Crypto's Collapse

Richard Kramer: Welcome to Bubble Trouble conversations between the independent analyst, Richard Kramer, that's me, and the economist and author Will Page, where we lay out some inconvenient truths about how financial markets really work. This week, we salvage what's left to the crypto bubble, delve into the recent dollar devaluations of stable coins that we've seen, and to do this, we needed some expert help. Enter stage left, Kenny Estes, founder of Diffuse Digital, a family of funds aiming to fill the gap between traditional asset managers and allocators, and digital asset strategies. Back in a minute.

Will Page: Welcome to the show, Kenny. Um, before we go any further, we always like to toss you the microphone, adjust the mic stand, and give you a minute to introduce yourself, your own work, your background, which is fascinating, but most importantly, where our audience can find you.

Kenny Estes: So my background's a little on the eclectic side. So I started in, uh, traditional finance or TradFi, as all the crypto folk call it these days. Um, I was a high frequency trader, started doing that when I was 18 strangely. So did about a decade in the space.

Will Page: Wow.

Kenny Estes: Yeah, no, it was an interesting experience. Did the whole, you know, 15 person startup to 1500 person public company. So fun, fun times. But on the side I started spitting up various fund vehicles. So I did a bunch of real estate funds after the '08 crash, bought way too much single family cash flow property, um, and then spun up a VC fund about five and a half years ago. But what we're doing now at the primary focus with Diffuse, which we launched in 2020, is we're spending up opportunistic cryptocurrency fund vehicles. So we have two that are live right now. One is a market neutral DeFi, I think we'll probably define that term in a little bit, and the other one is an index fund that we're actually gonna be submitting our [inaudible 00:02:00] application for in just a moment.

Will Page: So Kenny, one thing that makes us show work with our listeners is we unpack complicated topics, but we do sort in a short space of time. So imagine I'm in an elevator with you and we're destined to go to the eighth floor and I got a feeling I know what cryptocurrencies is, but I like to bluff my way at dinner parties just to make it sound like you're an expert, what do you need to understand about crypto that you are too scared to ask?

Kenny Estes: [laughs] Tell you what, the first thing is, crypto is not Bitcoin. People tend to confuse those two quite a lot. Bitcoin is this whole limited fixed supply, digital way, medium of payment type set up. There's very little interesting things or very few interesting things going on in Bitcoin, in my opinion, [laughs] not popular for this opinion. There's almost no innovation. It's kind of a static thing. The rest of crypto is much more interesting. Think of Ethereum that was kind of the first mover and then all of the other blockchains, we can talk about more. The easiest way to visualize them is they are a decentralized computer. So you can do most things that you can do on your computer in a decentralized manner using these other blockchains.

But by far the biggest adoption is in financial services. So DeFi, decentralized finance, is basically trying to use a blockchain, again, a big decentralized computer, to do everything that a financial institution does. So that is a fascinating area and completely separate to Bitcoin, but it's where all of the smartest minds that I know at least are flocking in droves right now, because it is the wild west, it's the efficient frontier, and there's so, so many interesting things going on.

Will Page: Very clear. You're like the, the university lecturer I wish I had, or I was too hungover to acknowledge in the first place. But that, that really helps. We're gonna turn to the question of devaluation in certain cryptocurrencies. But I think before you can discuss devaluation, the other question, your average Joe Blow in the street would like to know is, are these cryptocurrencies inflation proof? Let's color this a little, you know, I say that Richard is perhaps a more of a hawk in inflation and am perhaps more of a dove, but clearly a question our listeners are asking is there's a lot of inflation out there, what happens to my currency? A natural extension is what happens to a cryptocurrency?

Kenny Estes: I drew that distinction between Bitcoin and the rest of crypto as a precursor to this question, knew it was coming. Bitcoin is where you typically will hear the argument about inflation the most frequently, right? Fix the apply, they're trying to replace money with Bitcoin. So in order to do that, you do need to think hard about inflation and how it impacts your Bitcoin position. I would argue it is kind of a hedge. Um, the correlation between Bitcoin and the largest stock market is way larger than it probably should be. But it is in that sense because that correlation is high, it's a real asset, right? The best hedge for inflation is to go buy an actual asset because then you can go buy house, the value of the dollar goes down, the price goes up, that's just how the mathematics work. So in that sense, yeah, sure, Bitcoin is kind of an inflation hedge.

The other cryptocurrencies, like I talked before, that big decentralized computer, the value of the token is driven by utility. Like financial services, you do a trade. There's this concept of clearing and settlement. So there's some central party typically who steps in and says, "Okay, you send me the money, I'll send you the shares to both sides of the people," and they make the transaction actually go smoothly. And they take a fee for doing that. Blockchain, DeFi in particular, once you get away from Bitcoin, you can kind of think about being a decentralized clearer. So it tracks who holds what, and it takes a fee for providing that service, very similarly to how traditional clearers do. So there, the underlying value of the token itself is the future cash flows of those fees. And as this asset grows, it just goes up and up and up and up.

Will Page: Kenny, there's been some headlines here, I'm just gonna read out to you and maybe you can just get the audience underneath these headlines, 'cause they're quite explosive language. We've got one here which says, "Everything broke. Terra goes from DeFi darling to death spiral." [laughs] And the second one gets even more animated, "There will be blood in the streets, what's to come in cryptocurrency." Now this presumably is referring to the destabilization of certain stable coins.

Kenny Estes: Mm-hmm.

Will Page: For our readers benefit, you just want to sort of summarize what these articles are actually discussing?

Kenny Estes: Sure. So we've talked about Bitcoin, we've talked about Ethereum and the other blockchains, there is another kind of digital asset known as a stable coin. So a stable coin is designed to maintain a peg, meaning it has the same price as some other asset. In pretty much all cases that other asset is US dollars. So a stable coin generally is going to be pegged to the US dollar. So at all times that stable coin should be equal or should be worth $1 by design. If it's not, then it's what we call de pegged, it lost its peg, something happened. The simplest and probably best run in my opinion, stablecoin is Circle' stablecoin, USDC, is the name of it. You as a user you want USDC, you give 'em a buck, they take the buck, they stick it in the bank account, and they give you a claim on the buck, right? Mathematically that claim it's a script, if you wanna go back to finance 101. That claim is gonna be worth a dollar as long as that dollar is sitting in the bank account, that's called being fully collateralized.

Now the issue is sometimes that dollar's not sitting in the bank account, that's what went on with Terra. So there the collateral to maintain the peg was not dollars a bank account, it was another made up token that they just said is the collateral. That's not very long term sustainable, and that's what's called an algorithmic stablecoin. But really what it means is we're trying to use some funky math and a new token to try to maintain this peg without having to stick dollars in the bank account. I've not seen one succeed long term. We've seen a lot of these algorithmic stable coins blow up, so we always took the position, the death of Terra was inevitable.

It wasn't a matter of if it was a matter of when, because as soon as the, the other token, the collateral token that they also made up that there was no backing for, well, very little backing for, was called Luna. So as soon as the value of all the Luna out there was less than the value of all the Terra out there, now you are under collateralized, but that kicks off the death spiral that your articles are referencing because once it becomes under collateralized it just basically reinforces and reinforces and reinforces, 'cause they have to print more Luna, which further drops the value and then it goes down to zero.

Will Page: And there's no Central Bank intervention to stabilize an exchange rate, there's no buying back or those support mechanisms as well.

Kenny Estes: It's even worse than that because there was a... They even called it Central Bank, which was hilarious. But the way that they did that was by printing, minting, more Luna. So if you have, [inaudible 00:09:49] certain amount of Luna outstanding and you create more of them, the value of the Luna token goes down mathematically, like that's just... It's a new share assurance right in the old Harlands. So it just made it worse the more they tried to use the central bank mechanism, as soon as it went under collateralize and started de pegging.

Richard Kramer: That, that sounds like something that should have happened to the US dollar when you had a decade of money printing and quantitative easing, and yet didn't happen. Am I missing something here? Because it sounds like what these token purveyors were doing is very similar to what the central banks were doing when their currencies were looking under collateralized or they needed to attract capital in these financial services.

Kenny Estes: I'll make a statement that I'm totally unqualified to make, um, [laughs] and you guys are way more qualified to make, the US dollar will blow up. That is inevitable. Again, it is not a matter of if-

Will Page: Right.

Kenny Estes: ... It's a matter of when. And that is because at the end of the day, it's a feud, as soon as the us dollar ceases being a reserve currency, and that will happen. That might be in 200 years, I don't know, it will collapse unless they back it with something.

Richard Kramer: Yeah, that has been predicted many times, and yet we see now the US dollar at, at all time relative high versus other currencies. So all of the efforts to undermine its position as a reserve currency haven't worked yet.

Will Page: I smell a lot of disintermediation here, but one last question from myself is the devaluation point. There's a two sided kind effect to devaluations, you know, the bad side, the loss of currency value, the good side, the booster exports and the political aspirations. We've read some crazy headlines about devaluations in cryptocurrencies. You can just walk us through those, but what I'd love our audience known for me selfishly is, is there any upside to devaluation in the crypto world?

Kenny Estes: It really depends on what your long term outlook is. There is no central bank, right? So the devaluation is just the price of generally Bitcoin going down, owing to limited supply. So as the price goes down, devalues, whatever you wanna call it, what, what does that mean? Most people who will really buy into the future of crypto would say that, uh, that's just a great buying opportunity in the same way that you have the, the, the Payso go down and value, there's a lot more people from England who's gonna be doing, uh, vacations [laughs] in, in the Canary islands.

Will Page: So it's a great buying opportunity. But if I'm just holding my head from the past world of macroeconomics, to this new world of DeFi, for the people holding that currency, it's not a great opportunity, but for the Spanish car plant firm that's devalued a Payso against the Deutschmark, it's a great opportunity. What about the people that are holding that collapse currency?

Kenny Estes: Is there an opportunity for people that are holding Bitcoin or Ethereum above and beyond just this is a buying opportunity to buy more? I'm not so sure that there is actually, I think it is just kind of a one side price goes down. One could argue that this is gonna create a lot of inflow, new capital coming into the space, which is the bread and butter for any financial services system, and that is at the end of the day, a lot of what the use cases are right now. So in that sense, it's a great time to be building new products. But I don't know that that's actually any better than if we were still in the exuberance of last year for crypto prices.

Richard Kramer: I have two specific questions I'd love to dig into on all these alternative currencies if you want to group Bitcoin and crypto and all of these various DeFi approaches together. The first one really is around utility value. Now, I can see that absolutely all manner of crypto has become of great utility value for people looking for speculative vehicles for trading, and indeed you run a asset management firm that is engaged in that and their, their loads of listed companies and unlisted companies that are at least some of them seem to be doing very well out of using it as a speculative vehicle.

But when do you make the leap to real utility value for the Page family? And I include the Pages, the, the parents of Will Page, not just the children of Will Page. I understand there was utility value for Bitcoin if you wanted to either buy a large quantity of drugs, weapons, or people, but, uh, beyond the sort of out of the way, use cases, call them what really... Can you help us understand the utility value of these alternative currencies, and beyond of course something you've mentioned already, which is if you believe the dollar's going to blow up, you want to have your money in something else, and that might be a useful something else?

Kenny Estes: Yeah. And then there's a phenomenon question of like, is this the best devaluing of the US dollar hedge? Uh, probably not. There's probably better ones out there. The utility, I think I'm briefly touched on it. The utility for non Bitcoin, and candidly, I don't think there's any utility value in Bitcoin, it just... It isn't there, it's a medium of exchange.

Richard Kramer: Unless you want to have anonymized transactions in illicit substances-

Kenny Estes: True.

Richard Kramer: ... Or weapons.

Kenny Estes: Yeah, exactly. Yeah. It's fair.

Richard Kramer: It's got a lot of value. It seems to have a lot of value there for a decade of silk road and all that.

Kenny Estes: I- I'm using utility value in the sense of like-

Richard Kramer: Right.

Kenny Estes: ... I can do a DCF against it-

Richard Kramer: Correct.

Kenny Estes: ... Which I don't really see that in Bit. But there is definitely utility there. Now we're talking about using it as a ledger, that big decentralized computer example. And I talked about traditional finance in the clearing and settlement model, or you need to have an intermediary to make sure the cash goes to the right place and the shares go to the right place if you clear and settle a transfer or just cash cash. In that sense, that's the utility. We're doing this big decentralized computer, we're charging a small fee, which goes to the validators, these are all a bunch of jargon. But the key thing is there is actually a cash flow stream where people are paying the network and the validators on the network for performing that clearing and settlement function. That is utility, right? That has value, you can do a DCF on that.

Richard Kramer: And I guess that, that moves on to my... The second area I wanted to touch on, which is when you look at these, the trillions of transactions that happen as, you know, as a high frequency trader, so what enabled that whole space to evolve into the monsters of Citadel Securities and many others these days, is incredibly low transaction costs. And when I look at the whole DeFi world and the crypto world, I see transaction costs that are just orders of magnitude out of line with what you get in the TradFi world. Of course, it doesn't sound as hip and cool in Brooklyn coffee shop to talk about TradFi in the same vein as DeFi, but I'm seeing fairly steep transaction costs for the most high profile platforms, take Coinbase as an example, that one would never in a million years imagine would, would persist in TradFis.

So, which is the direction of travel? Eventually does DeFi have to make itself work on much larger volumes, but infinitely smaller fee structures, or will this additional friction or transaction cost just limit the market, the size of the market, because many sensible investors will look and say, why am I paying percentage points instead of one or two basis points to clear and settle my transactions?

Kenny Estes: So we'll trip down memory lane for you. So I started in high frequency trading in 2000 and, wow time, two, 2002. So when I started...

Richard Kramer: [inaudible 00:17:21] and, uh...

Kenny Estes: Oh yeah, no, I was, I was [Echo 00:17:23], which is actually now [inaudible 00:17:24] funnily enough. But no, that was, that was before [inaudible 00:17:27] was even on the scene.

Richard Kramer: Right, yeah.

Kenny Estes: This is 2002. And we were trading right in Excel and the spreads were like a quarter, right? Like, like a quarter of a dollar, it' 25 cent, very expensive. The technical infrastructure sucked, like a lot to the point that 2008 we made some decisions which either really well for us, where we became self clear. So we basically made the decision to take all of the technology stack and make it internal, so we're not reliant on the rickety tech stack that was out there at the time. So when '08 happened and all these volumes went on, exchanges were going down because of integer overflows, clearers couldn't handle it, and we were one of the few people that were actually able to stay in the market because we'd made that decision.

I made that point not to, to brag about something we did in a former life, but to show how bad the technical infrastructure was at the time. If you go into DeFi right now, it feels exactly like that. It's wildly inefficient, the fees are really high. It's very... It's, it's just all over the place. There's so many blockchains you gotta track and so many platforms. And how do I convert? And do I use the centralized exchange, do I use a decentralized exchange, all of that stuff. But there are so many really good technologists and incredibly intelligent people coming in that I fully expect to see over the next five to 10 years, a new layer or a new level of efficiency in the space.

Richard Kramer: So on that hopeful note, let's go to the break. We'll come back with Will to probe further how big can this crypto DeFi world get within his beloved world of central banks and macroeconomic inflation and, and, uh, recessions and all that stuff that he, he was schooled in 20 years ago. But thanks for, uh, some simple explanations to Kenny, we'll be back in a moment. [music]

Welcome back to Bubble Trouble. Uh, we're here with Kenny Estes, learning more and more about crypto and decentralized finance. And Kenny, this is something that I guess I've always considered baffling, except for the boffins, you know, something that had a very high barrier to entry for the average person to understand. And I guess one of the topics I'll throw over to you and Will is, how does or can crypto go mainstream when people see these sort of fluctuations and value that you've seen with the highest profile crypto assets, for example, Bitcoin? I know you made the distinction between Bitcoin and others, how can corporate treasurers really embrace, uh, a currency or an asset class that has such extreme levels of volatility, uh, unless they wanna moonlight as traders? So that's maybe something for you to step in on and think about or reflect upon the currency volatility that we see in this crypto world and when it sort of asymptotically starts to match or resemble the kind of volatility we see in ordinary currencies.

Will Page: I, I wanna add further weight to my personal thesis, which is that the best selling books have the dumbest titles. And the best selling book of the credit crunch was called This Time It's Different. Now, maybe this time, we're going into a bit of an economic spiral, potential recession, potential stagflation, where you have a contraction in the economy and increasing prices, but you also have this cryptocurrency thing building up on the, on the hard shoulder. That's interesting for me. So this time it's different again, which is an oxymoron, is it gonna be different again, because now we have a plan B in terms of how we're gonna view the world of finance?

Kenny Estes: That's a great question. The first is, as far as adoption, you ask the question about kind of like, hey, with all the volatility who's gonna use it, things like that. There's a term in the industry called red pilling. Red pilling, it's a matrix reference, right? You, uh, the Morpheus had the blue pill, the red pill, Neo, or whatever his name was chose, the red pill and then now he's in a whole new world, right? That is used to describe new adopters to cryptocurrency. People are like, oh, they hear about it, it's interesting, it's a scam, it's a whole load of BS, and then they just, you know, for whatever reason, decide to sit down and actually go learn and just play around and download a meta mask and, and just kind of play around with cryptocurrency. And once they do, they get red pilled, right? It's no longer a scam. They're looking at it like this is really interesting, there's so much cool stuff going on over here. So that it's become common enough that is red pilling.

Now the really key takeaway that is only one direction. Once you're red pilled, you ain't going back, right? [laughs] You're... Every time I have to come back to traditional finance, I want to shoot myself in the head. Like, why is it so hard for me to send a wire to Ireland? That shouldn't be difficult, but it is. And because of all of this kind of bureaucratic debt and regulatory debt we put on. So that is the first thing as far as user adoption, it's a one way flow. It's not a flow back the other way. So and it's logical extension, you're gonna end up with an enormous amount of user adoption.

Richard Kramer: So Kenny, you mentioned red pilling, that process by which enlightenment is achieved, you realize a new reality, and you can never go back. But for those folks in the crypto world who've come to a unwelcome end, found themselves on the wrong end of scams or had some coins hacked and disappeared from any of the various vaults that were, uh, supposed to be the new Fort Knox of crypto, do they ever go back? Do they ever get burned and walk away? Do you think there is a backwards step from red pilling for some folks in this world maybe because the volatility is too much for them to take or because they didn't have that federal deposit insurance behind them, that, that bail them out up to a certain amount?

Kenny Estes: Sure. They do. That again, that goes too back to human nature, the next bull cycle in crypto, like they're gonna be back, right? That's just greed. If nothing else is gonna bring back to the table. Now, but I will give you this, uh, [laughs] a fun little thought experiment. If you are a country creating a new currency, [inaudible 00:23:42] Venezuela hyperinflation, yada, yada, they gotta restart it, you will never again choose a pure fiat currency. It will be, even if it's just for marketing and user adoption purposes, it might be a central bank digital currency, a CBDC, something that they can still control the monetary supply, but there's a digital asset element to it. It'll be maybe some hybrid, but you will never again see a pure fiat currency because crypto exists. If you're comfortable with that assumption and you might not be, if you're comfortable with that assumption, it is only a matter of time until the entire financial services system is digital assets.

Will Page: You're speaking sort about Scottish nationalists here. And should we get our independence, you've given them ideas. [laughs] The current exchange rate by the way, is one Scottish pound to the English pound, that seems relatively speaking quite stable, but yet it's interesting when you think about countries who are separating.

Kenny Estes: Right.

Richard Kramer: You can also see that the countries that would recognize this as a potential threat, for example China, are creating their own digital Yuan. So they are saying, "If we are going to have an alternative currency, we are going to create it and manage it ourselves."

Kenny Estes: Yep. Which is fair. And that's probably the most likely outcome. Most of these, or this is gonna wanna control the monetary supply, yada yada, yada, but the key thing it's gonna be on chain and everybody's gonna have to be comfortable using it.

Richard Kramer: That ideally because of the nature of blockchains or distributed ledger technology in a much less sexy way to put it, is that it ought to, an ought to is a wish not a reality, eventually comment much lower transaction costs.

Kenny Estes: Exactly right. Yep, and that is the... You're assuming that we continue with the user adoption. The... It becomes a more and more efficient over time-

Richard Kramer: Right.

Kenny Estes: ... That- that's just how technology works.

Richard Kramer: Right. One of the unpleasant questions that's been looming for some time is regulators-

Kenny Estes: Mm-hmm.

Richard Kramer: ... What they do is regulate. This has been a relatively lightly or unregulated area of the financial services market, Will, that come into a purview which adds all those bureaucratic costs. I know it's seems outta the realm of possibility, but could traditional finance learn from what's going on at decentralized finance and dramatically reduce its own transaction costs? Because as you mentioned, you know, high frequency trading today would never be what it is with 25 basis points of costs portrayed. It's... And pennies portrayed or less. So is there a risk that as Gary Ginsler and the US Congress decide to step in here that all of those advantages that cause people to swallow the red pill and have their eyes-

Kenny Estes: Sure.

Richard Kramer: ... Wide open, they get blinders put on and, and all of a sudden they have to start doing things like pay tax on crypto transactions and it becomes materially less, less attractive.

Kenny Estes: The regulatory question is a hard one to solve. I don't know what the answer is. I will tell you what's not working as our current approach as a country, the USA. So for a very long time, because of some of the things we've already touched on, we are a reserve currency, most of our banks are these huge multinational conglomerates, right? Because of that, and this is stolen from Matt [lavine 00:26:54], his thing is virtually every financial transaction in the world right now goes through New York because so much of the financial infrastructure is these big multinationals based outta Wall Street. So even if you're doing something that has nothing directly to do with New York, it's regulated in some way, shape or form by New York. That's just the reality of the financial services system we have right now.

So that makes it very easy to be very heavy handed as a regulator. 'Cause if you're touching every finance, you can just say you now unilaterally have to do this because I said so. That doesn't work in crypto. By design it's decentralized. So as an example, we briefly ran like a play to earn scholarship program, it doesn't matter. Basically we were hiring people in Indonesia to work for us to play this game and we did a rep share thing on it. Our hiring process was they scanned a QR code, that was it. So when you have the ability to hire people and work from anywhere in the world, the concept of a geographically based regulator doesn't make any sense. And there is no requirement, there is no ability for the US to come in unilaterally say anything.

One of our, one of our friends, he sits on a lot of boards for big crypto projects, he says about a third to a half of the board offers he gets require him to not be in the United States. So we're running with the current regulatory we're, we're running this huge, [inaudible 00:28:28] I mean a digital backwater, but I'm a big believer in regulation, right? I think there's so much scam in crypto we need safety mechanisms 'cause people are inherently greedy. And that is not gonna change anytime soon, but the answer's not a geographic regulator. So it's either a decentralized regulator, I have no idea what the hell a decentralized regulator looks like, or it's a global regulator that is centralized, which is completely anathema to everybody in crypto. So it's a super, as far as I can tell, intractable problem, but we do need to figure this out I think before at some point.

Richard Kramer: And, and before I hand it over to Will, I'll say that, you know, traditional finance, I think this podcast has made the point that the investment banks are the great criminal enterprises of our time. So you have a Codery of a dozen or two dozen banks that routinely get fined billions of dollars and carry on as before. And so the fact that we've seen endless numbers of scams, and malfeasance, and hacks, and disappearing funds in the crypto world, to my mind, it's just part and parcel of when you steal a small amount of money, you might think twice about it. But clearly when you can steal a large amount of money, many people don't think twice about it. And whether they're working for some of the largest banks in the world or coming up with very clever algorithms in crypto.

Will Page: That point throws a ball to me like Randall County. And it's almost like those fines are a cost of doing business, which is not the purpose of a fine. Um, I wanted to get back onto the topic of safety nets just briefly here, because you made me think in the first part about how there is real no safety net when you're backed by another fuzzy currency in the crypto world, but there is a safety net if you're backed by a central bank in the traditional finance world. But it's almost like a lesser of two evils question. Is the grass that much greener on the TradFi side of the fence?

And the point I wanna make is a brief lecturer in economic history, Black Wednesday in 1992, George Ross went head to head with a Bank of England and said, "I don't think the Sterling's worth that much against Deutschemark. I wanna bet you against it," and won. I think you won 10 billion in one single day by betting against the Central Bank. The point being yes, TradFi has safety nets, but they're not that safe and they're routinely breached. Do you see in this time it's different scenario, crypto currencies developing safety nets which could be potentially superior to that of Central Banks? I wanna be the optimist here.

Kenny Estes: Yeah, no, I get it. Uh, I'll give you a real answer, but first I need to ask you a question. Do you actually think that Central Bank is a safety net? Do you fundamentally think that their ability to print more money to keep in interest rates artificially low is a safety net?

Will Page: Well, my gut reaction to that is to cite an article by Gillian Tett from the Financial Times, a huge fan of our show at the height of the credit crunch. She just asked a very pertinent question, which is, "What happens if countries lose their AAA rating?" You know, is Greece safe? Is Ireland safe? We were asking those questions in 2008, nine, 10 quite often. And it made me think, well, chapter one of your macroeconomics textbook governments are safe places to put your money, perhaps not. So the answer's not 100% clear cut, I'm afraid, I have to do what Richard warned me about, which is find me the Congress who's got one hand because we say on one hand this they're safe on another hand they're, they're not safe. So I'm doubtful. Then we go to the current state of affairs on the horizon, I'd be interested to know where it could go. I mean, the grass is not that green on the other side of TradFi.

Kenny Estes: Yeah. And [inaudible 00:32:07] Nassim Nicholas Taleb.

Will Page: Yeah. Black Swan.

Kenny Estes: Yeah. Black Swan and he also wrote a book called Antifragile. It's a little preachy, but generally what the key takeaway from the book is creating systems that have lots of safety nets, whose goal is to make sure that nothing ever breaks, ultimately makes the break way worse when it happens. So one could argue that in traditional finance what's happening is we have the central bank quote, unquote safety net printing more money, whatever it is, and they're doing everything they can to make sure that stock prices keep going up, and interest rates are staying low, and everybody feels warm and fuzzy, and all of that stuff. But what's actually happening behind the scenes is there's this momentum building up of shit going wrong. [laughs] Right? And so when it breaks, it's gonna be really, really, really bad. I would argue cryptos on the other, uh, other end of the spectrum where you have failures all the time, right? So each of them individually, yeah, they kind of suck, but you don't create this massive systemic blow up risk at the end of the day.

Will Page: Right. And it's almost like the analogy of crime stats when crime stats go up, three things can happen. A, crime is on the increase, B, we're getting better catching criminals, or C, we've changed the definition of crime. So learning about crypto blowups all the time isn't in, in many ways a good sign because what I'm not learning is what the central banks buried under the carpet and the journalists couldn't dig up.

Kenny Estes: Right.

Will Page: So there's that kind of cynical thinking too.

Richard Kramer: So Kenny, one of the things we try to do as sort of the mission of Bubble Trouble to get at the inconvenient truths behind how the markets really work, are to ask our guests and, and come up with our own, sort of smoke signals, things to watch out for, things that make you go, uh, that's really not gonna end well. Uh, having worked to tech and finance now for close to 30 years, I have personally looked at crypto and felt there were a lot of hallmarks of the watch out moments written all over it, blinding people with science, uh, talking about a miraculously better future, decoupling, or dare I say, disrupting the man.

Look, I'm no expert, and if I had been clever enough, I would've bought Bitcoin when it was 12 bucks and sold it in 30,000. And, and I know a lot of people who are actively trading crypto assets and seem to be enjoying it, whether they're making money or not I don't know. What are the couple of sort of things that make you go uh, oh that really worry you, or you would suggest people look out for as smoke signals? [laughs]

Kenny Estes: So, uh, a couple of points to make, one is we're not speculators, we don't go buy a thing and hope it goes off like ever. We would be mark and microstructure maybe where there's... Because there's so many moving pieces, there's inefficiencies, and you can find ways to make money out of inefficiency by its right nature. And the other way is, uh, you can't really call it in this space, but value investing [laughs].

Richard Kramer: Right.

Kenny Estes: Like trying to figure out what the underlying economics are to support a token or a particular price. So I've harped a couple times down on the Ethereum, clearing and settlement, you getting paid fees, even DCF, do that math, right? Like is this... Is the valuation that you get by doing that, is that even close to what the market is currently trading at? Figure that out, right? Think it through and see if it's reasonable or not. Understand the actual... There was, there was a super popular for, I don't know, three months token called OHM, which was trying to be this new central money. But if you went into the documents, they're like, yeah, we have this downside arbitrage mechanism that only kicks in, I think if, if the value of the OHM token becomes less than like a buck, right? And it was trading at like hundreds of dollars. And like, yeah, that doesn't make any sense. Like fundamentally, like that's just all hype all the time. Like, yeah, we can't really short it because the market can remain.

Uh, as Kane said, the, uh, market can remain irrational longer than you can remain solvent. The other thing that goes a long way is do test transactions. Like there's this concept of a technical audit. So they actually have a third party come and look at the code to see if there's like, it's a scam, or if they, they can just steal your money at the end of the day. Don't go invest in stuff that's not audited. [laughs] Right? Like do a test transaction. Uh, we do this all the time on our trading where you put in, put in, put in 100 bucks, right? Take out 100 bucks. Did it work about? That half the time, the answer is no. Is really basic stuff like that gets you really far in crypto.

Richard Kramer: Well, I guess it's the digital equivalent of before the advent of the Euro, if you started out with one European currency and went to every success of airport and changed currencies 12 times around the, the formerly smaller European Union, you would end up with less than 50P in the pound, because that was the transaction fees and the spreads. And I guess what you're trying to do with these tests is to find out how bad is the spread, what are my real transaction costs?

Kenny Estes: Not only transaction costs, but like, did it come out like as in... Was this just a straight up scam, right? [laughs] Like they, I just, yeah, you can deposit it, right?

Richard Kramer: You don't, you don't hand your money through the window at Travel X and expect them to just get up, pull down the window, pull down the window, share it and walk away. [laughs]

Will Page: Well, after smoking no illicit substances purchase with crypto, but simply some financially astute cigarettes, um, I wanna thank Kenny. This has been genuinely saying a podcast which I went into not knowing a lot about crypto and I sincerely hope our audience comes out like myself a lot well versed in what's going on in this world of, uh, new world of finance. Um, you also gave us a couple of sound bites, red pilling in one direction. Good inspiration for future drug dealers and boy bands to think about too as well. But Kenny, thank you so much for coming on the podcast, and you meticulously and clearly guiding us through the world of cryptocurrencies. And my appreciation to Richard Kramer for his assistance here. This has been Bubble Trouble and we will see you next time.

Richard Kramer: If you're new to Bubble Trouble, we hope you'll follow the show wherever you listen to podcasts. Bubble Trouble is produced by Eric Newsom, Jesse Baker and Julia Nat at Magnificent Noise. You can learn more at bubbletroublepodcast.com. Will Page and I will see you next time. [music]