Cryptocurrency – Internet’s Magic Money? [Chills 42 with Hayden Hughes]

Now, there’s a real simple way to look at the indicator on the chart to decide whether to buy or sell. But is it that simple? That’s where we need to understand the principles behind it and that’s what we will be learning today!

Hello, my name is Andrew and welcome to another Chills with TFC session. In this series, we hope to bring on interesting and relevant people to help us learn better from various perspectives. Life is not always about learning from the people you agree with. Different perspectives shape us to be more well rounded in our thinking.

So in the pursuit of the life we love while managing our finances as well, my guest today is the CEO and co-founder of Alpha Impact: a cryptocurrency copy trading platform where you can copy the traits of other experienced traders. A disclaimer: everything you hear is not financial advice. There are risks involved in cryptocurrencies and investments so seek your own due diligence. All information shared on this platform is for entertainment purposes only.

With that said, let’s welcome Hayden Hughes! 

First question I have for you. It’s a bit generic and it’s meant to be so that we take that as a launching platform. Buy and HODL (Hold On for Dear Life), or trade? 

Hayden: For crypto?

Andrew: For crypto.

Hayden: I think it’s important to have both buckets. Now, whether or not you have time to actually trade or whether you want to allocate the intensity and the energy to actually figure out how to trade responsibly, or if you maybe don’t want to trade responsibly, that’s a good way to do it as well. But either way, you definitely have to buy and hold.

Just looking back a little bit… bitcoin, if you held for… let’s call it a three and a half year period of time, that would be a superior risk adjusted return to pretty much anything. Bitcoin in the short term, in 6 months, 12 months and 18 months, incredibly volatile. But over the long-term, three years, three and a half years, it tends to be a fantastic asset in terms of risk adjusted returns so I think you have to have a little bit of buy and hold that you just don’t touch forever. You just hold onto it for 10 years, 15 years, 20 years. 

But definitely, trading is something that I do quite a lot of and obviously following a top trader as well if you can put that into your portfolio as well so I think you have to have that trading bit. It is just a question of whether you do it yourself or subcontract to someone else.

Andrew: Because different people are at different levels when it comes to crypto, because it’s such a new thing. When I say HODL, it means Hold On Dear Life, HODL. It just means to… Did I pronounce it correctly? I’m hearing different ways of… 

Holding onto your cryptocurrencies for dear life, which means to hold it for the long term. But you mentioned that you do some trading as well so how would you describe the percentage allocation of how much you are buying and holding and what coins are those and what are the specific coins that you are trading in?

Hayden: Yeah, sure. I think when you come down to buying and holding, you can’t be buying the exciting stuff that’s in the news that day. You need to be owning stuff that you understand that has a long-term appeal that you know will be around in many years. Most cryptocurrencies don’t fit that description so I think the way that I would think about that would be Bitcoin as a store value. Ethereum and Solana… their ecosystem plays so there’s an active ecosystem there. Then there’s platform-specific tokens like the FTT token and BNB from Binance. Those are use cases in businesses that I believe in and I hold those for the long term.

In terms of percentage, I think it depends on where we are in the market cycle. At some points in time, I would be as low as 10% in the “just hold on” category and then other times, it would be up to 50%. It’s depending on where we are in that market cycle,. I might take some from column A and put it into column B. 

Andrew: Okay, so you mentioned some use case of different coins. We’ll go into that later. You mentioned market cycles as well. Let’s go into that. What do you mean by market cycles? How do we evaluate a crypto market cycle as compared to traditional finance? 

Hayden: Sure. I think in crypto, we tend to think of the market being more volatile and it’s more volatile for many reasons. It’s very early. We haven’t really figured out what the true values of assets are so that’s part of the reason that is volatile, but also it’s 24/7. A lot of people think that the stock market is big and exciting and lots of stuff happening but when you look at it, stock markets trade seven hours a day or six and a half or seven and a half, depending on where. But let’s just call it seven for argument sake, five days a week. That’s 35 hours of trading.

Crypto trades 24/7, 365. That’s 168 hours per week so you’re really looking at five and a half times more just because the markets never close. It does tend to be faster moving, more volatile. The market cycles that we’ve seen in crypto tend to… I guess you could describe it as the very early stage, nobody knew what Bitcoin was. 2009, it started off being one person and then it was two people and then it was 16 people and then a little community evolves. The Bitcoin pizza, that was a famous event that happened in… I think 2010, where someone paid something like 10 or 20,000 BTC. I think it was 10,000 BTC for a pizza. That sum of money would now be worth massively more. 

Early on, there was really very little. About 2012, 2013, crypto exchanges started coming into play. But I guess when I think about the crypto cycles, you’re really thinking about from the point at which the Bitcoin supply changes. These events are called the halving or halvening, depending on how you want to say it. Every four years, the Bitcoin blockchain adjusts the rate of inflation. What that means is people… you might’ve heard of or your listeners might have heard of… blockchain, Bitcoin miners. People are validating transactions across the Bitcoin network. 

Basically it’s just like any other transaction. They’re just validating pieces of it. All these people are collaborating. There’s a reward that they get in exchange for doing that and keeping the network safe. Every four years, the Bitcoin blockchain is pre-programmed to reduce that reward by 50%. The reward used to be 25 Bitcoins every 10 minutes, then it became 12.5 and it’s just recently last year gone down to 6.25. 

So what happens in between these four year cycles is we have these crazy bull markets and then usually a crash. The halving usually happens when prices are starting to recover from the previous crash. We have the halving then within 18 months, we tend to have a crazy run-up of the crypto prices, of Bitcoin prices, which of course leads the whole market and then it crashes, but it never crashes below the previous all time high, so to speak. The first time this happened, Bitcoin went to… I think 800, then it went to 20 000. Now it’s crashed and recovered and we’re now at about 50 000 as we record this. So those are the cycles. 

Andrew: Okay. So what’s the purpose of halving? 

Hayden: The purpose of halving is to eventually make the reward go down to zero. The theory behind the Bitcoin blockchain is that it’s decentralized, right? So you’re essentially paying… you have no centralized source of trust. You have a whole bunch of people collaborating on the internet to mine Bitcoin. To encourage them to actually do this, you’re giving out a lot of Bitcoin very early as a reward so the idea is that over time, you need less and less of a subsidy to incentivize new people to come onto the Bitcoin blockchain. And so over time, that subsidy starts being very big and it just slowly decreases. Eventually, the subsidy will actually become zero. 

Andrew: When we talk about market cycles, I imagine a graph… bull market goes up and then bear market goes down and you’re talking about market cycles for crypto in terms of halving. How do I understand it from this graph point of view? How should I see it? Could you explain a bit more? 

Hayden: Sure. I think when you’re in a bull market or a bear market, it tends to look like whatever is going on is very meaningful. But what actually tends to happen over time is that the scale of these… if you think of the bull markets as like a big… you can picture it like up to the right increase, it’s like a half of a parabola, right? Back to year 11 chemistry or math or whatever geometry, calculus… you have an exponential increasing line…

Andrew: A graph that goes from left to right and it’s increasing exponentially. 

Hayden: Correct, and I think now that we’re in the world of COVID, we understand the principle of exponentiation. What starts small doesn’t stay small and it grows quickly. Are your viewers primarily here in Singapore or listeners? 

Andrew: Mostly Singapore. 

Hayden: Okay. So if you think of 1 April 2020, daily COVID cases, that was like right before the first ircuit Breaker. That is a great example of what happens in a crypto bull market. Prices just go exponentially higher than they were. It doubles every week or something like that or every month. That’s what the graph looks like. It goes way up, way higher than it ever had been before and then it crashes back down quite a lot. In a one-year time horizon, you would think of it like a massive spike and then a massive falling off. It would be like a spike pointing from down to up. 

But what happens over time after that spike goes down, it trails along and trades sideways for a while and then it goes a bit lower and then this happens again. There’s another spike that’s even bigger. The previous spike looked big at the time, but now it’s only 10% of the current spike and then it crashes again and then the next spike goes even higher than that.

So over time, if you were to think about this like an animated graph, what happened 7, 8, 9 years ago doesn’t even register on the graph because the scale that you’re now in has changed so much because of the appreciation that’s occurred recently. I hope that gives a bit of context.

Andrew: Okay. Let me see if I understand it correctly. First of all, great analogy, except that in one case when COVID cases are exponential, that’s not good, but in the case of crypto, people are saying “to the moon!” Some people are happy, investors… the traders are happy. So what you’re seeing is that there is… just like a traditional market. 

There’s the bull market and the bear market and it doesn’t drop below the previous all time high, which means in the short term, you see a lot of fluctuations, but if you really zoom out the graph, you see it going to the right and going up, upwards. At least that’s what we are looking at when we look at a past 10 years in terms of crypto and you’re saying that in the short term, maybe seven to eight years ago, it’s barely registering because it’s such a small fluctuation in terms of the bigger picture. 

Hayden: Yeah. 

Andrew: But apart from the halving, what else affects this cycle? 

Hayden: There’s a model called the stock to flow model that attempts to quantify it. It actually is related to the halving. What we have mathematically is when we think about Bitcoin in terms of the monetary supply… the monetary supply is fixed beforehand. We know at every point in the past and at every point in the future, how many Bitcoins there were and that there will be in circulation so we can actually use this idea of scarcity to quantify. We can quantify the exact scarcity by using this thing called the stock to flow model. 

The stock to flow model is a ratio that measures how scarce a commodity is based on how much is out there circulating, floating around in the world relative to how much we know will exist in the future. You can think about this… you don’t have to think about Bitcoin. You can think about gold. You can think about silver or you can think about nickel or palladium.

We have an understanding of what those commodities… how much of that. Let’s just talk about gold. I don’t know the exact numbers, but we know the ratio. We roughly know how our… we have an estimation of how much gold is yet to be mined. It’s still in the earth for whatever reason. It just hasn’t been mined yet and we know how much gold has been mined already today. 

You could describe that gold as sitting in vaults and in wedding rings. It’s out there in the world, right? Same thing with silver. So all you’re looking at is this ratio of how much of the item is floating around, what is the stock divided by how much is left to come basically. So it’s… sorry, the flow is the production rate, the annual rate of production. What you’re looking at is the relationship between how much of something there is and how much can you produce in one year. 

Andrew: Okay. So it’s the flow… the rate of production…

Hayden: Yes, the rate of production.

Andrew: … of the Bitcoin that has been mined and the stock will be referring to? 

Hayden: The Bitcoin that has been mined already. 

Andrew: Okay. The Bitcoin is already out there. 

Hayden: Yeah. 

Andrew: It has been mined. 

Hayden: The principle is that and this… we can actually model these mathematically, but the principle is stuff that is difficult to mine is usually worth a lot of money and stuff that is easy to mine is usually not worth as much money. The reason comes down to the responsiveness of the price relative to the production. 

I’ll give you an example. Palladium is used in cell phones and some other stuff. It’s very easy to mine. We can… if the price of palladium doubles or triples tomorrow, we can mind 5, 6, 7, 8, 9 times more. 

Andrew: All the miners in the world are going to join in.

Hayden: They’re just going to start. It wasn’t profitable at some point in the past and now it is profitable. So those people can just start or those producers can just start producing assets very quickly. What that does is it floods the palladium market, so to speak, with supply which brings down the price. That asset, because it’s so easy to produce more is not valued very highly. 

Silver, on the other hand, and gold to a greater extent, are pretty hard to get out of the ground. If the price of gold goes from $1600 to $10 000 tomorrow, Barrick and all the other gold companies will really struggle. They can probably increase the production rate a little bit, but they can’t really move it that much because it’s so hard to mine. 

What that means is that gold is very scarce, very hard to produce so all we’re looking at is the ratio, which is the relationship of how much of whatever it is out there divided by the rate of production. That gives us a number so we can actually draw this on a kind of graph where gold is. I think the stock to flow ratio for gold is like 60. Silver is like 30. Bitcoin has now become… I think it’s about 50 right now, but before May last year, it was 25. What it gives us the ability to do is actually compare Bitcoin’s scarcity to other assets.

All of these assets I’ve mentioned fit along a regression line where you could see on a chart and if your listeners want to type “Bitcoin stock to flow”, you’ll see some beautiful charts by… I think it’s a hundred trillion, the person’s Twitter name. It could be a hundred billion, but anyway, Bitcoin stock to flow. There’s a beautiful chart that I’m thinking of in my mind. 

This ratio changes over time because Bitcoin in the past was more scarce and in the future will be less scarce. What it allows us to do is plot a future price based on that scarcity of the future scarcity. This has been a very accurate way to look at the price of Bitcoin over time. What you see is that this model tends to predict pretty well the Bitcoin price in the future. 

When you hear people talking about Bitcoin is going to 300k, Bitcoin is going to a million dollars, everyone who’s saying that has looked at this stock to flow ratio so I think it’s very important whether you believe it or not. People can decide for themselves. I think that this model has been very illustrative in the first 10 years. I’m pretty convinced in the next two years, it’s going to continue to be accurate. But let’s see what happens after that. 

Andrew: Help me out here. So the higher the number of the stock to flow, that means… 

Hayden: The more scarce.

Andrew: The more scarce it is and therefore, values should go up.

Hayden: Correct. 

Andrew: And that comes from your example of gold and palladium. That’s what you’re saying. So you’re looking at this stock to flow to look at the value of Bitcoin itself. Over the next two years, you’re saying… or over the long-term, it should be more scarce because it’s in-built into the design of Bitcoin that there’s a limited supply and therefore the value should go up. But what we are looking at so far… I mean you mentioned the halving and this is related to the halving as well. It’s all part of the design of Bitcoin, but how does the market sentiment come to play in terms of the whole valuation? 

Hayden: Sure. So yeah, great question. A lot of traditional comments around this topic really centre along the fact that… I just saw yesterday on Bloomberg, they had an asset manager on saying Bitcoin has value because it’s scarce. The value is nothing, but because there’s not very much of it, it tends to go up because people want to buy it. 

That is in my view, a very simplistic way of looking at things. Sentiment is very important. When we think about the evolution of Bitcoin as… when we first started in 2009 and I shouldn’t use the term “we” because I was not involved at that time, but when Bitcoin became popular, it was really just a very small group of… we probably can call them nerds who are really into cryptography and they were obsessed with this idea of a financial system that didn’t require a centralized third party. There’s no central bank. 

Fast forward a few years, it started to become traded. 2013, on exchanges… 2014. Fast forward a few years after that, you started to have derivatives marketplaces. It began to take different forms over time and so what that meant is that people discovered this at different parts in their own journeys. Most people will be familiar in 2017. That’s when Bitcoin first became very, very popular. It was talked about in the news. For those that were in the industry at that time… I remember that’s when I got into the industry, it was very hard to get an exchange account. You went to every single exchange and just did all the KYC (Know Your Customer) procedures trying to get in quickly. 

Andrew: Some dark alley, give them your driver’s license. I heard stories like that. Yeah. 

Hayden: Yeah. Well, you have to provide KYC because these companies are regulated or should be regulated. That’s the journey in 2017. It was a hype. There wasn’t really much happening. Ethereum started in late 2015. It’s a platform for what we call smart contracts. We’re only really seeing now in the last year and a half to two years, real stuff being built on these assets. 

Sentiment… I think initially in 2017 was driven by FOMO (Fear of Missing Out). It was going up every single day no matter what the asset is. Bloomberg and CNBC and the Wall Street Journal… if something is going up, they will write about it. Then you had an ICO (Initial Coin Offering) boom. Then you had a massive bust when people realized these assets had grown in value too quickly. Then you had… I guess 2019, Facebook came onto the scene and they started building their own cryptocurrency.

All of these things had positive or negative effects on the Bitcoin sentiment. March 2020, you had Bitcoin in every other asset on the planet basically be sold off because there was a perception that we were going to zombie apocalypse. This COVID thing was very serious and which of course it was and I don’t dispute, but since then, there’s been a massive recovery.

Some assets have grown more than others, but the sentiment is really based on what’s happening outside in the world as well as what’s happening in the crypto ecosystem as well. 

Andrew: Okay. If you look at online comments, different people take to Bitcoin or cryptocurrencies very differently and of course there are people calling cryptocurrency a scam. I can understand it from the point of view that from whatever you are describing the halving and the whole built-in mechanism of it being limited in supply by itself. 

It just sounds like Internet’s magic money and it depends on whether enough people believe in the story, because if there aren’t enough people believing in the story of cryptocurrency, then the cryptocurrency itself… if the one is using it, then he has no value. Am I correct to say that? 

Hayden: Yes, sounds correct. It is like any asset that is bought and sold. If no one believes in Tesla anymore, their share price will go to zero and Tesla will be removed from the stock market. It’s a buyer and seller matching system that we live in. Yeah, that’s a fair statement.

Andrew: Okay, so it’s like fiat currency and I believe in the government that backs it and therefore, we take out whether it’s US dollars, Sing dollars and we believe in it because well, we believe that someone or the government is backing in this case. 

Hayden: Yeah, and it’s interesting. Bitcoin was created… I guess in some ways, as a protest against currencies like that. One of the core criticisms was that monetary policy should not be set by politicians. If you look at inflation, for example, we print money all the time and that is causing an increase. For those that did economics 101, an increase in the monetary supply means increase in prices that causes inflation which is why basic stuff: coffee, bread, internet, all that kind of stuff costs more now than it did 25 years ago because of the government printing more and more money.

What the Bitcoin… I guess maximalists would say is that the government who is the one who’s multiplying the monetary supply is actually destroying your savings. If you hold a dollar, if you have a dollar now and you hold onto it for one year, you have less purchasing power in one year. If you look at it on the graph, the St. Louis Fed inflation value of a dollar… I think is the name of the chart, over the past 90 years, they’ve destroyed something crazy like 99% of the purchasing power of a dollar. 

So you have on one hand, a currency that is decreasing in value and I would put Singapore dollar and every other currency in that bucket, especially the US and then on the other hand, you have Bitcoin, which is actually designed to become more scarce over time. It’s designed to accomplish the opposite.

Andrew: Okay. I’ve heard this philosophy before where if the central banks or the fed has the power to print money, then in a way they’re stealing from you, right? Because over time, the value of your money goes down and whatever you’re earning is not keeping up with inflation and therefore the whole Bitcoin and cryptocurrency comes in. But now that you’ve painted this picture of the market cycles for us, what’s your trading strategy? 

Hayden: Well, I think at the very least something that people need to understand is that inflation is real and it’s about to increase because we’ve just printed a whole bunch of money to deal with COVID. I think that everyone needs to have a strategy that goes beyond holding savings in the bank. That is in the words of finance professionals. That’s a negative carry exercise, which means that you are losing purchasing power every moment of every day, right? You’re even on an annualized basis. You could think about it on a daily basis, right?

In an one day timeframe, you theoretically have less purchasing power than you had one day before. That’s not really how it works but inflation is not something that just happens periodically. It’s happening all the time. 

So I think the trading strategy needs to be something that produces income… generates upside without taking a lot of market risk. I think that a lot of people think there’s a common conception that 100% of crypto trading is highly volatile and you will lose all your money. There’s a very popular trade right now which we have a subsidiary business that’s running for institutional clients called the basis trade. What you’re basically doing is you are… let me think about how to explain this in a way that is not too complex. 

There is a opportunity to… they are what we call futures which is the future price of an asset that trade at a difference to the current price of that asset. There’s a gap between the future price of Bitcoin which we can buy and sell today right now in real time and the current price of Bitcoin.

If you were to go long at what we call the spot, which is the current price and short the future, because the future is trading at a premium, over time… so you’re going short something that’s above the current market price and you’re going long something at the market price. Over time, that arbitrage opportunity or the gap between those asset prices will converge.

So your short will start to make money and your long will start to make money until you converge at a point where they meet and this is called the carry trade or the basis trade in crypto. You can do this trade quite profitably without taking any directional risk which means that you are half long and half short. You can use leverage quite successfully and it’s effectively free money. It’s what I tend to think about as the risk-free rate in crypto. 

Andrew: Help me understand this trade. What am I shorting? 

Hayden: Sure. You’re shorting a futures contract that has a specific date in the future. There’s also what’s called perpetual futures, which are effectively one hourly futures that rotate and roll over.

Andrew: Okay. When I’m shorting something, I think that it will go down in value in the future, right? 

Hayden: Yes. 

Andrew: Help me understand this part. 

Hayden: Yeah, sure. The way that these assets are priced… if people are very, very bullish on Bitcoin, for example, they have the ability to go long and go further along on Bitcoin using these futures markets. What that tends to do is because there’s more people buying Bitcoin and using this instrument of a future, they’re using those instruments and they’re pushing up the price of the asset so that causes a premium, a gap in the price. 

People who are mining Bitcoin will actually go and sell or short that future to effectively lock in whatever that price is to be able to sel. Because they know miners, for example, know that they will be producing X number of Bitcoins at that point in the future so miners are using the futures to basically hedge their positions because they don’t want… what if the market crashes in six months and the price of Bitcoin is 50% lower? 

So what they’d like to do is they’d actually like to sell or short the future and buyers are using leverage to go long in the future to effectively get more and more exposure. They’re pushing the future price up and these miners are using it to push the price down. What tends to happen in a very bullish market scenarios which is most of the time for Bitcoin, there is more buying power on these futures than there are selling power. 

That means that the price of the of Bitcoin at a future point in time, the market has priced that as being worth more so there is a opportunity because over time, if you’re trading a future that’s going to expire tomorrow, basically there’s not going to be much of a premium whereas if you’re trading a future, that’s further out the curve, there is going to be a bigger premium. 

There’s a gap between those two prices but over time, that gap narrows and so what that means is that the future price currently is trading at a higher-than-market price and it will go down over time to hit the market price. If you already have Bitcoin, you can short this future and you’ll be betting on those two prices converging towards each other so you make money on the short and you’re already long the asset. 

So you’re half long, half short. You actually are not exposed to the price movements of Bitcoin. If Bitcoin goes up $10 000 or down $2000, you still have that 50% long and 50% short, which counteracts any market movements up or down.

Andrew: Just like an insurance, just like a hedge like you’re saying. You’re describing a relationship between people who are long or bullish on Bitcoin, for example, and the miners’ point of view. They know how much Bitcoin are going to mind. They roughly have a number and then they are they’re shorting on that.

Hayden: Yeah, so miners use this to hedge. That’s right. 

Andrew: That’s a form of hedging for themselves?

Hayden: Yup. 

Andrew: Okay, so this is one trading strategy? 

Hayden: Correct. 

Andrew: What else? 

Hayden: I think another one that I often look at is there’s technical ways to do this as well. I guess one of the key indicators that I’ve been looking at over the past two years has been the RSI. The RSI is like a momentum indicator and it tells you basically what the… it tells you the momentum of the price movements in the market. I think most people probably have a trading view account… I’ll go through a few more things that I look at shortly, but the RSI peaked in the recent market movements in Bitcoin in February. So the RSI was decreasing, showing… 

Andrew: RSI stands for… 

Hayden: Relative strength index. Basically, it measures the momentum of the market.

Andrew: Okay. 

Hayden: When the momentum is decreasing but asset prices are increasing, what that tells you is that this is a bull market that’s running out of steam. We’ve seen it go the other way as well, when asset prices are decreasing and RSI is increasing. If there’s a discrepancy between what the RSI is doing versus what asset prices are doing, we tend to call that a RSI divergence. That’s when one thing is going… when the market price is moving in one direction and the RSI is moving in another direction so that tends to signify a reversing… at some point, there will be a reversal of whatever the price movement is. That’s one of them. 

I also look at some on-chain indicators. One of my favourites… if you watch my podcast on the Alpha Impact YouTube channel, I talk a lot about RHODL ratio. Now we’re talking about on chain analytics. On-chain analysis is really interesting because it allows you to see what people are doing with their Bitcoins. 

Andrew: Okay, because the thing about crypto is open and available to anyone on chain, right? 

Hayden: That’s right. 

Andrew: You can just take a look at what other wallets are doing. 

Hayden: And you can actually look at this…. you can look at all the wallets and aggregate. One of the interesting ways that some much smarter people than me have figured out is you look at not only what wallets are doing, but the Bitcoins that are moving around, how long were they sitting still before they moved? That gives us an indication of the types of people that are holding Bitcoins.

People that hold Bitcoin for a very long time, we tend to think of them as whales. If they bought it long enough ago, now they’ve become millionaires and they’re not affected by a small price movement because they’re still way ahead of where they started whereas people who bought Bitcoin last Tuesday will be very attuned to the market movements because it doesn’t take very much to cause them to lose money on their investment. What this gives us is it gives us a sense of what are people doing based on the age of the Bitcoins that they’re moving. The RHODL ratio is… 

Andrew: RHODL, is it? 

Hayden: RHODL, yeah. People can just Google this. It’s “R-H-O-D-L” ratio. It’s actually an easier-to-read version of another chart which is the HODL waves which shows you the behaviour of all of the Bitcoins on the blockchain based on when that Bitcoin was last moved. 

I’ll just summarize. In a bear market, no Bitcoins move around and in a bull market, a lot of Bitcoins move around so you tend to see that in a bull market, a large proportion of the Bitcoins have recently been moved and when things aren’t so bullish, you tend to see Bitcoins just sitting there. They don’t move. 

What the RHODL ratio tries to do is it tries to quantify the relationship between those two groups. If you think about it, long-term Bitcoins that have been sitting still for a long time, what is the behaviour of that group of holders versus short-term? When the short-term people are selling and when the long-term people are selling, it actually reflects it on a chart. 

So I recommend that your listeners take a look at this chart. It’s really easy to read. It’s the RHODL ratio. Basically, there’s a red line that goes up when whales are selling and down when whales are buying. Along the top of the chart, there’s a red zone and along the bottom of the chart, there’s a green zone. Basically, at the top of every bull market in history, the whales massively sell whatever Bitcoins they have to get out into cash. 

What that means is that this RHODL ratio, the actual indicator goes up and it hits the red zone. So it’s super easy to understand because basically if the line has hit the red sign zone, time to sell. If the line hits the green zone, time to buy. If the line is moving from the green zone towards the red zone, we’re in a bull market. If it’s going the other way, we’re in a bear market. Every bull and bear cycle in history has touched the green zone and the red zone once.

It really simplifies Bitcoin ownership because you don’t need to do a lot of thinking anymore. But it does tend to be a macro strategy, right? This is like a two to three year investment time horizon, but it’s probably the easiest way that people can just look at something it’s like “are we in the red zone? Are we in the green zone? What is the direction of travel between red and green?” There’s three things you need to understand, that’s it. It’s a really easy way to understand where we are in the macro cycle. 

Andrew: Why is it two to three years? Because crypto moves much faster than other markets. 

Hayden: We follow four year cycles.

Andrew: Okay. 

Hayden: At some point between hitting the green zone, the market realizes “hey, we’re going to have a halving next year. That means prices are going to go up. I better buy now before prices go up.” So that actually causes a little mini… it causes an uplift from the halving. 

Last year, the halving took place in May. We obviously had a crash in March, but you saw right after May, we traded sideways for a while. But then we did go up. It comes back to this idea of a four year cycle. 

Andrew: Okay, so you’re looking at what the whales are doing and if a lot of them are buying or if a lot of them are selling and then you talk about the red line and the green line. Without even understanding all the complexities of it, you can just look at the lines and make your decisions from that point. 

Hayden: It’s basically like are whales, net buyers… It’s like what is the whale… if you think about all the Bitcoins that are trading in the past hour, for example, what percentage of those are whale Bitcoins versus short-term Bitcoins and then you look at the next hour and then the next hour and the next hour. 

If you see that the whales are buying, then that tells you something. If you see the whales are selling, that tells you something else. It’s the relationship between whales and I guess shrimps, you could call them. 

Andrew: Okay, okay. Anything else about trading strategies that you want to share with us before we move on to another topic?

Hayden: No… I think the other point that I wanted to make is that Bitcoin does tend to lead the market and you have to realize Bitcoin is the least volatile cryptocurrency. What that means is a 2000% return is considered low volatility in crypto in the 2016-2017 timeframe. One strategy… because Bitcoin tends to lead the market and other stuff tends to follow, it’s important to buy small coins you’ve never heard of as well. 

This comes back to your idea of is it holding or is it just trading. In terms of trading, I’ll tell you one of the best decisions I made last year in November was I went on Binance and I found… what was I looking for? I think I found 25 different currencies that had been around since 2017 that were way below the all-time high and that had not yet gone up and I just put… it might’ve been like $100 into 25 of these different random tokens. 

Andrew: $100 divide by 25 tokens?

Hayden: No, no, just $100 each… or it might’ve been $200 or $500 but like very small investment amounts. At that point in time, it’s really spray and pray. I wasn’t looking at anything except… was this around in 2017 and am I going to invest? Yes or no? And so I just looked at 25 or 30 different coins. I put small investments into each one and that has become an excellent strategy. 

The other point to make… that would be my other point. DeFi and NFT (Non-fungible token) platform tokens tend to be good investments as well. If your individual DeFi projects or individual DeFi products or individual NFTs… it’s very difficult for people to figure out what’s hot and what’s not without even being in the industry. I’m in the industry and I sometimes can’t keep up with it all.

But I think what you can see very clearly is there’s… because everything is on chain, you can see this blockchain data. If you could see that a platform is succeeding commercially in the metric in DeFi’s TVL, Total Value Locked… if platforms are doing well and platforms have a token and the platform incentivizes you to use their token for their platform, that means that token should be a good investment over time and this has been true for exchanges in the centralized world. Now in the decentralized world, you have Aave and Curve and many other platforms so I think it’s important to have platform tokens that are in your portfolio as well. 

The last one is timing. When everyone says “this is the end of crypto. It’s over” and when you start seeing news articles about crypto is down 99%, people losing their money, that’s the time to start buying. It’s very difficult to turn off your mind because we’re all risk averse, right? We don’t want to lose.

Andrew: That’s the “buy to dip” strategy. 

Hayden: Exactly, and the other part is if you hear about something in the news that’s gone up 10 million %, whether it’s GameStop or anything or Ethereum… there’s this indicator that someone in the US invented called the shoeshine index which is if your shoeshine person is talking to you about an investment… 

Andrew: Get out. 

Hayden: You need to get out. I think something that a lot of… and I have a whole team of young people that I work with at Alpha Impact is if a lot of people start becoming aware of new investments because something’s in the media, because it’s on Reddit, because it’s popular, it’s in the news, you’ve missed it. It’s too late, basically so don’t buy. Short. 

When Bitcoin is at the absolute top of the market cycle, I can guarantee JP Morgan is going to come out and say “Bitcoin is going to $5 million.” Everyone on earth will be talking about Bitcoin: your taxi driver, your teacher, your server at the restaurant, every single person you come in touch with. 

At that point in time, you need to sell or short. When people are saying “this is it. It’s over. Bitcoin is done. Crypto is finished forever. It’s all a scam. It’s down to zero.” That’s the time to start buying. It’s very tough to do that, but if you can do that, don’t buy in all at once. Just start averaging in. People always think they need to buy an entire $50 000 Bitcoin. You can buy… you can buy a very small amount of stuff. You can invest $1 on these exchanges or $10 or $20. I think my philosophy would be to slowly make these investments over time. 

Andrew: Okay. This whole… let’s go into each of them a little deeper. So you mentioned buying small coins because Bitcoin eads the way and you said it was a spray and pray strategy and it worked out pretty well. Is that because when Bitcoin leads the way, the altcoins or any other coins apart from Bitcoin will go up at a higher percentage compared to Bitcoin? 

Hayden: Yes, that’s correct. There’s three phases that the market cycle goes in it. Bitcoin goes up, then Bitcoin stops going up and go sideways and then Ethereum and altcoins go up and then Ethereum and altcoins start to go sideways, and then everything dumps. And then Bitcoin goes up and then Ethereum and altcoins and then dump.

Andrew: Do you think that strategy can be replicated though? 

Hayden: Absolutely. It happens like once a month so absolutely, yeah. 

Andrew: Random small coins that you… 

Hayden: Sorry, not random small coins. This is a directional strategy that I would suggest with a 6 to 12 months time horizon. With that strategy, you need to buy when it’s clear. There’s a sustained uptrend in the market. But if you’re making small enough investments, that really shouldn’t matter and I don’t think that people should be making investments that… you can’t invest with money that you need for stuff, right? 

Andrew: Okay. 

Hayden: For your rent or anything like that. 

Andrew: So you’re saying like $100, $200 per coin? 

Hayden: Yeah, or you could start smaller, right? The transaction costs are so small in some exchanges. You need to just be careful that you… one thing I would say: if you’re trading on a crypto exchange and there’s a button that says “buy $100 worth of Bitcoin”, I can guarantee it is a much worse price than if you just figure out how to use the native trading on that app.

There’s crypto exchanges like FTX that do a really great job, giving you good prices. Binance, same thing. But don’t ever press the “buy $100” button because that has higher fees for sure. 

Andrew: Okay, and the second part you mentioned DeFi and NFTs are definitely worth it as well. Tell us a bit more about that.

Hayden: Sure. Let me start by introducing what is DeFi, because I think that’s important for people to understand. DeFi refers to decentralized finance and I guess it started… the foundation started back in 2015 when Ethereum came out, that was a smart contract platform. 

Now, a smart contract is basically just a self-executing contract. So let’s talk about… you borrow $100 from me and then I say “I don’t know you that well. I’m not going to loan you $100 unless you give me your iPhone”, so it would be a pretty bad deal for you, but let’s just pretend. 

So you give me your iPhone as collateral, I give you the $100 in cash. When you give me back the $100, I give you back your iPhone. DeFi, at least on the lending side is like a self-executing contract. I’m giving you Bitcoin. I’m putting it into what’s called a smart contract. I’m borrowing another currency like USDT for example. It’s basically just executing based on conditions. 

If the Bitcoin that you have given starts to fall in value, that smart contract will sell the Bitcoin automatically. But let’s just assume the Bitcoin stays the same. So I’ll give you $100 worth of Bitcoin, I borrow $20 worth of USDT. Once I repay that $20 worth of USDT, my Bitcoin comes back to me.

All of this is done without any human interaction so we’re designing contracts to execute automatically without having to deal with people, basically. That’s what a smart contract is. Ethereum built this as the first smart contract platform. On the back of all of this, you have all of these very complex… and I don’t have time to get into all of them, but lending is probably the easiest to understand.

Aave is one really, really popular, lending protocol. It does just what I’ve described. So there’s all these decentralized finance and it’s not just lending. There’s robo-advisory, there’s crypto ETFs, every different type of investment you can imagine. There is now a protocol that allows you to put money not with a person who’s managing your money like at the bank, but with a smart contract who’s doing something with it.

That’s one version of DeFi. There’s lots and lots of other more complex versions, but that’s kind of what DeFi is. When I looked at DeFi first last year, I remember thinking of S&X. Aave… what were some other ones? Ampleforth… there’s all these different use cases and DeFi was just extremely exciting last year. 

Yield farming became very popular. Basically, the idea of yield farming comes back to this idea of having what’s called a liquidity pool which is a little bit complex, but if you think about a market where you can interchange Asset One for Asset Two without actually having buyers and sellers for Asset One or Asset Two. It’s basically a pool. 

You start with… let’s say USD and Bitcoin. You start with $50 of Bitcoin and $50 of USD. I put in the $50 of Bitcoin and $50 of USD. You can come along and you can use your Bitcoin to buy USD or you can use USD to buy Bitcoin, but the way that this works you will actually be charged a fee if you move the ratio of those assets from 50 : 50.

We started off with $50 for one and $50 for the other one. If you buy all the USD, the price you’re gonna get for that purchase is very bad because you’ll be deviating very far from 50 : 50. A liquidity pool is like a mathematical way to exchange assets via these liquidity pools. The use case for people… this became very popular around this time last year, a bit earlier… was you could become a liquidity provider. 

So there will be all these new protocols, all these new tokens that would come out and they would say “hey, we want you to add value to our liquidity pool. If you add value to our liquidity pool, we will compensate you. We’ll share the fees that are generated with you and we’ll give you … we’ll effectively subsidize your participation.”

Yield farming or DeFi farming became very popular last year because this was a very popular way for people to earn money. You could earn… if you’re the first one in that liquidity pool, you can earn 5000%, 10 000% so there’s some pretty good returns. That’s what DeFi is and I guess the challenge for people wanting to invest in DeFi is if you don’t want to do this yield farming, if it’s too complicated, just go and buy the tokens that correspond to those platforms. 

Andrew: You’re seeing the potential because… and I’m asking this. While we spent a lot of time today talking about trading and people can understand it from a traditional finance point of view, of how trading works and all that. We do have a few episodes on cryptocurrencies. We have one on DeFi as well. You can go search for it if you’re listening to this podcast right now. 

I think we get the idea, but I just want to dig deeper into your thoughts. You’re seeing a potential because why? You mentioned total value locked, there’s one thing. What else? 

Hayden: I think that there’s a… 

Andrew: We haven’t gone into NFTs. 

Hayden: Yeah, yeah. I think people are excited about… last year, it was very exciting to be part of DeFi because you could make a 10 000% annualized investment return and you could make that return in a very short amount of time.

Any time, there’s a new innovation that comes around where you’re creating an ecosystem where you used to need traditional counterparts because a lot of these things are based on smart contracts. They don’t require trust so we’re doing for crypto what has been done over many years in the traditional financial markets ecosystem, if you want to call it that, and we don’t need to talk to the banks and you don’t need to talk to the regulator and some of them, I’m sure should be talking to the regulator, but aren’t. 

It just tends to create an exciting phenomenon where people are making money that creates… I think one of the strongest drivers of all crypto bull markets, which is recycled capital. If you make a lot of money on the first deal, then you have 10 times more, you could do 10 more deals and then 100 and then 1000 and so on.

That principle of recycled capital is enabled by whatever is happening. At that time, it was DeFi in 2017. 2018, it was ICOs. Now, it’s NFTs. I think making sense of all of this can be very confusing, which is actually one of the reasons we decided to open Alpha Impact, this social trading app.

Andrew: Okay. So NFTs. 

Hayden: Yeah. 

Andrew: We can still understand trading in cryptocurrencies, but how do you valuate NFTs then? Let’s talk about it from an art point of view since we all heard of Beeple and $69 million sold. Right now, we have CryptoPunk and you see all these avatars on Twitter and whatnot. How do you value that if I’m coming from a traditional finance point of view? 

Hayden: Sure. Let me talk about my journey in NFTs. I think most people look at a picture of a rock and say that it should not be worth millions of dollars. 

Andrew: How much is it right now? How many ether? 

Hayden: I don’t know. I’m not keeping track but I think most people… if that’s the first thing you hear about NFTs, you think this is crazy. Let me tell you what my journey with NFTs has been. I have not bought any NFTs but I guess I started my journey wondering how can these things possibly be worth so much? What it effectively comes down to… and this will start with Beeple.

It’s not only… the value of any piece of art, if you think about the Mona Lisa, for example, it’s worth, let’s call it $100 million. I can have an exact replica of the Mona Lisa even done on canvas. I’m sure there’s people that do this professionally. They create a fake of the Mona Lisa but it’s not the real Mona Lisa. You know it’s not the real Mona Lisa so even if it looks exactly the same, you will know that the Mona Lisa hanging in my house is not the real one. Why? Because it’s in the Louvre in Paris and if it had been stolen, you would know and I wouldn’t presumably be showing it to you.

So the value of art is… I think directly tied to the authenticity of that art. With the case of NFTs, what we’re doing is we’re saying this item that I’m creating is special to me. I will accept that there’s a bit more excitement in the space than I think. It’s been very surprising to see the level of interest but the fundamental value transfer that’s occurring is you’re having an artist express themselves and say “okay, this is something that I’ve put a lot of time and effort into and this is special to me. Here you go, it’s yours forever.” You can prove that it’s yours. 

Even if someone else has an exact JPEG copy of that file, you will know on the blockchain that the ownership does not belong to them so it’s about the authenticity of the ownership. 

Andrew: Okay. As I mentioned, we talk a lot about trading and I believe in DeFi as well. We’re like scratching the surface of it and there’s still developments ongoing. We can really tap into the potential of that, taking out the middlemen, taking out the banks, for example, and directly P2P, peer to peer relationship in our financial contract through the use of a smart contract.

I can see how that has potential, although it might be hard to quantify at this point in time. You can… to the moon, like you say it but it’s just that much harder. I do think that NFTs has a use case. I’m trying to say that it’s that much harder to apply that to NFTs. How should you think about it? And again, that is also barely scratching the surface. There’s so much more, so many more use cases that we can have for NFTs and in the real life, real estate and all that. It’s just very hard to explain to people who are not into it and to make them see the value of it. 

Hayden: Yeah. I think there’s different layers, right? I guess on the very bottom layer, you have people that are buying whatever NFT… N NFT or X NFT for such a reason that they think that piece of art is worthwhile. That’s a genuine piece of work. I think it’s great. 

Then on top of that, you have a speculative layer which we have in Bitcoin and other assets as well. Some people don’t care about what it is. They just want to make money. I guess the next layer on top of that would be real assets, NFTs in real assets. 

There’s a company called ArtWallStreet that I just came across. They’re doing some really cool stuff. They’re actually creating a marketplace for NFTs based… partly NFTs based on existing NFTs which… there is some really cool cross chain stuff with different blockchains, but also NFTs based on real art.

What you’re doing is you’re giving a creative person, an artist an ability to monetize, rent, sell, timeshare, fractionalize something that’s a real piece of art so you’re bringing value from old into digital. That’s just one example of a company I came across. 

Andrew: Do you think that we need to switch on a different brain, put on different lenses, come up with different framework for evaluating NFTs as compared to whatever you just shared about trading cryptocurrencies?

Hayden: Yeah, I think there’s different ways to think about it. There will always be people who are excited to make money and they don’t care. But there is a layer of innovation that’s happening where artists can share their work with the world, real assets including what this company ArtWallStreet that I discovered will be tokenized.

There’s actually a lot of innovation that’s happening that I think we do need to think about it differently but of course there’s FOMO, Moon Lambo, all that kind of stuff. 

Andrew: Okay. All right. Thank you, Hayden. 

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I have three last questions for you. The first one is what is one core life principle that you hold? 

Hayden: Core life principle? I’ve worked for many years at the intersection of crypto and traditional finance… started off in an investment banking role, working in an exchange and now at Alpha Impact, which is copy trading. I guess the principle that’s really guided me in my journey has been… I need to make this crypto asset class makes sense for the rest of the world. 

Right now, we’re still living in a space where only 20% of people own cryptocurrencies and the value set over time is massive, owning crypto. If institutions decided that they just wanted to have 1% or 0.1% of their assets under management into crypto, that would be something like a trillion dollars that would flow into the space. I think 1% is a trillion dollars. 

Figuring this asset class out is very confusing and so that’s what led me down this path of creating this social media website where people can copy a top trader. I guess that’s my kind of philosophy. How can we make this confusing world of crypto makes sense to the rest of the world?

Andrew: Okay. What is one piece of financial advice that you think should be shared more often? 

Hayden: I think that it’s important to not leave investing until too late. When I was younger, I had this idea that… let’s talk about planning for retirement. We don’t tend to think about that till we’re at least in our late twenties and starting to think about work and stuff. 

But the math… compounding return and exponentiation is a thing. If you start saving earlier, it’s better. My philosophy has always been that I need to put money away in a bad month or on a good month whether it’s $1 or $100 or $100 000, it all adds up. That’s something that I think a younger version of myself would want to know.

Andrew: Okay. What is one area of your life that you are giving additional focus right now? 

Hayden: Decorating my apartment? No, I’m joking. Well, I moved recently and it’s so hard when you just can’t figure out how to do stuff when you’re working. I think… what’s an area that I’ve been focusing on lately? Is that the question? 

Andrew: Mmm.

Hayden: Okay. I got really interested in immunology and science last year during lockdown. 

Andrew: It’s got to do with COVID. 

Hayden: It does have to do… I had never thought about science before. I think I got a C in biology in high school. I just became very interested and that’s something that… so now instead of music, when I go to the gym, I actually listen to medical school lectures that are on YouTube which doesn’t really help me, but I like to be learning always.

Andrew: Okay, something to take your mind off work. 

Hayden: Something to take my mind off work… that assumes that I never take my mind off work. 

Andrew: Yeah, because right after this interview, Hayden is going to go to work. 

Hayden: Yeah. Making crypto trading makes sense for everyone. That’s Alpha Impact. 

Andrew: Yeah. All right. All right. Thank you. Thank you so much for your time.

Hayden: Thank you.