Reflexive Capital: How Ethereum Treasury Companies Are Shaping the Late-Bull Cycle

TRANSCRIPT

Ryan Sean Adams:
[0:03] Bankless Nation, welcome to our monthly Fundamentals podcast. I'm joined by Mike Nadeau. How are you doing, Mike?

Michael Nadeau:
[0:09] I'm doing great, Ryan. Good to see you.

Ryan Sean Adams:
[0:10] Good to see you too. Even more energy in ETH since we last had this podcast. We've got some ETH treasury companies that have launched some big energy from Wall Street in the space. ETH's still 25% below all-time high. You wrote a post we're going to get into talking about ETH treasury companies. And it's sort of a bull case for that. I want to talk about that with you. I also want to talk about where we are in the cycle as of right now. So it's starting to feel like maybe early greed stage. And I believe that was a title of your post, maybe the altcoin season rotation.

Ryan Sean Adams:
[0:45] So how do we position for this and what should we keep an eye on? But in general, Mike, are you bullish or how are you feeling as we enter August, I guess, and start to conclude the summer?

Michael Nadeau:
[0:55] Yeah, I think, you know, the fact that the top, you know, something we're going to get into here is ETH treasury companies. It's kind of a sign of the times, I would say, and sort of where we're at in this cycle. We've made, you know, we're in year three. I think the way people should think about this, it's always helpful to sort of step back, zoom out. You know, we are in year three of a bull market cycle. These tend to be the biggest years and we're moving towards the end of that. So we've already seen, you know, pretty significant moves from Bitcoin and other coins. We've seen a number of metas develop. And so we are sort of late stage, but I'm still bullish, you know, within that structure.

Ryan Sean Adams:
[1:33] It was so funny. There was some selling over the weekend, right? And some people were, you know, crypto Twitter, of course, saying, oh, it's over, you know, like, but now we're back and it's only been two days of, you know, a dip down. And it seems like we're back to where we were at the end of last week. And how do on-chain fundamentals look to you? Is like now a time to buy?

Michael Nadeau:
[1:52] It could be. It could be, you know, we were, I think the last time we recorded, we mentioned that we were buying ETH at, you know, between 2200, 2500 or so for us, like we follow a pretty, like pretty systematic process to identify when we think it's the right time to buy. And I think it depends on what, what you're looking at. You know, there's a lot of sort of ETH beta plays, I think that are sort of interesting. And that's kind of why we talked about this ETH treasury, all these ETH treasury companies and starting to analyze those. I think there could be opportunities in sort of the more highly speculative kind of beta play type stuff. And I think we can get into some of that in this episode. But in general, I would say the on-chain data, some of the stuff that we're looking at is like, you know, what's happening on Hyperliquid, what's happening on Solana? You know, are we seeing, you know, DEX volumes, you know, jumping up? We actually came up with a new metric recently that looks at DGEN versus non-DGEN, you know, DEX volumes on Solana. is just try to kind of understand like where.

Ryan Sean Adams:
[2:54] Are the animal spirits sort of like coming back on chain and what does that mean?

Michael Nadeau:
[2:58] So I would say we're, we are definitely in like a, you know, more greed than fear stage of the market right now, but not at like a sort of peak euphoria. We're still, I would say, in terms of greed in the market, still under where we were in Q4 of last year and even Q1 of last year.

Ryan Sean Adams:
[3:15] Very interesting. So as a reminder, these monthly crypto fundamentals podcasts, we're going to go for about 45 minutes. It's going to be one or two themes, major ideas that are backed by on-chain data. That's what Mike here specializes in. I'm going to ask him at the end what calls he's made, what changes he's made to his portfolio as a result of this. And speaking of ETH Treasury Company, which we should mention to our friends and sponsors over at. Okay, let's talk a little bit about this guy, Tom Lee, the Wall Street legend. And he now owns, just a month in, he now owns the largest share of ETH in any publicly traded entity, maybe in any entity that actually exists. This is a record of Bitmine Immersion Technologies and some of the buys. Just this morning, Mike, on August 3rd, August 4th, I should say, another $200,000 in ETH was purchased by Bitcoin Immersion Technologies. That's Tom Lee's company. So they now hold 833,000 ETH. And Tom Lee has said that he intends to purchase 5% of total ETH supply. He's about 15% of the way there. All that in a month. You wrote a post about ETH treasury companies, and you compared them to Bitcoin treasury companies. And it seems as we're entering kind of maybe the greed stage of this cycle,

Ryan Sean Adams:
[4:37] ETH treasury companies will have a major role to play. So let's unpack that a little bit.

Ryan Sean Adams:
[4:43] ETH treasury companies. First of all, where does the premium come in? And when I say premium, I think bankless listeners know, of course, these ETH treasury companies, even Bitcoin treasury companies, they have a core asset, either Bitcoin in the Bitcoin case or ETH in the ETH case. And then the publicly traded company around that trades at a premium. So its market cap is overvalued, generally, the amount of ETH that it holds in reserve. And that premium is called MNAV. And it's always been above. I guess in MicroStrategy's case, there are times it traded below. Tell us about this premium. How should we think of it? And why does a premium even exist? Shouldn't it just be valued based on the asset that you have? And why is there a premium in the first place? Thank you. Yeah, it's a great,

Michael Nadeau:
[5:32] Great question. I think, you know, MicroStrategy has traded at a premium for most of its life. It did dip below like in the 22 bear market. And there are a lot of schools of thought out there with these things. I think there's a lot of smart people that think, you know, MicroStrategy is kind of like a Ponzi scheme, right? Like, why does it have this premium? And you know if you're going to start to look at the eth treasury companies i think it's absolutely critical you understand why you know microstrategy trades at a premium and then we can start to think about some of the differences with with the eth treasury companies but to me like this is this is all about like attention as kind of the first element of this i almost think of like michael saylor as like in microstrategy as like a meme coin like like on top of bitcoin so like that's number one is like there's just a lot of attention. Michael Saylor is everywhere. He's a really good evangelist for Bitcoin itself, not just, you know, micro strategy, but he's out there evangelizing Bitcoin, which then gets the Bitcoin community behind him. And so that is a very important element of this. Just like you have somebody who can be a spokesperson for the company and the asset at the same time and sort of get the community behind them. So that's one. Did you have anything that you wanted to mention on that? It's interesting.

Ryan Sean Adams:
[6:44] So I guess you're saying attention, the Michael Saylor effect adds to the MNAV premium of MicroStrategy itself. It's just more eyes on the stock because more eyes on Michael Saylor.

Michael Nadeau:
[6:54] Yeah. Yeah. And I think you see this also with things like with Cathie Wood and some of her products as well with ARK. And, you know, some of those products, you know, they are sort of mocked a lot, you know, in the industry for just being sort of like these non-revenue generating companies, frontier type businesses. But she is always getting inflows into those products because Cathie Wood is out there and she's out there on CNBC and in the media. So I think that just absolutely matters. The other piece of this is the leverage element. So like why coming back to like, where's this premium coming from? What's fascinating is that, you know, Sailor has done a really good job of being able to tap the debt markets. And there's an interesting thing here related to convertible debt and that the value of that convertible debt goes up with the volatility of the underlying asset related to that. And so it's become fairly easy for Michael Saylor to tap into the convertible debt markets when the price of Bitcoin is rising. And he's able to do that at very low, sometimes 0% interest.

Ryan Sean Adams:
[8:00] Why is that? Are there just a set of buyers that are, what, are they long volatility in some way? They're long volatility.

Michael Nadeau:
[8:09] These are like hedge funds, arbitragers that want to own that sort of convertible debt because they're trading out of the market and it becomes more valuable with more volatility. And so that sort of opens up the capital markets, you know, as Bitcoin is running, as it's in the media, Michael's able to go out and, you know, You know, basically get a bunch of capital at zero interest, sometimes a little bit above zero, and then go out and buy Bitcoin, make his announcements about Bitcoin, go on TV and talk about it. And sort of you start to see how this like reflexivity builds within this structure. And so that's like number two is you're actually putting leverage on the asset. And most people, you know, you're doing that and you're getting access to that in your brokerage account. You're not actually dealing in the perps markets. You're not managing keys or wallets or any of that complexity, but you're getting.

Ryan Sean Adams:
[9:02] Perfection, UX.

Michael Nadeau:
[9:03] Yeah, yeah, yeah. So that's number two. And we talked a little bit about the volatility that's kind of embedded in there. That's a big element of that. And then I just think it's access. Like we just mentioned, you know, people view micro strategy as sort of this like reflexive beta play on Bitcoin itself. And if that's the perception in the market, and there's really only one way to get that type of product, and it's through a brokerage account, and that tends to be able to access larger pools of capital, you can kind of see why it's historically traded at a premium. I think it's trading at a roughly 1.7 right now. If you go back and just look at the returns of MicroStrategy compared to Bitcoin, just from the beginning of this bull market in the beginning of 2023.

Michael Nadeau:
[9:47] MicroStrategy is up almost 15x, Bitcoin's up 6x, 7x. Wow. So it's just wildly outperformed. And you can look at that almost over any time period. You could go from the peak of the 21 cycle and then look at the performance. You could look at a bunch of different timelines and it outperforms across every single timeline. So it's a fascinating thing. To me, this is mostly about reflexivity. And I think the way you can think about that on the upside is that Bitcoin, you know, tends to rise and that gets the media talking about the asset that sort of opens up the capital markets for Saylor. As that volatility comes in, he's able to raise capital. He's able to go out and buy Bitcoin. He's on TV. He's sort of a meme coin. And so all of this starts to feed on itself. You get a premium and it just kind of feeds on itself. So I think that's what's happening. Eventually, the market starts front running him because they know he raised the capital. And so now the price is rising. He's getting on TV even more. So to me, this is really all about like access to this levered bet on Bitcoin that you can only get in a brokerage account. and then really all the attention that comes with Michael Saylor.

Ryan Sean Adams:
[11:03] And importantly, I mean, he started in 2020. So some track record here. And that track record is overperforming Bitcoin at all those junctures. And you said maybe MicroStrategy is like 1.75 or something now, maybe 1.75 MNav premium to like two, something like that. It was, it's gotten as high as almost four. So 3.89, that was in November of last year. So there's definitely some premiums on these things and reflexivity is the name of the game here. Okay, so that gets us to these ETH treasury companies that have sprung up over the last two months. And back to Tom Lee, who has the biggest ETH treasury company in existence. I think it's number three now in terms of crypto treasury companies,

Ryan Sean Adams:
[11:43] something like 3 billion in assets under management. That's all ETH assets, of course. And you wrote this, we think ETH is a superior asset to Bitcoin when it comes to the treasury company strategy. Why? Why is ETH a superior asset to Bitcoin?

Michael Nadeau:
[11:59] Two main reasons here. So number one is ETH has the yield, right? So you've got the staking yield with ETH. Most of these companies are telling the market that that's part of their plans here. They're going to buy their ETH. They're going to move it into staking contracts. They're potentially going to move it into restaking contracts.

Michael Nadeau:
[12:18] There's DeFi yield, you know, I'm not saying these are advocating for taking extra risk like this. But if your shareholders are demanding that yield, you do have the optionality for some of these companies to do this. And I think this is sort of what's going to differentiate some of the, you know, various players in the market right now, which ones have the skill, expertise to do this in a safe and secure manner. So that's number one, is you can actually grow the ETH per share based on staking yield and access to DeFi. And then ETH is actually a higher vol asset. So over the last 12 months, ETH's vol is about 59% compared to about 40% for Bitcoin. And so you just have a more volatility that, like we talked about earlier, that increases the value of the sort of the embedded option of these convertible shares. And you potentially have a situation where, and I would be curious to see what, you know, Saylor thinks about all these ETH treasury companies, but this is potentially going to create competition for him within these convertible debt markets as well. It could potentially make it harder for him to tap these markets. So we'll see how that plays out. But those are the two main reasons, I think, that ETH is a superior asset compared to Bitcoin for this strategy. And therefore, you have to start to think like maybe there's potentially a higher premium that these things are actually going to trade out in the market.

Ryan Sean Adams:
[13:43] Yeah, that's fascinating. There's those two elements. And from a volatility perspective, you write that ETH has about 40 percent higher volatility than Bitcoin. So ETH's annualized volatility of 59 percent. So it could make a bid. These ETH treasury companies could make a bid for some of those long vol kind of debt instruments and those seeking that. You also mentioned that the narrative here that could be forming of DeFi yield in public markets. So it does seem pretty obvious that many of these ETH treasury companies are going to deploy this ETH into the Ethereum economy, the broader DeFi economy. Of course, staking is sort of the risk-free ETH rate for that. Of course, there are some staking type risks, but many of these are protocol risks. And then you can go out on the risk curve a bit more. Maybe the next layer out is something like Aave. But you could go further and

Ryan Sean Adams:
[14:32] further out and you could generate yield that way. Of course, there's a point at which you get into risk territory where there's smart contract bugs, hacks, all sorts of bad things could happen. But that option exists with ETH where it doesn't exist with Bitcoin. Do you think this will have a broader impact?

Ryan Sean Adams:
[14:51] Let's say we get, you know, right now I think we're hovering at about 1% of all ETH is locked in these public treasury vehicles. So that's 1%. Let's say that 1% gets deployed. I don't know, it's six billion something, I don't know, six to ten billion dollars in ETH that gets deployed and it starts seeking yield. Of course, we'll see the amount of ETH staked probably rise as a result. But does this have a broader impact on the DeFi economy? And is there a way to front run that in your mind?

Michael Nadeau:
[15:21] I do. I do think this is going to have an impact. And this is sort of the second order thinking on kind of the differences in reflexivity for Bitcoin versus ETH here. And part of why not only is ETH a better asset from sort of the yield and the volatility perspective, but I actually think it's going to have more reflexivity as well. And this is part of that reflexive story where if these companies are, you know, sort of doing the same thing that Saylor's doing in terms of being able to tap the credit markets, go out, you know, buy ETH, go on CNBC,

Michael Nadeau:
[15:55] sort of become the sort of meme, you know, that Saylor has for their strategy. Then they're moving those assets into defy that is like improving the fundamentals of you know on-chain fundamentals within the ethereum network it's sparking on-chain activity it's sparking more transaction fees it's sparking tvl growing into to defy these this is all sort of like more reflexivity on top of what you're getting with with bitcoin and so i do think like you know you're gonna see you know it'll be interesting to see how much of this actually flows into something like Ovid? How much of it goes into something like an eigenlayer? You know, how much of it goes into staking contracts? And what does that mean for actually the yield? If you spark on-chain activity, there's going to be more fees, right? There's going to be more users coming in. And we tend to see this in crypto markets where the price moves first.

Ryan Sean Adams:
[16:50] That sparks people going on chain,

Michael Nadeau:
[16:53] Doing more things in DeFi, more activity on chain, sparks more fees, fundamentals improve, price, then price starts to go up. So it has this reflexive feedback. And I think these treasury companies are sparking this. And it's going to be interesting to see this play out here.

Ryan Sean Adams:
[17:09] You talk about those sparks leading potentially to a DeFi summer 2.0. And I'm not sure if this will happen during the waning months of the summer here or if this bleeds into the fall. But this does seem like a pretty clear second order effect, at least for crypto natives out there, which is just this simple, basically. So we've already talked about all of the stable coins coming on chain. That's a dearth of liquidity. We'll get to some charts later. But, you know, $250 billion worth of stable coins and growing that could hit a trillion at some point. So we've got liquidity there. But now we also have ETH liquidity that is going to be looking for some DeFi yields. And so is it just as simple as looking at DeFi yield assets that have strong cash flow, good growth, maybe have some sort of better token economics, some sort of ability to pass those cash flows and revenues back to token holders? And it does seem, by the way, with, you know, the SEC's Project Crypto, that that opportunity set is going to open up. Maybe the simple thing to do right now is, of course, you could look at ETH. You could look at ETH treasury companies. We'll come back to that. But maybe the wise crypto investors should just like front run all of that and get to the DeFi tokens that are going to benefit from this type of activity. What do you think about that? And are there any DeFi tokens you have in mind?

Michael Nadeau:
[18:32] Yeah, this is the big question, I think. And if you're sort of crypto native, that's probably where you're most comfortable is sort of just analyzing the Aave's, the Morpho, like which of these sort of DeFi protocols are going to pick up TVL and improve their fundamentals, improve their fees. That's one way to think of it. And then the other way is, you know, where is the largest pools of capital going to go? My view personally is that the largest pools of capital are probably going to go more towards the treasury companies just because you can access those in your brokerage account. And there's just more capital that can go there. At the same time, you have to think that this idea, these second order effects that we just went through, lots of people are thinking about this, right? And so there's a chance that there's a catch up trade that's going to come once these ETH treasury vehicles really start buying and moving assets on chain. So I think it's a personal preference for me. We've been sort of trying to identify the ETH treasury company we think is going to potentially be the winner because I think that's part of the conversation here is there's probably one of these that significantly outperforms all the others. And so we're trying to identify that and then park some capital there as an ETH beta play.

Ryan Sean Adams:
[19:51] Very interesting. We'll get to that in a minute. The way my brain, I haven't done the analysis for this, but these DeFi yield type of opportunities, it seems like you should really put yourself in the position of somebody who works at a publicly traded ETH treasury company. What would they do with ETH? They're probably not going to go farm points in a brand new protocol that has not been tested and put that ETH at smart contract risk. What are they probably going to do? It'll probably be the next layer of safe, quote unquote, DeFi yield opportunities for ETH that are adjacent to ETH staking, right? So once you stake, what's next? And it does seem like there is some blue chip type of protocols, maybe the Aave's of the world, but maybe increasingly like the Morphos or even DEXs like Fluid, which have been around for a while, that might receive some of that benefit. So that's something for Bankless listeners to go look into, a DeFi summer type of portfolio. But let's get back to the ETH Treasury entities themselves, because now there's a lot to pick from. Okay. We could go on ETH Strategic Reserve and we could take a look at, of course, there's BitMine Immersion Tech, which is Tom Lee. There's SharpLink Gaming, which is Joe Lubin. There's the Ether Machine, which is Andrew Keyes.

Ryan Sean Adams:
[21:07] BitDigital, of course, BTCS. what's your take on how to allocate among ETH treasury companies if an investor is looking for that ETH beta and essentially to replicate there you have to be fundamentally bullish on ETH once you get that then the question is how do you get beta on just buying ETH and the answer could be these ETH treasury companies but what sort of criteria should an investor look at for the best ETH treasury company to invest in?

Michael Nadeau:
[21:37] Yeah. I think, first of all, if you are bullish on ETH, you should probably own mostly ETH, right? So then you know you're going to do well there. These sort of high beta plays are a smaller allocation. I would just sort of caution that because probably the worst scenario for an investor is to get the thesis right and see the setup and get all that correct, but then just pick the wrong asset to express that view. And so people will do this, right? This will happen with these treasury companies. If you're in the wrong one, you got everything right, but you missed the final piece of it. And that's all that matters. So I would just caution against that a little bit. But in terms of like the views on kind of how this plays out, I do think that you're going to get one of these that is sort of a runaway, kind of like what happened with micro strategy. I kind of view it as like a sprint, sprint for a number of things. So a sprint to to tap the capital markets, right? And so you need to have a good network of people, you need to be trusted, you need to be able to sort of generate attention. So I think those are important things to be looking for. Speed is absolutely critical here. So the first one that can get out and raise the capital, buy lots of ETH, really bold strategy, can go out and sort of capture this narrative.

Michael Nadeau:
[23:01] And I think this is where the reflexivity kind of kicks in where if you're just seeing one sort of person who's kind of driving this narrative, I don't think Wall Street's going to be like trying to figure out like, oh, there's a little bit of upset. We can go to this, like the one that's 10th down on the list to sort of express our view here. I think it's just going to be like a sort of a follow on trade type set up. That's just my opinion on how this kind of plays out.

Michael Nadeau:
[23:29] So those are the things I'm looking for initially here is just like, who is getting out of the gate fast? Who looks like they're the most organized? Because all of these, it's important to realize all of these things are like small companies, right? These are like mostly companies that were doing other things. Some of them were Bitcoin miners, you know, Bitmine, the one that Tom Lee is involved with is like, you know, sort of Bitcoin mining, cooling technology. A lot of these are sort of pivots from Bitcoin mining, you know, something related to the Bitcoin mining business. And they're small teams, right? They've all been spun up fairly recently. So you have to imagine that there's a lot going on behind the scenes. You're just trying to look for ones that look like they're the most organized, like they have a plan. They've got connections on Wall Street. They've got a flywheel. They've got a vision. And that's kind of how I'm approaching the analysis of this. There are some different KPIs and different things that I think investors should be thinking about. And we can talk about that as well, if you'd like.

Ryan Sean Adams:
[24:29] So have you picked one, Mike? If you're evaluating based on attention, based on speed, based on the connections they have, the access to capital, based on the execution. I mean, it does seem like there are, unlike Michael Saylor and MicroStrategy, who's basically doing this just one company for years before anyone else kind of joined them. With ETH treasuries, there do seem to be some pretty strong companies and they've started relatively, like at the same time, they've all started this summer, right? Do you have one? You're like, this is the one, or are you kind of playing a portfolio right now?

Michael Nadeau:
[25:03] I've only invested in one of these. I can't give the ticker away.

Michael Nadeau:
[25:07] We do have our TDR Pro, so I have to protect the value of that for people. So I apologize, but we have picked one and it's sort of, like I said, it's a smaller investment relative to our ETH investment. But we have picked one and we've been sort of dollar cost averaging into that.

Ryan Sean Adams:
[25:23] What factor the other criteria that I look at is the MNAF, of course, because you could be like buying a winner, but you might be buying the winner at an overvalued price. Right. I mean, there was a point in time earlier where SBAT was trading at just like insane multiples just like a week after launch or so. And it came crashing down from like price of 40 or something all the way back down to like nine. And like there's clearly something that invest but if you bought sbet at 40 you're not feeling great about like where it is right now so how do you how do you evaluate the the m nav multiple on these things and you know what what you should pay are they all collapsing towards something similar yeah

Michael Nadeau:
[26:04] So there's a there's the top of the top five two of them are actually trading at a discount so bt, So BTCS is actually trading at a discount right now. And then the Ether machine, I believe, DYNX, also trading at a discount. And this is like the challenge, I think, for investors is understanding sort of the capital structure. Because what, if you look at the charts of like SBET and BMNR, what tends to happen is like these companies come out, they make their announcements that they're going to be, whatever they're signaling to the market, people get excited, they go out and buy the stock. And you've seen both of those like sort of re-rate initially very early in that process. And then they come out and they dilute, they raise capital and they dilute the shares, right? If they're not getting all, if they're not raising all that capital through converts, then they're diluting shareholders.

Michael Nadeau:
[26:55] And then you see the stock completely sell off. So this is like the challenge. These things are not as easy to do the analysis and kind of understand there's not as much transparency, I would say, compared to on-chain data. So investors should understand this and understand sort of who the sponsor is, who sort of formed this thing. What are they getting versus what you're getting? Are they being diluted at the same rate that you're going to be diluted as they issue shares to buy the ETH? So I think there's a lot of complexity with analyzing these, which also, you know, kind of feeds into what I was saying about, like, there being one winner, that that company is going to be the best at communicating with the market as well. And I think that's an important element of this that we didn't talk about earlier is like, So the winner is going to be the most trusted. They're going to have the most connections. They're going to move the fastest and they're going to create trust with the market by communicating clearly with the market. And that's kind of how I'm thinking about this.

Ryan Sean Adams:
[27:54] That's fascinating. And where were some of this data available? Were you getting kind of like the MNAV type data? So I see, and this is maybe like August 1st or something, kind of like a market analysis as of August 1st. But first, the premium to NAV, the MNAV premium for SBET was like 1.15. BMNR was like 1.67%. Some of these other things like BTBT was, you know, 2.07. DYNX, which is the Andrew Keyes, the Ether Machine, I don't even think that's accurate. Like, I don't even think that's right. There's something missing in the data set for that number because it's only 0.14. Where do you compile all of this? It's like, it's more difficult to do the non-chain data, right? Because you're screening through SEC filings.

Michael Nadeau:
[28:42] It's tricky. You're going through exactly, you're looking at what they're putting out in the market. There's, you know, strategic eth reserve, which I think you've opened up here on this pod. They're compiling a lot of that information for you. But this is like more trusted data, right? Like this is not just going on chain and seeing what's going on there. So to me, this is tricky. And it kind of highlights like if you're less experienced and you don't want to go through all this complexity just to get like a little

Michael Nadeau:
[29:09] extra beta, probably you should just stick with ETH is probably what I would caution for people.

Ryan Sean Adams:
[29:15] Or maybe you should subscribe to the DeFi Report Pro and see what Mike is doing. Okay, let me ask you this. So I am a buyer of these treasuries and these Ether treasuries for a beta plan ETH. I'm bullish on ETH, so I hit that criterion. So beta plan ETH. But not forever. Okay?

Ryan Sean Adams:
[29:33] And this is where I ask the question about risks for all of this, because reflexive up, also reflexive down. And I've read some things interesting recently about how this could unwind. There are some lessons maybe we could even learn from the 1920s. There were these things set up called investment trusts, all of these investment vehicles, basically to democratize access to stocks in the US. And so these investment trusts would be put together, basically grouping of blue chip stocks. And in a time, the 1920s were very difficult to buy stocks for the average retail, middle class type of investor. And so these investment trust vehicles made them very accessible, democratized for mainstream. In a similar way, it's still difficult for a lot of people to buy vanilla Ether right now or vanilla Bitcoin right now. They have to go on an exchange, create a new account. It doesn't work in their 401k. then you have something like micro strategy. You have something like strategy or you have something like SBET. It's very easy to do. What happened, of course, at the end of the 1920s was after a massive boom and reflexive up, you got a reversal of this. And all of these investment trusts basically multiplied downside as they had to sell all of their stock assets.

Ryan Sean Adams:
[30:54] And it turned into the Great Depression. And we got a lot of SEC rules as a result of that. So I don't think we're quite there when it comes to treasuries, which is why I'm bullish. But let me ask you the question about risks. And are there some signs that we're getting closer to the end? We have a Litecoin treasury. We have Athena treasury right now. We have a Hyperliquid treasury. We have almost a new ETH treasury every week. And that's nothing to say about the Bitcoin treasuries that are all popping up everywhere. At what point do you start to get worried that the market's overheated and we could be headed for a correction and a reflexive down? And what happens in that scenario? Do these things go bust like the stock investment trust in the 1920s?

Michael Nadeau:
[31:39] Possibly, possibly. I think that's definitely a risk for the longer tail of the assets that I think the Bitcoin and ETH ones are probably in pretty good

Michael Nadeau:
[31:48] shape to the extent that there's 15, 20 of them for ETH. I think the ones that are on the longer end of the curve are going to be potentially the ones that are riskier vehicles. And I think this is all, I think you're bringing up some really good points here because there's a lot of risks to consider here. The first is like, you need to be bullish on ETH, right? So if the ETH price doesn't go up, like there's no ambiguity there, right? If ETH does not go up, these treasury vehicles are most likely not going to go up. And then I think you're sort of like hinting at this, like.

Michael Nadeau:
[32:18] Potential for like a doom loop where basically the the you know east starts to trade down and maybe you have some activist investors that are trying to push it below that the premium line and so they're trying to get it into a discount because they want to get that thing into a discount because then the treasury company might have to sell assets to try to get it back to to par and and then that's just creating more reflexivity on the on the downside there and you can kind of see the setup for that type of a doom loop. I think that is going to potentially play out with some of these smaller ones. You just mentioned there's some longer tail assets now that are getting these treasury strategies behind them. And to me, it's a sign of, yes, greed is back in the market.

Michael Nadeau:
[33:06] Speculative activity is back. And capital almost always is going to flow to where it's easiest to sort of raise the money and sort of make a trade. I think a lot of these issues, the people that are sort of spinning these up are viewing them as like a trade. And so if they're viewing it as a trade, then if you're buying that thing, you better be viewing that as a trade. And so I think we're in the, I don't think we're at like the froth, you know, we may be at the froth stage of like the formation of these things, but I don't think that this has sort of like made its way out into the actual markets just yet. We're still kind of like at the stage where there being, the sponsors are coming in, people are pitching these things and like Wall Street's probably six to eight weeks, you know, behind on that.

Michael Nadeau:
[33:51] That's kind of where I think we are with this. And definitely keeping an eye on just like, what is the sentiment out there? Because we know things can get pretty wacky in crypto, and I'm kind of expecting that probably in the next three to six months or so.

Ryan Sean Adams:
[34:06] Yeah. I wonder if you resonate with this. So my just rough heuristic analysis here is like, if the doomsday clock, 12 hours in the doomsday clock, we're at about 9 p.m. Okay. So there's still some time. We got like maybe three hours of time. But where there is leverage, there are shenanigans. This happens in any financial market, whether it's crypto or otherwise. What I'm kind of worried about are the systemic things that none of us actually see. But the things that later we will point to and say, oh, that was the thing. Remember three hours capital with the GBTC trade? That wasn't obvious to anyone that that was going on behind the scenes. But we all got a sense that things were getting a little wacky.

Ryan Sean Adams:
[34:46] Things were getting a little overinflated. I'm not there yet with respect to these treasury vehicles, but I think that's the direction of travel, which means maybe we're in for a greed season, which brings us to some of the on-chain metrics that indicate that. And let's talk about that because you wrote a post about the greed season that we may be entering the early phase of. Other people call this altcoin season. You've called it that in the past. Can we talk about some indicators as to where we are in the market today and what you're looking at in terms of fundamentals here.

Michael Nadeau:
[35:19] Yeah, I think that's a good way to frame it up as like, yeah, it's like it's nine, it's nine o'clock. We've got like, we've got a few hours to go here and people should just be cautious that like everybody thinks they can get out of the market before their neighbor. Right. So just keep, keep that, keep that in mind. We all sort of fall prey to that. So yeah, where are we at right now? You know, as I mentioned at the beginning of the episode, like, Things have gone up a lot. We've been in a bull market structure for we're in towards the end of the year three here. And so what I tend to look for at this stage of the cycle is just like what is going on with global liquidity conditions? This is an updated chart from capital wars.

Michael Nadeau:
[35:59] As you can see, like there's been some bumps in the road there throughout this these last few years of the bull market. And each time we we've kind of come down, markets have have sold off each time. We just experienced the last one when global liquidity conditions started to fall off in Q4. And people probably remember there are plenty of people putting charts up in Q4 saying, hey, guys, liquidity is starting to come out of the market. We were very euphoric at that time. And so people were kind of looking past that. Eventually, it did catch up in Q1. And then you can see that the conditions improved, actually. so basically there's a lag here with the crypto markets catching up to liquidity from Q4 dropping off in Q1. Liquidity came back actually in Q1 and then the crypto markets came back in Q2. So that's kind of takes us to where we're at now. You can see that that line hasn't really started to turn over just yet. When it does, you can sort of expect there to be a lag with the crypto markets at some point. And it looks like kind of looks like it's setting up for the classic like Q4 peak zone, I would say. That's kind of my base case.

Ryan Sean Adams:
[37:05] Where does that global liquidity come from? Is it fiscal deficits? Is it a Fed policy? Just in general, what are the mechanisms that pump those liquidity numbers up? Yeah. So the chart we were just looking at is looking at all the major central banks. And so it's factoring all of that in.

Michael Nadeau:
[37:23] It's also factoring in, you know, we're looking at a chart here of treasury spending. So this is through June and we have a deficit of almost over $1.3 trillion just through the first nine months of the year because the fiscal year ends at 930 for the U.S. government. And so, yes, there's quite a bit of Treasury spending, you know, happening out there. We just passed the big, beautiful bill, which is supposed to increase the budget deficits up to 7%. And a lot of people are concerned about that.

Ryan Sean Adams:
[37:53] Yeah.

Michael Nadeau:
[37:54] That's sort of like something I think the markets are trying to process right now is sort of what are the key takeaways from the big, beautiful bill? And then we've had an opportunity to see some of Trump's deals on tariffs. And so I think the markets are processing that as well and trying to figure out, is this going to cause structural inflation? The Fed is still still waiting to see what they're going to do. But we know there's global liquidity conditions are good. Treasury spending looks good. We have a lot of bullish elements of the big, beautiful bill that I think are interesting as well. And so, you know, when I kind of zoom out on more of the macro stuff, to me, I don't see any like major, major warning signals right now.

Ryan Sean Adams:
[38:37] So what are the signals that we're seeing on chain? This is one of them. This is the active loans and the number is going up. These are active loans on Aave, Morpho, Spark, Fluid, Euler,

Ryan Sean Adams:
[38:48] some of the big DeFi protocols of which we were speaking of. And you got to assume if that ETH is going to be deployed inside of the DeFi economy, these numbers will continue to rise. But they're now at all-time highs, Mike. And this looks like a similar ascent that we saw from 2021 to 2022 in the top of the last bull cycle. What do you take from these active loan numbers? And will this continue going up? And at what point should we be worried?

Michael Nadeau:
[39:15] Yeah. So to me, it's just, again, like, you know, like you said, where it's nine o'clock, you know, it's getting late. I mean, you can see that here. It's pretty obvious where we're at in the cycle. There's plenty of demand for people to sort of lever up their assets and do looping and access capital in DeFi. So to me, this is just kind of a signal like, okay, this is looking good. I think there's more coming here. But how much farther is that going to go before it actually rolls over? I think we should be expecting that at some point. But I think it's actually going to go up before we get there.

Ryan Sean Adams:
[39:50] What are Bitcoin holders doing, the long-term holders right now?

Michael Nadeau:
[39:54] Yeah, so we always take a look at this. Just as a reminder, this is not including the ETFs. It's not including assets on exchanges. but we've always found some signal when we look at wallet holder cohorts. And this is some Glassnode data. So long-term holders have started to take some profits. That's the takeaway here. Over the last few weeks, we've seen the long-term holder count drop about 1.3%. So that's a small percentage in terms of what we saw Q4 of last year, even Q1 of last year. And what you tend to see is long-term holders, the Bitcoin price rises, long-term holders start to sell coins into the market. And then short-term holders are the ones that tend to step into the market, buy those assets. And we're seeing that just start as well. So you can see that that move we just had is pretty small relative to the one in Q4 and also in Q1. And so we think we're early in this sort of distribution process right now, but we can see that it is starting to, it's just starting to play out.

Ryan Sean Adams:
[41:00] Stablecoin supply as well. We're at all-time highs here. To what extent is that an indicator for you?

Michael Nadeau:
[41:05] Yeah, so this is a good sign. So there is a correlation between USDT, Tether, and Bitcoin price, and it tends to come on a lag. So USDT is up 11% over the last 90 days. You can see USDC did sort of like level off a little bit there. But what you tend to see is more on-chain liquidity. There's sort of a lag to this, but there's like a 0.8 correlation between Tether growth, Bitcoin price over a 180 day sort of lag there. So if you're seeing growth, we've been seeing growth in Tether over the last 90 days, even going back to the last 180 days, that's giving you an idea of where the direction of travel for Bitcoin further out. So it's a good setup, I think, for Bitcoin and the crypto markets, generally speaking, when you see stable coin supply rising like this.

Ryan Sean Adams:
[41:57] Well, let's look at these remaining charts and kind of summarize this for folks. So one is the MVR, the Z score, basically, which is kind of the cost basis of Bitcoin holders on chain. The other is the altcoin season index. And we also have a Bitcoin fear and greed index. And then we have some ETH futures open interest numbers going up and ETH perp rate funding rates going up. If you take all of these things in summary and you kind of aggregate them together, Where does this put us in terms of the bull cycle? Is this like early stage, you know, alt season, early stage greed season? And like how close, you know, how much further is this going to go? What are your indicators saying?

Michael Nadeau:
[42:41] So I would say early stage, like sort of peak euphoric greed levels. You know, we've, like I said, going back to the beginning of the show, we've been in a bull market structure for a while. If you're coming into the markets right now, you're late to the party. But there's still, like, I do think there's another thrust coming. And this is looking at the alt season index. You know, we've kind of had a mini alt season play out over the last couple of months as ETH has outperformed Bitcoin. And we've seen a number of other alts do quite well. Bitcoin dominance has dropped a little bit. That is now sort of correcting a little bit. We're in the month of August, which tends to be a slower month. People are on vacations and at the beach. There tends to be less liquidity, less trading volumes, things like that. So I'm kind of looking at this. We'll see if we had a little bit of a scare over the weekend and markets are kind of rebounding now. So we'll see if it just kind of rebounds. but we may see some a little bit of weakness you know through you know let's call it like labor day or so.

Ryan Sean Adams:
[43:43] So all that said if you're not trading like arthur hayes by the way i i saw a tweet from him over the weekend which said he was he was trading some of this in august basically he was uh you know selling some the beginning of august on that on that kind of dip before that dip hopefully for him and then he was planning to rebuy at the end of august right it's like but if you're not trading these monthly cycles okay in the month-to-month basis if you're more of a buy and hold crypto fundamentals, but you're doing some things within the cycle, you should really think about how you're positioning right now. And that leads me to ask the question, how are you positioning right now, Mike? What do you think fundamentals investors should be looking at at this point in August?

Michael Nadeau:
[44:24] Yeah. So typically I have a larger percentage of my portfolio in Bitcoin. So I would say that I'm more further out the risk curve, I would say, because the view here is that Bitcoin dominance has likely peaked. And so you're likely going to see ETH continue to outperform Bitcoin. That's kind of my base case here. When that happens, that's typically good for the rest of the sort of altcoin space as well. I think this cycle is unique because we have a lot of things happening in the public markets. And so you have to be really careful. One thing that I'm looking at is just like, I want to be closer to more assets that I think are publicly traded that have, there's just a bigger, a larger investor base that's likely to allocate there. That's something I'm factoring in here. But in general, growing the non-BTC portion of the portfolio for this stage of the cycle.

Ryan Sean Adams:
[45:18] Okay. Rotating out of Bitcoin and into some of these Bitcoin alternatives into

Ryan Sean Adams:
[45:24] Ether and down market as well. That seems to be what you're doing. And by the way, Mike, you just launched a pro version of the DeFi report. So previously, everything that you've written and still to a large extent, most of what you write on the DeFi report has been free. There's also a pro version that folks can upgrade to. And I think they can see exactly what you're doing on a week-to-week basis with a peek inside of the portfolio. What sort of goodies do you have set up for DeFi pro subscribers?

Michael Nadeau:
[45:53] Yeah, so this is super exciting. So it's been like four years in the making to roll this out. And we polled our readers and tried to understand like what is the thing that we can do for you that's just going to add more value. And so people enjoy the research. They enjoy a lot of our thesis-driven, fundamental-based work. But what this is, is really tying all that together and saying, this is how we're actually making trades in the market. So we share a report with our pro members each Wednesday, and we go through our views on the market and also any changes that have been made to the portfolio. We provide a link. People can see what the changes were week to week and can tag along with us as we do that. And yeah, super excited to have that. and people can access that on our website if they're interested in joining TDR Pro.

Ryan Sean Adams:
[46:39] Very cool. I'm a subscriber of TDR Pro. So I'm right there with you guys and you can find out more at the defireport.io. Got to leave it there. Of course, you guys know none of this has been financial advice. Crypto is risky. You could lose what you put in, but we are headed west. This is the frontier, not for everyone, but we're glad you're with us on the bankless journey. Thanks a lot.

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