Transcript – IG – Building a $6B Hedge Fund in Crypto with Joey Krug of Pantera Capital

Please enjoy this transcript of my conversation with Joey Krug, Co-CIO at Pantera Capital and Cofounder at Augur and Eco.
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January 5, 2022
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Joey is an adviser for multiple blockchain projects, including 0x and Numerai.
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Please enjoy this transcript of my conversation with Joey Krug, Co-CIO at Pantera Capital and Cofounder at Augur and Eco. Transcripts for other episodes can be found here

“When you're investing and you have a position that you think you have conviction in, where you think it's very high odds that you're right, take a big swing at it.” – Joey Krug

Joey Krug (@joeykrug) is Co-CIO at Pantera Capital, a crypto-focused asset management firm. He is Cofounder of Augur, a global betting platform, and Cofounder of Eco, a personal finance app utilizing USDC. Joey is also an advisor at 0x and Numerai.



IG – Building a $6B Hedge Fund in Crypto with Joey Krug of Pantera Capital

Daniel Scrivner:

Joey, thank you so much for coming on Outlier Academy. I am thrilled to have you on. This is probably one of the conversations I've looked forward to the most. So thank you so much for making the time, and for joining me.


Joey Krug:

Thanks for having me.


Daniel Scrivner:

So I wanted to start, if anyone looks you up and looks at your background, I mean, it looks like you do a lot. You're co-founder of Eco, you're co-founder of Augur, you're co-CIO of in Pantera Capital. So just as just an initial question, I was curious what an average day or week looks like for you? Where are you spending your time on? What are you trying to focus on? How are you fitting in research? What does that look like?


Joey Krug:

I'd say most days, I mostly have calls from 11 or noon until the evening, because I'm actually based in Puerto Rico. So the time is four hours ahead of the West Coast, so by the time it's noon here, it's 8:00 AM in California and people in California don't do calls that early anyway. So for the most part, I don't have to do too many morning calls. And so, during that time, I'm able to do a lot of looking at the markets, going through emails, because I get a few hundred emails a day, so it's kind of sifting through all that takes quite out a while. And then, any actual strategic stuff that I'm trying to work on, on my to-do list I tend to do then, and then also in the evenings as well. And then, during the day I'm mostly on calls and then calls are kind of with, I'd say, two or three groups. One is, potential LPs [inaudible 00:01:17] LPs in our fund at Pantera. Two is, companies that we're looking at investing and companies that we're already invested in, just regular catch ups or if they need help with something, that kind of thing.


Joey Krug:

And then, I'm on a few various syncs as well. The Eco currency is something that I'm not supposed to talk too much about, but basically, that is something that I spend some time on that as well, mostly just a couple days a week, there's like a sync kind of catch up call on that. And then, the rest is, I spend a lot of time reading, whether it's reading regular news, try to figure out the macro environment, whether it's stuff within crypto, because there's always new things happening in crypto all the time. And then, I guess the last part of what I do is, you have a lot of messages. Every time I go to sleep and wake up, I have a zillion notifications on my phone. They're Signal, Telegram, Slack or email, and you kind of have to respond to those basically every day. Otherwise if you took a few days off, it would be almost impossible to catch up. So that's the other piece as well; lots of notifications.


Daniel Scrivner:

Yeah. All the Discords, and Telegrams and everything that I imagine you're in. Well, that sounds about like what I thought it was. So you do a lot, every single day in terms of purging emails and messages, as well as then trying to spend focus time. So we're going to talk about a lot during the course of this interview, but I wanted to start with, I haven't heard you talk a lot about when you first became interested in crypto, and I want to talk in a second about Pantera, and then we'll talk about the other projects that you're working on and you helped co-found. But I just wanted to ask the question; I know you worked on Augur initially, was that your first dive into crypto? If not, what was that? And what was it that hooked you in, or made you interested and made you feel like this was an area worth exploring?


Joey Krug:

Yeah, I mean, I'd say the very first thing was mining Bitcoin in 2011. I came across that on this post on a form called overclock.net, and it was about how you can earn free money with your graphics card. And that seemed really interesting to me. I was in high school at the time. One, I'd never really seen use cases for GPUs outside of gaming. I was too ignorant to know about what people were doing with GPUs and machine learning back then. And even then, it was still primordial anyways; people weren't, as far as I know, running these massive [inaudible 00:03:15] setups on GPUs anyway, so pretty much all you do is gaming. And I thought it was interesting that someone had created this thing where you could run a program on your graphics card, and use it for something productive to earn money. And then, started reading about what Bitcoin actually was, and then thought it was really interesting.


Joey Krug:

I've always kind of been one of those people who thinks that governments will tend to print money, or spend as long as they can, so I always kind of been interested in things like Bitcoin. So, that's how I got started. And then, I'd say in 2014 is when I came across Ethereum. I thought that was actually much more impactful than Bitcoin, which is something that a lot of people may hate, but it's much more impactful because it actually lets you do stuff. It lets you program money, and that's really powerful. That's how I ended up getting into Augur, and that kind of stuff is 2014.


Daniel Scrivner:

Did you also find down about Ethereum on a forum? So we put the very early innings, both of those?


Joey Krug:

Well actually I first saw Ethereum before I dropped out, I was going to Pomona in Southern California, and remember one day I was sitting on the couch, and I saw this post on the Bitcoin subreddit about Ethereum. This was late 2013, the first forum post effort about Ethereum was on Reddit I think, but ended up thinking it seemed dumb, all the comments were very negative. I had a few minutes like after class, and so I read a few Reddit comments and I was like, "Okay, this seems like some random dumb project." And then didn't really come across it again until, I'd say, summer/fall 2014. And in the summer/fall 2014, I was working on this point of, of thing where you could pay with Bitcoin in stores, realized that was a really way too early and also a dumb idea for a lot of reasons. And then, shelved it and started working on prediction markets kind of in the fall.


Joey Krug:

And we were initially building a prediction market on top of Bitcoin. We basically modified Bitcoin code base, we're going to make like a Bitcoin side chain, and ended up talking to Vitalik on, is kind of the second contact I have with Ethereum. And he was basically like the thing you're building. I like it. I think it's cool. Really Ethereum was designed for this and you should really build it on Ethereum." And I asked some stupid question, I was like, "What about Ethereum's monetary policy?" And I don't even remember what he said, but it was something like, "We're not trying to be like the next gold. We're trying to create a platform for people to run applications and held out a bit more." I was like, "Okay, well that's actually what I need." And we ended up building it on Ethereum and never looked back. But I'd say Eth is one of those ideas. I'm like, Bitcoin, I came across, I thought it was cool and immediately bought in, Eth was like, I kind of resisted it at first, and then didn't realize how cool it was until I actually needed it.


Daniel Scrivner:

It's just fascinating because if you go back in time, today, there are all sorts of incredible stats in terms of on chain usage for Ethereum, from everything to just the number of transactions that are processed, the number of money that's locked up, you can look at NFTs that are on chain. So you see a lot of real word usage today. You didn't used to see that. So was that a part of your initial hesitation, was just no one else was building on it and you just didn't believe that maybe that was going to happen?


Joey Krug:

Yeah. I mean, weren't that many people building on it. That's true. I mean like there was us, and I think after us there was some project that was literally just a forum post. Some guy wrote a post and said, "I'm going to create this thing called E dollar." E dollar became MakerDAO, by the way, that was the name before it became Maker. So yeah, there weren't that many people building on it. It also wasn't live. It wasn't something you could actually use in production, it was this thing where you could run a Testnet. It sounds crazy now, looking back on it; we were building on Ethereum, as the main, core features of the bot team were getting added to it. They weren't even in alpha or beta, they were in what they called, "Proof of Concept stage." I think we started when they were Proof of Concept Four or Five, something like that. When we started building support for strings of text, you wanted to have the title of a market, "Who's going to win the presidential election?" You couldn't do that by default. You have to encode the words into numbers, which would kind of be a pain and a bit annoying. And so I asked the Vitalik to add support for strings, and he did. And I guess what I'd say is, it was just so early that it was tough to know that it was going to be what it became.


Daniel Scrivner:

Like many early things. Look, they don't look like serious things that you should take seriously just yet. I want to talk about Pantera and then we'll go and explore some of these other projects. But part of the reason I want to talk about Pantera is even hearing some of this early background, it's fascinating to then jump forward in time and think that in 2017 you join Dan Morehead who used to be Head of Trading for Tiger Global, who founded PanTera Capital back in 2003. And I'm not sure at what point he started focusing on crypto, but you end up joining as co-CIO in 2017 and PanTera is this first money manager. You guys now manage over 5 billion in crypto assets today, which is just incredible. And it's been fascinating because I've, I think received Pantera's newsletter for at least three years, four years, and it's just been such a cool window into what you're looking at and reading Dan's commentary on the markets. So I want to just ask the question to start; how did you and Dan first connect and what was the pitch, or what was interesting to you about joining Pantera and focusing on investing?


Joey Krug:

Yeah, well, so he first met actually at a party in 2014. It wasn't really a party, I mean it was a tech meetup thing for this company Blockstream was launching. They're a company that was building a ton of interesting stuff on Bitcoin. They had a bunch of the core data work there and they were launching some product, I forget what it was and they had a launch event for it. And it was at this house in the middle of nowhere, you have to drive an hour out of San Francisco, and out these steep hills and really, really bizarre. But we met there, talked a little bit about, really briefly, I think we just shook hands and maybe introduced each other, and then didn't really meet again until I would say early 2017 that's because Paul, the third partner at Pantera reached out and I had been doing a bunch of deals at the time.


Joey Krug:

There were two that I had syndicated. One was Numerai, and that was just the Numera token. And then, the other was 0x, the first decentralized exchange. And through those, ended up meeting Paul, talking to him, and Dan for the course of like three or four months. Their pitch was like, "We're going to launch these new hedge funds." And the space was getting really complicated, and Dan was like, "I have a finance background," Paul had this great networking background and knows everyone in Venture, and they're looking to bring someone on who was technical, and had operating background, building stuff in the space. And when I was looking at, one, I wasn't ready to make the shift to investing the first time they reached out. I had been doing a lot of it because it was fun. And so it's not like I was talking to a bunch of other firms at the time.


Joey Krug:

But then, the more I started talking to them, kind of the more I started thinking about, if I did do investing, what kind of firm would I want to join? And the other firms in this space, some of them were all tech guys, some of them were all finance guys, there weren't really any firms that would've had three partners who had three kind of complimentary backgrounds, I would say. And then, also Pantera just being around the longest, and it's not a fly by night shop. I remember in 2017, there were a million new firms that got started. All those kind of reasons were basically why I ended up joining.


Daniel Scrivner:

And what made you interested in investing in the first place? I imagine as someone that had built and co-founded a protocol before, and you'd been participating in this space for many, many years at that point, what interested you about investing? Was it just exposure to new ideas? Was it helping teams? There's not many people that are both building and investing, so I think that's unique about your background. But also just, I think how good Pantera has been in terms of making investment decisions. I'm curious, what was the spark for you personally?


Joey Krug:

For me, I'd say, I think investing's really fun, and it's fun for a couple reasons. One is that you get to talk to a wide range of people who are building a wide range of things, that are all very, very interesting, and they're basically dedicating their lives to it. Depending on the founder, you're working 80 to 100 plus hour weeks, and it's kind of all you think about. And I think, on the investing side, founders come to you with problems that they want advice or thoughts on, or things that they need help with, whether it's closing a candidate, or they have some legal problem that they want info on, or they have some tech problem where they want advice on like, "Here's a solution we came up with. Curious what your thoughts are," kind of thing. And so, I think that's really fun, and it's rewarding to kind of help out with those things.


Joey Krug:

And then too, I think on the other side, investing itself is just a fun activity to me. You kind of have to find something out about the world that you know is true before other people figure it out, because if they have other people have already figured it out, you'll probably make a solid return. It's kind of like, if you buy the S&P 500, you're going to make an okay return, but if you're trying to make free times that or more a year, you have to find something else about the world that no one else knows yet. And that's just super fun, I think.


Daniel Scrivner:

Yeah, and I think it's fascinating. And I think it definitely expands your mind because you get an overlay of everything that's going on. Not that you see every single deal, but I think that you just have a very different perspective on what's out there, what people are building, what issues they're running up against, what people are thinking about. I think it's one of the most interesting perspectives on the world. So I want to ask one more question, and then we'll move on and talk about something else. One of the things I was curious about is, so for you, you got your initial exposure in 2011, 2014 to both Bitcoin initially, and then Ethereum. You've been in the space now for a decade plus, and it's been fascinating for me. I first made my first Bitcoin purchase, I think in 2015, much later after you did. And so, for me, I've seen market cycles just over in that period in the 2017 period.


Daniel Scrivner:

So one of the things that I wanted to ask you about is, was there a moment, emotionally, after learning about these technologies really early on when you finally felt like we were at an inflection point? Because I would say clearly, yes. If you look at on chain usage, remember one stat I saw recently was there something like, I think 10 million active users and nodes on the Ethereum network, which is still very, very small compared to the size of something like Amazon, or the size of other, I don't know, benchmarks that you would use. So you could say that we haven't hit that inflection point; that's still coming. But I would say, we've definitely hit a clear inflection point in terms of crypto, generally. Was there a moment for you where you felt like, "Okay, this is it I've been following this for a while. This is finally something I think is really big," and what was that?


Joey Krug:

Yeah, I think there's the moments you have early on where you realize that it's real. I remember in 2011, so I mined my first Bitcoin, right? But I also bought some, I think it was in June that year, the price was somewhere between five and $20, I forget. But it was basically the day when, within a couple hours after I bought them, Mt. Gox got hacked the first time, not the big hack where all the money got stolen, but they got hacked once, and somebody stole a bunch of money on the exchange. And I think they later reverse the trades, so people didn't really lose money, but the price went down to like a penny. And I remember thinking, "Well, like a NASA that goes down to a penny," that was the only real exchange at the time was Mt. Gox. And an asset that goes down to a penny that masses back, seems pretty resilient.


Joey Krug:

But then, I think the next moment was probably when Ethereum came out and when Ethereum launched, I just thought that was very cool, thought it was going to actually like, just be super transformative for finance, but didn't have proof of that. That was just a belief. You're operating based on belief, based on evidence, you have easy to believe that that belief is rational, but there's no hard data that shows you should be as confident as you are, right? And then, I think the next time when I realized that it was actually real, and actually happening, it wasn't just a belief thing anymore. There was one day, a couple years ago when there was some trade I needed to do, and it was 1:00 or 2:00 AM, and it was on a weekend, so banks were closed. I didn't want to wait until the week, and I ended up selling crypto on a desk, then sending that money to... Basically converting that to SDC, and then sending the SDC to an OTC desk. And then the OTC desk sending me back to the other asset that I wanted to buy.


Joey Krug:

And when I did all that, 2:00 in the morning with an OTC desk based in Singapore, or Hong Kong, or wherever, that would not be possible with the traditional banking system. So, that's kind of like the first moment where I realized, it's actually adding value in a way that's incontrovertible. It's not just a belief, it's not just me betting on something; it's actually real and it's very concrete. So, that would be, I think, the moment.


Daniel Scrivner:

Yeah. And that one's an interesting one as well too, because it gets to, I think part of, for many people, how crypto's very different is just that literally trades 24/7, 365 days a year. And if you have any exposure to the traditional markets, traditional banks, you know that that's not the typical schedule.


Daniel Scrivner:

I want to talk a little bit about risk because I think someone that's been in the space for a long time, you've seen multiple cycles also as co-CIO of Pantera, I'm sure you're talking about risk all the time or about potential risks all the time. And this is something that I've thought about; so I do investing in the public markets, but the vast majority of my time is spent in venture capital. And one thing that I've always thought about, reflected on, is how I think that has just wired my brain very differently because I inherently think very long term, I can inherently [inaudible 00:15:39] big ideas, and willing to invest in them when they're very nascent, and volatility doesn't necessarily scare me. I mean, I'm very comfortable with just holding on a position as things kind of move around. I think crypto has also taught me a lot as well too. And I think I've learned a lot by just surviving, and being through multiple of those cycles. What do you feel like you've taken away from being an investor in an incredibly volatile market? Do you think there's any lessons there that you've grasped?


Joey Krug:

One thing I've learned investing in volatile markets is that you tend to have the urge to sell to soon is, I think, one thing. It's turned lucky sometimes, right? I remember one time, I thought Eth was expensive, this is right before the DAO hack in 2016. So I sold almost all my Eth, and then the hack happened and then it went down a lot. And so, I bought back at a lower price, but in the grand scheme of things say, I hadn't been monitoring that trade very closely, or I got greedy or arrogant was like, "It's going to go down more," then I could have missed the entire trade if I just never bought back in. And I'm sure there were people who actually did sell at that time, and never bought back in, and bought Bitcoin or something and massively underperformed at this point.


Joey Krug:

So I think one thing is, I have a tendency to sell too soon, especially in a very volatile asset. And I think another lesson is cutting loser positions, and rotating of winner positions is more important than trimming winners. Peter Lynch has a good quote on this. He's like, "You don't want to cut your flowers and water your weeds." It's very true in the crypto market. If you have something that's down 50%, it's probably not a value play. If the rest of the market's up, it probably is just a position that sucks. You should cut it, rotate it into stronger stuff.


Joey Krug:

And then, the last thing I've learned in volatile markets is when you take risk off, you have to be very careful about it and not do it very long. I forget the exact stat on it, but it's something like, if you miss the best five days in Eth or something for each year, you miss 80% of the return. If you hold the remaining 360 days, it's something on the order of that. Don't quote me on it, but it's something like that. And the point is, if you take risk off, you have to be very careful when to put it back on, whether it's because the market fell to the level you were expecting. And so, don't get gritty and think it's going to fall much lower or two, if your trade is invalidated and it's gone up, you need to have some level to cut off and jump back in, basically.


Daniel Scrivner:

I want to ask a question about that. You talked about, a lot of those comments are around trading, and something that's fascinating, at least from my perspective about Pantera is, you guys both do a lot of active trading and you do early stage venture style bets. How does that split work? How much time, energy, and effort are you putting into both of those? And maybe both talk about at the firm level and as well, just for yourself personally.


Joey Krug:

As a firm, we have like 75:25. 75% is probably early stage stuff. And then, roughly 25 or so is liquid, ignoring our Bitcoin fund, which I don't really count because it's just buys Bitcoin. And so, this rough split of assets, it obviously varies a lot, but I'd say over the last year or so, that's kind of roughly what I'd say. And then, I think in terms of people, most of our firm works across the funds. I'd say, I'm still the main person who works on the liquid one though. There's not a lot of people who work on that fund, but I do work across the other funds as well.


Joey Krug:

We do have some people who only work on liquid. We have a couple quants who work on that stuff. And then, we have like, our trader only focuses on buying and selling positions, not too much on the early stage side. And so, I would say the two strategies are interesting; as you mentioned, there's not too many firms that run both, but I think they both informed the other, like the stuff we learned on the early stage side, that's informed about liquid investing. For instance, we invested in, at the time was a small position, but is now a fairly large position in Terra Luna, because we passed on their initial seed round on the early stage side. But we liked them. We liked what they were building, thought it was cool. We just thought it was expensive.


Joey Krug:

And then, later at one point I think it was early to mid 2020. Their token was live, it was trading for a price that was fairly close to their seed round, but they had infinitely more traction, right? Because they had nothing live when, when they raised a seed, and they were basically a payments network. They do much more now. Back then, they were a payments network that had billions flowing through it a year, and if it were a traditional Silicon Valley startup, it would've been a valuation of those many multiples of what we were able to buy it on in the public markets. If you were just focused on public markets, and never saw them early stage, you may not know the team, you're just looking at ticker and trying to gather information online., so I think there's benefits of having both.


Daniel Scrivner:

Just another question on that, because I'm sure most people listening will be familiar with a hedge fund. Is that active trading style that you have, is that meant to hedge risk? Is that meant to just be a different, lucrative return stream? I know you'd mentioned quant, so I imagine there's some sort of quantitative trading you guys do there.


Joey Krug:

I'd say there's two or three different types of trading we do. One is just changing the weights positions because we think something is more worth owning the fund, better value, that sort of thing. The other is more aggressively managing a position, like if something bad happens to a project in the liquid side, we'd want to sell it and reposition. Obviously, you don't do that on the early stage side; that's a very different relationship. On the liquid side, most of the time the founders don't even know we own the position. And then, on the early stage side, obviously it's a relationship that lasts basically forever. And so, I think that's one big difference.


Joey Krug:

And then, I think the other type of risk management we do is kind of more macro risk management. I'd say, a handful of times a year when we take risks down in the portfolio because we think that there's a good reason to sell. We did that in March of 2020, during the COVID stuff, and then aggressively put risk back on because we thought that COVID was actually going to be positive for crypto. And then, we did it again, January and February of this year, a little bit in June. And those can be technical analysis driven moves, or they can be sentiment and event driven moves. I'd say, we're not doing the type of training where you get four or five people, sit them at their desk, have them stare at chart and try to crank out some alpha on the hourly or four hour candles or whatever. In the size that we're trading as well, it's really tough to do that. We don't do that, but longer time horizons, we definitely do trade around.


Daniel Scrivner:

I want to ask one more question about risk, and this one just to bring it meta. Something I've also thought about over the years is just the nature of risk, because I feel like risk is one of those words that, it's short, everyone generally knows, I think people are like, "Risk equals harm, risk equals potential harm." I think as an investor, especially when you're invested early, when you're invested on the public side, talking through some of those different tactical moves that you make, I think you just have a very nuanced take on what risk is. What is your perspective on risk? And do you have a way that you define it, or a way that you think about it?


Joey Krug:

The way I think about risk is you have different levels of risk. You have custody risk, you need to make sure your assets are stored securely so they don't get stolen. Like when you do a trade on an exchange, you have the risk, the exchange gets hacked in the middle of the trade. Okay, how do you do the trade? Well, you send a small amount of money to the trade so that not a large chunk gets frozen. So, there's things like that. Then there's risk of the actual portfolio, what you own. A question I get a million times from potential LP it's like, "So do you guys short a lot? Because your hedge fund," you know, well hedge funds don't have to short and some do. I think that's one question it's like, I actually think it's fairly risky to shorten crypto.


Joey Krug:

I mean, if you short Bitcoin, yeah, whatever, that's fine. If you short XRP, or something, that asset's gone up 30% in some days. And so if you have a big short position, you can really get wiped pretty hard if you're shorting something like that. So like when we want to short a position, for instance, we would buy, put options versus actually going short it, most of the time. There's also risk in DeFi stuff. A lot of people like to yield farm. When you put money into a liquidity pool, you have the risk that, well you think the market's going to go up a lot, you might actually lose more money due to in permanent loss. For those who don't know, the loss from the price is basically moving around as your market making, then you get from trading fees as profits.


Joey Krug:

So, if you think the price that Eth's going to go way up, most of the time, you probably should not market make 50% Eth, 50% USDC, because you're going to lose due to in permanent loss. That's another risk we think about. And then I think, the last big category of risk you have just classic stuff, like size, concentration, sector risk, things like that. For instance, we've been very bullish DeFi over the years, but right now, our liquid portfolio is a bit under, roughly depending on how you count, but under 40% DeFi. A year ago, it was probably 60 or 70% DeFi. And it's like, why? Well, right now I think layer-ones are going to outperform over for DeFi. And then, I think DeFi will come back, but it's just the market sentiment on it is a bit sour right now. I'm kind of rambling, telling you a million different things, but those are some of those sorts of things that I think about when I start thinking about risk.


Daniel Scrivner:

No, that's fascinating. I mean, I loved your take at the beginning of just thinking in risk in terms of levels, and thinking about kind of foundational risk, portfolio risk, obviously risk of execution. I want to ask a question which I'll try to be as articulated as I can with it. I mean, something that's fascinating to me about crypto, you kind of hit on this is it is incredibly dynamic in terms of in venture, if you invest long enough, you start to see, "Oh, this is a new of that thing I invested in five years ago, seven years, eight years ago." Because one quote I always love about innovation from Josh Wolf is that it's like waves crashing on a beach, and each wave lays the foundation for the next wave to come, because I think that's actually a very elegant way of thinking about it, because they kind of build on top of one another. That's happening in crypto, and it's happening faster, and it's happening in this dynamic market.


Daniel Scrivner:

So even as you talked about layer-one versus layer-two; how much emphasis do you put on each of those as both are changing around dynamically? Just to kind of take this back. One question that I wanted to ask is I know from doing research, you started off obviously in Bitcoin, you found Ethereum was really interesting. We're at a moment in time today where I think there's a polarizing debate of, is Ethereum still this innovative network you should be building on? Due mostly to things like high transaction fees, high gas fees as well as throughput. And then you have projects like Solana that have lower transaction fees, much higher throughput. How do you think about something like that? Where on the one hand it just becomes very difficult. Do you think about owning those in parallel? Do you try to size based off adoption? How do you think about something like that?


Joey Krug:

Yeah. I definitely try to think about things relative to adoption. Also relative to how much upside there is, also relative to how much risk there is. If you look at Solana, for instance, you have a large portion of it, which is owned by a hedge fund, you have a large portion of it, which is owned by a proprietary trading firm, and you have a large portion which is owned by either the team and other prior investors. And so, then if you think about like what happens in a bear market, it's kind of like a game of chicken, and the first to move gets the spoils, which is slide into the order book as fast as you can with this minimal market impact as you can, yada yada yada. And so an asset like that, when the next bear market comes, it's probably going to go down a lot because of the concentration in it. And that's kind of a thing that's genuinely true in this space. It's also a higher beta asset; it's much riskier than something like Bitcoin.


Joey Krug:

And so, I think, if you look at Solana in particular, not to pick on them or anything, you want to single them out here, I think if you look at the value there, I think there's much more value right now in investing in early stage projects on Solana, than actually holdings Solana tokens themselves because it's quite expensive. And I'm sure it can go up more, but it's more just like, you're able to buy something for a tiny, tiny fraction in the price that could be a mission critical infrastructure on top of Solana right now, in the years to come. And so, that's one way we think about it is, can we get better value elsewhere? We have all these different strategies. We don't have to always own a diversified book for every single thing. We don't necessarily have to have a huge Solana position if we can, at the same time, buy a good amount of early stage Solana projects, is how I describe it.


Joey Krug:

And then something like Eth, the question for Eth is, and I think they will, but the questions, can they get a roll up centric version of working where you kind of have all these scalable layer-twos that go back to layer-one, and it's not like crazy expensive to store data on layer-one. And if that gets figured out, then it'll scale well and be successful. And I think that's the base case; I don't think it's a difficult tech problem or anything. It's not trivial, but it's also not rocket science.


Daniel Scrivner:

Yeah. And I get the sense that you're not skeptic call on Ethereum's ability to execute. Which is interesting obviously to go back in time where you started off very skeptical, and then you've watched them execute. What is your real time take on Ethereum, and their ability to scale and kind of solve the high transaction problem?


Joey Krug:

Yeah. I mean, I think the way I think about it is, people love to hate on Ethereum's ability to execute or whatever. But I mean, I remember like seeing it there firsthand and yeah, they're pretty good at execution. It's more just about what trade offs do you make while you execute. And I think if you're smaller and nimbler, you can make more trade offs. Or if you're more centralized, you can make more trade offs, and you can make those decisions quicker. Ethereum has a massive community of people to get on board, and it's much more important than it get done. It's much harder to roll back, or do a take back, or ship [inaudible 00:27:45] very quickly, because you also have multiple Ethereum clients and implementations by different groups all around the world. So it makes it more difficult.


Joey Krug:

But I think at the same time, it makes it more resilient and it also makes it more likely that ultimate kind of cracks set up trade offs will eventually be chosen. If you think about how every phone company like, Google, Samsung, all these companies, they ship product really quickly, and launch tons of features before the iPhone does. And the iPhone will launch them. They'll launch them two years, sometimes even three years later, Apple will ship. And the Apple one's almost always better. There's a fewer exceptions where there's some featured Apple ships and it wasn't better. Like that time they shipped Maps and it was terrible. But most of the time, the features they ship are just superior, and it may be the same thing that Samsung shipped two or three years ago, but they hate the time to really get it 100% right. That's how I see Ethereum right now. They're not in this stage where they can rapidly ship product like they could in 2014 when it was super, super nascent, but they're also very smart and I think the dev teams there that are working on Eth2, and all the kind of scalability stuff around it, in my opinion, the best in the world, and will figure it out.


Daniel Scrivner:

Yeah. It's very well said. I want to talk a little bit about Augur, because one of the first projects you worked on was Augur. You were a co-founder of it, it's an open betting protocol. I think there's a few things that are fascinating about it, but one thing is it's obviously I think today fits right into DeFi as a trend, as a buzzword that people are using. But you guys founded this way, way, way before DeFi was the term, DeFi something people were talking about. What inspired you and the team to focus on betting in that particular problem set?


Joey Krug:

I mean, the way I thought about it was like, well, there weren't other tokens, right? It's like you couldn't make Compound or Ave in 2014 or 2015, it wouldn't have even made sense at the time. And so, we were thinking, what thing can you make that's useful, even if nothing else really ends up being built on Ethereum, and also, what's a fun problem to solve? And so, the thing we hit upon was, well, this interesting problem called the Oracle problem about how you get real world data into the blockchain. And then, also prediction markets are a really cool idea. They were even mentioned in the Ethereum white paper, it was one of the ideas that how thought would be cool to see both on Ethereum. And I used to do a lot of horse betting basically when I was younger, and so I'd always been into betting as well. And the betting sites, sometimes they freeze funds, or kick you off. It didn't really happen much in horse racing because the financial incentives were different, but in others sports, it happens all the time.


Joey Krug:

And so, we saw all these problems thought it would fine to solve them. And then, also I think prediction markets are also just really interesting. They provide information about the real world. What are the odds of this event's going to happen? The thing we always used to say is, imagine you could have an app on your phone that would tell you the probability of various real world events happening, kind of like the weather, but for everything else because weather's boring, I don't really care that much if it's going to rain tomorrow, but knowing whether Congress passes the current stimulus bill they're trying to pass, that's actually interesting info to me. It's also actionable info to me as an investor. So stuff like that we thought would be cool, and that's kind of why we ended up starting it.


Daniel Scrivner:

Yeah. On that point, I mean the way you kind of describe that, potentially in the future, there's this app on your phone where you have these predicted markets that you can look at in real time. That obviously hasn't happened yet, so I think one thing I wanted to ask is what is your real time, updated view on where you think prediction markets are headed, and what you think those will look like? And pick a time horizon; maybe that's one year, two years, three years, four years, five years. What do you think that that future looks like or hope that it looks like?


Joey Krug:

So, I think a couple things we've learned, right? One is that people really only to bet on sports, and politics and within politics, they really only care about races, like the congressional race, the presidential race. And they don't really care about whether a certain bill passes or not. And then people like to bet on really degenerate stuff, like if you look at PredictIt actually, and they remove them, but a couple years ago during the election, they had these markets that were like, "How many times will Trump tweet today" over, under. It's not useful. Nobody really cares. So basically, people like to bet on sports, random degenerate stuff and political events. People don't seem to really like to bet on stuff that's actually useful, like real world information. It's just not a cultural thing that people want to do. So that's like why you don't have that app on your phone; it's because there's not enough of people who want to bet on that stuff to make it happen.


Joey Krug:

I think the other thing is that there's a lot of UI UX hurdles to it. And what I mean by that is if you're in crypto, you're betting on crypto, you're going to buy various crypto tokens because you think they're going to go up a lot. You're not going to invest 50 cents into a prediction market, or $500, or $5,000 because you think you can make $1, or $5, or $5,000 profit. And so, that's the other issue is that in crypto there's better alternatives if you want to make money. And for people outside of crypto who are actually interested in this stuff, the barrier is still too high for them to use it. As you mentioned, there's only, I don't know what the number is, 10 million or whatever, users of Ethereum. Most of those probably aren't monthly actives, that number's probably much smaller. Those people who do like to bet on stuff or buying other crypto tokens, because there's more upside. And then, the people outside in the external world just can't figure out how to use it.


Joey Krug:

So I think over five to 10 years, that usability problem goes away. Everyone will have easy access to crypto. There probably will be wildly popular sports betting and political betting markets on blockchains. I don't know if there ever will be prediction markets that are widely spread that have various interesting things on them. I could see it happening as betting becomes more accepted in the culture. If you look at the US right now, they're legalizing sports betting in almost every state over the next few years. And so, more people start betting, then it can maybe happen, your friend bets on sports, and you're not a sports guy, and you're kind of like, "Eh, this is pretty boring," but you make an account anyways. And then, all of a sudden you see some markets on things that are not sports, but are actually interesting to you. I could see it trickling in, but it's probably going to take five to 10 years, if it even happens.


Daniel Scrivner:

I know in Eco, you're not supposed to talk about it. Can I ask you a general status question, which is, where are you guys at in the project, and kind of what are you focused on now?


Joey Krug:

Yeah, so I'd say on Eco, project wise, what we're doing is that whole plan with Eco is take the approach of: get a bunch of users, make sure the product market fit is very strong, and then you can add crypto to it, to supercharge it. Because crypto's kind of like fuel to a fire, and if you take something that has good prior market fit, and you add crypto to it, it becomes even better. If it's something like it makes sense and stuff. But you just start with the crypto piece, you don't really know whether you have true product market fit or not, and it's just kind of a mess. And so, I would say basically, that's the approach we're taking. And then when it comes to where we're at right now, I'd say the main thing is Eco's looking to hire solidity engineers, and you can guess where that may be going, but basically looking to hire solidity engineers, what we're trying to build, because I didn't actually answer that, if anyone doesn't know what Eco's trying to build, think of a banking experience, but like a 100 X better in every dimension.


Joey Krug:

So when we launched, we had the ability to basically earn money, savings wallet, basically, and then we added the ability to spend, where you get 5% cash back at the merchants that are most popular from millennials like Amazon, Uber, Uber Eats, that kind of stuff. And then we're currently piloting bill pay, so you can start paying your bills to the Eco. And slowly, but surely, we'll eventually have every feature of a traditional bank account, but we're not actually a bank. And I think the analogy there is you think about Uber, they're the best taxi company that doesn't actually own any cars, and they're not actually a taxi company. Like Airbnb, that's widest selection of hotels, but it's not actually a hotel. We want to be basically way, way better banking experience, but it's not actually a bank, and it doesn't have any of the negative aspects of the banking business model.


Joey Krug:

The very last thing I'd say is, your bank, basically you give them money, they give you anywhere from five to the higher end 50 basis points, and then they turn around and lend it out for 3%. But we'd like that basically to go back to our community of users, and create a more virtuous system, that ecosystem that doesn't have this massive rent seeking component in the middle. That's basically the pitch.


Daniel Scrivner:

We'll link to this in the show notes as well too, but for anyone that's interested in learning more about Augur, you can go to augur.net, and you can also learn more about Eco at eco.com. And I want to ask one more question about Eco because one thing that I felt really strongly for a long time, and it's shaped by almost every experience I've had in crypto, is that by and large, it still just, isn't easy. I think the bar for design execution's a lot lower than it is in the traditional venture capital space, or at least UIs tend to look much more technical, and complicated and I think are harder for people to understand. One thing that I've always been impressed by Eco, is it feels like it could become one of the first consumer brands in crypto. Meaning, I think you guys do a great job of marketing, I think the branding's really interesting, the product looks extremely simple, extremely well designed. Was that something that you guys were focused on from day one? What thoughts do you have about the need to just create, I think, really compelling experiences for everyday consumers in crypto?


Joey Krug:

It's something I think is super, super important/ story on this is, I have an interactive brokers account, and I have a Robinhood account. I know I get worse execution on Robinhood, and not buy in such large size that it matters. So when I buy stocks, I use Robinhood. I like the UI better. And I know that interactive brokers tactically, theoretically a better product. And I have an account there, it's not like it's a ton of work to use it. And I just don't care; I still use Robinhood. I think IU UX is super powerful, and I'm somebody who would consider myself a fairly rational person. And even I'm not able to really overcome that statement, which is inherently somewhat irrational. And so, I think it matters a lot, and something we think it's really important. I mean, when the app first shipped, the design was much worse. We've kind of improved it over time. We actually have a bunch of stuff that's in the works right now to improve it much further, and really take it to the next level. But yeah, I think it's super important, and critical for the space to go from however many million actually active users there are now, to the next 100 X.


Daniel Scrivner:

Yeah, I think real world, deep penetration, that's super important. I want to just close by asking a few close some questions. And so, I'm going to pop around a little bit, but one of the questions I had to ask is, for anyone that's familiar with Dan Morehead, I think people would think that you're extremely lucky to be working alongside him. Someone that's worked at Tira Global, someone that's done this at a really high level for a long time. So, I'm curious what lessons you've learned, and what insights you've picked up from Dan Morehead. And you can also expand that more generally, and maybe there's just by being exposed to more typical investors, whether that's quants, whether that's traders, what have you picked up from that side of the equation?


Joey Krug:

I'd say, the main thing is probably just when you're investing and you have a position that you think you have conviction in, where you think it's very high odds that you're right, take a big swing at it. Don't put that position on, in a small size or in a size that's not meaningful. Put it on in a firm size. An example I remember is we were doing this trade basically rotate out of Bitcoin into Eth in one of our funds last year because we thought that Bitcoin was basically getting overvalued and Eth was getting undervalued. And we were talking about how much we should put in, and we eventually ended up basically taking our entire Bitcoin position down and put it all into Eth. If Dan hadn't mentioned that-


Daniel Scrivner:

Super aggressive.


Joey Krug:

Yeah, we probably would've been far less aggressive. And then, the other thing too is timing in terms of, if you do have conviction in a trade, it's really critical to move on it quickly. And this one we did that trade quick. We discussed, "Maybe we should do it in a few weeks," and we ended up doing it very quickly. Since then, I've also just noticed it all the time in the markets. You have an insight to do a trade, the market looks like it has a good setup, and sometimes you might think, "I need to grab dinner. I'll be back in a few hours, and then I'll text or call our trader and put the trade on." Now I just email him, or call him before the dinner, or in the middle of dinner. Because often, you'll have an idea, and then the market will just move in favor of that idea, very quickly, within hours or if it's a longer timeframe thing, even within a couple days of you having the idea. Because someone else has clearly had the same idea too. It's both a good thing and a negative thing. It's a negative thing, because you could have gotten a better price, but it's also a good thing because if the market's moving in your direction, it's probably going to move further in your direction, if the reason you wanted to do the trade is actually correct.


Daniel Scrivner:

One thing related to that is I know that you used technical analysis in some of your trading, and previously you were a skeptic of that. I think I'm someone who still, not in the skeptical camp, I'm just in the camp of people who haven't yet spent enough time learning and understanding technical analysis. Was there a moment that changed your mind? And can you share a little bit about how you use that today?


Joey Krug:

I think there were moments that changed my mind when I just seen it work enough times. I'd say, the technical analysis that I know is, my thesis on it, the way I describe it is like, if you think about trading, I forget what book I read this in, it might have been Soros or someone else, but basically, you want to know what the dumbest person in the room is going to do, because most people are dumb. If you understand what they're going to do, and you just do that, you'll make a lot of money. Do you either want to be the dumbest person in the room, or understand what the dumbest person in the room is going to do, or be the smartest person in the room. But it's really tough to be the smartest person in the room, because you start telling yourself all this stuff you say, "Well, if I was going to do that, and then the market knew that I was going to do that, and then the market does this, and then I do this, then the market's going to do that." And you psych yourself out and unless you're literally the smartest person in the world, you're going to mess that trade up, because you'll go too many stacks deep, or you're not actually the smartest person. So, that's really tough.


Joey Krug:

But I think if you can figure out what the main, average, kind of animal spirits person in the market will do and trade according to that, you'll do well, I think. And so then, if you think about that and you apply to technical analysis, basically I'd say like the technical analysis, I know it's fairly basic stuff. I see some people draw really, really complicated TA, and nobody in the market's paying attention to that stuff because nobody else understands it. The TA that markets move off of is quite simple.


Joey Krug:

Especially in crypto. Equities market, far more efficient, none of the supplies, but in crypto, I think simple TA tends to work because a large portion of the market's paying attention to it. I've seen it work enough, where I've kind of converted from a huge skeptic of it, thinking it was incredibly stupid to thinking it's something that actually works. And the last thing I'll say on this is I was always a skeptic because, you couldn't quantitatively prove that it worked. And the reason why you couldn't do that is because, on quant models, you're trying to do something on a daily basis, or an hourly basis, some fine timeframe and find small alphas over those, but technical analysis when you have large alphas, it's not like that. There's a handful of really massive TA alphas in a given year. And so, you can create a systematic model of that, and play it out, and it would probably make money, but it's not like you're going to have daily trades. If you try to do it on a daily trades, you're going to lose money, which is why people who get those TA books, and they trade every day on it, there must be some people in the world who make money off of it. But very few. That's kind of my thesis on it.


Daniel Scrivner:

Yeah. Super interesting. Obviously, you've now been exposed to a lot of other thinkers in investing, whether that's at Pantera, whether that's people in the industry, I'm sure that's also given you some self-awareness and some sense of how you uniquely see things a little bit differently, and maybe what you're kind of uniquely good at. What do you think of as your investing superpowers? Because there's a couple places I could see that. I mean, someone who is both a builder, historically, and an investor, I think that's a superpower in a lot of ways. That's one. I mean, it's also fascinating to think about your background back to horse betting. Maybe you picked up something there? What do you think of as your superpowers?


Joey Krug:

One of them is being comfortable with risk and figuring out how to price it and react accordingly. You need to pay attention to risk. You also don't want to get caught up in it so much that you don't do the successful trade or investment that you should be doing. So, figuring out that balance, I think, is something that I would consider that I can do decently. Well, I think another thing would be, I think you mentioned being on both sides of the table. It's nice because it provides a really good lens for, is something BS or not? Often, you're talking to somebody, if you hadn't been on the other side of the table, you might not know what they're saying is credible. I guess, the way I describe it is it provides a very good barometer for whether you are reasonable or not, because you've it on both sides and see, "Hey, this is reasonable." "No, this isn't." "Hey, if I gave you this term, I'm actually being really, really nice. And so the one thing that I asked for you should kind of give it to me, because it's the fair and right thing to do." Knowing that line, I think, is really useful. And if you haven't been on both sides, it's kind of harder to do.


Joey Krug:

Those, I think, would probably be the main things. I guess the other thing is just having seen a bunch of stuff in DeFi. I've have wasted so much time on various things that now I know to do a different way, or not to do, or doing this, do that instead. Or when you're hiring engineers, you need to have a coding test, and you need to do it in a certain way that tests for exactly what you're looking for without actually explicitly asking for it. Because in your life, you're not always going to sit over the shoulder of the program where you're talking to and be able to explicitly ask for everything. Random stuff like that I think it's probably the third thing is just like, having been in a space a long time, you see a lot of stuff, and pull your hair out a lot of times, and the lessons from those are at least positive things you can take away.


Daniel Scrivner:

No, totally. And those lessons are burned really deep. You've processed so much information. Okay, two closing questions. One I can't not ask; what are you excited about today? And these can be projects, people, anything, but in crypto, DeFi Web 3.0 broadly, what are things that you're really excited about?


Joey Krug:

I'm excited about decentralized insurance stuff, where a company called Risk Harbor that's doing decentralized insurance for DeFi. I think that's going to be big. I think it's going to eventually be big, even outside of DeFi. Insurance is one of those things, just a pain to get; it's like getting a mortgage, it's a huge hassle. Although there's startups that are working on the mortgage problem, but on the insurance side, it's more nascent.


Joey Krug:

I think the second thing would probably be there's a project called Acala, which is building a EVM, solidity compatible thing on top of Polkadot and they're kind of the flagship project on Polkadot. And I think if they succeed, and build it, and it's fast, and it works well, I think there'll be a lot of developers that start to build on Polkadot. Something like that would be very interesting.


Joey Krug:

And then, the last thing I'm excited about, I haven't actually read it yet, I very briefly skimmed it, but Vitalik's proposal for scaling Eth with making it really easy for layer-twos to store data on Eth 2.0. because if they can do that, the scalability problem can be addressed, I think, pretty aggressively, and also without it taking a ton of time. It's a simpler design. I like stuff that's simple.


Daniel Scrivner:

That's fascinating. Those are great examples. And we'll list those out, we'll link those in the show notes as well too. I want to ask one final question, which is, this one I've always struggled with personally. So part of this is just super selfishly, I'm curious to hear your answer, and that is, so we talked about obviously just in Ethereum to focus on that for a second, 10 million active users or 10 million users on the network, which is still very small in the broad scheme of things. So then the next question becomes, what does it take to bring more and more people, bring the next 100 million to Eth, and to crypto more broadly? In there, I think it really is. Where do you point somebody who's new, who's interested, who wants to learn about the space, that that's an easy on-ramp for them? And I've never had a great answer to that. And my answer is just, you have to go down the rabbit hole, follow your interest, because there's so many projects, there's so many interesting things. That's been my approach, which feels very lazy. When people ask you or you're talking with somebody that is interested in crypto, but hasn't yet made the leap there, any advice for them, any places you would point them to? Whether those are resources, website, forums, anything?


Joey Krug:

It's kind of always case by case. It's such a specific thing, right? If someone's just interested in high level knowledge, I don't know if we still do it. At one point at the end of our investor letter, we had a list of 40 links and it's like, just dive in, spend a weekend, as much as you can just read through all this stuff. And then, I think another thing I'll do is somebody has less time, or if they're a bit skeptical, I did write a post a couple years ago, it's called A Crypto Thesis, which is a really generic title. It walks through why this stuff is cool, particularly from a DeFi perspective, why it is valuable for the world. In that piece, at the top, it says, "This assumes you've read the Bitcoin and Ethereum white papers. If not, you should read them, otherwise it's not going to make much sense." Those are always great places to start too; the Bitcoin white paper and the Ethereum white paper.


Joey Krug:

The Bitcoin white paper is one of those things, you read it the very first time, especially if you're not technical, you're kind of like, "What did I just read?" It doesn't make much sense. And then the Ethereum white paper is much more plain English, although it still has a lot of buzzwords in it. It's kind of the canonical literature in the space. It's like if somebody asks you about some religious work, and the religious work having to be really short, you can send them a link to a 400 page analysis of it. But if the thing that you're talking about is 10 pages, you could also just be like, "Here's the 10 page thing, and then come back to me with the million questions you have, and I'll try to point you in the right direction next."


Daniel Scrivner:

Those are great places to start. And I remember definitely seeing those 40 links. So I will try to go then dig those up, so maybe they're somewhere in my inbox, and I can point people in that direction. So a link to this in the show notes, you can find that at outlieracademy.com/krug, where can people follow you? Where can people find you on the internet?


Joey Krug:

I'm on Twitter. Haven't been as active recently, mostly just because it's hard for me not to engage. So if I tweet something and then a million people argue against it, I love to engage, and then I started getting distracted by that. So I'm mostly just lurk on Twitter now, but if you DM me, I'm happy to talk to people in DMs about anything. I'm just @joeykrug, just my name on Twitter. And then, if you have a company you're working on or something and you want to send me info on it, yeah, I'm just Joey@panteracapital.com.


Daniel Scrivner:

Thank you so much for the time Joey, this has been an incredible conversation. I think people will take away a lot from what we've covered, whether that's about investing in crypto broadly, about where the space is headed, about prediction markets, this has been fascinating. So thank you for the time. (silence)


Daniel Scrivner:

Joey. Thank you so much for joining me on 20 Minute Playbook, I'm super excited to have you on the show.


Joey Krug:

Thanks for having me.






On Outlier Academy, Daniel Scrivner explores the tactics, routines, and habits of world-class performers working at the edge—in business, investing, entertainment, and more. In each episode, he decodes what they've mastered and what they've learned along the way. Start learning from the world’s best today. 

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Daniel Scrivner and Mighty Publishing LLC own the copyright in and to all content in and transcripts of the Outlier Academy podcast, with all rights reserved, including Daniel’s right of publicity.

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