Bitcoin, Liquidity, and the Next Crypto Cycle

24:50And so I think it's going to reset and it's going to, quite frankly, fuck with a lot of people's models because it feels like a year cycle and everything. It's like everyone's still attached to it. I don't think they're thinking long term enough and that the wriggles and the moves in this are now going to be shaped differently, not only because the time has come. Blockchains are productive assets. AI agents are going to start showing up and activities going to start showing up in a very, very structural way. But also asset allocators, Morgan Stanley, Charles Schwab, saying that they should have 5 % or 7 % in Bitcoin, and then that fans out into other, you know, these are different buyers to the crypto native buyers of the past that were really cycle orientated.

25:29So, you know, we get a smoother cycle, probably don't get those bigger returns, but we get the kind of investor base that actually understands where all this is going.

25:39Raoul Pal:And then one of the things I think about in this is like everybody's saying, let's say you should be 5 % to 10 % waiting. Okay, let's say that. Now, currently, you can tell with the market that they're not. So it kind of tells me that if we do start to accelerate from here, that either we put in the low or we're still forming the low, but let's assume it's not going to be in October, November, which everybody thinks in, but it's somewhere around now. Okay, fine. If the market does start accelerating at any point, there's an enormous amount of capital that flows in. Because when you look at the relationship of NASDAQ to Bitcoin as a simple measure, it's right on the bottom of the log regression channel.

26:21Raoul Pal:It's like two standard deviations oversold. Bitcoin gold, Bitcoin everything. So unless the relationship and the sort of Metcalfe's law and that logarithmic chart of Bitcoin and crypto assets is broken, these are the cumulations. So I describe this year as not an easy year. I don't see a breakout in crypto. I still think that there is a non-zero chance that we get one more flush down in some sort of second half sell-off, which could be due to the amount of liquidity that will be required just to rotate into all these AI names that are going to IPO. There's a potential there it's happened before it's it's you know it could happen again so this year is like the accumulation year into the names which i think will have outstanding 2027 2028 2029s um so i've you know we're right about this all the time because i do get into the weeds of like where the lows could be and all that sort of stuff um that there is a non-zero chance that we get one more flush but where does that sort of bring us down so probably you know on bitcoin it should below 50s.

27:35And we are right at the point, like I just wrote a report, I'm not sure if you saw this, but it was out today. You look at all the on-chain cost basis of short-term holders and the average or the true mean of the network, it's right on 80 ,000. 80 ,000 is where a ton of volume traded on the centralized exchanges, but also where a lot of spot traded. This is typically in a counter trend move where things roll over. But it's very clear that if we clear high 80 ,000s, that this is essentially this bear market is technically over, like it's now broken out. So I love two minds, but it doesn't really matter because we've got this sort of view that looks beyond the next six months.

28:18Raoul Pal:So a quick break in your regular programming. If you're serious about your future, grab my free report called Prepare for 2030. I think you've got five years to make as much money as possible. And this guide will help you navigate what's coming. The link is in the description. Download it now. I agree with you. The probabilistic outcomes are quite complex right now. And we'll see. It'll clear up. Don't forget, we've got fucking war. We're in the middle of a war. After we had the government shut down, then we go straight into a war. We don't have a clean market. We've not had a clean market. what we've got is a very easy market to allocate capital in towards AI.

29:00Yeah.

29:01Raoul Pal:Because it's kind of immune to everything. Very clear. Yeah. Yeah. And so that's winning the narrative. Yeah. And narrative is everything, really. It's how capital flows. It's whoever's got the strongest narrative gets the most amount of capital. If you also think about the VC cycle, look at the size of the raises for the latest A16Z crypto fund versus their other funds. right? I mean, the VCs are getting gigantic amounts of capital going into the intelligence part of the equation. You know, robotics, the biological stuff, the AI, all of this stuff. But they're not raising as much money in crypto.

29:41Raoul Pal:And that, A, often leads to increased opportunity, but it just shows where capital is flowing right now. It's like everybody's got one focus. yeah look i mean i hear that data point and that actually makes me a little bit more bullish i mean so what does what does crypto really need in terms of capital like the base layer is essentially built the the networks that matter are scaling yeah they don't need we don't need another we don't need another layer one in any way shape or form layer twos are just commodity they're just business pipes that plug into the layer one a franchise call it that call it a franchise business or something built on top of Shopify.

30:24Raoul Pal:It's basically what it is, right? That's what a layer two is. Fine. That all applies. You know, you can build your business on Amazon by selling products on Amazon. It's all the same thing, right? These are all network models. So we don't need any of that. We just need product market fit to scale. We've seen Hyperliquid, but that is really crypto native platform for now. And without any VC as well. So that is your proof that the VC capital cycle doesn't drive or shouldn't drive crypto any further. And it also led to a lot of the, look, not slagging of VCs because they play an incredibly important role.

31:06But there was excess capital that was invested in crypto in 2020 and 2021. And the hangover has been too many tokens, too much supply, too much inflated valuations were ridiculous. these L2s valuations coming out, even the applications and what the valuations were. And it's just basically hung over the market. So you get people like my former colleague at Bloomberg Intelligence, Mike McGline, talking about 21 ,000 or 21 million coins and how that dilutes the value of crypto. He's partly right in that it dilutes attention, but he's very, very wrong when you looked at the activity numbers and see that actually all the activity is concentrated in the - It's the same with equities, right?

31:52Raoul Pal:It's the same with every asset. There's gazillions of them. Yeah, the Russell 2000 is not even all the US stock market. I mean, there's so much of this stuff. So you give it the same argument. It doesn't apply. It's nonsense to say that. But you're right. I mean, there's tons of the - I think one thing we do know is not everything should have a token, like not every company should be public. It's as simple as that. And they shouldn't have it because they don't have a business model that can satisfy a token. Yeah, I would agree. I think it would be fascinating to see what Circle does because they've launched their L1 arc.

32:30The gas token of the network, obviously, is USDC. So why do they need a token? But they have talked about the potential for a token. So it'd be interesting to see, you know, in this sort of, where are we, third, fourth generation now, whether a company like that does it and whether, you know, Coinbase does it with base as well. I would argue it's not really all that necessary when I really need it. You can buy equity.

32:56Raoul Pal:You can occur to the equity. You don't have, you know, you can have all the network effects and all the value. You know, would you spin out Amazon's kind of network structure, separately capitalise it? Maybe if you're trading at a massive discount? Possibly. I don't know. But the issue is issuing, Coinbase issuing a token is it's kind of one-off event. Yeah. Yeah, well, it's funny because I did the numbers actually for that last report looking at what led in the last cycle, what performed. And there's a subsector of the market that no one talks about. I don't talk about it. And that is centralized exchange tokens.

33:41They all outperformed. They did really well. But that's, I think, an example of how to use a token smartly because what they're effectively buying is discounts on trading. It makes total sense. It's your centralized exchange. You issue a token. You get the tokenomics right. You don't do like air miles tokenomics where they just inflate the hell out of it and destroy the value. You keep the tokenomics smart and you allow the people using your exchange to use the token to accrue benefits or discounts or whatever.

34:12Raoul Pal:And people, if you're Binance, people access your liquidity by building on your chain. So what you're doing is leveraging your network even further, and it flows through to the exchange itself. So it does make sense. And do you need the token? I'm not sure. But definitely, yeah, you're right. I mean, these centralized exchange tokens tend to work. Yeah. I mean, it's not a call on the equity. And I don't know enough about them, but it's not like you're getting centralized exchange dividends through the token. It's just sort of a membership benefit token. And look, they've done extraordinarily well.

34:51So it's just an interesting data point.

34:53Raoul Pal:So what other sectors are you looking at right now? What's interesting to you? Were you just thinking, listen, this is not the time. Let's just focus on the layer ones. There's a bit of the privacy one is interesting. The whole Tau intelligence one is interesting. Both still unproven? Yeah. are they going to get adopted at scale? So I wrote a paper on Zcash. I know you've talked about it. What I found fascinating about Zcash is that something happened with Zcash, which I've never seen before, and I'm kicking myself that I didn't see it, was that fees, obviously, like, it's a very vanilla chain.

35:41It's a payment chain, right? It doesn't have a smart contract platform. So what do people use it for? Use it for either store of value. In Zcash's case, because of privacy. Fees went from virtually nothing in 2023, and it was under SEC investigation. It like 10 ,000 X'd. It became, in terms of blockchains, like the third or fourth largest fee generating blockchain by midpoint of 2025.

36:08Raoul Pal:Why? The price didn't move. Why? Because people were moving into Zcash and using the shielded tool to protect or to create privacy for their value. And this is the feature that obviously Bitcoin and other chains don't have, although privacy now is starting to take hold within the Ethereum ecosystem. So they're going to build privacy into the base chain, which is amazing, right? Because this is essentially... Swee's doing it as well. Oh, yeah? Yeah, I was with Costas, who's the co-founder and the head of cryptography in Athens. He was at the GMI Roundtable event. And that's coming soon. I mean, they've kind of cracked it and just figuring it out.

36:55Raoul Pal:Because no financial institution will use change at scale without obscuring who it is. But it's permissioned privacy. So therefore, if regulators or anybody need it. So it's not like Zcash privacy. Zcash privacy is, you know, at individual level to hide from state, which is, as we know, can be used for nefarious needs, means, or really important means. And it's difficult to separate out. It's like gold. that's right yeah i mean look at that core foundation of you know western liberal democracies is is is privacy um i know it doesn't feel like that right now given everything that's happened in the last couple of years but to see it restored on chain i think is very positive and we've got an sec now that dropped the charges against um zcash and i think is respecting that need um we'll see how it plays out.

37:51It's not without risk. Things may change. Administrations change. Who knows? But the product market bit of Zcash was critically important. And just to sort of a side note to go back to what you're talking about. Yeah, hold on one second with that is, as I think about it,

38:07Raoul Pal:Bitcoin is basically chasing global savings, right? It's going to absorb larger and larger share of it until it gets to wherever its natural level is. Zcash is going to take a share of Bitcoin share, which is the people who want a global savings vehicle with the same economics as Bitcoin, but want privacy. And it's very early in that journey. So it kind of just makes simple sense. It's a very clean narrative. In the world we're going into, it also makes a lot of sense. Yeah, I mean, yeah, touche. That's how I think about it too. It's a percentage of Bitcoin. What's the percentage of Bitcoin that Zcash should command?

38:45Because I don't think that privacy is coming to Bitcoin anytime soon. It's got its own challenges and we can talk about quantum, not that I'm an expert. But with Zcash, they're very much on the forefront of that development and they've got a roadmap to get themselves to quantum resistance in the next couple of years. So it's not a change you have to be concerned about in that respect as well. Shield transactions around 31%. But the thing that I was amazed by was just this explosion of fees and really not a price reaction. Typically in crypto, it's reflexive the other way around. Price moves, fees moves because fees are denominated in the token, but that encourages liquidity to come in and then organic fee growth actually happens as part of it.

39:31But it wasn't that way with Zcash. And I thought that was amazing. I was late to the trade, like it was a Q4 trade. And it pulled back about 70%. And that's when I started getting interested again, because if you look at it on relative charts of Bitcoin. Very few charts have broken out against Bitcoin in a meaningful way. And I think that is a technical, technicals are like our bread and butter, like that is a meaningful signal. It just needed a pullback. Now it could roll over again. But I think that thesis is playing out 31 % shielded transactions. It might, you know, that needs to grow to show that Zcash is being utilized for its core purpose.

40:05So that's the key metric that people need to look at. but I think it's an interesting story. And just on the privacy aspect that, you know, Sui is obviously now integrating in, it's like, you know, if privacy was thought about earlier by the existing L1 blockchains, then Canton would have had a harder time launching, right? Because Canton addressed that need. So it's good that the other L1s are recognizing this and they can do that in the way that you explained. It's like, you know, selective privacy. You don't want to see the counterparty, or you want other people to see your trades necessarily, if you're trading tokenized assets on chain.

40:45But it should be available to certain counterparties if needed. And that's all programmatically possible.

40:54Raoul Pal:Yeah. So I think it'll be... So that may take a... No. In theory, it would take away a bit from Zcash, but it's not, because Zcash is purely a non-smart contract store of value. For individuals, yeah. Yeah, and therefore you've got Bitcoin or that. So that's pretty. And how are you thinking through BitTensor and that ecosystem right now? Because that's been wobbly. We've had a few problems. It performed really well. Not been doing anything for a bit. It's kind of a very early stage to figure out how much traction it's getting. What are you thinking? So it's definitely interesting. I haven't done enough work.

41:32And I know that you've written about it. So yeah, I've not written a deep dive on it yet.

41:37Raoul Pal:I keep thinking about it, but price action, I don't know, doesn't feel right yet. And don't know. The story is getting traction, like the tokenomics have been improving the size of the network. You can see the network growth. So these are the things that we would typically look for. And it is one of the few that are actually growing throughout this whole downdraft that we've experienced in the last six months. So it's got the ingredients there. I just haven't done enough. I mean, I think looking at the, you know, the profitability of the subnets themselves is kind of like the key thing. Like, are they generating real value?

42:12If that's the case, that's the, that's the case for the application layer performing, which is critical to the three prong, sort of the three layer approach that I use for network intensity, being a driver of the token value. So it's interesting. like venice is very interesting i haven't yeah i really like what he's doing there as well yeah i mean i don't i don't know what i know you're using claude but i'm not sure what your sort of agent orchestration layer setup is and i'm looking into that after using various other alternatives but i really like i personally very much like eric as exactly he's always great i'm

42:50Raoul Pal:trying to get him on at some point to talk about this because it's super fascinating yeah yeah i I'd definitely like to learn a little bit more about it. So, I mean, you know, then you've got the decentralized compute, which always made sense, but never was quite clear in terms of how it was playing into the ecosystem. But they are, you know, potentially interesting. I don't know the economics on them. Nia is doing a ton. You know, I've had a love-hate relationship with Nia because of, I guess, this massive pivot it took in the last cycle, which I think will pay off in this cycle because they have essentially an agent orchestration layer in Ironclaw as well.

43:28They're using Nier's decentralized cloud and they're using decentralized compute from a cache and render as far as I'm aware. So everything that Ilya is doing in the Nier ecosystem is custom built for the world we're moving into and that token is very depressed. It's just hard to understand. And there's also Near Intense, which is basically this interoperability layout. It's doing a ton of volume. A lot of Zcash is actually trading through the Intense protocol. So if you're able to trade Zcash on Solana, for example. The other one that's discounted that way is Chainlink. I mean, they're doing a lot.

44:07Doing a ton on the RWA side, sort of murky tokenomics. Not too, yeah, so I haven't really been able to dig in there. No, but you see the announcement of literally everybody.

44:18Raoul Pal:The whole finance sector uses Chainlink as the interoperability layer. Yeah. Yeah. Yeah. I mean, look, I haven't done enough work on it. It's kind of like XRP. Ripple's doing partnerships with everyone, but how does that actually accrue to the token? It's very unclear. Ripple itself, as an equity business, that's why Fortress and Citadel invested massively into the Ripple business at half the value of the XRP token that they have on their balance which tells you something about the value of the XRP token, I think. Yeah, it's just harder to understand those protocols. I mean, there's one little pocket which I'll mention is on-chain options.

45:01So perps have been the story for the last three years. Hyperliquid has done amazingly well and continues to innovate, which is a great story. on-chain options it feels like with you know there's been a myriad of attempts through amm structures which just do not work for options but the same central limit order book approach that hyperliquid has taken is now you being used by a small token called derive which i think is really interesting um doing partnerships with a lot of the um the prime brokers in the space and then we saw Coinbase go and buy Deribit. So there's a huge opportunity on-chain options if they can get the tech right.

45:47Derive is a very interesting one because the tokenomics is actually fairly strong. They've got a buyback. And it's a micro cap. So it's way out on the risk.

45:59Raoul Pal:I can't remember if someone mentioned it to me at the GMI Roundtable. In fact, it was one of the trade ideas from one of the CIO from Switzerland interesting yeah there's a couple of on-chain option ones i think yeah there's a there's a couple coming up on um on solana um and there's a you know eventually hyperliquid will get there um into options as well so you can't discount them just being massive in that space but there's probably given the the next upgrade for hyperliquid is focusing more on the prediction markets it's probably another 12 months before they even try to tackle that but it just it Regardless of the protocols, like on-chain options just seems like the next vertical because the technology, the tech stack has improved so dramatically over the last couple of years from the first generation of these protocols, which all failed miserably, that it eventually gets there.

46:50And people want to, you know, want to trade different types of risk and perpetuals are great. You know, they're eating the world, but they don't offer institutions the kind of risk exposure that they need. and options will do that. And especially when assets, real world assets start moving on chain, options on chain makes a total map and SANS is a complimentary.

47:12Raoul Pal:Yeah, it just depends how they solve the risk equation of, you know, who settles, who goes bust, who's collateral, you know, all of that kind of stuff for the option seller side. An insurance fund, yeah. Protocol insurance funds are critical. Yeah, and that's the issue that I always had with Deribit standing on its own being 85 % of the entire options market in crypto. I'm like, this just doesn't make any sense because if something goes wrong, everybody goes under. And then having Coinbase bring it, and then CME and everybody else bringing options as well, it's kind of calmed it all down because that was an accident waiting to happen.

47:46Yeah, yeah, yeah. I think it gets a lot more distributed now as well in terms of the activity because Deribit was obviously the main player, and it was independent. Now it's part of Coinbase. What is Coinbase? Coinbase is a multi-pronged crypto financial institution. One part is prime brokerage. So obviously, it's going to route all of its clients' orders through Derivate. Now, if you're another prime brokerage account, sorry, prime broker, you obviously trade with the liquidity is, but you'd want to see competition in that space. So I think there's an opportunity for other protocols to grow on the back of the fact that Coinbase now owns the largest options venue.

48:28So let's just look forwards a bit.

48:32Raoul Pal:Let's talk a little bit about, OK, we've kind of laid out a nice clean structure where we think we're not entirely sure how this year plays out in terms of do we have another low? Have we put in the low? You know, all of that stuff. I think liquid is accelerating. I'm really quite bullish into year end. Let's see. But I said I could see another low. The only thing I can see that's the problem is if this Iran war doesn't go the way that we think, which is it gets solved. And if it doesn't get solved and oil goes up to$200 a barrel, it's going to get pretty ugly again. Yeah, there's no two ways about it.

49:18So it needs to get solved. If it doesn't, I think markets are looking at another pretty sharp decline. The share of the economy resulting from oil is less than it was in 2007, but it's still not insignificant. So the longer it remains above these levels, the worse it is for the economic outlook and for financial markets. Yeah, because it may not be the worst for the US because it has all its own oil and all of that stuff.

49:49Raoul Pal:But it's certainly bad for everybody else. So the rest of the world's slowing down. We can see it in the European economic data versus the US economic data. The US is going up like a rocket ship right now. Arguably, high oil prices just bring in more cash into the US for anything they export. But Europe is the opposite. And Australia is the same, all of them. Yeah. I mean, yeah, let's not talk about Australia because the economic situation down here is dire. But yeah, like... I'm so surprised you're there, mate. Every time we speak, you're like, this place is so fucked. but you're still there.

50:25Yeah, I guess I'm a glutton for punishment. That's why I'm in crypto.

50:29Raoul Pal:That's right. Your tolerance for pain is so enormous that nothing matters anymore. Yeah, so that is the big outlier. It can't be discounted. We all thought it would be over by now. So hopefully it does get resolved. So gun to your head, end of the year, higher or lower? Or same? I think Bitcoin can touch high 90s, but I think we go down from here in the short term. I think it's going to be a really bumpy year. And look, I mean, gun to my head, I think we make higher highs from here, but I don't think it's directionally going to go there immediately. So you're just saying we can't have nice things.

51:15Raoul Pal:we're just gonna have to watch the nasdaq just going up you know 20 every month as it's just gone up and we just stand there looking at it thinking why doesn't anybody love us anymore not this year around not this year oh jimmy that's no good listen mate fabulous conversation as ever and uh let's see how it all plays out yeah absolutely thanks a lot ral okay mate Cheers. So as ever, a fantastic conversation with Jamie, just kind of kicking the tires of what's going on, where we are, where the attention is headed, where the opportunities lie. I think we're both coalescing on the idea that still the easiest bets are the layer ones.

51:57Raoul Pal:The layer twos, not the layer twos, but the applications layer is still harder to select. I think there's still a disagreement between us about where we are in the cycle. Jamie doesn't see higher prices. I see higher prices. But let's see how it plays out. There's so many factors at play. There's no perfection in trying to forecast things, as everybody knows. It's, you know, you're taking your best bet with all the information that you have today, but tomorrow can be a different day. Anyway, stay self-help there. Remember, long time horizons. That is what matters here. Because where this is all going is oh so fucking obvious.

52:34Raoul Pal:See you next time.

52:38Raoul Pal:high net worth individuals and institutions with a competitive edge in trading, investing, and collateralized borrowing while maintaining full control through segregated account infrastructure. So if you're looking to gain access to additional liquidity, Abra is one of the most competitive loan products on the market. You can borrow against Bitcoin, ETH, and Solana at up to 50 % loan-to-value. Rates are in the 4 % to 6 % APY range, and at open term, you can continuously draw down against your collateral as the price appreciates. Abra has other strategies to add yield and their team is happy to help align your portfolio to your risk profile.

53:09Raoul Pal:Reach out today and get a complimentary consult on your portfolio. It's worth seeing if they can help manage your allocation, reach investment goals, manage risk, and add some additional yield. Go to realvision.com forward slash Abra and tell them I sent you. You obviously enjoyed the episode because you're here with me at the end. But listen, don't forget to go to realvision.com forward slash join and grab a free membership. It's an incredible community packed with alpha great investment ideas and the research that you need to help you unfuck your future. So get started now. Go to realvision.com forward slash join.