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