The Implications of the BlackRock BTC ETF w/ Edward Chin & Thejas Nalval

0:00Your favorite neighborhood spot grows with Square. Indeed, my favorite neighborhood spot has quickly become Todd Snyder in Williamsburg. Todd Snyder is one of my favorite menswear shops and has supplied me with all the clothes I have needed this quite hot summer. Every business has different goals, but Square is the business platform that supports them all. From opening a new location, selling something new, or just expanding their reach. Indeed, I've seen it with Todd Snyder. In Square, also, you can get real-time insights, so don't wait for end-of-day reports. Go to square.com forward slash go forward slash realvision to learn more about how your business can grow with Square.

0:43That's S-Q-U-A-R-E dot com slash G-O slash R-E-A-L-B-I-S-I-O-N.

0:57Hey everyone, if you like this podcast, go behind the paywall to get privileged access to the smartest minds in finance. Join the Real Vision community and learn how to become a better investor. Visit realvision.com slash RVpod and use the promo code podcast10, that's podcast10, to get 10 % off our essential membership for the first year. Now, to the top analysis of today's crypto markets.

1:30what's up everybody welcome to real vision crypto daily briefing i'm ash bennington i've got parataxis capital co-founders with me today ceo edward chin and cio tejas nalval welcome guys yeah thanks for having us ash well it's great to have you here lots to talk about obviously lots of news flow we got to pop in prices let's get to that right now take a look at price action here bitcoin trading at 29 860 trailing 24 hours it's up 10 and a quarter percent trailing seven days up nearly 15 percent ethereum trading 1850 trailing 24 hours up nearly seven percent on my screen trailing seven days up just about six and a third percent.

2:18Guys, we said it at the top of the show, a lot of news flow, a lot of interest right now in this space. We've got a lot of stories that show this kind of bridge between TradFi and crypto happening right now, or at least threatening to. We've got a BlackRock ETF. We've got an exchange at EDX announced yesterday. This is Chuck Schwab, Fidelity, Citadel, Virtue, Sequoia, Paradigm, some true behemoths of the Trad5Space. And today, this morning, Deutsche Bank applying for a digital asset custody license in Germany. Guys, big picture, what do you make of it? Yeah, I think it's a reaction to the BlackRock ETF news.

2:58I think the market was due for a little bit of a catalyst. There were some signs of forced selling that took place over the last several weeks, which tapered off right in line with when BlackRock announced their ETF filing. So I think what we're seeing right now is a reaction to that, but more importantly, some short covering in the market as well. We saw some evidence of upside calls being priced in, so option market makers just repricing their books and the market slowly grinding higher. So this could be the start of the next run. Time will tell, of course, but we feel very constructive over the fundamentals over the past several weeks.

3:44Yeah, I think the key thing that the market was looking for was an incremental buyer. And to the extent that a household name, probably the bluest chip institutional name in the space BlackRock, to accept that they're going to come out with an ETF product that could tap into the$35 trillion U.S. retirement market, there's your incremental buyer. And so I think the market's getting pretty excited about that and the price action that we've seen over the past couple of days is reflecting that. So what do you make of it? What do you make of BlackRock's entry into the space? Obviously, lots of spot ETFs have been declined by regulators in the past.

4:23What do you make of it? What does BlackRock know or what do they think they know about their chances of getting an approval here for a spot Bitcoin ETF?

4:34So this is a debate we've had internally for going on two weeks now. We don't have, of course, without knowing any particular specific information, we do think that this is a little bit of a watershed moment for the space, number one. BlackRock wouldn't enter the space, in my opinion, if they couldn't get this ETF through. It does, you know, looking at the fine print, it does look and feel a little bit different than some of the spot ETF filings that have been rejected by the SEC since over the past few years. So, you know, our own view internally is that there is a greater than 50 % chance that this ETF will get approved.

5:20and what is what is particularly exciting for us as a as a fund manager this is real this is a real volume real capital uh coming into the space that is uh you know likely not going to be traded on leverage it is it is real uh long-term you know quote-unquote huddle capital that is entering the spot markets not the futures market is entering the spot markets um so that should in our view that should bode well for market growth and activity across the space. So let's ask the obvious question. Why does it matter? Why does a Bitcoin spot ETF generate more potential for activity for BlackRock than a futures ETF, which has already been approved?

6:08The easy answer there is there's no hidden costs that come from the contango between the futures price and spot prices if you I don't remember the exact stat but if you were holding one of the futures based ETFs year to date I think you'd be underperforming Bitcoin spot price by something like 10 or 20 percent so there is a there's a real cost to holding a futures based product so number one your your performance is actually in line with Bitcoin number two it again for most crypto natives and for most practitioners in this space spot activity does does beget volume across the space so as volume comes into bitcoin's spot markets it does you know it does make its way into other spot markets other blockchains other layer ones, other tokens, and just by virtue of volume coming into the spot markets.

7:11That dynamic. It's basically cheaper and therefore better tracking and also the potential for a great deal more volume in terms of retail interest in the product. Yeah. So let's talk about what this means for the space more broadly. Obviously, we're seeing this surge on the price action right now, particularly on Bitcoin. I believe we're seeing highs right now for a significant period of time in terms of the Bitcoin dominance index right now. And by the way, these will vary depending upon which index you look at. I'm looking at coin market cap right now. It's basically at 50%, 49.9 % Bitcoin dominance index.

7:51This is obviously showing some significant interest in the space in terms of what market participants are looking at. Yeah, you generally see this trend where the initial marginal capital comes into Bitcoin, but then it slowly dissipates down into further down the risk spectrum into Ethereum, into Solana, into other layer ones, into the actual the all set or trading on different blockchains. you'll see Bitcoin leading and you'll see the Bitcoin dominance ratio go up but then you slowly start seeing the ETH Bitcoin ratio bottom out start moving higher so that implies capital is being sold out of Bitcoin into Ethereum capital is being sold out of Bitcoin into other tokens and you know crypto traders are actually comfortable taking a bit more risk and this is just one of those trends if you look at the ETH Bitcoin ratio you'll see an oscillating relationship so So we're in the phase where the new marginal capital is coming into Bitcoin.

8:48We've used the term that Bitcoin is the gateway drug generally in the crypto markets. Capital flows into Bitcoin first. It's the most liquid. It's the most well-known. It's the easiest to access. But then that capital slowly makes its way into the markets. And Ash, if I could add to that, I think if I could step back. If you think about the institutional allocators that have been exploring the space, we do manage public pension fund assets in a couple of our hedge funds. But I think retail and high net worth have always been a bit progressive and have gotten into this sector a bit earlier. I think for institutional allocators who are, you know, past the$35 trillion in retirement assets, the next couple of trillion dollars in deployable assets that are looking to get exposure to space, having an SEC approved regulated product from the likes of BlackRock, I think will help with the reg risk.

9:47And in every one of our discussions, I think a lot of folks have spent the past three years on the institutional side studying the sector. And they have a pretty good sense of the investment opportunity. The key headline right now is the regular risk. And so I think with the approval of this ETF, and I saw a stat saying that BlackRock's hit rate is, I think, 500 to 1 in getting these approvals. And so, as Tejas described, the fact that they're moving forward with it, I think, lends to their confidence, number one. But number two, bodes well for the sector as it kind of really opens up the possible pool of investors that can move forward.

10:24Hey, everyone. We're going to take a quick pause and hear a word from our partners. We'll be right back.

10:33So we got sucked into the news flow here. Obviously, there's a lot happening right now. Let's give a little bit of background, a little bit of context. You guys both come from the TradFi world. Tell us a little bit about your journey, how you guys got interested in crypto, and what you're doing right now at Parataxis. Yeah. So by way of background, I'm a former military officer. I spent about a decade as a tech media telecom banker and came upon a space in late 2017. I ran the advisory business at one of the early merchant banks in the space called the Element Group, looking at early-stage token projects, fundraising, and investing.

11:07That's where I connected with my partner and co-founder, CIO Tejas Naval. He was on the other side of the Chinese wall, managing the firm's asset management business. We spent the first two years, I would say, at various hedge funds and merchant banks. I spent a year at Galaxy Digital before launching Parataxes Capital. Our goal from day one was to create a product that would appeal to institutional allocators. And we've been waiting four years for this day to come. And it's a great milestone for us. I feel like coming out of what was a pretty painful bear market, it kind of sets us up pretty well for the next phase of growth.

11:49Yeah, and Ash, I have a similar background to Ed. Spent most of my career on a trading floor. Spent about a decade at Goldman Sachs. I learned about Bitcoin on a trading floor at Goldman. This is a pre Mount Gox and I followed the space personally for a number of years. And for me, what was appealing was just seeing a second iteration of Wall Street being architected. As a trader, obviously it was appealing to trade the markets and be a part of that. And I decided to take a career risk in 2017 and I joined the element group with Ed, built and launched a hedge fund business over there. Spent some time at another crypto quant fund running a long short strategy before leaving to launch Parataxes.

12:39And we launched our company in the beginning parts of 2020, launched our first fund in June of 2020. And right now we have four funds. Since we're a small team, I think most of our team comes from a traditional Wall Street background. from different parts of the ecosystem. But a lot of what we do does take into account what we've learned and how we were trained, just being at a big bank. Yeah. So let's talk a little bit about the secular thesis. Was it a play, as you suggested, about essentially modern financial infrastructure and architecture? We see Jay Powell down on the Hill today talking about inflation still not being adequately controlled.

13:24Was this about separating the monetary base from the nation state or from the central banking system? What was the thesis that you guys had from a secular basis when you spun up this fund? And by the way, 2017, you sure got the timing right. Yeah, I mean, I can kick off there. I think the thesis initially was two parts. The first one is just the massive potential for growth in the second. I think with any nascent technology, something that can be as disruptive as Web3 and the applications that are being built on all the various layer ones. That was really exciting for us. And obviously that growth and adoption is typically manifested in price action first.

14:03And we did see a lot of that in 2017 and in 2020 and 2021. But as fund managers, as folks that are managing not just individual capital, but the capital for institutions, what was also exciting about the space is that it was very inefficient. And still is. And there are many parts of the ecosystem where you can apply traditional investment management strategies and risk management principles to extract alpha and returns that are above what you can find in track high markets. And so from a hedge fund perspective, outside of the growth, there was the ability to deploy capital, meaningful capital, at what were, in our view, very, very interesting opportunities.

14:51Yeah, and just to add to that inefficiency angle I mentioned, our view is that the market is inefficient, it will remain inefficient. As a result, the opportunities for investment will be exciting, will be somewhat idiosyncratic from the rest of traditional markets. But I think the, you know, I came from the equities world where your edge came from either the knowledge that you had or the amount of capital that you had to trade with. So if you were very large, you could influence the market and have an effect and, you know, be profitable. Whereas in this digital assets, your edge came from your experience.

15:36If you're not a practitioner in a space, if you're not actually trading the markets, if you're not actually interacting with DeFi, if you're not actually rolling up your sleeves and learning how this technology works, it's very difficult to acquire an edge. So for us, just by virtue of having worked in this space and really developed a network and really understood how this space operates, both on a fundamental basis, but also from an investment standpoint, we developed an edge. And, you know, as a natural evolution of that, we thought it made sense to launch a fund. And, you know, this is right at the beginning of COVID when I think Bitcoin was trading right around$4 ,000 or$5 ,000.

16:23You know, we launched our first fund. So that's, you know, our view is that that dynamic will continue to persist. And for us as a fund manager, that means, you know, we're in a good spot. how's it playing out in terms of the thesis uh versus what's actually unfolding there obviously we know this is a tremendously volatile asset class uh how is it playing out though from a secular thesis perspective do you see the kind of developments that you thought you were going to see when you came into it and how are they playing out a pace in terms of what the projection was uh based on your expectations for the time horizons

17:00so go ahead um so it's exciting when the market is just going straight up and and whatever projections one may have had kind of goes out the window and you're just right you're waiting to see that um i i think because nobody can actually predict the future i mean we can't that's for sure and and number one number two we're not ideologues we never tell anybody to sell everything and just buy Bitcoin or crypto. And so what that forces us to do is to create different vehicles that do have different time horizons and different risk return parameters. And so we do have four vehicles and each vehicle has a different time horizon and the ability to have different vol profiles.

17:47And so because we can't predict the future, we do have a view that the technology will continue to experience growth and be disruptive and that there will be inefficiencies and opportunities generate alpha. But ask to your point, you know, one investor may be comfortable with a 40-ball asset class. Another one will probably puke. And so we have to create products that would appeal to them. So tell us about the strategies that you guys are running right now. Yeah, yeah, sure. I can kick that off. So we're an active fund manager. We have multiple funds and each has a targeted return profile. When we launched this company, our view was there would be multiple ways to generate a return.

18:38The market was inefficient enough. It was growing fast enough. So really just pigeonholing yourself to one single return profile as a fund manager meant you'd likely be out of business within 18 months. The cadence at which this market evolves is much faster than the traditional markets. It's still a young, nascent market, but it is an order of magnitude more mature than it was when we entered a space. And our views, it'll continue maturing. So we decided to launch with a multi-strategy type of approach to anything that we're doing. So our first fund is a multi-strategy fund. It allowed us to build a product that would allow us to scale capital and appeal to an institutional investor.

19:26And I think that biggest hurdle for a fund manager sometimes is to scale excess capital. You may have a strategy that does really well, but the moment you start trading X amount of capital at size, your alpha goes away and it's because the market's still somewhat very small and you know folks are maybe catching on to the types of strategies that you're running. So we decided to launch with the multi-strategy approach that allowed us to generate returns from trend following, both directionally and on a relative value basis, allows to generate returns from more fundamental thesis driven investments and tokens and allow us to also generate returns from opportunities that are more market neutral that are yield oriented and you know when we obviously launched with this multi-strategy approach to scale capital but our thinking was we could by by running multiple strategies in one fund we would build up an expertise and a track record that would allow us to spin out other funds assuming there was demand and we actually did that with our yield fund which we launched last year.

20:33This is one in which we're capturing returns that are entirely market neutral or uncorrelated to Bitcoin beta, both on-chain and off-chain. So this could involve structured trades between spot and derivative products. This could involve more structured credit type of opportunities and this is also where we trade some of our systematic higher frequency type of strategies that are, again, uncorrelated to Bitcoin beta, but allow us to take advantage of trends that we're seeing intraday. You guys are running a ton of different strategies. We are. We are. And again, it comes back to what I said before.

21:18We've been doing this for a while. We're not just a tri-fi transplant that is trying to do something. We've been doing this for quite some time. And even prior to, for myself personally, prior to entering the space professionally, I was trading Bitcoin and crypto across different exchanges. So I'm very well versed with how these names work and where the risk of vectors lie. A lot of that knowledge has been put into our funds. Just to round out on your question here, a strategy I find that we launched this year, which I think we're really, really bullish on, is relative value. And this is where we're trading Bitcoin against.

22:02Hey, everyone, we're going to take another quick break and hear a word from our partners. We'll be right back to the Real Vision crypto daily briefing.

22:14I think, oh, TJ, you're back. You're my back? Okay, great, great. You're back. So with our relative value strategy, we're pairing Bitcoin against Ethereum long and short. And this allows us to take advantage of the oscillating relationship that occurs between Ethereum and Bitcoin. Generally, the trend you're seeing with specifically with crypto traders, you'll see folks that are willing to take risk. When risk is on, you'll see ETH outperform Bitcoin because folks are taking a view that ETH is going to move at an order of magnitude larger than Bitcoin. And vice versa, when crypto traders are taking risk off, they'll move back into Bitcoin selling ETH.

22:54And you'll see this E-Bitcoin ratio move in kind. So we take advantage of that in our relative value fund that we launched this year. What's the maximum leverage that you guys have in these structured trades? So the structured trades that we put under our yield fund, these are unlevered returns. I think our general view with leverage is that it is dangerous in a 90-ball asset. it is something that we we had a thesis on when we launched our company it's also something that avoid allowed us to avoid many of the pitfalls last year leverage the build-up of leverage and the squeeze of leverage is considerably more violent there are no margin calls in crypto it is either a long squeeze or a short squeeze so really i think as a fund as a as a institutional fund relying on leverage is a bad recipe sometimes.

23:54Yeah, that's why I ask. Listen, as we talk about this, there's obviously a lot of different moving parts that you guys have running under the hood. How do you think about it? Are there broad kind of structural categories that you filed these strategies in in your head, particularly when you explain this to new investors? What's the approach that you take? Yeah, so go ahead. Go ahead, Ed. So our main fund, our absolute return fund, that's a fund where we run every one of our plays. So there is a macro component to it, which does have trend following and directional strategies that we run there.

24:31And then there's a much more, as Tejas described, the fundamental, we call it our thesis-driven book. And that's where we do bottoms-up analysis on individual tokens, where we try to identify the equivalent of earnings power in the space. the same way that a long-term equity analyst will look at similar stock. And then the third bucket is a market-neutral trading strategies. And so those three, the reason why we have all three, as Sage described, number one, allows us to scale a capital, but number two, the market really does evolve. If I think about our yield fund, we launched it early last year with the intent of going after the DeFi yield opportunity.

25:12And as soon as Luna Terra happened, the yields are basically collapsed. And so we take that multi-stretch framework even to some of the yield-oriented strategies within our space that required us to figure out a different way to generate attractive risk-adjusted returns for our investors. And so what we saw was the structured credit opportunity in digital assets. And then when Voyager and Celsius and a lot of these CIFI lenders went down, what you saw was this huge vacuum in the lending space. And typically when that happens, spreads blow out, which are great for allocators of capital. And so that with the overall macro environment, as we were kind of entering a rate hiking environment, really, really helped us to kind of pivot there.

26:01But that wouldn't have been possible had we not had a view to each one of the strategies, what the puts and takes were, and to parcel out and carve out these into various buckets to provide a very specific type of exposure for investors. Yeah. So tell me, what do you guys use as your benchmark? Is it unlevered Bitcoin return? Is that kind of like your beta proxy? Yeah, for our multi-strap fund, it's the easiest. Folks, generally, we've been asked the question, how have you done versus Bitcoin? Yeah. So it is the easiest for our market neutral fund. We generally look at like a high yield, general traditional high yield.

26:45So like an HYG ETF. That's been the bogey. It's a different investor base. It's a different type of return profile we're targeting. What's the historical return been like for you and where are you year to date right now? Yeah, so our multi-stripe fund, uh we're you know handsomely outperforming bitcoin life to date um it is that is the that is the goal you know we've we've uh it is meant for uh someone looking to take um some directional risk uh but is looking to outperform bitcoin over what we think is a full market cycle so generally bitcoin's having cycles for years that's historically been a full market where you see a secular bull and a circular bear if we can outperform Bitcoin pretty, pretty meaningfully in that cycle, then I think the job is done for that fund for our yield fund.

27:42Are you able to share the more specific metrics on returns? Yeah. Yeah. So, so let me, let me pull this up.