Why Is Crypto Crashing? | Weekly Roundup

Unlike other cycles, we've never had this amount of adoption. Adoption's all-time high. Prices are at two-year lows or approaching two-year lows, and that's what hurts the most here.

In a scenario like FTX, you're like, yeah, there's a lot of dumb that we did as an industry, certain players that just it's warranted, but now it's harder to reconcile the adoption with the price action.

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Ladies and gentlemen, welcome to Empire. It seems like every 10 minutes Bitcoin's going down by a thousand bucks. Rob and I are not market oracles, maybe Rob a bit more than I am, but we brought in Josh because Josh is here to tell us if Bitcoin's going to hit 60,000 by the end of the conversation or if it's going to rebound at 100K by the end of the month.

That's right. And then yeah, if it does, I might disappear forever. You might never see me again. But there's a lot of that happening in this space.

But Josh, for anyone that's been under a rock and doesn't know who you are, why don't you give us a quick background and then we level set the conversation?

Yeah, absolutely. Glad to be here. I am co-head of markets at FalconX. FalconX is a prime broker trading firm in crypto. We service a lot of hedge funds, institutional counterparties in the space.

We do a lot of things from OTC trading spot and derivatives. We're swap dealer regulated by the CFTC. So we do a lot of options activity on crypto underliers. And then we also facilitate direct market access to various exchanges, provide financing, all that kind of stuff.

So you're basically from your standpoint, you're seeing a lot of the flow, a lot of who's selling, who's buying, you know, who's stepping in, who's leaving, all that stuff?

Yeah. It's a privileged position to be in, you know, like the sort of centralized dealer seat. I think a lot of counterparties do rely on us for liquidity, for access, for market commentary and an aggregation of a synthesis really of what's happening across the whole space.

And yeah, we get to kind of help distribute risk, right? That's sort of like the function of any dealer is just help concentrated positions get distributed to the market in the most efficient way possible without disrupting things.

These days there's forces bigger than us, right? There's just a lot of retail rotation away from crypto. There's all this sovereign flow and all that kind of stuff. I'm sure we'll get into it, but yeah, we try to stay front and center for our counterparties.

Josh, how big is Falcon X on a relative basis? Do you think you're the biggest dealer, the third biggest dealer? Like how big do you think you are relative to the space?

Yeah. I mean, look, unfortunately, compared to traditional markets, crypto is pretty opaque, right? There's no public reporting on this type of stuff. I think we're generally considered top three at this point.

We do get involved in all the major kind of derivative flows at least on blocks. And there's channels on Telegram. You can search for them and you can kind of see like large blocks that are printing on chain between dealers and large funds. And so that's probably one good way to track and measure our market share, but we're usually in the mix there.

Awesome. Well, maybe we should start like Josh, just give us the state of play. Like what is happening? I think Bitcoin is down 25% on the year. It's down another 7% today. Silver is down another 10% today. Gold's down 2%. NASDAQ's down 2%.

We were just talking about this, but Blue Owl is down I think two or six% today and is down significantly over the last couple of weeks. Seems like there's a lot of things that are both cryptospecific and non-cryptospecific that are flashing red lights. And so I'd love to hear like from your perspective what's happening.

Well, how much of it is crypto specific? How much of is related to like October 10th? And then how much is maybe more macroeconomic or other types of extrinsic factors?

Sure. And these are the types of bombardments of negative news and catalysts that usually result in bottoms, right? We're seeing just a cascade of really, really bad things.

From everything from like really notable people and market participants leaving the space. There's just general kind of negative sentiment around technologies that have been built in crypto over many many years. The Ethereum road map for instance and even questioning the fundamental architecture of things like Bitcoin right like with all of the questions with quantum computing and things like that.

So, on top of that, you have just a series of negative flows away from crypto. You've got retail that's generally packing their bags and leaving for greener pastures like equities and metals and really chasing that really parabolic run that we had last week.

At the same time, the sovereigns, right, you look at China just stacking thousands of tons of gold basically, right, in reserves. And then on top of that you have Tether which is really a crypto native institution also buying a lot of gold right in favor of gold in favor of Bitcoin right so that's really what's driving the dynamics and it's a combination of flows it's a combination of these fundamental overhangs like the quantum question.

It's weighing the entire space. I think liquid managers that we trade with are positioned very defensively at the moment. There's really only a handful of names that can be held in these portfolios with any duration at the moment.

Hype has been a notable outperformer. I think you've discussed on your podcast many times with guests that there's this rotation to revenue, right? The revenue meta tokens that can be sustained through buybacks or other means that revenue revenue generating means.

There's only a handful of names in crypto and everyone's hiding out in those names. That's what we've observed. They're very concentrated but at the same time they have been actually performing relatively well relative to even the majors.

So yeah that's kind of what we're seeing. Everyone's kind of pointing to like high 50s as a point where they will dip their toes back in and start accumulating long positions. It's probably that that probably means that we'll bottom ahead of that. But so maybe maybe you know low 60s this podcast will get there.

Yeah, for some of for someone that's not in your seat of seeing all the flows, what are some of the indicators around like options or implied ball or that you can say like we just said okay that the low low to mid50s are something that the market's kind of looking at like for for a retail guy like what can you look at to understand that?

Yeah. I mean crypto options are a reflection of just market demand for protection and the fear that's embedded in the market right so we've seen V levels rise from historically low levels in the last two to three weeks all the way up let's call it like 10 points 10 15 points in the front of the curve.

So the front is implying something like mid60s V and the back is still let's say in the mid50s but that's coming off like a very low level of you know let's call it like 40 V flat across the curve prior to a lot of these recent sell-offs.

The low level of implied V prior I think is just a good indication of lack of retail interest low levels of all the basis spread between Bitcoin futures and the funding spreads on pers relative to spot price were all at very compressed levels, right? So that all indicates there's just not a lot of people still trading levered instruments in crypto.

All of this is obviously on the back of what happened last year in Q4 where just a ton of leverage got blown out on Binance and Hyperlid and many other levered venues. So it's still we're still dealing with the fallout of that I believe.

I mean, I started writing about like my bare like just being very defensive in October and then November and I've just been not I don't feel like I'm getting paid enough to take this amount of risk on liquid side. But you know from from your standpoint like coming into the year like is was there anything positive that would have compelled you to take on put on more risk?

What would have to change for you to really meaningfully like go out of on the risk spectrum cuz you're seeing a lot of value destruction not not just in crypto like you know silver is more volatile than a meme stock you know SAS is massively der like rerating like markets just are very jittery right now and want to go down negative headlines carry more weight like why why take on more risk when you sit in treasuries and just, you know, hide there for a while?

Well, I mean, not even just treasuries. Almost every other asset class has outperformed gold or Bitcoin in the last couple of weeks. I mean, if we just rewind towards the top of the year, like you'll remember some of the key talking points that people had for Bitcoin, right? One being you know turn of the year there will be a alleviation of the redemption outflows of 2025 and there would you know be a new influx of capital subscriptions into funds.

Now, I think some of the recent headlines that we've seen like different liquid funds you know spinning out or you know reconfiguring I think that kind of like speaks to some of the challenges right now in the space in terms of fundraising and being able to kind of like deploy into these discretionary liquid strategies. So that point is sort of off the table.

Another big point at the start of the year was this idea that you know the DATs which had been a big driver of flows in 2025. There would be a lot of pickup in activity from well either you know MNAPs improving or some kind of like activity across these stats maybe M&A type activity or activism activity. I think that has been slow to play out so far this year. Although you know you can kind of see that a lot of smart thinkers are thinking about it.

You saw the Matt Lavine article this morning did the tape just talking about the the potentials for activism in the space. So there is capital looking at it but it just hasn't materialized in a way that people can buy.

Another area that people point to is just this stark stark divergence between Bitcoin and gold. And actually Bitcoin and global measures of liquidity like central bank liquidity, right? That is obviously all benefiting and flowing into gold and not into Bitcoin. And just like we've said in the last couple minutes, like it's it's really widened now and not really compressed.

It's not played out the way a lot of fundamental macro guys are thinking respect to Bitcoin. So, on that point, there's all these like now trying to conspiracy theories come out when prices don't do what you want them to do, right? Tom Le of the world says that this is a feature, not a bug. He's lost billions and billions of dollars for his investors.

You know, believe me, bro, this thing is going to go up. Moon math, all this kind of garbage comes out. Novo comes out saying, you know, hey, there's like there's like suppression by the old guard that doesn't want to see Bitcoin, doesn't want to see crypto thrive because it, you know, stable coins are hugely destruct, you know, going to eat into their interest income.

So there's all these kind of weird things that no one can quantify that are suppressing prices. There's also like the more kind of probably cynical view here which is dude crypto continues to be a very like farther out on the risk spectrum and people feel pain in their portfolio. The marginal buyer is not there. So just assume that there's a ton of ball. Write it out for 10 years. Anyone that's written this out for 10 years usually comes out ahead.

And don't make it 100% of your book. Like you know as much as Rob is you know an investor in the space he personally has stuff outside of crypto and that allows you to be a better investor but anyways I I invest only in dragonfly funds so that's it the only thing I invest in insert clip of I bought ET last week but no I mean like you always said like all these what's your take on all it's like you know and give us you know and Josh I'd like to understand one thing from your perspective too is We're talking like you're talking a lot about a lot of like very I think like you know uh like trading specific like you know quantitative type measures right but like if I just like zoom out for a sec right like you know if puts out ify uh who's the founder of of winter mute puts out a post yesterday that you know he essentially says that you know talking about like economic activity on chain is pointless because it's not really big enough for it to matter to anybody.

He's like I he doesn't think stable coins matter because like you know again it's like really small relative to what's happening in the broader market. I think he's being pretty unfair there but like you know 10 trillion of stable coins that's more than master combined like you know that's not nothing.

Yeah he's he's being pretty unfair I think on on the stable coin side. He talks about how like CME doesn't matter. He thinks Bitcoin has lost you know any reason to exist other than number go up. So he comes out with this like extraordinarily bearish post about like this. He's like he thinks that the market and like the the space is in a good position for like you know adoption of certain things but also he's just like extremely bearish on like all things token prices and you know there's been a lot of discussion around that and there's been a lot of discussion also around like just like micro structure like did 1010 and like the blowout of leverage just like completely screw the micro structure and that's the problem and so like how do you think about it from like what is like structurally fundamentally that something wrong is is happening here or it's just you know to Sant's point like it's high risk and you know we're it's a more volatile industry and like where the whole market is kind of you know showing signs of weakness during this you know kind of volatile period?

Yeah, look, I mean this happens every cycle. Like I think people are doomsayers at the lows always. And yeah, of course he's right on many points. Like our industry is still relatively small compared to the broader world of traditional finance and payments and all that kind of stuff.

But yeah, that's not to say we should be dismissive of it, right? I mean just Rob like you and I have followed some of these trends in the last couple of years that have become like huge world changing phenomena like everything from prediction markets which were broadly dismissed by the general public you know five six years ago as being completely irrelevant and like with no volumes and now just you know being plastered on every CNBC and CNN screen and grocery stores and grocery stores everything.

A lot of crypto bros are going to be walking out of that grocery store. Yeah. Got liquidated. I I mean, we've all been in the space long like we we remember like I I remember, you know, talking about like Arthur back in the day when he was trying to pitch BitX and perpetual swaps as a tradable instrument in crypto. And everyone like would, you know, was extremely skeptical. I was like, well, we there's a liquid spot market. Why do we need this thing?

And I mean, everything just takes years and years and decades really to play out. And yeah, we've we've we've all seen it happen many times in crypto. And and and by the way, like I do think that all of this stuff will be an overhang in the short term, but as soon as you know like price leads narrative, right? We all believe that in crypto and crypto is the most reflective reflexive asset in the world. Like once price starts to turn, like all these things will pick up again and then we'll all be believers again, right? In in the tech.

So it's funny because I we didn't talk about this at the beginning but you joined Falcon X through an acquisition of your prior company called Arbellos which Dragonfly and myself led the investment into and I sat on the board of your company and I remember you and I had lunch. It was January of 23 I think in uh and like a like a taco stand or something. Uh, and it was like right after FTX happened and we looked at each other and we were like, is this space like cooked and we were like, no, we believe that the space is is still it has a reason to exist like we think that there's a lot of, you know, secular tailwinds here. We think that the technology is going to be used for tokenization and stable coins. We talked about all this stuff back then.

And you're like, I want to start a business that just, you know, is a better institutional transparent dealer than what we saw with FTX and and otherwise. And you know that kind of played out and now it feels like we're having this like same exact discussion again like you know four years later three years later because of how volatile that the space is. So I I I do to your point like for those of us who have been here a long time it does seem a little bit like deja vu it just happens with like Bitcoin being at a higher price.

The the the thing that I I I feel like is going to be more painful is that you're seeing adoption, right? I mean you have 10 trillion of stable coins settling in January. I mean that's amaz on real utility you're seeing a lot of enterprises you know we've talked about at length here so unlike other cycles like we've never had this amount of adoption like adoption's all-time high prices are at two-year lows or approaching two-year lows and that's that's what hurts the most here like in in a scenario FTX you're like yeah there's a lot of dumb that we did as an industry you know certain players that just it's warranted but now it's it's uh it's harder to reconcile the adoption with the price action.

Josh, I want to ask you I I was thinking about this yesterday and even today like you know Google posted like record earnings and it's down 6% entire SAS like in a prior life I was a SAS analyst and like just looking at that just makes me wonder about like how do markets react to new information like like software as a service being totally repriced because of the AI risk right you're taking uncertainty if you thought a business was going to compound at 10% a year you feel like you can you know that business is durable AI comes along and no one really still has priced how much does this change the game for software as a service.

And by the way, not workday is not the same as HubSpot, but the market in this moment where it reads the the quant reads a headline SAS disrupted by AI runs through it in their model adjust the growth and then says oh trim risk and because it has really tight parameters and I think a lot of it the market's in index like it's just passive. So you have these like violent movements in the market. I I feel like the market is just becoming more violent. It's more connected but it's more violent.

It's at this moment like in SAS for instance the market is still trying to work through like what is the implications of AI and by the way that might take a couple of quarters. And I think where the most amount of money is made is when you have a strong view of like look Snowflake and Service Now are not going to go away. The market's like treating it like trash. It's not. I'm going to put in step in and buy. translating into crypto like what are the catalysts like you know are there particular catalysts that you've seen um or people that are really smart in understanding when when stuff like this happens they just really step in uh Bitcoin whales like there's a there's an address on Twitter that just tracks Bitcoin whales right and they're like oh Bitcoin whales like oldtime Bitcoiners are stepping in to buy what is it in crypto market structure that you say okay that's a really smart buyer like They they and what are those guys doing right now?

Yeah. I mean, I think the smartest buyers in crypto are the crypto native players with the deepest balance sheets, right? Like, and a lot of those are players that have been in the space from the very beginning and, you know, maybe did token sales or whatever. They accumulated huge cash balances and they pick very selective points in price action to like start accumulating again, right?

I mean, I think one one name we can all agree is like relatively smart money is like Tether, right? We kind of follow like what they do and how they're thinking about crypto markets. And they have a lot of assets to deploy into the space. I think they've yeah, you know, I think more recently they've sort of thought about maybe diversifying their holdings across to RWA, but yeah, those are some of the players like I mean there there's others in the space, you know, like the like the block ones, like those types of players who've been in the space forever and kind of seen multiple cycles.

Yeah, it's it's those folks with like billions of of of capital to deploy and are aren't afraid to kind of like take swings on liquid.

When you say when you say liquid, is it historically well to what degree is it now just concentrated in Bitcoin? Because that you know I think the marginal buyer for Bitcoin is stronger and but the marginal buyer for anything else other than Bitcoin is weaker. Yeah. because it's retail or momentum shifted to AI and and like and like other instruments maybe that or crypto like crypto equities.

Just trying to think about like where the marginal buyer is today where it would have been in prior cycles that would come on chain is no longer coming on chain. Yeah. Or is that just an over extrapolation and like the the buyer eventually comes on chain?

Yeah. No, no. I mean, I was actually thinking about what your your thesis around software names and I I actually think that the story here is does the availability of substitutes of substitute assets outstrip the growth in capital and liquidity. Right? We we can all agree there's a lot more money slloshing around because of expansion of of balance sheets, central bank balance sheets and fiscal and monetary policy across the board.

I would say does that outstrip the availability of substitutes? And when you talk about software names, what that really means is like is AI increasing the ability of companies to replace and substitute vendors with, you know, something they build with claw, right? Or or something like that, right?

For crypto what it means is like everyone's there's like you know a million new meme coins that launch a year right and everyone is you know there's a million there's you know let's say 20 new major token launches that are sucking capital out from their competitive set every year and the question is is that dilution and then let's not even forget the dats right the dats like the hundred of data hundreds of dats that launched last year as sort of like substitutes for deploying into the token markets themselves.

So now there's this mass dilution of investor attention across so many different things and then you have macro phenomena like gold ripping and silver ripping. You have you know very compelling narratives in equities like rare earths and you know quantum and AI you know what what have you all of these sort of major themes happening that are really going to change the way global power is distributed and all of that's just sucking attention away from crypto.

So there's only going to be a handful of things that can really retain investor mind share. And so to your point like Bitcoin has to be the one that that wins in that category, right? It has the longevity and the ubiquity. I mean anyone in the world can trade it now. It's accessible through every investing platform through every sort of like mode and medium.

And then yeah and then the you know then the the the main questions are like what is the set beyond that that can really like also have some durability through the next cycle and it's probably things like hype with with with of revenue. It's it's maybe things like Ethan Salana that have had branding and awareness around them built up over many years of market dollars and all that kind of stuff.

So yeah, I think that's but but you're right. It's not going to like all coins are fundamentally broken. We all agree on that. And the well there's nuance there but but but but like like I I do agree like Jenny's observation is something the reason why I started in version like we just don't have durable demand for anything other than speculation and you so I want to brute force that by acquiring stuff and integrating the tech but like you know you could also argue like hey how do I go along the stable cocoin thesis Rob you think about that every day right I mean you're seeing you're seeing a ton of stablecoin interest and growth And uh you know on the private market side like pretty interesting startups getting funded like Rain and stuff like that.

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I mean, I think there is like to to the question you asked earlier, you know, is there dilution happening? I think there's no doubt about that. I mean, Josh has kind of said that, right? But there was this there was this Jason Choy tweet yesterday that was like showing like developer activity and like AI versus crypto. And basically crypto developer activity kind of peaked right around right before FTX and has basically been kind of like down since we had a little bit of blips or whatever and AI developer activity has basically went straight up and to the right and they actually crossed the more people were you know committing code in AI applications and the more than crypto starting around that period of time when FTX went under and like I look at that from like a venture capital perspective and like it's very clear to me now that marginal person at Stanford does not care.

The marginal kid at Stanford does not care about crypto anymore. The marginal kid at Stanford, he cares about AI, right? The marginal developer cares about we've had a number of like, you know, high-profile defections out of crypto. I mean, there was I believe just yesterday u Nater who who was at I believe he he was at where was he at before this? He was head of growth at at one of the big ETH protocols, Celestia. Uh no no no no he was at IEN I believe right before this. Yeah and yeah yeah and you know he just left cognition right and you know this is somebody who has he basically put his entire life into crypto for like you know like a decade right and we're seeing like a lot of that happening so there's dilution there and then there's dilution on the the public markets because you know all of a sudden you look at what what's happening with like trade XYZ on hype right and that you know the you know one day silver did a third of Bitcoin's volume you know all of trade.xyz at XYZ and the hip 3 markets did a third of all hip hyperlquid volume in a single day.

Like there's more people even in who have capital on chain trading commodities than and that's where like retail interest is right now because like people have been excited about these other reflexive assets like like the reality is is like these retail investors sort of don't care what the asset is. They care about the refle reflexivity, right? And they care about leverage. And so like if the reflexivity and the leverage is is able to be had in commodities like they won't trade the meme coins right like they will trade what they think they can get where they can get that and so I think it's both the retail but bid it's happening at the private markets I think we should talk a little bit about there's a couple posts around like basically the death of cryptovc we should talk about that a little bit and then there's just you know now the institutional interest is okay we'll buy and hold Bitcoin ETF but it's you know Maybe it's Salana, maybe it's ETH, like to to Josh's point.

But like, you know, you look at a I was you look at a lot of these other altcoins and like there's even if they have ETFs, even if they have DATs, there's not really like an institutional bid at the moment because it's not clear what that story is. And I think it's even happening. I want to make one last point, which is like I was on a board meeting this morning with with one of our portfolio companies and they were actually asking me around like should we still launch a token, right? And this is a company that they're you know in the stable coin space. They're actively have revenue. They're uh you know doing you know hundreds of millions of dollars of monthly volume.

But the story was always around being more of a protocol and having decentralizing and having a token and they're looking at me and they're saying we don't know if that is the right move anymore for us to go like raise new venture capital. Like should we you know like who is the right you know capital partner for us in the future and like should we even have a token? is that actually bad for us, right?

I think there's until I I think there's a really clear story or or a clear reason why people think that. And there we have to get some sort of regulatory clarity act type market structure bill passed that says, hey, a token can have some sort of, you know, equity type or like at least going to acrue value type of of structure for um we to get like a mass like institutional type bid in a bunch of these altcoins. And I think that's a, you know, kind of what's overhanging all of this.

Well, the I definitely agree on on the on the, you know, clarity on regulatory stuff. Josh, I think you mentioned I think the market's not dumb around like let's talk about like deepen. For instance, we're talking a lot, you know, with with EV3 guys and SL, there's a whole overhang of tokens that just have codified their tokconomics and those projects are not going to necessarily catch a bit if you have a new project launching with like a cleaner slate of tokconomics.

And so if you kind of look through that, you say, well gosh, like you know, you definitely don't want to be exposed to legacy tokens that just have broken tokconomics and need to restructure it on chain and maybe it's not going to be as easy and needs to pivot and stuff. There's there's a couple of things that you mentioned, Rob, that I think be worth just double clicking on. the developer interest and deflections like it's a little bit like LP like fundraising right people want to give you money when you shouldn't be investing and they don't want to give you money when you should be investing we've talked about like fundraising is always extremely hard it's only getting harder across asset classes.

Josh maybe from your standpoint like are you seeing new signups on the desk like new institutions come in and be like hey where'd that guy come from they never traded crypto they're coming in because because often times like a a working theory that we've had here as a group is there's now new smart money coming in on the private markets. You have fintech investors like participate in rounds like Rain and others that we haven't seen since prefx. So clearly interest in in in getting behind the stable coin super cycle. But on the liquid side just from your standpoint not the fast money cuz dads I think were just hedge funds like you know arbing away and even the Bitco book was like very much hedge funds like just kind of momentum driven but are there characters that you haven't seen in a while show up you' be like huh that's interesting that that's that's a very strong signal of people stepping in not the tethers of the world that have always kind of stepped in and are smart money but like just new players that you haven't seen like Have you seen any new player in the last six months that is interesting?

Yeah. We have we have it's not it's not a complete wasteland over here. So I would say this that's not what I was suggesting. I would say the actually this is maybe a little surprising like the category where we're having the most constructive conversations and where we think there's actually a real path to growth in in the business is in the banking sector.

So, but this is you have to understand, right? This is like after four or five years of conversations with major, you know, G SIBs that are now starting to move in a meaningful way towards setting up custody, you know, setting up like trading lines with firms like us. They want to start expanding the product set beyond you know just trading cash settle derivatives or CME futures. they really want to do meaningful things like putting it into their private bank portfolios and you know distributing it through warehouses and RAAS and stuff like that and I think all that took a very long time because obviously we've only had ETF approval for what a year year and a half right and that was always on people's minds is there going to take like it's a it's a sequential path to getting this stuff into people's portfolios and now we're at that on that path like we're we're basically ically getting to the point where product sets are getting more complex. the choice and variety of things is is becoming more interesting and because the profile of the risk profile of the asset class has changed too right it's now no longer this sort of like I only want upside linear you know it's got upside convexity all that kind of stuff now Bitcoin is like okay well it has had some upside convexity it's also come in quite a bit it's now rangebound maybe I want to get yield on this product like black rockck just announced this sort of yield ETF on Bitcoin where they're going to sell options on iBit, which is their own linear product.

So the variety of things is just is is picking up enormously. Now, if you're talking about just like smart money in crypto, what are they doing? I I don't think it's come in yet where they have started to pick the bottom and accumulate Bitcoin again. In fact, I think it's a little bit still a defensive trading posture for most of them. like we've actually seen quite a pickup in across the board of liquid funds trying to do spread trades.

So that would be things like you know long Bitcoin short