The Great Deflation & Opportunity Collapse
Understanding Deflation in Currency
In this section, the speaker explains the concept of deflation in currency and how it is different from consumer price inflation.
Deflationary Environment
- The speaker simplifies the concept of deflationary environment and explains that it is a confusing topic for many people.
- The speaker clarifies that currency inflation and consumer price inflation are two separate things.
- The speaker states that we are currently experiencing an extraordinarily deflationary period for currency, which contradicts with what people see myopically for the state of the US versus the state of the rest of the world.
Understanding Currency
- The speaker explains that currency is M0, which is a tiny drop in big picture.
- The speaker clarifies that M2 is not dollar bills but rather a credit of numbers or liabilities.
- The speaker gives an example of how American Express credits an account with digits instead of giving paper money.
Deflation and Dollar Liabilities
- The speaker explains that 909 thousand to 5 million dollars is only a fraction of a percent of total dollar liabilities in circulation.
- The speaker clarifies that getting a loan from American Express does not involve base money or fundamental unit account (dollar bills).
- If everyone defaulted on their credit card debt and mortgages, this would lead to a collapsed state where only dollar liabilities remain.
Impact on Behavior
- A deflationary environment causes distortions such as behavioral changes, fear, less credit availability, and funding issues.
Deflationary Currency and its Effects
In this section, the speaker discusses how deflationary currency is causing people with dollars to be less likely to deploy them and causing people without dollars to take on more risk to get them. This is leading to a decrease in opportunities for individuals.
Deflationary Currency
- Deflationary currency is causing individuals with dollars to be less likely to deploy them.
- People without dollars are taking on more risk to obtain them.
- This leads to a decrease in opportunities for individuals.
Lack of Opportunity and Risk in the System
In this section, the speaker talks about how there is not much opportunity in the system due to deflationary currency. They also discuss how small markets are ripe for large actors to extract capital from smaller actors.
Lack of Opportunity
- There is not much opportunity in the system due to deflationary currency.
- Prices aren't going up because there's less currency being deployed.
- Small markets are ripe for large actors to extract capital from smaller actors.
Risk in the System
- The few margins that excel at PVP and Psychology have an easier time getting capital.
- Large actors can easily extract capital from smaller actors by owning 50% or more of circulating value.
Understanding the Crypto Market
In this section, the speaker discusses how larger actors can drive excitement in the crypto market and create their own opportunities. He emphasizes the importance of understanding vested interests and alignments when playing the game.
Vested Interests and Alignments
- The speaker explains that a large actor can drive emotional events in the market to lead smaller investors to believe there is an opportunity.
- It is important to understand who you are playing with, their vested interests, and their alignment.
- Temporary alignments between predator and prey may occur, but it is not always the case.
- The larger actors have a greater capacity to influence markets and capitalize on opportunities.
Liquidity State of Markets
- Total liquidity state of markets is down billions due to a lack of fresh cash flow.
- USDT has been sucking up capital from USDC incredibly.
- Ethereum mainnet still has a tremendous amount of capital as it is the largest liquid playing field in the entire crypto space.
- Arbitrum's recent hype of ARB airdrop has driven significant capital inflows.
Deflationary Environment
- This is a deflationary environment for the crypto space where there are less currency units in circulation causing underperformance seeking outperformance.
- Arbitrum's ARB airdrop drove excitement which affected sentiment and emotions leading to capital migration from other chains to Arbitrum.
Assessing Value in Crypto Markets
- The best thing we can do during cycles of increasing liquidity and decreasing liquidity is assess what actual value there is in crypto markets.
- 2023 will probably be a year of complacency, boredom, and disillusionment like previous cycles.
Crypto Market Analysis
In this section, the speaker discusses the crypto market and its potential for outperformance. They also compare the current state of the market to that of 2018 and 2019.
Market Realization
- The speaker believes that the whole market will realize what is significant and meaningful in the crypto space.
- There is now sticky capital in the market, which was not present in 2018 or 2019.
- The behavior of systems in traditional finance is similar to those in the crypto space.
Currency Recycling
- The speaker explains how Aura, Convex, Curve, and Balancer are protocols that allow people to rent their votes for currency recycling.
- Currency recycling is a foundational structure used by sovereign nations prior to the 1950s with regard to bonds and currency recycling regimes.
- Choosing which protocol to engage with comes down to understanding the market, due diligence, portfolio management, portfolio structure, and portfolio health.
The Importance of Being Comfortable
In this section, the speaker emphasizes the importance of being comfortable and free from anxiety, frustration, and fear when engaging with the market.
Being Comfortable is Key
- Anxiety, frustration, and fear hinder engagement with the market.
- Setting achievable goals is key to success.
- Critical thinking helps reduce anxiety and improve decision-making.
Currency Recycling
In this section, the speaker discusses currency recycling and its impact on circulating supply disruption.
Third-party Financing for Circulating Supply Disruption
- Third-party financing is necessary to avoid significant increases in circulating supply.
- A third party pays people to purchase currency to avoid price depreciation.
- Lack of critical capital financing for circulating supply disruption accounts for price action.
Solid Price Action
In this section, the speaker talks about solid price action and how it relates to currency recycling.
Paying People Not to Sell
- No one is paying people to purchase solid.
- Someone paying us not to sell something avoids depreciation due to increasing circulating supply.
Investing in Multiple Rental Systems
In this section, the speaker discusses investing in multiple rental systems versus spreading investments too thin.
Excessive Diversification vs. Concentration
- There is no answer as sentiment and instinct play a role in investment decisions.
- Excessive diversification can be protective, but excessive concentration can lead to missed opportunities.
Ethereum Mainnet vs. Everything Else
In this section, the speaker compares Ethereum mainnet to other systems and discusses the opportunities for crypto recycler systems.
Opportunities for Crypto Recycler Systems
- Curve has established itself as the place for stables.
- Excessive diversification can be protective, but excessive concentration can lead to missed opportunities.
Curve, Balancer, and Stables
This section discusses the capitalization of Curve and Balancer compared to other platforms. It also highlights the importance of understanding liquidity flow in the market.
Capitalization of Curve and Balancer
- Curve has $4.62 billion worth of capital while Uniswap has $3.78 billion.
- Balancer has a much smaller capitalization with only $1.31 billion.
- Aura and Balancer have a significant position on Ethereum Mainland.
Understanding Liquidity Flow
- Understanding the flow of liquidity into and out of a market is crucial in assessing its structure, situation, and direction.
- Capital flows from lack of opportunity to places with opportunity.
- The Stables overview page on Defi Lama can highlight where capital is flowing.
Ethereum Mainnet vs Arbitrum
This section compares Ethereum Mainnet to Arbitrum in terms of opportunity for investment.
Opportunity on Ethereum Mainnet
- Ethereum Mainnet has three tiers - Curve Stable Coins predominantly V2, Aura, and Balancer.
- There's more opportunity on Ethereum Mainnet as compared to Arbitrum despite the latter having a 21.12 change in liquidity.
- There's $74 billion worth of capital on Ethereum Mainnet.
Transitory Opportunity on Arbitrum
- Capitalizing on Arbitrum is a transitory opportunity as people will eventually retreat to safety on mainnet due to risk tolerance factors such as multi-sigs control.
- A thought experiment could be done to assess this further.
Risk Tolerance and GMX
This section discusses risk tolerance in the market and the significance of GMX.
Risk Tolerance
- Risk tolerance is an equation that considers multi-sigs control and associated risk profiles.
- Trust no one, verify everything.
GMX
- GMX is significant infrastructure for trading on optimism.
- It's where Arthur Hayes has a vested interest.
- Forex markets are favored for non-stable coin assets.
Crypto Market Analysis
In this section, the speaker discusses his available capital and his thoughts on the current state of the crypto market.
Available Capital
- The speaker has very little liquid capital available for new positions in the entire crypto space.
- Tapioca is the only project that interests him, but he will only deploy 10-20% of his available cash position.
- The speaker will not overpay for assets in a market that is fighting over valuable currency units due to a deflationary global currency regime.
Bunny Protocol
- Bunny Protocol catches the speaker's fancy due to its currency recycler feature and recent influx of capital.
- The structure of a chart to range and a currency recycle regime is probably destined to really range as long as liquidity conditions are not significantly changing.
Chart Analysis
In this section, the speaker analyzes charts for three different projects - Aura, Curve, and iPORT.
Aura
- Aura's chart shows horizontal ranging behavior similar to other currency recyclers.
Curve
- Curve's monthly chart also shows horizontal ranging behavior.
iPORT
- iPORT has decent tokenomics with regard to Escrow and investing periods. The speaker has invested one unit of iPORT to five units of stable coins.
Hedging Interest Rate Exposure
In this section, the speaker discusses how to hedge interest rate exposure using an interest rate swap.
Hedging with Interest Rate Swap
- An interest rate swap can help manage or hedge the risk associated with variable interest rates.
- By converting a variable interest rate into a fixed one, you can effectively manage your payment requirements.
- SFX and SFETH are good collateral options that pay predictable returns.
Arbitrage Opportunities
In this section, the speaker talks about arbitrage opportunities in cryptocurrency trading.
ARB Trading
- ARB ETH is trading at different prices on Uniswap and SushiSwap.
- There may be opportunities for arbitrage if you have enough capitalization.
- However, it's important to remember that this game is scored in dollars, so make sure to convert any profits into dollars before spending them.
Conclusion and After Party
In this section, the speaker concludes the video and invites viewers to join an after party on Discord.
Conclusion
- The speaker thanks viewers for joining him and encourages them to subscribe.
- He reminds viewers that they do better together and invites them to join his community on Discord.
- The video ends with a call-to-action for viewers to click the thumbs up button if they enjoyed it.