The Future Of Crypto Trading with Jakub Rehor, Co-Founder and CIO of Lucy Labs | The Raz Report

The Future Of Crypto Trading with Jakub Rehor, Co-Founder and CIO of Lucy Labs | The Raz Report

Show Video

this edition of the razz report to have jacob ray  or um co-founder and chief and chief investment   officer of lucy labs this um is gonna be an  exciting one because he has tons of experience   working at hedge funds from third avenue and  just being in this industry being at mckinsey um   i'm gonna stop talking i'm gonna ask questions  jacob thanks for coming on the raz report today   well thanks for having me yes so um i was excited  to have you because you have a lot of interesting   experience from crypto to equities being a  multi-billion dollar uh value fund for many years   um but before we get into all that fun stuff where  did you grow up well i grew up in czechoslovakia   it was uh in the 1970s and 1980s so it was still  a communist country and it was a very different uh   place than uh than living here in the u.s now so  like you went through like the velvet revolution   yeah velvet revolution i mean uh one thing i might  mention because it has something to do with crypto   is uh there was an interesting currency situation  in czechoslovakia so you had the national currency   which was the crown and you would that's what you  would earn and you would spend in regular shops   but you also had hard currency stores that  had stuff that the regular shops didn't have   and if you wanted to be shopping in those hard  currency stores you needed these special vouchers   that uh that were exchangeable for higher currency  and you could go into these stores and use these   vouchers uh to pay for you know more luxury  luxurious stuff and nobody would really ask you   how how you got your hands on it it was uh it was  just considered to be okay and the third currency   was circulating in the country was the deutsche  mark and the deutsche mark is what you would use   if you were planning to go on vacation abroad and  you needed to you know you were planning to live   it up and go to restaurants and buy some souvenirs  so there was really like three currencies in   circulation in the country and there was a gray  market where people would be uh changing from one   currency to another so i'm kind of familiar with  uh with a situation where technically you have a   single currency but you have actually in reality  multiple circulating currencies with fluctuating   exchange rates and uh the connection to  crypto is that people are talking about   now you know oh why would we even have something  like bitcoin running in parallel with uh whatever   the country currencies is and it's so strange and  there would be never any need for it and i'm like   you know that's normal to me i grew up with that  that's just absolutely normal state of affairs   yeah um and so you going with those multiple  currencies do you think then like the bitcoin   revolution would be here to stay oh it's  absolutely here to stay i mean nobody will   uninvent bitcoin i mean we now know that it's  possible uh whatever happens to bitcoin in itself   uh somebody will come up with a new cryptocurrency  it's just uh you know you'll never put this genie   back in into the bottle um what bitcoin did was  to do something that was considered impossible uh   prior to that a lot of people have tried to create  native internet currency and they a lot of them   sort of floundered on the same set of problems  it was centralized it was easy to shut down   it was referring to an underlying fiat or  underlying commodity uh and it was difficult to   keep the ledger synchronized around the world and  bitcoin solved all of these problems uh it really   it is a real breakthrough in computer science  got it and so and it brings you back to when   you were growing up in chunks of hockey  and where there was multiple currencies   um etc yeah and the problem that bitcoin solves  are very often not problems that we have here in   the us uh here you know the payment systems work  pretty well banks work pretty well you're not   worried about your atms stopping working tomorrow  so explaining the value of bitcoin to americans   is a little bit like it it sounds a little bit  unreal you know the problems that it's trying   to solve but you go outside of the us you go  to countries like cyprus or lebanon venezuela   iran they you know they get it they immediate they  understand it solves their problems today and here   got it got it understood um so going back  to the back to your upbringing you ended up   going to school i think at yale was that from  czechoslovakia or like how did you end up in   yale oh it was a little bit circuitous so i was i  was going to i was studying electrical engineering   in czechoslovakia and i was involved in the  student strike i joined the national student   strike coordinating committee which was part  of the velvet revolution and what we did there   is we built um uh like we basically built the  czech internet very early on we connected all   the universities across the country uh hooked them  up and we use that network to print and distribute   uh all the materials that the uh the velvet  revolution leaders were putting out we were   uh you know our goal was to break the monopoly  the media monopoly that the communist media had   and get all this information out into people's  hands and we managed to do that in a space of a   week about a week and a half we uh we hooked up  basically all the printers and copy machines and   fax machines that we could get our hands on and we  were printing we're printing posters and materials   by the tens of thousands we had them you know on  all the streets in the country very very quickly   really and and did did it like catch on or  is everyone was it was becoming a big dealer   yeah i mean when the students track started  it uh originally was just a couple of schools   and then it snowballed it started at the theater  academy then you know we joined at the electrical   engineering and pretty much all the schools very  quickly joined on and 10 year 10 days after the   start of the strike we were able to organize  a general strike where the whole country shut   down for two hours wow to show sort of to send  the message to the government that uh you know   we can prove that we have general support for what  we stand for and in order to organize the general   strike you really needed to coordinate all this  information get it out get it into the right hands   um early on we realized that kind of again sort of  there's a connection to bitcoin the problem really   wasn't in trying to encrypt the communication on  our network we didn't really care if the secret   service was reading us or not because we were you  know putting it out in posters and all that stuff   anyway the the real challenge was to authenticate  the information we were worried that uh the state   security would try to inject some provocative  material in there try to disrupt us by by sending   uh false information in there so authentication  was was more of an issue than encryption   and that's very similar to bitcoin where all all  the uh transactions are visible to everyone uh   they're not encrypted you know which address sent  how much to what address but the important part   is it's authenticated you cannot fake sending  money you cannot send money that you don't have   um so yeah okay got it so that's so that's so  then so then you make your way to america and   you go to yale does that like change you the  level of revolution shape the person you are   today like how how did that play a role oh yell  was a wonderful wonderful experience you just you   just surrounded with a lot of bright talented  driven people and it's uh uh you know it was a   great environment to sort of encourage you to go  and uh and pursue whatever interest uh you have   got it and you so from yale did you go right  to your first job yep went straight to mckinsey   uh spent a couple of years at mckinsey  doing consulting uh at various places   uh which was very what kind of companies are  you consulting for while you're at mckenzie um yes yes it was a very interesting batch  of companies so my first client was was   an online service actually one of the first online  services this was before internet really caught on   so in those days you had the three companies  compuserve prodigy and aol and they had uh they   had a strategic issue you know what do we do about  this internet thing are we just gonna ignore it   because you know we have much better uh content  on our own network or are we going to take this   bet that over the long term the content that's  available on the internet is going to be better   than what we have inside our walled garden and  okay if you decide to take that bet what does it   mean what kind of technology do we have to build  how do we connect our customers with that how do   we do our marketing it was really interesting  times it was in the early days of the internet   so did that like did you like from that you're  like i want to be in the internet or i wanna   like is that something that you were striving  towards or no like yeah i mean it's like basically   whatever whatever i did i couldn't get away  from the internet and the technology all right   it just follows you everywhere yeah yep okay  and um then you left mckinsey and is that when   you went to marty whitman's third avenue uh not  directly at first i went to sanford bernstein   um and then i went to putnam investments  and then i ended up at third avenue so i   actually started doing value investing uh  at sanford bernstein i was an equity analyst   and then sort of worked my way up uh you know  through being more senior all the way to to pm   level at third avenue and so i spent a long time  uh analyzing balance sheets analyzing companies   analyzing businesses and uh making investments and  uh you know running portfolio construction running   managing risk and all that wonderful stuff so at  third uh avenue we came all the way to pm and you   you were making adjustments once you're like a  pm at one how many well how many people work at   third avenue time uh at the time it was about 100  people in total of whom about 20 people were in   the research department or in the investment  department yeah well what what made you want   to go from mckinsey to wall street um the best  part of working mckinsey was doing the strategy   strategy research and sort of thinking longer  term the hardest part of working mckinsey was   doing cost cutting so one of the studies i was on  was at an electrical utility where you know they   had a capital budget that was getting a little  bit out of control and you had to go in there   and start cutting expenses so you would go  and identify the projects that needed to be   slowed down or shut down and uh you know that's uh  it's pretty stressful situation because you talk   to people whose jobs are linked directly to these  projects so they know that if this project gets   canned you know they may have no future at the  company so they will you know they try to fight   really hard to preserve it so you end up in this  like hand-to-hand combat uh where you're fighting   uh against the people you're trying to help uh  it's quite stressful and wasn't all that enjoyable   um going into wall street and uh equity investing  is very much like becoming a strategy specialist   right you're thinking about longer-term issues you  spend a lot of time researching what's going on   but uh you know luckily you don't have to go there  and actually do the hard things that are required   to run a business yeah right you get to be on the  outside and study and make decisions and not have   to be the day-to-day operation i get it i get  it and so yeah and it's like being a detective   so wonderful thing about it is is you you go and  dig and dig and you try to dig deeper than anybody   else find out more than anybody else knows and  it's it's quite exciting it's an intellectual   challenge so you understand that so i got into  this whole thing back in the day um so um then   like you were advocating uh whitman for  nine years what made you leave there   well the business is getting difficult uh the  the active management business on equity side   is uh is shrinking as you know uh the excitement  is kind of uh leaving the space assets are moving   to a passively managed product so it was just a  tough environment to really see much long-term   growth i went and started doing commodity trading  and i really spent the next couple of years sort   of retraining myself as a quant so i did the  equivalent of a master's degree in financial   mathematics uh at a couple of places and uh sort  of retooled to to get ready for the new world   which i thought you know i didn't  see really crypto in the future but   it turned out that that toolset uh is very  very helpful in entering the crypto market   got it yeah i know that and so is that did  you when you went from third avenue did you   get into crypto or was that right no that  was still a few years in the future i was   focusing on commodity trading so i was doing uh  systematic quantitative strategies in commodities   and uh when he started uh sort of talking about  crypto again in 2017 2018 with my co-founders   we started looking at the market and thinking hey  you know i wonder if this stuff would work here   okay got it and um and so then you so that you  so you start researching this crypto space you   wind up this stuff would work here and is that  when you're like your co-founders you got ready   to create uc labs or was that later yeah that  was pretty much around uh 2017 early 2018   um it turns out the three of us have very  complementary skill sets so my co-founders   one of them came from investment banking  and private equity he was actually the ceo   of uh lehman brothers north american equity  sales so he's very familiar with that side of   the business with things like prime brokerage  uh execution operations all that stuff and ma   the other co-founder is uh a technology specialist  and he uh started his career working at jp morgan   working on their foreign exchange trading desk  when it first became automated in the early 1990s   and his latest project before we started lucy labs  was he was a consultant for isda uh is the you may   be familiar is the uh is the organization that  regulates over-the-counter derivatives trading   and they had a long project sort of stemming  from the financial crisis in which they are   forcing over-the-counter traders to put up margin  historically otc trades were done without margin   uh which led to problems when lehman blew up  and the ista sim margin project went on for   several years to create the methodology  for to calculate margin requirements for   any derivative ever traded anywhere in the world  so you can imagine that was a huge project and uh   our co-founder rob was a was the lead consultant  on that yeah oh really okay and so so that okay so   so then you're so you let's go so you're lucy labs  you start this in 2017-18 is there like something   like okay here's what we're going to be or is it  like we're we're in crypto we got to figure out   a business and go along with it like what was that  when you put your shingle up what's the first like   two things you're doing well the first things  is let's figure out what what works here i mean   this is a completely new market that we don't know  anything about which is very exciting uh but you   know a little bit scary too so roll up our sleeves  and start uh figuring out how to do execution here   how to find investment opportunities how to get  historical data how to put it all together and and   roll out uh roll out an investment strategy and  uh so we did that you know we were a prop trading   uh uh fund for for three years we're doing it  with our own money and uh you know investigating   as much as we could about the market got it and  there are a lot of like other things that work   in traditional finance but don't that don't work  in crypto uh absolutely so i would say even most   things in traditional finance don't really work  in crypto so coming in as a as a value investor   there's really no value investing in crypto it's  very difficult to figure out intrinsic value   for any of these projects i mean people have tried  we have certainly tried uh it's a very difficult   problem and i don't think that anyone has found  a way to make it work what does work is momentum   momentum-based strategies so momentum is something  that has worked on all sorts of assets over long   periods of history and uh so when we started  looking at crypto we had this theory that you know   probably will be working in crypto as well and  we were pleasantly surprised how powerful the   momentum factor is within crypto um it is uh it  is actually quite surprisingly powerful crypto   is very much driven by sentiment by retail trading  and uh momentum just captures that very very well   got it and so um this volatility this macro  volatility what what do you make of it in the   crypto space the past few weeks well you know  we've been in this space for for years and uh   this is just par for course this is actually not  even particularly painful period in the sense that   uh we've lived through the bear market of  2018 we've lived through the 2020 early years   in the bear market in 2018 just to give you a  little comparison ethereum was down 95 percent   uh from peak to trough in a space of less than a  year i mean that's a very very painful situation   uh bitcoin was down over eighty percent peak to  trough uh so that's that's what a bear market in   crypto looks like um similarly in uh 2020 in march  2020 we went through a 24-hour period in which   bitcoin dropped 50 percent in 24 hours and it  was it was just when was that when was that march   2020. yeah not that long ago so yeah where are  you in crypto you have to deal with the volatility   uh your models have to take that into account you  cannot be leveraged uh you your risk management   has to be you know on top and uh you just have to  expect that there is uh there is always something   scary happening right and and you and so for you  guys you guys trade your own money you also have   accredited investors through a fund um i know you  can't really talk about that but how do you guys   go about trading in crypto like what are you short  term or what what do you guys do on this stuff so   we do a bunch of things so i can sort of describe  a few of those things so uh let's talk about the   momentum trading uh we have a pretty active uh  program in which we take uh long positions in   crypto coins when momentum is positive and we  go to cash when momentum turns negative uh so   there is uh there is based on the momentum yes you  look at the recent historical performance and in   general there is a auto correlation of performance  so things in crypto that have gone up recently   have a tendency to keep going up and things that  have gone down recently have a tendency to go down   so that's the bet you want to be taking uh the  downside is you will miss the turning points so   when things start bouncing off the bottom or when  instinct things start rolling at the top you're   gonna miss that but that's actually over the long  term that's a price that uh that's beneficial to   pay so we would uh when there is a bear market  in crypto think things start selling off we would   generally go into cash and that's certainly  what we've been doing uh most of this year   in that our models started putting us into cash  uh towards the end of last year and towards the   beginning of this year and we were we were almost  completely in cash for the past uh month or so   just from seeing models of sentiment or momentum  of the price moving purely purely price momentum   wow and you don't you don't necessarily even need  a very elaborate model sort of any sort of trend   model will tell you to get get out of the market  over the past month or so so then how do you know   when to get in you wait and you miss the bottom  you see the market turning around you see the   price momentum picking up and then then you jump  back on with the expectation you will probably get   in 10 15 above the bottom price uh but again in  the long term that's a very good trade-off to take   got it okay so so when you look to get like so  are you guys getting back in now or what's your   no we're still we're still waiting for  things to stabilize okay and so do you   have in your when you're looking at your data  is there like what do you think that is or what   one thing i've learned is not to try to predict  the markets it's it's way too hard so i you know   i have no idea when this will turn uh is there  more downside it's possible i mean again in 2018   we've seen 85 to 90 drawdowns in in crypto so  it's certainly possible uh is that what's going   to happen i have no idea we're gonna we're  gonna let our models tell us when to get in   uh-huh and um so do you so right if you're  in cash are you in straight cash or are   you doing stable coins how do you handle that so  there's there's so we can talk about that there's   there's a number of things you can do in the  crypto market if you want to be market neutral   uh there are strategies that you can do to  generate returns so i can i can mention a few   mention a few of them so one is uh a trade that  does have a counterpart in traditional markets   and it's called a basis trade uh the idea there  is um you may have a derivative let's say a future   that's trading at a different price from the  underlying so you can have a future on bitcoin   trading at a premium to the spot price of  bitcoin and a simple trade is you can go   short the future you can buy the underlying  spot and at the future expiration that gap is   going to close and you're going to collect that  spread so that's the traditional basis trade   that works in traditional markets people do this  in u.s treasuries and commodities and all sorts of  

things but it also works in crypto and in crypto  there's actually a slightly uh a different version   of this the dominant product in crypto trading is  a perpetual swap which looks a little bit like a   future but it has no expiration and the way the  mechanism works is that when there is a difference   between the derivative price and the underlying  price there's a funding rate that goes from one   side to the other when the derivative is more  expensive than the spot the people who are long   are paying people who are short so you can put  a short position in the perpetual swap you can   put a long position in the spot and collect the  funding rates and that's uh that's a trade that   historically has been providing returns of about  10 to 15 per year uh there are periods when it   makes more money than that i mean when there is  a lot of speculative excitement and speculative   mania uh we have seen it book uh 30 40 annualized  and then there are times when uh you know   people run away from the market and you will be  generating maybe zero you know low single digits   got it okay so that that's not the average  like for example i mean i don't do that like   i personally put some money in stable coins usdc  right do you do you look at that part of because   what you're describing too complicated for  me i wouldn't understand that sure sure yeah   so yeah well stable coins stable coins are  there stable coins is a safe place to be when   when things start falling apart but of  course stable coins you know we have seen   is uh it's it's it's full of it's a minefield as  well and uh so i can sort of give you my my take   on the whole stablecoin uh market you you there  are multiple kinds of stable coins uh there's the   very simple kind that works sort of like a money  market fund in traditional finance there it's a   fully backed by reserves and the stable coin is  just a together token it works like a share in the   underlying fund and the fund hopefully is fully  collateralized and always has a hundred percent   of their assets in cash or cash like products so  usdc is a great example of that right that's uh   uh that's a stable coin that's fully packed with  would you say that products would you say that's   versus like usdt or any of those that's  algorithmic would you say usdc is very safe i   would say usdc is very safe i would also put usdt  in that so people think that usdt is algorithmic   stablecoin but it's not it's uh exactly the same  idea as usdc they are also backed by reserves   they started disclosing their their reserves and  the composition of their reserves so you can look   at their statements and sort of figure out how  well backed they are and how much confidence you   can have in them so usdt is actually fully backed  stablecoin uh and it's not subject to the same uh   run on the bag oh sorry it's the same  problem that the algorithmic stablecoins have   algorithmic stablecoins are completely different  beast um and there are really two kinds so uh   you can imagine a situation where you do not  have u.s dollar reserves backing you but you   can have crypto reserves backing the dollar peg  value of your stablecoin you know because crypto   is so volatile what you need to have is you need  to be over collateralized right you want to have   if you're issuing one dollar worth of stable  coins you probably want to have at least two   dollars worth of crypto backing you because if  crypto falls down 50 you still fully packed and   you're reasonably well run so over collateralized  stable coins are you know they're not necessarily   that great because crypto can fall more than  50 but at least it's kind of a reasonable   stab at approaching this problem there is a whole  another class of algorithmic stable coins that are   under collateralized so they issue one dollar  worth of liabilities effectively and they have   less than one dollar worth of assets and that  is crazy stuff and those are bound to blow up   and terra usd uh was definitely one of those  uh where they were under collateralized they   issued these billions of dollars worth of the  pegged stablecoin and the mechanism that they had   was saying well if somebody comes in if a lot of  people come in and try to convert to us dollar   at parity we have this other things that we can  print unlimited amounts off and we're gonna print   this thing and we're gonna sell it and that that  way will generate the value for the stablecoin   which obviously is insane because when you  have a run on the bank when you have a run on   the stablecoin uh you're the value of the stuff  that you are printing is starting to collapse   so you have to keep printing more and more and  more to generate the same amount of value and you   end up diluting that that second asset to zero  and you end up breaking the pack us the terra   usd is not the first one where it happened  there was a bunch of other ones in the past   it is absolutely amazing to me that people kind  of keep falling for this uh but you know here we   are people put uh tens of billions of dollars into  this yeah i mean and and so i guess part of it is   the people did it because there are huge returns  like i'm saying 20 25 so people are getting   greedy maybe or they thought the algorithm was  thick because i know i mean one of the big uh   one of the big funds was in the galaxy i think  was in the uh stable coin uh alvin algorithmic   what do you think got people so into it i guess  well you know there's the old saying uh in the   markets you know bulls make money bears make  money and pigs get slaughtered uh you know   people just got really piggish uh these twenty  percent uh yields it sounds amazing right you   have twenty percent yield in theory zero risk  it's all us dollar denominated you can just   put your money in what looks like a bank  and and generate returns they don't look   anything like what would you get from a bank  and a lot of people found it irresistible   i think that i think a lot of people did  understand that these yields are unsustainable   and they are uh they're funded by the vc investors  or the uh or the launch funds that that uh luna   the project behind the stable coins raised  so they they understood that these 20 yields   wouldn't last but they thought you know i'll just  collect them for as long as i can and get out   and you know as as we know getting out is the hard  part yeah um getting out is the hard part and so   when you have when you're in cash i don't know if  you can say specifically but do you guys do just   like hey i'm going to buy some usdc or sure yeah  we do that and yeah do you what about tara luna   no forget it uh nothing nothing algorithmic we we  wouldn't uh we wouldn't feel comfortable with that   yeah okay um there's actually an interesting  innovation going on so i i would say there is   one potential new kind of algorithmic stablecoin  that is you know interesting to watch right now   it's it's tiny it's still an experiment and  we'll see if the experiment is successful or   not but the idea is um similar to what i just  described about the basis trade right so when   you have a basis trade you sell a derivative  and you buy the underlying spot what do you   actually generate is like a synthetic stable  coin you you create a synthetic dollar that way   uh and there are people out there who are  trying to generate to create synthetic dollars   exactly by doing this by putting these offsetting  positions on the derivatives and the spot markets   and they're doing it on decentralized exchanges  so that uh that is an interesting idea because   it's not really subject to the same risk that the  traditional algorithmic stable coins are because   even in a run you should be able to liquidate both  sides and uh and be able to defend the peg now   it's still early days there's only i think  few million dollars sort of experimenting   with this approach and a lot of this depends on  the infrastructure outside of these folks control   so if you are issuing a stable coin like that you  need fairly liquid markets in the derivatives that   are that you use to back this up those markets  have to provide 24 7 availability they have you   have to be able to withdraw money fairly quickly  so the infrastructure really needs to be there   and you know the danger is that we are still too  early and the infrastructure cannot support that   but it is a very interesting experiment got it  and so do you guys try to get involved with these   experiments or are you just watching and seeing  if it's important we're watching we're watching   at this point we're watching and you know cheering  on from the sidelines the the whole crypto space   is a thousand experiments right a lot of them  failing as you know all experiments do but this   is an unexplored space this is like you know you  discovered america and everybody jumps on a ship   and sails across the ocean a lot of them get eaten  by uh by cannibals and a lot of them get drowned   and a lot of them don't make it but few of them  do make and and build uh build the united states   so you yeah do you think there should be more  regulation in the crypto space uh regulation is   coming uh there is no doubt about it uh regulation  makes sense when the market is a little bit more   mature and it becomes obvious what is the right  thing to do and what is not the right thing to do   regulators are not really equipped to sort of uh  know upfront what is a good idea and what is a bad   idea and in right now you see a lot of the  regulators around the world including the us   sort of stepping back and trying to figure  out what the heck is going on what should   we allow what should we not allow uh and that  allows the space to do a lot of experimentation   and sort of by learning we're gonna discover what  is a good idea and what we should just not let   happen again i think algorithmic stable coins is a  very dangerous idea and we're getting a lot of uh   evidence for that and i think the regulation is  going to uh clamp down on that at the same time   fully backed reserved stable coins uh are sailing  through this crisis pretty well and i think the   regulation again should should reflect that and  encourage that sort of product as opposed to   the more uh algorithmic ones okay  here's a random question lucy labs   where the name come from or who is lucy lucy yes  that's uh yes our our cto is uh came up with that   uh do you remember the the the fossil uh early man  lucy uh the australopithecus found in east africa   i should at least say yes yes so there was uh  there was a fairly famous find in the 1970s of the   early human like before humans really evolved to  to become modern humans and it's so it's it's uh   it hearkens to that it's like early steps in  this new world that is that is being uh that   is developing in front of iii's that's what i  was thinking just that's right yeah you're right   so lucy labs i know you have clients that look  for the fund what else does lucy labs do like   can someone listening to this but the raz report  today you know inquire in like what what yeah   we do uh we are we're publishing uh sort of  reports on some of the aspects of the industry   that we find interesting that we think other  people might find interesting so we have uh uh   on medium we we just launched a blog talking  about crypto products uh i mean the first post   specifically talks about perpetual swaps  the history of them it's a product that's   unique to crypto doesn't really have an exact  equivalent in traditional finance so we spend   a little bit of time kind of explaining how it  works and what are the tricky things to be aware   of working with that and uh we're really enjoying  that so i think we'll be doing a lot more of that   perpetual swaps is that anything to do with like  future like like perpetual swaps um what does that   do is that like stuff that you make trades on or  you guys are right about it so other people can   understand it so perpetual swaps it's it's super  interesting it's a it's a version of a future   uh traditional features of an expiration  date so usually every three months or so   the future expires and it's settled either  with the underlying or it gets settled in cash   and when when the crypto exchanges started  taking off that was the product that they offered   and they discovered that uh retail  investors actually had a real trouble   managing futures and managing the expirations  people would forget that you know third friday   in june or whatever is the expiration date and  they would you know log into their account once   every two weeks and one day they would log  into their account and the position was gone   and they would be like oh my god what's happening  so uh the traditional futures turned out to be uh   not a great fit for crypto so a number of  exchanges started experimenting and one of them   called bitmex which was based in hong kong in  those days sort of they played with different   things they tried to shorten the futures to have  expiration every 48 hours then every 24 hours   and finally they decided what if we never  expire this thing just make it perpetual   well then the issue you have how do you make sure  that the swap price doesn't drift away completely   from the underlying if you don't have expiration  that will force those two prices to converge   how do you make sure they don't just you know it  just doesn't walk off into space somewhere and uh   the the innovation they came up with is they they  first started thinking of referencing some outside   interest rate that would and you would charge  the people who were sort of on the wrong side   of the trade so if the future was too expensive  they would charge people who were long and the   question is how do you set an interest rate  in in crypto like what is the bitcoin interest   rate there's really no good answer for that so  they uh they decided well let's just generate   it endogenously let's just generate it from the  price itself let's just look at the difference   between the price of the swap and the price of  the underlying and let's charge that difference   that will force people who are long to you know  to be paying a lot of money and hopefully it will   incentivize them to close the position and and  sell the long position which will force it back   to the equilibrium price and when they first sort  of came up with that nobody knew if it would work   or not it was a real experiment it was a kind  of stab in the dark and uh in the first six   months it was pretty hairy the prices were all  over the place the the underlying uh sorry the   swap price was drifting away from their underlying  and it was a little bit chaotic but after about   six months arps figure out how to how to play  this game how to push it for uh closer to the   to the fair value and uh over the past two or  three years that market has really matured and   it became the predominant way of trading crypto  outside of the us so uh the perpetual swap markets   are anywhere on the order of five to ten  times greater than the underlying spot markets   okay so so and this i mean is this stuff that  it's like finding these opportunities like you   were like one of the things you mentioned  earlier with marty whitman you're kind of   like you're an investigator and you're looking  for opportunities at companies and you can value   invest and see stuff that people aren't seeing  is this is this kind of like opportunities that   as you a fund manager looking at things like this  take advantage when there's that arbitrage play   but when it gets caught let's move on to the next  thing it's very similar it's again you're being a   detective and you sort of constantly ask questions  like what's going on and why i mean the the way we   really wrapped our head around the perpetual swaps  was we were we were taking regular positions in   the spot markets and then we saw liquidity is  much better in the perpetual swap so you know   why not start trading that we started trading  it we're getting hit with these funding costs   and we're like oh we hate paying these funding  rates you know hear me out what if we start   collecting them instead how would you go about  it and very quickly we figured out you know okay   you can create the synthetic position and do  this um and uh yeah you stay you learn by doing   so the way you've discovered these opportunities  you are active in the space you trade you   you do experiments and you discover things  that you didn't realize were happening and   you find new opportunities all the  time and we'll help amplify your blog   and get people to get the word out um because  i mean if you're writing about the stuff that   people aren't paying attention to it's definitely  opportunity for making alpha uh making returns   um what advice and final couple questions  what advice do you have for crypto investors do you mean retail investors or institutional  i think my ideas would be very different   to those two groups it's a good question let's go  with let's go with both i would love to hear what   to say for both okay i would say with retail uh  crypto is a very risky very volatile asset space   uh you do want to be in it longer term but be  aware that these uh 80 drawdowns are happening and   are likely to happen for the foreseeable future  so position sizing is the most important thing   you need to worry about uh if things get really  tough can i can i survive this you know uh   don't don't put don't put on too big a position  and definitely do not put on leverage uh retail   investors tend to get in trouble with uh too much  leverage on their positions uh but longer term i   mean crypto is very likely to be around uh for  for a long time and learning about it is is best   done by trading and being active in the market  so you know be there and trade it but keep it   small enough that you can afford the pain of  the downturn similar to what we're seeing today for institutional investors my advice is uh  slightly slightly different i would still say   you should be experimenting in this market  for you guys the interesting thing is   the infrastructure for trading that's being built  in crypto markets is i would say 100 years ahead   of what's in the traditional markets that you are  used to the efficiency and effectiveness of the   trading platforms is is going to absolutely  steamroll the traditional trading venues   and i would recommend to sort of start  learning about how things work there so   that when it happens you know you'll be prepared  um i'll give you an example sort of the the huge   difference between a traditional infrastructure  and the crypto infrastructure in traditional   infrastructure let's say you trade futures and the  way let's say you're trading futures on uh wheat   for example so you have to put up a margin and  at the end of each day that the your position is   marked to market and the exchange calculates any  additional margin that's needed and you have you   know until the next morning to come up with the  cash to uh to keep the position right in that   period between the calculation of the margin and  depositing of the cash the exchange is at risk   right if if you actually go bankrupt the exchange  may not be able to collect and you know they have   a fund to uh to kind of insure them against that  but it is a real business risk for the exchange   which is why they set the margins very high uh  to to sort of live with uh having that risk on   their balance sheet so the size of the margin is  a function of the payment cycle and the settlement   cycle in traditional finance the settlement  cycle has to be at least 24 hours because the   traditional payment rails take 24 hours to get  you know your your payment from your bank to the   exchange or the broker and settle it so by nature  they cannot offer high leverage in the products   that they trade just because of the settlement  counterparty risk issue you go to crypto   exchanges and you realize that they have they  recalculate the margins at a much higher frequency   you know the exchange i mentioned bitmex actually  they started recalculating margin on every tick   so every trade happens they go and go through a  million accounts that they have and recalculate   the margin requirements immediately so they don't  have this 24-hour sort of delay for them to be at   risk they can liquidate positions much faster than  that because of that they can lower their margin   requirements and some of these guys used to offer  100 times leverage i mean thankfully they sort of   reduced that now but you can still get 20 to  25 times leverage in your crypto positions   uh the exchanges can afford to do that without  putting themselves at risk because of this   much faster settlement cycle that they have  available now if you are an institutional   trader and you're doing things like hedging you're  doing things like arbitrage where do you want to   execute you obviously want to execute at the  place with lower margin requirements because   you'll have a better capital efficiency you'll  have a higher return on capital so liquidity   is likely to stay at these crypto exchanges that  have the newer technology and we're seeing that uh   clearly in for example the bitcoin futures market  cme rolled out their bitcoin futures product in   uh what is it december 2017 right so it's four  years now and uh they only have about five percent   market share in global bitcoin futures trading  which is amazing i mean cme is a is a leading   venue for derivatives trading how come they  cannot get more uh market share than that and   and the response is because of the how slow  their settlement cycle is they are requiring   35 margin for any bitcoin position while the uh  crypto exchanges are doing you know they may ask   for three to five percent margin for the same  position so again as an institutional investor   you'll be better off trading on these new style  exchanges now these guys the the crypto exchanges   are coming into the us so right now there is  uh there is a hearing in front of the congress   senate senate agriculture committee and uh and  there is a application with the cftc in which ftx   which is one of the leading crypto exchanges is  trying to bring this 24 7 trading in commodities   with instant margin uh margin calculation and  instant uh settlement so t plus zero seconds uh if they get if this gets approved and really  there's no reason why it shouldn't be uh it it   needs to work its way through the regulatory  process but uh if this gets approved and you   will get a fully regulated exchange with these  parameters i mean can you imagine what that's   going to do to people like cme their their  technology is completely unprepared for   competition with this sort of uh with this sort of  competitor and this is where ftx can really drive   a huge growth i uh so i have great admiration and  respect for the ceo fdx uh sam mackman freed he's   he's an amazing entrepreneur uh and he is very  ambitious and he's very clear that his long-term   goal is to replace the traditional finance trading  infrastructure in the us with this new generation   of technology that literally is a hundred years  ahead the reason cme is doing things this way is   that that's how you did it in 1868 when you were  started when you literally had a guy you know in   the morning run to the bank with a check and  deposit it with the clerk on the exchange at 7   30 a.m and if the check wasn't there by 8 30 a.m  the positions would be liquidated that's and it's   baked into all of their systems they are it will  not be easy for them to to upgrade their system to   be able to compete with us yeah i met with him and  talked to him around the super bowl in california   wearing his shorts and t-shirt and you know  just passionate as ever that guy he's very   focused amazing amazing focus and execution  ability he's definitely somebody to watch   i think he's the he's the uh the caliber of jeff  bezos or elon musk or or uh you know that level   of entrepreneur i think he'll they'll do great  things i i agree i i agree um so um okay then   we asked that there was um can you guys let me  see if there's anything else we want to hit up um   do you personally buy bitcoin or like  were you early in investing in bitcoin   oh yeah way too early yeah i uh yeah i bought my  first bitcoin back uh oh my goodness must have   been 2013 or something like that do you remember  what the price was or no yeah it was fourteen   dollars yeah i remember yeah did you keep it yeah  well i bought it at 14 and watched it go to two   so that was my that was my introduction to the  bitcoin market i was down 80 percent like within   a month of my of my purchase so yeah it was a  small amount of money it was really sort of toe in   the water uh in those days uh you had to trade on  monocoque so you have to open an account in japan   and uh that that in itself was an experience and  uh so yeah my bitcoin was sitting on mount gox and   uh things were kind of shaky rumors started  flying around about problems at mount gawks   but what really kind of got me going was when i  noticed that bitcoin and mount gox was trading   at a premium to other exchanges and i was like  why is that this is kind of strange and then i   sort of started poking around into what was going  on and i realized that they uh they had trouble   meeting their us dollar redemption requests so  the only way for people to get their money off   of mount gox was to buy btc and then transfer btc  out of the exchange which drove btc price on that   exchange above the fair market value so it was  like a market signal that something is wrong here   and uh you know i i listened to that signal and  i actually got most of my position out uh before   uh before moncox blew up wow okay i mean you're  paying attention i mean i mean that's what you do   i mean from morgan i mean from uh mckinsey working  uh for marty whitman i mean you're finding these   opportunities and that's what you know you  guys have your fun for and uh you know what   i hear is that you're freaking genius with your  co-founders and um that's why i wanted to have   you guys on um what i guess one final question  um what do you have a favorite crypto coin i'm i'm still partial to bitcoin you know my  first love yeah yeah yes and then wait the   last one is what's your worst or your first  job that's a question we've always asked   my worst or my first job yup where's your first  one oh i got i got i got plenty of those uh yeah um your worst or your first stuff you don't  have a yeah i was uh i i did all sorts of things i   was i was painting i painted houses i work in the  fields i worked in bakeries uh you know so it's a   it's a very wide range of things and honestly  they're all fine you know any any job is uh is   what you make from it what you make of it you can  you can have a lot of fun just painting a house i   sure did and if people want to check you out at  lucy lab where should they go loose labs.com and   click on lucylabs.io dot io io because we're a hip  we're with you're with it check out lucylabs.io   and they can reach out that question about  investing um you're not doing any of those   uh algorithmic uh crypto stable coins so that's  good um i'm tired of hearing about tara and all   these things you know everyone's thinking usdc  is done too so um i did sell a little bit of usdc   just because i got a little nervous you know but  i guess it has nothing they'd have nothing to do   with each other do that yeah and i you know i can  share my experience in 2008 uh when i was at third   avenue we got we had some money involved invested  in prime reserves which was a money market fund   that uh invested in some lehman paper and they  were the fund that actually broke the buck   and went through some difficult period and  third avenue was actually elite plaintiff in   the litigation that sort of followed and  uh so uh i have some experience kind of   with the worst case scenario even with these uh  backed fully backed money market funds and uh   sort of just remind people that even with all the  bad stuff happening there the the final recovery   was 99 cents on the dollar for the prime reserve  fund and the 97 cents on the dollar for the   for the uh the more uh more uh sort of more  effective uh fund so if you have a fully backed   money market like instrument even in the worst  case scenario you're not necessarily looking at   huge losses it's very unlikely you're gonna end up  going to zero but in that example of the algorithm   rhythmic uh stable coin would you say that's  the same thing for the algorithmic stable coin   no you can definitely go to zero yes so i'm only  talking about the fully backed uh reserved uscc   yeah yeah i probably didn't need to sell a little  bit but i did and i just you know moving around to   a few different places instead of having it mainly  at one place you know like like uh you know i use   voyager coinbase uh lock by you know the whole  thing and maybe just allocate it but i hear you   and i mean i know circle administers it all so  um all right well as you have updates jacob i   i mean you're gonna you see you're you  you find these arbitrage opportunities   i mean this is like crypto uh one not 101 it's  like 401 in the sense that you find opportunities   before they exist to the public market so i  mean pay attention to lucylabs.io's blog um  

i mean you're a guy that you know went from  started and built this whole thing up and uh   that your your story about the protest back in the  day um i mean you have all the stories there so   one one day you're going to write that book that's  right we'll wait for all the witnesses to sort of   disappear and then yeah there you go i'll write my  version of the story yeah there you go there you   go all right well thank you for coming on the raz  report we appreciate i know we went longer but you   have amazing information i'm actually gonna listen  to it again because there are some things that   i didn't you didn't understand the first time  sometimes you told me two or three times because   when you're dealing with someone your  kind of brain that's what it takes   you know so thank you well thank you thank you  for for having us on the show yep appreciate it

2022-05-29 15:06

Show Video

Other news