This episode unpacks the intricate dance between short-term market volatility driven by leverage and geopolitical tremors, and the steadily improving long-term fundamentals for Bitcoin and innovative crypto-native financial instruments, offering a playbook for navigating current prices.
Market Overview: Navigating Choppy Waters
- The discussion kicks off with an analysis of the current crypto market, which has seen a slight downturn, though still trading above the significant $100,000 level (referring to a market index or total market cap, contextually). Avi expresses increased nervousness, noting that recent price action, characterized by lower highs since May 23rd, often signals the end of a run.
- He recalls getting bullish around the 83k mark and turning cautious between 95k and 97k.
- Currently, Avi is avoiding levered long positions, anticipating a potential retest of lower levels like 93k if the 100k support fails. "I'm definitely a little bit more nervous about the market now than I was a week ago," Avi states, highlighting his cautious stance.
Leverage Unwind and Short-Term Volatility
- Jonah concurs that while the fundamental setup for crypto appears strong, with potential for a rally to 120k or 150k, excessive leverage has been a point of concern. He points out that many traders added significant leverage at market highs, a risky strategy.
- The recent pullback is attributed to the unwind of this leverage, with auto-liquidations playing a key role. Jonah mentions, "High basis means high leverage," referring to basis, the difference between the spot price and futures price of an asset, which can indicate leverage levels in the market.
- He views the rally to 112k as "noise" fueled by leverage, and the subsequent drop to 104k as the necessary correction, suggesting 104k might be a new equilibrium.
Bitcoin's Enduring Fundamentals
- Jonah emphasizes that Bitcoin's long-term fundamentals continue to strengthen, a sentiment Avi probes for clarification. Jonah elaborates that "fundamentals" encompass more than just price.
- Key fundamental drivers include a favorable macro backdrop, increasing legislative accommodation for crypto globally, and stock-to-flow dynamics, which consider the existing supply (stock) versus new production (flow) of Bitcoin.
- He also highlights the impact of miners' selling pressure, influenced by hash rate, power costs (now competing with AI for energy), and Bitcoin's growing acceptance as a portfolio hedge for Registered Investment Advisors (RIAs) and private wealth.
Global Bitcoin Adoption and Geopolitical Influences
- Avi shifts the focus to Bitcoin adoption outside the US, suggesting its growing importance. While US leadership was initially expected to catalyze global adoption via game theory, the politicization of crypto, particularly its association with Trump, has made some regions like Europe more hesitant.
- "If the US leads on Bitcoin then other countries are going to follow," Avi notes, was a prior thesis.
- However, he observes that international sentiment, especially in Europe, can be negatively swayed by associations with US political figures.
- Positive signs are emerging elsewhere, with Jonah mentioning, "Panama fast-tracks Bitcoin integration," indicating a move to legitimize Bitcoin within its economy.
Altcoin Opportunities Amidst Bitcoin's Consolidation
- Jonah believes the recent market movements are primarily technical, with underlying fundamentals remaining strong. He advises against trying to time the market by selling Bitcoin now to buy back cheaper, fearing missing a subsequent rally.
- He notes that altcoins are not showing signs of a bear market panic. Syrup and Monero, for instance, have shown resilient bounces.
- This period is presented as a "phenomenal time" to invest in altcoins with strong 3-6 month potential, especially those that haven't fully run.
- Hyperliquid (Hyperlid) is cited as an example of a project that saw a hype cycle, a price surge to around $40, followed by profit-taking – creating a good entry point on the pullback. Avi suggests, "Now is a good time to take a little bit of a punt" on altcoins that have sold off with Bitcoin's dip from 112k to 104k.
- For investors, key catalysts to watch are TradFi integrations for projects like Syrup, and for Hyperliquid, the potential US legalization of perpetual futures and integration with chains like Solana.
Perpetual Futures: Crypto's Transformative Innovation
- Jonah passionately describes perpetual futures (perps) – futures contracts without an expiry date – as "probably the most important financial innovation since maybe the Black-Scholes formula." While BitMEX and Arthur Hayes are credited with popularizing them, perps are currently not fully legal for US users due to CFTC regulations, though discussions are underway to change this.
- If legalized in the US, Jonah foresees perps spreading rapidly throughout traditional finance, with crypto platforms like Hyperliquid being ideally positioned to capitalize due to their existing expertise.
- Avi provides historical context, noting Robert Shiller proposed a version of perpetual swaps in 1992, and Alexi Bragan developed the crucial funding rate mechanism in 2011. The funding rate is a periodic payment exchanged between long and short traders to keep the perp price tethered to the underlying spot price.
- The speakers agree that perps are not inherently illegal, and Coinbase is actively working with the CFTC to introduce them to US users.
The Potential of Perps in Traditional Markets
- Jonah, drawing on his experience as a professional futures trader, explains the drawbacks of traditional futures, such as the cumbersome "roll" process (closing an expiring contract and opening a new one) and the complexity of historical data analysis.
- Perps offer a cleaner, more efficient instrument for speculators. He envisions perps for equities and interest rates, like a "rolling two-year interest rate exposure," becoming mainstream.
- Avi concurs, stating, "Everything that doesn't require physical delivery... the perpetual future is a better product." He suggests S&P E-Minis as a prime candidate.
- The introduction of perps in TradFi would also provide valuable real-time positioning indicators, such as funding rates reflecting market sentiment.
Crypto's Data Transparency Advantage
- A significant advantage of the crypto market, as highlighted by Avi, is its unparalleled data accessibility.
- Tools like Velo Data allow anyone to track leverage, basis, and open interest in real-time. Exchanges often stream order book data freely.
- Jonah contrasts this with traditional markets, where such data is expensive and often less accessible. "The fact that basically every exchange you can just stream their order book data is crazy," Avi remarks.
Crypto: The Premier Asset Class for Retail Investors
- Jonah champions crypto as the "golden asset class for retail" due to its unique combination of features:
- Access to leverage and sophisticated financial instruments like perps.
- Abundant, readily available data and information through platforms like Discord, Telegram, and Twitter.
- Its increasing geopolitical relevance.
- He shares a personal insight: "One of my the biggest mistakes I've ever made in my career was thinking that I needed to work for a company to trade crypto." He argues the opposite is often true, as institutional constraints can be limiting.
- The innovations pioneered in crypto, like perps and data transparency, are expected to eventually democratize traditional markets.
Macro Geopolitical Shakes: The Russia-Ukraine Escalation
- The conversation turns to the macro environment, with Avi noting stagnant equity markets and a significant rally in gold, which he attributes to a recent escalation in the Russia-Ukraine conflict.
- Jonah details a Ukrainian AI-enabled drone attack on Russian nuclear-capable bombers, an event confirmed with the US, signaling potential for further escalation. "Geopolitical uncertainty is up on this," Jonah states.
- Gold and oil prices surged in response. Bitcoin, in such scenarios, tends to initially act like risk assets (stocks) but then behaves as a hedge against government monetary easing designed to mitigate financial impacts.
- Avi observes that the S&P 500's flat reaction to the gold surge could imply either a binary market view (either a massive downturn if war expands, or no major impact) or that nations are accelerating gold accumulation in an increasingly multipolar world.
Bitcoin's Resilience and Dip-Buying Opportunities
- Jonah questions why Bitcoin often dips sharply on geopolitical scares only to recover quickly, suggesting these are buying opportunities before the market fully prices in Bitcoin's role.
- Avi explains these dips as often due to "flow issues," where macro portfolio managers sell Bitcoin as a liquid proxy for risk, especially during off-market hours like weekends. Correlation traders and momentum effects can exacerbate these moves.
- He notes Bitcoin recently broke its uptrend from early April and could see further chop, potentially testing a floor around 97k.
- Jonah sees these dips, unless driven by catastrophic, medium-term news, as chances to "add some exposure to things where I still feel a little bit light," like Syrup or Hyperliquid. He believes current volatility is suppressing prices below their fundamental value.
Deep Dive: Analyzing Leverage with Velo Data
- Jonah admits he was initially mistaken about the extent of leverage in the market, having focused too much on funding rates which didn't appear excessively high. Avi then provides a masterclass using Velo Data (integrated with TradingView) to analyze market leverage more accurately.
- The key, Avi explains, is to monitor aggregated open interest (OI) in Bitcoin terms and its ratio to price movements. A sharp increase in OI relative to a small price move is a danger signal. "For a 9% move, you get 40,000 coins added in leverage. It's all about the ratio," Avi clarifies.
- When OI remains flat while prices go sideways after such a spike, it indicates an exhaustion of buyers, with existing leveraged positions vulnerable to liquidation.
- Avi uses funding rate spikes primarily to confirm the direction of OI (i.e., that the new OI is predominantly long positions from aggressive takers). Funding rates themselves tend to be arbitraged back to neutral relatively quickly by large players.
- Jonah adds that TradFi institutions engaging in these arbitrage trades consider their cost of capital and opportunity costs (e.g., versus T-bill yields), which influences how quickly and to what extent funding rates are normalized.
Conclusion: Strategic Patience and Fundamental Conviction
- The episode underscores that while short-term crypto markets may exhibit volatility from leverage and geopolitical events, the underlying fundamentals for Bitcoin and innovative DeFi protocols like Hyperliquid are strengthening. Investors and researchers should monitor leverage indicators like open interest to gauge market froth and view fundamentally sound projects on pullbacks as potential long-term opportunities.
