From Arthur Hayes

(Any views expressed in the below are the personal views of the author and should not form the basis for making investment decisions, nor be construed as a recommendation or advice to engage in investment transactions.)

We are all speculators. Every instant we exist in this universe is filled with uncertainty. In our attempt to wade through an unpredictable existence, our brain constantly constructs a probabilistic map of our environment. Our actions are based not on facts but on perceived probabilities across various outcomes.

A simple example that applies to my existence is the risk of triggering an avalanche while skiing. The most enjoyable powder runs in the backcountry are located on pitches 35° to 40°. This is also the perfect gradient for an avalanche. Before dropping in, my guide assesses the probability of an avalanche, given the observed snow and weather conditions. My guide also relies on recent observations of other guides who have skied in the same area. If the risk is too high, we don’t ski. 

A more quotidian example is whether to take the elevator or the stairs. The former is faster than the latter. However, elevators are mechanical devices that sometimes fail, and failure could lead to severe injury or death. You assess the expected value (probability * outcome), whether you are conscious of it or not, of the time and effort saved by taking the elevator up 30 floors, given your belief about the chance of injury or death, vs. walking up stairs which is a less risky mode of travel but takes far longer and is more tiring.

You are gambling with your life every second of every day. It’s not a bad thing; it just is the essence of humanity’s inability to perfectly forecast the future. And what an awful existence that would be if we knew precisely how the future would play out. I prefer our imperfection.

The story you tell yourself about certain actions informs your perception of their risk. I will call this the narrative. For social beings like humans, the narrative is primarily created through the “wisdom” of the crowd. For better or worse, the most powerful stories are the ones in which everyone believes.

The narrative is also created by objective facts. The facts, in most cases, are discrete events that point to the riskiness of certain behaviours. It is a fact that avalanches are more prevalent on a 40° pitch. It is a fact that people have been injured or killed while riding an elevator.

Common chatter and objective facts combine to create the narrative. While facts are great, it is challenging as an individual human to know the exact number of fatalities on an elevator over the total number of rides ever taken. It is also challenging to know the number of skiers who died in avalanches on a 40° pitch over the total number of runs taken on a similar slope. In the absence of our ability to ascertain the exact actuarial data, we rely on others.

It goes something like this. 

Avalanches:

I know avalanches in this type of aspect are more prevalent. But my guide, who has extensive experience and training on how to determine which slopes are avalanche-prone, believes this particular line is safe. Safe doesn’t mean there won’t be an avalanche; safe implies the probability of an avalanche is low enough to be acceptable. Therefore, due to my trust in his training system, which evolved from the experience of thousands of mountaineering guides over time, I will follow him down this slope.

Elevators:

I know that riding the elevator is more dangerous than taking the stairs. But everyone else is taking the elevator. If everyone else is taking the elevator, then it must be safe. Everyone can’t be wrong all at the same time. Additionally, there are building codes that were created using the experience of trained engineers, and this elevator is certified as safe. Therefore, trusting the expertise of engineers I will never meet and the crowd's wisdom, I feel safe riding the elevator.

The way we assign probabilities doesn’t hinge on the facts or the technology but on our perception of the facts and how good the technology is. These perceptions are based on what other humans, who we assume know more than us due to their training and experience, say are the facts or say is good technology.

Crypto:

To tie this into crypto, consider the following. Suppose a new project claims to solve a problem using novel technology. The problem they claim to solve is well-known, and the tokens of other projects attempting to solve this problem are highly valued. You believe the project’s engineers are smart and talented enough to solve this problem. You believe this because other engineers who have launched successful crypto projects are advising them. You are also confident in the team because they have graduated from well-regarded tech-focused universities and have prior work experience at successful tech companies. Because the narrative is strong (story + tech), you invest. But digging deeper into your thought process, what is more important: the story or the tech?

The Story. The story is more important than the tech. Your perceived probability of success is based on what other people say about the problem and what other people say about the team's technical competence. In very few cases do you have the ability to evaluate the tech at a fundamental level solely. That’s why you trust others you believe are better informed than yourself to signal whether the tech is highly likely to solve the problem.

While your tech skills are usually inadequate to properly evaluate the project, you can easily understand whether a story is good or not. A good story is one that more and more people tell each other. Of course it’s great if the story is spoken about in a positive manner. For example, “All retail traders are going to switch from CEXs to DEXs in this cycle.” But even if the story is spoken about negatively: “There is no way that retail traders are going to leave CEXs for DEXs.”, the story of the migration of trading volume from CEX to DEX is still being spread. I don’t care if people believe the story; I just want them to tell a positive or negative variant of it. Because you make more money being long than short, optimism will win over pessimism during the cycle. It’s just how the human brain is wired.

What Is My Job?

While my official title is Chief Investment Officer at Maelstrom, I should alter it to Chief Story Officer. I tell stories. The better and more concise the story, the faster it will spread. The greater the story's virality, the more tokens adjacent to that story will appreciate in value. 

The tech does not matter!

The financial professionals at Maelstrom all graduated with finance degrees from the Wharton School of Business at the University of Pennsylvania. I didn’t plan it that way; it just happened. While we understand the potential applications of cryptographic and blockchain technology, we are not cryptographers, distributed network specialists, or have deep technical computer science knowledge. When we do deals, we outsource tech due diligence to others with those skills.

The others might be the lead VC  firm or qualified angels in a pre-sale token round. Some might be the project’s highly respected technical advisors. In the absence of these types of validators, we might get comfortable with the tech because the founders have launched successful projects, and by successful, I mean applications that were used by many crypto projects in the past.

Our job is to ascertain which project has the best probability of success given the story vertical. Success depends on a macro and micro-story spreading wide and far. You make the most money on a token attached to a story to go from being perceived as “never” to “maybe” happening.

I would rather invest in a token with a perceived probability of success of 0.01% that has a story in the growth phase of virality than a token with a perceived probability of success of 50% but has a story that has reached the common knowledge phase. If the probability of success rises from 0.01% to just 1% because the story quickly infects the minds of many, I 100x my money. But the only way to 100x my money with a token that has a perceived probability of success at 50% is that the actual results, in whatever format is relevant to that project, are so amazing that growth comes from observed results rather than a rising perception of future success.

The macro story speaks to an observed trend and how this project will capitalise on it. It’s a story more than a trend because we are taking a small movement and extrapolating its impact much further into an uncertain future. Macro Story: “Retail derivatives trading volume is shifting from CEXs to DEXs.” BitPerp is building a perpetual (perp) swap DEX. BitPerp’s token will pump because its macro story is currently not well known but has the viral potential to infect many minds.

The micro story speaks to why this particular project will be the best in class out of all those competing within a particular macro story. Micro Story: “BitPerp is advised by Arthur Hayes, who helped invent the perpetual swap.” When others hear that Arthur is involved, they assume the project will get some kick-ass advice to help them best all other competing projects.

This blog is usually about macro stories. Most of the time, I’m telling stories about thieving central bankers and politicians who are destroying the value of time and human labour by printing fiat money. I’m telling the story of how Bitcoin and the crypto ecosystem are an antidote to this organised theft of human dignity. But given I run a trading book, I also tell micro-stories about trends within crypto and how my chosen coins and tokens will rise in price as more people believe and hear about the story in question.

I don’t write in-depth micro-stories that often about specific tokens outside of Bitcoin and Ethereum. But, it’s bull market time bitches. I laid the foundation of the significant forces that will drive crypto usage and adoption; it’s time to shill my bags.

Results

Do results, and by that, I mean growth in trading volume, total value locked, number of unique wallets, etc., even matter? Yes, they matter, but their importance to the price of a token differs depending on what part of the hype life cycle in which you are investing.

When investing in a story/trend you believe will go from “never” to “maybe” happening, the importance of a project’s traction is low. The market doesn’t expect much because the market believes this token is attached to a trend that is unlikely to grow in the future. Therefore, even mediocre results are trumped as groundbreaking because the expectations are so low.

When investing in a story/trend you believe will go from “maybe” to “definitely” happening, the importance of a project’s traction is high. The market’s expectations are high because they believe in a bright future. What would be considered mind-blowing results in the previous phase are considered mediocre in this phase. Amazing results are not enough; in this phase, a project must be genuinely revolutionary in order to meet expectations.

Shitcoin Story Time

The point of this essay and thought exercise is to provide readers with a view into the conceptual framework that guides Maelstrom. Over the coming months, most of the essays I write will focus on specific tokens we hold and their macro and micro-stories. These tokens have launched or have upcoming public launches, and thus, I’m trying to spread the story wide and far. I do not care if you buy or sell any tokens spoken about. I care that I present such a provocative story and supporting arguments that you discuss it in a positive or negative manner with others.

I know I have succeeded when I read the following on social media:

“Did you read Arthur’s latest essay? Man, that guy is a fucking dumbass. There is no way that Pendle will be the biggest derivatives trading platform in crypto, surpassing Binance. I don’t even know what an interest rate swap is, nor do any other degens in crypto.”

Or

“Did you read Arthur’s latest essay? Fuck me, none of us own enough of Ethena. Tether is going down, and Ethena is definitely going to be the top USD-pegged stablecoin.”

Below is a rough idea of the macro and micro-stories I intend to tell over the coming months.

Retail derivatives trading volume will shift from CEXs to DEXs. 

The launch of ETH staking will spark a surge in interest rate swap trading volumes across DeFi

There is a way to use tens of billions of dollars worth of low market cap shitcoins to power DEX quanto derivatives trading volumes.

DEX on-chain liquidity will be provided by middleware that disintermediates the current crop of market making firms.

As DEXs become the primary venue for price discovery, on-chain oracles that provide prices for settlement and liquidation will surge in importance.

Why Tether and any stablecoin uses a TradFi bank for custody of fiat will face pressure and we can create fiat pegged stablecoins without relying on TradFi.

How to solve cross-chain bridging of assets without building a bridge.

Harvest

Right now, the energy and attention is on the astonishing amount of Bitcoin the US-listed spot ETFs are accumulating. This, along with a global fiat debasement orgy, will drive Bitcoin to unfathomable heights in fiat currency terms. And the upcoming US-listed Ether ETF will drive Ether prices higher as well. I’ve got my Bitcoin and Ether. I might buy a bit more, but by and large my focus is shifting to shitcoins.

Are there tokens that I can purchase that will outperform Bitcoin and, secondarily, Ether? This is Maelstrom’s hurdle rate. We accomplish this by becoming as knowledgeable as possible about certain projects and telling amazing stories.