Empire - Building the Perfect Crypto Portfolio | Avi Felman & Roshun

In this episode of Empire which took place on April 30, 2024, Yano and Santi hosted Avi Felman and Roshun Patel to discuss bearish sentiment, ETF strategies, private investments, market dynamics, and more! Read our notes below to learn more.

Background

Yano (Host) – Founder of Blockworks, Host at Empire & Pleasr

Santi (Host) – Co-host at the Empire podcast

Avi Felman (Guest) – Host at 1000x Podcast

Roshun Patel (Guest) – Partner at Hack VC

Bearish Sentiment, ETF Flows, and Investment Strategies in Cryptocurrency Markets

Yano asks Avi Felman about the origins of his bearish sentiment and its integration into his trading strategy, referencing George Soros’s long-term bearish stance.
Avi Felman explains that his bearish outlook crystallized after Bitcoin failed to break $73K multiple times, coupled with declining ETF inflows and a stagnant stablecoin market cap.
Avi says that his bearish perspective doesn’t specify exact price targets but rather revolves around the possibility of Bitcoin trading around $50-52K, with altcoins potentially experiencing a 70-80% decline.
Avi says that crypto flows, including spot $BTC ETF inflows and stablecoin market cap, are easily accessible data points.
Avi elaborates on the market dynamics, attributing the rally to the anticipation of ETF approval, subsequent outflows from $GBTC, and unexpected inflows post-approval.
Roshun talks about the need for caution in the current market and emphasizes balancing risk and reward. He advocates for a strategic allocation of cash reserves and a discerning approach to late-stage investments while remaining open to early-stage opportunities.

Insights on Market Trends, Token Launches, and Ethereum Dynamics

Yano asks both Roshun and Avi whether there are particular market trends they are following or avoiding, mentioning potential opportunities in both long and short-market positions, despite market fluctuations.
Roshun mentions being generally averse to shorting but highlights areas such as recently launched tokens with high supply but low circulation, suggesting caution due to potential depreciation.
Yano follows up by asking about the performance of recent token launches, noting that larger launches have generally not fared well in the market.
Roshun agrees, pointing out that while some recent launches have succeeded, the larger market trend shows significant downturns, particularly when pricing Ethereum against Bitcoin.
Roshun discusses potential investment opportunities on the long side, highlighting catalyst-driven movements in the market, such as expected announcements that could significantly impact token value.
Avi shares his perspective on Ethereum, noting its resilience in price action compared to other tokens and suggesting a potential upturn due to underallocation and forthcoming developments like an Ethereum ETF.
Avi also discusses the challenges Ethereum faces due to the fragmentation of its community across various Layer-2 solutions, which he believes might dilute Ethereum’s market strength and complicate community cohesion.

Ethereum Investment Insights: ETF Impact, Layer-2 Dynamics, and Tactical Strategies

Yano observes that an ETF for Ethereum might lead to similar price movements as previously seen with $BTC ETF, suggesting a potential for significant price action and the importance of maintaining cash reserves for Ethereum investments.
Avi Felman expresses a short position on Ethereum relative to Layer-2 solutions, indicating that while L2s like Arbitrum may see higher gains, he prefers the risk-adjusted returns and liquidity of Ethereum.
Roshun agrees with Avi, highlighting the challenges with Layer-2 solutions in terms of predicting where user activity will concentrate and the risks associated with an oversupply failing to capture user volume.
Yano brings up the profitability of Coinbase from sequencing fees and its upcoming earnings release, speculating on the financial impact.
Roshun supports investing primarily in $ETH if bullish, suggesting a cautious approach to investing in NFTs, meme coins, or Coinbase’s $COIN as a secondary option to avoid unforeseen market risks.
Avi Felman shares that his bearish stance could be swayed by increases in stablecoin market caps and genuine inflows into the ETF, reflecting significant market shifts.
Roshun suggests using at-the-money straddles as a strategy to leverage market volatility during uncertain times, indicating a tactical approach to navigating market conditions.
Avi Felman advises that sometimes the best action is inaction, highlighting the option of not engaging in trades during uncertain market conditions.
Yano and Roshun discuss the contrast between skepticism towards the Layer-2 market and the potential long-term gains from investments in specific Ethereum-based Layer-2 solutions like those associated with Hack‘s venture fund approach.

Strategies and Challenges in Cryptocurrency and Private Investments

Yano mentions he has often questioned and examined the data across his investments, noting that sub $50 million fully diluted investments generally yield positive outcomes, though it’s challenging to outperform $ETH and $BTC over the long term. He expresses that investment outcomes are predominantly price-driven and vary significantly depending on the scale of the fund.
Roshun suggests that allocation depends on the manager’s preference for liquidity and value, recommending starting with 50% liquidity, which includes a significant cash position for earning yields.
Yano asks about the specific ratios between Ethereum and Bitcoin in Roshun’s suggested allocation.
Roshun suggests an even distribution between Ethereum, Bitcoin, and Solana if one desires a balanced risk profile, but prefers a slightly overweight position in Ethereum due to its market position and the current sentiment towards it.
Discussing private investments, Roshun outlines two main strategies: investing in infrastructure and layer-1 blockchain protocols, and investing in applications built on these protocols. He advises caution with infrastructure investments due to their high market valuations but sees potential in applications, especially those on emerging ecosystems or those transitioning to their own layer-2 solutions.
Avi Felman shares his strategy, highlighting the importance of maintaining a substantial cash reserve to capitalize on market downturns. He proposes a portfolio distribution focused on major cryptocurrencies like $BTC and $ETH, with a smaller allocation towards applications, advocating for investments that bet on the future success of applications in the blockchain space.
Avi also discusses the challenges of investing in private deals without existing credibility as an angel investor, indicating a tough environment for newcomers to secure valuable deals.

Solana Auction: Interest, Hedging, and Market Dynamics

Yano notes the significant interest in FTX’s Solana auction, where the second round closed recently with a smaller discount compared to the first. He interprets this as a sign that many funds are underexposed to Solana and are catching up, despite its past issues.
Avi Felman agrees, adding that the attractiveness of the trade is due to the ability to hedge in the future and the high yield gained from buying at a discount.
Yano mentions his participation in the first round of the auction and queries about the terms of the vesting period.
Roshun highlights that for long-term Solana holders, particularly those in tax-advantaged jurisdictions, it makes sense to rotate from liquid to illiquid assets, but warns that not all new flows represent new buyers, which could affect perceived demand.
Roshun also points out that some investment flows might be driven by well-crafted pitches that secure funds from limited partners (LPs), benefiting the individuals who crafted these pitches without much risk to them.
Yano discusses market behavior, highlighting the importance of the amount of capital and the terms of lockup, suggesting that a significant lockup should warrant a substantial discount. He criticizes the lack of due diligence by latecomer funds in previous cycles and notes significant ownership by Jane Street in Coinbase, implying broader market manipulations that are not immediately apparent from public filings.

Exploring Economic Cycles: Bearish Short Term, Optimistic Long Term

Avi Felman says he no longer believes in the concept of cycles due to structural changes in the market, particularly mentioning the influence of Bitcoin ETFs and the maturing nature of Bitcoin as a major macro asset. He predicts a future with less volatility and more gradual market movements.
Roshun agrees with Avi, highlighting the reduced volatility seen in other matured markets like oil and gold following the establishment of futures and spot ETFs. He discusses the difficulty in predicting cycle peaks and suggests using daily indicators for making de-risking decisions.
Yano shifts the discussion to credit’s role in the last cycle, asking Roshun for his expectations on how credit will influence the current cycle.
Roshun reflects on the cyclical nature of credit and predicts a smarter, more segmented approach in the future. He discusses the evolving landscape of crypto credit markets, highlighting innovations like isolated risk pools and smart contracts that aim to minimize systemic risks.

DeFi Revenue Fundamentals, Nonproductive Assets, and Long-Term Crypto Market Confidence

Yano asks if revenue fundamentals in DeFi will matter in this cycle, mentioning that Maker is capturing a significant portion of the fees.
Avi Felman believes that in the long term, good products like MakerDAO, which have outperformed many in DeFi, will become more important as the effects of meme coins diminish.
Avi Felman defines nonproductive assets as those based solely on speculative value without a tangible product, mentioning meme coins as examples.
Roshun points out a cultural shift towards creating tokens with inherent value, rather than just governance tokens, mentioning Uniswap and dYdX as examples that are moving towards models that could increase token value.
Yano and Roshun discuss various indicators like exchange flows and stablecoin yields, highlighting their importance in understanding market dynamics.
Roshun says that Bitcoin DeFi is misunderstood and believes that traditional Bitcoin holders will not adopt DeFi, as it involves trust assumptions and does not offer clear benefits over existing systems.
Yano agrees, highlighting that many Bitcoin holders are reluctant to move their assets to platforms with high smart contract risks, despite the allure of yields.
Avi Felman considers Bitcoin NFTs to have enduring potential but is skeptical about the sustainability and demand for staking, predicting a significant market correction for overvalued staking platforms.
Avi suggests that, despite theoretical benefits, many crypto products lack practical demand and effectiveness.
Yano and Avi speculate on the impact of a potential global crisis on Bitcoin and gold prices, with Avi firmly believing in Bitcoin’s price surge in such scenarios.

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Show Information

Medium: YouTube (Video)

Show: Empire

Show Title: Building the Perfect Crypto Portfolio | Avi Felman & Roshun Patel

Show Date: Apr 30, 2024