Trading Crypto Inflection Points | Hal Press

Transcript

first you're going to have seller exhaustion then you're going to have fomo buying and then third you're going to have the start of the positive reinforcing feedback loop where what happens is when you actually start to get that it creates these violent moves and those violent moves actually create on-chain activity and on-chain activity creates things like each burn creates things like further interest and actually results in further price appreciation all right everyone uh welcome back to another episode of Empire we got uh Mike eppolito from block work seven in for Santi and then we are not going to be joined by Hal press from North Rock um North Rock digital Sushi omokase extraordinaire how welcome to the trail man thank you thanks for having me on I'm excited to be here yeah you ready to

Taco mukasa sure if you want to talk sushi for the next hour and a half let's do it all right let's do it I think I think folks would be a little happier if we talked about uh this Market pumping so I want to talk about a bunch of stuff with you like real yields framework like your thesis around I know you've got this like BTC trade want to get your insights into like how you think about l2s as well a bunch of stuff we can talk about but I think it'd be a good place to start by just talking about this recent Market pump right we went into the air eath was sitting around 11 or 1200 today we're sitting around 1600.

I'd love to just get like your high level framework for how you're thinking about the market today sure um and I was quite vocal about this actually as early as November I put out a thread on Twitter like after the whole FTX debacle because I was I was pretty bullish during the FTX kind of episode during the digestion period And I put out a thread kind of explaining my logic and honestly I'm kind of annoyed given how much it's turned out to be true that I didn't capitalize on it even more than I have but um just to go back to that basically the thought process then was that foreign by the end of the year we were

going to have reached what I'd refer to as extreme and complete seller exhaustion and there was a large Confluence of things that I felt like all coincided with that year-end date um but basically after FTX blew up that was in my opinion kind of like the final shoe that dropped and everything that could have possibly gone wrong during 2022 did go wrong and so if you were gonna sell your crypto exposure you basically had every single excuse to do so and everyone that was going to sell sold and then on top of that you had tax loss selling you had fund redemptions and you had traditional fund window dressing all three coinciding

with year end so those were three technical forces on top of like Mass capitulation like I mean you saw every magazine headline every like Tech prognosticator all saying crypto's dead sell your crypto the Market's over like this was a fad and so combine all of that with the technical forces basically everyone that was possibly going to sell crypto um sold and because of that you had pushed prices to a level where there was clearly real sort of strong-handed demand because otherwise like who was buying all of

that Supply right for every seller there must be a buyer so clearly what that was indicating was that at those levels like at sub 1200 at sub 17 000 Bitcoin There's real demand from crypto natives that just will CCA continuously at those prices into perpetuity especially after like the merge when there's no structural supply of eth um and Bitcoin emissions at that point were quite low in dollar denominated values and alts had mainly vests everything like there wasn't a lot of actual structural Supply left either um and so the flow Dynamic was perfectly primed for a year-end inflection like at East 31st there was simply no sellers

left and and also that was like part one of the thesis and then part two of The Thesis was first of all FTX doesn't really change anything or like okay so we're down in exchange that's not great but like crypto is still crypto everything that that it used to stand on still stands um and actually in a lot of ways it probably accelerates the sort of Regulation that that whole episode shows that we need right and so there's potential for that actually to turn out to be a positive um and then on top of that we've been seeing a macro inflection um just a broader macro inflection and now the crypto Market wasn't pricing that in because it was dealing with all these videos and credit issues but inflation has clearly topped the FED is

about to reach terminal rates um recession is proving to be probably more mild than people thought Equity markets are 15 off the lows bond yields are 50 bips off the highs like the broad macro is also inflecting so all of those things created this Confluence of events for year end to lead to the start of a sort of new uptrend and then the second part of the thesis was as soon as you had that start it was very easy to see continuation because basically every pocket of discretionary crypto exposure had been zeroed and if there's one thing that crypto is extremely good at it's creating fomo and so if you start to move off the lows

with everybody like every pocket of exposure except super diamond hand crypto natives underexposed then you're very likely to have some fomo buying after the initial move and so we saw that too and then the third part of the thesis which actually also held was that first you're going to have seller exhaustion then you are going to have fomo buying and then third you're going to have the start of the positive reinforcing feedback loop where what happens is when you actually start to get that it creates these violent moves and those violent moves actually create on-chain activity and on-chain activity creates things like eth burn creates things like further interest and actually results in further price appreciation and what you get is this this feedback loop where price

appreciation begets activity and activity begets price appreciation and you start to create this this feedback loop and that that was actually the third part of the thesis all which I laid out in November um and basically all three of those all three of those distinct events have really happened you had this other exhaustion then the fomo buying and now the activity the self-fulfilling feedback loop and so where we go from here um is harder obviously to to to predict but that is my sort of understanding as to like how we've gotten here so all right so you nailed that call right you've got fomo buying uh uh yeah exhaustion and sell and selling and then you've got these this like nice positive

feedback loop that's going on on chain and the thesis was right that you that in November right or December and the market gone up 30 days I will say as I said before like just because it doesn't mean that we capitalized on as well as we should like I am you understand maybe you understand that but like so you got the thesis right now 40 30 40 in the main ones things like Aptos are up like 400 percent but like I'll focus in on eth because I know you spend a lot of time in youth like eth right now is pushing up against that like 1650 1700 read like that that strong wall that you that you see oftentimes what like where do you think dark it goes from here I know that's the much harder question but yeah so this is actually one of the things that we got

wrong um we thought that eath was going to lead the early part of the the yearly rally and that wasn't true um I sort of thought that um well at least empirically that didn't turn out to be the case I thought that eth would lead uh because I thought that the the technical selling into year end was probably greater in East than Bitcoin uh because it was probably led by more institutional selling um which for whatever reason may not have been the case but I thought that eath was going to rebound more strongly also because typically in in historical regimes eth is the higher beta asset and so when the market rallies ethbtc tends to go up eptc tends to trade with some beta goes

up when Mark goes up goes down the market goes down but um that didn't happen uh and the reason it didn't happen in my opinion was because of Shanghai withdrawals uh well two reasons I think BTC was was crowded and second showing how it draws so personally I I had expected eth to sort of underperform into Shanghai but Shanghai is not till April and I thought that the market would start to price that in like two months out in February I didn't think it would start as early as January so it happened a little faster than I um anticipated um and so I think just to get to your question eth has been a laggard I think eth has been kind of used as like the funding leg for a lot of these other higher beta shorts at higher

beta alt Longs and also I think more of the fresh buying has been in Bitcoin um and also like I think e3tc was a bit crowded coming into the year so all three of those have contributed to sort of underperforming Bitcoin and definitely underperforming alts um however I think we've finally gotten to some levels now where eth BTC is pretty washed out um and on top of that like the Shanghai sort of front run I think is largely priced in and also I think Shanghai is not going to be that negative like this is another thing that we can talk about but I think the market is overly anxious about it I don't think there's going to be a lot of supply and

like I said we can get into the specifics of that and at the same time you do have structural demand in ethnast so you have five million dollars of each body pressure daily um and so what that means is just that like every day you know people can keep rotating out of eth but that's just going to be absorbed and at a certain point they're gonna like they're gonna run out of willing Sellers and after Shanghai when everyone tries to rotate back into E I think you're going to see East start to outperform again um so how it trades between now and sort of April is is tricky I think it probably chops around and doesn't do a whole lot in terms of like each BTC and just generally moves with risk in the market but I do think um after Shanghai it can like e3tc can

can restart its uptrend that it was on before how when you say that BTC was a crowded trade uh first of all can you explain why that ratio is important if PTC like why do so many people check it out but then also are when you say if PTC was crowded are you is there a very specific trade that people were putting on and if so like how does that trade kind of online we had the trade on it was painful um yeah that's right the trade is long East Short Bitcoin I mean that's a structural position I had I had decreased it because I was already starting to worry about Shanghai but I hadn't taken it off to start the year um and I think a lot of funds had that position on right and so it you can you can the position can be manifested in a

few different ways like you could either as a fund if you like don't have shorts you can just have more of your exposure in Ethan Bitcoin or you can literally have the actual trade on which is what we had which is right long eth short Bitcoin like on purpose um and so that is the the trade that I'm referring to and I think that had become a sort of consensus position because of a lot of the structural factors which I've talked about at Azam um and I think that that that unwounds to start this year um and and why do why do just for for folks who might not be familiar like if BTC that ratio gets talked about quite a bit right and people track it you see these charts on Twitter like why is that an important ratio to pay attention to yeah sure

um I mean they are the two major Assets in the space right there's like really no other there's no other assets that come anywhere close in terms of liquidity in terms of staying power and in terms of importance to the to the space and so they are kind of in a category of their own and then the relative ratio of them it just reflects a lot of sort of the Dynamics of the space typically it's been important because um Bitcoin has kind of been the reserve asset of the space and eth has been the higher beta alt and so it's it's used sort of as a reflection for risk appetite and risk beta but also it's

just important to try to like a lot of people think one one's better than the other and so there's this like large sort of like the heated debate between the two sides about it and that's kind of a reflection of how the market is perceiving it um and yeah historically it's just been it's just been a very notable ratio because those two have always been the largest tokens in the space for a long time let's talk a little bit about Shanghai I mean can you um I'm sure most listeners will already be familiar with what Shanghai but can you just give like an overview of what Shanghai is and then maybe we can get into sort of like the ramifications price wise yeah sure

um so the beacon chain was enabled a couple years ago and that meant that there was a proof of stake chain this was still when proof of work was live um but you could then stake your eat on the proof of stake chain and receive um staking rewards through the format originally they were just issuance and since the merge they also get priority fees in Mev which used to go to minors but not now go to stickers and so you could deposit eth to the beacon chain and start becoming a validator and receiving these rewards however you could not withdraw that eth and you still cannot withdraw that Eve so once

it was a one-way door and it still is a one-way door you can deposit eth you cannot withdraw heat um Shanghai is just the name of the fork that is going to finally two years later enable withdrawals and that just means that anybody that staked their Eve is now going to be able to withdraw that Eve from the beacon chain if they would like to and so there's a lot of anxiety in the market because they look and they see okay 16 million eat distaked which is like 20 billion dollars um more a bit more than that and they think okay that is locked eat that can't sell and then once Shanghai

is enabled that's all going to be able to come out and then a lot of those people probably want to sell and that's going to be a ton of Supply on the market now the reason that I don't think that that's that that sort of knee-jerk reaction is necessarily the right one is a variety of things well first of all actually over 60 it's about 62 percent I I refreshed my calculations the other day of that eath is actually already liquid so if you stake through vido for example or coinbase you can either liquid steak they have a liquid sticking derivative or an exchange State derivative um and if you do either of those right they they give you a representative token

that is liquid today and you can trade and these have traded very close to Peg for a long time and so anybody that wants to exit their liquid eth position can already have done so for 62 percent of that eat so 62 is already liquid and the rewards on that 62 is also already liquid so that's 62 you can kind of just forget about when Shanghai happens there's no liquidity change for that 62 percent now the other 32 percent is what we care about and that is made up of home stickers so that's like if I have my own validator which I have set up by the way um and you just set it up in your house and you are just validating traditionally through the chain instead of paying somebody 10 of your rewards to

validate for you then that eat is not liquid because you do not have someone giving you a liquid staking derivative token to represent your eth in the meantime so do you actually have been locked however the important thing is to look at the profile of those people really those are the most die-hard eth Maxi Heath loyalist people that exist you know in in the world right those are the people that were that were liquid staking two years ago or not sorry not liquid staking they were homesicking two years ago when staking wasn't even being talked about very much um these are not the kind of folks that want to sell their eth they want more eat like they're not gonna just be like oh I finally after two years can redeem

this eat experiment and sell it and move on right like that's not who they are they wouldn't have they wouldn't have been hope staking two years ago if that was now some of these people might have had Changing Life events or whatever and want the money and sure some of them are going to sell but I think it's going to be a very low um percentage of that 38 and so like I have my own model which at some point I'll share um and I run the numbers and I just don't see a very material amount of notion I'll eat selling and I think you know it's going to be spread over quite some time so what's going to happen is the rewards on those homesteakers are going to be distributed quite quickly over the first I think about four days and that will lead to a small burst of like moderate

selling but really honestly that's not even that much like we're talking in the order of like a couple hundred million dollars of each selling which like you know that sort of flow happens on a daily basis that's not like anything out of the ordinary um like that's that flow is certainly not worth 10 of each BTC which is what we've already seen the ratio move and especially especially in like a market where it would normally have been up and then followed by probably another couple months of a similar order of magnitude selling and then it's done right and then that's it like there is no more each selling ever like the miners have sold withdrawals have sold that that's it that's the line of the podcast there's no more eth selling ever

uh two months after Shanghai no more technical selling of you yeah into eternity so that's a good counter argument uh to how to the you know there's gonna be a big dump from Shanghai What will the will there be any other like structural or like rotations into maybe like who will the like what platforms will come out winning this like will rocket pool do do really well from this will Lido like do better or worse because of this like yeah coinbase better or worse I'm curious to hear like who's gonna be the the beneficiaries of this rotation so it's a good question I don't want to like I don't want to show all my cards on this obviously because like you know we obviously have positions and doesn't mean you're either long uh rocket pool or long Rideout is that uh what I'm

hearing here wait wait we obviously have positions and like this is a this is like a very important Dynamic right there will be winners and losers um and you know there there's positioning to be done in regards to that however with that said I would say probably in my opinion the most obvious winner the eth Maxis are going to like this um is rocket pool you're about to fire up David Hoffman um I I think it's rocket pool because I just think it's the most direct beneficiary of staking participation

going up because you actually need to buy RPL to stake on Rocket pool and then on top of that um I don't think it's that crowded of like a fund or like Fast Money long so there's probably not that much sell the news that comes and then third a lot of the well some of the home stakers are going to migrate to liquid staking and if those folks are going to migrate to one of the liquid staking platforms it's very likely going to be rocketful because those folks are decentralization Maxis and rockable is like the most decentralized of the liquid staking options and so I think like for those three reasons it probably stands to gain the most from actual Shanghai implementation

hey everyone quick break from Empire to tell you about another blockworks Channel that I know you're gonna love I've been in crypto full-time for five years and have always struggled with one thing which is keeping up with the next big Trend as soon as I wrap my head around Mev Rhonda app jeans as soon as I wrap my head around napkins we're on to liquid staking derivatives I'm sure you've been there blockworks research hasn't solved that problem for me our team puts research data governance proposal updates models and more into one really easy to use platform so I can always stay ahead of the curve if I don't understand something for example I just built the platform I can search for an L1 I can search for a protocol both

the platform at blockworks research.com I searched the term there's always an amazing amount of insight in a really consumable way uh right now you can subscribe to the platform it's 2500 bucks a year or 900 bucks a quarter hopefully you can uh make more than 208 dollars a month by using the platform if you can't you're probably in the wrong business but if you're not ready to subscribe to the platform today you can subscribe to the research team's free newsletter uh you can follow their Twitter handles today links in the show notes trust me once you do that you're going to want to subscribe to the platform if you are ready to subscribe right now I got you guys with a little hookup Empire listeners get a 10 discount for the first 50 people who use the code empire10 got your back

check out the links in the in the description to find out more now let's get back to the show hmm there are other implications but that's the most obvious one to me yeah what what do you think about you know when you look at the liquid state and derivative providers like the like Lido rocket pool there's there's CBE Thunder as well I mean let's just talk about light on Rocket pool so what do you think about there's like two ways to think about that as like a trade right which is like don't overthink it left side of the bell curve like liquid's taking you know Shanghai after like liquid striking derivatives go up like that's a good momentum trade but then there's like a longer term kind of fundamental uh valuation that you could do and this is one of those like one of our analysts was uh talking about this

the other day which is like even if you take really generous assumptions for something like Lido like Lido's trading at a two billion dollar fully diluted valuation even if you assume they get like you know some ridiculous like 80 market share or something like that they're still incredibly richly valued basically so I guess my my question yeah oh my gosh shorter term narrative basis but then also like if you could talk about them on like a evaluation Tech framework as well so okay I said a few things so first of all that there is a real fundamental benefit here right so what happens is and I've talked about this at NAS I'm like I've written a uh like 30 page thesis back when we did the merge about

my liquid psychic derivative thesis and why withdrawals matter and it was just purely focused on fundamentals the reason that okay so the fundamental sort of Tailwind like why is this positive uh is really there's two prongs to it if you think about these protocols they have revenues and expenses their revenue comes from the 10 percent reward that they charge the 10 fee that they charge on staking rewards on their products and so that's really a factor of a few variables but one of those variables is how much each they have staked and one of the variables that influences that is staking participation rate so on the

revenue side of the calculation if there are more people that are going to stakeheath and I think history you know people have looked at Ethan been like okay it's 15 staking participation rate like every other proof of stake chain is 60 plus so there's a lot of reasons that eth is lower than the others and probably doesn't get to that level but there's a lot of room for growth above 15 and one of the things holding it back is the fact that you can't withdraw and so after withdrawals are enabled there's a view I think at the correct view that staking participation rate is going to go up dramatically so on the revenue side of the equation that just leads to more stake for everybody every player in the field just gets their product to get greater um traction so what does that mean for like Lido for

example Revenue up um that's the that's the revenue side of the equation and that's like forget market share like it's just the it's a it's a rising tide for all of the parties in the entire space right because just more safety now the expense side of the equation really the largest expense of these protocols is the emissions that they pay to maintain the peg on their staked derivative versus e so for example Lido has to pay out Lido tokens to the curve pool such that people will LP in the curve board provide the penalty to maintain Peg because otherwise they will not keep their pay

after withdrawals you shouldn't need to pay out so many emissions because there's a natural Arbitrage the market forces alone should be enough to keep Peg right and so they should be able to reduce those emissions so the actual fundamental thesis is that on the one hand revenue is as a beneficiary and on the other hand expenses are reduced so you have these two prongs fueling greater fundamentals for the protocols now that's just the directional drivers to your point valuation is also a factor right like okay these things get a benefit do they get a 300 benefit or a 100 benefit and that's a relevant question

um and I think you're right like if you look at Lido evaluation I think I haven't I haven't refreshed the numbers on my model that recently and it depends on each price but like they might do somewhere like 60 million of Revenue or something like that um and you know you you mentioned that they traded 2 billion FDB it's a bit higher now but something like that right um so they're trading like 40 times that that full case Revenue number which you could argue is expensive right like in the traditional stock market that's an expensive valuation um especially for like a market incumbent that isn't going to take market share anytime soon however

the reality is pretty much every single thing is fundamentally overvalued in crypto like if you want to look at the metrics from a pure Equity standpoint um you're not going to find a lot of cheap things that's actually not entirely true like there are some cheap things like for example if you look at eth pays a seven and a half percent yield and is deflationary so in theory it's trading like 13 times earnings maybe less actually 12 times earnings which is extremely cheap um if you look at something like GMX they generate an eight percent eth yield which is also 12 times earnings so like there are some exceptions but what you

find is that generally in crypto things don't really trade off valuation metrics right because like the holder base is not the type of polar base that's gonna hold these things for 10 years and see the earnings outflow it's it's crypto is much more of a short-term oriented audience and as a result uh the fundamentals tend to matter less than they do in the traditional Equity world and so I think it's important to understand those things but I also think it's it's really important to understand that like just because you have your fundamentals does not mean the Market's going to reflect them how this seems like a pretty convicted bet and I've heard you talk about how like most at this point like your job really as a Trader is to take really

concentrated highly convicted bets is there anything that could change your decision here whether it be on like eth or liquid state derivatives I just say like on the liquid staking derivatives like it's a high conviction bet however there's naturally like phases of things right like there's phases of that conviction and I think that conviction is much stronger to start the year when no one's talking about it than it is now when the first question I get asked on a podcast is about it right and everyone on Twitter is talking about it right so

um you know and I'm not mad like I I've tried to make this extremely clear in general and I will make it clear again now like I'm not married to any position right like my obligation is to my investors and My Views change all the time right so certainly My Views can and will change um and when I think that something has ran its course I will move on to the next opportunity that I think offers me the best reward like I will not hold the same positions for five years it's just not going to happen um and so like the answer to your question is yes things can change for me to change my views and one of those things is just time running its course and my view becoming better appreciated by the rest of the market like if that happens then

all right like the the gig is up that doesn't mean that I think these things necessarily have to go down but they no longer offer me Alpha so I need to find move on and find something else that does offer me Alpha where people aren't aligned with my view and where there is further greater potential for change um so there's that's not to say like that's the case with everything right like there are certain things which are just structural and I believe in and I'll hold for a very long time but certainly my sizing and my positioning um uh definitely impacts sort of or is is a is impacted by my level of conviction and one of the factors that influences that is really just how differentiated I think my view is from everyone else yeah one view I'd

love to get your take on Mike I don't know if you want to keep talking about Shanghai but I guess it's tied into this it's just like your your real yields framework and your belief around real yields and some of this conversation that was happening more in the like September October October time frame um would love just get your like updated views around your real yields thesis yeah it's it's a good it's a good question and it's definitely something that I pay attention to and the gist of it is really just there's a lot of yield in crypto but not all yield is created equal um as we've learned over and over and over and over again um there's a difference between a token paying out or minting 10 new tokens every year out

of thin air and giving that to stakers and saying oh here's a 10 staking reward like that is not a real yield that is just we're diluting You by 10 and giving that token back to you and so you feel like you're getting 10 but you're actually getting nothing because for the market cap to stay constant the price needs to go down 10 and nothing nothing actually is happening here um there's a difference between that and we actually have users that want to use the chain eth and they pay us money to use the chain and we distribute that rewards to you and that's your yield now that now eth yield does not come only from uh fees it also comes from emissions however if you look at the net effect of it

is deflationary so like the net emissions are negative and you get a seven and a half percent yield so that's seven and a half percent yield is real yield like it's actually accruing to the users because they're not being diluted um and that's very different than another blockchain where they just they just omit the tokens and then you get those as a staking reward but you get deflated so that's the concept of real yield and I do think it's relevant um like I said before crypto is only Loosely tied to fundamentals so it's not like the only factor that matters but I do think it's an important consideration um I um you know one thing that you know on that subject how I'd love to get your

your sort of thought about how other alternative layer ones sort of do in this environment so like Aptos obviously just ripped like yeah 400. to talk about Aptos Aptos is an interest in case they discuss and I've talked about this on Twitter I was shorted to start the year so it's another technical one that I wish I was sorry it's okay uh I covered it all around six to eight dollars so I have uh I got out of the way before things got really ugly but yeah it was a painful one that's taught me some lessons yeah so you know I'd love to even before getting into Aptos specifically like you know when it comes to it it seems like ethereum is like far out right in terms of winning sort of this like L1 War uh battle that's been raging for the last two

years you know in your opinion has eth kind of definitively won here and there's just there's not going to be much act maybe there'll be like some small ones that capture a small portion of of activity or do you think like because one way I could see the what I I could see investors Having learned from the last cycle is that some of those L1 trades didn't pan out but it's like the only investable asset in a lot of in a lot of ways you know like you could have learned that lesson there's becoming it's becoming there's becoming more investable app layer tokens which I think is necessary like dydx is one I've talked about a little bit um I was I was actually looking at it as a short because there was this massive Cliff unlock but then they moved that and as I dug into it on the short side I

realized how much potential there was on the long side and now I actually think it's a really compelling law um and we could talk about that at some point if you want but just to get into foreign the L1 dynamic there's so many different like pieces of this of this question that that I want to unpack and so I'll try to distill it down and kind of hit on each one but um I do think that if has clearly demonstrated and sort of won the L1 competition in terms of who's

going to be the prominent L1 it's like I don't even know if you can even say that though because long term is probably not even that used that that used of an L1 it's probably more of the L2 chains built on top of Ethan eats more of the settlement layer so it's like it's not even it's not even really cute but I guess what I had to rephrase that is the ecosystem has one as sort of the dominant L1 ecosystem whether that be if polygon arbitrum optimism starkware CK sync like whatever right there's so many different like large-scale chains that are going to be built on each that are

all going to like utilize ethos collateral a lot of them are going to have their fees paid in each they're all going to settle on Ethan pay each fees to do that um so like that ecosystem I think has clearly won and the reason that I think it's clearly one is because it's captured such a liquidity moat um like if you want to have an nft collection that has real liquidity it needs to be on eat because that's where all the nft Traders are and like yes Solana has another and also I am long Solana too Solana was one of the things that we did get right we bought a lot of Solana under ten dollars because we thought that it was probably the poster child of all those technical forces of year-end selling

um and was going to mean revert the hardest in the new year and and that was one of the parts of the thesis that we did get right um and also I I do I do believe in Solana like I think that there is a real ecosystem there of developers of more importantly than actually developers there are users like there are actually users that want to use the Solana chain um and they're and also another important thing which kind of gets underappreciated is that Solana has culture like there's its own culture to Solana it's not just like a rip-off chain like it's its own thing it has its own sort of History its own culture its own honestly influencers like it has a whole ecosystem built around it

um that I think is the only other chain that really Rivals eth at all in terms of that culture um and so like I do think Solana will exist however you saw this right like with with d Gods like they move their nft collection from Solana to eth and everyone's like me included is like geez what a bunch of clowns like have they have no loyalty but the floor price pops it's like so yeah I mean that's because there's all the liquidity is on Heath um so I think that other ecosystems will exist um and I think that certain there will be certain winners of that like second tier um category but I think eth has has won as the as the premier sort of L1 at

least in the foreseeable future like nothing is set in stone but I think for the foreseeable future that'd probably be my view um and then on top of that though I I hesitate to even have this discussion because to me like eat is more than just an L1 layer um or at least to have this discussion only talk about it as an L1 layer like I actually think that Heath is a better decentralized SLV store of value than Bitcoin like I actually think eth is competing for that sort of Market as well and it's not just a um application chain like L1 gas fee token like I actually think eth is probably like if you're trying to just store value in a censorship resistant

um way long term I think Ethan's a better bet than Bitcoin and that that's not to say that right now eth is more decentralized than Bitcoin or more censorship resistant than Bitcoin because it isn't um but it is to say that I think it has a better chance in the terminal state of being a sustainable sov that Bitcoin does because I think Bitcoin just faces a lot of sort of fundamental foundational flaws that Eve has actually solved can you can you go deeper there Hal can you just say more of the time um sure and this is something that also I have spoken about and written about but basically the gist of it is I do not

think long term like if we're going to talk decades I do not think that an SLV can just keep paying for its security by emitting tokens to minors and having them just sell those back into the market um I think long term what you need and this was actually written in the Bitcoin white paper and this was the division of Satoshi was that that security Cost needs to transition from Pure emissions to actually fee generation so rather than getting people to mine or yeah to mine the token because they get the token emissions you need them to mine because they get the

fee pool because that fee pool is sustainable and doesn't inflate the total Supply um the problem is Bitcoin doesn't generate any fees and the fees have been down only for a long time and there's only one chain that actually does only one L1 chain that well there's two the other is BNB but BNB is so non-decentralized that it's not really in the conversation for this um outside of BNB there's only one chain that does generate fees that are sort of large enough to actually cover the security budget and that's Eve um and on top of that if is not as decentralized today but has the potential to get there like I Envision a world in 10 years where vitalik is no

longer really involved with ease the developers have all turned over the roadmap has mainly been completed and the developers are fulfilling more of like a maintenance role similar to the Bitcoin developers like the Bitcoin has a core developer team too it's not like it's any different it's just it's less important to bitcoin than East developer program is to eat because eat is actually still evolving and Bitcoin really isn't um but I think that each can get ossified to a point where it looks a lot more like that in the future but it still generates fees and at that point it will be equally decentralized equally censorship resistant because I also think they're going to be able to solve the issues with censorship on the staking layer

um and much more sustainable long term and as a result going to be just a better decentralized store value than Bitcoin long term and so I will concede it's not today but I think what really matters especially like if you're somebody who has a lot of money and you're trying to store your value you're not trying to store it for like five years you want to store it for like decades I don't think you can have the conviction that Bitcoin is going to be that in a few decades I think you can I think one thing that I'd be curious to get your your thought on is the way I kind of see this is um there's a branding element here that people don't often talk about which is just like what is the one word that you

associate with Bitcoin what's the one word that you associate kind of with e same way like that companies get like one word when you sort of think about their brand and Bitcoin sort of staked it all on this like digital gold narrative and in a lot of ways that was kind of limiting but what it is is very simple um and very easy to understand and that's what I want that the if because it does so much else it does so much more than that it complicates it it dilutes it it like people don't think at least most people I would argue out in the world don't think Money store value when they think of eth so when I think of like what's going to make these things a store of value like what are their paths the the path for each now to grow is to increase its utility in a

crypto ecosystem right like that's a soup and that's everything that we're talking about in in the show here Bitcoin doesn't have that it's basically lost that battle but it's road to growth is off chain buying it's like it's like macro funds it's like you know at the highest level potentially countries are central banks buying it so like what do you do you think that's an appropriate Framing and when you lay it out like that I mean where do you think the bigger growth driver is for for both of these assets yeah I think I think I think you're correct like regardless of what I think the market perception is the market perception right it doesn't matter what I think it just matters what the market thinks

um and I would agree because Eve does do a lot of things people don't actually see it for what it necessarily is um and that that's not necessarily that doesn't necessarily have to remain the case like it just takes One Sovereign or one like country or whatever to buy each as a store of value and then um you know people might just start view it differently but I think at current there's so that's certainly been the case um and the the so I do think that I agree with you on that point and I and I do agree like certainly that other pool of capital is extremely large and and could conceivably represent a larger growth

driver than like just the kryptonators buying more eth to keep um using in this crypto economy but the other point that I think is kind of relevant though is that there is a very large structural difference which is that like because of these inefficiencies that exist with Bitcoin there is just more Bitcoin admitted to miners every day and that just gets sold every day and because eth has actual fees there's just Eve bot every single day to buy each so it's not just your incremental buyer it's also the structural forces that I think are arguably more important um and their youth has clearly won um and so that that is that is definitely a big factor I have a I have a question maybe we can get into Aptos here because you know so much of the the discussion about aptos's

run has been like oh like they shouldn't be doing this as ridiculous aptosis is valued as much as they did rally hated rally most hated rally um but if I had to maybe take a guess yeah I really like do they love they love the Aptos Korea is Korea has been the main driver of the Aptos rally yeah so so one force that always tends to get underestimated is you there's like a tremendous um like dampening of volatility forces like assets get bigger just because the amount that's uh needed to marginally like move the price is like so much larger and larger that like Bitcoin I think was like the first if you want to

call it like a victim of this and I think eth is now in that pool too where like just the marginal amount of buying or selling to move the price of uh these assets are higher and like Aptos is in that low liquidity category which it can just rip like this and some I think it was Ryan Watkins that made a pretty interesting point which was that until you get a valuation framework that everyone agrees on for these l1s this is going to continue to happen that like there'll be a big move uh and then people value l1's like relative to one another so they'll be like oh like eth is worth like 200 billion dollars here's this like upstart maybe it'll be worth five percent of that which is like an arbitrary number and because it's low liquidity in many cases low float it

just rips so like is that kind of the dynamic hey is that the dynamic that you see with Aptos and do you see that General Dynamic like kind of continuing into the future with well there's there's a few Dynamics there's a few dynamics of app does it's an interesting one um first of all I think a lot of people were shorted to start the year as indicated by the fact that I was shorter to start through there um like I think that was a consensus thing because um I think part of this get the like a part of this at the very heart um is about fdv versus market cap and I think ultimately like fdv is the relevant metric because that's

what represents the total tokens however in any shorter period of time fdv truly isn't me like it actually doesn't matter because it's not liquid it's not like the the portion of liquid participants they don't they they're not they're not part of that like if at those market cap is 200 million but it's FTV is 3 billion and Solana or let's say Matic market cap is 3 billion and FDB is three billion they're the same valuation however there's only 300 million dollars of people long after those and there's three billion dollars of people longmatic so if 10 of the people move from Matic to Aptos at those doubles and Mata goes down 10 like it does it like

the market cap in terms of the actual money flows is what matters now long term if you want to put a pair trade on for three years you could do fdv because ultimately those tokens will become liquid again and then they will reflect that but it's just way out in the future especially for something like Aptos where the investor unlocks are not actually until um until September like then FDB truly is a mean and this is one of the things that we got wrong is that we were looking at it on fdv but FTV is not relevant so far away from the unlocks um so that was like one factor I think you had a lot of people short and then the market just systematically targeted everything people were short rationally so because they knew

these people are going to have to cover um and and they all did me included thankfully I covered earlier but yes everyone covered um and so the market kind of targeted those shorts and Aptos was a poster child of it and so that was like what got it going and then as I've said many times and before in crypto well in every Market this is the case but it's definitely the case in crypto price leads narrative and not the other way around and so yes the fact that and the fact that people were short Aptos that's all you needed for it to go up right it wasn't because app does is a great chain it just like the market new people were short and they could squeeze them and so

they did um and then the people covered and the price ripped because it was low float and everyone had to exit a small bore and then people say oh well hold on a second maybe this app does chain is the next big thing and then like I think I don't I don't want to like generalize but I have heard that in Korea a lot of the things that the investors focus on is gaming and l1s and Aptos has marketed itself as a new gaming L1 and so I think like naturally um there was a fit there and so for whatever reason there's been a ton of retail buying in Korea of Aptos and those guys

just like they are they're very good at this um then they we've seen this in the past where like these tokens just go on crazy runs when this happens and there's there's Korean retail buying um and so I think the fit with the profile of the chain with the fact that it was shorted with the fact that the price had already gone up with the fact that the unlocks were so far away with the fact with the year-end inflection all created this Confluence which created the apdos rally so this is something I didn't actually even realize is the connection with South Korea but I'm I have blockworks website pulled up here and we just published an article that says um after surge triggers

flashbacks of ripples 2017 Bull Run shorting positions in the South Korean crypto Market might hold some answers to the Token Spike and I pulled it up and the uh in South Korea they just kicked off the jungle blockchain Foundation week which is this is the other thing that I was going to tell you which is that there's actually the start of a series of hackathons this is actually the reason that we covered and Aptos is really heavily promoted there I guess right this is the reason that we covered thankfully we figured this out um was that there is the start of a whole series of Aptos hackathons the first one is in Seoul on February 2nd and it's going to be very promoted there's going to be a lot of gaming

announcements Etc and so as soon as I realized there was this date on the calendar that people were eventually going to figure out and get behind I I can't we cannot be short this until after that day that the absolute earliest um and yeah so all of those things all of those things but how let me um okay so all right so really interesting Lessons Learned From Aptos how does this then apply to how you um tackle like the L2 trade I mean I don't know that it's that necessarily related to the L2 trade but it certainly influences like how I think about sort of managing the

fund just in general like I'm constantly learning like honestly I think back you know we only launched 13 months ago and I was I had no experience managing a crypto fund that it was a pretty funny timing actually for the towel what were you pre-crypto I did I did five years at Morgan Stanley in a variety of roles and then I did one year at Maverick as a hedge fund analyst I had some money management experience at Morgan Stanley because I ran a derivatives book there for three years um but like we launched at the Pico Pico Pico top of the market like literally couldn't have timed it any better like our initial mark on eth was 46.50 on these first of of 2021 and then each

proceeded to go down 80 percent in a directly straight line over six months and our whole thesis was the merch right so we obviously had a decent eat allocation um so like as I think back to that there's so many like Lessons Learned along the way and then by the way but I never experienced a bottom I never experienced like what a bottom looks like how the market like trades on the bottom because I'd only experienced down only from the top and then this was the first sort of this the year end like that's why I said like I'm a little annoyed myself I didn't capitalize on it better but like I was bullish and so I was like buying

in December and I took the firm's net position up and I bought a lot of alts but there was other things that I didn't do which I should have done like in hindsight it was obvious that the market was going to Target the low flow tokens that everyone was short but I hadn't had the experience to realize that right and so like that's the lesson learned from Aptos is like when you and I can talk about this because the next bottom is not going to be for many years and anyone that watches this is going to have forgotten about it by the time we get there and so like I'm not giving up any Alpha by saying it now but um when you get to bottoms like that and you have this like this really heavy cell pressure and you can identify some reason why you think

there's going to be an inflection like you actually don't want to buy the good tokens because those are all tokens that have good tokenomics and have unlocked and whatever they don't they're not they're not they're they're hard to move like we got somewhat fortunate in that we bought Solana and it pumped just because it pumped a lot just because it had gone down so much but like that wasn't actually the right profile of a token to buy what you wanted to buy was these things that had extremely low float and other people were short um but I I had I I just like didn't have that framework so that's really the lesson that I learned um does that apply to like the reason that I say it doesn't necessarily apply to the L2 trade it's like this is different than the L2 trade like the L2

trade like I don't even know what the L2 trade is frankly but like to the extent it's like buying L2 is because they're going to launch like that's just a very different thing than what happened with Aptos it's a good lesson I mean let me then rephrase the question like you believe in the eat the ecosystem a lot of things will settle to probably l2s instead of L1 instead of instead of eth like how do you think about like arbitrum versus optimism and like just the L2 landscape yeah I also do just want to say like this is a great project and I'm sure everyone's like that support like I love Ben Jones and what they're doing at optimism but optimism is like the definition of that as well it's got like 500 million dollar circulating Supply off a 11 billion fully diluted value and

op was a token that ripped as well so I feel like that does fit that yeah right for the same reasons yeah the same reasons I I was not short optimism because I was bullish on the Epico but it was a short Target for a lot of people right um like people were short at it was low float what happened like same thing like optimism GMT dydx Aptos um Stargate it doesn't matter any token that was heavily shorted in low float they all ripped like it didn't matter what was going on like that just shows you like this isn't about fundamentals this is about but hell actually let me uh I dig in for a second there like when you say people are targeting the places that have shorts that seems like a very

like hedge fund like a fund mentality but then it's also like okay well a lot of this rally and something like Aptos is very retail South Korean drifting so like it's not just funds it's not just funds retail's doing it too like you don't want crypto Twitter you go on crypto Twitter and people are talking about this like GCR tweeted this and it was correct right like everybody is aware of this Dynamic and like it's like okay who targeted the short squeeze in GameStop retail yeah same thing that's really funny yeah um I had a question for you and I totally blank ties but let's let's talk about l2s though because that's like the next big I've got what like sort of two

more Dynamics I want to cover with you but like what what are your thoughts on sort of um like it's I mean we're recording this on January 27th we're sort of like the the heart of of a bear right and maybe maybe price action is going to improve from here which is I think Jason my general framework but like it's gonna probably be a better one sorry so you're telling me so you're telling me it's time to sell I no no well yeah yeah actually yeah I said it was time to buy so yeah it's time to sell um I'm just kidding I'm just kidding no I have extremely reliable contraindicator but I but there's still like a bear Market left and like when you kind of look out into the Horizon about things that people are excited about like l2s definitely like you just

kind of mentioned like l2's like B what what are your what is your sort of General framework for when you think about the major layer twos today and like how important of a sector is that going to be to be extremely relevant um I think it's going to be relevant for eth and I think it's going to be relevant for the l2s I think I'm a little like skeptical long term of the L2 tokens because there's going to be so many of them competing for the same mind share whereas like there's only ever going to be one eth um so I I like if you're asking me like my five year view do I think optimism outperforms eat like definitely not

um I think the outperforms all of them over any long period of time doesn't mean that there won't be trades to be had um I don't have very strong views about sort of like which L1 which L2 is going to win for which reason and like which ones you should be buying I I'd say my my stronger view is just that I think when you have Arboretum launched optimism launch Matic launched CK sync launch darkwear launch all promoting the adoption of their chain on eth all trying to onboard new people paying people for Partnerships on their chain that is going to be a powerful by

dynamic in terms of bringing users to the ethereum ecosystem and if if arbitrum onboards a user that wasn't in crypto it's very likely that that user is going to buy RB and also buy ease and so you're basically getting these free marketing budgets from all the chains built on eth and I think that's going to be a powerful Dynamic for eth itself I would agree with that I agree with that um I have one sort of thought and idea to run by you here because you know I think it's worth talking about and just like event for this for the end state of crypto right like

where does the user value capture sort of occur like right now people say like people are users of ethereum today I think I think most people might agree that like 10 years from now people aren't going to be users of of ethereum right like people are ultimately going to use apps you don't think so I think there will still be users I think it will be whales mainly but there will still be users okay um well I I guess like the the point is like most people will like come to CR like I I'll tell you that I will concede what I think the point you're trying to make is like it won't be super widespread mainstream adoption yeah yeah that's that's like ultimately if if you think about each business

model is selling block space then they'll do that to other blockchains and and like whales that want to transact right um I think your question is like what is the use that the mainstream adoption is going to come to crypto for I'm I guess I'm asking you to this is a really tough question but like let's say there's a value chain of like there's an app that a lot of people use just it probably won't it might be this but like let's say it's a decentralized exchange that maybe like is a roll app right kind of like a layer three that would set and I would go down to a layer two that ultimately then gets you added to eat where is this the value capture a crew right like like and across that chain do you see what I'm saying yes so you're saying

there's a decentralized exchange built on optimism they charge a user ten dollars to do a trade in a commission how much of that value accrues to decentralized exchange how much of that value accrues to optimism how much of that value accrues to E that's exactly what I'm asking you so I think the majority there's two buckets there's like the trading Revenue so like if you pay ten dollars in commission like the the that's like their trading Revenue the majority of that is going to recruit to the app layer

um like when dydx was built actually this is a perfect example right because dydx was built on starkware stockware yeah yeah right so that was the example so the majority of the value when the user paid went to dydx and then some minority of that went to starkware for facilitating and then what went to start where Starker had to pay some portion of that to eat for settlement and I think so I actually don't know the exact numbers but I have seen them in the past and I if I recall correctly that second bucket more value accrues to eat than the L2

but it's like in the same order of magnitude we call it like 60 40. and then the majority of value though accrues to the app layer however like there's only one eth and then there's 10 l2s and then there's a hundred apps on all the l2s so like yes each one of those 100 is going to generate the majority of the value but they're all going to contribute to the L2 and then all the l2s are going to contribute to E so eth is only going to get uh small portion of each individual transaction but they will see a cut of every transaction the the reason I was sort of asking as a defer another for another podcast was doing research on um aggregation theory

if you've heard of that by Ben Thompson sure and what one of there was a there was an idea in there called uh The Smiling curve and The Smiling curve is a dynamic used to describe the PC industry in the early days and it's called a smile because like if you divide up like r d over here at the beginning of the production of PCS then there's Fabrication in the middle then there's like brand and consumer like the interaction with the actual customer the way value would accrue was a smile whereas there was actually a lot of value in owning the relationship with a customer there was a lot of value in the r d and patents and everything at the beginning and nothing in the middle nothing in the middle they just got smoked and it was highly commoditized and like honestly when we described like

these Dynamics I could sort of see that playing out you know what I mean and yeah so that's an interesting point I do think the app layer is going to generate a lot of the value and I do think eth is going to generate a lot of it that's kind of like the two ends of the smile Wild and the l2s are more like questionable but I actually think this and this is an important point that I think we should discuss which is that like I actually don't know how much it matters for Keith specifically how much value they capture because like I said like if you think of etha's competing for the

decentralized sov market cap 2 which is arguably like bigger than this sum of future cash flows from staking market cap and I also think that eth has a tremendous amount of value just from being adopted and used as collateral for a variety of things right like if you own eat to buy nfts that are denominated in eth which everybody does that provides value to eat that has nothing to do with how much fees each generates and if you buy eth because if is a decentralized sov a lot of Bitcoin that value also has nothing to do with how much money each generates um so I think I'm hesitant to focus too entirely on it because it's not really

the most important point it's a part of the value proposition but it's not the only one and I mean this can sound contradictory to the fact that I say that all l1s don't have a lot of value because they don't generate fees the difference is all that ones also don't have a native ecosystem that requires the L1 token and they also don't have decentralization that allows people to buy them as decentralized sovs so in their case it is the only actual source of value and they happen to generate none of it but for eth it has the other sources of value so it is actually relevant so like those two aren't actually necessarily contradictory um but yeah I just I just want to make that point like like ultimately I don't think eth is going to stay deflationary like I think L1 fees will compress and each price

will go up and you know it'll probably reach some steady state of like very minor inflation like you know less than one percent um but as long as it's adopted for those other utility as long as it keeps being used and the ecosystem keeps growing and the economy keeps growing I still think that the price can perform very well and another reason for that is that this is really a key point is that like ether missions are very different than Bitcoin emissions because they go because one is proof of stake and one is proof of work right if you're a Staker you just like buy a liquid sticking derivative you have no cost like when I get paid like I have I manage whatever I manage for the fund and then I also have

my own personal crypto Investments that I just like don't I don't average trade my PA because I don't want to conflict with the fund but like I own some crypto assets for like 10 years 20 years 30 years that I'm just like never touching and eth is the is the main one that I own and like I obviously own a version of State deep but like I'm never like oh crap I need to sell my staking rewards because I paid expenses to get them like so the emissions that people get from staking rewards don't actually end up hitting the open market for the most part but with Bitcoin the emissions that miners get they all end up hitting the open market because they all have tons of expenses that they need to cover and so they all need to sell them and so even if each is slightly inflationary

that doesn't mean it has net Supply it actually still has net demand as long as the fee pool is significant because that issuance is not actually being sold I I think that that's a super compelling argument by the way I think that was I think you uh that you sort of made me change my mind on that that idea it's a very a super important dynamic well happy to help Hal um I wanna maybe end it with this question which is uh because I know we got to jump in a second here things we're talking about today is like long Eve excited about liquid staking derivatives talking about l2s is there anything that's maybe less like those I would say those three things are like very in the narrative like very talked about today like is there anything else

that you're really excited about that are maybe more on the fringes I think the most contrarian take I have recently is about dydx um like I think dydx is another like hated token because it's been like a terrible valueless governance token and most people hate it and it has this low flow Dynamic however I mean we can talk about this one quickly because I think people will find it interesting but I have long thought that if you could get a good app layer token that actually has product Market fit actually generates revenue and actually

returns that Revenue to users in an efficient fashion it would be super powerful and I think kind of an exemplification of this is GMX like GMX has a lot of flaws but it fits those buckets and because it does it's been an extremely successful token um and I think dydx has the potential to be that like supercharged because dydx is by far the market leader has by far the best ux and is now seemingly very committed to solving the other issues that have held them back so the fact that they delayed the token unlock a year tells you a lot like the team is willing to work with

investors and can see the vision and they don't want to sell here like they know what's being built and they know that the token is going to be worth a lot more in the future once they complete the vision and so I think that's a really strong reaffirmation and then like I think V3 is probably going to come in the third quarter once B3 comes it's going to fit the description of what I just outlined assuming they execute um for like the first time in this in this entire kind of industry whereas like they generated 350 million dollars of Revenue even at current value it's a two billion dollar fdv like the actual market cap is like sub 350 million but the fdv itself is 2 billion so like they're going to be trading seven times real Revenue like that's kind of unheard of in this industry

um and all that revenue is going to accrue back to the Token holders so the vision is that when they create their the new chain on Cosmos you're going to be able to get a dydx token which by the way then will be an L1 and we'll have some L1 premium rereading second of all all the rewards are going to flow back to validators so you're actually going to receive the yield and that's also another way to to solve the regulatory issue if you're not turning on a fee switch you're just returning Revenue to the stickers that's that you kind of that's the the ability to bypass that regulation via creating an L1 um and then on top of that like nobody owns it because everyone was scared Away by the

fact that there was this massive unlock so all these funds that are like desperately searching for an application layer token that they can own that actually has valuation support that actually has utility that actually has a product Market fit well you're potentially going to see one exist for the first time in eight months and no one owns it and it's super low float and it's super liquid and like everyone hates it so I think like I don't know whether this is going to work or not but as a fund we just have a position now that we've that we've accumulated that's like I'm just putting this away and I'm forgetting about it and I'll come back in eight months and see what's happened with this launch but there's like massive potential here in my opinion

I said that's a pretty contrarian take I don't think a lot of people have kind of articulated that right yeah I guess one more thing just to um so I know Jason said it was gonna be the last question but just to like you know you talked about sort of one one of the Dynamics like pumping crypto right now is the the change in rate regimes right like everyone sees inflation rolling over and yeah everyone's like about Macro for a minute if you want can we just close it on that like because I the it seems like it seems like if I had to outline a macro thesis it would be that we're going to get stop start inflation right this is the classic thing that happens in inflationary periods like there's a cyclical rollover in inflation it's like largely like gas prices and and stuff

like that and then and then well ease rates you know uh before we should necessarily and then they it tends to rise up and also like we haven't even seen a lot of the the impacts that you would have thought that you would see some from such intense monetary contraction like housing hasn't gone down the labor market hasn't gone down or like hasn't uh you know been disrupted so like do you see and earnings haven't dropped at all earnings have been like pretty steady States like what what do you do you see any like macro overhang here that concerns you or no foreign 's right at the end but I've got 10 minutes

um so there's like a lot of there's a lot of different things to break down and I don't want to like ramble too much on macro and like bore people at the end of this but I'll give you my I'll try to give you my condensed tape um I think at the Crux of this is inflation and trying to understand what is inflation what drove inflation and then trying to use those inputs to forecast future inflation so the first part of the question um

is really what actually is inflation so I think a lot of times people confuse inflation with prices those are not the same thing like inflation is not an absolute price gauge inflation is the rate of change of the price gauge so for inflation to moderate you do not need prices to moderate prices are not going to moderate and people I think confuse that with thinking that inflation is not going to moderate like I think a lot of people think prices are never coming back down and so inflation is going to be like structures you know that we don't need prices to come down we just need them to stop going up um and then inflation goes to zero and if you get even prices to tick down off the very Pico top that's actually deflation

um like if price goes up 20 and then drops one percent you have deflation and so I think that's an important first point then the second point is what's actually driven this inflation and I think there's been really two main forces one was coveted like for you know 30 years we had structurally declining inflation and in my opinion that was driven by a lot of structural forces most importantly population Dynamics which by the way ain't changing um and then all of a sudden you had this massive surge in inflation and I think

clearly that indicates an acute driver not some change in structural Dynamics and what was the acute driver covet so covid created inflation for a variety of reasons first of all it crimped so inflation is really just like so many things in markets it's just a product of supply and demand it's just either more buyers of the asset or more sellers of the asset and then that determines whether price goes up or down um and so when you think about it in that lens covet did two things it crimps demand it made it harder for factories to get together and produce stuff it created Supply bottlenecks which which all had an impact of reducing Supply and then it also boosts the demand and

it boosts the demand in a variety of ways one it forced people to be stuck at home so they bought all kinds of different things that they wouldn't normally buy including new homes um and like computer electronics and home furniture and whatever dogs like people just bought all kinds of things and then another reason that they did that was because there was this initial perception that kovid was going to create a very hard economic period because it was causing unemployment and all this disruption Etc which by the way didn't actually turn out to be the case because the society very quickly learned to adapt and deal with covet but this was the view and because of this view it gave central banks a green light to

implement extreme easy monetary policy and this had an effect of massively supercharging demand so they one handed people tons and tons of free money which was like crazy but then they also took interest rates to zero and then on top of that started printing more money so like they did everything you could possibly do to supercharge demand at a time when demand was already being supercharged by the structural shift of covid and then this all happened at the same time that Supply was crimped so you created like the perfect storm to

see prices astronomically rise for everything and that's what happened prices went bananas on everything you can look at the price of any good and it just was like on a trend and then went like straight up into the right extremely quickly um and that's kind of where we are right and that creates like a very dislocated price like that reaches that that takes prices to a very unnatural level because of that Supply demand Dynamic end but then what's happened since so covet is now basically over right I go around I don't even see anyone wearing a mask everyone in factories is back to 100 like actually now you actually this is one of the things like things tend to overshoot

right you create all this artificial demand and then all these places start building the capacity to handle it and then the demand disappears but they still have all the capacity right so now everything is actually over supplied like well oversupied it's actually timely that you ask about this because I used to be a semiconductor analyst Intel had the earnings they're one of the large semiconductor companies in the world perfect perfect litmus test for sort of Supply demand bottlenecks they said they are seeing and this is a quote the largest inventory correction in history um so you now have massive oversupply and so that's on your supply under the

equation and then what happened on the demand under the equation rates are the highest they've been in a decade federal policy is the tightest it's been in a decade they're draining money from the system and everybody just spent all their savings on buying all this new they don't actually need and now have no more appetite to buy anything so your demand has like fallen off a cliff and supply has gone through the roof and this has happened at the same time that prices have been dislocated to a level that's like completely unnatural to the upside so for me and I've had this view for a very long time before it was like consensus to think this it's becoming more consensus now as it plays out but I've been talking about this for a

better part of seven months it's pretty obvious to me that that's going to lead to deflation like prices are actually going to come down it's not that they're just going to go up more slowly they're going to come down and we've actually already started to see this so I tweet this all the time like used car prices are a perfect example they were on a trend hadn't moved in 10 years all of a sudden imagining they go up to 30 percent what do you think is going to happen when the Dynamics that drove that 30 increase reverse they're going to come down and what's happening they're coming down home prices coming down computer electronics products coming down food prices coming down commodity prices coming down freight rates coming

down every price asset prices coming down they're all going to come down and so now that like if you understand what inflation is it's the rate of change of the price not the absolute level the price the price is not going to come back down to where it was but it is going to stop going up and that is going to create deflation and more than that there's going to be some like adjustment period and it'll settle out but there's simply no reason that any of the structural Dynamics have changed as a matter of fact population demographics have actually probably accelerated and we just built out all this XX capacity that we don't actually need so it's very hard for me to see any justification for why we would have

structurally higher inflation after this episode I think you have a blip up a blip down and then right back to the trend that you had before there's simply I can't think of any reason why it would happen any other different way and so in that context I actually don't think it's going to be this big battle to get inflation down like I think like pretty soon people you're going to be hearing people worried more about deflation than inflation and that's going to allow central banks to stop being as tight and that's just gonna lead to resumption of the previous dynamics that we had that has been my base case for a very long time continues to be my base case today I could be wrong but that's what I think um and

that's been a very contrarian View and a lot of people tell me I'm stupid and naive because I don't understand how business Cycles work and that's never how it works but that's how I think it's going to happen and also I think people don't give central banks enough credit I actually think Jerome Powell has done a pretty good job okay yes he made mistakes um but he has a freaking hard job and a very thankless one at that and I think they do a better job than they get credit for and they are more competent than people give them credit for and I actually think they will be able to handle this like people say how are you sure that inflation's going to come down it's like because the fed's not going to let it keep going up like they have the tools to bring it down and they're going

to bring it down um and then like who's going to manage the soft Landing the same competent people that are going to bring inflation down now and I actually think so I actually think that Jerome and the whole fed team is done a better job than people want to give them credit for we'll continue to do a better job than people give them credit for and we'll actually accomplish this and it's not going to be a straight line that doesn't mean risk assets are going to go straight up into the right forever but in 12 months time I think we're going to be in a lot more of a settled stable monetary regime than we are right now I agree yeah I think that's I it's honestly a super fair to take and and I agree with that point that uh the FED deserves more credit than people give I

mean they navigated this like could have gotten a lot worse you know when the whole world shut down um I appreciate you indulging indulging my questions it took exactly 10 minutes yeah this is great man thank you for coming on this is awesome um and appreciate you coming on no worries thanks for having me yeah man take care [Music]