Arthur Hayes, cofounder of BitMex, discusses how he’s trading the Merge, the impact of macroeconomic policy in the markets, his career as a writer, and much more.
- how crypto is reconfiguring how humans do finance over the internet
- why Arthur initially thought Ethereum was worthless
- how NFTs allow users to trade human culture and will unlock trillions of dollars of value
- why Ethereum doesn’t even need to be deflationary
- whether other layer 1s can take some market cap from Ethereum
- why Arthur thinks that a successful Merge is understated and why this is a valid reason for hedging
- why he thinks an Ethereum proof of work chain won’t succeed and how Arthur will trade ETHPoW
- why LDO, Lido’s token, is a riskier bet but has more potential gains
- how he believes the Shanghai upgrade will impact ETH’s price
- whether the Merge affects BTC’s narrative as digital gold and whether the inflation hedge theory of Bitcoin still holds
- why Bitcoin is a measure of USD liquidity and why the Fed rates don’t matter as much as everyone thinks
- whether hedge funds and institutional investors would want to invest in crypto given the high correlation with traditional markets
- what Arthur believes the impact of a potential US recession would be on the crypto markets
- why he believes the real economy is not relevant to the financial markets
- whether algorithmic stablecoins are doomed to fail
- how the credit cycle works and how it repeats again and again
- Arthur’s method for identifying good projects to invest in
- how Arthur became such a good writer
- whether BTC is money and the religious aspect of the Bitcoin culture
Thank you to our sponsors!
Previous Coverage on Unchained:
- With the Merge, Will Ethereum Take Over Bitcoin’s Title as Digital Gold?
- Why Kevin Zhou Believes Ethereum Will Have 3 Forks After the Merge
- Post-Merge, If Lido Becomes Dominant, What Does That Mean for Ethereum?
Arthur’s posts discussed during the show:
ETH Post-Merge Dynamics:
- Cumberland on the Ethereum dynamics after the merge
- Miles Suter on the implications of the Merge
- The triple point asset
Hi, everyone. Welcome to Unchained. Your no-hype resource for all things crypto. I’m your host, Laura Shin, author of the Cryptopians. I started covering crypto seven years ago and as a senior editor at Forbes was the first mainstream media reporter to cover crypto currency full-time. This is the September 6, 2022 episode of Unchained.
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Today’s topic is the crypto markets. Here to discuss is Arthur Hayes, Cofounder of BitMEX. Welcome, Arthur.
Thanks for having me.
A quick note before starting. My Twitter followers might have seen that this episode was initially supposed to be a conversation between Arthur and Willy Woo, however, Willy’s sick. So, even though this is what I think of as a topic episode, which is usually a conversation between two people on various topics, we are going to do it with a single guest, but for those of you who are familiar with Arthur’s blog, I’m sure you’re quite well aware that he is expert enough to handle all this alone.
So, Arthur, this has been one of the most tumultuous times in crypto history. Not only are the crypto markets just a shade above their all-time highs at the top of the 2017, 2018 bubble, but we’ve also seen multiple spectacular implosions and bankruptcies. Terra Luna, Three Arrows Capital, Celsius and Voyager.
Meanwhile, amidst historic inflation, some say bitcoin has failed to actually as the inflation hedge was touted to be, and on top of all that, we’re heading into Ethereum’s Merge. Quite possibly the most anticipated upgrade to a blockchain ever. You have been in this space for a very long time, as far as I can tell. At least as early as 2014, if not earlier. So, I was just kind of curious for your overall thoughts on this kind of crazy moment in crypto. Years from now, how will we look back on this time?
I think that this is no crazier than the Mt. Gox failure in 2014 in February. No crazier than the Ethereum and bitcoin and ICO implosion in early-2018. This is new technology. We’re reconfiguring how humans want to do finance over the internet. It’s extremely speculative. It’s extremely religious and exciting. There’s haters and there’s people who love it. There’s all this emotion and you mix money with it. So, I think these events over the last six months, let’s call it, 2022, I would say are par for the course for crypto.
All right. So, let’s just start talking about the Merge because this is what everyone’s been talking about. In general, I find your trajectory around Ethereum quite interesting because you used to think Ethereum was worthless. So, let’s just start at that time. What was your thinking about Ethereum initially?
So initially, when the presale happened, 2014 or 2015, whenever it was, it was probably the first major ICO of this ecosystem, and I didn’t really see value in going out to the market and saying, hey, give me a bunch of money and I’m not going to fix the price or the supply of what I’m offering. So, it’s almost like if we take 100 million dollars and we take 10 million dollars, you as the person who’s putting in this money, to me it didn’t seem like you’re getting anything beneficial. So, I’m like why would I want to invest in something like that where it’s a scarcity? How do I know that I’m actually getting my scarce capital today and I’m going to be better off than somebody who comes in six months from now? And I didn’t see that, and I wrote about it.
I said this is complete dog shit. I’m not investing in this. Of course, I was wrong, which is fine. That’s the name of the game when you’re talking about financial markets. You’re wrong more than you’re right. You just hope that you bet on the things that you’re right on more than the things that you’re wrong on. So, thankfully I didn’t short Ethereum. That would not have been such a good idea. But I missed the presale, which is fine. You can’t beat everything.
Subsequently, I think I wrote a piece called Two Digit Shitcoin when ETH was around 500 or 600 bucks, whenever that was in 2018, I got that one right. It went down to below 100 for a period of time. Then as sort of the DeFi ecosystem started to have some green shoots after the March 2020 meltdown, somebody posted on Twitter or I saw an email, I don’t remember where it was, and there was a chart that showed the complete value of all dApps build on Ethereum was greater than the value of Ethereum. So, one of two things has to be true. Either all these dApps, which were down 95 percent from the highs of 2017 are just completely worthless or Ethereum is extremely undervalued, and I took the road of Ethereum is extremely undervalued, so I went long a lot of it and very good trade. Cover up a lot of other bad things that I did with my portfolio over the same period of time.
So, that’s sort of my rocky road of Ethereum. Starting in early-2020 and then 2021, you really had this explosion of DeFi and all these new financial primitives, people actually starting to use these things, hundreds of billions of dollars of total value locked. You’re starting to see the real value proposition of what Ethereum can do and what it’s enabled its really, really smart and innovative engineers and financial technologists to build for this new ecosystem.
I’ve seen you talk and write about this about how you feel that DeFi or total value locked is a proxy for the value of Ethereum, and I’ve also seen you talk about how you could value a blockchain or the price of its token by comparing it to the revenues of existing financial services. So, I was wondering, because in the case of Ethereum, obviously there’s more than just DeFi, so I was curious, do you also factor in other things like NFTs or DAOs or in general how do you think about kind of like other types of activity and their relationship to the price?
So I’m extremely bullish on the concept or the technological concept of NFTs. I think I’ve written that I think it allows us to trade human culture. Now, obviously people think some of the human culture that is currently being traded is extremely vulgar. I have a crypto dick butt on my Twitter profile and all sorts of JPEGs that are worth hundreds of thousands of dollars, and people are like what is this? Why are these people trading these images that I can copy and paste. I don’t think they get the point. It’s the same as why you have a luxury watch, a swatch is just fine that’s 100 dollars, but you have a 100-thousand-dollar watch. It’s all the same stuff, in my opinion.
So, I think the NFT technological construct is going to unlock trillions of dollars of value in the ways in which we interact socially with each other over the internet. We can now trade these things that are representations of communities and culture and whatnot. Again, extremely early. NFTs have kind of gone through half a market cycle over the first month, so obviously most of this stuff is going to go down 99 percent if not completely worthless, but that’s just how it goes. But I do see extreme promise in that, but I don’t think the NFTs are really driving throughput. Obviously, OpenSea, LooksRare and a few other platforms are doing quite well in terms of activity generated, but they’re not at the same level as the total value of all of the financial aspect of Ethereum.
Then you haven’t really even gotten to the self-sovereign identity and Ethereum Name Service. Can we replace DNS? And all these other things. It’s just still extremely early. So, I think the financial aspect is very easy to understand, especially for a former financial markets professional. I understand trading. I understand markets. You charge a training fee, people come on there, they exchange assets. It’s quite easy to understand. Some of this other more meta stuff I think is going to take a little bit longer to be recognized as a big value driver for the network.
Okay. Well, I will keep reading your blog posts. I’m very interested down the line when you come up with a way to figure out how to add that into the value to see how you do. All right. Now, let’s talk more directly about the Merge. One of the premises of your thesis and in general, kind of the main thesis behind this ultrasound money meme is that after the Merge, Ethereum’s monetary supply could become deflationary. However, for the last month or so, usage on Ethereum has actually been down and so actually at current rates of usage, ETH will still be slightly inflationary after the Merge. I mean if that level’s maintained. I was just wondering how you thought about that. Do you think that most likely usage will increase? That this is just sort of a blip.
At a macro level it doesn’t matter, right, because if we take the bitcoin example, the bitcoin inflation rate reduces. It doesn’t go to deflation after, at least it hasn’t yet, after a halving yet the price still goes up. Now, we expect that every halving over a period of many years the price of bitcoin will appreciate. Whether or not that continues to hold true, who knows, but it has in the past three or four times that it’s happened previously.
So, Ethereum doesn’t need to go to deflation. I mean that’s even better if that happens in terms of the cyclical nature of the reflexivity of the price and usage and the price and the usage, but even just reducing the inflation rate, what is it, like 90 percent or whatever that number is in terms of the amount of ETH that’s going to be admitted versus the consumption that’s happening versus the applications on the blockchain, it’s still a massive reduction, a massive change in the inflation. That’s what we care about. We don’t care about the absolute target at the end of however many decades or hundreds of years. We care about the change today and what that portends to the future.
So, cool, okay, maybe it’s not deflationary. Does it matter if the inflation rate was at X and now it’s at 0.1 of X. That to me still means that at the margin you’re going to have more demand from people who need to spend money on gas than there is supply being admitted naturally through the network.
Also, the Merge won’t really do much to improve scaling issues, so that could potentially lead other layer 1s to continue to take market share from Ethereum. Do you think that could have a depressive effect on the price of ETH or is that not something that you’re…
I mean that’s just par for the course, right? Everyone knows that ETH doesn’t scale, whatever that means, right. If you are the Solana guy, it doesn’t scale but then your network goes down. I don’t know. We could talk about that on another day, but that meme hasn’t changed today or tomorrow, yesterday. Who cares. That is what it is. We have one discrete opportunity. We have proof of work blockchain going to proof of stake, and you have this massive reduction in the amount of ether emitted. No other blockchain has this setup like this. That’s why I like this trading opportunity or this value play for ether because it’s just so idiosyncratic to ether and there’s only these one-time events and so who cares if ETH doesn’t scale, unless you’re telling me that after the Merge no one’s going to use Uniswap, no one’s going to use Aave, no one’s going to use OpenSea and that the network uses goes down to zero. Who cares if Solana’s advertised TPS is higher. It was the same advertised TPS before the Merge, it’s the same one after the Merge, so it doesn’t matter.
Now, let’s talk about the trades that you’ve been talking about or kind of your plan going in, which I find it fascinating that you reveal all this publicly. Anyway, in your essay, ETH-flexive, you walked through the way the ETH future’s contracts are currently trading and then what that means about what the market believes about the Merge. Your conclusion was that the market’s confidence in a successful Merge is understated. Walk us through how you reached that conclusion.
Take myself for example, right. I still don’t believe it’s going to happen. I mean obviously I believe in the macro sense that it’s going to happen, but if you ask me today is the ETH Merge 100 percent going to happen? No. I don’t know. Tech’s hard, right. I have faith that these guys can pull it off but as somebody who has run a tech company, stuff’s always late, stuff doesn’t work. So, I’m fully prepared for what happens and then something comes up they didn’t really anticipate, and we could be talking about a massive rollback of these changes. I literally cannot give you a probability on that happening.
Now, obviously people much smarter than me say no, no, no it’s fine. There’s all the testing, but if you’ve been around in this space for as long as I have you get a bit jaded because everyone’s always talking about what they’re going to do. Well, do it and show me. Prove it to me that you did it and that it worked and then I’ll believe you. I think that’s where a lot of people ar