Why Crypto Could Be Near A Major Turning Point w/ Richard Galvin

21:40Raoul Pal:So it's like, you know, if you're looking for the asset allocation switch, not just the outright, you know, do I put more money into the market here? But the asset allocation switch would suggest that crypto outperforms going forwards. And that kind of makes sense in the environment you're talking about, where the macro is favorable for owning scarce assets outside of the traditional system that have a higher rate of return over time. I mean, tech stocks generally will do fine anyway, but they've already priced in a lot of goodness while crypto has done the opposite. In fact, I've never really seen that dichotomy so much as that this time.

22:17No, I guess you'd probably see a little bit if you look more granularly through the NASDAQ at some of the software stocks, right? Some of the quality software stocks and the multiples that they're trading on. I mean, a lot of them are priced for going out of business to never growing again, which seems a little extreme. Look, I know they face a bunch of sort of structural changes, but the internet teaches us that not everyone dies in that environment. Like people reinvent themselves and find ways to sort of survive and rebuild their companies. Like some of them don't, but a bunch of them do. And if you look through at some of the multiple sort of key software companies are trading that, I don't think they've had, look, I mean, it's all relative, but they're kind of in a similar position to crypto in terms of the time they've had over the last two years as well, right, as AI has taken all their marginal dollar.

23:04Raoul Pal:And also, it's kind of there's this narrative that goes in the market as well. Anybody can vibe code an accounting app or a payrolls app or whatever it is. So therefore, all these software companies are worthless. People don't realize that you try and build an app that does that and then get distribution. Distribution is the hard part. And then you get the institutional stickiness because companies adopt something like Ramp or whatever payment platform or whatever it is, you can't get it out. So SAP is still one of the largest technology stocks in Europe because you can never get rid of the thing.

23:42Yeah, and we do a lot of it in our business in terms of dashboard-type, portfolio analysis-type software that we've built. But that's only one part of the market. We're not building software that we're going to integrate with our auditors and our administrators, right? We're not going to build anything.

24:01Raoul Pal:For 50 ,000 employees around the world in different languages. Yeah, or just anything that's that business critical. Like from an analysis perspective and from the ability to deliver data to me to help me make investment decisions better, I think it's astronomical and some of the most incredible technology that I've seen in my life. But that doesn't mean I then stake my whole business on the back end of my business and other people's money on code that I've built. There's no way that's going to happen, right? So I still think there's a lot of a place, you know, for SAP-type software where it's business critical.

24:35You've got a heap of different vendors and those sorts of things plugging into it, and it's mission critical where, you know, there's insane expertise required to do that. I can't see that getting replaced overnight. But then, you know, we're drifting off the topic. I'm far from a software expert, but I'm just trying to overlay what I see in my business. I think AI technology is, and I've worked in technology basically since I left university. I think it's the most life-changing thing we've invented to date. And I do think it's going to change the way we do all sorts of things. But I also think there's incredible opportunities coming out of that.

25:10Raoul Pal:The other big themes that have been around, I want to see what your thoughts are, perps, hyperliquid. Because there's basically been two decent-sized assets that have really outperformed. One is perps and the other is Zcash. What do you, you know, that whole privacy narrative? Because that's a very clean narrative. It's like, well, some people don't want to show their bank account balance to everybody, which is what blockchain so delightfully does. And therefore, you know, 10 % of Bitcoin's value could be in a privacy version. Super clean and easy. And then everybody got behind it. So that was a good one.

25:44Raoul Pal:And Hyperliquid has, you know, has been amazing. What are your thoughts on those two themes? Yeah, let's start with the privacy theme first. When I look back at, and I often do this, look at the initial pitch book for our first fund back in 2017 and look at the thematics that we were talking about in crypto that we were going to allocate to. And privacy was one of the two key thematics we had in our fund when we first launched. And I had done a whole bunch of work around, if you looked across any economy, there's always a lean towards privacy or a privacy bent towards any economy versus the sort of the, I guess, the bright economy.

26:30And we had a bullish thesis on Bitcoin and our view was it was impossible to be bullish on Bitcoin without there being a privacy-centric version of Bitcoin that would grow at similar rates to that. And so we actually owned a bunch of Monero back in the day when we launched the firm. Actually, a pretty good penetration back there. People probably haven't been around in a long moment. Remember, they used to be trading against Monero pairs on a bunch of exchanges, right? So it seemed like a logical extension of crypto. Why wouldn't you trade it against a fully private coin? And that thesis, it's taken a long time to be realised.

27:06It's probably, if I draw a chart from when we launched the firm in 2017, it's proven right, but it was pretty bad, sort of five or six years in the middle there. But it feels like the time has come that Bitcoin's re-rated to a trillion plus asset, and you've seen the privacy space significantly lag that. And I still think that original thesis is right, that there is a place in the global economy for a privacy version of Bitcoin, for want of a better word. And it feels like Zcash is picking up that mantle. Monero is still there and it's performed okay, but Zcash seems to be the one, and we own it across our long funds on that basis, seems to be picking up the mantle and running with it.

27:48And I think everything that's happening in the world from a surveillance perspective, from even a technological change perspective, even from a quantum computing perspective is playing into the privacy sector and the ability for these coins. Do you think it's harder to hack Zcash stuff that's been shielded? So therefore, it's safer against AI and the rise of agentic hacking and all that stuff? Yeah, I think it is. And they've also got a pretty good roadmap around quantum resilience as well. And look, these coins, they meet their nameplate. We've owned Monero in our funds in the past. And our auditor hasn't been able to prove that we own it.

28:37And so they've tried everything they possibly can. And we've really struggled as a fund back in the early days to actually show and prove ownership of it. And we've had to do all sorts of things like moving on to a centralized exchange to prove we actually owned it. So they actually work. When you get sophisticated top four auditors trying to prove that you own something they can't using all the technology they've got, it's a kind of a decent sort of backward hack to check whether it's traceable. And this technology is pretty impressive. And I just think, you know, from a macro perspective, everything that's happening in the world politically, like AI is doing for crypto from a decentralized perspective, I think a bunch of things governments are doing from a surveillance and monitoring perspective is, you know, advertising the use case for people to be able to allocate some of their wealth to a privacy retaining asset.

29:28Raoul Pal:And it's a privacy retaining asset that's also in scarce supply. So it works for the debasement side of it as well. So it's like got the double kicker to it. Yeah, I think one of the things that's changed materially and one of the things that sort of rugged our initial thesis around Monero, it basically got off-boarded by most exchanges, right? So you saw the liquidity drop and, you know, it's one thing to buy a privacy asset, but you want liquidity, just like Bitcoin. If you don't have liquidity in a privacy asset, why would you allocate capital to it? Because you can't get in and out of it when you need it.

29:59Now, I think what we've seen, particularly with Nier, near intense platform, we've seen the privacy assets, particularly Zcash, be reintegrated into the whole crypto liquidity framework. And the volume that has gone through the new protocols intense platform with Zcash, it's been the leading asset on its platform a lot of the time, has basically reintegrated that privacy asset into the liquidity framework around decentralized exchanges and has removed that risk of sort of delisting and those sorts of things that we lived through for those first sort of three or four years of our cycle. So, look, it's not a surprise at the same time as you can trade it and liquidity bumps up that we've seen a re-rating across both Zcash and Monero.

30:45Raoul Pal:But surely the governments will come back and say we don't like it at various points because it depends who's using it. My guess is part of the recent run is the seizing of the Iranian assets in Bitcoin. And so the Iranians who've always used crypto as a way of, you know, staying outside of the system, we'll just move some of it into Zcash. I mean, that's going to be the issue is the dual use of it. But that's without all money, obviously. Yeah, and look, I think we've kind of seen that playbook to a degree when everyone made the same arguments around Bitcoin, right? Now, it's clearly traceable and technology has come a long way to help governments do that from their perspective.

31:24I do think that's where the intense platforms, things like Nier have built that allow people to trade these in a decentralized way basically materially reduces that risk. Because you could effectively off-board Zcash from every exchange today, and don't get me wrong, that would clearly impact its liquidity and impact its value. But it would still be readily tradable through near intents, and it does tens of millions of dollars of volume through there a day.

31:50Raoul Pal:And so what about hyperliquid and what's happening with that? Because that was the other phenomena. Yeah, I think getting back to the Perps platforms and decentralized exchanges, we've always been massively bullish on the ability to trade in a decentralized way. It's always been one of your core theses, is the whole DeFi and just the trading thing has always been a core thesis of yours. Yeah, because I think that's what crypto does best. And again, in a world of not trying to overthink it too much, right? If you look at a spectrum, will crypto disrupt and change the world's gaming space? Or will crypto disrupt and change the trading space?

32:29Now, I think you can make valid arguments for both of those, but there's a hell of a lot lower risk around trading, right? Because it's just a core part of what crypto is. And it's just such an easy vertical for crypto to disrupt and change. Now, I think a few things have happened that across that journey have made that more and more inevitable is the technology has got better and better. And the ability to build an experience that matches a centralized exchange experience and then overtakes it has really come to fruition over the last few years. And look, I think we've spoken about it in the past.

33:04I'm an old guy, so I can remember when there were still newspapers, right? And you often see competing technology. Utility drives technology. There's a small cohort of people that will muck around with things and test new technology just to check it out. And we'll put up with the quirks and the hard things about using it just to sort of try it out. And, you know, we saw the same thing back in the sort of mid to late nineties as people were messing around on message boards and online newspapers, but that was still a much clunkier experience and the utility of it was way lower than the thing that got thrown and delivered to your door every day, right?

33:40That you just opened up and it gave you the news and that sort of stuff. And then we saw, finally, we saw, you know, bandwidth increase and we saw all of a sudden those clunky websites became fast. All of a sudden they started having high res photos of them. All of a sudden they started updating every half hour and they started to have video. And then all of a sudden that newspaper thing you had starts to look clunky and slow. And you get rid of that in a zero to one type experience, then you start to move everything online. And I think that's what we're starting to see around decentralized trading applications in crypto, that we've gone from that period where it becomes a much clunkier, harder technology to use than the centralized experience to one where it's a hell of a lot easier.

34:20Look, I mean, if you have an idea on a Saturday, you know, you see, you see anthropics pronouncements, emotive pronouncements over the weekend, and you have an idea, maybe I want a short memory stocks. There's only one way to do that if you're on Aussie time on a Sunday morning. I actually did it myself. There's only one way to do that on a Sunday morning Aussie time, right? Like you can't open your interactive brokers. You can't go and open another account somewhere else. You trade in a decentralized fashion and you can execute that view in literary seconds. And there's no KYC AML uplift. There's no barriers to entry there.

34:58There's no, I've got to wait till Monday morning. And that's that point where I talk about the utilities overpassing. That's a much better experience than your traditional CFD provider or your interactive brokers or your stockbroker. And we're at that sort of newspaper to internet type crossover, I think. And that's why I think we're pretty comfortable that volumes explode from here.

35:20Raoul Pal:And also on the other side is the kind of ease of which you can get high quality yields now. without, you know, you've got, you can have manufactured yield, which can be riskier. There's straightforward stablecoin yield. There's a lot of yield opportunities. The whole kind of the complex of what you can do now between DeFi and trading is getting really sophisticated. Yeah, I think, you know, as you know, in traditional markets, the efficiency of capital, given the amount of balance sheet, given the amount of, you know, bank balance sheets that are available to traders, keeps yields relatively low.

35:57And if you look at traditional, we use a pretty simple sort of framework here that in traditional markets, you've got sort of 80%, 90 % plus institutional type ownership, and then you've got 10 % to 20 % type retail speculative ownership. And so you've got these massive wallets of liquidity on the institutional side that provide the liquidity to all the traders in that ecosystem. And there's a yield that they'll provide that liquidity and they can effectively flood that market whenever they need to flood it. If the yields get a little bit above, we're talking basis points above where they can get it in traditional treasuries or bond markets.

36:36Crypto kind of flips that on its head, right? You've got a market that's probably at best 10 % owned by institutional investors, 80 to 90 % owned by retail speculative investors. And so when trading picks up and they need that capital, they need that collateral, you've got a really small amount of wallets providing that capital into that trading ecosystem to allow them to take that leverage and so you get overpaid and you know i don't think that dynamic i think that's you know we've seen that i've seen that slowly come down and down through my time in crypto but it's still not an efficient market and to your point you can still get pretty attractive yields for providing that liquidity and it's the same as traditional markets you're just providing liquidity to people that want short-term capital.

37:19It's just in crypto, there's not enough people providing that liquidity versus the wave of people that want to borrow it. Hence, you get yields that are pretty attractive versus most sort of standard benchmarks.

37:29Raoul 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. The other thing that's talking about retail that's been fascinating is the rise and speed of Robinhood in this space and what they've been doing. And now they've got a mincoin revolution going on and massive volumes. I mean, where the fuck did that come from? It's because they onboarded different people.

38:04Yeah, I think that, and this is the time, right? You start to get a marketing machine of the strength and experience of Robinhood that's got serious marketing capabilities and experience, marketing financial products to retail investors, married up with crypto rails. And that's one of the things that we've kind of missed today. We've been a very engineering heavy type sector. And that's because we've been in that developing technology phase. And we work across the venture space as well. And one of the key things we spend a lot of time talking to founders around is you can't just have a bench of developers.

38:41You've got to have some marketing capability because the build it and they will come. Business model.

38:47Raoul Pal:Distribution is the most important thing or you don't have a business. Yeah. And look, engineers rightly, and a lot of people sort of underestimate the ability of that. You would have seen, I've seen through my career, a bunch of inferior products that win because they've got better marketers and they've got a better marketing team and a better ability to place their product in front of users. And I think one of the interesting, exciting parts of crypto is we're seeing two things. We're starting to see fintech type businesses that have proven their leaders in distributing products to retail users, the Revoluts, the Robin Hoods of the world, marrying up with crypto rails.

39:22And so you're starting to get that engineering kind of disruption married up to that sort of marketing expertise. And at the same time, you're getting some more experience under the hood for some of those crypto founders that are now delivering products like FOMO apps and some of the things happening on Pump that are starting to deliver products and innovate products from a distribution perspective well ahead of what we've been able to do through previous crypto cycles. And we're starting to see, if you look at FOMO app, the amount of people they've onboarded in a short space of time, it's pretty phenomenal.

39:55And Robinhood going from, it's done$40 billion of Dex volumes in two months, which is just kind of staggering, right from kind of zero.

40:02Raoul Pal:Are you seeing through the VC side, are you seeing anybody actually figuring out token economics properly yet? Because, you know, there's the amount of businesses that launch with the token and the token just gets sold by the original owners and there's no demand for it. And so I've yet to see many token economies forming outside of chains themselves for other things. You seeing anything yet? Anything interesting? Yeah, I think DeFi still does a pretty good job of putting the token in the middle of it and using the token from an incentive perspective. The Aerodromes of the world and Curve, who basically use the token as the center of their economic universe, but also as an incentive mechanism to make sure that liquidity on the Aerodrome perspective is efficiently allocated.

40:52I think one of the things we're starting to see on the event, no one is launching a crypto project that generates a token with expectations that it's going to be an easy run, right? Like we've had a... We should have learned by now. Yeah, no one that's sensible, right? So I think we are starting to see a recalibration of expectations around that. I think there's a few missing pieces. I think the thing that crypto needs to get right, and we spend a bunch of time with our founders, you know, got a lot of experience in the traditional IPO market, spend a lot of time with our founders trying to walk them through the best way to launch a token.

41:27And crypto has unfortunately had the opposite experience to equity markets where crypto tokens unfortunately often trade at their best price on the first day and then rapidly trend down. Now, a lot of people in the Twitter universe will get quite upset at that. That's actually a terrible experience for the founder as well. Most founders don't have any liquidity on day one, so the day one price is largely irrelevant to them. And us as a VC, we never have liquidity on day one either. So from us, that's actually a burden that you don't want on the founder, right? Because a bunch of people lose money.

41:59It's the wrong directory. No one wins in that environment, except maybe the exchanges that had a bunch of tokens at the start. I think what crypto needs to get right, and we're starting to see some more serious focus on this, is more like the IPO market, right? Where buying on day one, post an IPO has been a good strategy or buying through the IPO process at a small discount has been a good strategy and working out that a slow trajectory that matches the growth upwards is a much better outcome than booming at top blast prices on day one. So I think getting that listing experience right, getting a deeper capital market around that listing experience, which we're starting to see, I think will fix some of that.

42:39And people getting smarter around how they choose vesting and those sorts of things. I think the market's wised up a lot more over the last few years and some of the games that we saw traditionally aren't going to work again. And there can't be a lot of capital being allocated in the VC market right now.

42:57Raoul Pal:Because, yes, A16Z raised another fund and stuff like that, but a lot of people just haven't got the capital or they've moved on to AI for VC investing. We've seen people like Delphi Digital, who are good friends of mine. They've now built that reasonably big-sized AI business attached to it. So the deal prices must be decent in crypto. Are there opportunities in terms of? There's a lot of opportunities because I think, you know, and we've run a venture fund. We've got an evergreen venture fund that's allowed us to invest since we launched that in August 2018. So we've always got capital to deploy and we've always been deploying capital through crypto cycles.

43:36And, you know, it's a hard structure for us to administer, but it's been a godsend in terms of the ability for us to operate through crypto cycles and always have capital for the right founders. And we're still allocating capital. We closed it till last week. But the ability to the market to adjust in the venture space, it is a bit slower. And you do find a lag. I find in the venture market, a trailing lag, that expectations of crypto founders on the VC side trail what we see on the liquid side. And the liquid market might fall 60, 80 percent, but venture values take a much longer time to get there.

44:14I think we're starting to see them come down to levels that the risk reward looks pretty good to us. And I think we've also been, to the earlier discussion we had, the ability to exit in hot token markets shouldn't be on your framework of how you're valuing your venture investments either, right? And so both from a less amount of capital chasing the deals, bringing values down to exit paths being much harder and much more difficult than they've probably looked since the crypto VC sort of market started. They both suggest that the entry prices need to come down on VC, and we have seen some of that adjustment.

44:54I think for us, the sort of the sweet spot that we're starting to see is, again, you don't have to overthink it. You don't have to find a venture project that's trying to do some crazy frontier thing of crypto in some vertical that no one's ever thought of before. We still think there's so much addressable market for new crypto founders, even starting today, just in traditional spaces like lending, like trading, like stable coins, that you don't need to go and find the craziest off sort of beaten track venture investment to make venture type.

45:25Raoul Pal:What do they have to do to be better than what's out there already? I think that's the hard part. I think they've just got to market and release this application is better than we've done before. And things like FOMO, even things like Robinhood prove that the ability to scale those applications at insane kind of like crypto type speeds is still there for people that execute properly. And so I don't think any of these markets are settled whatsoever. Like I don't think the ability for you to enter some of these markets, it's not like we've only got these players and that's what there's always going to be.

46:00I think because the pie here is going to grow so fast as well. You've only got to capture a small amount of share.

46:07Raoul Pal:I guess Robinhood proved, as did Hyperliquid, how fast you can grow in this space if you have decent UX, which is something crypto never has ever managed to do. But you have decent UX and suddenly people use it fast. Yeah, and I think the other thing that crypto probably undersells itself on is just the capital leanness of it as well. Like if you look, we see it in the AI world, like it costs literally tens of billions of dollars in CapEx to build meaningful AI businesses. In crypto, you can still start a crypto business and launch a crypto app literally in weeks with close to no capital, right?

46:42Because the back end of it's already built for you. And so the ability to scale businesses in crypto in a capital-like fashion, I think is nothing like we've seen before in other technology markets because that back end is built for you. You can basically scale off the end, scale off the back of rails that are sitting there pre-built for you that you can just plug in to on day one with the added benefit that there's no geo blocking. There's no geographic distinctions between this technology. If I launch a crypto trading app today, it's available in every country in the world at the same time as I launch it to as the same time as I basically hit go.

47:20And that's two things I think crypto underrates, the capital leanness and the ability to globally launch. literally on day one.

47:27Raoul Pal:Yeah, and the fact that we're dealing in a globally homogenous product, the tokens themselves, it's like you talked about US equities or how difficult it is for me to buy Australian equities. It's a pain in the arse. But this is the same product everywhere in the world, and it's fractionizable so everybody can afford it. So the whole ethos of this thing is super different. So what do you, How much time left do people have to get in again? Because there's a lot of people not sure. Are we going to pull back again? Do we trust it? Surely the magic cycle finishes in December and we should be waiting for that.

48:09Raoul Pal:What do you think? Yeah, I think the road is littered with disappointed people that tried to time crypto cycles both at the top and bottom to the month, right? I think you've got to take a longer term view that, you know, are we at or near the bottom of a crypto cycle? And I actually think that's a pretty easy call to make. And, you know, does it take another second leg down in October, November, January? Maybe. But does it still have the quantums? Even the midpoint of the cycle is, you know, magnitudes away from where we are today, right? So even if you bring a cyclical mindset without adding on some of the structural benefits you've got around tokenization of other assets and increases in addressable market, just playing the cycle suggests that there's meaningful upside.

48:55As I mentioned, when we started out this discussion, decentralized trading volumes in the last cycle went up 16x from the bottom. right so there's a lot of room for error in timing when you bought that that's still having material upside and then if you look at the tokens that that sort of uh the decentralized exchange tokens they're you know they're they're beta or their their reflexivity to that volume is you know one one plus right up to two so they've got you know incredible call they've got incredible correlation to the links and increases in those volumes so you know the ability for But to have access to just thematics that increase, like volumes increasing in crypto, I don't think you want to overthink it too much.

49:40Raoul Pal:And if you're weighting a portfolio, which you obviously do, are you overweight DeFi and exchanges and that kind of stuff, the activity layer, or are you more overweight the layer ones? Where's the kind of broad asset allocation mix for you right now? Yeah, so we're materially overweight DeFi. So if I looked across, and we still think this is an opportunity, and I think we spoke about this last time we talked, we still think that the application layer in crypto is materially undervalued. We think there's more than enough block space to handle the volumes we're going to see over the next three to five years.

50:15So I think the scarcity of block space, the ability for layer ones to scale fees or see that increase in fees, I think is somewhat constrained. They'll see massive volume upticks, and that's fine. But I think where we see the real sort of mispricing is across that application layer, where you've not only seen them hold their fees, you've seen them priced at material discounts to what you see on the layer one type level. Look, I think apps and DeFi type applications still make up sort of 5 % to 7 % of the total crypto value, which to me is just kind of nuts when you look at, you know, they make up more than 50 % of the revenue across crypto.

50:53And we can see that going higher and higher, right? So you're basically saying, well, for sort of 5 % of the market value, I'm getting over 50 % of the revenue in this story. So we're running weights close to 50 % across DeFi applications and now long-only funds.

51:08Raoul Pal:Amazing. Richard, as ever, my friend, good to speak to you. And let's see how it plays out. Yeah, last time it was around the bottom and then it rallied and then didn't do a lot ever since really, did it? It tried, didn't do anything. So hopefully this is it now and we can just get on to some happier days because it's been a bit boring, to be frank. I'm used to the volatility, so I don't care about that. It's just how boring it is. It has been a little bit boring, but calm before the storm, let's hope. Exactly. All right, my friend. Good to see you as ever. Yeah, good to speak again. Thanks. This episode is brought to you by Pith.

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