Richard Craig, welcome to the show. Good to meet you, dude. I'm really excited to have a conversation about something that I've been trying to grapple with since the pandemic kicked off. I trained myself to be good at making money, but never really understanding investing money and have watched the frustration build with people that feel that they're working inside a broken system and couldn't really understand, like, what they were struggling with.
And now once the pandemic hit and I began to see that I need to look more closely, investing and all that, what was gonna happen to the world financial markets? I started to be unpleasantly startled by the things I was finding in terms of how it's structured. And as a person that I would say is the future of finance. And the way that you're approaching things in the Mirai is absolutely fascinating.
Talk to me a little bit about what is the structure of finance? Well, it's for sure broken. I mean, and that's why there's so much energy and new ideas around finance. I mean, one thing I always ask people is like, what are young people doing?
And young people today, you don't like, meet someone out of college who says, my idea is I'm starting a new bank or a new hedge fund even. And the reason is the barriers to entry is so crazy. And it's basically like controlled by regulation. And the regulation sounds nice at first, but it's designed to protect people.
We all need protection. And then it creates like this crazy class of like, compliance. People are sort of required to do anything. So I can't imagine what we're like for a 25 year old to apply for like a banking license or something like that.
But the sad thing is that's so bad that it's not even in anyone's, it's not even in anyone's affordance to even have the idea to do anything about it or try to change it. And that's where crypto is powerful and things like Nimmerai are powerful because it's somehow making it possible for people to be involved in the financial system. So I have this thesis that I'm working on. I'd be very interested to hear what you think.
So I hear this idea that basically there's all this tension happening between the generations. And the reason that the tension is happening is because the old guard is refusing to pass the baton to the new guard. But that doesn't strike me as the way the human nature works. And I think that people cling to power for every conceivable Second, you have to pry it out of their cold, dead fingers.
And I think that historically what happened was youth and vigor, like so much of the economy, was generated around being able to have a higher degree of stamina, do physically demanding jobs, and therefore the next generation, which is able to beat the old generation on that. And now as we go into an information technology economy, what you see happening is it's easy to get ahead of people because you understand the game better, and you can either do political moves or you can just be more knowledgeable. And so that allows you to hold on to power longer. So that creates all this friction between the generations.
And now what we're seeing is what I call fuck the man energy. And so we're getting this energy. You saw people with occupied Wall street, but then Satoshi writes a white paper, and people that have been watching me for the last like, six months heard me say, like, this idea over and over. But this is really interesting to me.
So. So Satoshi writes this white paper and creates digital value out of thin air. And people buy into this, and it creates this decentralized, democratized way to go about money. And it's now starting to spill over into other areas.
But help me understand one. Is it just regulation? Is that the only problem that makes this fuck the man energy so strong? And what is it about decentralization that seems to be the cure to whatever the ill is?
Yeah, it does seem like a lot of the energy in crypto kind of couldn't, maybe wouldn't be there if they were. If it just were incredibly easy to do normal business. So if it was extremely common for young people sought new banks or just people to IPO companies even, that's kind of really rare. If all that was a little bit more possible, then it would be hard to imagine the world of crypto developing with so much energy.
So I do think it's definitely related to regulation. It's also like a kind of. I think there's something going on with like, technological literacy as well, where the way that the finance people talk about things like exchanges, it's like there's a lot of jargon. You don't understand it.
You could never build something like this. We're much smarter than you, that kind of thing. When actually it's like 100 lines of code to write uniswap, and you can have digital assets being traded in a decentralized way with no intermediaries at all. And so there's something about it where it's like people are realizing how bad it is and how easy to rebuild the whole financial infrastructure is just with new technologies.
And that's the sad thing. It's like when you're growing up, you kind of think, I remember growing up and watching Internet entrepreneurs do amazing things. And I was like, well, when I grow up, I'm going to use the latest technology to do amazing things as well. And somehow it's a little bit gray area to be using blockchain or even AI or kind of any gray area from regulation.
Yeah, you don't know what the US is thinking about cryptocurrencies and any new systems that challenge old systems. And so it's like super okay to build a social network in 2006, but even if you can write a new stock exchange or a new bank or a new type of hedge fund, even if you can do it and you have done it, it's weirdly not. It's like not acceptable yet. You don't know whether the government's going to be like, wow, yeah, we want all this wealth to be captured by the United States or are we just going to ban it?
And people like me came here, I came from South Africa to be trying to be like an Elon Musk of hedge funds or something like that. Right. And I thought this would be a place to be. Definitely very, very pro technology.
But weird things happening in the culture where it's not. And I think it's bad. Yeah, tell me more about that because. So I never expected to do a single interview where the words culture war were put together.
Like, just did not think that that would be something I would ever get involved in. Not the, the thing I wanna focus on. I'm about the individual. How do you empower an individual person regardless of where they were born, color, creed, nationality?
Nothing. To me, none of that shit should matter. It's like, can you add value to the world? If you can, you should be richly rewarded.
And now I find myself where the ideas seem self defeating to the very people that are promulgating a lot of the ideas. So what do you see as going wrong? As somebody who could look at America one way when you were younger, and now that you're in the thick of it, think, ooh, maybe some of these ideas aren't as useful as people are hoping. But what is broken in the parsing of that data, it's something like a desire for like a static society they don't necessarily want innovation in because it leads to uneven outcomes.
It could be that, but it's also just if you're older it's also annoying to have things change and have to learn a brand new technology or something. So I think there's something like it's. And it's like it's fine if all you're doing is kind of a joke. That's why I think kind of like NFTs are interesting because it's like a joke and so it's like, can't be illegal because it's just art.
And so the same people who I think. So I have a friend who created an NFT project and he's like, got a computer science degree, really good at machine learning and like he decided to make NFTs out of college. And it's like on the one hand that's cool sort of because it's like a protest art thing maybe. But on the other hand it's also like, is that the only thing that's not banned?
Like if you can't sell shares in your futuristic new bank or hedge fund or something on the blockchain, but you can sell pictures of cats or something. So we just did a big NFT drop and dude, the number of hours I had to spend with attorneys trying to figure out like, hey, I want to make sure that I keep supporting this thing. The SEC is not going to come after me. And of course the first words out of their mouth are like, hey, this is just a big question mark.
Yeah. Some of the attorneys were like, you shouldn't do it, there's questions. And so our job is to cya and so just, you know, don't. And, and then other people, you know, were far more thoughtful in their guidance.
But it is so the thing that winds me up about the system now that I'm like really looking at it. So the old system worked very well for me. Right. I generated a tremendous amount of wealth.
So while I was doing that, I, it seemed like everything was working perfectly. But then once I had wealth and I was like, oh, I want to do something with this. And then I need to look at the way the system is made for somebody who isn't an entrepreneur, which is the vast majority of humanity, then I started to just be dizzy. And it started with accredited investor regulations and I was like, wait a second, I am the dumbest investor of all time.
But now because I have over a million dollars in liquid net worth, I can invest. Like it was so strange to me that the value of an idea or a company or whatever is captured long before an IPO and it's now captured by VCs or, you know, accredited Investors. And so I remember the day that I learned about it, I was like, why are people riding the streets over this? Like, this is crazy and that's crazy.
And so to your point about NFTs, how do we get, how do we deal with that? What's like the path forward? Well, I mean it's, it's so obviously bad. And one thing that's kind of interesting I think is I do think there's quite a lot of research coming out on like marginalized groups, let's say traditionally considered marginalized people are actually much more likely to be involved in cryptocurrency and any of these new things because in some ways the other stuff is clearly not available to them.
So you have two friends and can't invest in each other's companies and it's like crazy. It's so crazy. And I actually didn't know about that law. I thought America was like, clearly, you know, the place to be for capitalism.
And I met a young guy who was like 23 or something, he wanted to invest in my company. And he wasn't accredited and he was super smart, knew exactly what he was doing, but he couldn't invest. And he had to kind of figure out other ways to be involved. But that's.
So how could you make anyone think that was a smart law to pass? And it's very much in the, in this framing of like protection, like how can we protect people from themselves? And that's the opposite of the American value of like individual responsibility and being able to pursue whatever dreams you want to pursue. Going back to my question about like, what do we think is broken in the culture?
That to me is a big part of this is I love the energy of wanting to protect people and making sure that they're safe. And you know that there's like in, in business, number one rule is avoid a mortality event, right? So you have to learn to hedge your downside. So I'm gonna try this thing and if it works, we've got upside, but it doesn't work.
I got a way to make sure that this isn't a catastrophic moment. So I get that like I, I can put on my, you know, my hat of giving them the benefit of the doubt. But at some point you have to look at what is the result of that system. And if you're looking at the result of that system becomes pre apparent that you've made things so hard, that it's only people that can cross this incredibly insane threshold that are going to be able to take advantage of It.
And so that is where this starts to really get wonky. But now if we take that hat off and we put on a cynical hat for a second, it really starts to be outrageous. Of you've created the ultimate game to isolate people that don't know how to play that game. And then it creates this sense of overwhelm which shuts people down.
And then they don't engage because, um. And so when the crisis, the COVID crisis kicked off, whatever we're filming this, like 18, 19 months into it, I started having like some of the biggest brains in finance on. And I didn't know how to do those interviews to be helpful. Cause I was trying to help the average person.
And I just could not get them to articulate. Like, how do you. You don't want to put the average person in a position where they have understand what's going on in China and trade wars and stuff like that to be able to make a decision. How do you think that?
Like, as you look at. All right, we have. We're wearing our cynical hats for a second. We have this system that seems designed to isolate the average person.
It is an incredibly complex system. I think that there is an answer that was presented, which I'll give my answer once you've got a chance to speak. But how do we help people in this new era navigate that without having to just tear down the old system? Well, it is.
I mean, I don't know. I mean, I. So numerai. We have a hedge fund and it's kind of.
Obviously you have to be a great investor to invest. So anything I'm working on, probably not for the normal person, but it's not for lack of trying. It's just the way it is. So, I mean, but I do think that there are.
I mean, there are more people. There are people involved in the stock market through things like Robinhood and ETFs and things like that. So I don't think, like, in some ways there is more access than ever. But then there's always like this underbelly story, which is like, well, Robinhood's selling the order flow to Citadel Securities.
And they're this huge entity that's kind of like Donald's like regulatory capturing stuff. But like. So it's every. That's what sad.
Every story you hear was like, about financial inclusion. It's like something in the background that isn't. That's like the dark side of it. But then when it comes to crypto, it's kind of like weirdly public.
You know, it's like there's every, everything is on chain, you can see all the transactions. You kind of know what you're getting into. And then when you have applications, like decentralized applications, you know that there are no intermediaries. And so there's something compelling about that for the normal person.
However, it's sad that many of those things can't be what are considered securities. So you can't say, I'm going to make a company and my company's going to be on a blockchain and we're going to turn, we're going to make a thousand shares and sell the shares to people to fund the business. That is like completely illegal. And so people are doing things where they almost are told they're not allowed to make their blockchain projects valuable if it makes return really bad.
And if you tell people it might go up really bad. And that seems strange that you're kind of pushing this energy into more and more things that aren't securities. It would be better if some of these things could be more valuable or could have an open, they could do what they wanted to do. So it's a, it's very hard, I would say very hard for people to navigate.
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Yeah, right. I think you actually though have your finger on the answer. It's interesting to me that you're doing it within the sort of traditional hedge fund world, but here is the my core thesis I'm building literally Impact theory is built on one idea. And that idea is if you want to scale in today's age, the fastest way to do it is to crowd validate.
So I came onto this idea, which probably was to people long before me, but it took me a minute because we're a studio so we're trying to tell stories and in any creative endeavor you can expect a 1 in 20 hit ratio. And so as I'm thinking through that, I'm like, okay, we have to then start with the most inexpensive way to bring these ideas to the public. And then in the inexpensive version, you want to get the crowd to vote with their attention essentially on what do they like, what do they not like. And as they validate that, then I spend more money.
So the, our value chain starts with what we'll call fan fiction. So just prose, right? Somebody's writing a story and people are either responding to it or not. It's often called light novels because it's not like, you know, Nabokov, where, you know, like some really deep shit.
It's fun stories. It's done serialized. So, you know, maybe you do a few pages a week or whatever and people just tune in and every week they know they're gonna get something. And so, okay, cool.
If that's popping off, then you move it to a comic book. Then if the comic book pops off, then maybe you do short animation, the short animation pops off and you pitch to Hollywood and you do like the full blown thing. And so you've got this trail of value where you can point back and say, hey, Netflix, the reason you should get this is look how many people read the weekly thing. We've already got, you know, 100,000 people that read that every week.
The comic book has a million people in a week. Our animated shorts, you know, have done hundreds of millions of views. So this is something that, you know, people are going to be interested to check out. Now you have to explain people exactly what riot does.
But the fact that you're essentially, I don't know, you would use the word crowd validate, but you're using this intelligence of the crowd to create a totally new paradigm for approaching the market. And I think you've tapped into something that is universal. It will work everywhere. You just happen to be using it for finance.
Exactly. I think you're right. That thesis is going to be completely right. This idea that you can make kind of communities and then those communities could have huge impacts over the long run because they get bigger and bigger and bigger.
Think about the Ethereum community or something like that. And newerai is trying to do that. So basically the trad finance. Trad finance, traditional.
It's like you have a lot of thousands of really bright people going into Wall street and you have thousands of sort of associated paper pushing kind of like imaginary bullshit jobs that we all know about, this kind of whole fake system. But you would think it would be worth it if they were good at their job. But it's like more like 80% of fund managers actually underperform. The markets don't beat their benchmark and they charge huge fees and they just keep getting money because it's often an agency problem.
So a big pension fund will say, oh yeah, you guys have a bunch of our money. And the pension fund gets to go to drinks with them. And then they slowly lose money over time, but they keep entertaining the guests, this kind of thing. And the people who own the pension fund don't even know where their money is, so they don't have any agency to stop that problem.
But anyway, Numerai was the idea was, could we make a completely new kind hedge fund where anyone could contribute ideas to the hedge fund signals to the hedge fund and the hedge fund would combine them all together and trade a really smart model that had a lot more alpha than a traditional fund. So people are basically giving you, here's what I think is going to predict the success of a given stock. So yes, but it's a little bit more, it's very quantitative. So every model that is submitted on Numerai is a machine learning model.
And so it's not really for everybody. It's not like you got to tell us your favorite stocks or something like that. It's much more complicated. So we give out a huge data set of thousands of features and decades of financial data, and all the data is completely obfuscated, meaning no one knows what the data even means.
Like if you look at our data, it's like millions of numbers between 0 and 1. That's it. And you're supposed to do something with that. And people can't do anything with that data because they can't, they don't know what to do.
It's too fast, it's too vast and there's too many features and they don't even know what the features mean. But a machine learning model can model any data set. Machine learning model can look at patterns in any data. Right?
And so everyone is downloading our data and using machine learning models like neural networks or tree based models or anything they want and finding patterns in that data that no one else has found before and submitting signals to us on 5000 stocks in the world. And again, they don't even know what stocks they're predicting on. It's kind of complicated, but it works. And they're predicting on 5,000 global stocks and giving Numerai a deep edge over anything else that's been done before.
Because we have by far the most models. If you take a big hedge fund like a Renaissance or Bridgewater or Two Sigma, the number of people who are actually modeling data because they have lots of compliance people and all those things, it's like maybe a few hundred. And Numerai already has about 4,000 models that every week are submitted to Power our hedge fund. Yeah.
So this to me is incredibly interesting. I don't understand though, and we'll come back around to the idea of just using the crowd validation. But machine learning, why doesn't a machine learn the same thing? Like why do all of these different models end up adding more value?
I don't understand how machine learning works, to be honest. That's a good question. It's a very good question. So actually, if you think about one way to think about machine learning is that it's like fitting a line, so fitting a curve.
So if you have an XY scatter plot of data, right. You can draw the line of best fit, right? The linear regression. So would find the mapping between those two variables and find the line that fits the data the best.
So for a linear model like that, there's always a right answer. So given any scatter plot, if you computed the line of best foot and I computed the line of best foot, we would get the same answer. And numerai, what we're doing is not just an X and Y coordinate system. There's about 10,000 dimensions of the data.
And anyone can model the data, so they can use any type of model. And so what a neural network is, it's a non linear model. So it can combine those features in all kinds of ways. And so the more features we give out and the longer the data sets, the more types of models could be discovered.
And so actually many of our users are finding things that are really strange and might never be found by another hedge fund. But by having thousands of those unusual uncorrelated models, you can create a very, very high shark ratio, which is like very high return per unit of standard deviation in your returns. So that I can see if I can understand machine learning at a really basic level. I'll give you the example that I saw a video of and fell in love with it and just think, this is so extraordinary.
And I use it as an example of learning from your mistakes. But now when I actually understand what's going on. So it's a game called Breakthrough and it's like an old Atari game and you've got a paddle and a little ball and then you've got these bricks at the top. And the idea is to break all the bricks as quickly as you can, basically.
And when the machine starts playing, the little paddle is just wiggling like Mad clearly the machine doesn't know what it's supposed to do. So I don't know if they called it get a high score. And so it's like, okay, like, I know I can't move paddle. And so it moves paddle randomly.
The paddle finally ends up accidentally colliding with the ball. The ball, and breaks something. Now the machine's like, oh, I'm sorry, I see how this goes. And then now tries to hit the ball.
And then it hits the ball and it starts getting points. Then one time it breaks through all the way on one side. And now the ball starts bouncing automatically at the top and automatically killing everything at the top. And paddle doesn't have to do anything.
So then the machine starts to optimize. How quickly can I break through one of the sides and get the ball to do this auto bouncing at the top and break all the things? And so what is the person doing to explain to the machine? Like, is it giving it an incentive to get a high score?
Is it telling it wiggle the paddle? Like, what does it do so that then the machine can actually learn? Great question. And that's a great example of machine learning.
So what's happening? There is, there are features, right? What do I mean by features? Just like at any given state, there's stuff to know about the system.
And so you know where the paddle is and you know where the ball is, maybe. And based on the pixels on the screen, those can generate a bunch of features. And then you're basically fitting a model to those features and learning from experience. Are you teaching the machine that there is a good state and a bad state or a better state and a worse state?
In that particular game, I think they did give it a score and they just said, optimize the score. And in a similar way, how sometimes these machine learning algorithms can become so good they have almost like an alien intelligence. Like the way it breaks the breaks up into the top of Breakthrough and just sort of like starts. It just becomes like, whoa, you're like perfect at this game.
And my hope is that with Numerai, the longer we go on, the more alien and peculiar the types of trades we make. I'm trying to reach into your mind and figure out what you mean by alien. And I think it's this, that there's no emotion. There's no emotion.
And it's also unexpected. It's like a creativity that emerges and it's like, why did you think to trade Tesla? Now everybody doesn't like Tesla or whatever. And then he's like, well, I don't know why, but the models have started to get really, really intelligent and do things where we're like, whoa, that was a good trade.
This is so interesting. So I'm going to keep pushing on this. All right, so you're giving, you're telling the machine to look for states. I'm guessing if we're numerate, why are you going to tell me that?
You don't know? I'm going to say things out loud. I gather they're going to be flaws on this if I'm trying to come up with a numerai signal. So I'm saying here's the thing that I think will accurately predict what trade to make when that I have to tell the machine that's parsing out historical data, I have to tell it that there are certain things to value over other things.
One of those, I'm guessing, is return on investment. Yeah, exactly. That's your first guess that you might want to tell it to choose to make return. So the target variable, the thing you're optimizing for is return.
And where this becomes alien is that I think, ooh, actually don't optimize for return. Optimize for this. And it happens to give me a bigger return. Yes.
In fact, we don't optimize for return. It's much more complicated. And you, because when the stock market, you're not just trying to choose one stock and put all your money in it and hope it goes up. You're trying to build portfolios.
And in fact, with numerous funds, we don't really mind where the stocks go as long as the portfolio. Yeah, most people don't know what hedge fund is. That's true. Even so, I'm going to give you a definition of hedge fund and you're going to tell me how off I am.
Here's what I think. So I try to make sense of the word hedge so that most people think the stock market is. You choose the right stocks that are going to go up, whereas a hedge fund is going to be able to go in either direction because they're hedging something. So either if the stock market is going down, you can hedge know actually it's going to go up, or the stock market's going up, you can hedge and say, no, I actually think it's going to go down.
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Love the way that's correct. And yeah most a market neutral hedge fund is kind of the purest version of a hedge fund where every long position, every stock that's bought is also a corresponding short position. How does that just always equal zero? It should.
Yeah. That's what's cool. If you, if you have lots of longs and lots of shorts and you bought them randomly and all along means is the value is going to go up and the short means the value is going to go down. Exactly.
So you've got longs, you got shorts. The expected value of that is 0%. And if you bought the because the basket of random stocks you're buying have an expected return of the market so it'll kind of grow as much as the S and P. They've already got 500 random stocks and then the expected return of the shorts are also negative the market and so together they make portfolio that shouldn't move.
And the trick is what if you didn't choose randomly and you chose with intelligence, maybe you could have the risk of cash. Because it's just if it's not supposed to move, you're taking the risk of cash, not taking the risk of the market. And they know what that means. You're taking the risk of cash, not the market.
Yeah, so it means like, if you have $100 and in your account and you go long $100 and short $100, you haven't spent any money. When you short a stock, you get money for selling it, even though you don't own it. How. God, this gets complicated.
So I've. I've, thankfully, I've walked through this with my money manager, and I think you want to punch me in the mouth because I was like, I don't fucking understand this. But now I have a loose enough grasp. So basically, if I am betting, which you're probably going to hate that term, but if I'm betting that the stock market is going to go down, there's somebody else who's betting that, that it's going to go up.
And so people are willing to buy my position and there's like, they're paying me to guarantee me to buy it. They are, they are making a little deal with a broker to borrow your stocks for shorting, and they can borrow your stocks. And then once they borrow them, they sell them. And so they're selling something they don't own, but they will, they will return your stock later, whenever you need it.
But somewhere in here, we get into Wall street bets and how you can really fuck people up with shorts and stuff. Maybe explain that. Why? How does it end up being dangerous?
Because I still can feel that my brain is confused and I've had this conversation a lot of times. No, it is confusing. So, yeah, it's quite weird. Like, if you have $100 in your account and you short $100 of stock, you'll have $200 of cash.
In theory or in reality? In reality, yeah. How? But you're.
Because you borrowed stock from somebody. You said, he can borrow some stock. I'm like, sure, you have a little bit interest, but, like, you can borrow my stock. So now I haven't done anything.
I've still got $100 and I've borrowed $100 of stock. And now because I've borrowed it, I'm also allowed to sell it. It's mine to do whatever I want with. So I sell it and then I get $100 of cash proceeds.
So now I have $200. Have I doubled my money? No, because I have a short position. I have to return the stock eventually to the person I borrowed it from.
And therefore, if that stock doubles, I will lose everything because I have to buy it back at the higher price. I would buy it back at 200. So if the price actually goes down, then I was okay, because I sold it and I don't have to buy it back. You can return it at the lower price.
So if it goes down to 50 and it goes down to buy more and I got the vig on the Delta. I got the Delta. Yeah. Fuck.
So that's how shorting works. And you can see why it's scary because this is complex shit. This is like really gambling, but this. So you're going to say something, I'm guessing, about the efficiency of markets?
Yeah, I would like to say something about that. But yeah. I mean, if someone knows something about a stock, knows it's going to go up, you want them to buy it because they're putting their. They're making the market more efficient because they're putting buy orders on that stock and it becomes more valuable.
If someone knows something about a stock like it's going down, why shouldn't they be able to express that knowledge in the market so that the price of that stock tends towards the same? Because it's mean and it will influence people's perception. Now, I'm not saying you actually shouldn't be able to. You probably should.
I don't shit about it, but that would be one. That's one thing that freaks me out about shorts is if you're paying attention and people see, ooh, that person who I think is really smart is shorting it. Now my psychology flips and I think it's going down. And that brings us right to fucking Wall street bets, where it's like, you really can influence markets.
Yeah, for sure. And there's maybe some questions about whether you should be able to short and then also take out a front page ad in the New York Times that says this company sucks and everyone should sell it or something. People do that kind of thing. And that's what was happening with Tesla.
Even you had these kind of normie analysts on Wall street making up stories and trying to get Tesla to go bankrupt. And that would have been a very bad outcome for the world if that happened. And it was quite close. So then, you know.
But yeah, it worked out in the end. So I would say that when we short, we're shorting like very small amounts of very small, and we're actually not interested in the company losing, we're just interested in hedging our risk with a company that we think is like, average. And so those are the companies we tend to short. And I do think there's big questions about the sort of activist shorting where they're like, this company's a fraud, it's going bankrupt and they get huge positions.
But thanks to markets, they've been killed already. So the Gamestop people killed those types of shorters. In fact, they shut down their firms. Is this the craziest story of the last, like, five years?
I mean, this is absolutely bananas. Walk people through that. I don't know how familiar my audience is with what happened with Gamestop and Wall street bets. Walking through.
What does Wall street bets? Let's start with that. Well, I'll tell you a funny story, actually. I was coming back from South Africa after Christmas and I was stopped by the immigration and they were like, what are you doing in America?
What's your job? And I was like, I work at a hedge fund. And he just started laughing. He's like, did you.
Were you short gamestop? And he was just like, laughing. He was so happy. He was so happy that the hedge fund people were struggling under the Wall street bets thing.
So it was a very interesting kind of movement where GameStop considered kind of a bad company, not many prospects and. But Reddit people decided they really liked it and kind of got together and pulled off this massive short squeeze where they knew a lot of people had shorted this company and they knew that the more the price went up, the more they'd have to cover their short. As in, you know, do this, what we just described, where you have to go out and buy it, buy the company that you don't even want to buy in order to return it back to the person you borrowed it from. And why can't you just wait for the price to come back down?
Because you have some kind of risk mandate in your fund and maybe you have a deal with your investors where they say, you know, I have more than 30% in one name, otherwise, you know, we're going to pull the money or sue you. And so they maybe put 10% into games to stop short, and then it went to 30%, 30% of their positions because the value would be so high for them to have to buy it that on the books. It changes the ratio. Exactly.
Yeah. So it's something that's a huge position and they have just a rule they can't keep holding it even if they think it's going to eventually go down. Their risk limits. Say they have to sell some.
And so as an exit position, so they end up needing to go into the market to buy the exact thing that they think is going down and that pushes the price even higher. That is crazy. Yeah. And so it was very interesting thing to watch because it was a bit of like, maybe crowd validation, because it's like you have all these people and they're posting screenshots of their accounts on Robinhood, proving that they're in and that they're diamond hands, they're not going to sell.
And suddenly people like me, we can do this. And in this kind of distributed way, decentralized intelligence, they end up doing something that was actually very smart and did cause big ripples in the hedge fund industry, because a lot of those stocks were. When that type of thing is happening, it affects all kinds of other stocks. So there's almost like a huge rally in these kind of junk stocks.
And all the hedge funds are short the junk stocks. We even short some of them, not GameStop, but some of them. And they don't know how to deal with that type of event. And it's almost like unprecedented.
And so you had funds like one of Two Sigma's funds was down 8.6%, which is like one of their worst years, one of the worst months on the record. And many, many other quant funds did terribly because of this. So it really did have a negative effect on those markets. Okay, so what was going on there is.
So WallStreetBets is a Reddit sub. A subreddit. And so it's just a bunch of humans that are in a space sort of together, talking about, were they saying, hey, let's go. I believe in GameStop and I want to see it go up, or, hey, guys, if enough of us buy into this, we can fuck over the hedge funds.
Yeah, it's hard to know what the sort of, like, aggregate motivation was, but there were people who liked the stock. Like, even Michael Burry, a big short guy, he owned it. He thought it was a bit undervalued. At the time, this money was on $4 or something.
And then there are other people that came in and for their own reasons liked it. But then it started to become like, well, someone's posting that there's this huge hedge fund that has a huge short position, and all we need to do is to get this up by $50 or more and they'll be toast. And we can literally take their money out of their fund into our Robinhood accounts. That is insane what you just said.
We can literally Take the money out of their accounts and put it into our Robin Hood accounts. That's bananas. That's the show cover. Here's why I always encourage people to don't think about things.
Think about the nature of things. Once you understand what's really going on. Like, I could never pull it off because I don't understand it well enough. Because I don't understand it well enough.
I can't think from first principles. And if you can't think from first principles, you can only follow. You can't lead. And wow, like, that is really, really fascinating.
So this whole idea of distributed anything, we're moving into a really fascinating period in human history. And my mission has slowly become over the last 18, 19 months since COVID kicked off, getting people to recognize that we're going through something unprecedented right now. But in any moment of disruption is tremendous opportunity. I wanted to have you on the show because I see you applying that to an area where I know people told you to your face, like, this isn't going to apply to finance, which you're really pushing back on.
But going broader than finance, why do you think there is. Why is decentralization as a movement? Well, one. Do you think it's inevitable and the future, and if so, why?
Someone said to me that what decentralized thing has ever really worked? And I was like, what? Literally capitalism. That is a decentralized.
That is the story of it. So it's like this idea that if you leave people to their own decision making and let them start things and create capital, it will just kind of do amazing things. And no, there was no central planner who called Elon Musk 15 years ago, 20 years ago, and said, you have to start an electric car company. Please do it, we need it.
No one, it was from him. And so you can have a system like the capital system, where you have amazing outcomes from people following their own instincts and motivations. But decentralization now means a lot, like crypto related stuff. And it's like, why is that decentralized?
Well, no one's in charge. There's no one who can stop you from building a small set of instructions on the blockchain and have that become a very valuable piece of financial infrastructure. And that's so empowering for people. And to make it even more intense, why crypto is a kind of hypercapitalism.
Even if that thing is doing something wrong, like it's a little bit scammy or a little bit scary, there's no one who can stop it. And so in the capitalist market. In United States, if a company's doing something wrong, they can just be shut down. But in crypto, it's more free, but it's also more dangerous for that reason.
But the benefits so far seem to be outweighing the bad things. I mean, the good things on crypto are very good. What are the good things in crypto? Well, I mean, some of the things like, say, Uniswap is a really interesting exchange and it suddenly got.
It's a decentralized exchange. There's no intermediaries. You don't need to sign up to it, you don't need to kyc yourself, you don't need to do anything. You just trade.
And it's got. Some days it has more volume than Coinbase. And it was started like, I don't know, 18 months ago or something. So there's that type of thing that.
And it's also got no one working there in some way. So there's some coders who work at a company that sort of support the protocol, but the protocol's out there and it can't be taken down ever. Ever. So it's kind of cool.
Yeah. This to me is. This is the closest I've ever felt. There's two things I will say.
There's two things that I'm like, you have to stop and look at these two things because it will change your life so profoundly that I've given my entire professional life to getting people to understand two things. The first one I knew would be a thing because mindset. So that, like, changed my life. It took me from scrounging my couch cushions to finding a change to a gas my carbs, the real story to, you know, having serious success in business.
And so I was like, whoa, this is teachable, it's repeatable. Other people can do this. And now the other is. I don't know what word is shorthanded to maybe decentralization, maybe crypto, I don't know.
But the shift in cultural energy to things that can't be censored, stopped, broken, whatever, going outside the system, maybe that's it. And when I see what's happened like this, the number of people, in fact, I'm saying it now to everybody listening to this, you have to do your own research. I cannot see the future. This is not financial advice.
I'm not financial advisor. I do not know what the fuck I'm doing. So all I want people to do is look at it. And if they look at what's going on in crypto and they reject it for now.
Maybe you know something I don't and maybe my gains are short term gains. This is so possible. And I cannot stress enough that people need to do their own research. But now, having said all of that, what I want people, the reason I want people to do their own research is the rich getting richer is not a phenomenon I find interesting even though I am wealthy.
And so this like crypto is playing out extraordinarily well for me. All I do is dollar cost average, I buy a little bit every day of what I call the blue chips, like the safest ones. Cause again, I do not know what the fuck I'm doing. I did not spend my time.
This one's a pretty risky, already ultra volatile. But like getting in there and learning about where all the cultural energy is flowing and at least looking at it like, otherwise, dude, this is gonna be another thing where a small number of people who are in the know end up reaping all the benefits. And so I am so eager to get people to even forget, like crypto as currencies. Anybody out there who's contemplating starting a business understand why the culture wants that to happen.
Because you can deploy that, as you have done with numerai, into a business, whether it's finance, whether I'm doing it on a studio level, this is going to happen everywhere. This is what I think is the inevitable future, which all sum up is saying this. You have to find a way to tie the community into the success of a product and company. And if you fail to do that, you will fail in business, you will fail in finance, you will fail in everything.
And it is, it's a transition that's happening so rapidly that there will be outsized success over the next. I don't know. I don't know if it's five months or five years or 50 years, I don't know. But it's happening so rapidly, terrifyingly fast.
And it's absolutely thrilling. I'm having the ride of my life. Most businesses will not be able to switch from extracting value to giving value. And that will, I think, will decimate them and is exactly why there's huge opportunity in this moment of disruption.
But I'm just so eager for people to really look at that. Yeah, it's very hard for people to get their head around that simple fact of like unstoppable or immutable technology. And because they've grown up in a world that is very controlled. So if you've had the experience of posting a picture on Facebook or Something and then it gets reported for some violation and then you realize you're not.
This isn't your profile page. This is like. And even they could change the design of the page. They could change what, what content is shown to your friends.
You could be sort of shadow banned. And so if you think like that, you don't have any kind of relationship with any of the web. Two things that you've been involved with, like Facebook or Twitter or something, you are. You're not in any position of real ownership.
And that is what crypto changes. And that's very, very powerful difference. If you upload, and that's maybe what you're seeing with NFTs, if you can upload an image to your Facebook profile and everybody can see that image, that's extremely, extremely low value compared to if you can own that image or a token that represents that image. One is worth nothing and some are worth $60 million on the blockchain.
And so the difference between owning something forever and being this kind of like, sort of like slave to a system is a very different mindset and people. It's like one of my friends said, Fred Urson, he's a co founder of Coinbase, we went on hike a long time ago in like 2013 or 14 or something. 15. And he was just like, I think people want to like, own their stuff.
And I was like, what is this guy talking about? He's like, I think people want to own their stuff. And I always remember that because that's exactly what it is. You don't.
It doesn't feel like we own things anymore. Like, even if you own a house, it's like somehow vulnerable to some government change of the way they. Yeah, it's crazy. Like, I'm in my 40s, I shouldn't feel this way, but I do.
It feels weird. Yeah. You feel like you don't own. Yeah, it feels like there's just a lot of, like, meddling, a lot of.
And maybe it's just restriction, I don't know, but there's something really intoxicating about this idea of actually owning your shit. Yeah. And I've become way more enamored with virtual goods, which I would not have believed. If you told me this a year ago, I would've said, no, no, always.
Like, I dig it. I get virtual stuff. I've always understood that. That's just made sense to me.
But I would have thought that I'd always value the physical more. And somewhere in the last 12 months, I changed. Yeah, that's an incredible thing to change, to feel like your relationship with your physical world is somehow fragile, but then your relationship with the digital world is actually fixed and permanent and doesn't need police. And so that's a very powerful thing to be aware of.
And I do think you're right that over the next few years, people that don't get that quite right are going to be in a bad place. And I think even the big owners of the big monopolies like Facebook or Google or Twitter or any of those things, they're totally aware at this point of this huge sea change. And they've built out a lot of relationships with the deep state. Basically, they follow the party lines, but they are also run by, in some cases, entrepreneurs who maybe don't want to play that way forever.
And if the Internet is going to be free, which seems like a thing that will continue in the United States, hopefully, then all this crypto stuff is part of it. It's not like we can really have a free Internet and not have crypto. Either the whole Internet's free and kind of unregulated, or it's not. And it's a very different game.
If the US Starts saying, well, no, you can't use this application, and what do you think will happen? I'm very curious to see. I think it's going to be very intense the next couple of years. I'm kind of worried about, like, some of my friends in crypto, because there's a lot of good intentions and a lot of good actors in the space, especially in the United States.
Like, the people here are nice. They try and make nice things. They're very wealthy. They're not worried about making money.
They really do want to make something special, something new. And if the good actors get targeted, then it's like a particularly sad state. Like, if you like Brian Armstrong, founder of Coinbase, he had the situation where, like, he's like, well, he's been talking with the SEC about these issues for so long, and they put so much thought into the regulatory policy, but they keep getting kind of treated badly, I think, by regulators, even though they're so clearly good actors. Yeah, this will be.
It'll be really interesting. I'm worried about what happens if the US Tries to clamp down on it. There's so much cultural energy pouring into it. And look, you used a great word earlier that crypto is.
There's a sense of danger to it. So I just had an experience this morning that was absolutely hilarious. So because there was a period of my life, an Extended period of my life in my 20s, where every dollar counted in my life. And so I developed this real frustration when banks acted like my money was their money.
Yeah. And now that it's on a grander scale, I still have that sort of rage inducing mechanism. And just today I was trying to wire a non inconsequential amount of money, but first of all, they trapped it and so they stopped it. And I called them, tried to deal with it.
Nope. They wanted me to go into a branch. I'm like, guys, I do not have time. A and B, Covid, no thank you.
So not super keen to go in the bank. Let's just deal with this over the phone. They were, one, you have to stand hold for ungodly periods of time. And then second, they were like, what?
Why are you wiring the money? And that's like my red line. I'm like, that's not your fucking business. Yeah, this is my money.
I'll fucking wire it to whoever I want. Like, thank you for the protection. But like, asking me what I'm doing with it, like that drives me fucking crazy. And so once you get into crypto and you see how easy it is, one, it feels a little scary because you're like, I could send this to the wrong address and it is gone forever.
Like there is no getting that back. But the first time you send a payment and it's like 0.2 seconds, it is amazing. And so the reason I had to wire the money, not that I was willing to tell my bank this, not that, nothing bad, but I was trying to buy an NFT and coinbase limits. Right.
The amount that you can send in any one day. And so that's important thing to note is there are some parts of crypto that are centralized and so you run into the same issues, but once you get your wallet, you do whatever the hell you want. So anyway, I was having trouble getting enough in my wallet to buy this nft. So I ping a friend and I was like, yeah, I'm trying to get this.
And he was cool, I'll send you the eth, then just wire me the money. And so the hilarity of it took him 0.2 seconds to get me the ETH. And it's taking me like four days and like battling with my bank to give me the money. I was like, oh my God, this is so obnoxious.
Well, it's funny you say this like I just had this kind of experience. So for some reason, just because I made a. I sold some crypto That I had not one that I bought a long time ago from a friend's project and sent some to my bank account, shut my bank account down, card blocked everything. And I was like, what are you guys doing?
And I have like a private wealth person who's supposed to be like looking after my interests and she's like, well, you know, we need to do some kyc. I'm like, what are you talking about? Like, you do know, like me, I have been like at the bank for like 12 years and now I'm like, I paid. I got my assistant who works for me, Sky Pedro, he catch, draw money from the cash, mail it to me by FedEx to the hotel so I could afford to like buy a cab to go to the conference that I'm going to.
And like, it's still in process. My Netflix is. I can't even watch my gifts. My PayPal's off and I'm like kind of a good citizen of the financial system and I paid like a lot of taxes and like fuck it, man, I hate it.