SUMMARY:

In this week's episode of Between2Chains Jeff Dorman joins our host Peter Hans, talking about impact of macro on the digital asset class, Fed’s hiking Cycle, inflation, interest rates and much more.

IN THIS EPISODE:

1. The episode begins with Peter and Jeff discussing the impact of macro on asset classes and risk assets in general.
2. Jeff discusses what has happened in several sectors over the last three months.
3. Jeff compares the performance of assets over a shorter and longer time period, as well as about people's perception of setting Bitcoin as a market benchmark.
4. "To make your entire investing decision based on three weeks of Fed talk around, is really premature," Jeff says of the Fed hiking cycle.
5. Peter switching to Bitcoin asks Jeff, "low rates is obviously good for any asset and risk asset, but isn't inflation kind of playing into the Bitcoin story?"
6. Peter sticking on the gears of inflation and rates enquirers Jeff Does Increasing rates in the Fiat ecosystem effects the digital ecosystem?

TRANSCRIPT:

NOTE: Following transcript is generated using AI. Minor errors might be present.

REAL VISION 00:00

Welcome to the real vision Podcast Network.

REAL VISION 00:08

Before we get going, we want to remind you that Jeff Dorman is the co founder and chief investment officer of ARCA funds. And Peter Hans is ARCA funds managing director. The commentary and opinions expressed in this podcast are solely those of the podcast participants and do not necessarily reflect the opinions of our funds or its affiliates and are subject to change for any reason without notice. Any discussion of investments or investment strategies within this podcast are for informational purposes only, and not to be construed as a recommendation to buy or sell any particular investment security, digital asset or strategy. Investing in digital assets involves a high degree of risk and volatility, including the risk of the total loss of principal and now enjoy the show with your host Peter Hans.

PETER HANS 01:01

Hi, everyone, this is Peter Hans and welcome to this week's episode of between 2 chains. We're doing a little bit of a later than normal recording. It's Friday, January 14, and I'm joined by my longtime colleague and friend, Jeff Dorman. Jeff, how are you doing today?

JEFF DORMAN 01:19

I'm doing great, Peter, good to be back in the in the old studio.

PETER HANS 01:23

Yep, I know we've had, we've had some different guests recently, it's been a nice change of pace, have some more coming up. Real vision is going to be doing some exciting transitions with their podcast lineup, as well. So that's, that's going to be fun to see how that plays out over the course of the year. But let's let's let's talk, let's talk the market and and what's going on. You know, before we, before I hit the record button, you and I were chatting a little bit about just kind of the effect that macro is having on this on this asset class and risk assets in general. And, you know, one of the reasons why, you know, nascent inefficient markets are tougher to trade in short term is just, you can't really rely on a lot of the backward looking metrics, you know, especially around correlation and now it just seems like, you know, the the bifurcation in kind of tech and the Nasdaq has really leaked over into digital assets and we're trading you know, we're, you know, I don't know what the correlation is between, like, sushi and peloton, but I bet you it's pretty high.

JEFF DORMAN 02:29

Yeah, I mean, you know, it's honestly, it's a little bit of an extension of what we've seen for the last three months. You know, we we all get a little blinded by you know, the overall equity indices, right. Your your s&p is your NASDAQ's even to some to some people, the DAO, you know, those have largely been able to buck the trend, right? If you go back to November, you know, in early December, the indices got hammered, but then they came all the way back. So, you know, the, the general consensus is, oh, equity markets, fine, everything's moved back. But the reality is, there's been massive dispersion in the equity market as well, you look at things like, you know, the Ark Innovation Fund, which was down 20 or 30%, in December or K Web, which is the Chinese innovation ETF, you know, down 30 to 50%. Last year, you go down the list with, you know, memes, stocks, or, you know, some of the more profitless IPOs, obviously, the crypto stocks, I mean, a lot of these are down, you know, anywhere from 30 to 80%, from their highs in 2021. You know, and you're seeing similar things in digital assets, right, the difference is, there isn't really sort of a broader, you know, index or anything like an apple or a Google in the digital asset space that goes off no matter what. So everything in digital assets went down and didn't really bounce back up, you know, in November and December, but now we're starting to see that dispersion come back, right. I mean, even this month here in January to start, you know, even though the broader indices and Bitcoin and ethereum and a lot of things are still down 10 To 15 to 20%. To start the year, there's been a lot of pockets of strength. You know, you've had some newer layer ones, like Phantom and harmony and near protocol and Adam, doing really well, you've had some events, and catalyst type investments do pretty well, you've seen things like chain link, which largely didn't do a whole lot of anything last year, but still powers you know, the majority of DeFi, you know, up 15% this year. So as long as I see that kind of dispersion, you know, I don't think there's a whole lot to worry about in digital assets. I think it is a normal, you know, normal way for the market to trade in a healthy environment, which is some things are up some things are down. And there's a lot to go into there. Right. I mean, is you and I talked about there's a lot of parallels to what we saw last summer, which we can get into in a minute if you want as well. But you know, to me headline numbers of digital assets down is just too broad based now. It doesn't really describe what's happening with all the dispersion and all the different quality of assets that are that are doing behaving differently.

PETER HANS 04:55

Yeah, no, it I think that the dispersion is really the key point. You know, because, you know, one, one question that, you know, will arise from time to time is like, does this volatility? Or do do these sell offs kind of scare capital away from from coming into the asset class? And and, you know, the short answer is no, right? You know, you have a long term thesis and and, you know, you don't, you don't really get scared off by near term moves, especially when they're not really based on anything other than macro. And then and then to the dispersion is actually very, very healthy for the long term trend. Because, you know, ultimately, you know, really all we're talking about digital assets as an asset class is it's a blockchain, you know, custody and exchanged asset, but what, you know, just like the wrapper that you always talk about, like ETFs, or, you know, an ETF is just the structure, a digital asset is just the structure, you know, you have, you know, a major asset like Bitcoin, which is essentially purely a macro asset, but then you have tons of other assets that are actually tied to, you know, business fundamentals. And, you know, the, the interesting thing is, you still see, you know, you do see some, certainly some some dispersion, which is very good, but when you see the inefficiencies of certain assets trading off, say, in sympathy with sell offs in, you know, tech names, or IPOs, that were flying in 2020. It's, it's odd, right? You know, that those would trade off on a macro to an extent, you know, you know, and the last thing I'll say is, you know, you look at like zoom or peloton, or any of these names that were just like, absolutely going up every day throughout 2020 of the pandemic, like the valuations were crazy, right. But the valuations and a lot of these names in digital assets where you can put a value on them, were and still are very, very cheap. So that's, I think there's definitely a disconnect there, in my mind at the market.

JEFF DORMAN 06:54

Yeah, I absolutely agree. And I think, you know, again, a lot of that is just based on how it is shaped by the media and some of the large organizations right for a lot of people still associate Bitcoin as the market benchmark, right? We talked about there's no apple in digital assets. You know, some people still view Bitcoin as the apple. I think you and I both agree that that's just makes no sense, right? Bitcoin is just way too different of an asset than anything else and digital assets now to do it, but what happens is you look at something like Bitcoin, bitcoins correlation with the s&p has absolutely gone higher in the last 18 months, right. I mean, you could start with, you know, the March 2020, you know, pandemic response. And Bitcoin has basically been straight up in terms of correlation, you know, to the s&p, ever since then. But it's still very sporadic, right, it goes up and down a lot. I mean, we have periods of time where Bitcoin s&p don't behave at all, in any reasonable pattern. So it comes and goes, it's very spurious. But when it comes, and you have these two and three month period, where it just trades tick for tick, like we're seeing right now, there is a couple of explanations for it, right? One is simply the the amount of investors and people who are now touching bitcoin is, you know, almost equivalent to the amount of people and investors who touch US Treasuries, right. I mean, there's so many different types of firms now that touch Bitcoin you have, you know, countries and governments, right. Central banks, you have local cities, you have a macro investors, you have retail investors, you have individuals who are using it as a store of value in places with high inflation, you obviously have your crypto native funds, you have, you know, even long short equity funds are starting to trade this as more of like a 24/7 Vol instrument because, you know, a good example is earlier this week, I started earlier last week, when the minutes of the December Federal Reserve meeting came out, Bitcoin got slammed two hours before those minutes come out. And you know, for those who aren't aware, it doesn't mean it's leak, right? That's not like nobody saw that coming. The Wall Street Journal gets a call, you know, hours beforehand with those numbers, because they have to write the article. And have you ever wondered why CNBC and the Wall Street Journal had an article up one minute after those numbers come up, because they wrote the article ahead of time, and all they have to do is wait for the actual release, and then hit send on their on their report. So, you know, big, huge institutions, whether your banks and brokers or you know, large 20/50/100 billion dollar hedge funds, like they get this information early. And obviously, in the securities world, in securities law, you can't do anything with it. And also because the markets aren't really open. Yet, when a lot of this data comes out at 8:30 Eastern, but bitcoin is open, it's always open. And you saw you saw a ton of selling a Bitcoin right before those minutes came out. And we also had anecdotal evidence from a lot of the dealers, we speak to very large respectable institutions that said, you know, big huge institutions that were in the know, we're selling Bitcoin ahead of that. So you know, you're gonna get these periods of correlation when macro is the focus, and right now macro is the focus because of the inflation and because of the Fed, but again, it doesn't last forever. You know, in three months, we won't be talking about that correlation anymore. And more importantly, just because Bitcoin is correlated with the equity markets, doesn't mean everything else is right and that's where that dispersion comes in, that's where that sector analysis and that individual credit analysis really comes into play. You know, so again, for me, you know, you look at other event like December 4, where the entire market fell 20 or 30%, in like an hour, or you look at, you know, last week, where right around the Fed minutes, the entire market fell about 10 to 15% in a day, you know, those events are tough as investors, right? Because you're like, what just happened? Why would I even bother to do any work on anything because it all moves together. But when you look over any seven day period, or 30, day period, or 90 day period, or one year period, etc, you know, the correlations aren't there, right? There's, there's tons of assets that go up, tons of assets go down. I mean, you can look at last year, just as a whole, right? DeFi was in a bear market all of last year, Bitcoin didn't go anywhere, right? Bitcoin is at literally at the exact same price today as it was on January 10. Last year. Meanwhile, layer one protocols are up 302,000%, gaming, NFT's are up 10,000%. You know, that's real dispersion. And it doesn't really matter what those assets do on a tick for tick basis on a few days around a Fed meeting, relative to what is happening, you know, over longer time periods. So unless you know, investors who are getting compensated or celebrating every 36 hours, most people have a longer time horizon. And over a longer time horizon, there's just a lot of unique things to do in this asset class that have nothing to do with what's happening in the macro.

PETER HANS 11:20

Yeah, you know, definitely don't, it won't last forever. Because I mean, I think and, you know, look, doll a spade a spade right there. Like, there's a lot of people who participate in this market who've never lived through any sort of economic or market cycle. Right. You know, and, you know, us relative boomers have been through quite a few. But, you know, like, we see this all the time, and we've been seeing this since the housing crisis, right, like, rates rise, and, and, you know, and markets, you know, anticipate rising rates, risk assets trade off, but like, we cannot sustain a, as an economy in my mind, a higher interest rate environment, even even a even a low interest rate environment, right, because so much individual wealth is tied up in housing, and monthly affordability is a factor of your monthly payments. And, you know, right now, so much of you know, at least in America, Americans, families lifestyles are based on their monthly affordability and you raise rates, and you know, all of a sudden, houses become much more expensive, right? Housing turnover becomes next to impossible because now people become more underwater, and they can't afford the same house that they could and the economy suffers. Like, that's just like, very simplistically, at least in my opinion. Like the way it works in my every time we've raised rates. Yeah, and sometimes there's been other, you know, global economic factors, but like, the housing market drives our economy, it just does.

JEFF DORMAN 13:00

Yeah, and I think I'll pick a new little bit here, just because I think it's fun to do so. But the, you know, there's also here's, here's the other fallacy with with with, with what is happening with with with the Feds decision to raise rates, you immediately jump to, oh, we can't really raise rates because of housing or something else, right. And immediately in your head, as soon as we start a Fed hiking cycle, you start to jump to what it looks like at the end of a head fed hiking cycle, right. So for instance, the last fed hiking cycle was 2016 to 2018. And the Fed hiked rates from basically zero to a peak of like two and a half percent prior prior to that the last hiking cycle was back from 2004 to 2006. And over that time period, we hiked rates from about 1% to 5%. Right. So literally right now, we are just about to start a Fed hiking cycle. In fact, we haven't even had the first rate hike yet, right? We are hinting at a march fed hike, which was three months earlier than what everyone expected anyway. But these fed hiking cycles take about two and a half to three years to play out. It doesn't happen overnight, right. So immediately, the markets like that's it Fed rate rates are higher, we had to start selling everything. It's like maybe maybe rate higher rates will actually hurt the economy. If we even get there. And to your point, there's a good chance we don't even get there because of how much damage it can do. But also people forget, it takes like two to three years to get there. And if you look at the data, and we actually put a lot of cool charts in our last, that's our two Satoshis on our blog, at ARC ar.ca V actually look at the last two fed hikes, equity markets and digital assets when they existed went up during the entire fed hiking cycle. So again, we'll go back to 2016. It was late. It was December 2015, when the Fed first started hiking rates, and they didn't finish hiking rates until the end of 2018. The equity market and the digital asset market went up the entire time until about middle of 2018. And it only reversed when the equity market collapsed at the end of 2019. We had a 23% decline in about three months, when the Fed started talking about withdrawing liquidity, and that's when the Fed actually started lowering rates again. So we withstood the entire three year fed hiking cycle with equities going higher and digital assets going higher. And it was at the very tail end when the Fed went too far that risk assets collapsed. Same thing in 2004 2006. Same thing, we have a chart there, typically markets did in the, you know, obviously, this predates digital assets. But the equity markets did amazing, from 2004 to 2006. Again, it was only at the very end in 2007, when the Fed went too far that we started to collapse. And then obviously, it led to the 2008 depression. Also, just one more comment on that, you know, you mentioned mortgages and housing becoming more expensive. Well, usually, when you start to hike rates, like the Fed is doing, it actually leads to a flattening of the curve. So even though the two year, Treasury will start to go higher, because you're starting to raise front end rates, typically, and I put a good chart in there from Deutsche Bank, typically, after the first rate hike, the curve flattens by an average of 80 basis points after one year. So that means that generally, if we're gonna raise rates, call it 100 basis points, which is what people are calling for now, this year, that actually means the long end of the curve, the 20 year, the 30 year aren't going to move a whole lot, which means that mortgage rates don't actually change at all. So there's a lot of reasons to believe that yes, this could slow down the economy. Yes, this could eventually be bad for digital assets and equities and other risk assets. But we're talking two to three years in the future. So to make your entire investment decision based on three weeks of Fed talk around, right eggs is incredibly premature.

PETER HANS 16:24

There's a few things there. So one, I would argue that the 2004 to 2006 data is pretty irrelevant, in the in the at least in the in the lens of housing, right? Because the 2004 to 2006 market is what now independent of structural products and CDO square, it's everything that is what caused the housing crisis, right. And that is, in my mind, like that is what put us where we are today. Right? When we like when I started working, and I traded interest rates, right, like, overnight rates, Fed Funds repo was at 650, you know, six and a half percent was overnight rates, like, like, if you got a 7% mortgage, you were like, Oh, my gosh, this is unbelievably cheap, you know. And, and then, you know, we had tech bubble burst, we had 9/11. And, and, you know, economy sucked for a few years and rates went through effectively, you know, 1%, zero, whatever it was, right? And then, you know, as the economy rebounded on low rates, and, you know, we came out of 9/11 and everything, you know, rates rise, and it led to a housing bubble, and, you know, in a financial bubble, right, you know, then, you know, then obviously, rates had to get cut again, and then we saw, you know, LBOs and, and, you know, Bear Stearns Merrill, like, you know, everything that happened in the, in the global financial crisis. And, you know, rates obviously maintained to zero, you know, there. Yeah, you know, there's the psychology of like, right now, we have free money, right, and everyone likes free money. And, you know, and real assets, fixed assets, anything, you know, there's demand for borrowing, right? So you can borrow for basically next to nothing. So it it significantly increases the velocity of money. Because that and that's very good for the economy people spend, right and then and then what you get is inflation heating up and, and the Fed is tool to slow the velocity of money is to is to is to raise rates. And obviously, you know, just like any market, right, you know, we're going to overshoot in anticipation. But yeah, am I looking ahead? Sure. You know, could it be two years of it? And can it be? You know, in reality, is the pain not going to be there yet? Like I don't I agree with that. 100%. Like, I think this is a major major overreaction. But what I'm also saying in addition to it being an overreaction, is it's not going to matter, because it's not like we're all of a sudden going to go back to where we were in 1999, where, you know, short term rates are 6%. And mortgage rates are 10%. Like, that's just never gonna happen again. Right. You know, we are in Japan, you know, it's just never gonna happen again.

JEFF DORMAN 19:04

Yeah, I totally agree. One, one, we never get to that extreme level that people are worried about, but two, I mean, think about what you just did, right? You just said you talked about 2001 to 2008. That's a seven year period if everybody had full clarity of what was gonna happen in 2001. Would they have to be like alright, that's it. I'm just gonna go to cash for eight years.

PETER HANS 19:20

I'm gonna put 100% of my money at Apple

JEFF DORMAN 19:22

right

PETER HANS 19:22

got away

JEFF DORMAN 19:23

and that's the point right? It's like you know, you you with perfect clarity of what happened over an eight year period of rates are basically extrapolating on what could happen again today and so do I so does everybody else right? So this is you know, I'm going to read some numbers here from I did a lot of reading over the break one of them. Larry sumac at the block put out 163 Slide report about some of the statistics and digital assets last year that some of these are pretty amazing. Stable coin supply grew by almost 400% from basically $30 billion to $140 billion. m&a activity was up 730% year over year with a surpass Single for $6 billion DeFi TVL grew over 700% to 250 billion decentralized exchange volume grew 500% year over year wallet growth, just looking at ethereum wallets up 300% to 170 million unique, unique addressesn and NFT volume was $8.8 billion. I don't even know what that is up because it was negligible the year before. You know, you could look at electric capital put out their annual developer report, you know, 18,000 plus monthly active developers were committing code 34,000 new developers were added in 2021. You go down the list, right. And so here's the tug of war that you as an investor have to think about, yes, the macro environment is changing. Yes, rates are going to be higher at some point, although, you know, as you and I just said, it probably doesn't get anywhere near as high as people are worried. Is that enough to avoid investing in an asset class or an industry with that kind of growth? I mean, it's crazy, right? You mentioned what would you have done in 2001? Have you had perfect clarity? You just would about avid Amazon? Right? I mean, it's like, okay, now all but. I'm sorry.

PETER HANS 21:02

I probably you know, what I wish it was it was a monster energy. It was the top performing stock,

JEFF DORMAN 21:08

Or Domino's Pizza, right? Wasn't that one of the

PETER HANS 21:10

Domino's was a little later, that was like, oh, eight, add on,

JEFF DORMAN 21:15

They get the point, right. I mean, like, so what, what did well, even with that entire eight year collapse of macro, there are still pockets of real growth, right? Well, the entire digital asset industry right now is one of those pockets of growth, to just dismiss this, because Oh, my God, the Fed is going to be three months more aggressive than we thought is just crazy, right? I mean, it's not like, it's not like stopping mortgage backed bond investments that the Fed was doing for the last few years, you know, certainly going from quantitative easing to quantitative tightening is going to immediately just remove all liquidity in the market. I mean, there was 1.6 trillion of reverse repo in the last six months, right, that means that literally, people are just giving money back because they can't figure out what to do with it, you can withdraw a lot of liquidity in the market and still have plenty of excess liquidity. So it to me, it's just crazy. It's crazy to make a bet against these growth numbers that we're seeing and this adoption that we're seeing, just because we're worried about a few things offensive. Now again, you know, the response was was correct, right. You know, November, middle of November, we had the first real big inflation report. middle of December, obviously, we had the Fed meeting. And then, you know, the minutes came out in early January, like there should have been a correction, and we got what like that is the right response to new information, but to immediately then jump to, oh, my God, there's a bear market or, you know, I'm afraid of everything and in in, you know, equities and digital assets because of the Fed. That's the overreaction, right? A little bit of a drawdown? Sure. A little bit of a change in assessment. Absolutely. But, you know, there's going to be an amazing amount of winners in both the equity market and the digital asset market this year. And if you can find them and look for those pockets of growth, you know, look for those layer one. ecosystems that are following the new playbook of launching an ecosystem fund launching some DeFi applications incentives, like you're gonna see massive growth across chain, you know, looking for the NFC and gaming opportunities, looking for the, you know, web three opportunities, there's going to be a lot going on in this asset class this year, that has nothing to do with, you know, the two or three week periods every year where, you know, Bitcoin moves tick for tick with NASDAQ.

PETER HANS 23:18

Yeah, I mean, a couple of questions of that, like, one, the narrative of Bitcoin is that it's basically like your inflation hedge. So isn't inflation, theoretically good for Bitcoin? I mean, I understand that, you know, low rates is obviously good for any any asset and risk asset, but isn't inflation kind of playing into the Bitcoin story?

JEFF DORMAN 23:39

I mean, I think, you know, obviously, you and I know the and most people listening to this know, the Bitcoin narrative changes all the time. But yes, you know, one of the one of the narratives of Bitcoin is that it is supposed to be in inflation. But you have to also recognize, like, well, what does that actually mean? Right? inflation in the sense of your purchasing power is just gone. And you have to stand in bread lines, because if you don't buy bread, within an hour, you're gonna, you know, not be able to afford it an hour later, you know, like we say, seen in, in certain economies, like, you know, in Turkey, or Argentina or South Africa, where you have massive, massive hyperinflation, that's a very different form of inflation, then, you know, the CPI is up a few percent year over year and all of a sudden, it's a little bit more expensive to buy a used car to pay your rent. So you know, bitcoins not going to help you in that scenario, right? Bitcoin will help you in a hyperinflation scenario, certainly so so for me, yes, for me, the inflation narrative isn't invalidated per se. It just doesn't mean anything on a year over year basis or over on a month over month basis. You know, if like, for instance, I own a lot of Bitcoin personally, you know, we don't own a lot of Bitcoin in our funds but in personally, I'm not a Bitcoin, but I don't think of it in terms of dollar conversion. I think that is, you know, one day I may actually need this Bitcoin because there could be hyperinflation around the world and Bitcoin legitimately becomes a medium of exchange, but I certainly don't think of Bitcoin as like, you know, wow, I'm really worried about the next CPI print next monthly, I can't wait for Bitcoin to protect me from a 3% drawdown in the markets. And I think, you know, with our you know, I think the overpowering narrative right now is not the long term inflation hedge. It's, hey, cool, all these different macro hedge funds and governments and central banks now trade Bitcoin and therefore it's a risk asset and it's going to trade, you know, on these headlines, you know, not the long term, I hope I actually own a couple of physical bitcoins to be able to, you know, live off of 20 years from now, if every single fiat currency basically races to the bottom.

JEFF DORMAN 23:55

Yeah, no, I think that's it. I think that's right. I mean, the hyperinflation environments are, I mean, it's horrible. Like, I actually read an article this morning about, don't ask me why I was reading this article, but it was, it's about a CrossFit gym in Turkey, which is experiencing like hyperinflation and because the members pay in Turkish Lira, but the utilities and like rent is paid in US dollars. The guy the guy just went from charging the US dollar equivalent of $100 monthly membership fee to what would have been $3 a month membership in US dollar terms getting paid in Turkish Lira and had to raise rates to the equivalent of $15 and then like lost membership, because Turkish wage inflation is not keeping up with the actual hyperinflation and everyone is paid in Turkish Lira so it's just like you think about something like that it's it's it's really scary you know, for for consumers that type of environment kind of Bitcoin help like Yeah, absolutely in an environment like that I would I would think right because then you know, it protects the you know, the purchasing power of your money that quickly but you know, that's not I you know, I don't know I'm sure every country has its own issues and reason why that's not that that feasible but yeah, it's it's that stuff scary.

JEFF DORMAN 26:55

Yeah, I mean, I have a you know, trillion dollar Zimbabwe bill that my parents brought back from Africa trip 10 years ago as like a joke souvenir right? Well, it's a great joke souvenir for some privilege deal kid in the US. That's pretty awful for the people who were depending on Zimbabwe dollars, you know, 20 years ago.

PETER HANS 27:13

That's horrible. Yeah, it's

JEFF DORMAN 27:13

really disgusting. Well, that they sell they sell in Africa, right? I mean, it's like, it's like a joke, right? I mean, current, the currency. Currency wars are real and are debilitating. But, you know, there's a reason why there are certain countries that are taking Bitcoin very seriously. Here in the US, nobody's worried about owning a Bitcoin to protect their purchasing power from a 7% CPI, right, in developed nations in Europe and Asia, like, that's not the issue, right? Clearly, people are owning Bitcoin ether, because it's an investment or a trade or whatever. Right. So, you know, again, you have to separate out the long term inflation thesis from the short term. You know, this is a tradable asset, you know, so So yeah, like, if all you did was shorted a bunch of Bitcoin, because of a couple of CPI prints, and then 10 years later, is that how did I do? Yeah, you're gonna lose, right, you know, 10 years later, right. But if you did it on a three day time horizon, because you saw that the Fed minutes were nasty, and that, you know, tech stocks, were getting clobbered and digital assets were getting clobbered like Sure. You know, that's a that's a, that's a different inflation thesis, then a long term hyperinflation or loss of purchasing power.

PETER HANS 28:23

Yeah. Do you think there's any concern in the market over the pending CBDC report?

JEFF DORMAN 28:30

I haven't heard a lot about it. I mean, you know, we see the headlines like anyone else, but but, you know, when we used to go back and look, you know, so let me back up for a second. We wrote about six months ago, you know, you and I, as well as others are, we wrote a an article on our blog talking about debunking all of the the bear market thesis, right.

PETER HANS 28:49

if you made a good we had a good podcast episode about it.

JEFF DORMAN 28:52

Yeah, yeah, exactly. We talked about right. So if you go back to May, June in July, there's a lot of parallels to today and I'll get to the CBC thing in a second. But the you know, in May, Bitcoin fell first right, Bitcoin started to fall. In June, the rest of digital assets caught up and in July, all of a sudden the momentum guys the the traders jumped on and piled on the fear and greed index fell to 10 sentiment was at the lows and there was 10 or 12, legitimate concerns about you know, why the bull market and digital assets were over, we wrote a blog, bunking all, you know, 10 of the major theses, you know, everything from you know, why China pulling out was not really long term bearish and why, you know, regulation wasn't coming immediately for defy and while the Fed tapering wasn't coming anytime soon and why retail momentum wasn't dead and all the you know, ESG concerns tether Celsius MicroStrategy dumping all these different things that people were talking about. If you fast forward to today, the parallels are very similar, right, you had instead of the main Bitcoin drawdown you had the November Bitcoin drawdown instead of the June you know, collapse of all risk assets. You had the December collapse or risk assets and instead of the July, you know, capitulation trade sentiment went to zero and everyone thought the world was ending. You had that heat now in January, right? The fear and greed index hit 10. And everybody has a bear market thesis. The difference is, back six months ago, there was legitimate real concerns in a lot of different areas that ultimately came became not true. But there was a lot of different reasons people were scared. If you look at right now, there's only one reason people are scared. And that's the fit. It's the overpowering dominating there. There's nothing else that people are talking about even the CBDC. So you know, I have not heard a peep from any of the dealers, we talk to any of the investors, we talk to any of the partners at all that we are investing in, they're like, you know, What scares me is CBDC. You know, my personal view? Oh, by the way, in just a closed loop on the parallels, you know, what took us out of that spiral in July 21 2021, which was the lows, ironically, one of the things that took us out of that was when open sea raised a billion and a half dollar valuation. So just just stick with those parallels for a second open sea just raised a week ago at a $13 billion valuation. So almost a 10x rise in open seas valuation the big NFT platform in just six months. So we'll see if that was, uh, we'll see if that becomes a catalyst to to turn around the market here as well. But anyway, with regard to CBDCs, you know, I think most people that I've spoken to believe that this is a long term positive for digital assets, right. And, and, you know, it's not about the competition that a CBDC would have with other digital assets. It's about the fact that this opens up blockchain technology and the use of wallets to you know, hundreds of millions of people. So even if you just hate all of blockchain, or digital assets, or you hate Bitcoin, or ethereum, or you know, multi chains, and all that kind of things, if you love the idea of your government, and you want to own the cbdc Well, guess what, once you understand how to have a wallet, and how to transact on blockchain, you're probably going to gravitate into other things, you're going to start playing some, you know, NFT, you're gonna start buying amenities or start using some, you know, in game, Blockchain based assets or start to, you know, participate in some DeFi network. So the explosion of adoption and growth from the CBDCs, if it actually takes off and succeeds, will far outweigh any negative consequences from competition.

PETER HANS 32:10

No, I totally agree. I mean, I think, you know, we'll see what the report, the report says, you know, obviously, but I think, you know, it'll be interesting, because, you know, CBDC, you know, you increasing adoption, increasing the number of market participants is going to be, you know, one of, I think, a couple of very impactful tailwinds for this space. Let me let me, let me stick on the gears of, of inflation and rates a little bit. And, you know, obviously, one of the things that, that, you know, we get involved in a lot is, is, you know, taking advantage of some of the structural inefficiencies in the market to get very high yields, you know, whether it be lending or deposits or even, you know, things like yield farming and rewards, do you, you know, obviously, if if if rates increase even, even slowly, or even the expectation of rates increase, right, in kind of the Fiat ecosystem? You know, I don't know that we have any real data on it. Does that affect rates in the digital assets ecosystem?

JEFF DORMAN 33:20

Yeah, I mean, if you think the last thing he said is the most important, right, there's no real data to figure out because DeFi didn't really exist, the last time we were raising rates, but you know, intuitively, what I would say is, while a move from zero to 1%, in a year sounds like a shocking number 1% rates is still you know, in the 99th percentile is lowest rates we've ever had, you know, in the world, right? It's not like, I'm going to be like, you know, what, it's been really hard to put my money in a bank for the last year, because I'm only earning five basis points. But as soon as I earn 100 basis points a year, that's going to be a game changer for me, right? So I don't think it's going to be a real shift in consumer behavior, just because we move from zero to 1%. Now, we end up in that 5-7% range, like you talked about from, you know, in the 2000s. Or, you know, even if you go back to like 15-20% rates back in the Volcker era of 1981. Like, that's a different story, right now, you're talking about, you know, there's no real reason to invest anything else, but we're not anywhere close to that. So I don't think rising rates is going to have an a material effect on anything that's happening in within the Digital Asset world. Where it could have some impact is, you know, there's a few there's a handful of firms that have real crossover between the traditional bank and brokerage world and the digital asset world, right. You know, so for instance, if you're Genesis one of the biggest lenders, which is a division of digital currency group, digital currency group is a massive company, right probably has a $30 to $50 billion private valuation, they own coin desk, they own grayscale they own Genesis, and Genesis is certainly using traditional banking tools to borrow assets that they're then lending out in the digital asset world, right. So, you know, just in a typical kind of bank model of net interest margin. If the rates that are going up that you're borrowing it, then you know it, but you can't then lend it out at higher rates, you know, your business declines, you start to have a lower net interest. So you could see impacts like that. But if you just go into broader define all the different reasons why these yields exist, right, it's because people are bullish on the market and therefore want leverage, it's because dealers want, you know, more collateral to be able to trade on these fragmented markets. It's because there's a lot of different rewards that are given out. You know, a lot of the yield in digital assets comes from the fact that companies and projects are basically rewarding you for being an early participant by pulling forward some of that equity. You know, that kind of stuff doesn't go away, just because the front end of the curve rises. So I don't think you'll see a material effect, I think more likely than not, if you if you see a real decline in yields in digital assets, it's not going to be because of the Fed, it's going to be because of adoption, right? There's still trillions of dollars of balance sheets out there from banks to brokerages, to hedge funds to mutual funds, money, markets, etc, that are not in this digital asset world yet, if they start to enter and they start to just clobber, you know, volatility that we see in Bitcoin and eath markets and Klopper the the CME curve and things like that, like that will have an impact. So if we see a just a massive, massive influx of dollars in independent sub context, if you look at coinshares, weekly report of UTP flows, you know, UTPs being, you know, non US ETFs, effectively, you know, there was $10 billion of inflows last year into bitcoin Ethereum salon Cardano. You name it, the single product ETPs. You know, that's nothing right. The US equity market had a trillion of inflows last year, the ETFs. So a trillion of inflows and ETFs last year relative to 10 billion of inflows into digital assets. If we start to have 100 billion of inflows, or 500 billion of inflows or a trillion of inflows, that's gonna crush yield, and that is much more of a dominating force than anything we're seeing in the front end of the raker.

PETER HANS 37:00

Yeah, yeah. No, I think I totally agree with that. And I think ultimately, you know, there's, there's a major connection between the the CBDCs. And, and I think rates, right, you know, like, is ultimately what will affect rates is, is, you know, the rates exist now, not because of economics, they exist because of market dynamics, right. So if you put an essence more US dollars into the system through CBDCs, they will contract rates, of course, that supply demand and balance will will start to change. Well, good. Well, I mean, look, I think, I think there's a lot to talk about in the macro. But at the same time, it's kind of like, a, you know, what, like, the market cares. So I guess we have to care. But at the end of the day, like, the market shouldn't care probably as much as it is it is.

JEFF DORMAN 37:48

Yeah, I, for one, look forward to the next narrative that isn't macro related that dominates. So you know, the good news about investing and being a participant in this space is that very few things last for longer than six weeks, right? So you know who everyone's true. Everyone's become a Fed watcher in the last two months, that's been a lot of fun. Congratulations to everyone who just realized that the CPI report comes out every month, or that jobless claims comes out every Thursday, but the reality is, in three months, nobody's gonna care and even remember that what these economic reports are, and they'll be on to something else, whether that's CBDCs, or, you know, a new sector that emerges. So, you know, I think, like I said, I think the macro is real, I think we need to be aware of it. I think you could even argue for the small correction being warranted. But this is not going to be the dominating narrative for the entire year.

PETER HANS 38:34

Yeah, get off my lawn exam, like, like I, you know, I wanted to maybe get into like, kind of what's going on layer ones, but um, you know, that that could be a whole another big discussion. So maybe let's save that for for a future date. And, and hopefully, you know, a lot of those dynamics are still taking place, but otherwise, enjoy your weekend. Maybe watch. I don't know if you'll be watching any of the playoff games. I know. The Browns didn't make it. And I went over on every NFL division future I bet on talking literally went over. Yeah, I got to stick to college football. I don't know why I mess around the NFL. But, but yeah, the Browns colts, Minnesota, Arizona and I stupidly didn't hedge that. But yeah,

JEFF DORMAN 39:22

I had a few bets on the Browns to make the Super Bowl this year. I'm not I'm not paying out on losing on that until it actually doesn't happen. So with COVID and everything else that's happening here. I'm not I'm not ruling out of browns comeback here.

PETER HANS 39:33

I love that happens. I love that. Though. I will say in baseball season, I was staring at my preseason bats of Braves to win the division Braves to win the NL pennant and make the world series and I was like it at the time they were in third place. Akun you just tore his ACL. And I'm like I'm gonna have to stare at this for the next however many months and then obviously it hit it was it was great. Yeah, I'm pulling for the Bengals because I saw the lions when they win the play when they kid and just to win the AFC, the Bengals were eight to one. And like the chiefs were like, plus 130. You know, pats and bills are like plus 300. And like angles or, you know, just be Kansas City like they can compete with anybody like that. I don't know that they'll make it. I don't think they'll make it. I think that that's gonna lose probably, but the number was just off, so I took it.

JEFF DORMAN 40:25

Yeah, look, you're here. You're exploiting inefficiencies. For me. I don't know how much fulfillment I get to watch this weekend though, because my kids just got into Star Wars recently. So I've got a lightsaber battle I have to get into so depending on what depending on how, depending on how Obi Wan does against a mannequin, and this weekend's lightsaber battle will determine whether or not I get to watch football.

PETER HANS 40:43

Yeah, so my youngest daughter is now into Star Wars and constantly wants to watch it. My oldest is I kind of been there done that but still likes it and then and then nick it just makes just he doesn't have any time spent watching movie anybody likes. He likes Jar Jar blinks, which is what he called him and when you realize he's like the most hated character of all time, and any love any he talks like them. He says the name wrong on purpose because it annoys me. Any any any goes he's like Meesa Meesa. Want this?

JEFF DORMAN 41:14

Awesome. Well, I spent a lot I spent a lot of time researching and what the appropriate order is to watch all the Star Wars for kids who have never seen it before. So I don't do that. Yeah, so it's been it's been fun Gonna go.

PETER HANS 41:25

Yeah, we gotta go for first but I will say from for Charlotte. My little one. I'm starting at one episode one. That's the way she wanted to start it.

JEFF DORMAN 41:33

Yeah, we started episode one we did 123 Then we took a break to do solo and row one. And now we're getting into four now that we know what happened in row one. Now that we know now that we know about all the problems that are that are the dark that that the Death Star has from from the early plans. Now we can get into four or five six and see what happens with the Death Star. So you know who jury's still out on whether that's the right order or not. But the kids are into it. So I'm excited to get back into it this weekend.

PETER HANS 42:01

Yeah, the broke one was actually a smart movie. Did you ever I think everyone's definitely tuning in for this banter too. By the way, did you like yeah, no, you don't I know you're a Simpsons guy. But I don't know if you've ever watched Family Guy but there was like this Star Wars special they did like before Rogue One came out DC that one of us where they like, you know, the guy designed the Death Star. And he's like, we have this one vulnerability where if you shoot that the whole thing blows up. And they're like, why? Why'd you put that in there? Like, why do you do that? And he's like, I don't know.

JEFF DORMAN 42:31

Yeah, it's been a couple of family guys. Star Wars. parodies.

PETER HANS 42:35

Yeah, they're really they're really funny.

JEFF DORMAN 42:39

Good,I think he just invented a new real vision podcast. Crypto guys talking Star Wars.

PETER HANS 42:44

Star Wars yen sports betting like we could do all sorts of stuff.

JEFF DORMAN 42:47

Yeah, for sure. Good luck with your NFL bets this weekend.

PETER HANS 42:52

I don't have any. It just have I just have the bangles future. The games are just like in a bed of hell. Lions are so efficient to the it's just it's the most efficient market in the world. You know, betting on maybe, you know, it's like NFL lines and interest rates are the most efficient.

JEFF DORMAN 43:06

certainly more efficient than digital assets.

PETER HANS 43:09

Oh, yeah. Why do you think I do this for a living and not not bet on football? Bye Man, have a good one. And we'll talk soon.

JEFF DORMAN 43:17

Take care.

REAL VISION 43:22

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