Crypto Gathering Day 4: What are the Hedge Funds Doing?

28:30So until those things are solved, or at least seem to be solved, with indications like Citadel and Blockwreck coming in, it's just no go until those things happen for those type of investors. Hey, everyone, we're gonna take another quick break and hear a word from our partners. We'll be right back to the Real Vision crypto daily briefing.

28:53Yeah, so well said. And I think it's such a great opportunity for people who are listening to this Twitter spaces to get a sense of what this market looks like, because the institutional side of finance is something that most individuals, unless they're fortunate enough to have worked in that space at a certain level, just don't see. By the way, I get vertigo when I hear 10 to the 15. It's hard for me to get my head around just how large this space is. But again, that's what we're talking about in terms of the total value of financialized assets. Again, some of those are probably netted out and hedge positions and other things that might be a little bit different than traditional investments.

29:27But it is important, I think, for people to get a size understanding of this space. Let me ask you this, Rainn. When you get on the phone for the first time with someone who works at a pension fund or an endowment, what is that conversation like? I think that would be fascinating for our listeners to get a sense of because most of us will never get to be on those calls. It's interesting. It's very hard to kind of bucket them all together because it's still very very specific to the institution um and it's usually being driven by one or two often more junior people who have some sort of thesis around digital assets um and are kind of doing missionary work there and then um there are people that are a little higher up to the food chain or just you know, they're seniors that are more suspicious and less, you know, just thinking digital assets might be, you know, the flavor of the week type of thing.

30:32So you don't really know. What I hear you saying when I read between the lines is you've got smart people in their 20s and 30s, maybe and probably some people who are older as well, who are just more forward thinking at these companies who are interested in digital assets because they've got their own personal curiosity about it. And they sit on the sidelines for a number of years, and then they say, hey, listen, I've got to raise the flag at this fund I'm working at. We should be long this because, as you said earlier, if we're not long, we're structurally short relative to other assets. We need to tie this conversation.

31:01And then they pick up the phone and they call Rain Steinberg. Something like that, yes. And the interesting thing about it is that while often it will be a younger person that starts the conversation, what's fascinating is that digital assets, though, as an idea, once we get past this concept of a technology, but when you start to get into the decentralization of trust and what the actual value proposition is, When explained correctly and getting past this idea of a very volatile asset class of crypto and magic internet money or things like that, but when you're really talking about the value proposition, it actually resonates quite well with older generations who have actually been through more risk-off events like great financial crisis.

31:58who were around for the failures of things like long-term capital management, stock crash in 87, when a lot of our younger compatriots have really only experienced this great mitigating market and have not experienced that many risk-off events. So once you actually get past that this is just some sort of whiz-bang technological innovation, And when you get down to the heart of it, it actually resonates quite well with those people. It's just finding kind of a language to talk to them about. And this is where my colleague, Jeff Dorman, and what he puts out a weekly newsletter called Two Satoshis, which anybody can sign up for and get, where he really contextualizes digital assets in a language and lexicon that is accessible to institutional investors and more traditional investors.

32:52that's really important because this is really about a narrative and getting people to understand it. And that's how you get adoption. And it's not just for people of a certain generation or age who are trying to bring everybody in a very big tent approach. That's regulators, pensions and endowments, retail. We think it's appropriate for everyone at the end of the day. So I hear you saying that there's no typical conversation. Everyone is unique. And that makes sense. But What are some of those themes that you hear in terms of what people are interested in, why they want to take an allocation in the space, and also what some of the structural barriers are at this point in time that hold them up?

33:32Sure. So the number one thing that I would say when you get down to a pension endowment is that this is an important financial technology innovation, and they would like access to it. So what's interesting or challenging for them is that a lot of the offerings in this space do not line up with the way they typically invest. And for people to understand pension and endowment foundations and institutional investing, a lot is controlled by things called consultants, where they do diligence, the investments, and bring a kind of approved palette of investments to these institutions. And very few digital asset, the problem is very few consultants and very few of these institutions have gone through this process with digital asset investment choices.

34:29So it's very challenging for them in their workflow where they get, you know, 10, let's say a biotech allocation where they would have 10 appropriate biotech managers or passive instruments or things that they can consider and then go through them and see if they met their investment needs or, you know, how they gelled. That just doesn't exist yet in digital assets. And part of the problem is a lot of the teams and people that come through this, you know, just don't take that normal track that lines up with those things. Like I said, this is an innovation that came out of, you know, retail and financial technology and not the typical, you know, asset management development.

35:08And I can speak a little to this from my time at WisdomTree and ETFs. Now, everybody thinks ETFs are a fantastic idea,$10 trillion in the asset class or in the structure. Even as late as 2000 or the early 2000s when I co-founded WisdomTree, and this is almost, I guess, maybe 10 years after the innovation was created, financial advisors were still wary of the structure of ETFs just because it was new. and there's a high cost to doing something new in financial services if it goes wrong and not a lot of upside for those people making those allocations. So we spent a tremendous amount of time on just educating people on the structure of ETFs, the benefits around taxes, diversification, how you got better costs than mutual funds.

36:05And sometimes that would take 5, 10, maybe even 15 touches around that before an allocator would get comfortable. Now, everybody's comfortable with ETFs. So it's just a, you know, it's a very, you have to have a very patient approach in these circles when you go about this. And our space is not, it's a lot of things, but it's not, I don't think, known for its patience around that type of stuff. Boy, what an interesting point and the perspective that you bring, having founded a shop that does ETFs. Yeah, I mean, I'm old enough to remember when ETFs were seen as something that were, you know, they were the new kid on the block in terms of a mechanism for getting exposure to, you know, to whatever the underlying was.

36:50So I guess I should say ETP, more generally exchange-traded products, but exchange-traded funds specifically when we're talking about U.S. equity. So it is fascinating to hear that as a metaphor and to talk about how it takes time for institutional investors to get comfortable and wade into that space. It's a really interesting metaphor. Thanks. So Rain, I'd love to open up this conversation to questions. It's one of the things that we love about Twitter spaces here at Real Vision is how interactive they are. I would love to bring some folks in for some questions if you're up for that. Please, question away.

37:24All right. First, let's go to Goldmember and Penny. I know you guys have been listening to this conversation. Curious if you guys have any questions for Rain.

37:36Yes. Penny, do you want to go first? I just saw you take your mic off. Yeah, thanks, Peter. Rain, I just wanted to pick your brain. how long realistically do you think it will be until all the old school trad fi funds especially those that have been so vocally anti-crypto will admit defeat and it will just be the norm for them ah that's a good question um hard to say on timing um this is one of those things where it's going to be very lumpy and not like a straight line like it was very hard to see what the catalyst was going to be and we're not sure if this is the final catalyst of a move up from here and adoption but black rocks filing um and then you see kind of the wave of sentiment change and you're going to start to see many many more announcements of traditional financial players that either had initiatives working on this or um have started ones um are going to come out.

38:42But it just takes a while to work through. So I wouldn't be surprised if this takes, you know, five more years, honestly, maybe 10 more years to do that. I can tell you that just to use, again, I don't want to beat the ETF metaphor too hard, but when we started Wisdom Tree in the early 2000s, It seemed evident that ETFs were a better mousetrap than mutual funds. Yet, the one thing when we found wisdom of our thesis that was incorrect, we thought the funding that we would get would come from traditional asset managers that would want an ETF offering. We had incredible challenges and over 200 no's from traditional asset managers that were not interested in offering ETFs because they cannibalized their active offerings.

39:32And only after the success of iShares and people like that were they interested. So I think it's going to be quite a while and then kind of a tipping point and then you get past it. but it's going to be quite some time, at least five years, I would say, before it's self-evident and they give up, as you say. Really interesting. And then, of course, you have innovation like smart beta ETFs, which occupy kind of a middle ground, I guess, between active and passive. Yes, yes. All of those things, that was what was so fascinating was because when you think about, and I use again this analogy for ETFs and digital assets, when the ETF wrapper came out, first.

40:12It was the spider. And then iShares locked up Dow Jones and S &P and MSCI. But that was as far as the asset management industry could see ETFs going. They were like, okay, all of the existing intellectual property is now in ETFs. What else? There's nothing else that could be done. There was no concept of leverage ETFs, smart beta. We pioneered currency ETFs, shorting out currency exposure and things like the XJ. And so the wrapper of the ETF allowed a utility that was not able to be done in 4pm closed mutual funds. That's the same thing I see in digital assets, that this tremendous wrapper of alignment of stakeholders, frictionless trading, no exchanges, and infinitesimally small sizes.

41:03There's all these ideas that this is better for liquidity, costs, time of trading, things like that. But then the knock-on of effects of when you compress the space between investment vehicles and payment vehicles and the type of innovation that you're going to get over that, we don't even understand it yet. And it's so much broader than what you can do with ETS that it's really going to be fascinating to see how it evolves. It's going to take a while, but this is why it's definitely going to displace all these other things. it's just more flexible and has better outcomes. So I think it's inevitable, but it's going to take a while.

41:39It is truly fascinating. And to your point, it is sort of a question on how far we can lean on that metaphor with ETS before it strains. But it does suggest a couple of interesting things. And one, I think that you just touched on there, is the kind of just the unknowability. It's almost like the cone of uncertainty around a hurricane. You just don't understand where things are going to be because the systems are just too complex and dynamic. And by the way, we should say not everything in the ETF space works out. I think most people who are following markets are familiar with the XIV implosion, the inverse VIX ETF.

42:12There are times where sometimes the test tubes in the lab explode and the laboratory burns down. Yes, exactly. And I think people have to also take that out more broadly when you're talking about innovation in digital assets, that this is unusual when you have a tech innovation dealing very much in real time with real people's money like that. So in normal tech innovations, the laboratory burns down, move fast, break things, works, and you just go into V2 of it. You don't generally have tens of millions, hundreds of millions, or billions of dollars of people's capital kind of locked up in these things.

42:56So this is where kind of when people complain about the regulatory bodies or the slowing down of things, that it's actually, I think, a very important and appropriate push-pull on that. Not that regulators get everything right or the industry gets everything right, but that kind of interplay is important. And I think we can all admit in digital assets that there have been some rather not good outcomes in when the space has been just left to its own devices. Now, what's also interesting is that in digital assets, things can go away and then be very quickly replaced and rebuild and things like that.

43:37And you don't need necessarily a massive intervention or things like that. So that's fascinating, too. So that kind of creative destruction is very much a part of the evolutionary process of digital assets. Yeah, Schumpeterian creative destruction. I guess another fancy 50-cent word here we could use is this sort of ongoing dialectic, the idea that it's basically, you know, it's kind of an argument that you see between the innovation in the space and regulators. Some things work, some things don't. pivot to do more of what works, hopefully less of what doesn't, and you have this kind of very complex, ongoing, dynamic system where you eventually come to some more refined versions of the earlier hypothesis.

44:19Agreed. All right, Goldmember, go ahead and unmute, and please ask your question for Rain. Yeah, of course. Thank you guys so much for this conversation, Rain. It's just been absolutely wonderful to just hear your insight on this space. So thank you again for your time. You know, my question kind of comes a little bit from, you know, narratives that I've been hearing a lot, particularly from the NFT side of things. You know, people are always demanding value or utility to be delivered. What in your opinion, or what do you think would be some of those use cases that, you know, some of the bigger players that are sitting on the sideline might find particularly bullish.

45:03When you're talking about NFTs specifically? Well, it doesn't necessarily have to just be NFTs, but in NFT space, we hear always about the gaming use case of it. We hear about AI a lot. I'm just curious what some of maybe the use cases that we might not be hearing about that some might be having conversations about behind the scenes. I still think we're very much in the early stage of infrastructure building. And I think some of the super interesting things that you're seeing are that aren't very sexy, but fascinating, are kind of the evolution of the decentralized exchanges. and even though this is very much about a set market structure and things like that, these are the necessary things that actually have to occur for stuff to happen.

45:55Just the same way you weren't really going to get an explosion of the internet until you had broadband and faster internet access and that rolled out to places before you could get the really exciting use cases. So I think we're still very much in the infrastructure UI UX components I've seen some really interesting things on wallets and you know like usability of things happening so I think this is we're still in this kind of very I don't want to say boring because it's exciting to me but you know kind of behind the scenes market structure infrastructure type of building period that you need to get before this then And really, the sky's the limit on utility, you know, portable identity.

46:43He's representing the digitized ownership of everything, honestly. Like I said before, when I was alluding to your asset management products and your investment products collapsing down to your payment vehicles. So there won't be any friction between your investment portfolio and your payments. I think this is all on the horizon. but like we talked about you're dealing with real money and it's very hard to innovate in these things you have to be very careful and patient during these periods and it's just it's not something our space is great at on the the patient side I think that forward motion is fantastic but it gets ahead of itself sometimes so I think there until just recently a lot of the enthusiasm was out of the space are actually quite important.

47:34And we saw that as very important for the last wave of innovation. Rain, you sound like you're structurally incredibly bullish on the space and saying simultaneously it's still extremely early. That is correct. I think you can be both. And I think as long as you – this is a space where – we talk about this at ARCA a lot. It's a space that is constantly trying to make you think short term. And it's a really big problem. When you think about when you're trying to create projects or do things that you're creating with hopefully multiple type of outcomes, and you can have a value accretion or change of 10, 100, 1 ,000x in the matter of weeks or months.

48:25this really skews people's risk-reward mechanisms or how they think about things or what's success. So we're really trying to build a company and a space that is durable and lasts decades, hopefully hundreds of years. And it's constantly battling that short-term thinking where this is a space that is constantly saying, think about this new thing that's here for a second and maybe doing this. And really that balance between the two. So I think you can be incredibly below, feel it's very early, and still think that there's a lot of risk and caution that you have to take when approaching it. Yeah, well said.

49:05When I last checked, we had over 100 people in this Twitter spaces. I'd really like to broaden the conversation here, bring some new folks up on stage for some questions. Bats here. Did I goof up your name again? Did I get a closer this time? It's okay, Ash. I'll find a way to forgive you one day. um so wait say it say it for us say it for us it's uh but just call me batsy yeah yeah you say batsy that's right yeah that's close enough great okay you know for an american what do you for an american no no problem uh so uh uh thanks for letting me up rain i have a couple of a couple of three questions so okay the first thing is okay bitcoin etf is looking highly likely.

49:48Of course, we don't have a crystal ball disclaimer. Question number one, how soon do you think an ETH ETF will come? If it comes, that's the first question. The next question is, take out your crystal ball, predict the future. When do you think the total crypto market cap is going to reach$100 trillion, which will bring it similarly in line with stocks and kind of which projects that you see now are going to have kind of what percentage of market share? I know it's a complex question, but surely you have been thinking about that. Thank you. Sure. No problem. Thank you. I will caveat everything with the timing is incredibly hard, But I would say, first part, ETH spot ETF, where you were feeling one way about that just even yesterday.

50:53Some of the rulings and directions that you're getting around ETH, as it currently stands, is looking like it's moving more into that thing that could be deemed around something similar to Bitcoin. at least is the way the regulatory bodies perceive it and an ETF being pulled forward. So I would say you're definitely going to see Bitcoin spot before it. And I'd still say that that is minimum. I think you're going to see way more back and forth on regulatory bodies than you would on a normal thing. So we've seen very positive indications from a BlackRock filing, but they still had to revise it once already.

51:37And I think you're going to see a lot of back and forth on that. So I think you see Bitcoin first in ETH. And I would say you're probably not going to see it for at least earliest would be just under a year for Bitcoin ETF. That would be my guess. Next. That's a good question, Batsy. I want to bring up, I'm going to screw this up too. Chirag, did I get that close to right? can you hear me oh hey everyone can you hear me am i open yeah loud and clear you sound great perfect perfect awesome thank you so much uh that's good that's good yes that's right you got it right awesome thank you so much for this really insightful uh yeah this this space has been really really insightful actually thank you so much for your vision Yeah, I thought so too.

52:32Yeah. So my question would be, actually, I just want to know what your thoughts on decentralized asset management is. I mean, we have seen so many platforms like Celsius, Lowdown, and why is decentralized asset management not taken off? And what would we need for institutional asset management to shift to a decentralized infrastructure for their management? Sure. So I would first point out that we've only really had faux, at any scale, faux decentralized asset management. So you've still had some of the issues of centralized asset management. So you have the appearance of decentralized wrapper, but then you still have a centralized authority making those decisions in a kind of obscure, directed way, where if you have a great party doing it, maybe the outcomes are good, but then things happen like happened with Celsius and you're running into the same problems that we're all trying to avoid with decentralization.

53:34So I would say that you really haven't had it yet. And then some of the reasons are there are still challenges around regulation, around decentralization and what a decentralized authority is and is it regulatory appropriate or where is the bear there for regulatory compliance, things like that. So there's things that still need to be answered. And then there's also the challenges, excuse me, the challenges of running a decentralized organization. And this is something we actually spend a lot of time at Anarka, not so much in decentralized asset managers, but DAOs in general and decentralized projects where governance is just incredibly challenging.

54:14There's a reason we have centralization and centralized entities making decisions. It's a much more streamlined ways to do it. And generally, when you have a very good centralized authority making good decisions where it's not conflicted, you can actually have good outcomes. And the contrary, when that is not true. So we are seeing that it's still very hard to govern and make decisions in decentralized arenas. I don't think this is just a challenge. I think we're going to overcome it. And there are things that we're working on that are doing better. And we're going to learn more and more about decentralized governance.

54:46But I think you're going to have to solve that before you get really, truly decentralized asset management. and also we would love to be a part of that and those are the type of ideas that we have truly decentralized asset management products as well so stay tuned as it becomes appropriate from offerings at ARCA as well yeah you know decentralization is clearly a spectrum and not an on off switch and it takes time obviously to get there as well we're incredibly early in this revolution I think at least I'm just expressing my own opinion but it definitely seems like we're heading in that direction Okay, let's go to DeFi Diffin next, and then we'll get back to Penny for a follow-up in just a second.

55:23Hi, guys. Hi, Ray. It's been fascinating listening to you speak. It's been brilliant. Hey, welcome back, man. It's great to have you with us again. Yeah, thanks, mate. Thanks, yeah. Just a question for Ray. If you had to, gun to your head, a sappy seal, a wreck guy, or an MF-er, which would you buy? Gun to head Sappy Seal Gun to head Done Quality Thank you You're welcome Great answer

55:58Penny Over to you Hi Ray I don't know Whether I missed this But have you

56:11Hey I think Everybody just got Muted there Something weird Happened with the glitches there in Twitter spaces. Penny, if you can hear me, please unmute and continue with your question. Yeah, I don't know how much of that you heard, Rayne, but I might have missed it earlier. Start at the beginning, just not to be on the safe side. It's Twitter, man. I don't know whether I missed it earlier in the daily briefing, but did you say you guys have an NFT fund?

56:42rain i think you're muted let's see if we can get rain on you there you go i'm now unmuted sorry about that um i don't believe i mentioned this um but we actually do have an nft fund perhaps jeff spoke about it earlier um so we have yeah daily briefing so it was exactly yep yes we do have an nft fund uh with a very talented portfolio manager named sasha fleischman who if anybody is interested in the NFT space and investing in an institutional manner in that space, please get in touch with us and I will put you in touch with Sasha. And could I just ask, what's that fund valued at the moment with the NFTs?

57:23A dollar amount or returns or what are you looking for? A dollar amount, please. That we have about, it's a called capital fund where we have about 50, we call it 50 million in capital in that fund. Explain what that means for folks who may not know. So it's a closed-in fund where you set a certain amount, people give you commitments, and then you call capital as it deploys. And we're almost done calling the capital in that. I think we have one more capital call left in a$50 million fund. I think it sounds like you just got a little bit faint there. Can you still hear me? I can. Has something happened to, is this better?

58:08Yeah, it just sounded like you got a little softer there. This may be just one of the vagaries of Twitter. I'm going to go vagaries of Twitter as I have remained constant, like Arca, never changing, perpetually, like a rock. And now you're back. And now you're loud and clear again. I don't know if I can see Twitter, not me. Yeah, I'm sure that's the case. By the way, we'd love to get Sasha Fleischman on Real Vision. I think it would be a phenomenal interview. I highly recommend it. Yeah, he's never been with us. Go ahead, Bas. We'll make it happen. Wonderful. Thank you for letting me do the follow-up question.

58:48So can you answer my second question that I asked before about the$100 trillion? And then in terms of market share between projects, you know, how do you see that potentially? least? I think the$100 trillion, probably not for a decade, at least. I think you're going to get a lot of resistance, and then it will move rather quickly. But you take a look. Again, I use the analog ETFs. It's just there's a lot of friction in financial services, a lot of gatekeepers, There's a lot of ways to slow this down. So I just don't think it, you know, reaches tech innovation type of things. You know, there's different regulatory regimes in places.

59:39So it just takes longer. So at least a decade. And I think even that would be fast. That'd be great. So that's kind of, I think, kind of an optimistic, bullish one. And then when we think about protocols, what are the projects that are going to be them? That I won't even venture, I guess, even though they're the ones that are there now. This is something that I've seen in this space, and this is why I really think that still active management and an approach that incorporates people thinking about it is still very important. I come from a passive world where we designed really fantastic indexes.

1:00:13They had a value tilt, and we kind of pioneered smart beta. But you still had efficient markets. The market structure was understood. The players remained the same. There weren't tremendous innovations in that. But one of my first most humbling experiences with digital assets was I tried to approach it in the same way we approached equities. And it was completely wrong. And the indexes I designed were completely obsolete in a matter of a couple of weeks in some cases. And it made me think, really, that you had to approach this in a different way and that you would probably not have come up with passive indexing at the beginning of the equity markets either when we were trading stocks under a pear tree, when it was very inefficient and there were huge asymmetries of information.

1:00:58So I think that that's the case right now and that we're seeing giant innovations all the time. And I don't know where that would come from yet. I mean, it looks like ETH is going to be giant. And, you know, a very important thing. But I don't know in a couple of years or on the way to 100 trillion. It just seems too early to say what that big winner will be and why you really need to stay engaged with the space. I'll give you my speculation. Please, speculate. I love it. Braver than me. Okay. I'm an enterprise guy. I'm about enterprise blockchain solutions. So I think the projects that are offering that, I think most enterprises are going to move to DLT-based systems.

1:01:43Even if they have Web 2 stuff, they're still going to be writing things on the ledger just to prove what they're doing, even if they don't have smart contracts on their app. for things like Hedera, things like Avalanche,

1:01:58things that people can build businesses on, so things with permissions, things with traceability, things with private and public, that kind of stuff I think will probably gain a decent market share closer to the 100 trillion mark. That's just my two cents. Not financial advice out of no shit. I agree with the thesis there. I would say that definitely appears to be correct right now. My only thing is that this space has changed so much and where it goes changes so much that many of my thoughts, I have had to be flexible in certain things, more North Star type thing. But I would agree broadly with what you say.

1:02:48Thank you.

1:03:16some of those parallels from your long and extensive experience working in finance might be relevant to understanding the crypto landscape. I would love that. We love what you do. We've always found it a fantastic venue to appear on. Jeff's been there several times. Anytime you would have me, I would love to show up. Well, we appreciate that. And I think we'd love to take you up on that offer. That'd be wonderful. Rain, great conversation. We've covered a tremendous amount of ground here. Lots of different topics and wonderful questions, as always, from our Twitter audience. I'm curious, final thoughts, key takeaways that you'd like to leave us with from this conversation?

1:03:55I really liked – I don't get a lot of questions where people are talking about the structure and understanding how some of these kind of larger, slow-moving investors move. So I enjoyed you going deep there. I think it was hopefully insightful and not necessarily something people always talk about. So I really enjoyed it. I like both the broadness and specificity of the conversation. I thought it was a great conversation in that regard. So thank you for leading it. And I would leave people with this. It's very early, guys, to get involved, learn about it, ask questions, show up to things like this.

1:04:35There are no bad questions. I love the engagement here. And thanks to everybody. Well, I can see from all the Twitter emojis, Posh, being up on my screen right now that the audience really loved this conversation as well. Really a pleasure, Rain. And I look forward to continuing it on the Real Vision platform. And of course, everyone who's listening is welcome to join us. We'd love to have you back there as well. I should say, final housekeeping note, we've been talking all week with experts from around the crypto sphere to try and understand where we are and where we're headed. You can watch the entire Real Vision crypto gathering entirely free in the link pinned to the top of this Twitter spaces or the pinned post on the Real Vision Twitter feed.

1:05:16Really wonderful, Ryan. Thank you again, everyone, for joining us. Incredible conversation, as always. Looking forward to doing it again soon and to continuing this conversation with you, Rainn. Thanks again. Thank you. Look forward to it. Have a great day, everybody. What's up, revolutionaries? Thanks for tuning in. For more content like this, head over to realvision.com and get unfiltered access to the very best, brightest, and biggest names in finance.