Trader legend Willy Woo: A 80% Bitcoin drawdown again is possible

I think we're we're due for it with the market pretty soon, just looking at the structure of the liquidity right now. So, yeah, I could see an 80% draw down again.

You know, if you look at each cycle and you break it down, each cycle has been different. It's been different dynamics, different investors, different instruments. It just so it turns out that the longer-term investors have a lot of say in the long-term price structure and how the cycle develops.

Willie Woo is a leading crypto analyst, famous for his pioneering work on Bitcoin on-chain metrics, market analysis, and price predictions on social media. He's got over a million followers closely tracking his valuable insights.

I'm not a believer that M2 expansion, global liquidity, is going to predict the price of Bitcoin. Bitcoin, out of all the macro assets, is the most sensitive to liquidity. In fact, it moves before M2 moves. But once the liquidity starts dropping away, the clock has started on the cycle top. We often get misled by like, say, commentators saying, "Look at the inflows are incredibly high. That's so bullish." And actually, the converse is true.

Hey guys, welcome back to Less Noise, More Signal. Today, I'm very honored to have Willie Woo with us. It's a guy that probably doesn't need that much of an introduction, but maybe we'll do it anyways because maybe there is one or two people that don't know who Willie is, but I'm very honored, feel very honored to have you here with us, Willie, today. Thanks for coming on.

Thanks, Pascal. Good to see you again. I think last time was Ria, just last month, right? And there. Yes, it was good to see you.

Um, yeah. Uh, intros. All right. So I'm, um, you know, I'm an engineer by trade, actually. Um, so I had a technology career, and that's how I found Bitcoin in 2013. Um, by 2016, it became my day job as I delved into the data behind the markets and some of the early work with on-chain analysis. Today, I run, um, you know, a number of hedge funds, Crest, and I have a partnership with Swiss Block and Glass Node, uh, to, um, basically put out an intelligence data on on the markets. And so that's me in a nutshell.

Yes, that's great. Yeah, we just interviewed uh Yan Alimmon a couple of days ago uh and and put it up online, and people were quite uh impressed, and I think it was well received. Everything that he was showing us, uh the things that Swiss block has developed over, yeah, like 10 years, as you said, that's so it's quite impressive. Uh, I think we will get into some of the topics uh, um, that we discussed with him as well with you now. I think one thing that maybe I want to start with is, and and you mentioned Ria, and that was quite impressive because you were up on a panel, and some people asked you, or, or like the moderator asked you, what are you looking forward the most in the next few months? And you mentioned the bare market, you know, and that kicked off quite a fuss, and everyone was, or everybody was sort of laughing, but I think you were quite serious. So maybe if, if you could quickly summarize why are you looking forward to the bare market, then then also assuming that there will be a bare market, or are we quite close? I, I assume otherwise you wouldn't have dropped that line, so to say.

Yeah. Yeah. First off, bare markets are for me a time where I can kind of recharge a bit because it gets a little bit frenetic during the bull markets, and it's also the time where products can be built, and I have a few on the go currently. So, it makes life a lot easier if you're building stuff. But certainly, I do expect to be a markets don't go up forever. We're a late phase into this current bull market. I know people are thinking, you know, what do you call it, a super cycle or whatnot? England's basically going up, um, forever, Laura. Uh, but it's, it's, um, I, I think we're, we're due for it pretty soon. Just looking at, um, the the structure of the liquidity right now. So, um, it could be even developed, be developing, um, right now over the last month. Um, so it, it's a tricky also to know when the top is because tops are unstable, but we do get a rough idea when the danger zone in is in, is is coming, and has been building up for a number of months now.

And what is your impression? Because I think a lot of people would agree that stuff can't just go up in a straight line, and they never do, you know, and even though maybe in the long term it goes up, as as Sailor once wants Laura to believe. But I feel like what is your impression there, or your belief, you know, is it going to be like this typical bare market that we will see where we get an 80% correction with Bitcoin, or is it going to be like a different beast, just because of the institutions that have come in, or, uh, yeah, like what is your obviously it's also beholden to the the market structure in general, like if we get like a huge business downturn and a recession, then I guess Bitcoin would be, uh, disproportionately affected. But if we don't get this, uh, and it's just going to be a normal slowdown and downturn, then maybe Bitcoin can can hold up comparatively well, or how do you assess what's going to happen in the future?

I mean, the four-year cycle is kind of a cliché within our industry because it has been for four-year cycle since the beginning. And, you know, if you look at each cycle and you break it down, each cycle has been different. It's been different dynamics, different investors, different instruments, and the structure of the cycle has changed a lot. Yet we're still being on these four-year cycles. One of the things with Bitcoin is that we do had this four-year hen, right? And that is up to now being quite reliable. It's, you know, a supply shock, which is an impulse. Now, when you have the new supply rate coming down, you get this sort of impulse, and the whole system has to rebalance. Presently, that force is waning, getting smaller, because the inflation rate of Bitcoin now is half of that of gold. I think it's like 0.8% or 0.6% per year. So, as, as we go into future hardenings, that's that's going to dwindle. Um, what some people might not, um, realize is that, um, we have another cycle called the liquidity cycle, which is, you know, it's just the resonance that central banks print their money at. Um, there's times where money is plentiful when they drop interest rates, and other times where they tie some knot. And historically, that's been gone for years, and I think it's the super position of both of these waves that have created our four-year cycles. Now, there's this other cycle called a business downturn cycle, and that tends to be every 10 years, but it's not that like you won't set a clock to it. Let's say the last proper one we had was the world financial crisis in 2008. Um, you could say COVID was one, um, but that was very, very, you know, a flash in a pan, very, very quick, and, um, you know, central banks pinched their way out of that very quickly. Um, and so, uh, I think the the economic shape of the economy is getting through downtown. Um, if that is confirmed, then I think even though, um, the the weakness in our industry, let's say the infrastructure, the types of investments that are being made, anything like what we saw in the last beer market, you know, with the likes of Luna blowing up, testing the weaknesses in in the entire ecosystem, Genesis trading blowing up, Alameda, FTX, there's just this gray scam. The whole thing sort of had a sort of a domino effect of all the weakness points being tested. And I think the cycle, you know, we have Bitcoin treasury companies, they might be a little bit frothy. And now we have digital assets treasury companies, even frothier. You know, the, you might feel this weakness, but I would say next to say the last cycle, it's stronger. And maybe some people think the drawdowns will be less, but I think when you think about it in terms of, uh, where the world economy sits, Um, I think we'll get this four-year cycle again. I think the drawdowns will be, um, this time pulled down by the world macro markets. Um, and the coin being quite sensitive to liquidity is has got a lot more to pull down than typical market. So, yeah, I could see an 80% draw down again. Um, no one really knows, but, um, it's like, yeah, it's, it's not out of the question. In fact, I think it's probable.

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Yeah. Interesting. I mean, one thing that I'm hearing when I listen to you is really like when we think in these different cycles, you know, you said like there's a liquidity cycle in and of itself. There's like the Bitcoin halving cycle, you know, there's the business, uh, cycle as such, you know, and one thing that comes to mind is really like Bitcoin has never really undergone or went through a a business cycle downturn, I would say, you know, and I think that's why it probably makes sense for me as well to stay open to the possibility that even though there might be the liquidity cycle, they might try to extend this, you know, through various means that I've discussed with other people on this podcast, and maybe, uh, also the Bitcoin halving cycle might not be that relevant there anymore. But if it coincides, the positive things with this rather business downturn, if we were to get one, then yeah, I think it's just uncharted territory because Bitcoin has never undergone something like this. Is that something that you're having in the back of your mind as well?

Yeah. See, we're not not in our 16-year history since, um, the genesis block was put down. It was put down, um, at the at the last business cycle downturn in that financial crisis. Um, so we've never tested this before, and that's the interesting part. Um, and, you know, a lot of people are quoting, um, M2 money expansion with global liquidity is going to be coming, the rate cuts are coming. That's almost guaranteed now. So we're thinking more liquidity coming in. I think the game is quite complex now because it's in this cycle that Bitcoin is reliably above $1 trillion, presently close to $2.5 trillion. So this is now a global macro asset, the newest one we've seen in 150 years. And so it is traded by global macro participants, macro huge funds, and so forth. And it's not really, look, I'm not a believer that you sort of can just run everything off M2. But what we do find is M2 is not, I, I'm not a believer that M2 expansion, global liquidity, is going to predict price of Bitcoin last 10 weeks ahead, you know, um, because the work that Swiss block have been doing, my partner was looking into the data of it, is that Bitcoin, out of all the micro assets, is the most sensitive to liquidity. In fact, it moves before M2 moves. And whatever reason, maybe it's traded by global macro firms that had a very predictive read on where the the state of economy is going. Maybe by using Bitcoin is as that, um, as that trading vehicle, um, it's high liquidity and high volatility, you get a lot of bang for that instrument. I don't know, but that's what the data is showing is that it's most sensitive, and it's the canary in the coal miner's liquidity.

Yeah, that's that's true. I mean, that's a a great observation. You know, M2, this is something that a lot of people in X are pointing to right now again, you know, because we're seeing sort of this divergence, you know, M2 going ever higher. Then you mentioned, you know, the interest rate cuts that will be coming our way, where some people argue this is liquidity enhancing. And then they're all like, "Okay, just don't worry. You know, Bitcoin is going to play catchup." And maybe it will, as it always has. I, I think what you're what you're saying is that there is no direct, uh, correlation or even like causation, and and maybe it's just this self-fulfilling prophecy that in hindsight, it's always easy to point to some sort of overlap there, but it doesn't mean that it has to be like this in the future. I mean, the world always changes, and as said, I mean, it can, it can be different, sort of, as I'm hearing you explain as well, right?

Yeah, I'm saying it is different. If you look at the data, you know, you can overfit it a chart and go, look, they follow each other, and now you can move it backwards or forwards a few weeks, and now it fits even better. But that's what we call in our trade, overfitting. You zoom out across, um, 30, 40 years. Does that still work? Cuz, you know, a localized, a localized touch point on M2 chart on Bitcoin might look wonderful for a while until the correlation breaks.

Yeah. No, that's that's definitely true. I mean, you were, we're speaking of the 2021 bull market and then the the following bear, you know, and there obviously in hindsight again, we can point to these sources of danger, you know, that we had FTX, Luna, all these like really blowing up. Would you say that in in the current market structure, you already hinted at it a little, but are there any similar hot spots or or sources of danger that are of of similar magnitude, you know, uh, which we don't know yet, but maybe some people are pointing to the treasury companies, and some obviously say Michael Sailor with strategy could be the big problem, you know, blowing up and dragging everybody down. To me, this argument doesn't make that much sense. And and also I think that's something you said as well, and others, this market is is more sustainable in the sense that it is like spot driven nowadays again, a lot more because of the ETFs and the treasury companies vis-a-vis like the 2021 bull market and then blow-off top that we had. But, yeah, do you see any similar danger zones, so to say, or or sources of danger, you know, we could point to as of now?

In the treasury companies, we do need to see what will they be liquidated. Something like MicroStrategy, which has been using now 8 to 12 year up debt. Meaning, if your price is dropping into a point where you'd normally be liquidated, well, you've got 8 to 12 years for the price to recover to a point before you have to, um, you know, sell your Bitcoin to pay the debt holders their their capital back. That's very safe. You know, we're looking 10 to 12 years out of Bitcoin. Will it climb above the current price? So, I, I think MicroStrategy is very robust around that. And the latest way they're doing it is with preferred stock, where there's not even a debt instrument on it. And so, um, I think that's okay. There's been a lot of copycats that are trying different structures of Meta Planet. And I think Metapanic could be liquidated if they time the market wrong and end up with a big bag of debt and can't sell through it to pay it off if the market turns, you know, and some of the treasury companies are using four-year debt and so forth. So, um, we need to really see, you know, it's very individual. And that's a Bitcoin treasury companies, and there's a whole host of, um, you know, Ethereum, BNB, um, a whole bunch of digital assets that are now starting to roll out. And we know those assets, um, pull back, um, often above 98%, 95% in a bare market. So, um, will they be liquidated? If the question is if they will be liquidated, that'll really hit the markets, and those coins that are locked up will then be dumped onto the market and cause some some calamity to the holders of the direct token asset. Um, it's different if you, if you're holding the shares, the securities, you're going to be exposed to MNAV compression. And so you say MetaPlanet was trading at 8x MNAV, well, way back from those earlier days, but at 8x, you could expect that to compress to 1x at the bottom of the beer market. So that's, let alone the underlying value of its treasury of Bitcoin pulling back, right? So if you're riding though that stock, you can expect that to come down quite a lot in a in a proper bare market, though. But yeah, that that's it's just that is the, I see that as the the weakness, the cycle one is the shares, but that that's kind of like a, a MNAV buffer. It doesn't mean coins will be liquidated. If the coins get liquidated, they get dumped back onto the market. I mean, that's quite different from last cycle where we had an $8 billion fraud, and, you know, people going to jail, and masses of coins being dumped back into the market as the these things went. But there was the actual infrastructure was broken. It was illegal. There was a whole lot of problems, and the whole thing unwound one after the other, cascading.

Yes, I see. I, I also heard you say on treasury companies that some of them might be interesting shorting opportunities in an actual bare market, you know, that, uh, just because the way they're they're structured. But then my question would also be, how do you think about the industry as a whole and and its future? You know, the the industry of treasury or Bitcoin treasury companies, is there a future for them, and that you can see that they can function and work in a future world, or what is your general assessment when it comes to these companies?

If the Bitcoin treasury companies work as intended, and that you're tapping global bond markets to feed capital into Bitcoin, then that's a benefit. If that is actually being done, I'm sure some of this is coming in. And the question is, how much of it? How much of it is from holders selling their Bitcoins to buy this more, uh, volatile asset for a bigger gain in the bull market? If it's the same capital recirculating, that's not beneficial, um, because ultimately we want, um, two things for, uh, Bitcoin to be impactful in this world. One is that it remains decentralized. So it is a sovereign asset, and it's a proper decentralized money, not under state control. It's a separation of money and state. And on that theme, um, the, the, um, you've got the centralization of supply of these treasury companies that can be nationalized, and that's a vulnerability. But also Bitcoin needs to be big enough, right? What's the point of having a, let's be extreme, a a $1 million asset as a global money? You know, you can't even buy a house in in most places in the West with the entire market cap of this asset, right, if it's $1 million. So, you need to scale this up, right? And typically, $20 trillion is where a real money starts to come in. And and I think above $20 trillion, you you start to really impact the world with this this asset. And so that needs to happen. Um, and treasury companies, spot ETFs, these are all instruments where the large capital pools are comfortable with. So they do open that door. So it's a, it's a trade-off. You know, we're trading off decentralization. We're centralizing the supply. It's vulnerable to nationalization attack, but also we're, um, allowing the inflows to get a lot bigger.

Yeah, it makes makes a lot of sense. I mean, it's probably the inevitable way or, or like to just say inevitability to get there, you know, to have these treasury companies like, uh, take part in this as well, just because it started with the private individuals, and it's now like, yeah, moving over to these institutions, and then maybe at some point even the governments, you know, that there will be like another cycle, maybe in the next cycle where governments will will go all in. But, I mean, I, I had this very interesting article that I just recently read, you know, and it was speaking of a, it's like the gold rush area for Bitcoin, you know, because Bitcoin is still in this monetization phase. Everyone tries to get as much Bitcoin as possible. And with these treasury companies, as Michael Sailor showed, you, you have maybe the first phase is you issue as much stock as possible, you dilute your shareholders. This works in a hype cycle to get Bitcoin onto your balance sheet. Once you have it, you maybe you do debt issuance. You give out preferred shares, and you only hit the ATM to sort of pay not back the principal, but so obviously the interest on these, uh, products that you that you issue. And maybe in the third phase, then, and we're not yet there, it's really that some of these companies who have strengthened their balance sheet with Bitcoin might become productive and use Bitcoin productively. And, and my question would be, do you see such a future where maybe also Bitcoin treasury companies, they almost turn into the new type of banks of the future, and maybe turn to people like you and and the fund that you have, hedge funds, to productively earn a yield on Bitcoin, you know, and, and so, uh, do you see that's that's a possibility, and that they will be like the demand side for for products like like you have, or and for other hedge funds, you know, who do a great job in in maybe providing yield on top of Bitcoin?

Yeah, I mean, it's certainly there's a lot of value to having a big bag of Bitcoin, right? Um, and there's, there's two paths with that. Do you want yield on Bitcoin where you use it as collateral so that you can do some amount of yield generation? Typically, that might mean trading around markets using it as collateral. Um, and the other way of using your Bitcoin, so that is a, I got some Bitcoin, I want more Bitcoin by climbing up the risk curve, is you're trading now, and you're giving your Bitcoin onto people to trade it, and it's sitting on potentially not robust exchanges. So you do, you're taking extra risk. The other way of using Bitcoin again as collateral is to front it and borrow against it. So, um, these are for the investors that, uh, want to, um, you know, follow the pattern of the wealthy, which is never sell asset and use your asset as collateral, so you can borrow see it to live your life, which is the basing towards zero. And so those are the two uses. I think that it's, it's already started that there's a infrastructure and an industry developing using Bitcoin as collateral. And we've seen Fant Fitzgerald reserve $2 billion of liquidity US dollars to lend to Bitcoiners. Freddy Mac, Fanny Mae, who dictate a lot of the U lending market in the US, are now accepting Bitcoin as a balance sheet item for a borrower when assessing risk. And so these steps are starting to happen, and the trade fire world is now starting to recognize that this is an asset, and it is, it serves a very good purpose as collateral. So, um, yeah, I could totally see a lot of use for this. You know, I don't know the complexities of what a public company may and may not be able to do with Wall Street, but I can see there's there's great value in it. I also see there's great risk for Bitcoin as an asset because if you think about Bitcoin getting larger and larger and larger, who is the competitor? And that is the central banks that print fear. And so it does mean there is a power shift, and during a power shift, we've seen all sorts of things happen, and nationalization of an asset such as gold in the 20th century, and converting that into fiat by closing the redeemability of paper notes for gold has happened before. And so, um, I think it's a very real risk down on the track. It might not be this rosy future where we have a great treasury company. It's a Bitcoin treasury company, and it can do all of this great stuff with the asset. We need to think about where does that put the state, and what are their options, and what are the risks around that.

Yeah, it's definitely the adversarial thinking that that Bitcoiners, uh, still have and and and never want to lose. But do you see any difference there to to the gold nationalization? You know, because Bitcoin in the end, it is software. You, even though it might be held centrally and in a centralized way, it's still, you cannot really mess with the protocol itself, you know. People could try to maybe even, um, you know, vouch for for a hard fork if that were really a problem at some point, if if people were like, if Bitcoin was held with all these treasury companies and and they would try to manipulate its supply or something like this, or, or do you say, okay, no, it's just going to end up the same like gold, you know, it doesn't have any difference in that sense, you know, and that's why it's a real risk that this could end up being a losing trade as well in that sense.

Bitcoin's got one thing, a number of things going for it. But what I'll focus on on this discussion here is that Bitcoin can and travel across the world at the speed of light, right? So, it is, it is a good medium of exchange. It's just other than the price volatility, and gold wasn't because it's very hard to ship a gold bar across across the world to settle trade. And so we needed a a paper layer too called notes that are redeemable for gold. And that means that the supply gets centralized. Let's call it Fort Knox, and it's the one entity and nation states saying whether or not that gets redeemed. All right? So that became a very fragile structure. If you look at 6,000 years of gold and silver as money, medium of exchange, and the store of value, just holding it, the value of holding it were united until the world got complex with the industrial revolution, and we needed to separate the medium of exchange because shipping gold, lumps of gold, does not work. But Bitcoin, you can have this with the medium of exchange, and once you get that, the whole thing becomes robust. It's very hard to tear the medium of exchange out from the unified money in there, whereas gold was not capable of doing that. So that's the path we want to get to, and we want to get to that that end goal without having big pockets of the supply under a digital Fort Knox and controlled, because once it goes there, it's going to be very hard for us to reverse that. Sure, you can say we can hard fork this. I'm sure you can do that as a development project, but what does that mean for the entire world that is using the current Bitcoin and the regulations around it? The real world that we live in that are governed with governments and armed military and prisons to go to, and, um, you know, edicts from countries. It's, it's a, the practicality of just hard forking is it's no longer a cipherpunk, um, situation where it's at the early stage. It's now at a very developed stage and a mature stage. So then if this future happens to where it gets nationalized, then you've recreated the gold standard. It's called the Bitcoin standard. It was it didn't really take off. You might convert, you might back the US dollar by Bitcoin. Maybe you do that, and then you you close the redeemability, or you back to fiat again. So, you know, now it's going to be harder for the next time, um, we try this experiment.

Yeah. No, that's that's definitely great. And a sense of rationality that you're that you're spreading here because like to me, this is also something I'm struggling with, you know, because I figured Bitcoin would be this very unique thing, you know, that will never be manipulated in that sense, but, uh, yeah, you're right, we're in the real world, and in that sense, it might not be stripped away completely from politics. And, and that's also where I started to grow somewhat appreciative of of what people are doing in the US, you know, all these like political endeavors to maybe also try to steer the political system into the right direction, you know, even though I, I would prefer if we wouldn't have to go down this route, you know, because it would be more cipherpunk reality, but it's just, uh, as you said, it's, it's a reality of life that politics is is still a thing, and even Bitcoin doesn't really obsolete it in that sense, or at least that's that's my feelings.

Yeah, definitely something for people to appreciate. I, I maybe want to come back though to, you know, the more, uh, liquidity driven dynamics and and and capital flows. And I know I, I had some questions prepared that I sent up front, and I know that a lot of this is probably proprietary IP that you won't be able to share, but I can't help picking your brain on this and try to see what this episode allows, you know, because I'm hearing these terms all over again, you know, liquidity flows, capital flows, volatility structure. And maybe if you could define each of these terms for us, what are we looking at if we talk about liquidity or liquidity flows, and and what goes into this? That would be interesting to hear your perspective for sure.

Yeah. So, there's many definitions of liquidity. Um, there's a classical sense for a trader, which is effectively the depth of the order book. You know, if I sell $100 of this asset, how far is the price going to slip? Um, the slippage. What if I sell $10 billion dollars of it? How far will the price move? That's liquidity is depth through the order book. Um, and that's that's quite a term. It's related to when we talk about liquidity flows. Generally, I would just picture capital as a liquid. And where does it flow between buckets? Is it flowing from the gold bucket to the real estate bucket to the Bitcoin bucket, from the Bitcoin bucket to Ethereum bucket to, you know, Solana bucket to the mid-caps, the low-caps. And so here we're looking at capital and where is it moving to? We can even talk about global liquidity, which is fiat money printed by the the central banks. And as that money is is printed into existence, it becomes a pretty bad asset. So it flows, and it flows, this capital flows into these, you know, wealth preserving buckets like real estate, um, Bitcoin, gold, so forth. And so that's the premise of when you talk, we talk about liquidity flows, that's what we're, we're, um, we're really like looking for. Um, and in markets, it's somewhat highly obscure or opaque because all you see is a price ticker, particularly, you know, historically, the rich don't tell everyone this is my wealth and where this is where I'm putting it, and we don't report it everywhere. That would be one way to figure it out. Another way to figure it out is the price is going up here, and the price is going down here. I think someone's moving some money around between these buckets. And so now it's like, how do you measure the flows of liquidity? There's, you know, we need to look at techniques of how we do that. And this is now another term we have. Another term called capital flows. Actually, it is liquidity flows. But because Bitcoin has a blockchain, we can make a pretty good estimation of when coins move from one wallet to the other. And we can estimate this amount of money moves between wallets. When we make the assumption, it's going from one investor to the other, or more likely, one investor to an exchange. Spay start happening, and it goes back to an investor, a long-term investor. So when we're looking at capital flows in the Bitcoin network, we're actually looking on-chain to see where the the capital is moving. Is it moving into say, an ETF instrument? Is it going to, which is an investor? You know, is it moving from an old investor to new investor? Can look at the price at which they bought it at, and what the current price is, and from the calculation of, um, the new flow that came into Bitcoin because the new investor brought in new capital, and we know what the price is. So, um, I, I turn this capital flow, um, because we're actually measuring the capital coming in. Um, but that's not actually, um, a full picture, right? Because you, you know, um, this is only capturing the movement of coins between a wallet. It could be an an investor that just has their wallet on Coinbase, and they just bought some coins, but it's, it doesn't do anything on the wallets. That estimate's missing. And so ultimately, you get down to the pricing structure. That buying of coins and that selling of coins, and how that came about has an impact on the price chart. And so ultimately, it comes down to a blend of many techniques, one of which is on-chain to get a very dialed-in liquidity flow, you could say, of one cohort called a long-term investor. That long-term investor holds a self-sovereign wallet, or is using an instrument called a spot ETF or a treasury company, and you can see that that impacting, and we can measure it, and I call it capital flows. And then you can overlay what are these guys that are doing with wallets that are on Coinbase, or what are hedge fund managers doing, what are traders doing? These are all impacting the liquidity, and that you can only pick through, um, the pricing structure. And ultimately comes down to understanding the the volatility structure of price and overlaying these two dynamics that we have, particularly in our industry. They have blockchain and gold. So you basically down to just the pricing structure, but we do have both.

Yes, I was just going to ask this, you know, because it feels like this is where it's distinctively different to traditional assets, you know, because in traditional assets, you, you don't have a blockchain, you know, and then you're maybe left to to exchanges and, as you said, the volatility structure, the pricing data, which maybe is also sometimes probably hidden away in some dark pools that we don't even know of. I guess this is probably some of that is the case in in crypto nowadays as well. You would argue that because of the on-chain, the blockchain we have, there is another element that maybe lends some more transparency to to what is going on here, and, and, as a, as a sophisticated trader with with a lot of experience, you can make maybe take advantage of this and make use of this on-chain structure, at least because there is some more transparency available.

Right. Exactly. Exactly. So, um, it's actually quite a high-resolution picture of one cohort of, um, the market, which are the longer-term investors. And it just so it turns out that the longer-term investors have a lot of say in the long-term price structure and how the cycle develops. So it's a very important picture, and it's a high-accuracy picture. And then when you layer multiple blockchains, and you can then start to make an estimate of capital leaving one network and going into the other.

Yes, I see. That makes makes sense. I mean, I do understand now liquidity flows and capital flows from a bird's eye perspective, you know, but maybe in terms of volatility structure, the pricing structure that you mentioned, what is it that you're looking at there? What does it mean, like the volatility structure of an asset? Is it how the price evolves over a time frame, or, or what, what does it mean if I look at the volatility structure of something?

Well, in broad terms, um, how the price bounces around, the patterns in which it bounces around. Um, you can tell a lot of things, right? Um, if we're going sideways, for example, if you're going sideways, um, and with very little volatility, it could mean, um, many things. It could mean, you know, an investor's come in and said, "Look, that's a good price. I'm buying, and I'm going to buy a big chunk. Maybe I'll buy a billion dollars or many billions of dollars." Was actually when I put my order in. And whenever the price wants to drop down, it doesn't it doesn't drop down because he's filling his order, right? And so you'll see that, for example, the bottom of a of a cycle is often met with, um, like, um, a very reduced amount of volatility because actually investors are coming down and they're bidding, and they're buying, and they're filling their bags. Um, and volatility is coming down. Near the top, liquidity drops away. The price is running up on sheer momentum and frenzy, but actually the liquidity, the flows aren't keeping up with the price. So you get this divergence between how the asset is priced and what the investors are really doing. And so what you get is an increase in volatility, and things are chopping up and down, up and down, because there's no liquidity buffer to bid and fill the bags of the asset because liquidity is dropping away. So you're there in, and is an example of how the price moving around changes, um, you know, the volley structure, how the price moves around is starting to give you an idea of the liquidity in the system. And so that's just in a simple term.

Yeah. Okay. I see. And that makes a lot of sense to me as well. But I mean, if if I wanted to maybe track stuff like this myself, you know, and obviously this is probably too much that I asked for here, but is there a way that you can sort of try to assess the liquidity and volatility structure yourself? I mean, when it comes to the capital flows, again, I feel like, okay, nowadays I do have on-chain data that is available, or I can at least get to the data. I know where it's available. Stuff like Glassnode, you mentioned, is providing a lot of this data. But then again, when it comes to like order books and, um, just the pricing structure at exchanges, is this also available in some sense, or is it the case that in, in that sense, we are beholden, like the normal retail traders, to to people like you and others who who do this for a living, you know, and, and really have the access to these type of of of?

I mean, like everything, the more components are there. You know, Glassnode, you think about Swiss Block, they were trading with this type of data since 2015. By 2019, the decision was made that this is great. This is low-hanging fruit. Now, you know, four to five years on, there's much more sophisticated models and know-how. So the low-hanging fruit was spun out for the world to use with Glassnode, and that's that's inspired a generation of analysts to use this data to build new models. And some of these models are useful, some are wrong, and some are terrible, but some are useful. And it's the same thing, right? The pricing data is there to understand it and work with it. And it's now been 10 years of knowledge between Swiss Block and myself to make sense of it, because there's so many, what we can go down, and it may work for a while, but it's might not be the full picture, and it can be, you're using the wrong type of data, and all that stuff is like an artisan doing their job. You learn the trade. Unless if you're a retail person, um, and if it's something you want to rabbit hole down to and do that, let's say apprenticeship or sort of in the years to get the understanding, then it's available. It's available. The the data is available. People talk about it. I'm on this podcast discussing how we think about it. And so it's going to be a lot quicker now to learn this than, you know, when I got started, when we didn't have anyone providing the on-chain data and giving insights to how it all works. So absolutely, um, it's, it's easier now than say 10 years ago. Uh, but, you know, you, the time needs to be done to understand the liquidity. Um, and I don't expect, um, 99% of the population to go down that path. 99.9%, and that's why, um, we've, you know, like wrapped up a product, you know, and we've created the models, and we've with layering that with our knowledge of interpreting the models, and we've created, you know, the Bitcoin Vector, Bitcoin Vector Light coming out on Substack. And these these reports, um, and actually, we we wanted to do this because we could see, um, the trade fire of this world coming into Bitcoin as it grows to represent the data behind the space. We've been doing this for 10 years, and we thought, let's, let's do this now and provide the insight within our industry with the Bitcoin ethos. So that's that's why we we're doing this, even though Swiss Block has been trading these markets for 10 years successfully, highly with high success. I don't know if Yan spoke about it, but in my opinion, they're one of the top trading firms within the industry. Kind of the secret trading firm no one knew about, because there was no reason to say much as their own capital, and the Swiss by nature and private.

Yeah. Which, uh, resonates with a lot of people as well. I mean, and you're right, you know, the demand is there. That's definitely what I can see as well with my podcast and just like with with people I talk to. But in the end, you're also right that a lot of people might not be willing to put in the necessary time to work through everything, and, and if it's like it has taken you guys more than 10 years to to come up with this, then it's probably better for for most of the people to stick to to something like, uh, the Bitcoin Vector Light or stuff like this that you mentioned, so they can sort of get a glimpse of of what this is all about. But I know that you yourself are also tracking this data, uh, I think with your own metrics that you have, and I remember you sharing regularly sharing like these three charts, you know, the liquidity index, the macrocycle risk model, maybe the Bitcoin network flows, if I recall it right. But if you could share some of this right now, and, and, and just explain where are we at right now, you know, when we look at, uh, your models, what is it telling us, um, you know, in terms of like, as you said, we're late stage cycle, that's maybe something we can read from the chart. But then also like right now, Bitcoin is hovering around 112K, I guess, and people are wondering, is this now the bottom? Are things stabilizing? Yeah. Can you, can you talk to this as well?

Yeah. Oh, maybe I'll share a screen. Okay. So this is a macro cycle risk model. Ultimately, this signal is picking up on liquidity. Underlying it is the the core liquidity model I use. And so when it sets up high, that's an error higher risk, which means that the the price is running away without the underlying liquidity support. And you can see as we approach a near the tops of the market, we get into a high risk zone. And we really there are dips, um, which are environments where, you know, we can get recoveries, um, and then once we're at a bottom, the liquidity comes in, and the risk drops. And you see this back in 20, um, 2017, and you'll see that even as you, the risk rises, liquidity is dropping away, that the market gets quite flimsy. And so we started the rise, say, in 2017, when the price was only $25,000, um, and it ran to $20,000. So, but once the liquidity starts dropping away, the the clock

has started on um on the cycle top and so you know that's there's a a a more zoomed in picture. Yeah. You can see as as liquidity comes back in, the risk drops, we're structurally good with investors coming in. And so we're actually right now in a little zone where the price has pulled back so much that the liquidity underlying it is starting to look okay. And so it's sort of dropped a bit and it's going a little bit flat right now. Um, which is quite unusual to see.

You'll see again when we broke alltime highs, the liquidity started coming back in and it was a healthy structure. And then in actual fact a lot of speculators jumped on and liquidity started falling away and that that created a locally bearish area. So it is quite sensitive this one.

If you zoom out on this one and we just look at the current cycle assuming it started in maybe in late 2022 obviously I think yeah we we hit yeah right there. Yeah, exactly. January 23. But yeah, in late 2022, liquidity was starting to come in right out of at that 16,000 bottom. As that started to to start to really zero in, we we had the liquidity come back in and that picked the top the bottom in 2024. We had this first peak there, which wasn't at the exact upper bound right around there. It was March a little. Yeah, like maybe it was in in June eh I guess where the risks were the highest. But now in in in early 2025 we had it hit the upper bound. Would that be in your mind now be okay as you said the clock is running now. you know, we know, okay, we are in the late stages because we hit the upper bound for the first time in this cycle, so to say. And now, as you showed in 2017, it can go on and the price can also run uh for for several months still, but we know at the the time sort of is running out and then we should should be do later cycle, so to say. Is that how you're reading data from?

Yeah, I'm seeing it. I'm seeing as a timing signature to a top. Another view of it might be this one, right? This is closer to the liquidity model that um that powers it. And this is the liquidity index. And generally when we drop below this standard deviation line here, that's pretty close to the top. And our last cycle top was um was when it crossed this line was right at this zone here. Um and the the investor liquidity dropped away. It stabilized here and allowed a recovery but know that this recovery was actually from derivative paper really pumping in and um so a lot of open interests buying that forced the price up before it finally fell away. So I kind of think of this as a dead cat bounce. The investors had left the the paper was pushing it up before it fizzed out. Um and that's the 2017 top um around here. Yeah. Okay. And it was much more of a smoother bear market in terms of liquidity coming and falling away. And where we are now is um we're below the dotted line already. So that's something to be worried about. It's a highly it's a highly dangerous zone.

And um if you were to look at um what we talked about in terms of the capital flows here, we here we go. All right. This is the uh this one's easier, right? You're just estimating onchain the the the capital flows coming in. I'll turn off the leading signal. You will see that higher higher higher price higher flows and now we had a higher price with not the corresponding higher flow. So you know something's wrong here. You know that this is not supported by investors and so this is a very dangerous structure right now. I think to recover we need this to go higher. Exactly. Because I think the way to to read the purple area here as well is also once it is already very high this means the capital inflow the rate of change it's inflowing is quite high. So in order to sustain it we we need high capital inflows you know. So with that, it's probably better if if the purple line is is is is lower because that means the the probability of it going higher might be might be better so to say. Is that a correct interpretation?

That's the way cuz we we often get misled by like say commentators saying look at the inflows are incredibly high. That's so bullish. And actually the converse is true. When the flows are high, it's incredibly dangerous because the um price moves, you can see it on this chart. The price moves with increased the rate of change of flows. If I'm you think of it as like a sky diver practicing in a wind tunnel and um the fan the RPM speed, the the updraft is the flows, right? Well, that skydiver is going to float higher up in the wind tunnel as the flows get increased, right? And that's what the price does. And so as we're we're peeking out at here, $2.8 billion a day coming into the network. If that's not sustained, then it starts to fall away, you know, now it's like 1.5 billion a day still coming in, but it it was 3 billion just the other week. So that creates a bearish environment. So it's kind of um you know, it's kind of converse to what you immediately think. And let me show you the last cycle top. We did the same structure. We went higher and then we had a lower high. This was the paper top. This is the top which was not valid. It was not supported by investors. And so what I'm saying here is we're in a very fragile structure given the liquidity measurement. The clock is ticking and it's well deeply into the the um the the bull market. We're very deep into it and liquidity is falling away. We're in a highish zone. I'm not saying that that's the start of the price running down. I'm saying that the investors are are not here. And you can see in 2020 um tail 2021, we did get a higher high here. But if you were to look at the liquidity model, you know, we already started peaking here and we crossed this line. It was dropping away in the capital flows model. This was the this was the fundamental top for investors and we did get a little bit more flows in but it was this was really pushed up by not investors it was by the paper markets and if you were to you know there's many views of the the the part of the market but here I will show you what was happening with the paper and let's go back to this zone here the investors fell away and you can see paper started coming back up here this is the speculation shut tracking the paper and so that was what was powering it. So right now what's developing in the in the Bitcoin market is a weakness with investors and if we don't get these flows high enough then we're in a divergent state where price is not being supported and that's very late cycle and maybe we pull back. Um, and maybe we run up higher like we did here, but it's not got the legs for a fundamental um, healthy structure and you can bet on the bear market being just around the corner at that phase. And so we've got a few weeks to recover here. If we don't get that, then we're starting to get into a very high risk zone. September, October will be telling.

Yes, for sure. Well, that's that's a great explanation, especially like as I'm hearing you, you know, it's it's not necessarily the total flows which are the most important, but sort of the rate of change of capital, you know, coming into the network. And this is what you want to track like the closest if you are like sort of a tactical investor that's really trying to time the market so to say. And then maybe also hit up these capital flows with the pricing structure again that you mentioned. You know, like that if if we were to get another inflow um swath or wave, then we want to also compare it again to the pricing structure. Is it stabilizing with these inflows? Is it really just jaggy? Which would then again, as you explained, be an implication that maybe some of the market makers have left the market already and that's why it's more volatile. So, I guess that's probably painting a full picture as you said, like putting all these different indicators together and try to find some confluence and and and it's it's never probably just one thing that you can point to and say, "Okay, now we're going higher because of this." So, that's definitely worth understanding.

Well, I I think that that's very interesting. I don't know if you have anything else to add on this.

No, I think that that's that's a good summary is that um it it is really important to see the fuller picture. In this case, we might even say um like where is the capital gone, right? And actually the capital's going into Ethereum and so like if we track these flows here, we're looking at the flows into Ethereum now and you can see that's rising and the Bitcoin flows are dropping. And so this is where some of the work of Swiss block um because they they're doing many many different signals around how does it move around the altcoin ecosystem. The their signals give us a really good view of the entire flows across the um the crypto ecosystem. So but right now a lot of the flows are being diverted into Ethereum is is the reason why this is is not piecing as high right now.

Yes. Yeah. Oh, that's great. We will definitely link back to the episode that we did with Yan where he gave us a deep dive on on how Hawkeye and everything works that they've built. So really, uh, yeah, we've gone almost an hour, I guess.

Yeah, we're coming up on the hour right now. Maybe one last question that I would like to ask you just because of curiosity as well. Um, the work that I do as an investment manager, I also do see like a lot of hedge funds coming into the market. I haven't been in that space for quite some time, so I can't tell the difference to earlier. But it feels like this market is getting crowded as well. Like on the sell side, so many are trying to find liquidity and capital to to move in into their products. You've probably more than anyone seen a lot of competitors and a lot of people in that space. What is your general assessment of all these crypto hedge funds? Are they worth the buck? Um or is it very highly concentrated with a few that you want to dabble in or Yeah. What what's your overall assessment?

Yeah. So to be specific, you know, crest the fund of funds um operation. So we have three three funds and these funds are actually our day job is to assess managers hedge funds basic other hedge funds on their um robustness and their suitability to create a portfolio out of and so it's our day job to um see how good these managers are and whether or not these strategies are suited for for our needs and we are a liquids alternative branch of hedge funds. these these managers are quantitatively trading the market and in our case we're generating yield whether it's against US dollars or versus um you know bitcoin we have a bitcoin yield product um and we're allocating capital or capital allocators to these managers and then you know there are other types of hedge funds right there's the venture capital hedge funds there's many different strategies some people are just buying bags of coins and writing those up under indexes and so be aware There's many many different types and my specialization is in the quantitative trading side of things and we generally shoot for even a subset of that which is the market neutral where we're playing arbitrage so we're not taking directional risk. Um we we track over 700 hedge funds and their performances and um we we do due diligence across them. I would say that presently the majority of managers hedge funds that are trading directionally aren't ready for prime time. Their models are over overfitted, meaning they are working until they break and then they start to lose money very quickly. And that's a big danger with directional trading strategies in general. Where do you know it's particularly Bitcoin in crypto markets is they're still in their infancy and they're constantly changing their their their their structure. The market is changing its personality every 3 months. So it's very hard to build a robust model around that and that's part of the problem. So we've steered away mainly from too much directional hedge fund managers. In fact, our we try to c that it all the directional trades always sneak in because our managers like to throw that in and it's our job to try and try and keep away from that because right now the the inefficiency within the crypto markets are still pretty good that you can get a nice you know two three four five times multiplier on T bills and so that's

Can you can you maybe concretize this you know like what do you mean by they have overfitted their models and then uh it works until it doesn't. Is there like a concrete example that you maybe can give how a fund can really overfit their models?

Yeah. So when we say overfit, you know, you have a bit of you create a strategy, you go, you know, XYZ happens, I'm going to go long or go short because of ABC. And then you run a back trace on the existing data set you have and like oh look I made money right and then and then you then get another bit of pricing data from different date and you run it forward and hopefully it should give you roughly the same returns right if it doesn't it means that you fitted all the parameters of your strategy A B and C and XY Z were so tightly constrained around that picture of the price chart that when you set it loose on an unknown picture it didn't work and it was overfitted. And then the real thing is when do you do this on the real life market? And then the real life market is something you've definitely never seen before. Did you overfit it? And now how sensitive is it? How robust is it? Is it um and now how is the market going to respond back? Because you're going to make a footprint in the market. Maybe you put too much capital in it and it, you know, and it is basically bot wars and trader wars with humans in it and they're all fighting out a zero sum game. And so it gets very hard to make a very very robust strategy that is hooking into maybe some real behavior of human psychology or of the market such that in 5 years time in 10 years time in one year's time it's still valid when you and you realize that the crypto markets are changing because you know market strategy came in and started buying bullets big billion dollar bullets of Bitcoin um and and then you you know, the petrol swap back in the day came out and the derista started to push the market around and now we've got, you know, an Ethereum treasury company coming in and so they all have footprints on the market and if you fit your whole strategy on something in the past when that was not the case and then you run on a live market and and it's chaotic and everchanging. Did you build something that works in this newly structured market that's changing every 3 months, which is the challenge within crypto markets? It's very very difficult to build these strategies.

Yes. No, very interesting because like you know that's a train of thought that I've been hearing from other people that I've interviewed as well. And I mean it really starts on the macro level as well. You know, I just had this recent interview with a guy who who's really adamant about the fact that like a lot of investors on the macro level are still clinging to to the gold backed era, you know, and they're applying a lot of their models as if if like our money would still be applied to to gold, you know, which is which not, you know, and then maybe you have to recalibrate your entire framework there as well. And so it starts on the macro three year or level you know and then it moves down to different markets and as you just explained even Bitcoin and crypto itself it's changing by the weeks or months you know how how everything works. So I think that's so important that you stay vigilant and really try to understand what's actually driving the market you know because if you cling to as you said some some wrong yeah if you have some wrong inputs then obviously we're it's it's not surprised that your output might not be correct.

You know, we we started doing this and in the early days we got our asses kicked and then we, you know, I approached a friend who ran a $4 billion quant shop and was head of research and he's come on as as advisor how to help us diligence how robust these strategies are. Um, and he's trained over a thousand quants on how to build these models to trade it at the highest level. you know, even if we get an A on the the diligence report, once this thing starts running, I can show you the track record. A lot of them break. A lot of them break. And that that's part of the reason why we do market neutral to get this stuff right, even from the pros that have done at the highest level in trad um so yeah, it's it's it's a it's a tough thing right now. I think we will stabilize um these the structural market will become better. Um, but for now um 95% even of these strategies we're yet to see if they're ready for pride prime time and that's been three and a half years of learning.

Yeah. No, definitely good advice here as well. Well, Willie, thanks a lot for doing this. That was very interesting for me. I just I learn a lot whenever I talk to you. So much appreciated. Um, enjoy the rest of your day, I think, uh, in Europe and then hope to see you soon again somewhere in in the world of crypto.

Been great catching up. Look forward to our next encounter. Yes. Thanks for having me on the show. Thanks. Have a good one. I'll be linking to everything you mentioned and then yeah, enjoy. Bye, Willie.

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