Podcast Transcript: Stéphane Ouellette on the Crypto Crash, and What Next

This is an edited transcript of our podcast episode with Stéphane Ouellette, published 27 May 2022. Stéphane is CEO and Co-Founder of FRNT Financial – a crypto-focused investment bank. He began his capital markets career working in the Equity Products group as a Cash Equity Sales Trader. He eventually transitioned into BMO’s hedge fund sales trading group. In the podcast, use cases for crypto, why the differences between Ethereum and bitcoin are exaggerated, what to look out for when investing in crypto, and much more. While we have tried to make the transcript as accurate as possible, if you do notice any errors, let me know by email.

Introduction

Bilal Hafeez (00:00):

Welcome to Macro Hive Conversations with Bilal Hafeez. Macro Hive helps educate investors and provide investment insights for all markets from crypto, to equities, to bonds. For our latest views, visit macrohive.com. US data has started to weaken, and markets are questioning The Fed. Will The Fed continue to raise rates, even if it means a recession? The coming months will tell us, and on the R word, we’ve published a new piece on Four Reasons for a US Recession in 2023.

We’re also continuing our research on crypto. This week, we look at how low Bitcoin could go before it becomes cheap, and we also look at how safe is the stablecoin Tether. Then on equities, we give our take on the US sector we’d like to be underweight (John Tierney’s latest US Sector update). And I have an announcement to make. Due to endless requests, we have launched a new, free newsletter to give more and more people access to Macro Hive. The newsletter will contain charts, explainers, and unlock content from our prime product and it’ll be a weekly dose of sanity in an uncertain world. All you need to do is go to macrohive.com/free and just enter your email to get the letter once a week.

And now, onto this episode’s guest, Stéphane Ouellette. Stéphane is CEO and co-founder of FRNT Financial, an investment bank focusing on crypto and digital assets. Before founding FRNT, Stéphane ran various teams at BMO Capital Markets. And I have to say that Stéphane is one of the few voices in the crypto industry who sees the negative as well as the positive in the new asset class. So now onto the podcast.

Stéphane, it’s great to have you here. It’s great to have you in person as well now that the lockdown restrictions are being lifted, we can start to have the podcasts in person. So welcome to our office.

Stéphane Ouellette (01:40):

Thank you very much, very happy to be here. Thank you for inviting me.

Bilal Hafeez (01:43):

Just for the benefit of our listeners and viewers, there is thunderstorm going on in the background so if people do hear thunder, it’s the weather.

Stéphane Ouellette (01:50):

Those are some of the biggest hail rocks I’ve seen in a while, I don’t know if you noticed those, they were enormous. Yeah.

Bilal Hafeez (01:55):

But Stéphane, let’s kick off with a question I always ask all of my guests. Essentially, what’s your origin story? What did you study at university? Was it inevitable you were to end up in finance and then later crypto? How did you end up where you are today?

Stéphane Ouellette (02:07):

Yeah, thanks. I like that question, it’s something that I’ve thought a lot about. My origin story in markets definitely predates university, for sure. My dad was a stock broker by trade, who ended up getting into management, and ended up architecting some wealth management companies in Canada. When I was very young, we had this routine where I’d come to the floor in the bedroom in the morning and he noticed that I was looking at the sports scores, and circling who I thought would be the winner the next day. This was like eight or nine.

And then he was a huge stock market player. I mean, he ended up becoming more kind of a manager at bank-like firms, but his real passion was the market. So he’d kind of casually slip the stock page in front of me when he saw me doing that because I wouldn’t even watch the games, it was really just like the prediction, I wouldn’t even watch them. I’d just come in the next morning and be curious to see who won.

Bilal Hafeez (02:52):

How old were you when you were doing that?

Stéphane Ouellette (02:53):

I was probably eight to 10, something like that. So he started slipping the stock page in front of me and saying, “Well, which ones do you think are going to be up tomorrow? Which ones do you think are going to be down?” And then that was like crazy because it went from having like 10 games to having thousands of stocks. So I was very interested in markets from when I was very young. As I got older, the elements of markets where you’re really playing for keeps, you’re really held heavily accountable, can’t just say something and then assume you’re true and walk away, there’s a lot of accountability to your analysis. And just the concept of just being able to really read the front page of the newspaper and see how that aligned to what you were doing that day always really appealed to me. That front page of the newspaper was kind of your world.

So throughout high school, I started trading little bit of stocks on my own. Went into university, really picked up the mantle there and got really excited about the market. It was really everything, all I was doing all day, skipping class and watching the market and stuff like that. And I had an opportunity to work on a trading floor in the summer, just in like filing documents and stuff like that, so I worked at the BMO equity floor in Toronto, got down there and just fell in love with it even on a whole other level. It was really the end of the prior generation of traders, really old school type characters that, where the days there were just wildly exciting and couldn’t get enough of it, be on the desk still really late at night.

And then felt like it was a large company and I was probably moving a little fast for the way that my managers felt, and was really feeling like I had more energy to expend on just some ideas. So I connected with a gentleman called Adam Rabie who’s a co-founder of FRNT with myself, and we built other businesses together as well. And was very clear that we had a complementary skill set, he came from entrepreneurship and he was a software developer, I came from the corporate world and was more on the sales side. So we initially started talking about launching a new HFT style macro fund together in 2016. Adam was an extremely early participant in the Bitcoin ecosystem. He has a 10 year old dog called Satoshi Nakamoto, which my head of investor relations has heard me say a million times at this point, but really passionate about this space. And in 2017, as we were sitting down talking about building another hedge fund, the liquidity in the market exploded, and in our opinion, that was a real turning point for the industry from the way that we looked at it, because it went from being something that was much more venture capital driven, to something that you could actually trade.

Bilal Hafeez (05:08):

What year was that?

Stéphane Ouellette (05:09):

2017. So it was things like not only liquidity that came in, but you started to see more consistent infrastructure emerge in this space. There was constant banking issues in this space, but there were things like futures platforms like BitMEX had really started to really pick up its liquidity and that was a really consistent platform. So there was a lot more moves that you had to trade and we could not believe the market inefficiencies that were in this space, and honestly still are to this day, that were driven by things we could understand very easily, high levels of retail participation, a lack of infrastructure, lack of understanding in the market and consensus around valuations.

It was all the things that have created inefficiencies historically and were fully on display in this space, for arbitrage trades 24/7, and data’s free so there was so many benefits to new entrants. So we launched a prop vehicle, which has since to become a hedge fund together, and built FRNT to be an institutional service provider that started off as a trading firm, to educate institutions and provide synthetic exposure for some of these dynamics, that we had become well aware of in this other vehicle that we were trading. Since then FRNT has grown into, we’re referred to as a challenger investment bank, emerging out of crypto. We have deliverable service lines where we assist clients in trading physical crypto, lending it. We have derivatives, we have an asset management arm, which tries to work with larger investors to help them set up their own portfolios. And we have advising, consulting business lines that now are looking very much investment banking like.

Bilal Hafeez (06:30):

I didn’t realise you were so into trading and stats and all of that type of stuff at such a young age.

Stéphane Ouellette (06:36):

Yeah, I got lucky. The fact that it was something that I really stuck to, that really appealed to me from an early age and it became my thing in school. And that was developed an identity around being someone who was interested in the market and I think my friends thought it was pretty weird. Until then they were looking for jobs out of school, and I was like, “Okay, I guess we’re all going to be doing this now, so.”

Use cases for crypto

Bilal Hafeez (06:54):

Now onto the subject of crypto, one question I often ask is, Macro Hive, we’ve started to cover crypto for about a year now and we still keep coming back to this question from people, what’s the use case of crypto? How do you go about answering that question?

Stéphane Ouellette (07:08):

It’s a question that’s taken on a life of its own in this space, which I think isn’t exactly logical. I mean, I think it’s quite clear what the most popular use case for cryptocurrency is. Essentially being used as an alternative currency, alternative investment, so people are either getting into Bitcoin to spend it eventually, or they’re viewing it as a potential alternative currency that will continue to grow and the infrastructure around payments will grow, et cetera, et cetera. I think that that’s really been the ultimate use case of this space that’s had staying power and it’s been around for a long time.

And that speculative versus use case as a currency has ebbed and flowed in really aggressive bull markets. A large percentage of the markets is speculators, and in down markets, a lot of people who are still purchasing Bitcoin are using it as a serious allocation in their treasuries or they’re using it for payments. Or they live in countries where the Bitcoin ecosystem is a lot better than what they have and all that.

But that is a very inconvenient story for the majority of the world who has developed on the back of fiat systems. So I find that that narrative is being fought constantly. In the prior cycle, one of the things that people said was blockchain, not Bitcoin, and that struck me as bizarre because, well there’s really been one successful use case of blockchain technology historically, on a global level, and it’s been Bitcoin. So why would you say that the thing that has worked is not the thing, and the thing that hasn’t happened at all yet, is the thing? It’s a psychological reaction to a very inconvenient development for the largest industry in the world, which is finance.

Why the differences between Ethereum and bitcoin are exaggerated

Bilal Hafeez (08:33):

Within crypto there’s different areas, one is smart contracts and DeFi, that whole arena. Obviously Ethereum’s the dominant smart contract or L1 platform, what’s your thoughts on Ethereum? And then also its challengers, the Solanas, the Cardanos, and Avalanche, and so on?

Stéphane Ouellette (08:49):

I’ve consistently said that the market has very much underpriced the risk in Ethereum, and I think that Ethereum has something that defied logic for a very long time. A lot of what Ethereum focuses development around, are applications that you could build in the Bitcoin ecosystem. But Ethereum really did a great job with the marketing element around them being a smart contract platform. So for a large part of Ethereum’s life, there’s been this perception that it can do things that other blockchains cannot do, which I think is much more of a marketing move, and then that leads to now more focus on development there.

So, it went from being a marketing play, to now there’s a lot more decentralised applications on Ethereum. They also have ERC20 tokens, which allow for additional economic incentives, that allow people to launch their own tokens, get huge valuations themselves and do really well. So that maybe started off as a bit of a myth but has really grown into it being true for a variety of different reasons.

Bilal Hafeez (09:42):

So, you’ll say that you could do the same things with Bitcoin?

Stéphane Ouellette (09:45):

I mean, there’s a lot of layer technology that is decentralised on top of Bitcoin, like the lightning network and stuff like that. There is platforms like RSK, which is a smart contract platform. It doesn’t have the same kind of incentives embedded where I can launch my own token and then I can do a pre-mine and get really wealthy. So people look at those projects as… I mean, I feel like the rest of the ecosystem looks at a lot of the development that’s going on in Bitcoin and saying like, “What are you guys doing? You guys are basically doing this for free.” Because a lot of these companies have extremely limited valuations, relative to what you typically see in the token ecosystem. And I find it to be a different attitude, the building that occurs in Bitcoin. But now I think that the risks of Ethereum, as you’ve alluded to, are extremely elevated. And it’s hard to see how this is all going to play out, but at least these are all on the table.

The transition from a Proof of Stake consensus algorithm to Proof of Stake consensus algorithm is one of the most complex transitions that we’ve probably ever seen occur, okay? Ethereum has managed to rally its community in a lot of impressive ways, but they’ve also had much less complicated developments that have ended in 11th hour panic situations. Like the Constantinople upgrade two or three years ago, where there was a vulnerability found at the last second. I mean the likelihood that something like that happens in Ethereum, and obviously there’s other episodes that are even more famous that you could point to, is elevated in this situation.

Bilal Hafeez (10:56):

We’re seeing it with all the delays, it seems like it’s a moving deadline, like when the switch is going to happen.

Stéphane Ouellette (11:01):

In 2018, there were people that thought that this was a development that was a year away, right? So that’s very complicated. So of course, to deal with the scaling issues that haven’t been resolved by this transition to Eth2.0, there’s been a lot of infrastructure built around dealing temporarily with scaling issues, with layer technology. And I feel those are becoming large platforms themselves and they carry a lot of weight in the Ethereum ecosystem, and so what happens if the chain goes to Proof of Stake? What happens to those applications? I think that there’d be a lot of concern for those entrepreneurs that their use case starts to lose value. They have a lot of weight, it seems like the whole community is moving towards, I don’t know if it’s going to be a hard fork, but some fracturing if this transition to Proof of Stake occurs.

So it’s like, okay well, why doesn’t it just stay proof of work then and focus on building layer technologies? And I don’t really know why the community is rejecting that as a solution. Why the major players like Vitalik are rejecting that as a solution. My feeling is that they then feel like it looks too much like Bitcoin and that is problematic for them. But as a result, as you alluded to, there’s certain chains that exist today that essentially are already Eth2.0, and so they’re in a very tough spot, but the market just never seems to care. Ethereum and ether are part of the zeitgeist of crypto now. They’re viewed as… Even regulators will tell you, “Well, okay, Bitcoin and Ethereum, I know are going to stick around, but what about everything else?” So it’s somehow attached itself to Bitcoin developments, which I think could’ve gone either way, from regulatory perspective in particular, but seems to have won, but yeah.

The unwarranted valuations of crypto markets

Bilal Hafeez (12:30):

What do you make of the other rival coins? Solano, Cardano, Avalanche, some of these other ones?

Stéphane Ouellette (12:36):

I have a general scepticism around the philosophies in Proof of Stake. I don’t think we need to get too far into it, but the criticism of Bitcoin has been that it’s a Ponzi scheme, right? Because it’s created out of thin air. Well, that’s not really accurate in a proof of work chain because there’s large input costs in a way that there is to mining, and it isn’t really just a merry-go-round, that it’s perceived to be. Proof of Stake is, it really is, and so all of the typical criticisms that people bring to things, Ponzis, helicopter money type things, and fiat systems in the first place, right? I think you apply the same criticisms you could bring to Proof of Stake. And there’s other governance elements around it that make it sound democratic with the staking process, et cetera.

I have a hard time getting fully on board with Proof of Stake. I think that these other chains have done a very good job in developing themselves and growing, but it’s so early, right? If Solana, for example, had a valuation in the one to $3 billion range, say, I would say, “Wow, no, that’s expensively valued startup, but there’s a lot of smart people behind it, and they’re really committed to this, so okay.” That’s not what you’re getting, you’re getting like $50 billion Solana. It was essentially ICOd and the beginning of 2021, and by the end of the year, it went from a $75 million valuation to a $75 billion valuation. And so you want to be positive on some of these developments. It’s hard to be positive when you look around and you’re like, “Okay, I think there’s enough positivity out there for this thing. It’s got a $75 billion valuation,” right?

I tend to find myself being more of a detractor, but not because I’m all that negative, I just kind of counteract what the narratives are that are out there and people that are way too excited, that haven’t done any homework, that lean on very flaky analysis to suggest why… No analysis at all, right? Just like a friend told them or something like that, and you’re a naysayer if you say anything else. So I find that while there’s interesting developments, a lot of these protocols are in their first year of being operational. Some that have very large evaluations haven’t even launched yet. Interesting early technology with an uncertain use case that I think we’re going to get into a bit, that has kicked off a whole bunch of different things, that I think that there’s a lot more that’s going to evaporate than’ll stick around in 20 years’ time.

Whether decentralized finance (DeFi) adds any value

Bilal Hafeez (14:44):

One of those use cases is decentralised finance or DeFi. How do you think about that? That seems to be a potential, like a clear use case, as in its challenging traditional finance, it’s creating new mechanisms for people to borrow, to lend obviously new forms as well or different version of speculation. What’s your thought on that space? And obviously there’s lots of accusations that it’s a Ponzi scheme as well.

Stéphane Ouellette (15:05):

I haven’t been clearly showed that there is real demand for decentralised trading applications, as opposed to the reason why this space has grown so much is due to dynamics like yield farming, which I think are artificial and I can talk about that, and regulatory arbitrage. Those are the two mechanisms that I have seen grow the DeFi ecosystem. And I haven’t really, outside of this little narrative that happened in the summer of 2021, where people were accusing Robinhood of favouring Wall Street pros versus the retail investor, I have never really seen a use case where a decentralised trading application for someone who has launched hedge funds and investment banks, I haven’t really seen a use case for decentralised trading applications that I would want to use myself.

I’ll give you an example. These decentralised trading platforms have been around for a long time. Bitfinex was launching several in 2017, they launched Ethfinex, they launched EOSfinex. As their names would suggest, they were on different blockchains and they were trying them out. And myself and our team would observe them on the couple of millions that it’d trade a day, as an interesting, very far off future development for trading. But we would never want to trade on them ourselves because, one, if something goes wrong, if they’re really decentralised, there’s really supposed to be no one to call. And even if you could get in touch with somebody, they can’t fix it anyways if it’s really decentralised. So it seems so irresponsible for us to trade using this early technology on platforms that weren’t really offering anything else to us. Like, they weren’t offering anything else. They looked like the same order books too, and everything. To take all that risk, what were we really getting back? I don’t know what we would be getting back, some kind of self custody element that I’m also sceptical of.

But in 2020, the entire DeFi ecosystem took off for the first time ever, and why did that really happen? The first thing that happened was compound finance launched a comp token where you were able to post much more mature assets like stablecoin and Bitcoin, and receive a yield in comp token. And that’s how almost all these yield platforms are, you’re paid in kind, right, with their token? From what I can see, they seem like honest operators, they want to build technology and all that. I think that they just had really a… I don’t want to call it excellent, but the timing was such that there was people like Paul Tudor Jones had just started talking about Bitcoin and it was already kicking off this crypto rally, so something like compound finance and comp token sounded new and people got really excited about this token as well.

So it almost instantly, overnight traded to a huge valuation. I believe over a billion dollars, like overnight, okay? But this is a platform that has very few earnings attached to any kind of token, uncertain governments. From my eyes it’s an unregistered securities offering, so why on earth would it be trading above a billion dollar valuation like the next day, right? So that was an inflated token valuation, I’d argue, that was now allowing them to pay their counterparties in outsized yields. Because there is a yield on Bitcoin. You can go to peer to peer lending markets throughout the entire crypto ecosystem, and you can see what the yields are on Bitcoin. That right now they’re particularly low. The market isn’t in an aggressive bear market where Bitcoin yields would typically increase because people borrow it to go short. So there’s no magic to the yield till you get this token dynamic in there.

After that happened, tonnes of copycat platforms that came out and a new use case for decentralised trading came about, which was platforms like Uniswap, which allowed a venue to launch these new tokens, which very much looks like an unregistered securities offering, right? So now Uniswap’s growth, you could go, “Well, why do people use Uniswap? That’s not a yield farming platform necessarily.” And it’s like, well, they were using Uniswap to launch more yield farming tokens.

Bilal Hafeez (18:17):

And the yield farming, all of that works as long as the newly issued token is going up in price.

Stéphane Ouellette (18:23):

Yeah, where it’s at a level where the company feels comfortable with the dilution in paying outsized yields, right? But it’s all predicated on the value of this token, maintaining its value. And if not, if you talk to most people who do yield farming, what they tell you is that they earn token and they sell right away. But not everybody could be doing that or else these token valuations would never get off the ground, right? So if you pledge an asset like Bitcoin and you receive comp token and the market starts to turn, your entry was very easy but your exit is a very small window, right? Because those tokens will have a lot less liquidity.

It’s essentially like a carry trade that’s going to be tough, that could have a huge unwind. We’ve already seen this occur at this point. This is the dynamic we’ve been talking about throughout all of 2021 at our firm. And it’s one of those things where you look like a dummy 99% of the time until the one day that you’re right, and you miss out on huge gains and all this kind of stuff along the way.

Bilal Hafeez (19:13):

On the interest rate side. So, you pledge, you receive an interest rate, and then on the other side, who’s borrowing? And what are they doing with the borrowing?

Stéphane Ouellette (19:20):

A lot of these things are complete black boxes, right? So you really don’t know what’s going on. And I mean black box to the extent that sometimes these platforms have launched and the next day they’ve run away with the money, which now has a name to it that’s well known, called a rug pull. But I mean, it could be doing anything, right? Like if you pledge US dollars, like through a stablecoin, the firm could turn around and actually lend that US dollar stablecoin out in peer-to-peer lending markets, which you borrow US dollars in the crypto ecosystem or stablecoin to go long, right? So in a market where everything’s going up, US dollars and US dollar stablecoins have outsized yields. They have for a long time, which is a great arb trade that we try to speak to institutional clients about, but you don’t have as much success with that as you might think.

But yeah, you could get 18% yields annualised on US dollars or Tether. Often last year, 18, 20, 25%, so the company doesn’t pay you yield in Tether, they’ll pay you yield in token they receive and they go out and they get the 18% annualised yield for themselves, right? But again, there could be many things happening behind the scenes. Even a lot of centralised platforms, not a lot, but there was a couple large blowups in centralised platforms throughout the worst parts of the pandemic, because what was made evident was that what they were doing was actually hedging. You lend them Bitcoin, they hedge your Bitcoin exposure and then they take fee out and they lend it to high risk borrowers at a much higher level so it didn’t even have anything to do with crypto. They were just using it as a layer of obfuscation on top of some other high risk lending that they were doing and they blew up, so…

Bilal Hafeez (20:40):

And you were saying these new tokens that in effect, like unregistered security offerings, so that implies that there’s a clear regulatory arbitrage that…

Stéphane Ouellette (20:48):

I mean, we’ve already seen this occur in ICOs. The whole industry was referred to as an unregistered securities offering and there’s still people in court right now suing the founders of these platforms because they lost all this money and now they feel like they can claw some back because it was an unregistered securities offering from the start. Some of the larger platforms had people that got into a lot of trouble because of this, so…

Bilal Hafeez (21:06):

Why are the new tokens issued today not called an ICO? I mean, what’s the difference between an ICO and what’s happening…

Stéphane Ouellette (21:11):

It’s new branding. The whole NFT craze was also first seen in 2017 by actually a lot of similar developers that sponsored the NFT craze like CryptoKitties. CryptoKitties, I hope I don’t get this wrong, I believe was launched by Dapper Labs, their Canadian company in Vancouver. And we saw this happen before. There was CryptoKitties, they were trading for $350,000 and then some sold it a penny a couple of years later, right? And so I don’t think there was, in this last wave, there was all that that was completely new. A lot of this stuff has been tried before within the crypto ecosystem and had a lot more success this time, I’m not exactly sure why the crypto ecosystem was more creative this time when seeing the concept of NFTs than they were when seeing CryptoKitties, because essentially very similar things, but everyone’s brain ran wild with this.

There’s a lot of industries that are looking for some kind of tokenization, like the art industry is dying for some kind of digitization because they feel like they’ve been left in an analogue world. And if you talk to people about NFTs, a lot of the time they want to talk about derivatives on art and shorting it and all that kind of stuff. So there’s a lot of people that were waiting for this, but a lot of what we saw in this last round, it’s like a very similar playbook to what happened in 2017, 2018. And before that, I mean, 2013 was a little bit of a different issue because it was really kicked off by the Mt Gox collapse.

These last two, I’m sure that the mainstream media will ascribe why the market sold off, but really it was just an overheated market that turned, we had things like interest rate dynamics changing. And why is the market selling off? Why did Dogecoin have a $50 billion valuation, right? That’s not the question people ask. People go, “Why’s Dogecoin selling off?” and you’d be like, “I was more confused why it was up here in the first place, with so little developer activity on the blockchain.”

Bilal Hafeez (22:43):

And you mentioned NFTs and then more generally on metaverse. I mean people use the term metaverse, what’s your sense? From what I can tell, meta’s virtual land, and then there’s the gaming side, two main types of coins as far as I can tell. But how do you see the metaverse in crypto?

Stéphane Ouellette (23:00):

It’s funny dynamic too, because the concept of metaverse of human future in a metaverse, I mean, I have a classmate who was writing on this dynamic in 2020, and he was writing (Matt Ball, if you’re listening, I’m talking about you) really well thought out articles about the metaverse in 2020. And what he was talking about was talking about Fortnite and how Fortnite had essentially… The Epic Games property… And how Fortnite had essentially created the most visible metaverse that we had seen, at least the most 3D representation of what we would think something like that would look like. And also the CEO of Epic was very vocal in saying he was building a metaverse company, right? But that got very little attention and I was very interested by that concept so I was following it very closely.

I mean, I was thinking that this was something that was going to be a 50 year development, and very quickly with the pandemic, it became something that extremely large companies were betting on happening a lot faster than that. And now there’s multiple companies that refer to themselves as metaverse companies. I haven’t actually seen a Microsoft executive do this, but Epic refers to Microsoft as a metaverse company, right? Not to mention now a company’s called Meta, right? It’s all played out a lot more quickly than I think any of us really expected. But that said, we’re in this space with this dynamic where it’s chaos in terms of people’s understanding. I mean, people call whatever we’re experiencing right now, the metaverse, right? In the same way that people said the blockchain, right? As, there is no the blockchain, there are blockchains. There are competing blockchains, there are blockchains with X use case, X focus, whatever.

There are competing platforms that want to be the dominant metaverse going forward, right? That’s what’s happening. There isn’t a the metaverse, there are competing platforms that want to basically win the metaverse race, and it’s extremely uncertain what that’s going to look like, right? Because probably the most visual representation of what a metaverse could look like, okay, maybe you could argue it’s something like Fortnite, right? Or the Sims or something like that. Or Grand Theft Auto, honestly, like Grand Theft Auto’s multiplayer mode. But the firm that obviously looks like they have the easiest jump to some online avatar is Meta, Meta, Facebook. So it’s are really, really early days of these dynamics.

Whether or not these companies continue to invest as much as they have been in this evolution, I think it’s going to be a hard sell, especially with the markets that we have today. I mean, these pie in the sky ideas of changing the world aren’t really what companies focus on when their stock prices are down 50, 60%, right? So I think you could get a really big break in this evolution. That said, this is obviously where the world’s going. I’m really avid follower of eSports and gaming and Twitch, and all that, and I think that even the millennial generation, not just the Gen Z-ers, like the millennial generation is completely unaware of what’s going on, on these platforms.

I think that there’s going to be this huge shock when the current 12 to, call it 18 year old demographic of today, has spending power in their late twenties and early thirties and what they spend that money on, what entertainment they spend that money on, I think is going to shock everybody. I was saying to someone else the other day, “I couldn’t even tell you who the CEO of Warner Brothers is, but I’m wondering if they know people like TIFU and NICKMERCS and Pokimane, and all these people that are massive online stars, xQc. xQc is a Quebecer from Canada who was a former Overwatch pro, ended up getting basically kicked out of Overwatch League and just started streaming on Twitch. Every day he streams for 10 hours to a hundred thousand viewers. I can’t even think of any other people that could do that.

And this is the world that that generation lives in, so we could say, “I don’t really feel comfortable with this concept of metaverse evolving. I like life the way it is with this kind of 50-50 digital life,” but you got a generation coming along that is very comfortable.

Bilal Hafeez (26:45):

Yeah, absolutely. Just one anecdote in that regard would be, my son’s 14 right now. And during the pandemic, obviously there was lockdown so he wasn’t able to meet his friends. So what they did was they met on Fortnite and they didn’t engage in the game and they just met some corner of the island and fooled around and played games and stuff with each other. And that’s how they interacted with each other every day. And that was so natural for him. They’d say, “Oh yeah, we’ll just meet in Fortnite.”

Stéphane Ouellette (27:06):

Yeah. I mean, it gets even crazier than that, right? These large online multiplayer games, there’s people who have jobs in these universes, that they actually have a job that they go to. I’m exaggerating a little bit, but they’re like a cashier in Grand Theft Auto, right? For those that aren’t familiar, jumping into that world would look crazy. So this is already happening. This has been a trend that has been developing for a long time. I mean, it was funny watching a lot of Twitch during the pandemic, you’d hear these gamers that would basically say something along the lines of, “I wouldn’t even be able to tell you it was a pandemic right now. I’ve been living like this my whole life,” right? And it’s true. Those kids, they strap in every day online, they’re not quite like an online avatar yet, but I mean, it can’t be that far away. Every day these people put their headphones on, they stare at screens for 10 to 15 hours a day, and they are in the game. They know whatever map they’re playing much better than they know their own neighbourhood.

Bilal Hafeez (28:01):

But what do you think do the crypto versions of these bring, anything new to the table? Because when you look at Fortnite or Grand Theft Auto, it’s amazing graphics and amazing gameplay, but then you look at, say Axie or just some of these other crypto-type games, which are more, I guess about the economics perhaps. But do they bring anything new to the table?

Stéphane Ouellette (28:18):

I don’t want to talk about individual platforms, but I’m not rushing out to play any of those games, and I like playing video games and stuff like that. I think that crypto doesn’t really want to talk about that because the most successful online currencies, outside of things like Bitcoin, etc, have been things like in Fortnite, they have V-Bucks, but there’s no element of decentralisation to V-Bucks. It’s literally instead of getting currency from your government, exchanging it with another government’s currency, you’re getting Fortnite currency. And there could be a lot that they do with that and create an economy and all that kind of stuff. And on another time we can talk about how that’s what Libra should’ve done. But the game’s user bases are really young, right? So that’s the issue that everyone’s running into here.

First of all, I was speaking to somebody the other day that they had a kid that wanted to play one of the centralised games, and they asked for money to be sent to them. It was like an enormous amount of money that they would need to participate in this game. And it’s a big enough problem when kids want their parents to give them 10 bucks to buy the latest skin for their character online. So I’m not as familiar with it, but I don’t really understand what the… It’s not an area of the ecosystem that I’ve spent a tonne of time focusing on. Maybe I’ve written it off a little bit too much because of the dynamics that you’re saying. I just look at the games and I go, “I mean, I don’t want to play this,” so maybe I haven’t done enough homework on what this could be.

But again, as you can tell, I’m sceptical about those pie in the sky ideas anyways. And it’s like, if it’s a great game, you’ll do fine and you don’t really need to worry about this crypto component, and if you wanted to, you could inject some kind of payment in there. Like there was this huge scandal that came out of Counter-Strike where kids were using skins that would go up in value because you could trade skins, and they were betting with skins that they bought, right? And some of these skins are like $10,000. For the unfamiliar, it’s a pretty crazy world out there with the video game economics. But in fact, a lot of these platforms, because they didn’t want to end up in a scandal like that, you just buy skins and that’s it. You can’t sell them anymore. There’s no mechanism for selling them.

Or if you believe that you’ve sold your account to somebody, which used to be like a retirement plan for like a Counter-Strike professional, that you’ll get banned and you can only just get deleted. So they’ve actually moved away from that to avoid the issues that seems like some of these crypto-based blockchain games are diving head first into, right? And these guys are really the experts, so.

Bilal Hafeez (30:31):

How about stablecoins? Obviously, we’ve had the whole Terra Luna blow up, what’s your take on the whole stablecoin landscape right now?

Stéphane Ouellette (30:37):

Yeah. I mean, I think probably easier way to talk about how much different the Terra Luna dynamic was from typical stablecoins, because that week what happened was Luna completely blew up and then the next thing was always Tether going to blow up. The Luna blowing up dynamic, I thought was clear and the Tether not blowing up dynamic, I think is also clear. I would love to sit down with some of these investors who I have respect for, who really put a significant amount of money into Luna because I don’t understand what they were thinking. And it’s not that I don’t think that they’re smart people with thesises, I just, I can’t see what it would’ve been at the start. So I’d like to hear that and show myself wrong.

But as I mentioned, myself and my co-founder founded a business that’s hedge funded, that’s primarily arbitrage. That’s really all we’d do with that vehicle. And so stablecoin arbitrage has been a semi-consistent strategy for us. You don’t really get an opportunity to arb stablecoins very often, but when you do, can be quite interesting and lucrative.

Bilal Hafeez (31:31):

And the way you arbitrage is, say for example…

Stéphane Ouellette (31:34):

It’s easiest to start with the traditional, what they refer to as centralised stablecoin like Tether, okay? Now if Tether trades below par, you buy it at a discount and as long as there isn’t major banking disruption or some kind of fraud that’s occurring at the stablecoin issuer, there’s no time sensitivity around that. If you buy Tether at 90 cents, you bought something at 90 cents for something that someone’s going to exchange to you at perpetuity, at one to one. One to one plus, in Tether’s case, 10 base points if you’re a market maker. So you just buy it, you can go to sleep, wake up in the morning, you can do… There’s no time sensitivity. You just go, and so as long as you don’t have a counterparty risk blowup issue, that is a real arb.

Bilal Hafeez (32:11):

And the risk there would be that the counterparty doesn’t have the adequate collateral?

Stéphane Ouellette (32:16):

Yeah, right. So when you buy USDC or Tether are the two largest centralised stablecoins, at a discount and you go to their mechanism which allows you to redeem it. So you give them a bunch of Tether and they need to send you a bunch of US dollars. So if they don’t have US dollars to send back to you, okay, now you got a big problem. But as long as they do, everything’s completely fine and you’ve got your trade. And if you get the money in your account, the trade’s over, you’re right. It’s not like, oh, I still don’t know what’s going to happen here. It’s like, once you get that cycle through, you’ve won, the trade’s done.

The issue with that and this concept of an algorithmic stablecoin, and I do think that there’s ideas in the algorithm of the stablecoin landscape that you could push further. But the way that this had been architected was, to run that process, you need a bank account. You need a bank account and unless you had a very small amount of market makers, you plug-in directly, it’s hard to imagine how you could link a bank account into a smart contract, which is necessary for an algorithmic stablecoin. It’s like a smart contract base. It’s a crypto-based dynamic that’s playing out here. So how you get an individual bank account into that?

Okay. Maybe with market maker, you might be able to find some way, but that was the struggle. So the other option that you have there is, okay well maybe we could buy stablecoin and put it in there. But what’s the point of making a stablecoin that’s full of other stablecoins? Why don’t you just buy the original stablecoin? You’re just adding an additional counterparty risk element in there. So this group settled on the idea that they were going to have this dynamic, where you could buy UST at a discount and then you could exchange it for a certain amount of Luna, which would be at par and then you could sell the Luna.

The issue with that is that that cycle isn’t instant and Luna is a highly, highly volatile asset. So if you were buying it at a discount, you don’t actually know where you’re going to sell Luna. You’re taking risk. As an arbitrager who’s trying to do, essentially risk free transactions… If I buy Tether at 99 cents, right? I know I’m going to get one to one. But if I buy UST at 99 cents, first of all, they also injected a bunch of different mechanisms in there that added frictions to it because of another issue that they did, which seems to be a fractional reserve-like ecosystem. So to avoid a run on the bank, they actually created additional frictions for if there was a tonne of arbitrage going on, which essentially made it impossible to arbitrage.

And if it’s impossible to arbitrage, how’s it going to maintain its peg? That’s who maintains the peg, arbitragers do. So this entity that I’m referring to, we looked at it and we thought this was going to be a great trade for us when we first started to look at these algorithmic stablecoins coming about. But then it didn’t take long to say, “No, no, there’s no way to arbitrage this safely.” So we had this in the back pocket that this was going to be a huge problem. And we weren’t sure that it wasn’t going to work, but we couldn’t see how it would work, particularly in a market sell off.

But again, then on the flip side, you could short UST, maybe, to play that trade. But again, that was also a very confusing dynamic. I don’t know, maybe UST could go up like crazy in some weird environment because again, we didn’t understand how the arb mechanism would work. So then you’re kind of all bets are off. So if people can’t arb it, who knows how these things are going to behave? Or the go short Luna, which you would’ve gotten completely run over by doing that, because it was a very much irrational longer than you can say stop type dynamic.

When the market started selling off, basically what an arbitrager would expect to happen, happened. We weren’t the only people that noticed that, but again, it was very hard to do anything with it, to bet against it. But then what happened was some hedge funds, whether they were acting, whether they were honest about they actually believe this, or whether they just viewed it as an opportunity, started to say, “Okay, Tether’s going to blow up next.” And what happened was Tether traded off its peg down as low as 90 cents and it was a huge opportunity for arbitragers because that was a real dynamic.

Bilal Hafeez (35:48):

So the important distinction here is that with Tether and dollar coin, USDC, they basically have the dollars as collateral and then you know you can redeem at one to one, when it trades below par. Whereas with these algorithmic ones…

Stéphane Ouellette (36:02):

The way that this algorithmic stablecoin had been-

Bilal Hafeez (36:04):

This particular one, yeah.

Stéphane Ouellette (36:05):

Basically the thesis was that a basket of highly volatile assets was going to support a very stable peg, which already, when you say that, it doesn’t seem to sit right. But there’s this kind of diffusion of responsibility around investing in crypto that keeps happening again and again, because these cycles… I don’t know of another asset class where something can go from a $50 billion market cap to zero market cap, within the span of five or six days. People are used to seeing, when the market ascribes a $50 billion market cap to something, I mean, there’s been a lot of due diligence that’s gone involved in this. This is like something that the markets really debated and found out, but these blowups keep happening again and again in crypto. How big was Enron? Wasn’t Enron about 50 billion.

Bilal Hafeez (36:39):

Yeah, yeah.

Stéphane Ouellette (36:40):

Okay, so we had an Enron played in six days, and Enron was once considered the largest financial scandal in the history of humanity so it’s very strange

The difficulties for institutions to access crypto markets

Bilal Hafeez (36:48):

Actually on that then, so what is the current ecosystem of Crypto? in the sense that, if I’m an institutional investor, so I’m some big asset manager who traditionally invests in bonds and equities and real estate, private equity, that’s my portfolio. And I want to go into crypto, how do I have the level of confidence that this is not going to happen to me? What are the checks and balances?

Stéphane Ouellette (37:09):

What we are saying to institutional investors is more so that… We think that a lot of institutional investors have taken this whole space off of their screen entirely, and for some of them it’s literally because the space is too small. And there’s a lot of reasons. People have been asking, “Where are the institutions?” Well, I mean, there’s so many frictions for institutions to get in this space, I don’t think they give this enough credit. If you touch crypto, your insurance premiums go through the roof, absolutely through the roof. Our company just moved offices and we had trouble getting property insurance, which okay, someone has a higher likelihood of breaking their ankle in our office than they do it a non-crypto related office? So dynamics like that. Your auditors are often adding a lot of frictions to you directly participating in the crypto ecosystem.

So a core thesis that we haven’t shifted around was that synthetic exposure was going to work a lot better, particularly in these early days, to get institutions in, so we focused on fiat settled derivatives. But I think the firms, even the billion dollar hedge funds that are able to trade this space, a lot of them have taken it off their screen. And the reason for that is they feel it’s a very trite space where everything’s going to the moon and they’re sophisticated investors so there’s nothing there for them. But we think that they’ve completely overlooked the alpha opportunities in this space that are brought about by the market inefficiencies. I think that that is the next wave of institutional interest that’s going to be in this space because these trades are real trades.

We have a whole suite of structured products, that’s regulated, that we offer to institutional investors, that allow them to play dynamics like basis and perpetual swap arbitrage, some of those pipelines in the product. These are dynamics that they couldn’t access themselves, in the same way that a lot of these investors, if they want to play an oil trade, they’re not going to hold physical crude at their office or in a storage facility, or whatever. So I think that a lot of my old clients, because I used to cover hedge funds and all that, have literally… They may be messing around crypto on their own, but they haven’t found an angle where they feel like they can put their customer’s funds into it.

Even owning Bitcoin in their portfolios, the firms that would more likely be risk forward enough to do that are not willing to hold passively, an asset that volatile. It’d completely mess up their return profiles every month or it would be so irrelevant that, what’s the point? But what we think that those investors are missing out on is just the massive arbitrage opportunities that continue to come out of the crypto space, that are trades that they can understand. They’ve played trades like this in other markets, even though they don’t know it, but there’s a huge mental hurdle getting these funds over the hump on, “I don’t trade crypto.” And it’s just like, they’ve seen so many people come in with these hair-brained ideas that they’ve seen blow up now, you know?

Bilal Hafeez (39:38):

Yeah, actually one thing I found, because I come from a traditional finance background, is from an analysis and research perspective. A lot of the so-called research in the crypto world that is so immature and amateur.

Stéphane Ouellette (39:50):

Or it’s like full promo.

Bilal Hafeez (39:52):

So it’s not really research, it’s marketing. It’s outlandish predictions, no explanation about the risks involved. And it’s almost fraudulent in many ways.

Stéphane Ouellette (40:00):

Yeah, I know. So our firm tries to speak about this space in a much more realistic way. We’ve dedicated our lives to this ecosystem, we’re bullish on it. To be long term bullish on this space, you don’t have to just think that everything that’s happening is going to change the world or every implication is positive for Bitcoin, et cetera, et cetera. This industry was built on people who have bought and held Bitcoin extremely successfully. That’s the foundation of the industry, and some of them have the loudest voices in this space, so they’re really just saying what’s worked for them. Like, “Buy it, it works. Don’t worry about it.” and some of those people have taken the same playbook to things that have evolved beyond Bitcoin, like DeFi because they’re, “Oh, the last time someone told me I was an idiot about investing was when I invested in Bitcoin in 2012 and look who is stupid now.”

So there’s so many different dynamics like that, that continue to push this promotional aspect. But I completely agree that that is extremely distasteful to most institutional investors, this heavy promo, no due diligence approach that people take. You can see it in the market too. People invest something around 50% of the DeFi assets that have been ponzis on these platforms this year was hacked. I mean, it just goes to show how no one’s doing the due diligence on these things. How is that possible? There’s a very low bar of due diligence for a typical crypto investor.

Bilal Hafeez (41:09):

In terms of the industry of crypto digital assets, what do you think is the elements that are missing when you compare it to, say the financial industry? For example, there are now investment banks like yourself, offering the services of an investment bank, there’s centralised exchanges. You can see everything’s kind of…

Stéphane Ouellette (41:24):

Yeah, it’s getting there, it’s all moving in the right direction. When this Tether situation came around, because Tether is viewed as being a much larger systemic risk, and it is, than something like Luna Terra to the ecosystem. And there is even some concern that it could actually… If there was a big Tether blow up, it might actually be a systemic risk for the whole economy. So I was getting a lot of calls from very large hedge managers the next day and all that kinda stuff, that I have relationships with, that have now grown to trust mine and our firm’s perspective in this space, and asking me what was happening and all that kind of stuff. And that’s a lot better than the last time there was Tether FUD around where I didn’t get those calls, and I didn’t get a single order at the end of those calls, but next time, maybe not next time, time after, we’ll get an order, right? We’re getting there.

And there’s a bunch of dynamics that I think are underappreciated, which I alluded to. But I for sure think the lack of partners in this space is something that is keeping institutions out. The easy way to make money in this space has been building some retail focused platform that offers retail tools that they wouldn’t usually have, like leverage, borrow lend. Retail investors don’t get access to borrow lend, so you give them these kind of tools and then you launch tokens around it and do all that stuff. That’s what’s made a lot of the money in this space, that has made companies overnight. So that’s what people keep chasing, that’s where… To use a Canadian sports analogy, that’s where the puck is, it’s not necessarily where the puck is going.

I think that this institutional wave is the largest opportunity that the crypto ecosystem has to build a firm out, but there’s been no focus on it. There’s been this, if you build it, they will come mentality, retail will come. So these institutions who trade equities with 25 brokers, they’re totally over brokered in all their other asset classes, they have no one to speak to. I mean, I like to think that FRNT has become a firm that has sought after in this space, but we’re still a small firm, growing firm. We’re building out our capacity and our team, we could use more help from the industry as a whole in supporting these investors.

And versus in equities, people are complaining they don’t want to pay brokers anymore because they’ve got way too many of them. And also I’ve been trading equities for 50 years, broker, so why do I really need you? In crypto these firms are dying for people to explain to them what’s going on. And the infrastructure isn’t being built, and the firms around this. And all the investment banks that are saying that they’re building a crypto arm, it’s like… I mean, I have not seen an announcement and then seen with my own eyes what that actually announcement manifests itself as, and been impressed. There’s no focus.

Bilal Hafeez (43:49):

Let me ask you this then, what makes it hard for these traditional investment banks from going into crypto? Because obviously they’ve announced it, but the execution doesn’t happen. And why can’t they just set up… Banks have a FX department, commodities, rates, just add crypto?

Stéphane Ouellette (44:02):

Well, there’s some real frictions there already. The Fed doesn’t allow any Fed regulated bank to touch Bitcoin at all, so that’s problem number one. But also, like Goldman Sachs did a transaction where they did a back to back options trade with Galaxy, and two days later, one of their regulators came out and said, “Don’t do that again,” basically. So they have real things limiting them from participation in the ecosystem. But on top of that, I don’t think that large firms are really well positioned to get into this space. For example, we were about to sign a deal with a large asset management business in 2021, to the point where I was asked to make two separate press releases about this partnership. And it fell apart because at the last second, some… I don’t even know, executive, board member, whatever came in from the top and said, “No, you’re not doing this without my approval.” It freaked all the other board members, executives out, and then the whole thing got put on ice.

And there’s so many people at all these organisations that are just ready to kill all of these different ideas, and they don’t really want it to happen and all that. So basically what happens is you’re sitting in… To paint the picture… That people are sitting in a boardroom and they go, “Okay, we don’t want to look like dinosaurs here, but we can’t go all in on this. We don’t have the internal support, three of our board members think the whole thing’s going to zero, it’s a Ponzi scheme. One of the board members’ son’s just got rug pulled in his own DeFi thing. We can’t do this,” so that’s what you’re seeing at organisations.

And when the market’s really rallying, maybe those people are sitting back because they don’t want to look like naysayers, but the second it turns, they’re right there being like, “See, I told you, we’re not doing this,” right? So there’s constantly these false starts, as you saw with Goldman’s first crypto desk, they completely shuttered the second the market started turning over in 2018. I don’t know what’s going to happen with this latest venture, but someone with a great crypto idea doesn’t want to work with Goldman Sachs right now, they want to do their own thing. So they can’t even support their clients to speak about this so they’re trying to go away from it. Not to mention Goldman Sachs basically… Sorry, I don’t mean to beat up on you, Goldman Sachs, it’s just, it’s a positive that you’re the name that comes to mind whenever I think of the financial industry. But the Goldman Sachs’s and the BlackRocks of the world, okay?

Bitcoin and cryptocurrency is essentially like a protest vote against the old financial system, which these firms basically helped build and have profited off of, a lot. So there’s even cognitive dissonance amongst the executives, that they’re like, “What’s so bad about what we made for everybody?” So they don’t want to learn about it in the first place. And to get up the curve, David Solomon and Larry Fink would have to sit down with somebody like me in the thirties. I don’t think they don’t want to do that, I don’t blame them. I wouldn’t even feel comfortable talking to them about it because they’re so much more experienced than me in every other single way.

So there’s just all these little blockers. There’s large blockers, there’s little blockers and it’s just, there is definitely a certain amount of the industry that wants everyone to feel as though this institutional thing is happening right now because they already have huge valuations. And so they just got a whole bunch of investors to invest at large valuation X, and now they need to grow it above X. So how do I do that when I already have a huge percentage of the retail market share? The institutions are getting in too, and that’s my next leg of growth, so there’s a lot of that happening.

Bilal Hafeez (46:57):

Yeah. So your sense is that native or TradFi find it hard to get into the crypto space so it’s better of new starters to come into it? And then also we’re likely to see a pivot away from retail towards institutional, but it will take time.

Stéphane Ouellette (47:10):

Yeah, I don’t know if it’s a pivot away from retail, but more like, I think that right now the market cap around companies that are retail focused versus institutionally focused, is over 90% retail, 10% institutional. Typically that’s more like 50-50 versus capital market platforms and wealth management platforms. And I think that that is going to become more normal. There’s people that want to do it on their own. There’s people that want to hire experts to do it for themselves. There’s already large pools of capital that are extremely sticky, that aren’t in the industry at all. So yeah, I see that. We’ve got in one of our decks right now, because we have a focus on OGC derivatives, we feel like we have the most sophisticated regulated structure of products platform in the world, so really trying to push that.

So we compare the total open interest of the CME Bitcoin future, which is essentially the only real regulated product outside of some of these trust products that has had serious uptake, and it’s about 2 billion in open interest. Versus Bitcoin at whatever it is, the latest $700 billion market cap. So you have 2 billion on a $700 billion asset, if you use a proxy like that in the interest rate environment, the OTC derivative and regulated OTC derivative marketplace is four times larger than the spot fixed-income market. We’ve got less than 1% of the market cap of Bitcoin in regulated derivatives, which essentially is all that these other institutional people can buy. That’s what it is.

It’s like, well maybe there’s something else that they can do, which would be the criticism to that. Maybe they’re doing something else. It’s like they can’t do anything else. If they could do anything, this would be what they could do, and it’s tiny. I think that regulated ODC derivatives, and this was literally what our thesis was in 2018, so now I’ve read a Financial Times article that says the same thing too. So it is all coming around, but that regulated OTC derivatives, a broader listed derivatives market. But I think OTC derivatives are going to be really important because this space moves so fast, it’s a lot easier for a firm to set up an OTC derivative and add more tools, than CME just coming up multi-leg products that they’ve never really traded before.

So I think that regulated ODC derivatives are going to be a huge source of growth. That’s going to help firms get in the industry because it deals with a bunch of the frictions. They don’t touch physical crypto, it’s just a derivative. A lot of firms already have in their risk disclosures that they can trade crypto derivatives. So I’m not sure what happens to this current cycle, but the next adoption wave, I think you’re going to… It might not be the ultimate adoption wave where the whole world of asset management has dedicated crypto strategies, but we can’t be too many away, maybe three, four or five away. Yeah.

Bilal Hafeez (49:34):

I mean, we’ve talked a lot about the crypto industry. I do like to ask some personal questions as well. So the first one I like to ask everyone is, what’s the best investment advice you’ve ever got from anyone?

Stéphane Ouellette (49:43):

My dad gave me constant investment advice, so I just have to give him a shout out because he’s definitely been the person that’s taught me most about any elements of this industry. There’s several books that were really foundational to my understanding of markets, but one of them for sure was Reminiscences of a Stock Operator. There’s a scene with what the author refers to as Old Partridge who’s an old stock jockey and he has this advice that is basically that he doesn’t buy stocks in bear markets and he doesn’t sell stocks in bull markets. And understanding underlying conditions is really half, if not the whole battle. I think that you can apply that.

That’s really how I’ve approached every trade, top down. Are we in a economic bull or bear market? Are we in equity bull or bear market? Are we in a financials bull or bear market? Are we in a large bank bull or bear market? Then you get down to all of that, and if you’ve got everything lined up in a bull market, you got a pretty good chance of success. And being a bull market is not being up 20% like it’s become, it’s the conditions of the typical trader. How is the market reacting? And people who’ve done this for a long time, know that these markets react very differently, and if you don’t know if you’re in a bull or bear market and you’re getting in, you’re stacking the odds against you.

Bilal Hafeez (50:49):

We mentioned earlier, you talked about Gen Z, what’s your advice to youngsters that you said were coming out of the university into the job market? What advice would you give to them?

Stéphane Ouellette (50:57):

I generally reject this online motivator person because I really couldn’t take my experience and apply it to somebody else. I have very specific things that apply to me, and for me to stand up at front of a stage and tell everyone how I managed my career, it’s just completely ridiculous, I find. You don’t know, like, well I would tell, “Don’t give up and to some people give up,” it’s very hard. But I will say that one of the most common denominators that I have personally noticed with people that hit massive success, is that they got themselves in the position where they said to themselves that… Think about eSports is a great example.

I mean, the people that have been really successful in the eSports industry and are sitting now with really large companies, like Nadeshot who created 100 Thieves, he’s a great example. 100 Thieves is one of the fastest growing eSports organisations. The whole eSports had a little bit of a dip now, but he’s really created an impressive firm. He was just a guy who liked playing video games. When he got into that industry, he said to himself, “Well, worst case scenario, I’ll be in the video game industry, which makes me happy.” And now all the economic success followed that. So, I think that if you try to focus your energy on things that you really enjoy, and you can find a way to create a life and an overhead, don’t get a huge apartment, a small apartment.

So, you go and be, “Know what? I’m pretty good doing this because I get to do what I love to do every day and get to do what I focus in,” you usually win two ways, because the reason why you like it is probably some reasons why other people like it, and so you yourself are probably part of a trend that’s just starting. And the likelihood that this becomes something that’s more monetizable as time goes on, is great. Plus, you’re doing what you love to do in the first place, so I think that that’s been overwhelming. The people who are successful in crypto now are people that… The real builders in the ecosystem would’ve worked on this for a much lower compensation because they are like, “I get to create a new financial system. How cool is that? What better use of my time can I think of?”

So, I would focus on that. I would say that that has been a real common denominator for the people that look like overnight successes now. Really, they just started doing something that they were really interested in and the rest took care of itself.

Bilal Hafeez (52:57):

And you mentioned a book, Reminiscences of a Stock Operator. Are there any of other books that influenced you?

Stéphane Ouellette (53:01):

For sure. And honestly, I think reading is the most important thing you can do. Reading books is the most important thing you can do. As you get older, you have less time to sit down and read a full book and you got to keep up with so much stuff that’s happening in real time. But being in university and high school is a great time to create this foundation of your understanding that you can just incrementally build on as time goes along, particularly in markets. Reminiscences of a Stock Operator, all the Market Wizards books by Jack Schwager. One book that just happened to be really important for me was a book called Hedgehogging by Barton Biggs, that I really enjoyed. I think that The Ascent of Money is also very foundational for understanding. And I think that there’s many books about the financial crisis that you could read. I think it’s very important to understand that kind of reset moment in the financial crisis, to see where we’ve come from. So, a book like Too Big to Fail is very entertaining and also really gives you the ins and outs of what happened there. Then the last thing that I would say is, yeah I would read also entertaining finance books, like Michael Lewis books and all that kind of stuff, because some of those books really gets you excited about the industry and stuff. For me, reading Liar’s Poker and Big Short and all that, it just made you so excited to be in that industry, and then you come to work after reading a book like that, more excited than you can even imagine, right? So that’s a pretty good subset. I think that’ll keep your listeners busy for a little while.

Bilal Hafeez (54:21):

What’s the best way for people to follow you or to learn more about FRNT?

Stéphane Ouellette (54:24):

I would go to http://www.frnt.io and subscribe to our morning note. This is a product that we originally were using as a value add to clients. We still write it as though it’s an institutionally focused morning note. It comes out every weekday and it has for four plus years now. I think it is that more balanced, realistic, things are going bad, we say it, if things are going well, we say it, look at the crypto industry that I think has been refreshing for a lot of our readers. So I think that’s the best way to stay in touch with us. In terms of news, we are on Twitter, we are on LinkedIn. I think we’re… LinkedIn, we’re frequently quoted in articles, we put out research, we repost a lot of that stuff on LinkedIn and that’s just FRNT Financial on LinkedIn. And we are on Twitter, but we’re trying to grow that platform a little bit as well.

Bilal Hafeez (55:07):

I’ll include the links to everything you just mentioned as well. I have to say the newsletter is great. I mean, I read it every day, one of the best out there.

Stéphane Ouellette (55:13):

Yeah. Well, it comes out under my name, but there’s actually a team, Straw, Savage and Joey VD, the team that puts that out there, but I get to take the credit for it every morning. So, good work guys.

Bilal Hafeez (55:23):

Well with that, thanks a lot once again, for taking the time to come out here and speak to us, and good luck with the company.

Stéphane Ouellette (55:28):

Thank you very much. You as well.

Bilal Hafeez (55:31):

Thanks for listening to the episode. Please subscribe to the podcast show on Apple, Spotify, or wherever you listen to podcasts. Leave a five-star rating, a nice comment and let other people know about the show, we’ll be super grateful. Finally, sign up for our free newsletter at macrohive.com/free. We’ll be back soon so tune in then.

Bilal Hafeez is the CEO and Editor of Macro Hive. He spent over twenty years doing research at big banks – JPMorgan, Deutsche Bank, and Nomura, where he had various “Global Head” roles and did FX, rates and cross-markets research.

(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)