Podcast Transcript: Tania Reif on Leaving Macro Investing For Crypto

This is an edited transcript of our podcast episode with Tania Reif published on 11 February. She is the Founder and CIO of Senda Digital Assets. Prior to her cryptocurrency focus she built her investment pedigree at top macro hedge-funds including Soros Fund Management, Laurion Capital, Citadel and Alphadyne Asset Management. In the podcast we discuss, lessons learned from macro investing, what drives crypto prices, the future of the metaverse, 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 (00:01):

Welcome to Macro Hive Conversations with Bilal Hafeez. Macro Hive brings you actionable investment insights for all markets from crypto to equities to bonds. For our latest views, visit macrohive.com. 

Another US inflation number, another shocker with January’s inflation numbers reaching the highest levels since the early ’80s. Markets are now expecting the Fed to raise interest rates by 50 basis points at their next meeting in March. This is something Macro Hive’s Dominique Dwor-Frecaut has been calling for, for a while. Clients of Macro Hive’s Professional Service would’ve been getting her insight. So, if you’re interested in our higher-octane research service, drop me an email at [email protected]. The question though is whether the Fed can tame inflation. I wrote a piece on the drivers of inflation on our main site where prime members can get access to. Take a look at it, and it could change your perspective. Then on crypto, we wrote a piece on whether Bitcoin is the next Amazon and whether it could make you a billionaire. We also update our Ethereum views where we look at macro and on chain analytics to derive our view, and we’ve introduced a new, easy to read dial system to tell you whether we are bullish or not, depending on each of these factors. 

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Now, onto this episode’s guest Tania Reif. Tania is founder and CIO of Senda Digital Assets, prior to a cryptocurrency focus. She worked at top macro hedge funds including Soros, Laurion Capital, Citadel, and Alphadyne. She was profiled in the 50 leading women in hedge funds 2017 survey by the Hedge Fund Journal. Her career spans public policy beginning at the IMF and experience in the banking industry, Citi group’s economic and market analysis team. She has a PhD in economics. 

Now, onto my interview.  

So, greetings Tania. It’s great to have you on the podcast. I’ve been looking forward to this for a while. We had to move this around a few times, but finally, I’ve got you on the show. 

Tania Reif (02:30): 

Great. Thank you for having me. I’m very happy to be here. Thanks for your interest and for inviting me to participate. 

Bilal Hafeez (02:35): 

Great. Well, before we kind of go into the meat of our topic, I always like to ask my guests, their origin stories. Where did they go to university? Was it inevitable you would end up in finance and how did you end up where you are now in crypto? 

Tania Reif (02:48): 

Yes. Well, actually in my case, I think the way I grew up where I grew up is very relevant to crypto because I actually grew up in Venezuela and I lived through the economic implosion of a country that was oil rich in the ’60s and ’70s to really what is a country that went through starvation of it’s citizens and mass exodus today. And of course that was the result and not only of fluctuations in the oil price, but as well as an oil exporter, but also of macro mismanagement. 

I lived through the years where we did most of the adjustment, the macro adjustment at the time through inflation and currency crisis. I actually like to say that in Venezuela, every taxi driver is an FX trader because we lived through so many currency crises over the years that everybody has to be on top of what the currency movement is doing, what the dollar is going to be the next day, what the government policy around the exchange rate is going to be. 

That’s really been pivotal for that country because it really exports oil and imports everything else. As I grew up and I lived through all these currency crisis, I was always curious and interested on what was causing all this devastating turmoil to the citizens and to my family, because I was hit very immediately by this crisis. 

My parents were both university professors in a public university. So our income was based on a public wage that was decimated in real terms when we had inflation and depreciation. We lived very viscerally, very dramatically in my family, this big crisis where 50, 60, 70% of your real income is wiped out in a matter of days or maybe a month. As I was growing up, I actually didn’t think of studying economics and studying currency crisis. I actually studied architecture initially back home. 

So I graduated as an architect and I was working in my last years of school and right after I graduated, in low income areas in the country, helping them with technical assistance and micro credits and so on. During this time we had a major financial and currency crisis. And at this time I realised nobody cared if their houses were green or red or square or round or not. They didn’t have what to eat. My motivation for economics and currency crisis in particular really took all over my day to day reason for my curiosity, my reason for being and going back to the office to design a kitchen was no longer that exciting. 

Very quickly, I initially was going to come to Harvard to a Masters in urban planning and economic development, which they had at the time. Before starting, I decided to take a principles of economics class as at Columbia, because my ex-boyfriend at the time was in New York. So I thought this would be fun. That was an amazing class. I learned so much, I enjoyed it immensely. 

I realised I loved economics, but I loved macro. The master’s degree that I had signed up for was actually about urban economics. Toll roads and sewer systems and rent controls and things like that. And I thought, “No, no, no, no. I really want to understand macro inflation currencies and all these things.” 

Of course, by the way, the typical model that you learn when you are doing a principles of economics course is when you have a currency devaluation, that’s actually good for growth. In your very basic 101. And I remember thinking, well, that just does not sound right. I went through tonnes of these devaluations and growth outlook became worse and worse. And of course, I wanted to understand better dig, deeper, get the more advanced courses and really get to the bottom of it. That was the motivation to switch to economics. I ended up doing all the undergraduate courses and eventually my PhD in international economics at Columbia and my dissertation was on currency crisis. 

Bilal Hafeez (06:52): 

You’ve spent between your architecture degree, your master’s PhD, that’s a lot of time in university. I can see you’re definitely the daughter of professors here. 

Tania Reif (07:00): 

Absolutely. Well, of course I had my undergraduate degree. When I did the undergraduate equivalent for economics, it was actually a faster pace because I just needed to do what was relevant for the economic major, if you will. So I could do that in about a year, a year and a half. And then I applied to the PhD and got in and then I just did the PhD. But the PhD, of course, is a long degree. I had an academic stint in my life where I was teaching courses, doing research and doing all that kind of stuff that you do as a PhD candidate. 

Lessons learned from macro investing 

Bilal Hafeez (07:30): 

And then when did you actually move into markets then? So you were teaching. How did you make that switch? 

Tania Reif (07:35): 

Well, not yet. When I graduated, before going into markets, I actually want to work for the International Monetary Fund. And of course, you can imagine that to me, it was extremely exciting because this is the fund that was created to help countries with their balance of payments, which is of course, what is the underlying law for the currency dynamics and that was my passion. Moreover, I got to travel all over the world, all over emerging markets. I got to go to Asia. I got to go to Africa, went of course, to Latin America as well. It was a great experience. I did that for about four years. And then we were in the Goldilock years of the economy. Those years before the global financial crisis, where everybody had paid back their loans to IMF, we had solved the world’s problems. The private sector was booming. 

The discussion at the time was why is the IMF still relevant? We don’t have any crisis anymore. Everybody has paid back. Maybe for low income countries, there was some lending there, poverty alleviation kind of stuff. But really the big balance of payments crisis were not happening anymore. The IMF started shrinking and actually incentivising some of its staff to leave. 

I ended up leaving to Citi in 2006 because again, the private sector was booming and was doing great and I thought, “This is going to be the exciting next step in the world.” And so I went to Citi, but funnily enough, a lot of the people at that time left in the first quarter of 2008. Of course, and you have the big global financial crisis by the third quarter of ’08 and everything that followed afterwards, and then the IMF became relevant again. 

They actually started recruiting a bunch of people back and like… But at this time, I was already at Citi. I was at Citi group in the Economic and Market Analysis team. I spent there a little over three years. It was a great experience. It was my first exposure to markets, the sell side and the buy side and how to think about strategy and how to translate my understanding of macro and economics into actual trade of executable, tradable themes that our clients could benefit from. I stayed at Citi up until 2009. Of course, after 2008-’09, it was a tough period in the banking sector. And in ’09, I was extremely happy and lucky that I got an offer from Soros Fund Management and that was how I ended up going from the sell side to the buy side. 

Of course, Soros very well known as an FX trader and currencies was my passion. So I was very happy to do that transition. It was a great team. I enjoyed very much my time there. I was doing emerging markets research and strategy when I first moved to Soros. 

From then on, I really spent the last 12 years of my career in macro hedge funds. After Soros, I went to Laurion Capital. That’s when I started to manage my first book and it was a currency only book. That was also a great experience. Smith, which is the CIO is a fantastic trader and I really learned a lot from him. 

After Laurion, I ended up moving to Citadel where I joined the group that was doing FX and rates. And after Citadel, I joined Alphadyne Asset Management, which is also a macro FX and rates fund. This is really what I was doing up until last year when I decided to take the leap and switch to the crypto world. Now, I’m in fund formation process to launch my own crypto-focused fund in the first quarter of this year. So hopefully very soon. 

Bilal Hafeez (11:08): 

Great. No, that’s a great story. Great background there. Just one or two questions come up. One is when you made that transition from doing research at the fund to managing your own book, what was that transition like? Because obviously, you’re providing research into the PM. That’s one thing, but obviously having your own book is a different thing. How did you find that transition? 

Tania Reif (11:25): 

Absolutely. I think it is a hard transition, but I was fortunate that the CIO Ben Smith at Laurion was very instrumental in helping me transition. Really, I think you need to learn about portfolio construction, about how to think about your beta and the portfolio, your mental, the volatility, all these things that as a researcher, when you’re not managing a book, you’re not thinking about. 

I also think you do a little bit of this when you’re thinking in strategy terms that I was doing at Soros and I was doing somewhat at Citi as well, which is to think about the timing of a trade as well. I think that is the hardest thing. You could be right, you could get the analysis right, call right. Everything. Right. And still lose money if you are too early in a trade or too late or too late to get out, et cetera. 

Thinking about that, thinking about how to size the trades appropriately, thinking about when to stop out of trades and how to manage risk, all that is the part of the transition. And I was just very lucky to have someone on my side that I could go to and I could discuss the book as we went along. It’s something that it was interesting for me to learn. I actually enjoyed very much the process of being able to put my ideas to work and learn how to do that. 

Bilal Hafeez (12:41): 

And then when you expanded your asset classes from FX to rates and I guess, global macro, what was that transition like? 

Tania Reif (12:48): 

When you learn a new asset class, you just have to learn a little bit of the idiosyncrasy of that asset class, how to think about those trades, how to think about those risks and how to think about the correlation and the margin of all of adding this kind of risk in your portfolio. 

It really, again comes down to portfolio construction. I think the transition from research and strategy to actually managing a book is a bigger change than adding a different asset class. Imagine a book, especially I’m going to say, especially rates and FX because they’re so interrelated. 

Had I just been adding say equity, that would be very different. Or if I would start at selling vol or doing some kind of… But FX and rates are very interrelated. From a macro perspective, they’re really linked by the hips. If you think about an FX trade, you’re thinking about rates. And if you’re thinking about rates, you’re thinking about effects. It’s a pretty natural transition to think about both of them together. 

Why to leave macro for crypto 

Bilal Hafeez (13:45): 

And then obviously you had a very successful career on the macro side, FX-rates, traditional finance, or TradFi as people in crypto call it. What made you decide to have this switch to crypto? That’s quite a big change. 

Tania Reif (13:58): 

Yes. I think that given my background and my interest in currencies. When crypto came to the picture early on, it was something that caught my eye and it was of interest. It was yet too early for me to be able to tell if this was going to actually have legs and it was going to survive and it was something that I could do professionally, but it was certainly very interesting, especially because after the global financial crisis, we had so much liquidity injection by the big central banks of the world. 

There are a couple of things between the QE and the liquidity, we had a dampening of rates all over the world, but we also have, for those of us that were looking at FX, all the financial account flows were completely dampening all the current account flows and all the fundamental flows. 

For those of us that were looking at emerging markets around that time, you could have, for example, countries like Turkey that had an enormous current account deficit, dwindling reserves, it was in the brink of a currency crisis and then it had this huge liquidity injection and they would come out victorious and survive a few more years and so and so. Really, this was changing the landscape and we had big QE efforts in a lot of central banks around the world. And then we came to the last few years where we actually had negative rates all around the world. 

When you have this new asset class, well, at this point, it wasn’t an asset class, it was just Bitcoin. When Bitcoin comes along and it has this digital scarcity and it has this ability to transact without trustless, ability to transact without a centralised way of verifying the transactions, but it’s really a decentralised system to verify the transactions and it looked that it was going to be a game changer in the world at the time. 

But it was very nascent and it was not clear to me that it was going to survive. It was really just an experiment. It was really in 2017-’18 when we had really this very big crypto rally that I began to think, “Well, maybe there’s tailwinds to this and there’s going to be more and more interest that’s going to make it more liquid.” Blockchain is now longer, so it’s safer. 

The ability to have more institutionalised, more formalisation of the ecosystems around it, it’s going to come to play. I began to look at it more as a serious asset class, something where I could diversify in and perhaps get involved professionally. But I think it was yet too early for me. 

I did look at some opportunities at the time, but I decided against this. And then I remember following it very closely thinking that this was going to change the world in an important way. It was 2019, the IMF meetings in October 2019 and we had a round table where I was a panellist and we were discussing the future of the global monetary system and the future of the US dollar. 

And they had invited representatives from top policy makers, top managers, top academics and we were all discussing this and nobody, nobody, not one person mentioned crypto or Bitcoin. If anything, in the hallways, the only thing they were worried about at the time was the Diem, the Facebook table coin, and that project actually pretty much died out, I believe. Who knows? It may resurrect after this call. 

But the point is the actual cryptos, the actual blockchain technology, the decentralised public blockchain technology was not discussed at all. I took get upon myself to bring the topic, to put it on the table and to tell everybody I could that this I thought was something that’s going to change things. That’s how a bunch of my colleagues in the TradFi world knew me as the crypto advocate in our group and then came 2020. 

In 2020 we had the pandemic and with it, a huge liquidity injection again. And that’s when I thought okay, this is it with this big tailwind, this is going to be a huge for the crypto asset class. It’s going to bring a lot of institutional interest and the like and I started to look at it seriously. Now, before taking the decision to do this on my own, I felt very comfortable with my calls in macro, with my understanding of the role that crypto could play as a digital scarcity asset, in the case of Bitcoin, of course, the other cryptos are different in our macro environment. 

I felt comfortable with my risk managing skills, but I needed the technology leg. I needed to feel as confident as I was on the macro and risk management side on the technology side, because you can’t really, I believe, they’ll deal in this space without really a profound deep understanding of the crypto technology. 

This is where I just get lucky because it turns out that my family, we have a bunch of really brilliant engineers. One of them is my brother who has also been working as a developer for more than 10 years. I tapped him on the shoulder and I said, “Look, I really like this asset class. I need you to look into it. Tell me what you think and together, let’s think about this and help me understand the gap that I don’t yet know and let’s look at this together, this opportunity together.” 

He looked at it and he became more bullish than I was. He thought that technology was fantastic. We started taking courses. He taught me about it. And then by the time 2021 came along, we thought that together, we could actually bring the best of the understanding of technology developer experience. From my side, I hold a very competent and also understanding of risk management in macro. And so together, we can bring the best of both worlds to really offer investors a serious vehicle to get exposure to the crypto space. 

What drives crypto prices and understanding unique aspects of crypto 

Bilal Hafeez (19:54): 

What would you say for someone who has a traditional finance background? What is it about crypto? What’s the biggest gap they’ll have in the understanding if they did want to fully go into investing in crypto? Because I understand, traditional finance space will understand your market sentiment, position sizing and all of that type of stuff. They should really understand that, but what is the gap they’ll have? 

Tania Reif (20:13): 

Yeah. So it is important to understand that crypto tokens are very different than any asset class that we have in our traditional finance. They have elements from different asset classes, but they are different. Most importantly, there are thousands of them and they are different within themselves. It’s not the case that you can say, “Well, I understand Bitcoin. Now that I understand Bitcoin, I’m going to invest in Uniswap because that’s just Bitcoin for DeFi.” 

That’s not how it works. They’re all very different and you need to understand each of them separately, how their underlying protocol works and therefore how the underlying technology defines how you’re going to think about it, how you’re going to think about valuation and how you’re going to think about how to trade it. 

For example, some people say, “They are like tech stocks.” Well, they’re not. They’re not actual equity. Some people trade them as commodity. Well, some of them are closer to stocks by the way. Some of them are not. Some of them are closer to commodities, but for example, you can say some people that are thinking in the commodities side, they’re like, “Well, we’re getting… The price should be close to marginal cost. Why isn’t that not the case?” 

Well, not really because the supply of these crypto tokens is not actually related to the cost of production. In there, it works more like a network effect or the supply, you can think of it as each token having some people call it their own monetary policy. But really, what it is. It’s their own governance structure that determines the supply of the token, how much, how quickly it comes into the system. Is it burned? Is it injected? Each token has its own monetary policy, if you want to call it like that, its own structure of supply, its own use of play. 

Even if in something like a smart contract platform, you are interested in developer activity in the platform as a sign of demand. Maybe that’s not what you want to look at when you’re thinking of Bitcoin, because maybe you think of Bitcoin more of a store value token. Each of these tokens is different. You can’t think of them just as a stock or just commodity or just as currencies. 

Different tokens have different elements of each of these and you want to understand in which bucket do each of these fit in and how do you think about trading them according to the fundamentals, if you will, for use of plays of each of these tokens. I think that’s a big difference, which is why when people from our traditional world, traditional macro world are involved in the crypto space, they need to really understand the technology very deeply to be able to make reasonable bets in the space. 

It’s not enough to just look at sentiment and things like that. It could be for somebody doing it on Sunday mornings in their home, but to do it professionally, you want to really understand the technology underlying. By the way, I would also say some of the technology guys that are also involved in the space, if they want to venture away from the venture tokens and very early stage tokens that are really a bet on the technology of the one token you are getting locked up in, if you want to do a more diversified portfolio and manage a book that is more involved in more of the liquid publicly traded tokens, then you also need to understand the macro side of things. 

Because at the end, the price of a token is an exchange rate. It’s the price of the token relative to your fiat currency of choice. It could be the US dollar or the Euro or whatever it is that you’re trading. You want to understand the macro drivers underlying that currency. I think we’ve seen some of the macro drivers play a very important role this year in the crypto space as well. You need, I believe, to have a diversified well-managed exposure to the space. You need both an understanding of the technology, an understanding of macro and actually, an understanding of course of risk management. 

Bilal Hafeez (24:03): 

Okay. No, that’s great. Maybe if we focus on one or two of the big cryptos to understand how you formulate a view. So say Bitcoin, how do you come up with a view on Bitcoin? 

Tania Reif (24:12): 

Yeah. Again, initially we classify the tokens on use of play. To me, Bitcoin fits in the store of value token. I think it’s actually a store value per excellence in the crypto space. Given the length of time that Bitcoin has been trading and the blockchain itself, hasn’t been hacked and it has worked really well all these years. I would say it’s probably the safest, most secure of the blockchains out there. 

It has digital scarcity built in the protocol. It’s decentralised. This is an important point. So let me just take a minute here to say, I often hear people say it’s about the blockchain technology, not about the token. It’s about the Bitcoin blockchain and not about Bitcoin. I think that’s the wrong way to think about it because we need to understand Bitcoin as intrinsic important, really the oil of the blockchain technology. 

This is what makes it work. Why is that the case? Because for a public decentralised blockchain, you need to compensate players to validate the transactions. That is compensated through Bitcoin. That doesn’t need to be the case in a private blockchain. So if you have a private blockchain, you could still have a blockchain, but the transactions can be verified by the centralised owner of that private blockchain. 

I like to tell people, this is like the internet versus the intranet. The internet is like a public blockchain. The intranet is like a private and that’s centralised. So for a central player to verify its own transactions, they can do that. They don’t need an incentive. But if you’re going to have a public decentralised one, nobody’s going to verify the transaction if you don’t compensate them. 

If you compensate people with Bitcoin to verify the transactions, it means that Bitcoin is a crucial part of how the public blockchain system works. 

Now, Bitcoin obviously is not the only one. There are many others and different governance. We talked about that, but it’s important to understand that it is about the token. It’s not only about the technology. And some of the funds out there that are investing in blockchain technology companies and investing in the equity of the company, that’s all fantastic. But the actual amazing, I think, out-sized returns that we see in the tokens, you won’t see there. 

Really, if you want exposure to the sexy part of the crypto space, you actually want exposure to the tokens themselves. Not only for Bitcoin, but for all of these tokens, what do we look at? Well, we look at both fundamentals and technicals. That’s very, very parallel to what we do in the traditional finance place. It’s just that the fundamentals look very different. 

Whereas macro players, for example, we look at fundamentals in things like current account and fiscal deficits and debt and all that kind of stuff. When we are looking at crypto, we’re looking at on chain analytics, for example. And on chain analytics, as you well know, will give you things like developer activity or transaction volume or circulating supply or things like that that you can follow. And it will inform you on what’s the underlying trends in the token itself. 

You also have to look at technicals or basically risk manage your book. People do it in different ways. Sometimes they just are protected with options, which are available now in some of the most liquid tokens. I like to use a quantitative filter to vol-dampen our strategy, our portfolio. There are different ways to do that, but you want to do that because the volatility in the space is high and you want to risk manage that as optimally as possible to increase your Sharpe ratio. 

But in that side of things, I think is the mindset is very similar to what we do in our traditional world, or we can use it because at the end, what is it that we are doing? We’re taking all this data in the case of crypto, this unchained analytics, but the trick is not… I mean, the data is there for everyone to see. A lot of it is actually free by the way. 

The question is how do you think about it? How do you take all this data, aggregate it, put it in an algo that gives you an indication of where these tokens are going to trade, where these tokens… What’s the potential for appreciation. Maybe there is a token that looks very sexy to you, but there is no developer activity in it. Therefore maybe, it’s waning out out or the other way around. 

Again, so you filter the tokens by proper underlying protocol. If we filter the tokens by the unchained analytics, we look at event risks, we risk manage the portfolio. Basically, what we are really doing is using our experience, applying it to the crypto space, using our experience, both in the technology and the macro to really make our best informed decision on where we think this is going to go next. 

Crypto valuations 

Bilal Hafeez (29:09): 

Yeah. It’s quite popular in the crypto world who come up with outlandish forecasts for Bitcoin and the cryptocurrency. People talk about, okay, I saw on Twitter recently, somebody said, “Bitcoin’s going to go to $650,000. It’s just started the biggest rally.” Number one, do you think there’s any value in forecasts? And secondly, is there some way of understanding valuations in Bitcoin or is that just not worth doing in that sense? 

Tania Reif (29:32): 

Yes. Of course, we can. But we can think about it and we do and we look at different valuation models and we try to get a sense of where things could go just to ballpark the potential for growth, but it is very hard to do a forecast of price in this space. It’s very nascent. There’s still a lot of uncertainty, both on the regulatory side and even on the technology side. There is really uncertainty on how to value the tokens themselves. 

There’s more than one methodology. We look at more than one and try to think about it that way. But as I say, each of these tokens is very different. Whereas I might care in some tokens on the network effects of tokens, for other tokens, that’s actually not important at all because it’s completely irrelevant on the use of the network or in the case of store value tokens, maybe you can… 

Bitcoin is an easy example. A very popular exercise is to say, “Well, if we really think Bitcoin is digital scarcity or a version of digital gold,” what we want to look is demand and supply. We know what the supply is because that’s fixed and then we just want to come up with a demand estimate. A very stretch forward way to do that is you look at the gold market and you say, let’s assume that say 30% of the market cap that is right now in the gold market is going to go to Bitcoin. 

But do I really know? Is it going to be 30%, 50%, 80% or 20%? I don’t really know. I just know that right now it’s like less than 1%. So people say okay, well, I think that can increase in time if people be comfortable with the technology, people be comfortable with the safety of the asset, of people know how to get involved from operational standpoint, et cetera. 

And then I can make that estimate, but it’s still a guess. But say call it 30%. Well, then you have an estimate of demand. You take the net person value of that thing, you divide it by the supply and you get a number and that’s how people will come up with 300,000 or 600,000 or a million. But the truth is, that first of all, you could use Bitcoin for other things than store of value. Clearly, I think that’s a use case right now that makes most sense. But there’s things like lightning network and there’s also ability to do layer two and other smart contracts and Bitcoin. Whether that’s going to take off in the future or not, I have no idea, but there are things that could change in time. 

Maybe people decide that Bitcoin is much easier and a liquid way to hold their wealth and gold. So maybe the transition is not 30% but 80% or something. Those estimates are just highly uncertain and it’s even more uncertain to time it in the middle of now we have big uncertainty on the fed. How aggressive is the fed going to be? Is inflation really going to stay high here because of all the stimulus and so on or is it going to come down for structural reasons? 

There is huge uncertainty, both on the macro side and the technology side. Really, putting an exact number, I think, it’s not helpful. I think what is helpful is to follow very closely the fundamentals, see how things are moving along. Really understand that it’s still very nascent and under-owned. The potential still for appreciation is quite high, just because it’s under-owned across the world. 

A lot of institutions are not yet involved. Although, I can tell you a lot of them are very, very curious and very close to being ready to getting involved. It suggests to me that the potential for appreciation is very much still there. I just can’t put properly time it or price it exact. 

Views on smart contracts/L1 coins 

Bilal Hafeez (33:00): 

Yeah. I’ve understood. And you mentioned layer two. Let’s talk about some of the layer one. So Ethereum, what are your thoughts on Ethereum first of all, and then we can go into other L1s. 

Tania Reif (33:09): 

The smart contract platforms have been incredibly exciting and they have been the source of a lot of innovation. Ethereum is used for so many things from, I like to say that European development bank actually issuing on Ethereum to having of course, all the DeFis and the Metaverse and all these other use of play that we’re seeing across the board because of the smart contract platforms exist, the NFTs. 

I’m not talking here, sorry, not only about Ethereum, but the smart contract platforms, which Ethereum was the first one and of course, the better known than the most popular and the most used today. I think they add tonnes of value. The issue with these tokens is of course, as the token appreciates, the cost of actually using the platform to execute your smart contracts goes higher and it gets more expensive now. 

So that means that as it gets more expensive, there’s room for competition of other tokens that can bring maybe cheaper and faster better service. It’s hard to tell over time, which of these tokens are going to survive in the long run. But I think it’s… That’s why I think a lot of them bring value in different ways. What we do is we build a diversified basket of these tokens and we rebalance this basket continuously by following their fundamentals and the on chain analytics so that we are closely following which baskets are becoming the winners and which ones are losing out. 

We hope that as we do that continuously over time, we will eventually keep the actual winners at the end of the game. But clearly they’re very exciting propositions. There’s so much yet for us to see in all the innovation. 

Bilal Hafeez (34:52): 

Out of these smart contract coins, can you say which ones at the moment you think look attractive? 

Tania Reif (34:57): 

I would hesitate to say that because what we have is we have an algorithm that ranks them and re-balances them daily. There is some persistence of course, but I would actually have to look at the algo, what it was saying this morning to tell you where we stand because they do rebalance and so maybe something that was looking fantastic two weeks ago is no longer in the top three. 

Bilal Hafeez (35:18): 

Okay. So it’s quite dynamic. One question, because we have some passive indices that we’ve built to sort of track some of the smart contract Metaverse DeFi and so on. One kind of question always is like at what point do you include a coin in the universe that you should target? Because you kind of see something small happening over there, somewhere in the corner and looks very interesting, but it’s too small and then it grows rapidly. What sort of criteria do you use to sort of say, “Look, this should come onto our radar.” 

Tania Reif (35:43): 

We have built a proprietary algo that we have back tested to come up with really a quantitative indicator of when it makes sense to include it. When things start bubbling up, call it Solana in the fourth quarter of last year. So it starts bubbling up, it starts appearing in the algo. 

The algo doesn’t immediately say, “Go in.” We follow it, we follow the on-chain. These things start popping up and then eventually, it will rank in the top of a ranking matrix if the improvement is consistent enough in time. Our systems, our algo will pick it up and we’ll say, “Okay, this thing has legs. It’s been consistent. It’s been doing well for some time. We can look at all these different on chain analytics that tell us that they’re flagging in the right direction. And so it’s time for you to put an allocation.” 

And as the token continues to improve in our ranking, the allocation gets bigger and if it begins to deteriorate, it gets smaller. That’s why it’s dynamic. That’s why if you ask me for the ranking today, next week it’s going to look different and the following week. There’s going to be obviously some consistency because it’s not like this thing jump around so crazy and algo the has some smoothing features into it so we’re not in and out, in and out the whole day, but it is actively managing. 

I think that’s the best to go about it because these things change all the time. Just to give you a sense, 75% of the top 20 coins today didn’t exist three years ago. This passive top 10 allocation to the top 10 by market cap index and we’re just going to follow that to have a diversified portfolio, I don’t think that’s the smartest way to go about crypto right now. 

I think you have to be a lot more active because if you do a passive allocation like that, you miss all the exciting new coins that begin bubbling up and you also have to put in there some things that you actually may not like from a fundamental perspective. I think the best way is what we’re doing. In fact, when we look, when we compare, back test to a passive allocation, we do much better. But that’s not surprising. It’s because it’s a very nascent ecosystem that is routinely changing. So any strategy that takes into account the very rapidly changing environment in this space is going to out-perform. 

Whether crypto market cap tells us anything 

Bilal Hafeez (38:00): 

What do you think of market cap as an indicator because a lot of people go to CoinGecko or some of these websites and look at the top market cap and just say, “Okay, I’ll just buy the top 10, top 20.” 

Tania Reif (38:09): 

That’s what I’m saying. When we look, our actively managed portfolio does way better than a passive by market cap allocation. The reason, like I say, talking again about Solana, if you had a passive market cap allocation in, I’m going to guess around August 2021, you missed the whole Solana rally. You weren’t even there because Solana was not in the top 10. 

Or maybe you are caught for longer than you would like in some of the meme points, in some of Dogecoin or like things like that, which you may, if you are brave enough, you want to try to catch that rally or not, but maybe from a fundamental perspective, you don’t really want to be there and when it starts coming down and you’re passive, that thing is still in your top 10. 

So you’re catching the thing all the way down. I don’t think it’s the smartest way to go about it in crypto. I think an actively managed strategy makes most sense in this environment. Maybe five years from now, it will be, I’m going to say something different, hopefully not because I do think we add value regardless, but certainly right now, I think it’s a pretty obvious preposition that you don’t want to go passive. 

Bilal Hafeez (39:17): 

You’ve mentioned on chain analytics a few times. Are there certain indicators that you think are useful? We look at on chain analytics as well, so there’s HODLer behaviour, there’s all of these other sorts of things, different sort of price metrics you can use and developer activity and things like that. What types of things do you think? 

Tania Reif (39:32): 

I think all of those are worth watching. I think the more information, the better. The trick is how do you aggregate information and how do you rank the different indicators because you’re going to have 10, 20 different indicators and how do you know which ones are more relevant and which ones are not? That’s where, well, obviously trained experience background comes into play and all the back test and all that. 

But I would just say that from perhaps because of my background and as an economist and a more fundamental take on things, I think at the end of the day, demand and supply are key. You can look at sentiments, you can look at Reddit subscribers, you can look at total activity, you can look at how much flow comes in and out of exchanges, but at the end of the day, demand and supply are king. 

That’s important. I’m saying demand and supply because for a lot of the very tech-oriented players in the space, they normally look at the use of play and they think demand is everything. But supply is very important for price. And so you have to look at both. I think people sometimes, “There’s some new coin. Firecoin, great for storage. Fantastic. The demand is going to be great. That’s all going.” And like, “Okay, great.” But look at the governance, look at the protocol, look at supply, look at all these other things. 

Just as we were doing serious analysis in our traditional markets, we have to bring that degree of serious analysis to the crypto space. Let’s look at all of it. Not only the use of play, the promise of the future, the demand. It’s what’s the demand? What’s the supply? What’s the sentiment? What are the technicals? You have to just put it all together to really have an optimally managed book. 

Where yields come from in DeFi 

Bilal Hafeez (41:15): 

Yep. Yep. Understood. We touched on DeFi earlier in relation to Ethereum. Really sort of basic question here is where do the yields come from exactly in DeFi? Because number one, these are new technologies. Yet they offer a yield. Often the yields are incredibly high, like a 1,000% or something like that. How can these tokens offer a yield? They’re not a central bank or they’re not linked to a yield curve. Where does that come from? 

Tania Reif (41:38): 

Well, no. I think that’s a great question because a lot of people think of yield farming as just interest rates. And then they say, “Well, my interest rates in my bank are less than 1%. These things are offering multiple digit percent in some cases. And how do I think about that?” 

What is important to understand is yield farming is not your typical traditional finance interest rate really. And there’s a lot of things where those interest income come from. Some of it is actually lending. Some of these DeFi platforms actually do lend crypto assets to players that need them for various reasons. Some of that lending is actually riskier because you even have a newer protocol that came out recently that has uncollateralised lending, for example. So then you have higher rates just from lending side of things. 

But it’s not only lending, you also could have staking. The proof of stake consensus mechanism, you can actually stake your tokens to validate transactions and get rewarded for doing that. That is a different way to gaining yield. You could also gain yield from doing basis trades between futures and spots for example, that has decreased in time, but that’s also another source of yield. 

Also, for example, you could get yield from selling vol from crypto options. As we know, the vol in crypto is very, very high. Actually, the implicit vol in the crypto options market is even higher. If you want to take the risk of course and earn some yield by selling vol, then you could earn a lot more. 

Now, of course, higher yield, higher risk. You need to know what is behind the yield you’re getting. I would caution against the 100% yield type products, but of course, it’s about risk taking. If you’re willing to take the risk, you can play in that market. We don’t do that, but there are in some of these more cautious and serious yield sources, lending activities, you can actually get attractive yields in a much safer way. 

Bilal Hafeez (43:46): 

Yeah. I was going, does the stable coin yields are much higher than zero. And so in your view, what’s the risk that you have with that? Because that’s quite appealing. You’re pegged to the dollar often, depending on which stable coin you’re looking at, but let’s say you, you pick a very credible one, audited, backed by treasuries. Then you still get a pickup of like three, four, 5% or depending on which exchange. 

Tania Reif (44:07): 

Yeah. But remember these things are risky. These things are in theory, credible ones. But at the end of the day, they’re pegs. We are pegging our stable coin to what we have to believe that our fully backed reserves in the Fiat currency of choice for these coins. We as FX professionals in emerging markets know that sometimes pegs break and sometimes there is risk in what they’re telling us that the reserves are. 

There’s some due diligence to do there. That said, I actually do think that’s one of the safest way to go about it. There are some stable coins that have been questioned on their actual ability to maintain the peg, but there are others that look a lot safe and well managed. And so you just want to do the proper due diligence and look at each of them and pick the ones so that you think are safest within that space. 

But you also have to always know that you’re taking risk when you’re involved. This is not the same to get some percent interest in your checking account in a traditional bank who is FDIC sure, than if you are getting some yield in a crypto space, even if it’s a stable coin. It’s much better, again, than the 100% yield in some volatile token than nobody has ever heard of, but there’s still more risk obviously than in our traditional world. 

The future of the metaverse 

Bilal Hafeez (45:25): 

And then on the Metaverse side, obviously that’s become a huge topic, not least because of Facebook’s rebranding, it kind of accelerated all and we’ve had this massive volatility in Gala. Gala recently has done incredibly well. You kind of have the virtual world side, you have the GameFi side. How do you look at the sort of the crypto Metaverse space at the moment? 

Tania Reif (45:42): 

I think the Metaverse space has huge potential. What happened is it was really pretty much ignored for a while there in the grand scheme of things until of course Facebook did this, a great PR campaign by changing their name and then drawing attention to what is the Metaverse. I think like literally before Facebook made that announcement, I think a lot of people didn’t even know the name Metaverse or what it even meant or what it actually was. 

It just drew attention for everyone to look into it and to see what’s in there and what the potential. I think it’s in very, very early stages. But the potential is enormous. You now have concerts on the Metaverse and of course, this is something that COVID has accelerated, our online interaction with each other. And now you actually can go to a concert. 

And then when you are in your Metaverse, perhaps in your concert, you’re going to be represented by an avatar and you want your avatar to actually look quite cool. Maybe you want to buy a Gucci bag for your avatar and people actually pay for these things and they’re buying real estate in the Metaverse and so on. 

Is it going to look the way it’s looking now? I don’t think so. I think it’s going to evolve. We don’t really know how or where it’s going to go, but the potential is really big. The fact that we are already having meetings, concerts, activity, art galleries, showings in the Metaverse, that just opens a huge amount of potential that I think we can’t ignore instead of having to go physically to check out an art show in Miami. You actually go to the Metaverse and see it there. 

And then you can, through an NFT, purchase a percent of the art item as opposed to having to purchase the whole thing. This is just opening a lot of possibilities. We don’t know where it’s going to end up, but I think it makes sense for everyone to diversify their portfolio and allocate some at least, I don’t know, call it 1%, 5% if you’re a conservative investment in the crypto space, because all this potential, it’s like an option. 

Could just deliver enormous returns. And if it’s well researched and well managed, I think it’s a good, educated risk. You don’t want to get into the crypto space blindly because there is a lot of Ponzi schemes, there is a lot of fraud, there is a lot of risk. But I do think it’s responsible to get into the crypto space in a responsible well-managed, well-researched way. 

Bilal Hafeez (48:07): 

And so if you are somebody who has like a traditional portfolio, 60, 40 or some variation of that, how should that person get exposed to crypto? Should they allocate 1% to a mix of crypto or? 

Tania Reif (48:21): 

From what I’ve read so far and of course these things change in time. But right now the portfolio construction exercises that we’ve looked at suggest that something around five to 10%, 10% on the very high end. I think 1% if you’re very sceptical. Let’s just call it 5% allocation to crypto will significantly improve the Sharpe ratio of your portfolio. 

Because if you look at Bitcoin alone, not just the last year, but say the last five, eight years or whatever you want to look at, the correlation is low and the return is high and say the Sharpe of Bitcoin for the last five years or so is around two. 

Now, if you have… We are constructing a diversified basket of crypto tokens. It makes it even better because our beta to the S&P is much lower, it’s around 2.3. Our beta to Bitcoin is like 0.4 because we have a basket of diversified tokens. If you have out-sized returns, lower vol and lower beta, that just enhances the return on the Sharpe ratio of your portfolio. 

I think an allocation of 5%, you don’t have to take my word, it’s not only me that has done this exercise. There’s a lot of exercise including from some of the fidelity of this worlds and so on where, you can see that there is a significant improvement in the Sharpe of your portfolio from adding exposure to crypto around that size. 

Lessons in launching a crypto fund 

Bilal Hafeez (49:46): 

Just to round off our discussion on crypto, what’s it been like setting up a crypto fund? 

Tania Reif (49:50): 

Well, it’s actually a lot of fun. It’s very different than a traditional fund, I believe, in the sense that everything is through APIs, everything is automated. The middle office connects through an API to the administrator who connects through the API to the bank who connects to the API to the custodian and everybody’s double checking each other and triple checking and it’s actually quite seamless and fun. 

My fund now has employees all over the place. Our middle office is in Europe. I have one of our quant analyst is in Mexico. Our developer is in Boston. The CFO and myself are in the New York, Connecticut area. It all works fantastic. The world really, since COVID has changed so much and the crypto world of course has been ahead of all of us. I think that’s been quite an experience. It’s been a lot of fun. 

Bilal Hafeez (50:36): 

Yeah, that sounds great. Now, I did want to round off with a few personal questions that I ask all my guests. The first one was what’s the best investment advice that you’ve ever received from anyone? 

Tania Reif (50:44): 

Well, actually I mentioned a little bit of that earlier are on, which is timing is the most important element. I think timing is 50% of your trade. You can be right and you can lose money because you get the timing wrong. So I think it’s very important, especially for those of us that come from a more fundamental background, as opposed to trading background where perhaps they’re all very aware of that. 

But for me, I had to learn that it’s enough to get the analysis. I really have to trade it accordingly to its proper technical, some proper timing. I have to take that into account to be successful. I would say that that’s number one. There’s many more things that are important, but I think that’s number one. I’ve learned that less in the hard way. 

Bilal Hafeez (51:23): 

And then the other question I had was, do you have any tips on productivity? I know you’re doing so much stuff right now and you probably have, historically. Do you have any system to kind of cope with everything? 

Tania Reif (51:34): 

I don’t think I have a good system. I actually don’t think I’m the most productive person in the world either. I think there are a lot of people that are more productive than I am. I think I stick to the idea working smart is more important than working hard. 

What I try to do is I try to focus on okay, what’s important now. In fact, actually that’s a little bit of what you have to do when you trade, because you have so much information, so much data and podcasts and articles and opinions. So you have to think how do I summarise this to pay attention and to work on what’s important? 

You have to properly prioritise and just concentrate instead of in developing skills to do a lot more for a lot more time to actually say, “How can I prioritise things and just focus on what’s important and get the biggest bang for my buck?” 

Books that influenced Tania

Predictably Irrational (Ariely), Thinking, Fast and Slow (Kahneman), Behave (Sapolsky), The Red Queen (Ridley) 

Bilal Hafeez (52:23): 

Okay. Yeah. No, understood. That makes a lot of sense. Kind of the last question I wanted to ask you was, are there any books that really influenced you of your career? 

Tania Reif (52:29): 

Yes, I actually am big on behavioural stuff. I think that the human mind is fascinating and how we make decisions, I think is crucial and coming from traditional PhD in economics background, where we are looking at rational agents, reading the book, Dan Ariely, Predictably Irrational, I felt was fantastic. 

Of course there is Thinking Fast, Thinking Slow by Kahneman. These, I think, are two very, very important books. They approach the subject in different ways. But the title of Ariely, I think is brilliant because not only we, human beings are irrational, we are predicatively irrational. 

We are irrational and we can predict how so. That’s likely because we are wired a certain way for, in my view, evolutionary reasons. I parallel to this. I really like evolutionary psychology. How our pre-wiring affects our behaviour. There are tonnes of books on that side of things that I also enjoy as opposed to these books and The Red Queen from Matt Ridely. All these things I think are fascinating. But in terms of our field of economics and finance, being aware of these biases, I think, is important both for our competitors, but also most importantly for ourselves. 

Bilal Hafeez (53:52): 

Yeah. No, that’s great. If people wanted to follow you in some way or just reach out to you or understand what you’re doing, is there a way for them to follow you or? 

Tania Reif (54:00): 

I think the easiest at this time is to reach me through LinkedIn. You can just search me. I’m there. 

Bilal Hafeez (54:07): 

I’ll include the link to your LinkedIn profile in the accounts. So yeah, just with that. Thanks a lot. It’s great speaking to you. I’ve learned a lot and good luck with the fund. 

Tania Reif (54:15): 

Thank you very much. I hope to do this again sometime. I enjoyed this. 

Bilal Hafeez (54:19): 

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 and a nice comment and let other people know about the show. We’d be really grateful. Also, sign up to become a member of Macro Hive at macrohive.com. 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.)