Invest Like the Best with Patrick O'Shaughnessy - Arianna Simpson – The Crypto Landscape - [Invest Like the Best, EP.84]

Starting point is 00:00:00 This episode of Invest Like the Best is brought to you by Paxos. I have personally interviewed Paxos's CEO, Chad Kaskarilla, on this podcast before, and I'm excited about how they're changing the crypto landscape. Whether you're a small fintech or a large financial institution, with Paxos crypto brokerage, you can offer your customers crypto buying, selling, transferring, and more, all with Paxos's easy to integrate APIs. Paxos takes care of everything in the back end from licensing and compliance to custody and exchange. You can start offering crypto to your customers within months. I've gotten a no Paxos over the years and have been personally impressed with their track record.

Starting point is 00:00:36 With clients that include PayPal, Venmo, Revolute, and Bank of America, they're the most trusted infrastructure provider for crypto and blockchain. I'm excited that more fintechs and banks are starting to offer crypto features, and Paxos crypto brokerage is the best way to get to market quickly and safely. To learn more, visit Paxos.com forward slash Patrick. That's Paxos.com forward slash. Patrick. Hello and welcome, everyone.

Starting point is 00:01:04 I'm Patrick O'Shaughnessy, and this is Invest Like the Best. This show is an open-ended exploration of markets, ideas, methods, stories, and of strategies that will help you better invest both your time and your money. You can learn more and stay up to date at investorfield guide.com. Patrick O'Shaughnessy is the CEO of O'Shaughnessy asset management. All opinions expressed by Patrick and podcast guests are solely their own opinions and do not reflect the opinion of O'Shaunacy. Asheny Ashton. This podcast is for informational purposes only and should not be relied upon

Starting point is 00:01:39 as a basis for investment decisions. Clients of Oshonosha Ascent Management may maintain positions and the securities discussed in this podcast. My guest today is Arianna Simpson, who has spent her career in and around the world of technology working at startups, Facebook, and now in venture capital as an investor focused on the world of cryptocurrencies. I met Ariana when I hosted a panel at a big investing conference in New York City, and she was one of the panelists. On the panel, I found her style to be very straightforward and compelling. It is clear that she loves to learn and that the best manifestation of her style of learning is investing in technology. In our conversation, we discuss broad trends in crypto that we haven't spent much time on before, decentralized versus centralized

Starting point is 00:02:27 exchanges, privacy coins, and evaluating a founder or early team. We build a framework for learning about this new asset class, discuss the importance of travel and the value of pushing oneself outside of comfort zones. Like the Hash Power documentary, this episode and other Hash Power singles are brought to you by Fidelity Investments, a company that, that is constantly researching and experimenting with emerging technologies like crypto assets and blockchain to improve the lives of their customers. Fidelity provides a comprehensive set of products and services to individual investors, employers, and financial advisory firms. For more information, please visit Fidelity.com. Please enjoy our conversation. I'm wondering if we could like on the fly

Starting point is 00:03:13 almost build like a framework for someone out there that's interested in building their own investment philosophy within crypto. Because you've done this through a lot of different means, we've talked a lot about your knowledge formation and how you've learned in the space. The question that I probably get the most often is it's just too daunting and intimidating and I just don't know what to do, so I'm just not going to do anything. So if you were doing like a workshop on like a build your own investment thesis or build your own investment philosophy specifically within this asset class, what would be sort of like the stages of that process? I think the first thing I would do is challenge the notion that it's too hard because I remember sitting again back when I was first digging into the

Starting point is 00:03:53 and I would have like 50 tabs open and I would be like three hours into it and reading about, you know, encryption algorithms. Yeah, literally. Yeah. And so I was like, this is super weird. Why am I doing this? And then I kind of got myself out of the mindset that I needed to learn something for a specific immediate application.

Starting point is 00:04:10 And if you approach it as more like, well, I know more now than I did before and viewed as a continuum rather than like a yes, I know about it or no, I don't know about it, then I think that can really help reframe it. because ultimately, you know, I talk to people who have been in the space for years, myself included, and you feel like, oh, there's so much more that you could always know. And so I think a lot of it is just being okay with not knowing everything and realizing that it's a perpetual journey. But more specifically, I would say, just allow yourself to go down the rabbit hole. So if you start reading one thing and that requires you to go look into a different area, that's okay.

Starting point is 00:04:45 You can use it as kind of a branching out. And again, I think knowledge is not like a linear map. It's much more of a tree that goes off in a bunch of different directions. And so if you can allow yourself to go down some of those branches, I think that's really helpful. One of the things that I've tried to build, maybe we could talk about it for a minute here, is a downside sensitive framework in this whole world. So a lot of people listening will be sort of native value investors. So they like pessimism, not optimism, as a signal to buy.

Starting point is 00:05:14 And a lot of value investors, a lot of very good ones, will start by focusing on mitigating downside risk. So obviously to do that, you first need to know what the categories of risk are. So maybe we could start with what you view as the major, like, chunky existential and non-existential risks to investing in crypto broadly speaking. I would throw out like regulation as one. Maybe you could flesh out how you think about regulation and then list some other major risk factors. Yeah. So on the regulatory front, I think that's an area of risk in which you want to be thoughtful about the existing frameworks that we have. use those as like a jumping off point. So realistically, so many companies in the past year have taken

Starting point is 00:05:55 the tack, oh, yes, well, we're not sure that we're offering a security and therefore we assume that regulatory rules for securities don't apply to us. And in reality, it's kind of more the opposite. So I think as an investor, you want to carefully consider, well, okay, what are the existing parameters? It's likely that what applies to cryptocurrencies is probably somewhat similar. And so, no, all of a sudden, you're not going to be able to do an IPO that's completely unregulated and that's fine. That's a bit of, I think, a jump. And so thinking about it in a way that's cautious is probably the best way to go. From a regulatory perspective, I think a lot of these questions remain to be answered. Most, I don't think regulators are out to get us, quote unquote.

Starting point is 00:06:35 I think they very much want to protect consumers, which I think ultimately is a good thing. And so realistically, we're going to see more regulation in the space, which I think is ultimately a good thing, as long as it's not so stringent that it really suffocates innovation. Beyond regulatory risk, I think a lot of it is also operational. And unfortunately, operational risk is something that is not, there's no like commensurate upside for taking it. So if you get hacked, whoops, there's no, you could get unhacked and somebody all of a sudden just deposits a million dollars, you know, right? So there's no upside per unit of risk. But unfortunately, we as humans, I think, tend to be, oh, you know, overly optimistic in this category. Now it's fine. Nobody's going to hack me.

Starting point is 00:07:16 And then, oops, there you go. And so I think operational risk is something, that isn't necessarily considered. You don't have to worry about that if you're investing in public equities. And so it's a category of risk that a lot of investors are not as familiar with. How might that one be hedged? So now aware of it, what would be the best steps to mitigate that? Security best practices. So use a hardware wallet, for example. Don't use a multi-sig wallet with a hardware wallet wherever you can. Obviously, it also depends on your investment style. So if you're a trader, then it's going to be a little bit more challenging for you to keep things on super, super lockdown in very deep cold storage because you need to be able to bring the coins online on a

Starting point is 00:07:53 regular basis. But for most investors, to whom that's not relevant, then you can put things away in a way that's most secure for them. So ultimately it depends really on how you need to trade. I think one of the challenges in this space investing also is just the fact that volatility and risk are not necessarily the same thing in my view of the world. And so something that is very volatile is not necessarily riskier than something else. And people try to quantify risk down to a number. And I think ultimately that's not necessarily the right approach because it's a very nuanced thing

Starting point is 00:08:26 and it has a lot of different vectors. And so trying to oversimplify it or over-math, it isn't necessarily going to produce the best result, even though it might make you feel good about yourself. Anything other than operational and regulatory that you would highlight is something you think about as an investor often? So I actually think that,

Starting point is 00:08:45 given the current environment, especially now that prices have come down significantly, a lot of the publicly traded currencies, especially those in kind of the more monetary realms, are somewhat undervalued relative to a lot of the earlier stage stuff, because I think realistically, it takes a lot for a currency, let's use Bitcoin as an example, to get to where Bitcoin has gotten. And so the likelihood that Bitcoin goes to zero, I think, is dramatically lower than a lot of these new ICO projects in which the team is unproven or they've raised a ton of money, but they haven't actually proven that they can deliver on anything. And so team risk and market risk is definitely something that is real. And so you want to consider what are the network effects in a

Starting point is 00:09:24 particular environment and what is the likelihood that ultimately this ceases to exist entirely, which I think is less likely in an environment in which there's a lot of people who are already stakeholders and who are interested in owning the asset or, you know, storing it. You've dealt a lot with the broad investment community. What is your sense of like the pulse of that community. So if you want it to like break it up into, well, I'll let you break it up into whatever categories you want. I get questions all the time. Like, who are the investors? To what degree? You know, what inning are we in, so to speak? Are institutional investors actually moving money into this space? How much money do we need to, from fiat and fiat

Starting point is 00:09:59 terms, to get into the space to maintain prices? What's your sense being in the mix of investor appetite and investor type? So on the institutional side, I think most folks that I've talked to at least are still trying to figure it out. So they're definitely interested. And at this point, they realize that there might be something going on here, but they are being cautious due to, to some degree, regulatory considerations, but also just trying to figure out what is their strategy. So saying, okay, do we allocate to a number of crypto fund managers? Or do we have enough exposure via our VC portfolio, which in most cases is a small percentage of their total assets and crypto is a fraction of that? Or do they buy a bunch of Bitcoin and hold that

Starting point is 00:10:40 directly. So most people that I've talked to are definitely spending a lot of time thinking and researching it, but not necessarily invested yet, which I think potentially could be a good thing in terms of investment outlook over the next couple of years. Do you think that it's, this is just my impression. I have no data for this. So I'm curious that it's a fair statement that more institutional, we'll call it institutional grade investors are accessing this world via fund managers than directly, meaning like they're buying a stash of Bitcoin and Ethereum and just sticking in cold storage? I think that's probably true. Yeah. Do you think that will change? Because it's expensive. It's an expensive way to access if the belief is the beta in the beta of the

Starting point is 00:11:20 space, not like alpha. And I'm sure that many believe that they're doing this because they think that it's super young and inefficient and it's easier relative to, say, public markets to earn alpha and earn better than a Bitcoin return. But I'm curious how you think that might change. Well, I think eventually it will become the fund managers, won't be able to, quote, unquote, get away with just beta. Right now, I think yes, realistically, because that's just where we are. And to be honest, a lot of the carry is deserved. I mean, these things are not easy. It's a lot of work operationally. It's a lot of work, you know, in a lot of different ways. And so I do think you get some points for doing all of that.

Starting point is 00:11:58 But over time, as the market, right now, these are still, like, wildly inefficient markets that would take, like, days to react to various pieces of news. And everything is still super new. So obviously, as the market matures, in 20 years, I don't expect that, you know, you will be able to just have a beta fund and that's fine unless it's more like an index fund fee model. So, yeah, I think that will change over time. Honestly, what I think people should do is buy a bunch of perhaps Bitcoin and, you know, maybe one or two other things that they think are, have good long term potential. And then allocate to a couple different fund managers who have different strategies and see how they do. And then, you know, reallocate based on that. It's always nice with somebody that is so deep into crypto to frame it with your overall interest, the source of your overall interest in the technology, in the asset class, and begin by telling us sort of how you heard about it and how you became interested.

Starting point is 00:12:48 I was working at a startup in New York and got pretty burnt out and decided to go travel around Africa for a few months, as one does, and spent some time in Zimbabwe. And I was there kind of right after the worst of some of their hyperinflation. And at its peak, their currency was devaluing by about 50% on a daily basis. And so seeing their economy start to get back on its feet and hearing basically the horror stories of what the people had lived through and the fact that they had switched over to the U.S. dollar to restabilize the economy really got me thinking about monetary policy. And so when I came back to the United States, a good friend of mine, Ryan Shea, who actually now runs Blockstack Labs. This was before he'd started any kind of crypto or decentralized businesses, though, was like, oh, hey, have you read about Bitcoin? And I was like, no, what's that? And so he gave me the white paper and I was like, wow, this is the future. And so after that, I was pretty much hooked. Can you talk a little bit about, since it started in Zimbabwe, and one of the use cases that you always hear is that this is something where the utility of a currency that can't be hyperinflated or controlled or manipulated or whatever is higher in countries like Zimbabwe or Venezuela or whatever, whether or not that's real yet. That's something that I hear quite often,

Starting point is 00:13:54 but I've never done a deep dive into whether or not that's just a nice narrative or whether that's an actual use case. We're seeing it start to become a reality. So in Venezuela, people are mining Ethereum to actually pay their bills and moving their money into it whenever they can. Obviously, on ramps are still difficult, but in order to store their value in the best way possible. In Zimbabwe specifically, actually, last year was really fascinating to see because when they had their political coup, basically the price of Bitcoin on local exchanges was about twice what it was on other markets just because there was so much demand. And particularly in times of political instability or unrest, there is a strong interest in moving your money into something.

Starting point is 00:14:33 that is more stable. And everyone in the Western world complains, oh, Bitcoin's so volatile is not a good store of value. But obviously, it depends what you're comparing it to. And in these countries that have seen massive hyperinflation, those currencies only go down. Bitcoin at least may be stable or may go up. So I think it's the best of imperfect alternatives right now. So if you started with Bitcoin and then have been learning ever since pretty much since 2013, maybe you could define kind of at this stage your investing thesis in the space. So there's tons of now active managers, hedge funds, all sorts of like kind of asset management type functions that are different cryptocurrencies, or just advocating on behalf of sort of the beta, like an index fund. How would you kind of summarize your

Starting point is 00:15:16 investing thesis and how you think about this as an investor more than like as a technology? So my lens is always very, very long term, 10, 20 years, because I think that's how long it takes to build meaningful change. And if you look at something like Bitcoin in particular, I was working at Facebook when I really fell down the rabbit hole or once I started doing more research and eventually decided to leave and join a Bitcoin company. And I remember feeling the sense of, oh my gosh, I've got to go do this right now because the world is going to be totally different in two years. And ultimately, it's five years later and things are slightly different and we're definitely moving in the direction I expected. But it just takes a long time. And so I try to keep that

Starting point is 00:15:52 horizon in mind when I'm investing. More specifically, I think we're very much still in the infrastructure days. So a lot of my investing is focused on that. I think until you have kind of the foundational pieces in place, it's hard to build on top of it. And we can't really have a rich ecosystem of companies or applications or decentralized use cases for consumers until we've laid the groundwork in a way that can hold up. And right now, we're still very much putting down those pieces. Let's spend some time on some of the individual issues that are out there today, both from a tech and investing standpoint and kind of get your take on them. So the first of those would be this idea around scalability. So everyone that's listened to any of

Starting point is 00:16:30 the blockchain-related conversations that I've had understands the basics of why this is interesting, why a distributed ledger is interesting in general, and probably also understands that one of their limiting problems is that it's very hard to have a lot of transactional throughput. So maybe talk about your take on what that problem is, how big of a problem it is, and whether or not we can solve it. The issue of scalability is a massive one, because we all talk. about this rich ecosystem of apps that everyone's using and smart contract this and the other thing. But if you can't get a transaction through because the network is totally clogged up, then obviously that's not really functional. So I think scalability is going to be one of the

Starting point is 00:17:05 biggest challenges for 2018 and into 2019 and potentially beyond. And so I'm looking at both layer one solutions, which may be smart contract platforms that were designed from the get-go to support a much higher throughput of transactions, as well as layer two solutions. So, things like Lightning Network and other kind of add-ons or modifications to existing chains that can help manage that volume. And I've mentioned this before in the context of CryptoKitties, the idea of, oh, hey, we've got people breeding cats on the blockchain and all of a sudden we can't get a real transaction through. And ultimately, you know, people laugh at that as kind of a fad. But I think it's really indicative of the fact that we have a lot of work to do on scaling. And until we've done that,

Starting point is 00:17:47 again, we're going to be limited. Can you say a little bit more about layer one solution? So I understand Lightning Network and sort of the layer two type stuff, we can say a little bit more about those as well. But what might that look like? Because my understanding has always been you can't have your cake you need to in this case. Like if you want strong decentralization and you want tons of security and you want lots of transactions, like you can kind of pick which ones you want, but you can't have them all? So can you talk about what you mean by the potential of having it all be scalable on a blockchain? Yeah. I mean, there's a lot of different approaches right now that people are taking to that. And I think you're exactly right. There definitely are

Starting point is 00:18:21 tradeoffs that have to be made, to some extent, at least between decentralization, security, and scalability. But if you look at something like our chain, for example, they are using a concurrent model whereby you can process transactions concurrently unless they're directly related to a transaction that happened previously. And so that allows for kind of these multiple lanes of transactions, if you will, to be happening at the same time. So, you know, there's a lot of different strategies that are being employed right now, and we're not quite certain what's going to work in the long term, but I think it's really important to have that kind of research lens because a lot of these are really hard problems that are being addressed for the first time. Let's back up for a

Starting point is 00:18:57 second from an investing standpoint and maybe hear your interpretation of what's known in the business as the fat protocol thesis as to where, I guess, investing or real value will accrue in this whole ecosystem and whether or not you think that's an appropriate starting point to evaluating these things as an investor. That's a question I think a lot about because I'm investing a lot in protocols, and so I certainly hope that some of the value is occurring there. I think for the first time, we really have a way of financially aligning incentives so that protocol creators and maintainers have a direct way of benefiting from the software that may be open source that they've created.

Starting point is 00:19:31 And I think that's hugely important and really a monumental shift that is widely unappreciated when people are like, oh, cryptocurrencies are so much speculation. And it's like, well, actually things like this are really meaningful shifts and we're seeing them for the first time. So I think the fat protocol thesis is definitely something that is in play right now. We'll see. I think some of the protocols have appreciated tremendously in value. You look at something like Ethereum that plays very nicely into that story.

Starting point is 00:19:57 We'll see. I think a lot of the long-term token economics are still being figured out. And I don't mean to give a cop-out answer, but I think ultimately nobody knows. And that's what we're all trying to determine. Maybe another way of framing it would be, what would it take for it to be totally wrong? So if we're 10 years from now and cryptocurrencies are. rampant. They're everywhere. They're being used for a ton of different use cases. And there's been a ton of like value creation, but it's just not in the tokens. Maybe it's because velocity is too high.

Starting point is 00:20:24 What are the conditions under which it's worked, but the investors in the protocols have failed? So I think there's a lot of use cases in which we might see that happen. And even on the, on the highest levels of the stack. So for example, if you look at something like a decentralized Airbnb, there's kind of this popular conception in the minds of some folks that Airbnb is a massive business, therefore a decentralized Airbnb could be very valuable and the token could be something that appreciate significantly. Whereas I actually believe that that value is not you take Airbnb's $30 billion valuation and you divide it by the number of tokens because actually what happens is half of that value maybe stays in the pockets of the host and half of that value stays in the

Starting point is 00:21:03 pocket of the traveler, but it doesn't necessarily mean that the token appreciates to that degree. And so that's actually why, from an investment perspective, I'm much more bullish on things that are not necessarily utility tokens specific to a network used to perform a particular function and more favorable towards security tokens, particularly monetary use cases, in instances in which I think people will want to hold the token for the long term and use it as more of a general purpose money than anything else. Maybe you can say a little bit more about how you would define utility and security tokens. So maybe starting with utility, how would you? describe that broad concept? The way I viewed is something, a token that is used for a specific function within a particular network. So you could use the token to vote on what you think is going to be an outcome in a decentralized prediction market or something like that. I think the challenge from an investment perspective in tokens like that is that in order to maintain a high token price,

Starting point is 00:22:02 you'll probably have to have a certain level of inflows. And if you don't maintain those at that level, then you'll see the price drop. And I may not really see a lot of value in holding a particular decentralized prediction market token as a store value. Why would I do that? I want to hold my wealth in something that is more widely used. And so, you know, I think that's where the utility tokens may see some difficulties in terms of price appreciation. Security tokens or more general purpose money, I think, can have a somewhat different role. Because again, you look at something like, the offshore banking realm, if even a tiny, tiny fraction of that money were to move into, let's say, privacy coins or other store value coins, then that would be 30, 50x from here.

Starting point is 00:22:49 And so I think that's kind of the sort of asymmetric bet that I'm most interested in making. So maybe using, since it's a more interesting bet to make than on a utility token, maybe using security or privacy coins as a good little mini universe within this overall universe to explain how you would then differentially evaluate a Monero versus. is something competitive to it. This is like the stock selection, you know, in MySpeak. How are you thinking about making bets, whether it's just on the overall idea? So maybe it's just, I have no idea which one's going to work.

Starting point is 00:23:19 I just think that anything that has this sort of generalized feature or is in this category, like I'm going to make a generalized bet on it. Or like, no, like clearly Monero is way better than Zcash or something like that. I tend to think about most things probabilistically. So it's not necessarily something where I have to have 100% conviction that this is going to be the one. I think that's dangerous in the sense that, you know, this is a very new field and anyone who thinks they're too clever is probably wrong. So I try not to do that. And so I evaluate things on their technical characteristics as well as a number of other vectors. Do I think a particular coin is

Starting point is 00:23:54 going to be more subject to regulatory scrutiny? So for example, I think, yes, privacy coins are, as a general category, probably more likely to be closely watched, if not worse, from regulatory authorities. And even within that, you know, I think something like Manero is potentially more at risk because they have a non-traditional company structure and that sort of thing relative to, let's say, Zcash. So, yeah, I mean, there's a number of things that I evaluate. But to be honest, I think the best approach, especially if we look at, well, really any category of these investments, is really to say, okay, I believe that this trend is going to be meaningful. Let's look at the projects within that category. Which ones do I think have, let's say, greater than a 20

Starting point is 00:24:35 or at least 10% probability of becoming the one or at least one of the top two or three players and make an allocation there. And so I think one of the differences in investing in cryptocurrency versus Series A venture is that you can make multiple bets and you don't necessarily have to stake everything on one horse, which I think is honestly probably the right approach, at least considering where we are right now. Do you think that within categories we use privacy as to stick with that example, that like in sort of network effect-based marketplace businesses or something in venture, that it's going to be effectively a winner-take-all type outcome and why yes or why now? I think it's going to be a winner-take most. I mean, I think returns or value is going to be

Starting point is 00:25:20 fairly concentrated. But I also think that one big open question that I think could dramatically influence the outcome of that question is how good we get at cross-chain swaps and how easy it is to switch between various cryptocurrencies. Because if we get it to the point where switching costs are effectively zero and there's no meaningful burden on the user to do that, then it may allow for a broader universe of cryptocurrencies to be widely used because it doesn't matter. I can move in and out seamlessly. Whereas if we continue to have challenges in that regard, it might lower velocity between coins actually and just force people to kind of take a position and perhaps hold it for longer periods of time. I've never explored this idea of

Starting point is 00:26:02 cross-currency swaps. Maybe you could say some more technical details about kind of what you mean by that, like why it's important, how it works today. That's a really interesting one because my big question is always like, why isn't there just one of these things? And I want to be dissuaded of that idea, not one that's functionally used, but one that holds all the value. So maybe say more about that kind of that swap idea. Yeah, I mean, there's a lot of different, I think, approaches you could take that question. One thing, for example, is if you're trading on a decentralized exchange, right now, a lot of them, they only allow you to trade ERC 20 tokens, for example. But you could see very easily a world in which Bitcoin becomes tokenized as an ERC20 token,

Starting point is 00:26:44 and therefore your Bitcoin, for example, gets locked up on the existing chain, but you basically have a token that's representative of that Bitcoin that allows you to move more seamlessly. Or that's just one way in which you could do it. But if you could, let's say, trade directly from your ledger wallet into a decentralized exchange and back to your wallet without having to really have any high switching costs or pay much in the way of fees, that might be more interesting, especially if it allows you to kind of keep your currencies in the wallet without actually bringing them online and exposing yourself to any kind

Starting point is 00:27:16 of security risk. Do you think that it's roughly right that the long-term value of these things, so you've got kind of the store of value, you've got these things as a means of facilitating exchange, like creating new markets where they didn't exist before, capital formation and fundraising? In my mind, it's a very financial set of interesting possibilities that just opens up the flow of capital in interesting ways that we probably, like you said, we probably can't even conceive of these things. So back to that idea of, is there any like pure reason why there wouldn't just be Bitcoin and it doesn't just settle back like it's just a settlement layer where all the value in cryptocurrencies is in Bitcoin? And then there's just this like massive interesting ecosystem

Starting point is 00:27:53 of other stuff on top of it. Well, so if you were settling into Bitcoin, probably that would mean that you have all of this universe of transactions that would have to come back onto the Bitcoin blockchain. So that could be really intensive from just a transaction throughput perspective, which could be problematic. Also, you know, Bitcoin's privacy is definitely not great. So I don't necessarily want to settle everything back into Bitcoin. So I think there's a lot of reasons why that won't happen. So I don't, I'm not a Bitcoin maximalist in the sense that, you know, I don't think everything is going back to that. But I do think that at this point, it has kind of this blue chip aura, which is funny, because I very much remember the days where I was like, oh, it's only used for drugs, which clearly isn't the case. But yeah, so, you know, I think ultimately we will have a number of different currencies that are used for different purposes. Consolidation in the store value realm will probably be into, I don't know, I would say five max. And people may have regional preferences, but ultimately, again, if you can easily switch between Zcash and Bitcoin and back again, then that might be something that allows for a slightly lower.

Starting point is 00:28:59 larger universe of store value currencies to proliff, right? One of the things that cannot be argued with is the use case of trading these things. People love to do that. Maybe you could talk about the difference between what you're seeing in centralized exchanges and decentralized exchanges. I know very little about decentralized exchanges as an idea. So maybe give us a bit of background on the comparison between those two types. So I think the idea of decentralized exchanges is really powerful because ultimately, you know,

Starting point is 00:29:26 they can be censorship resistant. they can allow for anybody to trade, create a market for any particular currency that they've created without having to wait for a centralized exchange to kind of approve it or that sort of thing. But I've been really seeing an interesting gap between the technologists who have a very decentralized exchange-centric view and the actual traders who work in the traditional hedge fund or finance world and where they see things. So right now, decentralized exchanges make up arguably less than 1% of overall trading volume. and I think it's going to be a while before that percentage becomes really meaningful. Now, that doesn't mean I don't think it's going to happen.

Starting point is 00:30:04 I'm obviously investing in that ecosystem as well. But I think right now there's really significant issues with latency and performance and stuff like that. And especially if you are settling on chain, like that's not going to be something that traditional hedge fund traders are going to be okay with. And I think the other open question is really around compliance and regulation because if you're a random retail person, you can trade with somebody and probably nobody's going to come after you regardless. But if you are a highly regulated hedge fund, then obviously you have to know who you're trading with and have a little bit more information about your counterparty. And if you don't have that, you could end up in serious

Starting point is 00:30:40 trouble. So I think it's going to be quite a while before we really see a majority of trading volume shift into decentralized exchanges. Maybe since you mentioned the kind of idea of hedge funds, the traditional institutional asset management complex, which controls low of a lot of capital, talk about how you see sort of, you mentioned regulation, but there's also things like security, like managing the keys, which for most institutional investors, I talk to a lot of them, the very concept is just bizarre. They're used to a third-party custody, and maybe that's what happens here again. And then you're in this, from my perspective anyway, this kind of unusual situation where

Starting point is 00:31:13 you've got this decentralized thing that's interesting because it's decentralized, that's now custody somewhere else that's sort of centralized. Maybe your take on all of that stuff, kind of like how the more traditional world is going to start to grunk this stuff and actually use it and store it and view security. I think that's a great question. On the institutional side, I do think that they're going to probably use a regulated third-party custodian. But actually, that's already the case in a lot of other kinds of asset classes. So Kingdom Trust, which has become known as kind of one of the leaders in the custody for crypto space and now was acquired by BitGo. They've been around for

Starting point is 00:31:49 years doing all kinds of other custody. And so if you're an institutional investor, you don't necessarily want to custody your own gold or whatever else it is. And so I think crypto for those folks will actually probably trend in that direction. For a broader audience, I think, hopefully the security is going to become better so that key management is no longer such a burden. So one of the reasons I joined BITCO in 2014 was the fact that I thought they were doing really great work in the realm of multisigs. So this idea of using multiple keys so you don't have a single point of failure. And so they have built product that I think is very good in that respect. It's usable but it's also much more secure than what you might get if you had a single key.

Starting point is 00:32:28 And so for consumers, I think ultimately that's the direction that will go. Yeah, I mean, I think honestly, the idea of managing your own keys is not for everyone, and it doesn't have to be. Most people don't manage their own bank. You know, they have a bank account, which custodies their funds. But I think realistically, just the fact that it's possible to manage your own keys and be your own bank, I think is really important. And so it's not something that everybody needs to do, but is a meaningful shift.

Starting point is 00:32:54 Let's talk about the impact that this is going to have on capital formation and how it interacts with like traditional capital markets. One of the things that I'm so interested in in public markets is the decline in the number of public securities and the decline in the number of firms that are IPOing to actually get capital. In many cases now, it's companies that don't necessarily need capital. It's sort of a cash out or a liquidation event or a liquidity event. So I'm curious how you think about the role of cryptocurrencies in like new types of capital formation, how it will impact. things like venture capital in terms of funding very early stage businesses or even, you know, much later stage businesses, traditional businesses, like, well, we see an Amazon or something like that do an ICO for some different type of capital versus kind of their traditional debt and

Starting point is 00:33:38 equity markets today. Yeah, I love the fact that it gives people an option that's not going to traditional capital providers. I think, and obviously I say this as an investor, investors are not savants. They don't know always what the world needs. And in many cases, it's better to have a broader universe of people to be able to vote with their dollars on what should exist in the world. I was just reading the other day about Mark Benioff and he said he couldn't raise a single venture dollar. And you're like, wow, that was a big pass on the part of a lot of investors. And so I think ultimately, like having the option to get capital from more places is important. And it just can proliferate, I think, allow for a greater base of ideas to really proliferate.

Starting point is 00:34:20 which I think is a positive development. How it impacts venture capital, I definitely don't think venture capital is going away anytime soon. I think what I hope it does is force venture capitalists to be better, because if money is widely available, then that's no longer the most important vector upon which you can differentiate yourself. You really need to actually add value to the companies or do something like that. And so I think ultimately that's better for the entrepreneurs as well.

Starting point is 00:34:43 Can you talk about the evaluation of the teams behind all this stuff? So when we talked before, you mentioned, you know, this is a lot of investing, especially early stage type investing. Certainly venture capital comes down to people. So how are you approaching that angle? What are the important traits? Are there different important traits than what you would typically expect from like a business founder or something like that in this world? Talk about the people. I'm a very founder-centric investor. I think ultimately most of my best investments have been people bets, even if they weren't necessarily areas that, you know, I had set out to invest in. And ultimately, The founders are the single biggest determinant, in my view, of the outcome because the right founders will continue iterating until they find product market fit. And I think ultimately that applies to crypto and it applies to any other kind of business as well. And I think that idea has gotten a little bit left to the wayside in terms of crypto because everyone's very focused on, oh, I want to build a protocol that does X. And I'm like, okay, great, but do we need a protocol that does X?

Starting point is 00:35:43 And so I think having somebody who is solid on the technical front, but who also really wants to understand whether what they're building is needed and wanted is pretty critical. When I started investing full time a few years ago, I probably thought that founders accounted for, I don't know, let's say 60% of the outcome. And now I think that's probably closer to 80 or even higher. So yeah, I spend a lot of time getting to know founders. And at this point, you know, I think you start to develop an understanding of people when you meet enough of them. And I think a lot of that for me is at this point, it's reference checks and your gut. And I think gut is actually something that I think is widely misunderstood, but I think is very important. And if anything, I've learned to trust that more as I've gone through my career.

Starting point is 00:36:26 Because I think we're actually a lot smarter than we think we are in terms of what we pick up on from people's micro expressions and how they make us feel. And, you know, if somebody is rude to me, they're probably not going to be great to their co-founders and their employees. and I've seen that play out in a lot of different instances. So even if somebody looks like they have the exact right pedigree, if something feels off, I won't invest. I'd love to dig it on this idea. So the gut thing, on the one hand, I think it's got to be true. We're pattern recognition machines.

Starting point is 00:36:56 We're probably better at that than any machine can be. But we also have this troubling overlay of inconsistency and emotions getting in the way of things. And so what I've always believed in the way that I invest is that you want to somehow extract what is repeatable about your gut. So if it's, let's say it's someone being rude. And so you could just have as part of your external model, not just something you feel, but something you actually deliberately look for. They can't be rude. And if they're rude, like you just pass, no matter how great everything else looks. So how do you balance that problem of, yeah, we're probably

Starting point is 00:37:29 good at if you see 500 founders. Like you're probably, if you're smart and thoughtful, you're coming up with subconscious ways of evaluating them, but humans also tend to be very inconsistent. So How do you keep yourself consistent while also letting subconscious pattern recognition do its thing? Yeah, great question. I think for me a lot of it is constantly checking. When I have a feeling, I think, okay, and this, I do this in investing. I do this in all of my life. I think, okay, I have this feeling.

Starting point is 00:37:57 Why do I have this feeling? Is this feeling rational? Is it justified? Is it based on the fact that somebody ran over my cat this morning and so I'm upset or actually is this founder being rude? So I very much run myself through, I think, a pretty rigorous. process of evaluating my own feelings about things. And then I also try to externally validate. So, for example, there was one founder who was kind of a real jerk to me. And so I was like, okay,

Starting point is 00:38:19 why is that? And so, or is it specific to me? Did he, you know, did I do something? And then I went around and asked a lot of other people and they were like, no, he's extremely condescending and a lot of us don't like him. And he's raised a lot of money from a lot of people. You know, the outcome remains to be seen. But at that point, I was like, okay, you know, I'm not being hypersensitive. He's made a lot of people feel this way. And so that's not somebody that I want to be involved. with regardless. So, you know, I think it's trust your feelings, check your feelings, and then try to validate externally. And if, for example, I've had instances in which I felt a certain way about someone, and then I went and referenced text extensively and realized, oh, maybe I was just off,

Starting point is 00:38:58 and then I'm totally open to changing my mind. So it's a little bit of both. If there's issues with trust, those are important and you should take action on those right away. Because ultimately, if, for example, my process has been, if something goes off on my internal radar about not trusting someone, then go and check into that. And I, for example, I had one instance in which a founder straight up lied about having worked at Coinbase. And I was like, I've known the Coinbase folks for years. Let me go check with them. And they had no recollection of this person. And then somebody else who was the co-founder of this person in question came to me like a year later and was like, oh, this person was a huge scammer. Like, how did you know? We talked to like 50 investors and you're the only one who figured this out. And I was like, well, Honestly, a lot of it was just gut. I didn't feel right about it. And then I went and checked. So I think the processes have the feeling and they go and look into it. One of the interesting things about crypto is the global nature of it.

Starting point is 00:39:50 And I know you grew up abroad. So maybe you could talk a touch about where you grew up, how you grew up, and the impact that has on your thinking. So I was born in Italy. My mom's Italian. My dad's American. And I spent the first 17 years of my life there. And so that has definitely influenced my thinking a lot. I think America is a great country.

Starting point is 00:40:05 I'm super glad to live here. but I think oftentimes people, especially ones who haven't traveled broadly, tend to get a very America-centric view. And because it's such a big country, I think it's easy to have that happen. And so ultimately growing up in Italy and having swapped currencies between euros and dollars and vending time in Zimbabwe, all of these experiences have very much informed the way I think about cryptocurrencies and just kind of the world in general. So I think it's important to remember that your experience is not representative of everybody's and the fact that, that you have Venmo and therefore don't feel the need to use cryptocurrencies, doesn't mean that

Starting point is 00:40:41 everybody has those options. And so I think traveling abroad, which I try to do as often as possible, is definitely a big, important piece of how I try to live my life. One of the things I read very recently was I was reading about intangible assets. And Italy is one of the lowest countries in the world in terms of the relative investment in intangibles relative to tangible. So like Italian investors actually like tangible stuff. They like stuff they can touch and feel. and real estate, et cetera, relative to technology, investing, or cryptocurrencies, for example. Yep. I'm curious what parts of the world, other than Italy, have most impacted kind of your worldview?

Starting point is 00:41:18 It sounds like you've traveled quite a bit. Are there other countries or regions that have had the largest impact on you? Well, let me, I'll just add one more thing on Italy. Yeah, please. My favorite place. It's pretty great. I think America, particularly Silicon Valley, is pretty incredible because it allows for what I call the suspension of disbelief, which is really the idea that you can do anything and that a whole

Starting point is 00:41:40 universe is possible in a way that doesn't currently exist anywhere. And for example, I look at things like Twitter, which I love. That would have never, ever in a million years, been funded in Italy. Something like that is just too far out there. And there's too many reasons why it wouldn't work. And in the valley, you can really suspend disbelief and say, no, actually, like this might work. The idea of this digital currency, it seems like a pie in the sky kind of crazy idea. And so in Italy something like that is very difficult to justify. And so you kind of get shot down before you can really get anywhere with it. And I know, you know, I could never be doing what I do if I were still living in Milan. And so as much as I love it, I think it's really important to be in an environment in which

Starting point is 00:42:17 people are open to new ideas. And I think that's definitely more the case, particularly in kind of the technology sector. Any other countries that you would most recommend, it could be a positive or negative. So I think that's a great lesson, right? That in Italy it would be harder to do. It highlights by contrast the strength of somewhere like the valley. So it could be somewhere that's great or somewhere that serves as a great point of contrast in your travels. I mean, I think Scandinavia on a totally different plane is amazing in the sense that I think their social net is really strong. And I think that enables a degree of kind of freedom. Yeah, nobody, not nobody is super rich. But I think the extremes of poverty and wealth are very much more within a confined ban than what you would see in

Starting point is 00:42:58 the U.S. and the fact that they're more progressive in terms of maternity leave and health care and all these sorts of things, I think, are important things to consider when we look at ourselves as a society and say, yes, I can become a billionaire, probably with more ease in the United States than just about anywhere else that I could think to go. But anyways, most places, but I literally see people dying on the streets in San Francisco. And so that's kind of just a very thought-provoking consideration. And so I think going around Copenhagen and seeing their green communities and everyone biking and all that sort of thing, I think, is a good sanity check for us. And so that also contributes to my thinking on societies and how we should live. Once in an email to me, you said to make sure that

Starting point is 00:43:42 you're always doing things that you're not qualified for. So I'm curious to hear about that kind of life philosophy and maybe your favorite example of something that you did that you weren't qualified for. Yeah. I mean, I think my approach is generally to want to push myself and I make myself do things that I'm afraid of as a general rule of thumb. So when I, you know, was in my early 20s and decided to go wandering around Africa for a few months by myself, of course I was scared. But, you know, I made myself do it because I didn't feel like I knew what I was doing, but I thought it would push me to grow in some capacity. Honestly, every job that I've had or thing that I've started, I've had fewer years of experience than everybody else who was doing the thing. And for me, I think that's a good thing because

Starting point is 00:44:21 I will work up to the level that, you know, surrounds me and hopefully beyond that. And so I really try to make sure that I'm in an environment that's not boring. I tend to stall out and become apathetic if I'm not in an environment that's challenging. And so I like to always be doing things that I think are a little bit beyond my comfort zone. And I think, you know, this is particularly true for women. Study after study shows that, you know, women often say, oh, but I'm not qualified for this and kind of limit themselves. And so a lot of times I'm like, okay, well, it seems like a bit of a stretch, but let's do it anyways, you know, and that applies to all kinds of things, whether it's speaking at a huge event or doing any other kind of thing.

Starting point is 00:44:58 Curious to hear a little bit more about that. So in finance, it's a huge problem, a massive imbalance between men and women. I think it's Silicon Valley. That's the case. In crypto, it's massively the case. So I'm curious, any thoughts you have on that experience and what we can do to maybe shift that around? I think ultimately the challenges I have are similar or mostly the same as what I would have if I were a man doing this thing. It's hard to raise a fund.

Starting point is 00:45:21 It's hard to run a fund. It's hard to invest in great companies and all these things. are difficult. The market's down 70%. Well, that's hard. That has no, no tie to gender whatsoever. So, you know, I think that's definitely something to keep in mind. And ultimately, those are the most important things. From my perspective, beyond that, there are tons of women doing really great work. And I think part of the issue is just visibility. And so I always, when people ask me, oh, you know, can you come speak at this thing, whether I can or cannot, I always try to recommend, you know, some other great women who I think can just by virtue of being visible help inspire others to come up

Starting point is 00:45:56 and want to do the same kind of work. So yeah, I think there are great women in the space. Ultimately, we're not where we need to be, but I think we're generally moving in the right direction. And to be honest, I used to have some pretty bad experiences in terms of just like weird comments and stuff like that, like, oh, you don't look like you know anything about crypto. And I'm like, is that supposed to be a compliment? You know, stuff like that. But I haven't had anything like that happening quite a while. So I think hopefully the industry and tech in general are maturing a little bit, or at least people are checking themselves before they say these things. Whether they're still biased is a whole other story. Jumping back to kind of pure crypto, what is the last thing that has gotten you really excited?

Starting point is 00:46:31 I asked the thing that got you most excited overall in the Bitcoin white paper. What's the last time you felt maybe not that same level of excitement or surprise or interest, but something more recent? I think X is something that I find really riveting in the sense that while I said that, were a ways away from having a majority of trading volume on decentralized exchanges, I think what zero X enables is this whole rich ecosystem of financial applications, which can be dexes, but it can also be lending and all kinds of other things, to use the same base. And therefore, I think that's really interesting because you're not reinventing the wheel

Starting point is 00:47:07 from scratch every time. And I think that's a huge benefit to not wasting resources and developer time redoing the same thing. Can you just describe zero X in a little bit, a little bit of detail? Yeah, sure. So Xerox is basically a protocol for building decentralized exchange applications, but also for various kinds of financial applications. And so they have kind of these functional building blocks, which a lot of relayers and other types of businesses that build on top of them can use. And so by doing that, every one of those relayers doesn't have to reinvent the wheel and create their order book and their matching engine and all that. But they can kind of customize the user experience and focus on other facets of the businesses that they're building. And so the other thing I think that's perhaps most exciting about what zero X enables is just this shared liquidity pool. And so one of the issues is if you have a decentralized exchange and it's very small in terms of trading volume, you have liquidity issues. And so a big trader cannot trade with you or on you because they just don't have the depth of order books that

Starting point is 00:48:07 these traders need. But if you're using the decentralized protocol of zero X, you can actually, all of the applications that are using can kind of pool liquidity. and therefore it becomes a lot easier for larger traders to be able to trade. So that's kind of the vision of where they're going. And to me, that's really exciting because ultimately, you know, it just enables more flows of capital in a way that benefits everybody. You mentioned also that when you were a little kid, the way that you'd get punished would be that your parents would take a book away. And I've always been sort of a lifelong reader and you love to read. Can you talk about whether or not that has changed over the years?

Starting point is 00:48:44 what I'm most interested in is as a method of learning, obviously, you know, it's hard to say reading's bad. But I'm always interested in lifelong readers, whether or not they've evolved in terms of the relative value they place on reading relative to other means of learning, whether it's conversation or writing as a mean of learning. How would you say your views on reading have evolved? I've always loved it. And I think, if anything, I'm glad that I'm no longer in school because that kind of forced my reading to go in a very specific direction. And I like to read pretty broadly. Ultimately, obviously I spend a lot of time reading about crypto-related things, but then that also involves economics and math and all of these other areas. I think writing is definitely a great way to learn if you want to make sure that you understand the full details of something and kind of the way the whole system works.

Starting point is 00:49:30 But I think in many cases, the benefit I get out of reading is just kind of making me aware of certain areas. And then if I need to revisit that for a particular use case or because I'm looking into it more deeply, then I can go and I know that. exists. But I think in many cases, you know, I combine ideas that I got from like totally different functional areas. And that can actually be really helpful in just kind of generating creative thoughts and assimilating knowledge. So my final and closing question for everybody is always the same, not crypto related. I guess the answer could be crypto related, which is for to ask what the kindest thing that anyone's ever done for you is. That would probably be my parents moving from Italy to the United States. I was 17 and I graduated early from high school and I said,

Starting point is 00:50:11 okay, I'm off to America for college, see you later, bye. And they were like, you literally can't even sign your own medical paperwork. What are you doing? And they decided to pretty much drop everything and move to the U.S. to be with me for the first year and then decide to see how it went. And ultimately, I think that was very, very generous and selfless on their part. So that would probably be the winner. Fantastic. Well, thank you so much for this. This has been a really, really interesting and wide-ranging crypto conversation. So thank you for your time. Thank you. Hey everyone, Patrick here again. To find more episodes of Invest like the Best, go to investorfieldguide.com forward slash podcast. If you're a book lover, you can also sign up for my book club at investorfieldguide.com forward slash book club. After you sign up, you'll receive a full investor curriculum right away and then three to four

Starting point is 00:50:58 suggestions of new books every month. You can also follow me on Twitter at Patrick underscore Oshag, Oshag. If you enjoy the show, please leave a quick review for us on iTunes, which will help more people discover invest like the best. Thanks so much for listening.

Invest Like the Best with Patrick O'Shaughnessy - Arianna Simpson – The Crypto Landscape - [Invest Like the Best, EP.84]

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