Crypto Is Entering A Paradigm Shift

It’s very clear that the environment for crypto is shifting right now. You have the ETFs, you have the stablecoin and the Ripple lawsuit. I don’t know what’s coming next, but it’s clear that there are green shoots in a way that there weren’t before, and that makes me more bullish. So, if you were a listener on the last podcast and heard me waxing bearish, I’m changing my tune.

I just came back from a nice vacation in Greece. I got to disconnect a bit, catch some octopi, eat feta cheese and delicious Greek food out on the beach.

Octopi?

Octopi. It’s for sure octopi. Have you ever watched My Octopus Teacher?

No, I haven’t. Maybe that’s another generational thing.

Yeah, no, this is a Netflix documentary about some South African guy who made friends with an octopus. I think the whole point of the documentary was to try to convince you not to eat them because they’re really smart.

He also sounds smarter than the dude who made friends with a hippo and then got eaten by it.

No way. A dude made friends with a hippo and got eaten?

Yeah, he was riding it like a unicorn or a horse for a while. Then one day the hippo was just like, “Enough. I don’t like you anymore.”

You gotta be careful.

Okay, now here it is, man: mauled to death in South Africa.

So what is it with South Africa?

Well, animals down there. A lot of animals down there.

He several times described the hippo as his son. It was a 6-year-old pet hippo. He went swimming with him. When he went in the water, Humphrey—he named him Humphrey—allowed him to get on his back and ride him like a horse.

Yeah, this guy’s nuts, swimming with a hippo.

These things are—more people die from hippos a year than die from lions.

Where does the octopus death count factor into that?

I don’t know, but there apparently is an octopus called a blue-ringed octopus, or something like that. It’s only 5 to 8 inches long, but it’s extremely dangerous if provoked or handled because its venom can kill somebody very easily. They’re found in tide pools from Japan to Australia.

Have you ever seen an octopus with blue rings on it?

Just whatever you do, don’t touch it. Sounds like certain altcoins, doesn’t it?

No, but, you know, just stay away.

Definitely some, like BALD. What happened with BALD?

Honestly, I did not pay too much attention to what was going on with BALD. All I know is that it’s just a continuation of what happens every time you get a launch of a new protocol, like Base, Sui or Aptos. There’s always going to be a meme coin, and 50% of the time that meme coin is going to run. You’re either early or you’re dead. That’s it.

In the case of the octopus, I think you’re just dead, and then you gotta avoid it. I don’t think there’s as much money to be made picking up venomous octopuses, but in terms of altcoins, you’re either early or you’re dead. That’s the way I think about it.

Although there have been 2 very notable exceptions to this rule. One of them was Pepe, and the other is apparently HarryPotterObamaSonic10Inu, which has done remarkably well. It actually seems to be holding remarkably well. There are some that last long enough to create a cult community around them, and then you’re good.

So I kind of disagree with you on Pepe. If you were early, you obviously did quite well. If you had bought into that early pump, the thing was only out for about 3 days. You could have said, “All right, I’m early. It’s only 3 days old.” If you bought it then, you’d be down 80% from there. Even if you bought it sometime in June, you’d still be down 50%. Pepe’s had its sell-off.

I mean, look, Avi, more broadly speaking, this year, if you just held BTC—or even more intelligently, if you’d held GBTC—you would have outperformed most discretionary hedge funds that trade crypto, do research and actually try to invest a lot of effort, capital and time picking apart the space. Most, but not all. I’ll just leave it at that.

Yes, that is true.

Only the best rise to the top, Avi—and loud in podcasting.

At the same time, as somebody who doesn’t work at a hedge fund in crypto—Cumberland is a little bit different—I guess the general approach that I’ve taken this year has been to dismiss most of the space and focus on coins, ETH and Bitcoin with an actual use case and products.

I go back and forth. Sometimes I feel smart for doing that, and this calendar year the price action has confirmed that approach. However, other times I wonder, “Am I just being lazy here?” I’m not particularly kicking myself for missing Pepe or that Obama coin, but maybe I’ll miss the next big summer of some new asset class within the crypto space just by ignoring all of this that I perceive to be white noise.

It’s a lot easier to make money on a bet on an infrastructure play because you’re effectively betting on the index. All of the money that flowed into crypto in 2021 came from people who didn’t have the chops to underwrite specific assets and specific applications. What they would do is put all of their money into index plays—meaning Ethereum, Solana, NEAR, Avalanche or MATIC.

These are effectively index plays on the applications that are built on top of them, and that’s why they radically outperformed. I don’t think that’s going to be true moving forward over the next 5 years. I do think that in the short term, it’s very likely to still be true because we’re not at the point yet where we’re sophisticated enough investors to really start to parse these things out in aggregate in the crypto market.

I think L1s still do reasonably well. I think we’re going to get a spike in Bitcoin dominance over the next month, but I do think that then what ends up happening is that it starts to peter off. The reason is that I think the ETF starts to get really priced in.

I have a slightly different view. It’s similar, but a bit different. Basically, I don’t think the ETF can get priced in until the ETF exists. I mentioned this on previous podcasts and on Twitter. Normally, markets price in information well ahead of time, and that’s because you have ample capital and dry powder in the market to price in whatever information may be available.

In Bitcoin and ETH, when events are bearish, that is certainly the case. Plenty of leverage can come out of the market very quickly, as we saw last year, ahead of problematic events for the space. However, leverage cannot be added easily at this point.

I saw some statistics on Glassnode showing that the long-term holders in Bitcoin—which is just an easy asset to pay attention to because of the nature of the blockchain—I think 65% of them have been held for over a year. The long-term holders are quite stagnant. There’s not a lot of fast money coming in and out.

If you’re retail in the United States, it’s kind of hard to access crypto, so you don’t have this steady retail inflow. I think an ETF like a BlackRock or an ARK ETF—ARK, by the way, their first approval date is this Friday—is very likely to get delayed.

Until you have one of those instruments, the capital that you would need to reprice crypto to the levels where crypto is accessible via an ETF just doesn’t exist. This is one of those very rare opportunities in the market where well-telegraphed information just can’t be priced in because the well-telegraphed event, to use your word, is that a gateway of liquidity will open at some point.

You do kind of have to get ahead of it. You have an opportunity to get ahead of it. So I challenge your month. I take the over, and then I think BTC dominance trickles down from there as interest returns to the space.

You make a very good point about how altcoins will come back in the post-XRP, post-Ripple-ruling world. I agree with you, but I don’t think it’s going to be a 2021 thing where everyone sees 4x of all altcoins and they go up like crazy. I think you’re going to have things like Arbitrum and Optimism, Ethereum-based altcoins, rally or outperform. dYdX is an ETH-based product.

But what about alt-L1s like Solana and NEAR and some of these other ecosystems? They could do very well or just die. We don’t know. What do you think?

My view is that they’re coming back. I just think this is a similar conversation to the one we had last time, but around greed. I think it’s inevitable that there’s going to be enough greed to pump these things higher.

I do want to talk about the Bitcoin ETF for a second. It’s very possible that the initial reaction to the Bitcoin ETF is outflows from GBTC. A lot of people have that trade on, and people will probably end up trying to redeem from GBTC. There are a lot of people who have been stuck in that asset for quite some time, so I do think it’s possible that there’s some negative reaction. There’s an offset to the pure positive.

Nine times out of 10, what we see is that the event marks the top of the trend. Basically, every single time I’ve seen an event in crypto, it’s marked the top. People talked about the ETF in October 2021, and when it came out, that was the literal peak top. People thought, “Buy the rumor, sell the fact.”

People talked about the Coinbase IPO, and that was within a week of the top in April 2021.

I mean, these things tend to get front-run very, very hard—billions of dollars in front-running. That's why I'm not sitting here saying, “Hey, I think we've topped now,” because I think the front-running can still occur. But by the time the event occurs, the likelihood that we're going higher post-event is pretty low, in my opinion. People just start to exit at that point, and there will always be somebody who says, “This time is different.”

The argument that you're going to hear over and over is, “Well, it's a spot ETF. It's a better product than the futures ETF.” The reality is that the futures ETF was a product that people wanted in October 2021, and prior to that, it didn't exist. Now, if you want access to Bitcoin, you can go buy long-dated futures on the CME, you can buy MicroStrategy, or you can buy Coinbase.

But it's terrible on those long-dated futures, though, right? In a contango market, you pay something like 10% to 12% to buy a futures ETF.

Yeah, that part's killer. Obviously, that's why the spot ETF is important in the long run, because you just can't hold these things. No institution is stupid enough to eat 10% to 12% roll yields from contango. Everyone learned that lesson from the USO and commodities ETFs—it just kills you. That's why I think the spot ETF is consequential. It'll allow your random hedge fund to trade Bitcoin.

Jonah, one thing I was thinking about: have you been paying attention at all to the semiconductor narrative, what's going on with LK-99?

I have. I listened to a couple of podcasts on it, and I was struck by the fact that it sounds like a 25-delta—that it's something that will be real in 3 to 5 years.

Here's something I've been thinking about: there seem to be other things that are interesting and on the periphery of technological breakthroughs that aren't crypto, and that is probably harming allocation to crypto. AI was the first big blow to crypto, where everybody in crypto was saying, “We're not the hot new technology anymore.”

If ChatGPT hadn't come out this year, do you think crypto would be higher?

No doubt. Ultimately, again, I think I have a slightly different thesis from you. I'm losing faith in the multichain world. I think that most non-Ethereum ecosystems will die. I agree with you that if you believe in blockchain-based applications, you're effectively putting your bets on ETH.

I think that ChatGPT, by proving a use case for emergent technology, basically invalidates a lot of what is going on in the altcoin space—the sort of long-tail crypto that people were investing in speculatively for years. ChatGPT just reminded people that new tech can actually be useful, whereas your coin number 500 has no use case or users whatsoever. ChatGPT is bad for that stuff.

I don't think ChatGPT, superconductors, cold fusion, or whatever's next is going to matter for Bitcoin and ETH. Each of those has its own narrative. Bitcoin's narrative is that it is a candidate for a global reserve asset, digital gold, and peer-to-peer money that will perhaps supplant the bottom 50 of the world's 180 recognized fiat currencies. It also has a role in challenging central banks not to debase their currencies too much.

That's Bitcoin off to one side. To the other side, you have ETH, a database that is owned by no one and everyone. There is use for that because if you have something like a deed to your house or a certificate of authenticity for a piece of art that you bought, why should it be stored by some random startup that will probably go bankrupt? It should be stored in an incredibly neutral database.

You have those two things, and I think there's real use for both of them. If you're ignoring them, maybe you're just focused on your little developed-markets lens, and you don't see what value they're providing to other people. They have a stablecoin-based layer of use cases.

We're going to talk about that in a second, but the rest of this, there's definitely a case to be made. We keep going back to Mike Novogratz's comment on this podcast: we're in the show-me phase for crypto. ChatGPT has done a show-me, right?

If you look at anything that's non-Bitcoin and non-ETH, you look at it with a really skeptical, stroke-your-beard kind of quizzical look and say, “What is being shown? What use case is being shown?” To your earlier point about Pepe and Obama Coin, I do think that memecoins are a cooler, more fun version of the lottery. We've talked about this on the podcast as well, so there is a use case that you can't ignore. Community is sort of a use case, but I think ChatGPT is bad for useless things, or things that haven't proven their use yet. What do you think?

Yeah, I don't disagree with any of that. In the long run, I agree with everything that you just said. In the short run, my take would be that there's definitely been some VC capital and some Silicon Valley capital that may have gone to crypto but pivoted into AI stocks.

For example, there's a lot of fast money in Nvidia. I would assume some of that fast money, if AI hadn't existed, would have found a home in crypto. There had been some percentage of that that would have thought of Bitcoin as their gambling fix, bought Ethereum as their gambling fix, or bought Pepe—whatever.

I do think there is some of that. But then the flip side becomes true, right? Once you get peak saturation of these memes, crypto can start to go. I think crypto can actually attract some flows again.

That's a great point. It feels like the capital is stuck in Nvidia forever. As soon as Nvidia is priced to the moon and Bitcoin hasn't, it still kind of blows relative to its potential, so it could just flow right back one day.

That's a little bit of what I'm thinking: that it will actually do that over the next 2 to 3 months. Definitely on the last podcast, I was a lot more bearish. We were trading around 30K at the time. I was a lot more bearish; now I'm a lot more constructive.

From a technical standpoint, we retested 28.5. I think that 27 area was the original target, but we clearly stepped into demand. You see today, Nasdaq is down 1.5% and Bitcoin is up 1.83%. Across the board, altcoins have started to do okay. A lot of them just haven't come off as hard as I would have expected, given the way that Bitcoin is performing. It's been a while since crypto has outperformed the Nasdaq.

Yeah, I can't even remember the last time this happened.

On all accounts, crypto is looking a lot healthier. It looks like we flushed a lot of the speculative capital and found pockets of demand. I'm definitely feeling a lot better now than I was before.

I think that's why, in the absence of the BlackRock ETF filing—which triggered that massive rally in June—the space just sort of trickles a bit lower, with an occasional micro-pop, and then trickles lower again. I think it's going to take some time. You mentioned this earlier, Avi: maybe some guidelines need to be laid down.

Yeah, I think so too. The PayPal thing was really interesting to me because it made it very clear that that's exactly what the regulators are trying to do.

Jonah, what happened exactly with PayPal for the listeners?

PayPal got its stablecoin approved, and there was a lot of noise around the controls on the stablecoin—that they could wipe your balances and control things. But that doesn't matter; they can do that with your current money anyway. We never really expected a centralized financial institution to lean in very heavily into these decentralized ethos, but let's put that aside for a second.

What does this mean? It means that there is a regulator out there that stopped Meta and stopped Facebook from issuing their stablecoin, sued Coinbase, but is okay with PayPal issuing a stablecoin. What's very clear to me now, more so than before, is that the government of the United States doesn't dislike crypto. They just want to make sure they can control the gateways to crypto. It's not about shutting it down; it's about making sure the right people are the gateways.

PayPal has 400 to 500 million users, while Coinbase only has 100 million. That means there are a tremendous number of people who could come into crypto because of what PayPal is doing, which is good and bullish.

Now the question is, what does PayPal do? Are they going to stop with their stablecoin? They currently list 4 assets: Bitcoin, Ethereum, Litecoin, and Bitcoin Cash, for some reason. Now they're going to have a stablecoin. Are they going to start taking on Coinbase? Are they going to start listing other assets? Are they going to win approval to trade different things when Coinbase is currently facing scrutiny from the SEC?

That's a question you have to ask, especially as an investor in this space: what is going to happen next with PayPal? What are the downstream effects from this? I think, at the margin, it makes me personally less likely to own Coinbase and maybe more likely to want to own some PayPal in my portfolio.

All of this is to say that it's very clear the environment for crypto is shifting right now. You have the ETFs, you have the stablecoin, and you have the Ripple lawsuit. I don't know what's coming next, but it's clear that there are green shoots in a way that there weren't before, and that makes me more bullish.

If you were a listener on the last podcast and heard me waxing bearish, I'm changing my tune a bit. The other big thing about this PayPal stablecoin is that, if you zoom out, let's say PayPal had carte blanche to do whatever it wanted with crypto and there was no interference from any government.

PayPal could issue its stablecoin, make it interest-bearing, and then tell merchants, “If you set up a PayPal wallet, when someone swipes their PayPal card at your coffee shop or newsstand, we won't charge you credit-card fees. You'll just get interest-bearing money yielding 5.25%, wired within block time—13 seconds—from your customer's account to yours.”

Suddenly, you've disrupted Visa, Mastercard, JPMorgan, and Bank of America. No one needs a checking account or a credit card anymore. It's just ludicrous benefits. Obviously, there are a few roadblocks between that happening and where we are today, but it's a first step along that journey, and it shows you the promise of crypto for developed markets.

In developing markets, PayPal PYUSD is just a no-brainer. I think that's why you're seeing things like USDC lose market share. At the highs, its market cap was $55 billion or $60 billion, and I haven't checked, but now it's only $30 billion. Tether is hovering around $80 billion, but it depegged by 10 basis points recently on DOJ headlines.

You're going to have a binary world where crypto-looking things are either blessed and flourishing or under constant attack and threatened with being shut down. You're going to see continued FUD in some of those assets that aren't necessarily in the good graces of the institutions that will ultimately dictate what crypto looks like, if that's how this ends up playing out.

Yeah, I would agree with all that wholeheartedly. It's going to be really interesting, though. I still think Tether's a great product. I think it offers a real solution to the developing world, and I do not think it will get interfered with nearly to the extent that crypto Twitter does. I think it's here to stay.

You think so? Why don't you think the DOJ could take it down, even if they wanted to?

I wouldn't go that far. I just don't think they will. I think they have, frankly, bigger fish to fry. I thought it was interesting how, as Tether started to depeg, all these rumors started circulating around Cobie and the shadiness that's going on there. It's interesting how quickly these things tend to reverse. Every time there's some amount of nervousness in the market, people try to attack Tether, and it's been through so much at this point that I view it as very unlikely that it has a hole.

The risk that I see with Tether is purely that the DOJ decides to come after them and says, “These guys are facilitating money transfers to sanctioned nations, and we don't want that at all. We don't want any of that. We're going to shut them down.” Everybody's going to get their money back, but they're going to stop operating.

That wouldn't result in a depeg, though. That would be an orderly unwind.

I don't think it has a hole, but I think there's some amount of time value. For example, imagine if it takes you 2 months to get your money back. Then Tether will depeg a little bit as people try to get their money.

Sure, right. It's like, if so much of the float tried to redeem all at once, it might overwhelm the mint-and-redeem mechanism that keeps it—

If I were Tether, what I would do personally is break myself up. I think it would be a lot better for the industry. If you're going to operate something like that, you probably want to have 3 different stablecoins and 3 different companies. Even if the network effect isn't there, you insulate yourself from risk a little bit.

The risk from Tether is very low relative to the risks of Huobi, OKX, or Binance going down. At this point, one really interesting conversation I had with somebody very close to the scene in China said that the first iteration and first wave of everybody who built abroad were people who were very likely from shady backgrounds to begin with. They got into crypto early because that was the type of person who got in early, built very big companies, and then institutionalized them over time.

Now there's a new crop of people coming in—Tencent, Xiaomi, and Alibaba people who took the Silicon Valley wave. You're going to see better, less shady, and more straightforward products offshore in the East, especially with Hong Kong opening up a little bit. I'm pretty excited to see this. This is why I'm going out there next month for Token2049, which should be a pretty good conference. I'm trying to get a better read on that area of the world.

But I think what I realized is that business culture isn't uniform across the globe. If you're going to trade a global, fungible product, whether it be a hydrocarbon like LNG or crude oil, or a dollarized form of value like Tether—or anything in between—Bitcoin is the most salient example of this.

People in jurisdiction X will have vehement opinions about the asset that people in jurisdiction Y adore, and vice versa. That's just how global commerce works. It's nothing unique to crypto.

I think it's a testament to the resilience and staying power of Bitcoin, ETH, and stablecoins like Tether that they're able to transcend those differences and offer product-market fit across these vastly differing jurisdictions and opinions.

I think it's important. That's part of why I joined crypto. It started to look familiar to me when it started doing that. Jonah, before we go, just because I'm very interested and we've talked about crypto for 42 minutes now, is the oil market interesting again?

Yes. What's going to happen in oil, for all of you in crypto finance, is that high interest rates are going to impact production. The business of digging oil out of the earth just becomes much more expensive. It's very capital-intensive for all commodities, but the timing of that relationship between higher interest rates and less oil coming out of the earth has a delay. It's like a 6- to 18-month delay.

I think demand is forecast to rise over the course of the next 2 years, but interest rates are going to curtail production, as will other factors—geopolitical factors in particular. I think you're going to get one of those things that happens in the twilight of a commodity's reign over a particular market sector. In oil's case, it's transportation, where the commodity rallies substantially into consistent or rising demand against a backdrop of reducing production.

Then you reach a price where it eventually squelches demand, and you get a pretty glorious sell-off for people who trade it, followed by some wild volatility. I think Bitcoin will maybe do that in 100 years, but right now Bitcoin is where oil was in the late 1800s—proving product-market fit and starting to rally. Very interesting ends of this barbell.

What do you think?

I mean, I have no idea. You're the oil trader. I just wanted to ask you to get your opinion on this.

Oh, well, I think it's vastly underpriced because a lot of countries will start buying and selling oil denominated in Bitcoin one day.

You think so? You think just because it's a neutral asset?

I think it's because—and again, we've got to wrap soon—let's say you're Chad. You're producing oil, you sell it, and then you get dollars for that sale. The banking system that delivers you those dollars is T+17 days because you're an oil company in Chad. What do you do with those dollars in Chad? Convert them to local currency through somebody who's going to take your pants off on that transaction, and then spend it? Or how does it really work? They're going to use Bitcoin, or it sounds like they might use Tether.

Tether, yeah. I think commodity trade will eventually start redenominating many staples—maybe Bitcoin, maybe a bit of both. Definitely the gray-market trade will do that.

Yeah, makes sense. Well, anyway, you heard it here first: oil for Bitcoin soon.

Jonah, as always, it's a pleasure. Great seeing you.

Avi, it's an awesome podcast. Thanks for taking the time.

Always. Take care.