Everyone's Wrong About This Crypto Bear Market | Haseeb Qureshi

Yeah, it's a good question. I think you'll get different answers depending on who you ask. From my perspective, I think this bear market doesn't feel tremendously different than previous bear markets, to be honest. If anything, it actually feels better because the fundamentals in crypto actually look really good. Most of what people are complaining about in crypto is price action. Is that Bitcoin's down, ether's down, alts are down, meme coins are down, and it's like, 'Okay, why won't things go up?' Which is basically just a function of, 'Okay, you know, nobody's buying or retail has left the building.' You can see this very clearly from some of the headline metrics that retail's not very engaged in crypto right now. So, the traditional things you'd look at were, you know, where is Coinbase sitting on the App Store? What are we seeing in terms of search volumes? And then of course, you know, platforms like Robinhood, which are traditionally retail-dominated, you can see that their crypto volumes have come down tremendously. All of those are indications that retail's not here. Retail's trading meme stocks, they're trading, you know, AI. They're fascinated by a lot of other stuff that's going on. You know, even the beginning of the year, you saw gold was more volatile than Bitcoin was. So, we're in this weird regime right now where the volatility in crypto is pretty muted. Price action has been fairly weak, and that is resulting in this price bear market. But previous bear markets, it wasn't just price. Previous bear markets, it was fundamentals that actually looked really terrible. So, you know, projects were collapsing, things on chain were just they were pancaking with respect to the TVL or the activity. There were narratives that just turned out to be totally wrong and false. So, things like, 'Oh, you know, everyone's going to be in the metaverse. People are going to use crypto games.' That was the animating narrative behind the 2021 2022 cycle. Turned out to be completely wrong. And so, anything that went up on that basis had to come back down. Whereas, if you think about this cycle, you know, what brought us to where we are today, what are the stories that really animated the cycle? It was the idea that TradFi is coming in, the space is institutionalizing, Bitcoin is not going to go away, it's going to be embraced by more and more institutions as well as potentially even governments are going to start embracing Bitcoin. There's going to be positive regulation in the space. And you know, DeFi and stablecoins and all this stuff is going to continue to grow. Well, here we are. Hyperliquid has become absolutely enormous. You can see DeFi is blowing through previous records with respect to the amount of trading activity and open interest. It's making front page news almost every single week. You see the same thing happening with respect to stablecoin supply hitting all-time highs. You see regulation continue to advance. You see governments continuing to buy Bitcoin. Like all this stuff is happening. The thing that's missing is that retail is not engaged. And so, you know, to me, from just having seen crypto for a long swath of time, I'm just like, look, retail comes and goes. There is a natural pendulum swing, it's kind of sine wave over time, of retail engagement with crypto. I find it very difficult to believe that retail is just permanently gone and is never going to come back. Crypto is naturally reflexive. It's the most reflexive asset class I've ever seen. So, that means that when retail comes back, retail wants to come back even more, and even more and more people want to come because they can see that price action starting to move. But right now, I mean, look, we're about to have a blockbuster IPO in China. We've got massive volatility, you know, what was it? There was IBM that was just down like 25% yesterday.

Oh, certainly, certainly. So, you're seeing stocks acting like meme coins. The amount of volatility you're seeing in the public stock market is mirroring what used to happen in crypto. Eventually the volatility in the stock market will come down. And think when that happens, that is probably when you will see the setup for retail to potentially re-engage with crypto and for some of that price action to eventually catch up with what we're seeing on fundamentals. So, that's why I'm in a deeper sense not that worried.

I mean, look, historically why was it that retail investors were so captivated by crypto? The answer is in part because, okay, crypto's a new technology and it's going to be used by people and blah blah blah, but there's a lot of new technologies. There's a lot of things that are potentially going to get used by people. A big part of the reason why crypto was so captivating was because it was the most volatile asset class. I mean, just look at the historical Bitcoin price. Like, that tells you everything you need to know. This is a crazy asset class. It's supposed to be wilder and more exciting than anything else you can put your money into. That is not true right now. Crypto has lower volatility than memory stocks. And memory stocks have the virtue of going up in their volatility, whereas crypto slowly goes down. That's not fun. That's not an interesting thing to trade. It's not an interesting thing to own. So, I think once you get out of this regime where traditional assets and stocks are more compelling, more exciting, and have more potential upside than crypto, obviously, who in their right mind is going to say, 'You know what? This memory stock stuff, this seems boring. This doesn't seem like the flavor of the day anymore. I'm going to move on and go back to trading Bitcoin.' Nobody's going to say that. Nobody in their right mind is going to say that. Now, maybe if they're making a long-term investment strategy, okay, they want to have some ownership of Bitcoin in their portfolio. Yeah, fine, but that's not the kind of explosive activity that leads to crypto being exciting, fast-moving, and as a result being the thing that people think is going to drive outsized returns in their portfolio in the short term.

So I think you have to decompose TVL. TVL is an aggregate metric we came up with a long time ago. And I think if you're looking at just this aggregate metric and saying, 'Okay, well, this number hasn't crested over the 2021 high.' Obviously last year we had quite a bit more TVL but asset prices drew down, which means that TVL also draws down because it's measured in, you know, ETH prices and Bitcoin prices are very impactful on what the headline TVL metric is going to be. I think the thing to focus on more is what constitutes that TVL, right? What is the underlying breakdown of what's the TVL and why is it there? In 2021, a large part of the reason why the TVL was there was because of these kind of yield farm type really crazy short-term projects that people were putting money into to go take the token rewards and sell them. And those kinds of farms were very compelling in 2021 because the Fed funds rate was 25 basis points. It was basically there was no yield anywhere in the world. And so anything, no matter how speculative, that could potentially offer you yield was compelling to put your money into. That's why we saw so much TVL in 2021 was not because, okay, we had all these great products in DeFi that people really wanted to use. It was just because the idea of yield farming in order to generate some yield in a world that was starved for yield was obviously going to attract a lot of capital. Okay, so after 2021, 2022, FTX collapse, everything re-normalizes, interest rates get jacked up to 5%, right? In that world, it's very hard to clear a 5% hurdle rate, especially when crypto prices are plummeting, right? So over 2021, 2022, crypto prices came way, way down. And that meant that all of these freebies that people were giving out in these yield farms that didn't have any fundamental activity behind them, these all dried up and basically went to zero. So now you're in a world where you have to really compete to find attractive sources of yield that are actually sustainably going to be above the federal funds rate. Right now you're making 5% or, you know, just under 5% basically doing nothing, taking zero risk. So if you're taking zero risk getting paid, you know, 4 to 5%, why would you take significant risk in crypto to get even more yield? So I think what you see on chain is that the yield is increasingly not what is driving all of this TVL. Obviously there's still yield, there's still a lot of yield, but the source of those yields are becoming more various. So one of the things of course is staking. Staking yield is kind of the quote-unquote risk-free rate in crypto. It's not really risk-free, but we kind of talk about it because it's the lowest risk, generally speaking, way to get yield on chain. And we consider this in a separate category from TVL. You know, staked assets don't count as TVL. I think in retrospect this might not be actually the right way to do the accounting because a lot of that capital moved away from the farms into staked assets and they're still generating yield but the fundamental activity is yield generation, right, that's what they actually care about. But then you look at your point, you know, the RWAs, the vaults, for example, they count as TVL but something that's an RWA may not necessarily count as TVL because it's not in a protocol. It's just, you know, it's being held as an asset that's tokenized on chain. So all these different measures I think result in different ways of decomposing what's actually happening on the blockchain.

And then of course you've got things like capital efficiency. When DeFi becomes more capital efficient, meaning that, you know, for example take Uniswap V2, Uniswap V3, or a V2 in particular, Uniswap V2 was very, very capital inefficient, required a lot of money in order to be able to create the liquidity in the AMM for you to be able to trade. But in Uniswap V3, Uniswap V4, actually it's much more capital efficient. You need much less capital to get the same amount of trades. Now you move from that to Hyperliquid, and in Hyperliquid you need even less capital to be able to trade because all you need is the tight band in the order book, very low latency, which means market makers don't need to have nearly as much inventory to market make on something like Hyperliquid. And then you go a step further to something like Variational, which is RFQ based. And if it's RFQ based, then you need even less collateral. You don't need, you know, 15 different market makers all competing to try to be able to fill the same quote at the top of the order book. You only need, you know, a few dealers quoting things just in time with the collateral sitting directly there on chain in some native asset as opposed to, you know, in the asset of choice that's being traded. And so all of this points toward DeFi is actually serving more volume, it's actually making more fees. You know, at the end of the day what we care about in DeFi is the economic value, the economic activity. Looking at TVL as the measure of economic activity is actually the wrong metric if capital is becoming more efficient. Because then it means that, oh, we don't need to lock up the capital. Locking up the capital was actually a downside. It was not an upside of the previous model of DeFi. So that's why I think it makes sense in the long run to stop thinking about DeFi in terms of TVL when the composition of DeFi changes.

In CeFi, the biggest product in all of CeFi is perps. It's where the most money gets made. It's where the most volume gets traded. It's where the most price discovery happens. Happens mostly in perps, not in spot. Perps is very capital efficient. Perps also make a lot of money. All the big exchanges that do perps, most of their profit comes from perps trading. So, if that's true, we should be compelled by the fact that now DeFi has moved increasingly towards perps away from spot. Spot is not the money maker. Perps is the money maker. Same thing in DeFi as in CeFi, right? And we see that. Hyperliquid, you know, Lyra, Variational, they're all making tons of money. Whereas, you know, before Uniswap and the previous generation of on-chain trading didn't make that much money. This is a good thing. This shows that DeFi is getting better, not worse. But if you look in TVL terms, you'll say, 'Oh, well, Hyperliquid only has a billion in TVL or a billion five or whatever it is.' And yet, you know, you look at Uniswap and Uniswap had tens of billions of TVL. Why this is terrible. DeFi is going backwards. It's the opposite. But if you decompose the metrics, you'll be able to see that. But if you look in the aggregate metric of just TVL, it looks like DeFi is losing. I think the opposite's true.