B2C0042: Where Could the Bull Case be Wrong? (w/Jeff Dorman)
Jeff Dorman (ARCA co-founder and CIO) joins our host Peter Hans on this week's episode of Between2Chains to discuss market trends, the tightening cycle, US monetary policy, the influence of narrative changes in digital assets, the availability of information in digital assets, and much more.
Jeff Dorman (ARCA co-founder and CIO) joins our host Peter Hans on this week's episode of Between2Chains to discuss market trends, the tightening cycle, US monetary policy, the influence of narrative changes in digital assets, the availability of information in digital assets, and much more.
IN THIS EPISODE:
NOTE: Following transcript is generated using AI. Minor errors might be present.
REAL VISION 00:00
Welcome to the real vision Podcast Network. 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
Hello, this is Peter Hanss. It is Thursday, February 3. Welcome to this week's episode of between two chains. We have some interesting planned I think today, we are joined by Jeff Dorman, Arca CIO and longtime business partner, a friend of mine. And, you know, we have both been very bullish, you know, certainly long term, you know, short term, I think we all acknowledge that, who the hell knows. But, you know, for 2022, in particular, we're both very bullish think we'll have a big year, continue to think that, and we're about 8% or so of the way to the year, and we're completely wrong. So, so, you know, I think we still have 92% of the Year left, but let's, you know, is this is this episode, let's, let's do a little, you know, activity that that's normally done kind of internally, and, you know, you see it in a lot of good firms, you know, Bridgewater certainly comes to mind, and let's challenge assumptions. And I think this will be helpful, both, you know, to, to us a little bit as we as we do this, but let's record it a little bit. And let's, you know, give kind of the listeners not only insight into kind of what we think about and discuss and how we do it, but the fact that look, you know, you can be bullish on Twitter, and talk about things that you love, but it doesn't necessarily mean that you're not constantly thinking about ways in which you can be wrong. Right. And, and, you know, I think this is a, you know, a good time given given the activity, and, frankly, every risk market to explore that a little bit further. So, I don't know if this will be fun or painful, Jeff, but let's, let's give it a shot.
JEFF DORMAN 02:57
Absolutely. Let's see where we go with this.
PETER HANS 03:02
All right, well, let's let's, let's start things off, you know, this way. Okay. So we know, you know, the digital assets market, you know, and let's just use kind of the the, the Galaxy indexes as a barometer, although we are seeing some dispersion now, which is, which is good, in a lot of ways. Very weak in December. Bitcoin was weak in November. We're very weak in in January, especially the back half and in February starting off, certainly volatile, we have you know, tech and equity earnings, getting hammered, you know, we saw meta last night, you know, Pay Pal was down 25% I mean, the downside betas that we're seeing in, in, in tech markets are, you know, well beyond historical. And then we have on top of that macro risks, you know, geopolitical risks with Russia and Ukraine, to, you know, concerns over, you know, monetary policy and in the United States. So, given all of that, you still bullish for the rest of this year? And why?
JEFF DORMAN 04:11
Sure, yeah. Lots of a lot to unpack there. So, you know, I think first you just start with, you have to understand or talk about what the thesis is for digital assets. Right. At this point, it's still pretty polarizing for most industries, right? Either you really truly don't believe in this technology or that any of the progress we've seen today is real right in progress. I mean, everything from you know, the the four major successes as far as blockchain which has been you know, Bitcoin as a you know, perceived store value stable coins in terms of their you know, rise from nothing to you know, well over 150 billion DeFi now, the idea of permissionless banking, and, you know, NFT's or gaming or some combination of those, right? Those are the four success stories, we've seen a blockchain. Either you believe that that is real and that there's going to be more Have those, you know, or you don't? Right? Neither of those opinions is going to be changed by any of the factors that have happened in the last six weeks. Right. So from a longer term standpoint, there's no reason to believe that any of the recent events around inflation, or tech earnings, or hawkish, you know, monetary policy, etc, should have any real, you know, impact on one of those two thesis either believe that this is a pointless technology, and it's not going anywhere, or you believe that, you know, this is the future of capital raising, digitization of assets, you know, coordination of stakeholders, etc. So, you know, I can't find, I get to find anyone who has changed their longer term thesis based on any of the things that have happened in last a week. Now, what does that mean, for the next 6 to 12 Months? You know, that's a completely different story. And, you know, I think, you know, you mentioned, the digital, you know, the Bloomberg Galaxy index down 25% To start the year, you know, that's a big move clearly, right. But in the last two years, you know, just as an example, the Bloomberg Galaxy index was up 150%, last year, and 276%, the year before, you know, so you're talking somewhere between 1/10 and 1/5, of the, you know, return potential of recent years, destroyed in one month, the NASDAQ was down 15%, at one point, in the, in January, before a massive, you know, rally at the last two days of the month, you know, ended ended down 9%. Historically, the last, you know, 10/20 years, the NASDAQ has returned on a really good year 50%. And, you know, on average, closer to 30%. So, you're looking at almost a, you know, 50% decline relative to expectations in the NASDAQ. You know, that that's important, right? Because a lot of times what you do as an investor is you is you look at the look back, right, or how long will it take to earn back, you know, what has been lost. And, you know, the equities relative to expectations are absolutely declining faster than expectations relative to digital assets. So while the absolute dollar loss is, you know, much more real in digital assets, you know, relatively there is an argument that there has been without performance. So I'll just start that as a backdrop, in terms of why I'm still bullish is, you know, I studied history of finance for, you know, my entire career. And even before that, right, and, you know, back in high school in college, I was reading history of Wall Street books, you know, this is an unprecedented sell off relative to why it's happening, there has just never been a historical precedent for why you would ever have, you know, 20 to 50%, declines in risk assets, three months before a Fed tightening cycle even starts while the Fed is still being accommodative. It's just never happened, right? Every single tightening cycle we've ever seen, markets rally during the tightening cycle, it's only at the end of the tightening cycle, when the Fed usually goes too far too fast. And you end up then having a real reduction in prices. And that doesn't mean you can't have hiccups along the way or that, you know, things can't be pulled forward, like we're seeing right now. But the market basically just pulled forward three years of losses into three weeks, it's unlikely that that kind of a pace of losses continues throughout the cycle, when we still have, you know, very high GDP, we still have very high earnings, there's still an insane amount of liquidity in the system, right? There's still negative one, you know, 1.7 trillion of negative or reverse repo, you know, stable coin. Volumes are stable coin, assets are higher sitting there on exchanges looking to deploy. You know, this is this is a temporary fear trade. This is not a long term, anything is in trouble trade. So, that's why we're both.
PETER HANS 08:38
Can we pause there? Like the pause there? Because you're right, I did. I didn't say a lot. You know, we talked about geopolitical and equity earnings and things like that. But But let's, let's pause for a second on the on the, on the tightening cycle, because historically, he Yeah, you're you're absolutely correct. But, you know, one thing I would, I would say is or just give you to think about is, alright, well, in the past, you know, most tightening cycles happen, you know, because rates were cut because of economic weakness and, and to spur economic growth, right, increase the velocity of money, and then when the economy really heats up, you know, to front run increases inflation or get inflation in check, obviously, you know, rates are are raised, right, then we enter a tightening cycle. But it's usually, you know, you know, kind of like, as the economy heats up, it seems like, you know, this time around, we had such a long period of not just, you know, we look at least historically like movements and interest rates in short term rates. This was a period of, you know, in essence, well over a decade of, of basically free money and kind of massive amounts of leverage and terms of borrowing costs. And, you know, that was, you know, extended partially due to COVID. Right. I mean, we did have, you know, strong economic growth, and then we'd have these kind of blips that seemed very big at the time. But then, you know, put even more into the system. And, yeah, I mean, these, these inflation numbers we're looking at aren't big by historical standards, but by recent history standards, and, you know, the standards of now, like a very retail driven market in a lot of ways, you know, both equity and certainly digital assets. It is large. So, you know, as the narrative changes, the rules of the game, potentially change. And, like, how much you think about that?
JEFF DORMAN 10:48
Well, I mean, you know, you hit on something that's pretty important, right? You said, we've been in an era of free money for 10 years, and that's now over the 10 year treasuries at 1.8%. That's still lower than where it was for almost all of the last 10 year period, except for the blip of 2020, when we entered a brief pandemic, where it dripped down the 10 year went below 1%, for a few months, you know, we are still in easy money, I just said there's 1.7 trillion reverse repo, which means there's money sitting there that cannot be utilized, right, even, even if we raise rates 200 basis points over the next, you know, year, the curve is likely to invert, or at least head towards inversion, which means that the two year goes from zero to 2%, the 10 years, probably at best gonna be 250. And most likely, it'll be at 2%, which is not too far from where we are right now. That is still historically, the easiest monetary policy we have ever seen. That is still basically free money. You know, people talk about in a hawkish and real rates, real rates means that the tenure is, you know, positive real rates means the 10 year US Treasury yield has to be higher than inflation. Well, inflation is running at six to 7%. Right now, most likely, it's going to be closer to 3%. Long term, I mean, two to 3% 10 year rate to even be flat real rates to historical hawkish environments, where you're talking about, like there's no free money and you get credit tightening happens when you have incredibly high real rates, we are five years away from even having positive real rates, let alone having any debilitating real rates. So this is 100% more narrative than fact, the fact of matter is, this is still going to be the easiest monetary policy in history, other than what it looked like for a brief period in 2020. So, you know, narrative matters. I'm certainly not dismissing narrative. But let's not go crazy with you know, thinking that all of a sudden the spigot is turning off, and there's no money anywhere, if there's money everywhere. It's not stopping.
PETER HANS 12:41
Agreed. Yeah, no, I don't I think that is factually correct. Right. There's no denying any of that. One thing that I think is interesting is, you know, look, corrections. And this is this is not a new phenomenon, right. market corrections now happened, faster market rebounds now happened faster. Part of that is due to technology and trading and information flow and efficiencies. Right. You know, we saw it in, in equity markets, I don't think anyone saw, you know, after, after the end of OA, you know, from like, Lehman collapsing until what was basically like a massive equity market rebound in February of Oh, nine, right, like, sell offs are violent, and quick. And rebounds can be, you know, as well, you know, in this, but it's also a much more global market. Right. And, and I think when you talk about, you know, studying history and rates and all this sort of stuff, and I don't, I don't, this is one thing that I don't I don't know, that's true, but it's one thing I've noticed in conversations with investors all over the world, it seems like US based investors who have followed, you know, the actions of the Fed, and, you know, rate curves and inflation and long term rates and, you know, the, like, get it, but there are, you know, you know, probably international investors where this is newer, and especially when you're talking about digital assets, which is such a global market, you have to pay attention to things like this where they never probably did before. There, that narrative of the free money is over, is it the game's over is very much intact. So regardless of whether it's accurate or not, if that's what the market participants believe we see that materialize.
JEFF DORMAN 14:29
I mean, you are seeing it materialized. Right, but what you're implying that that narrative will be here for long periods of time, right. You know, we've been doing digital assets professionally now for you know, four plus years, we've been doing it personally for you know, many years before that, right? I can count on, you know, maybe one one hand how many times people have carried what's going on in monetary policy related to digital assets, right? It's not like this is the constant narrative, right. Also, in terms of what you're saying globally, the US the Bank of England, you know, the ECB you They're all in this hawkish fight inflation, but the PBOC in China is doing the exact opposite, right? They're now easing monetary policy and trying to jumpstart their economy. So, you know, we are overly focused here on the Fed here in the US, as well, as you know, globally, but obviously, there's conflicting data out there with regard to where you're seeing easing and where you're seeing tightening. But again, you know, think about what this really means, right? For away from the narrative, right? The narrative is, you know, when when money's coming in good for assets when money's coming out bad for assets. But what does it really mean, when rates are rising? Right? It means two things, right? One is, it means that there's potentially going to be credit tightening, right? Meaning it's going to be harder to lend, it's going to be harder, you know, the government has basically been lending for free for 10 years, some of that just going to shift to the private sector, we're already seeing it right bank earnings are getting better net interest margin is decreasing, but you're seeing a lot more activity on the lending side for banks, you know, again, at a historically low interest rates, even if it's slightly higher than where it was nine months ago, or 18 months ago, there's still going to be an insane amount of credit expansion from a lending standpoint, so you're not going to see a slowdown from a lending or credit standpoint, the second thing is based on you know, relative value and present value. So, you know, when when bonds get cheaper, people will rotate out of risk assets into bonds. Right? Again, I just mentioned that real rates are still negative, right? It doesn't mean bonds are cheap, just because they're slightly cheaper. And also, it affects, you know, the terminal value, if you're running a present value math on, you know, take a 10 year, you know, investment time horizon and look at the cash flows over 10 years and discount them back. Well, almost all of the value in a present value formula comes from the terminal value, right? What is this worth at the end either in a sale or, you know, in some sort of finality. So, if you have rising interest rates, that's going to negatively affect the terminal value of a present value analysis. So in theory, your stock and your bond calculations will go lower if you have rising interest rates. So a couple things there right. First, as we just mentioned, the curve is going to flatten not steep in here so that just because the front end of the rates are going higher, doesn't mean the back end is going higher, which means that present values really aren't going to change much. Secondly, even if that is true, that the 10 year is going higher, and the 30 year is going higher as well, that's going to disproportionately affect things like housing and equities more than digital assets, right? digital assets have real cash flows and real revenues. What is lacking is that terminal value in most calculations, it's more of a going concern, and where are these revenues being dividend it out and flowing to token holders. So you know, I wrote an article a year ago, why digital assets are largely recession proof. And I still think that's true. It's recession proof for two reasons. One is a digital asset is largely a combination of quasi equity and quasi membership rewards, your membership, rewards are not impacted one bit, by higher rates, and your quasi equity rewards, while slightly impacted, again, don't have nearly as much of that value in the terminal value, so it's not going to be as effective as other instruments. So you know, again, I not dismissing the narrative, the narrative went from easiest monetary policy in history to oh my god, we have to fight inflation and everything's going bananas. There, there was no question that that was that a price action was warranted from that change incentive, right, we should have gone lower, and we did go lower. But to act like this is going to be a, you know, a 12 month trade or a three year panic or the end of risk acid is just crazy. When you look at the actual absolute relative absolute and relative impact on prices and on valuations.
PETER HANS 18:23
I think, look, one thing to consider is, is, you know, equity markets, you know, certainly fixed income markets are highly efficient, right, there's, there's near perfect information in the eyes of regulators, you know, it is perfect dissemination of information and the, you know, amount of very experienced and smart people being able to interpret and quantify that information is is very high. You know, which is why, you know, you see a you know, you know, stocks react too quickly on earnings. You know, and then the, the a lot of your I think a lot of the severity of the moves we're seeing and like a meta or a Pay Pal is just, you know, there's no doubt that equity valuations have been incredibly expensive, you know, for the past for a while now. And, you know, those those valuations are normalizing a little bit are starting to normalize and that's, that's, that's very healthy, you know, in the digital asset space in particular. One there are no earnings calls there is no formalized dissemination of information, no one can really look and say is salon a cheap or salon expensive, right. So, because of that, you know, you know, everything trades, you know, in the 24/7 nature of the market, right, like you know, everything trades much more on narrative you know, as a as a market and and narrative is akin to momentum. So, you know, the one thing you know, I don't disagree With anything you're saying, factually, I don't even disagree with you. I'm just, we're just doing this. I'm just this is this is this is thinking about where could this be wrong? Where could we be wrong? Right? I think we've identified a lot of ways in which can be wrong from a narrative. But narratives have to turn and switch. And there are catalysts that can get narratives to turn and switch in either direction. We've identified some of the narratives that are going on right now, right, from weakness in equity markets to, you know, all the garbage you see in the media to interest rates to geopolitical risks, like, what gets the narrative turning in your eyes?
JEFF DORMAN 20:40
Sure. I'm actually before I answer that, I'm going to push back on something you just said a minute ago, that which is, you know, in the equity market waiting, you have perfect clarity, right, like, you know, in the equity market, for example. You know, in the last, you know, in the last week and a half alone, you had companies responding both positively and negatively to earnings, right, you mentioned the ones that were negative things like, you know, PayPal and Facebook dropping, you know, 25%. But there was also, you know, Google, which had great earnings, which jumped 11%, and Apple, which had great earnings, which jumped 7%, there was real being dispersion in terms of the reaction in the equity market. In digital assets, I wouldn't say that the information isn't available, the information is available, often, actually, in more real time than in the equity market, right? The equity market, you are at the mercy of, you know, a month of delayed data, right, you get it every three months on quarterly earnings, and you get into you know, and the quarterly earnings usually come out three to six weeks after the earnings period, right. So you are constantly getting delayed information, and outdated information. In the equity market, you're just getting it in a very standardized way. In digital assets, you're often getting it in real time. I mean, you know, 90% of the companies that we invest in and cover we have real time dashboards, we can see, you know, in real time, how the revenues are changing how the cash flows are changing how the users are changing how the wallets are changing. Not now not not everybody in digital assets knows how to interpret this. And I think that's the difference, right? Again, I just mentioned Google and Apple were up. While you know, Spotify, Pay Pal, Netflix, and you know that now Facebook are down on digital assets, you just don't get the same reactions that you should write. You know, for instance, Elana just got hacked for $320 million yesterday, Selena was down just as much as Luna and Adam, even though Ilana trades at three and a half times market cap to TBL. And you know, Luna trades at one times and, you know, Adam trades at 0.25 times, you know, Luna just survived the bank run and USD didn't lose its peg and is, you know, producing free cash flow. So Ilana, you know, as measured by market cap, the TBL is the biggest hype relative to substance of anything in the market, but they all move together. So the point is not that you're not getting real information. The point is, the market is not sophisticated enough to trade that information, the way it probably should be in a more mature market. You know, if you give 10 equity analysts the exact same information, nine out of 10 are going to give you the same output because everyone uses the same valuation technique. If you give 10 Digital Asset investors the same information, you're probably going to get 10 different outputs, because they're all using different techniques, different valuation methods, different you know, some people are trading on momentum, some people are trading on ta some people are trading on, you know, actual fundamentals like us. So I don't I don't think it's the lack of information. I think it's that the participants in this market are not necessarily the most sophisticated yet and are not treating, or not creating the same reactions to news and information as you get.
PETER HANS 23:26
Well, yes, I mean, you know, factually speaking or, factually, yeah, pretty objectively, I think you could say that the market participants are far less experienced, and, and, and sophisticated in terms of in terms of managing money in this asset class. And then equities like, but But I will also, again, push back on you now and like, you can't compare the dissemination of information the two like there is true information asymmetry in digital assets. There is no Reg FD, you know, like the the it's more akin to venture investing with with with liquid markets. But in equities, you do have Reg FD not that there isn't, you know, MMPI but you know, you don't see that in in digital assets market.
JEFF DORMAN 24:17
I think it's I think it's nuanced, right? I think there actually is more information available in digital assets. It's just that you have to find it's harder to find and it's scattered where the information is. I wouldn't say that there's less information or like I said, I really truly believe there is more transparent information in digital assets than inequities. The only difference is you know exactly where to get it in equities. It comes out quarterly, it comes out in the 8 K's and the 10 Q's and 10 K's or earnings calls whereas in digital assets it comes out all over the place it could be on Reddit it could be in an AMA it could be you know someone uncovers it on Twitter it could be some you know on chain defy detective, it could be a blog, the information is out there, you just need a lot more time energy and people to track it and uncover it. So it's not a lack of information flow is a lack of standardized ability to capture and retain and process that information.
PETER HANS 25:08
Yeah, I mean, I think that's, I think that's 100%. Right. I mean, but again, it's about, Well, part of it also comes down to these, the, the source, right, and you know, when information is released in a cafe or, or some sort of formal, you know, SEC required release, like, you know, that information is trustworthy. When information comes from a media or, you know, a non in a Discord server, like, that's a very different calculus in terms of, you know, sourcing that information and interpreting it. Yeah, there's, there's probably more information in the digital asset space on a certainly on a relative basis. But it doesn't mean that terpening that information is easier.
JEFF DORMAN 25:52
Well, yes or no, though, right? Like, for instance, let's say Target has a credit card breach, you're going to hear about that eventually. But it might be a week before they release that information. There's no ability for anyone to get that information unless an employee basically, you know, cries foul and tells the media, right, they can hold on to that information as long as they want, get it under control, and then release it an AK when they want. So long, I got hacked for $320 million yesterday. And within five seconds, everybody could see exactly what was happening by going to a blockchain explorer and seeing the transactions that were happening. So again, not everybody in digital assets, knows how to read a block explorer and knows how to interpret that information. But it was out there in real time immediately. Right? There was no information asymmetry there, it was there, if you were into salona, discords. If you run a lot of Twitter, if you were watching a block Explorer, you knew immediately that that happened, right? The same thing has been true of almost everything that has been on chain, which is why this is so powerful. There is no hiding of the data on blockchain, there is lack of knowledge on how to source and interpreted, but the information is there in real time.
PETER HANS 26:53
Well, what what you said is, you know, when it came out, right, you know, there is no information asymmetry that operates under the assumption that no one had advanced access to that information before it was reported in the media.
JEFF DORMAN 27:06
No, I'm saying it's the second that that hack happened. Anybody who was looking to block explorer could see it. And it
PETER HANS 27:13
okay. Yeah, yes, yes. Now that that that is 100%. True. Yes, I get what you're saying.
JEFF DORMAN 27:18
And you know, same thing, like you know, whether you're looking at a gaming company, or you're looking at a layer one blockchain or you're looking at a DeFi application, or an NFT, if there is a transaction or a you know, wallet reduction, or a revenue decline or user to decline, that information is out there, and you can find it and you can track, right, there's probably less than a couple 1000 people in the world who have really good API's and really good data abilities to scrape that information. But it is there, right? And eventually it comes to light to your point, you know, you have to figure out who you trust and who you don't who's reporting it. But if you know how to find it, it is there. Right? You do not have to wait. You know, I wrote about this last week in our to Satoshis blog when I was saying, you know, the entire attention last week on d phi was talking about how, you know, one of the, you know, recent apps called Wonderland, which is, you know, one of the many applications in sci fi built by a guy named Danny sesta, who has you know, been a brilliant developer and created a lot of wealth and applications in defy, but it was uncovered that you know, one of his associates was involved with the quadriga scandal and has a criminal background, right? That kind of information came out within within weeks of of it being discovered it was out there, right compare that to like, you know, Serrano's and you know, made off and Worldcom and Enron, right. These are scams that go on for five years sometimes before they're uncovered. I'm not suggesting that you know, that anytime there's a scam or something that goes wrong in defy or a hack or whatever. But that's a good thing. I'm simply saying that there's actually the to me the focus on what went wrong in digital assets and DeFi is the wrong focus, the focus should be on because of the public transparency of blockchain. All of this information comes to light way faster than it does in the corporate world. Right there probably less bad actors and less fraud in the corporate world because of regulation because of Reg FD, because of reporting and all that stuff. But when it happened, it is very hard to detect. That doesn't happen in this world. Everything that has ever happened wrong in digital assets from you know the old BitFenix hacks to mount Gox hacks to quadriga to you know, Daniel sistance and Wonderland and now this Elana hack when something bad happens, it is caught and rectified immediately because of how the information is dispatched disseminated and because of the public data. I think that's incredibly powerful and not only that, all of the DeFi applications kept running and worked fine right it was there was actually some beautiful amidst the carnage you know, in the last few weeks have you know, a min in Wonderland and ust and anchor and now salona all these defy applications, for the most part kept working and all the layer ones kept working right there. It was, you know, a lot of noise going on about all these bad things. But the applications and the technology themselves never hiccup, and all the information was was, you know, revealed and fixed within weeks. I think that's really a big stress test. I mean, there's been a couple of really big stress tests in digital assets over the last three years, March of 2020, May of 2021. And now, January 2022. And it keeps passing and driving, I think, if you're a new entrant to digital assets, you know, you care about that you care about the fact that, you know, you hear about these things in real time, and that they're fixed and that, you know, life moves on. And it's not some, you know, for your cover up, that, you know, you might be blindsided by at the tail end of it. So again, I know the information is not easy to disseminate yet in digital assets. I know not everybody is trained well enough to learn how to interpret and read this. But the information is there. And I think that is a really, really powerful, positive narrative.
JEFF DORMAN 30:59
That will continue in digital assets. Now, that's a good segue to your actual question, which was what changes narratives. That's one of the things that can change the narrative, right? You know, for instance, I talked about how solando was barely down yesterday, relative to other things. You know, a lot of times at the end of down cycles, everybody's shorting everybody's trying to make money back by getting negative, well, when short stop working, either because everyone's already short. And there's no incremental seller or because new bad news stops mattering. No, that can be a rallying cry for people to be like, Oh, maybe it's time to get back in the waters. Because all the bad news is priced in in the same way that you know, when things stop rallying on the way up on good news, it's a sign that it might be time to reduce risk. And you know, that positive news and positive information is already baked in and no longer important. So I think that's one of the narratives that is likely to change over the next couple of weeks here is that bad news is priced in you know, we were already pricing in six to seven rate hikes this year, which is almost impossible. In terms of that actually happening, right, you're gonna see inflation pressures subside naturally, because of the carnage in the equity market. And because of supply pressures being reduced with manufacturing. You have also incredibly tough year over year comps coming in the third quarter and fourth quarter. So that's already very well priced in, you have all these bad news and defy and hacks being priced in that by itself is one of the reasons maybe not the only one. But that's one of the ways that narratives shift. You know, if you go back to the carnage in May 2021 cars were being aware it It lasted for about six weeks into the middle of July. One of the reasons that that the market stopped going down was because FTX and open sea's, you know, two very powerful companies and digital assets announced massive raises. So everyone was thinking, Okay, that's it digital assets is over, you know, let's go home and pack up our stuff. And here were two behemoths getting massive raises from traditional hedge funds in the case of FTX and, you know, powerful venture firms like a 16 in the case of open seat, that helps to shift the narrative, you know, in in, you know, go back to the end of 2019 when digital assets were just free falling and eath hit 80 bucks and Bitcoin hit 3000 You know, what happened, a couple of big leaders in the community came out and said, enough's enough. This is crazy. I'm buying you guys like Mike Novogratz, and, you know, metallic, and you know, Suzu sorry, Swazi at binance coming out, and basically being like, I'm calling bottom, I'm buying eath. And that helped change the narrative. So you know, little, little, little shifts in narrative can end up being monumental in terms of price change. When you have this many people negative and offsides at the same time.
PETER HANS 33:34
So do you think that we see a shift in narrative here? And, you know, when and what gets there? Or at some point, you know, does it does it doesn't matter? Or do you think it's just kind of, are we choppy? And I know you don't know, right? And none of us know, but But how would you answer this? You know, if it wasn't a podcast, and we're talking about it internally, what do you think? Are you probably answer it the same way. So
JEFF DORMAN 34:06
I've got nothing to hide. I think the choppiness probably continues for a little bit here, because there really is a complete lack of conviction, right? Lack of conviction generally means that you have big swings up and down, just as people are trying to, you know, fight through a bad market. But in terms of like, what chart changes narrative, I think this last week was a very big positive step towards changing that narrative, right for a couple of reasons. Right one, the economic data was terrible, which means that all these expectations of inflation and rate hikes which are going to start to get somewhat walked back, you know, when you have bad jobs data with ADP report, you have terrible you know, the Baltic Dry Index is is imploding, you had a pretty bad manufacturing data, like that's gonna start to weigh on those inflation and rate hike expectations. So that's part of a narrative. Number two is, you know, what I just said, You've had just about every everything that could go wrong in layer one and DeFi land in the last week and a half, and the stress test passed, right? You know, there was basically a run on Terra Luna, right? Think of Terra Luna. Think of Luna as the equity of a bank and think of USD as the deposits. There was a run on the bank, right? People were fleeing Luna for a second thinking that you know, you do the virtuous cycle, right, you sell your ust, that means that you get Luna back and you sell your Luna. So the price of Luna goes down, that makes people lack confidence, and they sell their ust that was happening for about 36 hour period, there was a real run of the bank. It's not, you know, and Luna, you know, has basically prove that, you know, the system works and that you know, it's stable. That's a big narrative shift. Right? So Elana just got hacked for 320 million, even though this is much more centralized, you know, major players who are backing salon basically came to the rescue to plug that hole, you know, without giving out names, but you know, everyone who's involved in salon and knows who the three or four biggest packers of Solana , you know, they came to the rescue and are plugging that $320 million hole, right, almost too big to fail, you know, not from the government's bailing you out, but from big people who have a lot at stake to make sure that solana is back up and running. You know, you also had, you know, Wonderland, we mentioned that earlier with, you know, everything from time and spell it is the tokens are still going down. But you know, there was a vote on whether or not to disband Wonderland and the vote was turned down, and you know, the assets are still there, and the tokens are trading at 50% of book value, like there's gonna be an arbitrage there where people go out there, and by the token, because it's cheaper than the balance sheet of the asset, no, when you try to break things, and they no longer break, that is the start of a narrative shift. It doesn't mean people are gonna rush to go long. But think about the opposite, right? Let's say there's tons of people out there who are short, right, we're seeing negative funding rates, we're seeing an open interest decline in futures, it is a clear shift from long only to short, only right now in the market, when your short stop working, that's a sign of, okay, there's exhaustion here, maybe I need to go start covering and then you start covering your shorts. And you find out that, you know, even though it looked like the market was for sale every day, there's actually no real sellers. And now I have to go pay up 10 or 20%, to buy back the assets that I will short. And then when you start buying back the assets of 10 or 20%, you realize that, hey, you know, there's people who are sitting in cash, and we're waiting for Bitcoin to hit 20,000 or eath, to hit 1800, it never got there. And now oh, I'm 90% cash, and I'm panicking because the markets going higher, and then that builds FOMO. And all of a sudden, you know, that's how that's how narrative shift, it can be the simplest little butterfly effect that has a massive, you know, contagion effect. I'm not suggesting that we are 100% out of the woods, but you can see those little signs that are starting to happen. You know, you'll start with that value investing starts to work again, right, something like maker DAO, which is producing, you know, a very strong earnings, you know, maker DAO was basically unchanged for the year, you know, while other things are down 30%. You know, you can see, like sushi swap one of our favorites, what I know, hasn't done well, but like, you know, sushi is basically, you know, I joke the other day that like, unintentionally, the developers were working on sushi, or basically trying to light the house on fire from the inside. And house is proven to be nonflammable, it won't go down the earnings, hidden volume and user growth of sushi as a protocol is crushing it. Well, internally, they're a mess, trying to figure out how to, you know, run a doubt, which is a difficult concept. You know, those are the kind of things that gives people confidence that the project and the company itself are doing great, there's just little fixes that need to happen. So, again, I'm not calling bottom, I think that would be foolish. I think calling tops and bottoms is always foolish. But there are DeFinitely signs that there is exhaustion here, both in equities and in digital assets. And you know, whether or not that means you grind higher or just stop going down or you fly higher. You know, you can certainly see those building blocks starting to be put in place in the market.
PETER HANS 38:48
Yeah, I think, look, personally, I am bullish this year. Like I think we end the year meaningfully higher than we started the year. So but I think this was a helpful and interesting exercise and we didn't even touch upon, you know, you know, some other things, I can't I don't know what the thing is to change the narrative. But, you know, I will also say, you know, you know, this Jeff, but we talk to investors all the time, you know, and by DeFinition, we talk to more investors who are not invested in the asset class than who are and those investors who are not in the asset class, again, by DeFinition are considerably larger than the investors who are invested in the asset class for the most part. And, you know, there has been zero change in sentiment or, you know, people being scared off like, you know, a retail investor mind, in fact, like, it's quite the opposite, right? If you're, you know, doing research on something for a couple of years and are ready to kind of get into the pool. You know, the fact that you can now do so at a 30 to 50% Discount is quite attractive, you know, long term because, you know, things can be back where they were and you're up 50% instead of, you know, instead of being flat or down, right, so, you know, there, there are a lot of reasons to be to be positive, just just just structurally, you know, the other thing that I'll just go back to, before we wrap up here that, you know, he made a really good point about terminal values, right, you know, in an equity like a company can go bankrupt and that that stock is gone, right, you know, or something, some event could happen, like, Yeah, I mean, that could happen to if you have a if you have a token on the balance sheet of a real company, but a lot of these projects like there is no catalyst to force bankruptcy or dissolution of the company. So, you know, you know, take something like Bitcoin, like the most appropriate way to value Bitcoin, you know, I'll steal this from from someone we spoke to last week, it might be like something like Black Scholes, you know, because you have this like, constant optionality of, of the project working, you know, where the token working? And, you know, that's a really interesting concept to think about. So, you know, yeah, there's discussion of like, you have fully diluted values, but like, these aren't new concepts, you know, and, but you know, that the terminal value is, is an interesting thing to think of, because it because in essence, it is, you know, Dogecoin was an equity, it would be gone seven times over, but like, you just have this, this, you know, optionality at the perpetuity, which makes a instrument very valuable when you have that.
JEFF DORMAN 41:31
Yeah, I mean, two of the biggest components, three of the biggest components of the Black Scholes model, right, there's five components, but three of them are interest rates, which are still low time, which is, you know, perpetual or infinite, in the case of most of these digital assets, and volatility, which is incredibly high, right? I mean, every single digital asset, Bitcoin is the ones that makes the most sense, because I really believe bitcoin is nothing but a call option on future modern monetary policy. But you could put a lot of digital assets through a Black Scholes model, and you come up with incredibly high valuations because of exactly what you just said. And I think what you also said is really important, too, right? The people who are not in the digital asset market right now are loving this, they're like, Oh, good, you know, I'm going to be buying digital assets for the next 10 or 20 years, I would love to be able to buy them cheaper, the people in the market are panicking, because they just lost a lot of money, right? There is a huge emotional component to investing, you know, behavioral psychology. And Behavioral Finance is a big part of it, right? The people who are not in this market, which is way more trillions of dollars that are not in this market than there are who are in this market. I mean, just for context, right? Facebook, is larger than Bitcoin, and Facebook just dropped 25% in a day, right? That's bigger than, you know, the declines in Bitcoin this year. Facebook just created way, you know, destroyed way more wealth than Bitcoin did. And you know, there's a lot more people in the equity market in the bond market losing money than there are people in the digital asset market losing money, people who are looking to enter digital assets are thrilled at lower entry points. So, you know, you talk about narrative shifts, again, you know, maybe there is a pension fund out there, or a large endowment who's been waiting to make an announcement that they're getting into digital assets, but didn't want to do it at the top, well, now it's 50%, on sale, maybe you get an announcement from a very big institution soon, about diving into digital assets. And that could be the kind of thing that, you know, turns this market around. So you know, where we could be wrong. There's lots of ways we can be wrong, in terms of this technology, just not being as impactful as we think, or, you know, there's just, you know, the growth was all in organic from, you know, wash trading, and a few users or whatever, there's tons of ways you can be wrong. And there's also ways you can be right, but to your point that people who are not in the market, yet, nothing has changed for them, right? Either you are a believer or you're not. It's only the people who are in the market that are now trying to come up with excuses and rationales for why they're losing money or why they're making money on the short side, where your future expectations have been changed. You know, I think the first thing I said 45 minutes ago, when we started this podcast is the most true if you're a believer in digital assets, and the future of this technology and the future of coordinated stakeholders and rewards and everything else that is made digital assets grows faster, that nothing has changed in the last six weeks, if you're not a believer, and you think that this technology will go away and it's not going to work, nothing has changed in the last six weeks. You know, so it's a it's only the people who are in the trenches, you know, getting beat up every minute of every day that are trying to rationalize and change their narrative.
PETER HANS 44:21
Yeah, I completely agree. Completely agree. Cool. Well, okay, I hope this was interesting and, and helpful exercise to everybody. And it also just gives a little more insight into into the way you can think about this market and frankly, we do think about this market and you know, from a risk standpoint, you know, challenge assumptions because it is it is very healthy, even if ultimately you don't you know, change your opinion every now and then you certainly you certainly can you know and then the last thing I'll say you know because we are overtime here is is a you know, we do The last kind of, you know, shorter term, I guess, I guess, big market correction last spring summer, we did it, we did an episode where we looked at all the different, you know, bear cases and kind of refuted them. And it did, you know, take a little bit of a narrative shift to realize that most of those were not concerns. Now. Now, it's not that the narrative isn't real or isn't a concern. It's just that it's the the impact of that narrative is not as big of a concern as it has, or, you know, frankly, it's priced it now. But, but that is a difference, you know, the narrative being real versus the narrative being perceived, but as the impact of that narrative, so, you know, with that, Jeff, let you run and appreciate it. And we'll talk next time.
JEFF DORMAN 45:50
Right, Thanks buddy.
PETER HANS 45:51
Alright buddy, take care.
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