From: thepipeline_xyz
Dan Matuszewski, co-founder of CMS Holdings, a VC firm specializing in financial services, big data, fintech, and particularly blockchain and cryptocurrency, offers insights into the evolving landscape of digital assets, focusing on the historical context of the crypto market, the impact of Bitcoin Exchange-Traded Funds (ETFs), and the nuances of institutional crypto adoption [00:00:05].
Early Days: Bitcoin and Market Evolution
Dan’s journey into crypto began in late 2012 and early 2013, several years after his graduation [00:09:25]. While working at a hedge fund with Julian, a co-founder of CMS, Bitcoin was already known in the trading community but was largely viewed as a payment system rather than a store of value [00:09:40]. Early engagement involved automated trading to capture bid-offer spreads due to the market’s inefficiency and low aggregate trading volume [00:10:20].
The market was dominated by Mount Gox, which accounted for approximately 80% of the volume [00:10:49]. However, many early exchanges, including Bitfloor and some in Canada, experienced failures due to hacks or banking shutdowns [00:11:13]. The collapse of Mount Gox in 2014 effectively paused the crypto party for a significant period, leading to a “dark” market in 2015 [00:11:31]. During this lull, the entire aggregate trading volume on the top exchange, Bitfinex, was less than a million dollars, with only about 1,100 Bitcoin trading at around $200 a piece [00:12:37]. This period saw companies like Circle shifting away from crypto [00:12:54].
The market truly transformed with the rise of Ethereum (ETH) and the ICO boom around 2017 [00:13:00]. Before 2016, Circle’s entire business was solely focused on Bitcoin [00:16:04]. The growth of ETH and its demand from existing Bitcoin traders forced a shift to support other assets, signaling a major change in market dynamics [00:16:15]. Today, the crypto market has grown “massively horizontal,” with an overwhelming amount of information and assets to track [00:16:58].
Bitcoin ETFs: Impact and Outlook
Dan views the approval of Bitcoin ETFs as a significant development for the industry [00:23:12].
Significance
- Passive Flows: ETFs provide access to passive capital flows common in traditional finance (TradFi), particularly similar to consistent capital allocation into US equities via paychecks [00:23:14].
- Broader Access: It opens up a new pool of potential buyers who were previously restricted or slowed down from owning the asset class directly [00:23:38].
- Legitimacy: With major players like BlackRock launching ads for Bitcoin ETFs, it provides “non-sketchy” additional exposure to a broader audience, such as those watching “Boomer Golf Channel” [00:26:47]. Larry Fink of BlackRock publicly stating Bitcoin is a “safe asset class” carries significant weight for older, more traditional investors [00:27:37].
Market Dynamics and Caution
Dan advises against extrapolating long-term trends from the initial weeks of ETF inflows, as the immediate noise may over or undersell people’s expectations [00:23:50]. He cautions that institutional adoption takes time, as random investment advisors or funds won’t necessarily buy on day one [00:24:16]. However, he believes it will lead to a “long tail boom” of passive capital flowing into the ecosystem over time [00:24:27].
Regarding specific ETFs, the approval of Grayscale’s Bitcoin Trust (GBTC) as an ETF is uncertain [00:25:02]. If Grayscale’s ETF is not approved, it could trade at a discount, prompting investors to sell Grayscale shares and buy Bitcoin futures to maintain exposure while awaiting other ETF options [00:25:22]. This bridging strategy could lead to “jacked” funding rates, which is a temporary pricing distortion [00:25:40].
The ETF market is also expected to be highly competitive among providers due to the “winner takes all” dynamic, leading to massive advertising efforts that will further increase exposure for the asset class [00:26:28].
Future ETF Prospects
While a Bitcoin ETF seems imminent, BlackRock has also filed for an Ethereum (ETH) ETF [00:28:13]. Dan believes an ETH ETF is likely within a year, estimating a “75-80 Delta” chance of its approval [00:29:01]. However, he is skeptical about ETFs for other altcoins like Solana (SOL), suggesting that the general cadence for ETF approval will require CME futures trading for a year or two first [00:28:38]. The ETH ETF approval might be complicated by considerations around staking [00:29:20].
Institutional Crypto Adoption
Institutions perceive crypto, particularly Bitcoin, as an “uncorrelated asset which has Alpha” [00:30:15]. For large asset managers aiming to beat benchmarks like the S&P 500, adding uncorrelated sources of alpha that appreciate over time is crucial [00:30:26]. Bitcoin’s uncorrelated nature and upward trajectory make it an attractive component to weave into existing portfolios of fixed income and equities, allowing managers to claim a “crypto strategy overlay” that adds significant alpha over time [00:31:00]. This integration is expected to be popular, with crypto being shoehorned into positions as a minority holding [00:31:16].
Trading Insights and Advice
Dan shares some of his most challenging trading experiences and fundamental advice:
Craziest Trading Periods
- COVID-19 Crash (March 2020): The day COVID-19 caused widespread market collapse was exceptionally wild [00:32:06]. Bitcoin exchanges like Bitfinex effectively “pulled the plug,” and FTX experienced issues [00:32:11]. ETH basis (the price difference between spot and futures) swung by over 20% in just half an hour, making trading incredibly volatile [00:32:21]. A key challenge was the extreme uncertainty about counterparty solvency [00:32:51]. This period also coincided with negative commodity prices and equities limit downs in TradFi [00:33:16].
- FTX Collapse (November 2022): The 48 hours after FTX’s shutdown were “weird” as traders attempted to strategically lose money in their FTX accounts to gain it elsewhere, trying to extract funds [00:33:53].
Core Trading Philosophy
Dan emphasizes two fundamental pieces of advice for traders:
- Avoid Leverage: Dan strongly advises against using leverage, especially for young participants in crypto, citing his own firm’s negative experiences when lenders failed, forcing them to unwind positions at unfavorable levels [00:48:26]. He highlights that in such highly leveraged markets, the failure of one lender can lead to a cascading effect, undermining perceived diversification of borrowing [00:49:00].
- Trade Less: He suggests that traders, particularly in crypto, tend to overtrade, often undoing their own good decisions [00:49:15]. Sometimes, simply holding an asset (like ETH when it was hundreds of dollars) would have been far easier and more profitable than active trading, which often leads to “brain damage” [00:49:41]. He notes that while one might hear about the rare individual who succeeds with leverage, “a 100 or a thousand people get carried out” [00:50:19].
He also references two common trading adages:
- “Hot Ball of Money Phenomenon”: This describes how capital quickly moves between different asset classes or sectors, often seen in markets like China, shifting from equities to real estate to commodities [00:34:58]. In crypto, this is observed when Bitcoin and ETH rally, and then capital disperses into various altcoins [00:37:47].
- “Do you want to make money or do you want to be right?”: This adage advises against fighting the market based on personal fundamental beliefs [00:35:24]. In crypto, where assets can surge “for no reason,” trying to short based on perceived irrationality often leads to losses [00:35:40].
Skepticism and Innovation
Dan touches upon the inherent skepticism found within the crypto community towards new innovations. Bitcoin developers were initially skeptical of ETH, calling it a “scam” [00:40:31]. Similarly, ETH enthusiasts expressed doubt about Solana’s scalability [00:40:39]. This pattern, akin to the saying “science advances one death at a time,” suggests that ingrained beliefs often prevent individuals from embracing new technical or scientific paradigms until time proves them out, and new generations of people accept them [00:40:54].