearing rumors about uh their financial position and solvency of being margin called meaning for people unaware you know is you know they had a lot of leverage um leveraged positions and so when the the value of the collateral drops you know you need a refill you need to like fix your whoever's on the other side providing you that capital calls you and says hey you need to you know put more eath otherwise you're going to liquidate you

right and so i think that was people started hearing that you uh actually you were the second person to ping me about this um and and there was some ramping kind of speculation about their position like no one has heard about from kyle and sue which i have a very historically had a very like visible and public kind of voice on going crypto twitter it kind of people are like oh they haven't tweeted in days uh zoo kind of like deleted his instagram profile and now people like start like really kind of doing these conspiracy theories like they're on the run they're like they've deleted like every reference every coin in their in their bio on twitter um but but more concretely i think a lot of these

providers that interacted with three arrows came out saying hey listen we actually haven't heard from them they kind of like yanked a lot of the capital from our trading accounts and we haven't heard from them um and so uh and then sue kind of came out um in response and saying hey we're in a very kind of like serious tone more character like uncharacteristic of like how he typically tweets it says like we're kind of working through it which to me felt like he was acknowledging part of that but i haven't heard since and i don't think there's been an update from him since that tweet so i don't know if i fill in the gaps i mean i'll i'll give my thoughts on three

hours in a second um can you explain to folks how margin calls work yeah sure so like say that i have um say that i have like one eighth um and i want to borrow against that because i want to you know go bargain son buy more east like say that i deposit eath with genesis which is a big um kind of entity owned by grayscale sorry dcg um i i give genesis one eth i deposit with them and i say hey guys i want to borrow on that position how much and they say well you can borrow percent seventy percent of the value of that each and say eath is at a thousand

for for round numbers so you can borrow 600 or 700 on that right and they will typically tell you look if the value of that collateral which is a thousand today ever drops below you know 800 on the 600 that you borrowed two things can happen we're going to call you and you say you need to keep a certain percentage ratio relative to what you're borrowing so that the whoever is the lender um always wants to keep a margin because if you can't put more collateral to keep that ratio they want to protect themselves because they're taking some counterparty risk they're saying they

want to have enough time to be able to they have the ability to yet take that collateral and sell it almost immediately because they're not in the business of being taking a view on where the market's going to go right these market makers don't are not they're typically very neutral on the market they're just providing these services they don't have a necessarily they don't want to have balance sheet risk right they don't want to go long ether shorty they just want to provide these services to people that need liquidity and want to borrow against their acid base and so what probably ended up happening is as we know that three hours was running a very kind of levered portfolio of eath and a number of other acids avax probably and a number of other crypto assets some of which are liquid some of

which are liquid and so the basket of that at some point is a market crash in the way that it has is recently uh you know these guys call them up and say hey you need a new post more collateral and if you can't do that you get liquidated which as we have now learned that three hours was in a margin called and and maybe maybe liquidated part of their book i don't know uh combine that with celsius and combine that with other folks uh that's a fourth seller yeah yeah these things are all tied together so here's my so three arrows is one of the largest funds in crypto um i think you mentioned 18 billion i've seen different

folks tag it as at the peak it was 15 billion someone mentioned 22 billion to me someone mentioned 20. that's the ballpark size to put it in perspective paradigm i think that's like eight billion uh a16c raised four and a half recently had two maybe the value portfolio was much larger but like this is massive fund top right they started three eras was yeah exactly one of the biggest ones in all of crypto they started the fund maybe a decade ago like they're very early kyle and suzu i think they went to high school together they also traded together at credit suisse they're traders right um and they've made a lot of money playing the different l1 bets so tara solana near uh avalanche they made a lot of money

playing different l1s minna i think as well polka dot kusama like they've been in those very deep into d5 ave balancer dydx um lido they're in a lot of those as well trader joe uh they've invested in the equity rounds of like block vi derabit fire block starkware they're in axia infinity so they've made a lot of money on the venture side but also or on the liquid side but also really the venture side and this is where it gets kind of interesting there was this great thread by um djen traitor i forget his name we can we can link to it because i want to give the guy a shout out but um basically here's what he said he said the last public number for three arrows assets were tagged at 18 billion i strongly suggest their real

the real amount to be lower by then there are roommate rumors of them pledging their derebit stake even though they had already disposed of them economically here's where it gets interesting let's assume half of the portfolios venture half as liquid so now the 18 billion gets cut into 9 billion and 9 billion assume that all all of that was in let's just assume that like that has gone down maybe 70 or 80 percent right so this puts their liquid portfolio at like two or three billion dollars at best but if you add in a lot of like the the l1s and kind of these like alt coins realistically their liquid portfolio would have been drawn down to like a billion dollars or less this then starts to make so everyone's like 18 billion dollar fund how can they

be insolvent well when you understand that their liquid portfolio might be down to less than a billion this starts to make sense on why they can actually get margin called and not being able to meet a margin call is kind of the death nell for any hedge fund right crypto or tradfi long term capital management lehman brothers exactly so many funds during covet like time and time again you get started you're pretty much done and i think well i think uh they are realizing what hedge funds have realized and made the same mistake they are amazing traders they've also been a lot of the great venture deals their problem is liquidity right they have been on the wrong side of a lot of illiquid synthetic trades first the gbtc trade which now trades at a 30 discount

uh they got really offsides on the steath trade right um i think they had like thirty thousand steeth so far um but that number's probably higher yeah down to sixteen thousand or something exactly it's uh they made a 560 million dollar investment in locked luna which that is down to i don't know probably zero now or like five billion bucks from 560 million they're down probably 99 on that um [Music] and they've it's uh there are a lot of rumors of them now using their the venture side of their portfolio that the actual equity as basically collateral so um it's interesting i spoke with um one of the big funds in asia today and i was like what are your what's your

take on three arrows they're like we do not deal with three arrows they are too smart they are the smartest people in the industry we will not trade with them because we will lose when we trade with them um but i think so they're they're brilliant kyle and two are both brilliant but they just mismanaged risk and got to offsides on the illiquid on the illiquid side of things so yeah i i don't want to say like for a fact because i haven't talked to them uh a i do think they're very sophisticated professional traders um and but i don't know if they're insolvent i don't know the extent by which they haven't been able to meet their margin calls like like i just want to be very clear and transparent that i'm not

operating under information that i know that they're insolvent or not assuming but look there is always some element of truth into these rumors um we haven't heard from them so you know if they want to come on and discuss that more than welcome um but i will i will go back to what i said a general statement because people want to hear hey how do i how can i i think you always look at these things whether they're true or not and you then say assuming they were true then how do we navigate the one as a how do we navigate generally in this current environment what can we learn from it um as an industry and personally how do you navigate a bear market how do you become a better investor i think these

moments you look back and say if there was a mistake how can i avoid that um and i think it goes back to the overarching theme of this conversation is don't play folks do not use leverage just to stay away from it leverage should be used to mitigate risk not to increase risk very few people understand that and how do you actually do that is difficult for people to understand and so just just don't use it um and second you know don't let greed get to you right whenever you're there's this mismatch of assets and liabilities whenever you're living ahead of your means whatever you're look i'll tell it from my

personal stance most of my portfolio is a liquid like over 60 percent of it is a liquid now say that i invest in project a i will be besting over three four years say the the coin list and it's trading at the bill this great valuation i don't look at that and i say whoa i just did 100x i say i'm going to keep it at cost and maybe apply some sort of like profile say okay i'm going to invest over x period of time i may have liquidity over the next four years but i don't most of the time in my brain i don't compute that big number and i

say whoa whoa i've made this great return let me go out and pretend that i all that is liquid and spend more or invest more again you always want to be in a position of strength whether you have multiple sources of income passive income another job whatever it is but you managing liquidity and constructing a portfolio that can allow you to be in a position of strength and give you the time and the luxury to go out and spend like as animals do not most of their time not doing much just simply thinking about about the future thinking about

observing the market not necessarily playing it not necessarily having to react to these very brutal market conditions like right now i i've been in the sort of like sidelines since i left terrifying like i'm investing a lot of my capital into very early stage deals how i size those positions there's a lot of thinking that goes into that because i always want to maintain which i didn't have in 2000 in the last crash um like i had another job like i was i was working um for like a health startup that i've been a part of because i love healthcare uh like i had other sources of income which

allowed me to kind of like not have to sell my crypto assets to like live day to day a lot of other people in crypto like borrow against their eat stack and other positions using maker and whatnot in hopes of then repaying that um but that's very tricky right and so you know again i'll stop talking here but i think the lesson for me and the last cycle that i've applied in this cycle which i feel much more calm is be to be always have liquidity um to be able to not have to give up on your thesis to not get liquidated to to live to actually like you know as much as we love the metaverse we still need to eat

and consume in the real world and spend um and so you know that if that's like that that to me would be like the number one takeaway out of all of this which is right now i don't have to do anything i don't have to respond to this market movement i don't have to sell assets forcibly i can buy more if i want we'll get to that later um and that to me is like maybe you're in the same position right you're building i right now i'm just thinking and observing the same little leopard sleeps 18 20 hours a day and hunts for four but in those four hours he [ __ ] hunts he's able to do that because he's been resting most of the

day and i think stan rugen also references like you want to be kind of zen and just observing things you go in a casino you're playing blackjack if you're playing every hand that's the surest way to actually like die like to lose all your money you shouldn't have to play every car that you're dealt and crypto is difficult because it's 24 7 365 market and it can be a casino but you don't have to play it you don't dejan spartan provides a lot of wisdom and again time and time again he says listen guys like you don't have to play the market all the time sometimes the best strategy is to just sit on your hands

and observe and not react to all of this craziness that's going on like is crypto listen is crypto going to go away do you think that crypto is going to die obviously not the idea of building decentralized institutions and protocols that that no one can easily control the ability to transmit value and have digital property do you think that premise is going to go whether it's expressed as an nft or a token erc20 or whatever do you think that fundamental premises has captured the imagination of artists um investors creators will go away of course not i mean and so and so why would you

what's the whole point of like being great again just you want is it going to take five years no it's probably going to take 15 years but again 20 years to get there but again you know people get agreed yeah all right contagion um three arrows is one of the biggest borrowers and clients for the lenders globally celsius is one of the biggest lenders right um a lot of the lenders might be a little offsides right now they operate these big 10 billion balance sheets maybe even bigger and they don't have much of an equity buffer there um obviously different lenders are are different like genesis for example like really clean lender like that genesis is probably uh genesis is like

very amazing these lenders aren't all treated equal but still lenders are going to end up protecting themselves by withdrawing credit from the system uh loans are going to be recalled credit is going to be shrunk when credit leaves the system there's less money overall in a system less money in the system equals less money for coins bad for coin price right price goes down um what do you think comes next we saw luna then celsius then three arrows what's next i think we'll continue to see speculation and some thought around the financial position of other funds more concretely i do look i mean everyone that's been long crypto's down eighty ninety percent

eighty percent at least sixty seventy percent unless unless i think most big funds and crypto didn't have the stomach to short the market so assume that most of them are down uh so if there continues to be paying in the broader markets i would assume that there's going to be some redemptions from traditional investors that want to just chop this part of their portfolio take the win because mind you most investors say that you invested in a fund three years ago most funds have at least a year lock up you're still very much in profit at least 235x right so if you get a lot of redemptions and these funds are down more for selling right as soon as you get away definitely you need to sell um so i think it's going to take like probably another a couple of quarters

for all for these systemic effects to kind of run their course right uh a lot of the big funds in crypto might have to close shop uh you know if markets continue to be really volatile there might be another you asked me this question like in like four episodes ago or something which is when i said my prediction was some funds would would just die he said are they going to explode or are they just going like what's gonna happen to them and my my thesis was most of these funds will probably like be so underwater that they close shop like this is melvin capital for instance that was on the wrong trade of like um of gamestop close shop because if you're down 80 percent

this happened a lot of crypto funds in the price cycle like you need to like go back to par which means the asset needs to go up over 80 to like actually then make some profit on the carry and if you're not doing that for a couple years like you can't pay employees sure you're charging two percent management fee but it's very difficult to continue to run operations and the perverse incentive is to just close shop and start a new one if you can get more money like and so i think that some funds are going to die um that will put some downward pressure on the market um and and so that's why i think it's not probably going to be a v-shaped recovery here

um so on this particular point around the connectivity that three hours has and celsius has on some of these other providers lenders i see less risk there and you tell me if you disagree like i don't think genesis is gonna die or is in a precarious position um derebit came out saying uh that they have an insurance fund and that there are some small accounts that are in debt but nothing like truly systemic or that would put them in a like nothing that would be worrisome again we'll see if that's actually true but a lot of these exchanges and providers have insurance funds they made a lot of money over the years some of

which have been put into this kind of like insurance pocket to potentially cover some bad debt of some players that might not be able to um you know positions that might not be able to liquidate easily and cover the loss and so uh i don't see a type of systemic lehman another lehman bear stern situation like the globe a lot of people doing the analogy overnight like literally global financial crisis for crypto luna celsius now three hours and stuff like that i i don't think we're i don't think there's that much more contagion other than like continued downward pressure for the remainder of the year i don't know um uh i mean on three arrows i mean they're

one of the biggest borrowers from every lender um like they are at many of the lenders they're the biggest borrower uh from every single lender whether it's block five genesis nexus celsius every lender i think takes a hit um but some but i don't think it like really hurts any of the lenders too badly um let's talk about tether which i i didn't want to actually bring up but i've gotten i've had more texts about tether from i usually get texts about tether when things like this happen from like the no coin or crowd and friends in banking who like don't believe crypto's a real thing i've had more texts about and messages about tether from like real crypto people like crypto founders or investors or builders or whatever it may be uh just being like hey like are

you watching some of this stuff and some of the things people are texting about is like you know in times of fear usually tether trades at a premium um and now it's trading at a sometimes it's been trading at a discount like not a huge discount but slightly below a dollar kind of for the last couple of weeks actually and i usually dismiss tether fud like i just i'm like that's more tetherfud um i've just been pinged a lot about it and like risk is a factor of probability times consequences right and the consequence here is so high that i think it's worth talking about uh just the probability yeah uh tetherfud continues to come up time and time again especially in these

moments um i've actually never gone through the flow of redeeming tether for dollars uh in their whatever entity uh sam from alameda like element is a big player and i think at some point there's a great threat on um this was like almost a year ago this slide came around and sam and some of the alameda folks that said now look we actually like are pretty close to this and we were able to easily swap usdt for dollars um uh the latest like audit report like of course they have some exposure like the it's not like fully backed 101 like like that meaning like the same with the usdc is right they have like proof of reserves and whatnot but they have some commercial paper and they have some exposure to others relatively low risk short duration assets

um but against some risk i don't know i i don't uh i'm not an expert on this topic i don't want to say that it's like bulletproof if you ask me where i hold my money it's stable as it's usdc i just feel more comfortable uh holding uscc and now interestingly today uscc or center came out saying that they were uh going to launch a euro stablecoin um fully backed so again i just feel much more comfortable holding usdc uh but i don't want to come across as this step like i don't want to applaud it about you no i don't know enough but yeah yeah yeah no

me too so transparency is interesting right uh the benefit of d5 is that one of the benefits of defy is that you've got this fully transparent system what's happened though in this market is that in a down market you can really see who's offsides and who's like basically overexposed themselves uh when everything is really transparent and on chain so what happens when this when when you can actually see this stuff is that a lot of the funds will go well basically like the funds will and the trading desk will actually hunt down some of these positions maybe push the price down to get these big positions liquidated then they make money on the trade when the force liquidation goes through um a i guess does that actually happen and b is that a negative consequence of transparency yeah uh it's

sort of like uh i think a lot of people are really watching very closely the position of that big wb wbtc vault um and celsius like not fixing that collateral and other really large vaults uh because now that you see that you can put a lot of like some actor can try to like liquidate that and push the price down it takes it takes a lot of capital to do that um but yeah it's uh it's an interesting question uh when it's so transparent i guess um i think well it's certainly more transparent to tradify but you know you can short you can create short squeeze you can look d5 is very adversarial with

transparency you have the possibility to when everyone knows your position and your price you get liquidated um or mechanism flaws and like like usd right uh then you can attack it you can you can take it you can orbit it's basically an arbitrage like you could call it an attack you can call it whatever but it's an art form of arbitrage the hope is that over time like these systems can these vulnerabilities or ineff i would call them inefficiencies not vulnerabilities but inefficiencies in these systems meaning mispricing of assets uh like these arbitrage possibilities get armed out faster and faster and faster and so you build more robust

protocols um but you know i like to i like to like zoom out for a minute and say look the amount of liquidations that have happened on ave and compound have been orderly d5 continues to work there's no bailouts uh in the aggregate in the whole like at the at the individual level yeah it's not fun if you if people know that they can liquidate you at a thousand eighth and eighth is at a thousand one hundred then someone might say hey you know what i don't like yano i wanna liquidate him i'm gonna try to push the price down i guess like we all know where these prices are but again like it's harder and harder it's pretty hard to like manipulate the market like

per surprise down this much and and make money out of that but i still i'm more encouraged now in d5 more and more i mean the the way that we've seen these assets move pretty violently and liquidations happen like i was just telling you like this is very the adversarial system but it's also anti-fragile in the sense of like it has been able to withstand the chaos in the market in a very orderly way it continues to function and you have a lot of certainty when you use truly what i call d5 protocols like having compound like i feel very comfortable depositing my money in these not an endorsement because i know where

my but again personally i use these platforms because it's better than celsius things are cascading down it feels really really bad right now um stress has been kind of recursive across the ecosystem price crash equals layoffs and hiring freezes speculators with leverage are now underwater lenders are in trouble with those speculators retail users who deposited with lenders they want out there is for selling across the industry [Applause] just be patient like don't don't chase the market let the market come to you i wanted to hold cash to buy pain i haven't seen true true pain what is true pain i want to see a forced seller i want to see the a bull a perma

bowl be chopped and just have to sell because he's being liquidated or he has redemptions or something and when i see that and i track wallets and i and i i'm looking at this stuff and when i see someone sell forcefully that's when i that that's when i'll hit the bid i'll lift that six weeks ago you said i said are you buying you said i'm waiting for max payne i am waiting for max payne to start buying and i said what is max payne and you said when gigalongs or permabulls are forced to sell and that's what we're seeing now these i was like okay sure sure um we'll we won't buy yet and sure enough this week we have perma bulls who are being forced to sell um

is this rock bottom uh probably not uh again i think probabilistically uh i'll tell you what i'm doing i'm not buying yet um for the reason that i think this is probably going to take much longer to play out um both specific to crypto meaning funds having to sell we need to get more clarity and resolution on celsius some three arrows and thereby that's one component the other is just macro um i think it's getting there's a number of things that i'm watching closely food prices um this kind of

you know uh how other central banks respond to what the us is doing the situation in japan feels like might be the first big country uh developed nation where modern monetary theory collapses and that to me is something that i think i want to talk about more in a later episode i want to bring more people to talk about this because you know japan has been pretty like that japan has twice a level of government debt to gdp than the us and the us is pretty bad i think and japan is twice that level and if japan fails and then it kind of really puts into

question like this like chicago school modern monetary theory and saying wait a minute can you actually can central banks actually get away with like this printing um and i think it's very if that happens then it's going to really kind of i don't know what that means for the us i don't know what that means for the euro i don't know and so i think like that's what i'm looking at and i i'm very cognizant of the this idea that i haven't invested through rising rates i want to be i don't i don't feel compelled to do anything other than like hold cash like yeah okay i'm being inflated out but like at least i'm not like losing eighty percent right cash is the best thing funny

enough cash is the best thing to hold in this uh inflationary period like i i feel um i feel like there's probably like 20 30 percent downside here on crypto um i would feel more comfortable at that level um i don't know um i i talked to a lot of other funds um some of which are in the position of strength some of which have like started like dollar cost averaging you know i'm not a short-term trader i i like to i like to remind myself what i'm think i'm good at which is early stage investing and i will continue to do that i just this week talk to three teams really smart guys

that want to build in crypto three like literally a founder that has exited two times uh three founders all of which have exited don't have to work a day in their life they want to build in crypto and so as long as that continues to be true i'm very encouraged by that um and i want to make sure that i can continue to invest these teams and my current teams um i'm also you know again the other flip side of this i don't mean to come across as super bearish but you know the merge is coming that's very i think as i would agree with travis it is the most important i think event in crypto um full stop um and i think the implications for eth are pretty important um

and so that to me feels like it's going to happen in the next coming months two three months the august september the merge will happen i think it's already been tested so it's very encouraging and uh that's a very positive setup for for eth yeah i have a question for you on the do you try to buy on the down so like are you gonna try to time the market on the downside and almost risk catching a falling knife or do you wait for i had that thread about stage one stage two stage three stage two is like a [ __ ] ton of fear and like fear on the market stage three is basically just boredom and consolidation and like a period of quietness do you wait on the downside and you wait for like the craziest days like maybe the day where it seems like three hours

might be collapsing or do you wait for post consolidation quietness maybe you don't hit the bottom perfectly but you get it five or ten percent off the bottom what what's your strategy when you try to time these markets ooh yeah great question uh i don't try to tick top the bottom absolute bottom but i would ascribe more to what you just said which is when it's quiet and despair and everyone kind of doesn't even want to talk about it it's like it's like that it's too painful to even talk about it's like voldemort it's like he who must not be named right when he fits when crypto categorically is that asset class that no one wants to talk about um then i don't feel more comfortable um

but i don't know how i'm gonna play it like i let me from it this way if i were to raise a fund right now today if you give me a hundred million dollars 200 a billion dollars and i have at least a year of walk capital or two years then yeah this i think a pretty interesting entry point across these assets pretty pretty interesting entry point uh if you have a longer than one year horizon which i do then this is in my estimation a pretty compelling entry point and but i wouldn't buy like i wouldn't i wouldn't immediately like deploy all of it

i would scale it and dolls the the best strategy that i've always employed since i first discovered the sassy classes i buy every day and i don't have to think about timing the market i just know that this is going to do that but over a long term with two three four five ten years i continue to believe we're going to have the possibility and we're going to see eth at a thousand or less than that and at 10 000 over the next two three years until the 10th that was my strategy in 2018 2019 that just worked well was i tried to turn off my brain and i just had a dollar cost yeah every time i paycheck it every two weeks it was i just had a dollar cost average into bitcoin and you probably outperformed 99 of funds and it didn't get liquidated

and built block works you know i mean so like at this point as my philosophy has always been i want to minimize all kinds of distractions in my brain time and time trying to time the market is a distraction from for me i'm not a trader i want to think about other things i want to be able to do other things maybe build and so well i don't want to be sitting in front of a computer like looking at charts and ta and all this crap which i don't know i've never met anyone that can systematically tie markets but i do know that this this is to me the best trade that i can make like this movement is the most important thing that will probably happen in my life and i think we're so goddamn early to that that in spite of all this

chaos will come out of it stronger the things that will survive and i have a short list of things that i think will survive i'm very compelled to buy um and then i'll scale in certainly and look none of this financial advice folks um again i'll continue to say this over and over we've got the disclaimer legally we're good i don't know i can't even want to like a paraphrase you're gonna get clipped yeah someone's gonna clip this and be like santa's giving me financial advice and i bought ethan it's down below a thousand now i know i know i know that's why i do this look uh every situation is different i can't give advice everyone has a different liquidity position but in my short list is eth

um bitcoin um some blue chip defy assets um and and some some games out there a lot of them like on the private side but like again if i if i were to deploy from scratch it would be mostly eth because a it's very liquid i don't move the market i can use it's very pristine collateral and so is bitcoin um and in this market i think you're seeing it you have seen you'll continue to see a rotation flight the quality once things kind of normalize it's still a flight to quality uh

meaning eth and and bitcoin um and i'm not as compelled to like invest in part upper layers of the stack just yet which are like a levered bed on ethereum for instance or like another l1 um i feel really strongly about eat right now like honestly like 80 of my assets would be like like i would say like 60 percent eat 20 bitcoin and the rest like a small basket um of other pretty interesting like d5 protocols like maker compound ave um that have like like money markets are pretty compelling or pretty killer use cases um so i would kind of do that um and this is and this is removing the

liquid stuff which i i love and i do most you know i'm just talking about public stuff here if you have um so i think there's probably a lot of folks who are sitting maybe in a similar position as me which is you bought a bun you've got your core position in crypto which might be like blue chip d5 maybe a bunch of eath a bunch of bitcoin and then you've kind of got this like long tail like the rest of the 10 of your portfolio is like you got half percent allocated to like this random thing you got half percent and you're down 90 on some of these tokens do you shed those tokens do you shed do you basically just sell them off take the loss for for um for tax harvesting or do you sit on them or obviously you have to reevaluate your

thesis on all of them but let's say you let's say you don't like some of them do you sell them at these what feels like the lows or do you just hold the hold on well that's a very broad-based question i think you need to constantly ask yourself like is this project building meaningful utility and further is this valuation warranted yeah um it's a difficult question just broadly um but look can an asset that's down 80 go down another 50 yeah absolutely um but if you have conviction then you know it just depends right i think um it just depends how closely

sometimes when you have this like it's weird how the brain works because a lot of times we end up spending this one approaching amount of time in these small positions uh that we want to work and we we feel like we're holding that like like like doge bag that might like you know randomly like you know um no but drucker said he's like sizing is eighty percent of the sizing 100 like portfolio construction i think he said something really interesting in that episode which is when you're right you're not always right you have to assume that you're never for the most part not going to be right but when you're right you feel you're in a hot streak or you feel you're right you want to be extremely right and you want to pile on that for me it was you know verify i was in before paraphrase

is very right on d5 i was using it i was close to synthetics i was observing maker and i just i was i was lucky that i was using it and close to some teams and and to me it felt like it was like we i really kind of like went in on that um but it took time it took time i think i was just like mostly like observing i was sitting on eath and then i said oh and i was using heath and like using maker with my eat and like um but sometimes yeah you're right like we we we tend to spend i think i would as an investor just think about how much energy and time are you spending on these small positions and are they actually going to move the needle and some look some can

what is a one we've all seen it right this is a temptation a one percent in your but still a one percent position in your portfolio can be uh can grow to twenty thirty percent um like i'll give an example like i sized ave pretty small the portfolio initially and then it became like what was like a two percent position i think every position should be at least one percent of your portfolio if you don't have the conviction to size position to one percent then probably music a you don't understand it enough b it's just like not it's not even worth it uh but if i would always like size at least one percent of your portfolio and if you feel comfortable because you're gonna have to spend time on that and so thematically obviously yeah so like if

you're not gonna put at least one percent of your of your bulk on it don't even bother like i think what most new folks coming into crypto do is they basically throw like a well whatever the amount is that they do a thousand or ten thousand make up the number like 100 bucks the same amount into like 20 different positions whereas in reality you should probably size that down to like five to eight positions and and adjust based on your thesis on them but yeah uh i have a q i have a question for you which is we in 2017 the market hit 830 billion market cap we're down to 904 today so what's the math on that 12

if we fall another 10 do you think we fall another 12 percent and hit the the peak of the 2017 market yeah probably yeah yeah yeah like i think we're gonna look back on this moment in history and say yeah gosh it was it was a really tough um really tough situation for for every investor out there that is inherently long and most investors are uh are taking a huge pain and i think we will look back and say yeah kind of what were we thinking like it's sort of and i don't want to come across as prestigious for like oh i was right because i i'm down a lot folks like i'm i'm long at this asset class i'm not shorting i went to cash for me it's i'm in a defensive

position now but i'm still most of my book is net long like and so i want to just kind of like preface that um but i think we're going to look back and say yeah like it was rising rates you're coming off of this huge period of money printing you have covet that hasn't gone away you have the situation in ukraine you have food prices uh rising food prices you have energy like a lot of these things are coming together in all at once crypto continues to be a speck of dust it is an asset class continues increasingly recognizes it as a really interesting asset class uh but investors don't act rationally uh and they chop

these positions and so i i really like this like uh there's this episode and invests like the best uh and one guy is reflecting on what happened in 2008 and so what happened then was a lot of investors brace for impact and every investor there comes a time where like the more sophisticated part of your brain human higher cognitive process shuts out and says it becomes super primitive and you literally are just the primitive l1 brain reptilian brent says i wanted to survive i think we're everyone has been hitting that right now and when that happens people go to cash because they want to survive

but very quickly people hate sitting on cash right people hate sitting on cash you want to deploy that inherently people need to deploy that managers need to deploy that and so i think i will i continue to believe that there will come a time where um most people after i feel like we're in this process where like there's still a lot of moving pieces people don't understand them even stan said this right in his interview like i felt that he was just observing meaning probably hold neutral to maybe slightly bearish but once we get more resolution and i think this will take some time a quarter or two uh to get the q like qe the q2 earning numbers from a lot of uh in the general

stock market uh then i think once the kind of the dust starts settling we have some stability whether that may be uh maybe one or two weeks of just kind of the market kind of the the the amplitude of these market moves so you see the nasdaq and like the market like everything in the everything the stock market today in the us was down at least three percent like that that is that's pretty brutal like i think that's a one or two that's a one or two sigma event like that's that's pretty bad um more value got wiped in the market today than the entire market cap of crypto like like multiples of what crypto is worth like just put that in perspective um but i think like going back to the original question i think i'll start feeling more

comfortable scaling into the market more aggressively when i see to your point on stage three which is things are still kind of negative but stabilizing seeing a three percent move in the market like i just gonna kind of want to want to wait a bit uh for people to kind of understand the magnitude and process a lot of information that is coming out uh and i think there will probably be i don't know a three to nine month window where you'll be able to actually like really really go hard at things that you like uh and right now i i think we're entering that but we're not there there yet uh like in 2018 2019 like you could you have pretty much like full six

months uh to be able to scale aggressively into ethan d5 right and still make a fantastic return like when compound launched their liquidity mining rewards that kind of really triggered and catalyzed like the whole d5 summer you could have invested a lot of money there and in the subsequent weeks when there was a lot of interest and you would have caught wi-fi you would have caught this entire wave right even nfts which talks about what stan you're going to keep going back to saying he's a genius which is you don't have to time it exactly there but you but being willing to really put more money to work in things that you see conviction in uh and constantly process that information

and i think the market's going to allow us to like scale into trades that are going to be pretty pretty like pretty meaningful return drivers in your portfolio um and and i think we're gonna have that ability to do that over the next like three to nine months yeah yeah i agree yeah we're seeing all the signs of the bottom in my mind the three arrows thing the celsius thing you have layoffs across the board right uh bitso 10 gemini 10 coin base 18 block 5 20 bit mex 25 there are some more big ones that haven't been publicly announced yet smaller projects are shutting down like um shout out jai who's just an amazing builder but uh i

think shutting down the uh tribe or shutting down rory capital um you have like down rounds are starting to quietly happen but you this doesn't feel like this feel it doesn't feel like the time to buy in my mind as well i agree with you because you haven't seen the period of quiet right it's just like trust your gut here and does this really feel like you could have a bull market come out of this period no it doesn't like people are freaking exhausted people are wiped and the market's still i don't know it just feels like a bet yeah it still feels like a bad time and we also haven't seen that stage three of boredom we haven't seen that just like that period of when your friends now now my friends are texting me hey are you okay

we had a period of your friends forgetting that i even that crypto even exists right right that's right that's when you buy so yeah i agree i think it's like at some point like a lot of these pension funds a lot of these venture funds are going to wake up and say wow we're pretty down how do we make up and where do we invest again in the next yeah look i i i love technology technology is what gets humanity out of trouble one of the more other than biotech crypto is the most exciting piece of technology for our generation and you're going to want to be long this asset class uh over the next 10 years like like i think every major investor is going to be long this asset class

because it is the next arc of the internet we don't have to regurgitate these thesis but i think increasing people understand that right now we're insisting survival mode and so bugs take care don't use leverage don't do anything crazy if you're using centralized institutions uh banks that have a lot of exposure to crypto uh providers have a lot of exposure to crypto beware of that you know use the horcrux model which is separate your assets in multiple wallets different providers again central the the overarching theme macro thingy like mega trend has been now i think increasingly hopefully people understand centralized institutions have been failing us over the last 20 30 40 years with covid health organizations terribly

underprepared um central banks and banks in 2008 um but celsius tara would describe as centralized because it was not very transparent and like a lot of the activity there was being operated by lfg and centralized institution the idea to like collateralize and you like all of it was kind of centralized and so be very skeptical um of of centralized institutions people that can't provide you very straightforward answers um of where your assets are of how they're being used like i think you know i'm not like you know don't put your like tinfoil hat on here but like be very practical uh and expect very straightforward answers especially moments like this and if you can't get a straightforward

answer from whoever then you know dig deeper yeah yeah um nfts will go into their into their first ever bear market people will get skeptical about dows remember what we're actually building here uh remember that this is just a bear market and that things return there are some friends who have come into crypto and this is maybe their first bear market and uh they're freaking out over open c volumes right open c volumes used to be like two to three billion a month this month it's less than 500 million right there's a massive it basically looks like it falls off a cliff that'll keep happening most of these nfts will go to zero or they'll fall 97 percent right uh dows people will say dows shouldn't exist or like

that you know we all had we had it wrong with dows zoom out long-term game uh recreating the financial system and just building an open permissionless world takes decades it doesn't take years so and i will just add that bear markets reward people who are curious enough to use new products to use crypto native products without the need for massive apis and without the financial incentive there and anyone who played around with dfi in 2018 2019 uh you you will get rewarded uh it's just not as clear so follow your curiosity in the bear market i'll give you one anecdote here because for me it's been very interesting to be out here in uh in africa and i was talking to one of the safari guides and he was asking me about like

just what i did and i was like trying to explain to him and i and i asked him a question and said okay you want to buy a car you want to buy a house do you have access to credit and he said uh it's kind of difficult yes because i have like a steady job i've had it for three years and the company that i unemployed is very reputable here in in in this country and and they like it i said okay what kind of interest do you get charged what are the what are the terms is it 40 40 like okay well that's illegal in many other places and um but it's a imagine a world where you can i can look at a lot of the data so he had a smartphone he said how long have you had that smartphone before

he's off i've had it for like four years so do you pay your bill do you have a plan he said yeah do you pay that every month he said yeah i've never missed a payment i said okay great what if i told you that i could use that data and other pieces of data in your smartphone and your interactions and build a credit profile for you and lend to you at like 15 20 eddie and he literally hounded me the rest of the trip he's like when can i like how like i'm really and so to me that's that's the bright side of this stuff and look these narratives the the banking the unbanked narrative has been pushed to extremes um but credibly i do believe that we're going to reach a point where like again i like to remind myself of like this is like the the practical business

sense is the bezos mentality which is your margin is my opportunity you know i mean like there is so much potential here and the only thing that we need to do is make technology relatable for people if i were to start to talk to this guy about like decentralization and all this like an anarchist to be well we need to be really practical and we need and but again technology is relatable increasingly crypto is very relatable to people nfts are very relatable to artists that want to you know connect with their audiences

whether you're a musician or a painter or whatever like that idea is not going to go away and and d5 in my mind has been largely neglected but it's giving you every crisis every major like violent move in the market and you're absorbing these that gives you a lot of lindy and confidence um so yeah uh look the more important thing is hopefully this is people the takeaways for this episode is not what to do specifically none of this is like i don't want to be prescriptive but it's more so like there's been a lot of failures there'll probably continue to be a lot of failures observe that learn from that um and i think that makes you a better investor makes you a better

builder um and so yeah you know you know i think a lot of people have been in pain but i wanted to ask you like you're obviously building block works um like how are you managing your team what are you hiring like how are you as a builder we talked about a lot of like my like as an investor but like there's a lot of builders out there how are you thinking about this market and the decisions if any that you wanted to take has that changed i think we're in a really unique position with block works because we we've never raised a dime of venture capital money we focused on getting profitable from day one of the business

and so we've run we've we've run a very different kind of crypto business than most folks right we've been profitable for four years um we've we're bootstrapped um we just launched this research product a couple weeks ago that's going really really really well and we've got just a really strong sturdy business like we're not trying to find product market fit we didn't go raise 50 mil and like have a massive burn and so i think we're in a little different position than most crypto companies out there so because of that yeah we are still hiring actually when most folks are laying off people we are still hiring i think though that i think though santi i i'm in the same position as you right now like mike and i are basically feel like we're in kind of like wait and see mode right we're capturing market share

we're excited we're still talking to folks uh to bring people on board we've got open positions um but we're but we're also just we don't you don't want to make any rush decisions in this kind of market and so we're kind of in like all right slow things down we told everyone at the company like if you're if it's 5 p.m you're debating like whether you should jump on another call you should send that email or like go for a walk go for the walk close your computer like zoom out take a take a breath of fresh air there's gonna be another bull market at some point uh we're gonna race to capture market share in this in this period and like um yeah but just slow things down for like a couple weeks and so that's what we're doing right now yeah yeah i think uh

again i i i didn't like plan the strip thinking the market is going to crash but it's been a welcome really for me to just be close to my parents thinking and observing everything that's going on yeah and and again i said this when we were talking for this episode which is i think as a as a builder as an investor these are the moments that really define what you do and and and it's very encouraging like i feel very alive right now me too these are this is what i talked to mike about this week these are the periods that define who's a good leader who's not a good leader what's a good company what's not a good company uh and thankfully we've done this right we built through the bear market we we launched block works december of 2017 uh so the first two

years of the company we're just building in a bear so we've we like these periods so yes you missed episode 100 this is technically episode i think it's like 102 but it has been a joy hosting yeah empire with you uh it is uh not easy sometimes showing up day in and day out when there are so much going on crypto so crazy there are a million other things we could be doing and yet we still show up at least two times a week sometimes three sometimes i force you to do a fourth episode at the height of the market uh and uh yeah man i just want to say it's been an absolute pleasure uh hosting empire and i'm looking forward to you know another building this through the bear market and uh and i also appreciate everyone for listening to this absolutely no look

it's been one of the best things that i'm doing right now and especially now i think people we have a true ability here and hopefully this is useful to people um and if there's anything else you want to hear but yeah no this is honestly at this point the biggest impact that i think i can have in crypto is is just connecting with people through this podcast hopefully this is useful for people um and we'll continue to do this no matter no matter what the price and market cap and market conditions we're going to continue to show up and we're going to continue to deliver this weekly roundup and also bring in super smart builders investors to share their perspective and hopefully this forum is useful to people to navigate bull bear crab and all other kinds of market conditions will be here

and uh delivering quality insights to you guys exactly so if you guys aren't subscribed hit the subscribe we've got a bunch of good episodes coming up we've got dan uh from cms coming on cms holdings we've got josh rosenthal talking about the crypto renaissance sunny from osmosis yan coming in from step in uh eric peters actually talking about just the institutional um side of crypto allocation eric voorhees a real crypto og we've got a lot of uh amazing episodes monet supply sam from maker just a lot of really amazing episodes coming up so excited to build to the bear market with you guys awesome my friend thanks everyone for listening see you next time see you next time [Music]