Podcast Summary
Renowned crypto trader Arthur Hayes is bullish on Ethereum merge: Arthur Hayes, a crypto trader with a long industry tenure, sees the Ethereum merge as the most obvious trade due to energy consumption, debt, and demographics, and emphasizes understanding fundamentals and risks.
Learning from this episode of Bankless is that renowned crypto trader Arthur Hayes, a guest on the show, is extremely bullish on the Ethereum trade, specifically the upcoming Ethereum merge. He believes the merge, an upgrade that transitions Ethereum from a proof-of-work to a proof-of-stake consensus mechanism, is the most obvious trade he's ever seen in crypto. Arthur, who has been in the industry for a long time, sees the merge as a near certainty due to factors like energy consumption, debt, and demographics. He also believes the merge's impact may be more powerful than macro markets. Arthur, who approaches the market with a macro, thesis-driven perspective, emphasizes the importance of understanding the fundamentals behind the Ethereum merge and cross-referencing various data points. Despite the challenges and risks in crypto trading, Arthur has managed to survive, and he shares some insights on how to do the same. The episode also features a conversation about Rocket Pool, a decentralized Ethereum staking protocol, and its role in the Ethereum ecosystem.
Innovative solutions Across and Arbitrum address high fees and long wait times in crypto: Across enables instant bridging of assets between Ethereum and other layer 2 networks, while Arbitrum offers fast transactions with cheap fees, enhancing accessibility in the crypto world
Across and Arbitrum are innovative solutions addressing the challenges of high fees and long wait times in the crypto world. Across, powered by Ooma's optimistic oracle, enables instantaneous bridging of assets between Ethereum and other layer 2 networks like Optimism, Polygon, Arbitrum, and Boba. Across v2 focuses on higher capital efficiency, layer 2 to layer 2 transfers, and security while maintaining low fees. Arbitrum, an Ethereum layer 2 scaling solution, offers fast transactions with cheap fees and is home to new and exciting NFT collections and DeFi protocols. Arthur Hayes, a crypto OG and trader, emphasizes the importance of clear thinking and writing as a tool for self-clarification and improving investment decisions. By openly sharing ideas and inviting criticism, one can become a better thinker and investor. Across and Arbitrum provide platforms to make crypto transactions faster, cheaper, and more accessible, allowing users to fully explore the crypto universe.
The Importance of Conviction in Trading: Having conviction in your investment ideas and beliefs is crucial for successful trading. Effective research and time management can help build conviction and make informed decisions.
Having conviction in your investment ideas and beliefs is crucial for successful trading, especially in the long term. Arthur Hayes, a trader and blogger, emphasized the importance of conviction and not being easily swayed by market fluctuations. He also mentioned the value of having a research analyst to help fact-check and save time. When asked about his approach to trading versus buy-and-hold strategies, Hayes explained that his mentality is geared towards trading due to his belief in the importance of actively managing investments and taking calculated risks. He also acknowledged the success of buy-and-hold strategies but emphasized that they require a different mindset and level of conviction. Overall, the conversation highlighted the importance of conviction, research, and effective time management in successful trading.
Crypto Market: Volatile and Belief-Driven: Investor views crypto market as volatile and belief-driven, focusing on long-term trends while remaining open to new opportunities
The speaker, who is an investor, views the crypto market as highly volatile and full of intense beliefs, making it an interesting market for trading. He doesn't have an allegiance to any particular crypto tribe but holds a pro-crypto thesis, believing that crypto will appreciate relative to most other assets. In Arthur's article "A Samurai, A Knight in the Yankee," he discusses the challenges of quelling inflation for different economic powers, with two causes identified: post-war reconstruction and the increase in the money supply due to quantitative easing. The speaker, as a trader, sees volatility as an opportunity and is not concerned with short-term market fluctuations. He prefers to focus on long-term trends while remaining open to exploring new opportunities within the crypto space.
Global economic shifts causing inflationary pressures: The Marshall Plan, financialization, China's entry, technology, COVID-19, and geopolitical tensions have disrupted economic stability, leading to inflationary pressures. Structural issues, like disrupted supply chains and geopolitical tensions, are challenging to address.
The global economic landscape has undergone significant shifts over the past few decades, leading to inflationary pressures. The Marshall Plan following World War II set off a wave of economic growth and globalization, leading to increased competition and cheaper goods. However, this trend was disrupted by the financialization of the US economy, the entry of China into the global workforce, and the advent of technology. The COVID-19 pandemic further exacerbated inflationary pressures by introducing a massive infusion of liquidity into the economy and disrupting global supply chains. The ongoing geopolitical tensions between the West and Russia, leading to sanctions against Russia, have added to the inflationary pressures by disrupting energy and food markets. The US, as the issuer of the global reserve currency, has the ability to mitigate inflationary pressures through monetary policy, but the structural issues, such as disrupted supply chains and geopolitical tensions, are more challenging to address. The predicament for economies, particularly those heavily indebted, is that they may have to inflate away their debts, creating a difficult conundrum for policymakers.
Protecting debt-backed assets with inflation: Central banks may choose inflation over deflation to prevent asset price decreases and bank failures due to large debt loads and scarce resources.
Central banks, in order to protect debt-backed assets and prevent deflation, may resort to inflating away debt as a solution for unproductive countries facing large debt loads. This is because deflation could lead to a negative feedback loop that causes asset prices to decrease further, potentially leading to bank failures. Central banks have learned from historical events, such as the Great Depression, that allowing the banking system to fail is not an option. With the global population not projected to grow enough to pay back all the debt, and energy resources becoming scarce, central banks are more likely to choose inflation as the less painful option. This phenomenon, known as structural inflation, occurs when the decoupling of fiat currencies from energy supplies creates a demand for energy that cannot be met by the market, leading to inflation. The US, being a net energy exporter, is in a better position than Europe in this regard.
Europe and Japan face energy challenges from rising prices and Russian dependence: Europe and Japan, heavily dependent on Russian gas, face economic strain from rising energy prices. The US could help by intervening economically, but this could lead to currency devaluation and higher import bills.
Europe and Japan, as net energy importers, are facing significant challenges due to increasing energy prices and their reliance on imported energy, particularly from Russia. Germany and France are key players in Europe, heavily dependent on Russian gas, and their economies could be negatively impacted if energy supplies are disrupted. The US, as a major global power, could potentially help its allies by intervening economically, such as purchasing their bonds or easing monetary policy to reduce the impact of rising energy prices. However, this could lead to currency devaluation and higher import bills for Europe and Japan. The situation is complex, and decisions must be made soon, as energy prices are expected to rise further this winter, potentially leading to social unrest. The US has a role to play in supporting its allies, but the form of intervention and its potential consequences are uncertain.
Central banks face unique challenges from demographic shifts and geopolitical landscape: Central banks in the US, EU, and Japan grapple with aging populations, insufficient young workers, and fewer children, which impact inflation and economic stability. Geopolitical issues, such as energy dependence and tensions with Russia, add to the complexity.
The geopolitical landscape and demographic shifts present significant challenges for central banks, particularly in the context of inflation and aging populations. The US, EU, and Japan face unique issues. The US, with its promise of government support for the elderly, has an aging population with substantial wealth but insufficient young workers to support them. Europe and Japan, meanwhile, are grappling with fewer children, which is deflationary from an economic output perspective. The central banks are taking a backseat to geopolitical issues, such as energy dependence and tensions with Russia, which can impact inflation and stability. These factors create a complex web of challenges that require careful navigation by policymakers.
Central banks vs. Crypto Industry: A New Approach to Monetary Policy: Central banks face limitations in addressing declining labor forces and aging populations through money printing. The crypto industry, represented by browsers and wallets, offers a less politically messy alternative through code as law, focusing on monetary policies and providing financial services like staking and DeFi.
Central banks are printing money to cope with declining labor forces and aging populations, but this approach has limitations as it cannot create new people. Instead, the crypto industry, represented by browsers like Brave and wallets like Ledger, offers a more objective and less politically messy alternative through the use of code as law. This industry's focus on monetary policies codified by code presents an intellectually curious and less politically charged environment for those seeking to engage in it. This transition from traditional monetary systems to decentralized digital currencies can be seen as a response to the complexities and messiness of the real world and its political surface area. The crypto industry's potential for stability and objectivity, as well as its ability to offer financial services like staking and decentralized finance (DeFi) through platforms like MakerDAO, makes it an attractive industry for those seeking a more straightforward and less politically charged approach to finance and monetary policy.
Crypto's Impact on Social and Monetary Interactions: Crypto's decentralized creation and exchange of value makes it a powerful tool for human creativity and potentially disrupts traditional financial systems. Its value and role may vary in different political landscapes, and traders can benefit from understanding and adapting to this new technology.
Crypto, as a technological advancement in finance, is redefining how we interact socially and monetarily. It's a digital frontier that allows for decentralized creation and exchange of value, making it a powerful tool for human creativity and potentially disrupting traditional financial systems. However, its role and value in different political landscapes may vary depending on the circumstances and the specific needs of a country. For traders, understanding and adapting to this new technology can provide better tools and opportunities for success. Ultimately, the future of crypto lies in its ability to demonstrate its merits and adapt to various situations, making it an exciting and evolving aspect of the financial world.
Money as a claim on energy: Money represents a claim on energy, and the best forms preserve energy value to maintain lifestyle and purchasing power
Energy, represented by hydrocarbons, serves as the foundation of our modern economy and standard of living. Money, whether it's Bitcoin, dollars, or other currencies, is essentially a claim on energy. Energy is the denominator that determines our purchasing power. The ability to maintain a certain lifestyle depends on our access to energy sources. Therefore, the best forms of money are those that preserve energy value and don't depreciate over time. This perspective emphasizes the importance of owning claims on energy and preserving their value relative to hydrocarbons. Ultimately, our civilization converts the potential energy of the earth into action, and the economy is built upon these actions. Money makes things easier by allowing us to store and transfer energy claims, making it an essential part of our lives. However, the value of these energy claims can be affected by various factors, such as geopolitical events or technological advancements.
Preparing for crypto market shifts: Focusing on Ethereum's proof of stake transition: Crypto market volatility calls for adaptability. Ethereum's proof of stake transition offers a unique investment opportunity due to less issuance and potential price appreciation, despite risks from monetary policy and competition.
The crypto market requires adaptability due to global events and the constant evolution of technology. Arthur Smilios, a well-known crypto analyst, emphasizes the importance of being prepared for various scenarios and the need to shift investment strategies accordingly. He is particularly focused on Ethereum (ETH) due to its upcoming transition from proof of work to proof of stake, which will result in less issuance and a structural change in the currency's emission schedule. This change, which is a one-time event, is not priced in yet, making it an attractive investment opportunity. Despite the potential risks, such as the Fed's monetary policy or Ethereum's competition, the structural shift in ETH's supply and the ongoing usage of its applications provide a solid foundation for potential price appreciation.
Ethereum Merge: Minimal Impact on Crypto Markets: Despite the Ethereum merge's significance, its impact on crypto markets is expected to be minimal due to Ethereum's fundamental demand and supply dynamics. The merge's success is seen as a positive development, driving Ethereum's price higher due to underlying usage and lack of precedent.
The Ethereum merge, a significant event in the crypto industry, is expected to have a minimal impact on the rest of the crypto markets due to the fundamental demand and supply dynamics of Ethereum. The merge, which transitions Ethereum from a proof-of-work to a proof-of-stake consensus mechanism, is seen as a positive development by those closest to it, with a high probability of success. However, as one gets further away from these core groups, the perceived likelihood of a successful merge decreases. Despite the merge not being priced in, the demand for Ethereum, driven by its usage in DeFi applications and Dapp usage, is expected to outweigh the supply. This imbalance will result in a rising price for Ethereum, regardless of external factors like the Federal Reserve's interest rates or the cost of dollars. This situation is unique due to Ethereum's large market cap and its status as the leading platform for decentralized finance applications. Additionally, there is no other major coin that has undergone a similar transition from proof-of-work to proof-of-stake on this scale. Furthermore, the merge is not seen as a sell-the-news event, as the price increase is expected to be driven by the underlying fundamentals rather than speculation. The merge's impact on Ethereum's price is considered a once-in-a-lifetime opportunity due to its significance and the lack of precedent for such a transition in the crypto industry.
The Ethereum Merge's impact on Ether's price is uncertain for traders due to complex factors and uncertain timing.: Traders face challenges in predicting Ether's price during the Ethereum Merge due to uncertain timing, complex systemic implications, and the need for precise timing to profit from transactions flows.
The Ethereum Merge, a significant event in the crypto space, is not easily predictable for traders due to its complex systemic implications and the need for precise timing. The Merge's impact on Ether's price depends on various factors, including developer activity, user adoption, and the timing of the event itself. Traders would need to accurately forecast transactions on the network and pre-trade those flows to profit, which is a challenging task. Moreover, the Merge's narrative is influenced by the recent crypto market downturn, which has dampened investors' appetite for new investments. Traders are wary of the risks involved and may not be eager to invest in Ether despite its potential bullishness. Additionally, the Merge's timing is uncertain, adding another layer of complexity to traders' decision-making process. While spot purchases are the simplest option, they offer limited leverage and potential returns. Derivatives, options, and timing plays can provide greater returns but require a higher level of confidence in the Merge's timing and the team's ability to execute. Ultimately, the Merge's pricing in depends on how long it takes for the positive reflexive loop to kick in, and traders must decide whether to front-run the reflexivity or wait for the flows to materialize in the price.
Ethereum merge's impact on Ether's price may outweigh macroeconomic factors: The Ethereum merge, expected in December, could significantly increase Ether's price due to reduced supply and proven execution ability.
The upcoming Ethereum merge, which reduces the inflation supply of Ether by 90%, is expected to have a more significant impact on the price than macroeconomic factors. The merge, which is predicted to occur in December, is seen as a bullish event due to the proven ability of Ethereum's team to execute difficult technical tasks and the continued demand for using the network, even at current depressed levels. The speaker believes that the macroeconomic pain has already been felt, and the merge's supply reduction will outweigh any negative macro impacts. It's important to note that this bull case doesn't rely on DeFi or NFT sectors as positive catalysts, but rather on the merge's fundamental impact on Ethereum's supply and demand dynamics. As for the speaker's personal transformation, they were previously criticized for calling for ETH to reach double digits during a bear market in 2018, but their bullish stance on Ethereum remains unchanged.
The transformation of the crypto market influenced Hayes' bullish outlook on Ethereum: Hayes' bullish call on Ethereum was driven by the potential of DeFi and NFTs, which changed the market landscape and undervalued Ethereum based on its capabilities.
The transformation of the crypto market, specifically the rise of DeFi and NFTs, significantly influenced the bullish outlook of Arthur Hayes on Ethereum. In 2018, when Hayes made a bearish call on Ethereum, the market was vastly different. There was no dominant DeFi ecosystem, and the value of Ethereum was significantly undervalued based on its potential capabilities. However, after the market crash in March 2020, Hayes saw the potential in Ethereum and made a bullish call. The subsequent DeFi summer explosion and the creation of a new financial primitives ecosystem changed the market landscape, making Ethereum a valuable asset. Hayes' success in trading Ethereum was not dependent on the projects built on top of it, but rather the undervaluation of Ethereum itself. Additionally, Hayes challenged the notion that there is a clear distinction between retail and institutional investors, arguing that both groups can make mistakes and lack the necessary knowledge. The success or failure of a trade depends on the individual's understanding of the asset and the market, regardless of their label as retail or institutional.
Proper position sizing is essential for crypto trading success: Even if not right in every trade, correct position sizing ensures survival and profitability in crypto trading. Regularly reassess crypto landscape and adjust investments accordingly.
Position sizing is crucial for success in crypto trading. Arthur Hayes, a seasoned trader, emphasized that even if one is not right in every trade, proper position sizing can help ensure survival and profitability in the long run. He also shared his perspective that Ether, while a valuable commodity, is not his preferred store of value, and he advocated for regularly reassessing the crypto landscape and adjusting investments accordingly. Arthur spends his time reading extensively, writing, playing tennis, and practicing yoga. Listeners can find his articles on Medium under the handle CryptoHaze and follow him on Twitter @CryptoHays.
