Epicenter - Learn about Crypto, Blockchain, Ethereum, Bitcoin and Distributed Technologies - Daniel Gallancy: SolidX – Bridging the Gap Between Bitcoin and Institutional Investors

Episode Date: December 1, 2014

SolidX Partners CEO Daniel Gallancy joined us for a discussion of Bitcoin, institutional investors and how his company is working on creating a bridge between the two. While there is no question that interest in cryptocurrencies has risen dramatically – also among the financial elite, there is still a big chasm separating the two worlds. With Daniel we explore how it could be bridged, when it will happen and what the consequences could be. Topics covered in this episode: How SolidX offers institutional investors exposure to bitcoin using Total Return Swaps The perception of Bitcoin on Wall Street The relationship between VC investments and direct bitcoin purchases If a derivatives market could undermine the security of Bitcoin Episode links: SolidX This episode is hosted by Brian Fabian Crain and Sébastien Couture. Show notes and listening options: epicenter.tv/055

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Hello, welcome to Epicenter Bitcoin, the show which talks about the technologies, projects, and startups driving decentralization and the global cryptocurrency revolution and sometimes even institutional financial markets. My name is Sibbysinkw with you. And I'm Brian Fabian Crane. So we're here today at Daniel Galancy. He's the CEO of Solid X Partners. So Solid X Partners is a sort of Wall Street firm that is trying to make Bitcoin accessible

to institutional investors. So I actually thought when we started this podcast, and I guess I thought also when I got into Bitcoin that there was going to be a lot of involvement from the sort of financial institution side, that it was obviously going to happen and I feel like it hasn't happened so far, at least my impression.

So I'm excited that we have a chance to speak with someone who really knows what's going on in that area and dive into that. So thanks for coming on, Daniel. That's a flattering description, and I appreciate it. But the financial markets are very large and I'm not sure anyone would be able to truly say they understand exactly what's going on. But thank you anyway, yes.

Yeah. Right. There's a lot going on all at once. Yeah. So can you just give a brief introduction to what Solid X partners is and what you guys are trying to accomplish? Of course. So Solid X partners is what's known as a swap partner. market participant and ultimately will be in the future a swap dealer. These are terms that

are very specific to the United States, although swaps are used internationally. Now, the word swap can mean many things. And if you look back at the financial crisis, people demonized credit default swaps insofar as they were part of, you know, part of, you know, part of the financial part of the meltdown, so to speak, that we all endured. But there are many different types of swaps. Some of them involve risk, you know, between two parties. Some of them are really meant for hedging, right? There's always risk, right?

But they all have different uses. In this particular context, we're offering one kind of swap called a total return swap. And that's essentially an access vehicle. What it does is it enables a counterparty, who you would think of as an investor, to get the economic exposure to an amount of Bitcoin, you know, pick the amount, without actually having to do any of the work involved in sourcing it, storing it, or any of the other stuff that they would have to do to make it, I'm using air quotes here, you can't see me compatible with the rest of their portfolio. and the rest of the way they trade assets. So that's a long story. Long story short, we're a compatibility layer between Bitcoin and Wall Street. Think of us as middleware, financial middleware.

And for those who are financially illiterate such as myself, how does a total return swap differentiate itself from an ETF, for example? How are they different? So an ETF is publicly traded, and anyone can access an ETF as long as they have a brokerage account. And publicly traded equities and ETFs can be accessed by individual retail investors, and they can also be accessed by institutional investors. And in that sense, if you think of the gold ETF, GLD, indeed, you have both institutions and also individuals participating. So ETFs are great. And I think ultimately there's a good chance there will be a terrific Bitcoin ETF. It's not here yet, and it's difficult to know when it will arrive.

And in the meantime, there's a barrier for institutions to get involved. Okay. So they are very similar, just that the return swap is built for institutional investors. Yes. And the swap market in the United States is specifically geared for institutional investors only. So you have to be what's known as an eligible contract participant in an ECP under CFTC guidelines. CFTC in the United States is the commodities futures trading commission. Sorry.

And the CFTC regulates, the commodities futures trading commission regulates most swaps and derivatives in the United States. there are other kinds of swaps and derivatives that are regulated by the SECC, but the CFTC in this context is the regulator. And so how did you come up with this idea? I can't. How do I come up with this idea? That's a good question. Well, let me rewind for one second and explain two more things that are important. Swaps, these particular types of swaps are not exchange traded, so you can't buy or sell them on an exchange in the way you can buy or sell stocks. And there are other kinds of swaps that are exchange traded, very specific kinds that trade on what's known as a Ceph. These swaps, these particular total return swaps are what are known as over-the-counter.

So they're not going to trade on an exchange. They're not going to be visible to most investors. You have to know where to go to get them. Or we have to be able to find you. you know, and the you in that sentence is a hedge fund or an institutional investor. So that links to what you just asked, which is, you know, how did I come up with this idea? So my background before doing this is largely, you know, from the financial services world, I spent many years working at hedge funds as an analyst covering technology stocks and other types of equities.

And when we would get involved with equities overseas, stocks that would trade in Asia, for example, we would often use a total return swap. And the reason for that is there are controls, both regulatory and logistical, that make it more difficult for U.S. investors to participate in certain overseas markets. And as a consequence of that, the structure that's grown up around that is total return swaps. So if you think about it, the example is, you know, if I want to purchase a stock in XYZ country in Asia, right, but I can't for whatever reason purchase it directly, you know, I call up, you know, Morgan Stanley or Goldman Sachs or Merrill Lynch, you know, whoever it may be and say, okay, I want to be long $10 million of, you know, this particular stock that trades, you know, in XYZ country in Asia. And what they do is they say, okay, we're going to do your trade for you and they do the trade. And then what I see as an end investor, as a hedge fund, is the swap, right?

I get the full economic return in U.S. dollars on whatever movements happen in the underlying equity overseas, but I don't actually own the equity. So is there any restrictions or regulation as to what type of underlying assets you are able to use for a swap? What type of underlying assets you're able to use for swap? So I can't speak to what the regulation looks like in every country. Certainly in the United States, there are regulations as to what – it's an interesting question. As to what underlying assets can be used as a reference asset for a total return swap.

I don't know the specifics of that rule set. One of the interesting things, no, is that with the ETF, we've been sort of waiting for that to happen. And I guess one problem is that they were like, what is this thing? You know, you have to get approval there and it's a complicated process. And if a swap is sort of a way to like, you know, you can take equities in China or you can take Bitcoin and they don't really care, right? So then that provides, I guess, a nice way not having to do with that. So I'm curious, you know, is there? I wouldn't say they don't really care.

They certainly do care. The CFTC cares. I mean, they're in a very important regulator here. So I don't remember the exact criteria. One important criteria is that the asset is, the pricing for the asset is readily available. So if there's no reference price for the asset, that makes it very difficult to create a swap. So here there are, you know, there's certainly a reference price. There may be other regulations as to what, you know, what can and cannot be, you know, used as a reference asset for total return swap. I'm not sure what those are off the top of my head. But certainly the ability to come up with a price is very important.

And you could conceive of, you know, for example, other reference assets for which it would be far less clear what the price is. Right? I mean, you know, what's the price of my computer monitor, right? I could sell it on eBay, but it's not a very liquid market, and for this particular brand of monitor, right? You know, who knows? So with Bitcoin, although we do have multiple exchanges, trading in different geographies,

and sometimes there are arbitrage opportunities, or at a minimum price differentials, if not actual arbitrage opportunities, you can converge to a price. I mean, you can say that it's pretty close to whatever it is, right? But that's actually an interesting question. because I was going to ask you like that, right? Because you know, someone, let's say they want to have exposure to 10,000 Bitcoins.

And now, six months from now, they get, you know, the return on those Bitcoins. But so the question is, like, what do you use as the basis of the price index to determine that? Are you using, I mean, I presume you're not using like a CoinDisc average or Bitcoin average, but you would need something more robust and reliable and durable, no? There are multiple ways to do it. One could use a robust index, and there is one index in the United States that the CFTC has, I don't want to, I'm not sure I want to use the word approved. Maybe they have approved it. They certainly allow parties to use it as a reference price index.

the way Solid X's swaps are set up is such that we have a specific entry and exit price that are essentially agreed upon with the counterparty. So because these swaps are not meant for hedging, they're meant for exposure, the parameters are somewhat different. If you have a swap that's meant for hedging, you would almost certainly require a reference price from a third party. here you could have reference prices that are agreed upon by counterparty A and counterparty B, if that makes any sense. Okay.

So because I was going to ask, right? So like let's say I want to sell that now or after six months the swap ends and I want to get the return. Right. So then you have to presumably go out and you have to sell those Bitcoins. So I was wondering if you, because if the price. is based on an index, then it could happen that you have a risk there, especially if it's a large swap and someone has 10,000 Bitcoins, right? And you have to go out and sell 10,000 bitcoins. You may not get the same price that you would have on an index.

That's right. Does that risk exist? So that risk can exist in the world of swaps. We have found ways to mitigate that risk by the sub-agreements within our swap documentation. So we're not going to have that risk ourselves, largely because we come to an agreement beforehand with the counterparty as to the range of prices that will be the termination price. So we've dealt with that problem up front. Now, of course, that's not to say, you know, if we did a swap today, right, and then six months from now, I'm not expecting, you know, the counterparty to say today, here's the reference price in six months. that would be absurd. But the right way to put it is that there are parameters around the reference price in the future.

So if Bitcoin goes from here to 200, right, and obviously I'm trying to sell some, the counterparty has, and maybe they're short, so maybe it's a gain for them, right? You know, the counterparty certainly doesn't want me to, you know, purchase the underlying Bitcoin to cover the short at 210, right? But there are parameters around the price at which we execute that trade and end up covering our position and thus enabling their position to be covered as well. Okay, okay. So basically you just then liquidate that position and you have and then that they get what they get at least roughly. And you guys can sort of pass that risk on because... That's right. That's right.

Can you talk a little bit about how far, long have you already done swaps at this stage? Or are you still working on building the infrastructure? We are up and running and have been for a little while now. But at the same time, we're still building more. So we have an organization that is fully operational right now today. if you were a hedge fund or you were calling me today and say, hey, I want to do a swap, we would make that happen. But of course, that doesn't mean that our work is done. There's a lot more that we want to do to streamline the process, add partners, add what we would call a distribution channel.

There's a lot to be done before I'd say we are at the finish line. I don't think any business ever really gets to the finish line because once you've hit a certain point, you want to grow some more and you add more things. you know we're not we're not resting on our laurels by any means we're actually all working tremendously hard to to move this forward so before i would say like let's in a minute dive a little bit more into sort of you know what the state is of the perception of bitcoin on wall street and and what interests you're seeing there but before we do that we want to um to our ad because we have a new sponsor and um they are if you listen to into our last episode, you will know them because they're GEMS.

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cryptocurrency to the next level. And sorry, just to correct you, Brian, the pre-sell is December 1st to January 5th, not September 1st. Okay. So can you talk a little bit about the interest you are seeing in this? Is it hedge funds that are investing and entering these swaps with you? or is it, I remember somewhere, I think you mentioned also family offices. Is there you seeing interest or are there other parties that I didn't even think of

that is interested in entering positions at this stage? So the largest pool of interested parties are hedge funds. That's for sure. You know, there is certainly some interest from family offices as well. That's, you know, no doubt about that. and there are other pools of institutional capital that are somewhat more esoteric that are interested as well. But I would say that right now the largest pool is indeed hedge funds. And I think that that makes a lot of sense because they tend to be hedge funds, depending on the variety,

tend to be the most pioneering, I would say, of investors, you know, far more so than, say, mutual funds. Yeah, I mean, that's also one thing I sort of thought of like, you know, when I got in it, because the way I've often thought of Bitcoin is, and I've also talked with people like that about it, so let's say you think there's a small chance of this happening and this working, right? Let's say you put the chance at 5%, or maybe you say you don't think this is 1%. But if it does happen, right? So you say, like, what if Bitcoin does become really success? What if it does become a worldwide use currency in payment network and people treat it as an asset, what would that mean?

Well, I think it's totally feasible, you know, people with around numbers, $10,000 per Bitcoin and maybe $50,000, maybe even more, right? So if you think of it like that, it just sort of seems like it's such, first of all, an extremely high potential sort of game to play if you are after a high return, but also an insurance to take. Because if it does happen, it's not like the world all of a sudden has that much more wealth. I mean, there may be an extent to that that Bitcoin actually can increase maybe GDP, but to a large extent there would be a redistribution, right? So you could think of it as a hedge and as an insurance policy. Do you see that sort of perspective also held on Wall Street?

So it's interesting that you frame it that way. I wouldn't necessarily call it a redistribution of wealth. That implies that there's a zero-sum game here. If you think about it, think about the stock market, for example. When the market goes up, right, it's not as though you're redistributing value amongst a set pool of players. There's a set amount of value to be distributed. right what you're actually doing or what is actually occurring is actually the creation of new value or at least the perception of the creation of new value we can that getting into the nuances gets a little more

confusing but um as you know GDP grows overall and as asset prices increase on a real basis you know excluding inflation you are indeed creating value so to the extent that bitcoin increases in in in price and the monetary base, I prefer monetary base to market cap because it's not a stock, right? It's a money-like asset class. To the extent that the monetary base increases in size, there is, in fact, a creation of value, right? It's not a creation of value out of thin air, so to speak, in the way that one might think of, right? It's a creation of value as a consequence of market participants making the decision that XYZ asset, has more value than it had yesterday.

Does that make sense? I can frame it differently if that, that's sort of a... No, it makes sense. I mean, the way I think of it, I think of both potentially happening, right? You do have a creation of new wealth, right? You do have utility. You have maybe all of a sudden people are able to move their money more easily, internationally.

You can say, like, this is made, this is not a serious home thing, right? This is a positive thing. this is brought value. But at the same time, especially when you start to think of people treating Bitcoin as an asset, sort of as a bit like gold, then I would think when you start having, let's say you have a trillion dollars, or a value of all the bitcoins. It seems like there's just, you can think of it like inflation, no? I mean, that would mean more money is there, for example, in New York to buy expensive apartments.

So if you think of it that way, I do think that you can think of it at least potentially as a type of redistribution. So look back to the Stone Age, right? We were all, you know, running around and chasing animals with sticks and, you know, picking berries from bushes. and over time, you know, civilization became more and more sophisticated and advanced. We learned how to do more stuff. We had the actual creation of value, right? When I say the creation of value, I mean, you know, the ability for all of us to live better lives as a consequence of innovation. Right. In economics, that's called the total factor of productivity.

Right. And it represents the degree to which GDP grows as a consequence of innovation. And I think in a lot of circumstances today, there can be confusion between the creation of value and the redistribution of value. And I can understand why. It's a very confusing situation. And there are sometimes occasions where it's nebulous. in the context of asset prices going up on a real basis, excluding inflation. What I mean by that is the value of some particular asset traded for exchanged for other assets tomorrow gets you more of those other assets than it did today.

That's real growth in the value of the asset, right? To the extent that it gets you the same amount of assets as in the past, right? That's inflation, right? So. Yeah, let me give you an example. Maybe that sort of explains what I mean. Let's imagine we had in, we were in the Middle Ages and the only thing used as money was gold. And then someone comes up with a better thing, right?

It's like gold plus and it works a little bit better as money and people start using that for Let's it 90% of things It seems like I mean pretty obviously right the people holding gold They will not be happy about this right because now this is other thing which maybe has some more use and That will gain in value and the goal relatively the losing value and and maybe part of it you could say is like well this is more useful so the world's better off and and value has been created. But to a large extent, it just seems to be a transfer, a redistribution, right? And you

have the thing that was more useful now, and it was the only living money, and it's not the only thing money anymore. So, I personally think both are going on, but... It does. No, I understand what you're talking about. So, in the context of

a specific substitute for money-like asset class A for money-like asset class B, I guess you should say B for A, whenever, it's subsequent for the prior, right? And it's a true substitute. One, one, one, overtakes the other and the value attributed to the former declines on a real basis, right? So, what I mean by that is, you know, we were using, let's talk about, let's talk about silver, just as an example, right? People, let's say people are using silver, you know, in one particular

year and, you know, a hunk of silver buys you four horses, right? And then the next year, people start using gold, right? And the hunk of gold buys you five horses, but the equivalent hunk of silver, as you would have used last year, only buys you two horses, right? Then you've had a change in the real value of silver, right? But if you have a situation where the hunk of gold buys you five horses and the hunk of silver still buys you four horses, right? Then you've had creation of new value. I think you're referring to the destruction of value of a prior asset and the replacement of that value by a new asset. And that certainly does happen as well. What I think in the in the context, so that makes, so I think that's the difference between what we're referring to here. Yeah.

Well, the question is, you know, with the creation of cryptocurrencies and the proliferation of cryptocurrency and apps being created that are creating new value, like gems, for instance, or other altcoins being created that are creating value, what can we anticipate will happen? Is the silver going to buy you three horses or two horses after? So meaning, will fiat currencies lose their value? I guess is the question that we're trying to get to. I'm not an economist, I just play one on TV. So one can speculate about that and come to various different conclusions. And I think it will depend largely on the context. How will this turn out? There are important members of the Bitcoin community who have described Bitcoin as an experiment. I would prefer not to describe it that way.

but let's use that terminology for a moment. How will this experiment turn out? Will it turn out with a scenario like what you're referring to or a scenario more akin to what I've described? Or will it turn out some other way that we haven't thought of? It's very, very hard to predict. I'm hesitant to hazard a prediction. The one thing that I will say, since you asked the question,

one thing that I will say is when you have a technological advancement, you create something that didn't exist before insofar as new functionality, right? That is innovation, right? That is growth in total factor of productivity, right? And as a consequence, there needn't be destruction, right? Now, that doesn't mean that things won't get run over, right? I mean, when cars became the norm, right? People stopped buying horses for transport, right?

We've seen that happen all the time, and venture capitalists, of course, you know, take advantage of, I don't mean that in a bad way, they, you know, they take advantage of innovation insofar as the cost of doing a set of functions could be, you know, a million dollars, and then there's a new way of doing it and only costs $1,000, right? And then the old way of doing it, there are all these prior beneficiaries and they all get wiped out, and the new way of doing it, there's only a smaller group of beneficiaries and they make less money, right? But, right, they create more value or they create a lot of value for other people. So, sorry if that was confusing, but does that make sense?

And I think with cryptocurrency, with Bitcoin and other cryptocurrency, I think it's really that scenario. Creative destruction, it's often called. Yeah. No, I mean, I agree with you. I think that's, for the most part, what's going on today. And I think that's what's going to go on in the future. and I think Bitcoin is creating value

and it will create tremendous value potentially. But I do think, if you think of Bitcoin becoming like a store of value, so I guess you can sort of separate it, right? So maybe to some extent it's a utility, right? It's payments, sending money. That's all adding value, it's new value. But when you talk about it as a store of value,

then I think at least that potentially, is there of a redistribution. But I guess we will see. I think it will be one of the fascinating things of how this will play out. And it's a very long scenario we're talking about. Absolutely. I think it will be one of the most fascinating things about how this will play out.

And it will be interesting to see. And I am interested to see it myself. You know, it's hard, like I said, it's hard for me to make a specific prediction. but I can understand the logic behind both sides. Yeah. I've often thought of Bitcoin sort of as an ETF on the cryptocurrency ecosystem. So you think Bitcoin becoming successful, it sort of functions in a way that you own some

bitcoins and you profit from all the value that's added by BitPay, Coinbase, etc., etc. Do you agree with that analogy? I think that's a very good analogy and a fair assessment. I feel like I feel like I really... read either a blog post or something from Tony at BitPay about exactly that. And I think that that is a very reasonable analogy. So it's interesting. An ETF is a very specific thing, right?

The ETF is, you know, an exchange traded fund, which is, you know, there's an under underlying asset that is represented in the price of the ETF represents the price of the underlying traded asset. So here with Bitcoin, right, and that analogy, you know, the analogy would be that the ETF is indeed Bitcoin with a little B, right? And that the underlying asset is the value created by Coinbase and, you know, and BitPay and all the other players in the ecosystem. I think it's a fair analogy. I think it's a good way of thinking about it. One of the reasons I think it's a good way of thinking about it is that... Oh, nothing's perfect, right?

One of the reasons I think it's a good way of thinking about it is that as the ecosystem grows and as there are more participants and more users, more people involved, more companies doing interesting things, indeed, the underlying value, and I use the word value specifically, not price, right? The underlying value of a Bitcoin increases, right? Then the question of price versus value is another story, right? So that which has value can be mispriced, right? So you can have an asset that's priced at $100,

and the true value of that asset might be $1,000. The reason it's mispriced is because market participants don't realize what's going on. It could be any number of reasons. If you're able to identify that mispricing, it's to your advantage to buy that asset. I think with Bitcoin, one could make the argument that that's exactly what's going on. You're seeing a huge amount of growth in the ecosystem, a huge amount of growth in participants, a huge amount of growth in intellectual capital that's entering the ecosystem in terms of getting involved with new projects and building on pre-existing structures and adding new pieces of code.

There's a lot of stuff going on, right? So one could make the argument that the fundamentals of Bitcoin have improved tremendously from one year ago today, right, from late November of 2013. Yet the price is down. the price is down, right? So, you know, what's the logical conclusion, right? Or, you know, maybe, you know, it's also possible that it was mispriced back then, right? And yes, the fundamentals have improved, but it remains mispriced.

And in spite of the fundamentals today, it should be below where it is. Now, one of the problems with pricing Bitcoin coming up with the price, and they're very various methodologies for it is that looking at the fundamentals is not done in a way that that's the same sort of construct as we'd use for for some like stocks right for stocks there's a cash flow and you look at the cash flow and you say okay fundamentals or this and it's worth X right this is a little bit more like a commodity right where you for valuation purposes where you look at the supply curve which we all know with pretty good precision right based on the algorithm we know what's going to

Of course, there's some variability around the exact timing of the generation of a block, but we have a pretty good sense of the supply curve. What we don't know is the demand curve, and that makes things very, very difficult. Whereas with something like oil, we know sort of what the supply curve looks like, and we can hazard reasonable guesses as to what the demand curve looks like. We can disagree about that, but we're going to come to some reasonable range. Good luck doing it with Bitcoin. What are some ways that one may try to predict what the demand curve?

would be. What are some indicators that would allow you to at least try to to make some predictions? Or is that even possible? I'm working on it. Let me get back to you. But no, but is that something that even makes sense to think about? Is that something that even makes sense to try to think of? Or is that? There are other ways, look, there are other ways that you could, the other ways that you could determine, that you could come to a determination, come to a determination as to what the value of the underlying value of Bitcoin is, right? You could look at it, you know, you could look at Bitcoin with the Big B, the payment network, right? And say, you know, Bitcoin with a little B is is the money in the payment network and it's the only money, right? Although there's, you know,

stuff that people built on top of the protocol, but let's put that aside. And say, you know, the velocity of money is this and you, it's not, not that difficult to do. Susan Atthe at Stanford presented some good work on that. And actually, a buddy of mine here in New York, Karel Kov, wrote a good paper on it as well. You could use that as a valuation framework for Bitcoin. And I'm not going to refute it. But that's a different framework entirely.

And what I was referring to a moment ago was a supply curve versus the demand curve. And your question was, can you construct a demand curve? is it even a reasonable exercise. And my answer is, I'm working on it. I think that there are ways to think about it and come to reasonable conclusions, but I'm not there yet. I don't have an answer for you, unfortunately.

But I'll tell you this, is it worth doing it? I think it's certainly an interesting thing to contemplate, and I wouldn't be contemplating it if I didn't think it was worth doing. Okay. Well, at least it's worth doing, right? I think it's worth it's worth doing. I mean, you know, are we going to get it right? I don't know.

Okay. Well, we'll get back to that in just a second. Before we do that, we'd like to tell you about another new sponsor, our friends over at ShapeShift. Brian, have you ever tried buying all coins? I have. And how was that experience for you? Yeah, it's pretty painful. Yeah. Yeah, I mean, sometimes you want to buy alt coins like light coin or doche coin or some of these new coins coming out like storage or gems.

And if you have, well, you've probably come to the same conclusions as us. It's really painful. You have to find a reputable exchange. And that's difficult because some exchanges have recently fallen. We're finding out the fraudulent. You have to create an account. And then you have to give them a bunch of personal information. And then you've got to deposit some Bitcoin.

And then you've got to place the order. Wait for that to be fulfilled. I mean, that could take hours. It could even sometimes take days. Not with ShapeShift. ShapeShift is the easiest way to buy altcoins. They support, get this. So light coin, peer coin, dark coin, doge coin, name coin, feather coin.

I can't keep this off the top of my head. I've got to read it. And they're supporting, they're adding new coins all the time. So the best thing about shapeshift is you don't even have to create an account. They don't need any personal information. They don't even want your email address. In fact, if you gave them your email address, I think they would be offended. And trading with shapeships, they just a few minutes, not hours.

So let's just walk through how this works. It's super simple. You go to their website and here you'll see some sort of a, it looks like a currency conversion tool. You've got one currency on the side. So it's a Bitcoin and another currency. Let's say you want those coin on the other side. And then you just enter the amount of doge coin that you want, for instance.

And you press start. And you put your doge coin address. It could be yours. It could be a merchant. It could be somebody you want to tip. And then all you need to do is they'll show you an amount of Bitcoin. You send that specific amount to an address. they specify and that's it. In just a few minutes, you'll have doskorn in your wallet.

So ShapeShift is super fast. It's super easy. There's no accounts needed. No personal information is required. Your privacy is protected and you pay an upfront fee, an upfront rate rather, that is announced when you initiate the trade. So head over the Shapshift.io at shapeshift, like a shapeshifter.io. Give it a try. Tell us what you think. And I really think you'll love it. And we want to thank ShapeShift for their support of Epicenter Bitcoin. So, Daniel, moving forward with regards to Bitcoin and Wall Street, I mean, we've seen a lot of people attempt to try to bridge the gap between Bitcoin and Wall Street. You're certainly trying to do that.

You know, there's been talk of the Bitcoin TF. And even from the regulatory side, the Bit License, you know, incorporates some regulation that would try to protect investors in the future. Do you think that Bitcoin and cryptocurrency is becoming an accepted asset class amongst financial investors is something that's feasible? And if so, when will that take place? How do you see that scenario playing out? It's absolutely feasible.

Feasibility, for sure. You've asked a loaded question. So, right, is it feasible? Yes. But I think that that might. might not be the measurement I'd use. Is it feasible? Then maybe you ask, is it likely?

And when will it happen? It's definitely feasible. The likelihood of it will depend on a lot of other factors, right? I think the likelihood of it will depend quite largely on what goes on in the Bitcoin ecosystem and whether or not there continues to be progress, as well as what goes on in the outside world, right? So if we continue to see more and more usage of Bitcoin, more transactions, more merchants accepting it, more people saying, hey, I want this thing, you know, more accounts of Coinbase, right? More accounts at BitStamp, you know, more accounts of Biffinax, you know, more people doing things and more people coding, you know, more GitHub repositories, you know, more and more.

more stuff, right, then it will become clearer on a fundamental basis that the value of this thing is increasing and that will entice more institutional investors to get involved. That will certainly raise the interest level. Now, another scenario here that would be sort of less palatable, but it's entirely possible, is that, you know, bad things happen with central banks, you know, globally, pick your central bank. right you know you know some particular country and as a consequence of bad things happening um with that central bank um you can imagine that people choose to put their you know value into bitcoin instead right um so it's sort of a what i would call a negative catalyst versus all these

positive catalysts of people getting more and more involved um either set of catalysts would entice, would be, you know, would be create a greater incentive and interest on the part of institutional investors to get involved. Now, when will that happen? How will that happen? I don't know with precision. There is, you know, there are two other barriers, one of which we're trying to deal with. I wouldn't say both of which we're trying to deal with. The first is, I think that there is, although a familiarity with Bitcoin insofar as people have read the word, it's been on the cover of the Wall Street Journal, right? So the institutional investing universe, the folks have read the word Bitcoin, some of them have a sense for what it is.

There's still a lot of confusion as to how it works, what it means, people still talk a lot about Mount Cox. I keep hearing that all the time. People haven't, and I don't mean this just about investors, I mean this about, you know, general public haven't necessarily taken the time to understand it. It's not the simplest of topics, right? You have to kind of sit down and think about it, and people tend not to sit down and think about money. It's just not something people tend to think about.

Money is the thing that shows up in your checking account on payday. Right? That's the first barrier. People have to really sit down and think about it. And there's a lot of stuff in this world to think about and a lot of investment opportunities for investors to say, hey, we should be thinking about this particular thing, right? to have people saying, I'm going to go do the work and understand this thing. And then the second thing, you know, what we're trying to do is make it accessible, put it on the menu, right?

And, you know, this gets to the heart of what we do here at SolidEx. The institutional investing landscape consists of entities that are accustomed to, you know, very specific parameters around, you know, settlement, clearing, custody, all these things that are heavily regulated, pretty well entrenched, have incumbent players that have a reason for being there. And unfortunately, Bitcoin doesn't really fit into any of those, into any of the buckets that the current system offers. So it's not as though you can buy it on the New York Stock Exchange and then have it clear through a particular clearing agent

and then have it custody to get a big custody bank. It doesn't do that. It doesn't work that way, right? Now, could those entities come around and start to do that? It's certainly possible, right? I mean, I don't think that's happening in the near term, but it's possible that it could happen. Until that happens, you have a situation where Bitcoin isn't really on the menu, so to speak, in the way that stocks are or fixed income securities.

It's just not there, right? You can't put it into your order management system and say, hey, I want to be, you know, long $10 million with Bitcoin. You just can't do it. So that's a situation where swaps come in and you use swaps as a mechanism to get that economic exposure in spite of the fact that the underlying asset doesn't fit into the buckets that already exist in the current financial ecosystem. Let me put it like this. Do you think that the demand will come from the investor side or do you think that the demand will be created by companies like yours trying to bridge the gap between the Bitcoin space? and the institutional investors. Do you think one day all the investors are going to wake up and say,

we need to buy Bitcoin and the ability for them to get into it as an asset, those facilities will not be there? Or do you think it's the other way around that you guys are creating that demand? So I certainly wouldn't give myself that much credit. I would love to think that I'm creating the demand from thin air, but that's pretty unlikely. I think what we're really doing is providing a mechanism for people to get involved. And we are also providing information and education.

We're not going around and evangelizing. I'm not out there saying you should be long this thing or short this thing, and I'm not saying that. We're providing information and letting people make whatever decision they want to make. There are plenty of people out there who are evangelizing, and I think they do a very good job of that. that's not my role. My role is to provide information and access. So it's a very different role in a very different context. I don't see myself as creating demand. So maybe finish your thought, but let me ask my question first, and you know, you decide if you want to finish where you started. Sure, sure, go ahead. It seems to me that with Bitcoin, you have this sort of likely scenario that, you know, let's say some people are

on walls you start thinking like there is something there right you just start going in this drives up the price and then other people are like well this must be true because the price is going up and even if it's not true i don't want to you know you don't want to be the last one right and it's just sort of uh i think it's just prone for bubbles in that dynamic and and the interesting thing is if you compare it to let's say something like the dot com bubble where uh you maybe have to have you maybe have had a similar dynamic where everybody wanted to go in and they had a fear of missing out, there was still something in the end tying it to sort of tying it to the floor, which was, are these companies actually going to generate the profits that justify those valuations?

With Bitcoin, that's not really there, right? I mean, you can say to some extent, like, its usage as a payment network, adoption, etc., to some extent, it can function like that. but only to a limited extent. So I think that dynamic is really interesting. And I feel like that dynamic is going to be the thing that's just going to drive it like crazy. It hasn't happened yet. Do you see that too?

Do you think that dynamic exists and do you think that could be something that would drive developments in the future? People chasing asset prices because asset prices are around. because asset prices are rising is a phenomenon that we've seen throughout the history of financial markets. So it absolutely could happen here. It sounds to me like that's what you're talking about. And it happens all the time. So it certainly could happen here. I wouldn't count on it happening here. And I wouldn't, you know, I would prefer to look at it on a fundamental basis and say, you know, how is this thing? being used. How is Bitcoin being used? How is the Bitcoin ecosystem developing rather than looking at it on a fear of missing out basis or asset price increase, therefore people buy asset? I mean,

I'd rather look at it on the fundamental basis. But sure, it definitely could, what you're describing could happen. I definitely won't make a prediction as to when or whether it will happen, but it could. Yeah, I mean, I think there's no way to predict that kind of thing. So we come towards the end, but there's one thing I want to touch on, which has been on my mind quite a bit. And I should give credit here to Martin Kuppermann, who is the CEO of Fairleigh, who was the first advertiser. I still are advertisers. So he gave a talk at the meetup here in Berlin, which I run, about some issues of mining. And there's one thing he talked about, which I thought was extremely interesting and extremely,

worrying, which was that let's say you start having a derivatives market, and that's a derivative's markets where, you know, like you and I, we do a contract, we say like if Bitcoin price goes that way, I give you a certain amount. Like let's say, I mean, with you the difference is you're actually buying those bitcoins, right? But what if you start having a derivative market where neither party buys the Bitcoins, but people rely on the credit risk? of the counterparty to actually come through in a certain event.

Now, if that happens and if the derivative market takes on a size, maybe many times the size of the Bitcoin monetary base, and I think we've seen that happen sort of in derivatives markets very often. Then the thing that worries me is that you could take a really big short position in a derivatives market. Let's say you could maybe stand to

make $10 billion if Bitcoin goes to zero. And then you could take some of that money you stand to make and attack Bitcoin on a technical level. So go, for example, bribe mining pools to stop including transactions and blocks, do that kind of thing. So it seems to me that as true as, because right now in my view at least, we are sort of relying on miners being altruistic. or at least sort of it being in their long-term interest to generate their money from mining bitcoins and getting transaction fees.

But if they get their revenues, not from there, but from somewhere else, all bets are off what's going to happen. And that's something that really worries me. So I'm curious. Do you think that's a real risk? Is that something you've thought about or you've had someone heard talk about? I certainly have thought about that, and I've thought about various permutations on it, and it's absolutely true that we are all relying on minors to do their job for the network.

We have a significant reliance on miners, and there are certainly concerns about the centralization of mining. It's not what I suspect Satoshi envisioned. And that's a concern. And what you described in terms of, you know, the derivatives market being larger than the underlying market, absolutely possible, 100%. The scenario that you've described, it absolutely could happen. A couple of things that I sort of think should be thought about in this context. If you had a situation where the incentive structure of miners were to change or miners were somehow to be, somehow threatened or something were to happen to mining such that transactions don't clear something

weird happens right um the question is this how would the market react right what we saw in march of 2013 when when the blockchain forked right we saw the the traded price of bitcoin decline but it certainly didn't decline to zero right so there was a what I would call an underlying network event, not as severe as the one you're describing, but the trading, you know, the price of Bitcoin didn't go to zero. What would we see today, right? Would we see that the price go to zero, right? Would we see exchanges saying we're halting trading, right?

What would happen, right? Would this be a situation where it's an irreparable problem, right? I think there are a lot of parameters that are very difficult to predict, and I think anyone who would be engaged in the sort of activity that you're describing, and there certainly are entities that have enough capital to do it, of course there are, I think they would think carefully about what the consequences would be in terms of, you know, would they actually be able to cash out on their short position? If you had the sort of network disruption that you're describing, right? I'm not so sure that everyone would suddenly give up on Bitcoin.

People might say to themselves, hey, you know, we've discovered a problem. We've kind of known that this was a problem for a long time, right? We've known that we have a reliance on mining. We've known that, you know, for quite a while. And here we are, things are coming to, coming to ahead. Now, to the extent that that event precipitated a change, right, now we're being very abstract, right? But you can come up with concrete scenarios. Precipitated change, right, in the proof of work. It's something where it changed, right? You can imagine that Bitcoin would actually emerge stronger, right? Just as it did, right, you know, post the collapse of Gox, right? You know, what happened? Bitcoin went down, down, down, down, gox collapsed, right? And

then it went up, right? Yeah, this is the Andreas Santinopoulos scenario where he says, you know, we'll have Bitcoin 1 crashes and then Bitcoin 2 will emerge and be stronger. Right. Now, of course, you know, derivatives contracts can be written in different ways and it gets really hairy. So what I would say is on a simplified basis, right, what you're describing is certainly plausible, right? But I think that there's a litany of things that are plausible in terms of disruptive problems for Bitcoin and a litany of ways in which those problems could. potentially be resolved. And I think the number of permutations involved here makes it very, very difficult to predict what will happen. I used to be deeply concerned about mining, really, really concerned about it. It's still on my mind, right? But I can conceive of various scenarios

where things get resolved, you know, but I'm still worried about it. So look, I mean, I'm trying to be measured here, right? Does that make sense as an answer? Yeah, no, it does makes sense. I'll add one last thing. It is entirely possible that the specific scenario that you've described could happen. So I would assign a non-zero probability to that. That is not a zero, right? There is some probability of that, right? But I think that there are probabilities all around the chart. There you go. Yeah, absolutely. And I mean, it's a scenario that's pretty far off because there's no such to rid of his market. Bitcoin would actually have to get to a significant size.

So it will have to be as I'm sure there are many things in the meantime that could go wrong as well. And maybe they're more likely and more dangerous and more imminent. It's just it seemed like that it would be something very difficult to defend because it's like outside. I mean, to some extent, right? I mean, of course, if you say Bitcoin itself is is not vulnerable, right? if you can deal with those, if you can prevent the tax on Bitcoin itself, then, you know, perhaps. But yeah, it's one thing of many things that I think has to be on our minds. And it's certainly not the only thing.

I mean, the mining centralization is another one. You got to wonder if Sassoshi thought about mining centralization when he wrote the white paper. I don't know if, I don't know if he envisioned a world where large mining, pools and large mining companies had so much power. Just coming back to the Solid X, can you talk about the company? What does it look like and your team? Sure. I have a terrific team.

Actually, I'm very fortunate to have such a great team. So it's folks who are largely from the institutional investing universe or the legal side of institutional investing and also bitcoinsers and people who are simultaneously both. So we have, you know, our head trader used to work at a very big hedge fund. He's also a bitcoiner. Our chief operating officer used to work in the foreign exchange markets and he was, you know, he's had a C-suite position and he's a bitcoiner. Right. So I have this team that has this, you know, fortunate mix of skills, right, that can get both institutional and they're also Bitcoiners. So in that sense, I'm truly blessed. You know, we also have some others on the

team who are purely institutional, right? We have others in the team who are really purely technical. But we have this great crossover point. I'm very fortunate to have that. You know, what does the company look like? You know, we're a bunch of folks in an office building in Manhattan. How many people on your team? There are seven of them. There are seven of us. us and it looks like there may be some others joining us soon. And it's a little bit on the older side for Bitcoin. The youngest member of our team is 29. And the oldest member of our team is in his 50s.

And most of the team members are north of 35. That's got to be in the upper limits for the, the Bitcoin ecosystem, or at least a startup ecosystem. Right. I was going to say, yeah. Right. Most of the team members are older than 35. Wow.

And so recently you received a round of funding. Can you talk about that round of funding where your investors' traditional VCs or is it Wall Street? Combination of both. We were very fortunate to have, we are very fortunate to have great investors. And it is indeed a combination of VCs. and folks who have more Wall Street experience. The round was led by Liberty City Ventures

and had the participation of a syndicate of other VC groups and also some folks from Wall Street as well. So the capital comes from both sources, and these are people who have a strong understanding of what the potential is, you know, for Bitcoin to become both the VC side and the Wall Street side. So, you know, we're very fortunate to have that as well. And so what are your plans for the next 12 months, broadly speaking?

Sure. So, as I said, you know, we are up and running, which is great. But that doesn't mean our work is done. We have a lot more to do. We want to broaden our outreach significantly. we want to make sure that the institutional landscape is more aware of Bitcoin and how they can get involved. There are other products that we're considering in the blockchain ecosystem. There's a lot of stuff happening, not just in terms of alt coins, but in terms of app coins, so to speak.

You can, you know, the great thing about swaps is that you can match cash flows for cash flows. So if you were to make, you know, a blockchain-based interest rate swap, and you can conceive of that happening, right? You could match that with, you know, ISDA form swap, right? And again, we would function as the mechanism that connects the two things. So I think they're going to be, there's certainly the potential for, and we're already seeing it. a nascent market for blockchain-based financial assets. And as that, if that matures and as that matures, we are positioning ourselves to get more involved with that.

And we're very excited about that as well. Cool. So where can people find you? People can find us at www.sldx.com. Right now, the web page is fairly bare, it's not blank but there's not much on it. The reason is that we're not, you know, we're not really retail facing.

So it's, you know, not really meant for, you know, people who, it's more meant for institutions and less so for retail. Right, that's right. You know, which is not to say that we are not engaged with the Bitcoin ecosystem. on the contrary, we are very, very engaged with the New York Bitcoin circuit and also the Bitcoin circuit outside New York. But right now, because our products are regulated in a particular way, we are purely institutional.

Maybe that changes someday, but not today. Cool. Well, Daniel, thanks so much for joining us today. I was really interesting talking to you, and it's really interesting to hear what you guys are doing. And I think it would be great to see how things evolve, first of all. in that sort of space in general, like how Bitcoin will be used

adopted in the financial world and it would be interesting to see how your role and the role of Solid X evolves in that context. So thanks so much for joining us today and for sharing your experiences with that. My pleasure. Thank you for taking the time. It was an interesting discussion.

Yeah, and to our listeners, thanks very much for listening or watching the show. If you want to follow us on Twitter at Epicenter BTC, we'll let you know about the next show. Also, you can follow us in Google Plus on our hangouts or announced there, so it makes it particularly easy to see when it's coming up. And finally, if you like the show, please leave us an iTunes review. That helps very much new people find the show. Thanks so much, and we'll be back next week.