WEBVTT - Analyzing The CeFi Wipeout

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<v Speaker 1>I'm Stacy Marie Ishmael, Managing editor of Crypto for Bloomberg News,

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<v Speaker 1>And this is Bloomberg Crypto, a daily Bloomberg I Heart podcast.

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<v Speaker 1>It's Tuesday to line nineteen. As investors around the world

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<v Speaker 1>grapple the reality of sustained declines and prices across crypto markets,

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<v Speaker 1>more and more stakeholders are asking the question what's next,

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<v Speaker 1>and in some cases, who's next. In this episode of

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<v Speaker 1>Bloomberg Crypto, reporter Emily Nicole interviews Alston Zecha, partner at

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<v Speaker 1>global venture fund eight Roods, for his perspective on how

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<v Speaker 1>the crypto winter is affecting sentiment and markets. So you

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<v Speaker 1>probably read the story that we did. It was like

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<v Speaker 1>the two trillion has been wiped off the crypto market

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<v Speaker 1>cap since November UM. And one of the initial questions

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<v Speaker 1>that I posed in that article and that I wanted

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<v Speaker 1>to put to you more deeply, is about how, um,

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<v Speaker 1>this crypto winter is different from the ones that we've

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<v Speaker 1>had in the past. So obviously we had a crypto

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<v Speaker 1>winter period in and Bitcoin had experienced his own little winters,

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<v Speaker 1>I guess before that. But what do you think is

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<v Speaker 1>different this time around? I think this was a classic

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<v Speaker 1>Minsky bubble or a Minskey moment, which is exuberant over

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<v Speaker 1>speculation in an asset underpinned by tremendous amounts of over leverage.

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<v Speaker 1>Minsky moment, a sudden market collapse that follows an extended

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<v Speaker 1>period of high spending and indebtedness. And I think that

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<v Speaker 1>is a starting point for a key difference against previous

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<v Speaker 1>crypto winters, and it starts to look more like dot

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<v Speaker 1>com bast um to twenty years ago. Maybe even there's

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<v Speaker 1>some shades of things that happened in the financial crisis,

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<v Speaker 1>although I don't want to get too grandiose. There are

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<v Speaker 1>a number of other things that are quite different. And

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<v Speaker 1>I think when it's re hypothlication of assets, rehypathlication using

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<v Speaker 1>customer or client said fill your own trading purposes that

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<v Speaker 1>are denominated in other assets that are also part of

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<v Speaker 1>this spiraling upwards bubble, this creates an almost infinite loop

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<v Speaker 1>of self referentiality that helps everybody look good on the

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<v Speaker 1>way up and really accelerates everything on the way down.

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<v Speaker 1>And I think that's how I would summarize what's been

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<v Speaker 1>different here, And of course that's been underpinned by the

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<v Speaker 1>fact that there's just been so much capsule that has

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<v Speaker 1>flooded in so quickly. That's partly been a facet of

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<v Speaker 1>enthusiasm for crypto in particular, And that's partly been the

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<v Speaker 1>tail end of the over stimulation of the economy, whether

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<v Speaker 1>that's been in regular tex stocks, whether that's been in

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<v Speaker 1>equities or other asset classes in general. I think that's

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<v Speaker 1>just been very obvious here in the world of crypto

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<v Speaker 1>as well. So you add all of those things up,

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<v Speaker 1>and it basically sounds like all of the financial crisis

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<v Speaker 1>buzzwords that any of us ever studied who are economic historians,

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<v Speaker 1>and you line them all up, and bingo. Because you

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<v Speaker 1>mentioned some of those key buzzwords, I guess like rehypothefication

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<v Speaker 1>would be one, leverage would be another. UM And those

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<v Speaker 1>are things that are very specifically playing out right now

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<v Speaker 1>in the collapses of different players, like three Horos Capital

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<v Speaker 1>going through liquidation. Three Hourrows Capital one of the biggest

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<v Speaker 1>crypto head funds out there. It was ordered into liquidation

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<v Speaker 1>by a court in the British Virgin Island. UM and

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<v Speaker 1>do you want to kind of explain a little bit more,

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<v Speaker 1>I guess how you view those as being potentially toxic

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<v Speaker 1>during this winter. I think one of the really interesting

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<v Speaker 1>conversations that I had probably eighteen months ago with UM

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<v Speaker 1>where they startup that was making a business model off

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<v Speaker 1>of lending and staking and yield in defy and was

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<v Speaker 1>promising yields of seventeen And I'm I'm no deep defy engineer,

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<v Speaker 1>and I'm certainly no market arbitrage expert, but I've been

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<v Speaker 1>around long enough to know that if something is too

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<v Speaker 1>good to be true, then it isn't true. And there

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<v Speaker 1>is no such thing as ristlessness. And actually, lastly, most importantly,

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<v Speaker 1>you can't bet against the market and the overall economy.

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<v Speaker 1>And so if you were thinking that you could get

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<v Speaker 1>yield on something that was at lower rest than something

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<v Speaker 1>that was yielding three or four percent, you might get

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<v Speaker 1>away with that for a few weeks, maybe even a

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<v Speaker 1>few months, but you wouldn't be able to get with

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<v Speaker 1>that get away with that indefinitely. And I think it's

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<v Speaker 1>that live of hubrist that also crept in to a

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<v Speaker 1>number of players in the market, this belief that this

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<v Speaker 1>time it was different, this time we were smarter, this

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<v Speaker 1>time technology or engineering would make us better. Those were

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<v Speaker 1>just fundamental aspects of the hubris that crept in that

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<v Speaker 1>again was reminiscent of the tech bubble. I think one

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<v Speaker 1>thing that we mentioned previously was about how you almost

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<v Speaker 1>picked up on it a little bit there. But the

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<v Speaker 1>marketing of all of this and the message that was

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<v Speaker 1>being sold to investors is that, you know, I think

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<v Speaker 1>in the in the article I wrote, I referenced an

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<v Speaker 1>advert on a bus that said if you're seeing bitcoin

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<v Speaker 1>on a bus, it's time to buy It was very

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<v Speaker 1>famous in the UK and got banned eventually for being

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<v Speaker 1>too you know, for I guess forth right with them

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<v Speaker 1>bitcoins pros and cons. But in that I guess how

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<v Speaker 1>much of the current crypto window was created by this

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<v Speaker 1>messaging that was being put out to investors that this

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<v Speaker 1>was something very easy to get into, very you know,

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<v Speaker 1>not a risky bet to be making, or at least

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<v Speaker 1>no more risky than buying bitcoin directly. I think why

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<v Speaker 1>I've been the best way to put it. You know,

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<v Speaker 1>it's it's hard for me to judge because that's pretty

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<v Speaker 1>qualitative and anecdotal. How much more was it created by this?

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<v Speaker 1>How much could it be focused on this? And then

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<v Speaker 1>you'll move into a realm of should it have been regulated?

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<v Speaker 1>How much more closely should this messaging have been monitored?

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<v Speaker 1>Now that's equally I'm not saying that it should not

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<v Speaker 1>have been regulated. These are financial products, and any time

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<v Speaker 1>you're promoting financial products to consumers, there needs to be

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<v Speaker 1>a moderation in your messaging, and there needs to be

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<v Speaker 1>Dare I say at some level of regulation, which there

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<v Speaker 1>was not in a lot of these crypto products, and

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<v Speaker 1>that the complication there, I suppose the does that make

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<v Speaker 1>it any different? Again, it makes it different from previous

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<v Speaker 1>crypto winters because the sheer volume, in the sheer number

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<v Speaker 1>of people caught up in the exuberance, it was just

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<v Speaker 1>an order of magnitudes more than anything we've seen in

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<v Speaker 1>the past. But I think when you're starting to get

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<v Speaker 1>people who wouldn't normally play and as you've said, less

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<v Speaker 1>complicated financial products, thinking that they could have riskless, easy

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<v Speaker 1>access to money with promises of or more per year returns,

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<v Speaker 1>that becomes a real problem. And I think there's a

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<v Speaker 1>There was a great statement that I read in a

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<v Speaker 1>blog post that this went beyond recklessness and moved into tragedy.

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<v Speaker 1>And we're hearing stories now of people who plowed their

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<v Speaker 1>life savings into some of these lending business models convinced

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<v Speaker 1>that yield class they could do it with. As you said,

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<v Speaker 1>also no more risk than just buying buying gold or

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<v Speaker 1>yeing bitcoin. And I think that's going to have some

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<v Speaker 1>real world repercussions for a number of people that said.

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<v Speaker 1>I don't want to overstate it either, because we talked

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<v Speaker 1>about this notion of systemic risk, but I think that

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<v Speaker 1>it was self contained, as hermetically sealed within the crypto world.

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<v Speaker 1>And and obviously we've talked about the tragedy of the

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<v Speaker 1>implications for individual retail investors who plowed in too far.

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<v Speaker 1>But I don't think what we're seeing is something that's

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<v Speaker 1>having ongoing implications for the wider real economy. And that's

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<v Speaker 1>probably a good thing. Um. And and that's that's something

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<v Speaker 1>that I think is perhaps similar to previous crypto winters,

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<v Speaker 1>that this still has been largely in crypto world, although

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<v Speaker 1>of course crypto world is now an order of magnitude

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<v Speaker 1>or more bigger than it was the last cycle. Yeah,

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<v Speaker 1>And I guess part of that that order of magnitude

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<v Speaker 1>contributing to that is the fact that the current economic

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<v Speaker 1>environment is so difficult. So you know, it was very

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<v Speaker 1>easy to sell a story of yields and defy when

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<v Speaker 1>you're getting less than one percent on your savings are

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<v Speaker 1>count in a real bank um. But kind of going

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<v Speaker 1>beyond that, we've seen that you know, around two trillion

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<v Speaker 1>is wipes off the market cap since the November peak,

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<v Speaker 1>So that's about a two thirds lost for the sector

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<v Speaker 1>as a whole. What are the consequences of that that

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<v Speaker 1>you think? And the crypto sector is now going to

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<v Speaker 1>be facing. So I don't mean to be overly flippant,

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<v Speaker 1>but I think the consequences are everything and nothing um.

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<v Speaker 1>And so what do I mean by that? I was

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<v Speaker 1>actually looking up the amount of ECTI value destruction again

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<v Speaker 1>during the dot com bost. I think the estimates range

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<v Speaker 1>between five and ten trillion, And of course we look

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<v Speaker 1>at the wider ecty markets and the collapse in share

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<v Speaker 1>prices also in other parts of the real economy. Again

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<v Speaker 1>we're talking of something north of five trillion. So in

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<v Speaker 1>the grand scheme of things, especially because crypto was reasonably

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<v Speaker 1>hermetically sealed from the rest of the wider economy, you

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<v Speaker 1>could argue nothing. Again, it's not going to feel like

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<v Speaker 1>nothing for the thousands of people who have lost their

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<v Speaker 1>jobs and for the many consume umors who have lost

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<v Speaker 1>very significant investments. But in terms of the grander scheme

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<v Speaker 1>of things, what are the implications for the real world,

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<v Speaker 1>for the real economy, also for the innovation cycles that

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<v Speaker 1>that maybe we'll get onto talking later on in tech

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<v Speaker 1>also in crypto, you could argue not so much. We'll

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<v Speaker 1>be right back with more of Emily Nichol's conversation with

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<v Speaker 1>Austin Zeka of Eight Roads Ventures about the state of

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<v Speaker 1>the Sea FI wipeout. So if we're thinking about how

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<v Speaker 1>crypto might come out of this winter and then go

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<v Speaker 1>back to that sunshine and summertime of the of the

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<v Speaker 1>bull market, um, what role do investors play in that journey,

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<v Speaker 1>both on the retail side but also within venture capital.

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<v Speaker 1>How much do you guys have a say, in a

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<v Speaker 1>participatory role in in reversing the winter. Well, the starting

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<v Speaker 1>point is we do have access to capital that's hopefully supportive.

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<v Speaker 1>I think that you will have noticed that in terms

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<v Speaker 1>of investing into startups in the space, capital has slowed

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<v Speaker 1>down but not dried up. So being an efficient allocator

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<v Speaker 1>of capital is supposed to be our job, taking capital

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<v Speaker 1>to the business moans that we think are sustainable and

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<v Speaker 1>and whereas I suppose in the over exuberance of the

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<v Speaker 1>last couple of years a lot of that capital was

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<v Speaker 1>not allocated effectively or efficiently, and and fueled to a

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<v Speaker 1>certain extent too much of the exuberance. Um, I think

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<v Speaker 1>that everyone has now gone back to basics, and and

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<v Speaker 1>I'm quite hopeful that we can help we as an

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<v Speaker 1>industry can be helpful in that regard. And again, secondly,

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<v Speaker 1>I think in terms of the pattern recognition we ourselves

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<v Speaker 1>as professionals, or at least in terms of the institutional

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<v Speaker 1>knowledge that we have, even if we didn't have it personally.

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<v Speaker 1>We've been around through many cycles. For example, eight Roads

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<v Speaker 1>and its predecessor funds have been investing in venture capital

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<v Speaker 1>since the late sixties, so we've seen quite a few cycles.

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<v Speaker 1>And hopefully we can therefore bring the pattern recognition, but

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<v Speaker 1>also a bit more of a sense of when there

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<v Speaker 1>are some leading indicators that spring is coming to be

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<v Speaker 1>supportive about the right strategies to to use that capital effectively.

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<v Speaker 1>From the perspective of retail investors, who gets involved, especially

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<v Speaker 1>in terms of crypto itself, that's a really interesting question,

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<v Speaker 1>and I think that that is potentially a dangerous one

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<v Speaker 1>until we've got a bit more clarity about the extent

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<v Speaker 1>to which these business models ought to be regulated, or

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<v Speaker 1>at least the messaging how much it ought to be

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<v Speaker 1>moderated to pure retail investors. Obviously retail investors range and sophistication.

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<v Speaker 1>For now, I think that there will be a certain

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<v Speaker 1>amount of market enforced self regulation, but I think that's

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<v Speaker 1>gonna be an interesting conversation to go on over time.

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<v Speaker 1>That that said, I think there's a third element here,

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<v Speaker 1>and that comes back to the infrastructure. I think that

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<v Speaker 1>will be another very interesting trend during the next turn

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<v Speaker 1>of the cycle here for digital assets. And then I

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<v Speaker 1>guess our last question, what should traders and companies be

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<v Speaker 1>looking out for in this current environment? You know what,

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<v Speaker 1>what would be the signs that they should be looking

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<v Speaker 1>forward to say this is the kind of the ending

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<v Speaker 1>point or the turning point, because at the moment it

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<v Speaker 1>definitely feels like we're in the doll drums of the winter.

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<v Speaker 1>I'm afraid I'm going to give a very safe answer,

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<v Speaker 1>which is if I if I knew that perhaps I

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<v Speaker 1>would be a more active crypto trade in myself, I

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<v Speaker 1>do subscribe, and I think there have been surveys out

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<v Speaker 1>there which have said that the consensus is there's more

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<v Speaker 1>downside than upside in the price at the moment. I

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<v Speaker 1>think I would agree with that. Then again, I think

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<v Speaker 1>that's more generally the case for a lot of stocks.

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<v Speaker 1>With every passing week, it looks like there's more bearishness

0:12:51.240 --> 0:12:53.719
<v Speaker 1>about where equities will be trading over the next few

0:12:53.760 --> 0:12:59.480
<v Speaker 1>months as well. So I definitely think that although people

0:12:59.559 --> 0:13:02.280
<v Speaker 1>talk about crypto is being a hedge to inflation and

0:13:02.360 --> 0:13:05.960
<v Speaker 1>non correlated with traditional assets, I think we've not seen

0:13:06.040 --> 0:13:09.240
<v Speaker 1>that over the last few quarters, and I think that

0:13:09.320 --> 0:13:11.480
<v Speaker 1>we're going to see a little bit longer of that

0:13:11.559 --> 0:13:14.320
<v Speaker 1>level of correlation. Well, thank you for joining me. Thank

0:13:14.320 --> 0:13:17.640
<v Speaker 1>you very much. You just heard from Emily Nicole, reporter

0:13:17.920 --> 0:13:20.959
<v Speaker 1>for Bloomberg Cryptom. So glad that she was able to

0:13:21.000 --> 0:13:23.880
<v Speaker 1>do that interview. You can find more of Emily's reporting

0:13:23.960 --> 0:13:26.400
<v Speaker 1>on the Bloomberg terminal on Bloomberg dot com, and you

0:13:26.480 --> 0:13:29.480
<v Speaker 1>can find her on Twitter. She's at Emily J. Nicole.

0:13:29.840 --> 0:13:33.920
<v Speaker 1>That's n I CEO L L E. On the next

0:13:33.960 --> 0:13:37.080
<v Speaker 1>episode of Bloomberg Crypto. What do rapper Jay Z and

0:13:37.120 --> 0:13:40.200
<v Speaker 1>the former CEO of Twitter, Jack Dorsey have in common?

0:13:40.840 --> 0:13:43.199
<v Speaker 1>It's not music and it's not just that they're billionaires,

0:13:43.480 --> 0:13:47.079
<v Speaker 1>it's bitcoin. And if you spend enough time around people

0:13:47.080 --> 0:13:50.439
<v Speaker 1>who believe in the arguments that crypto can transform society,

0:13:50.800 --> 0:13:54.079
<v Speaker 1>you'll eventually hear them talking about the idea of financial inclusion.

0:13:54.480 --> 0:13:56.600
<v Speaker 1>And that's exactly what jay Z has teamed up with

0:13:56.640 --> 0:14:00.360
<v Speaker 1>Dorsey to do on something that they're calling Bitcoin ac Adamy,

0:14:00.880 --> 0:14:04.280
<v Speaker 1>which they say has the goal of educating and empowering

0:14:04.280 --> 0:14:07.640
<v Speaker 1>people through financial literacy, and of course there's a focus

0:14:07.640 --> 0:14:11.600
<v Speaker 1>on bitcoin. Bloomberg Proportas, Polina Cachero and Aquila Gardner will

0:14:11.679 --> 0:14:15.040
<v Speaker 1>join me to discuss Bitcoin Academy and whether crypto is

0:14:15.080 --> 0:14:22.120
<v Speaker 1>truly the key to a more financially inclusive society. I'm

0:14:22.120 --> 0:14:25.640
<v Speaker 1>Stacy Marie Ishmael, and this is Bloomberg Crypto, a daily

0:14:25.680 --> 0:14:28.920
<v Speaker 1>podcast from Bloomberg and I Heart Radio. For more shows

0:14:28.920 --> 0:14:31.280
<v Speaker 1>from I Heart Radio, visit the I Heart Radio app,

0:14:31.520 --> 0:14:35.600
<v Speaker 1>Apple Podcasts, or wherever you get your podcasts. Email your questions,

0:14:35.640 --> 0:14:38.640
<v Speaker 1>comments or suggestions for the show to Crypto at Bloomberg

0:14:38.720 --> 0:14:41.560
<v Speaker 1>dot net and you'll find us on Twitter at Crypto.

0:14:43.320 --> 0:14:46.240
<v Speaker 1>The supervising producer of Bloomberg Crypto is Vicky very Galina,

0:14:46.480 --> 0:14:50.320
<v Speaker 1>our senior producer is Janet Babin. Our producer is Mohammed Farup.

0:14:50.600 --> 0:14:54.120
<v Speaker 1>Our associate producers Ozanam Suddiki and Moses and um Desta

0:14:54.200 --> 0:14:57.320
<v Speaker 1>wonder At is our engineer. Original music by Leo Sadrin.

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<v Speaker 1>The Safe Shot a bl