Podcast Notes 📝: How Arthur Hayes is Trading the Ethereum Merge
We watched the entire hour and a half long video in order to provide y'all with a synopsis of the key ideas discussed in the podcast
Bankless recently released a podcast Arthur Hayes discussing how Arthur Hayes is trading the Ethereum Merge. We watched the entire hour-and-a-half-long video in order to provide y'all with a synopsis of the key ideas discussed in the podcast:
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Done? Now let's dive in!
ARTHUR'S PROLIFIC WRITING
QUESTION: Why is Arthur writing so much in recent days?
Writing articles helps him to clarify his thoughts. It's an intellectually stimulating exercise especially when you get to have opposing views from other people. The whole world can see and critique your writing and point out the fundamental thing you have missed in your article. So, by spending time to write and open yourself up to criticism from anyone with an internet connection, you become a lot better thinker & a better investor.
WHY IS ARTHUR A TRADER
QUESTION: Why are you a trader, why not just buy and hold?
It's just his mentality and he thinks "buy and hold" works for a certain mentality but certainly not for him. He didn't have the mindset of holding $BTC for a long period of time (like 10 years) when he first discovered it. He also doesn't trade in a shorter time frame because it is extremely difficult, and it takes a lot of dedication and time to master it.
WHAT'S CAUSING INFLATION?
QUESTION: What is the major cause of inflation right now?
There are 2 major factors that are causing inflation:
During Covid, the government decided to respond by printing a bunch of money and handing it out to people. Consequently, people bought a lot of stuff with the money handed to them. So, we have inflation due to excessive money supply in the economy.
During the Ukraine war, the government kicks out the biggest energy exporter in the world, Russia.
So, now you have real inflation of energy and food because things get more expensive when you remove the biggest exporter out of the global economy. The governments can raise interest rates to curb the monetary part of inflation. But it will be difficult for them to curb the structural inflation caused by the energy supply issues.
The U.S is in a better position than Europe because it has a lot of land to feed itself. Maybe Europe can do it too, but it cannot function at an industrial level. Countries like Germany cannot function without Russian gas and the German producer prices are already up 40% YOY. Also, the dollar's rise in value is very bad for Europe and Japan. Because the import bills will skyrocket since all of the energy is priced in Dollars.
WHY CRYPTO?
QUESTION: Why are you a dedicated #Crypto trader? Why specifically Crypto?
We are in a monetary technology transition that is fueled by the Crypto industry. The world has come from 16th-century double-entry bookkeeping - the printing press - printing paper money - telegraph communications - computers - crypto. We are moving towards a world where money and technology work together just like the way #Bitcoin does!
We are reorganizing how we interface with each other socially with money with this new piece of technology. It's the first time in history that anyone can create their own currency by writing code and posting it on the internet! But everyone around the world lives in a different system with different rules
Crypto might demonstrate its value for a particular set of countries under a particular set of circumstances but it might be completely useless for the other set of countries.
DENOMINATE IN HYDROCARBONS
QUESTION: As a trader what do you denominate your value in? Is it the Dollar, the Euro, or Bitcoin?
Everything he does is predicated on Hydrocarbons. Hydrocarbons are the main source of fuel for a human's existence. The air-conditioned apartment, the computer powered by electricity, the food in the supermarket that is flown all around the world - all require hydrocarbons to function. Your ability to maintain a certain standard of living depends on your use of hydrocarbons.
It doesn't really matter if you have Bitcoin, Dollars, Gold, Yen, or Euros, if you can't buy enough hydrocarbons to have the lifestyle you want to live then it's not the right mix of investment assets. Thus, he wants to have claims (money) that can be used for energy. He doesn't want to hold claims that depreciate over time. He wants to store value that preserves its value relative to hydrocarbons and that will be the assets in his portfolio for the long term. It doesn't necessarily have to be just $BTC and $ETH!
THE ETHEREUM MERGE
QUESTION: Why are you hyper-focused on $Eth right now?
The fact that the second most dominant currency is going from proof of work to proof of stake is a structural change of the $Eth infrastructure itself. There will be less issuance of it and it's the only currency that's of this size that's doing this switch. We know the emission schedule after the merge and the flows are going to be similar to Bitcoin halving. The flows are guaranteed as long as the Merge is successful!
He loves this trade b/c he can be wrong on the FED and still make money on Ethereum since the structural flows are dramatically changing in such a way that it gives the price enough upside to possibly overcome a negative macro environment. You can say that the transactions have gone down a lot since the #Defi summer but it still has the most activity and there are people who use these applications today and also after the merge. The Merge is also not influenced by any political decisions and political people.
THE ETHEREUM PRICE FOR THE MERGE
QUESTION: IS THE MERGE PRICED IN?
A lot of people still don't believe the Merge is going to happen including myself because nobody can say with a 100% guarantee that they are going to switch to POS without any blow-up. The rational way to think about this is to say "Show me POS, show me that it works, show me all the dApps function just as they did before."
So, until all of this happens, it is reasonable to assume that the merge may not happen! @TrustlessState says a bear case for the Merge is that it is an overhyped event and as the Merge event gets nearer the odds of people that are willing to buy $Eth right after the merge is very low.
Arthur replies that "You don't need that for the price of $Eth to go up"
For example, let's say there are 100 units of gas usage today and after the merge, they are not selling the gas token as much as they used to. But there are still 100 units of demand to use the dApps and you don't need any new buyers to create new demand.
Unless the number of people using Defi applications is going to stop and reduce from today's levels, there will be a certain demand for $Eth to pay gas fees with supply going down. Demand is constant while the supply is reduced This increases the price of $Eth!
TARGET $ETH PRICES
QUESTION: What's your target price of $Eth if the merge isn't priced in?
I have bought calls for $3000 by the end of the year. I am not worried about the FED because even if the FED raises rates by 20%, there will be a certain amount of demand for $Eth to use the dApps and the supply isn't there to meet it!
MAKING THE $ETH TRADE
QUESTION: How are putting this trade? Spot? Options? Derivatives?
Adding leverage has a possibility of liquidation but there is also a concept of timing. You need to have a very good view on timing & confidence in the team's ability to ship the product (POS). The easiest is obviously spot trade but you're not gonna get the big juice. And if you are taking those risky bets, be good at timing it!
The reason he chose December strike is that it's usually liquid since it's the EOY & the market usually goes up or down a lot in the Q4
SURVIVING AS A TRADER
QUESTION: How do you survive through multiple cycles playing the Crypto trading game?
It's all about POSITION SIZING. The major reason for the 3AC's fall was that they made the wrong trade, they didn't size their positions correctly. He has been wrong on a lot of things, but he doesn't have to be right on everything as long as he is right on a few things! So, at the end of the day, it's all about POSITION SIZING.
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