Watch: Masters of Risk | Season 4 Episode 2 (Video): Beyond Volatility: Inside the Hidden Risks and Rewards of Crypto Markets

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Stewart Webster   00:00:00

Welcome to Masters of Risk, Season 4 Episode 2. Today on Masters of Risk, we're joined by Ali Hassan, Founder of Perceptive Capital, a hedge fund focused on digital assets and cryptocurrency markets. Ali's journey itself is a study in risk. He left a stable and well-defined career in traditional investment banking to build a fund in one of the most volatile, misunderstood and rapidly evolving markets in finance. It's a space where innovation moves fast, downside can be extreme and conviction is constantly tested. In this episode, we explore what risk really means in crypto markets from volatility in decentralized finance to custody, infrastructure and the long-term future of digital assets. Ali shares how he thinks about risk as an investor, a fund manager and an entrepreneur building in an industry still finding its footing. Ali, thank you for joining the podcast today.

Ali Hassan   00:01:04

Thanks for hosting me. We've talked about doing this for so long. I'm glad we finally did it.

Stewart Webster   00:01:07

Absolutely. We're finally here doing this. As I mentioned in the introduction, you left a career and a stable career in traditional investment banking, right, whether private wealth management, you were covering all these different types of areas, but you foresaw something in crypto where you left that world. And what actually caused that conviction? And what was the moment where you said, you know what, I need to do this?

Ali Hassan   00:01:28

I think it comes down to one word, asymmetry. So my whole life, I've noticed that going against the grain has treated me well, not going with the flow, doing something slightly different. Goldman was a great career. It was my dream job. It was what I hoped and wanted to do in my entire college. That was the end all, be all dream of all dreams reach, I got it. But I realized it was capped. So you're doing -- you're following a traditional path. You're doing great, you're set financially for life, but there are caps in that. Bitcoin offered something different. At the time, it was mostly Bitcoin, not even crypto. It offered an asymmetrical uncapped return on life. The risk for me wasn't in staying in the safe short fire thing, but to look back in a few years and wonder what if I didn't do it. And I knew that there were other people who are going to do it, and I wondered why not me? In my whole life, I've better myself. I've tended to win more than I've lost. I was surrounded by great friends who are so positive and willing to help me on this journey. And it was really a decision on, do I want to sit here and follow the Tried and True path? Or am I willing to try something new? And if I failed, I knew that the Tred and True patath was still going to be there for me, whether it was Goldman or another financial firm, pursuing something as innovative and as wild and chaotic as crypto was truly just the start of something really beautiful for me.

Stewart Webster   00:02:52

Absolutely. That's a great story. And this is the Masters of Risk podcast. So we focus a lot of our conversations on risk. So as a traditional investor or a traditional financial analyst, I think of risk in terms of these quantitative risk measures. So every day, I'm looking at leverage ratios, value at risk measures, standard deviations, but that doesn't fit well, and it's not really suitable for crypto returns because those are typically asymmetric. So what type of risk measures do you typically look at? Or what does risk mean for you?

Ali Hassan   00:03:21

Yes. most people when they think about risk in crypto, they actually just confused with volatility. They look at the headline risks. They look at the charts going up, numbers go up, numbers go down. For me, I think of risk as economic risk that is permanent. And that economic risk that is permanent can come in many flavors in crypto. It can come from someone stealing your funds. It can come from leverage. It can come from regulatory, operational issues, custody issues. Risk in and of itself is not bad. And our jobs as investors is not to avoid risk, but to get compensated adequately for those risks. I looked around and every single risk that everyone was talking about at the time, so we're going back in time now, 2017. People were afraid of having their Bitcoin stolen. They were afraid of what is the government going to do. They were afraid of what if it gets hacked, what if the founder comes out, regulatory, legal, hacking, custody, the framework of risk at the time was nowhere near the risk units that you're talking about. And I decided that I can control some of those risks in ways that others might not be able to control. I could essentially create my own custody solutions. I can bifurcate and hide a lot of the risks and get compensated in the same way as the other investors who are not able to hide those risks. It worked out really well for us. We built a product that was essentially an index fund at a time when nothing like it existed. That was the first product I launched in crypto. That product offered a way to capture the beta of the crypto market in a systemic and formulaic way. The formula was very simple. We said, what are the risk people are worried about? They are worried, for instance, about liquidity. A lot of times, the liquidity looks like it's there until it's not. So we created a parameter within our portfolio that we would never own an asset that didn't have less than 30% of the float on average per day, meaning if it traded -- if the market cap was $100 million, I need $30 million of trading per day across 2 trusted exchanges. We also needed it to have a minimum of $500 million in market cap over the past 90 days on average per day. I know these numbers sound small now, but at the time, that really the investable universe was approximately 5 to 10 cryptos that were available to us to invest in. We also had to make sure that it was custodian and cold storage. At that time, there were no custodians. There were no cold storage solutions beyond Treasurer and then ledger came in a little bit later. In order for a coin to be investable into our portfolio, it had to have a cold storage solution. When you combine all of these things, you create a product that actually minimizes a lot of the risk while still capturing a lot of the upside, packages it in a neat little portfolio for people. It's very investable. It's very easy to track. You get compensated for taking risk others are not willing to take, and we were compensated very handsomely for it.

Stewart Webster   00:06:18

That's interesting that you talk about beta because what you're articulating now, it sounds more like a long-term investor, right? It sounds like you're speaking more like a mutual fund type manager and ways that you can minimize risk. So it's interesting hearing that from you. One of the risks that you talked about was price volatility, and that scares a lot of people. And actually, when I look at a typical Bitcoin chart, it's quite volatile. And the reason why is because it's based on a linear scale, right, in the linear scale, it doesn't capture those exponential returns well. But actually, if you plot the Bitcoin return on a logarithmic scale, to me, it's one of the most eloquent price charts I've ever seen. So that allows me to actually take the risk and kind of put that into perspective when I see a smooth gradual chart like that.

Ali Hassan   00:06:59

I love that. I actually talk about this often with our investors. We tell them, this is going to be a scary investment. It's going to be a lot more volatile than you've ever experienced. You have to give us 4 years. If you look at the chart, whether you graph it linearly or logarithmically, there has never been an investor in Bitcoin specifically that entered the market in any period, peak or trough, waited 4 years and wasn't adequately andhancedly rewarded for it. So you have to be able to stomach volatility. You have to have the ability to trust in either yourself and if you can't trust yourself trust in a manager that will guide you through that volatility over the course of 4 years. risk in and of itself is not a unit of measurement. I like to think of it as speed. Speed is defined as miles per hour, right? You can't just take a look at the speed of something in the miles. It's over time, correct? Risk, especially when it comes to crypto has to be assessed over time, those who are able to survive and avoid the permanent economic risks of permanent loss. Most often, it has been due to leverage that has been -- has blown up many investors, both retail and institutional. If you're able to avoid the permanent economic losses and you're able to last at least 4 years, the units of risk you took were adequately and handsomely rewarded. And I think that's the really big narrative and what I'd like to bring to your listeners and to all the people that have spoken to me. If you trust in yourself, if you bet on yourself and you've come to the conclusion that Bitcoin is a bet that you're willing to make, give yourself the full 4-year cycle. Unless you're going to be the first person in the history of Bitcoin, you're going to be the one that loses after a full 4-year cycle. It's unlikely, and I think that you will be rewarded.

Stewart Webster   00:08:37

So you talked about institutional blowups. And I've seen that whether it's FTX, protocol failures or smart contract vulnerabilities that we end up finding out about. You don't see that typically in the TradFi markets in the traditional financial markets. The last time we had a stock exchange collapse, I think one was in the 1700s, one was in the 1800s, and then there was a panic of 1907. And then from there, we actually started creating these mechanisms to help that out, and that's the clearing houses that we have now. When you look at the cryptocurrency markets or the exchanges, they actually hold the crypto. And sometimes these exchanges have their own proprietary trading departments. So that in itself can be conflicting, right? So what other types of structural risk do you see similar to that in your space? And what worries you?

Ali Hassan   00:09:25

Let's talk about that risk first and foremost, because oftentimes, people don't understand why you shouldn't leave your crypto at the exchange. You go to an exchange -- I like to think an exchange is a marketplace. It's like any other market, whether you're buying and selling cryptos or buying and selling clothes or buying and selling fruit. You take your asset, you take your money to the marketplace, you buy what you want to buy and then you go home with what you bought. In crypto, people tend to go to the market with their money, buy what they want to buy and then leave it at the market and hope no one steals it, hope no one touches it. It's actually totally illogical. And there's a common saying in crypto, not your keys, not your coin, whether you're trading Bitcoin, Ethereum, Solana, DeFi, anything. You have to take it off of the exchange. That is the fulcrum. That is the weakest point of the entire trade, leaving your assets at the exchange at the marketplace. If you can get rid of that, if you can put it into cold storage or let's just remove it off the exchange, you've solved, in my opinion, 75% of the major risk. Most of the people that you've heard of all the headlines, all the stories, the majority of those permanent losses were due to exchanges, whether the exchange itself failed or your access to the exchange was compromised and someone to be and was able to take those assets off. Beyond the exchanges, you obviously have the smart contract risk. That is a risk that is not pertaining to Bitcoin. Bitcoin is the simplest, purest. Its simplicity is its main source of value. Beyond Bitcoin, you have the smart contracts, the smart platforms like Ethereum, Solana, Beyond that, you have the DeFi that's built on top of those platforms. Every single one of those sectors of the risk curve come with additional potential reward, but many, many more mine fields. If you're going to invest in those, you have to be conscious of what you're looking at. You have to be conscious of a lot of investors, especially traditional investors, think that the audit is the end all. This platform was audited. This project was audited. It's a good starting point. It's not a good ending point. You need to actually take a look at does this project solve anything? Is there any natural benefit beyond the traditional financial corollary that it has. And what we find most often, and I know we're going to get this later is most of these projects don't and the risks that you're assuming in pursuit of that yield in pursuit of whatever promised return tend to be outweighed by the possibility of permanent loss.

Stewart Webster   00:12:00

Yes. I think that's an interesting articulation about self-custody because that's something investors aren't used to. Even wealthy investors or someone who has a sizable retirement account, sizable checking account, savings account, we don't hold the custody of those funds actually, the bank holds custody of those funds. So it's something that we're fundamentally not used to. So seeing people actually learn about self-custody. -- it's something that people need to learn about more in the future.

Ali Hassan   00:12:25

I love that. Everyone wants to be their banker. That's what Bitcoin is, be your own bank, not your keys, not your coin. -- until you realize what the bank actually does for you. You lose your password, you call your bank, you get back in. there's a fraudulent transaction, the bank can sometimes cancel it out. Someone writes a bad check, you can cancel it. The bank does a lot of services for you. They get paid to do those services for you. Obviously, I believe in Bitcoin and I believe in the benefits of self-sovereignty and the ability to be your own bank. It comes with its own set of hurdles and set of risks. As long as you understand those risks and you're comfortable taking them on, that's when you should pursue self-custody.

Stewart Webster   00:13:00

Now let's take a shift to DeFi, decentralized finance. What are you seeing in that space? I've seen situations where you can lend, you can borrow money on DeFi. There are real-world applications. Some people talk about actually real estate being placed as an NFT and you can purchase a property on the blockchain essentially. So what type of DeFi applications are you seeing? And what's the risk behind them?

Ali Hassan   00:13:23

It's beautiful. I think DeFi is going to change the world, but it comes with every single traditional financial risk metric that you know and understand. coupled with programming risk, smart contract risk. All the traditional issues that you face in credit markets and lending markets and real estate markets, those are all there. They might actually be bifurcated and hidden behind smart contracts, and it might not appear to be there, but they're all there and they're all magnified. DeFi is a way to offer financial services to many that have no access to banking infrastructure. It's a good way to bank the unbanked. It's a good way to bring the rest of humanity into the banking world. I believe that DeFi is going to exist, in my opinion, on the Ethereum platform most likely. It is the largest and most secure platform. Some viewers might argue with me that there's going to be others who have different opinions. It is my belief that DeFi will exist on Ethereum. It will exist in every single capacity, whether it's lending, credit, real estate. The programmability of trust is what's happening here. I don't trust you and you don't trust me. We can have a smart contract sit in between us as long as the parameters that we agreed to are met, the transaction is executed. I think it's going to be beautiful. I think it's still early to figure out how you're going to invest in it. It's really hard to follow which tokens are going to capture value. And my belief, if you believe in DeFi, if you think that this is going to be a thesis that you want to pursue, by the picks and shovels. The picks and shovels are the Ethereum and the salonas and the foundations by which these projects are built upon.

Stewart Webster   00:15:09

Absolutely. And I guess let's talk about the institutional involvement in the cryptocurrency space now. Several years ago, many of these institutions publicly stated that they will fire employees or employees will be penalized for bringing up cryptocurrency or investing in cryptocurrency. But now I'm actually starting to see more institutions involved in digital assets and cryptocurrency. Even at S&P, we have many teams focused on decentralized finance. We have a Chief DeFi Officer. We actually recently collaborated with Chainlink to bring our stablecoin assessments on chain. I saw that -- so we may be bringing additional information on chain as well. So what type of -- I guess, what institutional plays are you seeing out there? And how are institutions getting involved in this space? And is there any risk that they're kind of like undermining or don't understand?

Ali Hassan   00:16:01

Everything that you talked about, I think, is a drop in the bucket compared to the institutional capacity and interest in Bitcoin. Like these are the headlines that are getting focused on now. S&P does a collaboration with Chainlink, bringing data on chain. These are all great and they push the industry forward. But the overwhelming majority of conversations that I've had with any traditional institutional firm has been around Bitcoin. It is more than 99% of their interest, their capital, their brain power, their hiring. Most of the money that's flowing into the space today is still around Bitcoin. And that's for many reasons. And it's obvious that I'm very biased towards Bitcoin something that you know. Most of my friends, most of the people in the industry will tell you that the #1 regret people have is selling their Bitcoin in pursuit of anything else. Anyone who can go back in time would own more Bitcoin. -- everyone learns that lesson. I believe that the institutions are aware of this. They are pursuing the ability to generate money, generate cash flows through DeFi, through other projects. But at the end of the day, the value creation and the value capture is going to happen at the main settlement layer, which is Bitcoin.

Stewart Webster   00:17:21

You're right. I think the fundamentals are there. There are only 21 million of them. Many of them have been lost. So there are millions less actually that could be available over the future.

Ali Hassan   00:17:30

I was looking up some stats before I came today. Global M2 supply is $97 trillion right now. Bitcoin is $1.7 trillion. So you're looking at 1.8% of the global money supply right now is sitting in Bitcoin. That number has actually been growing steadily for the past 10 years. I charted it out before I came here. At 1.8%, call it, 2% -- the penetration is sizable. We have never had a non-sovereign asset penetrate this large into the M2 monetary supply. I'm of the belief that Bitcoin is going to penetrate much deeper, whether you believe it's 100%, 60%, 50%, even 10%. At 10%, you're looking at a 5x multiple from where Bitcoin is today. If you're talking about asymmetric returns and the possibility to outperform any other portfolio, a 5x return on a Bitcoin right now, you're looking at $500,000 per Bitcoin. That is totally achievable and only gets us into a 10% penetration on global M2 supply. I believe that Bitcoin is going to fundamentally change the course of history. It is the most beautiful monetary financial instrument we've ever created. It is the single most scarce asset in the history of humanity. People ask me, what does that mean? Some people like to compare it to gold. Well, that's not true. Gold, actually, we can dig deeper. Every time the price of gold goes up, we find more and more gold and we make more of it. Every time the price of real estate goes up, we build up. Every time a company's stock goes higher, they issue more. Humans are really, really good at inflating assets that are going up in value. Bitcoin is the first in the history of humanity that we don't have the ability to do that. I think that's still misunderstood. I think that as more and more people realize that, not just traditional players, but the institutions and then the sovereigns come into the space, Bitcoin is going to change the world in ways that you and I have couldn't even fathom.

Stewart Webster   00:19:34

Have you compare Bitcoin to gold? Yes. When I was first introduced to Bitcoin, it was a payment system. So it was a peer-to-peer payment system. Then another cycle, people start comparing it to gold and called it a store of value. Then in another cycle, people called it an inflation hedge. So to you, what exactly is Bitcoin? Is it multifaceted in that sense or...

Ali Hassan   00:19:54

Its simplicity is its biggest value. I think I've said that before. The fact that it's pluses and minus plus 1 Bitcoin 2 minus 1 Bitcoin Ali, the transferability and the immutability of it is its value. The network continues to grow. And as the number of end nodes on that network, users and wallets on that network continue to grow, the value continues to grow. How people use it is secondary to that. Some people like to use it as a store of value, myself included. That store value can also be an inflation hedge. That store value, maybe at some point, I want to use it to buy something, right? For instance, I'm installing some solar panels on my house and the solar installer agreed to take Bitcoin. So now it was a store of value. It's now going to -- in my checking account, and I'm able to use it as a transfer of assets. It is multifaceted to answer your question plainly. As more and more people own it, more and more use cases will emerge, but the simplicity of it is what really gives it all that value. 21 million Bitcoins, 8 billion people. There's over 100 million millionaires in the U.S. There's not even one Bitcoin for every millionaire in the U.S. Obviously, it's fractionalizable. So that's not an issue. But the truth of the fact is there's not enough Bitcoin to go around as more and more institutions jump into this space, the value of this will skyrocket. This podcast is about risk. I believe the biggest risk an investor can have is to be on the sidelines. As you -- we talked about asymmetric returns when we first started the asymmetric return of leaving Goldman to pursue this. I believe today, the biggest asymmetric return driver for any portfolio is Bitcoin, not because it's uncorrelated because Bitcoin has proven over and over again to be correlated at times with risk assets. especially in risk-off situations. But because over the long history of Bitcoin, now we're at 14, 15 years since Bitcoin has come out, has proven over and over and over again to be an outsized driver of return in portfolios. I don't think that's going to stop. I think it's going to accelerate. People are moving their eyes off the needle and trying to pursue other opportunities within the crypto blockchain sphere, that less is going to be learned the same way. I learned that lesson the same way. All my peers have learned that lesson. At the end of the day, it will return to Bitcoin.

Stewart Webster   00:22:15

It's interesting what you're saying that it's so simple that it's flexible, right? You're saying it could be used as a store of value, it could be a payment system. And what's interesting is this could be global, right, or it is global. And actually, it could be anywhere in the universe where we have Internet connection, you can use this type of payment system essentially. You spoke about correlation. So I remember historically, Bitcoin wasn't highly correlated with the traditional markets. But now and sometimes, we're actually starting to see it behave like a large tech stock. So is it still a diversifier in your eyes? Or are we too highly correlated or...

Ali Hassan   00:22:51

I think it's regime dependent, meaning Bitcoin can assume so many use cases like we already talked about. If enough people are using it in a particular manner, it behaves in that manner. So if enough people are using it as tech beta high-growth risk on, it will behave in the same way as tech in the U.S. behaves. If enough people are using it as a gold hedge and believe it -- I'm sorry, as an inflation hedge and believe it to be an inflation hedge, it will behave that way. I'm not of the opinion that it is an uncorrelated asset and that it should be invested in solely for diversifying your return profile in your portfolio. I think that at times, that changes, and it's going to be difficult for the average investor to adjust based off of what regime we're in and how to adjust that. I believe you should own Bitcoin for the long term. The uncorrelated returns historically, it's a misconception. It's just because Bitcoin has grown so fast relative to almost any other asset, it seems uncorrelated. The magnitude is so massive. It will just be uncorrelated with almost anything else. Obviously, as more and more people own Bitcoin, the volatility will come down. As the volatility comes down, the number of units of risk you're taking comes down, the rate of return will come down, more people will own it. The more people that own it, the volatility comes down, the number of units you risk. It's a cycle, I believe. And Bitcoin will come down volatility. Its perceived risks are diminishing every single day. 2017, when you and I were first investing in this, you were taking on so many different risks. There are no more regulatory risks today for Bitcoin specifically. You have the son of the President of the United States mining Bitcoin to the tune -- I forget the third or fourth largest Bitcoin mining operation in the world in the U.S. The administration has signaled slow for Bitcoin. We're beyond that. We're beyond the custody issue. No one is afraid of Bitcoin being hacked anymore. We're beyond the legal and taxation issues that people were worried about in 2017. All the people who took those risks early on got compensated for those risks. Those risks no longer exist. The rate of return will obviously mirror the number of units of risk we're taking. I still believe we should own it, but it's nowhere near as our as it was.

Stewart Webster   00:25:20

So let's fast forward 20 years from now. Let's say, it's year 2045. What does the crypto landscape look like? What survived, -- what evolved? What completely disappeared? What does the crypto landscape look like in the year 2045?

Ali Hassan   00:25:33

I'm going to get a lot of haters for this. I think the long tail of over 10,000 coins out there, nuclear winter for all of that. All -- most of that will disappear. A lot of it is speculative. A lot of it is solely based on gambling and the ability to issue new coins quickly, capture the mean craze, NFT craze, DFI craze. It's a lot of money cycling around, chasing its own tail, pursuing money pursuing money, pursuing money. Bitcoin will exist in 2045, if I had to guess. The call that I like to make is $1 million by 2030. I couldn't even imagine what it would be in 2045, whether that's because the value of Bitcoin has appreciated so much or the value of the dollar that we're measuring the Bitcoin in has devalued so much. I believe Ethereum will also exist. Most of the programmable nature of money and the trustless infrastructure that the traditional financial firms are building will exist in the Ethereum network. So I do believe Ethereum will exist. I believe Bitcoin will exist. I believe there will be 10 to 100x higher from here and overwhelming majority of the coins in most people's portfolio will be at 0.

Stewart Webster 00:26:56

That was Ali Hassan, Founder of Perceptive Capital, offering a thoughtful look at risk through the lens of one of the most dynamic asset classes in the world. What stands out is that crypto risk isn't just about price volatility. It's about infrastructure, governance, technology and human behavior and understanding where those risks intersect. Ali's perspective shows that success in digital assets requires more than conviction. It demands discipline, humility and a deep respect for uncertainty. As markets continue to evolve and new financial systems take shape, conversations like this remind us that the biggest risk isn't always about taking the leap. It's failing to understand what you're stepping into. If you enjoyed this episode, don't forget to like share and leave a review. Thanks for listening to Masters of Risk. I'm Stewart Webster, and we'll see you next time.