WBD608 Audio Transcription
Trapped Inside The Collapse of FTX with Travis Kling
Release date: Friday 20th January
Note: the following is a transcription of my interview with Travis Kling. I have reviewed the transcription but if you find any mistakes, please feel free to email me. You can listen to the original recording here.
Travis Kling is the Chief Investment Officer at Ikigai. In this interview, we discuss being on the frontline of the FTX collapse: Ikigai had a large majority of its investment funds in FTX when it stopped withdrawals; Travis had a majority of his liquid net worth also stuck in the bankrupt company.
“The bad guys are kicking the shit out of the good guys. Look at what just happened, this shit is in shambles right now. The space has this attack vector from intelligent sociopaths, and they’ve done so much damage at this point.”
— Travis Kling
Interview Transcription
Peter McCormack: Travis, how are you doing, man?
Travis Kling: Not great but not terrible, all things considering.
Peter McCormack: So, a lot has blown up in the last year, and when the FTX thing happened, I saw your tweet thread. We wanted to somebody affected by this, we want to talk to somebody as a retail customer but also somebody who may be on the business side, and it was particularly hard to read your thread because you're actually a friend, you're one of my oldest friends in this industry; I've known you since, God, very early, I can't even remember but probably what, four years, maybe even close to five?
Travis Kling: It would be late 2018 or early 2019.
Peter McCormack: I think it was late 2018.
Travis Kling: Yeah.
Peter McCormack: I hadn't been doing the pod for long. So, we've hung out a whole bunch of times in LA, you've been on the podcast a few times, and so when all that stuff happened, I was reading it all and thinking, "This sucks", and then when I read yours, it fucking hits hard because you're a friend, and I was like, "Shit!" So, thank you for coming on and talking about it because I think it's important for somebody to hear this.
Travis Kling: Yeah, happy to. It's the first time I've done a podcast since all this stuff happened so happy to talk about it, and I don't really think there's too much of anything that I can't or don't want to talk about.
Peter McCormack: I'm worried about you, as a friend, hoping you're okay. I met you when you first started Ikigai, so I've seen you grow that operation and grow your team, so I've been worried about you as a friend but here we are. I think the starting point for it is to ask you firstly to walk me through the day when you realised that your funds on FTX were gone; talk me through that day.
Travis Kling: Yeah, it's not that I would have put the counterparty risk of FTX at zero, I never would have done that, but the speed at which the collapse occurred, that, I think, I never could have imagined; the Coinbase article with the Alameda balance sheet came out Wednesday afternoon, and I work up Monday morning and saw some of the news flow and was like, "We need to move assets off there", and you couldn't get them off Monday morning.
So, that was the speed at which richest guy in the world under the age of 30, he'd raised it at a $32 billion valuation from BlackRock, a bunch of marquee names, that was how quickly all that came down. I saw the news flow, Wednesday, Thursday, Friday, Saturday, Sunday saw it and didn't dismiss it and was in Telegram chats with guys that were much closer to Alameda and FTX than I was.
It is worth mentioning that I've never talked to Sam one on one, don't have a relationship with him, never met him, knew some other folks that had worked at FTX in the past but didn't have a relationship with Sam. I didn't know anything about Gary or Caroline or Trabucco, didn't know anything about these guys, but I had close personal relationships with guys that did have close relationships with them and with those organisations that had done a lot of business with them.
These guys were sort of saying that there wasn't anything to worry about, that the Alameda balance sheet snapshot was an inaccurate representation of that organisation's financial position. Then, when the CZ stuff started popping off, well they had been in a pissing match for, I don't know, like 18 months before that on and off, so I just kind of dismissed that as this crypto Twitter pissing match kind of thing, and then it all just came really quickly.
So, Monday morning, went to withdraw a lot of assets and got almost nothing off before they gated withdrawals and then, by Monday night, they had gated withdrawals entirely, and by then it was looking like there was a pretty big problem. That obviously developed over Tuesday, and then there was the, "CZ's going to bail out FTX" thing that lasted for 36 hours or something like that, and I think they filed for bankruptcy that Friday.
Peter McCormack: So, I guess you went through the week with a little bit of hope something will come out of this, and then Friday, it's like, "Fuck, this has gone!"
Travis Kling: Yeah, not a lot of hope, a lot of dread.
Peter McCormack: Okay.
Travis Kling: Yeah, when all that was happening, we use Slack for our internal messaging and there's a message from me Monday at noon where I'm like, "Yeah, worst-case scenario here, this is a ball game for us".
Peter McCormack: Okay. You read the article on the Wednesday, do you know if you had attempted to make withdrawals then you would have had any chance?
Travis Kling: Yeah.
Peter McCormack: You would have?
Travis Kling: Yeah, and it's going to remain to be seen in the bankruptcy process of what's going to happen potentially with some of those withdrawals getting clawed back, there's a lot of uncertainty there, but yeah, withdrawals were open. I think the quote, at least from Sam, and I don't know how much to trust him, but I think he's said they processed $6 billion of withdrawals in the 72 hours prior to them closing withdrawals, so a lot of money came off the exchange.
Peter McCormack: So, that Friday hits, what is the reality of what that means for you and Ikigai at that moment? Have you shared what you lost in it, and can you share what you lost?
Travis Kling: It was the large majority of the fund's assets, of the hedge fund's assets, and I had a very big chunk of my liquid net worth invested in the fund alongside all of our other investors. So, we've got just a very small amount of assets left over that aren't stuck in FTX that we still have available. I was in constant communication with all of our investors; I think we sent out an email Tuesday night, Wednesday night, did a two-and-a-half-hour Zoom Thursday morning, sent out another email Friday afternoon of that first week. The cadence slowed down a little bit over the following few weeks, but still in very consistent communication as more stuff became available.
I think maybe a week or ten days after the bankruptcy was filed, we hired bankruptcy counsel, because I've never dealt with a bankruptcy before, to try to and just help us make the best decisions possible through that process. We were the 18th largest creditor; there's a creditors' committee that gets formed in the bankruptcy process, they send out an application to the top 50 creditors, that if you want to be on this creditors' committee, you fill out this application, they do an interview with you. They did an interview, we ended up not getting selected, but there was a potential in there for a couple of weeks where it was like, "We could be on this creditors' committee and be very much involved in this bankruptcy process".
Then, I think it was the second week of December where they picked that creditors' committee, we weren't on it, and then it was like, okay, now there's basically nothing you can do in terms of affecting the outcome, you're just in wait-and-see mode. You can sell your claim; there's a claims market for FTX accounts.
Peter McCormack: What are they paying on the dollar?
Travis Kling: Before two days ago, it was about 13 cents; there was that headline that came out yesterday or two days ago.
Peter McCormack: The $5 billion fund?
Travis Kling: Yeah, that $5 billion number, and that $5 billion number was, I would say, billions of dollars higher than what people were thinking for that number, so I think that's claims market, it's probably gone just completely, it's probably entirely on pause right now while people sort out where did this $5 billion number come from that everybody's so surprised at? But I think that 13 cents number, and I've talked to a lot of claims buyers, I think that translates to an expected recovery value, base case, safe recovery value of 25 to 30 cents with upside beyond that, multiple sorts of avenues of upside to that, and with this new information, I think that will probably double that number, I would guess.
It's been weird, it's a weird feeling, you're parsing through trying to figure out the different paths to what the recoveries might be; it's very opaque, it's tons of conjecture. There were balance sheets that were sent around of the venture capital portfolio; you're sitting there looking at the venture capital portfolio going, "Okay, if you liquidated this thing a year from now, what kind of value could you get out of this?" It's a lot of conjecture, especially with this news that came out a couple of days ago. There are paths to 75, 85 cents on the dollar recovery, and then it could drag out two years, three years, four years, five years, and it's like this weird feeling to think that five years from now, I get 85 cents on the dollar back, I don't know, it just feels weird, yeah.
Peter McCormack: I guess also, therefore, there's a trade-off between -- I mean, Ikigai's still a going concern, right?
Travis Kling: For now, yeah, it's up in the air, but yeah.
Peter McCormack: Like if there was a chance, say the claims market was offering 50 cents on the dollar, you would have a scenario of like, "Do we wait or do we recover that?"
Travis Kling: Right.
Peter McCormack: I guess some of your investors might withdraw, but that would give you something to trade through what may be a potential rise in the market price over the years.
Travis Kling: Right.
Peter McCormack: I guess these are things you're kind of weighing up.
Travis Kling: Yeah, that's definitely one factor. The investor base has been I would say meaningfully more supportive than expected given the circumstances, very little anger and zero vitriol; we've got 300 LPs and not a single one has been ugly. People aren't happy, obviously, people are disappointed, people are asking questions about, "Why would you keep so many assets on an exchange like that?" but the large majority have been very supportive, want us to keep going. We're not accepting new subscriptions into the fund right now. If we were, we could raise some meaningful amount of money in fresh capital if we wanted to do that.
Peter McCormack: Why aren't you; is it the wrong time?
Travis Kling: You know, when something this big happens in life, you just want to pause and get a sense of your bearings and re-evaluate. It is a season of re-evaluating things that are foundational in your life, and I've been doing that for sure, and I don't know what the exact outcomes of that are going to be. It essentially for me looks like a series of decision trees, and the top of the decision tree is, do I want to stay in crypto; yes or no? If yes, do I want to keep managing other people's money; yes or no? If yes, do I want to do that standalone, like Ikigai, or do I want to go join another organisation, and there are opportunities like that out there? If I want to keep managing other people's money, do I want to manage it in the same way I have been managing it; or do I want to approach the market with some different kind of strategy, some kind of different investment process?
Then, if you run back up that decision tree, if I want to stay in crypto and I don't want to manage other people's money, or at least maybe not right now, well then what would I do in crypto? And I think most of those things are still on the table. I think I want to stay in crypto, I still believe that this is a fight worth fighting, I still believe that this technology has the potential to make the world a better place, and it's really all just potential at this point. If you look at the entirety of the history of crypto and the good that's been done over that entirety, and you back out all the damage that's been done, the net-net to me is probably marginally positive, and we could argue about that, but my view is it's marginally positive, the entirety of what crypto's done, over its history minus the damage.
So, at this point, you're really just still sitting on a lot of potential to make the world a better place and whether or not this technology delivers on all of or some of or none of its potential to make the world a better place is entirely dependent on the individuals that are working towards those various outcomes. I use this term "fight worth fighting", that's a fight worth fighting, to me, and I think I want to stay in it, but I feel pretty convicted that I need to fight the fight differently than I have been doing it.
Peter McCormack: I know what people listening are going to say, because it's a Bitcoin show, right, they're going to say the reason it's marginally net positive is Bitcoin bringing it up and that it's all the crypto shit that's bringing it down. I would argue the FTX situation was an evidence case for why Bitcoin is important in that they didn't have any in the end, and it is crypto which is the damaging part in that what they essentially did is they kind of ran an ICO, they pumped up a token, then they leveraged that token to borrow and trade, and that is part of the contagion that's been around a lot of these failures.
It's not to say the contagion isn't part to do with people leveraging Bitcoin as well and rehypothecating it, but I would expect people listening would be like, "Travis, it's the crypto shit that's ruining this", that's what I expect the response to be.
Travis Kling: Yeah, I don't disagree with anything that you just said. I still believe in use cases for this technology outside of a non-sovereign, hard-cap supply, global, immutable, decentralised, digital store of value, I still believe in use cases outside of that. I still think that abuses of power of centralised tech companies are causing societal problems, and I still believe that technology and humanity are set to become further intertwined in the coming years and decades and that that looks like a setup for those societal problems to be exacerbated from here.
I still believe in the potential for decentralisation to alleviate some of those problems, and I think that those solutions would be delivered in a decentralised technology outside of Bitcoin. I still believe that metaverse is coming for humanity, we can argue about the pace of that, but Apple's got these goggles that are coming out pretty soon, and I don't know, when was the last time Apple whiffed on a big product? I don't know, right. I still believe that there's the potential for decentralised technology to try and wrestle some of the power that would obviously come along with centralised tech companies having complete control over that direction that humans and technology look like they're heading towards. So, yeah, I believe in those things, but that's not to say that the shitcoining that was present was not a major driver of all the damage that was done in 2022.
Peter McCormack: I think it's a combination of the shitcoining and the irresponsible lending, borrowing and leverage and, Travis, this is something we've had to face, more so me, but we've had to face. BlockFi, one of our sponsors, has gone and I told people I was using it; we had adverts for them for four years and people who listen to our show used BlockFi and they've lost their assets.
Travis Kling: Yeah.
Peter McCormack: Compass Mining were a sponsor of ours, didn't deliver on their promises to a number of customers on the ASICs they bought, and they weren't mining during the bull time and some have been delivered very late. There is an issue currently between Gemini and Genesis, although I'm more sympathetic to Gemini than I am Genesis in this scenario, but like we've had to weigh up how we operate this business. The podcast is a business with six employees, we've had to weight that up and deal with…
It's similar, it's not the same, but you have people who have asked you to manage their money; it's gone, we know, because of what we've done, and it weighs on us heavily. But it's a different scenario for you, and I want to really understand emotionally what you've been through. How rough has it been; how rough was that first day, week?
Travis Kling: Yeah, I got a really nice one-two punch there because my mum got real sick right around the FTX deal. Yeah, my mum went into the hospital 9 November, and from 9 November to 23 December, which is like 45 days, she was in the hospital for like 35 out of those 45 days and was real sick there for a while. She's doing a lot better, and God willing, she's going to be fine and make a complete recovery, but I was dealing with both of those things at the same time.
She had a procedure and then had multiple complications as knock-on effects from this procedure that she had to have, which was an emergency procedure to start with. So, over that six-week or so period of time, it kind of ebbed and flowed of she'd be in bad shape, she'd get a little bit better, there'd be a complication, it would be really scary, she'd get a little bit better, there'd be a complication, and it was like. And during periods of time when she was really sick, I had like zero ability to have deep thought or my attention span was like non-existent; I just couldn't do anything much with work.
Peter McCormack: So, you were on autopilot for your mum, priority?
Travis Kling: Yeah.
Peter McCormack: And in some ways, that become a protective layer for overthinking work?
Travis Kling: Yeah, I think so, I think the work stuff just was extremely one foot in front of the other, that's it, one day at a time, one foot in front of the other. Over the last couple of weeks, as my mum's gotten a lot better, it's been easier for me to get some brain space back to think more deeply about, "What do I want to do going forward? What do I want to do with Ikigai?" just that series of decision trees that I was talking about; like I said, I still haven't come to any exact conclusions, but I'm pretty convicted I want to stay in crypto and I'm pretty convicted that, if I keep managing other people's money, I've got to do it differently than the way that I was doing it.
The way I was doing it was taking up an incredible amount of hours, brain space, emotional energy. I was figuring out how to outperform the market by trading the market, which it's just fucking hard to do, man, and I'm not smart enough to figure out how to do it any other way other than to pour an unbelievable amount of hours into it. I've said this plenty of times publicly, portfolio management, Point72, was like cupcakes and rainbows compared to this job, that was like a walk in the park compared to this job; it's a hard job.
I was also trying to be a good actor in the space while I was doing that, and I was trying to warn people about all the different risks that were in place, and we made sure to not play the kind VC "dump on retail" game and tried to not participate in just ridiculous vapourware bullshit type of stuff. But I still feel convicted that I was not doing enough, and I just didn't have the time and the brain space and the emotional energy to fight a better fight.
I think Nic Carter is a great example of a guy that is able to run this venture fund and still be out there in the trenches calling out bad actors and using his voice to try and pull this technology towards its potential. I'm convicted that if I stay in this space, that I have to do more of that and that I can't spend so much of my just raw hours, brain space, emotional energy grinding out outperformance.
Peter McCormack: Yeah, because Nic's company's a venture investment fund.
Travis Kling: That's right, yeah.
Peter McCormack: So, he gets to use his time differently from probably some that's trying to outperform the market.
Travis Kling: Probably.
Peter McCormack: Look, I know how hard you work because I've known you for a long time, I know those hours you sit in front of the screen, etc, but I guess you're questioning is that worth it?
Travis Kling: Yeah, I just don't really give a shit about trying to stack as many dollars as I can on my bank account, I don't care, I just don't care. It's nice to have money, enough to take care of yourself, if you've got a family, take care of your family; but beyond that, we're here for a blink of an eye on this earth and then we're going to something else, and you can't take it with you and it's not going to make you happy.
If I fast-forwarded five years from now, ten years from now, it's still my pretty high conviction base case that all this stuff's going to be worth a lot more five years from now, ten years from now, than it is right now. There's a real possibility that you fast-forward five years, ten years from now, it's all worth a lot more, I've got a bunch of dollars of my bank account, and this technology's delivered on very little or none of its potential to make the world a better place, and that would be so fucking disappointing. I'm not going to do it, I refuse to do that.
Peter McCormack: My net wealth during the five, six years I've been doing this has been a rollercoaster, and the thing that's always stood to me is the cliché, "Money doesn't make you happy". Look, being broke can make you sad, abso-fucking-lutely. If you can't get your next rent cheque, I know people who can't heat their homes at the moment, being broke sucks. I always think, if you can cover your base, you can afford to pay your bills, you can have a holiday, a nice life and you can go to the supermarket and buy whatever food, groceries you need without thinking about it, you're good there; beyond that, those chunks that you think you want, like the house, the car, they're a temporary blip of happiness but they just change the benchmark of where you are.
Travis Kling: Yeah.
Peter McCormack: Ultimately, it's not fulfilling, and I know this; it's not the same as you, in 2017, I didn't have a lot of money and I turned $32,000 into over $1 million and then back down to $200,000, and through all that period, I know the wealthiest I was was my most miserable, and the brokest wasn't my most miserable, it was a bit shit, but I know the money never made a difference. The money can't avoid all the other shit going on in your life and in your head, and I know that. It doesn't mean I'm not going to go out there and try and earn money, but we're in this business of this scarce asset, I'm always reminding myself I've got a scarce asset which is time.
Travis Kling: Yeah, I completely agree with that; I've been pretty convicted on that over the last couple of months. So, if I do keep managing other people's money, it's going to be in a manner that will give me more of my brain space and emotional energy back that I can then go try and just be louder in this ecosystem and just have a voice, have a platform and do whatever I can to try and push this stuff in the right direction.
There are different ways to slice that pie. There's a lot of quantitative research that we've done, it was a big part of our investment process. We could just decide to just take all the AUM that we have and hook it up entirely to automated execution algorithms that are hooked up to proprietary statistical models and just ride with the models and not have any of Travis's discretion involved in it; investors will either ride with that or they won't, and it'll make it money or it won't, but historically that part of it has done really well.
Peter McCormack: Where's the joy in that? It doesn't feel fulfilling.
Travis Kling: The point of that would be it would give me a lot of my brain space back and a lot of my emotional energy back.
Peter McCormack: Right, okay.
Travis Kling: For me, Ikigai was building an asset management business in the space, my goal for it was for it to be a platform so that we could go try and do good in the world and do good in this space; it's literally why we named it Ikigai. I'm pretty sure the first time I ever came on this podcast I said, "Ikigai, what you're good at, what you like to do, what the world needs and what you deserve to be paid for. I had a career in hedge fund investing, I was pretty good at it, I liked doing it, I made a fine living doing it, the world does not need another portfolio manager, the world doesn't need another hedge fund. If the world doesn't get another hedge fund the world's going to be just fine", I've posted that 500 times.
I think it's hitting differently today, after all this, than it has been, and I think that there was an aspect of me feeling out of alignment with my purpose spending so much time grinding outperformance and not doing enough things that would have a more positive lasting impact, and I'm just not going to do that anymore. If that means that I'm not going to manage other people's money, that's okay, and maybe I'll start a research product. I've got this monthly update letter that goes out to, I don't know, over 6,000 people; could move that to Substack, see how many people want to pay $5 a month for that thing, could build other kind of research around that.
We've done an incredible amount of qualitative research on this space; you could pretty easily create a product out of the kind of crypto qualitative research efforts that we've done and can continue to do. Then we have a great quantitative research, body of work, that's been built over four years, and you could potentially sell the signal to that. And then people have been telling me to do my own podcast for years, you've been telling me to do that, a lot of people have; I've had multiple offers from podcast networks that have sponsorships lined up that said they'd do all the legwork for me.
I've never had the emotional energy and the brain space to do that because I've been sitting there grinding outperformance. But now, when you look at the state of this ecosystem, it's like, "Okay, well, we've got to do something else now. Travis has got to do something else now because the bad guys are kicking the shit out of the good guys".
Look at what just happened, this shit is in shambles right now; the space has this attack vector from intelligent sociopaths, and they've done so much damage at this point, and that was true in 2022. But it's also true, if you look back at prior cycles, you can ramble off the names of 2022, Sam Bankman-Fried, the Alameda folks, Do Kwon, Su and Kyle, Alex Mashinsky, you can ramble off a lot of these sociopaths, but then you can go back prior cycles and you can add another 20 names to that list. Mt. Gox and FTX, they're not exactly the same, but they're quite similar, and Gox was a fucking decade ago, man!
Peter McCormack: Yeah.
Travis Kling: We're shooting ourselves in the foot with the same bullet that we shot ourselves in the foot with a decade ago. If you fast-forward a decade from now and we're shooting ourselves in the foot with the same fucking bullet, that's a terrible outcome.
Peter McCormack: I don't disagree. I see those situations slightly differently. I think the things that have started to happen are bigger and worse because this technology has expanded, we've got more people in this world, so more people means more money, which means the damaging things that happen can be -- well, relative to the space, Mt. Gox could be as damaging as what happened this year, but I did a whole six shows investigating into Mt. Gox.
I think Mark Karpeles, I think he was somebody massively out of this depth, he was sold something that was possibly already insolvent, and through naivety and incompetence and a lack of previous knowledge in the industry, like we didn't have the case studies previously, he got hacked. Whereas, I think what happened with FTX is a little bit more dishonest and sinister. I've sat with Karpeles, I've interviewed him, I don't think he sat there knowingly losing people's funds.
Travis Kling: Who did Willy Bot?
Peter McCormack: I don't know.
Travis Kling: So, people don't really know actually?
Peter McCormack: No, I don't know if we ever got to the bottom of that.
Travis Kling: The backdoor of FTX and Willy Bot, they're not the exact same thing but they're like next-door neighbours.
Peter McCormack: Yeah. I also think that Sam was just also incompetent, out of this depth. I mean, you're giving somebody without any experience hundreds of millions, billions of dollars of capital to invest and manage. Where is the competent team around him advising and guiding him? Yeah, I know they took that $200 million investment, but my expectation's always been with Silicon Valley, when somebody making a nine-figure investment, they put somebody on the board, you have advisors.
I struggle to scale a podcast where our revenues are like a dot of sand on a beach compared to what they had. How can somebody who has not had the experience of managing the safety of that money and the investment of that money know what they're doing? So, there is incompetence from him, and there is incompetence from what happened with Mark Karpeles. But you can wrap around that incompetence, the crazy leverage trading, the dishonest investments from 3AC, you can wrap into that the -- I think what happened this year is more sinister and more dangerous because the numbers are bigger.
Travis Kling: Yeah, it's hard to decide whether or not Gox or FTX was more damaging on a relative basis.
Peter McCormack: Well, Gox could have ended everything.
Travis Kling: Right, the crypto ecosystem lost $1.4 trillion market cap last year, so that's obviously never happened before.
Peter McCormack: That's a function of size.
Travis Kling: Right.
Peter McCormack: Percentage drawdowns seem to always be very similar.
Travis Kling: Yeah, that's true, that is true. And I think with Sam, people thought the guy was a savant, and you looked at his background and you looked at him and the space puts Aspey, people up on this pedestal and you're like, "Okay, this is a guy at MIT, went to Jane Street, started this crypto quant fund, crushed it and then he launched an exchange, and it was a great exchange"; people fell in love with the story. I think humanity, in general, we look for heroes but crypto specifically, we've got this thing that we do where we look for our heroes and then put them on the pedestal and then ignore their shortcomings or misjudge the character of our heroes, and it seems like it's happened so many times.
The entire concept of trust, I think, has to be rearchitected in crypto. It's so ironic that what blew up crypto this year was the trusted third-party middlemen, like the exact thing that all of this shit was designed to ameliorate, and you're sitting there going, "Okay, we can't keep doing this". To me, it seems like you've got three options of how do you solve --
Peter McCormack: Well, before we get into your options, I do want to push back on that because I think that is a crypto problem and not a Bitcoin problem, and let me explain it. Bitcoiners don't trust, verify. Anyone who seems to make any career for themselves in Bitcoin, they get hammered, they get pushed, they get tested. I've been on the receiving end, and rightly so for some of it, of opinions, guests, sponsors; they hammer, they push, they push, but I see the hero-making happening more in crypto on the people who maybe launch -- they become like cult heroes.
Look, Richard Heart is a cult hero, HEX, he's a cult hero, he's wandering around in the most ridiculous clothes, showing off his watches and cars. Arguably, a lot of people will have lost a lot of money, and Hex says they've locked their shit up for 15 years. We create these cult heroes or crypto people, and I think it comes from a separate mission. I think there is this mission in Bitcoin which is to create good money, the best money for the world, something that cannot be seized, that is censorship-resistant, that is used not only for individuals, you and I, to invest and store our money but also it is used for humanitarian needs, it's used for activists.
So, I think that desire to build the best money has created this kind of ethos where the toxic maxis, they do push back and they create this kind of atmosphere of, you need to be a good actor. And I think the ethos of crypto is a little bit more venture, it's like, "What can we launch; where can we make money; how can we make money?" There's less talk about the use cases of the best money, and I think because of that, it has this more kind of reckless nature to it and less of the don't trust, verify.
Travis Kling: I would agree with that, yeah, I wouldn't push. The only thing I would say is, okay, Michael Saylor is a Bitcoin hero and he was telling people to sell their house to lever long to buy Bitcoin at the top of the market.
Peter McCormack: Yeah, and I think he has received criticism for that, maybe not enough, but he has received criticism; I would happily criticise him for that. A lot of people talk about recently, "Who would be the best person to go on Rogan? Who are going to get to go and talk about Bitcoin?" Firstly, I don't think Rogan gives a shit, I don't think he wants it on his show, but if he did, when people bring up Saylor, I actually don't think he's the best person for it.
Travis Kling: Yeah, I wouldn't do that.
Peter McCormack: That's not me criticising Saylor himself, I think he's brought a lot of good to the space, he's just not the right guy.
Travis Kling: Yeah.
Peter McCormack: The right guy is Alex Gladstein who approaches Bitcoin from a needs basis, his analysis of the IMF and the World Bank and his criticism of economic imperialism, and then the Human Rights Foundation, they have workshops where activists come in and they teach them how to custody and use Bitcoin in a safe and private way. If you're going to have any hero in Bitcoin, it's that kind of person, who isn't about his personal investment, it is about why this is the best for the world. But I think your criticism of Saylor on that point is fair. I wonder if he'd admit it; if we get to sit down with him, I'd ask him.
Travis Kling: Yeah, and I think Bitcoin does have more individuals "fighting the good fight", but then I also think that if you talk about Alex Mashinsky and Vitalik in the same breath you're discrediting your entire stance.
Peter McCormack: Yeah, I would agree with that. I've been calling out Mashinsky since 2019, I think, yeah.
Travis Kling: Yeah.
Peter McCormack: There's like, "Oh, Mashinsky, I've been caught", like people have been caught, and it was obvious back in 2019, and I agree with you. I think what it is is intentions; I think Vitalik believes, whether you agree with him or not, agree with Ethereum, the changing narrative, whatever your opinion is, I believe he in himself believes he is doing good.
Travis Kling: Yeah.
Peter McCormack: And I believe, in himself, Mashinsky knew he was taking risk, and there are going to be times where he's gone back home and he's going to be laying up in bed thinking, "Oh fuck, we're fucked here! We shouldn't have done that".
Travis Kling: Yeah.
Peter McCormack: Or he's gone back and thought, "I need to save this business", and just made poor decisions.
Travis Kling: I know this is bad for the flow of a podcast, but I want to go back to the thing you were talking about with the sponsors, BlockFi, etc.
Peter McCormack: Please do.
Travis Kling: I just want to say I publicly endorsed FTX and we did the overwhelming majority of our trading activities there, and had for a couple of years, and I told people it was a great place, I told people it was as safe as Coinbase for them to keep their assets there, and I just want to apologise publicly for that; people would have listened to what I said and people would have lost money because of that and I'll carry that with me for the rest of my life.
Peter McCormack: I don't know if you heard our last show we made with Matt Odell and he held my hand to fire with regards to BlockFi and he said to me, "Did you make a mistake?" and I've really wrestled with it because I was like, "No, because with my information at the time, I believed they were a legit business, they were regulated, they were responsible". So, I said, "No". I said, "I feel bad for everyone who's lost money, but I don't think I made a mistake. That's why I'm not going to apologise". But by the time I got to the end of the interview, I actually had to reflect on it and go, "Hold on a second, I'm not responsible for what happened, but perhaps I should have seen the signs earlier", perhaps the warning signs, or they were there earlier.
Travis Kling: Yeah.
Peter McCormack: Danny, do you think we can say, if we were 100% honest, do you think we could say that we would not have had FTX as a sponsor?
Danny Knowles: No, we probably would have done.
Peter McCormack: In a scenario where, say Gemini ended, no other one had come in and FTX said, "Look, can we sponsor the show?" one, obviously, we would have considered it; secondly, we would have said to them, "We will only promote any of your Bitcoin products, which is our policy". We ended the BlockFi sponsorship four or five months before they stopped withdrawals, and we have to be 100% honest about that; that ended because their funds were tight and they couldn't afford the rate anymore, and they said, "Can we cut the rate?" and I said, "Well, do you just want to end it?"
There's every scenario, if I'm 100% honest, BlockFi would have still been a sponsor when they stopped withdrawals, and so it would be dishonest for me to say, "Well, it's not our issue, we ended that sponsorship". If FTX had got in touch and they'd offered us a good rate and they'd have said, "You can just promote the Bitcoin products", there's every chance we would have been, and so I think we're all reflecting on this.
Travis Kling: That's like a soul-searching mental exercise to go through because I've been talking to some folks about maybe starting a podcast and the sponsorship shit, and in the back of my head I'm like, "Dude, give me fucking Athletic Greens and Manscaped! At least then I don't have to sit there and be terrified that I'm going to hose thousands of people that are listening to me". If this just happened with FTX, it's like how do you look at any crypto company and be like, "Oh, this is for sure good to go and I'm not going to torch my listeners on this?" That is, when I say "soul searching", it's like the embarrassment and the pain that you feel from that, it makes you sit there and you go, "What the fuck am I doing in this shit? What am I sitting here doing here?"
Peter McCormack: Yeah, Coinbase are not the most popular exchange with bitcoiners because they expanded into shitcoins.
Travis Kling: Rough fee schedule too.
Peter McCormack: Yeah, and some people argue that Brian Armstrong hasn't always been the best advocate for Bitcoin, he's pushed for things that they disagree with.
Travis Kling: That's true.
Peter McCormack: But in terms of an exchange, if you're going to trust your Bitcoin with anyone, all right, they might be selling your data to certain agencies, but in terms of do I think there is a rug there? That's probably the one, alongside Kraken and Gemini, I trust the most not to rug your exchange.
Danny Knowles: I do wonder if they just got lucky though that the SEC didn't let me have a product and they might have been caught in this as well.
Peter McCormack: Well, that's a different thing, that's based on the Earn thing, yeah, possibly did.
Travis Kling: The interesting thing, and this is what makes Gensler look even more like a clown, is that Coinbase's yield product, do you remember that tweet thread that Brian Armstrong put out about talking about how the SEC shut them down when their direct competitors were obviously offering a same product? Well, BlockFi and Gemini Earn were running all this stuff into Genesis, Coinbase's product was actually a blue-chip DeFi wrapper.
So, they weren't going to go to a centralised borrow/lending business, they were going to send it into Aave and Compound and a couple of other blue-chip DeFi things, which all of that shit held up through all of this, which that makes you think too. I don't know, it makes Gensler look at like a complete joker.
Peter McCormack: Well, he's looked like a clown for a long time now, slow to deal with it. To issue action against Genesis and Gemini after the fact, it's like, "What the fuck are you doing; why now?!"
Travis Kling: It's very clownish.
Peter McCormack: Well, I think that is an admission that he's fucked up and he hasn't got control of a space he claims to be wanting to, well, he is in a position to control. But yeah, I get it, we spoke to a guy, we've been thinking of having somebody helping us with our ad sales, and we were like, "Yeah, I'll take a mattress, I'll take Squarespace, I'll take Athletic Greens".
Travis Kling: Yeah.
Peter McCormack: "Supplement that with some subscriptions, maybe we do some bonus content". It's too stressful dealing with the potential losses for other people and the barrage of I would say fair criticisms but some overstep the mark; it just becomes really difficult, people saying, "Are you going to pay that money back?" so that's difficult. All these things that you're wrestling with, we're wrestling with, I think a lot of other people are wrestling with.
Travis Kling: Yeah, it's likely trusted third-party middlemen that are going to be ones that are paying for sponsorships for podcasts, and that's not absolutely true, but in the large majority of cases, that's the case. Back to my earlier point, before we start talking about something else, the unacceptable level of opacity that has been present there, like the potential solutions there, and to talk about the Gensler thing, you have three options about what to do with trusted middlemen in crypto.
You can say, "Forget all of it, we're done with it, we're moving the whole thing on-chain, no more Coinbase, no more Binance, no more, 'We're not going to deal with that', we're going to do DEXes and borrow/lending. We're not going to do centralised borrow/lending anymore, we're going to do DeFi protocols"; that would be option one.
Option two is you allow some trusted third parties to remain and you regulate them. Look, I'm a libertarian; the number of times that you're going to hear the words coming out of my mouth, "Please regulate something that I'm interested in", I don't know if I've ever said that before ever, it's just not in me. But then, the third option is self-regulation, and option one to me feels like a nonstarter for the next couple of years; the world's just not read for that.
Peter McCormack: If it's a free market, if you want a free market, people are going to create these companies and products over and over again.
Travis Kling: Yeah, and the world's just not ready. Certainly not to make light of what happened Luke Dashjr, but it's like that was kind of like, "I feel like a billboard for how reasonable is it to expect the world to start to dealing with private keys?"
Peter McCormack: I'm going to push back on that one; we did an interview with Jameson Lopp discussing that. I think that's a red herring for self-custody. Luke Dashjr likely had a setup that he created back in maybe 2010, hasn't updated it, he's somebody who openly admitted that security, did Lopp say, security isn't his strong point, he's a coder, he's a developer. Look, it's his issue, but he's likely created a setup and never changed it. Nobody else is going to be creating a self-custody setup like him, they're going to likely get a COLDCARD, a Ledger or a Trezor, perhaps a multisig.
For everyone I know who's moved onto a hardware wallet, I know very few stories of people who have fucked that up, very, very few. I remember one other guy got phished because of Ledger and he lost some Bitcoin, and I know some people have got targeted with the telephone scam; but generally speaking, I don't know anyone who's had a bad experience of that. It wasn't like Luke had a multisig setup with Casa and did something stupid and fucked it, he had such a unique setup that --
Travis Kling: It was very old.
Peter McCormack: Yeah, very old. So, I think that is a red herring to say whether people are ready for that. I think people are ready for this. A hardware wallet isn't that hard; my dad would struggle and there will be people who struggle, but you're writing down 24 words and hiding them, that's all you've got to do.
Travis Kling: Yeah.
Peter McCormack: If you get a hardware device, you set it up, you write down your 24 words, you transfer $10 to it, you wipe it, you retest those 24 words, and you learn where to hide those safely.
Travis Kling: Right.
Peter McCormack: That is 95% of what you've got to do. The other 5% is having those seed words safely, so if you have a house fire; I think people are capable of that. Then, if their assets get meaningful, there's Unchained Capital, there's Casa, both very good multisig products. I've had a great experience with Casa; it's geographically distributed, you cannot come to me with a $5 wrench and get from it, and I managed that very easily. So, I think things will get better, but I think we're okay there.
Travis Kling: Okay, well then that's one option, is to move all of this on-chain so we're not going to do trusted third-party middlemen anymore, and we can argue about whether or not the world's ready for that; in your view, maybe it is, in my view, I don't think it is. Then, three, self-regulation by itself, we've failed so utterly at that that I don't see any particular logical reason to say you can snap your fingers in January 2023 and we're just going to make that work.
So to me, it feels like some combination of two and three; regulation around the trusted middlemen that you allow to remain in the space, and then more effective self-regulation, which goes back to the point of good actors being louder, having sharper elbows, being more adversarial, being more acute in criticism, being more willing to publicly call out and question the motives, the intentions, the actions of all kinds of different actors in this space.
It's so obvious at this point that this ecosystem, bad actors come to this ecosystem like a moth to a flame. If you're trying to make as much money as possible and you don't care at all about who you hurt on the way, where else would you go other than crypto? We have to acknowledge that and then stop pretending like the way we have been acting is sufficient to defend against that because I just don't think it is. Back to my earlier point, I wasn't doing enough, I've got to do more, we've all got to do more.
Peter McCormack: Yeah, I'm pro regulation, people know this by now, on certain things. I'm pro regulation that we don't have guns in the UK because we, as a society, are not ready for that, and I'm okay with that. I'm pro regulation around who can own missiles, and I'm pro regulation on dangerous explosives. I'm pro regulation on banks because banks custody our money. I'm pro regulation on certain things, and I know that's a slippery slope, and I think we need a stronger civil society to push back when it goes too far because I'm not pro CBDCs and I want pushback on that.
I think a certain amount of regulation within Bitcoin I'm okay with, the regulation around companies who custody assets because I believe they will exist. I think, in a free market, you're going to have those companies, so if we are in a regulated market, I'm pro certain regulations to ensure these people are able to prove their reserves.
Travis Kling: Yeah.
Peter McCormack: I'm okay with that, and I know I'll get pushback on that, but I'm okay with that; that's a scenario I'm okay with. I don't know what you can do though about large amounts of capital coming into the market and certain players taking very, very risky bets; I don't know if you will ever stop that.
Travis Kling: Right.
Peter McCormack: It's a tricky one.
Travis Kling: Yeah. From your perspective, what do you think that rebuilding from the ashes over the course of 2023 is going to look like?
Peter McCormack: Interestingly, I'm quite optimistic on the Bitcoin price because I think the price was massively supressed by what went on. Now, I'm not somebody who can analyse markets, you maybe will know this better than me, but my gut instinct is the price didn't go as high as it would because we had people selling off large amounts of Bitcoin.
We had LUNA, we had to swallow up 80,000 Bitcoin with that, well no, 8,000 or 80,000, I can't even remember they number, it was a lot of fucking Bitcoin. I've heard rumours that some of the big funds were trying to supress the Bitcoin price. I've heard FTX were trying to supress the Bitcoin price. I don't know if any of this is true, but I also feel like the bear market went deeper than we would have because of the amount of forced selling and then the cascade that miners then had to sell.
I think perhaps we could have gone higher, and I perhaps think the low wouldn't have been so low. So, because of that, I think the price that we sat around for like $16,000, $16,500, the reason it went sideways I think for a couple of months like that is because nobody really knew what the fuck was going on, "Have we got another blow up coming? Shit, so it might go lower; I don't want to buy, but I don't want to sell because I don't want to sell this low".
So, I'm quite optimistic on price and I think some good price action will be good for the market. What I think is going to be difficult is convincing people to invest in this industry because some people are going to have lost a lot of money, that's the one area. But that maybe mean we get these more scrappy little start-ups, people who are working on innovative ideas around the technology, around Bitcoin, the Lightning Network, better wallets.
Maybe we don't get these huge Bitcoin, crypto companies who want to go through five rounds of fundings and IPO; maybe the market doesn't even suit that. Maybe, because all we're trying to do is expand the adoption and use of this technology and money, that needs to happen as like grassroots work, like I'm doing with the podcast, that you might do if you launch a podcast or expand your newsletter, maybe that's all we need.
Travis Kling: Right. I do agree with you, and it's one of the things that's been messing with my head the most is you don't really know what happened over the last few years, it's really weird, especially as a guy that stared at the shit for thousands of hours over that period of time.
Peter McCormack: Did you have a gut feel that weird shit was going on?
Travis Kling: The number one way that it showed up is in the quantitative research that we do. We experienced a lot of signal decay, alpha decay, we would find stuff that would work and have edge in it, and it'd work for a little bit, and then the edge would just go away and then we'd go bang our head against the wall for a couple of months trying to find some more edge, then come up with some stuff and then it would work for a while.
It's something that Hans and I, Hans that does all the quant research for us, we've talked about it a lot over the last couple of months. It's quite likely that there was a lot of distortion in the quantitative data that came from all of the reckless lending, intertwined with fraud, used to heavily lever long to speculate on vapourware and that is was just deeply distorting the signal from all of this quantitative data, and that there's a completely logical reason to expect that when you pull most or all of that away, like what just happened, that what's remaining in the quantitative data would be a cleaner signal, that the data would just make more sense in characterising the bullishness or bearishness of the market. It's too early to say right now, you've just got to get, I would say, multiple more months down the road before you start to get a sense of what this new regime looks like.
Peter McCormack: Well, when FTX didn't have any Bitcoin, it made me wonder, well, how much paper Bitcoin was being traded on that exchange? Like when you get the volume data for FTX, that will tell you how much Bitcoin is being traded, but if that was paper Bitcoin, it never really existed.
Travis Kling: Yes.
Peter McCormack: What distortion is that adding?
Travis Kling: Heavily, heavily distorted, yeah, and the way to think about it is it's the no liquidation agreement that Alameda had. I could lever my FTX account long and there are margin limits where you lever up to a certain point, like say you level long, you've got a bunch of spot crypto assets as collateral, you lever those with perpetual swap positions or by buying spot on margin, and you move into the way they showed it on FTX was like a negative cash balance and that was your margin; people did that all the time, that's the point of the exchange. If you lost too much money relative to your collateral value, then the margin framework would automatically start selling your spot assets to make sure that you didn't get in a hole where you owed the exchange money, and that's how these things work.
Well, Alameda had a no liquidation, like a line of code or whatever, a switch that was flipped on their account where they would never get liquidated, and so they just went deeper and deeper into the hole, which will have many billions of dollars as we now know, many, many billions of dollars, and having that in place undoubtedly would distort price action, price discovery for sure, without a doubt.
Peter McCormack: So, were they just really shit at trading?
Travis Kling: You don't really know. I think their edge went away and then I think they -- you really don't know and I really don't want to speculate that much.
Peter McCormack: I think, if you lose $8 billion, you've got to be pretty shit.
Travis Kling: Yeah. There's probably a decent chance that the truth will somewhat come out through the bankruptcy process of all the money that went out the door to do venture investments and to buy the Miami-Dade Arena and to do all the shit that they did, all the real estate and all the political donations, etc, but how much of that was just trading losses?
I think what we probably know now is that they lost a lot of money when LUNA collapsed and that they were already long and that the bid completely disappeared on FTX; and that when the market was crashing with LUNA and that they had step in and be that bid, they probably blew a $1 billion hole in customer assets because they had the no liquidation agreement on their account, buying through that crash.
There was the internal email from Sam that came out that I think was from August where he was contemplating, he was like, "Maybe we should just shut down Alameda, it's not that great of a business anymore", that's from August, that was months before the collapse; they had already dug themselves into this big hole and had wiped probably all the profits or close to all the profits they had every made just over those large couple of months.
Peter McCormack: How big was LUNA when it went?
Danny Knowles: It was huge, it was £8 billion, more than that?
Travis Kling: Yeah, and the stablecoin was like $40 billion, I think.
Peter McCormack: I wonder how this all would have played out with no LUNA.
Travis Kling: It's unclear that any of this would have happened.
Peter McCormack: Yeah, but it seems like a lot of people were piling into the LUNA trade.
Travis Kling: Big time.
Peter McCormack: And then it unwound.
Travis Kling: Yeah.
Peter McCormack: That unwound in, what, days?
Travis Kling: There was so much supply of crypto and dollars that came into the borrow/lending market that wanted the yield, and the supply completely overwhelmed the demand. And what normally happens in that case is that the interest rates would move down massively, but for competitive reasons, the centralised borrow/lending firms tried to keep their interest rates higher than the market dictated so that they could keep customer assets, because everybody had this like "grow at all costs" type of mentality. It was like Alex Mashinsky was willing to do whatever, right, he's not going to lower his interest rates, he's got his Celsius token, whatever.
So, that setup they put in place made it where everybody was trying to find anywhere to park crypto assets to earn any kind of yield, and Anchor on LUNA showed up and they had a 20% interest rate, and people just decided to kind of ignore all of the risks associated with that because they needed some of their capital to be earning the 20% because they couldn't get half that anywhere else.
Peter McCormack: Yeah.
Travis Kling: And that's where you get into these situations. I don't know how much you follow Su Zhu on Twitter, and don't get me wrong, fuck Su Zhu for sure, but he's talked about this where, at the peak of the market, he could get a $1 billion loan to him uncollateralised.
Peter McCormack: That's insane.
Travis Kling: Yeah, because if you're willing to pay the interest on it, we'll give you $1 billion completely uncollateralised.
Danny Knowles: Sorry, it was $60 billion between the two.
Travis Kling: Yeah, LUNA and the stablecoin.
Danny Knowles: Crazy.
Peter McCormack: Yeah. Su Zhu, I mean --
Travis Kling: Sociopath?
Peter McCormack: Yeah, he seems to have got away with it at the moment, hiding out.
Travis Kling: Yeah, all this extradition stuff, who knows? There are all these places he probably can never go again, but…
Peter McCormack: Yeah, we seem to learn a big lesson every cycle, it's like the evolution of Bitcoin, you know, "We're going to teach you about not your keys, not your Bitcoin", we had that with Mt. Gox, and then, "We're going to teach you about ICOs".
Travis Kling: It didn't stick though.
Peter McCormack: I think it did for a lot and then complacency set in.
Travis Kling: Yeah.
Peter McCormack: I mean I was complacent; there was a time where I had meaningful amounts of Bitcoin on exchanges or with BlockFi or various places, I was complacent for sure.
Travis Kling: Same, obviously.
Peter McCormack: I would say right now, I'm probably a little bit complacent with my self-custody in terms of I haven't done a full check in three years. I need to recheck my seed words; I just need to do that. I think complacency is that, but I think what we've learned in this cycle is leverage is dangerous and trust is dangerous; I think there's a constant lesson. We have an issue though, that we might have learnt them, the new people coming in haven't learnt them, and they might be dismissive of the things we're trying to tell them because we've experienced them, but until you experience it -- I had to experience massive trading losses to realise I'm never trading again, and yeah, I don't know the answer to it.
You know when you put your thread out, which by the way is probably the most viral thing you've ever put out, sadly --
Travis Kling: 7 million impressions.
Peter McCormack: Wow! There was a lot of sympathy in there, but there was also a lot of criticism; I've got to ask you about that. There was criticism in the counterparty risk that you took; how do you now reflect on that?
Travis Kling: The criticism itself I'm cool with, yeah. I don't know, I'm a grown man and if people want to talk shit on Twitter to me for whatever reason, that's fine; I engage with essentially zero of it.
Peter McCormack: But is it valid?
Travis Kling: Yeah, it is. There is a unique reason why we had that many assets. I had just sold a bunch of crypto down into cash and I was just about to buy back again, and it was all market-dictated type of style, so it just so happened to get caught with a ton of our assets on the exchange. And it's a trading business; our investors completely knew that. You'd go from 100% cash to 50% cash to 0% cash, that happens in a day, or in a couple of days, or in a couple of hours, and so it's just a business where you're going to have at times a lot of assets on exchange.
Obviously, I wish I'd have been quicker on the trigger, of course, to pull stuff off. This is something that we've definitely been contemplating, it was like, "If I keep managing other people's money, in what manner do you do that?"
Peter McCormack: Can you have multiple exchange accounts, distribute the risk?
Travis Kling: You can. Well, part of the reason was because we did so much volume on FTX and we held a decent amount of the FTT token that we essentially traded for free, you got discounted trading fees holding FTT and you got volume discounts, so we would pay a very small amount for taker, we actually make a little money on maker, and it would net out where we would just have a rounding error amount of trading fees every month, which that all flows back to our investors. So you tell investors, "We do all of our trading on FTX, and because of that, we have to pay no trading fees", investors were like, "Oh, that's a good deal".
Peter McCormack: But do they read that as a good deal because they see the upside, but they maybe aren't the ones who are contemplating the counterparty risk?
Travis Kling: Yeah.
Peter McCormack: And by the way, just to say, I had zero idea that FTX would ever be in trouble; I thought they were this cycle's success story. I saw them sponsor a stadium, I saw Gisele and Tom Brady posters up, I saw the ads, I was like, "They've killed it".
Travis Kling: Yes.
Peter McCormack: I didn't see the inner workings, I think some people did but it was very, very few.
Travis Kling: Yeah.
Peter McCormack: I think it was a surprise to everyone.
Travis Kling: Yeah, and obviously to us as well too. And I think for a lot of it, I thought of it as the diworsification where it was like, not in the case of Coinbase, but it was just the Coinbase spot markets were just not nearly as liquid as FTX, like we could just get on and off size much easier in FTX than we could in Coinbase and pay way less fees while we were doing it.
Another thing that I think lulled me into complacency in that moment was that, when the 3AC stuff started happening in June, we pulled all of our assets off rapidly, like high eight-figures type of assets, off of the exchange like in 20 minutes, and it all went through immediately. So, you're like, "Okay, well that worked fine then", and that was something that was a factor in that moment as well too.
Danny Knowles: When you're taking that kind of money off an exchange, are there any processes that are different to if it's like a few thousand dollars or whatever?
Travis Kling: No, you need to have your limits up, but we had big limits.
Danny Knowles: But there's no other process you have to go through?
Travis Kling: No.
Peter McCormack: I don't know if you can answer this, when you are managing that kind of volume and you're taking it off, are you taking it off into a multisig; is that how it works?
Travis Kling: Coinbase custody and the cash, we would keep in a bank.
Peter McCormack: Okay.
Travis Kling: Yeah, so there's this Silvergate Enterprise Network; have you heard of that?
Peter McCormack: Yeah.
Travis Kling: Although now we pulled all of the cash that we have left, we pulled it out of Silvergate because we're like terrified of Silvergate now, which is that is such a weird thing as well too where you're like this space nuked so hard that you can't trust a straight-up bank, like a regular-ass bank, because Silvergate, I don't know what kind of trouble they're in, but you know.
Peter McCormack: Yeah, I've been to Silvergate, it's a really interesting place because they support a large part of this ecosystem and then you turn up and you feel like you're in an old bank, and Alan Lane's a very traditional bank manager.
Travis Kling: Yeah.
Peter McCormack: I believe he's a good actor and I believe they've been caught out. I don't know what mistakes they've made because I haven't spoken to them about it, but he's a good guy, and I believe they brought a lot of positivity into the space by solving the banking issue.
I think this is this wider contagion, people are very anti regulation, but I'm pro regulation of the banking sector following 2008, I think the regulations they've put in place have been helpful. I still think the whole sector's fucked, but it's made it slightly better. We do have, as Bitcoin and even crypto, because even as a bitcoiner, I can be as maxi as I want, I can't pretend crypto doesn't exist and I can't pretend Bitcoin and crypto aren't, as industries, comingled together; I can't pretend that doesn't happen, so I have to be aware of the wider thing. We had a multi-trillion-dollar market nuked down, what about in four years if it's $10 trillion; what if it goes from $10 trillion to $2 trillion? That side of things, that mildly worries me.
Travis Kling: Yeah, man, I guess it depends on why it nukes.
Peter McCormack: Maybe it just nukes because fear and greed, just a natural market cycle of them?
Travis Kling: Right.
Peter McCormack: We know how this works, even if you forget all these industries and leverage, the Bitcoin price starts to go up, my phone starts ringing.
Travis Kling: Yeah.
Peter McCormack: It won't ring at $20,000, it won't ring at $25,000, but maybe $30,000, $35,000, and it's on the BBC, it's on Sky News and my friends will be like, "Is it a good time to buy?"
Travis Kling: Yeah.
Peter McCormack: I'll be like, "It was two months ago", and they'll put a little bit of money in and other people will, and then you just get that cycle.
Travis Kling: Reflexivity.
Peter McCormack: Yeah, and so it shoots up, and then, at some point, it can't go up any more and it comes back down; it's an inelastic asset.
Travis Kling: Yeah.
Peter McCormack: I still think you can get these market cycles even without having nefarious actors causing the market to nuke, and I still wrestle with what that actually means. If you had a $10 trillion market that came down to $2 trillion, $3 trillion, how many people are affected, how many people have taken savings and put it in, and when the Bitcoin price is at $100,000 and it's going to $120,000 and back down, I wrestle with that a lot.
Travis Kling: I think you also can't lose sight that, if the Fed hadn't have raised the rates in 2022, none of this shit would have happened, it all would have gotten painted over, just you wouldn't have had flows coming out of the market that pulled the tide back to see who wasn't wearing any shorts, or whatever Warren Buffett said.
Peter McCormack: Yeah, and perhaps Barry would have been able to go out the market and borrow a couple of million and hide their loses.
Travis Kling: Yeah, enough froth would have stayed in the crypto market that you just wouldn't have uncovered all of this stuff.
Peter McCormack: What was it you were saying about bitcoiners and inflation earlier?
Danny Knowles: Well, a year ago, 18 months ago, everyone was cheering inflation numbers coming out high because it was a Bitcoin hedge, and now we're cheering inflation numbers coming out low.
Travis Kling: Yeah.
Peter McCormack: Because it's a Bitcoin sync.
Travis Kling: I don't think you could ever find me publicly saying Bitcoin is a good CPI inflation hedge.
Peter McCormack: I think you'll find me saying it!
Travis Kling: But a bunch of times I've said, "Bitcoin loves QE and detests QT", I've been saying that for years and years, and I think that very much was on display over the last year. I don't think there's any particular reason to think that that setup has changed. Now, the reflexivity that you were talking about, when you remove most or all of the reckless lending intertwined with massive fraud, you just heavily lever long to speculate on vapourware, when you remove most or all of that, you don't know how reflexivity's going to act going forward because it was obviously such a crucial part of reflexivity.
Peter McCormack: But we have seen it historically, if you look at the Bitcoin chart, that did happen back in --
Travis Kling: Yeah, but the total market cap is such smaller that you're just like talking about an asset that small can just move a lot differently.
Peter McCormack: Yeah, of course, I accept that over time the volatility will decrease, but I still think it'll happen, I just think you have these hype cycles.
Travis Kling: I agree, yeah, I agree with that; the magnitude, I'm not sure.
Peter McCormack: Can you dig out that that James Lavish tweet from yesterday?
Danny Knowles: Yeah.
Peter McCormack: I want your perspective on this because I know you can't avoid -- are you still trading or are you on pause?
Travis Kling: Not much, a little bit, but yeah, not much.
Peter McCormack: So, do you know James Lavish?
Travis Kling: The name sounds familiar.
Peter McCormack: Yeah, interesting guy.
Travis Kling: Oh yeah.
Peter McCormack: So, "My CPI analysis, if you think the Fed is ready to stop raising rates because gas and used car prices are lower, you're out of your mind".
Travis Kling: Yeah, I agree with that.
Peter McCormack: So, you think they're going to continue to raise?
Travis Kling: A few more times.
Peter McCormack: How high do you think we go?
Travis Kling: Probably 5.5%.
Peter McCormack: So, do you think it swings back the other way in that do you think we could have negative inflation numbers?
Travis Kling: I don't know, I don't have a view on that. No, I think they'll probably raise it to 5.5% or so and then try and keep it up there for a while. They want to see the labour market loosen up meaningfully; Powell's been very clear about that. Nasdaq's up 3.5% this year or something like that, and if people are going risk on and financial conditions are easing, Jerome Powell is going to jawbone that back down because that's not what he wants.
Peter McCormack: What does he want?
Travis Kling: He wants inflation numbers down, he wants the labour market to slack up a lot, he wants to make absolutely sure that there's not a wage price spiral, for sure. It's actually incredible how much he has the market by the balls. He has the price of every asset on planet Earth in a complete headlock, it's incredible actually.
Peter McCormack: Is that because of wage price spiral would also then drive inflation up?
Travis Kling: Yeah, it's like his worst nightmare.
Peter McCormack: Right, and we saw a lot of early indications of that when we came out of COVID where they couldn't recruit people.
Travis Kling: Right.
Peter McCormack: Which is this weird scenario because you've got these mixed signals coming in of inflation's high, people can't afford to pay for goods, yet companies can't find people to recruit.
Travis Kling: Yeah, well I think he had like 6 million people leave the workforce during COVID.
Peter McCormack: And a lot didn't come back.
Travis Kling: That's what I mean, yeah, I think the permanent number is 6 million.
Peter McCormack: Do we know where they went; was it people retiring early?
Travis Kling: Over half of it was just retirement.
Peter McCormack: "Fuck this, I'm out".
Travis Kling: Yeah.
Peter McCormack: Yeah, maybe with two partners both working, they made a lifestyle choice to…
Travis Kling: Yeah, something like that, yeah.
Danny Knowles: Do you think he's got the market by the balls because the policy he's implementing is effective or just because asset managers and --
Travis Kling: It's effective at affecting the price of assets.
Danny Knowles: It's just all sentiment?
Travis Kling: Yeah, it's just like he gets up to the podium and talks hawkish and all asset prices go down and financial conditions tighten. He can flick his wrist, like if things are getting a little ugly, maybe the market's like staring off into the abyss of some kind of crash or something like that, potential crash, he can get out there and just flick his wrist dovish and everything rips again; it's incredible, yeah.
Danny Knowles: All just sentiment?
Travis Kling: Yeah.
Danny Knowles: How do you get out that?
Travis Kling: I don't know, like some kind of major event.
Peter McCormack: I'm over major events!
Travis Kling: It seems like they happen a lot more often these days, right?
Peter McCormack: Yeah.
Travis Kling: Yeah, we'll see what happens the next time they cut rates, maybe something happens real bad with Russia and Ukraine and then they cut rates majorly because of that, and oil goes to $200 a barrel and then the government is sending out cheques to everybody to cover their gasoline prices; I'm just saying as a hypothetical, but yeah.
Peter McCormack: Well, we've mentioned this on the show a couple of times recently, the UK Government has just agreed to subsidise company energy bills because energy's so expensive in the UK right now; can you dig out that? I didn't actually know the detail of that. So, what now, Travis?
Travis Kling: I think I've got some decisions to make here in the coming couple of months, and I'm going to get some more clarity on that in the next couple of months. Like I said, I'm confused about what happened in crypto over the last couple of years, and that makes it hard for me to try and predict what's going to happen in crypto.
I think, in a lot of ways, we wasted a cycle's worth of innovation the last couple of years because there was so much distortion in the feedback loop mechanism of a market where it's like, "What do people want; what's getting traction; what are people interested in? Okay, that's making prices go up; okay, those prices going up, is that leading to more interest and more adoption?" and looking at that across various different use cases in this asset class. I think all of that was so heavily distorted by reckless lending intertwined with massive fraud, users heavily leveraged long to speculate on vapourware, that exactly what that's going to look like going forward I think is difficult for me to ascertain, and I think it's just going to take a couple of more months or a few more quarters or all of this year.
It's pretty easy for me to imagine 2023 just being a hangover year in crypto where there are so many more shoes to drop, and I'm not sure how many of the shoes to drop will actually have an immediate effect on prices; not many of them will. For example, Gensler sues Gemini and Genesis yesterday. Well, it didn't do anything to price, in fact price has been going up over the last few days, but that is just like a negative event. There are going to a be a lot more regulatory stuff to come out. In aggregate, my gut would tell me that the consistent negative headlines of additional shoes to drop is the kind of thing that just keeps large pools of traditional capital out of this space. The ones that got in last cycle, with very little exception, got smoked, and the ones that didn't get in last cycle feel incredibly vindicated for not getting in; that type of setup takes meaningful time to work through.
The two most straightforward ways that I think prices are a lot lower this year would be the Mt. Gox coins, which I think are almost assuredly coming this year, and TBD on how the market is going to react to that supply coming to market. Then, if the GBTC Trust gets dissolved and they sell all the Bitcoin they hold on the open market, that's pretty straightforward as well too; I don't know how to handicap the likelihood of that. The DCG, Gemini Earn, Genesis thing looks like a complete mess, and I don't see a path to it getting cleared up any time relatively soon because it is significantly affected by the proceedings of the FTX bankruptcy.
Alameda sent Genesis $2.5 billion in August. Well, if they were fraudulent in August, which almost assuredly they were, it was a fraud in August, then it's quite likely that that $2.5 billion comes back, that the FTX bankruptcy claws that back from Genesis.
Peter McCormack: It's a fucking mess!
Travis Kling: Mess, dude, that's what I'm saying, mess!
Peter McCormack: How the fuck do you untangle all of this?
Travis Kling: It just takes time.
Peter McCormack: Yeah.
Travis Kling: This isn't the same as Madoff for a number of different reasons, whatever, Madoff got 78 cents back on the dollar or something like that.
Peter McCormack: Didn't you say 90% was recovered?
Travis Kling: Well, maybe it was 90%.
Danny Knowles: It was really high.
Travis Kling: It was very high, yeah, but it took, I don't know, eight years or something like that, but it's pretty easy for me to imagine 2023 as just a wash more or less for crypto.
Peter McCormack: Yeah. Well, I appreciate you coming on and telling me this because sometimes I think with something like this it's easy to hide away because you don't want relive it, you don't want to go through it, but I think there's a lot of learn from it, and whatever you do, I wish you luck, and if I can help you, just reach out. You don't want to see friends go through stuff like this, whatever the reason; it sucks, man. So, listen, good luck, dude.
Travis Kling: Oh yeah, it'll be fine.
Peter McCormack: Yeah.
Travis Kling: It's all going to work out.
Peter McCormack: Okay.
Travis Kling: Maybe one of the nice things about getting older is like --
Peter McCormack: Shut up, man, you're like ten years younger than me!
Travis Kling: 37; you've had a couple of laps around the block and you've had bad shit happen and you have had a lot of anxiety around the uncertainty in those moments, and then you've lived enough life that like, with the benefit of hindsight, you fast forward a year, two years down the road and you look back at that and you go, "Oh man, that turned out to be a great thing because it opened up this path for this other thing that never would have happened anyway, and now I'm so happy that this other thing happened".
I've had enough of those happen, I've had enough of things like that happen in my life now. But even through as shitty as this has been and the anxiety around the uncertainty and losing my investors a bunch of money and my own personal stuff getting caught up and everything like that, I can still see a path where, if I fast-forward two years and I'm fighting the fight better than I was, I'm going to be much more in alignment with my purpose, and that's just going to feel better.
Peter McCormack: All right, good, man. Well, I can empathise with that; when I got divorced ten years ago, I thought my world was imploding, and then I ended up getting the best job in the world, making a new best friend and owning my football team.
Travis Kling: There you go.
Peter McCormack: Life can do really weird fucking things, dude, but look, good luck with it all. We're friends, we'll stay in touch, and anything I can do to help you, just reach out to me.
Travis Kling: I appreciate it, brother.
Peter McCormack: All right, man.
Travis Kling: Cheers.
