Speaker 1: Hello, and welcome to another episode of the Odd Lots Podcast.
Speaker 1: I'm Joe Wisntal and I'm Tracy Alloway. Tracy, do you
Speaker 1: remember the conversation that we recently had with Doug Seafood,
Speaker 1: the Virtue CEO. Yeah, that was a great conversation. Looks funny, Yeah, no,
Speaker 1: that was that was a really fun one. Um. Obviously,
Speaker 1: that was a discussion about high frequency trading, electronic market
Speaker 1: making and listed equities and what's striking is ultimately, I mean,
Speaker 1: these are like profitable businesses, but you know they're in
Speaker 1: that business just scraping for like pennies or fractions of appennies,
Speaker 1: like these are pretty uh efficient, you know, pretty efficient markets.
Speaker 1: It's it's hard to ring more profit out of out
Speaker 1: of them. It's definitely a volume business. You're making like
Speaker 1: a penny on the trade aid, um from a tiny
Speaker 1: tiny like difficult to see spread, right, there's so many
Speaker 1: different players and as everyone's trying to get their margin,
Speaker 1: and so you know, I've said it before, if you
Speaker 1: know US listed equities in particular and probably elsewhere too,
Speaker 1: it's like they're pretty efficient markets. Yeah, I think that's right.
Speaker 1: I mean I think, um, well, we also just had
Speaker 1: an episode on the U. S. Treasury market, and I
Speaker 1: think you'd probably say stocks and maybe US treasuries are
Speaker 1: the most liquid markets out there. Um corporate bonds not
Speaker 1: so liquid. We've talked a lot about that on the show.
Speaker 1: So one thing we haven't actually talked about, I realized
Speaker 1: is we've done a few episodes about like crypto and bitcoin,
Speaker 1: but we've never really talked about like market structure in
Speaker 1: the space as far as I know, or at least
Speaker 1: not in depth. And my impression is even though the
Speaker 1: sort of like industry of this ecosystem that's been built
Speaker 1: around it several years old now, I think it's safe
Speaker 1: to say completely still on the other side of the
Speaker 1: efficiency spectrum from the space that like the for twos
Speaker 1: of the world are the citadel securities of the world
Speaker 1: are playing it. Yeah, I think that's a fair assessment.
Speaker 1: I mean, for one thing, you have just tons of
Speaker 1: platforms and the market is completely fragmented, and then you
Speaker 1: also have these big regional variations where like the price
Speaker 1: of bitcoin can be one thing in Korea and then
Speaker 1: a different thing on a platform in the States. There
Speaker 1: are a lot of arbitrage opportunities, I think, but Also,
Speaker 1: I can't imagine what it's like trading in that environment,
Speaker 1: and I think you probably have to think about costs
Speaker 1: and platform risk and other things a lot more than
Speaker 1: you would for certainly for equities. Right, So you have
Speaker 1: these sort of like massive different you know, all these
Speaker 1: different platforms, huge spreads potentially at times between what an
Speaker 1: asset trades at one place elsewhere, different regulatory regimes, different currencies,
Speaker 1: different banking systems. In theory though, those costs create big
Speaker 1: opportunities for savvy traders. Yeah, and we've heard some stories
Speaker 1: about people making millions um, possibly billions, just by arbitraging
Speaker 1: like a simple regional spread. Yeah. So today we're going
Speaker 1: to talk about crypto market structure with someone who I
Speaker 1: think is basically the perfect guest to discuss it because
Speaker 1: he previously was in the world closer to the sort
Speaker 1: of market making uh world that we've talked about with Doug.
Speaker 1: We're gonna be speaking with Sam Bankman Freed. He is
Speaker 1: the CEO and co founder of the crypto exchange f
Speaker 1: t X. He's also the CEO and co founder of
Speaker 1: the crypto hedge fund alimt Research, and previously to that,
Speaker 1: he was in the in the market making business. I
Speaker 1: think trading E t F at James Street, which is
Speaker 1: one of these trading shops that compete in that space
Speaker 1: of of you know, high tech market making for regulated
Speaker 1: listed assets. So has really seen both both ends of
Speaker 1: the spectrum, the perfect guest to talk about crypto market
Speaker 1: structure with us. Sam, thank you so much for joining us. Yeah,
Speaker 1: thanks for having me so, Sam, I've you know, read
Speaker 1: a little bit about your work. I take it you
Speaker 1: got you know, not this boom, but the last sort
Speaker 1: of like crazy cycle for cryptov I think is when
Speaker 1: you sort of made that switch over. I think you're
Speaker 1: at Jane Street at the time. Talk to us first
Speaker 1: about sort of like your background. How did you first
Speaker 1: get into finance and how did you find your way
Speaker 1: into the world of before we even get into crypto
Speaker 1: and make that John jump the world of the world
Speaker 1: of trading. Yeah, I it's interesting, you know, sorry for
Speaker 1: in retrospect, looking back on it, it seems like so
Speaker 1: weird it in contingent how some of these things happened,
Speaker 1: but also like kind of inevitable isn't quite the right word,
Speaker 1: but like you know, it worked out like kind of
Speaker 1: remarkably neatly given that, but you know, the context is,
Speaker 1: so I went to have I t is, you know,
Speaker 1: server math nerd, albeit a math nerd who was sort
Speaker 1: of coming, you know, into the middle of their college experience,
Speaker 1: having kind of reckoned finally with the fact that like
Speaker 1: I wasn't going to become a math professor. And I mean,
Speaker 1: they're probably pretty compelling arguments that that wasn't gonna be true. Um,
Speaker 1: but realizing that I really like doing academic research was
Speaker 1: maybe a little bit of a you know, a hole
Speaker 1: in the plan. So sol it's sort of like, didn't
Speaker 1: didn't really know it's gonna do with my life. The
Speaker 1: one thing that I sort of know is that I
Speaker 1: wanted to find out how I could have the most
Speaker 1: positive impact on the world. Um. I've been into utilitarianism
Speaker 1: for a very long time and and recently started getting
Speaker 1: into effective alters, which is basically this movement of like,
Speaker 1: you know, if you're trying to figure out how to
Speaker 1: impact the world, like try and quantify things, trying try
Speaker 1: and figure out what the most efficient way of doing
Speaker 1: that is, you know, what the ways that you know
Speaker 1: gives you the most bank for the book, and was
Speaker 1: kind of playing around with a lot of possible careers
Speaker 1: that were kind of all over the place. I had
Speaker 1: some conversations to people, and basically, so, you know, you
Speaker 1: go to work for for one of these charities or
Speaker 1: organizations that that you think are good or you could
Speaker 1: kind of donate to them, and you know, frankly, given
Speaker 1: like your strengths and weaknesses, you know, maybe maybe you're
Speaker 1: gonna be able to donate more to them than you'd
Speaker 1: be able to contribute working directly for them. Um and
Speaker 1: certain I thought about that. It seems like a pretty
Speaker 1: plausible argument, and so I sort of started looking into
Speaker 1: for the first time, well, okay, like if that's my goal,
Speaker 1: if my goal to figure out or at least maybe
Speaker 1: kind of like short term goal, how how can I
Speaker 1: make as much money and donate it as possible? Like
Speaker 1: where would that lead me? And sort of one of
Speaker 1: the obvious, you know, obvious things to look at was, well,
Speaker 1: how about finance. You know, I kind of heard that's
Speaker 1: what happens there. I didn't really know a whole lot
Speaker 1: else about it, but like, frankly, really was just like
Speaker 1: I know, it's sort of like in my junior didn't
Speaker 1: know what to do, and like just like applied for
Speaker 1: some internships. You know, I don't know, some friends headered
Speaker 1: in into James Street. They said, like, you know a
Speaker 1: lot of really good things. So it's just like, you know,
Speaker 1: sent in her resume, you know, really low conviction, and
Speaker 1: then she's like interview there and really liked the interviews
Speaker 1: and she found them really engaging, and then sort of
Speaker 1: one thing led to another. Interned at James Street Capital,
Speaker 1: you know after my junior year, really liked it and
Speaker 1: and then went back full time when I graduated. So
Speaker 1: what were you doing at Jane Street exactly? And I guess, um,
Speaker 1: what was the opportunity that you spotted in crypto because
Speaker 1: you know, it took a while for a lot of
Speaker 1: financed people to jump into that market, but um, you did,
Speaker 1: did it fairly early on. So what did you see
Speaker 1: and how did your Jane Street experience, um in form
Speaker 1: that decision? Yeah, I mean I think a Jeans Street
Speaker 1: really the goal was buying low and selling high. I know, um,
Speaker 1: but but but you know, I think that there is
Speaker 1: sort of like something there of like people think of
Speaker 1: like to use these you know, quant prompt firms on
Speaker 1: Wall Street and either they think through this old style
Speaker 1: you know, gigantic men in suits talking really loud, being
Speaker 1: grabbing shairs of stock from each other on you know,
Speaker 1: the stock exchange floor, or they think of sort of
Speaker 1: a bunch of nerds with like, you know, equations you
Speaker 1: could not fathom, you know, I mean, Jeezu is much
Speaker 1: more on the second end than the first end. You know,
Speaker 1: we were a bunch of a bunch of nerds basically
Speaker 1: trading trading stocks. But you know the truth is that
Speaker 1: like a lot of it is not sort of like
Speaker 1: this incomprehensible girbledy book. A lot of it is like
Speaker 1: really straightforward simple trade ideas, just don really carefully with
Speaker 1: a lot of supporting you know, evidence and ringing everything
Speaker 1: you can out of the trade, optimizing it as much
Speaker 1: as you can, thinking hard about it. You know. So
Speaker 1: I was treading internationally ETFs there um, which are you know,
Speaker 1: ETFs are funds which contain other other equities um, and
Speaker 1: the funds themselves trade on exchanges, and there's this classic
Speaker 1: arbitrage of well, you can sort of price the e
Speaker 1: t F based on you know, the sum of all
Speaker 1: the stocks that it don't you know, and and you
Speaker 1: can sort of you know, great and rogeem back and
Speaker 1: forth between them. And you know, if the e t
Speaker 1: F is trading below the stocks, you can buy the
Speaker 1: et F and sell the stocks. And I was training
Speaker 1: both the stock team buy the stocks, you know, merge
Speaker 1: them into the e t F and sell the e
Speaker 1: t F and do an arbitrage. So I was trying
Speaker 1: internationally ts, which are those types of products, but where
Speaker 1: the stocks don't trade on you know, on on NISY
Speaker 1: where they trade on foreign stock exchanges on you know
Speaker 1: Green or or you know Indian or or you know
Speaker 1: the UK stock exchanges. And it's basically the same thing,
Speaker 1: except incredibly messy and complicated and intricate because get all
Speaker 1: these nice properties that fall out when you're training U
Speaker 1: S ETFs that you don't with foreign ones and just
Speaker 1: want to start. Is the et F itself is trading
Speaker 1: you know what PM New York time five days a week.
Speaker 1: You know, you take a n e TF on Korean stocks, right,
Speaker 1: and there's Korean stocks are trading, you know, I don't
Speaker 1: know whatever it is, like a A M two the
Speaker 1: three PM or whatever Korean time five days a weeken,
Speaker 1: those don't really even overlap. So whenever you're training d TF, right,
Speaker 1: it's it's it's this fund of stocks that haven't traded
Speaker 1: for twelve hours, and you can't just say, well, through
Speaker 1: the arbitrage stocks aren't trading, no price for them, And
Speaker 1: so that sort of opens this gigantic set you know,
Speaker 1: can of worms of like how do you think about
Speaker 1: these e t s? How to price them? And how
Speaker 1: do you understand exactly what they hold? Uh? And how
Speaker 1: do you understand the liquidity of the underlying stocks, how
Speaker 1: do you understand the fund itself the mechanisms behind it,
Speaker 1: and basically just be Hans is sort of like you know,
Speaker 1: somewhat intricate modeling problem and and I and that does
Speaker 1: sort of you know, what what we did was basically
Speaker 1: provided liquidity in those international ETF and and particularly kind
Speaker 1: of specialized in providing liquidity when it wasn't trivial, you know,
Speaker 1: not doing the single easiest trade because anyone can do
Speaker 1: that and that's super crowded, but trying to do even
Speaker 1: just the second easiest trade through the hardest trade, but
Speaker 1: being you know, trying to be out there twenty you know,
Speaker 1: not going for something. But whenever US markets broken, have
Speaker 1: as much liquidity as we could in those products given
Speaker 1: the constraints and the uncertainty of you know, what they represented,
Speaker 1: And yeah, that's that's sort of like what that desk
Speaker 1: and you know, which is the death stares on, you know,
Speaker 1: specialized in. So when you say that like the second
Speaker 1: easiest trade, what do you what exactly do you mean
Speaker 1: by that? And I'm glad you know it's funny. I've
Speaker 1: actually wondered about this exact question before, Like, Okay, a
Speaker 1: Korean ETF is trading during American hours when the underlying
Speaker 1: shares have stopped trading, So like what is this based on,
Speaker 1: you know, price relationships? Like you know, there's probably like
Speaker 1: some historical correlation between what the SMP does and what
Speaker 1: the COSPY does the following day, and sort of like
Speaker 1: imputing what those stocks would theoretically be doing during that
Speaker 1: time based on what the trading of other equities are happening.
Speaker 1: Like talk about that a little bit more. Yeah, totally.
Speaker 1: And I think that you're you're you're you're talking about
Speaker 1: really good things there. And I think that's sort of
Speaker 1: another takeaway there is like how do you start It's
Speaker 1: not by you know, waving magic wand and using native words.
Speaker 1: You start with literally the most sort of like intuitive,
Speaker 1: straightforward things you can think of. You know, it's like
Speaker 1: if you kind of think hard about this and have
Speaker 1: a lot of context, and then she like, I don't know,
Speaker 1: maybe I tried it this way you want. Honestly, that's
Speaker 1: probably a good start. You know, you're probably gonna do
Speaker 1: a lot better than someone who doesn't do that thing.
Speaker 1: It doesn't do anything at all, But you know whatever,
Speaker 1: twenty people can do that who have the setup and
Speaker 1: the liquidity and the capital and everything like that, and
Speaker 1: so and you have to do better. You know, that's okay,
Speaker 1: you know you've you've done better than than just no
Speaker 1: no modeling. But but there's there's enormous amounts of extensions
Speaker 1: that you can build on that. And it's all about
Speaker 1: acknowledging you're never going to be perfect, but trying to
Speaker 1: get you know, as good as you can. So, can
Speaker 1: you talk a little bit more about the crypto transition,
Speaker 1: Like what was the opportunity that you spotted just to
Speaker 1: circle back and what was um, I guess the shared
Speaker 1: skill set that you thought could be applied to the
Speaker 1: crypto market. You know, I love King Street and and
Speaker 1: by the way, I really really liked it there maybe
Speaker 1: the most notable thing about it was how much and
Speaker 1: how much I liked it, how much a lot of
Speaker 1: the people they're liked it. It was just a really
Speaker 1: good place, and it probably still is in just a
Speaker 1: number of different dimensions. And we just look at things like,
Speaker 1: you know, like employee satisfaction compared to competitors. You know,
Speaker 1: my sense is that's just off the charts. And again,
Speaker 1: you in in many cases just for kind of straightforward reason,
Speaker 1: it's you know, it's just like it does a good
Speaker 1: job of treating its employees well, giving them responsibility when
Speaker 1: it makes sense, and you know, guidance when they need it,
Speaker 1: and and you know all that. So so anyway, you know,
Speaker 1: I really liked it there, but after after about three
Speaker 1: and a half years, basically just felt like, um, like
Speaker 1: it was time to try my own thing. And I
Speaker 1: think the core of that came from just thinking about,
Speaker 1: you know, going back to to why I start in
Speaker 1: the first place, which was, how can you figure out
Speaker 1: how to have you know, as much positive impact as
Speaker 1: I can on the world, and you know, as much
Speaker 1: as more than just like a good amount. And so
Speaker 1: I really started thinking very clear about like, all right,
Speaker 1: is this the best thing I can be doing. And
Speaker 1: basically it came away feeling like I have a lot
Speaker 1: of things I want to try it with my life.
Speaker 1: I don't know what's what's going to end up being
Speaker 1: the right thing, but at least one of them might
Speaker 1: go extremely well and maybe not. There's there's a lot
Speaker 1: of risk in that, um, but so be it. And
Speaker 1: so you know, left and sort of like started trying
Speaker 1: things out. Um. And one of the first things that
Speaker 1: that that I looked at was like, you know, all right,
Speaker 1: like it's not the most imaginative thing ever, but have
Speaker 1: a crypto. And this was late It's when Crypto was
Speaker 1: really going through that that first gigantic public boom, and
Speaker 1: you know, this was the time when when I had
Speaker 1: sort of the mass retail appeal more so than ever
Speaker 1: before or or after. You know, to this point where
Speaker 1: you passed two people on the street and you see
Speaker 1: them talking with each other and you're like, they're probably
Speaker 1: talking about things. You know, She's is everywhere right, and
Speaker 1: it wasn't clear why she's completely captured the public's attention
Speaker 1: and imagination. In seventeen I mean, you know, the North
Speaker 1: Bricing Creas obviously was like a large part of that,
Speaker 1: it had a lot of the hallmarks of something that
Speaker 1: might be, you know, really an efficient system with you know,
Speaker 1: a big need for liquidity, which is basically gigantic demand
Speaker 1: all of a sudden growing really rapidly, you know, want
Speaker 1: the volume, lots of retail users, and not a lot
Speaker 1: of time to build up institutions, not a lot of
Speaker 1: time to build up liquidity, not a lot of time
Speaker 1: to build up systems that worked seamlessly. You know, it
Speaker 1: sort of felt like the thing that was decently likely
Speaker 1: to have very large volume and price discrepancies and just
Speaker 1: like not not really an a fliquidy prior to priding
Speaker 1: to that. So like, can you give a little comparison
Speaker 1: between a seventeen what you were seeing in trading internationally
Speaker 1: t F versus the spreads that you were seeing crypto
Speaker 1: and then also like, you know how twenty seventeen spreads
Speaker 1: and crypto compared to spreads and crypto. It's obviously whatever,
Speaker 1: there's there's you know, always whatever. Different situations have different spreads,
Speaker 1: blah blah blah. But but okay, fine ball parking it.
Speaker 1: I think you look at sort of like that, the
Speaker 1: like lowest margin trades you find in finance that the
Speaker 1: really purest h f T trades and the most competitive
Speaker 1: ones what to spread on those. So I've never really
Speaker 1: done pure h f T, but my sense is that
Speaker 1: the answer to this is, you know, you're talking about
Speaker 1: like a tenth of a penny to a hundredth of
Speaker 1: a penny or maybe even a thousandth of a penny,
Speaker 1: where a penny is is like about a hundredth of
Speaker 1: a percent on on the average stock, and so you
Speaker 1: know you're talking about like something even getting to like
Speaker 1: the one one million of the price level presents it's
Speaker 1: really really slim margins, right, And it's the kind of
Speaker 1: things that like seem like how can you make any
Speaker 1: real amount of money on that? Well, if you create
Speaker 1: you know, five percent of all volume of everything in
Speaker 1: the world every day, that adds up. Then you get
Speaker 1: to sort of like scale like quant trades with you know,
Speaker 1: what I was doing sort of being you know, an
Speaker 1: example where the right unit to talk about it and
Speaker 1: it's like a basis point and uh, and that that
Speaker 1: the hundredth of a percent. That's not that everything had
Speaker 1: exactly that amount of margin, but that was that was
Speaker 1: sort of the order of magnitude that like the industry
Speaker 1: talking there, sort of talking and like, are you making
Speaker 1: like one hundredth of a percent? Are you making half
Speaker 1: a hundreds of a percentery making like three percent? And
Speaker 1: you know, and in a hundreds of percent, you can
Speaker 1: think of it approximately is something like a penny on
Speaker 1: the average stone. So okay, now that's sort of like
Speaker 1: roughly the sort of margins that you're thinking about, right,
Speaker 1: And you know, occasionally you see things a bit bigger.
Speaker 1: Occasionally you'd be trying to scrape out anything you could,
Speaker 1: but but whatever that that's sort of like the level
Speaker 1: at which things at which competition tended to get. And
Speaker 1: then you get take Crypto, and it just had things
Speaker 1: I've never seen before or after, things that were just
Speaker 1: completely bananas, and I'll give you They're all over the place.
Speaker 1: It was sort of like a whole industry filled with
Speaker 1: implausibly big spreads. But to give you the biggest that
Speaker 1: I that I've ever seen, basically and biggest in terms
Speaker 1: of obviously, you know, you can make ten percent on
Speaker 1: a trade if you don't mind the total size available
Speaker 1: being seven dollars ever, right, and that's like sort of
Speaker 1: not interesting, right, like bias stick of gum and sell
Speaker 1: if someone kind of wants to stick a gum right now.
Speaker 1: But the real thing is finding traits are really good
Speaker 1: and really scalable. And so from that perspective for late
Speaker 1: early there's this really highly publicized thread called it and
Speaker 1: it's often called the Kimsey premium um And what was
Speaker 1: it was the price of bitcoins on creating scanatings. And
Speaker 1: at its heart there is huge man for crypto all
Speaker 1: over the world, but it wasn't equal everywhere, and there's
Speaker 1: even huger demand in a number of countries including Korea,
Speaker 1: then in in in many others to such a massive
Speaker 1: net bling of crypto from Koream users. And the koream
Speaker 1: one is also restricted currency. It means you can't just
Speaker 1: freely sell it. You can't freely get it out of
Speaker 1: the country, trade it for USD. You and all these
Speaker 1: Crean citizens trying to sell their Korean wand for bitcoins,
Speaker 1: and um, no one who could do much with the
Speaker 1: cream one. You know, it's not like other people just
Speaker 1: like selling bitcoins and deal with the current, get stuck
Speaker 1: with it. That spread got up to like at the peak,
Speaker 1: which say that pre and big wins started trading at
Speaker 1: you know, fifteen dollars, while every else in the world
Speaker 1: it was ten dollars. So that is a completely insane spread.
Speaker 1: But and this was the big catch. You get back
Speaker 1: to this restricting currency thing where sure you could turn
Speaker 1: you know, ten U S dollars into fifteen dollars worth
Speaker 1: of grand wand doing this, but then it's it's stuck.
Speaker 1: You're not regular clearly allowed to just really turn that
Speaker 1: grand wand back into US dollars. And so you know,
Speaker 1: if you really wanted to buy a lot of consumer
Speaker 1: goods in Korea, you could do it, but you can't
Speaker 1: sort of easily loop that arbitrage through. You get stuck
Speaker 1: at one end. And a lot of people tried to
Speaker 1: do this trade. Many found a way to do it
Speaker 1: for small size, very very hard to do it for
Speaker 1: big size, even though there are billions of dollars a
Speaker 1: day volume trading in it, because you couldn't all float
Speaker 1: the grand wand easily um for for non crypto and
Speaker 1: and so does serve a complication to it. And no
Speaker 1: one is known to practice for massive size. You know,
Speaker 1: there are a lot of people who are known to
Speaker 1: have practiced for small size. No one is known to
Speaker 1: have really been able to maximize the hell out of
Speaker 1: that one because of the regulatory concerns. And and this
Speaker 1: was sort of like the interesting thing down the road.
Speaker 1: There are worth these Japanese exchanges, and on the Japanese exchanges,
Speaker 1: like on the Krea exchanges, they're huge inclose, huge neckline.
Speaker 1: Crypto is praying at a really big premium. But the
Speaker 1: Japanese yen, unlike the Korean wand is not a restricted currency.
Speaker 1: It's a free currency. You can you can sell it,
Speaker 1: you can trade it, you can do whatever you want
Speaker 1: with it. Um and that it wasn't trading it quite
Speaker 1: the same premium, but it was trading at a fifteen
Speaker 1: percent premium or so at the peak instead of fifty okay, fifteen,
Speaker 1: it's not fifty, it's a lot. And there is you know,
Speaker 1: billion dollars of volume trading in in in big point
Speaker 1: against Japan's yeen each day, and you could actually do
Speaker 1: that trade. You can actually buy bitcoin for ten thou
Speaker 1: send it to Japanese exchange, send it, sell up for eleventh.
Speaker 1: That was in five hundred worth of Japanese yen, and
Speaker 1: then sort of you know, turned that end back into dollars,
Speaker 1: send it back to the States and and cycle anew um.
Speaker 1: It took about a day to do that trade, um,
Speaker 1: given the wire transfers involved, but it was doable, and
Speaker 1: you could scale it, making literally ten percent per weekday,
Speaker 1: which is just absolutely insane, right. That is that that's
Speaker 1: a thousand times what you make on you know, traditional trade.
Speaker 1: But you're able to do it for like hundreds of
Speaker 1: millions of dollars of volume per day. There was you
Speaker 1: could actually scale it. And so you can start doing
Speaker 1: that map. And I'm sure some you know you may
Speaker 1: be doing that as I speak in multiplying those numbers,
Speaker 1: and yeah, that's the right map. I don't know what
Speaker 1: to tell you. And son, you can ask like, how
Speaker 1: could that possibly be? Right? How could you possibly see
Speaker 1: a trade that inefficient? Why wouldn't that get competed away? Right?
Speaker 1: And the answer is, well, think about what you actually
Speaker 1: realistically need to do. I told you could do this trade.
Speaker 1: I can tell you how what you need to do
Speaker 1: to do it? What what goes into this? Right? What's
Speaker 1: the recipe? And well, okay, first of all, step one
Speaker 1: is you start out with a US bank account and
Speaker 1: you wire money to point base and then your bank
Speaker 1: acount gets shut down because JP Morgan Chase doesn't want
Speaker 1: to deal with Krypto. Um. Okay, So now you're back
Speaker 1: to the drying board, right. And as you try again
Speaker 1: and somehow you solve that step I don't know how.
Speaker 1: You send it to point Base and then you realize
Speaker 1: you have a thousand dollars a day withdrawal from Point
Speaker 1: Base and you just sent your entire hedge funds capital
Speaker 1: there and it's gonna be thirty decades before you can
Speaker 1: get any money out, and their support ticket to is
Speaker 1: three months long. So okay, So now you solve that problem, right,
Speaker 1: You buy your bitcoins, you send them to a Japanese exchange,
Speaker 1: and you realize that in order to get verified there
Speaker 1: you need to be Japanese, but you're not Japanese. In fact,
Speaker 1: maybe you couldn't be Japanese to get some of the
Speaker 1: other things you needed. So okay, now you have to
Speaker 1: somehow beat Japanese and not Japanese. And you solve that,
Speaker 1: and then you try and send it to the Oh god,
Speaker 1: now you realize you need a Japanese bank account send
Speaker 1: it to and needs to be a domestic bank account
Speaker 1: in Japan. Um. And you need to again be a
Speaker 1: Japanese resident to get one of those. So as you
Speaker 1: get a bank account, and then you realize they're not
Speaker 1: They don't like crypto either, so you need to solve that.
Speaker 1: And then you finally get all these pieces and you
Speaker 1: go to them you're like, yes, I would like to
Speaker 1: do a wire transfer please, Yes, it would be you whever,
Speaker 1: like fifteen million US dollars to this random bank account
Speaker 1: in America from this random bank account in Japan, different owners,
Speaker 1: same wire transferated yesterday. Yes, that's correct. Yes, it's always
Speaker 1: in the same direction. I acknowledge that. Yes, it's international.
Speaker 1: And there's sort of like this is literally the sketches
Speaker 1: that you can possibly do, like like think about like
Speaker 1: every day this random guy walks in sends it to
Speaker 1: an seemingly unrelated bank account across the world, always in
Speaker 1: the same direction, always changing currencies, right, and sort of
Speaker 1: like that no business has that right there, like it's
Speaker 1: obviously just money laundering, and like no, it's arbitrage. You're
Speaker 1: talking like it's color at Japanese bank, you know, just
Speaker 1: be Japanese, right, So okay, Son, you're trying to explain,
Speaker 1: like no, you buy it this point, you have to
Speaker 1: transfer it on the block chain, and they're like, sorry
Speaker 1: you you said you trade stocks but in Japanese, so okay,
Speaker 1: so whatever. So you solve all these problems, right, and
Speaker 1: then you realize that you have two thousand dollars to
Speaker 1: your name, and so you're gonna be making two hundred
Speaker 1: dollars a day and that's pretty cool, but it wasn't
Speaker 1: the fortune you thought. And now you're trying to raise
Speaker 1: two hundred million dollars of capital, and you know this
Speaker 1: trade won't last out long. So you've got about a
Speaker 1: week to build a two million dollar hedge fund that's
Speaker 1: doing random international cryptocurrency trades in twenty seventeen. And everyone's like, yes,
Speaker 1: obviously will not find your hedge fund. That sounds incredibly
Speaker 1: risky um, And you're like, no, it's arbitrage, don't worry.
Speaker 1: And they're like, sure, I'm hot ten percent per day returns. Yeah,
Speaker 1: I've heard that one before, but okay, fine. Somehow you
Speaker 1: then get your million dollars in capital, and now now
Speaker 1: what like, now do you make twenty million dollars a day?
Speaker 1: The answer is yes, you do. So I mean you
Speaker 1: just laid out the very fragmented nature of the market
Speaker 1: with the different platforms and also with its interaction with
Speaker 1: the traditional banking system. You laid that out really well,
Speaker 1: but I I have a slightly weird question, which is
Speaker 1: about like the nature of crypto trading itself and how
Speaker 1: it maybe differs to stocks or bonds or more traditional
Speaker 1: financial assets. So, I mean, it seems like when bitcoin
Speaker 1: really takes off, it's usually because the price is going
Speaker 1: up quite a lot, and people are talking a lot
Speaker 1: about holding and waiting for it to go up even
Speaker 1: more So I'm curious, like, how do you reconcile the
Speaker 1: hoodal or huddle concept with having a liquid two way market,
Speaker 1: Like how do you get that activity going? It's really
Speaker 1: interesting and and there's a lot of really weird dynamic
Speaker 1: and cryptom You've hit on one of them, which is
Speaker 1: how incredibly I mean, there are lots of ways to
Speaker 1: phrase it, but one of them is, like you can
Speaker 1: phrase it as how incredibly bullish the crypto ecosystem is.
Speaker 1: On the crypto ecosystem, everyone's bullished on the thing they
Speaker 1: believe in, the think they're spending their top time on. Generally,
Speaker 1: but not to this extent. This is sort of like
Speaker 1: much more so than you find with with stuff. And
Speaker 1: then also like how about south side liquidity? Right? If
Speaker 1: people want to buy bitcoins and no one who holds
Speaker 1: bitcoins is willing to sell their bitcoins, who are you
Speaker 1: buying it from? And and you know, both are sort
Speaker 1: of like a how do you ever find people buy
Speaker 1: it from? But also like a day to day where
Speaker 1: where the offers coming from? Whereas where the market makers?
Speaker 1: If all the bitcoins a ruined by people who are
Speaker 1: just toddling and not you know, then I don't know
Speaker 1: you you actually if you trace that down and start
Speaker 1: to uncover some interesting things about crypto and the ecosystem.
Speaker 1: So one thing is that everyone is bullish inside of
Speaker 1: crypto on crypto and actually massive impact on the ecosystem
Speaker 1: because any way that people can find to get longer,
Speaker 1: they will. And so you see these weird things where
Speaker 1: features are always trading it not always, but on average
Speaker 1: training at big premiums in crypto where people are willing
Speaker 1: to pay a year to borrow dollars in crypto, um
Speaker 1: generally chooses to buy more crypto, and anything else that
Speaker 1: serves a synthetic interest rate or forward type product reflecting
Speaker 1: will generally reflect this, you know, forward looking premium. So
Speaker 1: it's that's sort of one thing, and that plays into
Speaker 1: these concepts of yield quite strongly. But another thing is,
Speaker 1: as you said, like a lot of the real supply
Speaker 1: here is not circulating. It's not really circulating, right, It's
Speaker 1: it's it's sort of some guy who's just not going
Speaker 1: to sell. And so you look at crypto and the
Speaker 1: the trading volume divide by market cap is actually quite
Speaker 1: high compared to other assets, and the market cap is
Speaker 1: also even lower than it looks like. It's even more
Speaker 1: extreme than that, because a pretty large number of holders
Speaker 1: of crypto are just not trading it. They're not selling it.
Speaker 1: They're they're going to keep it no matter why. And
Speaker 1: so you actually have this really large amount of volume
Speaker 1: traded relative to the effective liquidity in the products on
Speaker 1: both by side and sell side, and you get these
Speaker 1: really giant market moves. Firstly, as as a product of that,
Speaker 1: there's a video of you online that's really interesting where
Speaker 1: it shows you acquiring a bunch of bitcoin that someone
Speaker 1: had dumped on the exchange binance, and you like walk
Speaker 1: through this trade where like, I guess someone made a
Speaker 1: terrible trade or they were not very sophisticated did, and
Speaker 1: they sold a bunch of bitcoin on that exchange and
Speaker 1: it depressed the price, and you recognize this. I thought
Speaker 1: it was an interesting video. One question I have is,
Speaker 1: so a how much um more efficient does the market
Speaker 1: these days than it was when you first started trading?
Speaker 1: But be there's a part where you talk about um.
Speaker 1: Part of the slowness that you had in scooping up
Speaker 1: some of those bitcoins that were just dumped was you
Speaker 1: were waiting for your tether to arrive at finance and uh,
Speaker 1: that took a little while because you didn't have cash
Speaker 1: on hand at that exchange. How much also, you know,
Speaker 1: talk about that trade, but also like how much of
Speaker 1: the premium that you can collect has to do with
Speaker 1: to put it better better ways, like sort of like
Speaker 1: counterparty risk. And I'm not I'm not one of you know,
Speaker 1: sending aside all the sort of conspiracy theories about tether.
Speaker 1: You're dealing with like a lot of sort of like
Speaker 1: either unregulated or underregulated entities that are not at all
Speaker 1: like say the exchanges that a Korean et f for
Speaker 1: a Korean stock is. So you have to rely on
Speaker 1: these entities in order to complete the trade. Talk to
Speaker 1: us about those calculations and how they play into both
Speaker 1: the risks but also the profit opportunities. Absolutely, and I
Speaker 1: think what I would say is basically um that that
Speaker 1: I think those things do play huge, huge roles in
Speaker 1: the ecosystem for the reasons you outline, which are you
Speaker 1: see these big premiums sometimes open up, and the reason
Speaker 1: is like, you know, how can there be like a
Speaker 1: three arbitrage for a hundred million dollars of size all
Speaker 1: of a sudden pop up? Right that seems like a lot.
Speaker 1: And part of the reason, part of the part of
Speaker 1: the answer there is roughly, you know, in order to
Speaker 1: clothes that you need to have a hundred million dollars
Speaker 1: of tether sitting on bindance. How many people are doing
Speaker 1: that right now? You know? It's like and and you
Speaker 1: there's no cross marketing between exchanges, there's no central clearing
Speaker 1: firms or brokers, and so you can it's not just
Speaker 1: you don't even just need a hundred million dollars in crypto,
Speaker 1: a hundred million dollars in every single exchange if you're
Speaker 1: gonna wait for you know, any one of them to
Speaker 1: go crazy. And so it's really capital intensive. And also
Speaker 1: you you have to worry about counterparty risk. And the thing,
Speaker 1: big thing I'd say about counterparty risk is it's not
Speaker 1: so much that, like with all good trades, they're actually
Speaker 1: not nearly as good to say, look because secretly you're
Speaker 1: being paid three percent in order to assume two and
Speaker 1: a half percent worth of counterparty risk. Rather, what's going
Speaker 1: on is, if you take a really outside point of view,
Speaker 1: right at a point of a sort of relatively uninformed
Speaker 1: one of this space, you're sort of like, look, there's
Speaker 1: counterparty risk all over the place. I don't know what
Speaker 1: sketchy and what's not. Like you sort of like using
Speaker 1: your instincts, but all of these trades have these weird
Speaker 1: forms of counterparty risk, and you have just sort of, like,
Speaker 1: you know, from a low information perspective, doing the math
Speaker 1: and decaying that it is all counterparty risks, but there's
Speaker 1: no edge after that. From a high information perspective, if
Speaker 1: you really know this space deeply, then it's a bit
Speaker 1: different because then you can sort of feel like, Okay,
Speaker 1: but I actually know that in this particular case, the
Speaker 1: county party risk is very close to the room, and
Speaker 1: the edge is still quite high, and other people aren't
Speaker 1: doing it because they can't distinguish this from the cases
Speaker 1: where the counterparty risk is real. And so I think
Speaker 1: really the answer to that is the specter of counterparty
Speaker 1: risk holds a lot of liquidity out of the ecosystem um,
Speaker 1: and then there's a lot of money to be made
Speaker 1: to be made if you can really figure out and
Speaker 1: pinpoint when there isn't isn't a ton of edge and
Speaker 1: whether it isn't isn't a ton of actual counterparty risk? Um.
Speaker 1: I want to go back to that liquidity point, UM,
Speaker 1: because I think you yourself have been described as one
Speaker 1: of the biggest whales in crypto. I think someone called
Speaker 1: you like the moby Dick of crypto whales. And I
Speaker 1: saw one estimate that you you can move like ten
Speaker 1: of the market when you make a trade. Um. How
Speaker 1: does well first of all, how big do you think
Speaker 1: you are? Um? And how that happens? How does that
Speaker 1: liquidity risk affect your trading strategy? Like how do you
Speaker 1: offset that or how do you manage around it? Yeah? So,
Speaker 1: I you know, the first thing that I'll say, I mean,
Speaker 1: you know first things that I you know, I was
Speaker 1: I was a full time trader a few years ago
Speaker 1: in crypto, building out Alameda. You know, I'm now spending
Speaker 1: you know, my time focusing on building out fts the
Speaker 1: crypto exchange I founded, um so I'm I'm you know,
Speaker 1: have been um a lot less involved in that, but
Speaker 1: but recently. But the other thing is that you know,
Speaker 1: Alaminus core core model is acting as sort of a
Speaker 1: liquidy fighter, an arbitrage firm. And what that means is
Speaker 1: that like if if you trade large volume, the core
Speaker 1: trade and this didn't say every trade, but the average
Speaker 1: core trade is sort of just adulta neutral hedged position.
Speaker 1: You know, it's it's whatever it is, you know, selling
Speaker 1: a future against buying spot or something like that, something
Speaker 1: where you're keeping your book hedged in neutral uh and
Speaker 1: and so so that's sort of one of the big
Speaker 1: things there, which is like, I you know, if the
Speaker 1: risk is in sometimes a lot lower if you don't
Speaker 1: have a net position on right, But that's not trivially true,
Speaker 1: and in particular here, you know, the thing that I
Speaker 1: would add to that is roughly like, you know, well,
Speaker 1: the nature of crypto that's sort of like cross exchange
Speaker 1: and not the exchanges don't talk to each other, adds
Speaker 1: this interesting new twist of risk to it, which is
Speaker 1: you have to manage your position on each platform, on
Speaker 1: each wallet, and you see the global view, but no
Speaker 1: one else does of your book, right, and so you
Speaker 1: have to deal with exchange specific liquidity risk um and
Speaker 1: you have to worry about cascading liquidations on a particular product,
Speaker 1: blowing that one out and not anything else. And you
Speaker 1: have to make sure that your book and your cackle
Speaker 1: in your positions can withstand those moves. And it's one
Speaker 1: of these, like you know, you have to make sure
Speaker 1: that that you know you can hold your position for
Speaker 1: you know, longer than the market can stay crazy, so
Speaker 1: to speak. If you're doing an arbitrage and eventually right
Speaker 1: you can just lock in your gains and and there's
Speaker 1: nothing anyone can say about that as long as you
Speaker 1: can make it to that point to expery or whatever.
Speaker 1: But you can sometimes seem gigantic dislocations and sort of
Speaker 1: the biggest one the industry scene was on you know,
Speaker 1: the probably the bloodiest day in any market, maybe in
Speaker 1: the history of anything, which is market twelfth of last year,
Speaker 1: when all global markets burned free fall, you know, COVID
Speaker 1: was causing and just panic and equities were down or whatever.
Speaker 1: Crypto was down like SI that day. It was a
Speaker 1: massive move. You know, you've gone from like nine thousand
Speaker 1: to four thousand. You know. One way to think about
Speaker 1: what happened was that it went from nine thousand to
Speaker 1: sixty or something like that. And then it triggered two
Speaker 1: billion dollars of liquidations of people who have leveraged long
Speaker 1: positions in the futures products that were now close to
Speaker 1: going under water. And so the exchanges began closing down
Speaker 1: the customers because they put on margin positions they didn't
Speaker 1: have the margin for it. And as they started closing
Speaker 1: these positions down dead to sell off the leverage longs
Speaker 1: and that caused more selling pressure that drove markets down more,
Speaker 1: which meant even more people had to be liquidated. There's
Speaker 1: this danger that can happen. She's really weird and wacky,
Speaker 1: and it's when this ratio gets above one, which is
Speaker 1: like the impact of liquidations. You sort of look at
Speaker 1: like how much you move price when you when you
Speaker 1: you have a logation of a certain size, and how
Speaker 1: much how large of liquidations at triggers as it jus
Speaker 1: larger size than it took to get there in the
Speaker 1: first place, you have this exponentially diverging growing set of
Speaker 1: liquidations and crashing and rather than like things calming down,
Speaker 1: things seroically just crashed his rown, you know, in an
Speaker 1: exponentially increasing way. And obviously it's not exactly what happens,
Speaker 1: but but it is sort of what happened. And you
Speaker 1: saw them they playing crash from some exchanges as just
Speaker 1: cascading liquidations did their thing. So I'm really glad you
Speaker 1: brought up this day last March because this leads into
Speaker 1: a sort of bigger question I've been having. Um. So obviously,
Speaker 1: like that was just this insane selling across all markets everywhere,
Speaker 1: and everyone wanted liquidity, everyone wanted wanted cash, and it
Speaker 1: clearly sort of on that day, it was very clear
Speaker 1: how the global demand for liquidity was intersected with both
Speaker 1: crypto and traditional traditional financial instruments, and you know, this
Speaker 1: was sort of seems like it's what's kind of a
Speaker 1: new phenomenon, because I have to imagine that like back
Speaker 1: in the old like ten years ago, during the Mountagox days,
Speaker 1: when it was just a handful of sort of like
Speaker 1: weirdos who were trading bitcoin, They're like it was probably
Speaker 1: like pretty disconnected from anything that was happening in the
Speaker 1: quote real world, so to speak. So it's clear that
Speaker 1: like and you know on on f t X and
Speaker 1: I want to get into this in a minute, but
Speaker 1: you also have actually your trade tokenized forms of equity.
Speaker 1: So I'm curious about, like how much these linkages are
Speaker 1: emerging between what's happening in say the NASDAC and what's
Speaker 1: happening in bitcoin. It feels like it's happening. Um you
Speaker 1: can see on days lately, for example, there have been
Speaker 1: some really uh ugly days in the NASDAC textell off,
Speaker 1: and it kind of looks like on those days, even
Speaker 1: like bitcoin gets caught up in the down draft. What
Speaker 1: is your perspective and view right now on a sort
Speaker 1: of these like cross crypto asset linkage is and the
Speaker 1: degree to which there is this sort of emerging correlation
Speaker 1: and feedback between the two that's probably didn't used to exist. Yeah, totally.
Speaker 1: And you if you go Rewindah, you had big arguments
Speaker 1: about whether stocks in corrictly were positively or negatively for it,
Speaker 1: and a lot of people like you know bitcoin is
Speaker 1: is that the flight to safety asset, like when stocks
Speaker 1: crash and people don't trust the financial system anymore, they're
Speaker 1: all going to turn to bitcoin with like a thing
Speaker 1: you heard a lot, and then other people would say, no,
Speaker 1: it's sort of like a risky asset. It's gonna be
Speaker 1: risk on asset and positively correlated. And you look at
Speaker 1: historical data and you know, you could maybe try and
Speaker 1: draw conclusion from it, but but really there's sort of
Speaker 1: like summary was that I don't know, it wasn't totally clear.
Speaker 1: You know, there certainly wasn't extremely strong or consistent positive
Speaker 1: or negative correlation. It just like it wasn't clear what
Speaker 1: what the answer was going to be. So it's sort
Speaker 1: of like, really the answer historically and then after March
Speaker 1: Paul Feforn is like, Okay, no, we know the answer now.
Speaker 1: It's positive. That's fine, positive relation. And that's what happened
Speaker 1: there was you know, basically when when when people are
Speaker 1: training crypto, there's a question of what do they see
Speaker 1: it as? What is the real trade that that most
Speaker 1: people are doing when they're buying bitcoin, And at least recently,
Speaker 1: the answer hasn't been that they're betting against etonomy exactly,
Speaker 1: or or companies or things like that. It's first of all,
Speaker 1: it's been much more intertwined with currency and with worries
Speaker 1: about inflation and money printing and and and so so,
Speaker 1: and in fact, like you can see some of the
Speaker 1: positive correlation coming from that, people feeling like, well, you know,
Speaker 1: if it's sort of like you know, the currency hyperinflates,
Speaker 1: then stops will go up in crypto will go up,
Speaker 1: and gold will go up, and everything will go up
Speaker 1: measured into hyperinflating crypto ther currency. So that's a part
Speaker 1: of what's going on here is just sort of like
Speaker 1: expectations of future inflation basically, but there are other things too,
Speaker 1: And you know, it's clear that at least right now,
Speaker 1: people see crypto as something with huge upside potential and
Speaker 1: huge volatility, and that's the sort of thing that does
Speaker 1: well in risk on markets, not risk off markets, because
Speaker 1: you know, it's sort of like when you've got a
Speaker 1: lot of money to play around with and you're looking
Speaker 1: for something to do with it, something with huge upside
Speaker 1: sounds really appealing, and you're willing to take the risk
Speaker 1: that it goes to zero. But you know, when everything's crashing,
Speaker 1: you flaw stall your money. You know, a lot of
Speaker 1: people are just sort of gonna put in what they're
Speaker 1: they just think is gonna be safe. So so I
Speaker 1: think that's sort of like why my best guess about
Speaker 1: why it seems like that correlation has become just really
Speaker 1: robustly positive. There's one other thing I would say too, though.
Speaker 1: In the last year, equities have started to look a
Speaker 1: little bit more like crypto and I mean you look
Speaker 1: at game Stop, right, and I mean I think for
Speaker 1: a lot of people like this is nuts. I've never
Speaker 1: seen something like this before. Um, there's like these short squeezes,
Speaker 1: like people are in liquidated and like the markets can't
Speaker 1: handle it. Liquidity has fallen apart. And what's driving it
Speaker 1: is not rampant disagreement on the business model. It's like
Speaker 1: people ship posting on social media and then getting together
Speaker 1: and then Elon Musk sort of like acting as a
Speaker 1: standing standard bearer for it. And you're sort of like,
Speaker 1: this is this has like nothing to do with like
Speaker 1: analysts publishing reports on on Apple's future dividend stream. You know,
Speaker 1: from someone who's been in the crypto ecosystem, as they're like,
Speaker 1: I don't know if there's a word for that. It's
Speaker 1: a it's a checkpoint. There's thousands of them. We see
Speaker 1: it every day. That's normal. That's how the market works
Speaker 1: for all these assets. Like GameStop was behaving like a
Speaker 1: s Illoqually cryptence the ship colinization of equity markets exactly.
Speaker 1: And it's like this moment, and I think the beautiful
Speaker 1: moment of this was the moment that Robin Hood banned
Speaker 1: buying a game Stop. Do you guys know what happened next?
Speaker 1: What happened? Um, game Stop crashed because you could only
Speaker 1: sell it, not buy it. Okay, not talking on Robin Hood.
Speaker 1: So everyone was either you know, start selling their game
Speaker 1: Stop or being forced to or couldn't buy it and
Speaker 1: had money, and so they stopped buying game Stop and
Speaker 1: instead they bought what he's in retrospect the only possible
Speaker 1: answer to this question, like as soon as you hear like, oh,
Speaker 1: of course that's what they bought. Um they bought so
Speaker 1: as soon as game Stop started crashing, dodge quintin act
Speaker 1: and and it's like absolutely beautiful of like, yes, that
Speaker 1: is exactly what this is. Like game Stop and dodge
Speaker 1: Coin are like very very similar products. This is the
Speaker 1: idea that like a stock can basically be a token
Speaker 1: for gambling, right, Like you're just speculating at that point
Speaker 1: whether it's going to go up or down based on
Speaker 1: popular interest. Right, you're you know, you're you're speculing whether
Speaker 1: it's gonna go up or down based on whether you
Speaker 1: think people think it's gonna go up or down. You know,
Speaker 1: and and and I think that one of the key
Speaker 1: insights here, which is really powerful and spooky at the
Speaker 1: same time, is um let's say the Apple, you know,
Speaker 1: the Apples, no news and Apple, but someone sells a
Speaker 1: lot whatever liquidations. Who knows something? It doesn't have any
Speaker 1: bearing on the company directly, um an Apple's market cat
Speaker 1: cap crashes from what is it now, like one or
Speaker 1: two trillion dollars, and it crashes down to a billion
Speaker 1: dollars tomorrow. Right, what happens next? Apple crushes to a
Speaker 1: billion dollars. I'll buy it because their cash flows are
Speaker 1: so high that I'm not worried about. I'm not worried about. Right,
Speaker 1: you should google like Apple earnings, then they'll take themselves private.
Speaker 1: At exactly I'm googling it right now, your Apple earnings.
Speaker 1: And you know Google is claiming that their revenue was
Speaker 1: a hundred billion dollars. You know, let me see if
Speaker 1: I can figure out what their earnings are. Here Apple
Speaker 1: was whatever, you know, revenue of a hundred billion and
Speaker 1: guessing their earnings were, you know, fifty billion or something, right, So,
Speaker 1: so so you're sort of like, okay, so you're telling
Speaker 1: me that for a billion dollars, I can buy an
Speaker 1: entire company and that company is going to make what
Speaker 1: is this like fifty times that in the next year,
Speaker 1: like I'll be sailed by right Warren Buffeties comes in.
Speaker 1: It's like I'll take it all of it now. And
Speaker 1: so there's just sort of this lower bound what equities
Speaker 1: can trade at, which is like, you know, they're discount time,
Speaker 1: discountry future cash flow adjusted for risk, and you know
Speaker 1: how long it's gonna take to realize it, and you
Speaker 1: know whatever else you want to kind of tack on there.
Speaker 1: But now flick script around, right and instead of Apple,
Speaker 1: you're talking about game Stop, and instead of going from
Speaker 1: a trillion to a billion, you're talking about going from
Speaker 1: a hundred million to right, so it's market cap, you
Speaker 1: know if thousand excess in a day, and it's clearly
Speaker 1: not because game Stop is going to be selling a
Speaker 1: lot of games this year. And now you can ask
Speaker 1: like what you do, right, Like what's the trade there?
Speaker 1: And the problem is, well, it's not it's not actually
Speaker 1: really clear, is it, right. I mean, you could sell it, right,
Speaker 1: you'd be like, this thing will make seventeen dollars from
Speaker 1: the next year, and like it's never gonna make more
Speaker 1: than seventeen dollars. Ever, it doesn't even really have much
Speaker 1: of a business left. And now it's got a hundred
Speaker 1: billion dollar market. Yet that's the best short sale ever. Right,
Speaker 1: you can short sell it, but it's not like it's
Speaker 1: not like you can short sell and then be like
Speaker 1: ha ha, earnings were low, Please give me money now, everyone,
Speaker 1: Like that's not how it works. There's no strict arbitrage
Speaker 1: in the selling direction. Like if it just never goes down,
Speaker 1: it just always trades at this insane premium to earnings.
Speaker 1: You're never gonna make money. You're just gonna slowly be
Speaker 1: bleeding to borrow costs and and the dividence duo each
Speaker 1: year as you slowly look sillier and sillier, and and
Speaker 1: so while there's you know, things can't trade in theory
Speaker 1: that much below their future cash flow, there is no
Speaker 1: upper limit to what they can trade at. And if
Speaker 1: things start to diverge on the upside, you know, the
Speaker 1: global liquidity priors. Can't you step in and fix it?
Speaker 1: Like it's not to slew it? That means, so I
Speaker 1: have a question about f t X, and you know
Speaker 1: we're talking about equity, So this is a good you
Speaker 1: have not everything on ft X is actually strictly crypto,
Speaker 1: and you actually have what you call token ized equity,
Speaker 1: and there's listed companies sort of like I don't I
Speaker 1: think it's like like Tesla futures trading and Square Future
Speaker 1: trading and and this is sort of the even weirder
Speaker 1: part you have had. And I think you have now
Speaker 1: equity trading of companies that aren't trading. So I understand,
Speaker 1: like say like Tesla futures, because you could you know,
Speaker 1: there's a link between the price of what you could
Speaker 1: get it on. But you have you have coin based
Speaker 1: equity trading on f t X. But there's no actual
Speaker 1: venue right now for coin based trading yet because they
Speaker 1: haven't gone public. How does that work? And how do
Speaker 1: you head your exposure in that kind of situation? I
Speaker 1: don't really get how like you can make a book,
Speaker 1: so so um, the first thing to how it works
Speaker 1: there's two different models for it, but though they're ultimately
Speaker 1: economically very similar. And and the way to think about
Speaker 1: is basically one version of this. Let's pretend for now
Speaker 1: that you happen to know for sure coin based was
Speaker 1: going to go public sometime in the next three months. Right,
Speaker 1: you know, it's not public yet, but it will be,
Speaker 1: you know, for whatever it is, and you're a hundred
Speaker 1: percent confident in that, then what you could do is
Speaker 1: you can say, okay, here's a coin based feature. It's
Speaker 1: gonna cash settle to the price of one coin based
Speaker 1: share um on June one or on you know, August first,
Speaker 1: or whatever whatever point is safe, right, and and and
Speaker 1: the point is that like, even if it's not trading now,
Speaker 1: if you know it will be trading, then you can
Speaker 1: always do something like cash expiring too, you know, to
Speaker 1: whatever price it ends up trading. Act. That's sort of
Speaker 1: one way to think about what you can do with this.
Speaker 1: And another thing, which is, you know, economically very similar,
Speaker 1: is you could say this converts into one actual share
Speaker 1: of coin based stock once it lists. Either way, it's
Speaker 1: something between a stock and a future on stock, and
Speaker 1: query what the difference even is if you can't actually
Speaker 1: do anything with stock today. So that's the way to
Speaker 1: think about things like the coin based market. Um. And
Speaker 1: you know, we had an Airbnb market, and you know,
Speaker 1: I think we're gonna have another one of these coming
Speaker 1: out soon. So anyway, you know, that's sort of like,
Speaker 1: you know, that's how you can think about um, these
Speaker 1: like pre I p O markets, so to speak. And
Speaker 1: and then you ask like the second part of your question, right,
Speaker 1: which is like, how the hell do you hedge that?
Speaker 1: Because it's it's not trading, right, It's not like like
Speaker 1: someone wants to go buy you know, if someone goes
Speaker 1: on on robin Hood Right to buy a share of Apple,
Speaker 1: I mean, fine, you know, robin Hood whoever hands it
Speaker 1: to some you know pe fops it out, um, some
Speaker 1: h f T firm that then goes and buys it
Speaker 1: on on nasdacs. That that's all fine, you know that
Speaker 1: that works. But then you say, okay, but but point
Speaker 1: based is not trading anywhere. There's no you know, even
Speaker 1: if you've got sated out there, where are they gonna
Speaker 1: buy this? And part of the answer, you know, there's
Speaker 1: two possible answers to this. Neither of them are perfect,
Speaker 1: but both of them theoretically work, and one of them is, well, um,
Speaker 1: you know these sickly in order service you need to
Speaker 1: actually own equity, right. That would be one model is that,
Speaker 1: you know, you you have to be like an existing
Speaker 1: equity shareholder to sell this to short, you know short
Speaker 1: this que quote and then you're basically converting your equity
Speaker 1: into the tokenized equity and you know that will sort
Speaker 1: of settle out once um, once at list and and
Speaker 1: so and you're you're start backing the shares by actual equity.
Speaker 1: But of course then in order to get any liquidity
Speaker 1: in this, you need to like, you know, find someone
Speaker 1: who happened to be you know, a big VC in
Speaker 1: point base. The other thing that you do is is
Speaker 1: the cash subtle futures model. And again this is all
Speaker 1: playing off of you know, either treating this as a
Speaker 1: cast subtle future or training it as a uh, you know,
Speaker 1: as a physically settled thing. Um. Once it lists with
Speaker 1: the cast settle futures model, what you say is you know, whatever,
Speaker 1: it's fine, Like, um, you know this is just gonna
Speaker 1: settle to whatever it'll settle to, and you need to
Speaker 1: post collateral, right, you know, you need to post if
Speaker 1: you want to go along or short this. You have
Speaker 1: some dollars in your account, and you know you'll make
Speaker 1: or lose money equal to the difference between what it
Speaker 1: trades that when it lists, and what you buy or
Speaker 1: sell it at. Now as then anyone can be a
Speaker 1: liquid e in fighter. They just need to post collateral.
Speaker 1: And now that doesn't answer the question how they could
Speaker 1: do this in a risk this way, and the answer
Speaker 1: is probably they can't. They can't just arbitrage out of
Speaker 1: this um, and that makes it harder to get liquidity.
Speaker 1: But they can still trade it. They can do what
Speaker 1: they think is a good trade. You know, if they
Speaker 1: see these trading at ten trillion dollar valuation, they just
Speaker 1: short it. They're pretty sure they're gonna make money. And
Speaker 1: so it's it's not the most liquid thing in the world,
Speaker 1: but you can do it. And those are basically the
Speaker 1: true models I have. What I think in normal circumstances
Speaker 1: or for traditional financial assets would probably be a very
Speaker 1: boring question, but in relation to the crypto market, I'm
Speaker 1: hoping it's more interesting. But like, how do you manage taxes?
Speaker 1: I'm really curious, Like, yeah, both for f t X
Speaker 1: and for UM. The hedge fund when you are running it.
Speaker 1: Like if you think that it's difficult to even open
Speaker 1: a bank account that's dealing in crypto, I can't imagine
Speaker 1: what it's like to actually try to, you know, work
Speaker 1: with the government on crypto profits or losses. Yeah, and
Speaker 1: and of course you know then you know, and I
Speaker 1: think the answer is it's about what you think, which
Speaker 1: is to say, a complete total mess. And and so
Speaker 1: what you do, well, you know you can get part
Speaker 1: of the way they're easily right, Like it's sort of
Speaker 1: like you know, if you like in the middle of
Speaker 1: your you buy a bitcoin for ten thousand, you sell
Speaker 1: it for eleven thousand, you just clearly got a thousand
Speaker 1: dollars of gain somehow, right, So to some extent you
Speaker 1: can just treat is trading. Whatever trading is trading. And similarly,
Speaker 1: if you've got an exchange, right, and you know you
Speaker 1: make a thousand dollars of revenue from fees earned on
Speaker 1: your exchange, that's that's okay. You know, I've got thousand
Speaker 1: dollars of revenue. You know, if you don't have expenses
Speaker 1: you booked as profits. So to first or some of
Speaker 1: this is easy something it's just a straightforward answer. But
Speaker 1: once you dig under the hood to some of the
Speaker 1: weirder cases, what you learn is the same thing you've
Speaker 1: seen in crypto regulation, which is, you know, the answer
Speaker 1: isn't known, not in a lot of cases. There's there's
Speaker 1: a lot of cases where it's just like world isn't
Speaker 1: ready for that yet. You know, here's one case which
Speaker 1: I think is pretty clearly something the world needs to
Speaker 1: think through a lot harder than it has um, which is,
Speaker 1: let's say that you get a locked token from some
Speaker 1: like defy staking or air dropped type system. Right, you
Speaker 1: aren't allowed to sell this token for years, and you
Speaker 1: sort of forcibly got this. You didn't purchase it, you
Speaker 1: got it for free. Okay, what's that mean for taxes?
Speaker 1: And did you just did you just realize a lot
Speaker 1: of game, you know, equal to the price of an
Speaker 1: unlock token mark to market when when it was forcibly
Speaker 1: air dropped on you. Maybe I don't know. I mean
Speaker 1: you can't you can't not get that game and you
Speaker 1: can't sell it out for dollars to pay the taxes
Speaker 1: locked you actually kind of forcibly bankrupt someone if you
Speaker 1: really think this, right, you just like forcibly air dropped
Speaker 1: them like a billion dollars marked to market if to
Speaker 1: pins that the blockchain won't let themselves for two years
Speaker 1: and then let them have fun with their tax bill, right,
Speaker 1: So okay, So as soon as you start to get
Speaker 1: into the weirder cases is when it becomes clear that
Speaker 1: you know, actually this this is really complicated, and like
Speaker 1: there's going to have to be a lot of new
Speaker 1: thinking about how to treat these things. And the world
Speaker 1: isn't there yet. I know, we're like sort of running
Speaker 1: short on time. I have like a few can we
Speaker 1: do like a little like short lightning round questions where
Speaker 1: I just ask you a few quick things. And so
Speaker 1: here's one question. There's a lot of stable coins, Now,
Speaker 1: what can you explain the persistent dominance of tether in
Speaker 1: this market? Given uh, you know, there's all kinds of
Speaker 1: always concerns about it and legal questions. What is it
Speaker 1: about their role in the crypto ecosystem that's so hard
Speaker 1: to dislodge despite the existence of many competitors. It's a
Speaker 1: good question, and a lot of people have this question.
Speaker 1: And and if I understand your question right, you're not
Speaker 1: saying you know them to be a fraud erant I don't,
Speaker 1: and I actually think most of the fraud arguments aren't compelling.
Speaker 1: But I do know also that there's other more regulated ones,
Speaker 1: right exactly. It's like even if you don't think, if
Speaker 1: you think it's basically totally fine, it's like okay, but
Speaker 1: there's also something that no one even has ever thought
Speaker 1: was a fraud, like like where's the bar here? Really, like,
Speaker 1: so part of this is just historical. Part of the
Speaker 1: answer here is, well, it was first and it was
Speaker 1: the first stable pining crypto at least first one traction,
Speaker 1: and what that means is that a lot of people
Speaker 1: started using it. It became listed on all the exchanges.
Speaker 1: It wasn't just listed in the way that like random
Speaker 1: tokens are listed on the exchanges. It was the only
Speaker 1: way that these exchanges made sense. I think it's like
Speaker 1: a crucial part of the history of tethers back in
Speaker 1: if you want to have an exchange, a spot exchanging crypto, right,
Speaker 1: and you want to have like a quote unquote bicklin
Speaker 1: usd market, how would you do that if you didn't
Speaker 1: have a bank account, um, and and of course you
Speaker 1: probably didn't have a bank account because it was really
Speaker 1: hard to get a bank account. If you're in crypto,
Speaker 1: no one wants if you want, and it's certainly no
Speaker 1: one want to get you want if you said you're
Speaker 1: gonna be, you know, putting customer deposits in it from
Speaker 1: you know, and all of a sudden you start talking
Speaker 1: about all the messy things in running exchange and and
Speaker 1: it just sounds so much worse to a bank than
Speaker 1: it did when you were a trading firm. What you
Speaker 1: do then, right, Like, the answer is you listed tether.
Speaker 1: You got a big poin tether pair. And if people
Speaker 1: want to get dollars on you're like, go talk together,
Speaker 1: put your dollars in together, and then come here. And
Speaker 1: so because of a lot of the industry just grew
Speaker 1: up with tether, is the answer to how you got
Speaker 1: dollars and that that gives a huge built in advantage.
Speaker 1: That's one piece of it. But there's another piece to
Speaker 1: which is quite important. There is a big East West
Speaker 1: divide here and in the West you'll generally hear people saying, like,
Speaker 1: all right, we got one regulated stable point held in
Speaker 1: the US bank account like audits from US auditing firms,
Speaker 1: and like got another one which like it's not clear
Speaker 1: it's been audited. Really, it's probably not regulated. There's like
Speaker 1: rumors of fraud. It's offshore maybe something Bahamas. I don't
Speaker 1: think any government can can can really regulate it or
Speaker 1: or control it, like I don't know which of those
Speaker 1: sounds like like like like you know, lower risk and
Speaker 1: and sver. It's like, okay, no, obviously it goes like
Speaker 1: you know USDC or whatever. Right, But then you go
Speaker 1: to China and and you say, okay, yet two different
Speaker 1: stable points, one of which is how is in an
Speaker 1: untouchable offshore bank account that there's sort of like uncertainty surrounding,
Speaker 1: and another of which is a highly government regulated bank account,
Speaker 1: you know, with with like lots of people looking at
Speaker 1: it and auditing it. Which is those sounds safer? And
Speaker 1: they're like, jeez, you're telling me that in one of
Speaker 1: these cases the government has access to this bank account
Speaker 1: and the other they don't, Like, obviously, I'll take the
Speaker 1: one the government doesn't have access to. Please And and
Speaker 1: this is sort of a weird. Big part of it
Speaker 1: is that this notion of being government regulated is a
Speaker 1: good thing. And as astanding safety is, you know, so
Speaker 1: omnipresent has to be obvious in the West in a
Speaker 1: lot of countries, like government regulated doesn't mean state necessarily, right,
Speaker 1: Like sometimes that that that's even maybe the opposite right right,
Speaker 1: And and so I think that's another piece of this
Speaker 1: is that a lot of people are like, oh, geez,
Speaker 1: like you know, give me the tether pees, like you're
Speaker 1: telling me that, Like no one, not even a government
Speaker 1: or auditor, can confirm for sure what's in this bank account.
Speaker 1: That is so much safer, Like the worst thing I
Speaker 1: could do would be with this in a bank acount
Speaker 1: ever knows about this is a very short question. There's
Speaker 1: a report that f t X is going to sponsor
Speaker 1: the name of the Miami Heat Arena. Is that true? So, um,
Speaker 1: I think there's a sorry, I'm just thinking about what
Speaker 1: can be said now? Are that there's there's a board
Speaker 1: vote scheduled for tomorrow. It's a basic answer, um, and
Speaker 1: you know after that, um, there will be uh, you know,
Speaker 1: actual final confirmation on this. But but yeah, I think
Speaker 1: it is now public that, um, that that is the intention.
Speaker 1: Cool with the toe on ft X, with the Since
Speaker 1: you trade crypto and equity, do you see people doing
Speaker 1: cross asset trades themselves? They're like arbitraging square against bitcoin,
Speaker 1: stuff like that. We do see some of it. It's
Speaker 1: super cool. It's not large size. I'd be super excity
Speaker 1: if it were huge size. But it's one of my
Speaker 1: favorite things to see. And you can even use them
Speaker 1: as merchant for each other. You can buy micro strategy
Speaker 1: and you see this flateral for bitcoin future. You can
Speaker 1: buy bigcoin says flateral for micro strategy or micro thregy
Speaker 1: short um. They're all we cross margin everything, including the currency,
Speaker 1: crypto and equities. We do see some of that. You know,
Speaker 1: we see bitcoin run up after hours and and then
Speaker 1: sometimes we'll see you know, micro strategy move, We'll see
Speaker 1: buyers of it, and you know, the actual stock won't
Speaker 1: be trading on other venues because most places are in
Speaker 1: point four seven. But Sam, uh, so great to have you.
Speaker 1: This is like such a fascinating here. I think this
Speaker 1: is one of the most fascinating crypto discussions I've ever had.
Speaker 1: So really appreciate you joining us. And well, uh, maybe
Speaker 1: in a year or something we'll talk about how much
Speaker 1: more the industry is matured, because there's still just like
Speaker 1: a million things I want to know take care of. Sam,
Speaker 1: I really did think that was probably one of the
Speaker 1: most interesting crypto conversations I've ever had. I mean, you know,
Speaker 1: I guess I'll say this. I like talking to a
Speaker 1: lot of people in bitcoin. I find it to be
Speaker 1: a very fascinated world. But you know, I'm the sort
Speaker 1: of typical conversations. The government's printing all this money and
Speaker 1: they're gonna want to like buy fiat. It gets a
Speaker 1: little repetitive to actually like talking about market structure and
Speaker 1: how to exploit these seemingly huge obvious arbitrarge trades, but
Speaker 1: how difficult that is in practice. Super interest think topic.
Speaker 1: I totally agree, Like I am legitimately excited about crypto
Speaker 1: market structure now in a way that I didn't necessarily
Speaker 1: think I ever would be. But the other thing that
Speaker 1: I thought was really interesting was Sam's point about the
Speaker 1: equity market resembling crypto more and more like Bitcoin sort
Speaker 1: of like open the floodgates to people becoming comfortable with trading,
Speaker 1: you know, basically a token um that's not attached to
Speaker 1: anything specifically. And I think like we've seen a few
Speaker 1: stocks like game Stop, like AMC that started to take
Speaker 1: on that characteristic as well, Like people were just trading
Speaker 1: a number on the screen. Um. And that's really new
Speaker 1: for the market, I think, and it's a really difficult
Speaker 1: one for the existing stock market structure the way it's
Speaker 1: organized actually deal with, which is why game Stop was
Speaker 1: such a huge deal in was it January February? I
Speaker 1: can't remember January. Yeah. And I also I also feel like, um,
Speaker 1: this like the existence of exchanges like f t X,
Speaker 1: and we didn't even really get into like its own
Speaker 1: situation that much, but like f t X as a
Speaker 1: token that itself now has like an eleven billion dollar
Speaker 1: market cap um. And so this is like a you know,
Speaker 1: pretty substantial platform that Sam Sam is built and the
Speaker 1: ability to do like these sort of like you know,
Speaker 1: he said a small still, but the ability to do
Speaker 1: like cross crypto equity trades. It just feels like this
Speaker 1: like melding of what we call like the crypto world
Speaker 1: versus the traditional world is only going to get more
Speaker 1: gonna get more notable as time goes on. And it
Speaker 1: really started last March, like in that huge crash. But
Speaker 1: it just feels like they're getting more and more interlinked. Yeah.
Speaker 1: Well that's the other thing I was thinking about. So
Speaker 1: if you're doing that sort of cross trading, it feels
Speaker 1: like you're adding a lot of leverage and perhaps unappreciated
Speaker 1: linkages into the market. Like all these coins basically come
Speaker 1: from nothing, and so if they're going to be tied
Speaker 1: to traditional assets, like again that's something that I don't
Speaker 1: think has really happened that much before. No, But it
Speaker 1: also seems like how can you know that there has
Speaker 1: been a lot of selling of bitcoin as a diversifier
Speaker 1: and it's hard to see how that persists as they
Speaker 1: get more linked because you know, again going back to
Speaker 1: that last March, when you need liquidity, Like sure, intry
Speaker 1: day whatever, things will be different, but people want diversification
Speaker 1: for the big moment, and in the big moments, the
Speaker 1: question is often comes down to like do you have
Speaker 1: liquidity or do you need liquidity? And so as you
Speaker 1: sort of like get these into linkages where it's like
Speaker 1: the world's falling apart, we gotta gross down and you're
Speaker 1: gonna sell some SMP and you're gonna sell some other
Speaker 1: stuff and you're gonna sell some Bitcoin, it feels like
Speaker 1: we're going to have that those linkages are allowed to
Speaker 1: get even tighter than they are. You know, it would
Speaker 1: be interesting is if we got a big market sell
Speaker 1: off because of like some massive inflation shock or scare,
Speaker 1: and then see what bitcoin did. Yeah, that's like the
Speaker 1: ultimate question for bitcoin. That would be like the real test.
Speaker 1: I think of the thesis because yeah, that would be
Speaker 1: that would be interesting. Okay, shall we leave it there,
Speaker 1: Let's see it there. This has been another episode of
Speaker 1: the All Thoughts podcast. I'm Tracy Alloway. You can follow
Speaker 1: me on Twitter at Tracy Alloway, and I'm Joe wi
Speaker 1: isn't Thal. You can follow me on Twitter at the Stalwart.
Speaker 1: Follow our guests Sam Bank and Fried he Is at
Speaker 1: s b F Underscore Alameda. Follow our producer Laura Carlson.
Speaker 1: She's at Laura M. Carlson. Follow the Bloomberg head of podcast,
Speaker 1: Francesca Levi at Francesca Today, and check out all of
Speaker 1: our podcast at Bloomberg under the handle at podcasts. Thanks
Speaker 1: for listening to to