178 - Is Crypto's Bear Market Almost Over? with Raoul Pal

what's really interesting to me that most people don't think about is what is the compute called for AIS the tokens right you you pay for a certain number of tokens right it's obvious to me that a tokenization of an AI open AI Network makes total sense welcome to bankless where we explore the frontier of Internet money and internet Finance this is how to get started how to get better how to front run the

opportunity this is Ryan Sean Adams I'm here with David Hoffman and we're here to help you become more bangless guys I'm in David's New York City studio today this is the first Monday episode we've ever recorded in person and this is all about getting our bearings as crypto investors where are we headed are we on the right path will there even be another bull market in crypto anytime soon raupal is our guest for these questions a few benefits and takeaways for you number one we rewind to 2022. what happened over the last 12 months in

crypto did we learn anything number two we talk about why Raul thinks there's a crypto inflection moment on the horizon number three liquidity indicators these are the key indicators that inform rowell's outlooks in crypto investing number four we talk about why Raul thinks the popular inflation narrative is complete trash maybe we're in for deflation rather than inflation in the coming decade number five we talk AI is it a bubble or is it massively under hyped and how does crypto fit into the story and finally we end with Raul's crypto portfolio in the summer of 2023

has he increased his exposure to crypto or decreased it stay tuned at the end to hear the answer to that David why was this episode significant to you well other than having you right next to me which took some getting used to but I think it went pretty well uh Raul finds signals and finds ways to look towards the longest term uh signals that crypto can offer and just like investing in general and it's a nice uh respite for people who like I know you and I tend to

be like sucked into the center of crypto Twitter uh there's like a lot of noise around there but Rel does a very good job of zooming all the way back out tapping into macro signals tapping in some internal to crypto signals and then also just being a strong reminder of some of the fundamentals that drive this space like when's the last time we talked about metcalf's law right here like like Raul's he just loves metcal's law and there's a reason for that uh and if your head's down like sucked into the middle of crypto Twitter and like like I said like you and I are like it's it's

easy to forget some of these things that are playing out over the longest term time Horizon is that crypto has to offer uh Raul always Israel will remind us that crypto and macro are the same story and so even though Rick crypto is so young it's it's so risk on it's so small it is still a part of the macro conversation and the macro conversation is very very big right now uh and so I think we do a very good job defining the Contours around crypto the macro environment that is defining the internal crypto environment and then

also trying to parse apart what's up with the internal crypto environment like there's a there's a story to unpack there and I think even Raul is a little bit lost and uh lost although patient for crypto to find its footing that's these are the the themes of the episodes I would say and bakeless nation of course stay tuned for the debrief episode that is available for bankless Citizens it's our episode right after the episode we're about to hit record on we've also never done a debrief in person either and we'll be sharing One mic so David we'll have to see how that

goes uh but if you are a bankless citizen you have access to that right now on the bankless premium feed if you're not a citizen consider upgrading there's a link in the show notes to get access to that episode right now alright guys we're going to get right to the episode with Raul Paul but before we do we want to thank the sponsors that made this episode possible at thankless Nation I am super excited to introduce you once again to Raul Paul he is the co-founder and CEO of real Vision which is a financial media and education platform focused on macro investing in crypto he's bootstrapped this company

independently from mainstream media just like bankless Raul it's been about a year since we've had you on and what a year it has been welcome back to bank list my friend good to be here yeah it's been one hell of a year I truly has and uh by the way for bankless listeners seeing on on YouTube you can see David and I are actually recording this episode in person this is the first Monday episode we've ever recorded together never would have thought it was possible David it's very cute yeah seeing it on the other end so a bank

list listener you can see how we do with it with this um bro we were hoping that this episode could be one where we get our bearings a little bit as crypto investors um because I think the market particularly maybe crypto investors we're all feeling a little bit lost right now like we're unsure of ourselves we don't know where to go next so we're hoping you could help with that does that sound good yeah of course you know where I wanted to start though was taking a trip down uh Memory Lane because I said in the intro it's been quite a year and I think you agree the

last time we had you on the bankless podcast we titled the episode very aptly should we be scared right now okay this was May 16 2022 several months prior crypto had just hit all-time highs I think people were still feeling generally bullish um but the tires were starting to to wobble at that point in time and there were some bad things that were about to hit us um this is a clip from that episode and I I want to play back for the bankless nation just to capture that

moment in time let's play that clip I'll take over here yeah it's UST which we talked about I just interviewed doe this morning by the way my goodness well let's talk about that because he didn't he didn't give a lot away what's happening with UST price and Raul I don't know if you want to pull up a chart too yeah when you hopped into this uh recording room UST price was at 98 cents being defended uh do you know what it is right now no it's in 92 cents what a day yeah yeah so that's a billion

dollars of stable coloring market cap that's gotten a race in the last uh 30 minutes uh and uh as a monitoring Twitter right now and uh the Luna guard the Luna Foundation that has the BTC has just sent their BTC outbound so they are probably in the process of liquidating 500 million yesterday we continued on in that conversation Raul and we're trying to figure out what in the world was going on at that point in time um and so I think the answer to that episode titled should we be scared right now we found out later it was very much

yes although we're talking mainly about uh macro in that episode I just want to reflect on you uh with you about the last 12 months in crypto so it was also a Priceless moment the face of mine when I was totally going through the ramifications as I said you know the ramifications of people who were going to get really hurt in that that's what was going through my head at that time it's like oh my God okay so I co-founder Remy was hugely involved in that space and I'm like

he's gonna get wiped out people did yeah can you tell us what happened so so that was going through your head at that point in time and then what what went on in you know the days and the weeks to come and then maybe zoom out and um and tell us like reflect on the last 12 months in crypto when we realized that there was going to be much bigger implications to the space because that was the

the the first major Domino that's going to start accelerating everything but having been in this space for quite some time now since 2012-13 I've seen this before many times and it's where narrative suddenly gets to Peak frenzy A Narrative of fear and so it was by June that I started I hadn't I don't really trade a lot so I just kind of you know

I'm a accumulator I wait for for opportunities to add and at that point I had realized that okay we're now in the phase where there's Mass liquidation Mass fear and narrative couldn't get much worse it didn't get worse in October I'm not sure because he's never made a new low so this was utter panic because it took people by surprise by October we were kind of used to the fact we were in a our own banking crisis of sorts um but back then it was Peak fear so

what I was doing was trying to zoom out I try and spend as much time as possible hearing the noise and then trying to step back out of it to say okay if you filter out the noise what is going on here and it was the deleveraging of the space but my liquidity indicators which I think is the primary driver of well all markets were bottoming so I'm like huh so here we are just take the log trend of Bitcoin or the log

trend of eth we'd come down to the log Trend which is the secular uptrend and we're at the bottom of the liquidity cycle which was turning up so that to me was like a golden opportunity and I started making noise about that saying well you know that June period was really an opportunity to start you know significantly adding into the space I'd not sold anything and that if you understood the liquidity cycle in the business cycle which most people in crypto didn't really yet

understand that this was going to be a a good opportunity then we play through to the FTX thing which was you know a enormous moment um probably more so for mainstream media than it was for the space itself um and so it became headline news all around the world and again by this stage things like the year-on-year rate of change of M2 which was a big driver of Bitcoin which was my secondary order liquidity indicator had

also picked up so I'm like okay here we are when the narrative is completely opposite to the indicators now not all indicators work all the time you know everything is a probabilistic outcome but the probabilities were very high so again I kind of added into that period as well thinking that through thinking okay here's our kind of Mount gox moment here's the big one it's the kind of puking the kitchen sinking of everything of all negative news flow and

then since that date I mean firstly it gave me a lot of comfort that eth didn't make a new low in October right that was telling me something major then we started to see even over the FTX period eth starts becoming deflationary it's like not even in a bull market it's becoming deflationary that was interesting the Solana story was very interesting to me because Solana had been you know as the cheap narrative goes it's just a VC token but I started

to dig in I owned a small amount of Solana but I started to dig in in June um to really look at the ecosystem and look at the depth of the ecosystem and I thought you know what this feels like an eth 2018 moment where it's down 97.5 um there's forced liquidations and so that becomes interesting so for me it was a it was an opportunistic year it was hard because the narrative was so violent and you felt so under attack by everybody you know not only did people

from the crypto from outside the crypto space turn on everybody on crypto but everybody within crypto turned on each other as well and it was a real moment of ugliness um and so it was hard emotionally hard to try and tune out the noise but if you're truly believe in a longer term time Horizon then these are the opportunities you wait for you know what and I would start to listen to people like Chris benisky who was great at this kind of stuff you know there's a few people Arthur Hayes there's a few people

who really understood what what this was in the cycle and that it was an opportunity not a threat then subsequent to that we started to see the Gensler noise ramping up and my hypothesis on Gensler for over a year had been here's going to there's multiple hypotheses on him but as a negotiator he's going to start with hard no hard no hard no you're going to prison you're all going to die and the space is going to go where

Libertarians we can do anything we want we'll we'll rebuild the Silk Road and you know it's like somewhere there's going to be a compromise and we don't know which side of the line it's all fighting which side of the central line it is obviously against have became politicized with in the process as well um even more so than when he started um and had different ideas what he wants to do what that meant because of his relationship with FTX whether they just wanted scalps who the hell knows but

again what was really interesting as Gensler was firing up the narrative and that was becoming the predominant narrative in the space crypto prices were rising in line with liquidity and again that just gave me Comfort that the macro cycle was actually more important and the adoption cycle was continuing and none of this mattered I then started also focusing on there's too many people on crypto Twitter are us-based and so everybody filters everything

through their own narrative which is they're going to ban everything it's the US it's the end of crypto but when you look at it the US is only a fraction of crypto yes there's a lot of money there yes a lot of companies building there but in a world of capital that is liquid that moves anywhere it's like water it'll find the easiest path it flows even the EU can't seem to regulate anything very easily got a decent set of rigs across the line then we saw obviously Singapore had obviously

put that in place they had a bit of a bloody nose from the FTX Saga but they were still there then the news out of Hong Kong comes then the news out of the UK comes and I'm looking at this thinking we've seen all of this before is the US is trying to become protectionist over the system of money because it is the world's Reserve currency but in a global Capital Market Capital will find a way and my hypothesis has been if the U.S screws this up it'll just go to the UK and I remember speaking to Brett tej Paul and others from coinbase saying you

know the probability of you opening your main office in London is extremely high it's like yeah it's easy to get staff to London yeah the weather's a bit [ __ ] but other than that um you know it's it's an easy place to go and you know I my entire time in the finance industry London was the epicenter of everything you know Goldman's main office was London no mirrors and Main officers London society's General's main office was London so we know how this plays out and it doesn't stop Capital it just moves it around the board and again the US people were so U.S Centric about this

that they were again getting confused over the global adoption which is what we're all in this game for versus can I trade my bags it doesn't matter over the bigger structure of things so I've been very optimistic over this whole period because the narrative was Peak pessimistic and there was only one hypothesis to test is this technology going going away or not that was the only hypothesis you had to have

and if you didn't see evidence of it going away um or use cases dying and the other thing that backed up my theories were we saw what 60 billion dollars of VC money go in so there's an incredible amount of startups and building new projects building new areas which will form the next foundation for the bull market now we've never seen that much money in the space before I mean it's like 10x the size of the entire hedge fund Market in in crypto just went in and like

basically two years so you have to start betting on the outcomes of that what does it mean you know what are the opportunities are going to come that we don't realize we know there's infrastructure stuff I know you guys are involved in kind of a ZK side and all sorts of stuff there we're also seeing some new layer ones do they help or not help who knows but we're also seeing I think people working on how to get Mass adoption you know what is the consumerization it's one of the things that also attracted me to the Solana ecosystem as well which is a

really small part mainly a my main bets are in Eve but because if I were to say Solana stands for one thing it's a consumer application chain now narrative is everything in this game particularly in crypto the meme wins and if that's their meme that's a nice meme to have because nobody else owns that somebody's going to own blockchain of gaming somebody's going to own blockchain of Finance in the end because I think that's how the space evolves so yeah with all of those macro factors with Peak macro pessimism as

well um you know I started getting along the equity market for the same reason it's like the pessimism was obscene people attacking everybody who could be vaguely bullish um made me think okay if the liquidity cycle is turned we know what happens which is over this period the economy will weaken so the probability of more liquidity or more cowbell as I put it comes back into the market and therefore forward-looking asset prices technology crypto will outperform and that's been

exactly how it's played out never feels that way because there's so much bloody attacking and misery online but it's actually played out exactly right maybe I can try and put your answer into even more context role I remember throughout 2021 um it was just an endless onslaught of top signals to the point of where like you started to have to ignore them because even though the from the start to the end of 2021 was full of top signals like it was still beneficial to have exposure to the market and yet finally the top signals played out and the the top actually came in November of

2021 and uh that's when it was down only from then on out and I think maybe what you're saying is that in the last year or so we've had just a Year's worth of bottom signals you know starting with Terra Luna followed by three arrows Capital followed by FTX uh but around the FTX era I think you're what you're saying is that you started to see some Divergence in some signals versus some bullish indicators and like one of them was the fact that uh eth did not make a new low during FTX eth started to become deflationary uh and some other you know

various signs of strength started to emerge while there was a growing Divergence in signals right Gary genzer comes in with his heavy Hammer uh everyone gets scared yet there are signals out there even in the midst of mass pessimism Mass depression Mass like infighting in the crypto World there are stronger and stronger signals sources of confidence for you uh that we are towards the end of that and I think that maybe that's really hits home especially when we get the Bitcoin ETF I don't know if that's really going to change the

game but it has made people very very happy at the very least uh so maybe maybe what you're saying is just like man the the pessimism is drying up and at some point people are going to start to hear the signals for what what they are maybe we're not there yet but we're getting there I think the final part of pessimism that's washing through most things in a business cycle terms there tends to be things that lead and things that lag so it looks like eth lead buy it bottom first the things the thing that lags is the

further out the risk curve which is nfts so nfts are having a horrific time right now you know you can blame it on blur and other stuff but really it's a factor of nfts are recycling of capital within the space so when people are making money they want to buy premium nfts crypto punks or fidenzas or whatever it may be and when everybody's losing money they don't do the same it's the same with high-end real estate it's the same with you know Rolex watches you know we saw that Rolex watch prices come down because of the same reason is once you

go out there's kind of trophy assets and stuff there's not enough money around so that is still washing through the space so that's the I think the last part of what has to happen and then as as you say the ETF is the tink of light on the other side now the ETF in itself doesn't cause a stampede if you launch the ETF between June and October you would have had zero uptake but the ETF as prices rising becomes very powerful because most people in this space are

momentum investors particularly the raas uh the pension plans and others most people have done the institutions have done the work on this space and all they need is price because they don't want to look stupid you know everyone's investment committees beat them over the head saying see you were stupid thinking about this but everybody I speak to it's still on their plan I mean don't forget BlackRock we're talking about this during the last cycle you know remember they had Bitcoin on their website and he was talking about I think was saying you know we've had more

hits on our website than we've ever had in history you know they've been thinking about this through as have most of the big players so it feels that as the darkness is on nfts we see the light coming for New Capital into the space and then it flows through and again very typically in a cycle you start with the Benchmark asset Bitcoin that outperforms then as the capital comes into the space because each part other part of the space is less liquid you put the same

amount of money in as it spreads down it causes an outsized reaction in other parts of the space so what what the space does need is New Capital because we've been recycling capital for a while it's the same with economies you know there's no new investment anywhere going on in the global economy right now because of uh except AI because of you know the economic situation nobody's got money but the moment people start making money again it flows through and we'll see um again stuff like the um eth Bitcoin

um out performance begin again now interesting enough I've been digging on work on that too and I found that's entirely correlated to the business cycle that I've got a certain set of indicators that kind of suggests when that happens and it's again it's based on liquidity so it's the same thing um so that gets interesting to me as well um we're gonna talk about macro in just a minute because there's lots going on the macro side but in the first um questions of this this conversation the first part of this conversation two

questions uh arose in my mind as you were speaking the one is uh how's your co-founder doing how's Remy doing you mentioned you got kind of hit hard I think use the term wiped out in the in the Luna Terra thing is he doing okay look I think it's very hard um because he had left real Vision um and was pursuing some other stuff and he was thinking about the crypto space so I look at it's very hard for him because you have to rebuild your Capital again um but you know he's building his own

research service out uh doing some other stuff mainly on the macro side because he used to work with me at Global macro investor as well as my macro analyst so yeah it's you know it's hard we saw a lot of people I thought more people got hurt by the Luna thing then got hurt by FTX yes retail people as well yes and same with Celsius and all of those you know the this the you know centralized exchanges uh you know the C5 stuff that really hurt people um so a lot of people I know got caught

out in that not that many people I knew were actually using FTX yeah some funds were I've got an asset management company exponential age Asset Management which invests in digital asset hedge funds it's a funder funds because I think well one of my hypothesis is the secondary markets are staffed of capital in the space and we need more participants so we need to create Vehicles much like the ETF does most people will use stuff like hedge funds to give them exposures to the other parts of the space that aren't Bitcoin let me dive into maybe my second question here because you brought it up

a couple of times and I really want to hear your perspective on the market right now because I'm bankless I feel like we covered sort of the Builder side of things very well but something that you said that I don't think we cover enough here and I want to get your lens on this is liquidity indicators you say you look at the crypto Market from a there's a series of liquidity indicators you kind of evaluate from time to time how can investors look at crypto from a liquidity perspective like what liquidity indicators do you use

that sort of indicated that hey June is a good time to buy hey October November might be a good time to buy tell us more about that so it's complicated the business cycle is what drives liquidity so we can use stuff like the ism survey as where we are in the business cycle if it's below 50 we tend to be in recession real contractually times if it's expanding and above we tend to be expansionary times but what we know is when the economy slows down

the answer to that is more liquidity because that's how you stabilize the economy whether it's cutting rates or whether it's increasing the FED balance sheet and I've spent a long time looking at this and developed something that I refer to as the everything code we could talk a bit about that later but so there's a bunch of liquidity measures they're not easy to do some of them you can get on trading view I think because some people have built them one is fed net liquidity which is U.S Centric which I don't think is the most important and that is basically uh the FED balance

sheet minus the treasury general account which is the treasury building or reducing liquidity and the reverse repo that those three things and they actually have mirrored asset prices pretty well but it's not all about the us as we talked about before so then you need a global proxy so the global proxy that's easier for people to find is global money supply but again even that's difficult because there's no one measure of global money supply so you have to kind of construct it yourself but again I think people have got that on trading view now whether how

good it is or not I don't know because we use Bloomberg and uh refinitive and other data sources and then finally the big daddy at all is we've got the global macro investor which is my research service the weekly liquidity index that's based around the G5 central bank balance sheet so that's the US the ECB uh the pboc in China the bank of Japan and the bank of England that seems to explain

97 of the entire price movement of the NASDAQ and about 87.5 of Bitcoin the reason why Bitcoin actually has a lower correlation than NASDAQ is because of the upcycles because the adoption rate is so high because it goes up the blow-off tops right that is the reason because the compounding of that but other than that it's all driven by this factor which is the central bank balance is different to the general liquidity in

the market a money supply and stuff like that the central bank balance sheet is actually debasement of currency so debasement of fiat currency is a thing that most people don't understand because it's it's not obvious but when you are printing more of a currency particularly when all the central banks are doing it you're lowering the denominator which is the same why the Venezuelan stock market looks like it goes vertical it's because the the Bolivar keeps going lower so that is what is driving almost all

asset prices so once I started adjusting for that I realized there was two assets that did better than anything else everything else like equities divided by the FED balance is a simple way of doing it you know for people who can't find a larger set of thing the S P's got nowhere since about 2012 since QE really became prevalent or 2008 really um and we found the same with real estate Gold Everything technology yes why

adoption trends right technological adoption is Relentless and the other one that beats it all obviously is crypto because it's got the technological adoption um and it counteracts the debasement so once I found those out I realized liquidity was going to become the really important driver and I think it'll be the thing people talk about for this cycle and now whether it fully works all the way through or not remains to be seen so it's a little bit hard for people um to look at it themselves some people

have um got some indicators of IT Tech Dev on Twitter I post a bit of this stuff I understand it's hard for people to do and if I can in due form we're just building out a new real Vision platform I'll try and make some templates for people that they can use um to make it a bit easier because it is incredibly powerful and really helps but right well the basic story is when you see central bank balance sheets growing when you see currency debasement when you see that denominator being debased

then that's an indicator to be bullish on assets and particularly crypto assets that's generally the all-in indicator for that you'll see so it will stabilize the exposure now that's right so usually it stabilizes first if you remember 2018 the FED had been shrinking the balance sheet most of the sent Global central banks did the FED go and pause some of the other central banks start doing the same that moment assets took off Bitcoin was up 300

um into June or July of that year then corrected uh into 2020 but that period of pause is like the somebody taking the foot off the beach ball and it rises out above the water then the thing that lifts it is when they really start expanding the balance sheet I when recession is coming or you've got a banking crisis both of which we're toying with right now this is the summer months so it tends to get a bit quieter but that narrative probably picks up again and the beach ball gets lifted up by the gust of wind so this is the kind of moment in liquidity