Ep. 27 The Long-Short | All eyes on digital assets

Published: 18 May 2022

The Long-Short is a podcast by the Alternative Investment Management Association, focusing on the very latest insights on the alternative investment industry.

Each episode will examine topical areas of interest from across the alternative investment universe with news, views and analysis delivered by AIMA’s global team, as well as a host of industry experts.

Following AIMA’s sold-out inaugural digital asset event in New York last week, The Long-Short caught up with the keynote speaker Eric Peters, CEO of One River Asset Management, who offered an update on the latest trends in the market that dominated discussion on the day.

The Long-Short also spoke to conference attendee Alex Botte, head of client and portfolio solutions at Runa Digital Assets, who offered her analysis after a tumultuous week in the crypto space, driven by the collapse of the TerraUSD stablecoin, and discussed what it means for the digital asset space going forward.

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Hosts: Tom Kehoe, AIMA; Drew Nicol, AIMA,

Guests: Eric Peters, One River Asset Management; Alex Botte, Runa Digital Assets

Interlude: Dawn Angley; AIMA

Tom Kehoe, AIMA  00:05

Hello and welcome to The Long-Short, a new podcast brought to you by AIMA the Alternative Investment Management Association, focusing on the very latest insights on hedge funds and private credit. My name is Tom Kehoe.

AIMA is the global representative of the Alternative Investment Industry with around 2,000 corporate members spread across 60 countries. Of these, our fund manager members account for approximately two and a half trillion dollars in hedge fund and private credit assets. Each weekly episode of The Long-Short will examine topical areas of interest from across the alternative investment universe with news views and analysis delivered by AIMA’s global team, as well as a host of industry experts. So, whether you're a hedge fund or private credit industry veteran, a student of the industry, or just someone interested in learning more about hedge funds and private credit, this podcast will be your ideal companion to help navigate you through the long and short of this fascinating industry. 

Hello and welcome to episode 27 of The Long-Short. This episode coincides with AIMA's inaugural digital assets conference which took place in New York last Wednesday, May the 11th. The sell-out conference hosted over 300 delegates including crypto fund managers, service providers, as well as featuring a keynote from SEC Commissioner Hester Pierce.

The Long-Short sat down with two speakers from our conference. In part one we spoke with Eric Peters, founder and CEO of One River Asset Management and its subsidiary One River Digital Assets Management and a keynote speaker at the AIMA conference. Eric described to us what inspired the launch of One River Digital in 2020 and why he believes the trend of hedge fund managers launching crypto funds of products will continue, his outlook for digital assets, including his views as to what will happen regarding regulation for the sector, and the next steps regarding the institutionalization of digital assets.

Drew Nicol, AIMA  01:59

And of course, all this happened in a week which shook cryptocurrencies, (according to some market observers), as Bitcoin lost almost a quarter of its value, not to mention much steeper declines taking place in other coins. Therefore, we were delighted to then speak to Alex Botte, head of client and portfolio solutions at Runa Digital Assets. In addition to offering her key takeaways from the conference, she gave her views on the volatility seen across cryptocurrencies over the week, whether she thought Bitcoin made for a good inflation hedge, and what investors should think about when incorporating digital assets into their portfolio.

Tom Kehoe, AIMA  02:35

So enough talking from us, let's get straight into it, starting with an excellent conversation with Eric Peters of One River Asset Management.

Drew Nicol, AIMA  02:42

We hope you enjoy the show.

Tom Kehoe, AIMA  02:45

Eric, welcome to The Long-Short, and many thanks for taking the time to speak to us today.

Eric Peters, One River Asset Management  02:49

Great. Thanks, Tom. Thanks, Drew.

Tom Kehoe, AIMA  02:51

So, Eric, you have a long and distinguished career as a global macro investor. So, what then inspired the launch of your subsidiary business, One River Digital in 2020?

Eric Peters, One River Asset Management  03:01

Well, I viewed digital as an extension of macro really. We had spent a couple of years leading up to the pandemic anticipating a major policy shift away from the monetary policy dominance to something that involved a very aggressive fiscal impulse. And so we felt that while central bankers were crying out for more help from politicians to actually spend money, that call would inevitably be answered and it would happen in the next recession. And when that happened, we'd see very aggressive fiscal policy supported by monetary policy. What we had not anticipated was that we would get a catalyst like COVID, which proved to be such a powerful catalyst that we ended up with a couple of years running 15% deficits out of the US, more or less fully funded by the Fed. So, when we saw that we were very well positioned, and our investors did well across the strategies that we that we currently run. But we're always on the hunt for interesting strategies to express the themes that we have high conviction in, and monetary debasement was one of those themes and digital assets seemed a unique way of playing that and this notion of digital scarcity almost seems like an oxymoron, but we felt it was poorly understood. And that buying these assets would prove to be very valuable addition to portfolio.

Drew Nicol, AIMA  04:47

And it seems that there's a fairly healthy pipeline of traditional or legacy hedge fund managers that are following your lead and exploring and launching crypto funds and products to diversify and have some exposure to a new value creation ecosystem. Do you expect this trend to continue at its current velocity? And for those that do transition, how do they compare when it comes to the sophistication or the aptitude of native crypto hedge funds?

Eric Peters, One River Asset Management  05:21

Yeah, that's a good question. I think we have seen a very strong move into this new asset class by hedge funds, well, in advance of the real institutional money. So the big asset owners of the world, like that's going to start coming. As that does, I think, naturally, we'll see more hedge funds, more asset managers entering the space, we seem to have announcements week by week of that being the case. And then, if you think about it over the longer term, our expectation, and I think, honestly it's just an inevitability, I think that all assets will ultimately become tokenized.

What that means is that any asset manager will become a digital asset manager. So, I think the world of digital asset management and asset management will converge over the next decade, and so much in the way that during the dotcom period, a lot of incumbent businesses added dotcom to their name, and then there were firms that truly were dotcom. Now we don't really talk about any firms as being dotcom firms, I think the same thing will happen asset management, really.

So right now we have digital asset managers, we're a digital asset manager, we're also an alternative asset manager, I suspect in a decade, we won't really be using those terms, we will just be asset managers, but everything will be tokenized, meaning equities will become tokenized, bonds will become tokenized, commodities and all sorts of derivatives will be delivered in a tokenized form of real estate as well. And yeah, and so that's, that's what I see coming. And so I think it's very smart for all asset managers to be moving into space, to. And those that are slow to that new framework, I think will prove to be a strategic mistake for any asset manager.

Tom Kehoe, AIMA  07:20

And in Episode 11, of the Long Short, we discussed the outlook for crypto assets over the coming 12 months. And last year, all the talk was about Bitcoin. And this year, we're seeing a lot of conversation around the merits of Ethereum and Solana. So what do you think then is likely to be the cryptocurrency that everyone is going to be talking about 12 months from now?

Eric Peters, One River Asset Management  07:43

It's always a risky business. I think the safe answer, but I think it's the right answer and perhaps not as interesting as you might want, but I think that we'll really be talking about Bitcoin and Ethereum in 12 months. There clearly are going to be all sorts of additional assets that become important, I suspect, Solana will, will continue to be one of them. And I think that I think that these and a growing list of assets will be interesting and will be important to the development of this whole space. But Bitcoin and Ethereum are different assets. They are foundational to the development in this whole space. And I think over this next year, what we're going to find is that we will have got through what will prove to be a very bumpy process of Fed rate hikes and an at least an attempt at policy normalisation, that's proving to be challenging for all assets, including digital assets.  Understandably, it has more or less always been the case that when central bank tightens financial conditions, financial assets and assets, just broadly struggle in that environment. Over the next year, what we'll find is, we will have got to the other side of that process. And I think digital assets are gonna do extremely well. And the use cases of Ethereum will, will become more obvious to investors. We are actually involved in building out some financial infrastructure that uses Ethereum and so have a glimpse of some of the important things that are coming down, the pipe. In the case of Bitcoin, once the Fed pivots, I think it'll be very apparent that this period of monetary debasement is not over. I think it's a policy choice that that our politicians and policymakers have made. And so while we're tightening financial conditions, it's a difficult environment. But once we get to the other side of that, these assets are going to go a long way. And so, we'll be talking about the dominant assets. You know, again.

Drew Nicol, AIMA  10:08

it's interesting, you mentioned the transitional phase that we are going through now. There's no such thing as a boring time in digital assets. But if you think about where we are now, as opposed to the types of conversations we were having, last year, before the inflation conversation really kicked off, we look at some of the sort of macroeconomic environments now. But how do you see the asset class developing in terms of the conversation when it comes to dealing with using cryptocurrencies as a hedge against inflation or some sort of other macro conditions?

Eric Peters, One River Asset Management  11:08

Yeah, you know, it's, it's interesting. Maybe I've spent too many years trading market. Markets anticipate events. So therefore, when you think about assets that are inflation hedges, for instance, I think the right way to think about them is the assets that you want to own should anticipate a period of inflation, as opposed to assets should perform extremely well, when you're seeing your highest inflation prints. So for instance, we've already seen and there's not a lot of talk about this in the markets or on the news right now. But we've already seen inflation sensitive markets rolling over. So, you know, one year breakevens, in the US, they peaked a month and a half ago at let's say, six and a quarter percent, they're five ish percent right now, two years, peaked at around 5%. They're now around 4%. So, we're starting to see actual inflation markets roll off. Even as people are talking about inflation being extremely high. I think inflation will remain high this decade and will be very volatile. And so, I think digital assets, there are a number of really important drivers for them. One is kind of a monetary debasement driver of their valuation. Another is the technology. And therefore, I think that, because we're in a high inflationary, albeit a volatile one, this decade, we will see volatility in these asset prices. But underlying them, we'll see, you know, the growing importance of their use use cases and the technology, and that, you know, that will help maintain a bid under these assets for that period of time. But if you think about this inflation, that we've now seen and has already crusted, at least for this part of the cycle, (the price of) digital assets had a huge run up well in advance of that. And so when I think about have these assets provided an inflationary hedge, they have, and like most hedges have done a good job of anticipating what has now manifested, if that makes sense.

Tom Kehoe, AIMA  13:22

And Eric, in the in the broader digital asset space, there has been a lot of noise around regulatory oversight on the digital asset products and service providers, particularly in the US. Do you see regulators becoming more open to digital assets this year?

Eric Peters, One River Asset Management  13:38

I do. Yeah. I think the I think that Biden’s executive order in March was extremely important. We have a very complex regulatory system here in the US, certainly relative to other jurisdictions. We have a lot of regulators across multiple states, so there's a lot going on. I think it was an extremely important signal for Biden to come out and issue that executive order, because essentially, what he said was, ‘you all need to start figuring this stuff out, so start talking and we need we need an answer that is not going to restrain innovation in the US and US financial services. And that's something that we've advocated, strongly, as you know, the head of our advisory council, Jay Clayton, the former SEC chair. He and our advisory council and my firm have worked closely in advocating for a thoughtful, sensible regulatory foundation upon which the private sector can build upon these innovative technologies. And so I think   that's starting. We're seeing other jurisdictions come out too.

The UK has come out strongly advocating for innovation in this space, that's a very different position from the one that they took, by the way, a year, year and a half ago. So, what we're going to start seeing and what we are seeing unfold right now is, I think more competition in different jurisdictions globally, by regulators and by governments. And that's a great dynamic when people and when countries start competing, to try to make sure that they don't miss out on innovation and or can lead in innovation, that that's a good backdrop doesn't mean that all activities will be approved. Of course, that's not the case, I think that we're going to see, you know, material regulation around De-Fi. This year, I think we'll see an increasing amount of clarity this year, I don't think things will become perfectly clear. But the direction of travel is I think, now pretty evident. And we're moving toward an environment where we will get more clarity and these assets will be allowed to be integrated into the mainstream financial industry. And those are all good things.

Drew Nicol, AIMA  16:09

Of course, no one truly knows the mind of regulators or policymakers. But you mentioned that the UK has somewhat shifted direction in terms of its views on the digital asset market. And we're seeing that in other jurisdictions as well. Do you feel that that's come from a certain threshold being met, when it comes to the industry being not sort of a flash in the pan? A lot of people were very skeptical to begin with. We can't necessarily point to administrative change or something in the UK that would have led to a significant change of direction. So is it just a growing appreciation, more sophistication, is that really what's underpinning this? Or is it something else?

Eric Peters, One River Asset Management  16:54

I think that's right, Drew. Look, I've thought a lot about why have so many really smart asset managers  and investors been so slow in this space. And it really is true that they have, you know, this whole market has been led by retail, which is kind of interesting, because it often is not the case, right? And so, and why have regulators been left? So far behind? I think it's because we had this new technology, which was Bitcoin and the early adopters were more or less, very libertarian minded people, almost anarchist type people. They're certainly, and the nature of the technology, in the initial stages, anyway, lent itself to certain types of illicit activities. And so it kind of attracted a whole bunch of bad actors, and it got a bad rap. And I think as a result, a lot of the more serious people (is probably the wrong term), but I'll just use it, you know, the regulators, and maybe the larger investors and asset owners just shied away from it for a long period of time. I think what's starting to happen now, is there's a growing recognition that these technologies allow for much more efficient execution, real time settlement, things that actually take an antiquated trading and settlement system in Rails and turn into something that's more efficient, allows for greater transparency in the transactions and holdings allows. And all of those things, incidentally, I think promotes financial stability. And so we've seen incidents in 2008 and in March of 2020, where certain markets broke down, and a big reason that and there have been other incidents as well. But a big reason is that settlements are just really delayed and things don't go through. And people don't know what you know, what their position is, as a result of that. These technologies really address these things. And they allow a real decline in the cost of cross border, trade settlement, all those things. And so, I think as it's taken, it's because of how Bitcoin started, has just taken, the more you know, substantial financial actors and regulators time to just take it seriously. And now that they, they've looked at it, they recognise that this is this is real. And by the way, I think it's helped that the Chinese have introduced their CDBC because it's forced governments to have to reckon with the notion that if China's right, these technologies are really important, and we have done nothing, then maybe we're at a competitive disadvantage and in a in a world that is becoming more hostile. That's just something that's unacceptable. So, again, that's why you get something like this executive order.

Tom Kehoe, AIMA  20:00

And there have been some notable Bitcoin investors emerge over the past 12 months and your own firm has made a significant investment to in this area. But what are you hearing about the institutional investor appetite for crypto assets? Are we seeing an institutionalisation of the industry, has it started or are we midstream?

Eric Peters, One River Asset Management  20:19

Yeah, I think it's been slower than expected. And yet this year, it's starting in earnest. And so there are all sorts of there all sorts of impediments to it, that that haven't existed in other markets. So one of the things that that this reminds me about a bit is when this notion of the BRICS, (Brazil, Russia, India, and China) became a big investment, theme or thesis. years ago, and, you know, when that happened, I think it, I think a lot of a lot of institutional investors all over the world thought about that thesis, and it either made sense, or it didn't make sense to them, it ultimately made sense to a lot of them. And what they did, when they decided to invest in those countries, they picked up the phone, they call their counterparties. And they said, go buy me a bunch of, you know, Brazilian, Russia and India and China stocks, and the entire infrastructure was built for them to do it. And it was a relatively easy transaction, it fit within all of their risk systems, more or less. And so it was a reasonably easy thing to do. In this case, we have an investment thesis, that's, I think, more important than that one, and ultimately will be bigger, but they haven't had the custody relationships set up. They don't have the risk system set up. The assets are very, you know, they're poorly understood by a lot of the people, particularly older people that tend to sit on the investment boards for large pensions. And so there's been a much greater need to educate, and then figure out what are the right access points, how are we and who we're going to do this with, etc. A year ago, I expected there to be a faster move into this. But this year is actually the year where what you see is, you see all these DAWGs popping up, digital asset working groups, (and, you know, you guys have one), and, and so what you're seeing is, you're seeing groups of people. And in most of if not all of the largest asset managers forming these groups, they're usually led by someone who's extremely knowledgeable, that person is the educator within the organization. And the allocations are beginning this year. It's exciting.

Drew Nicol, AIMA  22:55

If we could just dwell on this question of geography for a moment longer. You've mentioned China and, we've mentioned a few other markets outside the US. Are there any other key trends when it comes to interest in digital assets from institutional investors or even sovereign wealth funds that are slightly ahead of the curve or anyone that's really identified this as a, as a good investment early on, you mentioned there's been some feet dragging elsewhere.

Eric Peters, One River Asset Management  23:29

I'd say that the, the US is, is leading in this space. And, and if I were to identify a State, I would say that Texas within the US is the leader, in terms of doing a lot of work and, and making allocations and, or likely to make earlier allocations than, than others. I'd say behind the US would be Canada. Canada's pension system is rather different from the US in terms of its structure on their very large pools of capital, those and they tend to have teams within who are who are pretty aggressive investors relative to relative to others, and not terribly dependent on on consultants, as well. So we've had lots of discussions with big Canadian plans, and they have, you know, they have their own DAWGs. The Australians are quite interested. But the interest really is global. Just in the last in the last couple of weeks, I've met with two of the major sovereign wealth funds in the world and they're very interested in in these assets in these technologies in the infrastructure. One of the themes that I see clearly is that is that all these big investors want to invest in the picks and shovels because they know that these technologies are going to form the infrastructure for the future of finance. And it’s a lot easier for them just because it kind of fits with their investment style, their tolerance for volatility, it's easier for more people within their organisations to wrap their heads around an infrastructure type investment, rather than have them think ‘Why don't we go out and buy an 80 Vol instrument or 100 Vol instrument that could theoretically, you know, decline by 25%  in the month after we've invested in it?’, That's, you know, that's just  a high bar. By the way, over the course of my career, I have seen, it's usually the hardest investments that are the best one. So I think we're that we're actually at a point where a lot of the infrastructure is probably richly priced right now. I think people investing in infrastructure in this in this space will make money and probably a lot of money over time. But I think that these assets, these assets are gonna go up, I believe, a long way over the next decade. And they're the things that are hardest for the largest institutions to touch. So I think that they're going to kind of tiptoe their way into those markets. But those markets will go up a lot. And so, you know, if we have the same conversation a decade from now, I think we'll see all these institutions with material allocations to these assets. I think the volatility of these assets will come down over that time, but it'll be because they're quite a bit higher in price and that there's just more institutional ownership of them.

Tom Kehoe, AIMA  26:38

And then aside for cryptocurrencies, the digital asset universe is also expanding into (you mentioned) De-Fi strategies, but also NFTs. So, what's catching your team's interest these days?

Eric Peters, One River Asset Management  26:52

I think NFTs are incredibly important. We haven't allocated capital specifically to particular NFT's we're kind of leaving that to others there. We've got plenty on our plate that we think is important and interesting. We are leaving it to other people right now to figure out which NFT to buy. But I think that the technology behind NFT's and the adoption is super interesting. And I think that we'll look back in 25 years and say that NFTS changed an awful lot of things in the world and changed the way people are compensated for work, I think, for their work, you know, their time and effort and, talent. And they'll be used for all sorts of other things as well, that are just very practical. So you know, a really interesting space, but we haven't developed investment products there. We're more focused on access products to the core assets that we think are important. We've developed the leading institutional index product in the space for our clients. We're doing really interesting things in the credit markets in this space, we've developed an income product, and we're working on what is just going to be an excellent Alpha product in this space. But none of those things are touching NFT's directly.

Drew Nicol, AIMA  28:27

And before we let you go, one of the reasons we wanted to speak to you is because you are the keynote at AIMA’s first dedicated digital asset event this week. The event was sold out, and there is a long waitlist for people trying to get last minute tickets. So there'll be a lot of people out there who will miss out on hearing from you and all the other great speakers we have lined up. So, for everyone who wasn't there, what are the key takeaways from your talk?

Eric Peters, One River Asset Management  28:55

The themes that we're seeing this year really have to do around what's going on with the Fed and the tightening of financial conditions, and how is that reverberating through these assets? It's pretty clear that like with all financial assets that it's challenging. And I think the important question is to try because as investors we should be looking at what's happening in the future. I think that the key takeaway certainly from me is that once we get through this tightening cycle or even midway through, I think these assets can do very well. And then the other big takeaway is what's happening with regulation in this space, and we chat a little bit about the importance of this executive order. What we've seen that be a catalyst with the large institutions that we speak with, who have I wouldn't say it's a full green light, but it's more or less a green light, that that they need to take this whole space very seriously. And then you start doing things there, ultimately. So those are the two important themes.

Drew Nicol, AIMA  30:09

Thank you for your time. That was an incredibly insightful discussion. I know Tom and I are sorry not to be in New York this time around. So this was a very welcome alternative. Thank you so much,

Eric Peters, One River Asset Management 30:14

Drew. Thanks so much. And Tom, thank you. It's been great. Thank you. All right. Thank you.

Dawn Angley; AIMA  30:27

The AIMA Next Generation Manager Forum 2022 returns in person for its ninth year on Thursday, the 26th of May at the Sofitel London St. James hotel. The forum provides a platform for the exchange of ideas and the development peer networking for senior individuals and emerging alternative asset management businesses. Throughout the afternoon, discussions will focus on how to keep on top of regulatory requirements. Digitalization to streamline costs, asset raising, and speakers will share practical ideas and guidance on how to successfully start and manage an alternative asset management firm. Register today on AIMA website to hear the discussions network with peers and join the evening drinks reception. We hope to see you there.

Tom Kehoe, AIMA  31:11

Joining us now is Alex Botte, head of client and portfolio solutions at Runa Digital Assets. Alex, you're very welcome to The Long-Short.

Alex Botte, Runa Digital Assets  31:25

Thank you so much for having me, Tom. I'm very excited to be here.

Tom Kehoe, AIMA  31:29

So Alex, you're fresh from AIMA’s digital assets conference. Can we ask you what are your key takeaways from the day?

Alex Botte, Runa Digital Assets  31:37

Absolutely. Well, first of all, the conference was just a great use of time, very well done. The content was fantastic. I met a lot of really interesting people, service providers, other asset managers, institutional asset allocators. So, the quality people was very high caliber. I'd say in terms of the key takeaways. First is that it was, you know, obviously difficult to ignore the recent market conditions. During the conference markets, crypto markets were crashing, UST was collapsing and de-pegging. So, there was a lot of talk about that whether there was going to be any contagion risk the future of stable coins and regulation. The second is there were some great discussions among the institutional asset allocators. And it seems like they vary a lot in their journey in their approach to digital assets. Most appear to be starting with venture capital but are cautious of the asset levels that have been raised last year and more recently in venture capital things according to PitchBook USD$28.4 billion in deal value in 2021, versus only five or so billion in 2020. And I think 2022 is on pace to exceed 2021. And some also expressed in addition to VC some directional exposure via liquid funds. And then finally, great conversations around gaming and identity. This is an area that we're really excited about it, you know, a growth area that we actively look at. So this is particularly interesting to me. The goal of play to earn games like an XE infinity, you know, not really to maximise token value, but users should be incentivized by the value of the game and not the speculative loops. Games should be fun, and there should be some non-economic value to users in addition to strong tokenomics. So some really, really great discussions overall across a variety of topics.

Drew Nicol, AIMA  33:31

Alex, you've written several pieces on how Bitcoin tends to perform well when macro markets are trending in one direction or another but tend to perform poorly when macro markets are choppy or directionless. What are your views on the volatility seen in crypto markets this week? And does it support this thesis?

Alex Botte, Runa Digital Assets  33:53

Yeah, that was research I conducted for my prior firm. And the idea of the whole concept behind that was to see whether Bitcoin risk could be explained by traditional risk models. And so, the multifactor risk model that we use for that analysis included macro factors like equity, risk duration, risk, commodities risk, as well as these long short style factors, one of which was trend following, which I think you're talking about here. And you know, there's long short value investing momentum investing in stocks, this this model didn't have any crypto specific risk factors in it. And the primary conclusion was that 90% plus of Bitcoin risk was unexplained. However, there were some statistically significant factor relationships that explained a small amount of risk and trend following was one of them that trend following factor those long and short various asset classes across equities, fixed income currencies and commodities, there again, no digital assets. And it's all based on going long or short, but you know, based on price trends, past price trends, so we saw that Bitcoin had a statistically significant positive relationship with this factor. And so, what I interpreted that to mean is that Bitcoin has historically performed well when traditional macro markets are trending, like you said in one direction or another that could be up or down. And it struggles when markets are choppy and directionless. And I remember we had looked into this relationship by breaking down the trend following factor into its four different asset classes and found that Bitcoins sensitivity was strongest to trends in equity markets. So, I don't know how that relationship has statistically changed more recently, that paper was written about a year ago, but anecdotally, like equity markets have been fairly choppy and directionless. This year overall, of course, in the last week, there's been a little bit more direction. And that hasn't been the best environment for Bitcoin and other digital asset assets. Bitcoin itself was down double digits year to date, even before this most recent downturn.

Tom Kehoe, AIMA  35:54

And Alex, I mean, you've alluded to it already. But it has been a challenging period for cryptocurrency this week. And indeed, if we look at cryptocurrency year today, particularly Bitcoin, and the argument made earlier in the year was, particularly in the increasing inflationary environment that we're seeing is that Bitcoin will be somewhat of an inflation hedge. Do you think that argument is somewhat flawed now?

Alex Botte, Runa Digital Assets  36:20

I think it's a good question. And a good point, the last major inflation period is in the 1970s, early 1980s. So when people do these historical inflation studies, they look back to see how assets performed during those time periods. But of course, crypto didn't exist back then. Crypto grew up during this period of quantitative easing and easy money. And many, of course fear that this type of expansive monetary and fiscal policy would lead to a debasement of fiat currency. And yeah, we have seen these higher inflation prints, you know, over the past year. So, I mean, on Thursday, for example, CPI was at 8.3%, on an annual basis, and Bitcoin and other digital assets are not doing so well. So, I guess you could look at those two facts. And you could say that crypto, you know, isn't serving as an effective inflation hedge. But this was actually something that was discussed a little bit at the conference is that these markets are anticipatory- they're looking ahead. And so instead of looking at past CPI prints, which are you know, delayed, you can look at the relationship between Bitcoin returns, or really, any other digital assets returns and changes in inflation breakevens, which represent expected inflation derived from nominal and inflation linked government bonds. And just looking back historically, that relationship, the correlation was around 9%. And it was statistically significant. And more recently, I just actually checked this yesterday, the correlation is kind of right around that long term average. So that's just kind of the kind of the quantitative analysis but I think the principles behind Bitcoin serving as an inflation hedge, that to us are still very real over the over a longer term horizon, you know, it's produced much higher returns than the annual inflation numbers we're seeing today, historically, Bitcoin has this predictable monetary policy, you know, how much Bitcoin is going to be minted - there's this fixed supply of 21 million Bitcoins. Most importantly, the network itself is meaningfully decentralised. So, the network is kind of out of control of a centralised authority to come in and change some of these, you know, predictable monetary policy, basically a Bitcoin. So, I think over the long term, we still think it's a great inflation hedge, but over the shorter term. Yeah, definitely we have seen Bitcoin struggling a little bit with this high CPM.

Tom Kehoe, AIMA  38:41

Yeah, one certainly to keep an eye on, as you say, as we expand that time series and follow the fortunes of Bitcoin. Thank you.

Alex Botte, Runa Digital Assets  38:50


Drew Nicol, AIMA  38:52

And just before we let you off the hook, regarding this week's activity, there's been a lot of talk around this concept of contagion within the Digital Asset sector and how that may strain to traditional finance. Just for our listeners, who may be looking at the headlines this week and hearing this maybe for the first time, could you just help us understand a little bit how the selloff in Bitcoin has actually potentially been triggered by an entirely separate asset or an entirely separate token and, and what that really means about what we've learned about the evolution of the space today, compared to maybe five years ago?

Alex Botte, Runa Digital Assets  39:33

Yeah, so I guess, two things. There's one, the relationship between digital assets and traditional markets. I've seen, you know, these figures of Bitcoin becoming extremely correlated with the NASDAQ, for example, over shorter time periods. If you look at rolling correlations going back much further. You see positive and negative, you know, over time, but right now, we're at record levels. And I think the macro is really what's been driving digital assets, the fundamentals are still very strong for a lot of these projects and and networks. But I think, you know, you have this higher inflation, you have the risk of recession. And so that's going to put pressure on risk assets and Bitcoin and digital assets, I think falls into that category. The second point is, I think contagion within digital assets, you had the fall in the collapse of UST, which is an algorithmic stable coin this week. And there were a lot of questions on how that would impact other parts of the ecosystem, especially because Bitcoin were reserve supporting the peg. And I think Bitcoin held in pretty well. I think, overall, digital assets are still relatively new. And there's experimentation. I think algorithmic stable coins are an example of that some of these innovations are going to fail. But at the end of the day, I think the focus should be building real projects that are delivering, you know, real use cases, to end users, and are dependent on these short term incentives to keep to keep going. And I think, finally, there's going to be regulation, I think a lot of people are waiting for that. And that regulatory clarity overall will be helpful to our industry, I think it'll bring in more institutional players that are kind of waiting for that clarity before and

Tom Kehoe, AIMA  41:28

That's a good segue to think about the institutional investor angle here and given your experience working in various risk management roles, and indeed your present role, working at Runa Digital Assets, an investment firm focuses primarily on digital assets. So, what then should an investor be thinking about when incorporating digital assets in this portfolio?

Alex Botte, Runa Digital Assets  41:54

So yeah, Runa is exclusively focused on digital assets. Most of the people at Runa, like myself came over from we call Trad-Fi. And I think incorporating it into a broader portfolio is understanding kind of the relationships obviously, between everything else that that you already own. And the biggest thing I think is just the volatility of this asset class, it is extremely volatile and just put to put some numbers around this. The volatility of Bitcoin and Ethereum, the two largest digital assets by market cap are around 80% and 110%, annualised, you compare that to stocks and bonds, which are more around like 20% and 5%, respectively. And there really aren't, that I know of any off the shelf, you know, crypto specific risk models or systems yet that you can use for this asset class, like they, you know, like they exist for traditional markets. And so, I think, when it comes to managing and understanding that volatility, there needs to be a crypto specific kind of risk model, because the existing ones don't really work. Like what I was saying before Bitcoin 90% plus of the risk is unexplained when you run it through traditional risk systems. I think just kind of more innovation on the on that side to better understand the volatility that investors are taking investing in this asset class.

Drew Nicol, AIMA  43:20

And Alex, you'll have to forgive the slightly impossible question here. But we try not to limit a conversation around digital assets to just cryptocurrencies, although maybe our listeners will forgive us in this week of all weeks, but just turning to the much broader universe that's out there, if at all possible, can you just summarise the general level of appetite you're seeing among investors for digital assets? And for example, maybe it'd be fair to say that some of the NFT market may have come off the boil, but I know other areas are emerging just as fast to take the place and maybe capture that piece of the pie, if at all possible. Can you summarise that?

Alex Botte, Runa Digital Assets  44:02

Yeah, that's a great point, Drew. That I think a lot of people when they think about digital assets, they immediately go to cryptocurrencies, everything's about cryptocurrency. But there's so much more to  this asset class than cryptocurrencies like Bitcoin. And I'm guilty of that. I spent a lot of time talking about Bitcoin so far on this podcast, but you have smart contract platforms and decentralised finance and Metaverse and gaming. And there's a lot of interesting sectors in the space. When we're talking to investors that are seeking to access digital assets, we describe it as this spectrum of how you can invest from venture capital to early-stage investments to these liquid token funds. You know, these might be more like more market neutral arbitrage or something like us that's directional, long primarily diversified across sectors. Then you get into these like single asset liquid funds that could be like a grayscale or a Bitcoin futures ETF, and then all the way to public equities that are tied to this ecosystem like a Coinbase or, you know, some of the publicly traded mining companies. A lot of the institutions that we've spoken to have access to crypto through venture. I think it fits really well in the innovation early-stage tech allocations. On the liquid side, a lot of interest in that market neutral arbitrage yield, yield farming strategies, these are great, but they're not giving you that exposure to the asymmetric upside of the entire asset class. We are in a believer in this like, multi decade transition to decentralised networks and blockchain enabled business models. And with that comes an enormous investment opportunity. So you're able to get that in this long, biased actively managed liquid token fund. But yeah, I think I think it's institutions and investors are really at different stages right now in their crypto journeys and figuring out where they want to invest along that on that spectrum.

Drew Nicol, AIMA  45:51

Well, I'm very sad to say that unfortunately, that's all we have time for today. I feel like we've just scratched the surface of what's going on in the (Digital Assets) universe today. And I think all that's left is to thank you very much for attending AIMA's inaugural digital asset event, I can almost say with complete certainty that there will be another one, bigger and larger. The queues out the door was the resounding message that we received on the day so no doubt, we'll have another opportunity to speak to you again. Thank you so much for your time.

Alex Botte, Runa Digital Assets 46:22

Thank you very much, appreciate it.

Drew Nicol, AIMA  46:26

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