What Is Crypto's Bullish Catalyst?

We're in a very shaky place for risk overall. I think the time to be aggressive is when everybody's talking about a recession. I think any buy below $25K on BTC will make you look like a genius in a year.

Yeah, so it's just a matter of making sure that you have a good entry point.

Well, there you have it. Don't fight the flows. You just don't fight the flows.

It has been an extremely eventful 2 weeks. Jonah and I are back in our homes, and we've been watching this unfold over the last 72 hours. I'll say that it's going to be a very interesting period for the markets—crypto, risk, oil, just across the board. It's time to pay attention, in my opinion.

I agree. There's going to be a lot of opportunity out there over the coming weeks, but there's also going to be a lot of danger.

The biggest—obviously, the biggest news story of the week is this conflict that's come up in Israel. You see defense stocks up: Lockheed Martin was up about 11% at the peak today, and Palantir was up. You're seeing oil go up as well, which I thought about for a bit. I went back and forth as to whether oil would go up or not, purely because the people fighting have nothing to do with oil. I mean, there's no oil in Israel, and there's no oil in Gaza.

There is a little bit of a question as to whether it should go up. Jonah, I'd be curious, because you come from a world where geopolitics is extremely important, so you probably have a good knack for understanding how these things might impact the markets. What's your gut take after digesting the news?

Sure. Let's start with oil. Oil is up because whenever there is conflict in the Middle East, it's a knee-jerk reaction for oil to rally. But if you delve a little deeper, the leadership of Hamas has openly thanked Iran for helping them plan this attack. The Wall Street Journal has reported something to that effect.

I obviously have no idea what Iran's involvement in this particular conflict is, but the market perceives Iran to be an involved participant. Iran is a huge oil producer, and it is currently sanctioned by the United States, which makes it difficult for the country to sell its oil on the open market.

There have been years of attempts at diplomacy between the Biden administration—and even when Biden was vice president during the Obama administration—to lift those sanctions and allow Iran to export freely again. Those talks have been progressing recently, so this conflict would be a setback to that diplomacy. If Iran can export, that means lower oil prices; if it can't export, that means higher oil prices. A setback to diplomacy, which would lead to higher Iranian exports, means higher prices.

It's a bit tough to follow, but not that crazy. The sidebar here is that Iran is quietly exporting all of its oil anyway, or close to it. So even if the sanctions were lifted, it wouldn't actually result in much of a difference in global exports, but it has to be at lower prices—much lower prices than what Iran would get otherwise.

Yeah, but the price that you see on the screen is just an amalgamation of all the different oil prices in the world. You're looking at Brent and WTI, and those benchmarks factor in global supply and demand, right? You're not looking at the price of Iranian crude when you look at crude.

That's correct, right? That's why you got a knee-jerk rally, even though the balance of supply and demand doesn't really change that much one way or another. It's just a setback.

Another thing is that wars consume a lot of petroleum, but Israel is a small country, and this war probably wouldn't consume that much petroleum. Meanwhile, if you had China mobilizing against India, that would probably be a big deal, but that's not happening. Hopefully, that's a good overview of the situation.

One thing that stands out to me is that, despite crypto decorrelating from risk a ton over the last month—which is normally a bullish signal—if you look at it over the last 30 days, the S&P has traded down and Bitcoin has actually traded up over that time period. I think, unfortunately, part of that is definitely Saylor buying. How much did Saylor buy? Was it $500 million in BTC?

We're in a very shaky place for risk overall because I think the flows still look bad. You have this conflict that's escalating, and higher oil is very bad for risk prices, especially right now, because inflation and rates are already booming. The bond market is selling off massively.

Price of bonds down, yields up.

Yes, bond prices down, yields up. I think that has long-lasting impacts that take a while to show up in the real economy. What you get is this perfect storm.

I think one other issue was that the market was pricing in a soft landing pretty aggressively, and we're slowly starting to go the other way. I think the time to be aggressive is when everybody's talking about a recession—when everybody and their mother is looking around and saying, “There's no way that we have a soft landing on the horizon. We're going into a recession.” I think that's when it's going to be a good time to start scaling in.

All of that being said, I don't think Bitcoin has enough idiosyncratic juice to avoid a drawdown if the broader risk markets go down, which is why I'm positioned very cautiously right now. I think puts are a good idea—both 2-week and 4-week puts. Implied volatility is pretty low.

ETH is obviously in more trouble than BTC, but it is also more shorted than BTC, so you have to weigh that a little bit. Just looking at open interest, there are a lot more shorts open on ETH than—

Yeah, ETH is going south fast. I'm sure you know more than I do at this point, Avi, but I just look at NFT floor prices. CryptoPunks are down 20% in the last couple of weeks. Gas prices on ETH are around 9 gwei. The level that's neutral for the flip between inflationary and deflationary ETH is 15 or 16 gwei, and we're trading well below that level. Gas prices are well below that level, so there's just not a lot of activity.

There's also the FTX guy who has had 180,000 ETH. As of this recording, he's out of about—let me see—half of it.

Well, there you have it. Don't fight the flows. You just don't fight the flows.

If you're going to buy anything, you might as well just buy Bitcoin at this point. There are some alts that are doing well, like LINK and dYdX, but overall, this is a bad market to be long in.

I'm waiting personally. I'm waiting for the flush. I think any buy below $25K on BTC will make you look like a genius in a year. It's just a matter of making sure that you have a good entry point. If you're buying at $27.5K and you draw down 10%, you start to feel a little bit skittish. Maybe you trade at $24K, and then you start to get really worried. Psychologically, you're hurt.

I think you basically just focus on getting good entries, so you're not psychologically tormented if we go down to $22K.

Yeah, and then just wait. Realistically, if you think about it long term, this is actually quite good for Bitcoin. Conflict in the world—well, terrible—is good for Bitcoin. It's very good.

Global disorder is good for Bitcoin because it is an impartial reserve asset that anyone can stash when the United States starts going sanction-crazy. The other thing you mentioned was interest rates, Jonah. When we're sitting here in a year's time and interest rates are still explosive and mortgages are still expensive, at some point home prices are going to start to tank.

Then the United States government, in an election year, is going to face a very difficult choice. Do we let American homeowners—do we let the middle class—take the medicine that should have been taken in 2008 and again in 2020, tank the whole thing, and cost ourselves the election? Or do we pump more stimulus in, print more money, bring yields down, and do all of these things that governments do?

I have a feeling it's going to be the latter. In fact, I'd put my money on it. At that point, maybe you're looking at $100K BTC or higher, because that is what BTC is purpose-built to hedge the investor against.

In the short term, who cares about Bitcoin when there's geopolitical conflict? The only thing that's been holding stocks up is AI mania, Nvidia, whatever. Things could tank pretty hard in the short term, so tread carefully, tread lightly, and stay nimble.

I agree with you, Avi. You picked such an interesting time to get back into that game. It's always an interesting time to get into oil or into crypto. There's always something going on.

Let's say that you started in oil with a clean slate right now. It could be, “Well, it's in a precarious position. It could go up a lot or down a lot.” If there's a recession, oil could tank 30%. If there's a massive geopolitical conflict in the Middle East, oil could rally 50%. You have to tread lightly; otherwise, you get steamrolled in your new role.

It's the same in crypto. We both think this thing is going to 10x over a 3- to 5-year timeline, but you might not be able to hang on to the mechanical bull. You might get thrown off. I think all markets are in a very tenuous position, and that's because of the 10 years when they weren't in a tenuous position—the period from 2010 to 2020, when Janet Yellen kept her foot on the gas for about 5 years longer than she should have.

There was a long period when markets were just super boring. That set up a period driven by interest rates and geopolitical conflict in which all markets—including crypto, crude oil, natural gas, equities, and everything else—are going to be super volatile and treacherous, but also really rewarding for people who play it right.

That specific set of circumstances does make me think that the probability we end up going sideways in Bitcoin or crypto for a substantial period of time is higher than people expect. One thing that people forget is that there doesn't have to be a cycle. There doesn't have to be another bull run in 2024 or 2025 just because that's how it has worked in the past.

In the back of everybody's mind, that's almost taken for granted, but there were very specific circumstances that led to that, and they may or may not happen again. Long term, my view of the world is obviously that Bitcoin has a much greater place, but that could be in 2026 or 2027. That's why I'm spending a lot of time in the other areas of digital assets and crypto.

I had the benefit of playing around with Stars Arena, which was the platform that got hacked. It was built on Avalanche. I tweeted about this, and I said, “Just to be clear, I would not put real money on this platform.” But the reality is that the product itself was pretty good. It was a competitor to friend.tech, and I used it. It had a feed and a better messaging system; the product was more fun to use than friend.tech.

We're actually seeing iterations now that are making consumer products for crypto better, and we are seeing usage. If it hadn't gotten hacked, I think it would be doing quite well today simply by virtue of being a good product. I'm obviously not advocating that anybody put money on it—it's been hacked twice—but it's one of those things that makes you realize that maybe there are actually some good applications slowly coming out.

Investing in the technology and the infrastructure is another area where this stuff can actually decorrelate over a long enough time period. You might find that Bitcoin could be down 15% or 20% over the course of a year, while there are going to be things that are up 100%.

Yeah, you just have to be one of the few people left paying attention. If it didn’t get hacked—that’s a big if, right? If it had a good user experience, if it didn’t get hacked, and if there were no fraudulent SBF-type characters involved in all of these ifs, crypto is a little bit too plagued with problems at the moment. I feel like, to have its next big summer, you need 5 to 10 amazing new products and use cases to come out that are secure, user-friendly, and run by competent operators.

The competent operator is key.

Yeah, exactly, because anybody can spin up a project at the valuation levels of 2021 and run it into the ground. I feel like you need lower prices to foster good stewardship of a project. It does make me sad, just because it was a pretty solid product that got hacked. I was like, “Okay, that thing’s good.”

So FTX got hacked as well. What happened there? Some guys stole how much ETH? And then, do you mind talking about it? I wanted to ask you as well, Avi: There’s the FTX hacker, and then there’s the FTX administrator, custodian—whatever you call it—Galaxy. What are these 2 entities doing, and how much are they selling each week?

It’s a really good question, and the answer is that it’s going to take a very long time to actually come up with the plan. They’re in the process right now of figuring out what assets to sell, how to sell them, and over what period to sell them. This plan has to be approved, so this selling is going to take a while to actually occur.

It’s obviously going to be an overhang on the market, but it’s mostly going to be an overhang for Solana relative to everything else, because the actual supply they have in BTC and Ether is much, much lower in terms of circulating cap than Solana.

SOL looks rich at $22. I agree with you—it does. It’s one of those things I really like. Oh, wow, look, we’re getting a nice little sell-off here on BTC.

Personally, I think ETH puts are a great idea. I think they just make sense right now. I would finance them by selling calls. I would just buy bear risk reversals: buy a put, sell a call. I don’t see ETH exploding higher in the next couple of weeks. There’s too much selling.

The issue right now with the market is that there’s no real reason for people to step in and buy. You had the Grayscale lawsuit resolve itself, so the only positive catalyst to the upside is the ETF at this point.

The way I always think about these types of things is that you have momentum buyers, who are currently momentum sellers, and then you have your value buyers. When I look at Bitcoin, I don’t see value until $25,000 or lower, so there’s really nobody who’s going to step in aggressively until those levels. On ETH, it’s much, much lower.

One of the issues with ETH has actually been, conversely, the prevalence of L2s and the amount of activity that L2s have relative to the base layer. The argument was always, “Well, if you increase throughput by 100x,” which has happened, “then you should increase transactions by 100x.” But that hasn’t happened. It’s not even close to happening. What you’ve done is move all the transactions from ETH to Arbitrum, and you’ve barely increased the overall amount of transactions that are occurring.

From my perspective, there’s going to be a big lag period over the next year where ETH just looks bad on a fee basis. Everyone was expecting it to look good on a deflationary basis, but that’s just not going to be the case as long as activity is mostly on Base, Arbitrum, or Optimism. I’m quite negative on ETH for the time being, and I’m quite bearish on the ETH/BTC ratio.

I used to be bullish on ETH because all these scaling solutions were being built. As a California guy who grew up in the state of California, I’ve watched them constantly add lanes to the freeways, and it never seems to ease the traffic. Every time they add a new lane, it just brings more cars onto the freeway.

After a while, you start to wonder, “What’s the point of doing this?” You don’t ease the bottleneck. I thought the same thing would happen to ETH. I thought it would be, “Okay, you have this blockchain whose block space is constantly in excess demand relative to supply. Gas prices are insane. You have to spend $200 to buy an NFT that’s worth $20. How the hell—”

I assumed that scaling solutions would ultimately bring more flow to ETH, make the product more scalable, and make it this global world computer, only faster. Instead, it’s looking more like the way pipelines work in the Permian Basin in Texas. Sometimes there’s too much oil and not enough pipelines; everything’s bottlenecked. So there’s a frenzy of pipeline building, which is effectively a scaling solution for an oil field. Then suddenly there’s way too much pipeline capacity and not enough oil, and it goes back and forth.

I think scaling solutions were overbuilt during a particular time in ETH’s history when there was a lot of demand for it. Now there’s not a lot of demand for ETH because no one cares right now, and there’s way too much capacity, so gas prices are forced into the toilet. I agree with you: I think the pendulum will swing back the other way hard one day, when it’s, “Holy shit, we have this thing that’s cheaper and better than AWS for our use case, and probably more permanent.” But that might be a year off, 6 months off, or 2 years off. Who knows?

There’s no OPEC for ETH. That’s an issue. So there’s a foundation, and they’re selling, right?

They’re selling right now. They’re increasing supply at the worst possible time. Even though they sell very small size, they’ve been remarkably consistent at selling local tops. I think it’s very funny because they sold $2.5 million this time, which is nothing, but everybody’s talking about it. Everybody’s saying, “Oh my God, what do they know this time?”

It’s self-reinforcing. They do it once, and then people feel like, “Oh my God, they must know something.” Then they do it again, and people start to panic.

Yeah, I mean, look, if your entire net worth is in ETH right now, you should be panicking. But if ETH is part of a diversified portfolio, as we’ve recommended, maybe you shouldn’t be panicking. Maybe it’s more like, “Oh, cool, this thing is cheaper.” I would definitely reduce ETH exposure. I think the right level for ETH/BTC to become a giga is 0.05.

Well, if you’re like me and you own NFTs, your ETH exposure reduces naturally for you on sell-offs. It’s like a gamma position. During these periods of time where ETH goes down, the value of your NFTs denominated in ETH also goes down, so I have less ETH than I did when ETH was high. It’s amazing how it self-corrects like that.

Yeah, that’s good. At this point, I think you’re right. Also, there was that futures ETF that launched for ETH. In and of itself, I don’t think it’s that relevant, because no one cares about a futures ETF anymore. People just want spot.

It’s such a bad product. You could only imagine a world of people buying tons of it at a pico top, thinking, “Oh my God, get me ETH exposure somehow, anyhow. I don’t even want to read the prospectus.” In a bear market, something with contango and roll yield isn’t going to attract anybody.

I’m not reading into the poor ETF launch as, “Wow, look at how doomed crypto is.” I’m looking at it as, “You launch a crappy product in a down market, and no one cares.”

One issue is that BITO was live, so everybody could see just how shitty that product is—how terrible it is. One thing that’s funny is that people tend to overestimate how bad it is. If you look at the returns, it’s underperforming Bitcoin by something like 30% from a pure price basis, but they have dividends and cash distributions, which compensate for a lot of it.

I think it’s actually only underperforming by 10%, but that’s still bad. That’s still very bad.

You know what doesn’t underperform by 10%? Stablecoins. Avi, what do you think about the world of stables right now, and specifically the leakage in USDC?

There’s a concept that bad money drives out good money, and I think that’s what’s happening right now. You have a lot of people in China and Russia who want dollars. They want real dollars. Maybe they want to buy real estate in the U.S., or they want to buy other goods in the U.S., because they want to protect their portfolios. They don’t want too much exposure to the ruble or the yuan.

A lot of people are using Tether to get out of this, in my opinion. Based on the flows we’re seeing and the people we’re talking to, this actually seems like a very common occurrence. People are buying Tether to get out of their base currency.

If you look at it, Tether growth has almost coincided one-to-one with the decline in USDC. What’s happening is that people can source Tether in China, Hong Kong, and these other places. They buy the Tether, create the Tether, and then take it to Binance, OKX, or Huobi and sell it into USDC. Then they send the USDC to somebody else who has an account with Coinbase, they redeem it, and then they buy something in the U.S., whether it’s real estate or something else, and transfer over the deed.

That dynamic is occurring fairly frequently right now. I think it’s leading to the contraction of the USDC supply because, if you think about it, USDC is a better product. The irony of the situation is that it’s dying because it’s such a good product.

I don’t know if I have the same opinion. I think USDC is a better product from a mint-and-redeem perspective. It’s technically a better product, but its target demographic is the developed world, where crypto is not a solution.

Crypto is a solution right now for emerging markets, underbanked markets, and people without access to stable currencies or J.P. Morgan checking accounts. That’s where Bitcoin and stablecoins are really useful. Ultimately, if USDC serves the developed markets, where that solution isn’t needed, it’s going to lose market share to the technically inferior asset that serves the market that actually demands it.

Since the beginning of 2023, the market cap of Tether has exploded from $65 billion to $85 billion and has been stable at $85 billion since the summer. Meanwhile, USDC, or Circle, has collapsed from $40 billion to $25 billion—a $15 billion decline.

Ultimately, I think what this is telling you is that there’s a use case for crypto right now: preserving dollarized value in the form of Tether. I think it’s emerging markets that are still using crypto for its purpose-built use case. Maybe developed markets are giving up on crypto a little bit, and there’s probably a lot of cycling in what you just described as well.

I think so. At the end of the day, it’s demand for dollars, and USDC is the best form of dollar right now.

I also think that’s why you’re seeing USDC as the best form of dollar, but the market cap of USDC has collapsed because people know it’s backed by dollars.

Oh, right, I see. So they’re redeeming it into dollars.

Yeah, okay. If you want dollars, your best bet is to buy USDC and redeem it for dollars. From that perspective, it’s the best product and the best way to access USD.

Why not Tether? Why can’t you just redeem Tether and get your dollars back?

The mint-and-redeem mechanism for Tether is a little more complicated. It’s much harder. You have to work with specified counterparties. I also think there are potentially some worries, like, “Do I want to go through the process of redeeming USDT and then have wires to the U.S. from USDT bank accounts?”

We probably don’t want that. It’s probably easier to just use the Coinbase USDC channel.

Exactly. It’s much, much easier to use a Coinbase USDC channel.

There’s a drain in fiat in the general ecosystem right now. That’s actually useful for figuring out what your risk tolerance should be in the markets. One anecdote is that we use the stablecoins deployed in the market. Take all the top wallets that are active traders and calculate their average stablecoin balances over the last year. When that balance goes very high, it’s actually a good buy signal. When it goes very low, it’s a good sell signal, because there’s just not that much fiat left in the system to buy or sell.

In aggregate, there’s been a drain, and that’s not good. That’s why I’m advocating for patience. I’m advocating for the bear view. I don’t expect ETH to test the FTX lows. I don’t think it’s going to get that bad. On ETH, I think the FTX lows were a forced-selling, flush-liquidation-type price set.

I don’t know how many of you listeners have researched the Kelly criterion, but it’s worth pulling it up on Wikipedia and maybe doing a little spreadsheet. Type in your own probabilities for where you think different price points are and the probability of ETH reaching them.

Let’s say your band for ETH within the next year—roughly 2 standard deviations—is $1,000 to $2,000. It’s amazing how quickly the risk/reward of being short goes from amazing to terrible as ETH goes from $1,600 to $1,400. How quickly your risk/reward shifts, and how scared you should be to be short at $1,400, becomes clear as you approach the bottom of your distribution.

Personally, I don’t think ETH is going to go much below $1,200. I think that would be an absolutely dire liquidation flush—an “everyone just gives up on it” type of level. It would be lower, but I think half the space already threw in the towel during FTX.

Ultimately, as Avi said, tread lightly here. I think it’s more of a situation for investors to add on dips rather than traders trying to dance between the raindrops and capture $100 a token by selling now and buying later.

You framed it well. At $1,400, I think you basically have a floor at $1,100, so the risk/reward becomes very, very skewed. That’s why I think you’re probably going to get a lot of chop between the $1,650 area and the $1,500 area. That’s where the risk/reward is the most balanced.

If you’re looking for a move to $2,000 or a move to $1,100, that’s the most balanced area for you. I think that’s where the real battle is going to take place. If we break down into the lower portion of that range, that’s a buying opportunity. That’s what I’ve been saying: You’re just looking for good areas to add length so that you look like a genius in a year.

You’re absolutely right, and you have to have that one-year time frame. Also, if you read Crypto Twitter frequently enough, as probably most of the people who listen to this podcast do, you see people throwing in the towel and giving up on ETH. It’s, “This is it. I’ve been long ETH since $100, and it’s over now. This is a useless piece of an asset. I’m never buying this crap again. I’m selling all my ETH.”

If investing or trading isn’t your profession, but you hold some ETH in your personal account and care about your net worth, you look at your ETH and those tweets and say to yourself, “Crap, I’m going to get out.” Remind yourself that in 12, 18, or 24 months, when this thing is moving higher and trading at $5,000 a token, those same people will be talking about how ETH is the future, how it’s going to $50,000 a token, and how they’ve been long all the way up.

You have to filter out the noise and remember that.

Dude, I love it when you go giga. It’s a probability distribution. It’s a gradient of outcomes. It’s not black and white. ETH is not over, and ETH is not the future. It’s a constantly evolving shade of gray.

I will say one thing: I am worried about L1s in general and what happens when block space becomes very cheap. It remains to be seen, but we’re really going to need to increase the number of transactions that go through these networks.

We might just be going through a dead period for L1s, which is why I’m so focused on applications right now. For L1s to do well over the next couple of years, you really need applications to do very well over the next couple of years. L1s have become so much more efficient over the last 18 months with all the launches of the L2s, and you’ve got ZK coming out soon. I think it’s going to be all about the apps.

We’ve beaten that horse. I don’t want to get too deep into it, but one game could take off. It only takes one application to generate more transaction volume than the network has ever seen in its entire history. Maybe it’s a game, a back-office payments application, or Visa.

What type of application would you want? What are you looking for?

I think gaming is the most likely. Then you have SocialFi as well. Realistically, I think one thing that could really take off is tokenized stock trading or bond trading on-chain.

I know Goldman’s trying to come out with its money-market fund in Q1 of next year. That’s going to be big. We’ll see if it’s composable with the rest of the world. I doubt it, but we’ll see. The more products that launch like that, the better off we get in crypto. That’s something I could really see taking off massively.

Look at Canto. They’re doing a lot in the RWA space right now, and one of the things they’re teasing is a launch of a Treasury product. What if they allow you to leverage Treasuries? That would be a good use case for crypto.

If you’re in crypto, it should be for the big wins. It’s not about dancing between the raindrops and chipping around. I know there are a lot of market-neutral funds out there, and I’m sure some of them are really successful and run by brilliant people with great investors, but I think that whole sector has been torched over the course of the last year and a half.

They’ve taken so much risk. A lot of them lost assets on FTX, which was ironically the best place to get short crypto. There were probably a lot of people using FTX perps to sell this or that altcoin, and people probably lost a lot of money on that. Now we’re still in a bear market.

Let’s say you want to be short. My favorite dead horse to beat is short Polkadot versus long ETH. Where are you going to get short Polkadot? Is there any efficient way to do that? Market-neutral strategies involve a leg where you get short something that there’s no efficient way to short, so it doesn’t work.

You have to be in this for the asymmetric upside, and you have to find ways to survive during times like these. You need investors who are in it for the long haul. You need investors who want exposure to crypto. You can’t sell a market-neutral strategy to an investor base that’s uninterested in crypto.

I agree with that.

It’s been a good conversation, Avi. Thank you. Always fun. This is dope. We’ll do it again in 2 weeks. Stay safe out there, everybody. This world is looking complicated and tricky again. Hopefully, when we talk next time, we’ll be out of this situation, but if not, I’ll see you in World War III. Till then, Avi. Good talk.