Episode Summary
Executive Summary: Lee Drogan and Corey Hofstein discuss crypto’s brutal 2022 drawdown, why Starkiller’s momentum/trend model mostly sat in cash, and how their research shows crypto momentum is strong but must be paired with trend-following and strict risk controls. They also cover GBTC discounts, FTX claim value, Binance conspiracy theories, and what a new crypto cycle may look like.
Main Topics: Starkiller’s crypto strategy during the bear market (Priority: 5/5): Lee explains that their momentum/trend-following model largely exited crypto by April 2022 and has mostly stayed in cash or neutral positions since, which felt boring but protected capital. Crypto market collapses, fraud, and survival (Priority: 5/5): The guests frame 2022 as another typical crypto collapse driven by leverage, fraud, and blowups like FTX and Alameda. Their core thesis is that survival matters more than trying to catch every move. GBTC discount, closed-end fund mechanics, and arbitrage frictions (Priority: 4/5): They debate whether GBTC is still an attractive trade, emphasizing the large discount to NAV, fees, credit concerns, and the practical limits to arbitrage because shorting crypto is difficult and costly. FTX bankruptcy claims and recovery estimates (Priority: 4/5): Lee gives a rough valuation range for FTX claims and explains why recoveries could improve over time as clawbacks, asset sales, and venture holdings are realized, but with substantial time-value tradeoffs. Binance and Tether conspiracy theories (Priority: 4/5): Lee presents his strongest ‘conspiracy’ views: Binance may be too big to fail and effectively monitored by regulators, and Tether may have extended large opaque loans potentially linked to Binance balance-sheet stress. Crypto momentum research and paper methodology (Priority: 5/5): The guests describe their white paper showing strong cross-sectional momentum in liquid crypto tokens, using cleaned exchange and DEX data, liquidity filters, and practical tradability checks. Future of crypto and macro outlook (Priority: 3/5): They discuss likely next-cycle winners, new token launches, KYC/arbitration debates, infrastructure maturation, and whether inflation and Fed policy are actually under control.
Key Arguments: Crypto markets repeatedly suffer 80-95% drawdowns, so investors should expect multiple cycles of collapse before maturation. Trend-following and momentum strategies are valuable in crypto because they help avoid catastrophic drawdowns when trends break down. There is no clean S&P 500-like index for crypto because the asset class is dominated by early-stage venture-like tokens with very high turnover. GBTC’s discount to NAV reflects not only sentiment but also real frictions: fees, counterparty concerns, and the difficulty of arbitraging it with shorts. FTX claim prices around 19-20 cents may still understate eventual recoveries, though value realization could take many years. Many crypto blowups come from leverage and naive arbitrage attempts, especially involving discounts, governance tokens, and rehypothecated collateral. Their momentum paper finds that recent winners tend to keep outperforming in the near term, but only when restricted to liquid, tradable tokens. A pure long-only momentum strategy in crypto is too volatile for institutions; combining momentum with a Bitcoin trend overlay improves drawdowns and returns. Crypto market structure is still immature, with liquidity fragmented across venues and historical pricing often inconsistent across exchanges. Next-cycle crypto winners may differ from prior cycle winners because old winners become crowded and new projects need fresh capital and attention.
Data Points: Starkiller market exposure: Mostly in cash / neutral since April 2022 - Lee says their trend model exited the market when trends broke down and stayed out for most of the year. Momentum paper initial universe: About 33,000 potential tokens - The team filtered a massive crypto universe before narrowing to liquid, tradable assets. Liquid selection universe over time: From 10 coins up to about 400-500 coins weekly - They tracked how many tokens met liquidity and data-quality requirements through the sample period. Momentum top quintile return: About 50% annualized in-sample - Pre-2021 testing period showed strong performance for top momentum names. Momentum top quintile return: About -1% annualized out-of-sample - The out-of-sample period included the 2022 crash, highlighting regime risk. Drawdown of pure cross-sectional model: About 75% - They argue a long-only crypto momentum sleeve is too painful without trend risk management. Break-even trading cost: 50-60 bps - Estimated transaction cost threshold for the strategy to remain viable. Typical crypto trading costs: 10-20 bps before impact on major venues - Lee notes costs on Coinbase, FTX, or Binance can still be substantial, especially with turnover. Portfolio turnover: Weekly rebalance with about one-third of the book turning over - They describe practical implementation of their strategy with limited turnover each rebalance. Capacity estimate: $100M-$200M fund - They believe the strategy can support a sizable institutional vehicle given liquidity filters. GBTC discount: Roughly 50% discount to NAV - They discuss how the trust traded from premium to deep discount and why it may persist. FTX claim trading level: 19 cents on the dollar - Lee says claims were trading around this level at the time of the conversation. Potential FTX claim recovery: 40s cents near term; 80-90 cents over many years - He expects recoveries to improve as clawbacks and assets are realized, but over a long horizon. Binance market share: About 80% of volume - Used to support the claim that Binance may be too important to fail abruptly. Tether loan amount: $6 billion USDT-denominated loan - Lee cites Tether disclosures as evidence for a possible hidden Binance balance-sheet issue. Tether alleged borrowing theory: About $7 billion borrowed to plug a hole - Speculative theory that CZ/Binance may have borrowed via USDT and collateralized with BNB.
Pivotal Quotes: "crypto is about survive and advance" — Lee Drogan: Core investment philosophy describing why capital preservation matters more than chasing every move. "we’re looking at a momentum anomaly in the crypto markets" — Corey Hofstein: Summary of the paper’s main finding that short-term relative winners keep outperforming. "these two things need to be married in a strategy" — Corey Hofstein: Argument that momentum must be paired with trend-following risk management to be institutionally viable.
Implications: Crypto remains structurally fragmented, high-cost, and highly cyclical, so disciplined risk control and liquidity-aware factor investing are essential. The next bull market may reward new tokens and better infrastructure, but only managers who survive the bear market will be positioned to benefit.
From the Transcript
What we do at the core. And then, yeah, that comes into the second thing, which is really just we are a trend-associated model, and the trends have been bad. And we've sat on our hands, which has not been easy or fun, but it has certainly saved us a lot of money. And I think coming into this, you know, our part of our thesis was crypto is about survive and advance. You just have to survive these periods and advance to the next one where the overall growth. In the actual underlying fundamentals of the protocols and chains and users, it just lifts all boats. And that's when you want to be involved. You do not want to push on a string because there's so much fraud. And so, yeah, the counterparty risk stuff and the trend stuff and having good advisors like Corey has really done it. For people listening who are either involved, not yet involved, what's the advice on, like, is it just like, don't play in the sandbox unless you really, you know.
Their venture portfolio. And we're looking at, you know, one of them from the last couple of days, Aptos, which is up four or five X, you know, in the last couple of weeks. So there is a possibility that the venture portfolio actually does well and whatnot. But I think 19, 20 cents is probably still cheap. I'd say by the end of this, my expectation is that those claims probably trade somewhere in the 40s. Range, and that's probably the max that they trade at. And then, if you really wanted to hold those FTX claims all the way for the next five, seven, eight years, or however long it takes, I'll bet you get, you know, I'll bet you get 80 cents back, 90 cents back. But, you know, the time value of that money is obviously probably want less of it now than more of it later. So, are you setting up a Starkiller SPV just to load up the truck with these, or what? No, but I did have an idea.
550 exponential moving average crossover on Bitcoin as the signal for the portfolio to go in and out of cash. And we show what that does to the returns of that top quintile momentum portfolio. And unsurprisingly, it very significantly increases the returns, it reduces the drawdowns, all of the things that you would want a trend-following strategy to do. And what we're trying to get at is that these two things need to be married in a strategy. Right. That simply just being balls to the walls long at all times in crypto is not very smart. Even if the long-term returns associated with that top quintile portfolio are good, the underlying kind of other metrics are certainly not. So, yeah, we look at that. In terms of other groups doing this, we're not aware of any kind of sizable funds that are running stuff like this, but I'm sure that there are funds that are using pieces of it in their
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