Mar 18, 2021 · 1h 0m · capital-allocators
Crypto for Institutions 4: Ari Paul – Exploiting Inefficiencies in Crypto Trading (Capital Allocators, EP.183)
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gold bands on the timeline = statements, start to end. Hover to read, click to jump. CC turns on captions
In this episode of Capital Allocators, host Ted Seides interviews Ari Paul, Chief Investment Officer of BlockTower Capital, exploring how institutional endowment experience and quantitative market-making frameworks enable active alpha generation, cycle navigation, and risk management in cryptocurrency markets.
How this conversation actually went
Every chapter scored 0–10 on four independent dynamics. Hover any point for the reasoning behind the score. Ted holds 17.6% of the talking time here. How this is scored →
Ted as informed peer 3.9 Guest teaching 5.1 Guest disagreement 1.5 Ted pushing back 0.1
speaking balance: gold is Ted, purple is the guest (3 minute bins)
Sharpest disagreement ▶ 48:35 Directly challenging industry consensus on Proof-of-Work safety
Ari openly dismisses the industry narrative labeling Proof-of-Work consensus vulnerabilities as mere FUD, arguing that game-theoretic exploits represent a legitimate 10% existential risk.
Hardest push from Ted ▶ 17:13 Challenging conventional risk management separationTed presses on what institutional pools can actually learn about risk, leading Ari to reject the premise of separating risk management from portfolio decision-making.
Biggest teaching moment ▶ 31:10 Explaining the unexploited edge of on-chain data over traditional quantsAri educates the host on how real-time blockchain transaction transparency provides an analytical edge that traditional quant firms relying solely on price and volume fail to exploit.
Ted holds their own ▶ 21:52 Framing the multi-strategy alpha and beta landscapeTed actively synthesizes the exact beta composition between Bitcoin and Ethereum to probe where active management generates persistent alpha in digital assets.
the scores for every segment, with the reasoning behind each
| Chapter | Topic | Ted as informed peer | Guest teaching | Guest disagreement | Ted pushing back | Why |
|---|---|---|---|---|---|---|
| AlphaSense Institutional Investment Intelligence Platform Sponsorship | 0 | 0 | 0 | 0 | Monologue opening segment covering sponsor AlphaSense and the crypto mini-series overview. No guest interaction takes place. | |
| Introduction to Capital Allocators and Guest Ari Paul | 0 | 0 | 0 | 0 | Host monologue introducing Ari Paul's professional background and reading mid-roll sponsor spots for Chainalysis, Falcon X, MG Stover, and Bitwise. | |
| Concluding the Crypto Miniseries with Ari Paul | 4 | 5 | 1 | 0 | Ted opens the interview asking about Ari's transition from poker to trading at Susquehanna. Ari explains game theory optimal play versus exploitative market strategies in depth. | |
| Lessons from Market Making, Crisis Mistakes, and Endowments | 4 | 6 | 2 | 0 | Ari outlines the structural flaws and agency issues during the financial crisis that led endowments and traders to become forced sellers despite claiming perpetual time horizons. | |
| Socializing Bitcoin at the University of Chicago Endowment | 5 | 6 | 2 | 0 | Ari describes the institutional bureaucracy at UChicago that prevented direct Bitcoin allocations while staff invested personally and via VC crypto funds. | |
| Risk Management, Expected Value, and Portfolio Diversification Principles | 5 | 6 | 2 | 1 | Ted prompts Ari on risk management in institutional pools; Ari argues that separating risk from portfolio management is nonsensical and breaks down Bitcoin's expected value and equity correlations. | |
| Seizing Market Timing and Founding BlockTower Capital | 5 | 6 | 2 | 0 | Ari details the urgency of the 2017 crypto run, the absence of institutional-grade funds, and how BlockTower profited from basic exchange pricing discrepancies. | |
| Building an Institutional Crypto Fund from the Ground Up | 4 | 6 | 2 | 0 | Ari explains the necessity of an opportunistic mandate across liquid strategies rather than narrow specialization during cyclical crypto bear and bull markets. | |
| Modern Crypto Market Inefficiencies and On-Chain Quantitative Edge | 4 | 7 | 2 | 0 | Ari discusses how on-chain data provides quantitative edge over traditional quant funds, citing that professional capital controls under 3% of crypto assets. | |
| Valuation Frameworks: Momentum Trades, Uniswap Fundamentals, and Accessibility | 5 | 6 | 1 | 0 | Ted asks for specific asset valuation examples; Ari explains short-term Dogecoin momentum vs. fundamental cash flow analysis on Uniswap and retail accessibility baskets. | |
| Market Cycle Dynamics, Altcoin Exposure, and Narrative Rotation | 5 | 6 | 1 | 0 | Ari breaks down his portfolio construction methodology, detailing a barbell strategy of altcoins and cash to capture upside skew while managing downside drawdowns. | |
| Investable Universe Constraints and Cross-Sector Blockchain Interactions | 5 | 6 | 2 | 0 | Ari maps out the interconnected crypto layers from Filecoin storage to Ethereum layer-2s, and analyzes why NFT platforms face margin compression despite massive volume. | |
| Differentiating Market Volatility from Existential Consensus Vulnerabilities | 4 | 7 | 3 | 0 | Ari counters common industry views by highlighting existential game-theoretic risks to Proof-of-Work consensus alongside standard regulatory market risks. | |
| The Institutional Evolution Toward Direct Digital Asset Ownership | 4 | 5 | 1 | 0 | Ari reflects on the evolution of institutional allocators from crypto fund investments toward direct asset ownership and the future necessity of crypto prime brokerage. |
Statements from this episode (29)
Paul: Exploitative Play Beats Game Theory Optimal Play in Poker and Trading
“In poker, there's game theory optimal play, and there's exploitative play, and the biggest winners are the ones who exploit.”
Paul: Market Makers Must Yield to Massive Counterparty Bets
“Susquehanna, the whole thing as a market maker is there's always someone who knows more than you always. And your goal as a market maker is basically no one to get out of the way. If someone is willing to bet a billion dollars that you're wrong, it doesn't mat…”
Paul: Institutional Market Errors Stem From Structure and Incentives
“And I spent a lot of time thinking about, man, why are all these really smart people with tons of skin in the game making such obvious errors? And my conclusion was it's structural. It's not that these people don't see it. It's that incentives are everything. …”
Paul: Endowments and Pensions Were Net Sellers in 2008 Crisis
“The reality was in the financial crisis, endowments and pensions were net sellers, not net buyers.”
Paul: A Third of UChicago Endowment Staff Bought Bitcoin in 2016
“Almost immediately, probably a third of UChicago endowment employees bought Bitcoin in 2016.”
Paul: Endowments Entered Crypto Through VC Funds to Bypass Board Approval
“The first crypto investments by the endowment world were in VC startups investing in the crypto space, because that didn't require board approval. It was just another VC fund.”
Paul: Segregating Risk Management From Portfolio Management Is Nonsensical
“Risk is inseparable from return, that the idea of segregating the risk function from portfolio management is nonsensical. There's actually a discussion that I sometimes have with prospective investors in BlockTower, where they'll say, oh, do you have a separat…”
Ari Paul: Bitcoin faces existential risk and could go to zero
“There's also existential risk. This is maybe debatable today, but I think it certainly could go to zero, as most assets in the world can.”
Paul: In 2017 Only Four Crypto Funds Had Proper Hedge Fund Structures
“I was surveying the landscape on behalf of UChicago. I literally talked to every crypto fund I could find on UChicago's behalf, and there were like four that were investable at all. And by investable, I mean in the legal sense that actually had a hedge fund st…”
Paul: Two Sigma, Citadel, and Rentech Stayed Out of Crypto in 2017
“I saw that guys like Two Sigma and Citadel and Rentech and the discretionary trading houses, none of them were in crypto for good reasons.”
Paul: BlockTower Made Millions Manually Arbitraging Crypto in Late 2017
“In late 2017, we made a few million bucks manually arbitraging between us based regulated exchanges.”
Ari Paul: Basic arbitrage across low-risk crypto exchanges is mostly gone
“Today, basic arbitrage among zero counterparty risk exchanges, or low counterparty risk at least, mostly doesn't exist. It gets arbitraged away by guys like DRW.”
Paul: Bitcoin is a risk asset that drops with equities during recessions
“And we were strongly convicted that that's nonsense, that Bitcoin is a risk asset. And while it might not be correlated one to one on a five percent S&P move, If S and P falls enough, Bitcoin is going to catch up to the downside because that's wealth destructi…”
Paul: Two Sigma and Susquehanna Run Machine Learning Algorithms on Bitcoin
“Bitcoin, you do have machine learning algos from guys like Two Sigma and Susquehanna pointed at it.”
Paul: Traditional Quant Firms Cannot Utilize Crypto On-Chain Data
“Amazing thing about cryptocurrency is that we have these whole new types of data that traditional quant has never had. And traditional quant firms have no idea how to make use of it.”
Paul: Professional Capital Controls Under 3% of Crypto Assets
“The professional capital and cryptocurrency probably controls less than three percent of the assets, which is the lowest ratio of any major asset class.”
Ari Paul: Uniswap generates 30 bps fees on over $1B daily volume
“Uniswap, you can actually value in a very equity-like way based on cash flows, because Uniswap actually collects a 30 basis point fee on all transactions, and it's currently doing more than a billion dollars a day in transactions.”
Ari Paul: BlockTower holds crypto baskets based purely on exchange accessibility
“So as an example of a bet that we have on right now, we've created baskets based entirely on accessibility. So we have a basket of Coinbase coins, a basket of Binance coins, a basket of Korean and Japanese retail coins, where it's the assets that are easiest f…”
Paul: Wealth created by Bitcoin flows down the risk curve to newer assets
“The wealth created by Bitcoin flows down the risk curve. Bitcoin going from 3000 to 30,000 in a year, that generates wealth. That wealth looks for its next 10 X and flows down the risk curve into riskier, newer assets.”
Paul: The NFT Space Will Probably Grow 100x By 2024
“So I think over the next three years, we're going to see the NFT space grow probably a hundred X in size.”
Paul: BlockTower Has Allocated Very Little Capital to NFTs
“I've been bullish on this for five years. I can tell you as an investor, I've actually allocated very little to it.”
Paul: Fierce Competition Will Compress NFT Marketplace Profit Margins
“I think their profit margins are pretty small because I think there's going to be fierce competition driving profit margins down.”
Paul: BitMEX held 70% of global Bitcoin trading volume around 2020
“BitMEX, which had the largest trading volume for Bitcoin in the world, they had 70% of all volume about a year ago.”
Paul: 10% Chance Bitcoin Suffers Disabling Attack By 2026
“I put it at maybe 10% over the next five years that there is a successful attack on Bitcoin that effectively renders the network temporarily unusable, but unusable in a way where we don't know when the next attack will be.”
Paul: Most Top Ten US Endowments Have Invested in Crypto Funds
“What I can say generally about the endowment world is most of the top 10 endowments have invested in crypto funds.”
Paul: Direct Bitcoin Ownership Will Be Operationally Easy for Endowments Soon
“But my guess is that in another year, that's similarly will feel not like a terribly difficult allocation decision operationally.”
Ari Paul: CME Bitcoin futures often trade at 20% annualized premium to spot
“Basis, you can capture CME futures, often trade at a 20% annualized premium to spot Bitcoin.”
Paul: Twitter Serves as the Bloomberg Terminal for Crypto Traders
“Crypto Twitter is the best aggregator, which is to say, if you follow the right 50 people on Twitter, any time a good article's put out a good anything, it ends up getting posted there. Twitter is the equivalent of Bloomberg for a lot of crypto traders”
Paul: Copying Long Crypto Addresses for Million-Dollar Transfers Is Insane
“The idea that we're copying and pasting this arcane long string of alphanumerics to represent a million or ten million dollar transfer is insane. It's so error prone. It feels awkward. It's terrible. I had hoped four years ago, I thought that by this point we …”