YouSaid · the spoken record

Ari Paul

lines on the record: 70
first: 2021-03-18
most recent: 2021-03-18
sittings or episodes: 1
sources: podcast

Every line below is reproduced as it was said and linked to the record it came from. Nothing here is summarised or generated. Directory · Search · Corrections

“Anything unless you're almost anything you want to do that's senior or ambitious eventually requires recruiting sales and management. It doesn't matter if you're running a firm, even if you're just managing a small team. And so those skill sets are so critical that I wish I had embraced them a decade earlier and come to the Blocktower experience with a lot more experience under my belt.”
2021-03-18 · Capital Allocators · Crypto for Institutions 4: Ari Paul – Exploiting Inefficiencies in Crypto Trading (Capital Allocators, EP.183) · IDENTIFIED FROM THE TRANSCRIPT · source
“I don't know if it's exactly a life lesson, but I knew when launching Block Tower that I was terrible on the management and HR side of running a business, I didn't desire to be an entrepreneur. I knew those were both weaknesses and things I didn't particularly enjoy. So I didn't learn anything new on that. What I will say, though, is I wish I had embraced them earlier in life, basically as an entrepreneur now. When I launched Blocktower with Matthew, and for those listening, Matthew's my co-founder, our CEO, I decided to embrace those things. I said, okay, this might not be natural to me. I might not be good at that, but I know that if I want to build a successful firm, I have to, frankly, suck it up and embrace these things. And if I view them as daily pain points that are just not good, I need to embrace the pain and say, I'm going to get better at these things. I'm going to view this as a challenge and a learning experience. I wish I had done that earlier in life. I wish I had embraced the importance of the soft skills like sales and management and recruiting because those are so important to doing almost”
2021-03-18 · Capital Allocators · Crypto for Institutions 4: Ari Paul – Exploiting Inefficiencies in Crypto Trading (Capital Allocators, EP.183) · IDENTIFIED FROM THE TRANSCRIPT · source
“Level of support, and that something my father's always drilled into me is always keep your options open. I'd say he's a little bit on the conservative side in risk-taking just in the sense of maintaining optionality. But then he's always been someone who, when he saw an opportunity, that's what the optionality is there for. That's what you're saving up for. That's what you're positioning yourself for. You have to seize it. Otherwise, what have you been waiting for? So is that kind of a moment? And getting that affirmation from someone who I respect and whose opinion I respect and if anything, a little bit from the conservative side was a good kick in the butt to actually get moving.”
2021-03-18 · Capital Allocators · Crypto for Institutions 4: Ari Paul – Exploiting Inefficiencies in Crypto Trading (Capital Allocators, EP.183) · IDENTIFIED FROM THE TRANSCRIPT · source
“Learned a huge amount from my parents and look up to both of them. One line from my father that I'll highlight, a lot of life is timing and a lot of the reason blocked hour is where it is today is because Matthew and I acted with alacrity when we did. My father in early 2017, I've been talking about cryptocurrency for a couple years. He was a good sounding board. He was interested. Didn't really have an opinion on it, but was just interested. And in early 2017, I started talking to him about how do I make this a career. And I think it was maybe in February when I said, you know, I think I could do this and start building a track record and maybe this. And at one point, he turned to me and said, what are you waiting for? If you're this convicted and this passionate about it and you want to make this your career, what are you waiting for? And that one line basically that day I started making concrete plans to leave you Chicago and do something. I think my parents are pretty typical parents in the sense that they're a little bit risk averse when it comes to me at least. But hearing that from them, hearing that.”
2021-03-18 · Capital Allocators · Crypto for Institutions 4: Ari Paul – Exploiting Inefficiencies in Crypto Trading (Capital Allocators, EP.183) · IDENTIFIED FROM THE TRANSCRIPT · source
“Life or in crypto And actually, this might be the same. So a challenge for the cryptocurrency world is the UX is still terrible. And the thing I'll highlight is the idea that if I want to send money to you right now, if I want to send you Bitcoin, you'll probably give me a Bitcoin public address. And I will then copy and paste that and send Bitcoin to it. The idea that we're copying and pasting this arcane long string of alphanumerics to represent a million or $10 million transfer is insane. It's so error-prone. It feels awkward. It's terrible. I had hoped four years ago, I thought that by this point we would have abstracted it. It's very easy to abstract in a technological sense. It's just a UX problem, and different projects have abstracted it. The problem is there's no consensus in the industry.”
2021-03-18 · Capital Allocators · Crypto for Institutions 4: Ari Paul – Exploiting Inefficiencies in Crypto Trading (Capital Allocators, EP.183) · IDENTIFIED FROM THE TRANSCRIPT · source
“Crypto Twitter is the best aggregator, which is to say if you follow the right 50 people on Twitter anytime a good article is put out a good anything, it ends up getting posted there. Twitter is the equivalent of Bloomberg for a lot of crypto traders. And I'll actually say this. We subscribe to almost a dozen crypto services at this point that do news analysis alerts data. The first thing if I want to make sure I'm up to date on anything really important, I literally go to Twitter because I know that if anything is really important it's going to be talked about and it's going to be there before it's on any particular aggregator.”
2021-03-18 · Capital Allocators · Crypto for Institutions 4: Ari Paul – Exploiting Inefficiencies in Crypto Trading (Capital Allocators, EP.183) · IDENTIFIED FROM THE TRANSCRIPT · source
“Meditating, and it's one that I'm a bit hit or miss with and trying to be more consistent at. But I think as a trader of a 24-7 market, you've constantly high adrenaline and cortisol, and it's both very unhealthy. And at some point, your decision making becomes worse. It degrades because you're at this constant fight or flight kind of reaction. And this is a hypervolatile market where we need to feel that intensity because let me put it this way. It's extremely challenging to zoom out and view the big picture while also paying sufficient attention to these day-by-day massive price swings and game theory exploits and smart contract bugs both are important. You can't ignore the short term, but balancing those two is incredibly difficult and meditation is a helpful way to do it.”
2021-03-18 · Capital Allocators · Crypto for Institutions 4: Ari Paul – Exploiting Inefficiencies in Crypto Trading (Capital Allocators, EP.183) · IDENTIFIED FROM THE TRANSCRIPT · source
“As a founder and investor in 24 7 markets, I have a very boring life since launching Blocktower. I love reading fiction. It's an escape for me, reading about anything, whether it's historical fiction. I feel like I learn about a great deal of the world in history that way, science fiction. I actually say the three-body problem trilogy by Xi Shin Lu is an incredible work of science fiction that often gets cited in both cryptocurrency and geopolitics today. And reading it, I actually found a lot of the ideas in the sci-fi novel directly applicable to gain theory exploits and cryptocurrency to almost a weird degree. And I wasn't the only one to notice this. There's an essay called Ethereum is a dark forest and it draws this direct analogy between smart contracts and Ethereum and the work of that sci-fi and it's really well done. So I'd say reading fiction.”
2021-03-18 · Capital Allocators · Crypto for Institutions 4: Ari Paul – Exploiting Inefficiencies in Crypto Trading (Capital Allocators, EP.183) · IDENTIFIED FROM THE TRANSCRIPT · source
“Much harder and less efficient. Bitcoin itself took many, many decades after we had electronic money to build. So eventually we'll have crypto native prime brokerage, but I think that'll probably be five years after we have traditional prime brokerage applied to crypto.”
2021-03-18 · Capital Allocators · Crypto for Institutions 4: Ari Paul – Exploiting Inefficiencies in Crypto Trading (Capital Allocators, EP.183) · IDENTIFIED FROM THE TRANSCRIPT · source
“That's an arbitrage. Presumably, we think the CME has no counterparty risk, so it's an arbitrage. Well, why is it that high? The reason is just capital requirements. Because you can't collateralize a short futures position with Bitcoin. You need to use cash. It's an extremely capital, inefficient trade. Now, if you could collateralize that future's position with Bitcoin, it would immediately be arbitraged away. It's much an arbitrage as almost anything in finance. So basically, there's counterparty risk in almost everything you do in the crypto world. There's smart contract and engineering risk and almost everything we do. That is a huge pain point. What I expect it to look like is all of the traditional prime brokerage bells and whistles and features will exist for crypto and will have the start of crypto native prime brokerage. And what I mean by that is the same way in the beginning we had things like Coinbase, which were centralized exchanges for Bitcoin trading, something like seven years later, we got decentralized exchanges. The decentralized version of everything is much”
2021-03-18 · Capital Allocators · Crypto for Institutions 4: Ari Paul – Exploiting Inefficiencies in Crypto Trading (Capital Allocators, EP.183) · IDENTIFIED FROM THE TRANSCRIPT · source
“It's an interesting question. I think we've had recently people like JP Morgan say they think that in five years Bitcoin will be integrated into the global financial system, which is kind of an incredible statement coming from where we were a few years ago. Right now, it's certainly not. I'd say the thing that the industry”
2021-03-18 · Capital Allocators · Crypto for Institutions 4: Ari Paul – Exploiting Inefficiencies in Crypto Trading (Capital Allocators, EP.183) · IDENTIFIED FROM THE TRANSCRIPT · source
“I'm not a great authority on the current state of Chicago. I don't want to represent myself as anything in that. What I can say generally about the endowment world is most of the top 10 endowments have invested in crypto funds. It's been reported, but I have no firsthand knowledge of this, that three of the largest endowments have directly bought Bitcoin. I think the cat's out of the bag in the sense that they all now feel comfortable in crypto funds. Whether I think it's an extra leap to feel comfortable with direct ownership, but my guess is that in another year that similarly will feel not like a terribly difficult allocation decision operationally. In other words, do you want exposure to Bitcoin or not is an investment question? Are you able as an endowment to invest and meet your fiduciary obligations? That's an operational question. And I think the operational question is solved for funds, close to solved for direct buying.”
2021-03-18 · Capital Allocators · Crypto for Institutions 4: Ari Paul – Exploiting Inefficiencies in Crypto Trading (Capital Allocators, EP.183) · IDENTIFIED FROM THE TRANSCRIPT · source
“Know when the next attack will be, so even if it's unusable for three days, if you know that attack can basically be repeated at any time, well, the network is certainly much less valuable.”
2021-03-18 · Capital Allocators · Crypto for Institutions 4: Ari Paul – Exploiting Inefficiencies in Crypto Trading (Capital Allocators, EP.183) · IDENTIFIED FROM THE TRANSCRIPT · source
“Every consensus mechanism has vulnerabilities. Proof of work has a long list of known vulnerabilities that are attack vectors. It's intensely debated how serious those attack vectors are, what is the cost of exploiting them, who has incentives to exploit them. My view is that it's very plausible that it may be that state-level actors or even pure economic actors have an incentive to attempt to exploit it. And then the question is, what is the response? So if, for example, there was a block reorganization attack on Bitcoin by a state actor, what would the Bitcoin stakeholders do in response? And there's a number of responses they have, and it ends up being a very complex question. So my view is this is an existential risk. I can imagine a scenario. In my head, I put it at maybe 10% over the next five years, that there is a successful attack on Bitcoin that effectively renders the network temporarily unusable, but unusable in a way where we don't”
2021-03-18 · Capital Allocators · Crypto for Institutions 4: Ari Paul – Exploiting Inefficiencies in Crypto Trading (Capital Allocators, EP.183) · IDENTIFIED FROM THE TRANSCRIPT · source
“The purpose of a consensus mechanism is to allow people to arrive at consensus, at agreement in a decentralized way without relying on a legal system or a military backstop. So the way all modern business works is you have legal contracts that are ultimately backstopped by the legal system of a country, which is backstopped by a military. And that has its limits. So we see this come up, for example, with commerce between US and China. Somewhat frequently there'll be a dispute between US and Chinese company and U.S. company will sue a Chinese company for ripping off IP. And everyone kind of knows that we can't really trust that the Chinese courts will enforce the IP contract. There is a question about the enforceability of these contracts cross-border. So cryptocurrency replaces the legal system in the military with code. And not just code, but incentives. So proof of work is Bitcoin's consensus mechanism, and it relies on a bunch of people around the world hashing numbers. It's Nakamoto consensus is the term where every node accepts the longest chain.”
2021-03-18 · Capital Allocators · Crypto for Institutions 4: Ari Paul – Exploiting Inefficiencies in Crypto Trading (Capital Allocators, EP.183) · IDENTIFIED FROM THE TRANSCRIPT · source
“For example, they made taxes on Bitcoin gains and crypto gains double normal gains. Just they threw a lot of stuff that made it far less attractive to be in this industry. I could imagine a suite of proposals where that might cause a 70% sell-off. That is a market risk. That's obviously a 70% sell-off is huge. We would certainly hope to profit from that or at least avoid losses on that. It's not really an existential risk. It wouldn't end the industry. It wouldn't even necessarily end the bull run as crazy as that sounds. There's the market risk like that. The existential risks are the ones that could basically shut down the industry for years. And the highest on my list there is game theory risk for Bitcoin's proof of work consensus. This is an extremely unpopular opinion in my industry, as you might imagine. Almost any one of my industry doesn't want anyone talking about this. Not that it's a secret. It gets labeled as FUD, fear, uncertainty, and doubt is basically rumor. But my view is...”
2021-03-18 · Capital Allocators · Crypto for Institutions 4: Ari Paul – Exploiting Inefficiencies in Crypto Trading (Capital Allocators, EP.183) · IDENTIFIED FROM THE TRANSCRIPT · source
“Principles were indicted by the US government, and that could have been a calamitous thing for crypto markets. Bitcoin sold off something like 6% on the news. It made new local highs a few days later. That was an incredible bullish sign. Basically, this bull market was kicked off by the worst news many people could imagine happening, which was Bitmacs getting indicted, OKX, the second largest exchange. They had one of their principals arrested by China. And yet both events caused very small quick sell-offs, but were not existentially important. I think there is regulation that would be a deeper market impact. For example, if the US government, let's say FinCEN and the U.S. Treasury, imposed rules that made it much, much harder for a crypto investment firm like us or exchanges or broker dealers or custodians to operate in the US. They made it so hard that a lot of US entities would shut down. And let's say Europe followed suit. Basically, it's not illegal to own Bitcoin, but it's a huge pain in the butt.”
2021-03-18 · Capital Allocators · Crypto for Institutions 4: Ari Paul – Exploiting Inefficiencies in Crypto Trading (Capital Allocators, EP.183) · IDENTIFIED FROM THE TRANSCRIPT · source
“I literally spend more than half my time thinking about the risk side of things because I'm so confident in the beta and in the short-term alpha that literally something I say to my team constantly is rule number one, two, and three or don't blow up. Basically, if we can stay in the game and maintain our capital and we shouldn't care at all about missed opportunities because this is an industry and a market that generates amazing opportunities every couple months, if we miss one theme, forget it, don't chase it, don't sweat it. So I think about this a lot. Okay, now let me give you the real answer. Let me separate two types of risks. What I think of as market risks where a catalyst could cause a sharp market sell-off, but it's temporary in nature. So we think of those risks from the trading side. So most regulatory risks are trading risks for us in the sense that, for example, Bitmax, which had the largest trading volume for Bitcoin in the world, they had 70% of all volume about a year ago.”
2021-03-18 · Capital Allocators · Crypto for Institutions 4: Ari Paul – Exploiting Inefficiencies in Crypto Trading (Capital Allocators, EP.183) · IDENTIFIED FROM THE TRANSCRIPT · source
“Would you be willing to spend if you could actually take the item outside of the game? This is its own whole topic and whenever I say that people are like, all right, but why would Blizzard allow that? This is a whole discussion. But that is going to be a huge growth area. It's a short list, but my list really hasn't changed that much in five years. Those are still the areas that are promising, I think, over the next three to five years.”
2021-03-18 · Capital Allocators · Crypto for Institutions 4: Ari Paul – Exploiting Inefficiencies in Crypto Trading (Capital Allocators, EP.183) · IDENTIFIED FROM THE TRANSCRIPT · source
“Profit margins are pretty small because I think there's going to be fierce competition driving profit margins down. So it's not an easy space to be an investor. With that said, I think it's an incredibly exciting one and you're going to have a huge number of successful startups in that space. Gaming as well, we're just starting to see grow parabolically just at the, we're probably a little bit too early for that and that there's only a few crypto games getting any traction. But I think I'm very confident that over the next five years, basically NFTs are already existing games at huge scale. Games like World of Warcraft sell billions of dollars a year of gaming collectibles within the game. Those are not NFTs because they exist only within a walled garden. They're not decentralized. They're not permissionless. But what if they were? So imagine you're a World of Warcraft gamer and you spend $20,000 on in-game purchases and you know that the company behind the game can delete those from your account at any moment, that if that game falls out of favor, those items are worthless. How much more?”
2021-03-18 · Capital Allocators · Crypto for Institutions 4: Ari Paul – Exploiting Inefficiencies in Crypto Trading (Capital Allocators, EP.183) · IDENTIFIED FROM THE TRANSCRIPT · source
“This is for five years. I can tell you as an investor, I've actually allocated very little to it. And the problem is I feel a little bit like being really like I'm really bullish on social media in 1992. And it's like there's nothing to invest in yet. And then maybe it's not 1996 and you see Friendster, but you think Friendster is crap and you say, I'm really bullish on the thesis, but I don't see the winners yet. How do I invest in this? And then even a little bit later on, you do have a question of what's going to accrue the value. Are the platforms? So now we have maybe a dozen competing NFT platforms for digital art. These are the platforms that are aiming to be the eBays, the Christie's, the Subees, the dealers of art. And the problem I have is if NFTs grow 1,000 X, do those platforms grow 1,000x?”
2021-03-18 · Capital Allocators · Crypto for Institutions 4: Ari Paul – Exploiting Inefficiencies in Crypto Trading (Capital Allocators, EP.183) · IDENTIFIED FROM THE TRANSCRIPT · source
“A fun little side project. Maybe it'll bring in a few million bucks, and it's a leading source of revenue for the league now, which is insane. And this is just the start. The NBA didn't even market this. This was all organic growth. And frankly, I don't mean this at all as a criticism. Dapper Labs has been incredible, but people aren't used to buying NFTs. You think about this is appealing to a market that is just getting their feet wet and getting comfortable with the idea of a digital sports collectible. In fact, they've done $100 million of revenue right off the bat is just incredible. So all the other leagues, NHL, NFL, soccer globally, and then all the other IT content owners, Disney, everyone wants to get a piece of this. So I think over the next three years, we're going to see the NFT space grow probably 100x in size. The challenge as an investor is that's horizontal growth. It's not that any specific asset is going to go up 100x in size. It's that new assets will be launched. So as an investor, something I've spent a huge amount of time thinking about this, I've been bullish.”
2021-03-18 · Capital Allocators · Crypto for Institutions 4: Ari Paul – Exploiting Inefficiencies in Crypto Trading (Capital Allocators, EP.183) · IDENTIFIED FROM THE TRANSCRIPT · source
“Is a huge win. So that's DeFi, and that's now happening at scale, and now we're building all sorts of more complex primitives, things like lending, so collateralized lending is already here at scale, uncollateralized lending is a much harder problem than you need to get into things like credit scoring and reputation risk. And that's an experimental phase right now. So one was digital gold store value, DeFi, NFTs, meaning digital art and digital collectibles. That is in full-on parabolic mode. It's really incredible to witness what's happening now. Today, all of the big IP owners racing to get involved because of the success of MBA Top Shot. So MBA partnered with Dapper Labs, I don't know when the partnership was inked, but I'm going to guess maybe a year, year and a half ago. They rolled out NBA top shot, which are digital MBA collectibles, something like five months ago now, and they've done more than $100 million of sales. So I think my guess is that when the NBA signed that contract, they thought, okay, this is.”
2021-03-18 · Capital Allocators · Crypto for Institutions 4: Ari Paul – Exploiting Inefficiencies in Crypto Trading (Capital Allocators, EP.183) · IDENTIFIED FROM THE TRANSCRIPT · source
“Here, I'm boring with consensus. And by the way, this is a five year old view of mine when I first got into crypto, the only use cases I saw is viable in the next five years were Bitcoin as digital gold store of value, decentralized finance, which in its simplest form just means decentralized exchanges, a very simple use case, which now things like Robinhood are in the news we see demand for it, right? Retail is extremely upset at these wall gardens that tell them what they can trade and when and how they have to. But even putting all that aside, just the ability to transact 24-7 globally. But if you think about modern exchange infrastructure, it's really incredibly antiquated. We have the exact same equity listed on multiple exchanges, and they're non-fundible. You can have persistent price disparities between the equity of the same company depending on where in the world that's being traded. That's crazy. The law of one price doesn't apply in modern markets because we have this fragmented liquidity. So the idea of having true global instant liquidity”
2021-03-18 · Capital Allocators · Crypto for Institutions 4: Ari Paul – Exploiting Inefficiencies in Crypto Trading (Capital Allocators, EP.183) · IDENTIFIED FROM THE TRANSCRIPT · source
“So we've talked some on this series about the macro case, about Bitcoin, about some of the DeFi protocol and some of the other areas. What are your favorite investment areas as you're looking out over the next few years?”
2021-03-18 · Capital Allocators · Crypto for Institutions 4: Ari Paul – Exploiting Inefficiencies in Crypto Trading (Capital Allocators, EP.183) · IDENTIFIED FROM THE TRANSCRIPT · source
“The actual artwork on IPFS, which is a decentralized file storage system that has Filecoin associated with it. So you have this interaction between decentralized file storage, which is kind of its own sector, digital art, its own sector, and the NFT space, most of it sits on top of Ethereum and a competitor called Flow Today. Well, that's the layer one space. And then within layer ones, because of that NFT activity, it's been driving up gas fees. It's been driving up the cost of transacting because it's been clogging the network. Well, that leads us into another sector, layer twos, which aimed to help scaling. So each of these sectors ends up influenced basically without NFTs and without DeFi, there's no need for scaling and scaling solutions. So we've made bets on scaling solutions because we anticipated they would be needed because we were so bullish on gaming and NFTs.”
2021-03-18 · Capital Allocators · Crypto for Institutions 4: Ari Paul – Exploiting Inefficiencies in Crypto Trading (Capital Allocators, EP.183) · IDENTIFIED FROM THE TRANSCRIPT · source
“Fairly simple in the sense that it's basically anything cryptocurrency related at the highest level and the main limitation is liquidity and from two angles liquidity in terms of what can we trade into and out of in that we have non-trivial assets if something's a 3 million market cap it's not really investable for us and then secondly liquidity from a liquid versus illiquid perspective is in privates investment We're currently much more focused on the liquid side of things. And so when we invest in illiquid assets and we do occasionally do equity, generally we're looking for things that are going to have liquidity in one to two years. And so those are usually early stage projects that expect to list a token because tokens can provide liquidity typically faster than equity. So those are really our only two constraints. Beyond that, we look at anything cryptocurrency related, and it's still a small world in the sense that everything touches on everything. And as an example, NFT projects, non-fungible tokens like digital art, digital collectibles, they're often storage.”
2021-03-18 · Capital Allocators · Crypto for Institutions 4: Ari Paul – Exploiting Inefficiencies in Crypto Trading (Capital Allocators, EP.183) · IDENTIFIED FROM THE TRANSCRIPT · source
“So, across the assets you own, there's Bitcoin, Ethereum, you mentioned DeFi, there's a couple other areas that you could participate in. How do you map out the landscape in what your investable opportunity set us?”
2021-03-18 · Capital Allocators · Crypto for Institutions 4: Ari Paul – Exploiting Inefficiencies in Crypto Trading (Capital Allocators, EP.183) · IDENTIFIED FROM THE TRANSCRIPT · source
“For its next 10x and flows down the risk curve into riskier, newer assets. And so we re-rotated aggressively trying to anticipate that into all coins. And we were trying to bet on the altcoins that we thought would be the first thematic winners, things like DeFi.”
2021-03-18 · Capital Allocators · Crypto for Institutions 4: Ari Paul – Exploiting Inefficiencies in Crypto Trading (Capital Allocators, EP.183) · IDENTIFIED FROM THE TRANSCRIPT · source
“One thing that we're doing very aggressively at the stage of the bull market is trying to anticipate key themes and narratives. These will typically be one to three months long. So we say to ourselves, as an example in October and November of last year, the narrative was institutional money is flowing to Bitcoin. Retail is not really in yet. Bitcoin's where it's at. No one cares about anything other than Bitcoin. And our portfolio reflected that. We were very Bitcoin heavy. As we headed into the end of the year, we said once Bitcoin makes a new all-time high, that is the trigger that starts bringing in retail. Because when Bitcoin makes a new all-time high, that triggers media coverage. From then, every single rally, every new hundred dollars is a new all-time high. It's another Bloomberg headline. It's another CNBC headline. And suddenly everyone who's ever bought Bitcoin is in profit. And that attention brings in retail. The wealth created by Bitcoin flows down the risk curve, Bitcoin going from $3,000 to $30,000 in a year. That generates wealth. That wealth looks like...”
2021-03-18 · Capital Allocators · Crypto for Institutions 4: Ari Paul – Exploiting Inefficiencies in Crypto Trading (Capital Allocators, EP.183) · IDENTIFIED FROM THE TRANSCRIPT · source
“You can think of it like I want my portfolio to look a little bit like a cult. And what I mean by that is if I'm right on where we are in the market cycle, I expect all coins to outperform Bitcoin over the remainder of the market. With that said, all coins are riskier than Bitcoin. If I'm wrong, and Bitcoin”
2021-03-18 · Capital Allocators · Crypto for Institutions 4: Ari Paul – Exploiting Inefficiencies in Crypto Trading (Capital Allocators, EP.183) · IDENTIFIED FROM THE TRANSCRIPT · source
“Structure a portfolio that is trying to optimize between risk and reward in kind of a steady state, and then we're trading actively around that. I'll use today as the example. So today I believe we're in a bull market. I think we're in something like the bottom of the seventh inning, measured from the bottom of the bear market. So Bitcoin hit its lows of a little over $3,000 December 2018. We've now gone from just over $3,000 to we hit a high of $58,500. Retail started getting into this market only this year in 2021. So I think we still have a ways to go. We're still seeing institutional spread. We're still seeing retail come in. I think we have substantial appreciation ahead of us. But we are starting to get into that last third of the bull run. So given that high level macro view, that kind of market cycle framework, I want to be playing things from the bullish side, aggressively from the bullish side. I want to be giving my portfolio asymmetry upside skew.”
2021-03-18 · Capital Allocators · Crypto for Institutions 4: Ari Paul – Exploiting Inefficiencies in Crypto Trading (Capital Allocators, EP.183) · IDENTIFIED FROM THE TRANSCRIPT · source
“A theme that is going to excite the crypto world and institutional investors? Can people buy the thing? So for example, if an asset isn't listed on Coinbase or Binance or any of the big exchanges, the inflows are limited. So the analogy there is if a stock is a part of the S&P 500, it's much easier for it to be $100 billion asset. We just got a Canadian Bitcoin ETF. Well, why is there a difference between that and a US Bitcoin ETF? There's a difference because not all US investors can easily access the Canadian one. We live in a world of fragmented liquidity. And that's true in both crypto and traditional. So as an example of a bet that we have on right now, we've created baskets based entirely on accessibility. So we have a basket of Coinbase coins, a basket of finance coins, a basket of Korean and Japanese retail coins where it's the assets that are easiest for a new participant to crypto, someone who creates a crypto exchange account for the first time, what can they buy and what are they likely to buy?”
2021-03-18 · Capital Allocators · Crypto for Institutions 4: Ari Paul – Exploiting Inefficiencies in Crypto Trading (Capital Allocators, EP.183) · IDENTIFIED FROM THE TRANSCRIPT · source
“Without cratering it. Could Amazon have pulled a lot of their operating profit out as cash flow? What would that have done? Would that have created room for competitors? So we do the same kind of competitive analysis on Uniswap and say, how much of that 30 basis points could token holders pull out? You need to be incentivizing the liquidity providers. Well, how much? With 10 basis points, 20. So there's a fundamental analysis there. And then similar inequities were generally not valuing things on an absolute basis, but much more a relative one. So we'll say, okay, Uniswap, we can come up with this cash flow model, but at the end of the day, we recognize that there's no real sense of where fair multiple is, and we're not thinking on a 1020 or horizon of holding this thing and receiving cash. So we really at the end of the day want to compare it with comparables in the industry. What up and coming competitors, what existing competitors are competing, and what are the relative valuations of those. And then we always think from a trading mindset as well, even on fundamental analysis, which is supplying demand.”
2021-03-18 · Capital Allocators · Crypto for Institutions 4: Ari Paul – Exploiting Inefficiencies in Crypto Trading (Capital Allocators, EP.183) · IDENTIFIED FROM THE TRANSCRIPT · source
“We're looking at the UX, the target customer base, the usage, and the competitors. And it does depend on the type of asset. Uniswap's a great example here. Uniswap, you can actually value in a very equity-like way based on cash flows because Uniswap actually collects a 30 basis point fee on all transactions, and it's currently doing more than billion dollars a day in transactions. So there's real cash flow there. Those cash flows are currently being paid out to liquidity providers, but the token holders have the right, like equity holders, to vote about where the profits go. So the analogy here is right now, Uniswap is kind of like Amazon, meaning they're choosing not to be profitable. They're reinvesting all of their income into growth. At some point, though, the equity holders can say, we want to pay ourselves juicy dividends. We want to cut costs. We want to run costs at minimal necessary level, but not reinvest in growth, and we want to take those cash flows. As any equity investor has to think about how much cash can you take out of a company?”
2021-03-18 · Capital Allocators · Crypto for Institutions 4: Ari Paul – Exploiting Inefficiencies in Crypto Trading (Capital Allocators, EP.183) · IDENTIFIED FROM THE TRANSCRIPT · source
“It very much depends on what our thesis is, the kind of analysis that we're doing. So some assets, I'll give you an example, as a trader, I have no aversion to trading Dogecoin. So if Elon Musk tweets something bullish about Dogecoin and I think there's going to be a momentum effect, I think retail is going to be buying it for the next 24 hours, I'll buy it ahead of them, and then I'll sell to retail. And I don't need to analyze Dogecoin at all to do that. It's a pure financial asset trade, and I'm generally sizing that quite small where I'm not really, I don't have to think about existential risk. It's 2% of AUM, it's trade. And my only thinking is, okay, I'm betting 2% of AUM. I think it's going to rally 50% of the next 24 hours. If I'm wrong, I understand the worst case is this could go to zero. That's kind of it. When we're buying and holding an asset over a six-month to two-year timeframe, there it's very different. There we are evaluating it from very much like a VC mindset in, say, a Series A or Series B often, where we're evaluating the team, we're looking at the technology.”
2021-03-18 · Capital Allocators · Crypto for Institutions 4: Ari Paul – Exploiting Inefficiencies in Crypto Trading (Capital Allocators, EP.183) · IDENTIFIED FROM THE TRANSCRIPT · source
“Sentence, I think efficiency is a function of the ratio of professional capital to non professional and professional I mean people full-time evaluating the space. And the professional capital and cryptocurrency probably controls less than 3% of the assets, which is the lowest ratio of any major asset class.”
2021-03-18 · Capital Allocators · Crypto for Institutions 4: Ari Paul – Exploiting Inefficiencies in Crypto Trading (Capital Allocators, EP.183) · IDENTIFIED FROM THE TRANSCRIPT · source
“Industry, we feel like we're barely keeping up with 10% of what's happening in the space. And we do this 18 hours a day with a team of six connected with everyone who matters in the industry. And so the way I think about markets as efficient is they're efficient if people like us make them efficient. They're efficient if professionals with sufficient capital and expertise and time can price them correctly. But I know we're not pricing the stuff correctly because as much as we can do, we're generally making investment decisions with a very superficial understanding just because of how fast the space is growing and innovating. The level of expertise, the level of diligence that we can do on any individual asset is so minimal. And it's not like we could focus on a smaller list of assets, but then you're missing key pieces of understanding them. Can you really understand Ethereum if you don't understand the long tail of assets being built on it and driving its usage? So the reality is almost everything is still wildly inefficient. I would sum it up in this one.”
2021-03-18 · Capital Allocators · Crypto for Institutions 4: Ari Paul – Exploiting Inefficiencies in Crypto Trading (Capital Allocators, EP.183) · IDENTIFIED FROM THE TRANSCRIPT · source
“Frankly, almost everywhere outside of simple arbitrage, Bitcoin trading is, like in any asset class, large caps tend to be more efficient than small caps. That's definitely true in crypto. Bitcoin, you do have machine learning algos from guys like TuSigma and Susquehanna pointed at it. So if you're just trying to do simple quant looking only at Bitcoin and price data, a traditional quant where you look at basically volume and price as your two indicators, that is very competitive and very tough. But for example, not that many people do that and throw in the on-chain indicators. Amazing thing about cryptocurrency is that we have these whole new types of data that traditional Quant has never had. And traditional Quant firms have no idea how to make use of it. So the idea that we can see in real time every single Bitcoin transaction that's happening is incredible. It's an incredible wealth of data. And so anything that uses on-chain data is still inefficient today. I think on the fundamental side, this is such a fast moving.”
2021-03-18 · Capital Allocators · Crypto for Institutions 4: Ari Paul – Exploiting Inefficiencies in Crypto Trading (Capital Allocators, EP.183) · IDENTIFIED FROM THE TRANSCRIPT · source
“So that's a bit of an outlier. It's not that often we do those kinds of bets, but it's an example of the breadth that we can look at.”
2021-03-18 · Capital Allocators · Crypto for Institutions 4: Ari Paul – Exploiting Inefficiencies in Crypto Trading (Capital Allocators, EP.183) · IDENTIFIED FROM THE TRANSCRIPT · source
“That's wealth destruction. If you have a global recession, just all risk assets get hurt for a long list of reasons that are separate from their fundamental correlation. You can put it in Keynesian animal spirits kind of terms that people are not going to be speculating on Bitcoin when they're losing their jobs and when they're worried about all their other assets just fell 50%. We don't trade macro here. We don't try to predict where S&P or treasuries are going because my view is that's a full-time job. There aren't many people in the world who can do it well. With that said We're very willing to look at macro and say where should Bitcoin be relative to that? Can we price macro into Bitcoin smarter than other market participants? And last year that was definitely an area where we were able to have edge interpreting the macro climate and macro movements and saying”
2021-03-18 · Capital Allocators · Crypto for Institutions 4: Ari Paul – Exploiting Inefficiencies in Crypto Trading (Capital Allocators, EP.183) · IDENTIFIED FROM THE TRANSCRIPT · source
“We expect a 90% plus correction in them. Why don't we look elsewhere? Why don't we look at absolute return strategies? Why don't we look at option strategies? Why don't we look at catalyst driven? Maybe we're playing them from the long side, but we're doing it as much shorter-term bets where they can work out even if we're in a secular bear market. So we've generally pursued a very broad range of strategies. We trade options. We do catalyst-driven trading, event driven bottom-up fundamental analysis, top-down macro. An example of a trade last year was when we were in the start of COVID, correlations between Bitcoin and S&P were gradually increasing. And there was a period where the crypto world said correlations between Bitcoin and S&P should be zero. Who cares that equities are down 20%? Bitcoin doesn't care about COVID. Maybe it even benefits from it. And we were strongly convicted that that's nonsense. That Bitcoin is a risk asset. And while it might not be correlated one-to-one on a 5% S&P move, if S&P falls enough, Bitcoin is going to catch up to the downside because”
2021-03-18 · Capital Allocators · Crypto for Institutions 4: Ari Paul – Exploiting Inefficiencies in Crypto Trading (Capital Allocators, EP.183) · IDENTIFIED FROM THE TRANSCRIPT · source
“And so, my view was you can't be a late stage crypto investor without having an eye on the upcoming stuff because that's the stuff that's going to be competing with your assets in six months. And you can't be in early stage investor without really understanding the incumbents. So I felt basically the same set of skills and relationships and tools were applicable across the board. And the ability to be opportunistic and not be handcuffed to a mandate was very important because, for example, if you were an ICO investor in early 2017, you did incredibly well. If you were an ICO investor in late 2017, there was not a single good investment to put your money in. Let's say investors gave me $100 million and said, all right, I want you to invest in ICOs early 2018, it would have been a really bad conflict of interest because the right answer was we shouldn't invest in ICOs for the next two years, but I would have had 100 million burning a hole in my pocket. In my mandate, I'm told by investors, we want you to be allocating ICOs. So being opportunistic and saying, okay, ICOs are clearly extremely frothy.”
2021-03-18 · Capital Allocators · Crypto for Institutions 4: Ari Paul – Exploiting Inefficiencies in Crypto Trading (Capital Allocators, EP.183) · IDENTIFIED FROM THE TRANSCRIPT · source
“I've always really value the ability to be opportunistic. I think in traditional markets, I, along with most people, value specialization. When I was at UCHA, if someone pitched us on being a global real estate fund, it was almost not credible because, wait, you're really going to tell me you're the world's best real estate investor in every locale. How? Unless you have a team of half a million people, how do you know the whole world's local real estate? So we always loved Chicago hearing pictures from someone who only does southern LA commercial real estate because I believe you got a team of Forb guys. I believe you can be the best in the world at that 20-block radius. In crypto, I believe very strongly in 2017 the specialization did not make sense because it was a tiny industry with a small number of assets, a small number of key players, a small number of key developers and key technologies. And if you had expertise in those things, it didn't make sense to segment, for example, early from late stage. Because the difference often between early and late stage was one”
2021-03-18 · Capital Allocators · Crypto for Institutions 4: Ari Paul – Exploiting Inefficiencies in Crypto Trading (Capital Allocators, EP.183) · IDENTIFIED FROM THE TRANSCRIPT · source
“Duct tape solutions as best you can. And you recognize that some things are going to be duct taped. And then over time, as the industry is professionalizing and produced better tooling, we make use of that every couple months. We're adding some new third-party service or third-party tool. We've also built more things in-house. We've expanded our team and professionalized. So it's a process of growing alongside the industry.”
2021-03-18 · Capital Allocators · Crypto for Institutions 4: Ari Paul – Exploiting Inefficiencies in Crypto Trading (Capital Allocators, EP.183) · IDENTIFIED FROM THE TRANSCRIPT · source
“So let me say a lot of this has become easier in the last four or five years, but going back to 2017, we were certainly more a startup than anything else. We very much wanted to be Citadel. We wanted to be institutional, wanted to build a very professional platform. The reality is the day we launched, Back Office was me with a spreadsheet because that was really all you could do. And our investors understood that. They viewed this space very much from a VC mindset. They viewed us from a VC mindset. The investor base kind of got it, that they were taking a lot of risk, operational risk with us, risk and crypto, but they were hoping for that 10 to 50 X return, which makes the risk worth it. You're not going to take that level of operational risk to earn 4% a year, but to earn hundreds of percent a year certainly could make sense. We like any startup solutions as we went, and everything had an entrepreneurial angle where you have a problem, you figure out ways to solve it, you figure out ways to create.”
2021-03-18 · Capital Allocators · Crypto for Institutions 4: Ari Paul – Exploiting Inefficiencies in Crypto Trading (Capital Allocators, EP.183) · IDENTIFIED FROM THE TRANSCRIPT · source
“So, when you're seeing all these dynamics, you're seeing these inefficiencies, you're seeing the challenges and how difficult it is to get started. How did you get a fund started amidst all of those challenges?”
2021-03-18 · Capital Allocators · Crypto for Institutions 4: Ari Paul – Exploiting Inefficiencies in Crypto Trading (Capital Allocators, EP.183) · IDENTIFIED FROM THE TRANSCRIPT · source
“Why that is, but I might as well take advantage of it. And the reason that existed, you already had some firms like DRW, a big Chicago-based trading firm that has a crypto subsidiary called Cumberland doing this algorithmically. But the amount of capital ballooned so quickly during the bull run that it overwhelmed existing capital allocations to arbitrage it away. However much money DRW had in that capital account arbitraging it, it wasn't enough. And so I was picking up the leftovers. Today, basic arbitrage among zero counterparty risk exchanges or low counterparty risk at least mostly doesn't exist. It gets arbitrage away by guys like DRW, but everything else is there. So catalyst-driven trading, fundamental analysis, options are wildly mispriced.”
2021-03-18 · Capital Allocators · Crypto for Institutions 4: Ari Paul – Exploiting Inefficiencies in Crypto Trading (Capital Allocators, EP.183) · IDENTIFIED FROM THE TRANSCRIPT · source
“Didn't really exist. They didn't exist at the exchange level. You didn't have trading software that allowed for permissioning. You didn't have prime brokerage and clearing firms that would enable those kind of risk controls. You could, as an individual trade crypto, but it was extremely hard to do it as an institution. You basically had to be trusting everyone on your trading team to not walk away with the assets. So all those obstacles, all those pain points is opportunity. The fact that you had almost no professionals doing it full time meant that the alpha was incredibly available. And I'll give a few examples of very simple trades, even arbitrage. So when we launched Blocktower, we had no intention of doing arbitrage because I just thought there's other people who can do it better than us. But in late 2017, we made a few million bucks manually arbitraging between US-based regulated exchanges. And the way that happened was I just had Coinbase and Gemini up on my screens and I was looking to see where's Bitcoin cheaper. And it's like, whoa, there's a $400 discrepancy in the Bitcoin price between two U.S. regulated exchanges.”
2021-03-18 · Capital Allocators · Crypto for Institutions 4: Ari Paul – Exploiting Inefficiencies in Crypto Trading (Capital Allocators, EP.183) · IDENTIFIED FROM THE TRANSCRIPT · source
“World. The best you could do as a back office was a spreadsheet. There were some basic, basic software packages that would capture a small fraction of assets and exchanges, but those ultimately had to feed into a spreadsheet if you were doing any diverse styles of trading. So all of that was opportunity. I saw that guys like TuSigma and Citadel and Rentech and the discretionary trading houses, none of them were in crypto for good reasons. It was too hard. It was extremely hard to trade institutionally because you couldn't permission individual traders. So this is an important point. When I worked at trading shops or SIG, SIG might give me the ability to trade $100 million of NAT gas futures, but I couldn't steal it, right? There was no risk of me transferring $100 million to my own account. SIG had all sorts of controls in place that they could trust would prevent a trader from walking away with the assets. A trader at Rentech can't transfer $100 million of Microsoft stock to their own brokerage account and get away with it. Whereas in cryptocurrency, those controls”
2021-03-18 · Capital Allocators · Crypto for Institutions 4: Ari Paul – Exploiting Inefficiencies in Crypto Trading (Capital Allocators, EP.183) · IDENTIFIED FROM THE TRANSCRIPT · source