Lyn Alden, CEO and founder of Lyn Alden Investment Strategies, and Raoul Pal, CEO & cofounder of Real Vision Group & Global Macro Investor, explain their thinking about Ethereum and its native token, and talk about their perspective on GameStop. In this episode, we discuss:
- why Raoul views ether as similar to bitcoin at a macro level (1:25)
- why Lyn decided ETH was not currently investable (5:06)
- an analysis of utility protocols (John Pfeffer’s paper) (6:55)
- counterarguments to John Pfeffer’s paper (9:31)
- how to allocate between BTC and ETH (11:22)
- why Raoul also invested in other coins beyond BTC and ETH (11:47)
- whether Metcalfe’s law applies equally to all kinds of networks (13:35)
- why Lyn views Ethereum’s use case as circular, and why that makes it less investable (15:09)
- whether Ethereum 2.0 and Ethereum Improvement Proposal 1559, and whether that could make ETH more investable (21:20)
- the impact of fees on the value of Ethereum (23:36)
- Raoul’s views on what S-Curves and the Lindy Effect indicate about the development of a currency (25:22)
- how high fees make DApps less attractive, while low fees potentially decrease demand for ETH (27:06)
- how Lyn believes demand for DeFi is to circumvent compliance and know-your-customer processes, and she doesn’t also see that as a downside for Bitcoin (33:10)
- how the regulators are behind innovation in cryptocurrencies, particularly around taxation (36:32)
- Raoul’s and Lyn’s predictions for the ETH price by end of 2021 (41:45)
- what GameStop says about the democratization of financial information (45:32)
- whether smart contracts could play in preventing situations similar to what happened with GameStop and/or Robinhood (49:03)
- how blockchain technology could be used to prevent a situation in which the hedge funds could short more shares than existed (54:03)
- how the GameStop/Robinhood saga is a giant advertisement for self-custody (54:53)
- whether r/WallStreetBets’ behavior was market manipulation or not (56:53)
Thank you to our sponsor!
Crypto.com: http://crypto.comEpisode links:
Lyn Alden: https://twitter.com/LynAldenContact
Lyn Alden Investment: https://www.lynalden.com/
Raoul Pal: https://twitter.com/RaoulGMI
Real Vision: https://www.realvision.com/contributor/raoul-pal
Global Macro Investor: https://www.globalmacroinvestor.com
Raoul’s tweet storm on Ethereum: https://twitter.com/RaoulGMI/status/1347013567799848961?s=20
Lyn Alden’s research paper on Ethereum: https://www.lynalden.com/ethereum-analysis/
Raoul Pal’s tweet: ETH equals BTC: https://twitter.com/raoulgmi/status/1347013567799848961?lang=en
John Pfeffer’s paper: https://s3.eu-west-2.amazonaws.com/john-pfeffer/An+Investor’s+Take+on+Cryptoassets+v6.pdf
Network effects and Metcalfe’s Law: https://saylordotorg.github.io/text_developing-new-products-and-services/s04-12-there-is-power-in-numbers-netw.html
Quantity Theory of Money: https://saylordotorg.github.io/text_economics-theory-through-applications/s30-01-the-quantity-theory-of-money.html
How Will the Government React to GameStop?: https://www.coindesk.com/gamestop-regulators-response
GameStop and Crypto trading: https://cryptonews.com/exclusives/are-gamestop-style-surges-in-crypto-any-different-from-old-p-9151.htm
Robinhood Raises Extra funds: https://www.theblockcrypto.com/linked/93258/report-robinhood-billions-raised-investors-1
Possible role of blockchain in trading: https://cointelegraph.com/news/cardano-foundation-ceo-says-blockchain-could-prevent-gme-type-showdowns
Transcript:
Laura Shin:
Hi, everyone. Welcome to Unchained, your no-hype resource for all things crypto. I’m your host, Laura Shin, a journalist with over two decades of experience. I started covering crypto five years ago, and as the senior editor at Forbes, was the first mainstream media reporter to cover cryptocurrency full-time. Subscribe to Unchained on YouTube, where you can watch videos with me and my guests. Go to YouTube.com/c/UnchainedPodcast and subscribe today.
Crypto.com:
Crypto.com, the crypto super app that lets you buy, earn, and spend crypto all in one place. Earn up to 8.5 percent per year on your BTC and more than 20 other coins. Download the Crypto.com app now to find out how much you could be earning.
Laura Shin:
Today’s topic, plus a bonus topic, but today’s topic is ETH as an investable asset. Here to discuss are Lyn Alden, founder of Lyn Alden Investment Strategy, and Raoul Pal, founder and CEO of Global Macro Investor and Real Vision Group. Welcome, Lyn and Raoul.
Raoul Pal:
Great to be here.
Lyn Alden:
Hey, thanks for having me.
Laura Shin:
Both of you are widely respected for your financial analysis and views, and you’re also both known for being big believers in Bitcoin, and yet, you two have opposite views on the value of Ether, which is the asset native to the Ethereum network. Raoul, in January you tweeted, “ETH=BTC, like it or not.” What do you mean by that, and how did you come to that conclusion?
Raoul Pal:
You know, again, I’m a macro guy, so I don’t have the engineering background that Lyn has, but how I approach this is, I look at the attributes of how it trades as an asset. And what I did is, I looked at estimations of network effects, and said, well, do they look similar? And when you plot out Bitcoin’s journey, its market cap, or its price versus the number of active wallets, actually, there’s a nice, clear regression line, and it happens after a certain period of time.
So, it gets to about five million wallets, and then it goes in a very clear, steep line, which is essentially an estimation of Metcalfe’s Law, and I found that Ethereum was exactly mirroring Bitcoin. When I say “exactly,” when I look at it on a plot graph with the same regression, it looks similar, but because it started later, it just follows Bitcoin earlier, but in fact, its adoption, i.e. the number of wallets at this time, is actually a faster rate of adoption than Bitcoin had.
But what’s super-interesting is when you go back and match them from one million active wallet addresses each, their prices are identical, and their price movements have been identical, and that took me by surprise. I didn’t expect to see that, because that normally doesn’t happen. You have to fit the graphs, but it perfectly fit in every way. It’s exactly currently in the 2017 wrap-up that Bitcoin had, and at exactly the same time after it hit a million wallets, it gives you something similar.
So, that’s when I say ETH equals Bitcoin, is because when you think of it in macro terms, they’re both really network effects. And so, they may have very different properties, they may be different things entirely, and people struggle with value when it comes to network effects. Almost everybody underestimates value, by definition, because we try and anchor it on something that we perceive has value, but network effects are so hard to thinking, because they’re exponential.
Laura Shin:
Yeah, this is really interesting, and you’re right when, I think to the kind of late 2013, early 2014 runup in Bitcoin, I think it peaked at about 1250, and then ETH, in the last cycle, peaked at about 14-something, 20 or roughly, so just 200, or less than 200 dollars’ difference.
Raoul Pal:
And they both had 90-percent pullbacks. Everybody said they were dead, they were worthless. Bitcoin got down to about 100 and started rallying, ETH got down to 100, started…it’s literally identical, and that’s weird. That’s weird.
Laura Shin:
Yeah. Yeah. No, definitely, I mean, it was compelling. I mean, the one thing that I do have to ask you, which, you know, I didn’t prepare early enough to send you an email, but I just was trying to figure out, did the metrics about the wallets come from Blockchain.com? Because when I was looking at the Blockchain.com wallet numbers, I couldn’t really match them against your slides, and then I was wondering, like…anyway, but did it come from Blockchain.com, or…?
Raoul Pal:
I’m not sure. Remy, my analyst who puts together the data, got it from, I’m not sure what sources, but I don’t think it was Blockchain.com.
Laura Shin:
Okay. Okay. All right, so, yeah, maybe I can send an email, then we can put a link or something in the show notes. Okay, so, Lyn, you have a totally different conclusion. After writing, like, an extremely well-researched piece on all the ins and outs of Ethereum, so, based on that extensive research, you concluded that you would not invest in Ethereum at this time. So, what factors led you to that decision?
Lyn Alden:
Yah. So, one thing I point out is I don’t really view my position as opposite of Raoul. I actually think there’s a ton of overlap. It’s just not a perfect overlap, and you know, the way I kind of look at it is, so, for example, in the article, the overall conclusion is that I could see a non-zero allocation to Ethereum as making sense. And so, I gave, for example, 80 percent Bitcoin, 20 percent Ethereum, or 90 percent Bitcoin, ten percent Ethereum, or a hundred to zero. I think there’s still a case to kind of, you know, focus on Bitcoin, which is what I’m preferring to do.
But I also point out that, you know, if Ethereum were to break over 1400, which now, as of this recording, it has, that’s pretty bullish for the price action during a bull market, in a broad sense. And so, it’s not necessarily that I’m bearish in the price in any kind of given six or 12-month period. It’s more about outlining various pros and cons, and then kind of sharing some of the concerns I had. And so, I do agree that it is the, you know, really the one other protocol that does have a substantial network effect.
And so, that’s pretty much undisputable, because so many tokens run on Ethereum now, there’s so much development happening on Ethereum, and I…so, in my kind of mind, I think the big concern is to make sure we, in some ways, we separate the growth of the ecosystem from the growth of price in the long term. And because, you can be, for example, very bullish on the amount of value that’s settled on Ethereum, the amount of Smart contracts that happen on Ethereum, and then have a somewhat different view on what happens to actual Ethereum token appreciation over the long run, when you include bullish and bearish cycles.
And what I mean by that is, for example, if you look back during the 2017 high, since then, about three times as much value settles on Ethereum, and the market cap is still just roughly back to where it was. And you know, that, for an Ethereum bull, what you then argue is that therefore, Ethereum’s undervalued, and therefore that’s kind of a bull case for Ethereum. A somewhat different view is, you know, for people that aren’t familiar, John Pfeffer wrote a paper back in late 2017 kind highlighting this problem, and he, basically his argument was that the utility protocols, even if they are used for a lot of kind of ecosystem GDP, you could call it, if they’re used for a variety of things, that the value won’t necessarily accrue to those tokens.
Basically, you can have a high velocity, and that, you know, there basically might not be kind of a “moneyness” associated with those tokens in the long term. It doesn’t preclude those from being moneyness, if we see things like, you know, more and more collateralization of Ethereum, if you see a strong preference towards staking, and kind of enough people wanted to hodl it as money. It can still become money, but basically, there’s somewhat of a separate argument about the size of the ecosystem and the price of the tokens in the long run, although I do agree, I think in many points that, I can see why a lot of people want to have a position in Ethereum.
And I can also see that it does so far have a substantial network effect, and I think one of the challenges going forward is how Ethereum is going to transition, because Bitcoin is, you know, for the most part a finished product. It’s still evolving, just like any other finished product. Like, they’re still making updates to Adobe Photoshop, for example, but it’s in, like…
Laura Shin:
And Microsoft Word.
Lyn Alden:
Exactly, but they’re released things, whereas Ethereum, because they’re still doing radical changes to the underlying protocol and they’re, you know, as they shift from Ethereum 1 to Ethereum 2, they go from proof of work to proof of stake. They’re changing some of the dynamics, because they’re running into these scaling problems. Basically, there’s just a lot more implementation risk, I think. So, you’re kind of getting a higher-risk investment, and you know, I’m kind of open about whether or not it’s higher-reward.
And that’s why my preference was, I can see why people like it, but that my view is, I still like the risk-reward of Bitcoin the best.
Raoul Pal:
And you know, to be fair, Lyn and I would probably have roughly similar allocations for the same reason, you know? When we look at asset allocation terms, there’s three main metrics we use. One is liquidity preference, so, Bitcoin has liquidity preference. So, it’s our base in this bet in the digital asset space. The next is time preference. Well, Bitcoin has been around longer. It also has a more understandable both network effect and value proposition, so you tend to hold it longer.
But risk preference…and Ethereum has both of those, but not quite as superior as Bitcoin. Risk preference, there is a, because it’s earlier in its network effects, the chances of more exponential price rises are higher, so you need a smaller allocation to have roughly similar effects in a portfolio. So, we kind of agree. The one thing I do want to mention was that John Pfeffer paper, I kind of wrote a long article about it. Both of those things, firstly, he kind of said the network effect didn’t apply to anything except Bitcoin, which I think has been proven wrong.
But the other one is, he used the quantity theory of money, which basically we threw out in about 1981, and I worry that trying to look at these in terms of moneyness is trying to compare Bitcoin with an apple. They’re kind of not the same thing. I cannot…
Laura Shin:
Raoul, can you explain what the quantity theory of money is?
Raoul Pal:
Well, this is this MV=PT way of looking at, and that’s why we talk about velocity of money, because that was one of the reasons the whole thing fell apart. And you know, you’re trying to figure out what the overall value of the money proposition is within this, and I’m not sure any of that applies, and that was my issue with John Pfeffer’s paper. I thought it was really interesting, but I spent a long time thinking about it, I thought, A, that doesn’t work in the real world. I mean, there is literally zero correlation between money supply and inflation, so that kind of throws all of his arguments, all of that kind of Friedman stuff out of the window.
So, I looked at it and thought, well, what is the difference here? I think he’s arguing the case for Bitcoin, about Bitcoin as a reserve asset, and then saying, basically, nothing else looks like that. And guess what? Nothing else looks like Bitcoin, and that’s why we love Bitcoin. You know, it has a unique value proposition in the world, and many of these other protocols have their own unique value propositions. Many of them will not get network effect, and some that we don’t even know of now will have massive network effects.
The same happened with the internet, same happened with mobile phone networks, and almost any other network that we’ve seen.
Laura Shin:
So, Raoul, does that mean that you allocated ten or 20 percent, like Lyn was saying she might do if she were to allocate?
Raoul Pal:
So, I started at 80/20. The Ethereum’s gone up a lot more already, and then I allocated more. So, I’m, like, 60/35, and then I went further out the risk curve, and I bought a basket of Alts as well.
Laura Shin:
Yeah, which ones?
Raoul Pal:
Well, I’m not going to say, because I get, because I don’t want to make it like I’m pumping anything, you know, because the Alts world is a little bit wild and crazy. So, I don’t want to do that, but basically what I took was, I just looked at ones that look like they were getting network effects. I asked people on Twitter. I got six and a half thousand responses, so I could figure out, okay, what looks like they’ve got network effects here?
I look at the charts, and as long as they’re a reasonable-sized market cap, I just took an equally-weighted basket, because I’ve no clue, and I just don’t have time to understand these in the depth that, you know, we’ve all had to learn Bitcoin in, and we’re all having to get up to speed with Ethereum in. So, I did that, because I know in the end, everybody does what I’ve done, which is they get further out the risk curve. They do it in emerging markets.
So, you might start with the EM ETF, which is a very simple way of getting emerging market exposure. Then, you might get more India exposure, because you kind of favor that, and it works for your time preference. Okay, India, I can see that this is going to work for the next ten years, and then as that trend starts developing, you start buying all sorts of frontier markets, because everybody’s piling in the risk curve, and the same happens in crypto.
Laura Shin:
And so, you don’t even know if they were, like, DeFi tokens…
Raoul Pal:
I’ve got a mix, from derivatives, to DeFis, to DEX’s. I mean, I purposely made a kind of relatively balanced basket. You know, it wasn’t a totally random process, but it was just a, yeah, okay, some of that, some of that, some of that, to try and get an overall balance of the space, you know? I wanted interoperability, I wanted DeFi, I wanted fast payment networks, I wanted, you know, just different things, different protocols that allow smart contracts, and just got an overall basket of that.
Laura Shin:
Interesting, and actually, so, this then leads to this other question, I wanted to ask you this thing about Metcalfe’s Law and the value of a network. So, just wondering, like, does that simple framework apply to any network with any purpose, or do you feel like certain purposes will kind of, like, retain more value better than others?
Raoul Pal:
Well, we can see it within, let’s say social media influencers. The larger their network is, and the more their network creates connection points with each other and other places, the more that their celebrity’s worth. It actually exists almost everywhere, and exists in nature as well. So, the strength of the network comes from the network effect. So, I think it’s true almost everywhere, and the internet has made it more prevalent in our everyday lives.
Religion was basically that, too, that was the network effect, and had Metcalfe’s Law in its earlier days. So, we do see it in many places, and in biology and in nature. We see it almost everywhere.
Laura Shin:
Okay, so, you don’t feel like whether it’s a payment network or a borrowing and lending protocol, it doesn’t matter.
Raoul Pal:
So, Facebook, Google, Amazon, three wildly different network effects, and we might as well use, you know, 3G, three completely different things, internet, not internet, email. You know, all massive network effects, all wildly different things.
Laura Shin:
Okay. Yeah, this is really interesting. So, okay, another fun argument that I want to explore is Lyn’s critique was super-interesting, because there was this point where she was saying that Ethereum’s use case is what she was calling circular. And so, Lyn, can you define that, and then explain, you know, why you think that that makes ETH less investable?
Lyn Alden:
Sure. One point I want to touch on first, though, is, so, if we look at kind of a couple points there, because I think Raoul brought up really good points. And so, just to kind of hit on a couple of them in a row, I think if you look at that old equation, you know, that MV=PT equation, one of the things that was wrong with the initial assumption back in the Friedman days was that they assumed velocity was constant, and that was the big flaw, because as velocity fell, you didn’t get inflation the same way that it would’ve been expected by the money supply increase.
So, whether or not John Pfeffer’s making an error, it would be the same error because he’s actually, one of his kind of assumptions is that velocity will rise in those utility protocols, and that that’s why, even though you have more and more kind of one-sided equations sorting out, that it won’t necessarily accrue to market cap. It’d basically be the opposite reason why the Friedman version kind of didn’t work out. And so, I think it kind of remains to be seen whether that’s happening so far, for example, because three times as much value settled on Ethereum as it did three years ago, and we haven’t seen that rise in the market cap of that level.
So far, I’d argue that the paper’s, it’s somewhat on track. Now, whether or not it will continue to be on track, I still think is an open question. And then, for network effects, we actually do see some kind of divergence out there. So, for example, if you compare Twitter’s number of users to Facebook’s number of users, Facebook has more, but if you look at, say, the market size comparison, it’s like night and day, and that’s because Twitter has been less ideal at kind of accruing value from its network in the same way Facebook has.
And if we do a more extreme example, for example, there’s no, like, email companies that have just, you know, tons and tons of money. It’s usually, like, a, kind of a, you know, it’s kind of an unprofitable segment in some ways of these larger entities now, and that’s because there’s not a ton of money to be had in email, despite the massive kind of user base of them. Similar things for, say, Wikipedia. If Wikipedia was kind of valued, it’d be less valuable than other things with a similar kind of, amount of traffic, because it’s just not really prone to monetization.
And so, one of my concerns overall with Ethereum is that it could fall more like those other ones, where it has a substantial network effect, and the overall kind of GDP of the ecosystem is very large, and then, I think the big question is whether or not that accrues to the value of the tokens. And so, going back to the point about being circular, my concern is that, okay, during the bull run, you know, we all expect, like, most times that Bitcoin will go up. A lot of these Alts would probably go up even more, and I think the big question’s, what happens next time?
And so, if you look at kind of “successful” protocols, like Bitcoin and Ethereum so far, they manage to make new highs the next cycle, whereas some of the Alt coins, they hit these, do these big highs, then they collapse, and then when the next bull market comes years later, they’re unable to get back to where they were, because they never really kind of accrued that moneyness or that value. And so, I think the big question going forward is, how is Ethereum going to handle a bear market, because a very large portion of its use case is decentralized finance, you know, the exchanges, as well as liquidity providers, all of which I think is extraordinarily valuable to have.
But then, the big question is, what is all that worth, once we kind of get out of this, you know, this two-year bull market we’ve been in, and when we have a kind of, another consolidation, another kind of bear market? You know, I have concerns about what that would do to kind of Ethereum’s price at that point.
Raoul Pal:
You know, we don’t know, and these are always interesting things, because we don’t really know, it’s kind of like asking what happens to Amazon’s price during a recession, and they sell less goods. We kind of know what it does to the network itself, but over time, as things recover, you know, we know with Ethereum that whatever’s happening, there’s a lot of people developing stuff, right? So, whatever we think we know about what it’s worth now, we don’t know in the future because we don’t know what other breakthroughs…DeFi is so nascent, right?
I mean, this is basically ICOs from the last boom, and a ton of this will go bust, and then some bigger ones will rise, and we’ll see. You know, I think, I don’t have an issue with that. You’re right, we need to keep an open mind to it, because we just don’t know, and to try and choose which ones, I’m not smart enough. And so, the only way’s use the VC approach, I think, which is, you take a big enough basket, and my ten is not a big enough basket, you should take a larger basket, put a bunch of bets in it.
You can weight them accordingly to you, and then, wait and see how it plays out for a number of years, and assume that VC should not be real-time market to market. It’s the worst thing in the world, because, you know, any business that starts out, does this, does this, does this, best thing is just the VC bet. I’ll look at it in five years, and figure out what’s the next valuation. So, you know, Lyn’s question is dead right. I mean, none of us know any of this.
We’re just trying to figure it out, because it is a very new space, and maybe the whole space next time around gets up to a hundred trillion in size. We just don’t know. We just don’t know. It’s fascinating to be at this point in time, seeing something so new in finance, that gives us something to get our teeth into. I mean, Lyn and I are probably bored of talking about the dollar now, and probably bored of talking about rates, right? Here’s something intellectually interesting, that has not been around forever, moves a bit more, so it’s a bit more exciting.
You can get up in the morning, get excited, because it didn’t go up and down .3 percent. There’s no central banks really involved in it. I mean, it’s nice. We can be optimistic. As macro people, we can be optimistic about something.
Laura Shin:
Yes, and…
Lyn Alden:
I agree.
Laura Shin:
…for journalists, it’s also more exciting than covering traditional financial markets. Okay. So, one other thing that I want to…so, Lyn, when you were talking, you know, it just seemed like, I totally got how you were saying that the way Ethereum is going now, like, you could see it going one way or the other, like, becoming a widely-used business that, where Ether isn’t exactly super-valuable, or also becoming used, but also Ether does become valuable, it’s sort of, like, unclear.
However, obviously, we do have the Ethereum 2.0 transition that has begun. It will take, you know, who knows, at minimum 18 months, I think, so, it could even be as long as, like, three years. However, within that, there’s also this Ethereum Improvement Proposal 1559, which would burn the base transaction fees, and then given the, kind of, like, minimal amount of inflation, you could end up with Ethereum being deflationary. And so, do those changes that are kind of in the works start to make you think that actually, down the road, ETH could become more investable?
Lyn Alden:
Yeah, I think it’s possible, and actually, the most favorable thing I said about Ethereum in that article is probably the EIP 1559 point, because I think that’s a really elegant way to kind of improve their monetary policy, compared to what it has been. And so, for people that aren’t familiar with it, yeah, they would, you know, transactions, the base fee would be burned, and so, you’d have this kind of deflationary aspect to the protocol, and then you’d have a somewhat adjustable inflationary policy to incentivize validators, and it would be flexible depending on how many validators are present.
But the overall issuance would, at maximum, be pretty low, and in some cases, if there’s, you know, kind of a medium amount of validators and a ton of throughput, then you could have a deflationary scenario. And so, I do think that if they get that into place and they’re able to do their transition, that is, I think, a really elegant monetary policy for what Ethereum’s trying to do. I think kind of my, one of my concerns is as it transitions from Ethereum 1 to, you know, Ethereum 2, we do have these other competitors, probably some of the ones that are in Raoul’s side-bet portfolio. Probably, you know, I can probably pick out…
Laura Shin:
That’s what I was going to ask.
Lyn Alden:
I could probably pick out, I can probably guess two or three that are in there. And so, some of them are, they came after Ethereum, so they, you know, some people would argue that they’re technically superior, but the big problem is they don’t have the network effect that Ethereum has. And so, the question is, can kind of Ethereum kind of round this turn, and maintain its network effect while running into some, you know, throughput issues?
And so, one of the things we’re seeing, you know, I think that one of the things that Raoul and I are both super-bullish on is stablecoin usage. Probably stablecoins are going to keep proliferating and in, you know, the amount of, that they’re used, but if you look at the history of Tether, for example, that used to be based around Bitcoin and Omni, and then when Ethereum came out, that, Tether became more associated with Ethereum.
And as, you know, we’ve seen Ethereum fees rise over the past six months, now actually, more transactions for Tether take place on Tron than on Ethereum, and there’s still more value settled on the Ethereum side, but because the fees are high, a lot of the small transactions have had to spill over onto a cheaper protocol in order to justify it, because Bitcoin, since the average transaction size is pretty high, they can handle higher fees, whereas Ethereum, when you start to run into these high fees, a lot of these smaller transactions have to go off to a spillway.
And so, my concern is that even though I’m bullish on kind of the use cases for a lot of these utility protocols, including some of the ones that can run on Bitcoin, for example, but I’m bullish on utility protocols in general, in terms of, you know, kind of the developments that they’ll have, and then, I think figuring out where that value’s going to accrue is tough, because there’s not a ton of switching costs from moving stablecoins from one chain to another, and that can also apply to some of these other protocols, if, say, Ethereum were to stumble in its implementation, and one of these other Smart contract platforms kind of picks up the slack.
And so, I just think it’s a, kind of a point of uncertainty, and people would have to watch that space very closely in order to make sure that their chosen protocol is kind of staying ahead of whatever issues it’s facing.
Raoul Pal:
Also, I think one of the things we’re talking about here, that, again, I wrote in that long article that I wrote in Global Macro Investor about this, is S-curves are very prevalent in this, and the S-curve is, it’s either the questioning point or the failure point, and you know, what we’re saying here is there’s a big S-curve in Ethereum right now, coming up, and will it work or will it not work? We don’t know. Almost all of the currencies have had this.
Bitcoin’s had several S-curve moments, where it could’ve failed, and it didn’t. Then the Lindy Effect takes place, which is the longer it survives, the more likely it’s to survive. So, again, it’s why we’re all really interested in this space, because there are outcomes of which we don’t know. We can’t figure out the probabilities. We’ve got no historical parallels, so, it’s a really interesting space for all of us to try and figure this out, because, you know, one S-curve is just a pause before the rise, and maybe, that’s what I think Ethereum’s going through.
Again, I don’t know. We’ll find out, and you know, and that moves us, drives us further up Metcalfe’s Law, and the Lindy Effect. Some of these S-curves will see total failures, so, as they have existential crisis. So, it’s amazingly interesting.
Laura Shin:
Yeah. Well, it sounds like, you know, both of you kind of agree, however, Lyn’s just sort of decided, because of these different factors, I would rather just go with what I believe will take off, whereas, like, Raoul, you’ve kind of, like, decided to put a little bit of money in, but you’re also hedged, so that if the competitors do kind of pull through and start to take market share from Ethereum, then you’ll still benefit. But I actually wanted to ask Lyn one more thing, because in your paper on this, you cited this irony within the incentives, where you said potentially the ETH price would dip when demand was high.
And what you wrote was, “If transaction throughput is super-high and fees are pretty low, users don’t need much Ethereum tokens to run dapps, and there’s this interesting trade-off. High fees make dapps less attractive, and provide room for competitors to take market share, while low fees potentially decrease the demand for Ethereum tokens.” So, can you talk a little bit more about that, and you know, what you think will actually happen?
Lyn Alden:
Yeah. So, on one hand, high fees are a sign of a healthy, vibrant network. It means a lot of people are using Ethereum, and that’s, in the short run, a good thing. And then, you need Ethereum to run all this, and so, you have to, you know, you have to buy and use Ethereum. And so, there’s that demand for Ethereum as, like, fuel, in addition to the side thing of Ethereum as a stored value, as money that some people use it as. And so, but then, in the longer run, I mean, that starts causing problems like the one I mentioned, where some of those stablecoins start spilling off onto other protocols, because if you’re trying to send 100 bucks, you can’t pay a 10-dollar fee.
That’d be uneconomic. And so, you have to kind of sort out those smaller transactions, and then, for example, if you’re trying to do a trade on Uniswap, you’re paying, like, you know, 50 bucks, because that’s a more intensive calculation. And so, it’s higher fees, then, it’s multiple fees, basically. And so, that becomes uneconomic compared to, say, those centralized exchanges, or towards a decentralized exchange that’s trying to run on a different protocol.
And so, you kind of run into that problem. Now, one of the whole points of Ethereum 2.0 is that they’ll massively increase the throughput of the system, so you can have much lower fees to run all these applications. Then, it also means you don’t need a ton of Ethereum tokens to do all this. And so, the question of Ethereum kind of retaining its value goes back to my earlier point of, you know, kind of the conception of it as money is somewhat of a different thing than the velocity and the size of its whole ecosystem.
So, you can theoretically have a case where, you know, a ton of value settles in Ethereum, like, it’s something like a trillion dollars last year. It could go up 5X, and it’s possible that the market cap would, you know, double, or maybe stay flat. It kind of, you know, this big, choppy thing. It might not go up in the same kind of ratio that it has been, which is actually what happened over the past three years as well, because the use case tripled, and the market cap had this big kind of U-turn.
And so, I think that’s kind of the key thing to watch, is that kind of awkward trade-off between fees as something that’s a sign of the health of the network, but then also something that can pressure it, and then start spilling over onto the competitors.
Raoul Pal:
The other question is, within all of this is, and again, I don’t know, is does the number of transactions mean anything in network effects, or is it the number of nodes? So, in which case, you can put gazillions of transactions, and that doesn’t change it, if there’s only three people using it. You have a billion people using it, that is the value of the network. So, maybe there’s different things here we’re thinking of. We’re thinking of it either as a utility or a network, and we don’t know. It’s exhibiting the qualities of a network, but at core, maybe it’s a…if Bitcoin is a…here’s an idea.
If Bitcoin’s a reserve asset, with this adoption curve that comes with their technology, why could Ethereum not be a utility with an adoption curve that has a potentially higher future expected value? So, they both have different attributes, the utility versus a reserve asset, and they both have these huge upsides because of the network effect. Maybe there’s that. Maybe we’re just even still framing it in wrong terms, don’t know, haven’t even thought about that before. But maybe you’re right, and I’m right, is kind of what I’m trying to say.
Lyn Alden:
Yeah, I think it’s certainly possible. I guess, just to one point, one thing I’d like to see over time is the number of stakeholders in Ethereum, because if we’re monitoring different kind of aspects that we can monitor, that’s one of the ones that shows people’s willingness to hold it for the long term. And so far, you know, since they’ve launched that, that’s been pretty robust.
It shows a lot of people have confidence to kind of stake ETH, and then, you know, let it play out over 18 months, which might end up being optimistic, however long that kind of conversion process takes, because that’s purely kind of Ethereum as a money, rather than Ethereum as some of these other attributes. And so, I think that, over time, that’s one of the metrics I would want to keep track of in terms of kind of monitoring its adoption as something for the token price itself.
Raoul Pal:
It’s kind of also a little bit like SPACs. You know, you’ve got this 18-month, or whatever time period, of which they can put this SPAC together, and you need to have faith that they’re going to do something that’s…that’s really interesting, because they did create that money market curve for a period of time, which, what am I going to get compensated by giving you my ETH? And as you said, I mean, I found that surprising, that a volatile asset, people will lock up for 18 months. You’re like, wow, okay, that really is interesting.
Laura Shin:
Yeah. Yeah, but they can still, you know, they can borrow against it, and stuff like that. So, there’s all kinds of solutions for that. All right, so, in a moment we’re going to just do two more questions about Ethereum, but then we are going to switch to GameStop, because that’s what everybody’s talking about these days, and it’s super-fascinating. But first, a quick word from the sponsors who make this show possible.
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Laura Shin:
Back to my conversation with Lyn Alden and Raoul Pal. So, Lyn, there is one other thing I want to ask you about your really amazing piece, by the way. People should read this, because it’s, like, just extremely comprehensive analysis about Ethereum. It’s really, really interesting, but one of the things was, you know, I know that you’re a big supporter of Bitcoin, and when you wrote about Ethereum, you said that the purpose of decentralized apps is largely to circumvent know-your-customer rules, which, you know, those are meant to combat money-laundering and counterterrorism.
But Bitcoin is basically also a network that enables people to avoid KYC, and then I wondered, so, you know, since Bitcoin does also share those features, does that, is that something that gives you pause about investing in Bitcoin, or do you not see it the way that I just framed it?
Lyn Alden:
In my view, it’d come down to kind of percentage, use case. And so, you know, in Bitcoin, that’s always kind of been a tradeoff between people. There’s kind of the early adopters that are more, you know, kind of the cypherpunk culture. Then there’s, you know, the more traditional finance people that want to see it as a more regulated asset so they can get more institutional capital into it.
And I think, you know, Bitcoin’s going to kind of continue to exist in both worlds, where some people want to use it off the grid, and other people are fine with using it on the grid, because I think apart from the KYC question, a really big use case for it is store value. And then, we’re also seeing cool things like, for example, Strike Global, being able to use it not just as an asset, but also as a payment network, to use Lightning as a way to kind of send fiat to fiat, international transactions, you know, settled within seconds for free.
And so, you know, I think that’s kind of, it’s got enough use cases outside of the KYC question, that I think it can kind of get through all those regulatory questions. The big concern I had for, you know, Ethereum is that we have a lot of this interest in decentralized exchanges, decentralized liquidity providers, which I think is a good thing. I’m happy that they exist, and I think they’re going to continue to exist in some form indefinitely.
I think, you know, we’ve kind of opened that genie now, and so, but I think the question is, in the long run, what is the, kind of, the willingness of people to pay high fees for a Uniswap transaction, for example, compared to some of the decentralized exchanges? So, of course, we have this big kind of growth area. We have this kind of, you know, once you have your tokens, you can kind of, you’re operating off the grid a little bit, and people can, there’s tax questions associated with that.
So, you know, the question is how many of those people that kind of trade on some of these decentralized areas are properly accounting for the taxes every time they do one of these swaps and transactions. And I think that if you were to see a regulatory crackdown on that, my concern is how much of that volume would dissipate, whereas Bitcoin, I think, is a little bit more kind of cockroach-like. It’s a little bit more resilient to crackdowns, and I think its use case is a little bit, you know, there’s basically more use cases other than kind of circumventing kind of these KYC issues.
Raoul Pal:
Although, if we go back seven years, five years in Bitcoin, so the same time in the cycle of its birth than Bitcoin is now, you know, BitMEX, un-KYC derivatives, we have the rise of Tether completely unregulated. We have the rise of, I mean, that whole space was the same, right? It’s only because as its market cap has got bigger, the regulators have become more and more interested. You’re dead right, this is this whole new space that we’ve got in the Ethereum world and all the others.
The regulators are just behind. They barely catch up with Bitcoin, let alone all of this stuff. I mean, how the hell they’re going to regulate this, I have no idea. My guess is, all they can regulate is your on-ramps and off-ramps to fiat, and then they can say, well, hey, you put in 10 grand, and you brought back 20. So, I don’t care what you did with it. Prove that it went to an exchange, or whatever, and then, you owe us tax on that. I mean, they’ll have to figure out a different way of taxing, because they can’t tax transactions that happen nowhere and everywhere, and whatever.
So, again, really, really interesting to see how this develops, but it feels like that whole space is as early as Bitcoin was five years ago, and everyone was scratching their heads then. You know, just now the regulators are still catching up with the securities offerings, and the ICOs, and trying to get whatever happens to Ripple and XRP, there’ll be an outcome that will have clarified a bunch of legal points, and then we can all move forwards again.
Laura Shin:
Yeah, no, sometimes when I think about these DeFi hacks, where it’s like, you know, they borrow money, they do, like, a flash loan, and then they short the thing, and then they manipulate the automated market maker curve to manipulate the price, and like, all those things together, I’m a little bit like, okay, when you can do that in one Ethereum block that’s, like, 12 to 15 seconds, and normally in the real world, that would take, I don’t even know how many days or weeks, whatever.
I mean, it’s just like, okay, this technology’s definitely going to take off much faster than the regulators can keep up.
Raoul Pal:
Yeah, and wait till tokenization really takes hold. You know, we’ve barely started with tokenization. We’re just fiddling around with ideas. With tokenization, it’s going to be literally millions of these things, all with complicated attributes, some with smart contracts. Everything is going to be different. It’s offering a whole new trading world, of which basically, it’s almost impossible for humans to deal with the complexities of some of what these…I mean, wait till insurance market, with insurance tokens on policies, comes in, and allow them to be freely tradable for all of us.
I mean, I don’t know how to do that. We’re just not prepared for any of this stuff, but it’s all coming.
Laura Shin:
Yeah. Well, I’m excited for it. Okay, so, before we transition to GameStop, I’m just curious. So, Raoul, which of Lyn’s points was most persuasive to you, or, like, kind of made you pause a little bit about your ETH investment, and then, same question for Lyn?
Raoul Pal:
Well, look, I think Lyn raises really important questions, and the question is, is the transaction volume on the network going to drive network effects or not? I don’t think it’s the issue, but it’s something, again, we need to see that dichotomy, and see how that plays out. I think there’s an S-curve moment. We don’t know how some of this plays out, and she’s right to be more heavily weighted, well, all weighted, but saying this, and I can understand why people have an Ethereum view, I think that’s totally right, too.
You know, I think what happens to these applications, with the cost usage and all of this, again, something to monitor. I mean, the great thing is, is none of us know. None of us have seen this before. So, we have no precedent, which is, again, I keep saying, it’s one of the most rewarding things about this space, is we get to think blue sky and not, well, back in 1947, they did this, and it’s like, it’s just very different, and that makes it very interesting. And so, there is no truth. The only thing you can do is take on board what everybody’s saying, and just observe, and draw your own conclusions, and assess your own probabilities as you go.
Laura Shin:
Yeah. And Lyn?
Lyn Alden:
I think Raoul’s totally right about keeping an eye on it, and basically watching the network effects unfold, and then see what kind of roadblocks come up. And so, you know, for example, in that article, since then, this past weekend, I provided Ethereum update in one of my premium reports, just because, basically the point was, it was kind of right under its previous all-time high. It looked a lot like Bitcoin did back in, like, November, where it was kind of flirting under, you know, like, in the low 19,000s, and I basically said if this breaks out, it’s probably bullish for 2021.
And then the question is, I have less conviction about the long term, because, you know, that goes back to all the other kind of concerns I had. And so, I do think that Ethereum is large enough to warrant observation, not only as it pertains to a couple different things. One is, you know, how is it going to affect the Bitcoin investment? Is it going to eat some of Bitcoin’s lunch? Are they both going to grow? So, you have to monitor for that reason.
And then, two, you want to see, okay, how that’s going to impact, say, you know, centralized exchanges around the world. How’s that going to impact the banking industry? How’s that going to impact the insurance industry? And so, I do think that DeFi in general is something you have to watch, whether or not you’re invested in the token. It’s clearly here, it’s clearly growing, and I think it’s important to watch kind of all the ramifications, because like Raoul said, we really don’t know, in some ways, what the future looks like five years from now.
And so, I’m monitoring the Bitcoin network. I’m monitoring what’s happening on Lightning, and I’m also watching some of the things happening on Ethereum as well.
Laura Shin:
All right, and actually, so, the one last question just about this before we move to GameStop, Raoul, you did tweet that you thought ETH might, and I’m quoting here, “might well go to 20,000 dollars this cycle.” Are you still standing by that?
Raoul Pal:
It’s, all I did, no magic, I took the chart from a million wallets, and a million wallets in Bitcoin, and where did it go? It went to $20,000. So, I’m like, okay, there’s a good enough guess. What it means, what I’m really trying to say in something like that is, it’s much larger than you think, and we’ve got some idea of an event that played out in the past and looks very like this. And you know, people like me love a bit of a historical chart, and even though I said this whole new space, exciting, but when you’ve got something that’s so highly correlated, it’s, okay, this is interesting. That sounds a sensible target.
And I know it sounds nonsensical to many, look, because nobody can think in exponential terms. We’re just incapable as humans. So, think, I just spoke to, as I said, I spoke to Mark Yusco earlier, he said, and he had a great, and again, I don’t know if his maths is dead right, but just take it as roughly. He said, I can walk 20 paces and go across my office, linear paces. If I take 20 exponential paces, I go round the world three times. That’s why we cannot think in exponential terms. It’s hilarious. Humans just can’t do it, because we don’t think that way.
Laura Shin:
Yeah, I like that. That’s a great quote. And so, Lyn…
Raoul Pal:
But whether Mark’s maths is right or not, I don’t know, but…
Laura Shin:
Maybe I’ll try to find somebody to fact-check that.
Raoul Pal:
Yeah, exactly. I’m sure you can find someone.
Lyn Alden:
That’s like Jeff Booth’s thing, where he always points out that if you fold a paper 50 times, you know, if you ask people how big you think it is, and people say, I don’t know, like, three feet, and you’re like, no, it’s to the sun. Like, it’s…and after, like, fold 37, you’re already to the moon. Like, the math gets silly once you get out far enough. Yeah.
Laura Shin:
Wow. Okay. So, Lyn, what would be your price prediction for ETH by end of year?
Lyn Alden:
I don’t have a strong opinion on that, but you know, I think that, because the concern is if you were watching in 2017, you gave a price prediction on any of them in early 2017, they probably would’ve all undershot what happened in 2017. And so, but I think Raoul’s approach, you’re just kind of looking at, you know, price and seeing what happens, I think it makes sense. And it’s part of the reason why I got so bullish on Bitcoin about a year ago, is because I said, look, every time there’s a halving, this happens.
And so, I’d rather take the bet as a, you know, a certain allocation, because I don’t have a specific price target. It’s almost like you’re embarrassed to say what you think the actual price target is. You’re like, you know, if it’s sitting in there, like, 7,000, you don’t want to be like, I think it might go to 100,000, but like, and I was like, so, even then, when I kind of made my Bitcoin argument, I didn’t give a price target other than I thought it’s well north of here, and I kind of gave, like, a really big range of outcomes.
It, like, starts at, like, 30,000, and it goes up from there. And so, I kind of view Ethereum the same way, where if this is a good year for Bitcoin, I would expect Ethereum to also have a very good year, and you know, in all likelihood probably outperform during the bull market of that phase. I wouldn’t be surprised. And so, I don’t really know where the end of the year looks like. I just think it’s probably north of here, by, you know, probably a notable amount, if I were to guess.
Laura Shin:
Okay, all right…
Raoul Pal:
Yeah, and again, I’d use exactly the same way. Look, again, none of us know. Exponential assets are really hard. Not any of us, not a single person on Earth would’ve guessed how big Amazon got, or its share price, none of us would.
Laura Shin:
Right.
Raoul Pal:
So, we’re going to undershoot some years, and we’re going to wildly overshoot other years trying to figure this stuff out, and again, who knows?
Laura Shin:
All right. Let’s talk GameStop. I just want to hear kind of what your main thoughts are around everything that happened, and either of you can go first.
Raoul Pal:
I’m actually more on the fence about it than many. It got all the tribes up, with their hackles out. I love the democratization of financial information, trading. I love the fact that people are now not going, you know, we started Real Vision for this exact purpose, the democratization of information. You don’t give it to a wealth advisor who you barely meet once a year, he takes all your life savings, and at the end of it you get outcome. It’s madness.
So, people are now taking an active involvement. It took a while for the Millennials to do that, because they had a lot of debt, but now they’re in it, whether it’s stimulus checks, what, doesn’t matter, it’s great, it’s great to see, and people are like, you know, it’s David against Goliath. Well, they’re actually just doing what everybody else in financial markets does. I mean, hedge funds will look for every single short position. If they think somebody’s really crowded short, a bunch of them will get together and try and squeeze the other one out.
That’s financial markets. That’s how it works. That’s how you try and extract value. So, you know, I think a lot of that was normal. I think Robinhood went about everything in a unfortunately ugly manner. Firstly, most people didn’t realize, and you know, any of us who’ve been in markets for a while knew that if the product’s free, you’re the product, and that will be the same with the new Strike Network as well. You know, don’t forget, there’s a bunch of effects transactions in the middle of that.
Somebody gets paid. So, in this, you’ve got that whole Robinhood, them, the Millennials not realizing it, because many of them still don’t really realize, with Facebook, that they were the, or Instagram, that they were the products. So, there’s that learning, but…and Robinhood also didn’t have enough capital. That was actually the issue, for the natural margin trades that went through. So, when volatility went so extreme because of so much retail option activity, everybody got tapped on the shoulder.
But people like interactive brokers had plenty of capital. They had $10 billion in capital, but Robinhood didn’t, and that is where lies the problem, because they created their own settlement system internally to net off trades. And that’s what created the problems. So, outside of the philosophical battle of David and Goliath, and the democratization, and people against the hedge funds, and are the hedge funds crooks, all of this stuff, it’s actually a story of broken financial planning.
Laura Shin:
So, what you’re saying is that, if Robinhood had outsourced that function, then most likely, that third party would’ve been able to put up enough margin collateral…?
Raoul Pal:
My guess, and I don’t know, is the reason they have their own netting off internal clearing is it lowers margin. So, which is why hedge funds use prime brokers, for a similar reason, because you net off. So, they netted off, so they didn’t have to post as much margin to have more free capital in the business. So, what happens in times of stress, they didn’t realize that this is what happens, but the actual issue is here, you know, within the story is the story that a short position potentially was larger than the entire market cap, whether that was actually the case or not.
I’m not sure, but it’s the story of planning. What actually went wrong is the planning blew up.
Laura Shin:
Well, so, Lyn, I do want to hear your thoughts, but I actually just want to ask Raoul, because I was trying to figure out, you know, when I was looking at all that, obviously I also spend my time looking at DeFi, where a lot of things are over-collateralized, and then when people don’t, they can get liquidated when the value of their collateral falls below the ratio of what they borrowed. So, you know, I was just trying to figure out, well, would any kind of smart contract like that solve this issue?
Or not solve, but prevent it, where, you know, instead of just a blanket nobody can buy anymore, then, like, individuals, maybe, that don’t have enough collateral will not be able to do something, but…?
Raoul Pal:
Firstly, to have stopped the leverage on the hedge fund side, which is extreme, and on the option trading side, like, individuals, again, a lot of this could’ve gone on blockchain technology. So, at the core of the custody system, which is the DTCC, is where some of this problem had evolved, and who owned what in a situation where there are more short sellers than there is market cap, if that was the case. None of that should’ve happened. It’s because there’s no recorded ownership at a trusted level. We saw that with Dole Foods.
We’d seen this numerous occasions, with Lehman Brothers and the 32-times rehypothecation of certain assets. So, all of this is the big mess that, when I first saw Bitcoin, I realized that actually, the blockchain’s an answer to so much of this, to verify transactions and all of that. In terms of smart contracts, without question, can you build in auto-margin liquidation? Right now, what happens is, you get margin-called, you get an email, and then a phone call, and then you have to make post-margin, and then they might liquidate your trade, right?
This is nonsense, and I lost money in MF Global, which is one of the blow-ups in this kind of thing, and I tried to pull my money out. I couldn’t. None of this should really happen. Most of this should be just an algorithm.
Laura Shin:
Yeah. One other thing that I was going to say, so, Caitlin Long also, always, I mean, long before the Robinhood thing, has talked about the ability for companies to, or for investors to buy more shorts than there are even existing shares. And so, I saw, also, Senator Cynthia Lummis, the new Bitcoin supporter in Congress, also tweeted about it, and now she’s on the banking committee. So, who knows what we’ll see with that?
But yeah, in this case, the hedge funds had shorted 136 percent of GameStop, which, you know, obviously, if they were to try to cover the shorts, they wouldn’t even be able to buy enough shares, so…
Raoul Pal:
And the problem is, again, I spend a lot of time on this, because I almost went, after 2012 when Europe almost went under, almost tried to set up the world’s safest bank and recruited investors. Then I discovered Bitcoin, and realized there was probably a better solution. I had the DTCC, Euroclear, the New York Fed, and I’d spoken to the ECB, about settlement, right, custody. What almost happened in Europe, and what almost happened, why, why AIG was not able to go bust, but Lehman was, was because one was a triple-A collateral, and they were 32-times rehypothecated by the system.
So, there was 32 claims on that one bond. Now, when Lehman went under, the ECB injected 50 billion dollars quickly into Euroclear, which is a custody entity, and what Euroclear did was pledge collateral to the ECB for the loan. Normal. I found this book, and there is the collateral, the customer positions, because there is no segregation of customers at central Euroclear level. So, then I went to the DTCC, there’s a whole bunch of us were there, with the New York Fed.
We said, hey, listen, guys, is there segregation? And they said, of course, everybody’s segregated. I said, okay, let’s say one of the counterparts, let’s say JP Morgan goes bust, or a collateral. Let’s say UK gilts go bust, and somebody’s pledged them as collateral. What happens? Well, if nobody can figure this out, we’ll lend money to the DTCC. We can’t let them go bust. So, great, what are you going to take? They said, collateral. I said, what’s the collateral? They said, whatever they give us.
I said, this is customer positions, and it’s non-segregated at this point. They went, yes. So, what it means is, at the very core, nobody’s protected from anything, and the system over-uses assets, and we can over-use assets fine, as long as we have a chain of who owns what at what point. But in this situation, you have no idea, because then there’s a derivative layer on top, and this is why this whole problem is much larger than this Robinhood story. It’s actually the problem of a system that’s not able to cope with the amount of leverages within it, and claims on it.
Laura Shin:
Right, like, simply just, it’s like a lack of visibility. So, in that sense, the fact that blockchains can make the data transparent is actually, literally, pretty much the major advantage. Is that it?
Raoul Pal:
Trusted ownership. It’s the basic essence of the blockchain, is a verified, trusted owner, ownership structure. That’s what it gives, and we don’t have that in the securities market, at all. You don’t have it as a brokerage customer. You don’t have it as a brokerage house. You don’t have it as a clearing entity. You don’t have it as a custody entity. You don’t have it as a bank. Nobody has trusted ownership of anything, which is why people store gold in a gold vault.
And you have to make sure that the paperwork says that they cannot reuse it, because you can put it in a gold vault, and they can still reuse it. It’s an extraordinary world. Bitcoin, I own my Bitcoin, it’s in my name.
Laura Shin:
All right, and so, Lyn, yeah, why don’t you just give us any other thoughts that you want to add about GameStop? I know there’s so much to unpack here.
Lyn Alden:
Yeah, I think overall, I mean, it was a giant advertisement for blockchain, for, you know, self-custody. It couldn’t have been a better one for that, in many ways, because, you know, people had all these kind of issues about the kind of partners they’re working with, whether it’s Robinhood or their lenders, and then people just not, rehypothecation of all this thing, like more shares short than the market cap. And that goes back to, you know, like Raoul said, having gold in a vault, or having Bitcoin in your cold-storage wallet.
And so, that’s a very different environment than all this kind of counter-party trust that happens. And it also, it opened up questions, I think, to the broader market, of what exactly is market manipulation, because, again, as Raoul said, you’ve had this going on for a long time with hedge funds attacking each other all the time. And even in this case, there were hedge funds already kind of outlined, these media outlets that did profit a ton from it. So, you know, at the end of the day, it’s still the hedge funds that ended up kind of making a ton of money from this.
Whereas, you know, in an environment, for example, where some firms can pay millions of dollars to an exchange to literally put their server inside the exchange data center, and basically have a faster advantage than everyone else, what exactly is market manipulation? What is kind of the limit? What’s “fair” in the market? And so, that, you know, it kind of tied into the populism of the day, and it kind of just ended up being kind of this focal point that opens up just kind of a lot of issues that I think have been building up for a long time.
And it shows why some of these technologies are being built, and what some of the genesis was for all of this. Like, what made Satoshi Nakamoto, you know, all those years ago, back in 2008, or maybe before then when he was working on it, what made him, or them, or they start putting this all together? And it’s exactly these sorts of issues, and the same types of things that happened, you know, back in the sub-prime mortgage crisis, the global financial crisis, and then again, all the same stuff that happened here over these past several weeks.
Laura Shin:
All right, and one last thing, which just, when I was thinking about, and it goes back to the philosophical point that you were making, Lyn. You know, it’s that question of, well, how do you define market manipulation, because I don’t know if you listen to Chamath Palihapitiya’s interview on CNBC, but he was like, hey, what they did in, you know, a sub-Reddit is no different from what hedge-funders do when they go to a dinner in the Hamptons.
He was like, all that was different was that it was, like, public, and so, in that sense, it’s, you know, even less insider-y. And you know, then I saw other people just saying, well, so, I mean, I think what it is is that a lot of people do feel like, okay, well, clearly, what happened with the price was divorced from the fundamentals of GameStop at a certain point. You know, you could argue about, like, in the beginning, whether or not the low price, you know, that the Wall Street bets crowd was kind of railing against, whether that was also, like, artificial.
But you know, at a certain point, obviously, it’s sort of going to, like, $70, $80, $90, you know, $450, whatever. Then, it just became like something that really didn’t have anything left to do with GameStop. So, you know, just curious, how do you think a regulator like the SEC should handle this?
Raoul Pal:
There’s another precedent here, is, we talk about market manipulation. Many of us have all referred to this one by a different incident that happened in the past, which is the Volkswagen squeeze. So, I don’t know if you remember this…
Laura Shin:
No.
Raoul Pal:
What happens is, Porsche launched a takeover of Volkswagen, which was a much bigger company, and they bought a bunch of call options, and then bid for the stock, and they ramped the stock to the moon because they created, all the hedge funds had a different position on, which was, there’s these two types of Volkswagen shares. So, they basically forced, it’s a gigantic position the hedge funds had on. It was a really safe, one of the safest long-term kind of arbitrage positions.
They forced every hedge fund to lose all their stock borrow. They all got forced out straight, and Porsche owned the call options, and suddenly, at one point, were making a ton of money, and then eventually, by forcing VW, and eventually the whole thing collapsed, and VW ended up reversing into Porsche. It was this huge drama, but it was the biggest manipulation of all time. It played out publicly, in Germany of all places. Everybody kind of got away with it.
A bunch of hedge funds went under. It was in the middle of 2008. Bond deals collapsed because there was a run on collateral, because of the mess that it caused in prime brokerages. So, this stuff, as Lyn said, goes on and on and on, and what was happening before is, insider trading was slightly different, but that still happens in certain respects. But this ganging up with a group of like-minded people, because you think something has a different value, that’s a market.
Trying to push it to extremes, that’s probably foolishness, because in the end, value always ascertains itself in the end, or asserts itself in the end. So, you know, that’s why we’ve seen the mean reversion of value. So, who knows? It’s not an easy question, but the playing field was leveled, because people now have information. Look at the information we all get from Twitter. It’s unbelievable. The number of people we’ve all met.
I mean, I met Lyn on Twitter, you know? We all meet there, and we exchange information. That’s democratization. Before, I’d have to go and find an investment bank, and if I wasn’t a customer, I couldn’t speak to that guy or girl. It’s ridiculous. So, the world’s changed. It’s good.
Laura Shin:
All right. Any last thoughts before we say goodbye, on this whole GameStop thing, and how it relates to crypto? Because I think for me, what was so fun watching it was, I was like, I recognize this behavior. This is like the crypto markets. Any last thoughts?
Raoul Pal:
I think it’s the same crowd. It’s the same people. They’re discovering price, discovering opportunity, you know, things that nobody understands. I mean, nobody understands any of the DeFi projects they’re trading the tokens of, or any of this stuff, but that’s okay. People will lose money, people will buy money, but what you’re actually doing is giving people the testing tools to test out how to invest, and how to figure this stuff out. And you know, Bitcoin had its S-curves. People will have their S-curves, in their learning cycle of investing, but I think what it’s actually done is empower people overall.
Lyn Alden:
Yeah, I think it’s one of those important narrative moments, where it kind of goes down as a moment in history where people kind of realize a lot of things were wrong with the system. You know, we have that, like you point out with the Volkswagen incident back a while ago, Volkswagen briefly became the most valuable company in the world, technically, for that brief moment. It was worth over, like, 400 billion dollars, if you look at the market cap.
Yeah, and so, I think this kind of, this sort of same event here, they kind of showed some of the plumbing issues of the system, and showed why so many people are kind of working so hard on building other systems, other platforms to fix a lot of these issues.
Laura Shin:
Yeah. I think for me, the other last question that I’m left wondering is, what is going to happen to Robinhood? You know, Vlad Tenev, he’s going to be in the hot seat in front of Congress, and clearly, I think people are going to be putting a magnifying glass to what happened on the day that they stopped the purchases, so…
Raoul Pal:
The question is, did he actually do wrong, or was he given, by the exchange, the problem to solve, which is their platform had created more speculation in options, on four or five securities, than anybody else in the world had ever done before, essentially? And the way they margin it and net it and all of this stuff is, you can’t pay your bills, because the volatility in these names are too high. You either reduce the trading in these names, or you have to come up with the cash immediately.
I get it. He didn’t go, I want to stop these guys manipulating hedge funds. None of that happened, I don’t think. I don’t think Citadel tapped anybody on the, Citadel are big boys. They’ve been through everything from the long-term capital crisis, to the financial crisis, to the European…Citadel know exactly what they’re doing. Ken Griffin and that team is one of the smartest on Earth. So, Melvin, okay, they got it wrong. They shouldn’t have had open-ended risk in that size, and they are part of the equation. Steven Cohen, as Steven said, he’s like, I do have the right to invest in somebody I believe in.
He got caught out wrongly, and I want to make sure they have enough capital. That’s his choice. He’s a trader, too. He can make those choices. So, I’m not sure every…there’s a lot of accusations of wrong-doing, from everybody, and I just think everybody was a victim of circumstance, and the circumstance is what Lyn said. It’s the system itself.
Laura Shin:
Yeah, I think that one thing for me is, and Lyn and I were talking about this before we started recording, I do feel like Robinhood probably could’ve messaged better, because the night before is when they would’ve known, probably tomorrow we’re going to have to shut off the purchases. But the blog post didn’t go out until the very, like, right when the trading started. And so, then, you know, you had that massive plunge in price, and so, I feel like that was just something, they could’ve kind of gotten ahead of that a little bit, and like, given people some kind of warning. But since there wasn’t, then, I think a lot of people got hurt. So…
Raoul Pal:
They probably should’ve been fined for risk control, or lack of collateral, or something else, because there was a mismanagement there, because really, they were at risk of going under because of liquidity. You know, liquidity…
Laura Shin:
Which he refused to say when he was interviewed. I don’t know if you noted that, he, like, wouldn’t say it.
Raoul Pal:
Of course, because you never say the liquidity word, because everybody will bet against you, pull their money out, right? It’s the only thing you cannot say, but we know, because they raised one and a half billion dollars in seconds, because they had to pay their bills.
Laura Shin:
And then another 2.4 billion the next week, so…
Raoul Pal:
Because they didn’t have enough collateral overall, so that, they said, yeah, it’s going to be for growth. Guess what? It’s going into your collateral account, you won’t run such small collateral again, and bleeding VAR models.
Laura Shin:
Right. Okay. Okay. Well, we will see. He’s going up, you know, like I said, to testify in front of Congress, so we’ll have to watch that. All right, well, this has been so fun. Thank you both so much. Where can people learn more about each of you and your work?
Raoul Pal:
Easiest thing is find me on Twitter, @RaoulGMI, and I’m often around, and always happy to answer questions, and help out, or just check out Real Vision, is the other place.
Lyn Alden:
And I’m at LynAlden.com, and I’m also on Twitter, @LynAldenContact. So, thanks for putting this together. I think it was a really good conversation.
Laura Shin:
Yeah, yeah, this was great. Super, super, super-fun. All right, well, thank you both so much for coming on Unchained.
Raoul Pal:
Yeah, really enjoyed it, thanks a lot.
Laura Shin:
Thanks so much for joining us today. To learn more about Lyn and Raoul, as well as Ethereum and GameStop, check out the show notes for this episode. Don’t forget, you can now watch video recordings of the shows on the Unchained YouTube channel. Go to YouTube.com/c/UnchainedPodcast, and subscribe today.
Unchained is produced by me, Laura Shin, with help from Anthony Yoon, Daniel Nuss, Shashank, and the team at CLK Transcription. Thanks for listening.
