This episode unpacks the surge of institutional capital into crypto, contrasting it with current market uncertainties and exploring how new financial instruments and on-chain activities are reshaping investment strategies for Crypto AI participants.
Market Uncertainty Meets Institutional Inflows
- The discussion kicks off with an observation of current market sentiment, characterized by a "creeping uncertainty." Picacio notes significant net outflows from Bitcoin ETFs (Exchange Traded Funds), which are investment funds traded on stock exchanges that hold Bitcoin, with $615 million out on a recent Friday and $350 million on Thursday.
- Despite these outflows, there's a counter-narrative of institutional interest. Companies like MicroStrategy and its "clones" (other companies adopting a similar strategy of holding Bitcoin as a treasury reserve asset) continue to buy Bitcoin. Metaplanet, a Japanese firm, recently announced a Bitcoin purchase.
- Picacio, providing an analyst's perspective, mentions he's "holding on to whatever spot I have. And I've closed my perps," indicating a cautious, wait-and-see approach in the current mixed market. Perps (Perpetual Futures) are a type of derivative contract in crypto that allows traders to speculate on the future price of an asset without an expiration date.
- There's uncertainty about whether these MicroStrategy-like entities have fully deployed their announced capital. Mark Arjun raises this question, noting that for altcoins like Solana, some announced funds were previously undeployed.
The Psychology of Market Cycles and Institutional Adoption
- Ryan draws a parallel between current crypto market sentiment and historical post-crash investor behavior, such as after the Great Depression or the 2008 financial crisis, where under-allocation to assets persisted for years due to fear. He observes, "anytime like Bitcoin's down 1% over the last 24 hours... people are calling top."
- He contrasts this short-term fear with the broader trend: "they're opening up the floodgates to institutional capital for the first time." Ryan emphasizes that experiments crypto proponents have long desired, like NFT-based creator interactions, are becoming legitimized as capital is now permitted to enter these areas.
- This influx of institutional capital is seen as a long-term positive, despite short-term trader anxieties.
The Debate on Trading Transparency and Dark Pools
- The conversation shifts to the implications of transparent trading, sparked by discussions around large, public perpetual trades. Skepticism is voiced regarding the authenticity of some highly publicized large trades.
- CZ (Changpeng Zhao, founder of Binance) and others have commented on the need for Dark Pools in crypto. Dark Pools are private exchanges or forums for trading securities and derivatives that are not publicly visible until after the trades have been executed, which can prevent market impact from large orders.
- Picacio highlights a project called Silhouette, which is reportedly building private execution capabilities on Hyperliquid, a decentralized derivatives exchange.
- Ryan supports the need for dark pools, stating, "it's just such a common market structure... investors are just going to use it." He notes that in traditional finance (TradFi), dark pools account for a significant portion of trading volume, potentially as high as 80% historically, though numbers vary and can be hard to pinpoint due to practices like cross-clearing.
Strategic Market Approaches and Identifying Opportunities
- In the current "weird state" of the market, Mark Arjun mentions he's looking for "market share shifts" rather than overall volume increases. He points to emerging ecosystems like "Sulfi of the world on Solana" and the changing DEX landscape on Sui after the Satus hack as areas of interest.
- Ryan proposes an interesting hedging or alpha-generating strategy: identifying and potentially shorting "dead chains," particularly in the Layer 2 (L2) space. L2s (Layer 2s) are scaling solutions built on top of a base blockchain (Layer 1) like Ethereum to improve transaction speed and reduce costs.
- Picacio expresses caution about shorting in crypto, citing the market's susceptibility to news-driven pumps and potential manipulation around token unlocks. He uses the example of Tao, an L2, which had a "71% cliff unlock coming up this week" but was also listed on Binance Launchpool, potentially creating counteracting price pressures. Tokenomics refers to the economics of a crypto token, including its supply, distribution, and utility.
L2 Valuations, Shorting Nuances, and Solana's Position
- Danny emphasizes that shorting L2s based on unlocks requires deeper analysis than just the unlock event itself, as a post-unlock rip could set up an even better short opportunity. He notes that many L2s already appear "quite beaten down."
- Ryan outlines a framework for identifying potential shorts: assessing if a project is a "going concern," its fee generation, and team stability (e.g., key members leaving, declining employee count).
- Picacio shares his evolving view on Solana (SOL), stating, "I'm kind of disillusioned with... I'm just not sure if it's the most exciting thing for me to hold at this point." While acknowledging Blockworks Research's early correct call on Solana's undervaluation relative to Ethereum, he now wonders if the SOL/ETH valuation gap will close more by Ethereum declining rather than Solana significantly outperforming, and is seeking "sexier stuff."
Solana ETFs, Jito (JTO), and the Regulatory Stance on Staking
- The discussion touches on the potential for a Solana ETF. Ryan expresses a generally cautious stance on ETF flows, having been "bearish on the ETH ETF." However, he believes JitoSoul (JTO), a Liquid Staking Token (LST) on Solana, is a strong candidate to be included in a Solana ETF. LSTs represent staked assets and allow users to participate in DeFi while their original assets are locked for staking.
- Ryan argues that if JTO becomes the preferred LST for TradFi flows via an ETF, "its dominance as an LST provider on Solana really compounds." This is seen as more significant for Jito than for Solana itself.
- Mark Arjun delves into a recent SEC statement regarding staking. The SEC indicated that certain staking activities might not be securities because they fail the fourth prong of the Howey Test ("derived from the efforts of others"), particularly for self-staking or staking with a qualified custodian following protocol rules. The Howey Test is a U.S. Supreme Court case used to determine if a transaction qualifies as an "investment contract" and thus a security.
- Mark raises questions about how this applies to LSTs like JitoSoul, as Jito operates with "out-of-protocol" rules (its own MEV-boosted client, for example), and whether this constitutes "efforts of others." He also references the Kraken settlement, where their staking program was deemed a security.
- Danny notes that an issuer (Rex Shares/Osprey) mentioning JitoSoul in an ETF filing, even if conditional, suggests some confidence post-SEC statement, though Mark clarifies it was a future consideration, not a current implementation.
BNB Chain Resurgence and PancakeSwap's Under-the-Radar Performance
- Danny highlights a resurgence in activity on BNB Chain, particularly in meme coin trading, which saw a significant volume spike around January, partly attributed to CZ's public exploration of on-chain activities and DEXs. The Polyhedra ZKJ token also contributed to recent high volumes.
- PancakeSwap (CAKE), the dominant DEX (Decentralized Exchange) on BNB Chain, has been processing billions in daily volume. Ryan mentions that Binance seems to be prioritizing its chain, a shift from a year ago when he might have considered BNB a short.
- Mark points out PancakeSwap's strong fundamentals: "they've been burning either between like 10 and $40 million worth of their token each month." He notes its low valuation (around 2x FDV-to-fees/revenue) compared to other DEXs, speculating if a "Chinese vs. US equity" type discount is at play due to perceived opacity or Western bias.
- Danny observes that PancakeSwap's trading volumes in early 2024 surpassed its 2021 peak, an impressive feat.
PancakeSwap's Tokenomics and Governance Dynamics
- Picacio discusses recent updates to PancakeSwap's tokenomics, including cuts to CAKE emissions and the retirement of its veCAKE (vote-escrowed CAKE) system. veTokens are tokens locked for a period to grant governance rights and/or boosted rewards.
- The conversation touches on governance, with Mark recounting an instance where a single large, unknown token holder significantly influenced a vote to remove the ve-token system on PancakeSwap, highlighting the "opacity" surrounding the ecosystem.
- This leads to a broader discussion on governance models. Picacio argues for strong leadership: "you need three to four people who are leading the organization... you shouldn't listen to everybody." Ryan concurs, stating, "The reality is you want these things to ship, not argue on the timeline."
Conclusion: Navigating Institutional Waves and On-Chain Evolution
The crypto market is navigating a complex phase of institutional capital integration alongside evolving on-chain ecosystems and regulatory interpretations. Investors and researchers must scrutinize ETF flows, the rise of new financial primitives like dark pools, and the fundamental strength of protocols, particularly in diverse ecosystems like BNB Chain, to identify true value.
