How to invest in crypto in 2023 | Interview with Jeff Dorman

Is the worst of the crypto winter behind us? 
Can we expect a new Bitcoin bull run in 2023?   And what are the hottest crypto projects 
for investors at the moment? These are   The questions that everyone is asking 
as we enter the new year. The result:   Crypto Twitter filled up with all sorts of 
predictions. In this video we try to cut through   The noise to identify the main trends that will 
mark the crypto industry in 2023. Jeff Dorman,   The chief investment officer at hedge 
fund Arca, joined us in our quest. I don't think Bitcoin's correlation to the 
market will go away. When you look at Ethereum,   And you look at Polygon, and you look at Solana,   And you look at FTT, their returns 
had nothing to do with macro. I'm Giovanni. On this show, we challenge the ideas 
that shape the world of crypto. In each episode,   We assess a crypto narrative, a price outlook, or 
a potentially disruptive technology. Only the most   Solid ideas will make it to the other side. This 
video is presented by our sponsor Web3 Antivirus,   A security solution that helps protect users from 
online threats and scams on the decentralized Web.   Talking about prices for 2023, you said that 
we are likely to have reached the bottom,   But you don't know what could push us 
higher. So tell us more about that. You know, there's a couple of factors that 
lead me into believing that the worst is   Behind us. Most of the force selling is over. 
Any funds that needed to unwind before year   End have largely done so. There's not nearly 
as much leverage in the market. There's also   Really very difficult to short anymore. FTX was 
one of the easiest places to short the market,   As well as getting loans from places like 
Voyager, and Celsius, and BlockFi, and Genesis,   All of which are now defunct. So it's hard to 
short the market. There's a lack of supply.   I think that is encouraging for a bottom. But 
also generally when investors are all on one side,   And for the last few months everybody was 
negative, everybody was high cash balances,   Everybody was short, you start to see negative 
news no longer matter. And I think that's what   We're seeing now is most of the FTX dump 
has retraced. You're seeing negative news   About DCG and Genesis and NEXO, and 
the market just doesn't care anymore. You can't see what this catalyst 
or these catalysts could be that   Will bring the market higher in 2023? You know, probably my biggest 
thesis with regard to this is that   We're going to continue to see an onboarding of 
Web2 and other corporations coming into Web3 and   DeFi. Companies have been around for 50 to 100 
years, are starting to utilize blockchain. We've   Seen financial companies like KKR and Apollo 
start to tokenize funds and securitizations.   You've seen Goldman and JPMorgan and BNP start 
to get involved in some DeFi transactions. And   Then you're seeing on the NFT side, you've 
seen companies like Nike and Starbucks and  

Reddit start to adopt NFTs and start to find 
different product lines and revenue enhancing   Functions there. And what happens is, you look at 
the total digital asset market, there's only an   Estimated 200 or 300 million people who have 
ever really interacted with the blockchain.   That's smaller than some of these companies 
I just mentioned. I mean, Visa alone has 200   Million users, right? Apple and iTunes has 
300 million users. You start to pour it over,   You know, Starbucks has 60-70 million users. You 
start to pour it over some of these user bases   That already exist in the non-blockchain world, 
and you start giving them blockchain tools. So   I think when we see that, that's going to be 
a massive catalyst to the upside, certainly   For layer 1s and layer 2s, but ultimately 
for DeFi and for NFTs and other projects. On the other hand, we saw that in 2022 
crypto was tightly correlated to the   Stock market. We saw how these two types 
of assets were responding in the same way   To the macroeconomic picture. So why would 
you think that in 2023 it will be different? Sure. Well, first of all, not all that is true 
in my opinion. So Bitcoin has definitely been   Very correlated to traditional markets and to 
traditional macro factors, and largely because   Bitcoin has just become a 24/7 VIX, it's just 
a trading vehicle now for large funds who want   To get in and out of risk on weekends and 
overnight trading hours. So I don't think   Bitcoin's correlation to the market will go away, 
but the rest of the market decoupled back in May,   You know, again, the first four or five months 
of the year, the every single market was being   Hit by the central bank policies and by the 
speed with which central banks were raising   Rates relative to expectations and the fact that 
inflation was much stickier. But the digital   Asset market decoupled in May. When Terra Luna 
blew up, the digital asset market got crushed,   Whereas the traditional equity and debt markets 
didn't move. And that's because that was a very   Idiosyncratic event that was specific to Luna 
and UST. Now we decoupled to the downside,   Not the upside, so most people don't want 
to admit that that was a decoupling because   Everyone wanted us to decouple up, not down, but 
we decoupled down. And then in July and August,   When the Ethereum 2.0 Merge roadmap became 
reality, we decoupled to the upside. And we   Rallied pretty hard because of Ethereum. 
That again, had nothing to do with macro. But don't you think that that 
decoupling was just a short-term one,   So one that was strictly related to that 
specific crypto event? In the macro picture,   We really haven't noticed like a consistent 
decoupling of these two types of assets. There's no reason to lump all of these assets 
in the same category just because they're all   Digital assets. When you look at Ethereum, and 
you look at Polygon, and you look at Solana,   And you look at FTT, their returns had nothing to 
do with macro. FTT went bankrupt, right? Solana   Basically went down 95% because of its ties to 
bankrupt and failing entities. Polygon went up.  

And that leads into really what I wanted to get 
to, which is most investors three years ago,   Two years ago, even last year would say: 
"Okay, I'm starting to believe in blockchain,   But I don't believe in tokens because tokens 
have no intrinsic value. I want to own equities   Where it's safe." Well, how those equities do? 
How'd your equity and BlockFi do? How'd your   FTX equity do? How'd your Coinbase equity do? So 
in equities what drives the value of equities is   If you're a going concern, meaning if you're a 
company that's not bankrupt, it's the multiples   That you can get on your revenue and your cash 
flow stream. Well, if we head towards a recession   And we have higher rates, well, two things 
happen, right? Those revenues and those cash   Flows go down and the present value of those 
cash flows go down because of higher rates. But also you may have trouble refinancing 
your debt and you might end up in bankruptcy   Where all of a sudden your equity gets 
wiped out in a liquidation and creditors   Take over the new equity of the business. 
Well, that's very different from tokens,   Right? How do tokens generate their value? Well, 
there's two components. One is a financial value   Very similar to stocks, right? If you look at the 
revenues and the fees of Ethereum, or a Uniswap,   Or a Binance, or any of these companies or 
projects that have real revenues, there's   Certainly a financial component to the value of 
a token. And if those financial values go down,   Then those tokens will go down. But the other 
component of the tokens value is the rewards,   Or the loyalty, or the usefulness, or the utility 
of it. That doesn't go away in a recession. So   I think we're headed into an environment 
where you're going to see a lot of stocks   Get punished under the weight of restructurings 
and under the weight of lower revenues and lower   Cash flows. And you're actually going 
to see a lot of tokens do really well. Basically, according to your outlook,   Basically we're going to see a decoupling 
of crypto from equities, but that is not   Going to concern Bitcoin. So Bitcoin is not 
going to decouple, the rest of crypto is. Correct. That's my view. And that's because Bitcoin does not respond to   These logics of being like a token with 
a utility. It's just a store of value. Yeah, I think it's a store of value, but more 
importantly, it's how it's being used. It's being   Used by macro traders and by long-short equity 
investors and by other companies around the world   As a trading tool, as a trading tool 
to express risk-on and risk-off. We saw that   2022 was the year where a lot of CeFi 
players failed. And that is why a lot   Of people are now very bullish towards 
DeFi. So one of the most widespread   Predictions is that this is going to 
be the year of DeFi. You are also very  

Bullish in your predictions about DeFi. 
You said that in 2023 TradFi will lose   Market share to DeFi. So let's get into that 
prediction and explain what you mean by that. Three, four years from now you might come out of 
this. Actually, 2022 was the year that everyone   Realized that decentralized finance just works 
better than traditional finance. Right, code   Works better than humans. Humans make mistakes. 
Humans are greedy. Humans do things and cut   Corners. Code doesn't do that. I think probably 
the most important thing is when you look at   Each of the companies that have gone under this 
year, there is a DeFi or decentralized substitute   That does the exact same thing with the exact 
same customers that has flourished, right again,   For every Voyager and Celsius and BlockFi, there's 
a Compound and a Maker and an Aave that are doing   Really well. For every FTX, there's a Uniswap or 
a dYdX or a GMX that trades the same instruments.   Ultimately, when you look again where DeFi was two 
years ago, two years ago when DeFi just started,   The spot trading of digital assets was 
less than 1% of total volume. Now it's   12%. That's a big jump over two years, and 
that's largely because of the success of   Uniswap and some other aggregators. You're going 
to continue to see that shift happening where   More and more people just get comfortable 
using these decentralized alternatives. Of course, code potentially is going to be more 
trustworthy than just like a centralized entity,   But maybe we are not there yet 
because we started in 2022,   The highest amount of hacks was 
directed towards DeFi protocols.   And so it seems that these protocols still have 
a vulnerability towards these sort of exploits. Yep, I agree with that. I think that's a harder 
one to solve for. I don't actually know if that   Gets solved for in 2023, but I know that that's 
a big theme that we are investing out of Arca.   You know, I think with record numbers of hacks 
and exploits and bad actors, there's no question   That we need more rigorous security and testing 
practices. The test in prod is not going to work,   Whether it's products that offer simulation 
stress testing for DeFi protocols or just   Greater security of private key storage or more 
transparency around where your assets are. I mean,   These are initiatives that are basically going 
to have to be taken much more seriously in 2023   And beyond. And there are companies 
and projects that are attacking that. From the excitement that they get about DeFi, I 
guess that you are far more bullish on Ethereum,   Which is basically the foundation 
of DeFi than you are on Bitcoin.   So Ethereum is going to outperform 
Bitcoin in 2023 according to you? Yeah, I think so. Bitcoin still has a very 
large overhang of supply from the inflation   Rate and from the miners. On top of that 
you have again Mt. Gox distributions. You   Have government seizure distributions, you 
have a fair amount of collateral still held   On lenders and bankrupt entities that might 
eventually get sold. The number I estimate is  

About $11 billion of supply is going to come 
out for Bitcoin next year or this year 2023.   That basically means you need a $1 billion of 
buy pressure a month just to keep Bitcoin flat.   That's a lot. That's a lot of demand. You know, 
Ethereum is, basically because of its transition   From proof-of-work to proof-of-stake is now 
certainly disinflationary and in some cases   Even deflationary. I think in the last week 
and a half it's been deflationary. There's   Been more Ethereum tokens burned than there was 
a new ETH issued that flows to stakers. That's   A big supply/demand dynamic. Now, all else equal, 
Ethereum can be flat even if there's no new demand   Just because the supply is being burned. That's a 
big deal. And then on top of it, Ethereum has real   Revenues and cash flows that come in. You can 
think of Ethereum as like the Apple App Store,   Right? The more people who build in the App 
Store, the more transactions, the more volumes,   The more revenues that go to Apple. Same thing 
with Ethereum. Then you also have your utility   Function, which is you have to still use Ethereum 
in the ecosystem, right? It is a currency within   Its ecosystem. So I just think the usefulness, 
I look at everything from a financial modeling   Standpoint and from a growth standpoint, and 
Ethereum just has more usefulness. It has more   Revenues and cash flows, and therefore I think 
it has more likelihood of outperforming Bitcoin. I'm very excited to see how this all plays out 
in 2023. And I'm looking forward to talk to you   Again, maybe in one year from now and see 
how these predictions will have played out.   So, yeah, thanks a lot, 
Jeff, for coming to our show.   Good luck for everything this year. And 
yeah, I hope to see you soon on our show. Great. I appreciate it. And yeah, we'll see in 
12 months how accurate these predictions are.


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