All Podcasts Between2Chains B2C0031: Wrapping Up a Crazy September in Digital Assets (w/ Jeff Dorman)

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Oct 04 2021 . 41 MIN
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B2C0031: Wrapping Up a Crazy September in Digital Assets (w/ Jeff Dorman)

In this week's episode of between 2 chains, Peter Hans is joined by Jeff Dorman to talk about the trends going on in the market, the big selloffs and big rallies seen in the month of September, and compare them with the volatility seen throughout the year in different sectors.

Visit www.realvision.com/crypto to join crypto revolution.

Show Notes

Summary:

In this week's episode of between 2 chains, Peter Hans is joined by Jeff Dorman to talk about the trends going on in the market, the big selloffs and big rallies seen in the month of September, and compare them with the volatility seen throughout the year in different sectors.

Visit www.realvision.com/crypto to join crypto revolution.

You can reach Peter Hans on twitter: @peterdhans82


In This Episode:

  1. Jeff talks about where the way market trades after rebound seen in the market and about the three big distinct moves in the market.
  2. Jeff explains volatility in the month of January and compares it to the current market trend.
  3. Peter agree to Jeff that yes, there is volatility because it is a nascent technology and a completely young and immature asset class. But, at the end of the day, based on pure market dynamics, incremental buyers are always going to be greater than incremental sellers, unless we're completely wrong.
  4. Jeff goes on to show how people's attitudes alter as the market becomes more sophisticated and he discusses three techniques to buy on dips.
  5. Jeff discusses his ideas on risk management and institutional portfolios in the short and possibly even medium term, as well as their efficiencies.

 

TRANSCRIPT:

 

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 fund 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 aka funds or its affiliates and are subject to change for any reason without notice any discussion of investments or investment strategies within this podcast or for informational purposes only, and not 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 00:57

Good morning. It is Thursday, September 23 6:05am. Pacific time. Morning, sunshine, how you doing? Mr. Dorman?

 

JEFF DORMAN 01:08

Great. Market feels feels healthy, big a big September sell off and big September rallies, it feels right at home.

 

PETER HANS 01:16

It is a if every month is a year and this asset class what every day is is is what the equivalent of like, two weeks? Yeah, is it was it the beginning of the month was market seems very healthy coming off of you know, rebounds wasn't a lot of, you know, direct fundamental risks 2.2 positive catalysts on the rise and had some, a lot of volatility in the month with some, you know, sell offs and bounce backs. And then, you know, Monday, it seemed like, there was there was only headline risk and negative news. And, you know, thankfully you can, you know, maintain a level of composure, because but because we've seem to have now bounced back and at our, you know, I think relatively appropriately discounting negative news, but it what do you what do you make of the way this market trades?

 

JEFF DORMAN 02:16

Sure. Well, it's interesting in the sense that, you know, there's there's generally has been a little bit of seasonality to digital assets, you know, for the last, really, for really since Bitcoin started 10 years ago, but also with the advent of other types of digital assets of last five years, September has historically been a pretty negative month. So a lot of people would go into this month thinking, you know, hey, maybe take some chips off the table, it feels like it's going to be a little volatile. The difficulty with that assessment, even though it's been true for basically the last four years, is that every other month this year has basically bucked the trend of historical moves. So you know, if you're a if you're a seasonality pattern trader of any sort, you'd have been dead wrong all year. And then you come into September. Actually, I told you September is always a bad month. So you know, when you see it actually happen. It's okay, that makes sense. It happens every year. But But this has been far from a normal year, and certainly not one that you would have expected to follow the pattern. I think what's interesting, though, is that there's been three distinct sell offs already this month. The of more than 10%. Right. So you had the September 7, basically flash crash, right? That was the one we talked about, well, we could go two weeks ago where there was almost $4 billion of liquid liquidations in the futures market. It was driven by by excess leverage it cascading liquidations, it kind of drove the whole market down. On the as soon as that happened, though, you had real strength in layer one protocols right led by Salonen, avalanche and Luna and some others, but an algorithm, but you had a real bifurcation in the market on the heels of that first sell off, then the market felt fine for about a week and then you had another distinct sell off on September 12 and 13th of more than 10%. This one had nothing to do with leverage liquidations This one was much more of sort of the healthy spot market driven decline. Again, you had a little bit of bifurcation there, different assets were moving in different directions. And then you came into this week. And you have the China evergrande debacle which you know, truthfully isn't really an event in my opinion. We'll get into that in a second. But yeah, the China evergrande news you had a lot of regulatory news coming out of the SEC or maybe you don't call it news, but certainly headlines. And once again, you had another you know, greater than 10% move lower and this one was much more highly correlated with pretty much everything going down. So you know, this is it's only September 23. And we've had three really big distinct moves here. And you know, what's interesting to me is we look a lot of times at across the asset class, right we're looking for how does this asset class differ how to token types differ at a sectors differ How does specific assets differ and We've been a broken record talking about the correlation data just consistently tells you over and over again that the correlations are starting to break down. They're just not very high across different sectors across different assets, except for when you get these big kind of leverage flushes. But we looked at all three of these sell offs this month, if you were trying to run any sort of correlation or beta model, you'd have been basically dead wrong, right? The the first sell off, you had basically negative correlations, and you had very low betas because the layer one blockchains, took off higher as everything else was going lower. And the third sell off pretty much everything traded with a two to three times beta, to the downside. So it's really throwing some models out of whack. And it'll be interesting to see, you know, for anyone who's invested in a quant fund or an algo fund, because it's going to be a very challenging month for them, you typically have pretty consistent returns across those strategies, you're going to have incredible dispersion across those strategies this month because of how weird these uncorrelated and differently correlated sell offs have been.

 

PETER HANS 06:00

Yeah, it's an interesting take. Because the last month I remember where we had multiple kind of distinct 10% plus moves was, I believe it happened in January, but that might have just been with Bitcoin, if I remember correctly. I mean, I'm sure the rest of the market moved as well. But I do distinctly remember kind of big moves in in Bitcoin in January, and I don't, I don't recall exactly what the rationale for those for those moves was, I'm sure I'm sure history has changed, versus what we said in the present. But how do you think these markets are different?

 

JEFF DORMAN 06:34

Yeah, absolutely. Right. I mean, January, January is a weird month to think about in terms of that kind of volatility, because you know, what was one of the best months of the year for our funds? Certainly, a lot of the passive index has also had a pretty good month, that month, like the Bloomberg galaxy index was up 42% that month, Bitcoin was up 14%. But you're right, there was six different 10% sell offs during that month. So it certainly wasn't a certainly wasn't a clear path higher. by any stretch of the imagination. That was an incredibly volatile month, that led to much higher prices, so people tend to dismiss it. But a huge move in volatility that month as well. You know, this asset class has really been trading at 80 vol for almost the entire year. And that wasn't the case in 2022,2020, they actually traded closer to 40 vol for most of the year with big kind of pockets of higher Vol. Right, March 2020, had higher vol, fourth quarter 2020 and higher Vol. But most of the year was pretty lower vol market. That hasn't been the case this year. It started in January. And it's been it's been high implied volatility the entire year. But we kind of dismissed that January volatility because the the overall numbers ended up so high that people just assumed it was a good month, and you could have just sat back and checked your statement at the end of the month. So we've been dealing with this higher volatility all year really, which makes obviously hedging more challenging. It makes your var models more challenging things like that. But it's just interesting environment where it I think what's different about right now is that the best parallel I see to September right now is probably actually September of last year. So if you recall, September of last year, we were climbing a wall of worry, you had a lot of things happening. You had the presidential election was looming where, you know, obviously the country in it, really the world was pretty torn with regard to what was going to happen there. That was right when Trump got COVID, right. So after, you know, six months of telling everybody COVID, no big deal, then all of a sudden Trump's in the hospital with COVID. It was the stimulus was starting to end, right. We had you know, we talked many times about how, after the march 2020, you know, quote unquote, fast depression. You know, with all the money that was poured into the markets in the second and third quarter, we had to really wait until the third and fourth quarter to get a sense of how companies were really doing because you can basically throw away the first and second quarter in terms of company earnings reports because they were relevant. And he had a lot of third and fourth quarter earnings reports coming out of that time that we're going to give us a better sense of what was actually happening. Bit Mex was charged by the DOJ at the time didn't X was 40% of the of the Bitcoin derivatives market. Now they're down to like 4% or 5% of the market. But that was a big deal at the time. And also DeFi was struggling a bit. A lot of people have heard of the DeFi summer last year. Well, the third the September in October was horrible for DeFi because he had massive regulatory pressure coming from the regulatory bodies in terms of headlines. So everybody is freaked out about the market heading into the fourth quarter last year. September was another really bad month for digital assets as well as for equities. You know, Bitcoin was down almost 8% in September of 2020. The s&p was down 4%. And, you know, I remember even writing a blog post in early October that said, the magic word is uncertainty. And it was all about it almost doesn't matter which way some of these items go as long as we get clarity and they end and then all of a sudden the markets will settle and that's exactly what happened. Right? You started to get a little more clarity. From the SEC. You had the Safe Harbor. announcement from from Hester Pierce. Obviously Bit Mex finally get charged instead of it just being an overhang for year about it might be charged, obviously the presidential election ended. All these things kind of just cleared up. And you know, these these are the returns for Bitcoin over the last three months of the year plus 28% plus 42% plus 47%. You know, the s&p 500 was up 11% in November 2020 after the election, that's a huge move for the s&p. So it actually looks very similar today, right? What are the things we're looking at today? Same thing, right? You're looking at all these SEC headlines, you're looking at China evergrande day, you know, you're you're looking at specific news in the digital assets market, like the open sea insider trading scandal that we talked about last week, and, you know, the fake Litecoin, Walmart news and sushi swap losing one of their head developers, it's all the same thing, you get this worry, what's going to happen, what's gonna happen, what's gonna happen? And it almost doesn't matter what happens as long as something does happen.

 

PETER HANS 10:55

Yeah, I mean, I think I think that's all I mean, obviously, it's all very factual account, the fact that there's uncertainty is going to persist in this market for a long, long time. I mean, it's, it's a nascent technology, that's also creating a nascent asset class. You know, I'm a broken record, when I talk about parallels of internet adoption. But the thing with internet adoption, is it, it didn't create a new asset class, you know, it was still you were still funding businesses and projects, via equity via venture, you know, via debt, perhaps, things here are being funded via total new asset class, and that takes capital investment. And, you know, one thing, and I don't, you know, you're speaking about bitcoins rally in the fourth quarter last year, which is really a substantial rally for an asset that's that large on a relative basis, I think could potentially speak to just institutional adoption, right? Because I think a lot of the narrative last year was that, you know, there are more and more institutions coming into bitcoin, specifically as as kind of their entree into the into the asset class, I think a lot of institutions started with having more indirect exposure through venture, like if they were invested in, you know, a16z, or Sequoia, right, they might have a couple of companies and maybe they own Coinbase, you know, privately through a fund or directly? And then and then then it moved to Bitcoin. And that could certainly help explain a rally of that magnitude, because the market on a relative basis is still quite small and every financial market no matter what is a market, right, so it comes down to Who's your marginal buyer, who's your marginal seller? And, you know, in this year, I think, you know, you saw that start to wane a little bit, because the institutions and I'm not saying that all institutions are in Bitcoin in the market saturated, I think there's still plenty on the sidelines, but those low hanging fruit are largely in and, you know, then you start to look what's next, right, and eath has rallied a ton this year. And, you know, we know more institutions are coming in to eath. And we also know more institutions are coming into actively managed funds, like like ARCA, are looking at different opportunities to invest across the asset class and the value chain for, you know, many times on a fundamental basis. So, I think it really speaks to, yes, there's volatility, because it's a, it's a nascent technology and a completely young and immature asset class. But at the end of the day, just based on pure market dynamics, by definition, unless we're totally wrong, the incremental buyers always are going to be larger than the incremental sellers, because there's so much more money on the sidelines, and there is money in the market, which speaks to basically buying sell offs, broadly speaking.

 

JEFF DORMAN 13:58

For sure, I mean, you know, the you you're seeing it not you obviously you're seeing that in the equity market as well, right. I mean, the by the dittmann mentality has been going on basically for 10 years in the equity market, too. And, you know, B evey came out with a survey recently saying that they have the highest percentage of clients in equities and the lowest percentage of clients in bonds in ever in their history. Right. We've also talked about the equity inflows a few year are on pace to be bigger this year alone than the last 20 years combined. So the money is pouring into equities. And the same thing is happening to digital assets. It's just been harder to measure. But you're right, it's coming. I think the biggest thing that you hit on was was last year in the fourth quarter. The money was absolutely pouring into bitcoin you had all you starting with, from Paul Tudor Jones, his first announcement in April of 2022, the MicroStrategy announcement Later that year, you had all these different entrants coming into bitcoin last year, and Bitcoin rallied. I think it was 102%-169% in the in the fourth quarter, right? But don't forget ethereum also rallied 105% of that same time and that wasn't because of direct flows that was because of, you know, basically just a rising tide lifts all boats. But when you look back what what's happened since then exactly what you said Bitcoin was the catalyst in fourth quarter That's the last time Bitcoin has been a catalyst. Everything this year has been new money coming into theory, new money coming into Alanna new money coming into your Luna and avalanche ecosystems, new money coming in directly to NFT's you know, new money coming in directly to DeFi there's been a bunch of passive DeFi indexes that have been launched this year. So for the first time, you're seeing real onramps into this market, besides just Bitcoin, and it's showing up in the returns right? Last year, everything was up last year right? 2020 returns bitcoins up 303% ethereum was up 460% other protocols were up somewhere between 104 100% like it was clear that Bitcoin was the driver and everything else, you know, it looks at rising tide lifts all boats, this year, the dispersion is massive bitcoins up 48% it's like the 10th best digital asset out of 200 that we track, everything else has exploded higher relative to Bitcoin. And I'm not comparing the two we've talked multiple times about Bitcoin has nothing to do with these other digital assets. But from a fund flow standpoint, the money is just coming in other places. It's not coming into bitcoin. And even more interestingly is the institutions that came in in the fourth quarter of last year. Those that stuck around are largely using Bitcoin. Now as a risk proxy. I was running some correlation data the other day, bitcoins correlation with other risk on assets over a 30 day rolling period. It's been close to one pretty much since the middle of last year, with a little bit of dips here and there where the correlation stops and gain goes even negative. But basically, the market participants outside of the digital asset native funds, like when we're talking about traditional long short equity funds, traditional macro funds, etc. They're using Bitcoin basically as a levered VIX, right now, every single time there's market volatility, whether whether it's upside volatility or downside volatility, they're pounding Bitcoin, right? They're either pounding it higher when there's reasons to be bullish on the markets, and they're pounding at lower whenever there's volatility. And it's pretty stark, looking at how these correlations have changed, right? Bitcoin has always been heralded as this completely uncorrelated asset over longer periods of time, it's been true, but over the last 18 months, and really more specifically over the last nine months, it's not true at all. Bitcoin is literally just a macro acid at this point, or at least that's the way it's being treated. And it kind of throws a little monkey wrench into what people believe Bitcoin is right? If Bitcoin really is this uncorrelated store of value, that's supposed to be somewhat downside protective it's just not happening day to day, week to week or month month. You know, there's just too much money coming from these macro funds and from these these other vehicles that are just pounding Bitcoin on every headline, because it's, you know, think about it, you know, if you have a headline like we had over the last week in China, and you're a US focused fund, what are you going to do are you going to wait till you know, Asian futures open? Are you going to wait until you know, the US market opens? Now you're going to take the 24 X 7 global super liquid vehicle, then you can just push around right? You don't need to trade euro dollars and futures anymore when you can trade Bitcoin 24 X 7 in all these funds over the last 12 months have figured out the infrastructure to allow them to trade it. And they're, you know, it's the best risk on risk off metric we've seen which is great in terms of adoption. It's terrible in terms of the narrative for Bitcoin

 

PETER HANS 18:32

Yeah, I was gonna say i mean it's it's almost a you know, a victim of its own success in a lot of ways because a kind of global proxy for volatility is 100% not the you know, the narrative of the of the Bitcoin maximalist at all at all, but, you know, as, as Tony pompliano says, like, the market doesn't lie. And if that's, you know, what it is, that's what it is, at least right now. Right. And, you know, I do happen to think that over the long term, it's much more akin to gold than, you know, that a global vol asset, but, you know, it's probably where we are in the lifecycle of, of the asset class right now.

 

JEFF DORMAN 19:20

Yeah, for sure. I think that's the one thing that that Bitcoin, as well as other digital assets have taught us is that it's rare for a narrative or a data point to stay for very long, right? It's been constantly changing over the lifecycle of these assets. So you know what, there was a time when we were talking about how correlated Bitcoin was to gold and that, you know, no one said that for 18 months, that correlation has gone away. But right now we're talking about bitcoins correlation to global risk markets, like you know, the global equity markets, that'll probably go away in a year or two. So nothing that we're saying today necessarily means that it will stay that way for the future, but it is definitely disadvantageous for Bitcoin holders right now in the current market. This is how people are treating?

 

PETER HANS 20:02

Yeah, I mean, one of the other interesting things I think about sell offs in this asset class, you know, which is which is not the case in more mature markets, like, like equity markets is, you know, you see a sell off in in equity markets and you always have something to point to where you're like, you know, this is just getting stupid, right in less the business or the sector is going to zero. Right? And that's, that's valuation. And there's largely a market agreement upon what is a cheap valuation and what is an expensive valuation. And of course, we can argue now that valuations are inflated, because what else what else you gonna put your money in. But you don't really see that in visual digital assets. Because, again, for the 15th time, it's a, it's a nascent technology and an immature asset class. So whatever x y, z token can be trading at 30% yield and two times revenue. But that doesn't necessarily mean that there's a market backstop or enough market participants are saying, Let's back the truck up and buy in fact, that almost seems the opposite, where people are like, Oh, this is down we should short more of it. Just because that's like the way it's rolling. But eventually that has to change as the market becomes more sophisticated.

 

JEFF DORMAN 21:23

Yeah, I mean, for sure. I mean, I think it is it is changing, it's just doesn't always show up that day, right. And this is what we talked about. A lot of times with the working capital issues, it's really hard to buy dips in digital assets because there's only two ways to do it right are three ways to do it really, one is you already have money just sitting there idle on exchanges, waiting for dips, and then you just buy it when it dips, that's great when you catch some of these huge you know, 10% 20% 30% moves, but one it's really hard to pick the point where you want to buy it and two is that's just dead capital sitting there doing nothing while you're waiting for one of those moves right so it's not a very efficient use of capital even though it once in a while works. The second is you go OTC, which is, you know, only an institutional product right? retail can't really do that. But you go into the you know, you can go to the OTC Markets, and get quotes when markets are moving. But guess what, they're committing their own capital, they don't really want to offer it down there on those moves either. So it's kind of hard to get real good offers in a market crash from an OTC dealer because they're trying to buy it themselves before they will offer to you. And the third thing is you start moving money into markets in real time to try to buy Well, you know, we've seen outages across every centralized exchange the, you know, it's you see, with high gas prices on ethereum, or with, you know, a block times kind of changing, it's just really difficult to move assets quickly when you want to buy those dips. So we definitely see it. You know, even at the top of the show here, we're talking about how, after the September 7, flush out all the layer ones rally to tremendously like there was bids the whole time for the layer ones, they just us couldn't get them in fast enough. So you know, you there definitely is a buy the dip mentality in digital assets, it just, it just doesn't happen as quickly or as orderly as it doesn't in regular market. Because you don't have these prime brokers that are just sitting there saying, Yeah, go ahead and buy it. And we'll figure out settlement later. So if that gets solved, I think that will smooth out some of the volatility. And I think it will show very, in much more definitive fashion, it'll show that these dips are being bought, I think what's potentially more interesting and I actually need to rerun the data here, I haven't looked at it in a while. But there was a time last year when digital assets were starting to act like a leading indicator for the markets. And then it kind of went away for most of this year, because it's been such a bullish year for digital assets. They've just been kind of going up for most of it. But it starting again, starting in May, when we had that first kind of move in digital assets. And then again, last the last two weeks. digital assets are largely leading some of these equity moves every time we've seen an equity down move you've typically seen in the last four or five months, it's starting in digital assets. And I'm not 100% sure if that's correlation or causation yet. But again, going back to what we said about Bitcoin, it kind of makes sense, right? When you have a 24 X 7 global market, it's just easier to trade in this world than it is to wait for your local market to open. And I think there's a reason that you're starting to see a little bit of that lead lag element to digital assets. I mean, there's no question that digital assets started moving before the equity markets did around this evergrande day news. There's no question that digital asset started moving earlier than than other risk assets back in February, March of 2020. So while I'll keep an eye on that, and maybe I'll come back with some more data in the next week, but it's certainly interesting to see as more and more market participants get in this space. You know, the difference between the idiosyncratic buys and sells of different sectors that people actually want to own versus that they don't want to own as well as just how it's being treated as an overall risk asset or asset class.

 

PETER HANS 25:00

Yeah, I'd be really interested to see how much randomness or noise is in that data because intuitively, I just find it very hard to believe that the asset class broadly serves as a leading indicator, but to your earlier point about Bitcoin being treated as kind of a new vote VIX, right? That I suppose you could see it to the extent that Bitcoin leads this charge, as you know, global market participants are trading or trading futures on it. And then that leaks into into the rest of the asset class because even though you know, it's frankly absurd, there still is like a you know, I'd almost call it a tail wagging the dog now type thing where, where people see Bitcoin move, and, you know, their extension is to the rest of the asset class. Right? It I think it's a very inaccurate way of thinking that that will proven to improve out in the future. But for right now, you know, I mean, the fact that people still talk about Bitcoin dominance and compare it to like, you know, or, you know, I saw some, you know, post yesterday talked about CAG is one of their favorite vaults which like I applaud them for doing research on CAG, how the hell isn't all to Bitcoin? I have no idea.

 

JEFF DORMAN 26:19

Yeah, you couldn't find two assets that have less in common than then Chili's and Bitcoin. Yeah, I agree with that. But I also think, you know, you have to also remember how markets work, right? So let's say that we're right, let's say that people across the world are funds and macro funds and other high net worth investors. And so let's say they are using Bitcoin as this kind of global risk proxy and using it as like a levered VIX, right? So let's say all of a sudden there's some China news or something that scares you and you just start pounding Bitcoin and take it lower. But don't forget, when that happens, somebody's buying it right then maybe a market maker, maybe intentionally somebody who had a bid out there and all of a sudden got hit. Well, most of the people in this market still are market makers and quants and algos. Right, so what happens when you start getting in on one asset is you look for something with high correlation to sell on the other side, right? So right or wrong? Maybe that's a theory. Okay, so all of a sudden you get hit on Bitcoin? So you start selling ethereum? Okay, well, once you start selling ethereum, then there's relative value of ethereum. to other layer one blockchain, okay, ethereum is going down, maybe salon and avalanche and start going down. Okay, whether that makes sense. Maybe it doesn't, then they'll start to go down, well, then you're like, well, if the base layers are going down, maybe the applications built on their going down. So maybe they need to sell DeFi because eath is going down, or maybe they need to sell, you know, some of the new solana apps because a lot of starting to go down. And and then and then you trigger the cascading liquidations across futures, and then everything starts going down, right? All this can happen in an hour doesn't have to be very conscious, right? It could just be all these things trigger at once. It doesn't mean that people aren't looking for specific assets to buy. And again, that's why you might see on the bounce of very different reactions. We talked again, about September 7, layer one blockchains, where absolutely bid the entire sell off, it just took a few days for all that money to get into it. And then you saw huge dispersion where half the market was down 10% to 30%. And half the market was up 10% to 30%. But it does take some time for that to play out. And you're just not sitting there with standing bids saying well, you know, if Bitcoin goes down, I'm not going to let the other things go down, I'm just gonna sit there and bid or that you have to wait till some of this stuff flushes out. So the algos, the quants, the market makers, they might get hurt because they're getting hit on Bitcoin. So they take something else down, then they realize the other thing they're taken down is actually bids that starts to go back up. And you know, eventually it does balance out, this really is a fairly efficient market. It's just the 36 to 48 hour window, all this stuff is shaking out is just violent. And that violence can change people's opinions of what the actual longer term data says.

 

PETER HANS 28:39

Well, market efficiency has a variable right in there meaning meaning time, right? So So efficiency of markets is always is always a function of time, over and over. Do you know, you know, n equals infinity? Yes, markets are going to be efficient, because ultimately fundamentals will win out, but it's that it's that variable of how long they stay and efficient, right. So one could argue, you know, equity markets, credit markets stay inefficient for a much shorter period of time than than a market like digital assets. Right. So how do you think about managing risk or an institutional portfolio in a market that to your point, I guess, ultimately, in the long run is efficient or will be somewhat efficient? But in the short and probably even medium term? Is is highly inefficient? Yeah. How do you just share some thoughts on on that?

 

JEFF DORMAN 29:37

Sure. I mean, first and foremost, you're always trying to look at what are you trying to defend against right? You know, everybody who is an investor is a risk taker, right? What we're doing from a risk standpoint that was trying to mitigate some of the downside risks, you're not going to eliminate them, you're trying to mitigate them. So in order to mitigate risk, you have to identify like, what is the actual risk so for instance, in those last month, we've been kind of probability weighting and discuss Like how big of a risk is this China evergrande situation and I think it's very low actually, um, you know, this has been a slow moving train wreck for a year, there's not a distressed fund out there that doesn't have, you know, some exposure to evergrande a bonds at 20 or 30 cents on the dollar and already understands how the restructuring is going to work. You already know that, you know, Chinese governments are going to try to stem that the contagion away from just evergrande, a bondholders and equity holders. So I think that one's pretty low risk, then you have the SEC regulatory risk, right? So that's been driving markets. But you know, I think we've talked about that one at length about how this is still years away in terms of changing the laws. And right now it's a lot of political theater and posturing to try to get the laws changed. There's a framework, but there's no question that there's headline risk right now coming from the SEC, you know, and then you also have the idiosyncratic specific news. So when we think about risk, like first performance minifigure, like what what are we what are we controlling against? Are we controlling against something that's affecting the entire market? Are we controlling against, that unilaterally affects just a just affects a small part of the market? And then it will look at like, Well, what do you actually own right? You own assets that are actually highly correlated to each other, or ones that should behave differently? You know, a year ago, for instance, Bitcoin. So Bitcoin and ethereum puts were really effective at hedging the entire market, for the last four months, it's been less effective, because you really have these different pockets where, you know, layer one blockchains, might be up, while a theory in the DeFi is down, right, Bitcoin may be down while gaming and NFT's are up. So if you have a diversified portfolio across different sectors, and different token types of digital assets, in some ways, your portfolio is already self insulating, and you're not really worried about these bigger kind of macro moves. So all we're doing when we're looking at risk is trying to identify what what is the risk? Is there a way to hedge against that? And? Or are you just willing to take a little bit of a drawdown because you still think the risk reward is favorable enough that trying to time all these elements just isn't worth it? And, yeah, we'll take a little bit of the drawdown, but we know that, you know, the ultimate upside, downside ratio is three to one or four to one or five to one, if we get these investments, right. And therefore, you know, we can stomach a little bit of a drawdown on the way down. So all these factors are what we are looking at, when we're managing risk is understanding what it is worth defending against understanding, is it worth it to try to defend against that relative to the upside, and understanding, you know, what are the things we own? Are they actually going to get caught up in in some of these moves or not? And, you know, I think I think September will be a pretty interesting case study, because by the end of this month, you're gonna see a pretty big dispersion, even though, you know, the market will talk about, hey, there's three big flush outs throughout the month, and everything went down together. Well, at the end of the month, you're gonna see, basically, half the assets were up 10% to 30%, and half were down 10% to 30%. So you know, you can talk all you want about these 24 and 48 hour periods. But the reality is, if you had a balanced portfolio, you're probably you know, breakeven, whereas if you just own Bitcoin, or you just don't have theory, you're hurt right now.

 

PETER HANS 32:44

Yeah, I think that's a very fair way of looking at it. All right. Well, you know, we're coming to the coming up on the last quarter of the year. When by that I mean, the last week of September? Because I do I do look at every month as a as a year. I won't make it. I won't, I won't hold the attendee, any thoughts about actually, you know, what, I will screw that? How are you thinking about the last quarter of this year? In other words, the last week of the month?

 

JEFF DORMAN 33:12

Sure. I think, you know, again, I, whenever you see these kind of wall of worries, is generally a good time to be long assets. Because almost inevitably, these eventually, one by one get knocked out. Now, sometimes the news is actually worse than you expected. Right? You could go back to 2008. And you had a wall of worry. And it turned out, it was right to be a wall of worry, because things were worse than we thought. But more times than not, even if you get a negative consequence, the actual negative consequence is better than the uncertainty. And because then you can then you can deal with it, then you can figure out okay, what actually happened, and what do I want to do around it? whereas these walls of worry are just, it's just constant overhang, right? multiples get depressed volumes go lower fear rises. I mean, I think there's a there's something called the crypto fear and greed index where, you know, literally, I think it was, I think it went from an 80 reading out of 100 in terms of greed to a 20 reading in basically overnight, right? See, you can see how the sentiment shifts really quickly, just because of price and because of things that people are worried about. So usually, that's a good time to buy. I'm not a huge believer in seasonality. But, you know, this has been a strong year for digital assets. This has been a strong year for equities, not much has changed that right. You know, we know rates are rising anytime soon. Even if we start to see a little bit of fed tapering, it's not going rates are actually going to rise anytime soon. We still have $1 that hasn't really moved, we still have the 10 year that hasn't really moved. You have tons of money sloshing around in equities and in digital assets. There's huge catalysts on the horizon across you know, the ethereum ecosystem with layer two starting to come online with these new blockchains like Ceylon and avalanche and Terra Luna, are starting to hit real traction. You have massive catalysts coming in the gaming and NFT world I mean, some of these NFT numbers are just mind blowing in terms of the growth and the onboard on Rampton stuff so it's it's pretty hard to stay bearish on on any part of this asset class in the short term to medium term here I think you know honestly the the one that I have the least clarity on and the least confidence in right now is Bitcoin just because you know Bitcoin tends to move in big chunks and it usually moves in big chunks for real reasons right whether it's you know hey a big hedge fund like Paul Tudor Jones just came in or hey you know the first country came in El Salvador the first deal corporate Treasurer came in I just don't know what the next bullet is for Bitcoin I'm sure it'll come eventually I just don't see it on the horizon right now so that's the one I build these confidence with.

 

PETER HANS 35:35

There are no fundamentals like there's nothing that you can point to and say hey, you know, Bitcoin sells off from 60 to 38 or whatever it is and you can't just be like wow you know bitcoins really cheap here like is it just like you can't say Bitcoin rallies from you know, 8k to 40k and be like well bitcoins really expensive here so based on what right so I think the only thing that moves Bitcoin is marginal buyers and marginal sellers right so so where's the next big wave come from like does it come from you know the money center banks getting involved and having a platform with their with their PWM and RIA teams? Maybe, you know, does it come from sovereigns doubtful you know, does it come from CBDC's bringing more people into the marketplace? Maybe I think a big part of the rally last year it frankly was like PayPal you know the fact that it you know, PayPal you could you could purchase Bitcoin through PayPal was a was a was big for new market entrants. But ultimately you need new buyers that's that's the fact the matter you know, population turnover I think will inevitably just increase it but we'll see.

 

JEFF DORMAN 36:44

Remember you're absolutely right and everything I think you know, I'll leave I'll leave it with this I remember at ARCA we always every month we just reset and every single person ARCA has to give us their predictions for the one month six month and just you know completely independent of what's in our portfolio just what do you think and I remember last year almost for the entire year everybody had a basically a all time high prediction for Bitcoin it was yeah we're gonna hit all time highs we're gonna hit all time highs and then as we get closer to the end of the year and we're still hovering around six step six or 7000 in Bitcoin and in all time highs were 20,000 I remember asking around September I said you guys recognize that if any of your predictions are right at some point it actually has to move right and you know lo and behold we had 168% fourth quarter rally I think the same thing is possible here right? Almost everybody's talking about 100,000 Bitcoin 100,000 Bitcoin 100,000 Bitcoin whether that's right or wrong, I have no idea but if it is right at some point you're gonna have a huge move. And I think that's what people bet on right now when they say when they're getting long Bitcoin is I think eventually going to that big chunky move But to your point something has to spark that and I just don't see it right now in the market you know when when we see it, we'll let people know but but you know, there has to be there has to be a trigger it doesn't just get there on its own.

 

PETER HANS 37:56

Agreed. Absolutely agree. This was a good conversation. And I'm sure next week when we chat it'll be a totally different environment and who knows what the hell we'll be talking about but good luck on a baseball season starts for Andrew and he had go get them go get him this fall.

 

JEFF DORMAN 38:18

Appreciate that yeah big big weekend baseball tournament for the new Delray sea devils travel team so if you're if you're a fan of nine and under baseball come out to Marina Del Rey this weekend

 

PETER HANS 38:27

Yeah, that's good. Yeah, Lucy's Yeah, so it's Jeff and I both now I've got to my son doesn't play baseball but my girls play softball and and my oldest is 11 and just better first game in our team is the boom so they all have walk up music with boom in it and and I didn't know that there was that many like boom songs but uh, but you know, one of the moms in the team put together like the What does the walk up music and as like the announcer and everything like that is pretty cool. And Lucy's lucea clean up in our first game. And her walk up song was boom by by pod, which was like an early 2000s like hard rock song It was it was pretty good. She liked it. She liked it a lot.

 

JEFF DORMAN 39:10

I love it. I love I love the youth sports I'll say that the most exciting thing for me was teaching all the nine year old and eight year olds that whenever we're slumping hitting you just take all the bats off the bat rack and throw them into the fence and start yelling wake up bats. And the kids kick out of that so I'm looking forward to it

 

PETER HANS 39:27

Do they do the golf What do you call those things in golf like that they had warm the the maranto ads for bad weeks I remember literally I actually had one of those like on my bat like I thought it was hilarious and I kept one on my bat.

 

JEFF DORMAN 39:46

That's a good idea. Now right now the kids are just they all have multiple batting gloves and I black and all kinds of wristband gear. I mean, they can barely walk out there they're carrying some extra weight with their hats fullbacks keep that school.

 

PETER HANS 40:01

All right, man, well take care. Great episode and talk to you soon.

 

REAL VISION 40:08

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