This post originally appeared in Off The Chain, the daily newsletter that I send to institutional investors analyzing the crypto markets. You can click here to subscribe and receive it in your inbox every morning.

Every pension fund should buy Bitcoin.

The retirement of hundreds of millions of corporate and government employees around the world depends on these pension funds’ ability to pay the individual a set amount of money post-retirement. Unfortunately, many pension funds are facing a significant crisis — it does not look like they will be able to pay their future obligations.

The difference between the obligations and the resources allocated to pay them is actually widening. This is driven by a decreasing worker to retiree ratio. Workers pay into the pension fund (think of this as revenue for the pension fund) under the promise that the fund managers will grow the capital and be able to pay the employee’s pension post-retirement. Once an employee retires, they begin to draw their pension (think of this as expenses for the pension fund) and will continue to do so until they die.

The gap between revenue and expenses is getting worse because of lower birth rates (fewer people entering the workforce) and longer life expectancy (the retirement age stays fixed so people are entitled to their pension for longer). Each of these trends is expected to continue, and possibly even accelerate, which will put additional pressure on pension funds to come up with the capital needed to fulfill their obligations.

There are numerous potential solutions to address the problem. One is to increase the amount of contributions from workers (increase revenue) and another is to grow pension funds’ capital by investing it at higher rates of return. To identify the right answers, each fund hires an actuary to model a pension fund’s future outlook. These actuaries look at demographic data, life expectancy, investment returns, levels of contributions or taxation, and payouts to beneficiaries.

The most important number is the “actuarial assumed rate of return,” or the target return on invested capital that is necessary to have enough resources to pay out future obligations to retirees. This assumed rate of return is typically between 6–8% annualized. As this number is adjusted up or down, the current workforce is directly impacted. Some estimates show that a decrease from 8% to 7% from the actuarial assumed rate of return would require workers to contribute up to 10% more to the pension. Not exactly an exciting idea for those currently working.

Either way, pension funds have to do something different. The definition of insanity is to continue doing the same thing and expect a different result. Take the California Public Employees’ Retirement System, the largest public pension fund in the United States, who has over $300 billion in assets. They are less than 70% funded (they don’t have enough money to pay all of their obligations in the future based on their current assets) and in 2016 the fund reduced their assumed rate of return from 7.5% to 7%. This new target is still higher than the 10-year annualized performance of 5.1% though.

Instead of lowering the assumed rate of return, which requires increased contributions from the current workforce, CalPERS and other pension funds should buy Bitcoin and other cryptoassets.

Seriously, a potential solution to the pension crisis is for them to buy Bitcoin. Here is why:

• Bitcoin is a non-correlated asset — This is the holy grail of any portfolio. Bitcoin’s current 180 day correlation to the S&P 500 is 0 and the correlation to the dollar index is near zero as well. Investing in non-correlated assets should reduce the risk and increase the returns of a portfolio according to modern portfolio theory.
• Bitcoin has an asymmetric return profile — There is much more upside than downside in owning the asset. The downside (loss of capital) is capped at the total amount of capital invested, yet the upside is ~100X+ (if Bitcoin only becomes gold equivalent).

The modern portfolio theory argument for investing in Bitcoin is quite strong. But how has theory played out in practice?

Bitcoin has been the best performing asset over the last 10 years. It has experienced a 1,300,000X+ increase in value from $0.003 to ~$4,000 today. It has beat the S&P 500 for the last 10 years, the last 5 years, and the last 2 years. As a fixed supply asset, I believe Bitcoin will continue to outperform traditional assets in the future as demand continues to increase too.

Although I have deep conviction in Bitcoin’s future outlook, pensions should not put significant funds at risk in this investment opportunity. It is risky and speculative. They could lose 100% of the money that they invest. For that reason, each fund needs to evaluate their current situation, their goals, and the amount of capital they would be willing to lose.

If the thesis plays out how I anticipate though, an investment of 100 basis points or less would materially change the performance of each pension fund, which ultimately changes the future viability of retiring for hundreds of millions of people. These institutions have permanent, long-term capital which allows them to stomach more volatility than most investors.

For example, an investment of 1% of assets at $4,000 BTC price would yield a 25% increase in the pension’s total assets if Bitcoin reached $100,000. If a fund decided to invest 0.1% of assets, the same price appreciation would increase total assets by 2.5%.

However, the exciting part is that many people believe Bitcoin will not only reach $100,000 one day, but rather be worth $1,000,000+. If that comes to fruition, a 0.1% investment today could lead to the same 25% increase in total assets for a pension fund. These types of trade-offs are the definition of an asymmetric return profile.

Most institutions have 0% exposure to Bitcoin and crypto however. This must change. They have to #GetOffZero.

As expected, this is not an easy decision for a pension fund. There are numerous factors involved, including (1) the investment team deciding they want to make the investment, (2) the investment team underwriting the risk and correctly sizing the position, (3) the investment committee understanding the pros/cons, and (4) the investment committee approving the investment. These people are intelligent and experienced investors, but many of them are not familiar with the asset (or worse, have a negative perspective based on reading headlines, etc).

It will take time for pension funds to get comfortable with investing in Bitcoin. We need to educate multiple stakeholders and demystify this nascent industry. When one makes the decision, it will create a cascading effect that leads to hundreds of them jumping in.

Bitcoin has the potential to save us from the current pension crisis. We just need one or two courageous individuals to make the first move.

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The following is a transcript of a conversation between Anthony Pompliano and Murad Mahmudov, one of the highest conviction Bitcoin Maximalists in the world, about what Bitcoin is, how it works, the importance of its deflationary monetary system, why all Fiat Currencies are doomed to fail, and how central banks and institutions should be thinking about Bitcoin.

You can find the recording here: Off The Chain Podcast: Anthony Pompliano and Murad Mahmudov

Anthony Pompliano: All right, guys, I am here with Murad. We are going to do our best to create a podcast episode that becomes the de facto episode you can send to people when they ask “What is BitCoin, and why is it important?” So Murad, tall task in front of us but thank you for coming.

Murad Mahmudov: Thank you for having me, Anthony, pleasure to be here.

Pomp: Absolutely. All right, so before we get into this, let’s go through your background, and then we can jump into everything.

Murad: Sure. So I’m originally from Azerbaijan, was until recently an international student here in America. Got into BitCoin quite heavily after spending a semester abroad in China during the previous bubble in late 2013, early 2014. A lot of the exchanges back there, as you may know, still didn’t have tremendous liquidity yet, and some of my foreign friends were trading BitCoin P-to-P, sort of bringing it into China, selling it, et cetera. Attended a bunch of Beijing meetups, and sort of been in the rabbit hole since.

Murad: Made a small pause, as many of us have, up to 2015, and then as 2016 rolled in, got back into this game. Briefly worked in finance, and then now doing several different crypto things full-time.

Pomp: Absolutely. So let’s just start with the simplest question, right. What is BitCoin?

Murad: This is a very good question, and a BitCoin is something that can be described with more than 100 different definitions. A lot of people debate what they are, but to me personally, BitCoin first and foremost is a new form of money. It’s a new form of thinking about money, storing money, transferring money, and just dealing, organizing, and understanding money, and all kinds of second order financial effects that come out of that.

Pomp: Absolutely. So let’s walk through some of the core components of BitCoin. Obviously, it’s built on a blockchain, and then it is divisible, it’s fungable, it’s all these things. What are the important components to you?

Murad: Blockchain is definitely one of the components. A lot of people thing that that’s the core one, but really, that’s one out of four or five core moving pieces. I don’t wanna give the term ‘blockchain’ too much legitimacy right now, because it’s really been over-abused, I would say. Up to this point, it has become little other than a marketing term at this point. I mean, I’m not as fascinated with blockchain as I am fascinated with the BitCoin blockchain, but as I said, there are many moving parts.

Murad: Another is the proof of work function of BitCoin, and how the time-stamping and the security come into play in this regard. BitCoin governance, in particular, is very very unique and very very complex and hard to understand, hard to explain. I just want to underline the fact that it’s not just a currency on a blockchain, it’s really very very interdisciplinary, and multi-variable phenomena, where a lot of different things come into play and blockchain is merely one out of several.

Pomp: Absolutely, so let’s go into proof of work. How does that work, and why is it important?

Murad: Proof of work is very important because it is the first workable, in my opinion, solution to the double-spending problem at scale. As we know, a lot of different alternative currencies and alternative money forms were created in the 90’s in the early 00’s. Unfortunately though, they didn’t work quite well, because most of them were centralized more often than not, of course.

Murad: When something is centralized, it is very easy to shut down. A privilege of creating and controlling your own money, let alone a monopoly on it, is something that gives the controllers of that system a tremendous amount of power, arguably more than anything else in the world. With BitCoin, proof of work, once again coupled with several other things, allows the system to be secure and decentralized at scale, as well as allows us to time-stamp transactions on the ledger in a decentralized trustless, or rather, trust-minimized manner.

Murad: Which allows BitCoin, for the first time, to be an alternative monetary system and an alternative currency which is several orders of magnitude much harder to shut down, to censor, to stop, and to manipulate, than any other project of a similar variety that has ever arrived in the past.

Pomp: Absolutely. So this idea of the decentralization, right? In a centralized world, whether it’s the traditional banking system or other attempts like DigiCash, Hashcash, BeMoney, et cetera, the centralized versions don’t have the double-spend problem, right? So the double-spend problem is this idea, if I have a single U.S. dollar, physical dollar, and I give it to you, I no longer have a dollar that I can give to anyone else. So I only can spend that dollar one time.

Pomp: In a digital currency, the actual unit of value is a digital file. It could be copied, and so therefore the problem that many of these early attempts to build a digital currency ran into, is the doubles-spend problem you described. That was where I give you one unit of value, one BitCoin, and then I would be able to send that exact same unit of value to somebody else, therefore spending it twice, double-spending it, right?

Murad: Right.

Pomp: The blockchain structure is what solved this. Do you think that the solving of that double-spend problem is why BitCoin has been able to thrive when other previous attempts didn’t, or do you think it’s something else?

Murad: Technically, centralized currencies and centralized financial systems have a double-spend problem as well. However, in order to solve it, you need to … we need to place our trust in a central party, in a centralized authority, who often control the transactions, they control the settlement, they control the issuance of the currency, they control many different things, right?

Murad: Sitoshi, in one of his earliest posts on the cyberpunk email list, he noted that the traditional currencies have several layers of trust that you have to essentially give in to in order to use the system. You need to trust the central banks not to dilute the currency too much. You need to trust commercial banks that they’re going to let your transactions through, et cetera, et cetera, et cetera.

Murad: The amazing thing with BitCoin is that, now in a very very unique way, Sitoshi Nakamoto has managed, in a very elegant way, combined several innovations together, one of which is proof of work Hashcash, together with a chain of blocks, as well as several other things that we can get into, to create a digital currency where the double-spending problem is solved in a trustless manner. This allows as Nick Zabos says, for the system to be much more socially scalable than anything else we’ve had before. A lot of anthropologists have argued that expanding social scalability with various technologies that allow us to connect with as many people as possible, in a way where we don’t have to rely on any single party, with more and more inventions of this sort we can really expand the horizons of commerce and human civilization at large.

Pomp: Absolutely. Those previous attempts at this all either had lack of adoption or they had technical problems. There was issues that they couldn’t solve. One of the things that often doesn’t get talked about with BitCoin is the governance. Everyone is focused on the technology itself and how that is executed. What is so special about the governance of this digital currency?

Murad: Governance of BitCoin is not formally defined, and I would argue that in a way, it is a strength rather than a weakness. Technically, the governance has to do a lot with the BitCoin improvement processes, and how those get proposed, and how those get reviewed, how those get added in, et cetera. It’s a very conservative, extremely meticulous process, which I consider a strength. A lot of people consider that, a lot of people complain that BitCoin is not evolving or BitCoin is too slow.

Murad: To me, those people are exhibiting high-time preference and impatience. I think the alt-coin boom and the ICO boom, a lot of the blockchain boom as well, has it’s origins in part because of this. True BitCoiners understand that this isn’t a six-year get rich quick scheme, but it can be an 80 year project. It’s something that perhaps will continue going on until the end of our lives. So every changes to the system, need to be extremely extremely careful.

Murad: I like to compare it to a nuclear reactor or heart surgery or a moon mission, because there’s a lot at stake. 100 billion … more than $100 billion already, and potentially tens of trillions of dollars someday. So this … because it is software, it lends itself to flexibility. This malleability has allows us to create a money that is harder and sounder than gold, and fiat, of course. But at the same time, this malleability is also makes it fragile in a number of other ways.

Murad: Because of this, and precisely because it is software, we need to be extremely careful. But the governance process of BitCoin is what Pierre Rashad calls a P-to-P anarchic network governance. The fact that it is slow to change is something that really makes BitCoin far, far stronger than everything else. The number one reason, and I can give dozens of reasons, but the number one reason why alt-coins are far, far behind BitCoin is precisely because they are much more centralized in relative terms, and everything about it is much easier to change.

Murad: Currencies, first and foremost, are all about trust. As I like to repeatedly say, these crypto-assets are unlike many people in the VC world, San Francisco, California, they think of these things as software platforms. They try to apply the late-00’s early-10 tech paradigms to this thing, but really to me, it’s a monetary phenomenon. In very loose terms, I like to describe these things as digital monetary metals.

Murad: To me, that’s arguably the closest metaphor for now. I like to even say that they aren’t, BitCoin being compared to digital gold is an understatement. Really what it is, is digital monetary nuclear weapons. Because if you really dig into the third and the fourth orders game theoretic effects that are likely to arise when this things gets just a little bit bigger, which to me, it inevitably will, there’s just so much that it is going to cause and reorganize in this world.

Pomp: Absolutely. One thing that I think about a lot, is if you were to draw a spectrum, and on the left side you have the slow development cycles and carefulness of BitCoin, and on the right side you have optimization for innovation. I think that BitCoin obviously is pretty far on the left side of that spectrum, and a lot of the ICOs and alt-coins, et cetera, are pretty far on the right side.

Pomp: They wanna quickly build something, they wanna get it out, they’re trying and experimenting and innovating and doing all these things. So what ends up happening is, because BitCoin’s speed of development is slower, more methodical, more intentional, it can pull from the things that work on the innovative end, and it can avoid the landmines of the things that don’t work. Do you agree with that?

Murad: I agree with that, and I would even add that a lot of people who’ve started alt-coins have gotten into that wave in the last couple years, come from the technology world or the startup world, venture world, and one of the schools of thought, i.e. move fast and break things, it completely does not work for cryptocurrencies. Because once again, this is not a dog-walking app or a dating app, or a food picture app.

Murad: You need to be extremely extremely careful with this. We want to make it so that a huge chunk of the world financial system eventually gets absorbed into this one digital currency. So conservatism is definitely the way to go here. Some people would even argue that we need to even e more careful and review in an even slower fashion.

Murad: I definitely agree with you that BitCoin can definitely take whatever … if there’s ever something that is actually useful and truly innovative that any alt-coin does better in any capacity or function, BitCoin can eventually adopt that, for sure. However, and this is why I believe that privacy coins or coins with more programmability et cetera, et cetera, they really don’t stand a lot of … they don’t really stand a chance against BitCoin at this point in time. Because I believe people will soon realize the truth, and the truth is that the value aka the price is determined by the monetary premium.

Murad: The monetary premium is determined by a combination of the current monetary network effects, monetary liquidity, salability, marketability, recognizability, the Linde effect, and most, first and foremost, the credibility of the monetary policy, and just the general trust. In all of these terms, in all of these criteria, BitCoin is so far ahead than everything else, that the way I see it, yes there may be two or three more mini alt-coin bubbles, particularly as more people enter into the space.

Murad: There’s a natural incentive to find the next big thing, of course. I believe that once BitCoin goes above several trillion dollars or so, a big divergence will happen. Really, all the other cryptocurrencies will be similar to what penny stocks are to the big caps in the equity world right now.

Pomp: Got it. So would it be fair to say that, if you take that same spectrum, on the left side you’ve got security, and on the right side you have low levels of security. BitCoin conservatism pushes it on the extreme end of the left side, around security, right? Do you think that these other blockchains, tokens, et cetera, are lacking focus on security, or do you think they’re making a rational trade-off between security and, let’s call it innovation or something like that?

Murad: I think it’s a rational trade-off. The reason for that is because if you even want to compete in BitCoin in any capacity, then you … it’s really difficult to compete against it in terms of monetary disinflation, which really is the most important thing here.

Pomp: So what you’re saying is, if somebody wants to compete against BitCoin, another project, you can’t beat it on security today, because of the network effect. And then you can’t beat it on the monetary policy, and therefore you have to go to other areas in which you may be able to build a competitive advantage.

Murad: That is most of the thinking in alt-coin creators heads. I believe that it has worked a little bit, not really. It might even work a little bit in the upcoming waves. But it is doomed to fail eventually.

Pomp: It’s like winning the second or third most important aspect, right? It’s like saying, look, the most important thing around security-

Murad: It’s like sixth or seventh, you know.

Pomp: Yep. It’s super interesting. Okay. So let’s talk about the design of BitCoin. Obviously there’s proof of work, there’s governance, et cetera. But the actual monetary design, walk us through the disinflationary and deflationary nature of the actual design.

Murad: So before I delve into that, I will say, and I think this is something that people will increasingly realize in the coming years. Uncensorability’s cool, unsiezeability’s cool as well, but to me these really are perks. In terms of the prize going up and this thing taking over the world, if we create a pie chart, then 90% i.e the dominant force which will be doing that, is BitCoin monetary policy. Really, its unprintability. The fact that nobody can print beyond 21 million. That is by far the strongest and the most important innovation here.

Pomp: Okay, so the monetary policy of this system is by far the most important part.

Murad: Precisely.

Pomp: Okay.

Murad: People need to use something as money. Right now, some of the better currencies are the U.S. dollar, euro, the Swiss franc, et cetera. But really, people use those because essentially, they’re picking the least bad thing. I believe the supply of the U.S. dollar in the last year has increased by 6.2%. BitCoin’s stock to floor ratio, today, is around 3.8%, and after the next halving, if you go off of the 21 million number, it’s going to be 1.7%.

Murad: Actually, I believe that that switch from low three percents to high one percents is going to be the number one driver of the next big wave in 2020. But to answer your question more directly, unlike other currencies which their respective central banks, in the case of fiat, can print essentially whenever they want, as well as their respective local commercial banks can create more of when issuing that.

Murad: BitCoin is limited to strictly 21 million units. Some of them, it is believed that several million have already been lost. I believe that when all is said and done, the global supply of BitCoin is going to be somewhere between 16 and 17 million. The fact that nobody can print beyond the 21 million limit, and the fact that the users, the miners, and essentially everybody in … the developers, everybody who has as little as one Sitoshi of BitCoin, they are incentivized in having that rule be the number one and the most important rule, and the number one focal point, the number one selling point, which the community is gathered around.

Murad: Really, this is the number one thing which allows BitCoin to continuously increase in value. People are already pricing in, it’s extreme scarcity. I like to say we’ve never had an object, let alone a money, as scarce as BitCoin before. Even gold is expanding at a rate of around 1.6% per year over the last 10 years. I believe that after … by the late 2020’s, that number for BitCoin is going to be lower than one percent. Every year it’s getting lower and lower, so technically, that number is getting lower every ten minutes.

Murad: As you might know, every four years there’s a particularly additional sharp drop as well. I believe that that soundness, that hardness of currency, isn’t palpably felt by people yet. Even a lot of participants in the market, a lot of traders and investors, they don’t really quite grasp this aspect yet. But I believe that this is the revolutionary thing here, and this is why I believe BitCoin is going to be in the hundreds of trillions, in today’s terms, in the future.

Pomp: So there’s a couple of key terminology and components that you just described. There’s the total supply of BitCoin, right? So when it’s all said and done, 21 million BitCoin. We can get into why that is, and if that could change or not later. But for right now, let’s just say that there’s 21 million totally supply of BitCoin.

Pomp: At the same time, there’s the circulating supply. So how many BitCoins have been produced, and are currently available for ownership by people or organizations? And then, what we see is, every ten minutes, every block, there are more BitCoin that are added to the circulating supply, but that 21 million fixed supply never never changes.

Pomp: So what occurs is, the disinflationary, right? So yes, the circulating supply continues to expand until it reaches that 21 million, but that number goes down every four years or so, in terms of how many BitCoins every ten minutes are added to the supply. So that’s a disinflationary model. What you described is, once all 21 million BitCoin have been mined or are now part of the quote unquote ‘circulating supply’, we now get into a deflationary model.

Pomp: So it’s no longer disinflationary, because actually there’s no more being added, and now we can only go reverse. We can only lose BitCoin in the circulating supply. So let’s talk about the pros and cons of an inflationary system, and the pros and cons of that deflationary system. I think people hear these terms, but they don’t really know what they mean or why there’s pros and cons to either side.

Murad: We’re taught in a lot of schools and the contemporary mainstream neo-kings, anachonomists argue that mild inflation is best. To me, I think that governments around the world, particularly in the Western world, are incentivized for that kind of academic discourse, to be the dominant one even in the best institutions.

Murad: In my research I’ve found that there’s a lot of academic grants and academic sponsorships financing that central banks and ministries of finance, ministries of economics, et cetera, that allocate to certain schools of monetary thought than others. But I believe that those currencies are local monopolies, and those currencies are forced upon us from top down. BitCoin is a free-market phenomenon.

Murad: I would argue that BitCoin is an experiment in Austrian economics that so far, in it’s 10 years of existence, is succeeding massively. My belief is that money is a product, just like anything else. I think we will not have truly pure capitalism and truly pure free markets until money, which is a product that we utilize … which is a product which is a half of every single transaction in our society, is something that originates from the free market as well.

Murad: I believe that money is ultimately a product of the market, rather than a product of the state. I think the last 47 years in history have … are a temporary phenomena. For thousands of years, gold was the predominant money, or gold and silver were the predominant two currencies around the world, until the paper notes became more widespread as a technology. You can think of paper notes as a layer two technology, on top of monetary metals.

Murad: At that point, once you had paper notes, which were redeemable for metals, there was no longer … the divisibility problem of gold was solved, so the need for silver was drastically reduced, and thus silver was demonetized further. It’s very interesting to look at the gold/silver price ratio. After 1881, you see gold skyrocket in silver terms.

Murad: But I believe that something similar will happen with BitCoin versus all other monetary instruments, and even other financial assets. Which is really quite eerie. I think that when all is said and done, BitCoin will be the second or the third single biggest asset class, the single biggest asset in the world. Maybe real estate will be the only one bigger.

Murad: This is my reasoning around this. Right now, it is believed that the total money supply of all fiat currencies around the world is somewhere around $80 trillion. If you consider M1, M2, M3, if you add them all up around the world. I strongly believe that that number is artificially diluted and artificially kept small, because essentially by continuously printing, governments are disincentivizing the world, and disincentivizing investors and even average people, to store too much money in currencies.

Pomp: And they’re doing this because, if I take $100 and I put it in my bank account, as they print money, that $100 loses purchasing power every single year.

Murad: For sure. Every single day where the money creation occurs … it’s interesting, because the cost of creating that money for the government is near zero. All it takes is just a push of a button. But essentially, every single unit of fiat currency that gets created, reduces the wealth of the fiat holder around the world.

Murad: BitCoin is an unimaginably new phenomena, where for the first time, nobody can seize your wealth. Not just directly, like they did with gold in the 30’s, but just like they do with stealth inflation in fiat. Nobody can print more. For the first time, you have this currency that you can have full, or at least very strong confidence, that for the rest of your life, the percentage of the money supply of this entire system will always remain the same. Which, really, is completely unprecedented, because even with gold you don’t have that.

Murad: So here’s the thing. The total amount of wealth that is stored in currencies is artificially small. People … essentially, the system doesn’t want us, and doesn’t want people, to have a good robust unseizable store of value, because if that were to exist, then governments and central banks would lose a tremendous amount of seniorage privileges, because every time they print, they essentially enrich themselves at the expense of everyone else a little bit.

Murad: So this current system, because the money’s constantly getting diluted, people like surgeons, artisans, dentists, et cetera, engineers, they either have to play part- time investors on the side, or they have to outsource those services to registered investment advisors and brokers, et cetera. That’s part of the reason why the financial system is much bigger than it has to be, and why Wall Street is just a ginormous part of the world’s economy.

Murad: If we had something like gold, or better yet, BitCoin, then you could save your wealth and it would actually gain a little bit of purchasing power every year, without having to have this anxiety-riddled wave of activities that you need to do. It’s actually quite crazy how in today, I’m not even talking about the second or third world where this isn’t even an option, even in the first developed, civilized Western world, you have to create a diversified portfolio of equities, bonds, small caps, moonies, commodities, FX, derivatives sometimes, et cetera, just to preserve your wealth.

Murad: I’m not even talking about making some termendous outside returns. I’m talking about just to save your wealth. This is crazy. In the Biblical times, there’s a famous Jewish proverb which says, “Keep a third of your wealth in money,” which was gold, “keep a third of your wealth in land, and keep a third of your wealth in your business.” Even as recently as in the 50’s and 60’s, you could notice that in portfolio allocations, some of the traditional mutual funds and the early big asset allocators, they had a much bigger allocation to cash when the trust in currency was much greater.

Murad: You saw that reduced as years went by, and in recent decades with quantitative easing, the trust in currencies gets incrementally reduced. I believe that if BitCoin were to become global money, which I believe it will, or something like it definitely will, because genie’s out of the bottle and the idea is here to stay forever, the percentage of people’s average portfolio that will be in cash as opposed to today will be much greater. Perhaps not a third, but it will be much higher than it is today, and much closer to a third than it is today.

Murad: Precisely because of that, I believe that the total wealth in the world that is held in a currency, and note that this one currency will not be inhibited by inflation, it will not be inhibited by borders, it will not be inhibited by centralized control. All these things will contribute to it being the single biggest currency in the world. I think that eventually, I incresingly believe that the cryptocurrency market, even soon, not just in the future long-term equilibrium, it will be a winner take all rather than a winner take most game. I believe that BitCoin, as it currently stands, will probably take 94–95% of this entire market.

Pomp: So there’s a lot here to unpack, and I think it’s really important. What you’re describing is the idea, an inflationary model like what we have with the U.S. dollar for example, incentivizes me to get out of cash, and get into either hard assets, or to spend that capital, because if I hold it, it loses value. So that inflationary model, for many people, they spend or they take that cash and they buy real estate, or they buy other investment opportunities, because they know that they have to at least do better than two percent on their yield for the year. Because if they leave it in cash, they’re gonna lose two percent, give or take, based on inflation.

Pomp: So the argument that you’re making here is, let’s take, I don’t know, 5–10–20–30% of the real estate market, is actually wealth preservation, right? If people were given the choice, rather than buy real estate, they would rather take that exact same value and hold it in the cash equivalent. They don’t do it because today that loses money. But if there was a global digital deflationary currency, the-

Murad: Deflationary currency. The real estate total market cap would shrink because people would move from real estate back into that global currency, and this would not only happen in real estate but a number of, kind of store of value type asset classes where people today find safety to get out of cash and preserve wealth, but that may not be true in the future.

Pomp: Precisely. And I think that this really, the global total [inaudible] market for monetary instruments is a zero sum game. For bitcoin to win, other things have to lose.

Murad: Other currencies or other asset classes, or both?

Pomp: Both.

Murad: Both. And that is part of the reason I believe that bitcoin, the single currency will be bigger than, in their “market cap” or in the amount of wealth that is stored inside it will be greater than not just any, but all of current Fiat currencies and monetary metals added together because I believe that bitcoin is such a good store value, that it will take more than 95% of the current market cap of Fiat currencies. It will take more than 75% of the current market cap of monetary metals, and then, and this is sort of the interesting part, I think because the current Fiat currencies are inflationary, a lot of the high net worth individuals and asset managers around the world use the stock market, use the fixed income markets, use the real estate markets as a store of value. That is part of the reason why, if you try to buy an apartment in Tokyo, London, or New York, the prices are insane, and this is because both American high net worth individuals and foreign high net worth individuals use these sort of prime city luxury apartments as one of their stores of value. And I believe that sort of because the Fiat currencies are constantly diluted, at the same time this has caused an artificial sort of increase in the value of other asset classes and other financial instruments as people are hunting for yield.

Murad: The aggressive sort of quantitative easing and the aggressive sort of unorthodox negative interest rate monetary policies of some central banks says the financial crisis have exacerbated this effect even further and if you look at the inequality and the Gini coefficient it has increased sharply since 2008, in the last ten years even more.

Murad: One of the reasons for that, out of several, I mean of course it’s a very multi varied topic but one of the reasons because the working class and the lower classes, they mostly store their wealth in cash. Most of them live pay to paycheck and whatever savings they have, they do keep it in cash.This for simplicity’s sake.

Murad: Now the asset owners are those who own real estate, stocks, bonds, et cetera, and a lot of the wealth has flown there, and a lot of people although essentially the people who’ve benefited the most from this grand wealth effect experiment are people who are holding these assets. Much of the time it is the central banks themselves who are indiscriminate and price insensitive buyers of these financial instruments.

Pomp: So this is imporqtant because there’s a thought process that inflation is merely the act of stealing wealth from the poor and enriching the elite and wealthy.

Murad: Right.

Pomp: And, so what that means is, if you live paycheck to paycheck, and you leave a high percentage of your net worth in cash, then every year, you’re losing value, or you’re losing purchasing power. But if you actually have other assets, and a lot of them, inflation continues to drive the price of those assets up and therefore, those that own non-cash assets actually benefit drastically from inflation and are incentivized to keep the party going.

Murad: Right.

Pomp: And so, if you switch to a deflationary model, actually the people with the preference to have a high percentage of their net worth in the currency will benefit drastically and those in non-cash assets will actually not benefit in this scenario.

Murad: For sure. And I like to describe bitcoin and sort of the entire phenomena as a grand wealth transfer event and I believe that it will be arguably the single biggest wealth transfer event in human history. It will be a wealth transfer from the old to the young, from the tech savvy to the more conservative, from the open minded to the more closed minded. And of course from the people who will be holding these crypto assets, most of all bitcoin, and the losing side in this case, will be the people holding Fiat currencies, gold, et cetera.

Pomp: Absolutely. So, let’s say that everything you’ve described is true, right? And you just laid out the blue print for how this is gonna play out over the next, decade, 2, 3, 4 decades, right? How big is the opportunity? Right? What is the market cap of bitcoin 10 or 20 years from now?

Murad: So, before I answer that question I’ll say that as bitcoin, let’s say in six to eight years from now, as it- it’s a bit bigger, much more volume, much more Lindy effect, much more trust, much more credibility, et cetera; much more mainstream. People will simply compare two things and bitcoin, will be in a free market battle against Fiat currencies and gold simultaneously, and even other things when you just isolate the store value component as we have discussed.

Murad: People will simply say, Okay, this thing is expanding at 6% per year in its supply, and this thing is expanding at 1% per year in its supply. Which one should I pick as a store value?

Murad: And that’s why to me, sort of this feed back loop is inevitable. It would be so difficult to stop-

Pomp: The math becomes undeniable.

Murad: Really, if you extrapolate this phenomena and extrapolate this sort of financial change, bitcoin will be a black hole that will absorb a tremendous amount of value. I believe, the total addressable market is somewhere between 100 and 200 trillion. I’d like to say it will be 160 trillion, so if bitcoin, and that is if we go off of the $10 million dollars per bitcoin price, in today’s terms without even counting the inevitable hyperinflation of Fiat currencies. And, so this is my reasoning -

Pomp: So, you think that a single bitcoin will be worth $10 million dollars?

Murad: In today’s money,

Pomp: mm-hmm (affirmative).

Murad: Yes, I do.

Pomp: Which would give us a market capital of what? Like a hundred and …

Murad: 160 trillion. Right now the current market cap of bitcoin is 110 billion. I believe when this bare market is done, give or take, will bottom somewhere around 80 billion, and so, that’s a 2,000 x that is still possible between right now and what is probably our death, and I think there is still a tremendous opportunity here. And I think high net worth individuals are more edgy, open-minded, tech savvy institutions, and eventually, government institutions will push this to the extreme.

Pomp: These are big numbers you’re talking and you realize that very few people in the world believe what you believe right now.

Murad: I realize that but, if you spend months and months studying this, it sort of becomes self-fulfilling prophecy to you. I’m very confident bitcoin will be bigger than the U.S. dollar and potentially even bigger than all of them combined. Because, there’s an interesting table that Vijay Boyapati has made and he says that crypto currencies, or bitcoin in particular: are harder to tax, harder to seize, easier to transfer, harder to steal, cheaper, easier, faster to send around the world. They’re borderless, they are uber competitive, they’re highly deflationary, et cetera and there’s dozens and dozens of reasons. And all of these combined, I believe, will make bitcoin incredibly big. Similar to what the gold standard was in the late 19th century but, given the fact that the economy is much bigger today and given the fact that it is digital and much more fluid, I believe it will be far, far greater than even that, and yeah, these are my thoughts.

Pomp: Absolutely. So, let’s talk about this idea of hyperinflation in the Fiat currency experience. Our experiment, right? So, 1971, was it, Richard Nixon takes us off the gold standard. The gold standard being the thought process that for every paper currency, every U.S. dollar, you could go and redeem the equivalent in gold, where it was being held in the central banks.

Pomp: At the time, what a lot of people don’t realize is, Richard Nixon said, We’re gonna go back to the gold standard. It was a temporary decision, right? Or, at least that’s how this was presented.

Pomp: And so, we obviously didn’t, and since 1971, what we have seen across the world, at different times and different locations is Fiat currencies start to fail. And these Fiat currencies, where they appear to be failing most, is in regions or countries where a government or the overseeing organization loses discipline, right? And the thought process is, in the developing world, we have much more discipline, right? There’s checks and balances and the Fed can’t press the print button too much, right, because there’s those checks and balances. But let’s say in a country where a dictator comes in to power, there’s less checks and balances. There’s a higher probability that they will lose discipline. They can hit the print button too much and you get into hyperinflation, devaluing other currency, and we know how that ends, right?

Pomp: Let’s talk about that hyperinflation period. Why are we seeing this in the countries we’re seeing it today? And do you think that this is gonna happen to every Fiat currency in the world? Why or why not?

Murad: I believe it’s a combination of incompetence as well as outright grasping for power. And, I do believe that this will eventually happen to all Fiat currencies around the world, but it will happen stage by stage. Of course, the second and the third world currencies will be the first to collapse, and the more established Euro, then Dollar. The financial leak from there towards bitcoin will be a bit more gradual. It will be more like an “S” curve and then it will reach a point where the money will just rapidly flow into bitcoin, because as I’ve described, people will realize that this money is harder than the other one. The other money, there’s people behind it and these people can do whatever they want. However, this is governed by such a strong, unbreakable algorithm and the community of people strengthening it, that I believe the credibility, and the faith, and the trust in bitcoin relative to Fiat currencies will keep growing. And as I’ve said in the beginning, currencies and the cognitive monetary premium that’s placed atop them is, first and foremost, it’s about trust and it’s about credibility.

Murad: The Swiss franc, for example, people like it because the Swiss don’t print too much. They have 300 years of credibility. They have temperance, they have discipline, as you’ve described. And it’s important,[Savty Namoose 00:45:09], in his work, he often says that hyperinflation has never occurred with metals, because there are natural limits to creation and there are natural free market balances there.

Murad: But, in 99% of cases, it has occurred in Fiat currencies because they are the behest of humans, and [Jorg Gudahusman 00:45:30], who’s arguably the most prominent Austrian communist today in the world. He says that, this money supply inflation has traditionally been the means of financing war. But, as of late, it’s not just used in wartime, it’s being used perpetually. And I’d like to say that, this inflation, it essentially shifts some activity from longterm projects and longterm capital goods production, to more short-term consumption.

Murad: I’m a believer that it is not the consumption that really drives the sustainable longterm growth of the economy. The kind that actually increases our quality of life, but rather us engaging in longterm projects, longterm capital goods production. Longterm production of: tools, instruments, research, innovation, and things like that. And really, the best things that have ever been created, they were 10, 20, 30 years efforts. Rather than us going and buying something useless, right?

Murad: And so, I believe that if we have a currency that’s more deflationary, people will be incentivized, instead of going out there and as you’ve described, investing in something else, or even buying a pack of crisps or just new shoes, or really, something that’s really useless right now. Instead, people will be, just due to the deflation and nature of it, it will be seen and felt as more precious. People will be more incentivized to: A) save and B) invest in longterm projects and longterm craft.

Pomp: Absolutely. And so I think with this hyperinflation, right? What we’re seeing for maybe the first time or one of the first times. Humans have a choice. Do I trust the machines, the software code, the math, right, and the algorithms? Or do I trust the humans? And, as more people elect to take Fiat currency and convert it to bitcoin, they are electing to trust the machines over the humans, right? And I’ve described this before as, the machines are unbiased, they’re unemotional, they’re disciplined, and they do what they’re supposed to do.

Pomp: The humans are undisciplined and greedy. And, when you lay it out that way, I think this is gonna happen in a lot of different facets of our life, right. You already see some of this with the advent of Uber and that type of stuff. But, with money specifically, the problems arise from human lack of discipline, and therefore, as more people trust the machines, they are rewarded because money acts how money’s supposed to act. Agree or disagree?

Murad: Definitely. I definitely think we’ll see a similar phenomenon in different sort of facets of technology and capitalism as a whole. And, as I’ve sort of described in the beginning, bitcoin- I don’t wanna use the word entirely trustless, because there are still certain things you can trust- but they are far, far more distributed and in my opinion, harder to change than centralized solutions. And this allows commerce to happen on a global scale, and this allows you to trust this payment rail like never before.

Murad: Bitcoin is extremely secure and it allows us to- I believe another thing that it will do to finance is, it will eliminate the Forex industry completely because if we only have one global currency instead of these dozens of currencies that we have today, hundreds of currencies, then the foreign exchange market will cease to exist because we will just have one currency.

Murad: Hans-Hermann Hoppe describes the current state of affairs and the state of Fiat currencies as a mild state of barter. Whenever one company or one corporation in one country has to do business with another they first have to exchange their currency to another country’s currency, then need to change that for goods, and then need to go back and forth and every time. So it’s kind of like barter, in the sense that you first need to make these extra transactions. But with bitcoin, like several layers of those transactions will just get abstracted away. And I believe that this will expand the economy, and accelerate capitalism and free markets, and borderless commerce even more.

Pomp: Absolutely. So, all right. Here’s what I wanna do. I wanna play devil’s advocate, right? I wanna take the seat of the bitcoin detractors, the people who don’t believe or think that your view of the world is wrong, right? And so, you- I’m gonna throw some ideas out at you and some detraction and you kind of respond as you see fit.

Pomp: Can bitcoin go to zero?

Murad: I believe that theoretically it could. But with every ten minutes that it successfully adds another block to the blockchain and doesn’t fail, the probability of that is reduced every ten minutes or every single day.

Pomp: Okay. So there’s a non zero chance it could happen, but the addition of time makes it less likely.

Murad: Precisely. And this is precisely where our constant discussion of Lindy effect comes from. The longer a piece of technology like this exists, the more likely it is to persist even more in the future. And the longer it exists, it also gives trust to the people, because say you discovered bitcoin in 2011, a lot of us thought oh, it’s a joke. It’s whatever. We’ve seen that before right? Now you read again in 2013, you’re like oh, this is still not dead? In 2015, you’re like oh, this is still here?

Murad: Now in 2025 people are going to be oh, this thing is here for almost 20 years. This is here to stay. You know and oh, like, they still, in 20 years haven’t printed any additional bitcoin beyond 21 million, this is really, really strong, you know? Bitcoin, yeah, it’s not just the trust in the security, not just the trust in the decentralization. But also the trust in the currency as money is also growing, which is very, very important. And, like I’ve said, trust in market cap over the long term is really the same thing.

Pomp: Absolutely. If it did fail, if it did go to zero. What’s the most likely reason why?

Murad: Catastrophic bugs probably. It is software. And software, it’s an increasingly complex software. So many thousands of lines of code. So many things, so many moving parts at the same time. And really, unfortunately, very few people of that caliber, and that are simultaneously working on these kinds of technologies right now. And so, the main 10 to 15 contributors to the bitcoin project are people. Sometimes, once every four, five years- they do make mistakes as we’ve seen recently with the bug. Luckily it was fixed pretty quickly.

Murad: There will be bugs. I mean, as I’ve said, this is a multi decade project. This is a 50–60 year project. This is software we’re likely to see, 3, 4, 5 bugs more before this sort of thing takes over. But this is inevitable and as I like to think, it’s better we take care of these things right now, when it’s only a couple hundred billion, rather than, when it’s a $ 20 trillion dollar system with the world’s economy running on it.

Pomp: Of course. Okay. Bitcoin is too volatile to be a store value.

Murad: So, to me, this is the easiest piece of myth or misconception to parry, because you actually want bitcoin to be volatile. Bitcoin cannot go from $1 to being the global digital store value standard global currency without volatility. In fact, you desperately want bitcoin to be volatile, preferably upwards of course, but you do want it to be volatile especially verse a Fiat. When you use the term volatile you need to understand, volatile verses [vaught] and typically we mean, verses the U.S. dollar, right.

Murad: I think that bitcoin’s volatility is great. If you zoom out and look over the last years, especially on a log chart, this volatility has been predominantly upwards and this volatility is so good, it shows people that bitcoin’s strength verses Fiat currencies is strengthening. And Fiat currencies per unit of bitcoin are weakening and this volatility isn’t just inevitable, it’s desirable.

Murad: By the time bitcoin completely takes over and in the long term equilibrium. But a more practical answer is that, as bitcoin’s trader volume grows, as bitcoin’s liquidity gets deeper, as bitcoin’s order book become more abundant, as more and more people cognitively recognize it, as there are more hodlers, as there are more users, as there’s more infrastructure, as there’s greater security. And most importantly as there’s a bigger market cap, bitcoin’s volatility will decrease.

Pomp: So what this tells me is that bitcoin is a net positive volatile asset, right? There’s violent volatility, but over a long period of time, it continues to increase in value and therefore the only way to go from worthless to worth a lot, you have to have volatility, and that’s a good thing.

Murad: Precisely. I mean you can’t have all these trillions of dollars of wealth stored in one asset, flow into another asset without volatility being there on the way. And money is really a technology. It’s a financial technology that enables us to do a lot of things. And bitcoin, to me, is a far superior technology than any monetary metal or any state currency. And so people will- the world- because it is a superior technology, it will win in the free market and the world will adopt this better technology, and this better technology will expand everything

Pomp: Okay. Bitcoin can’t scale. The transactions, the blockchain can’t handle the number of transactions needed for a global adoption.

Murad: So, a lot of people make a very big mistake. They think of a bitcoin as exclusively a payment rail, where it’s only like one of the six things it does. And they compare it to say, VISA or PayPal. Now, bitcoin, the main blockchain is sort of the layer one of the whole system. You have to think of VISA as, it’s like a layer three or a layer four of the current status quo financial system. Which is like the dollar, then you have the central banks, then you have the commercial banks, then you have rails, and then you have VISA or PayPal, that all sit on top of ts thing.

Murad: And so, we will- bitcoin is also as you might know, developing layer two, layer three solutions already. Ad so those are the ones that you will eventually need to compare against VISA and PayPal.

Murad: The base layer isn’t so much as a payments rail for daily transactions when you’re buying crisps or a cup of coffee, but it’s a settlement layer for very big, and very serious transactions that require a lot of security. Eventually, I believe the base layer will be much more expensive than it is today, but rightfully so because most of the security will come from fees. And it will be large institutions and large business transactions, large commercial transactions that will predominantly and ultimately, eventually be settled on layer one.

Murad: But I believe that trillions of transactions will be occurring on layer two if not higher. As well as possibly on the sidechains, drivetrains et cetera. But my argument, and Nick Carter has put it very, very well. He said, These are- the layer one is not partials, it’s containerships. So, they will eventually be used as settlement for very, very big transactions. And if you compare it with gold, for example, today. Do you know how much it costs- and gold right now is a means of final settlement between central banks, which they do once every several years.

Murad: When moving gold from Europe to America or vice-versa, today, takes tens of millions of dollars and months, if not years in time. Bitcoin, even if you’re on the math at the very equilibrium, the price to settle, like several billions of dollars on layer one of bitcoin will still be [inaudible] cheaper than you can do with gold today. Which is still a huge, huge advantage and all of those daily, small, minuscule transactions that doesn’t require hypersecurity and hyperdecentralization, will be done on much cheaper, much faster, layer two, layer three solutions, which sacrifice some security for greater speed, greater availability, et cetera.

Pomp: I think that’s fair, that bitcoin is not being compared, not to the U.S. dollar, which it is superior to in a lot of ways, right. But, it is being compared to payment rails that aren’t accurate comparisons.

Murad: Precisely, and a lot of people have pointed out very, very well. [Savty Namoos 00:58:46], I believe, was the first one who pointed this out. Bitcoin isn’t competing against [inaudible]. It’s not competing against PayPal or VISA. Bitcoin is competing against central banks or even more precisely, it’s competing against the Bank of International Settlements as a major settlement network for large transactions as well as against central banks for currency issuance. Those are really the two things that, where it has a competitive advantage, and those are the things you need to be comparing and not the small value transactions.

Pomp: Absolutely. Okay, bitcoin is not accepted anywhere.

Murad: So, I believe that people and this is sort of what a lot of people behind bitcoin cash and nano ripple, et cetera. Lytecoin, even, they don’t understand. I believe that the monetary progression- and there’s a lot of debate about this, but this is sort of my strong belief- is that money has to move. A new pre money, a new synthetic commodity that has properties of becoming money. It needs to got through this evolutionary process and if you go on my Twitter page, it’s pinned right on the top. It sort of shows the step by step progression and I believe- and this is historical, what has happened to gold and silver as well- and I believe it’s what’s going to happen to bitcoin.

Murad: First, it needs to be a collectable. Then, it needs to become a store value. Then, it’s going to be a medium of exchange and finally it’s going to be unit of account. So, this sort of merchant adoption, to me , that’s more for later. Right now, we have to develop bitcoin in the criteria that make it as the best store value. I believe that bitcoin right now is still somewhere between the collectable and the store value phases. But every year it’s moving ever closer to the store value stage.

Murad: Early on, a lot of people argued that it was a collectable for cypherpunks, and nerds anarchists, libertarians, et cetera. And right now, as we’ve discussed, as market cap is getting bigger, as liquidity is getting bigger, as the comparisons to gold are becoming ever more obvious, as the market cap increases a bit more, as custody solutions improve, it will be seen more and more as a store value.

Murad: Now, as it grows, as we’ve already concluded, volatility decreases. It is my strong belief that prefer their day to day currency, i.e. their medium of exchange to be relatively priced stable in terms of purchasing power. And that’s why I believe the goal isn’t to spend bitcoin right now, the goal is to make bitcoin as good of a store value. As bitcoin grows, it’s disincentive to spend also decrease. Right now, I’m not spending my bitcoin. Frankly, I’m not going to be spending my bitcoin for another 15 years kor more. I’m not going to spend my bitcoin until it’s at least 15–20 trillion dollars, in today’s terms.

Murad: As bitcoin gets bigger, say its reached 20 trillion, then the amount of gains in percentage terms that you can have from there on until the ultimate future become less. There’s no longer going to be the thousand x still possible today. The maximum from then on is going to be like, what, five, six x and at that point the disincentive to spend that are very, very present today are no longer there. So, you know- everybody knows the pizza story, where in 2011, somebody spent 40,000 bitcoins on a couple of pizzas, and today that could’ve been like, half a billion dollars or something, right. And so, a lot of people now know that they don’t want to be the pizza guy, right. And so right now the key is to optimize bitcoin for store value. And as more liquidity pours into the system, we will optimize bitcoin for a medium of exchange after, I believe, the store value functionality has been more or less saturated.

Murad: Of course in monetary academic terms the medium of exchange and the store value functions of money are an execrable length, but right now, I believe, we need to optimize for the latter and then the former will come with it.

Pomp: Today, bitcoin is 21 million, total supply. Right? That is what is written into the code. Detractors would argue that, that can change through two different ways. One is, if the miners all agreed to allow an increase in the total supply. Or, two is, a hard fork, like a bitcoin cash, that would incorporate a different supply schedule, would then have bitcoin not be 21 million fixed supply. How do you respond to either one of those?

Murad: Yeah, so … the latter is easy to respond. It’s like saying des the printing of Zimbabwe dollar hurt the U.S. dollar? Not really. In fact, I think over the long term, this kind of currency competition is impossible. If bitcoin is really not government money, that we’re saying, this is the only one that you’re allowed to use, and that it actually needs to win in the free market. And bitcoin still has to win 20 other contenders before- and as it wins these contenders, the trust in those 21 million becomes evermore and people realize that these 21 million are much more precious than all the other stuff.

Murad: And bitcoin is far, far more unique than any other cryptocurrency in this sense. So, once again, bitcoin cash printing their own 21 million, is like if Zimbabwe or Venezuela prints their currency, it doesn’t weaken the U.S. dollar.

Murad: If anything, it makes it stronger because you have wealth into the quality one and over the long term, I actually think these alt coins are good for bitcoin because they’re showing that this one is far, far stronger and over longer term periods, the way monetary instruments work is that you want [inaudible] the risk your wealth as much as possible and your incentivized to instead of being to contrarian, eventually you want to bet on what’s the most converging asset.

Murad: And people will eventually- the one that’s less liquid, is riskier to store your wealth in and eventually, I believe that, not just with other financial assets, before it has to fight with gold and Fiat, it will first have to predominantly defeat other cryptocurrencies.

Murad: And to answer your first question. Miners aren’t in control of bitcoin.

Pomp: Okay

Murad: Full nodes, i.e. users, are in control of bitcoin and the user activated softfork is something that has essentially proved that. More than 93% of miners wanted to increase the blocksides in sort of their way. More than 85% of the company’s exchanges wallet providers were on their side as well. Essentially all of the- even many of the wealthiest bit coiners were on their side. However, so, the users, and those people running full nodes, they decide what kind of code to run and as well as what kind transactions to approve. Miners cannot make these changes to the code without consensus and at the end of the day, bitcoin is this impenetrable fortress of full nodes, which really collectively as we’ve previously discussed in a p-to-p network fashion control the network and I strongly recommend StopAndDecrypt’s article …

Murad: … The network and I strongly recommend stopping decrypts article titled Bitcoin is an impenetrable fortress of, for more nuanced on this topic.

Pomp: Awesome. All right. Let’s switch to the creation of bitcoin. Right. One of the things that bitcoin is able to point to that most other cryptocurrencies and, and even Fiat currencies cannot, is that the creator of the system is unknown, right? So anonymous, anonymous, et cetera, we don’t know if it was a man, a woman, a group, and there is folklore and myth around who this may be. Who do you think it is? Should we spend our time trying to figure out who it is? Is it important? And if we do figure out he, she, they is Satoshi, is that good or bad for bitcoin?

Murad: I have certain suspicions, but I’m not going to say any names out loud precisely because nobody knowing who that is for sure is what makes bitcoin so strong. As a bitcoin evangelist, I am incentivized in this pseudonyms myth and pseudonyms strengths to come to continue going. Frankly, I don’t think that the search for who the bitcoin creator is, is it productive activity and the fact that it is still unknown and it is still nearly a thing of theories is once again, one of the dozen things that makes bitcoin far stronger than 99% of other cryptocurrencies.

Pomp: Absolutely. Because you won’t say names, I think that’s completely fair. Will you at least tip your hand and whether you think it is an individual or a group?

Murad: I think it is one person.

Pomp: One person. All right. Well, at some point somebody is going to get that out of you.

Murad: Sure, but I mean there are sort of six or seven theories on this topic. Frankly it really doesn’t matter. Even if we found out who it is, it doesn’t matter. It wouldn’t even damage bitcoin at that point. I mean it’s good right now that we don’t have any quote unquote heads of the dragon to cut and that note, there’s no single party in control of it as well as the myth is a nice sort of cherry on the cake. But-

Pomp: The story is almost just as important as the technology.

Murad: For sure because I mean, you can have an emergence of this neo money phenomenon without just like religious, like wave the accompanying it, right, but it doesn’t matter. The work that has been done on bitcoin since 2010 is so immense, and now there are so many contributing individuals, contributing coders, contributing companies that it wouldn’t even matter. Bitcoin is far bigger than Satoshi right now.

Pomp: Absolutely. All right, we’re going to read quick message from the sponsors and then that will be right back. All right, so what I want to talk about now, I had Travis calling on, right? Travis previously was at Steve Cohen shop. Right now he’s got a crypto fund. One of the things that we talked about was this idea of musical chairs in the institutional world. There’s a fixed supply of bitcoin 21 million and right now the music is playing and everyone is walking or jogging around the chairs and at some point the music will stop and people will have to grab a chair, they’ll begin to sit down. One of the ideas that Travis presented was this idea that some institutions aren’t going to wait for the music to stop.

Pomp: They’re going to just start sitting down. He recently tweeted and said, “You know look, I talked about musical chairs, Yale came out and it’s now public that they’ve invested in two separate crypto funds.” Travis made the point that Yale just sat down. Yale just grabbed their seat. The music hasn’t stopped, but Yale sat down and said, “We’re going to make sure we have a seat at the table.” How do you think institutions, central banks, world leaders et cetera, should be thinking about bitcoin, thinking about how to diversify assets into bitcoin and possibly even fearing bitcoin? What do you think that kind of rational thought process should be?

Murad: David Swensen, who is the head of the Yale and diamond company, has been the trend setter in the endowment space as well as the large asset sort of allocation space for the last 20 years.

Pomp: Legend, absolute legend.

Murad: Right. Now that he has invested in 254 I believe, I strongly believe that we will see other ivy league syndicates, other ivy league endowment companies as well as big asset managers and even hedge funds in general start dabbling in the space.

Pomp: It’s important to call out. They invested in funds that aren’t just bitcoin, but it’s not like they just went and bought bitcoin and put it in custody account.

Murad: Yes.

Pomp: They invested in funds that from my understanding, a majority will go into liquid kind of late stage opportunities like Bitcoin, Ethereum, et cetera, but some portion of it will still go into ICOs, venture capital equity investments, et cetera. It’s kind of a broader basket than just bitcoin but bitcoin, Ethereum, these liquid Cryptos or a big percentage of the allocation. Obviously if they had just bought bitcoin and bitcoin alone and just put it in their own custody account, that would be an even bigger deal but this is still pRetty big deal. How do people respond other than just backing funds? If you’re a central bank right now, what do you do?

Murad: The two best things to do is to either invest in bitcoin directly or to invest in a GP of one of the top five best funds. The latter, given the superiority of the fund over others, might be the single best decision. Then the third best is to invest in the LP of the best funds of course. Those three are the best opportunities. I don’t quite agree with the portfolio construction without naming any names of the … I don’t quite personally agree with the portfolio construction of the two funds that are relevant to the story here. I believe that a mildly leveraged play on bitcoin will have a better sharp ratio then dabbling and altcoins.

Murad: I think it is … I mean I will personally be having 10 to 15% of my portfolio in two or three premium altcoins as well. But really my heart predominantly belongs to bitcoin and I believe that at this point in time from a technological perspective, it is fiduciary irresponsible not to have at least 60% of your cryptocurrency portfolio in bitcoin. My own fund will be engaged in a more active management, but the sort of the longterm portion of our portfolio will be prominently bitcoin or long leverage place on it. Here’s the thing, a lot of people perhaps rightfully believe that the sort of altcoin a game, so to speak, in this blockchain project game will still go on for two or three more cycles and that might be true. Given that, that is true, the two funds that we’re discussing, they have tremendous pedigree and tremendous sort of networks that they can tap into-

Pomp: They have the names and they’ve got their track records.

Murad: They also can’t really justify putting three quarters of their portfolio into bitcoin because then essentially many, if not most of their LPs will be able to just do the same themselves. They need to take advantage of sort of the opportunities that they have, the tremendous deep discounts on future altcoins and the future ICO projects that they will receive undoubtedly. Perhaps even they might, some of these things might outperform bitcoin in the near term and thus if they sort of changed their direction at a precise enough time, they might even make more bitcoin for the investors that way. I actually think that something like this is a strategy.

Murad: A lot of sort of similar people that I’ve talked to, they believe that when all is said and done, there will be six or seven currencies. I think that’s nonsense because if you study monetary history and given sort of the globalized increasingly fluid increasingly interconnected at interoperable nature of these technologies and the world at large, I believe, I used to think it was winner take most as well. I used to think it would be like 70/264 a like in a Pareto distribution type way, but I increasingly believe that it will rather be winner take all rather than winner take most, and I would also say too many of these investors that you have to, you absolutely have to think of these crypto assets as money first and software second.

Murad: A lot of people who come from the entrepreneurial VC or the technology world day, they think about it the other way around and I think that is going to lead to a lot of losses. It’s going to lead to a lot of losses and a lot of events, sort of the premium big hedge funds will not perform as well as those who managed to position themselves in accordance to more correct monetary theories.

Pomp: Yeah. Look, I’ll even take it a step further. In most cases you have more extreme views than I do, but in this case I may have more than you. In that, if you’re an institution today and you have zero exposure to the crypto currency asset class or market, you’re violating your fiduciary duty given that it was the best performing asset over the last decade. It has very unique characteristics when it comes to lower levels of correlation, upside the per unit of risk that you take by allocating capital here. Those institutions that are on zero percent exposure have to do what we call get off zero.

Pomp: Each portfolio is different, so some it’s 10 basis points, 50, 75, 200, 500, whatever the basis point number is, it’s all about what their goals are, what their current allocations are, all of that, but zero is the wrong number. That’s much easier, I think for longterm macro investors who have experience and even expertise in the alternative space, so Dave Swensen is a perfect example at Yale, but I think that this iS actually true at the central bank level, at the individual level, et cetera. Let’s go into a hypothetical world where the US central bank is playing that game of musical chairs and they sit down and it comes out that the US central bank bought five, 10% of the network on the open market. What happens to bitcoin, the price and kind of the macro economic world, if that was to come to light?

Murad: Oh, well then buying five percent would be impossible.

Pomp: Why?

Murad: Because people need to realize that I’m more than 10 million of bitcoin, I believe somewhere between 10 to 30 million are held and not like actively trading are actively circulating. Only three or four million are being actively traded. As bitcoin’s price will be increasing, I believe that people will be realizing that there’s really a financial revolution going here and this is something to be kept for a long time. Relative to the amounts of capital that are sloshing around in capital markets around the world, bitcoin is really so small still. It’s really liquid really. As they even tried to buy half a percent, like that very act will raise the price so much in a vertical fashion that just buying the next half a percent will be eight times more expensive and like this continuous compounding in an exponential fashion.

Murad: It will need to be done in an extremely stealthy, in an extremely clever, in an extremely patient manner over months, over years maybe even and maybe even then they’ll only be able to get to two and a half percent ballpark. Here’s what I like to say. Government’s buying bitcoin, really, I think they will be buying bitcoin last. There’s two things I want to say here. First of all, governments buying bitcoin will essentially be a putting the final nail in the coffin of reducing their own size by half, because bitcoin is unprintable, which you have discussed how it was going to destroy fiat currencies and bitcoin is increasingly on taxable. I mean the privacy technologies around these technologies, as you know, we’ll also keep improving rapidly. This is inevitable.

Murad: I believe that, government’s buying bitcoin will probably be the latest group of people to buy them and that will be the final ultimate credibility because essentially the biggest competitor is capitulating. Something like that will not just be a rumor or something like that, given bitcoins the liquidity will be extremely difficult to hide. I like to joke that once a and some asian central bank over, or a sovereign wealth fund announces that they put in two percent of their assets into the portfolio of blue chip cryptocurrencies, it’s game over. I don’t think that central banks will, are really the people by the time they will try to be accumulating any of them, bitcoin will already be huge.

Murad: I actually believe, and this is one of the things that my views differ from many people in the space actually. I actually think that bitcoins are a cent will be driven predominantly by the wealthy. The three people, the three sort of the three initials of investors that will sort of make bitcoin’s price skyrocket over the coming decades, will be open minded, ultra high net worth individuals. It will be a savvy funds and fund managers and it will be, I think politicians and dictators and sort of these fringe, third world, second world individuals who will need this currency perhaps more than anyone else.

Murad: I liKe to joke that, essentially the people and the institutions who bitcoin was designed to destroy will be precisely the people who will drive a bitcoin’s price and bitcoin’s success to the sky. Because if you think about it, the people who censor the most, need uncensorable currency the most. The people who sees the most, need unseasonable assets the most and of course the people who print the most neat unprintable currency the most. These people, every week you read about some fringe countries, wealthy individuals and government officials, bank accounts in Switzerland, in Luxembourg, in the Caribbean, being frozen in America, being blocked, transactions being censored.

Murad: This technology allows those very precise people to have unseasonable store value where they can essentially accumulate wealth with absolutely no one else in the world being able to take it away from them. For better or worse, this is how free market … instruments on free market technologies work. It will be of course, used for the good and the bad, but irregardless of these very people whose bitcoins, it’s fighting against ideologically will be the same people who will helping it financially.

Pomp: Absolutely. I attend to think that you are more right than wrong on that. Before we kind of go into some rapid fire questions, if an institutional CIO, a central bank authority, a government leader, is listening to this, give me your 60 second pitch to them why they should buy bitcoin.

Murad: Bitcoin is the soundest hardest currency that has ever been invented in the history of human civilization. This is disinflation is second to none. It’s monetary policies known years in advance and it is becoming increasingly credible. It will also be increasingly a threat to the very currencies that you guys control. I think getting in before most other central banks and most other sovereign wealth funds and most other rich people will, in the next decade will prove to be one of the smartest investment decisions in the course of human history. If you are able … the countries that are able to stealthily accumulate bitcoin and adopt bitcoin more than other currencies, will thrive in the age of hyper organization while the other countries that haven’t done so will suffer tremendously.

Pomp: Long bitcoin, short the bankers and I think we are in agreement there. All right, so you’ve answered some of these already, but what do you think is your most controversial thought? Is it the opportunity that exists for bitcoin stuff?

Murad: I Mean, the opportunity for bitcoin is better than ever. I would say the risk reward … so the award is technically low in and of itself is lower than it was in like 2013 or whatever, but the risks are also massively reduced. We already have 200 accompany building for this thing, building on the side of this thing, building on top of this thing. The number of engineers involved are ever greater. If you watch this slides and the lectures from a scaling bitcoin Tokyo that’s happening over the past couple of days, the amount of just genius interventions that are being potentially added to bitcoin and the improvements added to bitcoin are incredible.

Murad: The liquidity today and the volumes today and the marketability of the brand today is far greater than back then. Risk reward might even be higher I would say. The opportunity is still there. It’s at least a couple of hundred x and in the very, very long run more than a thousand x. There’s still a lot of wealth to be created here, doing a mildly leveraged play via various instruments or derivatives is a way to boost returns even further. I believe that the opportunities are, is definitely here and other controversial opinion is what I’ve described is that bitcoin isn’t necessarily sort of going to be adopted bottom up, but rather, and it’s not necessarily going to be adopted pop down either, but it will really be the wealthy who will be adopting it. Unfortunately due to the nature of the world, those are the people with the money and it’s the people with capital who are going to be sort of boosting the market capitalizations of these assets.

Pomp: Absolutely. What’s the most important company in crypto right now?

Murad: Chaincode Labs.

Pomp: Why?

Murad: They have some of the most prolific developers and block stream as well. Of course.

Pomp: Got it. Those working on bitcoin?

Murad: Yes. John Newbery, Alex Marcos, Matt Corallo, they’re just on a whole nother level of genIus.

Pomp: Absolutely. All right. If you had a magic wand and you could wave it, what’s the one regulation that you would improve or change?

Murad: I would reduce taxes and I would prioritize a lot more things around the world.

Pomp: Interesting.

Murad: I believe that a free market capitalism and individual entrepreneurs are much more efficient at providing solutions and a much more efficient at making world Austrian economists call economic calculations. In very, very crude terms, a thousand clever, smart, talented entrepreneurs with a million dollars each, we’ll do a lot more both for themselves and the world. Then I’m just an emotion’s burka with no connection to that particular money will do with a billion dollars. I believe that a lot of the things that governments do around the world today, if you privatized or even partially privatized, those things that the world will be much more efficient because I’m essentially seven fiercely competitive companies will always achieve the results much better than one sort of bureaucratic, fat government institutions.

Pomp: I don’t think anyone is surprised that you believe that and I tend to, I tend to agree-

Murad: of course,

Pomp: The most fastest there. Okay, so let’s talk about something for two minutes, that’s non crypto related. So aliens, we just got to admit that they exist. Most people think of aliens as a human equivalent. They’re depicted that way and movies and saifai, et cetera, but nobody ever really talks about alien animals. Do we think that there are multiple species of aliens? And if so, do we think aliens have pets?

Murad: Well, if you make the assumption aliens exist, then it is likely that many different kinds of aliens exist. Just due to the vastness of space, statistically speaking, this vastness is so immense that if we do go off of the assumption that at least one other specie exists, it is likely that hundreds of others do as well. It is also likely that several species exist on sort of one planet or ecosystem flora, fauna, whatever together and I wouldn’t be surprised if those civilizations have animals as well. Yeah.

Pomp: Yeah. You think they have pets though? You think they take the animals and they make them their pets in like a domesticated?-

Murad: It is hard to say some of the alien species would have pets. I think probabilistically speaking that’s very likely. It really depends sort of on the culture and the order of that particular world.

Pomp: Yeah. I think that’s fair. All right. I end each one of these with allowing the guests asked me one question. What one question do you have for me?

Murad: I guess you’ve asked this question to me, but I would like to sort of hear your version as well. I know we’ve already previously talked about this, but I just sort of like to rehash these bullet points in my head as well. You personally and sort of on with your work with Morgan creek and other ventures, how do you go about pitching bitcoin and sort of this ecosystem at large to not individually that says, but the more conservative large asset allocators?

Pomp: Yeah. Look, I think that it’s custom given who we’re talking to. There’s kind of different things that we emphasize or deemphasized depending who we’re talking to. A lot of it is informed by who they are, what their current allocation is, what their goals are, et cetera, but there are some common threads through each conversation. One of them is this asset class has some of the highest yield opportunities per unit of risk across the entire world. Any asset, any asset class, any strategy, this is one of if not the highest potential yield per unit of risk. That’s one. Two is that the idea of scarcity around bitcoin specifically, is something that they have likely not thought deeply about, nor do they actually understand the gravity of the implications.

Pomp: It’s one thing to just understand, okay, if there’s a fixed supply, an increase in demand price should appreciate. It’s another thing to understand 21 million bitcoin exist and there are hundreds of trillions of dollars of wealth in the world that are going to be competing for those 21 million. Hundreds of trillions of dollars exist. If you manage 500 million, a billion, 10 billion, a hundred billion, you’re nobody. If you don’t have your seat at the table now, you may not get a seat later.

Pomp: I think that’s the second one. Then the third one is, we actually make economic argument looking at other asset classes. The opportunity cost, if you do not invest in cryptocurrencies, bitcoin, block chain, et cetera, what else is out there? What you find, depending on who you listen to, my partner Mark Hughes is very well versed in kind of the endowment model and it comes out of that world and he walks people through this idea that they yield that they target or goal on may not be available in other asset classes. If you look at stocks, bonds, currencies and commodities, and only four assets you can own.

Pomp: The ability to drive six and a half, seven, seven and a half, eight percent annualized yield, may not be there over the next decade. If that is true, that doesn’t necessarily mean you should take a hundred percent of your assets and go put it into bitcoin for example, but you should have exposure. Those three core components make up this kind of verbal campaign that we’re on, called Get off zero. It’s the idea that, if you sitting in a fiduciary seat and you have a zero exposure to the asset or the asset class, you’re wrong. There’s a qualitative argument, there’s a quantitative argument, we’re happy to discuss either one of them, but your wrong. Zero is the wrong number and you have to get off zero.

Pomp: Whether it’s 10 basis points, 50, 100, 500, that’s a customized conversation for who it is, what their goals are, what the current allocation, et cetera, but zero is the wrong answer. What we find is that specific argument of you have no skin in this game and this could be the most important game available really residents. I think that Yale jumping in very big deal. We’ve got some institutions that I think when people find out are going to be shocked and again, more people grabbing seats.

Pomp: I think what we’re going to see over the next, I put it at like 36 months, is a formal or just an inflow of capital from very, very sophisticated people that most of the financial world is not expecting. There’s a, I think it’s Bill Gates says, “We overestimate what we can accomplish in two years and we underestimate what we accomplish in 10 years.” I’m probably with you in that even the most hardcore bitcoin believers are actually drastically underestimating what we’re talking about here and what the potential is. If that is true, this is the most important piece of technology that the world seen.

Murad: Without a doubt and those are amazing points. To add to the discussion on yield, I would say one of my old bosses told me that making money for you guys will in general as an aggregate, as a demographic will be much harder than it was for our generation or the generation before that. As you might know in the 50s or 60s, you could have just a regular job and still be able to buy one house or even two houses, have a big family, et cetera. Today that’s impossible. The world not just America, but the world as a whole is becoming fiercely competitive. We are sort of, obviously not at the end of the esker, but we are sort of, it’s kind of sloping down. Innovations are harder to create, the technologies are more sophisticated to sort of incrementally push further and the amount of, I guess, ideas that are easy pickings are scarcer nowadays. I generally like obviously becoming wealthy takes a decade at least or more for anybody but I like to say semi jokingly that crypto might be the last easy way to rich in my generation.

Pomp: Look we obviously today have the richest man in the world over a hundred billion dollars of wealth, Ryan Jeff Bezos. It would not surprise me that the richest company in the world which is over a trillion today, is matched by the richest person in the world in the future to we’ll have a trillionaire and the odds of that person comes from the cryptocurrency world, in my opinion, is the highest probability out of any other industry. If that is true, the amount of millionaires centi millionaires, billionaires centi billionaires that will be created in this asset class will be unparalleled and anything else in history. I think that’s part of the excitement.

Murad: For sure in monetary terms within that particular asset, a bitcoin will actually increase inequality because the way it is, the distribution is improving with every cycle of course but if hyper bitcoin quantization of work to actually occur, the gini coefficient of bitcoin would probably be higher than any fee at currency today among the predominant ones. We would definitely see a couple of trillionaires and today terms, I think without a doubt.

Pomp: Absolutely. All right man. This is epic. I really, really appreciate the time. I hope that this is valuable to everybody and want to do this pretty regularly to check back in and see kind of how all this is progressing, so thank you.

Murad: For sure. Thanks for having me.

Pomp: Absolutely.

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You can find the recording here: Off The Chain Podcast: Anthony Pompliano and Murad Mahmudov

If you enjoyed this post, please “clap” 50X in the bottom left corner so it will be shared with more people. You can always tweet me your thoughts as well.

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Fortunately, we have the internet. There is a seemingly unlimited amount of information available at our finger tips. These sources of information range from professional media outlets to meme-filled subreddits — if you are interested in something, there are people somewhere willing to talk about it.

Unfortunately, there is also a lot of inaccurate information as well. Whether it is a company’s financial performance, the behind the scenes actions of a leadership team, or even quantifiable metrics surrounding the performance of a piece of technology. We all see numbers, unverified reports, and “inside information” flying around the internet.

My hypothesis is that a material percentage of the information we consume in crypto is “fake news.” Sometimes these inaccuracies are labeled as FUD (fear, uncertainty, doubt) and other times they rapidly spread as fact. In order to better understand the nuances of this phenomenon, I designed an experiment.

What would happen if I intentionally created a tweet that was inaccurate and presented it as fact?

It took me a few days to think of the proper tweet for an experiment like this. I wanted to make sure the inaccuracy (1) wasn’t harmful to anyone, (2) would be believable by majority of people, and (3) was related to something in crypto that people cared about. It was honestly harder to design than I originally thought.

Eventually I settled on a tweet describing the probability of winning the lottery vs owning Bitcoin.

The tweet is easy to read, related to recent news (MegaMillions lottery) and appeals to the emotion of cryptocurrency enthusiasts across the world. At the same time, the tweet includes inaccurate statistics and compares a game of luck to a purchase decision.

I had a feeling that this tweet would go viral. It was the perfect mixture of fact and fiction, mixed with bullish sentiment. To ensure maximum effect, I tweeted it on a Friday night around 10p EST (one of the highest engagement times on Twitter).

Within minutes of tweeting the experiment, the engagement and subsequent virality was obvious. Within the first 10 hours, I was able to reach 88,000 people with a tweet that was mathematically proven to be inaccurate.

The good news is that not everyone was fooled by the tweet. Numerous people called out the inaccurate math or the irrational comparison. At the same time, plenty of people were fooled — almost 400 people retweeted the information without catching the issues. The implications are quite scary when you think about it.

This brings me to the my point: Crypto has a high propensity for fake news. The concepts are complex, the information is often hard to corroborate, and most “inside information” is user-generated content on Twitter, Telegram, Reddit, etc.

We must remain vigilant. Decisions are being made by lawyers, regulators, law enforcement, and entrepreneurs based on the information they consume from the community. If we aren’t careful, we may end up shooting ourselves in the foot.

Remember the golden rule of crypto: Don’t trust, verify.

SIDE NOTE: This was a one-time experiment. I don’t plan to make this a regular thing so don’t worry about future tweets being part of an experiment :) I have also deleted the original tweet to ensure the inaccuracies don’t continue to spread.

Some of the crypto-focused information sources I have found to be most accurate are CoinDesk, The Block, and Messari. If you’re interested in staying on top of the industry, while avoiding the fake news, you should give them a follow.

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If you enjoyed this post, please “clap” 50X in the bottom left corner so it will be shared with more people. You can always tweet me your thoughts as well.

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Anthony Pompliano: All right, guys. We’re here with Michael. This is going to be a great episode. Michael, thank you so much for coming.

Michael Sonnenshein: Thanks for having me.

Pomp: Absolutely. Let’s just start with your background because you’ve been in this space for quite a while. I think people probably don’t know what you did pre-crypto.

Michael: Sure. So I started out as a banker. Spent time at Bank of America, Barclays, and most recently JP Morgan. And I was looking for a challenge. I wasn’t even necessarily looking for crypto. My seat at JP Morgan, I remember sitting there looking at CNBC at the corner of my office and seeing the Bitcoin price rallying 20% or 30% or 40% and CNBC freaking out about it. But at that point, we’re talking about late 2013, no one was really asking about crypto investing or whether there was even jobs in crypto.

Michael: And I was getting ready to leave JP Morgan to work for a hedge fund and I had the fortunate opportunity to meet the founder and CEO of my company, Barry Silbert, who at the time was running Second Market. And Barry had started investing in digital currencies and digital currency businesses as early as probably about 2011 or 2012. He and Tim Draper, I think, were two of the first angels out there getting involved in the space. And at the time, Barry had already started a Bitcoin trading business through out broker/dealer at Second Market which has since become Genesis. And had started our first investment product, the Bitcoin Investment Trust, in 2013. And when I had the opportunity to meet Barry, it was a really funny story. His assistant said, “Hey Michael, did you know you went to the same university as Barry?” And I said no I didn’t. This is literally as I was walking in the room to meet him. And he and I just hit it off and he said, “Michael, come help me build something. You can always go work for a hedge fund but I promise you, take a chance and you won’t regret it.” And about five, almost five years later, I haven’t looked back once.

Pomp: Awesome. That’s so interesting how the connection between a university experience … Was there anything that you guys specifically bonded over from the time at Emory?

Michael: I think just having gone through the same undergraduate business program. Barry’s background was one of also being a banker. He spent time at Houlihan Lokey after undergrad and I think having that Wall Street background and that mentality certainly helps when you’re starting to run a regulated business the way that we do.

Pomp: Absolutely. I’ve got this thing I say, long Bitcoin, short the bankers. Right? It’s like you did that with your career.

Michael: Absolutely. Absolutely.

Pomp: Okay, so let’s talk a little bit about Second Market. When you get there, what’s going on? What is the split inside the company between crypto focus versus non-crypto focus. Just walk us through some of those early days as you got there.

Michael: Sure. So there was already quite a bit of a bifurcation at Second Market and two competing cultures. You had one side of the company that was very much working on the private company market space. They were focusing on liquidity events for private companies like Facebook and LinkedIn and things like that historically and were also helping to do capital raises and tenders.

Michael: And then you had a whole other part of the human capital at Second Market that had gotten into crypto. Barry had given our trading desk the mandate to go figure out how to buy and sell Bitcoin. And the folks at Genesis were super innovative. They mapped out who the big stakeholders were globally. This is way before the days of there being sophisticated order management systems and APIs into different exchanges and different wallet solutions. So they had already beefed up their operation. And then, there was a few people that had worked on launching the Bitcoin Investment Trust which was our first digital currency investment product.

Michael: So there was a little bit of, I guess, differences in terms of mentality and excitement about things. And ultimately, Barry stepped down as the CEO of Second Market really to focus on the company’s digital currency initiatives. And as we transitioned further towards the end of 2015, it was actually really an opportune time because NASDAQ came knocking and said we really like this private company market platform that you’ve built at Second Market and NASDAQ ended up acquiring Second Market. And that caused half of our headcount to move over to NASDAQ. And the folks that remained were the ones that were working on our digital currency initiatives.

Pomp: Got it. And how much of the experience in that regulated market that NASDAQ eventually bought helped in the early days of crypto versus is actually more valuable now?

Michael: To NASDAQ or to us?

Pomp: To you guys.

Michael: I think it was tremendously helpful, right, because when you look at the legal frameworks, dealing with accredited investors, documentation, AML, KYC. Today we run as strictly regulated a business and stay as buttoned up as we possibly can. So it was an amazing prerequisite for all the things we do today.

Pomp: Absolutely. And internally, when Barry is saying look, we’ve got our core business. It’s driving great revenue but I want to figure out this digital currency thing. What is people’s reactions? Are there people who are … There’s people who want to run through the brick wall and then they love it. And then there’s people who are detractors or is everyone on board? What’s the split there?

Michael: So that conversation slightly predates my joining Second Market but to the best of my understanding, there were definitely some folks who thought Barry was crazy. And there were definitely some folks who said I’ve worked with Barry for a long time, he’s a visionary. He’s kind of that guy who can always see around corners. I think he went to the Second Market board and said hey, I want to take some of the company’s capital and start building up some businesses and building up headcount around these initiatives. And they said go for it. And when it started to demonstrate a track record of success and started building revenues, I think people were very quick to glom onto it.

Pomp: Absolutely. And so, obviously you sell the Second Market business to NASDAQ. And then, now what is today DCG, or Digital Currency Group. Explain the structure there and how that came about.

Michael: Sure. So when Second Market got sold to NASDAQ, about half of the company’s headcount remained. And it was time for us to undertake an exercise to rebrand and repackage who we were. And Barry decided to form a holding company called Digital Currency Group. And so, Digital Currency Group or DCG is a C-corp. We hope ultimately it will at some point have public market aspirations. And I think as we decided to go, or Barry decided to go rather, with a holding company structure, he started looking at business models like SoftBank and IAC and Berkshire-Hathaway where you had this great holding company. It has a great brand. But all those companies I just mentioned, they don’t really have a product or a service per se. What they do have instead is a balance sheet that lets them buy companies, incubate companies, invest in companies. And that’s really the model that DCG has taken.

Michael: And so, when we formed Digital Currency Group, Barry did a small capital raise to bring in some kind of corporate and strategic investors. And so, we’re fortunate to have as backers of DCG folks like MasterCard and Western Union and FoxCon and New York Life and TransAmerica. And really, a whole series of strategic corporate folks who clearly could see that the proliferation of the digital currency asset class was going to effect their business positively or negatively. And so, if they were a part of the DCG family, this would give them a front row seat.

Michael: And I would say today in terms of how we’ve evolved, DCG is broadly broken down into three different buckets of assets. So the first bucket would be DCG’s venture capital portfolio. This is not by any means a standalone fund. Rather the VC investments that DCG is making are off of the company’s balance sheet. And today, Barry and our venture team have now invested in 130, I think a little more than 130 actually, digital currency businesses in more than 30 countries around the world.

Michael: And so, that certainly makes DCG the most prolific VC investor in the digital currency ecosystem. And it doesn’t actually mean that we’re the largest check writers. But I do think, obviously a little bit subjective, but I do think it means we have one of the highest quality portfolios out there. We’re very fortunate to have gotten involved very early in companies like CoinBase and Ripple, BitPay, Zappo, and I think our criteria is certainly, we look very scrutinizing of the opportunities that come our way but we’re seed-stage investors primarily. So at that point when you’re investing, we’re really looking at entrepreneurs and we’re investing in people much more so than we are cash flowing businesses.

Michael: And I think that you’ll continue to see us ramping up our VC investments over time. And it’s been a really fantastic way for us to stay squarely at the center of the ecosystem. It’s very easy, I think, at our company for all of us to come into the office every day and tell each other oh yeah, this whole digital currency thing, it’s happening. Right amongst these four walls, we can all talk about it as much as we want. But when you have portfolio companies in Kenya and Sweden, in the Philippines, and Mexico, and pretty much every corner of the globe you can think of, it becomes very validating to see what kind of volumes they’re experiencing, what kind of user growth they’re experiencing, what kind of contracts they’re landing. That’s been a really, really helpful and validating source for the DCG family.

Michael: The second bucket of assets … So outside of our VC portfolio, it digital currency directly. So on the DCG balance sheet, we have a couple hundred million dollars of digital currency. And I would say that we are pretty long term and pretty patient investors. And the digital currency portfolio is broadly broken down into five different currencies that we have high conviction in. And those are Bitcoin, Etheorium Classic, Zcash, and then we are also newer and also big believers in two less known currencies. One is called Mona which is the native currency for the Decentraland Project. And then, a currency called Zen which is the native token to the Horizon Platform.

Michael: And then, the third bucket of assets are the subsidiary businesses that Digital Currency Group owns. So the first of those is called CoinDesk. I’m sure a lot of folks listening to this and Anthony, I’m sure you as well know CoinDesk quite well so you know, they’ve done a really great job of establishing a foothold on the reporting and realtime statistics on what’s happening in the digital currency ecosystem. And then, they’ve also launched this really fantastic events business called Consensus and they run events all over the world. And CoinDesk was an acquisition for DCG in, I think, it was 2016.

Michael: The other two businesses were the businesses that were incubated under Second Market. So our registered broker/dealer, Genesis, is our trading business. So Genesis Global Trading now has probably a foothold as the second or third largest OTC digital currency trading desk globally. And I think they certainly have a competitive advantage in that they’re an SEC and FINRA registered broker/dealer. And so, for a lot of counterparties, they look very favorably upon trading with a registered and regulated entity like them.

Michael: And then, the third business is the business that I run for us which is called Grayscale Investments. So Grayscale is a digital currency focused asset manager. Today we manage probably about $1.6-$1.7 billion across a family of nine investment products. And at Grayscale, I think we are laying the groundwork or have laid the groundwork, rather I should say, for hopefully becoming what will be the I-shares or the Vanguard or the Wisdom Tree of the digital currency ecosystem.

Michael: And when you take a step back and you look at Digital Currency Group, what Barry has really done in bringing together this VC portfolio, the operating subsidiaries, our digital currency holdings, he has created a center of gravity around Digital Currency Group. And I’m really excited to see what we build from here. But we seem to have our hand in a little bit of everything going on in the ecosystem which keeps us really engaged and really involved.

Pomp: Got it. And so, as you think about this, there’s the parent company of DCG. You’ve got CoinDesk, right? You’ve got the two trading or asset management businesses. How involved is Barry and the executive team at that parent company in the individual business units?

Michael: Quite a bit actually. So Barry is definitely involved strategically in all the businesses and spends time with each of the businesses. CoinDesk has its own CEO, a gentleman named Kevin Worth who is fantastic. Michael Moro who I think you’ve had on recently is the CEO of the Genesis business. And then, actually Barry also serves as the CEO of Grayscale Investments. So he does spend quite a bit of time with each of the businesses.

Pomp: Very cool. And how do you think about asset management, venture capital investing, and then obviously you guys own a media arm, right? And so, there’s, from what I understand, some separation between the media coverage and that asset management business. But you sit on the non-media side. What is your view of how those two interact?

Michael: So there’s a tremendous amount of separation. CoinDesk, the entire CoinDesk team, and their entire operations sit in entirely different offices from Digital Currency Group, Grayscale, and from Genesis. So they have arguably their own culture, their own way of operating. There is by no means any kind of overlap in terms of business initiatives or anything like that. Certainly Grayscale, Genesis, a lot of our portfolio companies love to give stories to CoinDesk or interact with them but we really always try and be sure that there is quite a bit of separation between the two. CoinDesk is really trying to be objective in reporting on the industry in a timely and compliant manner.

Pomp: Absolutely. No, no it’s fascinating. And then, for those people who have projects or companies that they’re building and are interested in potentially getting investment from DCG, what’s the best way for them to surface those opportunities?

Michael: So I think one of the best ways that we get deal flow or project flow is actually through our existing network of entrepreneurs. So I think that the entrepreneurs that are building companies, products, services, et cetera, in the digital currency ecosystem is a pretty tightly knit community. And it’s often our entrepreneurs that are referring other folks in. That’s usually one of the best ways that we get alerted to new projects taking place. And other than that, I think DCG does a pretty good job of either hosting events or networking or being at certain industry happenings. And that’s another way that I think people get in touch with us as well.

Pomp: Absolutely. So let’s go deeper on Grayscale itself, right? So why don’t you explain what you guys are doing today, what the different vehicles are, and we’ll go from there.

Michael: Sure. So I think at Grayscale, we definitely take the view that digital currency as an asset class has arrived and that it’s here to stay. And that investors want exposure to it. Digital currencies though have some unique properties. They require some intelligence and some experience with figuring out where to buy them, how to transfer them, how to store them, keep them safe, et cetera. And I think that for us, we mostly look at other products within the investment universe that are construed as access products. So things like gold and oil that today have ETFs and that have notes and all different kinds of structures that are familiar and easy to access but if they weren’t around, investors would have a hard time gaining exposure to gold or gaining exposure to oil.

Michael: And so, at Grayscale what we’ve done is we’ve taken digital currencies and we’ve packaged them into securities, into familiar, transparent investment structures so that investors can gain exposure to them. And today, we operate eight single currency vehicles and then, one diversified vehicle. And so, our single currency vehicles are for Bitcoin, Bitcoin Cash, Ethereum, Ethereum Classic, Litecoin, XRP, Zcash, and Zen. And so, each of those vehicles solely and passively holds a digital currency. So our Bitcoin vehicle, for example, just holds Bitcoin. There’s no cash, no leverage, no trading, no arbitrage, nothing at all.

Michael: And so, if you’re an investor and you want to gain exposure to Bitcoin but you don’t want to deal with figuring out where to buy it or how to transfer it or how to store it or you’re concerned about your private keys or getting hacked or not really having the technical know-how to do so. Then, you can buy shares of the Bitcoin Investment Trust. That is a really easy and familiar proposition. And same goes for any of our other vehicles. If you want exposure to Ethereum or to XRP or whatever it may be.

Pomp: These are public vehicles.

Michael: There’s actually two sides to how people get involved with us. So all nine products …

Michael: … [inaudible 00:18:00] to how people get involved with us. All nine products have daily subscriptions. They’re private placements. They’re open to accredited investors. They have a daily net asset value. Every single day [inaudible 00:18:13] to Grayscale, buying shares of the products at that daily NAV, and then they’re subject to a one-year holding period.

Michael: Now, each of our vehicles, when they get to their one-year anniversary from their inception date, we actually then transition them out into the public market so that there is a public quotation for the shares. Today, two of the nine vehicles have been around for greater than one. Those are the only two that have public quotation-

Pomp: That is Bitcoin?

Michael: That’s Bitcoin, which trades under the symbol GBTC, and then Ethereum Classic vehicle which trades under the symbol ETCG. And so, anybody who buys shares as an accredited investor buys them through us at NAV, holds them for a year, and then is able to sell those shares out into the public market on the other side of a year.

Michael: Now, if you’re not an accredited investor and you want to be involved in Grayscale, you’re welcome to buy shares out on the public market. There’s no holding periods. There’s no minimum investment size, etc., but there has historically been a premium in the shares publicly in GBTC and in ETCG. It’s important to watch the premium and just make sure that you understand what level it is you’re getting involved in the products at.

Pomp: And so, the thought process here is, if I invest in the private placement I’m buying at NAV, right, and then if I’m buying in the public market, you get this premium, and the premium’s been pretty high right at times. How do you think about that? Is that sustainable? Where do you guys see that premium? Is it a good thing? Is it bad thing?

Michael: Well, so, one, I have to disclaim that the premium is really driven by market demand, right?

Pomp: Of course.

Michael: We are not engaged in trading the shares in the public market. And so, there has historically been an imbalance there where there is quite a high supply of shares out on the market, particularly in GBTC. It’s been quoted since the middle of 2015, but there has been not enough shares to meet that demand. And so, there has been quite a bit of a premium.

Michael: I think today the premium’s probably somewhere around 25 or so percent above NAV. This is a really unique structure. When you look back at something like GLD, the gold ETF, when that got introduced in 2004, that was the first time that an investor could say, “I own Apple, and I own Microsoft, and I own stocks and bonds and all this stuff in my account, but now I want to add gold exposure right alongside all those other things that I own.”

Michael: Similarly, GBTC and now ETCG, those are accomplishing the exact … the same kind of offering that the SPDR gold did when it first got introduced. If you have a brokerage account, if you have an IRA, if you have a mutual fund, whatever it may be, and you want to add this type of exposure, well, then, something like GBTC is the only way that people can get exposure to it.

Pomp: Absolutely. No, it makes sense. And then, how do you think about these vehicles that you have out on the public markets? Everyone is hemming and hawing about the ETFs and ETNs and all these other publicly traded vehicle treasure retail products. Let’s just say that they’re going to happen at some point, right? I don’t know if it’s a month, a year or whatever it is, but at some point they happen. What do you think that impact is on your business? Is it everyone benefits from just more retail investors in the public markets wanting digital assets? Walk me through the thought process there.

Michael: Sure. Well, number one, I think it’s no secret. Grayscale spent a good portion of 2017 working with the SEC to try and register our Bitcoin investment trust, GBTC, as an ETF. Ultimately we decided to withdraw from that process and continue building assets and building out more products. And so, we’re certainly believers in the idea of having digital currency ETFs, but as you suggested, it could take some time until our regulators are comfortable with it.

Michael: I think from our standpoint, we definitely think that having ETFs out in the market for Bitcoin and other digital assets will be net positive. When you look at what happened to things like gold, right, going back to GLD, having a instrument like that out on the market for something like Bitcoin creates an entirely new use case that doesn’t exist today, and especially for a fixed supply asset like Bitcoin, that could be really, really impactful to its price. And so, I think that Grayscale, and certainly a lot of other folks in the industry, are doing what they can to help educate regulators. We spent a lot of time with the SEC and a lot of time with FINRA trying to keep them informed of what’s happening in the space. We support entities like Coin Center down in D.C., which are doing a great job of also conducting those types of meetings, writing thought pieces and helping to keep people informed, so-

Pomp: Niraj has incredible means on the Internet.

Michael: Yes, yes. Niraj is a … Let’s call him the Twitter master.

Pomp: All right. You guys are doing a bunch of work that basically supports the overall industry as well.

Michael: Absolutely.

Pomp: And then, how do you think about the future Grayscale, right? Today you’ve got the existing vehicles. Two are public; it sounds like nine that are in the private placement space. Will you continue to go after the long tail in terms of add more private placement, token specific? Will you go more into the indexing, right? I don’t know that we haven’t talked yet about the bucket that you have for diversified exposure. What’s the future look like?

Michael: Sure. Well, one, yeah, we talked briefly about the eight single currency products we have. The ninth product we have is our digital large cap fund, which we launched earlier this year. That product seeks to have as its holdings the assets which constitute the upper 70% of the digital currency market, and holds them on a market cap weighted basis. That’s a quasi-index product, if you will, that has a rules-based methodology.

Michael: I think that our product development team really has, I don’t know, I’d say maybe 15, 20 different product ideas running on our listing. I think it’s a little bit of a struggle for Grayscale, if I’m being honest. We struggle with what it is that we see as being value accretive and things that we want to structure products around and where we think investors should be deploying capital, balancing that with what our investors and what the community as a whole is telling us they want exposure to.

Michael: I think early on, if you look at the development of the existing product set, you know our first product was Bitcoin. Our second product was Ethereum Classic. Our third product was Zcash. These were all products and digital assets around which we had conviction, and we would develop really robust investment theses around each of them.

Michael: I think that earlier this year, or maybe even late last year, we started to take a little bit more of an agnostic view about the world and say, “Well, if you look at businesses like Wisdom Tree,” they have a product for Russia, for Japan, for China, for the Philippines, etc. If they didn’t have all of those different areas of the world represented, then there would be a whole in their lineup.

Michael: I think Grayscale similarly took a view that we had to open ourselves up and upon up products for Ethereum and Bitcoin Cash and XRP, etc. And so, on a go-forward basis, I think that our eyes and ears are open. We’re always looking at new protocols, always looking at new projects, and then certainly are very engaged with our investors to understand where they want to deploy capital as well.

Pomp: Got it. And so, as you guys are doing this, moving forward, your role is unique in that you do a lot of stuff internally, right? You do everything from help manage the team to strategy to product development, and then fundraising itself, right? And so, let’s talk a little bit about, how have you guys gone from zero assets under management to $1.6, $1.7 billion? That’s not, just roll out of bed and that happens, right? How did you get there?

Michael: How did we get here? I think we’re exhausted. I don’t know. I think that if I look at how we’ve raised assets over time, one, I think we have a super high-quality investor base. We are very fortunate to call folks that are CEOs of Fortune 100 companies, family offices, hedge funds, you name it, as investors. They have been exceedingly loyal to us and have done a really good job of introducing us to other folks and making referrals. That’s been a huge help. I think when I look back at the lifecycle of how we’ve raised assets, in the earliest days, 2013, 2014, we were spending a lot more time, certainly in the Silicon Valley, San Francisco area and in the New York area, really raising money from ultra, ultra high net worth individuals and CEOs of companies that wanted exposure to the space.

Michael: I think as you transitioned to 2015 and 2016, we started to spend a lot more time with the family office set. These were folks that were very agile, and when they had a conviction about something, they would just go with it. They have a pretty high risk tolerance as well.

Michael: Throughout the beginning of 2017 through today, I think we’re spending a lot more time raising assets from hedge funds. And so, our inflows, I think even just this year, have skewed to be a little bit more than 50% coming from institutions.

Michael: Just to unpack that a little bit further, when I say institutions, I’m not talking about digital currency hedge funds. I’m talking about your typical long/short equity fund. It’s everyone who has strategies around value to momentum to global macro. There really is no one type of investor that we’re dealing with. I’d say probably over the last three to, call it six months, we’re now starting to spend a little bit more time with the pensions and endowments, and that’s really, I think, Anthony, because the once taboo nature around investing in digital assets has really been shrugged off. Every investor wants to explore this. They know it’s not going away, and they have to figure out whether or not it makes sense for them to have exposure to this space; and if they’re not going to have exposure to this space, well, then, they need to be figuring out where else in the world they’re investing and how the proliferation of digital assets are affecting certain places that they already have capital deployed.

Pomp: Absolutely. No, it was fascinating. As you started to talk to these more institutional investors, where are they today? Are they interested? Are they learning? Are they, “Get out of my office?” What, where are they?

Michael: If we were having this conversation even, I’d say, 12 to 18 months ago, I would be telling you that I’d go to a given major city, meet with a multi-billion dollar hedge fund or an endowment or whatever it may be, and I was still spending 30 to 45 minutes doing Bitcoin 101 and 201. We were talking about the way mining works, the way that proof of stake works, things like that. Today those meetings have no part of the conversation going into those types of topics.

Michael: The investors are coming into the meetings having done their homework. These are folks that are looking at the plethora of resources out there on the Internet. People have written books, etc. There are so many great resources for people to get educated about digital assets. That’s been super validating, to be able to go to a meeting and have people be super informed, so that’s been a major change.

Michael: I think now, though, most investors are asking us for our opinions around how this asset class affects areas that they have exposure to. The truth is that it’s too early to tell. I think you’ll agree that there are some really interesting projects going in, and the space has a ton of momentum, but at the moment, is there any one killer use case that we have identified for Bitcoin or for really any digital asset? No, because it’s still so early. And so, I can’t tell you how many funds I’ve talked to that say, “We’ve been a decade-long investor in payment company X or in credit card company Y. What does Bitcoin do to our long theses?” I’ll say, “I don’t know, but I’ll bet your bottom dollar that payment company or credit card company is either deploying human capital into looking at blockchain technology or digital assets and/or has already made investments in digital currency-related businesses because they know that they have to pay attention to it.

Pomp: Absolutely. Do you think that these people are buying into the qualitative argument, right, of, “Bitcoin is a store of value, a medium of exchange. It could one day be the global reserve currency. It’s a hedge against inflation or economic chaos,” etc., or do you think they’re looking at it more from a quantitative standpoint in, “If I add 1% of my assets into digital assets, here’s the impact it could have on my portfolio?”

Michael: I think it’s a little bit different with each investor. The notion of Bitcoin being digital gold, a digital store of value, a gold 2.0, a superior form of gold, that narrative has certainly been sticking with investors as we talk to them. And so, we definitely are seeing some investors rotate some of their exposure to things like gold and other inflationary hedging assets into things like Bitcoin. There is no question that people get that. We have to be a little careful, though, sometimes because there are some people who are gold buys and really do believe in things like gold and other things that have been these time-tested areas to go to as a safe haven. That has certainly stuck.]

Michael: I think, though, if people are building diversified portfolios and are always looking for new areas to generate alpha, they cannot probably find other assets that have the same risk reward profile that something like Bitcoin or digital assets in general do. And so, when sized appropriately as part of a diversified portfolio, we’re definitely seeing investors putting on 10, 20, 30, all the way up to maybe 200 basis points of exposure because if digital assets like Bitcoin do some of the amazing things that we think they can do, well, then, that 10, 20, 30, up to 200 basis points actually becomes a really meaningful driver of returns. In the event that it doesn’t do that, well, it’s a small enough position that it’s not going to kill their performance, and it’s not going to be that material to their overall strategy.

Pomp: Absolutely. What’s the absolute worst reaction you’ve had in an investment meeting?

Michael: It’s been a while, but I’d probably say it was probably about two to three years ago when people were much more focused and the popular press wasn’t doing that good a job of explaining what Bitcoin and digital currencies were in general. We had this very heated argument around the anonymity of Bitcoin and the fact that it was being used for money laundering and drug trafficking and things of that nature, when in fact, and I know you certainly agree with this, that this is probably the worst mechanism possible for conducting anything at all nefarious, right? We are investors now in companies like Chainalysis and Elliptic, who are doing fantastic work on blockchain surveillance and monitoring. They’re working with law enforcement and government agencies. They love this, right, because they catch bad people doing bad things very, very easily. Bitcoin and digital currencies leave a “digital breadcrumb” on every single transaction. People are always able to be caught compared to the physical world when you cash. It’s quite hard to trace those types of transactions.

Pomp: Absolutely. How many of these people do you think that are investing aren’t yet ready to invest with the institutional capital that they oversee, but they’re personally invested? Are there situations where they’re saying, “Look, I actually personally believe, but from an institutional fiduciary standpoint, I’m not yet ready to deploy capital?”

Michael: Well, so the traders at a lot of shops have been involved for a while, right

Pomp: I can only imagine why.

Michael: Well, there’s a couple of actually pretty good reasons why that’s the case, right? Number one, these are typically folks whose personal trading activities are very closely monitored. They have all kinds of restricted lists that they have to adhere to, etc., but Bitcoin and digital currencies aren’t things that generally fell onto that list the way maybe Coca-Cola or some other public stock did.

Pomp: Yeah. Just so people understand, what you’re describing is if you’re a trader, and for a whole host of reasons your company may be involved or have information, etc., so you can’t trade certain securities for a set period of time. What you’re saying is basically these people want to go trade cryptocurrencies because those cryptocurrencies are almost never on the no trade list.

Michael: Exactly, exactly. And so, I’d say probably when we started talking to hedge funds, call it 18, 20 months ago, it wouldn’t be uncommon to start seeing some of the portfolio managers or head PMs, founders, etc., want to deploy some capital personally. They got the thesis. They have a high risk tolerance. Those are folks that have been doing so for a while. Again, because that taboo nature has been shrugged off, there is no reason that LP money is not being deployed into digital currency now.

Michael: The LPs are talking about it, asking for it, and it’s not crazy when the quarterly newsletter goes out to all the LPs, and the PM wrote that we’re now investing in digital currencies. In fact, I think a lot of LPs value the fact that these funds are now thinking about new and opportunistic-

Michael: …you. The fact that these funds are now thinking about new and opportunistic way to generate returns.

Pomp: For sure. What do you think in terms of … you and the Grayscale team manage a billion and a half plus dollars. How do you guys think about bitcoin as this economic hedge in the way that it could play out if there were some of these crisis or chaotic events that occur?

Michael: My colleague Matt Beck wrote a really great paper about this very topic. So if you go to the Grayscale website, greyscale.co, you can take a look at it on our insights page. We looked at a couple of global macro shocks. Things like Brexit, or Grexit or the Chinese devaluation of the Renminbi, and when you look at how traditional assets reacted in the wake of those types of shocks, bitcoin actually holds up quite a bit better. And so I think in our view, that’ll probably continue to be the case. We look at what’s going on globally and we’re amidst a currency crisis. We’re looking at places like Venezuela and Argentina and capital controls in China, etc. The promise of a decentralized, non government, non central bank backed currency is a very, very powerful thing.

Michael: When half the world’s adult population does not have access to financial services, the ability to store value or have your money in pretty much anything other than your local currency, that’s a pretty powerful concept. We think it’s actually almost even more powerful than the proliferation of the communication space and cell phones coming along. That was a big one and we think this is potentially even bigger. We think that this is the springboard to financial inclusion.

Pomp: Yeah. I mean look we talk a lot about this idea of beginning to trust math and software over humans. So if you think of all the central banks led currency, there’s humans making decisions, but really when you go to a transparency conversation … I tweeted the other day and I said “Bitcoin is more transparent than the federal reserve.”

Michael: It’s true.

Pomp: You understand how the system’s designed. You understand every single transaction from the beginning of time til today. You can go look at it. You understand what’s going on right now. You can actually look at the real time data. And then you know what is supposed to happen in the future.

Michael: Absolutely.

Pomp: Right. And I don’t know if you can say that about a lot of [inaudible 00:38:26] currencies.

Michael: Yeah. You won’t know how much is being printed or how much is being retracted or what inflation rates are going to be or what may happen the next time we have a economic crisis. So, it’s a powerful concept. There’s no question about it and we take the view that the genie’s out of the bottle. We’re excited to see more regulatory clarity come into the space. We’re excited to see more institutional capital flowing to the space and for a lot of our portfolio companies to continue building out. Everything from order management to custodial solutions to trading venues and different things that can support the under payings of this ecosystem. But again, the genie’s out of the bottle.

Pomp: Absolutely, no I completely agree. Alright, let’s go into some rapid fire questions and then at the end I’ll let you ask me some questions. Actually you only get to ask one, because we got a couple people who have tried to ask too many. What do you think, other than a DCG company, is the most important company in the crypto space?

Michael: Ooh, that’s a tough one. We’ve definitely, I think, been really good about being involved in some of the best and brightest entrepreneurs. One company that recently has come out, which DCG is not involved in, is look at [inaudible 00:39:46], which is the new future’s based exchange that ISIS is deploying. That’s important. The proliferation of future’s, on CME, CBOE, has been great. It’s brought a lot more folks into the space, given folks hedging instruments, etc. Really excited to see what [inaudible 00:40:06] is gonna do as well and how the market’s gonna receive that.

Pomp: Absolutely. No, I think that that is a very interesting one. Alright, what is your most controversial belief? What do you believe that you think the highest degree of other people would disagree with?

Michael: I don’t know if it’s as controversial as it once was, but I think when we meaningfully got behind the thorium classic, a lot of people thought that we were nuts.

Pomp: Alright, hold on. We gotta talk about this. So, let’s walk through the difference [inaudible 00:40:36] Ethereum and why you guys stuck with a Ethereum classic over a Ethereum.

Michael: Sure. So, we have long been believers in the idea of a Ethereum as a technology. Looking at a decentralized global computer that can give rise to smart contracts and all other kinds of really interesting digital applications. We thought that the Ethereum community, the developer community around it was really robust, really strong, but had a difficult time finding either companies to invest in or reasons to start buying the Ethereum currency, or the ether currency itself. And after the DOW and seeing the split between Ethereum and Ethereum classic, well very quickly in the Ethereum classic community, some of the developers instituted some really positive governance and economic principles into it that, for us, were pretty closely mimicking what had and what continues to make bitcoin pretty successful, and that was to cap the supply on Ethereum classic. To have a decentralized governance model where you now have different teams of developers working on the protocol and not necessarily coming to consensus around things and both challenging the status quo, which we though was super important.

Michael: And when you start looking at things like that, we said “Wow, well Ethereum classic is kind of being left for dead”, and I think a lot of people are overlooking some of these new and really novel attributes around it. And I think we probably started getting involved in Ethereum classic when it was probably sub a dollar. Maybe fifty cents. And I think a lot of people thought we were nuts. And when you look at how far that ecosystem has come along today, it didn’t die, it attracted a lot of developers, and that ecosystem is thriving. So, I think that today people think we’re a little less nuts than maybe we once were, but again that was pretty controversial when we staked ourselves around ETC.

Pomp: I think that the counter argument that people would have, so all the people on Twitter who are gonna listen to this and go nuts, what they, I think, would say … “Yes, but if you compare it to what has happened with Ethereum, when you compare it to all the developer activity and the attention that what is now known as Ethereum has gotten, did you make a mistake?”

Michael: Well, I would say that Ethereum classic is certainly the David to the Ethereum Goliath. There’s certainly been more developer work or more corporates throwing money at Ethereum, or perhaps more resources being thrown on ethereum, but I think what people often overlook is that ethereum and ethereum classic are the same technology. And ethereum classic trades for, I don’t know, 1/20 or 1/25 the price of ethereum. And so, if you have the belief in ethereum as a technology, generally, then maybe there’s no harm in owning both ethereum and ethereum classic. So, certainly too early to say if one will win or what not, but I also think that ethereum over the last year has also really been utilized and it’s price depreciation has most been associated with ICOs, which has not really been a use case or any kind of utility around ethereum classic. It’s kind of stayed away from that.

Pomp: Yeah, and I think that also we’re still pretty early. So to your point, anything can happen. This is crypto, literally anything can happen.

Michael: For sure.

Pomp: Okay. So, let’s say you’ve got a magic wand. You can wave it and change any one regulation in the United States. What regulation do you think should be changed?

Michael: That is a difficult one. I don’t know.

Pomp: Or improved. It doesn’t even have to be changed necessarily, just improved.

Michael: Improved… um

Pomp: Something that you guys deal with on a daily basis or maybe it’s even just the ETF of application process.

Michael: No. I mean I gotta hand it to our regulators. I mean I think some people may end up throwing some shade at me for this, but I think by and large they’ve done a pretty good job so far. I mean you and I spend 24/7 in this ecosystem and you and I can barely keep up with it, so it’s hard to expect regulators that have a score of other asset classes and instruments that they have to be looking at and regulating, that they’re keeping up with this. So, I think the fact that in the five years I’ve been in the space that we’ve gotten clarity from the IRS on taxation, we’ve seen statements on the SCC around bitcoin and ethereum and we’ve had some of the bit license and some of the other things that have come through. I think we’ve actually made quite a bit of progress in the space, and I think it’s good to see them starting to crack down on some ICOs and some of these other illegal asset raising schemes. So, more of that to come, but I don’t think there’s much that I would change.

Pomp: Got it. Okay, that’s fascinating. Alright, so let’s talk about aliens real quick. So, we’re just gonna settle on aliens exist somewhere in the world and do you think they have pets?

Michael: Do aliens have pets.

Pomp: Every time you think of an alien, it is in a human like comparison. There’s aliens that are human like, but we never talk about the animals. Are there alien animals? Alien pets?

Michael: I mean if you think that the dog is mans best friend, then one maybe has to assume that there’s something else that’s aliens best friend. So, why not.

Pomp: I always imagine them getting off of the space ship and they’re got their dogs and all their different pets and stuff and they’re just coming to hang out with us.

Pomp: Alright, so you can ask me any one question. What do you got?

Michael: Okay, so what is the protocol or the application that gets you most excited about what’s taking place in this ecosystem right now?

Pomp: Yeah. So, it’s a boring answer. It’s bitcoin.

Michael: Okay.

Pomp: But, for probably a different reason. So, I think everyone knows, very bullish on the economic argument around a censorship resistant deflationary economic model. So, I think that’s table stakes at this point.

Michael: Well and a tangential question is, has the 2018 bare market made you more of a bitcoin Maximalist?

Pomp: Okay, so I’ll answer that one in a second. I think the reason why I’m probably most excited about bitcoin is I think we get very attracted to innovation and this thought process that we need to test new things and try new things, etc. I think bitcoin is the core value [inaudible 00:47:30] is the security of the network. So if you draw a spectrum on the far left side you have security, on the far right side you have innovation. Bitcoin is, I guess, far to the left as you can get because it prioritizes that security. And I think what we’ve seen is more and more people push the envelope going to the right of the spectrum, and they’re trying to innovate and do all these things, and bitcoin is actually in a position of power. They can allow people to do that with different projects, different chains, etc. and they’re picking the things that work, that are valuable, that people seem to adopt, and then they can incorporate it into the bitcoin chain.

Pomp: And so I think that it’s one of these things where … there’s a quote that I really like, it’s “Be the first, be the best, or be forgotten.” And I think, not only with bitcoin first, but I think it’s the best, in terms of today. And so if you can be the first and the best, it’s a really powerful position to be in. Now, in terms of this bear market, I think regardless of market cycles everyone has to go through this cycle of “Okay, I found out about bitcoin, bitcoin’s awesome, I love bitcoin”, and then they go through the innovation cycles. What else can you do? “Oh, there’s this ICOs thing, that’s interesting. Oh, there’s this other thing”, and you keep going through all of these different application of a block chain. The enterprise block chain, [inaudible 00:48:44] securities, literally all the way around. And you come back and you realize the strength of the bitcoin network is the security and all of those things are possible, where obviously people are showing that they’re possible, but if they can be built on a highly secured chain then you get the best of both worlds.

Pomp: And so, I think that …

Michael: But don’t you hate when people are like “Is bitcoin the Myspace to the eventual Facebook, and what am I missing here?”

Pomp: Yeah. So, two things. I hear this all the time. “How many companies were the first in the space that ended up existing?” There’s two components that are really important to this. So, the first being that bitcoin’s not a company. It’s not like somebody else is just gonna come along and built a company with a better business model. Actually a couple things. So, the second thing is the network effect. Bitcoin has the strongest network effect and network effect is a very hard mote to defeat.

Michael: Totally. People overlook the switching cost. If everyone’s about to say “Oh, there’s this other thing coming along”, well look at how much has been built and invested in bitcoin and what the cost would be to switch from bitcoin to what that other thing was. And they overlook the open source nature of bitcoin.

Pomp: Absolutely. And this is an important … the fact that you bring up Myspace and Facebook is really important because one of the things that people forget about Myspace is Myspace did not have the newsfeed like applications that Facebook had. So, really what Myspace was, was a database. I could come and I could look at your profile and I could do all the stuff, and so it was a very loose definition of a network, but Facebook actually locked people in the network. You could go to the newsfeed and then you could see all this content and there’s one central location and people weren’t tied in. And so it’s not good enough to just have adoption and have all of the different nodes, you have to lock the nodes in. And that’s what Facebook did a fantastic job of doing that. They also had real identity, a bunch of reasons why they won.

Pomp: I think what bitcoin did was, through the incentive mechanism, the block reward, the proof of work, all these different aspects, they locked people in the network. And so when they do that it’s really, really painful for people to leave. And then also, every new entrant is more likely to join the longest standing chain with the greatest network lock in. And so I think that’s what we’re seeing. The bear market, I think, definitely helps people go toward bitcoin and gravitate that way. But one thing that I’m really interested to see if how many new entrant go to bitcoin versus a different digital asset during a time of economic crisis.

Pomp: So, if the thought process around bitcoin is, it is a hedge. It is some sort of safe have asset, etc., well a lot of people talk about bitcoin specifically, but there’s a whole host of digital assets now. There’s 1900, 2000, whatever it is. If all of a sudden we have a huge recession in the united states again, there’s higher inflation, all of the ingredients to a bad situation, to people run to bitcoin. Do they run to bitcoin and ethereum? Bitcoin ethereum, ethereum classic?

Pomp: Or maybe they go to some completely different asset that’s not bitcoin.

Michael: It’s a good question. I mean I think that’s one of the reasons why we’ve seen so many index like products being launched. It’s one of the reasons Grayscale launched the digital large cap fund. We started hearing from a lot of folks “I think I missed bitcoin”, or “I think I missed ethereum”, or “I wanna put money to work in the space, but I don’t think I know enough to pick winner and avoid losers.” And so, this idea of getting broad market exposure actually kinda makes a lot of sense. That’s why there’s things like the SPY ETF, and you get exposure to the s&p 500 companies. And so we’ve had a lot of success there, as have a lot of other businesses launching index like products. And maybe those are good things. Maybe those give people the diversification benefits within digital currency as well as having the digital currency exposure on within the context of a diversified portfolio.

Pomp: Absolutely, no I think it makes complete sense and I mean look, I love the fact that you started your career out in banking. And so it’s long bitcoin, short the bankers.

Michael: Sure. I’ll take that one. I like that one.

Pomp: Alright man, thanks so much for coming, this was super fun. I really appreciate it.

Michael: Of course, thanks for having me.

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You can find the recording here: Off The Chain Podcast: Anthony Pompliano and Michael Sonnenshein

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The following is a transcript of a conversation between Anthony Pompliano and Jake Chervinsky, who serves as Defense Counsel in U.S. government criminal investigation’s at Kobre & Kim, about Securities Law, accreditation standards, terrorism financing, the applications of the Howey Test to crypto, and why Blockstream may be the most important company in the industry.

You can find the recording here: Off The Chain Podcast: Anthony Pompliano and Jake Chervinsky

Anthony Pompliano: All right, guys, I’ve got Jake here. This is gonna be pretty epic, because I think we’re going to go down a bunch of rabbit holes, so thank you for coming on.

Jake Chervinsky: Yeah, Pomp, thanks for having me.

Pomp: Absolutely. All right. So, as a lawyer, I know you can’t say a bunch of stuff and you could say a bunch of other stuff, so we’re gonna see how we can make this work. But let’s go through your background first. So where were you born? How did you get into law and then how’d you get into Crypto?

Jake: Yeah, sure. So, I’m from Massachusetts originally, Newton, Massachusetts, just outside Boston. I came down to Washington, D.C., which is where I live and work now for college. Went to George Washington, undergrad. I then went to George Washington Law School, and after that started working for a law firm in D.C. I’m sort of an adopted DC native.

Jake: I started working after law school for a pretty large law firm doing mostly anti-money laundering and anti-corruption compliance and investigations work. I did that for about two and a half years or so, until 2016. I graduated law school in 2013. In 2016, I moved out to Los Angeles, California. I had a little west coast experience. Clerked for a federal district judge in the central district of California. So, that’s a federal judge at the trial court in the federal judiciary.

Jake: That was a one year position working in chambers, writing opinions, working on trials. When I finished that, I moved back to D.C., couldn’t stay away from the east coast, and I got a job with my current firm, which is called Kobre and Kim. It’s a litigation boutique specializing in complex cross border disputes and investigations.

Pomp: The anti-money laundering litigations just sounds bad ass.

Jake: It was interesting stuff. I mean, that’s one of the things, frankly, that got me interested in the crypto space. It’s the intersection of law and finance, and I’ve also always been really into technology from a really young age. Growing up, I was going to computer camp and I was playing around on computers, programming html websites and like really basic stuff like that. I also was a big video game player when I was younger, so I sort of understood the concept of what a digital asset is and why people would be interested in that. So I think all of this stuff sort of combined to get me into the crypto space later on.

Pomp: Absolutely. We talk at all about all the time, like the revenge of the nerds, right? All the people who are playing the video games are like, “Ah, these are digital assets. We’ve been playing with these for decades.”

Jake: Exactly right. Yeah, for sure.

Pomp: A lot of times you are participating in securities litigation, right? And had quite a background doing it. And then obviously, with all the crypto stuff. Actually, first, how did you get into crypto? So, that’s how you get to where you are today, but actually where did the crypto component come in?

Jake: Yeah, sure. I think, like most people, I came across crypto a bunch of times before it actually clicked for me. The first time I ever heard about Bitcoin was in 2013, when I was working for my old firm, and FinCen, the financial crimes enforcement network, had just come out with these new regulations for what they were then calling virtual currency exchangers.

Jake: For one of my clients, I had to write up a summary of all of the most recent regulations in the anti-money laundering space. I spent maybe an hour reading this regulation, learning as little as I could about virtual currency while still being able to write this explanation. The whole thing struck me as like World of Warcraft gold. It was like some stupid internet money and made no sense to me why you would want to have it or why it would have value.

Jake: I didn’t come across it again until 2016. So, when I was clerking for my judge out in California, we were hiring another law clerk, and I was doing the interviews. There was a guy who came in to interview who had been working at a virtual currency exchange in San Francisco. I was asking him an interview, “Well, that seems really interesting. How has that?” His take, pretty much, was, “No, it wasn’t interesting at all. I’m trying to get away from it,” and I thought, “Okay, that makes sense. I guess this really isn’t that interesting.” It wasn’t until last year, the middle of 2017, honestly, I don’t even remember what was the first thing that got me to start looking into Bitcoin seriously. I think it was an article about price action. Maybe it was when the price had gone up to 3000, and I thought, “Alright, fine. Let me figure out what this thing actually is.”

Jake: And again, like most people, I fell down the rabbit hole, and I couldn’t stop reading about everything to do with Bitcoin, how it worked, what the technology was, why it should have value and that sprouted out into Austrian economics and monetary policy and decentralization, and all of the things that we all spend a lot of time thinking and learning about.

Jake: Then, earlier this year, I realized there’s so much going on in the legal world having to do with crypto that I wanted to make this the focus of my practice. So, in about June, I decided, “Let me get active on crypto twitter,” because that was where I was getting most of my information, and I was realizing there were so many people who were looking for and couldn’t find even basic commentary and analysis about how the laws apply to crypto.

Jake: I thought, “Okay, let me just do a couple tweet threads explaining a couple of these basic things. Like, “Here’s how the SEC’s ETF approval process works,” and it caught on. I guess that’s how I got where I am now.

Pomp: You are definitely famous on crypto Twitter now. You’re like the guy who actually has facts and information.

Jake: Well, that means a lot coming from you. I think you have many, many thousands more followers than I have, but I’m catching up.

Pomp: Those are just the bots. Don’t worry. All right, so you’ve been participating in like the securities litigation and stuff, right? Let’s start with what is securities litigation, and then we can kind of go into why it’s important and how people get into that situation.

Jake: Yeah, sure. Basically, securities litigation is any dispute having to do with the federal or state securities laws. Usually, there are two ways that I get involved in a case involving securities litigation. Either the Securities and Exchange Commission, the SEC, is investigating or prosecuting one of my clients for violating one of the regulations or for committing fraud or market manipulation, or something like that, in the securities world, or there’s a private civil suit, typically brought by investors, against the issue of security. That could be for issuing an unregistered security or for violating some other regulation like the disclosure requirements or something like that.

Pomp: Got It. And so, in those situations, how many of those types of clients already have lawyers on retainer or some sort of litigation-type lawyers around them versus, “Oh, I just got in a bad situation. I need to go hire one.”

Jake: Yeah, it depends. I mean, most large financial institutions and issuers of securities that are established companies probably already have general counsel working in house, and they probably have a relationship with some large law firm. The benefit of my firm, Kubre and Kim, is that we have a bit of a different business model. We call it a conflict-free business model.

Jake: We don’t maintain long standing relationships with large institutions, like most law firms do. A lot of law firms here in New York will have a Fortune 500 client, and they’ll do whatever kind of work comes up for that client. We don’t do that. The reason we don’t is because it frees us up, from a conflict of interest standpoint, to take cases that are adversarial to a broader range of clients.

Jake: So, if there are, for example, the investors who are bringing a suit against a particular company that maybe issued an unregistered security, there are other law firms that are already representing that company. They can’t obviously litigate the case against that company. So, we often come in as special counsel or conflict counsel to handle those types of discrete, specialized matters.

Pomp: Got It. So you’re like a seal team six of securities law. Got It.

Jake: I like that. Yeah, I like that a lot.

Pomp: All right, so how does the securities litigation and law apply to crypto, in the sense of we’ve kind of described how it works in the non-crypto world, but crypto’s like a whole new game here. Where do you see that playing out right now?

Jake: Yeah. So the big issue right now is about the issuance of unregistered securities by ICO projects. ICO stands for initial coin offering. In the normal context, if you do an IPO, an initial public offering, you have to register the security that you’re issuing with the SEC. You also have to comply with a bunch of other regulations in the federal securities laws, like doing regular disclosures on a quarterly and an annual basis. You have to do disclosures when certain special events happen. You have to have auditing programs, you have to do certain types of record keeping. These are all regulations that apply to the issuers of securities.

Jake: In theory, if these ICO projects are issuing securities as they are defined by federal law, they should be complying with all of those regulations, except most of them are not doing that right now. So, the big question in the crypto space at this moment is have those ICOs violated the federal securities laws, specifically sections 5 and 12a of the Exchange Act of 1934, by issuing unregistered securities, and how are we going to resolve that problem, if so?

Pomp: Okay, so, let’s take a step back here and really go into the details, because I think this is important, and it’s something that a lot of people in crypto, I think, yell and scream about on crypto twitter, around, “Oh, security’s not securities,” but I don’t think they actually understand what we’re talking about. So, when you’re talking about an issue or there’s somebody who offers a security or an investment opportunity to a set of investors, and the laws that we’re describing are basically governing what you can do, what you can’t do, who you can offer it to, etc., right?

Jake: That’s Right. Yeah.

Pomp: Okay, so, let’s start with the knowns. So, there’s definitely securities regulation or offering regulation around Reg D, Reg A+, S, CF, et cetera. What are the other main concerns or main points of focus in the known bucket around securities law that ICO projects or crypto projects need to be focused on?

Jake: Yeah, so I think you, I think you’ve nailed a lot of them. I think the big issues right now, like you said, are Reg D and Reg S. Reg D is about whether you’re doing a private placement, meaning you don’t need to comply with the registration and disclosure requirements. Reg S is about whether the SEC has jurisdiction over an issuance that is conducted either in the United States or executed sufficiently outside of the United States that the SEC doesn’t have jurisdiction over it.

Jake: I think the problem that we’re still trying to work out is whether a token is a security by definition, or whether it fits some kind of consumptive use, some kind of utility token, for example, where the person who’s buying it isn’t buying it with the expectation of profit, they’re buying it for their own personal use or benefit or enjoyment. If that’s the case, then the token would not be a security under federal law.

Jake: And I think the last couple of years, one of the main ways that ICOs we’re trying to do these issuances, to raise capital for the purpose of developing their networks without subjecting themselves to the securities laws, was to say, “We’re not issuing this for investors to make money. We’re issuing it because it’s going to have some use in the future. Therefore, it is not a regulated security.” That was one of the main ways people were trying to get around the securities laws.

Pomp: Absolutely. And really, what you’re describing and what they were depending on was the interpretation of this Howey test. So maybe you can go into detail of what is the Howey test, how did it come about, and then we can talk about how it gets applied to crypto.

Jake: Yeah, sure. So the Howey test is the federal standard for determining whether a particular financial instrument is an investment contract, which is one type of security regulated by the federal laws. When we talk about Howey, we’re talking about a 1946 United States Supreme Court case, Howey v SEC. So, here’s basically the story.

Jake: Howey was a hotel operator that owned an orange grove on its property, and Howey decided to split up the orange grove into different parcels and sell the parcels to investors. Howey said that this was just a real estate transaction. They were just selling property. It wasn’t supposed to be a security, but when they did the sale, they combined the sale of the real estate with a lease back contract, which said that the investors were giving Howey the right to continue to cultivate and harvest the orange groves, and then the investors were going to get the profit from Howey doing hopefully a good job in harvesting and selling these oranges.

Jake: The Supreme Court said this is still an investment contract and basically, the ruling was, it doesn’t matter what form your security takes, it doesn’t matter if it’s a stock certificate or a lease back contract or anything else. It doesn’t matter what you call it, either. All that matters is whether it fits these four factors in this test that the court set out.

Jake: The four factors are, number one, you have an investment of money. Number two, the investment of money is in a common enterprise. Number three, you have an expectation of profit, and number four, your expectation of profit is based substantially on the efforts of a third party or promoter.

Jake: And so, applying that to the crypto space, if you have a digital token that you issue and you hit all four of those factors set out in the Howey test, then you have a regulated security.

Pomp: What percentage of projects, just on an aggregated basis, what percentage do you think are likely to be meeting the standard of the Howey test? Meaning that they are a security versus not.

Jake: So that’s a hard question to answer for a couple of reasons.

Pomp: That’s why I asked it.

Jake: Yeah, no, for sure. The reason that it’s hard to answer is because it depends who’s going to make that decision, and so it’s important to understand how these regulatory enforcement actions go. There isn’t really going to be a concrete answer whether any token is or is not a security. All there’s going to be is, hopefully, an agreement between a particular project and the SEC about what the project is going to do to remedy the issuance that they made.

Jake: So, here’s basically how an enforcement action works. You’re an ICO project. You issue a digital token. One day, you get a subpoena from the SEC, and it says, “The SEC thinks that you may have violated the securities laws by issuing an unregistered security.” You then start this long, drawn out process of exchanging information, probably exchanging documents. You sit down at a conference table like this one, and you negotiate about how the issue is going to be resolved.

Jake: A lot of times, the company won’t even admit that what they issued was or wasn’t a security. They will admit no fault but settle the case by, for example, paying a fine or deciding to register their security while maintaining that it wasn’t a security in the first place. So, it’s pretty hard to answer whether any of these tokens definitely are, or definitely aren’t.

Jake: I will say, I think that most of these companies, in the end, will negotiate with the SEC, will come up with some deal where they pay a fine, they register their tokens as a security, or, alternatively, they give up and they decided to dissolve the company and liquidate all of their tokens. So, I think all of this will get handled one way or another.

Jake: What would be interesting, and what I’m waiting to see, is for one of these companies to say to the SEC, “Pound sans, we don’t agree with you. You’re wrong. Our token’s not a security. If you want us, come get us, we’re going to court.” That’s when we will finally get an answer from the courts on what a digital token is or isn’t.

Pomp: Got it, and so really the way you described around that negotiation is the SEC saying, “We think that you did this.” The company can go in and, if they want to play nice or they don’t want to kind of drag this out into the bare knuckle fight, then there’s some negotiation, and even if they do still believe they’re not a security, they may just settle because it accelerates their ability to get over the issue.

Jake: Yeah, exactly. It’s often a better way to resolve an enforcement action. It is less risky, because if you do end up going to trial against the SEC, they’re going to pull out the big guns and if you lose that trial, the consequences for you can be much greater than if you work out some deal with the SEC. So, if you’re not interested in what we call the company litigation, then you’re going to make some kind of deal, whether you think what you’ve done is wrong or not.

Jake: That said, when you sit down at that conference table and negotiate, what you’re doing is pointing out all of the weaknesses in the SEC’s case from the perspective of, “Hey, if we don’t make a deal, we’re going to go to trial. Here are all the arguments we’re going to make to a judge why your case should be dismissed. Here are all the arguments we’re going to make to a jury, why they should side with us. Are you really willing to take that risk?”

Jake: SEC lawyers who have career risk, if they try one of these huge cases and lose, and that’s how you end up using all of these issues as leverage to negotiate a good settlement.

Pomp: Yeah. And part of this plays into the SEC, from what I understand, they don’t want to go to trial unless they have a very, very high level of competence that they are going to prevail. Right?

Jake: Yeah, exactly. And the reason for that is, if they lose one case, it will impact every other case that they’re trying to settle in other conference rooms in other parts of the city. So, they don’t want to set any bad precedent that’s going to hurt them, as far as their broader enforcement strategy.

Pomp: Got it. What’s the saying? When you come at the king, you better not miss?

Jake: You better not miss. Yeah, exactly.

Pomp: Absolutely. Okay, so that all makes sense. What are we talking about in terms of these settlements? SEC subpoenas somebody, they come to the table, they’ve got all of their reasons why they think what they did was not wrong. The SEC’s got all the reasons why they think what happened is incorrect. Are we talking about big fines, like tens of millions, hundreds of millions, or are we talking about hundreds of thousands? Does it matter on how much capital was raised? Walk me through. Is there a framework to think about these settlements?

Jake: Sure. So it can be anything. As a foundation, I would say this is just a business negotiation. Like any business negotiation, you’re trying to expand the pie, you’re trying not to treat it as a zero sum game, you’re trying to make whatever the best deal is for everyone. It can include anything that both sides will agree to.

Jake: The typical things that a settlement in the securities enforcement world will include is a fine of some kind. The fine is usually punitive, meaning it is a punishment for what you have done. There’s also something called disgorgement. Disgorgement is the SEC taking back whatever you’re ill-gotten gains are, so you usually have these two separate calculations of how much money you’re going to pay.

Jake: Then there’s gonna be some remedial requirements. Like I said, if you issued an unregistered security, now you have to register it, or if you fail to make a particular disclosure, now you have to make that disclosure. There could be heightened requirements. So, if you were chronically failing to disclose a certain type of information, maybe you need to do even more disclosures than would normally be required for a securities issuer.

Jake: There’s something called a compliance monitor, which is usually another law firm that gets assigned to watch everything you do for a certain period of time, and then report back to the SEC to tell them, “Okay, they’re complying with everything that you agreed to.” So there’s a lot of different ways that this can go.

Pomp: Got it. Okay. And then, if there is a fine, that goes into the SECs pocket, do the investors get a piece of that? Where does that money go, and what is the potential value that the investors in that security or non-security have a claim on potentially?

Jake: So that gets super complicated, both from the investor perspective and the government perspective. There is an entire infrastructure in the government devoted only to figuring out when there is one of these penalties paid to the government, who gets what piece of it. And everyone who is involved in an investigation fights over how much should the SEC get, how much should the DOJ get, how much should the FBI get?

Jake: There is an entire office, the General Accountability Office, the GAO, that litigates disputes between different federal agencies over which one of them should get how much money. So this sounds like typical government stuff, right? When you’re trying to figure out with investors, again, there is a typical negotiation trying to settle a civil case. Most of these kinds of cases brought by investors are class actions, which have some more procedural requirements around them.

Jake: The deal with the class action is you settle this one case, but the settlement is supposed to apply to every single person who could possibly have brought this type of claim. So, for example, Ripple, right now, is subject to three class action cases in California. In theory, the class is any US investor, whoever purchased XRP.

Pomp: And that is at the issuance, or if I went on Coinbase yesterday and I bought XRP, I potentially could join class action?

Jake: So the allegations are that XRP is still, today, an unregistered security. Now, in theory, the Ripple fans who are listening to this podcast will say that XRP stopped being a security at some point in the past, if it ever was, because it became sufficiently decentralized. All that means is that Ripple would be liable for less of a period of time during which they had issued an unregistered security. That would affect the damages calculation but not their liability. But what’s going to happen is, when you settle that one case, you have to follow a lot of procedural requirements to make sure it’s not unfair to all of the thousands of people in the rest of the country who are not directly involved in that litigation. So, a federal court is going to do a whole analysis to make sure that whatever the settlement is, which probably involves the defendant paying some amounts of money to these investors who are theoretically injured to make sure that’s fair for everybody. And so it’s a very long and drawn out process.

Pomp: Absolutely. And we are pretty much describing is there’s regulators of the markets, right, the SEC, etc., and then there’s a second layer of the regulators of the regulators. They’re the ones who are figuring out where does the money go, who gets it, why do they get it, etc. So, you can kind of stack the bureaucracy on top of each other pretty quickly.

Jake: Yeah, that’s true. And look, this is a big revenue stream for the government. We haven’t really had any big settlements yet in the crypto space, but just to compare this to another area that I’ve done a lot of work in, which is the Foreign Corrupt Practices Act team, which is the law that prohibits bribery of foreign government officials, you can have cases that result in hundreds of millions of dollars in penalties that are paid by defendants. I think one of the largest ones was over $1,000,000,000. The number of lawyers who are working for the SEC or the DOJ prosecuting this, they’re not getting paid that much. So this is making a lot of money for their agencies.

Pomp: I guess this is one of the times where we’re probably glad that SEC employees or lawyers don’t get paid incentive fees.

Jake: Right? They would definitely be going after a lot more. They’d be a little more aggressive than they are now if that were the case.

Pomp: Alright. Just making sure. So, one of the things that we start to see teams do is say, “You know what? I understand that there is uncertainty around securities law, in terms of for crypto specifically. So, we know what the laws are. I’m gonna go ahead and I’m gonna issue this token. I don’t know if you are going to come down and say it’s a security or not. I’m not going to register it, but what I am going to do is I’m only going to sell it to accredited investors.”

Pomp: It’s this almost hybrid approach where it’s not a registered security with the SEC. Sometimes they go ahead and use an exemption, sometimes they don’t, but as long as I sell to accredited investors that I’m okay. That’s kinda their belief. Where does that fall in terms of less likely to be enforced on? How does that play into all of this? Maybe people should be doing that.

Jake: So yeah, what you’re referring to is Regulation D, and specifically rule 506b and 506c of that regulation, which pretty much say if you only sell a security to accredited investors, you do not need to register your security. You don’t have to do all of the disclosures that are otherwise required. So, if an ICO project succeeds in only selling a token to accredited investors, it has essentially complied with the federal laws because it’s going to enjoy the safe harbor that rule 506b or 506c provide.

Jake: I think what we’re seeing in 2018 is most ICOs that are coming out now are only selling to accredited investors because there’s enough capital there for them to raise what they need to raise, but almost no risk as far as securities enforcement down the road.

Pomp: Got it. And then, with that accreditation law, how much of the accreditation laws are driven by the issuance problems versus the other side, the enforcement problem? What I mean by that is, as these accreditation laws were kind of created and put into place, is it because they’re actually seeing what issuers are doing and they’re trying to react to that, or is it they’re trying to design a market from scratch that protects the investors? Or maybe it’s a hybrid of the two.

Jake: Yeah. So, well, let me explain how the accreditation rules developed. I think that might help clarify this. So the accreditation rules date back to 1982. Prior to 1982, if you were an issuer and you wanted to raise capital by selling equity, by selling an equity security, you had to register it with the SEC. You had to comply with all the disclosure requirements. There was almost no way around that unless you were just going to stay outside of the United States.

Jake: In 1982, as a deregulation measure, Reg D was adopted for the purpose of saying, “If you’re a small business and you only sell to accredited investors, we will allow you not to follow all those other regulations.” So, in a way it was a strategy to allow more capital formation by only allowing investors who could take the hit if the security ended up going to zero to purchase that security.

Jake: You have to understand. The point of the securities laws is to close the information gap between issuers and investors, to make sure that investors have basic information about the securities that they’re purchasing, about what the company’s assets and liabilities are, what the risks are facing that company, so that they can make an informed decision about whether they want to purchase or not.

Jake: And the idea of the accreditation laws is if we are confident that the investor will not go broke, if they make a bad decision because they don’t really have the information we would otherwise want them to have, then we’re going to be okay with that. So, I think that the accreditation rules are really to target both of those areas. It’s saying, “We’re going to relax the standards for giving information to investors, and we’re also going to take away some of those protections that they have as far as filing lawsuits after the fact if something goes wrong.”

Pomp: So really, what you’re describing is pre-1982, this idea of is a really high bar. You had to register, which probably took a long time. It costs a lot of money. Reg D comes in and there’s some deregulation, or the ability to make it easier for people to raise capital in certain situations from certain types of people. It’s a little bit shorter timeframe, probably a little bit less expensive.

Pomp: And then really, if I extrapolate that out, Reg A+, which allows you to take certain types of offerings and offer it to nonaccredited investors, is another form of deregulation along that same vein, making it easier to raise capital in certain situations.

Jake: Yeah, that’s exactly right. So, all of these are legal mechanisms allowing issuers to raise capital by issuing securities without complying with the core requirements of the original 1933 and 1934 securities laws, which were the original laws passed in the wake of the Great Depression, requiring issuers to go through these registration and disclosure obligations.

Pomp: Got it. Hence, why they’re called exemptions, exempting you from that law.

Jake: Exactly.

Pomp: Okay. So walk me through the counterargument to the following. A lot of people say, in crypto, we’re using things like accreditation laws that were created in pre-1982, using regulation that was introduced in 1982 and the Reg A+ recently, and we’re using the Howey test, which was created decades ago. That was, Howey test, for example, the orange grove. We’re now talking about building a deflationary decentralized, a global reserve currency or a world’s computer, all these high tech type projects. How do we use legislation or regulation from decades ago to apply in these situations? What’s your take there? Is that appropriate? Is it not? Should we change it? How do you come out?

Jake: So I think you make a good point, which is, sometimes events develop in a way where hold laws just don’t make sense anymore, and I think, particularly, when you move from the 1930s and 40s, and then even the 1980s, the pre-internet age, to a digital age, it is kind of hard to take these old regulations and apply them to this brand new type of asset that no one could ever have contemplated before, the rise of the internet and particularly …

Jake: I could never have contemplated before the rise of the Internet and particularly before Bitcoin came on the scene. That said it is a foundation of our legal system that we take laws that are drafted a long time ago and then apply them to conduct and assets that were not contemplated at the time the laws were drafted, right? We have the United States constitution drafted in the late 18th century were very little about modern life, could have been contemplated at all and yet we are taking those principles and we are applying them to modern life.

Jake: I think as long as the core principles make sense, you can still apply them to new types of products and new types of conduct. Like what’s going on in the Crypto Space now when you look at the securities laws, again, that core principle, which is we want investors to have basic information about the securities that they’re buying and holding. We want other market participants like exchanges and brokers and custodians and brokerage firms and investment advisors and all these kinds of people to operate honestly and not commit fraud and not be affected by conflicts of interest.

Jake: All of these core ideas make perfect sense in the Crypto Space, right? If you’re going to raise capital through the issuance of a digital token, it’s really no different from raising capital through any other means that someone has used in the past. I think the difference is a digital token is fundamentally different in the sense of you can issue it as a security and then as the life cycle of the token continues, it evolves from a security into not a security as it starts playing a role in whatever the network is that it was issued for.

Jake: That is extremely unusual and not something that was truly contemplated by the securities laws where you’re talking about an investment contract or a stock certificate. These are not things that develop and change over the course of their lives. And so I think we really need some more clarity as far as when does a digital token go from being a security to not a security, how do we define that shift and how do we handle it as it goes forward?

Pomp: Absolutely. And what you’re describing is we’re just entering a new type of environment, right. So one of the things in the news that’s recently come out is the SEC chairman Clayton are contemplating ways to give access to non-accredited investors. Right? So, is there a way for them to evolve or change accreditation laws to allow a subset of the population access to investments that maybe today they’re precluded from? Right?

Jake: Yeah.

Pomp: Good idea. Bad idea. Maybe even have an idea as to what the solution could be. Where do you come out on that?

Jake: I don’t know what the solution is, but I agree with you completely that we need one. I don’t think that the accreditation laws make a lot of sense in 2018, in the 1980s I think it made a lot more sense and I’ll tell you why. At that point, there weren’t that many people who qualified as accredited investors, right? The standard be an accredited investor is you make $200,000 in income if you’re an individual or 300,000 if you’re married. And you also have to or you can have $1,000,000 in net worth, right? That number has not changed since the early 1980s. At that time there were very few people who qualified for that level of income just given inflation. And as a result, the pool of private equity was pretty small and the number of private placements was very low.

Jake: This just wasn’t that big of an issue at that time the expectation was if you want to raise capital through the issuance of the security, you’re doing it through an IPO. And now it’s true for a very long time. It’s only recently that we’ve seen a huge drop off, maybe in the last 10 or 15 years or so, a huge drop off in the number of IPOs. And there are a lot of reasons for that, but it just doesn’t make sense anymore to be a public company. It costs between one and 2 million dollars to do an IPO, depending on the scale.

Jake: That is a huge amount of money for a smaller company that wants to raise capital, you have to comply with all of these registrations and disclosure requirements. They’re not easy to comply with. You end up paying auditing firms an extraordinary amount of money every single quarter to do audits and release financial statements. It’s just at this stage doesn’t make a lot of sense to be a public company, particularly when you have all of the scrutiny of the markets looking at on a day to day basis or on a quarterly basis, how are your margins doing, right? What is your balance sheet look like? And a lot of people, this is not specific to the Crypto Space, but for example, Warren Buffett is saying we shouldn’t be focusing on quarterly earnings. We should change that.

Jake: These are all the reasons why going public and now it doesn’t make a lot of sense and we see so many more of these private placements which are only done to accredited investors. And what that means is there is now very little opportunity for unaccredited investors to get access to high quality capital. And that I think is why we have to change something about this rule, whether it’s changing the wealth test to be something else that better reflects whether investors are qualified to get into a particular investment opportunity or something else, I’m not sure but I do agree something has to change.

Pomp: Yeah. I mean, the classic argument is we allow people to buy lottery tickets. Right?

Jake: Right. Exactly. No, for sure. I mean, look, the problem I think with doing a knowledge test, which I know is something you’ve talked about before is, I think one thing people don’t understand about accredited investors is you don’t apply to the SCC to get a license or to be an accredited investor. Right? It’s on the issuer to make sure that the people, they’re selling securities to our accredited investors, if they mess up, then they are liable for dealing and unregistered security.

Jake: And the wealth test, while I think it’s a rich get richer, the poor get poorer proposition and it’s a bad proxy for whether someone is sophisticated. I don’t think being rich makes you any smarter. It is still a very easy bar for an issuer to decide are the investors that I’m selling to accredited or not. And if you ask a those issuers to develop and administer some kind of knowledge test, you are asking for a lot of problems and a lot of litigation.

Pomp: Could you imagine like Elan Musk, Mark Zuckerberg, Sergey, all these guys saying, hey, I want you to invest in my company but, it’d be great if you took this SAT test first.

Jake: Right. It’s crazy. So, I mean, I don’t know what the solution is, but hopefully someone smarter than me will figure it out.

Pomp: I always joke around and say that I know a lot of dumb rich people, right?

Jake: Yeah.

Pomp: That should be the first warning sign. All right, let’s switch gears real quick and let’s talk about some non-security based, legal issues. So, taxes right now, I think a ton of people are dodging taxes for sure they’re not reporting this stuff. The number that we always joke around about is I think this year Credit Karma did a study a less than 100 people out of the 250,000 people they surveyed reported any sort of taxable profits from Crypto. Right? So if you look at all the numbers on the exchanges, Et cetera, it’s probably more than 100 out of 250,000. Are people like at big risk here? If so, what does that look like? Like just talk to me about, these people who aren’t reporting the taxes. How big of a problem is this?

Jake: Yeah, so as a legal matter, I think people are at huge risk if they are making capital gains in the Crypto Space and they’re reporting those capital gains and paying taxes on them. For a long time I think people just didn’t think about paying taxes on Crypto gains when you’re thinking about the people who are trading Bitcoin. In 2010, 2011, 2012, I don’t think taxes was even something on the radar for them. We’re also talking about some people who are, shall we say, more on the anarchy side of things and maybe they don’t want to pay taxes in the first place is.

Pomp: Is it though she’s getting a tax bill, you think?

Jake: Who knows, right? Hey, none of those coins have moved, right? So no taxable events yet anyway. Also, then for a really long time, there was this thought that Crypto to Fiat exchanges were not taxable events because they were like kind exchanges, which is this exception in the tax code that says you don’t have to pay taxes if you’re moving from two different types of products that are essentially the same thing. And the IRS came out I think last year and said, that is incorrect. It never was true. We are clarifying for certain now that it’s not true, every exchange of Crypto or Fiat was a taxable event.

Jake: I think there is a huge tax liability out there that has not been paid. Whether the government has the resources to go after that is a separate question. The IRS is known for being a little bit less aggressive. They’re under resourced to begin with. They have some really smart people in their criminal section, but they just don’t have the resources to be tracking down a trader who is making money on an early exchange on knock ox in 2011 or something like that. I think legally there’s a lot of risk, but I think it remains to be seen what the government is going to do with tax enforcement because up to this point, security is enforcement has been the main issue. We haven’t seen a lot of movement from tax regulators at this point.

Pomp: Would it be fair to say that there is a higher risk for people who have made those gains recently and the more gains you made, the higher risk you’re at? Or do you think that everyone from the person who made a couple of a hundred bucks in 2011 compared to the person who made millions in 2017, they’re all have a similar risk profile?

Jake: I think that practically speaking, the risk is a lot higher for people who are making money more recently. And the reason I say that is because number one, the government is watching now and I don’t think that they really were five years ago even. Number two, the government is developing new channels to get data and information from the OnRamps where people are putting Fiat in, in order to get Crypto. So somewhat recently, for example, there was a subpoena to Coinbase where Coinbase had to start turning over information to the government about some of it’s more high value clients.

Jake: So the government is getting more information and I would guess they’re going to be focusing on the transactions that are happening most recently when they’re sifting through that information and figuring out who do they need to send enforcement letters to say, hey, you didn’t pay taxes on X amount of profit that you realized last year where is that money?

Pomp: I mean the Crypto thing was interesting, right? Because I think the government came in and said, hey, tell us everything about everybody and I think Coinbase put a foot in the ground and said, we’re not going to give you everything about everybody. But there was, again, I don’t know if it was a settlement or an agreement around … and I may get this wrong, so correct me if I do. They’d give information on people who had more than $25,000 or something that they’ve either transacted or held. Walk us through as much as you can disclose there around what the government was looking for and in Coinbase disposition and why they took that position.

Jake: Yes, I think that’s right. I don’t remember the exact dollar amount, but basically the government as always wanted all information about every person who would ever open an account with Coinbase more or less, if I recall correctly, and Coinbase wanted to give over no information at all because that’s how this works when you get a subpoena from the government. There are in a normal circumstance two ways to deal with this. You can either make an agreement as the person who was received the subpoena to provide the government less than what they asked for or you can file a motion to quash and go to court and ask the court to say, okay, these aspects of the subpoena are all right. The rest of this is too broad. It’s not relevant.

Jake: If I remember correctly in the Coinbase example, they went to court, filed a motion to quash and they got the court to limit the scope of the subpoena. But in the end they did turn over a lot of information about their clients and my guess is, I don’t know this, but my guess is Coinbase and Gemini and any other exchange that’s trying to do business in the US is now providing some type of information to the government on a regular basis.

Pomp: Got It. And then maybe we can even touch on a ShapeShift. Right? The whole situation there were they’ve pretty much always said that you can come, you can transact, no accounts, we have the information and there’s people who found kind of peace in the no account type model. Recently they had to change that or are they did change it. And so there was a bunch of debate around did the government force them to do this? Is this something that they’re opting into proactively. Talk to us about why did they do that? And do you think that even the decentralized exchanges, Et cetera, are going all have to move to this model? Or do you think that there will be some ability to kind of live outside of these requirements?

Jake: This is an issue with the Bank Secrecy Act of 1970, which is enforced by FinCEN, The Financial Crimes Enforcement Network I mentioned it’s a bureau of the US Treasury Department. The Bank Secrecy Act, requires a certain set of regulated financial institutions to do financial surveillance basically on behalf of the government and report certain financial conduct to the government. ShapeShift may in theory be a regulated financial institution called a money transmitter, which pretty much means you are an entity that takes money from one person and then transmit it by any means to another person or a location.

Jake: Erik Vorhees came out a couple of days ago and said that adding KYC, Know Your Customer requirements to ShapeShift wasn’t in response to an enforcement action from FinCEN but it was in response to perceived regulatory risks that may be FinCEN, would go after them at some point for being a money transmitter, but not complying with all the regulations that apply to a money transmitter under the Bank Secrecy Act.

Jake: I think that this will be a growing problem for the Crypto Space. Basically everyone in the Crypto Space could be a money transmitter, right? If you’re running a node at home, you could be a money transmitter because you are processing transactions between different people in different places and there isn’t a lot of clarity about how those rules apply and much like the securities laws, the anti money laundering compliance laws are very onerous. It costs a lot of money to follow those laws and the penalties for failing to comply can be very severe. So I think that this is a problem we’re going to see expand a lot.

Jake: You asked about decentralized exchanges. This to me, is one of the most interesting things that will happen in the Crypto Space. The government has a strong vested interest in maintaining this tightly controlled, regulated, a global financial system that we have that the government uses basically as the only means for detecting international crime. Law enforcement depends almost entirely on financial institutions reporting on our financial conduct to the government. Decentralized exchanges are a way for people to circumvent that regulatory system which will stop the government from having insight into the financial conduct of people all over the world, which stops them from enforcing the anti money laundering laws and stops them from enforcing other laws like trade sanctions, laws and counter terrorist financing laws. And so I wonder once the government starts to understand what decentralized exchanges are and what they enable, how they’re gonna react to that.

Pomp: Let’s go really, really down the deep … the rabbit hole here in the sense of I like to think that the Hollywood movies of tomorrow are going to be based on all of the nuances of Crypto today, right?

Jake: Yeah.

Pomp: So we’ve seen billions, for example, the Showtime Show that they’ve started to now pay people in Crypto and all this stuff. But let’s talk about the legal ramifications of if there is a truly decentralized pseudo anonymous currency like Bitcoin for example, that begins to be used within, let’s say, terrorism financing for example, right? Technically every transaction is written into an immutable ledger, right? So there is some transaction history that is preserved, but you don’t necessarily know who’s sending and who’s receiving, you just know the accounts. How does this play into how law enforcement looks at this, how regulators look at this? Is this actually the biggest threat to a Bitcoin type a currency that the regulators don’t have that control and so they try to kill it? Like how … just walk me through this.

Jake: This is definitely my personal biggest concern about the future of Crypto. We spend a lot of time talking about securities laws. I think the securities enforcement issue is almost a distraction from what we’re looking at five or 10 years down the road. Once we get to a point where you can buy goods and services with Crypto instead of with Fiat, that what’s holding back the floodgates of regulators being suspicious about this space is right now if you want to buy goods or services, you’re still more or less taking your Bitcoin or your Minero or whatever you have and converting it back into US dollars reentering the regulated financial system and then doing your transaction there and in full view of the government.

Jake: I don’t think the government understands at this point what it looks like when there is a new financial system that is not under their well developed financial surveillance regime. That I think develops over time once we can buy goods and services with Bitcoin or even with Minero something that government truly can’t see, that he’s not a public ledger. If Bitcoin develops privacy and there’s a lot of discussion about how that’s going to happen either through confidential transactions or the lightening network. This is in many ways the end of the governments well established method for detecting, preventing, and discouraging crime.

Jake: That includes a drug trafficking, terrorism, any other type of crime that you can imagine where the criminals are by necessity going to try to integrate the proceeds of their criminal activity into this regulated financial system because otherwise they can’t spend it. I hope that the government when they do realize that what Crypto enables is for the world to transact without them watching that they will not try to shut down the entire space. Now I will say I don’t think they can anyway. Right? The whole beauty of Bitcoin is that it’s censorship resistant that government can do whatever it wants. Bitcoin will more or less keep going.

Jake: But I do think it will be a huge setback if, for example, the US government were to say starting tomorrow, holding bitcoin is illegal. I think that we may be able to prevail on the government that first of all, any effort they make to try to shut it down and we’ll fail and so they shouldn’t try in the first place. And secondly that it is a good thing for us to have financial privacy. Privacy, as I’m sure you know, is becoming a much bigger issue in 2018 than it has been in the past. We see that with Facebook and Twitter are going to Congress to do hearings about how they’re using our data.

Jake: People are starting to care more about how their data is used and I think that in a democratic society we hopefully will be able to impress upon the people in power politicians and regulators that financial privacy is something that we not only want but that we should be entitled to. Right. The fourth amendment of the US Constitution guarantees us a right of privacy. And so my hope is that the government will not take drastic action against Bitcoin, but that remains to be seen and I think it depends on whether or not we see a genuine crisis around the use of Cryptocurrency, which at this point we haven’t, right. It hasn’t funded some type of large terrorist action or anything like that. So hopefully that will remain the case.

Pomp: Well, what you’re describing is this argument that the violation of one’s privacy is the violation of all of our privacy? Because it’s the right some people believe we have and I think that the argument that the government makes is the trade off between security, convenience, personal rights, Et cetera. So do you see a world where the government basically says we’re not going to regulate it at all? We just can’t really just throw their hands up and say we’re going to figure out other ways to detect crime and enforced on crime? Or do you think that they tried to develop their own ways, whether it’s the on-off Ramps or something to monitor the best they can?

Jake: I think that they will do the best they can at any given time. Our government is not well known for predicting into the future and developing strategies to handle problems that are going to come down the road. They tend to react to the crisis of the day. I think that has more of the world’s transactions and move away from the regulated financial system and onto Blockchains, whichever ones they may be, the government will simply limit its surveillance to, as you said, the OnRamps where they’ll monitor what they can and the more or less give up on what they can’t.

Jake: That’s how it is now, right? The government can’t see our cash transactions in person. They can’t really see if someone loads a briefcase full of US dollars and flies to a sanctioned country like Iran and make some transaction using those US dollars. The government doesn’t think that they can control everything that happens financially in the world, so think they will simply scale back as the circumstances require them to scale back. I also think that law enforcement tends to do a pretty good job of developing along with technology.

Jake: This is something that Andreas Antonopoulos talks about a lot and very effectively, which is, the first use of any new technology is by criminals. Criminals by nature are going to take as much risk as they need to because criminal conduct is by nature a high risk activity. So for example, the car is developed, one of the first use cases for the cars for bank robbers to get away from the police faster, right? So the police get a car that’s faster than the ones the robbers have or come up with other ways of handling this type of criminal conduct.

Jake: I think that will happen again. We saw that happen already to some degree with some of the dark net drug markets like the Silk Road were okay, law enforcement could no longer track the transactions happening on this dark net drug market. So what did they do? They ramped up other enforcement efforts. They used to undercover agents, they started looking more for drugs that are being shipped through ports and through, UPS and FedEx and things like that. So I think law enforcement will find a way to keep doing its job well while also allowing the rest of the world to have freedom of money.

Pomp: I mean, it is a cat and mouse game to some degree. Right? You mentioned something that we’ve thought a lot about in terms of the way that a government have the heavy handed response to this could be to ban ownership of either one digital asset or all digital assets. They could come in and they could say you can not own Bitcoin. It is illegal and if you are found to own bitcoin, we’re going to throw you in jail. Right. That would be that most heavy handed response I could think of that a government could participate in. Do you think that actually deters people from owning bitcoin or does it actually drive an option because people go and buy the thing that the government tell them they should?

Jake: I think a little of both. I love the idea that if the government bans Bitcoin immediately, the price skyrockets. I think that’s a fantastic idea. I don’t really-

Pomp: It’s like digital prohibition.

Jake: Yeah, exactly. Right. And I mean that is true. I prohibition did not stop the trade of alcohol and marijuana prohibition today is not stopping the trade of marijuana, so this stuff doesn’t work the way that the government wants it to. I don’t think Bitcoin will end Bitcoin. I do think there are a lot of people and I’ll give you the example of my dad who I convinced to buy Bitcoin by explaining to him, here’s what they coin is, here’s why it’s so important and powerful, here’s why you don’t want to be left behind in his old legacy financial system. My dad is not going to hold Bitcoin if the government says it’s a crime to do that.

Jake: And so I think that the immediate reaction would be a big problem for price and adoption. I think it would slow adoption down a lot. On the other hand, the use case of Bitcoin is not for my dad. It’s not really for any of us in the United States or in the developed world. We want to and should have the separation of money and state. We should have border less, trustless, censorship, resistant money.

Jake: But it’s a lot more important for people in countries where the government itself is the criminal enterprise, where the banks are the criminal enterprise, where it is impossible to store your wealth without someone else who has censorship over it, taking it from you. I think in those countries they couldn’t care less what the United States government does with Bitcoin. Those are the people that’s being developed for. And their adoption rate will continue there just as fast as it would, no matter what the US government does.

Pomp: Yeah. And do you think this carries over, not just on the currency side, but we … have been on record of saying I think every stock bond, currency and commodities is going to get digitized. We already see this in kind of the traditional world. Is there a difference in the government’s eyes between owning a censorship resistant a currency versus let’s say censorship resistant stocks or bonds or commodities?

Jake: Tokenize everything.

Pomp: Tokenize the world.

Jake: I definitely think there’s a difference. And one of the tropes that we hear from the legacy financial industry a lot is Blockchain not Bitcoin, right? And that sort of underlies this concept of it’s okay to take some tried and true traditional financial product like a stock certificate and then make it digital, which we’ve already done years ago and now to put it on a Blockchain as long as it makes that financial industry and more money.

Jake: I think that tokenizing some things like stocks probably makes a lot of money for the issuers for exchanges, for a number of other players in the legacy financial system. Maybe not the DTC, but sometimes companies get disrupted, right. I do think that there is a big difference between a currency, which is something that the government controls for the purpose of taking on debt that it seems we have no way of paying off for the purpose of Geo political disputes. Right? So we use our money, we use the US dollar to litigate disputes with other countries. We use it for financial surveillance, right? The government has a monopoly on money and wants to keep it, that is very different from tokenizing other physical assets or securities.

Pomp: Absolutely. In your touching on trade there for a second. A theory that people have and in fact, I probably haven’t looked at enough at the data to have an opinion yet take Iran for example, right, where we’ve put a bunch of economic sanctions on the country and so people’s, thought process here is, oh, they’re going to move to digital currencies where they’re not included or precluded by these early sanctions.

Pomp: And so now all of a sudden we’re entering a new world where trade violations, trade sanctions, via cryptocurrencies has to be addressed. When do we think that’s happening today? And two, is there any work being done in the legal world to address this or either or prosecute it?

Jake: It is happening today. There isn’t really a good answer. I actually had a long conversation with one of my colleagues last week who does trade sanctions enforcement defense.

Jake: Yeah. No, because this I mean, Crypto is everything, right? It touches on every aspect of regulation. So this area, trade sanctions is enforced by a different federal agency called OfAC, the Office of Foreign Assets Control. OFAC is aware of Cryptocurrency. They know that Crypto can be used to circumvent their trade sanctions list. So basically OFAC has a list of people, entities and nations that you’re not allowed to do business with if you’re in the United States, and if you do like if you send some product to Iran, you have violated the trade sanctions laws and you’re criminally liable for that violation. OFAC is the one that’s going to enforce that.

Jake: OfAC has said that they may start adding Bitcoin addresses to their sanctions list, but that’s about as far as they’ve gotten in thinking about how do you regulate or how do you apply the trade sanctions and export controls the laws to Cryptocurrency. I don’t think that’s very effective because the best op sec is to never reuse the same Bitcoin address. And also Bitcoin addresses are not inherently tied to one person. So adding a couple of old dead bitcoin addresses to the sanctions list isn’t going to do a lot.

Jake: But the point my colleague made was the trade sanctions laws are not about stopping every possible transaction with every single person or entity on that list. It’s just about discouraging. It’s about impacting behavior. It’s about encouraging and discouraging US companies from doing business with those people. So if you are, for example, a terrorist in Afghanistan and you are trying to use Bitcoin … I’m not saying that this has happened or is happening, but if you’re a terrorist in Afghanistan, you’re trying to use Bitcoin to conduct some terrorist plot, right? And OFAC puts your Bitcoin address on the sanctions list and you decide to just start using a different address.

Jake: Well, your name is still on the sanctions list and it is still incumbent on us people to make sure that they’re not doing transactions with you, the terrorist. So I think that it’s going to be very hard for OFAC to figure out how to adjust the way that they do enforcement in the trade sanctions space to Crypto. And for now, they’re just going to do it the way they’ve always done it, which is the people.

Jake: And for now, they’re just going to do it the way they’ve always done it, which is the people in cities and nations that are restricted remain restricted. And it doesn’t matter how you transact with them whether it’s US dollars or crypto.

Pomp: Got it, yeah. It’s so fascinating how the evolution … Every time the government comes up with a solution to a problem, criminals are going to be one step ahead. They’re going to figure out some of way that they’re going to kind of circumvent.

Jake: Yeah, it’s like you said. It’s a cat and mouse game. Right? This is how it always works. It’s how it always will work. The government can come up with a perfect solution for a particular problem, and some person who is willing to take on the risk of going to jail for the rest of their lives will decide to circumvent it one way or another. It’s just the nature of things.

Pomp: Absolutely. There’s a list of people I made one time, and I said, I wonder if they own crypto or not. Right? So, like Osama bin Laden? Did he own crypto; did he not? Right? Does a Kayne West? An Oprah? Right? A Putin? Right? Do they actually personally own it? Donald Trump? All these people, and my take is that Congress recently started to require people to disclose crypto holdings. There’s been a couple of Congressional representatives that have come out and said, “I own crypto.” Right?

Jake: Yeah.

Pomp: And they own bitcoin, Ethereum, and all that kind of stuff. And so obviously, that’s going to continue as the market matures and more people kind of come in. But it becomes a huge problem when all of a sudden these sovereign nations begin to create their own crypto currencies, and so how does the government deal with that? Right?

Pomp: We’re seeing it in Venezuela. And then other people are working on it, and so I think there are a lot complexities here that, you know, again the government’s just not prepared to deal with today.

Jake: I agree. I don’t think there’s been a lot of thinking about this. My perception from what’s going on on the Hill in D.C. and when you watch these congressional hearings is that most of the politicians are still struggling to understand the basic foundations of what crypto is and what it can do . It’s like they’re trying to find the president of the bitcoin company so they can bring him in and ask him questions like they’re asking Zuckerberg or Jack Dorsey or something like that. Right? They just don’t get this yet. I think it’s going to take a long time before they do and probably as it often goes with issues like this it will take them longer than they would need to to have any kind of rational response to it. I think by the time our government understands what this stuff is, it will already be so pervasive and so well adopted that they won’t be able to do anything about it anyway.

Pomp: They’re trying to find Satoshi. They just don’t realize he’s not him, her, whoever’s not paying taxes, right?

Jake: Exactly. Exactly.

Pomp: Absolutely. Okay, let’s dive in real quick into rapid fire questions. What do you think is an important company in the crypto space that maybe isn’t on everyone’s radar but should be?

Jake: Great question. I’m going to give you one that a lot of people do talk about, but seems to be less in the news lately.

Pomp: Perfect.

Jake: Which is Blockstream. The reason I say that is because there’s so much focus now on these companies that are building on a theorem or that are doing web 3.0 kind of stuff and much less focus on the developments on bitcoin. I’m sure a lot of bitcoin cash fans if any of them listen to this will be very upset that I’m saying Blockstream.

Pomp: We scared them all away already.

Jake: Yeah, I figured. Right? We’re like Blockstream’s shows here. I think that the people at Blockstream are brilliant. We have this revelation about this bug in the bitcoin code. What I think is most interesting in crypto frankly is what we already have and what we’ve had for a very long time, which is bitcoin, and what may come sometime very far in the future, but we don’t have yet, like whatever a web 3.0 platform might actually be, I think a lot of what we talk about today with the security issuances are probably not going to amount to much just like in the Intranet age. The dotcoms that are coming out in the late 90s didn’t amount to very much.

Jake: I think that most of what could be built can be built on bitcoin, and I think that Blockstream is one of the companies that is doing the most interesting work on that network. For example, if you listen to Samson Mow talk about liquid and the idea of issuing assets on bitcoin, this kind of stuff is to me what is most interesting, and yet I think Blockstream just sits out there as a company everyone knows, but no one really spends that much time talking about what they’re developing and what they’re doing. That’s the company I am watching most closely.

Pomp: It’s so funny you say this because I ask a lot of investors this. I say, “What if we’re actually over thinking the entire space and the simplest trade or investment is bitcoin?”

Jake: Yeah, I mean look that’s what the maximalists will tell you. I would not describe myself that way, but I definitely am a bitcoiner. What attracted me to this space in the first place was the best use case of crypto, which is money, and I still think that’s true. I love the idea that someday we have some of the more esoteric interesting applications like essentialized autonomist organizations and decentralized exchange we talked about a little bit. I think all of that is fascinating. I actually think that the Dow was one of the most interesting developments, and because it fizzled we don’t really talk about it, but I think Dows are really interesting thing to disintermediate essentially the corporate structure, which dominates most business in the world today. Probably all of that can get done on bitcoin. I don’t know necessarily how strong the argument is that we end up in a world with many different blockchains on the theory that all of them can be secured in the way that bitcoin is secured.

Jake: Look, I’m a lawyer. I’m not a technologist or a programmer or an economist, so I don’t know how that stuff develops. I think the development on bitcoin is still the most interesting development going on in this space.

Pomp: If you look historically, you’ve got every time there’s been protocol wars and kind of this competition, there usually is five or less that end up being important. The Internet, the mobile world, et cetera. There’s definitely not going to be 1,900 as there are today.

Jake: Right. That’s based on network effects alone, which that concept is at play when it comes to the blockchain space. That ignores proof of work and securing your blockchain. If you have 19,000 blockchains, how secure is number 19,000 from an attack? Unless proof of stake works, and I have no idea if it will or not, I don’t think I know enough about the game theoretical underpinnings and the technology to say whether proof of stake works or not. I think it’s fascinating. I’m glad that it’s going to be tried. Unless that really works, I don’t think you have can very many proof of work blockchains at the same time that are secure.

Pomp: What you’re describing here is probably one of the most important things that we try to get through to the institutional investors. Right? If you kind of draw a spectrum, on the far left you have security. On the far right, you can draw innovation. Right? Bitcoin is actually probably the farthest left you can get. It’s super, super secure. It’s slow. A lot of people look at the slow speed both in development and transactions, et cetera, as a negative. If you look at through the lens of security, it’s a huge positive because there’s no fraudulent transactions or stuff. When you start to get farther to the right of that spectrum around innovation and kind of all of the things that people are doing and trying and experimenting with, et cetera, you have a tradeoff. You lost some security in order to accomplish some of that stuff.

Pomp: What you go back to is this framework of are really all of the other tokens and networks simply are D4 bitcoin? At some point bitcoin will get to the point where it will just incorporate smart contracts and asset issuance and all of this stuff. We’re kind of seeing some early signs of that. It doesn’t mean that that will play out forever, but I do think that when you go to a decentralized world security actually isn’t talked about nearly as much as it should be. It ends up being the most important thing because without it, the whole thing goes away.

Jake: Yeah, the whole point of the blockchain is to be secure. Right? A blockchain is a database, a very slow, very inefficient database that is also very secure. There’s a great flowchart that goes around Twitter. Maybe you’ve seen it? It’s only two boxes. It says, “Do I need a block chain?” It has one arrow, and it says, “No.” Because pretty much nobody needs a blockchain. Yet you have these studies that come out where CEOs of Fortune 500 companies get asked, “What is the biggest benefit of blockchain?” All of them say, “It’s faster or it’s more efficient.” I think people just don’t really understand what this is about.

Jake: There are a lot of applications for security. The security delivers censorship resistance. It delivers the borderless trustless nature of crypto currency generally, so you need that security before you can build anything else. That’s why I wonder do you start with the most possible security on your base layer and then build perhaps less secure but more efficient solutions on layer two or above, which is sort of the bitcoin model or do you end up in this multi-blockchain world where you have different blockchains with different tradeoffs at the base layer? As a lawyer, I will stay out of that discussion and watch and see what happens.

Pomp: Yeah. What you’re describing right here is this idea that humans in realtime are beginning to trust machines more and more. Right? We talked a bunch about this on the podcast. We’ve written about this idea that as humans begin to trust software and math more than “greedy humans,” what occurs is you can remove lots of the middlemen. You can remove lots of the inefficiencies and if this continues, actually the digitization of assets, whether it’s currency stocks, bonds, whatever, then leads into automation. Right? Imagine how many things in the financial system are inefficient not because we don’t have technology that could execute the transaction or execute the action, it’s actually because the asset is not digitized. Once you digitize it, then you can get more automation and in order for people to do that they’ve got to trust the machines over the humans. It’s scary when you describe it that way, but I do think that we’re watching this kind of evolve in realtime.

Jake: I agree. It is scary. One of the sort of unspoken impacts of blockchain technology generally is a lot of people lose their jobs because you’re right, humans are the problem in many of these systems. When you have a financial institution and you are keeping your records because you have people in the back office who are reviewing them and filing them and trying to make sure they are accurate, human error is the greatest introduction of error in that system. You improve the system greatly by replacing those people with blockchains, which means that they all lose their jobs.

Jake: There are a lot of benefits that come with bitcoin and the decentralization generally and the disintermediation of a lot of rent seeking third parties, which is one of the other reasons I’m really into this space. I think that as you say we are figuring this out as we go, and there are untold implications that we won’t realize until we see them happen.

Pomp: The greatest trade of our generation just may be long bitcoin short the bankers. All right. Let’s get going here. What do you believe in crypto that you think a high majority of other people would disagree with you with?

Jake: I think that most people believe that we are now working through the regulatory issues and that they will get better and more permissive as we go. I think the opposite. I think that things will get a lot worse before they get better. For a lot of the reasons that we have discussed already over the last hour or so, which is we’re dealing with a lot of security issues. The security issue only matters because one of the first use cases for crypto other than money was raising capital, and when you’re raising capital you implicate the security laws by nature. We have all of these security enforcement cases right now, but that’s not really the interesting thing about crypto. Eventually, there will be a professional system established where instead of doing an IPO you will do an ICO. I agree with you about that. This is going to get tokenized. There’s no reason to spend all the money dealing with a traditional IPO when you can do this in the form of a digital token and the normal securities world will simply adopt to this new technology as the single way of raising capital.

Jake: I don’t think that that ends up being very interesting. There’s obviously a lot of litigation to be done before we get to that point. What’s more interesting are these other issues that threaten the government like anti-money laundering compliance and trade sanctions compliance and tax enforcement. These things we’ve discussed. I think that right now the reaction to the securities issue more or less is, “Look, we’ve always had scammers who are trying to screw over investors,” and that’s all this is. They’re just doing it with a different type of security than they were doing it before.

Jake: The reaction will be different when the government shifts its attention to a truly revolutionary disruptive technology that fundamentally changes the way that they enforce the law and go about their business on a daily basis.

Pomp: Bad people do bad things regardless of what industry.

Jake: Right, yep.

Pomp: You got a magic wand. You wave it. You can change any one regulation. What do you change and why?

Jake: Oh, where do I start? I would change the money transmitter laws that we were discussing before.

Pomp: Oh, interesting.

Jake: I think that like I said anti-money laundering compliance I think is the next big issue that’s going to hit crypto because everyone is a money transmitter if you are taking crypto and sending it to somebody else. We can do that individually now. We don’t have to do it through financial intuitions. Regulating money transmitters made sense when in order to transact you had to interact with this regulated financial system that the government had set up and was overseeing. It made sense when money was just one thing. It was the currency issued by the government. Money is fundamentally changing. Right? Money is now whatever we decide to issue on a blockchain and then assign value to and treating every person who transmits that kind of money as a regulated financial institution that needs to implement an anti-money laundering compliance program is preposterous.

Jake: A strict application of the laws as they are now would say if you run a lightning node, you’re a money transmitter. If you are shape shift or you’re in exchange or your bit pay or you’re any one of these entities by virtue of your transactions and crypto currency, you have to comply with these onerous regulations. That, I think, is a huge problem and could slow down development in this space a lot and should be changed.

Pomp: Absolutely. Time for the hard hitting question. Let’s just say that we give up and we say aliens are real. Do aliens have pets? Are there human aliens and pet aliens?

Jake: So are these aliens wherever they are now or they aliens when they come to us?

Pomp: When they show up like are they getting off the spaceship with like an alien dog?

Jake: Not when they get off the spaceship. If they’re like our level of development on another planet somewhere in some other galaxy, then, yeah, I think they have pets because I think life probably develops the same way. We all like companionship, so probably they have pets then. If they’re so technologically advanced that they have interstellar travel they’re coming to earth to see us, I kind of doubt they have emotions left in that way. I kind of don’t think they care a lot about pets, which makes me sad because I’m a dog person. I love my dog more than almost anything.

Pomp: Somebody hit me recently with … It’s like Noah’s Ark. Humans don’t go to space, and we never bring pets with us. Noah’s Ark that was the first thing, two by two, right?

Jake: That’s a good point. Yeah, I mean look if I was going to go to Mars to live on Elon Musk’s new settlement there, I would be bringing my dog, so I could be wrong about this.

Pomp: Actually I haven’t talked about this on the podcast. So Stephen Colbert did this thing with the Mars Rover. He somehow got the Mars Rover in New York City, brought on Neil deGrasse. They took it for a drive down the block. They get in this thing whatever, and in it Neil says, “Some places in place that we know of, and we would want to go to would take so long to get there that a human could not last long enough in terms of life in order to actually arrive.” There’s a theory in all of this space exploration world that actually we may have to put two humans on a spaceship, send them, and they have to create a baby. On the way to the destination, those people will end up dying, but that baby will have to be taught everything it needs to know by the time it gets to the destination. That just blew my mind. I was like forget alien pets. We’re going to actually send people to space to have sex in order to have a new astronaut. That blew my mind.

Jake: If we want to be an interplanetary species, I guess that’s the sacrifice we make. I don’t know.

Pomp: Absolutely. I let everybody ask me one question before they leave. What other question do you got for me?

Jake: I want to know. You guys have this great campaign that I love, which is Get off Zero. Right? What I want to know is first of all, how’s it going? Secondly, what is the biggest obstacle that you’re seeing? What are people telling you is stopping them from getting off zero?

Pomp: In summary, the Get off Zero is our argument to institutional investors that there’s a qualitative and a quantitative argument for crypto. Everyone usually leads with the qualitative argument. What they say is it’s going to be potentially the global orders of currency. It’s censorship resistant. There’s all these things that we all, I think, generally believe if you believe in crypto are important.

Pomp: Institutional investors, a very small percentage of them today, believe that and kind of understand it well enough to have an opinion and all that stuff. There is a quantitative argument to be made that there’s all these studies where if you’ve got a 60/40 global portfolio, and you introduce 1% of digital assets into that portfolio over one, three, five years depending on how you cut the data, some of the data points are you can add between 100 and 400 basis points of overall yield to your entire portfolio. You get a very similar almost identical standard deviation of risk, and you can increase your sharp ratio by 15 to 20 plus percent. Right?

Pomp: The quantitative argument is even if you don’t believe in anything around the qualitative argument you’re going to make more money. If you are a fiduciary, you should get exposure. You should get off zero percent exposure, get off zero, and kind of get skin in the game. You’ll start learning and you can get some of these increased yields, et cetera.

Pomp: I even go as far as to say I don’t know of another asset class that has a higher yield per unit of risk than crypto currency bitcoins specifically. It’s resonating I think is the best way to say it. In the next couple of weeks, we’ll have a couple of announcements as to kind of who it’s resonating with and how it’s resonating, et cetera, that I think will kind of surprise people as to who some of those audiences have been. The obstacle side is really interesting though. There are some people who just they’re not early adopters. They’re scared no matter what you tell them. You could literally say, “I already have the profit. I’m just going to give it to you.” Not jumping in until a bunch of their peers do. I think that’s one.

Pomp: Two is there’s a lot of people who can’t disconnect ICOs regulatory uncertainty, bitcoin, and even infrastructure investments like buying equity in exchange for example. Right? I think that’s two. Three is many times it’s been the wrong people asking these institutional investors. Even if they’re the best investor in the world, they have the qualitative quantitative argument, they can’t get past the diligence. If you think of most crypto funds, they really haven’t been around that long. We’re talking about people … Most of these funds are like 10 people or less. They’ve got 20 million dollars or less in assets. They don’t have compliance. They don’t have the regulatory licensing. They don’t have track records and compliance departments and administrative support, all these things that an institution looks for when they make an investment or they kind of go through their due diligence checklist so people aren’t failing left and right. I think that that’ll get solved over time as people have more time to build those companies.

Pomp: The part that actually has been the most interesting to me on an obstacle basis is people who say, “I don’t agree with you. I actually think this is a complete fad or farce, but my kids believes.” We’ve actually had conversations where somebody says, “I don’t understand my mobile phone. I don’t understand YouTube or Spotify or all these different services that these kids use, but I also know that my kid was right about Uber. My kid was right about whatever social network or whatever mobile app they use, and my kid keeps talking about this.”

Pomp: What I try to get across to these CIOs that has fascinated me actually works is I tell them “You as a fiduciary and institutional investor would slap some of these kids in crypto who have double digit usually over 50% of their net worth in digital assets.” It’s not going away. Right? Literally, they have over 50% of their net worth tied up in these digital assets. Sometimes they put 1% and it grew. Sometimes they are taking their monthly paychecks and they’re putting in more. When people have that much conviction, you’ve got kind of the virus has spread around kind of which has captured all the mental energy, if it’s not going to go away, now it’s not a question of should you have exposure, it’s a question of how should I get exposure. Should I put 10 basis points into a beta exposure? Should I put it into more of a venture capital? A lending? Buy the crypto asset itself? All these different things.

Pomp: There’s almost like this barbell if you will. You get the younger CIOs who get it. They’re in the demographic. They understand it. They’re digital natives, all that kind of stuff. Then you get like the middle-aged crowd that’s like, “No way. You guys are all nuts. I don’t even want to do a call.” Right? Actually, as you get farther into the older demographic, they actually believe. I think that some of it has to do with they remember when money was backed by commodity. They’ve seen enough government screw over their citizens. There’s some historical context that’s really important in this, and if you look at like the people in crypto that understand the history of money or the history of governments and all this stuff, they believe because they have historical context.

Pomp: If you’re just old, you actually may have enough historical context without having to go do the research. I think that all of that tells me you know there’s some cracks in the armor that the institutional investors are jumping in. There’s some endowments and all of the stuff that has already come into funds that exist, and then there’s some that are kind of on the edge. I think that this idea of the institutional wall of money, the difference is when you go and raise money from family offices, you’re usually talking about five million dollar or less checks from most family offices. Maybe even hundreds of thousands of dollars. You’re talking about institutions that have a hundred billion dollars, and they take 10 basis points, and it’s more money than most of the funds have.

Pomp: It’s just a whole different level of a game. When they start to come in, the thing that I think is actually going to be the most important inflection point in crypto is this. As we see countries entering into hyperinflation and kind of all these issues around their currencies, we’re starting to see some people go into digital currencies. Venezuela I think the numbers are November 2016 is when the Bolivar entered into hyperinflation. The monthly volume on local bitcoins was like $215,000. Today fast forward it accelerated into hyperinflation and local bitcoin’s monthly volume is like over three million dollars, so about 1,200% increase in that.

Pomp: Well, those people are running digital assets because they don’t trust their currency. They don’t trust their government. There’s going to be an institution or sovereign wealth or somebody’s going to buy bitcoins specifically. Then another institution is going to turn and say, “Oh, I probably should do that.” And they’re going to buy a little bit. Then all of a sudden everyone is going to start looking around, and it’s musical chairs. There’s only 21 million. When that scramble happens at the institutional level, there’s a lot of institutions that actually could buy like 20% of the network. Right? If you manage hundred plus billion dollars, if you really believed and you really wanted to, and you weren’t worried about kind of your pension plan or your endowment order ever coming back and getting mad at you, you could take 10 or 20 billion dollars and just go ahead and buy a huge chunk of the network. If we start to see that type of kind of FOAMO and acceleration into the asset from the option standpoint, I think that everyone who understands how economics and supply and demand work, fixed supply, increase in demand. There’s only one thing that can happen, and that’s the price goes up. That’s going to be a really, really interesting moment if we get to that institutional FOAMO.

Jake: Right. That’s fascinating. It sounds very much like the S curve of adoption for technology. One way of saying that is it happens slowly at first, and then all of a sudden. I do think that’s how this happens. It sounds really great. I think your pitch is fantastic. I think you’re doing a service for the space, so thank you and good luck.

Pomp: Yeah. I go around and I beg for money for bitcoin. Right? Some people believe. Some people don’t. I always tell them the same thing. I say, “I promise you the most important thing I will tell you is you won’t remember who I am, you won’t remember where you were, but you’re going to remember somebody came and told you about this, and in 10, 15, or 20 years, you’re going to be like ‘Dammit, I should’ve listened.’”

Jake: Yeah. Right.

Pomp: No, man, listen thank you for coming. You’ve taught me a lot and hopefully everybody else, so I really appreciate it, and hopefully we can do it again.

Jake: This was great. Thank you.

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You can find the recording here: Off The Chain Podcast: Anthony Pompliano and Jake Chervinsky

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The following is a transcript of a conversation between Anthony Pompliano and Gabor Gurbacs, Director of Digital Asset Strategy at VanEck, where they discuss the ridiculous accreditation laws, Bitcoin and traditional ETFs, why regulators are currently concerned about crypto, and Gabor’s prediction for the growth of retail crypto projects.

You can find the recording here: Off The Chain Podcast: Anthony Pompliano and Gabor Gurbacs

Anthony Pompliano: All right guys. This is going to be an awesome episode. I’ve got Gabor here from VanEck and we’ve got a lot to cover. We’re going to touch on all things ETF, retail products, and some cool stories from your background. So I appreciate you coming on.

Gabor Gurbacs: Thanks, Pomp, for having me, fun to be here.

Pomp: Absolutely. All right, so let’s get started with, you know, born outside the U.S., right? So let’s walk through kind of how your background, how you get to the U.S., and we’ll go from there.

Gabor: Yes, absolutely. So I was born in Hungary, which is in central Europe in 1990. That is the time when communism fell in Eastern Europe. My parents were also in Hungary. Probably the interesting bit going in digital assets related part of the story is that two generations of my parents suffered under various dictatorships. First, the National Socialist in the ’40s. Then, from the ’70s to the ’90s under communism. Both of these generations had issues with their property, so their properties have been confiscated. They would have been very glad if they had an asset, something like Bitcoin.

Gabor: So, ’90s kid, I started in Hungary, lived a little bit in Germany, and Italy, and then came to the US to finish up my high school in, of all places, Massachusetts, Deerfield Academy, and then went to Williams College. At Williams College I triple majored in Mathematics, Sociology, and German. I was Bitcoin class of 2012, and I was class of 2014 otherwise in math, so I did a lot of work on distributed systems and discrete mathematics and graph theory and that’s how I found Bitcoin.

Pomp: That’s amazing. Bitcoin class of 2012, I haven’t heard that one yet, so we’re gonna have to steal that one. So let’s talk about, your family grows up in Hungary right? You obviously have that experience in … before we were talking about Bitcoin transactions early on in Central Europe, didn’t exactly involve Coinbase or any of these other exchanges. How are people actually transacting Bitcoin at the time?

Gabor: Yeah that’s actually a super interesting question. I was at the Budapest Technical University and one of my friends was telling about this thing called Bitcoin and he was about to send something like $80 worth of money to a Romanian dude who he has never met on Western Union, and the plan was that he sends this $80 to this guy who he has no idea about, and he’s going to get an e-mail with his public key, and a few days later in the physical letter, he would get his private key and then he would have access to this imaginary thing on what’s called the blockchain, or really Bitcoin, and so that was Bitcoin’s rating in 2012 and in the same year, two exchanges Bitstamp and BTC-e, have been established and you know, since then we have come far. We have over the counter trading, high frequency trading, futures contracts, ETFs, that’s almost crazy to me.

Pomp: Whoa, whoa, whoa, hold on. But it’s even crazier what you described, right? So 2012 … first of all, why is your friend in Hungary sending money to somebody in Romania that they don’t know?

Gabor: Yeah, I mean, that’s … so Technical University in Hungary is just famous of producing some of the best mathematicians and combinatorics and distributed systems so he was studying distributed systems and so one of the things that we have done together is looking at how difficult it would be to destroy the internet, you know things that Eastern European guys are thinking about in Budapest, Hungary.

Gabor: So we got interested in sort of like resistance systems, systems that are resistant to stress and we found that it takes about like 81% … you need to destroy 81% of the computers in the internet in order to shut down the internet. And we were thinking about it in the context of economics and money and found Bitcoin through some of the subgroups at the university who were studying really practical systems that are in place, not in theory but in practice and he was like, you know, I need to buy this but how do you buy this and that’s how he … you just go into Reddit and sub-blogs and found this Romanian guy who was selling Bitcoin.

Pomp: That is absolutely amazing. And so what people were doing was sending one of the keys via email, and then they were literally sending the private key via snail mail. Literally a physical letter with the private key in it and so me as the recipient, I would receive the email with the public key, mail in a physical format with the private key, I could put them together and now I’ve got access to the Bitcoin.

Gabor: Yeah, that’s correct. And that was from purchase to settlement, it was probably around five, seven days and geographical distance was probably around 400, 500 miles if the guy was really in the place where he stated he was. We never figured out whether he was at that place but he delivered on the obligation. The crazier thing was that you literally have to put up the check on Western Union to a person before any of these things would happen. But yeah, that was Bitcoin trading in 2012.

Pomp: The crypto-community really trusts each other.

Gabor: Yeah, I think the systems got a little bit better.

Pomp: Absolutely. Alright, so how do you go from living in Hungary sending $ 80 to random Romanians to working at VanEck? What’s kind of the path there?

Gabor: Yup, so I graduated from Williams College and my degree was in mathematics and I reached out to a bunch of people on my network and I’m sort of known to be a power networker and I really take networking seriously. So I reached out to a bunch of folks, one of our board members introduced me to Jan van Eck, who is the CEO of VanEck today and the guy is a visionary. He runs a private company with roughly $50 billion in assets and from moment one I knew that that’s where I want to work. So I joined the ETF team at VanEck so my responsibilities were a few fold. One of them was building new ETFs for the firm, so we built some country funds, green bond funds, wide moat ETF mirroring Warren Buffet’s investment strategy. We built some EM local currency bonds and VanEck was specializing in providing access to harder to access areas so my job was to do the non-sexy work in the background.

Gabor: And we also have large clients and I think Morgan Creek is occasionally our clients but the large shops are asking for the allocation recommendation, you know why should you own gold, why should you own emerging markets and so those were the questions that I’d been fielding and because of my background in mathematics and the pick up in crypto about two years ago, one and a half, two years ago I refocused completely on crypto and basically since then I’m working on building in the right market structure for exchange traded products and digital assets related vehicles.

Pomp: Amazing. So before we get into all the digital assets and kind of the exciting, sexy stuff of today, VanEck’s got a really interesting background, right, the company itself. Let’s walk through how did the company get started and what were some of those early products like and then eventually into the gold market. But let’s really start at the founding of the company.

Gabor: So VanEck was built in 1955. That’s not yesterday so it’s one of the older private asset manager companies and it was established by John van Eck who was a visionary and he has built a few things that are real firsts in the market. In the 50s, Mr. van Eck, John van Eck that is, built the first international investors fund so after World War II, Mr. van Eck was thinking about ways in which the post-war reconstruction could be accessed and how an investor from the United States would benefit from the growth that would inevitably take place and so he built the first international fund and people are like 50s … the international stocks were like Bitcoin in the 50s. People were like, why would you invest in these things? And in the next years to come, international investing picked up so that was the first fund.

Gabor: Then in the late 60s, Mr. van Eck, I think at that point in time he had a few kids and he was employed full time and decided to do a PhD in economics of all things, because as our CEO Jan van Eck would say, that’s the kind of thing people have time for in the evening school, a PhD in economics. And Mr. van Eck was a student of Ludwig Von Mises who was an Austrian economist and a part time professor at NYU and so Mr. VanEck called the gold liquidated, I think something like 70% to 80% of his holdings and in 1968 he created the first gold equity fund in the United States. Back then, again, people asked the same questions as 13 years before, why the hell would you invest in gold, right, and what is gold good for and before the gold standard was done away, gold was fixed near $35 per ounce and so Mr. van Eck created this fund and we know that gold sort of like picked up around $1200 an ounce today and became an $8 trillion market and is the top safe haven asset today.

Gabor: And then kind of the story goes forward, Jan van Eck, our current CEO took over and in the 2000s he launched one of the first of these things called the ETFs. And ETFs became in the US around a $4 trillion industry and provide unprecedented liquidity and access to harder to access areas and so Jan, our CEO has pioneered ETFs and he built some of the largest gold equity ETFs, GDX and GDXJ and he also hired a geologist, hired folks from … there’s a bunch of international people … he also built some of the first EM equity funds, that’s really VanEck and built things like moats, and moat is our Warren Buffet-like investing structure and some of the large municipal bond funds and a few other products on the country side. So areas that were at the time harder to access, for instance Russia, Russia investing was really tough because of sanctions and we built the fund RSX provides access to Russia and we built some of the smaller cap, Indonesia, Vietnam, and smaller country exposure funds that people have a hard time investing in in a way that would be liquid.

Gabor: So fast forward in time about I think around, we started conversations like two and a half, three years ago on the topic. We wanted to see what we could do on the digital assets and so it was a natural for VanEck to kind of transition into it. And we were like, oh, okay, so our core competency now is ETFs and around 35 billion of our 48 billion is in ETFs, we wanted to build a Bitcoin ETF. And then learn about this like a whole slew of things that needs to be put in place like validation, custody, and all these market structure questions that we were not aware of at the moment, at that moment, at that time.

Pomp: Absolutely. So let’s talk about what is the parallels that you guys, who are one of the pioneers in gold and gold ETFs, et cetera, see with the digital assets space? Are there any things that you’ve learned from being at the forefront of the gold industry that you’re using today or maybe even things that you’re avoiding?

Gabor: Yes. First of all, we learned that similarly to gold, I mentioned valuation back in the 70s, people were in the same place as with Bitcoin. Gold markets were fragmented and no one really understood like what is the price of Bitcoin, right? And so we learned that we would need to put in place a benchmark that would be sufficient for pricing Bitcoin for institutional investors so through our German subsidiary, MVIS, which is a [inaudible 00:13:09] benchmark registered in that same entity, we launched regulated indices and iterated with the SEC regulators on is this good enough to price Bitcoin and so we tracked the top 50 markets with our partner, CryptoCompare, which is a UK shop, one of the probably best known shops for providing accurate data on crypto. And so I am investing that with CryptoCompare and created these benchmarks. So that was you know, pricing and valuation was one of the things.

Gabor: Secondarily, we knew that derivatives markets are gonna be built around physical things that are traded, you know as physical as Bitcoin gets, but like sure enough futures contracts by CBO and CME were at that time built and our commodity traders at VanEck were instrumental in building some of the first gold and commodity contracts so we learned for instance, that cash delivered contracts are actually an improved version of futures contracts and a lot of people talk about physically delivered Bitcoin futures but a cash delivered futures … so in the 70s, there were physically delivered futures because if you had a thousand barrels of oil you had to actually go to the port and take your thousand barrels of oil and then traders are like, well I don’t know if I want to have a thousand barrels of oil delivered so they created something called a cash delivered future and started rolling contracts and having these obligations that are never delivered. So we immediately understood that cash delivered futures like as they exist today are actually an improvement and they are useful.

Gabor: So those are two of the things actually that we learned.

Pomp: Absolutely, no, so, so fascinating. So let’s go into what an ETF is. Like ETF 101, right. So I know nothing about ETFs, pitch me on what is an ETF and why are they important.

Gabor: Liquidity is the single key word why ETFs are important. So an ETF is basically a stock plus a mutual fund equals an ETF. So a mutual fund is generally a vehicle that trades and can pool assets and provides … it’s a pooled investment vehicle that investors … different, larger amounts of investors can put money into. We have mutual funds on emerging markets, the S&P 500, and a bunch of other things. And mutual funds are sort of like, were an invention or innovation in the 70s that you can invest with other people unlike what you do kind of on a private equity basis you go yourself and not with others. The tough part of that was that mutual funds are non-transparent so that you don’t know the exact amount of holdings during the day and often during the month. So you just don’t know what the mutual fund manager holds and you put your trust into the manager that they do the right thing.

Gabor: ETFs adds the aspect of a stock to the mutual fund. So ETF by definition is an exchange traded fund, so it trades in an exchange like a stock, you have every 15 seconds you have a price tick on where it is and at the end of the day, you also have a holdings published. Insurers need to publish their holdings on a daily basis and the cool thing is at the end of the day, you can always buy at 4pm US time for US ETFs, at an ETF, an NAV. NAV is a net asset value so at the end of every day you know the exact value of the fund holdings and you can transact on them. And the reason why … so why is this … so this is what an ETF is and how do they work. Well ETFs are securities that issue shares. So say an ETF issues 100,000 shares and what then happens is companies called authorized participants like larger wirehouses, your Goldmans, JP Morgans, large companies of the world, buy the underlying of stocks of an exchange traded fund and exchange it for the share of an ETF.

Gabor: So why is that important? For instance, let’s just use the S&P 500 as an example. If you bought the S&P 500 stock by stock, it would be really hard to do if you wanted to replicate that performance. Now if a large company does the work for you and buys the underlying assets and you can just exchange it to the share of the ETF, it makes the preassign process more efficient, cheaper, and these companies hold large inventories of the underlying assets so that means that they will add liquidity whenever you would like to issue or redeem shares of a fund. So basically you get an extra set of liquidity from authorized participants who are incentivized to buy and sell securities and liquidity is the single most important key word in investing, especially in the crypto markets where if you put a $30 million order in that may impact the price of something, let’s say Bitcoin, fairly significantly.

Gabor: So ETFs by definition help with liquidity management and yeah, so they’re just … and there’s … what I call them, ETFs are sort of like the trust minimized version of stock investing cause all these parties that are like the APs are competing with each other, they don’t need to trust each other, the investor doesn’t need to trust the fund manager like the hedge fund manager or a mutual fund manager and sure enough, ETF did pick up …

Pomp: So what are the downsides to an ETF? There’s a bunch of pros obviously, especially in crypto, but what are the downsides to actually having these products available to retail investors?

Gabor: Compared to the current landscape, if you’re talking about digital assets specifically, I don’t see many downsides because ETF ad liquidity, they have AMLK requirements, generally their custodians insures underlying asset. Again, it’s the most stressless form of investing in the crypto space. Possibly, when I have conversations with some in the top, like the Brickland guys, they don’t like the idea some asset manager accumulating large amounts of bitcoin and acting on behalf of their customers because it’s kind of against the spirit of bitcoin.

Gabor: I think to myself often that isn’t it crazy that we have launched an ETF on bitcoin when bitcoin is this sort of like decentralized retail-oriented asset. Some people still prefer to hold their private keys and have different cold storage solutions for methods of storing their assets and that’s their preference. Other folks, like my mom, for instance, despite the fact that she is from Eastern Europe, she’s not very good at cryptography and she wouldn’t be able to cold store her assets and I wouldn’t want my mom to walk around with a thumb drive of like a million dollars. That wouldn’t be safe, so an ETF just kind of adds this component of security, professional asset management around it. And probably weirdly enough if you trade crypto, you know this, you get tax reporting and other reporting on your assets which is incredibly hard, all the crypto trading is jurisdiction-dependent today so that extra tax reporting component is just helpful.

Pomp: Absolutely. It’s so fascinating because with these ETF products, you get more liquidity, you get more security, right? There’s some sophistication, some validation that comes with these products, so as you guys saw, “Okay, digital assets are becoming an asset class that we wanna participate in. We’ve got all this institutional knowledge and experience from decades of working in other assets, you know gold, etc.” What was the first thing you guys filed?

Gabor: So first, we filed for a futurist based ETF. You may ask why a futurist based ETF? So the reason for that is every month, two months, we see a major hack of some sort, somewhere around the world, and today, there are no custodians in the digital asset space that are full-fledged institutional custodians that could hold exchange trade fund assets. At least, no one really puts their balance sheets behind digital asset activity in a meaningful way. I do think this is a lucrative business and we are going to see entrance coming in next few years, definitely I would say. But no custodians existed.

Gabor: The first one we filed the futurist contract didn’t exist, and so we filed for this futurist ETF hoping that there would be futurist contracts as we have seen from our commodities experience. That way what happens in futurist land is that in that point of time, my thinking was that if you don’t own bitcoins directly, the best way to own bitcoin for institutions is not owning bitcoin, so by the futurist post-margin that you’re using with the futurist commodity merchants are basically buying and selling the contract in clearing houses. That way no one has to worry about actually physically custodying bitcoin while you’re getting price exposure. Either appreciation or depreciation, you’re getting the exposure through an ETF and then, only institutions could trade futures, so I was like we wanna make it available a bit more broadly and let’s just package it and have our futurist commodities trading team do the work for them.

Pomp: And what was the regulator’s response to that first filing? Excitement? Fear? In between? Where did they really come out with that as you guys had conversations with them?

Gabor: So first, when we filed the ETF, the call that we got is that hey guys, the bitcoin futurist market doesn’t exist yet. We got rejected on that. We’re not the kind of people who give up and we kinda showed that in the gold space as well. Surely enough, we sort of expected the CBO and the CME contracts to come out at year end 2017. They did come out. We refiled. Futurist contracts now existed and we were like oh you know, we’re ready. At the same time, we sort of iterated that we built with them as we have the largest data set in the world today to price bitcoin and we have solved the valuation problem long ago. We can price it. There’s futurist contract pricing from CBO and CME. We have a secondary level pricing from MBIS to 50 platforms. We’re also kind of working with some OTC guys on pricing and then, filed again for it. And then the response was that you guys should withdraw it because the futurist market is not mature enough. There’s only like a hundred and fifty to two hundred million dollars for futurist trading. That’s small compared to other commodities.

Gabor: While the experience was that it was not the case because there’s other small- like freight futures, electricity futures, and more thinly traded futures that have ETFs on it. We said fine, you know, we’re just gonna work through your questions. There was just ever moving target. The futures effort we kinda had it on file. We had to withdraw it again. We wrote a letter if you guys are interested in reading. The audience should actually read this on why the futures market is ready for an ETF and we discussed why valuation is there, there is enough volume, there’s arbitress markets. Its rating is efficient. OTC guys are amazing, able to trade it by spreads. Sometimes, bitcoin trades at better spread than the small country ETF so I was like, “Okay, the markets are ready.” So that line is kinda ongoing and we are working with regulators. Some of the things they are now focusing on is surveillance and are the markets surveilled.

Pomp: What does that mean? So are the markets surveilled…explain that.

Gabor: For instance, the US equity in futures markets participants are generally part of something called this inter-surveillance group. It’s a group of exchanges that the larger guys are part of it. What they do is they provide trade data to parent exchanges and owner requests to the CFT, for instance. So this surveillance means that you are monitoring for lost trades and potentially illicit activities on your platform. NASDAQ happens to have probably one of the most well-known solution called SMARTS and that monitors the top manipulation patterns. Basically, it gives exchanges assurance that there’s no illicit activity on their platforms and they can also report out to other larger exchanges or regulators that we have a clean exchange. Actually, to my crypto friends, I already recommended to use SMARTS. Winklevoss Brothers and Gemini use SMARTS and some of the other exchanges are looking at it. Why is that important? Well, you know for instance, we don’t want silk road money hitting an ETF and exchanges need to put in place best practices to these sophisticated programs that monitor trading patterns that we use out of wise in the equity and futures market. The goal is to make the crypto market look exactly the same. I think we are actually decently close, probably 70% there.

Pomp: Do you think that it’s important to have those protections there because the regulators need to see it and these look similar or do you think that they actually do protect investors and there’s some of this wash trading and manipulation, etc. that’s happening and so we need to kind of clean up that volume and the trading patterns, etc.?

Gabor: First, yes, it is important. The markets need to grow up. We need grown up markets for ETFs to come in. It is important to protect. The large exchanges of the world are incredibly lucrative businesses and it’s in their best interests to be clean, at least 95% of them should be clean and they want to be. Now, it’s not just a regulatory coalition in my opinion. At the end of the day, again, you want the same protections that you experience in the US and investor and capital markets. Investment is kind of about trust, so you shouldn’t experience someone running away with your money or some exchange trading their books against you so they can pay their employees or something like that. Exchanges just need to grow up and they’re on a great path.

Pomp: No, I think that makes sense. So how do you see ETFs and other kind of retail financial products evolving in the digital asset space in the next two years?

Gabor: Right now, the digital asset space is primarily retail, so people estimate something like 90–95% of it is retail. Conversations from larger OTC markets and exchanges that I had kind of confirmed that. So retail is kind of served already if you will. The exchanges and platforms just need to get better over their practices. With respect to products, I’m really hoping that ETFs come in place because what’s available right now doesn’t offer the full protection of what ETFs do. I’m gonna give you some examples to this.

Gabor: Crypto trading platforms, for instance, do not have the best execution type of principles applied to their books. So like high frequency makers are scalping retail investors from those platforms every second. There’s kind of like best bid and offer principles when US equity exchanges and those things should be applied to crypto platforms. ETF is required to have that type of protection.

Gabor: AML and KYC. I would actually think that AML and KYC standards mostly established exchanges are amazing. It’s easier to open up a German bank account. I did this a year ago when I was at Anvas building in Frankfurt. It’s easier to open up a German bank account than getting a Tier 3 verification from a crypto exchange. I’m not kidding. You take a passport photo of your face and a timestamp in it. Banks never ask for that kind of stuff. The AML and KYC stuff is actually very well monitored. So it’s all in pace. I’m hoping for ETFs. I’m also hoping that some of the larger players who have regulatory requirements and they have skin in the game also come to the market because right now, crypto companies just kind of enjoy their monopoly in the space and fro that reason they might not give the best pricing and customer protection type of things to their customers.

Pomp: Absolutely. It sounds like today, as you guys think of digital assets, really what you’re focused on crypto currencies, bitcoins specifically, right? So they’re highly liquid assets that operate as a store value medium exchange. One of the show’s sponsors is a company called Block Estate. Basically, what they have is they’ve got a tokenized fund in the real estate space and so it’s backed by real world assets or equity. How do you think about retail products like ETFS, etc. moving away from crypto currencies or at least in an additive way looking at these equity backed tokens or security tokens? You think that’s likely to happen? We’re far away from it? Where does that kind of fit in the vision of at least what you guys are looking at?

Gabor: We’re looking at all kinds of assets. We’re launching a product around bitcoin now, but I could see the future how we would, as the market develops, look at and evaluate other sort of like security tokens. You mentioned, the real estate space is actually super interesting to me. We have a real estate ETF that invests in rates. I think rates are actually one of the main targets of these tokenized initiatives that are ongoing. So I welcome a conversation with your sponsor or really anyone in the space regarding rates or anything. We’ve been obviously pitched around gold because we’re kind of the gold experts in the space. I would say in the future, ten years down the line, I would see how ETFs would contain securitized tokens because why not? The big question there is how liquid are these things and how is its rating? That’s gonna be the single most important question anywhere. I think one needs to list these tokens at regulated platforms in order to kind of get more widespread adoption. The ETF thing is just kind of the easy way of going about investing so you don’t have to worry about tax and you know all kinds of rebalancing and activities that most of us don’t have time for. I would love to see more developments in user interfaces and apps that would provide easier access and easier regulated access to these tokens.

Pomp: Absolutely. The Block Estate guys, blockestate.com. I wanna make sure that they get some airtime there. How do you think about other ETF type applications? So think about Bitwise, right? We built a large cap index product with Bitwise and another thing that they’re doing on their own is they’ve launched a crypto-index ETF. So whereas a lot of people have gone after bitcoin specific ETFs, they’ve said, “Look, why don’t we apply for an actual kind of top ten crypto type index in an ETF structure.” How do you think about bitcoin only or kind of a single asset ETF versus these index approaches?

Gabor: I like the Bitwise guys, you know. Matt Hogan is friends with our company for a long time.

Pomp: He’s like one of the ETF legends.

Gabor: Yeah! Love the guy. Love Hunter. They’ve done a great job at their work. I like the fund, the private fund that they have right now. I think it’s a smart thing to do. I hope that they get traction with the SEC with their multi-asset product. I would think, just kinda you know going rationally about it, that a single asset bitcoin type of ETF would be approved before a multi-asset would be. Bitcoin is more established, has more history. Some of the tokens supplies and centralization questions are still outstanding if you look at the top ten. There’s questions around dark tokens. Some investors holding near fifty percent of the supply in escrow so something like that. That’s just something to think about and regulators, I think, are looking at that too. But just to kind of support the Bitwise approach too, Vanex NVIS actually was the first one to launch a multi asset index and I spent 6 months in Frankfurt with our about 20 people analytics team to do that.

Gabor: I do believe in the power of diversification. Regardless of who the issue would be, I’m really hoping that a multi-asset product comes to market. The key there is to make sure that the tokens are clean and their liquid. Just on the indexing stuff and obviously I’m biased on this, I love what NVIS encrytpo compare does. There’s twenty people in Frankfurt. Fifteen in London. It’s rated. Basically, we have non-academic investible embassies that are also tradable. For instance, that was super important for our country funds and SMP 5 looks good, but how do you trade that? Fortunately, the SMP 5 is liquid, but maybe Vietnam and the top digital asset there is not liquid. If you guys want to check out the embassies, I’m happy to give more color around that. But multi-asset approach is just diversification. So far, it didn’t work out in past year for people because all coins are down. In 2018, the DA 10, I’m keeping an eye on that, is down like 80%. Bitcoin held up like 60, went down 62%. Our CEO and I were talking about this. We wrote a little piece for our investors on bitcoin and we said that we expected that bitcoin would lose 80 or 90% of its value and so far it’s holding up and fingers crossed. Other digital assets did not hold up as well as Bitcoin did. Again, I’m biased on this. I’m a bitcoin guy. I think there’s a case for trust minimized money and the other tokens are all dependent on their application, so I think there’s gonna be a winner in the payment space, whether it’s Ripple or Stellar lumens, there’s gonna be a winner.

Gabor: Stellar lumens, there’s gonna be a winner, and sort of asset issuance, and then Ethereum iOS type of space. We don’t know who that is yet. And so it’s interesting to monitor those. For every one winning position, there’s a hundred that competes.

Pomp: Absolutely. It is the ultimate protocol wars, right, to see kinda who becomes king in each one of these applications. Okay. So one other thing that recently got a bunch of attention is Gemini. It’s the Winklevoss twins. They launched a regulated stablecoin, right, so they were one of the first people who have essentially said, “Look, we’re gonna ensure that it’s backed one to one by US dollar. We’re gonna allow kind of external third parties to validate or audit that it’s true. And then the US dollars sit in a FDIC-insured State Street account, right. And so very similar to I think what you guys at VanEck are doing in terms of trying to legitimize or professionalize a lot of these … the products, the tokens, et cetera. How do you think that impacts just crypto in general? Big deal, not a big deal? How should people be thinking about that?

Gabor: So, getting sort of regulatory approval on pretty much anything is a big deal. And getting regulatory support and regulators to understand more about the space. So that’s a good thing I would say and it would go back to my key word, what is the liquidity of this? And sure Winklevoss brothers did a great job in general getting this approval and trying to get this product to market. And I think people look at it favorably and I do, too. I’m interested in the liquidity profile and how much control really the exchange has. Can they freeze a can, apparently in … I think it’s possible to freeze some of the assets in 48 hours turnaround or something. That’s not like bitcoin. Bitcoin cannot be frozen and that was one of the reasons we were looking at this trust list, decentralized, uncontrolled thing.

Gabor: And so that’s that, but the other … on the stablecoin front, we’ve seen from the success of Tether, as in … people have varying opinion on Tether, I think they have done a great job on solving the problems of US dollars and money. So Tether is fast, people want to see their holdings in dollars and people want to trade larger amounts of assets, and Tether’s created that market. There are questions around the audits and I’m excited for those markets to get better and improve.

Gabor: One thing that I’m most excited about probably in the stablecoin space … again I would put bitcoin in front of any other stablecoin, but as far as stablecoins go I read some things and heard some things. Circle is working on a stablecoin concept, and I think the institutions that the Circle folks are working with are just kind of work-monitoring. It’s work-monitoring new entrants, and so far the execution that the Circle team has done on pretty much anything that they have was excellent, and kind of liked how they cleaned up Polo in their acquisition. Their OTC desk was excellent.

Gabor: So I’m looking forward to see some competition in this space and what the Circle guys are coming up with, because I would think that sometimes the Winklevoss brothers stand to do everything, like a lot of things, and they have … again, they may have conflicts of interest or they may not have full resources to support everything, but the Circle guys kind of focus in on a few things, and I think they do have the resources to build something interesting. So as far as stablecoins go, that’s the one I’m monitoring.

Pomp: That’s awesome, yeah. Look, I found Jeremy and the Circle guys to be great at execution as well, and then super thoughtful about kind of where they deploy resources, et cetera. So that’s another validation there. All right, so let’s do this. Let’s do some rapid fire questions, and then we’ll wrap it up with you asking me one question. First question though is what do you think is the most controversial thought that you have in crypto, where the highest number of people would disagree with you?

Gabor: Ooh, that’s-

Pomp: What do you believe that everyone else is gonna disagree with?

Gabor: That’s kind of the Zero to One Peter Thiel question, is actually one of my favorite books. So here it is. And bitcoiners are probably gonna dislike me a little bit for this. The kind of controversial thought is that bitcoin needs an ETF. Just to go with my Game of Throne references, a lot of people are looking at VanEck as kind of Castle Black, holding the wall of institutional money, and I do think that the ETF, and the ETF comes out, then bitcoin is going to stick around for probably a century, if not longer. And the reason for that, and I don’t need to talk too much about that, is if Wall Street companies support digital assets in a meaningful way then you now have Wall Street and crypto kind of going against government. And right now Wall Street is in the middle. So I would actually encourage crypto companies, and that’s what we see, to kind of partner up, establish products that don’t fit bitcoin exactly into the existing capital markets, but bitcoin is inherently compatible, and make it work. And I think that’s the one thing that most people would disagree with me is bitcoin needs an ETF.

Pomp: But do you agree that that’s only correct as long as the ETF doesn’t create more liquidity or more kind of claims on the 21 million bitcoin, right? So basically as long as the ETF matches one to one to up to 21 million bitcoin, we’re okay, but the second that we start having more claims than there are bitcoin, we could run into some trouble, is that fair?

Gabor: I completely agree with that. In fact, what we’re trying to do is … and I can’t talk much about our security solutions, but we want … so by definition an ETF has to show its NAV. So every day in the bitcoin blockchain, you can show wallet sizes, and the ETF can show NAV, so you can show one to one correspondence, but wallet size and an NAV, and we are committed to doing that. We are committed to basically keep up bitcoin’s standards in the space.

Pomp: That’s awesome. All right, so other than VanEck, you cannot answer VanEck, what do you think is the most important company in crypto right now?

Gabor: I’m monitoring the OTC desks-

Pomp: Interesting.

Gabor: … so it’s probably the non-sexy answer again. I’m looking at Circle, DRW’s Cumberland, and Genesis. These guys have been instrumental in bringing crypto to the institutional space, and they were instrumental for exchange rate products and increased liquidity in the space. So I would say the top … actually maybe let’s just say the OTC firms, and I also think that Nasdaq surveillance system is actually a bigger deal and people don’t talk about it enough. So Nasdaq SMARTS and the OTC desk. The three U.S. OTC desk combined are the ones that I’m monitoring.

Pomp: Yeah, that’s definitely not a popular answer, but I think a really smart one. All right, so let’s say you have a magic wand, and you can wave that magic wand and change one regulation or law, what would it be?

Gabor: I am on the same page on sort of the retail and institutional investor standards. I think they are BS, and will change over time. Retail investors should be able to access private investments, and … when I was in college, I didn’t have the required amount of money to be an institutional investor, but I think it was probably smart to be able to say whether I want to invest into something or not. I expect the individual and retail and institutional investor standards to change over the next decade.

Pomp: Yeah, so you’re talking about the accreditation standards, right?

Gabor: Right.

Pomp: And the idea that … you’ll appreciate this because I’ve gone as far as to say that actually the accreditation standards are, as they currently stand, are violating the American dream. Right?

Gabor: Absolutely.

Pomp: So if you think about yourself moving to the United States, the American dream is that no matter where you come from, what language you speak, what your background is, who your parents are, or where you end up in the U.S., you should be able to build a life of wealth, right, and do it through your own effort. And so because these laws literally say you have to be rich in order to invest in some of the best investment opportunities, the rich can only get richer, right, and we’re boxing out or precluding an entire demographic of people based on wealth from investing in those opportunities, and it’s pretty ridiculous.

Gabor: It is indeed, and I actually couldn’t put it better. It hit me in the face when I started working in the financial services industry that I couldn’t invest in private securities. And I was like, wow, that’s crazy, all the Silicon Valley VCs are making bank based on just very basic probabilistic bets, and, I don’t want to put them down, but there’s not much thinking in many of those investments, you just spread it out and look for the next 1,000x unicorn. Whereas small people who have a few ten thousand dollars or assets that they kind of earned from something like their work, say, that the average New York person or something cannot invest into the next Facebook.

Gabor: I think, some people are gonna argue with me on this, but I think crypto actually opened up the door for private investing, and definitely younger people started to have, experience what it means to invest privately. And obviously these crypto projects are … and often there’s governance issues, there’s a bunch of other things, but if you guys read the SEC’s newsletter, Chairman Clayton came out with his views on how we should revisit investing in private securities. And again I accredit that to crypto and not just our work but the crypto community’s work of showing how important it is and how much interest there is in investing in private things.

Pomp: Yeah I mean, look, to me the most ridiculous part about it is we’re using wealth as a signal for intelligence, and we should probably just move to a system where we actually use intelligence as a signal for intelligence, right?

Gabor: Yeah.

Pomp: And so move to some sort of knowledge-based test, or knowledge-based system, rather than a wealth-based system. But that’s neither here nor there. We can go for hours on that one. All right. So, what one question do you have for me?

Gabor: Okay, so since you’re probably one of the most well-known guys in the crypto investing space, and you’re doing a lot for us, I’m wondering what are the three things that you are looking forward to in the next three to five years in crypto, and what should we be monitoring? So three things according to Pomp’s worldview.

Pomp: Oh man, this is a good question. All right, so three things I’m excited about next three to five years. One, right now, my partners and I are absolutely on a warpath to getting institutions off of zero, right. So right now a lot of these institutional investors, we’re talking family offices, endowments, pensions, foundations, sovereign wealths, et cetera, have zero exposure, right, and the idea that you can have zero exposure to the best performing asset class over the last five years. And it’s just pretty insane, right. And so we don’t think that they should go and put 500 baseless points, right. We don’t think that we actually even know what the right number is. There’s not kind of a one size fits all for every portfolio, but we know zero’s not the right number, right, and so we’re on this warpath to get every institution in the world off of zero, and get exposure to the asset class.

Pomp: So I think watching that happen is really important. We’ve got a couple off of zero and I think that we’ll continue to do that. And there’s a bunch of other people working to do it as well. But as more and more institutions move off zero I think it’s gonna be a really important trend.

Pomp: Two is the accreditation laws. I mean I just … it’s the one thing that irks me to death is that in a country where we are supposed to be kind of the lighthouse of freedom and prosperity, et cetera, our laws don’t reflect that, right. And so it would be one thing if kind of in practice it was hard to implement, or something like that, it’s just … no, the law is written in a way that prevents anyone from having the opportunity, right. And I think that goes against everything that we stand for, and it’s gotta change. So I think as that changes, if … Chairman Clayton said it in a very interesting way, he said, “Look, I’d love to give more people access to these private market opportunities, while keeping the same amount of investor protections,” right, so it’s not giving up protections, it’s just giving more access with the same protection. And so if they’re able to figure out a way to do that, I think that will be a huge inflection point, not only for crypto but just private investing in general and also wealth creation for Americans.

Pomp: And then the third thing is outside the U.S., right. So I think that people in the western world get very kind of insulary thinking, and they think that we are the say all be all around the world. And in some markets we are, and other markets we’re not. And I think crypto’s one of the first times where we’re seeing an industry being created on a global scale from day one, right. So a lot of people in the United States who had never traveled to, say, Asia for example and seen just the amount of intellectual talent and energy and capital and stuff that’s being put forward into this industry I think is … they just don’t have that perspective, and they’re missing out on how important it is there, right. And so if you kind of extrapolate that back to the U.S., I would almost question do we actually have enough intellectual capital being put towards this? Do we have enough kind of traditional capital being put towards this? And if we don’t do we fall behind? Is that good, is that bad, right?

Pomp: And so kind of this idea of a geographic arbitrage around talent, capital, attention, regulatory issues, et cetera, I think is going to be something that’s really important to watch. And at some point in the future may actually be a negative for the United States. I don’t think the U.S. is used to being in that position, and if we get in that position how do we respond?

Gabor: That does, sort of, actually … three years, I mean I’m also focusing, but probably you put it much better than I could … and a lot sometimes the allocations … two things is the allocation question. I know we have a lot to discuss at some point in more detail. VanEck has Jan, who is much smarter than I am, and I wrote a piece on what should be the candidate … what’s the right level of adding digital assets to a portfolio, and by the way we lived through the same thing with golden commodities so it’s an interesting evolution. Totally on the same page on the accreditation standards and kind of working on it. The international kind of realm and arbitrage, regulatory and capital arbitrage, and I’m so fascinated by Asia and how much one can learn. Spent a lot of time in Europe and the U.S. at various places, but Asia is sort of a frontier that we shouldn’t underestimate, like Singapore, Japan, China. Right now I think probably Japan and Singapore and Vietnam are something worth watching. China is a harder act to crack, but definitely interesting.

Pomp: Absolutely. No man, listen, you guys are doing some amazing work. I really appreciate your time, and I think you know all of us here are cheering for you guys to kind of break through on a couple of the applications in the public market and stuff. So good luck and thanks so much for coming on.

Gabor: Thank you, Pomp. It’s always a pleasure.

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You can find the recording here: Off The Chain Podcast: Anthony Pompliano and Gabor Gurbacs

If you enjoyed this post, please “clap” 50X in the bottom left corner so it will be shared with more people. You can always tweet me your thoughts as well.

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Frank Chaparro is a Crypto-Journalist currently at The Block, a global community for Crypto enthusiasts. He previously covered the intersection of Crypto on Wall Street in Business Insider.

In this conversation, Anthony Pompliano and Frank Chaparro cover the current state of Crypto Media, what it takes to develop sources, how you deal with sources who lie to you, what happened when the CFO of Goldman Sachs called Frank’s article fake news, and who the most important people in companies in Crypto are.

You can find the recording here: Off The Chain Podcast: Anthony Pompliano and Frank Chaparro

Anthony Pompliano: All right guys, here we go. We’ve got Frankie Scoops in the house today so let’s, let’s just get this thing popping right off the start. Thank you for coming.

Frank: Yeah, no worries. Pleasure to be here.

Pomp: We have gone back and forth on Twitter way too much, first time meeting in person. You’ve got more energy in real life than on Twitter, so I’m excited about this.

Frank: Big Scoop Energy, that’s what they call me.

Pomp: All right, so let’s go through your background. Most people don’t know that, how young you are and kinda how you got into the media side of Crypto.

Frank: Yeah. I am pretty young, which is surprising because of all of my mannerisms that would otherwise suggest that I’m like 60–70 years old.

But it all started in college at WFUV, I got into radio, got into telling stories, got into the news. First in politics, so going down to city hall, writing up stories on really bodontic city hall type things that really start to bore me after a while. I found a respite in writing about business news. There’s less sort of vitriol in business news in a sense. It’s funny that I ended up finding my way to Crypto because there’s ton of vitriol in Crypto.

But the thing that I liked about business was it was a lot less bull crap in a sense, a lot let less fighting back and forth. A lot more building things and figuring out how we can build things that people want to buy.

So I ended up finding myself at Nasdaq, as a marketing corporate communications intern. Really learned about capital markets for the first time, market formation, market structure, initial public offerings, the stock market. All those things that I really hadn’t been exposed to in my studies, because I was studying theology and sort of international political economy.

I fell in love with the best of part of my job when I was marketing at Nasdaq, wasn’t necessarily the job itself but waking up in the morning, reading the Wall Street Journal, listening to Bloomberg Radio. After that was done, I decided, this is what I wanna do. I wanna tell stories that will make an impact on Wall Street and in the business world. Had a great opportunity to intern at BI, which started out, basically they threw me into the wolf’s den. Covering whatever I wanted, talking to entrepreneurs. I think because of my sort of demeanor as a 60 year old trapped in a 23 year body. Or a 23 year old trapped in a 60 year old body. Thank God this is podcast and not television. ’Cause I have the face for the former.

I really was able to build a name for myself and quickly after a couple of months and especially after they brought me on full time. I mean, I was talking to people like the president of the New York Stock Exchange and the president, rather the founder of IEX. Massively important folks on Wall Street.

It wasn’t until I came on full time that they sort of said, “All right, we need someone to write about this Bitcoin thing.” And I said, “Bitcoin, Crypto.” I mean, I want to be taken seriously as a financial journalist. I don’t wanna write about magic internet money all day.

Pomp: Yup.

Frank: Their response basically was, “Well you’re gonna be writing about magic internet money all day because the things exploding.” This was right around May 2017, right after I graduated from Fordham and they needed someone to really pick up the coverage. Because the thing was exploding as far as impressions were concerned, in terms of the editors asking questions. I remember someone came to me at Business Insider at the time and said, “What is Ethereum? We need someone to write about what Ethereum is because the Google trend traffic is off the charts.” And it was off the charts if you remember, it’s down now along with the price. Really just dove into the thing. The rest is sort of history. But it was really accidental, in a sense, being at the right place at the right time. It was over the course of the next, I’d say six months, as the thing exploded, was finding a niche at the intersection of this crazy Crypto world and Wall Street. What are the people on Wall Street doing? At the time, they really underplayed it so we’re talking September, October, November, right around the time when Jamie Dimon called this thing a fad, right? I was thinking, all right but what are they doing with it? I thought the place that made the most sense to go to were the exchanges.

Because when we think about blockchain technology and where it can have the biggest impact obviously on capital formation, so the IPO process could be disrupted by something like an ICO or an, security token offering, an STO. Obviously trading can be impacting, you have things like decentralized exchanges that supplement matching, bringing together buyers and sellers.

So I wanted to see if they were positioning themselves places like NYSE, Nasdaq, CBOA, CMA, how they were position themselves to take advantage and monetize this revolution in a sense. At the time, I mean, no one really, they didn’t seem like they had an idea, right. We’re looking at it, we’re thinking about it, we look at all technologies.

But really, I mean now we know a year later, right. [crosstalk 00:05:41].

Pomp: They were all in.

Frank: They were all in and they were all in for a while, right. At the time when I was thinking about the impact that futures could have, Bitcoin futures on the market. I went to all the analysts who cover the exchanges. So the investment bankers, who are writing up stock report analysts for their asset management clients to see how they can, the ones that set the price targets, right.

Pomp: Yup.

Frank: Your listeners who might not understand what investment bankers some of them do. I went to them and said, “Listen, what to you think the revenue opportunity is here?” Bank of America had put out a report at the time, this was around November, October, that said that 1) Bitcoin futures could help dampen volatility, which kind of didn’t really happen if you think about it. But also, there was a 10% revenue something for exchanges. So I went to other folks covering the stock and they hadn’t, not only did they really not understand what Bitcoin was, but they hung up the phone on me. They said, “This is ridiculous, the exchanges aren’t going to do anything in this space. I don’t see what the opportunity is here.”

How off they were, here we are now with backed with Nasdaq potentially looking to do something with Crypto currency exchanges. Their supplying market surveillance technology too, I think at this point five Crypto currency firms. It really is a horse of a different color. To really bring the point home of how much it’s changed since I first started covering it. I remember asking a year ago, a very high-up executive at one of the exchanges, how big of an opportunity is this? Basically, he echoed the same thing that Jamie Dimon said, “It’s a fad, it’s dangerous.” Here we are now, here we know that-

Pomp: They’re all in.

Frank: They’re all in. Yeah.

Pomp: Okay, so let’s talk about the state of the media in Crypto, right. So I kinda of bucketed in couple of different categories. So you’ve got kind of legacy media which is CNBC, Bloomberg, mainstream media, etc. Then you’ve got what I would consider Crypto specific media, which is the CoinDesks, the CCNs, Cointelegraph etc. Then you have this citizen journal, journalist, right. Which are like all the people on Twitter, Reddit, Medium, etc., that are basically reporting the ground truth. How do you see those three interacting and what is the state of each one of them?

Frank: Well, I think it’s interesting because as far as legacy media is concerned, I think there are so many topics that journalists have to cover that it really just does become about the price and how traditional institutions are viewing this space, right. It’s all sort of in that lens, which under serves a lot of the folks who have been in it for a really long time, since 2008, since the beginning or maybe since 2012. That in it of itself, up until I’d say a year ago, or you have some really fine journalists at places like Bloomberg and Business Insider and the New York Times. Up until a year ago, most of the stories either had to do with price or the culture of these cyberpunks etc.

That’s changed, and I think we’ve seen a lot of legacy media really dive into this and pick apart issues ranging from technology trading and others. But that gap from the beginning where a lot of this was sort of viewed as a fly-by-night sort of thing, allowed for a lot of these medium type folks to come up. A lot of bloggers, a lot of podcasters, a lot of writers who are also trading this stuff and investing in these stuff, to fill a gap and really get granular on the technology side.

I think now you have all, those types of folks along with traditional media. But at the same time and this is a recent phenomenon too, a Cambrian explosion if you will of Crypto media publications.

Pomp: Yup.

Frank: That, to be honest, and to be frank, no pun intended, the pun was very much intended … there are a lot of these Crypto publications that don’t know how journalism works. They don’t know how sourcing works. There’s a lot that I think I’m very skeptical of who these Crypto first publications-

Pomp: Yup.

Frank: Outside of CoinDesk, I mean they have great folks working on great stories but outside of that, I’m very skeptical of where they’re getting their information of, from and the due diligence they’re doing to really make sure the information they have is precise and well sourced.

Pomp: So let’s talk about this theory, right. A bunch of us on Twitter have lovingly started calling you Frankie Scooped, right.

Frank: Yes.

Pomp: Because you continued to publish scoop after scoop after scoop.

Frank: As my ego grows and grows and grows.

Pomp: But let’s walk through the anatomy of a scoop, right. How do you-

Frank: Shall we go through one that you helped me with? That’s probably not the best.

Pomp: So let’s talk through-

Frank: Sure.

Pomp: How you find sources, right, how do you actually develop that source, learn to trust them, get information from them and eventually publish something?

Frank: Well that was the best thing right, about the intersection that I was at. No one in, well I don’t want to say no one ’cause that’s a blanket statement. But very few journalists, I think, were actually looking at, well let’s talk to the market structure Crypto expert at this Wall Street firm. As opposed to the Crypto first firms like Blockchain, or a Circle or a Coinbase. I thought, let me go to the Chicago base market making firms, New York Stock Exchange. Let me find their Bitcoin guys, their Crypto guys because no ones probably really talking to them because the attention is all on the Crypto side, the Crypto first side of things.

Pomp: And so that’s really your approach was let me go to the established legacy players, the Wall Street type institutions and if I start there it’s kind of a trickle down from the well established well known players all the way down to the individuals start-ups.

Frank: And that’s exactly what happened, so I started with like let’s say the head of digital assets at X Wall Street firm and they were able to connect me and grow my base with actually the Crypto first guys. So I started at Wall Street and then exactly as you sort of described, branched my way, branched myself out to those other folks.

Pomp: Got it.

Frank: It’s all about, I mean the question is how do you build trust, how do you make sure folks know that you’re not gonna burn them and that you’re not going to, I mean it’s very easy, right, to talk to a journalist in one sense. But it’s a scary thing, you don’t wanna lose your job and you just need to make sure that, I need to make sure that the person I’m talking to knows that they can trust me and-

Pomp: Yup.

Frank: That I’m not gonna 1) tell them, tell people things that they tell me off the record, or on deep background, I’m not gonna associate it with them. And it’s about relationships and friendships and getting to know them on a personal level, going out for a cup of coffee or a drink of some sort and really forming a relationship of shared information. I know things about the industry, I have some insights.

Pomp: Yup.

Frank: Some might call them insights, that can help them at their job.

Pomp: So is this like let’s say you call up head of digital at a bank or wherever, first call you’re asking questions that you want answers to that you can then use as information for a story or is it more of, “Hey call them up, I wanna get to know you, I think that we can build this long lasting relationship?”

Frank: Yeah, you don’t want to just call them and be like, “Hey listen I know you’re building this thing, you gotta tell me everything you know about it.” That’s gonna scare ’em right?

Pomp: Yup.

Frank: You kind of want to grease the wheels, the old foot in the door phenomenon. How are the wife and kids? I mean I’m being tongue-in-cheek but it’s serious, that’s part of the process. A lot of the time, I hear something from someone like Anthony Pompliano, might tell me that such and such is building, is being built at X Company and I think, that’s interesting. I can’t just go write the story, right. ’Cause Anthony might not know what the hell he’s talking about.

Pomp: You’re gonna make me lose all of my friends over at Fake News right now.

Frank: Yeah, right. You see this is fake news, Anthony’s not that helpful, don’t worry. But-

Pomp: Hold on so when you call these people though, ’cause this is the important part, right, so you call them and you get information.

Frank: Sure.

Pomp: How do you know that the information is true and do you have to go get it from multiple people to confirm it, or how does that process work?

Frank: Well so the first thing I think about when I go into any call right, is why would they tell me this and how do they potentially benefit from telling me this?

Pomp: Yup.

Frank: So I’ll give you an example and this is, I think I can give this example. So when I broke that CBOE was really getting close to, or at least telling its marketing making clients that it was getting close to launching Ether Futures.

Pomp: Yup.

Frank: I mean, I knew this was something that would move the price, and so the first market maker who told me, right. I’m thinking, why they want to tell me this? Maybe they have amassed a large position in Ethereum.

Pomp: Yup.

Frank: And they would benefit from such a story. I think a lot of people in the Crypto world don’t think that really good journalists think about these questions, they just wanna get the story out. But this is something that’s really, really important to me. And so yes, just because such and such market maker told me that this was something that they had told him or her. I didn’t go off of just that one source. Because of those questions that you have to think about and so I went to another one, got the same exact story, all the details need to line up. Because imprecision, even if it’s a sentence, can radically change a story and radically can impact someones money.

Pomp: Absolutely.

Frank: No one gets a story right all the time. I reported, it was a really gangbuster report on Fidelity and their Crypto efforts and everyone knows that Abigail Johnson’s really big into Crypto. I have first reported they were hiring-

Frank: … into crypto. I have first reported they were hiring from internal, and this is, when folks send me stuff from inside the company, it makes the story process so easier, because it’s just, you look at the documents, you read it, and you write it up, and so-

Pomp: It’s like you have got paper evidence, right?

Frank: Yeah, paper evidence, that makes it great, because I don’t have to, I can’t point to my nameless source, I can just point to what I have in my hand, and so, the job ads basically said, “We’re hiring for crypto custody, and for projects related to digital asset exchange.” I followed up that report, because obviously people, when you put something out like that, they wanna talk to you, or they wanna give you more information to the story, and so, I found out basically that they had a VC fund under a British subsidiary from which a number of folks, or that was created by a number of folks at the firm who had left, and I’m sure a lot of your listeners know who these folks are?

Pomp: Yeah.

Frank: Castle Island Ventures, and so, basically, from, I think I talked to at least five, or six people for this story. I mean, I really wanted to make sure I was getting it right, because this isn’t something that Fidelity wants to talk about, and companies typically don’t wanna talk about things, and companies typically only wanna tell you what they wanna talk about, which is the hardest part of the job, and so, the mistake I made, right? Was that I had reported that the fund had shut, which was the language that was used by all my sources.

Frank: Now, Fidelity calls me the next day, and basically says the fund is inactive. Now, it kind of sounds like the same thing, right? But, it’s that sort of precision that as a journalist, [crosstlak 00:17:44] you don’t always get it, but you wanna get it every single time.

Pomp: Because, the difference there is shut means is inactive in perpetuity, right?

Frank: Sure.

Pomp: It’s over.

Frank: Sure, it’s over.

Pomp: And, inactive could mean we have money still sitting here, we’re not currently deploying it, but we may restart at some point if it’s-

Frank: Exactly, which is an important distinction, and you know as a journalist you’re not always going to get it 100% right, but those are the questions, and those are the details, very specific details that you always wanna go after, and so, a long way of answering your question, but tying back to crypto first media, a lot of the coin desk wannabes of the world are not, I think, precisely tackling stories in that way where they’re thinking about how they may be approaching it in a way that doesn’t get at those tiny details that at the end of the day seem super tiny, but make a huge difference on the impact.

Pomp: Let me ask this question. Has anyone ever lied to you? Like-

Frank: Oh, totally.

Pomp: Tell me like the horror story, right? Of, you’ve got a source, you’ve built some trust with them, they say, “Hey frank, I’ve got this awesome piece of information.” And, they lie.

Frank: Honestly, that typically doesn’t happen, so it’s not the folks that I’ve had established really great relationships with who will lie to me. Maybe they’re just confused, maybe typically, and that’s why you go to other people. It’s something like, they heard something from a company, but it’s … they heard it a little bit off. Most of the time, it’s the companies themselves that will literally lie to my face, or try to spin me in one direction, or the other, and so, one time I was reporting, Mike Dudas-

Pomp: I want a good story.

Frank: Yeah, this is a good story, so, well, he calls me, so Mike calls me the LinkedIn assassin, because I’m always reporting on folks in the crypto world, going to Wall Street, or rather the other way around people from Wall Street going to crypto. I think I reported on five, at least from New York stock exchange going to Coinbase, right? Which the assault just continues. There was one hire firm, a traditional Wall Street firm, a really senior guy was going to a really well known crypto currency company, and so I heard, recruiters are the best sources by the way, because they know where people are going, and they know for a fact that these things are happening.

Frank: And so, a really well known … Excuse me, so a recruiter told me about a very well known guy making this move, and so I knew without a doubt, but went to the company, and basically they said, “ This isn’t true.” Which puts me in a tough position, because I have to think, “All right, I only have this one guy who without a doubt knows, but they’re basically telling me this hasn’t happened.” And, on this one I didn’t go with my gut. I wrote the story, but just set it aside, and said I’ll wait, and a couple, I think it was four or five weeks later-

Pomp: So you, wait, so you wrote the story, but didn’t publish it, and you like put it in the drawer for later?

Frank: Yeah, because I was only like 95% certain, and if there was that 5% uncertainty that’s sitting like in my gut, right? And so, basically, I went to the company, I said, “This guy’s coming on as exposition, is what my source tells me.” And, they said, “Well, I mean, we’ve talked to him, we’ve talked to a lot of people.” You know the classic stunt?

Pomp: Of course.

Frank: “Yeah, but he’s not hired right now.” So, I was like, “Are you gonna hire him?” “Well, no, we may not. We talk to a lot of people.” And so, that level of sort of doubt was enough to make me hold off for a little bit, so they ended up, someone at the company ended up calling me four, or five weeks later saying, “Frank that thing you were looking into four weeks ago it was happening.” And so, I mean, that’s what confused me with when we put out that that story on Goldman’s ambitions, and everyone on crypto on Twitter saw her coming after me, and saying, “Oh well, the CFO said, Frank was-”

Pomp: Okay, hold on, we got to back up, and [crosstalk 00:22:00]

Frank: Sure.

Pomp: So, you wrote a story that said Goldman is, I believe your story said Goldman is going to shut down, or is not going to launch the crypto trading desk that they had previously said they were gonna do?

Frank: That was what a lot of folks-

Pomp: Is that the takeaway people had?

Frank: That’s the takeaway people had, but the story itself was a little more detailed, and it was that custody has moved up the line, and the trading of-

Pomp: As a priority inside the bank?

Frank: As a priority inside of the bank, and the trading of physical bitcoin has sort of moved down the list, but they’re trading obviously a ton of different derivatives tied to crypto, and they’re trading futures obviously, and so I think a lot of people interpreted the story as them completely scrapping all traded … All trading of all types of crypto related assets, which obviously we did not report, because that’s not true, but I think a lot of people interpreted that as being the case. And so, the CFO basically of Goldman said that our report, or he alluded to the report, actually he didn’t really, he basically said that this sentiment is fake news, and a lot of people took that as meaning that my report, or Business Insider’s report was fake news.

Pomp: So, you wrote this report, everyone goes wild on Twitter, mainstream media, people start trying to correlate the story-

Frank: With the price.

Pomp: With the price movement etc.

Frank: Which is ridiculous, and so, CNBC for instance, they reported that bitcoin tanks $500 a coin after Business Insider report about Goldman’s crypto strategy, when bitcoin tanked an hour and a half before any of … before our report went out, and so, this just speaks to the degree of misinformation, and I think when Mike was on, he spoke to a lot of these issues, and that’s part of the reason why I’m joining the block is to create, and help create a center, a hub for people to go to where they can get out of this like ridiculous misinformation chaos.

Pomp: Absolutely.

Frank: To actually find some sound, reasoned, news and information.

Pomp: But, what is it like when you write a story, and somehow it gets convoluted into this thing, and then the CFO of Goldman has to respond, and he says it’s fake news. Like, what do you do? Do people start calling you saying like, “Congratulations.” “Hey you screwed up.” Like, what is that response from people, and what do you do?

Frank: Yeah, I mean, what did I do? I mean, I Tweeted about it, and I said, “Well, this is exactly …” I was disappointed in the response, because he obviously didn’t read the original story, or he didn’t frame his comments in a way that said, “Hey, it’s not just this one report, it’s the sentiment out of it.” So, he wasn’t necessarily precise, but I made the case clear, “Listen, this is what our report said.” And, actually Marty said after the fake news comment, he said, “Oh, you know, maybe trading of actual digital assets has moved down the list, and custody has become more important. Our strategy might have changed.” Which is exactly what the story said.

Pomp: Got it.

Frank: And so, everything in this world, as you know, emotions fly high, and they come down in like, a week, not even a week, a couple of days.

Pomp: Crypto is the greatest human psychological experiment that people, that we’ll probably see in our lifetime, because not only is it all happening in relatively real time, there’s prices attached to it, and it’s very, very well documented in terms of everything that’s being created online.

Frank: And, that’s what makes it so fun to cover, and part of the reason why I love writing about the space, originally what really attracted me to it wasn’t necessarily this any sort of political underpinning. You know, there’s a lot of libertarians in this space, wasn’t the technology underpinning, there’s a lot of really smart computer scientists in this space who love the idea of putting a monetary system in place that’s coded, impenetrable, etc. I mean, it’s insanely groundbreaking computer science. That didn’t attract me either. It was really the passion, and energy, and liveliness, and getting to tell stories for those types of people that are unbridledly insane.

Pomp: It’s epic, right.

Frank: Yeah, truly it is, yeah.

Pomp: All right, so let’s go back to, somebody tells you some sort of information for a story, right? They’re a source, and they provide you this information, and it ends up being wrong. Whether it was malicious, or not, what do you do after that story is either published, or you get kind of confirmation that it was incorrect? Do you go back, and say to them, “Hey, you told me something that was wrong.” Do you just drop it, do you burn them? Like, what is the response to that?

Frank: I don’t know if I’ve ever have written a story that’s been dramatically incorrect to the point of having to go back to someone, and take them down-

Pomp: Like, what’s going on?

Frank: Yeah. I know, it’s typically before the story will go live where someone might tell me something that’s inaccurate, but again, I’ve never had a source really tell me something that was inaccurate, people sort of dance around the truth, but that’s just part of the job. That’s part of the excitement, and it makes my job fun.

Pomp: Absolutely.

Frank: It starts with someone telling me something, and having to find, connect the different dots together, and it’s typically in that process of connecting the dots that you find people being inaccurate, or untruthful, and all of that typically shakes out before any stories is up.

Pomp: For sure. Let’s talk about a couple of things that are happening in crypto, because I think you have a really interesting perspective in that. You get to talk to all kinds of random people, right? Everything from traders, to people and legacy firms, to crypto natives-

Frank: Totally.

Pomp: Kind of the whole gamut. Let’s talk about the ETF, right? So, EFT’s gotten a ton of attention, and it seems like price goes up, goes down based around these applications, denials, potential approvals, what’s your take on, does the ETF actually matter, and if so, what would the impact be if, and when it gets approved?

Frank: I have come to the conclusion that I think the ETF matters for the space, but it doesn’t matter for the price. I think it doesn’t matter at all for the price. I thought it did, I thought it could have a big impact, but going back a little bit to the run-up we saw in December after Future’s launch, I think a lot of that was driven by this idea that we’d have an ETF in a couple months. Literally, people thought that, “All right, we’ve been moving at a breakneck pace, and it’s going to continue unabated.”

And, here we are months and months later with no ETF in sight, probably won’t get one in 2018, maybe not even the first half of 2019. There’s a lot of work to be done in getting that off the ground which we can talk about, but it’s not gonna happen. Now, I don’t think that’s as important though, because when you look at the crypto ecosystem as a whole, and you think about how much work we have to do on the actual digital assets themselves on scaling, on getting a DAP, or a theorem, or an IOS that’s actually used by people, not just 9, 000 active users a month, which I think is the DAP usage, or maybe it’s a day on a theorem.

We need something that’s actually scalable, actually as use cases, not just for nerds like us, but for grandma, and grandpa in Iowa that they can understand. I was at Token Fest this past weekend, and there was a really cool company on one of my panels, and they were sort of trying to position themselves as a decentralized rival to Google, and it’s a bit tangential, but basically I ask them, “All right, why would my grandma care? Why would my grandma want to stop using Google to use this thing so she can get tokens?”

Like, that doesn’t make sense to normal people, and we need to, or those companies rather need to make sense of their projects to regular people, and so, that’s the impediment we need to get over. A use case for crypto that makes sense to the masses, not an ETF, and so, I think, if we got an ETF tomorrow, maybe the price would rally a bit, but I think that’s all gonna go down, because you’re gonna think, “All right, now regular investors have access to this market.” But, it’s the same thing as if you have an amusement park. This is a really stupid analogy.

People tell me I’m really bad at metaphors, but I think this is a good one. It’s like having an amusement park with some cool rides that are like different than other amusement parks, but they’re not really there yet, right? And so, you have the ticket guy, and they’re all just normal ticket booths. You have to go to the amusement park to get your ticket, and so an ETF equivalent for this amusement park is, “All right, now you can buy your tickets online.” But, if you can buy your tickets online, and there’s not that many cool rides that excite you, you’re not gonna go to the amusement park. Likewise, if you have an ETF, but there’s nothing that you think is that great about crypto, or you don’t understand it, right? If there’s still that educational barrier, you’re still not gonna invest in the ETF.

Pomp: Yeah. It’s just, it’s changing the mechanism, or pathway to owning the assets, it’s not actually changing the asset itself or making it more valuable.

Frank: Exactly, and it’s not making it more understandable to regular people. There are a lot of people out there that are making really great, that are doing a really great job laying out how bitcoin could be the digital gold, or a rival financial structure, and other cryptocurrencies, and digital assets that can also make major moves into chipping into existing business …

Make major moves into chipping into existing businesses whether it’s data storage or search. But that has yet to be sort of deployed and truly tested I think. Until we see that, I don’t think an ETF will make a difference. And it’s also ironic I think that we’re waiting so much for Wall Street to release complex derivative products and other things as opposed to waiting with baited breath for what’s going on inside Ethereum and what’s going on inside a lot of these projects. That’s where I think we should focus a lot of our attention.

Although, ironically, I love watching the developments come out of Wall Street. And this is something I’ve sort of been tackling with the past couple weeks. I think it’s less important.

Pomp: It’s important, yeah.

Frank: An ETF is important for the ecosystem but I think it’s less important.

Pomp: Okay, so let’s go from Wall Street versus crypto adoption to the regulatory environment. So there’s all these lobbying groups, working groups that are popping up, that are either led by Wall Street executives or crypto native companies, individuals that are trying to bridge the gap of understanding education for regulators and law makers.

Are these things good? Are they just doomed to fail? How do you see the working groups and the lobbying groups actually having an impact with the regulations and the regulators themselves?

Frank: So, Mike Novagratz had something really interesting to say about regulators impression of this space and I think it’s really smart and true and it’s that this market, for so long, was so retail driven up until the end of last year, and while there were folks at Wall Street firms looking at it, a lot of it wasn’t public and so there was no, back in the housing crisis, regulators could go to there guy at Morgan or Goldman and say, “What’s going on here with these mortgage back securities?” And you didn’t really have that with Crypto because it was so retail driven. So now they’re playing catch up, they’re trying to figure this space out, they’re giving it a chance though…they’re not completely sending it off to other countries as far as regulatory arbitrage is concerned.

Pomp: Yup.

Frank: They want to see development but there’s a lot of unanswered questions especially around the ETF. How can we make sure these markets aren’t being manipulated? And when so much of the action is in Asian countries, so much of the volume and turnover is in Asia, and you don’t have market data sharing agreements between exchanges, you don’t have an equivalent, you don’t have, you don’t have a guarantee, right? That these markets are operating along-

Pomp: Just in the standardized safe way.

Frank: Exactly. We don’t know what best execution is, we don’t have those market safe guards that we have in equites. But to be fair right, equity markets had 250 years to develop. So it is kind of like comparing apples and as Lynn Martin at ICE said to me in an interview once: Comparing apples and neon fluorescent signs. Which is true. And we’ll get them to be apples and apples, probably, one day but there’s a lot of questions that the regulators have thrown to the crypto world and they’re not being answered, so on market manipulation, if we can get the exchanges to sort of cooperate and collaborate to create an SRO which, the Winkelvoss Gemini Exchange has sort of tried to spearhead with their, their working group that they’ve created but you know you have Coinbase creating their own with Circle and Genesis.

Pomp: Yup.

Frank: Right? And I’m just here thinking, why are we getting them all together? It’s just too much of- from my perspective, it seems like the Winkelvoss Gemini Exchange wanted to get something that could help- ’cause the regulators wanted an SRO type thing. And so here they are, they go, “Okay, we’ll create this thing” to help get their ETF on the ground. And Coinbase probably sees it and goes, “Well, we’re not gonna follow Gemini’s lead” we’ve gotta create our own thing. And it’s just troubling to me because we should all just be working together, right? We should all be trying to get to that common goal and purpose which is, sound markets creating the standards for those sound markets. And educating, market participants and non market participants alike on why this is a valuable space that you should put one to five percent of your assets in.

Pomp: Absolutely. So, as this happens, right, we need technologists, obviously to build technology standards etc. and one thing I think you and I agree a lot on is like, there’s a full on assault by technologists on Wall Street and financial markets right. That the Wall Street legacy and institutions, for a long time have dominated that world and they do things in a very specific way. Technologists happen to think a little bit differently, build things a little differently, and kind of have a different set of ethos and perspective and we’re seeing this clash. And it’s really the technologists attacking the financial markets and the Wall Street institutions. How do you see that from your perspective? Right? As you talk to a lot of these Wall Street institutions, like what’s their take on this?

Frank: What I think is really interesting, if you want to look at something that can prove or can support a bullish thesis on crypto, right now price obviously, is out of the argument. Scaling doesn’t look as great. There’s a lot of issues. But if you want something that looks good, look at the talent assault. Look at how many folks from traditional Wall Street, I can list them off, have either dived into crypto themselves or have been taken from a Wall Street firm to the crypto work.

You have a guy like Jamie Sellway who left ITG to be head of institutional development or sales, not sure what the precise title is, to go over to [inaudible 00:38:28]. You have a person like Christine Sandler leaving New York Stock Exchange to go to Coinbase. Eric Shrow from New York Stock Exchange went to Coinbase. Hunter Murgart, went from, I think he was a sales trader at Barkley’s? He’ll probably listen to this and tell me if I’m wrong. He went to Coinbase. You had a guy like, I first reported, 25 year veteran [inaudible 00:38:49] [inaudible 00:38:49] going to Cracken for their OTC desk.

I mean, the assault is unreal and so you have to think, I mean, they’re probably making great salaries but there is this, sweep that proves I think, that there is a vision that they see, and there is efficiencies that can be driven by this technology. And potentiallY maybe even a revolution.

Pomp: Yeah. I mean look at, forget all the money for a second, I really do think a lot of these people are leaving because they are going to something more exciting, more powerful, and it’s a global phenomenon. And so the whole idea of like the virus is spreading, really has become this thing of where, the idea of what Bitcoin, digital assets, decentralized finance etc. has spread and captured the mental energy. And it’s a thing where once people get exposed to it and understand it, they can’t stop thinking about it, they can’t stop trying to figure out how to solve some of these problems do get inside of an institution that’s a legacy Wall Street place just isn’t going to cut it for a lot of them and so they’ve gotta go find somewhere else, that’s what they’re doing.

Frank: Totally but at the same time you see a company like ICE launched back and I’ll tell you, folks inside Coinbase tell me that they think across the crypto exchanges, they’re not chasing the competition in that respect but they do see a serious competitor. And that’s because the trading market structure element of this is so integral to building a sound market whether it’s crypto or otherwise and so long story short, you see tons of institutional firms looking at how they can break in, whether it’s Goldman on custody, Numera on custody, ICE obviously on custody and potentially trading and that’s the story across the street.

Pomp: Absolutely. No that makes complete sense. Alright, let’s do some rapid fire questions-

Frank: Sure.

Pomp: And then I’ll ask you one non crypto question that I’ve been thinking about a lot and I’ll let you ask me one question to wrap it up. What’s the most controversial thing that you believe in crypto? So, the thing that you believe that the most amount of people, when they hear it, will disagree with you.

Frank: I guess probably the ETF thing. I don’t think we should be worrying about it as much as we do. Maybe that’s not controversial. I’m sure someone might say-

Pomp: There’s a good amount of people that disagree with you.

Frank: Everybody is like obsessed with this ETF!

Pomp: You’re not?

Frank: I’m not obsessed with it. It’ll be cool when it happens. People will probably argue -

Pomp: He’s all in on it. So, what is the most important or interesting thing in Crypto that people might not be talking about?

Frank: That people might not be talking about- I reported on a fundraise out of Chicago, a company called CCX, and this company is an institutional platform for spot and derivatives, and they have hedge funds knocking on the door. And so, what’s interesting about them, one they raised fifteen million in a bare market which speaks to a whole other conversation about how the public markets for crypto, whether it’s ICOs, or otherwise, really, really bad but companies are still raising millions of dollars.

Anyway, what’s interesting about them is the majority of the firms, or no, sorry, not the majority, but a large percentage of the firms that are knocking on their door from the institutional side, have never traded crypto before which is really insane. And so clearly they have something going on there. CFTC regulated platform that I think is really interesting. And they have a suite of heavy weight, ex Wall Streeters, a guy named Sam Tegal, who I first reportted left jump trading, he was recently brought on and they got a really cool guy running the show’s who’s like 25, super smart and so the company paid attention to him.

Pomp: Alright man. We’re gonna take your word for that one. You’ve got a magic wand and you can wave it and change one regulation. What do you change?

Frank: One regulation, that’s…i think I, we’re probably on the same boat as this, I think the whole thing around the fact that you have to have $250,000-

Pomp: Accreditation laws.

Frank: Yeah, accreditation laws, I would… I wouldn’t eliminate them I don’t think but I think especially someone who’s younger and has some extra cash, there’s no reason why a computer scientist at Harvard who may not have $250,000 net worth, shouldn’t at least take five grand and invest it in a venture capital project he think is interesting. I think that’s absurd.

Pomp: Yeah and I mean look, it’s not so much as eliminating accreditation laws, it’s just switching what the criteria is.

Frank: Yeah, exactly.

Pomp: So today we have wealth as a signal for intelligence which is a ridiculous. They’ve gone on and on about this, I don’t need to touch on it anymore but if we can go from a wealth criteria to a knowledge criteria, I actually not only think that one it is more inclusive of the general population but two, it actually probably makes it less risky in a more sound market. Because everyone is more intelligent.

Frank: There’s tons of people with 250,000 net worth who are stupid.

Pomp: Absolutely.

Frank: I can name like five.

Pomp: For sure. Alright, so this is the first time I’m asking somebody a non crypto question, but something I’ve been thinking a lot about and I just, knowing you you will have a great answer for this. So, lots and lots of people are interested around aliens, right? Let’s go ahead and just, yes there is some sort of living organisms outside of Earth. So there’s aliens somewhere. Do aliens have pets? So are their alien animals or are there just alien humans?

Frank: It reminds me of that South Park episode where Earth is like a show where they put a bunch of different species on one planet and like, we’re all going after each other, starting wars, eating each other.

Pomp: Joke’s on us.

Frank: Maybe we’re the pets.

Pomp: You think we’re the pets?

Frank: Maybe we’re the pets.

Pomp: Alright. I love that answer. The way that this came up was we were talking about aliens one day and I said you know, we always talk about aliens like human equivalents. They’re gonna show up and we can talk to them and hang out with them, they might attack us, but what about all the animals? Right? What- how does that plan go?

Frank: Do they have animals?

Pomp: I don’t know. Maybe we are the pets or the animals.

Frank: Or the show.

Pomp: Well we’re definitely a show. I don’t know who’s watching but we’re definitely the show. Alright, so I let every guest ask me one question, what question do you have for me?

Frank: That’s a great question. What question do I have?

Frank: What company- I’d like to know what company you think is the most exciting right now?

Pomp: Oo. What company do I think is the most exciting, I’m going to break from the question.

Frank: Aside from Morgan Creek.

Pomp: Yeah, take Morgan Creek out of it. I’m actually not going with a company. I’m gonna say that it is Bitcoin. And the reason being, I think people are bored by Bitcoin. I was making the argument to a friend the other day. Bitcoin as an investment opportunity. Bitcoin as an economic development, Bitcoin as a kind of, threat to sovereign backed currencies, etc. It’s too boring. It’s kind of come and gone in terms of the excitement of Bitcoin and so now we see everyone going into everything from the derivative trading, to what Wall Street wants to do, to enterprise block chains, utility tokens, there’s also other fun, sexy stuff going on.

But if you go back to Bitcoin, I still think it’s the most interesting, the most important development in space, and if it is successful, so it is a complete binary bet in the sense of a true venture capital bet. If it works, it’s going to be insanely valuable. Even from here, if it doesn’t work, it’s going to 0. Right? And so that binary aspect of it scares a lot of people, right? But if it does work, it is probably the greatest technological development of the last, I don’t know 500+ years. And the reason why I think that it’s so important is because it is so simple. There’s almost beauty in the simplicity of Bitcoin and what it is, what it is trying to accomplish. All of the intellectual Olympics that happen on Twitter and these other mediums, they kind of just skip over it. Yeah, Bitcoin’s a thing, it was one of the first applications and so let’s go talk about everything else we’re gonna try to figure out.

Well, if you go back to that and you really sit and think about out of every single thing in crypto, what has the potential highest impact in a whole different ways you cut it, Bitcoin’s still probably the most interesting, most important thing. We just don’t spend as much time thinking about it because of all the other sexy, cool things we talk about.

Frank: And that’s why were here.

Pomp: Literally why we’re here. Listen man, this was so much fun, I really appreciate you coming on.

Frank: Yeah, it was a pleasure.

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You can find the recording here: Off The Chain Podcast: Anthony Pompliano and Frank Chaparro

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The following is a transcript of a conversation between Anthony Pompliano and Travis Kling, Founder and CIO at Ikigai Asset Management, about token structures, price movements and outlook, value accrual, the importance of BitMEX in Asian algorithmic Market Makers, and what needs to change for crypto to have sustainability.

You can find the recording here: Off The Chain Podcast: Anthony Pompliano and Travis Kling

Anthony Pompliano: Where did you grow up? Where did you go to school, education, and then what did you do pre-crypto?

Travis Kling: Yeah. Grew up in Texas, and growing up in Texas, I’ve been out of college for 10 years, and nine and half of that was in energy investing.

Pomp: You really strayed really far from Texas.

Travis: Yeah. Got an undergrad in accounting, a master’s in finance, got out of school in ’08, took the financial crisis in the face, was doing oil and gas M&A for a couple of years out of college in Houston. Went to Magnetar Capital in 2011 doing long/short energy equities and non-control private equity and debt in the energy space. Pretty broad investment mandate, long investment horizon, highly illiquid or totally illiquid securities. I was there from 2011 through the middle of ’15, so that was like the go-go years in oil and gas.

When I joined, the energy business was managing 250 million. At Magnetar, when I left, we were managing 4.6 billion, so a pretty massive AUM growth over that period of time. Left in the middle of ’15 and went to Point 72 in New York, Steve Cohen’s hedge fund, and I was running a $200 million long short book there. Energy and materials equities. A little bit of commodity, a little bit of options, and probably a good way to just easily segue into crypto here.

Pomp: Why? Why jump into crypto?

Travis: I’m not a tech guy, I’m not a tech investor, and I’m not a tech person. I’m not an early adopter kind of guy. I’m not a futurist kind of guy. I’ve never been like that. So, the first time I heard about Bitcoin was when Silk Road got shut down. Just from a fascination perspective, like look at these crazy drug dealers that made this magic internet money to go buy drugs on the internet. That’s just wild. I joke around with my mom all the time where I’m like, “You know mom, it’s a good thing that I wasn’t into drugs when I as a kid, so I grew up to be an upstanding citizen.” But on the flip side, if I’d have been into drugs I would have seen Bitcoin early and I would’ve bought that shit in 2012.

Pomp: It’s true.

Travis: Same thing with video games. When I was growing up. I said the same thing with my mom too. I was like, mom, I’m kinda glad you didn’t let me play video games when I was a kid, which she didn’t, because now I read more than probably 99% of millennials out there. But then on the flip side, if you grow up playing video games and somebody pays $100 for a magic battle ax, and then you see Bitcoin come along, you’re like, this makes all the sense in the world, right?

Pomp: Absolutely.

Travis: Anyway, I was reading about Silk Road, just because it was crazy. Bitcoin’s part of the story. I probably read two hours worth about Bitcoin and my takeaway from that was magic internet money. There’s a math problem, the math problem’s really, really hard. It controls the supply/demand, and drug dealers trust it to use it as money. I’m like, that’s just nuts, right?

So now Gox got hacked not long after, and to me that was like, okay, this is not something I need to pay attention to, because I don’t have any way to mitigate or price in the risk. I wake up one morning, and somebody stole all my stuff.

Pomp: It’s like two strikes.

Travis: Yeah, and like being the like non-hardcore computer guy. I’m like, if anybody’s gonna get their stuff stolen, it’s probably me. So, I’m not into this. Didn’t think anything of it. Fast forward to the back part of 2016, price starts doing its thing. I started reading more about it. Early ’17, Ethereum and the ICOs started going crazy. I started reading more about it, and I basically came back from July 4th break last summer and fell down the proverbial rabbit hole and just started spending all my time reading about crypto. Go to the gym, listen to crypto podcasts. Go home, sit on the couch in the dark, read about crypto until the wee hours of the morning. Wake up, do it all over again the next day.

I started stacking out. You’re doing this self-study, and I really like behavioral economics and game theory stuff when I was in grad school. In grad school, I had graduate degree in finance, and they hammer efficient market hypothesis when you’re in school and then they do a little bit on behavioral economics and that made no sense to me because it was so obvious that markets aren’t efficient at all and behavioral economics is really what makes sense because people. Because of fear and greed in the context of economic decisions, humans constantly make mistakes, and behavioral economics is the study of that. I did a lot of self-study in school about that.

I circled back to crypto, and it loops in a lot of those aspects, and so I really got sucked into it. I did probably 4 or 500 hours over a couple month period of time and I went to senior management out of the blue at the end of September, and I was like, “Look, this blockchain thing’s gonna be completely revolutionary; it’s a once in a generation type of deal, and I don’t wanna be in equity long/short portfolio managing anymore. I’m gonna make a career change.”

Pomp: That’s awesome. All right. So, let’s back up. You came from, what I’ll call, Wall Street institutions. Whether it was energy trading pre-Point72 and then Point72, what is that like? When you’re inside of these organizations, how they view technology? How do they view these new asset classes when they pop up and some of them stay, some of them don’t? Just talk about being a more traditional institution, looking out at technology and new asset classes.

Travis: Yeah, so I was buried down in the … I was just doing my oil and gas thing, my energy thing. I did a decent amount of renewables as well, too, so I was focused in that one lane.

Pomp: So, you’re not looking at anything else out of oil and gas?

Travis: Energy broadly. Energy, broadly, was basically my career. I was 30 years old and knew as much about as oil and gas as any 30 year old you’re gonna find. That was just what I did. Working in institutions like that, I think one of the biggest differences that I think I’ve definitely taken with me as I’ve moved into crypto investing full time is I think people that haven’t worked at a hedge fund before think that it’s like an episode of Billions or it’s like Wolf of Wall Street or it’s like Boiler Room or something like that, and it’s actually way less sexy than that. It’s very, very process oriented, especially at Point72; you become an expert in how to build investing frameworks.

Pomp: It’s a machine.

Travis: Yeah. It’s a machine, and in the same way the Henry Ford used to crank out Model T’s, you can crank out attractive risk-adjusted returns on a repeatable basis like that, and simplistically, the way I think about it is you build this framework and then you put a bunch of processes inside of the framework, and then you build a bunch of tools inside of the processes to help you execute those. In the same way that Henry Ford used to crank out Model T’s, you can just crank alpha like that, and it’s like making sausage. You take a shit load of data, you stick it in the sausage maker, you turn the gears, and it spits out profits and you just do it over and over and over again.

Pomp: Just so we’re clear, that’s not what people thing is happening, what you just said, and then two is, that doesn’t sound very fun ’cause it’s not human-driven in terms of, I’m making a gut call left or right. It’s much more, we spent a bunch of time building what data sets we’re gonna do, clean it, structure it, build the machine, start stuffing the data through. There’s not a lot of dependence on the individual to have intuition or make mistakes or make the grand slam call, right?

Travis: Yeah. So, generally speaking, humans are pretty terrible at investing.

Pomp: Absolutely. Absolutely.

Travis: We have so many biases and we make tons of mistakes.

Pomp: We get tired.

Travis: Yeah, right. And so the term quantamental got thrown around a lot at Point72, which we’ve totally adopted into Ikigai Asset Management; it’s at the core of how we’ve built our investment business.

Pomp: Explain what that is.

Travis: It’s just the intersection of fundamental and quantitative investing, or said differently, harnessing the power of big data to help humans make investment decisions. Simplistically, you ask yourself the question, what exactly is it that a human does better than a machine when it comes to investing? The punchline is not all that much. This war has been waging for over a decade now in traditional asset classes, and the war is over, dude. The machines have fundamentally beat the humans when it comes to traditional asset class investing. Just look at the profitability of a place like Renaissance or Jump Trading or D. E. Shaw right.

Pomp: It’s because the machines are not only quote/unquote “smarter,” but they have the ability to do much more analysis more consistently over a long period of time.

Travis: Never get tired. No biases. Can crunch an incredible amount of data. Then you start layering in machine learning type of stuff and this, that, and the other. But the interesting thing about that, the quantamental aspect as you move into crypto is, a machine is only as good as the data that you’re feeding it. The data’s the food for the machine. If the investment decisions that the asset class is presenting are not quantable, they’re not able to be fed into a data stream format, then a machine’s not gonna be able to make very good calls. In my opinion, where we are in crypto assets, we’re not far enough along, and the most foundational pieces of this ecosystem haven’t been put in place yet.

Because of that, machines don’t do that well in that kind of environment and the data has a lot of noise in it. If I’m trying to run a stat arb strategy and a crypto stat arb strategy in September 2018 and it’s a strategy that was back tested against price action in the fall of 2017, what the hell does the fall of 2017 have to do with September 2018? It’s such a drastically different market because we’re so early and we’re still having these big seismic shifts in the way the market’s acting.

Pomp: I think what you’re talking about here is there’s two issues. One is the quality of the data or the reliability of the data. So, there’s just not that many market cycles to look at. There’s not that many great data sources that you have a high level of confidence in. The second thing is there’s also a lot of investment opportunities that there’s no data.

Travis: Right. Correct.

Pomp: So, early stage investing is really, really hard to quantify.

Travis: Correct. The way the humans do early-stage investing is like … So, I can’t have a view on Ethereum without having a view on EOS, and I can’t really have a view on either two of those things without having a view on Hashgraph. When you think about that spectrum of investing, a machine’s not that great at … humans are really good about taking this really broad set of data and taking this unrelated thing over here and being like, this kind of helps me think about how this is gonna be, and this other thing over here that’s got nothing to do with crypto at all. It’s like, oh, I read about the history of the internet and it helps inform my decisions about how I think some of this is gonna play out. Machines don’t do that that well.

Pomp: Multi-dimension thought process and decision making.

Travis: Right. So, the way that we’ve built it at Ikigai now, we’ve got one systematic strategy. We’ve got algorithmic market making that’s run by a piece of technology, and everything else is a human at the end of a line pulling a trigger, but you’re pulling the trigger … you’re making investment decisions informed by information that … quantitative type of data and things that look more like quant strategies that help inform the investment decisions that the human makes.

Pomp: Absolutely. Let’s go back real quick before we jump fully into crypto here. Let’s talk about Point72. Obviously, you can only say so much about it, but walk us through what makes that place special and what makes that place different from the repeatability of the returns they’re able to drive for decades.

Travis: Culture of excellence, incredibly high-caliber people from top to bottom, a stunningly strong operational framework so that, as an investment professional, the operations of a hedge fund are the foundation that you’re standing on and you’re trying to build a house on top of that foundation, and the foundation at Point72 is the most rock solid slab you could possible imagine. There’s like 1,000 employees at that firm. I don’t know what the ratio of back office to front office is, but it’s like 2:1, 3:1, something like that. So, you’re standing on this rock solid foundation, you’ve got every resource imaginable at your fingertips and it feels like you’re playing pro ball so it helps you elevate your game. It was a great culture and great environment.

Pomp: ’Cause the person next to you or down the hallway-

Travis: World class.

Pomp: Is not only world class, but they’re here to eat your lunch, right?

Travis: Yeah. I mean, it’s not … I feel like people sometimes think it’s … it was not this … it wasn’t cutthroat. Nobody’s trying to stab somebody else. It was not like that at all. I can’t speak to old… like early 2000s… you hear stories about that. I joined in the middle of ’15, fantastic place to work.

Pomp: Loved it?

Travis: Yeah.

Pomp: That’s awesome. It’s great, too, when you can leave a place like that and not only say I learned a bunch, I worked with great people, I had a great culture, and couldn’t speak more highly of it. So, that’s awesome. All right. So, what was the reaction from, either people at Point72 or just Wall Street in general when you said, “Hey, long/short equity, that’s great. I’m taking the full jump, going into crypto.” Are people excited for you or people think you’re nuts? Are they trying to follow you down the rabbit hole? What’s going on there?

Travis: I’m sure probably not to my face, I’m sure many, many, many people thought I was completely insane. My mom thought I was crazy.

Pomp: Moms always think that you’re nuts until you prove that you’re right, and then they-

Travis: You’re gonna do what? Well, what is this Bitcoin?

Pomp: They believed in you the whole time.

Travis: All I read about is it’s for drug dealers. I’m like, that’s not not true, but you gotta look out in the future, mom. My mom’s a small town Texas mom. I grew up in College Station, Texas. My mom grew up in College Station, Texas. My mom still lives in College Station, Texas. But generally speaking, I think people probably thought I was … it was early. I didn’t think it was that much of a risk. It didn’t feel risky to me. Again, not a tech investor, not a seed stage investor. That wasn’t my career path.

The only other time that I felt like I did when I really dove into crypto and started to understanding it was the first time I took an Uber when I was living in Chicago. Chicago got Uber really early. It was the second city after San Fran to get Uber. So, I think the first time I took an Uber was January 2011 or 2012, 18 months after they started or something. Nobody had ever heard of it. I don’t remember how I heard of it. Downloaded the app, black car comes and picks me up from my apartment, I got to a store, drops me off at the store, I’m standing on the sidewalk, drives away. I’ll never forget it. I was like, “That is going to change everything.” And I was positive about it. Positive about it. Sure enough, you watch what Uber did, obviously, over the coming years and I used to joke around, the day I took that Uber, I should have just quit Magnetar and walked into Uber’s office and been like, “Yo, I’ll push Microsoft Excel for you. I’ll do Biz Dev. Whatever.”

Pomp: Just sign me up.

Travis: Pay me in stock would’ve been a good career move.

Pomp: Beyonce’s got a line: pay me in equity.

Travis: Yeah, exactly. I would’ve been probably the 25th dude, whatever, at Uber, and that would’ve been a nice move. Only other time in my life I felt like that was when I really understood crypto and I dug into it, and I just didn’t have any doubt in my mind that this thing was gonna completely change everything. Specifically, I’m super unsure about how that’s gonna happen. It’s just I’m directionally, broadly, highly convicted. As bullish as you can be. It felt like a great bet to go make in terms of betting my career on it.

Pomp: It’s this idea of confident in the trend, details to be determined.

Travis: Yeah. So, what I tell people is there’s a nonzero chance that Bitcoin could be Netscape and Ethereum could be Alta Vista and we haven’t Google and we haven’t seen Facebook, Amazon, Netflix, Uber yet, and there’s a nonzero chance Bitcoin could go be the global, immutable, decentralized store of value and the world reserve currency, and one BTC could be worth 450K or 2 million or 3 million or pick a number and everything in between. I’m really not sure about specifically how that’s gonna play out, and so the way we’ve built Ikigai is to have malleability in our mandate and to have a clear look into how this thing’s gonna play out so you can make investment decisions accordingly. You just go with the strong opinions weakly held thing. You intake as much information as possible, you assess that information, you analyze it, you make investment decisions based on it, and when something new comes along, you change your mind, dude. You change your mind.

Pomp: How do you that, though? You’ve got conviction on something, you’ve got the strong opinion, you know that it’s loosely held, but what are the things that you look at that would change your mind? Is it data? Is it conversations? Is it gut? What are you looking at that allows you to change your mind, not necessarily on a dime, but pretty quickly to go after a different opportunity?

Travis: That’s a great question. It’s so many things. Yeah, it’s so many things. Coming from the world that I came from, I do latch onto any kind of data that I can; it’s pretty natural to me. Probably done more work in that than certainly not everybody. Hats off to a Nick Carter. The guy’s a beast with all that stuff. And Brendan Bernstein’s great. A lot of those guys, but I definitely have a tendency to take that … anything I can quantify, let me try and quantify it, and maybe I can’t draw an investment decision from it, but let me at least have it. Give me as many tools in my tool shed as I can get.

This space is very big on narrative investing. You track these narratives and start thinking through that, and you have to understand how these things are developing. A year ago, we were talking about … like, oh, we’re gonna use Bitcoin to buy a cup of coffee. Remember that?

Pomp: Oh, yeah.

Travis: That was a year ago. Oh, that’s what we’re gonna use Bitcoin for. Okay, got it. As people realized that wasn’t gonna happen anytime soon, it’s like, oh, no, it’s digital gold. I don’t know, Austrian economics. I get it. I get that. Ethereum, World’s Computer. Oh, it’s a decentralized computer, blah, blah, this and the other. Oh, it doesn’t scale. Oh, shit.

Pomp: What else can we use it for?

Travis: Oh, yeah, but it’s gonna scale ’cause we got Casper coming. Oh, wait. We don’t. Casper’s not close. Oh-

Pomp: Or we can save the world’s electricity ’cause we’re gonna go proof of stake.

Travis: Right. Right, right, right. But even from the very beginning, when I really went down the rabbit hole, just ’cause I am a really cautious guy. As an investor and as a human, I’m cautious. I’d never go skydiving. I’m not about that life whatsoever. As an investor, I’m very cautious in the way that I invest as well, too, and so the hundreds of hours that I spent in the beginning before I quit my job, a lot of that time I spent looking at all the problems in this ecosystem. I was like, why is this thing not gonna work? Why is it not gonna work? Why is it not gonna work?

I was looking at proof of work. This is obviously not gonna work on a large school, and then you look at this proof of stake thing. I’m like, but it’s not as secure, but then you start really digging into it, and a lot of the cryptography … people have been doing proof of stake as a concept and cryptography’s been around since the 90s. It’s not a brand new concept. Cyclic graphs. People were doing that work in the 70s, and now you’re just trying to weave it into computer science. That gives you a little bit of comfort that you’re not just trying to pull this stuff out of thin air.

Pomp: It’s what makes it so interesting to the smartest people in the world is it is the true polymath type environment, where you gotta have knowledge and some kind of experience or perspective from a whole bunch of different disciplines and you pull them together and it’s not just, let me pull economics, computer science, geopolitics, and the history of money on an even basis. I might actually only pull 10% from economics and 50% from psychology, whatever. How do you build that into a skillset that then not only helps you understand it, but then you can deploy capital against, right?

Travis: Yeah.

Pomp: And sometimes those two things actually aren’t the same, and I think that’s part of what draws so many smart people into this space is there’s problems that need to be solved and they’re not solved yet. They may never get solved, or they may get solved tomorrow.

Travis: It’s the puzzle of all puzzles ’cause there are so many aspects to it. It gives you so much to chew on. If you figure it out, obviously, from an economic incentive perspective, if you get it right-

Pomp: You’re gonna win the game.

Travis: Yeah, you’re gonna get paid on that. Not to get cheesy, but the societal aspect of it as well, too, was super important to me. Like Ikigai-

Pomp: Let’s talk about what you’re doing today and where the name came from.

Travis: So, Ikigai, ancient Japanese concept that means reason for being. Super old world. It’s, like, a 1,200-year-old word. There’s books and stuff written about it. If you Google Ikigai, you see this Venn diagram and the Venn diagram’s what you’re good at, what you like to do, what you deserve to be paid for, and what the world needs. I came across the concept randomly a year ago and I really liked it, and to be honest with you, I had a career in hedge fund investing, and I liked doing it. I was pretty good at it. I made a fine living doing it, but the world doesn’t need another hedge fund manager. If the world doesn’t get another hedge fund manager, the world’s gonna be just fine.

Pomp: Some would argue we could lose a couple and be okay.

Travis: And be just fine. But the world needs this technology, and the technology is a platform to effect societal change for the good. I’m much more of a realist than I am … you run across a lot of techno utopians type of person in this space.

Pomp: Of course.

Travis: A lot of those dudes. I’m much more of a realist, but what I saw society starting to recoil from these monopolistic abuses of power at various different levels, and you start seeing these trends. It’s like, Brexit, Donald Trump getting into office-

Pomp: Hyperinflation.

Travis: NSA stuff, Facebook election ads, Black Lives Matter, Harvey Weinstein, Cambridge Analytica. There’s a common theme that runs across all that, and you just to have to look at all the surveys of millennials. Millennials are the generation to have a deep distrust of governments, large finical institutions, large technology companies. Facebook takes your data and they do shitty stuff with it. Google takes your data and they don’t keep it safe. Apple takes your data and makes these other products and they hook you in and they box other people out. It’s pretty monopolistic the way they do stuff, and stuff gets hacked all the time. Equifax, right?

Pomp: Look, if you are under the age of 40, you might as well just admit or give into the idea that your data, your personal financial data and your actual personal data is floating around on the internet somewhere, and if somebody’s got money, they can buy it.

Travis: Facts. Facts. You can get 500 credit card numbers [00:24:30] for $5 on the internet, on whatever black market stuff. You look at just millennials in general, and the same way polls are showing you how much that distrust is, the older you are, the less you think Bitcoin makes sense, the more you think gold makes sense. The younger you are, the more you think Bitcoin makes sense, the less you think gold makes sense. So, you fast forward a couple decades from now, and millennials, we’re all 50, and what do you really think is gonna happen?

Pomp: Yeah. I mean look, we go and talk to these institutional investors all the time, and I always tell them, I say, “Listen, if you don’t take anything else from this conversation, understand that people under the age of 35 have an amount of their net worth in this asset class that would make you just absolutely disgusted. I’m talking mid double digits in many cases, where we’re talking 35, 40, 50, sometimes 70, 80% of their net worth, their total net worth, is tied up in digital assets.” Now, some of it is they put a little bit and they exploded it and value and so it grew, but I also know a lot of people who are taking 50, 60, 70% of their salary and they’re still buying. It’s a store value. It’s a medium of exchange. It’s the new stocks, the commodities, the bonds.

Travis: It makes sense. It makes sense.

Pomp: It just resonates.

Travis: The problems are gonna get solved. the hiccups with the industry are solvable hiccups.

Pomp: Absolutely and also it’s the opportunity cost. If you’re an institution, you gotta hit your 6 to 8% actuary assumed rate of return in order to pay out the millions of people who are depending on you if you’re an endowment for education or if you’re a pension for retirements, all this stuff. You’re not hitting that today in most cases. Well, if you can’t hit 6 to 8%, where do you go?

Uncorrelated digital assets is one are to look, and so millennials are saying, “Even if I could hit 6 to 8% in the public markets, debt, real estate, all this stuff, that’s not interesting to me. I can take a bunch of risk. I’m young.” So where do they go? They go for the 6, 700, 800% annualized returns that they just saw, and so they’re gonna continue to do that. It’s all of these forces at work that drive a huge amount of capital from a very specific demographic into digital assets. Everyone’s gonna follow. They have to follow. It may take longer, but it’s gonna happen.

Travis: Internally, we talk about it. It’s like musical chairs. Sovereigns, they have their game of musical chairs that they’re playing and institutional investors. Endowments, state pension funds, state plans, things like that. It’s like a game of musical chairs, and Bitcoin just stopped the music, or Bitcoin’s in the process of stopping the music. Nobody’s really sitting down yet. You hear whispers. There’s some people in who’s buying a lot of Bitcoin. You hear that. You hear whispers about stuff from a sovereign perspective. We know there’s definitely some large financial institutions that are definitely sniffing around and maybe got a little exposure here, little exposure there. Maybe something crazy happens, like Italy gets kicked out of the EU and the European Union starts looking like it’s questionable, which is not a-

Pomp: There’s a nonzero chance.

Travis: That’s a totally nonzero chance over the next couple of years. Totally nonzero chance. And then all of a sudden, it’s like you hear that the Swiss Sovereign Wealth Fund’s got some Bitcoin. So, now Switzerland just sat down and there’s not than many chairs. You got 21 million bitcoin, a couple million of them are lost, and so now people are like-

Pomp: Only 17 million have been mined. Game on.

Travis: All of a sudden, it starts looking like … it’s what we were talking about. It’s irresponsible to not be involved. The reflexivity and the price action, when some of that stuff starts catching on, the potential, I mean, it’s gonna be breathtaking if some of that stuff plays out.

Pomp: We actively tell these institutions it’s the best performing asset class over the last five years. If you had 1% of digital asset exposure into a global 60/40 portfolio, the returns go up by anywhere between 100 to 300 basis points, depending what it was, and the standard deviation of risk stays about the same and you get a double digit increase in sharp ratio. The second you start looking at that, where else can you get that? It’s not about how high can they go. It’s actually about managing risk of your overall portfolio, and if you have zero exposure to the asset class, you have to immediately get off zero.

You can imagine talking to a 50, 60-year-old CIO who manages billions of dollars and telling them get off zero. That’s the message right now, and I think to your point, there’s people who are starting to do it, but when the dam bursts, watch out.

Travis: Right. Totally.

Pomp: All right. So, let’s talk about some of the things that are happening pre before that happening. So, right now, I know that you’ve got some really interesting thoughts around BitMEX and some of these markets that are already here that people are already using today. What do you think is so interesting about those types of companies and markets that are being built?

Travis: So, earlier, you were talking about how do I change my mind? Part of it is you create all of these processes around in taking every aspect of information that you can about the development of this space and assessing that information and putting it into a broader mosaic framework to help it make investment decisions, and a lot of that is just thinking about market structure and year to date, the two 800-pound gorillas that have shown up from a market structure perspective, year to date is BitMEX and the Asian algorithmic market maker.

Pomp: Let’s go BitMEX first. So, explain what is BitMEX? [00:30:00] Why do you think it’s the gorilla, or one of the gorillas?

Travis: So, BitMEX is a non-licensed exchange, or unregulated exchange. They trade synthetic Bitcoin future. You fund only in Bitcoin. You can get up to 100 X leverage, long or short, on Bitcoin. It’s been around for a few years. Wasn’t that popular, especially in 2017 when everybody was going shitcoin hunting on Cryptopia and KuCoin and Binance, but as the market’s woken up year to date and realized all that stuff’s worth zero, BitMEX has become … I think they’ve got two or three times more volume than the number two exchange. You can get massive leverage on it.

Pomp: So, I really wanna talk about this leverage thing ’cause I don’t think a lot of people understand one, what is leverage and how do people use leverage in a positive manner and then what can that do to the market on the negative side as well?

Travis: So, specifically in the context of BitMEX, if I put one Bitcoin long with 100X leverage, that means I’m getting returns along 100 Bitcoin.

Pomp: So, you take out of your wallet or your portfolio, you take one Bitcoin, which is worth whatever, six, seven thousand dollars today, and you put it down and say, “I think it’s going to continue to go up in value as the bet,” but you’re getting credit for actually having put down 100 Bitcoin and saying these 100 are gonna go up. Why does BitMEX do that?

Travis: ’Cause humans love to gamble.

Pomp: What is the economic benefit to you when you put this 100X leverage on, and what is the potential negative side effect?

Travis: So, if the price goes up-

Pomp: If you’re right.

Travis: Right. Then you’re generating returns like you’re along 100 bitcoin, only putting up one Bitcoin worth of risk.

Pomp: Great risk return profile.

Travis: However, specifically on the 100X example, the way the margin works is is it doesn’t have … the way normal margin works in the real world, it’s a function of how much money you have in your account, and as long as you have money in your account, you continue to make … like at end of day, there’s margin calls and you make it up if you’re losing money every day to stay even in you’re account.

Pomp: So, you can basically pay down the margin? You can keep posting more collateral?

Travis: Your loses. And you can stay in a position forever. The way it works at BitMEX is the leverage is only specific to that individual trade. So, if you have 100X leverage on, you lose 1%, you automatically get stopped out and you lost the one Bitcoin that you put up. Or if you’re along 25X leverage, then you get stopped out at 375 bits, whatever the number is.

Pomp: So, great deal for BitMEX.

Travis: Oh, yeah. Arthur Hayes.

Pomp: Just absolute savage and just printing money right now.

Travis: One of the most savage guys in the space, period. Complete macho man Randy Savage.

Pomp: Yep.

Travis: Complete, complete, Macho Man Randy Savage.

Pomp: And we talked about it before, the part that I love is not only that he’s created these products, and he’s got them out there, and people are using them, but he out pounding the table saying, “We have them.” So he’s on Twitter, and he’s saying, “Look, good traders go both ways. Up or down, let’s see what you got.”

Travis: Yeah, and he introduced … so he started rolling out a new instruments. So he got directional Eth exposure, and up to 50X leverage on Ethereum, and you get paid in Bitcoin. You don’t get paid in Ethereum. If you make money on the short side, you get paid in Bitcoin. So you’re shorting Ethereum, making money in Bitcoin. Same thing-

Pomp: Which most of the shorts love.

Travis: Yeah, of course. You can now go long short on Ripple, Tron, Bitcoin Cash, Eos, Cardono, and with varying up to 20X leverage on some of them, 50X on others. And quantitatively a listing on Bitmex has been the kiss of death year to date.

Pomp: So I was just going to ask you, what do you think this is doing to the market?

Travis: What it’s done is, it’s given a venue to now have true price discovery, two way price discovery.

Pomp: Because previously you could only go long.

Travis: Well you could short on Bitmex, but you didn’t have enough liquidity. And now, there’s a ton of liquidity on Bitmex right now, so you can really express it. Except, which I’m glad you brought this up, it’s the worse kind of liquidity.

Pomp: Why?

Travis: Because it’s liquidity, except there’s extremely sophisticated quantitative investors, wall street guys, like-

Pomp: Like your old role.

Travis: Yeah, yeah. Not specifically point 72, but-

Pomp: Those types of people.

Travis: Like those types of folks, right. The best in the business form a quantitative perspective. I don’t want to name names. One of them rhymes with lump, the other one rhymes with BE raw. So these guys are doing liquidity modeling on Bitmex, and the way that works is, they call the network three times a second, and by calling a network, they’re pulling down very minute volume data. And then, I’m not 100 percent sure, but I think how they do it is, they can see where the price gets executed, relative to the specific volume at that moment, relative to the bid ask. I think they can backend to the amount of leverage that was put on for that specific trade at that specific moment, three times a second.

Pomp: Wow.

Travis: And they’re able to then map out where the stops are. And then you can map this out, and then they see where a bunch of stops start getting stacked up on top of each other.

Pomp: Foot on the gas.

Travis: Right, and it’s just like a Jenga game, except these really sophisticated quants are the only ones that can see the Jenga tower. Everybody just thinks it’s like, “Oh, there’s no blocked being pulled out yet,” but they see the whole thing. And then when they see all these stops that could potentially get pushed over, then all they got to do is go and the Jenga tower a little nudge, and then you run through all those stops. And so I you just look at the price action over the last handful of months, it’s so obvious that that’s the market structure that’s going on.

Pomp: And that’s when you’re seeing it. If you’re a retail investor, you’re seeing up, immediate within seconds, 400 price jump, right?

Travis: Right.

Pomp: Because basically you’re tipping it over.

Travis: Yeah. That’s right. And everybody gets stopped out. And then also Bitmex works just fine, until you really it to work, and then it doesn’t work anymore, because it gets shut down, because there’s too many people trying to trade. And then all these stops get run out, and then the really smart guys take all the retail guys money. So that’s terrible for the long term health of the ecosystem, which is why I wanted to talk about it today. You know those vines that wrap around the tree, and they kill the tree if you let the vine sit there long enough? That’s exactly, that type of stuff is happening right now. And so it’s really to the detriment to the long term health of the ecosystem. I’m guessing that it’s untenable in the medium term, and something’s going to happen. I don’t know what’s going to happen.

Pomp: But is it more so like a regulatory type solution? Or is it just that more people come to the space that are smart, and they all start commoditizing some of this, and then you get some relief?

Travis: Well the way I think about it is, if the quant is the bully, and the retail guys, like the small kid in school, everyday the small kids walking into school and getting punched in the guy by the bully, and he gets his lunch money stolen. After a while, you just stop going that way, right? And that’s exactly what’s going to happen. They’re just going to clear out all the retail money. It’s just going to be quant on quant crime, which I think it’s like … this is all happening in traditional asset classes. Quant on quant crime’s been happening for a decade now in traditional asset classes. And so that’s a problem. And the other things I want to talk about is Asian algorithm market making, which is the other 800 pound gorilla, which is also the vine that’s wrapped around the tree, that’s going to kill the tree if you let it keep going.

Pomp: So let’s just start with what is that?

Travis: Yeah. So I don’t mind-

Pomp: Let’s get the names.

Travis: Let’s see here, this one rhymes with left free he. Yeah, there you go.

Pomp: So there’s a couple of them, right?

Travis: There’s about 10 big boys. And they don’t sit in the United States. They’re not United States citizens, they’re businesses aren’t domiciled in the United States. So they’re out of the long arm of the reach, the long reach of US regulators.

Pomp: They’ve got some protections.

Travis: Which means you really can do whatever you want to. And it’s not illegal. And we call it … can I cuss on this?

Pomp: Yeah, of course.

Travis: We call it fuckery, cause it’s not illegal, it’s fuckery.

Pomp: And fuckery’s a combination of manipulation, and-

Travis: It’s morally stuff that you just wouldn’t do. And morals is a cultural thing. So I’m not trying to … look, they got a different set of cultural values than me, and if I was a Chinese guy that lived in China my whole life, and I could start printing money like that, I might do it too. I don’t know.

Pomp: You could view it as actually, “Hey, I’m getting back at you. You guys have been messing with us for decades.”

Travis: Whatever, right? Yeah. That’s what’s happening. So it’s one of the main reasons why the Asian ICO market, right now, as we sit here today, has decoupled so much from the US ICO market. US ICO market is almost ground to a halt. You got a small percentage of deals that you had earlier this year.

Pomp: Well it’s almost like the bully student example that you gave earlier. It’s like the teacher showed up in the hallway. It’s like, “Hey, hey, hey, knock off all the fuckery.”

Travis: Yeah, yeah, exactly. That’s a great point. That’s what is happening in the US ICO market. So now you’ve got Asian ICO, X, Y, Z token. They go raise like, 40 million dollars in their ICO. They take 10 percent of the tokens, and they just give them to the algorithm market maker. And not only do they give it to them, they also give them six million bucks in eth too. And then they get a coin listed on an exchange, and then they start wash trading. They start wash trading back and forth with each other.

Pomp: All right, so most people aren’t going to know what wash trading is. Let’s start from the beginning of, if you’re one of these tokens, you did your ICO. When you get listed on an exchange, you need liquidity. So there’s a couple ways to get liquidity in your token, or the trading volume on daily basis. One of them is wash trading. What is that?

Travis: So you have multiple accounts set up on the same exchange, and you’re buying and selling to yourself from yourself.

Pomp: So you own all the accounts on the exchange that are doing the high volume trading for the day?

Travis: Yeah. That’s right, you’re just executing trades amongst yourself with multiple account.

Pomp: Yeah, and that gives the illusion of-

Travis: The illusion that there’s volume, there’s real buying and selling that’s happening. And, by the way, they’re just driving price. You’re literally just manipulating price to get to a certain level. And these guys will contractually guarantee a volume, and contractually guarantee a market price in writing. Again, it’s not illegal over there. So it’s like, it’s fine. And they get paid hella money to do this. And then even crazier than that, they use WeChat over there, we use Telegram, everybody’s talking about it. So they’re I their WeChat groups, and they’re listening to all the technical indicators, like the TA guys, that are talking about the different indicators that are in this particular crypto, and they listen to whatever people are talking about, and then they just start painting a specific technical indicator.

So like, “Ah, it’s a bull flag. Oh we got a bull flag coming up. Oh, we got a rising ledge,” this, that, and the other.

Pomp: I mean, it really is a, it’s psychological warfare against retail investors to some degree.

Travis: Yeah, it’s terrible. It is the vine around the tree that will poison the tree. It is to the detriment of the health of this ecosystem as a whole. Now, the scary thing is that the exchanges are in on it. CZ’s in on it. They’re in on it, because in a bare market, they got to have these guys.

Pomp: They need the volume.

Travis: They go to have them. And if a X, Y, Z token gets listed, and they don’t have an Asian algorithm market maker on the backend, then the token, there’s a good chance it’s going to crash as soon as it gets listed, because the private presale investors that got into 80, 95 percent discount-

Pomp: Dump it.

Travis: … they’re dumping immediately. But the crazy thing is, is you’re giving 10 percent of the tokens away, and you’re giving 10 percent of the raise away to catch the volume on the backed. You see how not good that is?

Pomp: Mm-hmm (affirmative).

Travis: And how untenable that is, and not healthy for the overall longterm-

Pomp: It also, it is serving the number one used case for crypto today, which is speculation.

Travis: Yeah.

Pomp: Right? That’s literally what is happening here, is they’re taking tokens and they’re creating new speculation tools or products, and people are using them for speculation but not for the adoption that actually drives longterm sustainability.

Travis: Right, and the individuals or entities most likely to make a profit from that situation, are the ones that are the most sophisticated. The ones most likely to lose money … just the more realish you are, the more you’re guaranteed to lose money in this process, which is just not good. I am hoping, and I don’t know, maybe CZ are going to hear this, we’ll Tweet it to him. Does he like you? You homies with CZ?

Pomp: He retweets me a lot. We’ve never really talked.

Travis: I hope he hears this. When we get out of this bare market, which I don’t know when it’s going to be, but you got to cut the fuckery man. You have to self regulate. You have to self regulate. And you got to … this wash trading, the price manipulation, painting TA signals, you can’t have that.

Pomp: Here’s the one thing though that I think is really interesting. So the one thing that I’ll say to defend some of them, because I think that you’re probably right in that a lot of this is going on across exchanges. I think that it’s just what they believe, whether they’re right or not, needs to happen for the volume to be there, bare market, all that kind of stuff. So let’s just put all that in a box and set it aside for a second. The one thing though, that I think encourages me that that won’t be the longterm strategy, is all the tokenized security stuff. So you start to see a bunch of these guys saying, “You know what? Look, the token stuff, the speculations, it’s going to keep happening. We’re making a bunch of money today.” But longterm, regulators are going to step in in different jurisdictions, they’re going to draw the rules, and we’re going to have to play by the rules.

And so they say, “Tokenized securities.” I don’t, and I could be wrong on this, I don’t know if they’re going to be able to do a lot of that, wash trading, et cetera, in the highly regulated tokenized security world like they can do it now. Maybe they can get away with a little bit of it, but that gives me hope that there’s a light the end of the tunnel.

Travis: I agree with that.

Pomp: And tokenized securities will actually make this a much more traditional market.

Travis: I agree with that. And none of that stuff can happen. You can’t wash trade on Gdax, you can’t wash trade one Bitfinex. And they’ve got all kinds of technology to catch you. And if you do just a little bit of it, they will kick you off for sure. So Ikigai, so have an algorithm market making strategy, that makes money off buy and sell spreads, and very liquid tokens. And we also provide US regulatory compliant algorithmic market making as a service to tokens.

Pomp: Oh, interesting.

Travis: So if you want to do it, like in a regulatory compliant way, and it’s just buy and sell, it’s just a 24 … we’re the 7-Eleven. We’re open 24 hours a day, 7 days a week, nice piece of technology that’s sitting there. And if anybody wants to come by or come sell, we’ve a piece of technology that can easily execute those types of things. And your not manipulating price, you’re not doing wash trading. You’re obviously not painting any kind of TA signals or anything like that, because you do need a liquidity provider. Look at traditional asset classes. It’s an enormous business. Liquidity providers is a multi-billion dollar, many, many, many billion dollar a year business. And so, that’s not going to go away. You just need to do it in a manner that doesn’t bend over the retail investor.

Pomp: Absolutely. I completely agree with that. All right, so let’s switch for a second and talk about the evaluations of digital assets. Today, I think that there’s probably much more information, much more theory around how do we actually use data? And fundamentals to value individual assets. How are you guys thinking about this? Where do you think we are in terms of the maturation of evaluation methodology for digital assets?

Travis: Yes, this is a topic near and dear to my heart. I pretty much stopped doing anything other than valuing stuff when I was like, 19 year old. First up level finance class, my junior year in college, it’s pretty much all I’ve done since then. Done it in a bunch of different asset classes, done it in super liquid stuff, done it in completely illiquid stuff, up and down the capitol structure. And so, when I came into this space, it was incredible to me to see how early it was in thinking about, if I buy a crypto today, am I paying a lot or a little for it? If I buy Bitcoin today, am I buying a lot or a little? Well the price is $6500. Well that doesn’t tell you if I’m paying a lot or a little for it. It’s just a price. When I think about back to my old career path, if I want to buy a share a Exxon Mobile today, am I paying a lot or a little for a share of Exxon Mobile?

I’ve got 30 different tools in the tool shed to help me understand whether or not-

Pomp: And the way you’re coming to that conclusion, traditional markets, or in the digital asset world is, what is the price? And what is the value of the actual asset? And is above or below the value of the asset, the price I’m paying?

Travis: Price is not value. Price is what you can buy it for today, but you need some sort of relative valuation framework to think about, is this is a lot? Am I paying a lot relative to historical? Am I paying a lot relative to other assets? So you start needing to have this homogenized framework to start thinking about these kinds of things. And in traditional asset classes, there’s all sorts of stuff. I got metrics based on assets, and revenues, and cash flows, and earnings, and growth. And I want to buy a share of Exxon Mobile, I can take my oil price assumption and plug it into my model. There’s multi-factor models where you start breaking apart a stock, and it’s like, this stock is a function of … it’s a momentum stock, or a value stock, or it has high leverage. There’s all kinds of different valuation metrics.

And then I stepped into this asset class, and I’ve read probably 80, 90 percent of things that have been written about valuation and crypto period. I’ve read the vast majority of it. Nothing has been written about crypto asset valuation that older than 18 months old, which is crazy, because Benjamin Graham wrote the intelligent investor in 1949 or something. Still one of the most important books on equities and investing period. And when people look at PE rations for the S&P 500, you look at them 60, 70 years back in time. And you’re telling me nobody’s written anything that’s older than 18 months old talking about crypto asset valuation? So I started being like, how do we think about value in this asset class?

Pomp: Do you think it’s important to have the traditional market valuation understanding going into the asset class? Or do you think that there’s value in people not having that historical context?

Travis: I’m biased, but-

Pomp: All right, so what do you think?

Travis: These are public instruments, and they trade every day. And I wake up every morning, and I can buy or sell my entire universe every day. And not being involved in a specific name on the long or the short side is in and of itself a decision. That’s a position to not be involved. If I’m a tech guy, like if I’m a tech bro out of the bay area, that’s a developer or whatever, I have no understanding of that framework.

Pomp: What percentage of people trading crypto do you think have read the intelligent investor?

Travis: I don’t know man, way less than one percent. Right?

Pomp: Less than one percent?

Travis: Yeah.

Pomp: Wow.

Travis: Maybe, I don’t know. One percent maybe. And look, god bless those guys, because they have the vision for this shit that I didn’t have. I was slinging long short energy equities when these guys were all in this stuff. So I really appreciate that.

Pomp: Yep, different skill set, different perspective.

Travis: Yeah, and same thing with the VC guys. I really appreciate that perspective as well too. But the way VC’s invest is, you make 10 bets, seven of them go to zero, the eighth one breaks even, ninth on you make two or three times your money, the tenth one you make 50 to 100 times your money. The best VC firms in the world, they do like, one and a half standard deviations better than that. The shitty VC firms do one and a half deviations worse than that, but that’s VC math. And it takes three to ten years for that cycle to play out. So just imagine the skill set that you get investing in that type of world, verus investing, like I wake up every morning, and I can buy and sell my entire universe.

Pomp: And you have data to analyze and you have data to drive decisions, whereas a lot of the venture stuff, especially the early stage, you’re betting on people, you’re using intuition, you’re going after a whole different set of criteria on a yes no decision, versus the daily liquidity, data driven liquid market.

Travis: Right. And so that all feels comfortable to me. And so I started looking around for how to think about crypto asset valuation, and people like to use, total addressable market’s an easy one. Gold’s like seven and three quarters trillion dollars, so if Bitcoin gets half of that, it’s like seven hundred and seventy five billion, that’s up five times from here or more.

Pomp: Right, divided by how many Bitcoin.

Travis: Yeah, so that feels, that’s kind of helpful. And then people starting realizing that network value should be a function of network activity. And transactions per day, active wallet addresses, even things like community vibrancy metrics, which is like GitHub, GitHub Commits, GitHub Stars, lines of code written, net of lines deleted. People were looking at Slack channel members for a while, Telegram members, it’s way too easy to gain that. And there’s noise in all this stuff, which is a big problem with it, because it’s not, again, back to our quantimental approach, in trying to take in as many different … you got to use all these different tools in the tool shed.

So I can’t go hang my hat on, oh I got a strategy, I just wake up every morning and if there weren’t enough transactions on the Bitcoin network yesterday, I’m sure the … it doesn’t work like that. But it gives you something to try and help frame the overall mosaic approach to valuation.

Pomp: So here’s a controversial thought for you, I’m biased because I come out of this world, but I actually think that a group of people who have the best skillset for investing and trading in the crypto asset world, is people who worked on growth teams at large technology companies, because they’re used to the multi-disciplinary approach around statistics, psychology, user interface, community, growth, network effects, all this stuff. And they brought it together to drive growth of these assets. And so there was no price attached. So it’s really hard to say Facebook or Twitter, or whatever, hey our network value is X, and here’s our stock price. There’s none of that going on. But I think that the jump from that basic understanding to what price should do, is really easy compared to somebody who doesn’t have that understanding from a ground up perspective.

Travis: Completely agree. Glad you brought it up, because I want to unpack that. Because what your background is, is a boots on the ground experience of Metcalfe’s law, which people have taken Metcalfe’s, and tried to apply it to crypto asset valuation a lot, and-

Pomp: And there’s some truth there. And there’s also a lot of lies in there as well, by taking that one principle and trying to apply it.

Travis: Yeah, well true Metcalfe’s, which is the value or a telecommunication’s network is directly proportional to the square of the number of users, true modified Metclafe has never been shown to accurately describe the value of anything. But in 2013, I don’t know if you’ve read this paper yet or not, in 2013, some guys came out, I think Bob Metcalfe himself was actually involved in this. They put out a paper, either ’13 or ’15, where they introduced this modified Metcalfe concept called the Netoid Function, which is a S curve shape, which makes total sense, because you’re going to level out. Because if I’ve got five telephones in the world, and you add a sixth telephone, the amount of value that went up is totally different than if I’ve got a billion telephones and I add the billion and first telephone. Totally different. So it’s this S curve Netoid Function.

So this academic paper introduced the Netoid Function, and then, which instead of being true Metcalfe’s, it introduces this virality factor concept, and then introduces the percentage, it adjusts it for the percentage of users that have adopted relative to the total number of users that could adopt. And it introduces this S curve, and then they showed the Netoid Function to accurately fit the number of monthly active users on Facebook and 10 cent, to Facebook and 10 cents revenue growth. And that’s down. That’s super dope. And you were obviously front lines for that, right?

Pomp: Yep.

Travis: And so then that got super interesting in terms of thinking about crypto asset valuation, cause that feels like crypto. Totally feels like crypto.

Pomp: Part to it too, is not just where are we today in terms of what percentage of people are using something compared to the amount of people who could use it. So kind of addressable market and actual users, but also a lot of things that don’t get talked about around crypto, is what’s efficient. And things where like, every person who starts to use Bitcoin, how many other people can they bring into this system? It’s really hard to quantify that. It’s hard. So there’s some level of virality there, and as much as I joke around on Twitter about the virus is spreading, that’s really where it came from.

Travis: 100 percent.

Pomp: It was this idea that if I tell you about Bitcoin, and I tell three other friends, some percentage of you are going to say, “This is stupid,” some percentage of you are going to be like, “I’m all in and I’m going to go be the next crypto anarchist,” and some group says, “I want to learn more.” And so what does that growth look like as more and more people learn this? And what we find is, it really does capture the mental energy and attention of a whole demographic of people. It can’t be stopped. You cannot kill this.

Travis: Yeah, so the introduction of a crypto asset, what it does, is it allows for network affect to take hold in a completely different way than you’ve ever experienced in any other kind of instrument, or anything like that before. Because in traditional network affect, you’ve got, which is simplicity, any technology that drives significant portion of its value from network affect, it’s just the more people that come to it, the more the value goes up. And-

Pomp: Each additional user makes it X percentage more valuable as a network overall.

Travis: Yeah, that’s right. And it’s an S curve. And you get to the point where you hit critical mass, whether it’s a certain number of users, where in the network, where the average utility provided to each user, relative to the status quo become compelling. And then it takes off. And you hit parabolic phase, and then it levels off. It looks a lot like the Netoid Function. And so you have the bootstrapping phase problem with everything that has network affect. And that’s like, how do I get to a million users, five million users, twenty million users? Where you get to that compelling utility for each user relative to the status quo. And what the crypto asset does, is it allows speculators to stand at T zero, look out into the future, and make a bet about what that utility may be one day, if enough people come to the technology to use it.

And by standing there at T zero, and making a bet in the future, those speculators are able to receive financial utility today, and that financial utility you provided today, makes up for the bootstrapping phase, and they literally pull a technology into an existence via speculation. That is super revolutionary, dude. That is one of the big reasons I quit my job. When I understood how that worked, I was like, “I got to” … you’ve never seen anything like that before, ever.

Pomp: Yeah, the only analogy I can think of, and it’s completely different, is this idea with Facebook. So I forget the exact numbers, I’m going to mess it up, but you had to get 10 friends in the first 14 days when you joined Facebook. And so when Facebook realized this, what they was just getting a Facebook account, you had X percent chance to stay as a retained user over some period of time. If you got three friends in two days, you would have X percent, plus five, or whatever. And they eventually realized that, let’s call it 80 percent of all users, if they get 10 friends in 14 days, they’re going to stay for a year, or whatever it is. And so they sort of drive towards that metric. And so you join Facebook, you had no friends. They just inundate you, give us all your contacts, give us your email, do you know this person? Do you know that person?

Travis: Suggestions, suggestions, suggestions.

Pomp: They just overwhelm you until you start connecting with people. The second you hit that 10 in 14 days span, they back off and let you enjoy Facebook, because they got you. Then the data shows them that the lock in is there. And that network is going to pull you along to be a user. I think that social networks is very, very different than the technology we’re talking about on the digital asset side. There’s some comparisons or analogies, but the idea with money or economic value, it’s everything that these social networks did and we did for years, on steroids on a global basis. And I think that’s what’s pulling so many of these great minds in, is a whole new puzzle, it’s a whole new game, it’s global, and nobody has figured it out yet.

And the first groups that figure it out are going to not only personate a profit, but they are going to create inflation points to the technology that are going to be groundbreaking.

Travis: So that’s the things that’s actually, as a guy that was searching really hard for a valuation methodology, I got super fired up about a modified Metcalfe’s, read everything that’s ever been written about it, talked to professors, and shit like that. And started building my own frameworks around it, and I think the issue is that, and what really got me fired up is that the Netoid Function accurately representing monthly active user growth to revenue growth for 10 cent and Facebook. I was like, “Man, this could really be the answer.” But the introduction of speculation, I think may make modified Metcalfe approach just not really work, because the speculative aspect of it introduces the reflexivity that we’ve seen. And that’s a function of the velocity characteristics of speculators versus users. And we don’t have enough time to go into velocity.

I’ll just say, it’s totally a massive thing in crypto. Every once and while, I run across people that say it’s not a thing. They’re literally wrong. It is totally a thing, and the velocity characteristics of the speculator, I think may get in the way of modified Metcalfe’s acting the way it would in a social network setting. Because I’m not out there gambling with my Facebook users, like that kind of thing. And so that’s unfortunate.

Pomp: It’s different with each case. Yeah, absolutely. So let’s talk about, up till today, so 2018, we’re filming this in September of ’18. Let’s talk about price action from January 1st through September ’18. We just say 20 thousand in Bitcoin end of year. And also off sudden we get this huge 70, 80, 90 percent draw down across digital assets. What’s going on?

Travis: So it’s a number of things. And it’s kind of an aggregate. Bitcoin’s down 70 percent off the high, Ethereum’s down like 85 percent off the high. A lot of these tokens are down 90 plus percent off their highs. How do we get there? And it’s really an amalgamation of relatively, I think, unrelated things that an aggregate came to that. One, you had just a blow off top in late 2017. Price of Bitcoin went from 58 hundred to 20K in 34 days bro.

Pomp: You mean that’s not normal?

Travis: 34 days, 58 hundred to 20 thousand. And completely unsustainable.

Pomp: Probably one of the most epic price movements of the last 100 years?

Travis: No, ever in any instrument ever. Anything.

Pomp: Nuts.

Travis: Yeah. And so you had to back a lot of that out. And the price action got so drastically far out in front of it’s skis, relative to where the tech was. Top hundred aggregate market cap tapped out at like, 830 billion. 830 billion.

Pomp: It’s wild.

Travis: Wild.

Pomp: Because what is that, that’s like one eighth the size of the gold market?

Travis: Yeah.

Pomp: Something like that, give or take.

Travis: And the tech was not even remotely close to being ready. Nobody using any of this stuff for anything. So you had to back a lot of that out. Then you’ve got all these regulatory updates as well too. And the US has actually been, I would say, less heavy handed than feared. But there’s a lot of regulatory things over in … you’ve got China banning all kinds of stuff. India’s been super heavy handed.

Pomp: I mean, the US regulators, in my opinion, have probably been one of the best regulatory bodies across the globe dealing with this. If you told me in 2016, as all this was really starting to pick up steam, that we were going to be sitting in mid 2018, and they weren’t going to have really clamped on anything other than the people who egregiously violated a law around fraud, market manipulation, all that kind of stuff, I probably wouldn’t have believed you. And so they’ve allowed a lot of things to go on that were part of their learning process. And really saying, “Hey, what do people want to do with this? How does innovation evolve?” And I think that they don’t get enough credit for that. But now they’re getting to the point where they’re saying, “Hey, we got to figure this stuff out. We got to get some rules out there so the uncertainty goes away and now people can really start to build businesses in the United States, and they’re not looking for the regulatory arbitrages internationally.”

Travis: Right, but there’s been enough globally things happen from a regulatory perspective, it’s been a negative. The uncertainty, how things are going to get treated, it’s been a negative. It’s weighed on prices. Lack of institutional grade infrastructure, totally a thing. There’s the meme, in the back half of 2017, 2018, they’re like, “Oh, the institutional money’s going to come in the space. Oh, it’s all there.” How? Literally, how? Fidelity, you going to go buy a hundred billion dollars worth of Bitcoin and throw it on a dresser, and keep it in a filing cabinet?

Pomp: Abigail Johnson’s office.

Travis: Yeah, you know what I’m saying? How are they literally going to do that? You don’t have any of the major investment banks, can’t handle custody. The first that are handling custody aren’t big enough to take massive flows. We use BitGo for custody, but if somebody was trying to do a hundred billion in BitGo, they can’t handle that.

Pomp: And also the institutions that are building it today, I really do think that they’re looking at it as kind of like a commercial bank looks at a bank account. So if I build custody, and if I’m JP Morgan, Goldman, whoever, if I build custody, and I get you to use my custody solution, now I can sell you all of my services, trading, et cetera, around that custody service. It is the Trojan horse to customer stickiness. And so I think that not only do they need to build it for themselves, because that’s where they’re going to trust, that’s what they’re actually going to use, but then also it’s a huge customer acquisition benefit. And so if they can build this stuff they way they’re talking about building it, it may be the saving grace. It may actually give them a foothold into the market that allows them to really play as real players.

Travis: Yeah, we’ll get there. They’re throwing so many people, and dollars, and resources at solving all this infrastructure problem, dozens of projects trying to do it. So it’ll get solved, it’s just not here in 2018, so prices have been going down. And then volatility killed the store value thesis in the near term, there was that meme as well too. People thought we were just going to rock it up to like, 50 thousand dollar BTC, and then just hang out there, and you’re going to have, like, voila, digital gold. But like anything that goes up 14X in a year and down 65 percent in a hundred days, is not a-

Travis: A year and down 65% in a 100 days, is not a store of value. Yet, people are speculating that maybe one day will become a store of value, but it’s not yet. In the meantime, as people are waking up to that and like, you’re not gonna to buy a cup of coffee with Bitcoin any time soon either, right? It just doesn’t really make that much sense to do that.

Pomp: Well and time horizons matter, right? If you’re saying, “Hey, I need to store of value for the next year.” Probably not that attractive.

Travis: Right.

Pomp: Actually not attractive at all.

Travis: Right.

Pomp: If you’re saying, “Hey look, I want to store a high percentage of my net worth in this over the next 10, 20 years.” Now all of the sudden, you look at it a little bit differently, or your perspective changes on what is your belief of the future of the store of value properties.

Travis: Correct. Yeah. And so it’s like in the near term, BTC not really working as a SOV or a MOE. That’s hurt prices here to date. And then like, here come the stable coin parade too, right? Right? And you’re like, “Oh that’s how we’re gonna buy a cup of coffee, a decentralized stable coin.” And it’s not just shady Tether either, right?

Pomp: You think it’s backed up, one to one to dollars?

Travis: Whatever. Like, the Director of the FBI, said, it was like, okay … I’m like whatever happened in the past…

Pomp: That’s my whole thing, if at this point it’s not, right? You just, I mean, absolute, go back to your fuckery, right?

Travis: Right.

Pomp: If people have been speculating on this for how long, and then all of the sudden somebody goes to check today and it’s not backed up. It’s just complete stupidity.

Travis: Yeah, yeah. Obviously with all the fud around tether, it’s still the eighth largest Crypto by market capability, like $3.3 million of market cap in it or something like that. And so obviously there’s a really strong need for something like that. So there’s all kinds of people trying to solve that problem and you’re getting it. It’s like, what you got Andrews and Horowitz, it’s like throwing down hard on and paying capital ventures throwing down hard on it. Like, all these exchanges throwing down hard on it, so …

Pomp: I mean, what the biggest raise is probably Nater and the basis guys, right? So they raise like $130 million or something from the et cetera of the world. And then you’ve got on the other end of the spectrum, you’ve got the gemini, kind of regulated dollar, you know, stable coin. They didn’t raise any outside cap as far as I know. Right?

Travis: Right.

Pomp: So it’s two very different approaches. One’s an algorithmic central bank, the other is a, “We’re going all in on the existing laws, regulations, you know, Wall Street, et cetera. The scary part is, or maybe not even scary, just the interesting part is both could win. They could co-exist, right?

Travis: Oh yeah.

Pomp: There’s no kind of binary, one has to win one has to lose.

Travis: Yeah.

Pomp: Which makes it even more interesting.

Travis: Yeah. Yeah, so we’ll see how that plays out. Right? But I think that’s the introduction of the concept of a decentralized stable coin I think has hurt BTC prices here to date. Cause if you’re a Venezuelan farmer, or like, you know, you’ve sold your life savings into BTC at like, $19K, right … Well what you really wanted was like, US dollar, like you really wanted like a stable coin that’s like tied to US dollar, or whatever. So we’ll see how that plays out, but it’s certainly hurt prices here to date. And then also you’ve had this focus on valuation, and specifically token structure. And like, token structure in the context of value capture. Like, there was a general thought in 2017 that like, these ICO’s … Like, if more people come to this technology, the price of the token’s gonna go up. And it’s not that’s simple, right? And the vast … many, many, many, many …

Pomp: It’s also what every Ponzi Scheme believes as well, right?

Travis: Many, many, many of the like, 16, 17 vintage ICO’s, the token structure’s fundamentally flawed in it’s ability to accrue value over the long term.

Pomp: Yep.

Travis: And people didn’t realize that then, because no one was talking about valuation, and what really happened was, I think, was Chris Burniske wrote ‘Cryptoassets’, which was like a year ago. Literally a year ago. He wrote that book …

Pomp: And probably a top five recommended book in the space already, right?

Travis: Yeah, yeah, yeah. If you’re an introductory, you gotta read it.

Pomp: Yep.

Travis: And he threw out MV equals PQ. People got super fired up about MV equals PQ. And then like, 60 days after they got really fired up, people were like, “This doesn’t work, at all.” For A, B, C reasons. Which were valid reasons.

Pomp: Yep.

Travis: And what it did do was it shined a spotlight on the velocity problem. And people were like, “Aww.” There’s this thing, called velocity, all else being equal, a faster a token spends to the ecosystem, the lower the price needs to be for that token to satisfy the economic demand of the ecosystem as a whole. And it’s not something you plug into a model. You don’t use it like that, but you just know, directionally, if this thing … If people don’t … The mechanism design isn’t so much that people want to hold it or have to hold it or you have to stake it where you can’t move it for a while, or whatever reasons. If there’s a tendency to move it really fast, it’s gonna have a hard time accruing value over the long term. And that was kind of like, year to date, people have woken up to that. And so you’re just seeing this big drain in market cap, specifically out of, you know, BTC dominance has been rising for four and a half months now. You’ve gone from …

Pomp: What are we? Over like, 57 percent now?

Travis: Yeah, I think you’ve gone in a straight line from like 34 percent to like 58 percent or whatever, over the last four and a half months. The market’s obviously telling you something there. And you know, when I think about what’s a bottom in this market gonna look like …

Pomp: Okay, so that was year to date.

Travis: That was year to date.

Pomp: Let’s go outlook, right? So, are we at the bottom, and if not, where are we going?

Travis: So on coin market cap, I like looking at top hundred good market cap, minus BTC.

Pomp: Okay.

Travis: Which I call bottom 99 market cap.

Pomp: Yep.

Travis: That number peaked in the first week of January at $547 billion dollars, which is wild. That is an outlandishly high number, when you think about it.

Pomp: That’s like one fourteenth of the gold market?

Travis: Yeah. Yeah.

Pomp: For, by the way, 99 of those tokens, majority of the world couldn’t name a single one of them.

Travis: No, no. And nobody’s using any of this shit for anything cause it sucks, right?

Pomp: Yep.

Travis: And there’s 27 tokens that have 400 daily active wallets. Just saw that stat like a week ago. That’s a wild stat, isn’t it?

Pomp: Yeah.

Travis: 27 tokens with 400 folks thar care at all about this thing. And so that number …

Pomp: Win moon. Win moon.

Travis: Right. So that number currently is $89 billion, for the bottom 99.

Pomp: So it went from, we say 540 to 89?

Travis: 540 to 89. But 89 just takes you back to the first week in November. So shit was still super wild before then, right? Everybody [01:13:00] remembers that, right?

Pomp: Yeah. Yep.

Travis: Like, summer 2017 was still super wild.

Pomp: I mean, the barbers, the taxi drivers, they were all talking about it in the first week of November.

Travis: Yeah, exactly. So if I just go back and look at where that number was, you know, for example on July 17th, that number was 36 billion. In the first week of … September 15th, that number was 50 billion.

Pomp: Yep.

Travis: So, I kind of use that number to triangulate where a bottom might be, cause it’s actually easier for me to think about what everything below bitcoin should probably be worth.

Pomp: I mean, you’re talking about a you know, 50 to two thirds draw down to go down from here. Right?

Travis: Yeah, yeah. So I actually think there’s a good chance … I’ll put it this way. I think it would be healthy for the space for us to get cut in half again from here on the bottom 99.

Pomp: Yep.

Travis: Top hundred minus BTC. But then you look so then you can …

Pomp: And so if we get … Well that’s Bitcoin.

Travis: So then you triangulate that number, the bottom 99, with BTC dominance. And then I’ve got a chart that I’ve been looking at for months now, and then that backs you into what BTC price is gonna be. And so …

Pomp: What do you think? We won’t hold it to you, but what direction … Where you think we’re going?

Travis: Again, technical analysis is not the end all be all at all. This would be like the first quintuple bottom in like, the history of TA. Like, that’s not how TA works. The number doesn’t get tested five times, and then it holds. It’s just not really how it works.

Pomp: What you’re talking about here is, you know, let’s call it the …

Travis: 58 50.

Pomp: Yeah, 58, 59, whatever it is, right? We’re knocking at the door. We’ve knocked four times, and if we kind of stay at the 6,500 number and we go back down, is it the fifth, the sixth, the seventh, however many times we’re gonna knock at the door. Eventually, the door opens, we fall. Right?

Travis: Yeah. And it’s gonna be a function of getting dragged down by that bottom 99. When Arthur hays, the founder of Bitmex, introduced the Ethereum perpetual swap, he had a blog post called, “Ethereum, the double digit shit coin”. And Ethereum was trading at like, I don’t know, 400. Or three something.

Pomp: Off a cliff to what?

Travis: Off a cliff.

Pomp: What’d it go down to? 180? 150 …

Travis: 161. 161 on the bottom.

Pomp: Yeah. Jesus.

Travis: And I mean, you wanna talk about a dead cat bounce that we’ve seen over the last couple days, like that’s kind of the definition of a dead cat bounce.

Pomp: We’ve gone from 160 to like 250, 200, right?

Travis: Yeah, and now we’re sitting right there. So, I think we do probably go see a hundred.

Pomp: Yeah, at a hundred, Ethereum …

Travis: And that puts you at 10 B’s. That puts you at 10 B’s for Ethereum. And then you start backing into like, “Okay, where’s Ripple gonna be?” Ripple, like literally not a functional token. We all know that, right?

Pomp: Yep.

Travis: Bitcoin Cash …

Pomp: By the way, the Ripple army loves when people come on here and talk really highly of Ripple.

Travis: Shout out to Ryan Selkis, going on. That was some wild stuff, man. I love two bit, man.

Pomp: Listen, here’s my respect to how that guy is, because he doesn’t just talk about it on a podcast. He says, “Listen, Brad Garlinghouse, where you at? Let’s just talk about it, we’ll film it, let people decide what they wanna decide after that.” And so, look, there’s non-zero chance he’s right, non-zero chance he’s wrong.

Travis: Yeah.

Pomp: I think he would be the first to admit that. I actually tend to think that the Ripple crew is doing what they believe to be best, right?

Travis: Right.

Pomp: I don’t think that they’re, you know, out maliciously trying to screw people over or whatever, and so I’d love to see that conversation, because I actually think that there would be points scored on both boards. Right?

Travis: Yeah. So as a … Like, I’m agnostic in my views …

Pomp: Yeah, same here.

Travis: I don’t fall in love with any of this shit. I don’t fall in hate with any of it either.

Pomp: Yep.

Travis: And I think it’s really hard to be short Ripple here, cause I think the senior folks at Ripple realize that their token … You don’t need it for X Rapid. And now they know that the whole world knows that. So at any time, they could introduce new functionality on X Rapid, where you need … Or you kind of introduce this new concept where XRP, like there’s some compelling reason for it to exist in the context of X Rapid, and that thing will … That’ll be the quickest five-bagger you’ve ever seen in your life, dude. Totally, right?

Pomp: Right, cause what you’re talking about here is there’s like, price action, and kind of … There’s TA. There’s some of the fundamental stuff, or whatever. And then there’s just these wild cards in this market where the … I don’t even wanna call it price manipulation as much as just the ability to evolve the code and the kind of structure around these tokens in a night and completely change the landscape is unseen in almost any other financial market in the world.

Travis: Right.

Pomp: Right? If you’re Facebook, you can’t say, “Hey, we had, whatever, $400 billion dollar market cap, and we did, you know, $40 billion,” or whatever they’re doing now in revenue and overnight, “Oh, by the way, now we’re doing a hundred billion.”

Travis: Right.

Pomp: Right? That just doesn’t happen.

Travis: Yeah.

Pomp: And so the difference here is revenue isn’t necessarily driving the token price. And so it could be literally how it’s used. You change it over night. Bam, all of a sudden, completely different ball game, and we’re going up 5X.

Travis: Especially for a lot of these utility tokens, where a lot of people have realized that the initial token structure just doesn’t accrue value over the long term. So the way that we break up the world is you gotta think about your Web 3.0 stack, but then I think about … And we consider the top hundred and 50 Crypto’s by market cap as our universe. Those are the tokens that we collect data on, do analysis on, watch, everything.

Pomp: Yep.

Travis: You have the tokens that are vying to be store of value. Bitcoin’s obviously leading that. I put Bitcoin Cash in that bucket. All the privacy tokens go in that bucket. Decred goes in that bucket. And the value framework that you put those, it’s it’s own separate beast, right? Cause it really is that off-stream economics type of framework, right?

Pomp: Yep.

Travis: And it’s like, hard money versus soft, sound versus unsound, and that’s the kind of framework you put around store of value. And then you have the platform level protocols, so like, smart-contract platforms, [inaudible 01:18:54] platforms, payment real platforms. So like, Ethereum, EOS, Stellar, Cardono, Qtum, Rchain, ICON. I know I forgot some other ones in there.

Pomp: There’s a bunch of them.

Travis: But you get the point, right? And the value proposition for those, they’re a function of the activity that happens on top of them, right? You don’t write any Ethereum smart contracts. Ethereum ain’t worth anything, right? No payment’s going through Stellar. Like, it’s not worth anything. And so you think about the value proposition for those as a function of like, how have they build their specific sort of way that they’ve … You talk about the scalability trilemma, right? Like, how many transactions can it do? How secure is it? How decentralized is it?

Pomp: Yeah.

Travis: Where do they set those levers? To be the best home possible for the type of activity they’re trying to draw under that network. And the analogy that I use is when you make your own character, like on NBA2K. Right? Like if he’s got really good hops, he may not play defense that well. Or like, if he’s a great passer, like he probably doesn’t dunk that well.

Pomp: Yeah, we’re not looking for all NBA offense or all NBA defense. We’re looking just for all NBA.

Travis: Right, and so you’ve gotta set the levers at a certain point too be attractive to that certain type of activity to come on top of it. So that’s those valuation frameworks. Then you’ve got utility tokens. Specifically within utility tokens you’ve got productive utility tokens and non-productive utility tokens. Productive utility tokens are like war tokens. And that’s like Augur and Numeraire, where you can actually model those, and you can model them in the same way I used to do, like a DCF on like a company. Equity.

Pomp: Yeah. Yeah, yeah, yep.

Travis: And so the valuation framework for those actually kind of looks like the real world. So it’s easier to get your head around how to think about what those look like. And that leaves you with non-productive utility tokens. Those ar the ones we haven’t figured out yet. But what we do know, generally speaking, is that like, MOE tokens? They don’t accrue value over the long term. Like, if you’re just a Chuck E. Cheese token?

Pomp: Yeah, yeah, yeah.

Travis: You can’t put quarters in the video game, right? You take your five dollar bill, you put it in the machine, you get out Chuck E. Cheese tokens, put the Chuck E. Cheese tokens in the video game. But when you’re done playing Chuck E. Cheese, you don’t wanna hang around with the Chuck E. Cheese tokens. You’re like, “Give me my quarters back.” Right?

Pomp: Yep.

Travis: Do not accrue value over the long term. That’s a big problem for many of the ’16, ’17, early ’18 vintage ICO’s.

Pomp: But the problem’s also with … Like this the whole thesis around inflationary monetary supply. Right. Is that actually what they’re doing is they’re trying to incentivize you to spend. To not hold onto the cash because it loses value every single year as inflation hits.

Travis: Yeah.

Pomp: And so the deflationary model is the exact opposite, right? This whole idea of store of value, blah, blah, blah, whatever. But on the inflationary side, what we’re seeing is if we want you to spend, the price is artificially depressed because of the downward pressure. Like it is intentionally there because that’s how the structure becomes. So it’s a really bad speculative investment if you are trying to go long on the value of a token.

Travis: Yeah. And you know, we can keep going as far as … You know, you can go really far down that in terms of like, what do you need decentralization for in that specific instance, and like, in many cases like, don’t tokenize. Like, it’s not a good idea for you. But for utility tokens, non-productive utility tokens, we haven’t figured out how to make the token structure accrue value over the long term, and so … But at some point you’re gonna figure it out. I mean, the ecosystem will figure it out.

Pomp: Too many smart people.

Travis: Yeah. And then I think you could see a situation where if you’ve got a compelling piece of technology or a use case that exists today, but then the token structure doesn’t work, and it’s out there down 95% year to date … If somebody goes and figures out the token structure in another token, you may see just this massive swath of restructuring of token structures. And then they’re like, “Oh, look. We fixed it, and it works better now.” You know, like, “Come use our technology.” It’s hard to say how all that stuff’s gonna play out, but …

Pomp: It’s really scary. If you’re long or short, you don’t know what’s coming.

Travis: Yeah. Right.

Pomp: I think it’s really, really hard.

Travis: It’s hard to make money on the short side in this space.

Pomp: Absolutely. Alright, so let’s do a rapid fire here. What do you think is the most controversial thing you believe in Crypto. Right? So something you believe to be true, that you think of very high degree of other people would disagree with you on?

Travis: The bottom 99’s probably gonna get cut in half from here.

Pomp: You think so.

Travis: Before we bottom.

Pomp: And Bitcoin, the relationship to Bitcoin there is you think it’s getting dragged down 50% as well …

Travis: No. No, it’s gonna hang in better. The way … I mean, it’s really, really hard to say. I’ll just say that in that scenario, it’s hard for me to imagine that 58 50 holds as the low. Yeah.

Pomp: Yeah. I think that’s fair. I think there’s a lot of people who disagree with you.

Travis: Right.

Pomp: Right. Cause here’s the other part of this whole idea around price action and you know, where’s the bottom, and all this stuff we were talking about. I’ve never seen a market where there was bold-bear kind of cycle that turned over, and people still remembered the bull market, and you hit the bottom. Right?

Travis: Right.

Pomp: Like, from a psychological standpoint, if you go on Twitter right now, people literally think we’re going to 20, 30, 40, 50 thousand dollars by the end of the year. Right?

Travis: Yeah.

Pomp: And it’s just … I can’t believe that there’s no blood in the street, and we’re gonna turn it around. And so like, I came out and I said this and people all freaked out, you know, “Oh, you’re switching your mentality around all this.” And I’m like, “There’s just not enough pain yet?” Right?

Travis: Right.

Pomp: And when the pain gets really, really bad? I mean, people are gonna walk away. They’re gonna say, “This is over.”

Travis: Right.

Pomp: That’s when I think we are at least near the bottom. But we really haven’t seen that yet.

Travis: Yeah. I mean, I was an energy investor for seven years. Like, I’ve seen some major league in markets before, and if what we just had was the bottom, I’m gonna have to re-write my understanding of what bottoms look like. Like, I’m just being honest, man. I’m so willing to be wrong. I’ll text you. When that happens, I’ll text you. Like, “I think I might’ve been wrong.”

Pomp: Yep.

Travis: I’ll text you, and then you can tween it out to like, the millions of Pomp fan boys.

Pomp: Amazing. Alright. So what do you think is the most interesting or important company in Crypto, other than what you’re working on? I love the rapid fire. It gets the pauses in answers. Every time.

Travis: I’m not gonna name anybody specifically. I’m gonna say anyone working on mechanism design. And token structure. Anybody. Like, I know some … I got some buddies in token foundry.

Pomp: Yep.

Travis: The consensus is like, it’s kind of a mess, right? And everybody knows that. I’ve got some guys in there that are like crazy smart. Shout out Rocko. You know Rocko?

Pomp: Yeah.

Travis: Rocko’s the man, dude. Rocko’s … Right? And like, anybody doing that kind of work, digging deep on … Like, where’s the video game designers at, man? Where are those guys at? How are you not in this space?

Pomp: Yep.

Travis: Right? Where’s my Harvard PhD. mechanism design guy? What’s he doing right now?

Pomp: Dude, I’ll tell you. Listen. I keep going back to this idea. So the people who worked on growth … It was the badges, it was the streaks. It was all of the points and tokens and all of this crazy stuff that people have been doing for years are now tied to a value that can be traded. It is all of that design on steroids.

Travis: Hundred percent. By the way, I’m gonna retract my most controversial thing.

Pomp: Okay.

Travis: FOMO 3D, one of the best things to ever happen to Crypto.

Pomp: You gotta explain.

Travis: Again, complete scam. Literally a Ponzi scheme. The regulatory, the little drop down, like where you click through it on the regulations it takes you directly to the SCC’s website for definition on Ponzi Scheme. The website’s called ExitScam.com.

Pomp: Yeah, yeah, yeah.

Travis: Two months before I heard about FOMO 3D, we were talking internally about how we’re gonna figure out this token structure problem for non-productive utility tokens. And I said, I was like, “When we get it figured out, it’s gonna look like this gimmick. And it’s gonna look like this little thing, and when people see it they’re gonna be like, ‘That’s bullshit.’ But it’s gonna work.” And people are gonna be like, “ Wait, is that like a … That shouldn’t work, but it’s gonna work anyways.” Right?

And then the next thing you know, it’s gonna skyrocket some token to a hundred billion because it had that hook for mechanism design to like lock in that virality, and to economically juice network effect in a way that accrues value over the long term. FOMO 3D, again, not supporting it, but I’m saying that concept abstracted into part of a utility tokens design could very well end up being the key that unlocks the value accrual.

Pomp: The people who figured out growth hacking for the centralized internet won.

Travis: Won.

Pomp: The people who figure our growth hacking in the decentralized world will win by magnitudes more.

Travis: Fact.

Pomp: Right? I mean, it’s just gonna be fascinating. Alright. So you’ve got a magic wand, you can wave it, change one regulation. What do you change?

Travis: We’re not doing this with the Howie test. You’re doing it with something else.

Pomp: Oh, okay. On the security side.

Travis: Yeah.

Pomp: So not the… actually on the security side.

Travis: Yep.

Pomp: What do you think needs to get put in there that … Like what does the new one look like? What are some of the components that aren’t there that maybe you think should be there? Or are we too early we can’t tell?

Travis: I mean, you’re just using a piece of regulation that was … It was judicial precedent that was set …

Pomp: 1933?

Travis: Established, think it was, I don’t remember, but I remember it was about orange trees. Orange groves in Florida. Like, that’s the law [01:28:30] that we’re gonna use to govern magic internet money. About Florida orange groves. It just doesn’t make any sense. So if I could pull anything back, then you’d get a new law specifically about this.

Pomp: So it’s not getting rid of it completely, it’s just saying, “Look, we need something new.”

Travis: Yeah.

Pomp: Right? So we still need a [inaudible 01:28:44], it’s just what it looks like, we need to figure it out and probably need to regulate it, have a bunch more opinions …

Travis: And who knows. Maybe they’re gonna end up … They’re trying to like, shoehorn whatever like round hole, square peg this thing into making it work. And you know, what’s his name, Hinman, introduced the concept of sufficient decentralization. And they’re like literally gonna just like, layer that on top of a rule about Florida orange trees. Like, sufficient decentralization. Okay. Alright.

Pomp: Listen, is the orchard decentralized or not? Yeah. I don’t know.

Travis: I know.

Pomp: Alright. So one non-Crypto question: Look everyone loves aliens, right? Twitter goes nuts when I talk about all this alien stuff, and I recently had the thought of … Out of everything people thought about on the alien side, do aliens have pets? Right? So are there … You know, we always think of aliens as this equivalent to humans. Right? They’re gonna have some level of intelligence, they’re gonna kind of look like us generally, they’re gonna kind of all walk and talk and communicate and do all this activity, but we never think about on the animal side, right? So one animal aliens, and two is do they have pets? Are they showing up with some sort of equivalent to dogs and cats or what’s going on there?

Travis: I just try and draw from like precedent transactions on this one, and it’s like, I look at Chewbacca. Right? The guys is like basically like a really, really dope pet, right?

Pomp: Yeah, yeah.

Travis: I think, right?

Pomp: Yeah.

Travis: Did he have like, sovereign rights? Chewbacca?

Pomp: I don’t know about that.

Travis: I don’t know, anyways. I’d take a Chewbacca right now. So I figure if you’re an alien, like that’s probably how you’re gonna land.

Pomp: That’s how you’re gonna roll? You’re rolling up with a Chewbacca. Alright. I have not heard that answer yet. Alright. So I let everyone to close it out, as me one question. What question you got?

Travis: What’s the … I haven’t caught up with you in a while. What’s Morgan Creek. What’s y’alls like? What’s the next like six to twelve months look like for Morgan Creek?

Pomp: We are running around and banging our head against the wall to get every single institution off zero. So, you think, if you’re an institution, you’ve got no exposure to what is probably the best performing asset class over the last five years. There’s a bunch of data that shows if you take a 60/40 global portfolio, put one percent in digital assets, you get anywhere between a hundred and fifty to three hundred basis point increase in returns, depending on when you did it. And you get a near identical standard deviation of risk. You get a double digit increase in sharp ratio, and we actually …

Travis: That’s specifically for BTC?

Pomp: Digital assets is defined in a whole bunch of different ways. Some people done Bitcoin, some people have done top tens, top five, et cetera. That’s generally, or at least directionally where it ends up. Our argument is that if you are one of … Let’s take a pension, for example. You’re gonna have to do these future payouts. You’ve got a future obligation to fund all of your pension plan recipients. Your actuary comes in and says, “Hey. You’ve got a six, seven, eight percent assumed rate of return.”

So in order for you to pay out in the future, you have to hit six, seven, eight percent, whatever your specific plan is. Most of them are unperformed. Or underperforming that. So if you look out over the next ten years around stocks, bonds, currencies and commodities, it’s not gonna get you there. Right? Kind of what the class is. And so by no means do I think you should go put a hundred percent of your assets into digital, but what I do think that you should do is you should start to get some of the digital asset exposure. Because what it shows is not only does it keep the risk profile very similar volatility, you know, everything is attractive there, but you start to drive a higher return. Right?

And so that conversation is very, very different than like, “Buy Bitcoin, because it’s gonna be the global reserve currency.” Right? It’s taking the Crypto, Egos argument and speaking in a language that the institutions understand, and you know, look. I’m new to the institutional world, and so obviously Morgan Creek’s been a huge advantage in getting us in the room and having these conversations, and it helps to have, you know, friends like Mark Yusko, who’s got this long track record to be one of the people saying this. And what I’ve found is they’re incredibly receptive. They’re not as receptive to Bitcoin’s new store of value, digital gold, kind of what I would consider more of the qualitative arguments. The quantitative argument of, “You have to hit seven percent in order to fulfill your future obligations.” You’re not gonna do that with the current asset classes. This is a semi-, uncorrelated asset, and if you put some allocation here, we will get you closer.

It’s a data argument, right? And so, I think that we’re making end roads there, and then you know, we’ll announce a bunch of stuff over the next couple weeks. But I think that for the next at least 12 months, I mean, that is the campaign. It is, “Get off zero.” I can’t tell you what the right percentage is per portfolio. Maybe it’s 10 basis points, 50, 200, but I don’t know. You gotta look at each one individually.

Travis: What do you put them in?

Pomp: So, we literally say to them, “Look, you got a whole bunch of different capital pools.” So you’ve got your equity, got your debt, real estate, fixed income, whatever it is, we’re building a bunch of products that allow them to pick and choose. So if you’ve got an equity bucket and you’ve got ten percent of your allocation for equity, you’re only eight percent deployed, that means you’ve got 200 basis points that you can actually go and buy some equity, so let’s get some percentage into that equity bucket.

Maybe you’re fully deployed on the equity side, but you’ve got a debt bucket, you’ve got some under deployment there, “Hey, let’s make sure we’ve got a debt product.” And so building different products, we actually think that on the digital asset side, people are gonna build portfolios. They’re not gonna go … You know, you’re not gonna go a hundred percent cash. You never go a hundred percent into one real estate strategy. Right? So they’re gonna build this multi-strategy approach, or kind of portfolio construction in the digital world.

Now, here’s the counter-intuitive piece of this, and I’ve thought a lot about it in … So take the US dollar. 1970’s and before? Hundred percent paper notes. Right? Today, 92% of the supply’s not paper notes. So we’ve already had the digitization of a currency over time. The US dollar is probably the first digital currency that majority of Americans have interacted with. Right? Because it’s 92%. Right? So if you look at that, Bitcoin and other Cryptocurrencies, these actual currencies are just another evolution of that.

And then if you look at stocks, for example, used to be all paper, right? Then it went to electronic trading. Today, if you invest in a private company, most people are actually digitally signing for the documents, they’re receiving it through card or e-shares, you know … Angel List, whatever. They have an electronic or a digital version of that stock certificate, right?

And so, the idea that you’re gonna have a token in your digital wallet is just another kind of evolution of that technology. So what does that mean for like, capital allocators? Well, Robin Hood is actually a great example of somebody who has built asset management, capital allocation in a digital world. So it’s targeted digital natives. It’s got a fee structure that looks very attractive. It allows you to buy these digital or electronic public equities, and now they’ve added Cryptocurrency in there as well. Well, if all of a sudden tokenization of real estate becomes real, will they allow you just to hold your shares of real estate in the same wallet? Probably. Right?

Travis: Yeah.

Pomp: It’s just an evolution. And so, you know, when you start having that conversation with the institutional investors, I think that they’re generally like, “My kids telling me this?” Right? You know? “My 20 to 30 year old son or daughter is pounding the table and saying ‘Hey, this is real, I’m interested in this’ whatever.” That’s a little ways away from, “Hey, here’s a hundred million dollars.”

Travis: Yeah.

Pomp: Right?

Travis: Yeah.

Pomp: And so I think that’s like, next 12 months, we’re gonna see a couple of those checks get laid down. And when they get laid down, I think the dam breaks and game on.

Travis: Musical chairs.

Pomp: Yep. For real. Alright man, this was super fun.

Travis: Yeah, I enjoyed it.

Pomp: Thank you so much for spending the time, and hopefully we’ll get you on here again.

Travis: Cheers.

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You can find the recording here: Off The Chain Podcast: Anthony Pompliano and Travis Kling

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The following is a transcript of a conversation between Anthony Pompliano and Michael Moro where they cover crypto market infrastructure, how Genesis grew so quickly, what OTC trading is, and when institutional money will enter the market.

You can find the recording here: Off The Chain: Anthony Pompliano and Michael Moro

Anthony Pompliano: 00:00 All right, guys, here with Michael from Genesis Trading. How are you doing today?

Michael Moro: 00:05 Not too bad. How are you?

Pomp: 00:06 Awesome. We got a lot to cover today, but before we dive in, I think, probably, lots of people know about Genesis and some of the stuff you guys do but might not know as much about you personally, so maybe we could just start with your background, and then we can get into how you first discovered crypto.

Michael: 00:23 Sure. I am a reformed investment banker.

Pomp: 00:27 Awesome.

Michael: 00:27 Right out of college, I did seven and a half years at Citi in the financial institutions group covering finance companies, banks, and credit card companies. Then I left Citi in 2008, and that’s when I met Barry, Barry Silbert, the founder and CEO of Digital Currency Group, who was running a company called Second Market at the time. This is right at the onset of the financial crisis, and a lot of financial assets were becoming more and more illiquid. I joined up with him in the fall of ’08 and started getting involved in the illiquid asset-backed securities and the toxic assets that came about as a result of the financial crisis.

Michael: 01:15 Then one thing led to anther. Second Market got involved in crypto in … late 2012 is when we really started to study this base, and we opened up our trading desk in 2013. How did that all get started? That was all Barry. Barry, I think, personally discovered Bitcoin in 2011, spent about six months being a non-believer to a skeptic to a believer to evangelist. He completed that whole cycle in 2012, and then he wouldn’t stop talking about it in the office, and so we said, “All right Barry. What’s Bitcoin? Let’s chat about it.” At the time, we were making a market in all kinds of funky, illiquid, esoteric, off- the-rhyme financial assets. He said, “You know what? Bitcoin’s another one.” It trades like a lot of the other things we were trading at the time, and so we said, “Okay, let’s do this.” This was March 2013.

Pomp: 02:12 March 2013, you guys get the confidence, “Okay, let’s jump in and start making a market with Bitcoin,” right? What was, at that time, the concerns that people were voicing even though you guys were going to do it?

Michael: 02:25 It’s a few things. One, we were starting from scratch. The one thing we did have was Barry’s Rolodex. He had made a lot of contacts early on so he knew, really, a lot of the early adopters. What we really didn’t have were the investors or the buy-side demand. You had the guys that owned Bitcoin for like a dollar, right? What you didn’t have was the traditional institutional capital ready to step up and be the other side of the market so, one, establishing a Rolodex ourselves of the buy-side guys.

Michael: 02:59 Secondly, I think there was a lot of questions around money laundering, AML, KYC. Second Market is a broker-dealer, so we’ve always had the SEC and FINRA overseeing all of our AML, KYC compliance, but Bitcoin is just another animal, right? Fixed income compliance is entirely different than banking compliance, and so there was a lot we had to get comfortable ourselves, as well as our regulators, to prove to them that we knew what we were doing. Thirdly, I think a lot of the infrastructure that exists today simply, obviously, weren’t there, right? Even simple things like trying to do the Bloomberg equivalent and having a trading terminal getting up and going, simple things like how do we set up wallets? The Xapos and the BitGos of the world that are dominant today really were just getting started back then, and so trying to figure out how to properly store your Bitcoins, those types of things. Things you never had to worry about in the securities world were big issues, and so I think those were some of the biggest things.

Pomp: 04:10 Yeah. It’s interesting because, as much as things have changed, they’ve kind of stayed the same, right? There’s still conversation around compliance, anti-money-laundering, KYC. There’s conversation around infrastructure for institutional-type investors and is it high quality enough? How do they use this stuff? It feels like we just have moved that conversation down the road and up to the institutional level now but, really, what you’re describing is it wasn’t even there for retail, right, in 2013?

Michael: 04:41 We used to have individuals show up at our office with a suitcase full of cash wanting to buy Bitcoin-

Pomp: 04:50 Wow.

Michael: 04:51 … that would provide no driver’s license, no identification but, “Here’s my proof of funds,” and they’ll open up their briefcase. That world, obviously, that was 2013. We don’t have that issue anymore, and so a lot of the issues that we’re trying to tackle right now are actually much higher quality problems than we were trying to solve back in 2013. I would argue that we’ve come so far from where we are, but the market really expects how the equities world works and how the commodities world works and … but that took decades of evolution for it to get to today. Crypto, this has really been mainstream for a couple of years, and I’d argue that having futures products on the CME and the CBOE, that was unthinkable back then, and so I think about all the progress we’ve made rather than everything that’s still missing.

Pomp: 05:45 Absolutely. Walk me through … because that’s a interesting anecdote, right? People are showing up to the office with suitcases of cash and just, “Let me buy Bitcoin.” What’s their psychology or what’s driving them to do that? There was no exchange infrastructure for them to use? They didn’t trust the exchanges? They’re doing nefarious activity? Why are they walking in with cash trying to buy Bitcoin?

Michael: 06:08 I would argue that it’s probably a combination of both. When we first started, there were really two exchanges. You had Bitstamp that was still in Slovenia, and you had Mt. Gox out of Tokyo. If you really wanted to buy a bunch of Bitcoin, you were wiring money to a foreign country and just keeping your fingers crossed that the funds get there, right? Here we were where we were … we had an office. You could actually walk into our office and talk to us, which I think was a separate experience for a lot of people.

Michael: 06:39 I still think that there was certainly a level of … I don’t want to say Silk Road level of nefarious activity, but there were certainly lots of questions, if not red flags, certainly strong, strong yellow flags that were raised. Frankly, we were caught off guard back then because we didn’t really know what kind of reception the market-making stuff would actually take. Obviously, we didn’t end up onboarding any of these people that walked in in person, but it certainly raised the compliance profile in the program as a result.

Pomp: 07:14 Absolutely. Well, and it forces you to address it, right? There was probably a bunch of questions you hadn’t been asking that, all of a sudden, you started asking, and then two is it probably accelerates the build out of your own infrastructure, right, because you go, “Hey, we need to stop people from walking in the office with cash”?

Michael: 07:28 Yeah, there’s no question. I think crypto security is one thing. Physical security was quite another, so I think that it certainly introduced a new dimension to the way we need to think about our operations, certainly when we started doing the crypto things.

Pomp: 07:42 Very cool. Okay, and so let’s go from … this is ’13 or so up through ’14, ’15 into maybe even ’16. How does Genesis evolve over time, right? You guys started with just Bitcoin and pretty much just helping people buy Bitcoin, right, to even today, you have a multitude of products, different assets, et cetera. What does that evolution look like?

Michael: 08:06 In the late summer, early fall of 2013, Grayscale, our sister asset management company, launched the Bitcoin Investment Trust, so early on in 2013, we were just helping to put investors into the trust by buying the underlying tokens. As you might imagine, the earliest investors were sort of the West Coast, the VC guys, guys who understood the risk-return profile of 1,000X or zero because, frankly, that’s what all of their VC investment return profiles look it, and so they were the first guys to ultimately get in.

Michael: 08:42 Obviously, you recall, in 2013, what happened to the price of Bitcoin starting in the early fall into the end of the year. I think there was a lot more media attention, and press started to sniff around in the asset class when the price of Bitcoin went from $90 to whatever, 1,200, $1,300 that we saw in December.

Michael: 09:08 Early 2014 was the Mt. Gox event, and I remember being in the office. We had an emergency meeting one Saturday, and we were trying to think through, okay, Mt. Gox just announced their hack and all of that, and what are we going to do? What’s going to happen to the price of Bitcoin? I think all of us were like, “I think this might go back to the $50, $60 price of Bitcoin before the crazy run,” and we were trying to think through a strategy. What can we do to get out in front of this, et cetera?

Michael: 09:46 Then it didn’t happen. We didn’t see the price dip back down to the $50 level, but 2014, 2015, they were lean times. The institutional interest, I think, that had started to look into it just entirely got on the sidelines, and I really couldn’t blame them, right? You had the biggest exchange. Was it hacked? Was it an outside job? Was it an inside job? How much of it was manipulated? All that kind of things, and I think I threw a lot of those into question, and so even into early 2015 you saw the price of Bitcoin hovering around the $200 level, and the lack of volatility … Bitcoin became a lot less exciting, right? It became boring for a lot of folks. I think, for a time, a lot of the momentum that you saw in the fall and in winter of 2013, I think, certainly dissipated by the time early 2015 came around.

Pomp: 10:48 It’s interesting because, obviously, earlier this year, 2018, we saw this big draw down in the market, right? I think that there’s two camps. Some people say, “Hey, we’re going to … It could fall further, or we’re going to stay sideways for a while.” Some people think that it’s going to race back by the end of the year. It sounds like, during that last bear market while the draw down wasn’t as long as you expected, it was quite … From a timeline perspective, it did persist for a while, right? Do you think that there’s an element of it persisted for that long because people had to forget about the parabolic run and the following draw down, or do you think it was more technically driven around infrastructure getting built and hash rate and things like that?

Michael: 11:33 I think it’s probably a combination of both. I think when you look back to 2014, 2015 years, obviously, lots of questions around how you could even do a fundamental analysis of Bitcoin, right? There’s no book value. There’s no earnings. How do you get your arms around it? I think one of thing that people look to is where is the infrastructure? Certainly, while it was hard to … It was probably really difficult to justify a $1,000 Bitcoin price in 2013 given the lack of wallets and lack of any trading platform. Banking support was kind of here nor there, lots of questions about money laundering, all those types of things, I think, and the price of Bitcoin clearly ran ahead of itself.

Michael: 12:20 What I think what it forced the crypto space to do was retrench a little bit and actually really just build and really forget about the overnight, get-rick-quick type of mentality that I think a lot of the investors may have had in even 2013, which obviously repeated itself in 2017, but I’m sure we’ll get to that later. I think it really focused the industry to say, “Okay, there’s potential here, so let’s build the product, let’s build the services, and let’s elevate this thing from Bitcoin 1.0 to a next level and see where this takes us.” I think those couple of years were absolutely necessaries because the price stopped being a distraction, and it just really focused … got your mind to just focus on building the business.

Pomp: 13:05 Absolutely. This really takes us into ’15 and into ’16, right, and it goes from a Bitcoin-only world to Ethereum and all of these alt coins, ICOs, et cetera. From where you guys were sitting, at that point, having been so early in building infrastructure for Bitcoin, what does that look like? What are you guys talking about at the time? What are the concerns, or are you excited about these alternative assets popping up in the space?

Michael: 13:34 I think we’ve always imagined a world in which multiple tokens would certainly exist. I don’t really think that anyone thought that Bitcoin was the one and only. I think when Ether came around, I think, initially, we had a difficult time to just get our head around what it was meant to do because I think, from a design on specs perspective, it was just so different than Bitcoin. Bitcoin’s very narrow in what it’s meant to do, whereas Ethereum was exactly the opposite. It was so wide in terms of possible applications and uses via the smart contracts. Obviously, the way that Ether came about, then it’s funding mechanism was certainly interesting and sort of the first-ever ICO, right, being purchased just for Bitcoin. I think that certainly opened up our mind, certainly, as the possibility is what’s possible in a truly crypto world. I think all of the ICOs that have come upon afterwards and in the aftermath of the Ether stuff are certainly exciting. I think there’s fantastic projects. I think there’s a ton of potential for some of this stuff.

Michael: 14:48 On the other hand, I do think that that market clearly got overheated. I think the ICO market, there was a truly kind of a disconnect between traditional VC guys who said to me personally that these projects would have a hard time raising $1 million of traditional VC funding, and they’re raising 30, 40, $50 million in two days, right? There’s certainly a disconnect there, or whether or not VCs are really that bad, and they’re just way too strict in what they’re valuing, or there’s a lot of, quote, unquote, dumb money being thrown at these projects. We stood on the sidelines just trying to figure out what really is happening because there was a ton of noise, certainly, last year.

Pomp: 15:38 Absolutely. That brings me … Let’s go ’16 into ’17 and even til today in ’18. What does the business look like today, and what do you offer to clients across your different lines of business?

Michael: 15:55 Let’s touch on Genesis Trading to start with. From an infrastructure perspective, we’re now market making eight or nine different tokens. Our decision to add tokens are entirely based on investor demand, so we’re institutions only. Our average trade size is somewhere between half a million to $1 million right now, and so, unlike the exchanges that do thousands and thousands of transactions, we’re much more smaller in terms of trades per day but we’re doing anywhere from, call it, half a billion to $2 billion dollars a month in terms of total OTC volume.

Pomp: 16:34 Wow.

Michael: 16:35 It’s still mostly Bitcoin. I would probably say 75% of our volume is Bitcoin right now. Number two varies month to month. XRP, huge January, as you might possibly imagine, so they occupy the number two spot, but it switches, but most months it’s probably still Ether is probably buying me gas. We offer just the two-sided market, and we just recently hired an overnight trader to cover Asia hours, so we have a guy that’s doing that at 2:00, 3:00, 4:00 in the morning, which introduced a new market for us, so I think that’s been a really interesting addition to our service.

Michael: 17:21 Then, in February, we launched Genesis Capital, which is our lending business. We’ve had small pockets of demand for crypto borrow over the years, and we’ve always run it out of our broker-dealer, taking some of the Bitcoins and Ether that we owned on our balance sheet and lending them out. We realized that this was a true opportunity because, one, I think it’s really important for the market growth to have a two-sided price discovery possible. In a long-only market, I just didn’t see this, the institutional money being able to come in if the only thing you can do is just buy. Then we also said, “Hey, it’s a fantastic-”

Michael: 18:00 And we also thought, “Hey, it’s a fantastic sort of hedging tool for investors.” They may own crypto elsewhere that want to take a short position and kind of hedge your exposure at one point without selling their initial purchases.

Michael: 18:15 Two, I think the growth in the future’s market has sort of seen futures market makers come to Genesis Capital to get a borrow on the spot market, because as you’re taking action on the futures side they’re able to hedge instantly on the spot market via a borrow.

Michael: 18:31 Then, we’ve had guys who just wanted to outright short it, that had no long position, that were happy to sort of take a calculated, naked short bet that either this thing is zero or close to zero, and that over time this thing will actually play itself out.

Michael: 18:48 We launched the business with about 20 million in loans in February. I think right now we’re about $125 million [inaudible 00:18:55]. It’s sort of our overall loan portfolio. I think we’ve originated about a quarter billion of loans so far, so demand is there.

Michael: 19:05 The fantastic part about it is that we’re really only lending to the best of the best. Again, we’re not facing individuals. These are all hedge funds, sort of institutional accounts. We’re doing the credit work. Plus, they’re posting U.S. dollar collateral against kind of loan positions we’re making.

Michael: 19:21 It’s been a fantastic sort of new service addition for us. It allows both sides, [inaudible 00:19:26], to actually put on a position in the spot market.

Pomp: 19:30 Absolutely. No, it’s fascinating too to go from 20 million to about 125 today, got that $250 million or so in kind of total loans. Is this all in Bitcoin? Bitcoin and [Ether 00:19:43]? What’s the kind of disparity look like given what you see on the [OTC 00:19:47] side? Is it similar?

Michael: 19:49 It’s interesting. We get fantastic kind of market color. We’ve seen in 2018 so far sort of price resistance in Bitcoin in the high fives, some around the 5,800 level. We’ve had guys who initiated short positions kind of in the 7,000 area. Then, for … Because they feel some level of resistance on the price, close out their shorts somewhere around the 6,000, 5,900 number.

Michael: 20:18 We’ve had guys kind of do a rinse and repeat, have the price kind of come up to the 7,000s, innate the short right back down, about that’s where they close.

Michael: 20:26 When [inaudible 00:20:27] kind of talk about, hey, I think we’ve seen the lows of the year kind of come in, it’s actually playing out that way in the loan market because no one keeps their loans outstanding for very long once we kind of hit the high fives.

Michael: 20:40 [Ether 00:20:40], there really isn’t a bottom. I don’t have that sentiment for [Ether 00:20:45]. That’s just kind of the way data is kind of playing itself out. We don’t have guys that try to play the … I think there’s resistance around the 275 level, so they’ll short their way down from 300 down to 275. I think there’s plenty of people that will kind of keep their loans outstanding on [inaudible 00:21:04] for a lot longer than that.

Michael: 21:06 That’s actually playing out on the [OTC 00:21:09] side, too. The last two weeks priority to this run right now into the mid-7,000s, we couldn’t find a Bitcoin seller in the low 6,000s. We’ve had some buyers, but very, very few sellers. There was no [inaudible 00:21:21] sellers.

Pomp: 21:23 Wow.

Michael: 21:24 [crosstalk 00:21:24]. We could’ve sourced a ton of [Ethereum 00:21:26] if there was [inaudible 00:21:27], right? People talk about price decoupling and Bitcoin and [Ether 00:21:34], which kind of traded on path with each other for quite some time. I think we’ve already kind of started to see that.

Pomp: 21:40 Yeah. That’s super fascinating. If you started the business in February, this is kind of initial draw down had already been initiated, right? How much of the shorting that happened maybe December, January timeframe was volume that you saw and that drove the decision to get into the lending side, or you were already kind of planning on doing that and then it … The timing just worked given the market conditions?

Michael: 22:07 I wish I was smart enough to kind of predict it in December and January that this is the way it would play out, but we really just made the decision bout over a year ago now. This was in early 2016 where we said, [inaudible 00:22:22] 2017 rather, where we decided to launch Genesis Capital.

Michael: 22:25 It’s an idea that we’d been kicking around kind of internally and said, “Hey, one day is going to be kind of the right time to do it.” Myself and the board kind of decided that early 2017 was kind of the year in which we were going to try this.

Michael: 22:38 It obviously took six or nine months to kind of hire some folks and kind of build the infrastructure and kind of plan the launch of the business, but, yeah, February just happened to be when we were ready to go.

Pomp: 22:49 That’s awesome. Okay. Obviously you guys are very well-versed in kind of liquid cryptos, cryptocurrencies, and really kind of participate in maybe the top ten or so kind of liquid cryptos. One of the things that a lot of people have been talking about is tokenized securities, right? Kind of these tokens that are backed by stocks, bonds, currency [inaudible 00:23:17] commodities, etc.

Pomp: 23:19 One of the show’s sponsors is [Block Estate 00:23:22], [inaudible 00:23:22].com. They basically created this equity token for real estate, right? Before the show we were talking that you just bought a home, right?

Michael: 23:30 Yes.

Pomp: 23:32 The thought process would be rather than you signing all of the paperwork, etc., you could actually own a token that represented ownership of your home, right? How do you guys look at these equity tokens or these asset-backed tokens in light or your business and then the overall ecosystem?

Michael: 23:50 I think one of the things that we are still kind of trying to figure out is if these are technically securities, and if they are then they would be obviously under sort of [SEC 00:24:00] [inaudible 00:24:00] oversight and kind of purview. I think there’s a lot of questions and guidance that kind of needs to be put out by both regulators about how we should think about trading these assets, how … Who’s going to be the custodian of these assets, right?

Michael: 24:18 The traditional crypto guys are not qualified to be [inaudible 00:24:24] custodians, so that’s when Northern Trust is building something, it’s possible that Goldman Sachs is going to build something. There’s kind of been rumors in the press about both of these guys.

Michael: 24:34 It’s kind of getting the traditional [inaudible 00:24:38] custodians in place, I think, is a key, key determination of how it happens. Now, personally on the tokenized real estate front, yes, I did just buy a house last week. It was a painful process in terms of the closing. It took about an hour and a half of just signing my life away. Could this entire process have been a lot more seamless by having real estate on the block chain? 100%. The deed just kind of is on the block chain. It’s sort of provable, and then when it’s time to sell the house I just transfer the deed assets over to another address. I think there’s a lot of efficiencies that can come about, but I think it really kind of depends on what the regulators kind of sit on this.

Pomp: 25:15 Absolutely. It’s interesting too because if all of a sudden you get these asset-backed tokens, right? Whether it’s [OTC 00:25:22] trading, lending, etc., it opens up a world of possibility, right? Because today you’re basically doing this, with Bitcoin for example, a digital currency, but imagine if you could do it with every asset class, right? It’s fascinating to think about in the … For those that want to learn more about block estating, blockestate.com.

Pomp: 25:41 Okay, so let’s talk about the broader ecosystem for a second, right? What is the part of crypto that you find most fascinating or interesting that most people don’t talk about?

Michael: 25:53 I think one of the things that I try to find really [inaudible 00:25:57] kind of interesting is how everyone, and I don’t blame them for doing this, but I think everyone is trying to fit Bitcoin and block chain crypto into an existing bucket in terms of the way they kind of analyze prices, infrastructure, fundamentals. That type of stuff.

Michael: 26:14 I think we’re really still trying to get our arms around how do you value this stuff? While there’s plenty of kind of theories and kind of valuation thought pieces kind of around the asset class, I still think the equity research equivalent of crypto is still sort of a work in progress.

Michael: 26:33 I am sure over time there will be sort of investment banks that dedicate entire equity research coverage teams to this space and try to come up with an industry consensus for how we kind of think about this stuff, but that’s still up in the air. Lots of competing thoughts about how to kind of do this.

Michael: 26:53 My hope is that some point the industry kind of come together and come up with a [DCF 00:26:58] or a market comparables or any of those types of things to kind of think about the right way to think about it.

Michael: 27:05 Then, it’s easier to kind of get your head around price targets, whether they actually mean anything or not. I do think that traditional investors will look to equity research equivalent sort of in the crypto space as they kind of make their investment decisions.

Pomp: 27:21 Yeah. A lot of it is I think is, one, there’s got to be some level of standardization, righT? When it comes to, hey, these are the things that we’re actually going to look at from a data perspective.

Pomp: 27:32 Then, two is the way that everyone interprets that data, right? You and I may look at, for example, a revenue multiple in the public markets and we may think that the company’s actually worth different things, but at least we agree that that is one of the data points that are important to valuing a company, right?

Michael: 27:49 I think that’s right. I think … There’s certainly plenty of controversy around just data generally and the integrity of the data. While I have no doubt that 2017, 2018 block chain data and Bitcoin, people can kind of come to a consensus around what the right data is. Go back to 2012. Good luck trying to get actual real data on Bitcoin back then, or even trying to figure out the hash rates of [light coin 00:28:16] from just a couple years ago.

Michael: 28:17 Those data is really kind of hard to come by. While I do think there’s kind of promising data projects, I think there’s still a lot of work to be done on data curation side before we even get to trying to figure out the right methods of evaluation that the industry can kind of rally around.

Pomp: 28:34 Absolutely. I mean, look, one of the things that happened that was … I think it was either end of last year, beginning of this year that just really didn’t get that much attention was when coin market gap switched up some of the data sources it was pulling in. All of a sudden, it wiped, like, $100 billion of market cap, right?

Pomp: 28:48 That was one of the kind of higher-quality reference data sources, so that immediately pulls in the question what is the quality of the data that they’re using and the data that they’re presenting to people? I think that that’s just one website, right? Across exchanges, data providers, etc., this is a huge issue.

Pomp: 29:10 Again, I don’t know if we’re really going to get to a solution, right? In the short-term, but I do think that getting to a point where there’s audits or valuation of data, and kind of consistency and accuracy, is essential to get these institution investors in.

Michael: 29:25 I think that’s right. This is, like, the unsexy stuff, right? This is the back office, accounting, finance operations work, but that’s really kind of what’s necessary to kind of move the spot forward.

Michael: 29:37 Frankly, there really shouldn’t be like as of, let’s say, midnight, 12:31, what was the price of Bitcoin? Right? I guarantee you the people in this room will come up with different prices because you’ll reference different exchanges or different [inaudible 00:29:51]. We really haven’t really agreed upon kind of the standard.

Michael: 29:55 Now, there are folks that’s trying to kind of raise their hand and kind of become that. Certainly the efforts that the [CME 00:30:00] has done, for instance, around the Bitcoin reference rate as they price their futures. The [CBOE 00:30:05] obviously has something kind of similar as a way to kind of get there, but I do think that industry consensus I think has yet to be seen.

Pomp: 30:12 Absolutely. Actually, let’s dive in a little bit how you guys use data on the [OTC 00:30:17] side. First of all, there’s probably plenty of people who are listening who actually don’t even understand what [OTC 00:30:21] trading is, so maybe kind of give quick two minute overview of what is [OTC 00:30:25] trading. Then we talk about how you guys use data.

Michael: 30:27 Sure. [OTC 00:30:28] trading is all post-trade settlement. As opposed to exchanges where you pre-fund the exchanges with either [fiat 00:30:36] dollars or Bitcoin or [Ether 00:30:38] or [light coin 00:30:38], whatever it is, we actually agree to a transaction first. This is the way all Wall Street sort of works in that you agree to a transaction first.

Michael: 30:46 All Wall Street also trades on the settlements [T + 2 00:30:50], so trade date plus two days. On the third day is when you actually settle the transaction.

Michael: 30:56 In crypto, things move a lot faster, so we’re much more sort of same- day settles. We’re much more, like, [T 00:31:02] an hour or two hours, kind of opposed to settlement. We agree on the trade.

Michael: 31:06 On the time we agree on the trade, that trade is actually agreed. Regardless of what happens to the price, up or down, we honor the trade and we expect all of our counterparties to do the same.

Michael: 31:16 If we’re selling you Bitcoin, we give your bank wiring instructions, you send the bank wire … The bank money to us, and then we just send you the Bitcoins to your address, and sort of vice versa. It’s a very simple, kind of straightforward process, but it’s much easier than trying to wait for the wire to hit any of the exchanges before you put on the trade.

Pomp: 31:38 Part of this is … The way that it works in practice, right? Is I can call you, I can message you. Whatever way I choose to communicate, and I talk to somebody who works at Genesis. We come to an agreement. I literally say, “Hey, I want to buy five Bitcoin,” and somebody on the other side says, “Okay, we’ll sell you five Bitcoin at x price.” Right?

Pomp: 31:57 Once we actually agree, that is where the trade is final in terms of price, amount, etc. Then, the settlement is actually what you just described in terms of the transaction of [fiat 00:32:10] or crypto trading hands. Right?

Michael: 32:12 Correct. The exchange is the settlement portion, but that comes after we agree upon the transaction.

Pomp: 32:18 Yep. The reason why somebody does this, right? One is either they want to get lower fees, right? They’re going on an exchange with kind of a large transaction. Two is they want to guarantee that there is some liquidity there, right? Kind of consummate the trade much faster. Are there other reasons why somebody’s doing that or are those the two main ones?

Michael: 32:38 I think the … Certainly the two that you mentioned, exchange slippage is certainly one thing, and we’re much tighter probably on a spread on a $5 million transaction, say, than some of the exchanges.

Michael: 32:52 The other thing that puts [inaudible 00:32:54] Genesis is kind of our highly-regulated status. For the institutional guys and their … They have limited partner investors who rely on the general partner, they don’t want any questions as to where did these Bitcoins come from? How do I know that a Silk Road guy didn’t own these Bitcoins three hops ago?

Michael: 33:14 They trust they are [AMLKYC 00:33:15] compliance process to kind of know that these Bitcoins were … That we’re vouching for them and that the questions around, hey, where did you get these Bitcoins from, from your auditor or from your compliance department. Oh, we got these from our broker dealer. It kind of ends the conversation kind of at that point.

Michael: 33:32 Providence of Bitcoins and kind of the crypto is certainly one of the value add of sort of facing an [OTC 00:33:39] desk.

Pomp: 33:39 Makes sense. Okay. Obviously if I’m somebody who wants to purchase via [OTC 00:33:45] and I call you guys up, how do you determine the price? Right? We talked a little bit about kind of the quality of data that’s out there. Are you guys going to one exchange, kind of taking a average of a couple of exchanges? How do you actually use that data to kind of get confidence around this is the price that we’re comfortable trading at?

Michael: 34:04 Our early technology partner is a company called [Trade Block 00:34:07]. [Trade Block 00:34:09] kind of helps power our trading platform at Genesis. They have an index called the [XBX 00:34:15], which takes into account the volume weighted average process across some of the biggest U.S. dollar exchanges.

Michael: 34:21 Our quotes are based off the [XBX 00:34:23]. We don’t try to rely on any sort of single exchange.

Pomp: 34:26 Yep.

Michael: 34:27 Because, as you might imagine, this is kind of less the case now, but a year ago, two years ago certainly, prices varied greatly kind of across exchanges. If we only looked at one exchange for market color you would’ve been off kind of what market was.

Michael: 34:43 I think the advent of a lot more sort of market makers and some of the high frequency guys kind of [inaudible 00:34:48] involved have sort of removed exchange [inaudible 00:34:51] opportunities, so prices are trading way more uniform across exchanges than they were in the past.

Michael: 34:56 We do rely on an index from [Trade Block 00:35:00] as far as how we think about kind of our quoting.

Pomp: 35:02 Got it. Yeah. The exchange [inaudible 00:35:04] was huge in even as early as … Or as late as last year, right? There’s people who are literally setting that up as their trading strategy.

Michael: 35:10 That’s 100% correct, but, like I sad, I think all of that is gone by now.

Pomp: 35:16 Got it. Okay. As we look forward, right? What do you think are the areas that people are not building in that are going to be either important or are going to become kind of the focal point as we kind of go into early ’19 and maybe even into 2020?

Michael: 35:36 Ultimately I think there are questions around the exchange infrastructure and how that kind of ultimately develops over time. Today, you have in the traditional markets, you have sort of the NASDAQ, New York Stock Exchange, which is the pure matching engine, but they actually don’t hold any equities or any money. They’re just matching buyers and sellers, right?

Michael: 35:59 Then, you have the [DTC 00:36:01] that kind of does the settlement aspect of …

Michael: 36:00 Have the DTC that does the settlement aspect of it. And then there’s a separate custodian, the State Streets and the BNY Mellons that are actually holding the security. So you actually have three different parties in the traditional world, whereas all three happens by the same company in crypto today. You fund Coinbase, they hold your coins, they hold your fiat, and they’re also the matching engine, and they’re also the settlement agent. So you basically have pockets of funds globally scattered. Is that really the way that this space ultimately evolves? It’s possible. Or will the New York Stock Exchange model, will a DTC get created at some point to help settle transactions. ’Cause I think one of the things in the OTC space is somebody still has to act first. There isn’t this concept of simultaneous settlement and DVP, delivery versus payment, that you see in this world. And traditional investors really aren’t interested, obviously, in taking that counter party risk. What if I send the money and you don’t send me the Bitcoins? Then what happens to me? And while that’s why you work with reputable counter parties on the OTC side, I think a lot of that concern can be alleviated if you actually created a DTC for crypto. But that has to be so trustworthy, so well-funded and it’s possible, but I think it’ll take a lot of effort to get there.

Pomp: 37:24 Can that only get built by a traditional financial incumbent?

Michael: 37:31 If you recall, I think the DTC was initially funded by the big banks. Certainly getting industry participants that help fund a group effort certainly goes a long way. ’Cause you have immediate buy-in from the incumbent participants to a DTC. Is it possible that the existing crypto guys can put funds together? Certainly. But if we’re really targeting the biggest hedge funds and family offices in the world, I’m a little bit skeptical that they trust an effort put together by a bunch of startups.

Pomp: 38:05 Just [crosstalk 00:38:06] crypto.

Michael: 38:06 I think they want to see some traditional money backing it to really give them a comfort level that everything’s on the up and up.

Pomp: 38:15 Yeah. Look, it’s something that we talk all the time. It’s, to an extent, Wall Street is the best thing that could happen to crypto. And on the flip side, it’s the worst thing that could happen to crypto, right? In terms of, Caitlin Long came on and she was talking about the rehypothecation of Bitcoin, and really attacking the core value prop of this scarce asset. Wall Street doesn’t really like scarce assets, right? So I think it’s a double-edged sword there.

Michael: 38:41 I think that’s probably right. But I think I would argue most, if not everyone, wants to see the price of Bitcoin going up to 100K, half a million, a million dollars. And I’m strongly of the belief that this doesn’t happen without Wall Street Involvement.

Pomp: 38:57 Makes sense. Okay, and something you said earlier was at Genesis, you guys just brought on the first overnight trader. Obviously you’re doing that to address or serve this global community. In the customers that you guys have coming to you, either on the OTC side or on the lending side, talk about the demographics. These are, obviously, higher-quality either borrowers or participants. But mostly domestic-focused, internationally, even … What does that really look like?

Michael: 39:30 I would say that today we’re still about 75% domestic here in the US. But it’s our international counter parties that are growing the fastest. Over time, I do expect the ratio to get closer to 50/50, if not flip upside-down entirely. But, like I said, I think a lot of the age of flow and the conversations that happen, we’re just scratching the first surface. I think that’s an exciting growth opportunity for us. The one thing we haven’t done is open up foreign offices. We’ve decided to go 24/7 out of New York for now. What we’re really realizing is that a lot of the liquidity is isolated in separate countries, especially in Asia. There’s a Tokyo market, a separate Hong Kong market. There’s a separate market in South Korea, a separate market in a bunch of different countries, and there really isn’t fantastic overlap across the countries. You have really siloed pockets of liquidity. And trying to figure out which country to set up an office and figure out what the laws and regulations … As well, just hiring. The upstart costs. We really couldn’t justify that. What we’re doing for now is trying to figure out where the liquidity is, where the interest is, and gather the data ourselves out of New York. And then we’re in a much better position to decide what to do once we figure out what the right market for that is.

Michael: 40:59 But at the end of the day, everyone’s trading on an email or via screen. They don’t really care where the traders are sitting. We really haven’t had push-back as far as from folks that say, “Hey, you don’t actually physically have a trader in Tokyo.” That doesn’t really seem to matter.

Pomp: 41:14 Absolutely. It’s funny that you talk about trading over email or screens. Obviously on Wall Street, that’s not how it’s done.

Michael: 41:21 Right. And somebody said to me the other day that Skype is the OTC backbone of the entire crypto industry. Because there’s so much done via messaging and video, et cetera. And it’s just fascinating. The infrastructure is not to the level yet of Wall Street. But, given that we’re ten years, less, into this, it’s actually quite a bit of infrastructure that’s been built and sits here today to allow you to operate on a global scale, all from New York City, with a number of different assets, both on the OTC and the lending side.

Michael: 41:56 What I think is also interesting, I think, is that you have to remember as a broker/dealer, we’ve been doing traditional securities for years before we got involved in crypto. We know how everyone, all the traders on Wall Street, use the Bloomberg chat function. Plenty of trades get agreed upon in Bloomberg chat. Then you just cut tickets on Bloomberg to make it formal. But a lot of negotiation, the back and forth, still happen over chat. It’s just that in crypto, we don’t have the active community on Bloomberg yet. I bet that’s coming. And really, whoever controls the chat really controls the audience. We kid around from time to time that somebody like Skype should just open up a crypto trading platform. And you already own the conversation. And I do think that’s a large part of actually who gets the transactions.

Pomp: 42:46 Yeah. It’s fascinating. All right. Let’s talk about a couple of the controversial things that are going on in crypto right now, and from your seat, what you guys think. Tether, huge back-and-forth as to whether they actually are back to one-to-one to the US dollar or not. What is your guys’ take, or even you personally in terms of how you see that playing out and any concerns there.

Michael: 43:08 Obviously, I think that the industry as a whole has a lot of vested interest in making sure Tether is fully collateralized on the US dollar. And I don’t really, I don’t have a view one way or the other if it is or not. But it has certainly spawned a whole host of other stable coins and currencies out there that I think Tether was first to market. And I don’t know whether other guys would have really jumped in if Tether could have been way more transparent about their books and records. I think that might have been a closed door to a lot of these companies. But questions and skepticism around Tether gave the opportunity for a lot of these guys to launch their own thing.

Michael: 43:51 I certainly think it’s interesting. But I’ve always said to my traders, I don’t want you guys trading 35 stable coins. There needs to be more of an industry consensus around one, two tokens maximum. And as these projects come on board and come online, and actually start trading, I’m sure it’ll be a market test. Whoever’s strong enough and has the most liquidity will end up winning and play itself out. I think there’s a lot of interesting things about the traditional asset-backed model versus some of the algorithmic models that’s out there, and may the best one win. But ultimately, it’s all about confidence. And whether or not the market really believes in the product that you’re selling. But that’s no different than crypto and people buying into the vision, white paper, what it’s ultimately trying to do. I don’t think it’s any different on the stable coin side.

Pomp: 44:44 Absolutely. No, I completely agree. Obviously, some of the people who are transacting in Tether, specifically, are the retail investors who are trying to go in and out of crypto or transact with some level of safety in terms of that value. One of the things that I think people are really pushing for is the participation of retail investors into just investing in general. We saw this with the ICO boom, where all these non-accredited investors could start to participate. Remains to be seen how regulators will come down in terms of was that stuff compliant or not. But recently, the FCC chairman said they’re looking at ways to get the non-accredited investors into more private-type opportunities in a compliant way, but still provide the investor protections. You guys are obviously dealing with much more institutional-type investors. Is it a thing where if there was the regulatory compliance and protections available, you think that you’d be able to go down-funnel and start to interface with more of those retail-type investors? Or is it something where, just from a ticket size, et cetera, it’s preventing you from going down?

Michael: 45:55 It’s certainly much more the latter. We’re just not set up from a systems operational infrastructure to be onboarding thousands and thousands of counter parties. We’re much more high-touch, white-glove service, and it’d be really difficult for Genesis, I think, to offer the same high-quality customer service if we had 100,000 users calling in at the same time to be able to speak to a Genesis representative. It’s much less about the accredited investor definition around suitability, for instance, than it is much more about, hey, that’s a market that the exchanges service very, very well. But it’s the bigger ticket guys are the ones where it’s worth it from a customer acquisition cost perspective to spend the time and effort to get on the phone, on-board, educate, because they’ll eventually trade through us.

Pomp: 46:48 Got it. No. It’s fascinating. Okay. And what about the legacy tech players? You’ve got the Facebooks, Googles, Twitters of the world. How do you see them playing into this? Facebook’s got their block chain team. They’re going after it. I don’t think Google’s really said too much other than they’re going to ban some crypto ads. Twitter, same thing. How do you see an audience in a crypto space who comes out of that tech industry for the most part, interfacing back with those tech incumbents?

Michael: 47:19 My hope is that the solution for any of these incumbents is not to create their own token. And they just hop on the backs of the Bitcoin or Ether or Litecoin. Pick one of the existing ones and not create Facebook dollars, the Facebook coin. But you’ve seen the way that Square has integrated Bitcoin into their payments platform. I do think that rather than creating Square coin, they went with Bitcoin as the future internet money, in the way that Jack Dorsey is currently thinking about it. I do hope that they figure out ways to reward content creators by letting them accept payments in whatever crypto currency of your choosing, without creating the additional friction of a Twitter coin. And having to make people buy whatever that token is. ’Cause chances are, the author is not holding on to the Twitter coin. They’re going to turn right around and sell it for a fiat.

Pomp: 48:25 Absolutely. It is … Facebook, specifically, I have contenders say, one of the greatest things that could happen to crypto is if Facebook gave everyone a digital wallet and somehow drove adoption of Bitcoin. I mean, I think that just the inflection point of two billion plus people getting to interface with this digital currency would be like nothing we’ve ever seen.

Michael: 48:48 I 100% agree, and I think that if you rewarded users who click on banners by giving you a little bit of Bitcoin in your Facebook wallet, just even without having to buy anything, I think just owning some gives you that incentive and the interest to follow it more. And I do think there’s a lot of creative ways to get more adoption, certainly at the consumer mass level simply by rewarding folks back in crypto.

Pomp: 49:17 Yeah, it’s awesome. All right. I got one more question for you and then I let every guest ask me a question. So think of a good one, there. What is the one thing in crypto that you believe that you think a majority of the people you know would disagree with you on?

Michael: 49:32 That is a good question. I’ll have to think about this one for a few seconds while I also simultaneously come up with a question for you.

Pomp: 49:43 The big intelligence test on this podcast.

Michael: 49:47 I think that the US will get their head around ICOs and that they … I will say that within 10 years, the US will not be the ostracized ICO market that it exists today. I do believe that regulators, while they certainly are scared, first and foremost, will get their head around the fact that if they don’t adopt, all of that capital formation and capital funding moves offshore. And I don’t think that’s in the best interest of the United States to let that happen. I do think that the US needs to continue to be a hotbed for startups and funding. And I do think that they’ll get their head around ICOs and that US will be a hotbed for ICOs within 10 years.

Pomp: 50:41 Yeah. I mean, look, I completely agree with you. I actually think that ICOs are just a different name for an IPO. It’s a funding mechanism or a capital formation event. And the only reason why it is different is because the current laws force it to be. But if we changed the laws, then they would look very similar. You could see a world where they say, “Look, you’ve got to report X information. You’ve got to have these disclosures. You can only raise capital from one group of people versus another.” It really is taking the wild west and just putting a box around it and saying, “Here’s the right way to do this stuff.” Now, very, very cool.

Pomp: 51:19 All right. What question do you have for me?

Michael: 51:22 All right. In the last 30 seconds, I’ve come up with one. Is … Ether is $275 today. Is Ether more likely to be $1000 or $10?

Pomp: 51:41 Everyone who’s ever come on here always asks me random questions about Twitter, et cetera. And you asking me about price is amazing. I’m one of these folks, who, when it comes to Ether, I do not think that it’s very analogous to Bitcoin, in terms of the deflationary schedule versus inflationary and the way that it’s used as a utility. I probably don’t have the confidence to say that it’s going to $10. But I do think that the mechanism in which it is used, especially that de-coupling that you talked about, of prices, it is much more likely to stay depressed according to where Bitcoin goes. And the thought process there is, you are incentivized to use what you are holding if you want to use the network. The macroeconomics of that forces a lot more downward pressure than, say, Bitcoin, where because of the deflation and, ultimately, the detraction, of the monetary supply, people are incentivized to hold, right?

Michael: 52:43 Mm-hmm (affirmative).

Pomp: 52:43 It is … The decoupling piece is really interesting to me. Because, at the core, they’re two separate systems, in terms of how the assets are both created, held, and ultimately, incentivized to use or not use. I think that it’s much more likely to go lower than it is to go higher, over a long period of time.

Michael: 53:07 Great.

Pomp: 53:08 Awesome, man. I really appreciate the time. This is fascinating. I think that a lot of people are going to get a lot out of the OTC trading and what you guys do. I appreciate you coming on.

Michael: 53:17 Thanks for having me.

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You can find the recording here: Off The Chain: Anthony Pompliano and Michael Moro

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The following is a transcript of a conversation between Anthony Pompliano and Marty Bent where they cover all thing Bitcoin, crypto mining, and why hash rate is way more important than people give it credit for.

You can find the recording here: Off The Chain Podcast: Anthony Pompliano and Marty Bent

Anthony Pompliano: 00:00:00 So, Marty’s here. We got a bunch of stuff to talk through today. Before we get started on the smart people stuff, let’s just go through your background real quick, and how the hell you got into crypto.

Marty Bent: 00:00:10 I think I had one of the most … I don’t know if I could say this for certain, but one of the most peculiar career paths out of anybody I know.

Pomp: 00:00:23 And we’re starting with big words on the podcast.

Marty: 00:00:29 Peculiar is not a very big word. So if I missed them, don’t make fun of me. Yeah, so let’s go back to college. I was studying economics in Chicago at DePaul University. Luckily there, living and going to school in Chicago, you’re afforded some opportunities just being in the city. So, I interned at a manage futures fund starting I believe the end of my junior year, and then basically worked full time my senior year. I took night classes. So, Dearborn Capital Management ran a couple of LPs [inaudible 00:00:59] funds specifically investing in CTA managers.

Pomp: 00:01:09 Alright. So, you’re doing that all in Chicago?

Marty: 00:01:09 Doing that in Chicago. At the same time, I was studying economics. This is around 2012 when I first bumped into Bitcoin. I forget exactly what it was, but I was writing a paper on monetary policy for a money and banking class I was taking, and I was just Googling “monetary policy” and weird monetary experiments on Google, and stumbled upon the white paper and people talking about Bitcoin, and I didn’t think much of it. I was like, “Eh, this might be interesting, and then as happened to a lot of people I think, late 2012, early 2013, people started writing a lot about the Silk Road. So, that piqued my interest again, and while all this was going on, I was working at the futures fund and part of my job was to write commentaries and lead monthly, quarterly calls with the CIOs of the hedge funds that we invested in.

Marty: 00:02:03 So, part of my job was being a central bank hawk around the world sort of following their policies, seeing what they’re saying, whether they’re coming close or not to hitting their projections and whether they’re meeting their goals and basically how their policy changes affected markets and how our fund performed based on those markets movements. So, I got really into monetary policy and specifically how central banks crafted, how they set their benchmarks, how they look back at their benchmarks; and after three years of observing, I realized that they never hit those benchmarks.

Marty: 00:02:37 I was like, “Alright. This is [inaudible 00:02:39].” So, back step a little further. I was a senior in high school in the fall of 2008, just so happened to be taking a Intro to Economics class, and this was when the world was going to shit. So in that class in particular, we went through the TARP bill. The teacher was very astute and very in our faces like, “Hey, this is something wrong that you guys should probably pay attention to going forward. This is not the way that an economy should work [crosstalk 00:03:07].”

Pomp: 00:03:07 So, they were on top of it.

Marty: 00:03:08 My teacher was. Yes, luckily. So, that’s sort of what set me on the path and led me to Bitcoin. So, I was that analyst at the futures fund like, “Hey, we should be paying attention to Bitcoin. We should be paying attention to Bitcoin.” I got laughed at enough. I decided, “You know what? I wanna go learn a couple new skills.” I decided to quit there and go take a digital design bootcamp to learn about UX and basically how users love the apps that they love and how somebody designs a process and how apps are designed in general. That was a really good course on human psychology and sort of learning why people interact with the apps that they do.

Marty: 00:03:48 I was still in Chicago at that point. I decided to move here to the Big Apple, jump straight into this hellscape and-

Pomp: 00:03:56 Concrete jungle.

Marty: 00:03:57 Yeah. I worked for a software company to learn more about backend development, stuff like that. We specifically worked with CMS’s. More specifically, Truple. So, it really introduced to the [Fost 00:04:10] mentality. We were working with Truple for two years and really got an up close and personal experience with a decentralized, free, open-source community, which made my own understanding of Bitcoin even better over time; and then somehow, I got here [crosstalk 00:04:29].

Pomp: 00:04:30 Well, what’s interesting about it is, you also went in reverse, right? I think a lot of technologists over the last two, three, five years have started to learn monetary policy, and you almost went the other way first, right? You basically were studying economics, monetary policy, and then got into the tech side. I had majored in economics as well in college, and pretty much economics course if the professors were worth anything, they’d basically tell you, “Hey, this is how it’s supposed to work, and then this is how it actually works”, and then the difference is pretty stark in a lot of economies, and so I think people who have that economic background and then go into tech realized that, “Hey, maybe the tech is actually better than humans at designing this stuff, governing this stuff, etc”; and so the fact that then we end up with Bitcoin, blockchain, etc, is kind of a culmination of a lot of that, and so it’s super interesting to hear that that’s your path in.

Marty: 00:05:23 Yeah, that was a strange one, and I was happy it unraveled the way it did. I think it wasn’t easy at times [inaudible 00:05:31] cushy finance job to living on a buddy’s couch over the summer, but well worth it because then, I had this sort of well-rounded experience. I obviously knew a lot about Bitcoin. So, in Bitcoin in particular, I was a lurker for the first five years. First four or five years I was in, just had my list on Twitter, I’d like tweets, retweet every once in a while, but would never really put my voice out there, and then last May, or actually, it was my birthday last year, my parents were down in Brooklyn. We were getting dinner, and my birthday’s in June. Doxxing myself, and obviously it was when the pump of last year was beginning to build, and I was getting texts and DMs from friends and family like, “What about Bitcoin? What should I know about Bitcoin?” It was getting overwhelming. I was telling my parents just at my birthday dinner, and my dad who has a finance background after all, he’s like, “You should start a news letter just to sort of give little bits of information to these people every day.”

Marty: 00:06:30 So, that’s how it started. The original list was 10 people that I sent it out to, and then I was like, “Alright, I’ll just share these links online”, and it took on a life of it’s own.

Pomp: 00:06:40 It’s amazing.

Marty: 00:06:41 So, that was the first iteration. So with that, I tried to bring a bar stool voice to try to make Bitcoin in the overarching space sort of approachable for people who wanna learn more but aren’t as technically inclined as a lot of the hardcore Bitcoiners are.

Pomp: 00:06:56 Absolutely. Well, it’s also just a really scary, complex subject from the outside especially if you know nothing, right? So if you could make it approachable, there’s still complex subjects that you have to understand, but it’s easier to at least get started, right? Alright, so you were talking about central banks earlier, economies, and how basically they don’t work how they’re supposed to. One of the promises of Bitcoin is, it’s sound money, right? And this idea that it is a better designed system that should provide a whole host of advantages over a long period of time for a global population. Walk me through when people say Bitcoin is sound money, what do they mean and then we can get into what that impact would be if it actually comes to fruition.

Marty: 00:07:39 Yeah. So, I guess the most simple definition of sound money is, a monetary good that is inherently scarce that has no ability to be inflated away by central bankers or governments or central authorities in general. I would argue that a sound money has to be somewhat apolitical where everybody has a equal opportunity to participate in a network, that anybody can go and mine gold, anybody can go and mine Bitcoin. So as a sound money, obviously that would be the supply’s scarce, it’s not able to be inflated away. So at it’s simplest form, I think that’s what I would … I try to keep it simple, stupid.

Marty: 00:08:25 So, [inaudible 00:08:26], and then why am I for sound money? Again, and it really does harken back to my personal experience being a senior in high school and taking that class in the fall of 2008 when things were going to shit, studying economics in college during QE1, 2, and 3, infinity, and then falling into Bitcoin, as well. I think sound money is important because what I don’t think people realize is, when money is created, when money is printed in our economy in the U.S., we’ll just focus on the Fed and U.S., the people closest to the spigot of money creation have an unfair advantage to the people below them. So, that’s naturally banks that get access to the Fed would know. I just think that’s from a moral standpoint a bit immoral. So, that’s just based off of sound money, and before getting into that, the advantages that are afforded to these people closest to the spigot, I think they in the long run are [inaudible 00:09:27] societies.

Marty: 00:09:27 So, reverting to a sound money seems more ethical to me. There’s a really good book, The Ethics of Sound Money. It’s on Mises.org. Hülsmann is the author. I forget his first name, but he wrote it in 2007 before Bitcoin was even a thing, and he really dives into the ethics of sound money, and it’s very interesting the lack of education around money creation.

Pomp: 00:09:59 It’s funny. So, let’s use your spigot example. Not only are the people closest to the spigot have the economic advantage in terms of capitalism, etc, but also the security of that asset. The farther you get from the spigot, the less secure it is. So, if you think about how many people have ever broken into the Fed and stolen money, right? I don’t think ever, and so I think if you walk all the way down, then when you get into a bank, somebody can come and steal it through bank robbery etc, but there’s insurance and it gets replaced, then all of sudden if it goes into cash in a safety deposit box and you walk all the way out until there’s cash in your pocket, and somebody could run up and just rob you, right? And so, the farther you get from the spigot, not only is there less economic advantage, but there’s less security; and so, those two things are in my opinion correlated to some degree of the people with the greatest economic interest make sure they have the best security, and the people with the lowest level of economic interest obviously have lower levels of security.

Marty: 00:10:59 Well, I don’t even attribute that to security. Anybody could put money in a bank no matter how poor you are and have a certain sense of security. The insecurity of the actual money in your bank account is another thing. So right now, I think I saw a tweet that German banks are starting to institute negative interest policies against people with 200,000 … I mean, this is affecting the rich first, people with more than 200,000 Euro in their bank account.

Pomp: 00:11:25 Something like that. Yeah.

Marty: 00:11:26 Yeah. So, that’s a way that your money can just be insecure. It doesn’t even matter where you’re holding it. Just the whole nature of the underlying money is not secure from a first principles [inaudible 00:11:38].

Pomp: 00:11:38 Well, you don’t own it. Once it goes in the bank account, the whole idea of a bank run is if all of a sudden everybody comes and says, “Give me my money”, they don’t have it.

Marty: 00:11:45 Well, that leads to another thing, the existential question, “What is money?” And one thing Bitcoin’s doing that I’m probably most excited about is people questioning these types of beliefs like, “What the hell is money?” People never questioned it before 2008. At least, I didn’t before 2008, 2009, and I think that’s one thing, that Bitcoin has sort of sparked almost a new enlightenment Renaissance type of thinking around these subjects.

Pomp: 00:12:15 Absolutely. Alright, so let’s keep talking about security. Let’s go to the security of the Bitcoin network. So, obviously mining’s a huge component of that. One of the big knocks against mining which I know that you’ve spent a lot of time on is this idea that Bitcoin has an abnormally high amount of energy consumption in order to run the network. Agree, disagree, and what’s your response to people who say that?

Marty: 00:12:38 Well, it’s interesting. It’s hard to know exactly how much exact energy Bitcoin is consuming on a daily basis. So number one, that’s hard. Staying on number one, a lot of people think it’s way less than what we’re sent. We’re around less than a tenth of a percent right now, but that’s not what we’re talking about right now. Number two, people just assume that it’s all dirty energy and that it’s wasteful. So, what people don’t understand is that a lot of Bitcoin operations, especially here in the West and even in China, China uses a lot of coal, sure, but they use a lot of hydroelectric energy as well, and one thing we are finding here in the U.S. is some miners going to the West Texas, going to oilfields, and basically siphoning the excess natural gas that is being led into the atmosphere at these oil distilleries, and basically that would be wasted energy if these Bitcoin miners didn’t show up and instead of sending that either methane or natural gas …

Pomp: 00:13:50 All the pollution.

Marty: 00:13:51 Sending that into the air, instead of wasting that and polluting the atmosphere more, they’re actually harnessing that energy and turning it into Bitcoin and creating a whole online economy, which is incredible. It’s something we never had before in the course of human history. It’s basically a 24/7 live energy market.

Pomp: 00:14:11 Well, it’s interesting, too, because we’ve built a number of these mining facilities. It’s how we got into Bitcoin, and one of the first ones that we built was at a plant where we’d invested in a company that took car tires, put through this thermal demanufacturing process which is just big words for “burns the tires in a controlled environment, captures all of the excess output”, and turns that car’s materials into oil, steel, carbon, and syngas. You sell the oil and the steel’s a commodity, and you get the carbon and syngas, you can turn it into power, and rather than sell it to the grid or allow it to evaporate, we capture it and mine; and so, you can do this with natural gas, you can do this with these thermal demanufacturing processes, and I think your point is that actually, those aren’t net energy or net new energy consumption. Actually, what you’re doing is you’re capturing excess energy that could be harmful to the environment from a different process.

Marty: 00:15:06 Exactly, and it’s not wasteful at all. It’s actually very efficient. It’s an efficient market if that’s happening. [crosstalk00:15:14] Alright, this unused energy would otherwise be discarded, if you’re turning that into useful, productive energy, then all the better for humanity in the long run, and then on top of this, people don’t understand … What’s the benchmark for how much energy Bitcoin’s wasting? What are we wasting? What are we benchmarking it against? So, if everybody sees the stat, like 1% of the world’s consumption’s being used to mine Bitcoin, number one, that might not be true, and number two, alright, what’s the benchmark and just because it’s 1% of the world’s consumption, what type of energy is it? And we’re finding that it’s mostly hydroelectric or energy that would otherwise be wasted and more harmful to the environment than if it was used to not mine Bitcoin.

Pomp: 00:15:59 Absolutely. Well also, I think if you compare it to US Dollar production. So, if you talk about this benchmark, if you just say, “Hey, what other types of money do we have and what’s that energy consumption to create the money?” The US Dollar, I think I’m getting this right, is more than 10 times on an energy consumption basis than what it takes to run the Bitcoin network, and so, is that good or bad? I don’t think we know yet.

Marty: 00:16:24 No, we don’t. [inaudible 00:16:25] with it, how much energy we expend to uphold the Dollar status as the reserve currency of the world. Like, how many wars have we gotten into? How many countries have we bombed to uphold this status of this Petro Dollar? And if we wanna talk about energy expenditure wasted opportunities, let’s talk about that; but a lot of these subjects are too hard to dive down people, like to see what’s being said at the surface layer, and that’s what they tend to believe, but I do that with other subjects as well.

Pomp: 00:16:58 Of course. Alright, so I don’t think you tweeted this. I think you retweeted somebody who said Bitcoin mining’s been transformed or is in the process of transforming from a capex game to an opex game. Talk more about what does that mean and how do you actually see that playing out in practice?

Marty: 00:17:19 I’m not an expert in this area, but I think what we’re seeing is the price to manufacture ASICs is going down [inaudible 00:17:24] down. So, mining’s gonna be most profitable at the steps before and after these miners get turned on, not when they’re bought. So, who can design the most efficient chip which, that would be capex. Is that?

Pomp: 00:17:43 Mm-hmm (affirmative).

Marty: 00:17:43 Yeah, that would be capex; but then operationally, when you find enough energy at an efficient price, like however your miner’s set up, like how are you fine tuning it at the hardware and firmware level to get the most energy per hash, you know.

Pomp: 00:18:01 Yeah. Well, part of it too is, do you think that the capex requirements are coming down because there’s just more competition around chip design, hardware design, and a lot of the people who maybe were building GPUs, CPUs, etc over the last couple of decades are now realizing, “Hey, there’s a lot of money to be made here.” They’re rushing in, competition brings not only innovation up, but price obviously goes down and the manufacturers, that pressure as well, through their supply chain. Is that about right?

Marty: 00:18:31 I don’t know for sure, but I would assume. So, I actually have a good anecdote here. My wife’s aunt, I guess my aunt by extension, too-

Pomp: 00:18:38 Is that a step aunt?

Marty: 00:18:39 A step aunt. A step aunt, yeah.

Pomp: 00:18:42 Just checking.

Marty: 00:18:43 She works for a company that sells GPUs and ASICs at wholesale, and last year in particular, they got a massive shortage towards the end of the year and she was like, “I could not figure out why GPU mines, GPU chips specifically, were sold out. I’ve never seen anything like this. We assumed it was gaming”, and I was like, “No. It’s people mining cryptocurrencies. So, just an anecdote out from the field, there, last year there was the massive rush for all these types of chips, and if you’re a believer in an efficient market set, that demand’s gonna get quenched with some [inaudible 00:19:26] at some point. So, the mode of profit is there. Bitmain, for as much as people hate them, they took the risks in the first decade of this technology and they really went full on, and I think they said before, obviously Bitmain has a bit of a reputation in this space, but I would go and thank them as well, because alright, you proved that this is something worthwhile and can be profitable for your competitors. Now, they’re deciding to get in the game.

Pomp: 00:19:54 Well, you know what’s funny is, I wrote about this earlier this year. So last year, if you think about supply and demand … So, the supply of hardware for crypto mining drastically lagged behind the demand. So all of a sudden, you saw this huge spike in demand. Everyone wanted to mine, not enough hardware, prices spike because of the supply and demand offset, and then all of a sudden, as prices start crashing in the crypto markets, demand starts to flatline and eventually decline, but because of the lead time of manufacturing, what ends up happening is the suppliers had, “Oh wow, this is a huge business.” They had ramped up all this production, and now they’re sitting there with an overflow of hardware; and so, now they gotta liquidate it; and so you just saw the prices just plummet. So, I don’t know really know people who were buying S9’s at about $4,500 per machine in late January this year, but you can go buy an S9 right off Bitmain’s website for only $600, $500; and so, we’re talking in less than 12 months to see that type of decline in a piece of hardware is pretty incredible.

Marty: 00:20:57 It’s absurd and at the same time, you check the hash rate. I checked the hash rate today. It’s 62x a hash. It was at 6x a hash last June. It’s gone 10x in 13 months or 14 months, which is insane.

Pomp: 00:21:10 So, let’s dig into this because I think this is part of …

Marty: 00:21:14 [crosstalk 00:21:14].

Pomp: 00:21:14 Yeah, we’re starting to get into some of the more complex pieces around mining in the network. Explain what that is and why it’s important to people.

Marty: 00:21:22 Alright. So again, I’m not an expert on this, but the amount of energy used to secure the Bitcoin blockchain right now is at 60x a hash a second. So to add a block to the network, the cumulative hash rate around the world right now is expending 62x a hash of energy a second, or they’re solving that many hash functions per second. Excuse me. So, that basically means that miners have come onto the network in a huge way in the last 14 months. When you look at the chart, it’s exponential, and that’s where I’m sort of sitting there like, “Damn. If it keeps going at this pace, how secure is this network gonna be in a year or five years, 10 years? How much energy is gonna be used to mine this and how secure will this network be, and-”

Pomp: 00:22:15 Well, it is the most secure network in the network, right?

Marty: 00:22:17 Mm-hmm (affirmative).

Pomp: 00:22:17 It is the largest computer in the world, right? And if you actually take the hash rate that you’re throwing at it, it has the most computing power in the world, and so when you look at this, it’s heavily, heavily decentralized. Now, are there these concerns around some centralized components of it? Mining pools and certain people have larger mining farms and things like that, of course, but I think when you look across the entire ecosystem, it is by far the most decentralized. It is by far the most secure, and ultimately that’s going to translate to value.

Marty: 00:22:55 Yeah, and that’s the one thing about decentralization. It’s so hard to measure. That’s what everybody’s trying to do in this space. Like, “Who’s the most decentralized and what facets of their network are decentralized?” But I think with mining in particular with Bitcoin, what we’re seeing, like I was telling you before, we reported the effects of Bitmain’s moves in the last year helping to decentralize mining. They made a big bet on Bitcoin cash. I would argue that hubristic move and sort of positioning by them left them a bit vulnerable, and people are taking advantage of it. If you look at the breakdown of hash rate between pools, it’s becoming more and more-

Pomp: 00:23:39 Okay. So, hold on. Hold on. Let’s back it up for a second. Let’s go to Bitmain. So, Bitmain’s a hardware manufacturer. I think they started 2014. 13, 14, somewhere in there, right?

Marty: 00:23:51 I can’t say it for sure.

Pomp: 00:23:51 Wherever it started, and walk us through … They started out, they’ve build let’s say 10, 12 different versions of their main miner, and now they’ve kind of expand

Pomp: 00:24:01 … different versions of kind of their main miner, right? And then now they’ve kind of expanded their offering to other types of miners, et cetera. They’re preparing for this IPO and so all of a sudden now people are getting a more in-depth look at the company, their balance sheet, kind of their future plans, historical information. And so right now, what do you think are the pros around Bitcoin or around Bitmain, and then let’s go into what we think kind of the negatives are.

Marty: 00:24:27 I mean, the pro’s up to this point is they are an incredible case study in what you can achieve with economies and scale in this space. Like I said, they worked hard to get where they are, created very tight relationships with the fab manufacturers. There’s only four in the world I believe that can make the type of fabrication needed for ASIC miners. And they just so happen to have a really good relationship with one of the best in the world, and they’re a really tight supply chain, and were able to sort of figure out how to, for an extended period of time, how to do the RND process and get these new chips turned around in a pretty quick fashion. Those are the pros. They really paved the way for like, all right, how do you achieve economies the scale in this mining network?

Pomp: 00:25:15 And that brought them reportedly 1.1 billion in profits in Q1 this year?

Marty: 00:25:21 Yeah, and so like, people keep going back and forth on the number. Who knows exactly what it is, but it was-

Pomp: 00:25:26 It’s a lot of money.

Marty: 00:25:27 … a considerable amount of money. I don’t know. So yeah, that’s a pro. The cons I think, this is a personal opinion. I have no inside information, or I’ve not talked to somebody at Bitmain so I can’t say this for sure. But I think [Jihan 00:25:42] crew honestly thought that Bitcoin Cash was going to take over Bitcoin at one point. And I think this goes all the way back to the Hong Kong Agreement in 2015 when Bitcoin developers and miners in the ecosystem met to have a sort of scaling agreement and have a roadmap.

Marty: 00:26:02 And I think what came out of that meeting, most importantly, to me at least was you really saw that there was a cultural divide between the miners in the East and the developers and the users in the West. From what I can glean from that meeting in particular, the miners felt a little perturbed that they weren’t getting enough respect per se, like in the direction of how Bitcoin development played out.

Marty: 00:26:27 With that being said, I think that type of mentality carried over into the fork wars of last year where Jihan and crew tried to exert their power. They thought miners had more power than they did and things like the user activated soft fork and now SegWit2x sort of proved that hey, actually users have a lot of the control in this network, and you sort of have to have that checks and balance.

Marty: 00:26:49 And I think Bitmain tried to make a power play at that juncture and it’s backfiring. I mean, I can’t confirm anything coming out on Twitter but it seems like they messed, or actually I can confirm that they messed up. Their like, last wafer chip was terribly inefficient, like their last line of wafers. So the product was, at least part of their product suite, was not up to par especially with Bitcoin mining. You want everything to be as efficient as possible and then I hear they’re having a mass exodus on their teams, specifically on chip design and the supply chain of it.

Marty: 00:27:24 So, I think it’s a cautionary tale of sort of keep yourself in check and don’t get too hubristic in this space.

Pomp: 00:27:31 And so, what do you think happens from here? Do you think that more and more of these hardware manufacturers will come online and actually be able to compete, or do you think that it’s going to still kind of concentrate in power of two or three main companies that are better than most and they take 80% of the market, and now the crumbs are left for everybody else.

Marty: 00:27:50 Can’t say for sure. I mean I hope the former’s, sort of the former of what you just described comes to fruition, but I stopped making predictions in this space. It’s a good way to get your dick pushed in at some point. So sorry.

Pomp: 00:28:07 There goes the G-rating on this one.

Marty: 00:28:10 But no, like I have faith that mining is getting more decentralized. And it’s things like, again, this is I think if we are able to achieve and bootstrap the better hash protocol laid out by Matt Corallo, it’ll make me even more certain that Bitcoin mining is on its way to full decentralization. But I am optimistic that it is getting more decentralization, more decentralized excuse me, and that more competition will drive further decentralization as well. I mean you’re seeing it, like look at the hash rate. Like …

Pomp: 00:28:42 It’s crazy.

Marty: 00:28:43 Price is down 80% but the hash rate’s still going parabolic.

Pomp: 00:28:48 Absolutely. Okay, so let’s keep going on this theme of decentralization, right? One of the things I think many people who see the beauty and advantage of Bitcoin have an issue with when it comes to other cryptocurrencies is the idea of a pre-mine, right? So let’s talk about what is a pre-mine and kind of what are the … what is it that the community has an issue with around the pre-mine?

Marty: 00:29:10 Yeah, so pre-mine. So the drama with the pre-mine was basically like 2012, 2013 when the [scambrian 00:29:18] explosion of all coins proliferated. Basically, what people figured out that you could copy and paste this code, tweak a couple parameters, and voila have a brand new blockchain. And as long as miners were mining, you’d have a network with bootstrap value.

Marty: 00:29:34 So a lot of anonymous people online on bitcointalk.org specifically, this is where most of the marketing for these types of coins went down, they basically said, “Hey we’re going to launch a coin.” At first, developers weren’t even telling people that they will launch a coin with a certain supply schedule, and they would write to the genesis blog of the chain like, “Hey, on the first blog mine like a hundred thousand coins.” [crosstalk 00:29:59] and then just go on with the regular data supply scheduling.

Pomp: 00:30:06 Which, by the way, is the exact parallel to what happens in capitalism, in a lot of other areas of life, but when you’re talking about decentralization, it is the exact opposite of what is supposed to happen.

Marty: 00:30:18 Exactly. Yeah. So the whole ethos of this whole Gad damn project, this experiment we’re in is full decentralization. Nobody has complete decision power or economic influence over the network. And a pre-mine, a lot of people’s eyes, especially the hardcore Bitcoin-er is against the ethos of what this is all about. So it’s basically the creator gets something for nothing because they copy/paste it, some code, checks a few parameters and were able dupe some people [inaudible 00:30:54].

Marty: 00:30:53 So that was a lot of, I think a lot of the scoring towards pre-mines comes from the fact that a lot of people are launching these coins and then dumping their pre-mine back in the day on [Jobit, Polanix 00:31:07], [inaudible 00:31:07], Rest in Peace, and a few others.

Pomp: 00:31:10 Can we get you to name one or two that are the prime examples [Backman 00:31:14]?

Marty: 00:31:16 I mean like that, like anything [inaudible 00:31:23]. I think Blakecoin was one, Zetacoin. There were the Diamond Dozen back then. It was like … And then it became popular to a fair launch and then tell other [inaudible 00:31:37].

Pomp: 00:31:37 And part of it too was not only what was actually occurring but then there was just no transparency to what was actually happening, right?

Marty: 00:31:43 Yeah. As you had the ability to dive into the code and sort of discern what was going on or explore a blockchain, basically the concept is that these projects … and now, people are getting very creative with how they justify their pre-mining. It’s like it’s a development fund so it’s [inaudible 00:32:02] development going forward.

Pomp: 00:32:03 Yes.

Marty: 00:32:03 Which some people argue is very-

Pomp: 00:32:06 So let’s talk about a couple of them.

Marty: 00:32:08 [crosstalk 00:32:08].

Pomp: 00:32:08 Right, the kind of larger chains that have these pre-mines that still hold double-digit or mid to high double-digit percentage in any central entity ripple, Ripple, Stellar, NEO, et cetera. Good the ecosystem, bad for the ecosystem, where do you fall?

Marty: 00:32:31 I mean, I just don’t care about like Ripple, in particular.

Pomp: 00:32:35 Technically it is XRP, which I will correct us.

Marty: 00:32:38 Exactly.

Pomp: 00:32:39 Yeah.

Marty: 00:32:39 But where are the first 33,000 blocks? That’s what I know. Once you can answer that XRP troll army, I’ll give Ripple a semblance of legitimacy. And I don’t think that’s going to happen. But yeah, again, I’m what you would consider a Bitcoin [inaudible 00:32:57]. I’m in this for sound money and I think a lot of the people in the space have sort of missed exactly like why we’re in this and I would argue don’t even understand why this experiment exists in the first place.

Marty: 00:33:09 So yeah, pre-mine all coins, doesn’t Stripe have $6 billion worth of Stellar limits.

Pomp: 00:33:15 I don’t know the details but there’s something there. And I don’t know if they bought them or were granted them.

Marty: 00:33:18 I think they were granted them as equity in something.

Pomp: 00:33:22 Got it.

Marty: 00:33:22 I don’t know. But again, it’s again, going back to sound money, that’s all I care about. I think the E-recreation of sound money in the digital age is the only thing worthwhile focusing on this space because it has … like again, money is one half of every transaction on the planet. And the opportunity to recreate or create a new form of money only comes around once every few millennia. We just so happened to be born during one of those inflection points. And that’s why I think a lot of people miss it because this is something that similar to the black swan, it never happens, typically.

Pomp: 00:33:59 Yep.

Marty: 00:34:01 It’s not like the stock market or BC form. It’s completely different.

Pomp: 00:34:06 Absolutely. All right. So let’s get into take the ethos of decentralization and kind of what’s going on from a technology standpoint and now there’s a whole host of people who are trying to take that and apply it to the financial system. So not just money itself but this is banks, this is kind all the rent-seeking middleman, all of that stuff. Where do you think we can actually go and what do you think has to happen for us to be able to decentralize a lot of Wall Street, financial organization et cetera.

Marty: 00:34:43 That adds like into another overarching question in this space as well like what needs to be decentralized and what is able to be centralized. And I think what we’re finding it the only thing that really needs to be decentralized in this space is money. So I do think there will be bank-like structures in the future and there will be benefits to holding your Bitcoin and essentially this is an aftermath to a lot of … Sorry, [inaudible 00:35:14], sorry I’m saying this.

Pomp: 00:35:17 Alert, alert, controversial opinion.

Marty: 00:35:18 [crosstalk 00:35:18]. And again, this comes from like a UX background. There will be centralized services that utilize Bitcoin. That’s okay. Not everything has to be decentralized. What I really am looking at is things like unchained capital in the [block-fives 00:35:31] of the world that are allowing people to leverage their Bitcoin, and to leaver up and reinvest and really use their Bitcoins as a financial good, as a piece of collateral. That has a shit ton of utility in my mind. That is actually useful and actually worth paying attention to.

Pomp: 00:35:49 And for everyone who’s listening, what those companies are basically doing is it’s an asset-backed loan where Bitcoin is the asset, and they lend out fiat currency in exchange for that collateral.

Marty: 00:36:00 Exactly.

Pomp: 00:36:00 Right, yeah.

Marty: 00:36:01 And then so going back to banking, banking utilities on top of Bitcoin, we’re going to be able to derive, we believe we are at least to derive things like the reference rates using the Lightning Network. Like Nik Bhatia add time value of BTC on Twitter is working on right now trying to figure out a way to sort of derive an interest rate using like network transactions and it’s a completely emergent process where you’re basically observing the economic activity between channels, seeing how long Bitcoin was held in a channel trying to derive an interest rate off the fees you made because you’ve facilitated payments on the Lightning Network transaction and it’s completely emergent process where you’re basically observing the economic activity between channels seeing how long Bitcoin was held in a channel trying to derive and interest rate off the fees you made because you facilitated payments on the Lightning Network.

Marty: 00:36:46 So things that we’re used to in the traditional banking sector, I think they will emerge on top of Bitcoin but there will be in completely different ways that we’re used to. So right now the Feds sets the Fed foundry, the economic activity hypothetically may be able to set the rate of Lightning Network on top of that, by extension on top of Bitcoin in the future. So I think that’s the type of stuff that fascinates me.

Pomp: 00:37:11 Absolutely. All right. So you and I can go deep, deep in the weeds and crypto decentralization, Bitcoin, sound money, et cetera. On the flip side, you’ve got kind of the mainstream media. And they’re outside looking in and they realize there’s a bunch of activity and there’s probably some confusion with motion in progress. They really have a hard job because they’ve got to basically weed through everyone and their mom saying I’m building the next Bitcoin, I’m doing this, I’m doing that. Big numbers are getting thrown around. They don’t know who’s real, who’s not.

Pomp: 00:37:47 You’ve got a newsletter, right? So you come at it from a convert standpoint at time. What do you think they’re doing well and what do you think that they can improve on when it comes to that mainstream media?

Marty: 00:37:58 That’s a very pertinent topic. I just had Joe [Weismantel 00:38:02] on the podcast. Actually, I just posted it today. And obviously, he works at Bloomberg and is part of the mainstream media. In my opinion, I think he’s the top class of journalists covering this space in particular. What I think he does well is he was notoriously skeptical in 2013 so five years ago and has since become less skeptical. He doesn’t think Bitcoin is [inaudible 00:38:26] conclusion but he understands why his notions were wrong five years ago. He since changed course. I mean, all right, I’ll give this some tick.

Marty: 00:38:34 But I think what’s most important like I said earlier, I was a lurker for five years. This is so much to understand and there’s so many moving parts and so many people to remember, and so many … it’s a global phenomenon so you’re talking about seven billion people, seven-plus billion people who are potentially involved. So I think with the mainstream media in particular it’s tough. Like they get thrown on the Bitcoin/cryptocurrency beat like that’s what people have to realize, like a lot of these reporters are given assignments.

Pomp: 00:39:02 Yep.

Marty: 00:39:02 And I would hope that they’re doing their best but it has been piss-poor and I think that’s just a sort of a … That is because they haven’t been in the space and inundated in it.

Pomp: 00:39:21 Yeah. They don’t have the basic knowledge that people in the space have. Right.

Marty: 00:39:22 Yeah. And it’s tough. So that’s like when you’re … Again, we’re moving into the information age, the importance of critical thinking is going to become more the gravity of how important it is to critically think moving into the future is just going to get stronger and stronger. So you really as an individual have to do your research and find out who is actually feeding you good information. I think bad information in the space and sort of de-alienate between what is good news and what is hash “fake news.” And that’s for each individual, that’s like something you have to do yourself which isn’t always easy. And that’s something I did with Twitter using the list like a crypto-list I’ve been curating for like four or five years now. And it takes time as well so you have to go through these cycles and see who was right at one point and who lead you the wrong way another. And you sort of have to … That takes time to figure out exactly as well.

Pomp: 00:40:22 Absolutely. So we got to talk about it because I think you and I’ve both seen the preview at I think [inaudible 00:40:28] this week but neither one of us watched. So CNBC did this kind of dedicated segment to Bitcoin crypto, et cetera, and they had to characters is probably the best way to describe it, features on the segment. So the first was Jordan Belfort of the wolf of Wall Street. I guess infamy rather than fame. And then had a gentleman who as I said on Twitter, I probably want to be like his best friend. But he lives in a tree house and he walks around and wears these tiger paws on his hands. And he was the other featured person in the preview. Like what is going on?

Marty: 00:41:10 I think this is … I mean, I want to bash CNBC. [inaudible 00:41:15] bash CNBC. I mean, CNBC’s been terrible with crypto coverage for the last four years.

Pomp: 00:41:20 But here’s my question to you. Is it because they are looking at this from a journalism or are looking at it as an entertainment play.

Marty: 00:41:27 I think CNBC has gone full entertainment. Jim Cramer’s fast money was the beginning [crosstalk 00:41:33]. I mean, crypto drives clicks.

Pomp: 00:41:34 Yeah. Shout out to Jim Cramer, by the way, legend.

Marty: 00:41:38 [crosstalk 00:41:38]. Go for it. But I would, again, I won’t to consider it news, journalism, or anything. It’s something that’s out there to drive clicks and their information in the past has been pretty piss-poor. I mean, and they were letting analyst pump shit coins in 2014 and then again in 2017. They made everybody buy the Ripple top, rest in peace, he did.

Pomp: 00:42:03 I took that video. The video where they pulled the order book on live television. That’s my single greatest contribution is I documented.

Marty: 00:42:14 That’s the other thing. People out there realize there’s a long history of the people in this space and the coverage of the space. And if you understand that, you have a clearer sense of what’s going on. So people forget, again, CNBC was pumping [Novalis 00:42:30] coin in 2014. What’s going on with that? Dear … They’re more entertainment based.

Marty: 00:42:37 So again, going back to like first principles, as an individual, or not to critically think, decide for yourself who you trust and who’s giving you good information, who’s trying to drive clicks.

Pomp: 00:42:48 Who do you think is on the high-end of a quality journalistic spectrum for crypto? So you got Joe at Bloomberg, obviously. Who else do you put up there?

Marty: 00:43:00 I mean, shout out Kyle Torpey and [van Wirdum 00:43:05]. Kyle Torpey raised … Torpey, Torpey, I’m sorry if I’m butchering your name, Kyle. He writes for Forbes or Bitcoin Magazine every once in a while. And then van Wirdum is a Bitcoin Magazine. I think Aaron’s work, in particular, is leaps and bound above where anybody in the mainstream or Bitcoin in particular is.

Marty: 00:43:25 And then, yeah, I mean, [Larshen 00:43:29]. She does a good job of getting everybody … getting in front of everybody in the space to sort of see their case. But yeah, again, I like the [Indi 00:43:40] guys. I like [inaudible 00:43:43].

Pomp: 00:43:43 I’m with you.

Marty: 00:43:44 I think they know and it’s because they understand the space and they know what they’re talking about.

Pomp: 00:43:49 Absolutely. All right. So you’ve got a newsletter and a podcast which I’m fascinated by and we’ll get into why. But podcast is pretty self-explanatory, right? Tales of the Crypt.

Marty: 00:44:00 Tales from the Crypt, very similar to your podcast, trying to get people in the space. I’m very Bitcoin-focused, try to get developers, investors, and designers, and people that are interested in the space to see how they got into it and re-drink on the podcast. So it’s a little bit longer form.

Pomp: 00:44:20 Yeah. I came on at 8:00 a.m. one morning. We didn’t get in the-

Marty: 00:44:26 [crosstalk 00:44:26].

Pomp: 00:44:25 There was no drinks.

Marty: 00:44:28 Perfect. [inaudible 00:44:28] do Irish coffee. But yeah, we drink and actually what I find is then the booze helps open up these smart people who might otherwise not be willing to go in certain areas than if they were sober. Not everybody’s forced to drink. But it helps. So yeah, just long-form conversations, sort of very, very big range of the type of people I talk to and that’s been fun.

Pomp: 00:44:55 Yeah. Okay, so then you got this newsletter. And I’m fascinated by the newsletter for two things. One is you’re super deep Bitcoin, Bitcoin network mining, kind of all that stuff. It’s written in a fairly easy to understand way where you’ve got to have some sort of knowledge. But for the most part, anybody can pick it up and read it day one. Walk us through the process of how you started it and then like do you write it at night, in the morning? Is it easy, is it hard to cover the topics? Just kind of spill the beans on all of it.

Marty: 00:45:24 Yeah. So Marty Bent … The lore of Marty Bent. So Marty Bent is my newsletter. I write it every weekday. Just published issue number 306 today. So that’s started, first issue was June 8th, 2017, so a little over a year ago. And that basis started, my parents came to town. Bitcoin was approaching like $2, 500 I believe. I forget exactly where it was.

Pomp: 00:45:50 Feels like a decade ago.

Marty: 00:45:50 Right. And that was around the time when all the [Aldon Normy 00:45:57] started reaching out, tweeting, texting, [inaudible 00:46:00], emailing me like what the hell is going on with Bitcoin? Kind of overwhelming and at a point, I was telling my parents of this last June. My dad was like, “You should start a newsletter for your family and friends who want to learn more and teach a little bit.

Marty: 00:46:10 So that’s how Marty Bent started in particularly. I think the first I sent it out was to 10 people within my close family, friends. Then I decided to post it on Twitter, took a life of its own, And basically what I tried to do with Marty Bent is really get people inundated with the ideas behind Bitcoin and sort of what’s going on.

Marty: 00:46:31 So the way I write it every morning right when I wake up. It is at this point sort of like a mental exercise for me to get my thoughts down, start my day on a good foot. And the way I basically decide what I’m going to write about is probably the day before just on my TweetDeck feed. I feel like I’m plugged into the Matrix at any point in time I’m looking at my TweetDeck. So I’ll see somebody tweet something interesting or I’ll read an interesting article that somebody linked to. And I have sort of an idea in my mind like, all right, I’ll probably write about this tomorrow.

Marty: 00:47:05 So I go to bed like, “All right. I’m going to wake up and write about this.” So I have a little bit of an idea what I’m going to write about. And yeah, people have been really receptive. I think people like the randomness. It’s not very cut and dry. It’s not very formulaic at all. It’s sort of random and based off of the ideas that I think people should be paying attention to in any certain day.

Pomp: 00:47:28 What do you think the type of subscribers, right, are we talking retail investors who want to speculate on tokens? Is this more kind of hardcore decentralized crypto anarchist world? Have you snug a couple of CIOs and endowments in there?

Marty: 00:47:44 Yeah, the range … I mean, I have access to list and [inaudible 00:47:47].

Pomp: 00:47:46 Yeah.

Marty: 00:47:49 Yeah, the range is-

Pomp: 00:47:50 Pretty good.

Marty: 00:47:51 … pretty good. Yeah. So fund managers, people writing at other publishers in this space. Retail investors, obviously. And yeah, a lot of traditional investors. I got people from a few …

Marty: 00:48:00 Obviously, and yeah, a lot of traditional investors. I got people from a few banks reading. So I think it’s a wide range and I think that’s because I try to bring the bar stool voice to it. Again, that’s the niche that I have focused in on after starting the newsletter because I noticed that there’s this huge gap between the people that wanted to learn more and the technical barriers, the technical knowledge barriers that exist in bitcoin again like we’ve been talking about this whole episode. It’s so daunting for most to jump in with no knowledge of what’s been going on in swim so I just try to bring a lighthearted spin to it and inundate everybody slowly but surely, one issue at a time.

Pomp: 00:48:45 And then at the bottom you’ve got the thought of the day which is probably the weirdest yet funniest thing I have found in the entire crypto space, is Marty’s bent final thought of the day. Today I think yours was “there’s nothing better than a morning workout, when you’re sitting in the shower Indian style afterwards and questioning your life or something.” Right? Where did that come from? How do you think of them? What’s going on there?

Marty: 00:49:16 It was sort of, again so it started out with family and friends. In the beginning I was just fucking around with my family and friends, just throw a joke in at the end. Sort of an inside joke, the first few were. Then as it expanded beyond my family and friends people started DMing me like “I love your final thoughts.” I was like “alright, I’m not going to not give the people what they want.” But yeah it’s completely random and I think it’s just a good … I think it’s just a good way to end the letter to get people like, “hey this stuff is really seriously, we’ve dealt with some pretty heavy topics.” Just to remind everybody, “hey I’m a person just like you.” And also, “I hope you realize you’re reading the writings of a dunce.”

Pomp: 00:49:58 I think you actually called yourself a dunce today, which I respect. That is too funny. What’s the most valuable company in crypto today in your opinion?

Marty: 00:50:15 … I think … I mean by empirical stats it’s probably BitBay but I think most undervalued and potentially less valuable company crypto longterm, probably Square. What they’re doing in cash. I use the cash app to buy bitcoin now and I just think it’s impeccable UX-

Pomp: 00:50:36 They’re sneaky, man. They’re sneaking up on people.

Marty: 00:50:38 Yeah. I think Jack and the team behind specifically what they’re doing with bitcoin and cryptocurrency is top notch. They come from, they really understand what bitcoin is trying to achieve and have a very good ethical mindset to what’s going on and they execute extremely well. Square is probably the company I’m most bullish on just because again I think their UX is impeccable, team is top notch and the overarching exposure they have just via the POS systems in general right now can form fit bitcoin on top of all that, it could be huge.

Pomp: 00:51:17 Absolutely. Okay and then what’s the one thing you believe in crypto that you think a high majority of people you know would disagree with you on? … If you say something lame I’m calling you out.

Marty: 00:51:32 I think Satoshi could move his coins and spend them [inaudible 00:51:34].

Pomp: 00:51:35 Really?

Marty: 00:51:36 Yeah.

Pomp: 00:51:37 Why?

Marty: 00:51:37 Long time down the road. It would have to be, I don’t know. I just think … I don’t know. Do we ever want to know who Satoshi is?

Pomp: 00:51:48 Wait, hold on back up. Who do you think it is first?

Marty: 00:51:49 I don’t know I have no idea.

Pomp: 00:51:51 No idea, no guesses?

Marty: 00:51:52 No guesses.

Pomp: 00:51:53 Alright, no conspiracy theories?

Marty: 00:51:56 This is probably, I think is Satoshi were to- I’m not saying this is going to happen, I’m saying if Satoshi were to come back under certain circumstances I think it would be okay. I don’t think he ever will. He, she, it, they ever will. I don’t think it would be the end of bitcoin. There’s a lot of people who say that.

Pomp: 00:52:11 Do you think it would be bad though?

Marty: 00:52:15 I think temporarily, yeah it would definitely shock the market. … We’ll see. It could be the dumbest thing I’ve said in a long time.

Pomp: 00:52:25 I mean I think the counter belief is the fact that nobody knows who it is and it’s this more mythical entity has a lot of value.

Marty: 00:52:35 So this hypothetical Satoshi coming back includes anarcho-capitalist cyberpunk future where he is still anonymous and able to contract out jobs anonymously over the web and just pay people with bitcoin to do certain tasks. Maybe it’s not [inaudible 00:52:54] exactly, maybe he wanted something built for a certain community in a certain part of the world.

Pomp: 00:52:59 So you’re basically saying, come back and not reveal identity.

Marty: 00:53:02 Yes.

Pomp: 00:53:03 Oh I’ve never heard that one before. That’s pretty good.

Marty: 00:53:05 It could be completely [crosstalk 00:53:09]

Pomp: 00:53:09 So go back to you said move 800,000 bitcoins I think it is? Something like that, right?

Marty: 00:53:15 I think yeah it would range from 800 K to 1.5.

Pomp: 00:53:18 Okay. To purchase something, to just move it to show that somebody’s got control of it. What’s the … Where’s that come from?

Marty: 00:53:28 Well, this gets into another theory. We’re getting down the rabbit hole here. So some people think that Satoshi’s stash is a quantum computer alarm system because the way that his coins are secured and the type of contract, there’s two types of ways to do it, I believe. There’s pay to pub key and there’s pay to pub key hash. And the pay to pub key hash is what most people use today. They’re not using … It’s like the most secure way, not the most secure but it’s more secure than pay to pub key because it ads a hash onto your public key I believe. Which makes it harder to figure out your private key. Satoshis are pay to pub key, no hash. And I could be butchering this, I could be-

Pomp: 00:54:08 Yeah, yeah.

Marty: 00:54:11 Maybe pay to pub stick or something. I forget exactly. But the way Satoshis coins are secured in his UTXs are secured in the type of [inaudible 00:54:21] structure he has it is susceptible, more susceptible to quantum computing than your typical address so a lot of people think that was done on purpose by somebody from the future to [crosstalk 00:54:32] Satoshis coins have removed it means quantum computing is here, that would be alarming.

Pomp: 00:54:42 Okay. … I actually haven’t heard that one, that one’s …

Marty: 00:54:44 They’re all theories and maybe I don’t know-

Pomp: 00:54:48 So I gotta ask then, government’s involved or not involved?

Marty: 00:54:55 Could be. Could the fifth pillar. Bitcoin’s sign got above that on my podcast. This idea of the fifth pillar of people working within the government that sort of have the altruistic views of the people and anti-government slant. Maybe somebody from the NSA saw this fifth pillar and released it to the world altruistically. But it could also in the far explained by the NCAA- NSA, excuse me.

Pomp: 00:55:22 NCAA is also-

Pomp: 00:55:26 I don’t know if the NSA or the NCAA has taken more money from people.

Marty: 00:55:30 If you believe the bitcoin cash Build-A-Bear conspiracy theorists, it’s a big NSA ploy to enslave us all to the bitcoin network in the longterm. I just think it’s interesting as a money experiment and just the fact that anybody can download software and participate in this network is incredible.

Pomp: 00:55:49 Absolutely. Alright, last question for you and then I’ll let you ask me one question. Probability that bitcoin can actually become the global reserve currency in the world? We’re doing this end of August 2018.

Marty: 00:56:04 End of August 2018, so Macarella came on my podcast probably November of last year and he gave it a five percent chance. But with the way the hash rate’s growing and the way mining is decentralized, I’ll bump that up to a 10% chance.

Pomp: 00:56:19 Oh first person to break double digits.

Marty: 00:56:22 Yeah. 10%.

Pomp: 00:56:25 Five to 10% is, 10 is definitely the highest that we’ve had. Five is probably average, right? That’s anecdotally. But that’s pretty high percentage, given-

Marty: 00:56:37 Gets higher everyday. Longer it survives the more probable it will survive into the future.

Pomp: 00:56:42 Mm-hmm (affirmative).

Marty: 00:56:42 But again, anything can happen. Maybe governments could cripple it overnight. That’s why …

Pomp: 00:56:47 But how do you think that happens, right? I recently wrote this thing and I was like … So I compared- you’ll love this. I compared bitcoin to Four Loko, right? So I was in college and …

Marty: 00:56:59 [inaudible 00:56:59] Four Loko.

Pomp: 00:57:00 Yeah, Four Loko for those who don’t know was an alcoholic energy drink and-

Marty: 00:57:05 IT’s pretty awesome.

Pomp: 00:57:07 There was a bunch of speculation, rumors floating around that the government was going to step in and ban, not the ingredients but basically the recipe for how they created this because it was putting a lot of people into the hospital, right? Because basically you didn’t realize how drunk you were. So I think there was in one or two places at a state level or like a local level it got banned and all of a sudden sales exploded because everyone ran to the store and tried to buy all the existing inventory off the store shelves. Ultimately, the government did step in and say “hey you can’t do this. You’ve got to redo the recipe.”

Pomp: 00:57:42 Well one, sales had exploded so the company actually made a ton of money. So everybody talked to one of the founders and he was like “look, it’s one of the best things that had happened from a sales perspective.” And then two, was everyone then was hoarding all of the cans.

Marty: 00:57:57 I was once a Four Loko hoarder.

Pomp: 00:58:00 And then basically they dumped them on the market once it was banned by the government. And they made a bunch of money, had these parties, whatever. So bitcoin, if all of a sudden the government stepped in and said “hey. Illegal.” What happens? Do we see a spike in adoption? Do we see it just goes away, nobody really cares? What do you think happens there?

Marty: 00:58:21 Right? I have no idea how exactly that would play out but again, going back to the game theory that Satoshi created within bitcoin I think it’s just so fucking perfect because if, let’s say the US were to ban bitcoin, that gives a country that is outside the US an opportunity to fill that gap and really take over. I think in the long run it’s a prisoner’s dilemma. As soon as one country dedicated three sources and endorses bitcoin in particular, I think that’s when you’re going to see a mad rush. I think at that point it will be impossible for governments to regulate because it would be like, “if we don’t keep up we are going to fall behind.” That’s one thing.

Marty: 00:59:01 And yeah the other thing, the Streisand effect comes into play. If you look at Venezuelan buying volume on local bitcoins it’s been pretty consistent for the last year almost. They said a dollar bought per day to earn bitcoin. A US dollar bought per day. Can’t even value it below ours anymore. But that’s somewhere where bitcoin mining was banned. Apparently being forced to use the petro but the evidence is still showing that people are still buying it no matter what. And that’s just one government that’s tried to ban it.

Pomp: 00:59:34 Well what’s interesting about that example is some of the surrounding countries, they’re also seeing spikes in purchases. I saw somebody was speculating on Twitter saying “hey these countries have not yet stepped in and banned this or tried to really regulate it but what these individuals are afraid of is that they will and therefore they’re basically taking an example of their peer or their neighbor country and they’re getting ahead of the regulation, ahead of the government intervention and they’re just buying up as much of these digital assets as they can. Mainly bitcoin. With the protection built in that if their government does step in they’ve already acquired or accumulated bitcoin.

Marty: 01:00:10 That’s the ideal time to accumulate bitcoin is before any of that shit goes down. Then even beyond that you get into the sticky situation like is code speech? And at the end of the day bitcoin is just code. You just execute code on a computer. It’s software. And I think what we’re seeing right now with defense distributed and what’s going on with the 3D printed gun is a good precursor to the type of fight we could see in a future with bitcoin. So that’s something I’m following very closely now because the government, local governments and local DAs and state-

Pomp: 01:00:41 We gotta dive in. We were going to end it but let’s spend two minutes on it real quick. So guy basically comes up with a blueprint for 3D printed guns, creates a YouTube video, goes viral, literally printed every part, the entire gun, 3D printed, and then open sources that blueprint right? I believe what is it, federal government stepped in? Or somebody stepped in and said, “look-”

Marty: 01:01:08 Federal government in 2015 I believe stepped in and said “you cannot offer this on your website anymore” and that’s when he took the case to court. And he recently won in the last three months.

Pomp: 01:01:19 So now what he was doing is considered free speech right?

Marty: 01:01:24 Yeah so that’s the tricky thing because I’m not a gun guy at all. I don’t …

Pomp: 01:01:27 Yeah.

Marty: 01:01:29 I wasn’t allowed to watch Power Rangers because it had guns in it. I came from a no gun background. I grew up in northeast Philly, I never felt the need for a gun. I don’t go hunting. But I do believe at the end of the day this is really interesting topic because at the end of the day you go to a library and they’ll have books on literally, how it’s made. Like the show How It’s Made?

Pomp: 01:01:50 Yeah.

Marty: 01:01:50 It’s basically the only thing he’s doing but with a gun. How is a gun made? I think that should be information that’s open to the world. People should know. He I believe Cody Wilson, the man we’re talking about, the founder of Defense Distributed, posted a tweet the other day that’s basically “is Michelangelo a terrible terrorist?” And basically showed a blueprint of him, of how to make an arrow gun.

Pomp: 01:02:20 Interesting.

Marty: 01:02:20 So this stuff’s been around for a while. And just because you can print it out now, via code it’s still a how to guide.

Pomp: 01:02:31 Well what’s the difference between a dad writing it down for his son.

Marty: 01:02:33 Exactly.

Pomp: 01:02:33 Or somebody for their mentee, whatever. Versus this guy doing it to put it on the internet.

Marty: 01:02:37 Exactly. And that’s the other interesting argument. There’s a huge cottage industry of people who make custom guns. And have access to these books like, alright here’s how you make a gun. That’s been completely fine up until this point. I just think again going back to mainstream media they like to scare a lot of people, and this is a good boogieman to put before people. And I think like I said I think it’s going to be the way government and the media tax coding and I think what they’re doing at Defense Distributed is going to be a good precursor to what we can expect with bitcoin in the long run.

Pomp: 01:03:12 We live in a wild wild world.

Marty: 01:03:14 Yeah.

Pomp: 01:03:15 Alright you get one question, what did you want to ask me?

Marty: 01:03:17 You’re putting me on the spot here. So you just changed your prediction.

Pomp: 01:03:24 Yeah.

Marty: 01:03:25 What was your original prediction? 50?

Pomp: 01:03:27 50,000 end of year.

Marty: 01:03:32 End of year. … I just want to commend you and say hey it’s okay to change your-

Pomp: 01:03:36 Listen-

Marty: 01:03:37 Your thoughts. But how has it been since you’ve changed? [crosstalk 01:03:40] How has it been since you changed it?

Pomp: 01:03:43 Hold on. Let’s go back. So 50 is, there’s a little bit of a folklore here if you will. I got put on the spot on Bloomberg I think it was? I think it was Bloomberg in December of last year. And they were like, “how high can it go?” And I said to them, I was talking about look, there’s these corrections that happen every so often. Five or whatever that happened now I think in ’17. So I said look, the next big psychological number is 50. So I could see it going there. So it started out as could see it going there, said it on public television. Then it was like alright, psychology, psychology. So I just kept on it, kept on it, kept on it. And the mistake I made was I continued to stand by that number, right? And present the psychology argument of just, people are going to continue to invest in this asset to the next rounded number, et cetera. I had a conversation with Ethan Ackerman.

Marty: 01:04:42 Shout out crypto Ethan.

Pomp: 01:04:42 Yeah. So he came here and to his credit he pushed me on it. He was like, “I think we’re going down, I think we’re going sideways for a while.” And he wasn’t trying to convince me of anything, he just, that’s what he believed and then he kind of walked me through it. So I went back, I started looking at a bunch of the data. And the funny thing about data is if I asked you right now how long was the bear market between 2013 and 2014 and into ‘15? Right? If you asked 10 different people they’ll all come up with different numbers around 400 days. Right?

Marty: 01:05:15 [crosstalk 01:05:15] 18 months.

Pomp: 01:05:15 Some people hit you with 403, some people hit you with 420, whatever. So one of the problems in crpyto is just the data sucks right? Because we just don’t have standardized data and these data stores that we all kind of follow et cetera. But if you go back and look at the general trend, it suggests and I think a lot of people would agree, that we’ve got a ways to go right? In terms of falling. Could be as much as 50%. And so I think when that happens and you’ve got this kind of bottoming out you go kind of sideways for a while and there’s that parabolic run again.

Pomp: 01:05:47 From a psychology standpoint, one of the things I keep going back to is you can’t have another bull run until people forget about the last crash. I forget who says it, but the time to buy is when there’s blood in the streets?

Marty: 01:06:03 Yeah.

Pomp: 01:06:04 There’s not blood in the streets yet. There’s people who they bought at the top, they’ve ridden it down, they think it’s coming back. Until those people believe it’s over I think we’ve still got pain to suffer under.

Marty: 01:06:15 Yeah it’s gotta be mass humiliation to a point. That’s one thing, I stopped trying to, like I said, predict, make predictions. I try not to do that. What I do do is I’ve been keeping a journal for the last five years. And I like to go back through the journals, it’s multiple books. I like to go back and sort of look at what I was thinking in the depths of the bear market in 2013 or 2014, 2015. And that’s always going to be some solace because it is interesting seeing the sentiment that there was a lot of worry. Because that was my first bear market that i experienced. And I was keeping track of it. And it’s funny going back and using that almost as reassurance that this bear market, things are going to get better.

Marty: 01:06:55 But it’s funny how just I had the same emotional reactions during the price changes in this bear market and the bull market that proceeded it. And I did back then. So it’s good to, that’s one thing I would recommend. Keep a journal. Write about how you react to price changes and the ecosystem overall and get a good amount of reps in there and look back at what you said a couple years ago. It’s a good source of solace for me.

Pomp: 01:07:26 Absolutely.

Marty: 01:07:27 And then another thing, like when will it bottom? Who knows? It’s different like this time around the block reward, 2014, 2015 was that 25 bitcoin per block for most of that. So there’s less bitcoin to liquid in the market today but again the price is higher so it’s probably the same amount of demand getting eaten opportunity each day. Then obviously more people are educated. There’s more saturation of the user base.

Pomp: 01:07:56 There’s other liquidity options too, right? There’s obviously asset back lending now.

Marty: 01:08:00 Yeah. Coin Shares, the people from Coin Shares just wrote a great piece like, “this bitcoin bull markets usually get proceeded with new on and off ramps to the masses.” And again I’m back to Square. Just passed Venmo in downloads and a lot of people have had this app for a while and love it and bitcoin is just becoming more and more integrated with their product. Maybe that’s next. A lot of people are looking at backed and the potential ETF but again they also said in the Coin Shares paper that it’s probably, institutions are going to be waiting on the sidelines and watch the retailer sort of push this market up going forward. We’ll see though. Who knows?

Pomp: 01:08:38 I’m a big fan of your approach in not making price predictions. Now when I make the price predictions I say “listen, I was already wrong. So you’ve got to take all this with a grain of salt.” But making the prediction and writing it in a journal, to me, is probably the smarter thing to do. Making it publicly forces you to think even more critically because you know that you will face the public humiliation of being wrong. So for the last 48 hours I’ve had all these people yelling and screaming at me on the internet. It’s over now, we’re back to regular scheduled programming and we’re off to the races.

Pomp: 01:09:12 But dude thank you so much for coming. This has been a ton of fun and we’re big fans. So I really appreciate it.

Marty: 01:09:19 Thanks for having me. It was fun.

Pomp: 01:09:20 Yeah of course.

Marty: 01:09:21 It’s interesting to be on the other side of the mic.

Pomp: 01:09:24 We gotta get you, we’ve got videos here too. So we’re going to have to get your face on YouTube and stuff.

Marty: 01:09:30 Unfortunate for all your listeners.

Pomp: 01:09:32 Alright thanks man.

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You can find the recording here: Off The Chain Podcast: Anthony Pompliano and Marty Bent

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