Chamath Palihapitiya On Why Crypto Companies Will Fail

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01. hey guys welcome back to crypto studio 247 my name is tai and in this video we will be sharing with you some thoughts on one of the brightest minds in the 21st century chamath pala hapatia and his thoughts on the current conditions of the cryptocurrency space and the traditional financial markets enjoy the video and everybody starts to throw out this whole thing which is oh my god you can never slow growth and the company will die and yeah maybe in a vacuum that that's true but when every other company is fighting tooth and nail to survive the only thing that you need to do is actually survive by surviving you win if you can basically make your cash last as long as possible even if you cut to the bone and stop growing if you come out the other end and you're the only company that's left you will win and run over the market you may have pushed to the right a few years your plans of world dominance but they're still available to you we still had some amount of rate uncertainty from the fed i think people weren't sure how aggressively they were going to hike but by early this week it was pretty clear there's going to be two 50-point hikes one in june and one in july and then effectively a pause because then the fed funds rate will be at around two percent and everything from there will probably be path and data dependent now i think the the markets had actually already started to see that writing on the wall so if you go back to you know one of our favorite measures which is the 10-year break even it's effectively rolled over which meant that which means that from the highs in sort of late april it started to come down which says that you know they were thinking that you know the inflation was not going to be as bad in the back half of the year and then the second is that corporate credit which is really what matters in some ways to the fed because that's where they can intervene what is the spread above treasuries that a company can issue debt when it goes crazy and it goes up it means oh no the cost of capital is going up that's going to be hard for companies to raise money they may have to lay people off they may need to get into cost cutting mode right that's what goes through everybody's mind but that's also now about 35 and 40 days rolled over which means that the gap has started to shrink you know between the us treasury price and what you know decent corporates can can issue debt at so it looks like we are set up for potentially a decent little rally here the problem is is it a rally that is sustainable or is it a rally that's basically what we call a dead cat bounce or a bear market rally where you know you just get some one or two weeks of relief before the thing spears down again and there is the potential if this data comes back as reasonably good which means prices are you know not escalating as much as we thought um inflation is not going to be as bad growth is going to be moderate that that gives a lot of ammo for the fed to kind of take their foot off the um off the gas here and in that case markets will go boom i think we're in a we're we're in a pretty reasonable place here the real the real question is now what do you need to take the market lower and this is more of a nuance but you know when you look at companies that are now quote-unquote cheap right let's take an example like google or facebook right people say my gosh this is cheap because if you run a screen on it it's like 10 11 12 times price to earnings well the price you know because you can look on the screen the real question is are the earnings right and the thing that can take the market lower is if you actually think earnings are modeled incorrectly right so we saw this week as well snap completely just blew themselves they have the most incredible propensity to self-emulate on earnings calls than any other company i've ever seen there's probably been three times no less than three times over the last four years where i don't know whether it's just poorly scripted or not well rehearsed or the people that are helping evan get ready for these things but these are disastrous calls my point in telling you this story is that if you think facebook and google just as an example again are cheap at 10 times well you better hope that the earnings are right because if the earnings are actually wrong that's actually 27 times in 19 times you know i'm making these numbers up to give you the example because the earnings are fundamentally wrong so that's the risk now that's left in the market in my opinion that could take it much much lower is if that you know all of this slowdown really contracts spend and the earnings are actually not accurate the forecasted earnings will need to be revised over the next two or three quarters and that's where we will probably see the low if however growth is muted and the fed can as brad said it's a really good analogy now just course correct by degrees you know a degree here a degree there uh we've probably consolidated the lows i think there's still going to continue to be examples of folks who basically run themselves into a brick wall because they don't want to make the hard decisions that is going to be more exaggerated in silicon valley because we have a culture of tolerance and we have an economic business model that supports kind of irresponsible decision making and supports poor governance but a fund's job ultimately is to make a very important decision about whether they truly care about generating massive returns or whether the fee income becomes so meaningful so as to drown out every other incentive that they have the idea that over the last four or five years you optimized for anything except the market beta was kind of dumb you know and it's and and the worst thing that you could have done in that period was confuse alpha and beta meaning alpha is what you are able to do because of your discrete skill versus anybody else beta is when just the market goes up and i think that a lot of folks were made to feel very silly or you know a downer or a wet blanket in these last few years who will probably have the last laugh you're saying something that i think is also important that's not really talked about which is that there's going to be a lot of really good companies with really horrible capital structures really terrible cap tables really bad valuations really big overhangs of preference stock that are going to have to get worked out and in getting that worked out going back to what brad said the person that course corrects 90 degrees will win and the reason they'll win may not even because they're being that courageous they're just being less stupid than everybody else quite honestly because you have to remember in most of these markets over the last four or five years we funded four or five versions of every imaginable company and then there's going to be a marginal second kind of also rand that captures some value and everybody else is not that valuable and you know that's roughly been true but the reason we were able to support that was that every company looked kind of interesting anyone with traction could be you know competed against because the only differentiator at the time was very cheap money that was effectively free and it was flowing in you know faster than you could count so all of that has to get sorted out so i just think that that those dynamics shouldn't be ignored wow if you enjoyed this video as much as we did please give us a like and let us know in the comment section what you think about moths comments on the current state of the financial markets make sure you subscribe to our channel for daily cryptocurrency coverage a video every day providing you with opinion news and analysis check on the notification bell so you can see our new videos as soon as they are uploaded smash up the like button leave a comment below and we will see you tomorrow friends you