Ep. 742 Why Only a Few Crypto Assets Are Still Investable with FalconX

Josh Lim, global co-head of markets at FalconX and formerly of Goldman Sachs, Galaxy, and Circle, argues that the crypto industry has shifted from a store-of-value or currency thesis toward a technology layer providing payment rails and infrastructure plumbing for traditional markets. Many early idealists have exited as the space institutionalized, and the investor base now compares crypto opportunities against real businesses building AI infrastructure rather than against meme coins.

Liquidity and investor interest have concentrated into roughly four or five top tokens, with the broader altcoin universe down approximately 90 percent following the period around October 10th, when the Binance event significantly affected liquidity venues. The number of altcoins launched has grown parabolically, diluting attention, and repeated losses have led investors to conclude only a handful of tokens are long-term investable. The primary cause of the liquidity contraction is described as a self-reflexive cascade where a large initial price drawdown marked down collateral books across the ecosystem, compounded by capital rotating into supply chain plays and critical minerals.

Long-term investable tokens are narrowed to those with durable business models enabling compounding similar to real equity, those generating real revenue from user interactions, and those enabling speculation. Bitcoin is viewed as a neutral collateral asset used on-chain to back positions. Ethereum is considered potentially usable as a rail for stablecoins and real-world assets. Hyperliquid is placed on the speculation side of the framework. Stablecoins and payments are identified as a separately investable theme.

Old wallets sold approximately nine billion dollars worth of crypto around September and October, representing early holders rotating out near price targets around one hundred thousand dollars. Bitcoin has not kept pace with gold or M2 money supply over roughly the past one to two years, and its uncorrelated status has been eroded by integration into vehicles like MicroStrategy and ETFs such as IBIT. Larry Fink has stated crypto will do well in periods of government distrust, high inflation, and instability, though Lim adds the caveat that Bitcoin may not fully be that inflation hedge today and that the industry needs to build clearer answers over coming quarters. Key concerns among macro allocators, sovereigns, pensions, and endowments include quantum computing risk, concentration risk around MicroStrategy, political risk around crypto-friendly policy, and long-term sustainability of Bitcoin block rewards and security budget.

Two recovery scenarios are identified: a time-based bear market cycle where participants naturally return, or a cataclysmic macro event driving flight to safety into Bitcoin, as occurred during the SVB banking crisis in 2023. The traditional four-year cycle involves roughly three years up, one sideways year, two years up, then a bear market down 70 to 80 percent, and Lim describes this pattern as hard to dismiss as random given its historical consistency. Crypto's cyclical price behavior is attributed largely to human psychology rather than fundamental value metrics.

The options market is where most institutional risk expression in crypto occurs, with dominant volume coming from hedge funds rather than retail. Current implied and realized volatility for Bitcoin are low due to Bitcoin being range-bound, making volatility selling and call overwriting the dominant trade. Funding rates on perpetual swaps are near lows, indicating low demand for leverage. The basis trade between perpetuals and forwards reached approximately 30 percent annualized at its peak and has since compressed to near traditional-market levels, reflecting increased institutional capital and reduced retail speculation. A potential catalyst for the next bear market is identified as a large ETF blowup or a forced MicroStrategy liquidation event.

Three systemic risks are flagged: AI-enabled hacking of smart contracts, which has already occurred multiple times on-chain; social engineering and AI-assisted attacks on large custodians; and financial engineering around tokenized real-world assets, where tokenized assets could become dislocated from underlying real assets or bad issuers could tokenize non-existent collateral. FalconX recently acquired Blocks Route, a move Lim tied directly to growing importance of network latency as real-world assets move on chain, and the firm is acting as market maker for Arcus, an RWA perpetuals decentralized exchange launching on Robinhood Chain. Lim pointed to Robinhood's recent London product launch as a meaningful signal of consumer-facing platforms beginning to bring users on chain at scale, and predicted that global around-the-clock on-chain access to RWA and commodities markets will expand as these platforms mature.