On The Brink with Castle Island - How Canaccord Genuity is approaching the cryptoasset market (EP.108)

Episode Date: August 3, 2020

Michael Graham and Pat McEvoy of Canaccord Genuity join the podcast to discuss how their firm has approached the blockchain/cryptoasset sector. In this episode we discuss: Michael's perspective on blockchain/cryptoassets from his role as Head of Equity Research at the firm. We discuss how blockchain technology could alter the landscape of the dominant internet companies of our era Pat's perspective on the maturation of cryptoassets and the increased participation of institutional participants in the trading of these assets Where Pat and Michael see the biggest opportunities and how Canaccord is positioning their blockchain strategy To learn more about Canaccord visit their website.

Today on the podcast, I had a conversation with Michael Graham and Pat McAvoy from Canacord Genuity. Ken Accord is a full service investment bank, and they've been especially active in the crypto and blockchain space from a couple of different angles. Michael is the senior MD and head of equity research. So Canacord has been especially active on the research side, and they've been putting out some great reports, and I'd encourage you to check them out. So they've been looking at things like the usage of public blockchains, which metrics matter, how to think about valuations, how to think about valuation, really the types of things that you would expect from a big global equity research shop. And so it's been refreshing to read these takes over the years and how they've approached it.

Pat, on the other hand, is an MD on the trading side of the house. And he's been especially active trading the gray scale suite of products, which include, of course, the Bitcoin Investment Trust. So Pat's incredibly knowledgeable in terms of how this asset class is evolving. And he has a front row seat to some of the more traditional players that are starting to poke around and look at the digital asset space. And in addition to the research in the trading, Canacord is also pretty active on the capital raising side of this industry. And they're also doing some advisory work. So to me, this approach makes a ton of sense leading with research and trading. So I think it's a really interesting corporate strategy in an example of an investment bank that's really

rolling up their sleeves and trying to get more active in this industry because they obviously see a lot of potential. So that's why we had Pat on the podcast along with Michael. And I hope you enjoy it. So without further ado, here's our conversation. Brought down by bad mortgage investments, Lehman, which has 25,000 employees, will be liquidated. The federal government loans American International Group, AIG, $85 billion. This is a different kind of market, and the Fed is asleep. The federal government is stepping it to stabilize Fannie Mae and Freddie Mac, the two mortgage giants that have been threatened by the housing crisis. The Bank of England has pumped 75 billion pounds more to Britain's ailing economy with a new round of Concented Easy.

You print a couple trillion dollars and all of a sudden people start to worry. So out of this worry, we have something called the Bitcoin. All right. So really excited to have Mike Graham and Pat McAvoy. Thanks for coming on the podcast today, guys. Matt, thanks a lot. It's fun to be here. So I've been following what Kanticord's been up to for quite a while in this space.

And I think people have probably had various interaction points with the firm if they're in the crypto and blockchain industry, whether that be the research arm or whether that be on the trading side or a bunch of other stuff that you guys are doing. Mike, maybe we could kick it off with you. And could you just give a background on Canacord, explain what the firm does? Matt, thank you so much for having us. It's a real pleasure to be here. And yeah, happy to give an overview of our firm.

Candacord Genuity is a financial services firm where publicly traded on the Toronto Stock Exchange. We're headquartered in Toronto, but have big offices and big presence in New York and San Francisco and a bunch of other cities around the world. generate about a billion dollars or more in revenue per year, and that's really split across two businesses. We have a wealth management business, which manages right around $60 billion in high net worth assets in Canada, the UK, and Australia. That provides a great deal of stability to our revenue and our earnings stream. It's a little over half of our earnings. And then we have another exciting business in the capital markets area, which is the part of the business that Pat and I work in,

And this business, we have a full suite of services ranging from sales and trading, which Pat spearheads, and we provide a lot of liquidity services to various players in the ecosystem. We've got a big investment banking group that does a lot in the equity capital markets area, as well as advisory work and helping companies buy and sell themselves. And then we have a big equity research department, which is the area I work in. In that equity research group, we have 20 analysts split pretty, equally in our two focus sectors in the U.S., which are technology and healthcare. And we really like that focus because we can get really deep in those areas and provide

some of the best value to our clients. One of the things I think sets our research group apart is we have a really experienced set of analysts. Most of our analysts have over 15 years of experience covering their sectors. And we also have a really good culture here at Canacord, which makes it a great place to work. I think that's represented by the tenure of our analysts. We have, on average, our analysts have been with us for over five years. We have plenty. I've been here 10. We've got plenty sort of that have been here longer. And I'm really proud of the work that our research group does and also of the

mentality of our firm, which is we really just try to put our clients first and do what we can to help them succeed. Mike, so that's great. Thanks for that background. And I think a lot of folks are probably engaging with Kennecord from reading the research. And it's great to see, Bitcoin and crypto assets covered from this perspective, from a reputable firm like Kancourt. It sort of reminds me of when Spencer Borgart was covering Bitcoin initially back in 2014, 15 with Needham. And I think Gil Luria was pretty early with Wedbush. So what was it that initially got Canacord interested enough to cover this from a research perspective? Yeah, I think those guys have definitely got off to an early start in the sector. As did we, I think I've been looking at the internet

sector for over 20 years. I think I started in 1996. You had basically public internet companies were AOL and Yahoo and Amazon at the time. And of course, we know what's happened since then. So I've just been always trying to look out for important trends and new developments. And that just led to kind of talking to a lot of smart investors and a lot of smart people in the VC community paid a lot of attention to what Andreson Horowitz was doing in this area. and a lot of it was also due to some of the work that Pat was doing on the trading side. He and I kind of found each other. I'll let him talk about that.

We got introduced to some of the leading players in the space back in the 2014, 2015 time frame. I think we published our first report in the research group in 2016. It was just a white paper that laid out the landscape and the ecosystem. And in particular, you know, spent a lot of time on Bitcoin and put evaluations. model in there to try to let people figure out what assumptions they needed to make to back into the value of Bitcoin, which I think at that time was in the 1,000 or something like that. I should say, too, we made a strategic decision at the outset. I talked a little bit about the research group before, and we're obviously in the business when we cover these publicly traded

equities of providing recommendations, which consists of a price objective and a rating for each security. And we made a strategic decision when we first got into the blockchain area to refrain from doing that with Bitcoin or with any of the other assets. We've definitely expressed a lot of enthusiasm for the space and for Bitcoin in particular, but we've really tried to refrain from making investment recommendations in this area until it gets a little more mature. I think that's been a move that has served our clients well so far. But anyway, So we've been continuing to publish on the blockchain and Bitcoin space. We can talk a little bit about some of our research products later.

But that's kind of how we got started. And I think I'd love to kick it over to my partner, Pat, because a lot of the early enthusiasm was really from some of his work. And he was a key part of pulling the research group into this area too. So Pat, what are your thoughts there? That's great. Well, it's too bad that we're not going to get a Tim Draper press prediction out of you on this podcast today, Mike.

That's a shame. You wouldn't want to trust me. That's a good segue over to you, Pat. Why don't you kind of give us the view from where you sit and maybe a little bit of background on how you got into this space too? It's funny. I told the story once before at a Crypto Summit. But I have a cousin who she and I grew up together on Cape Cod being the same age.

We went to school all the way up through high school together. She continued on to McGill and then found her way to New York City about the same time that I did in totally different paths and got her doctorate and this self-guided. doctorate from NYU and philosophy, and it's always been a brilliant mind and abstract thinker. And she's always been somebody to identify trends before they happen. And I have an email from her in 2013, which is short, but talks about Bitcoin and the decentralized nature of this currency. And at the time, I get it a little bit wrong, but it was somewhere around $100, give or take, maybe it was 90, maybe it was 110, but it was somewhere right around $100. And she gave me the

short thesis for why I should own it, totally understanding that there were risks that this just never went anywhere. And fast forward to 2014, and the price had gone to nearly 1,000, and she had sold it, and she said, she'd written me another email saying I took my profits from owning Bitcoin, which was very lucky and felt lucky about, was happy to be part of one of the early investors in it. And now I'm buying this other coin called Ethereum, and it was trading at 10 cents. And very clearly, I did not buy either of those times where I wouldn't be sitting here talking to today. But it was my first introduction to the space. And because my cousin Haley is such a smart person and such a visionary in so many ways, it did keep me focused on the

space so that when GBT came across my radar and I started looking into it, it was something I remember calling her on. And it was one of the reasons that I started to commit time professionally to getting to know this product. I love that story. And there's probably so many examples like that of people that had one or two interactions with Bitcoin. And really those interactions set the stage for you to actually pay attention when it comes across your desk in a professional environment. So that's really a good story. No doubt about it. And the next step in that was in 2015, we were told to buy ledgers so that we could put our coin on. Do you remember that first ledger? It was that first key they came out with the ledger X. Yeah, of course, of course. So we joke about this all the time,

but me and my team and my boss at Canacord, we all still have our original ledger X's and the wrapping paper. Your story reminds me of all my interactions with you because Pat will come downstairs and be like, oh, you need to buy this, you need to buy that. And I'm like, yeah, whatever, I'm too busy. And then the next thing I know, it's six months. later and I could have paid off the mortgage on my house if I had only listened. Well, I know, but back in those days, you had to go on Reddit to get the high quality research. Now you can go right to KanaCard. Very true. And we can credit Mike for, again, being a visionary in that space and pushing

it forward because I will say, it was not a super popular thing for a mainstream mid-tier investment bank to be committing resources to doing that. And he forged ahead with it because he thought it was going to be transformative technology and disruptive and disruptive and something that, like I said earlier, he'll never tell you this, but it's something that he's been great at identifying throughout his career. And I think it's, again, given us, it's put cantacord in a great place and allowed us to capitalize when the capital markets have been open. It's allowed us to capitalize on some pretty reasonable banking deals, specifically in the mining space, Matt, which you probably know, but we raised a lot of money for a lot of miners when capital markets were open,

and we look forward to the day that those capital markets open again. We know we'll be there, we'll be ready. We have the client base and the wherewithal to make it happen. You're way too kind as usual, but one of the things that I just want to amplify there is Pat and I have helped create in the firm a bit of a SWAT team around crypto. And we're trying to represent us from all parts of our firm. It's a bit of an informal group, but we talk regularly, and we're constantly always trying to assess opportunities and risks, trying to make sure that we take the right amount of risk for our clients and try to make sure that we take the right amount of reputational risk and the right amount of financial risk as we sort of build business in this

space. And it's really great because we pull from all the different regions of the firm geographically and all the different functional areas to try and keep a good sort of nervous system around how we can evolve in this area. It seems like it's a really cohesive strategy starting with the trading and the research. And then as this industry grows, you'd imagine that you guys will be very well positioned in the capital raising and advisory side. Is that sort of how you think about it? You're exactly right, Matt. And Mike and I feel lucky to have created a great working relationship around this technology, which has been fortuitous and fruitful for our individual

careers and cohesively for us. We're lucky to have some of the most senior people at the firm, the presidents of both Canada and the U.S., for instance, that are involved in this sort of strategy group. And so we talk between research and trading and investment banking, ECM, and wealth management on a somewhat regular basis to make sure that everybody's aware of the goings on and making sure that if there's something that our clients are focused on or want more information about, the very flat structure of KAN accord allows us to answer. of those questions and be very nimble. And I think it creates a great situation for our clients who are really the beneficiaries of that. That must have been pretty wild at the early days of

just looking at GBTC. Had you had a lot of background knowledge in Bitcoin, sort of what was the diligence process like at that point for you and the rest of the firm, just trying to get your hands around it? As with most people, it was an extremely steep learning curve. It was the proverbial drinking through a fire hose type situation for us too. And at that time, while there wasn't the demand for the product and the secondary market that we see today, for instance, today, GBT traded nearly $45 million notional value. It was minuscule at the time. We had this understanding after doing homework that this could be very transformative technology. Not only that, this was the only way for institutional and retail investors to get exposure to Bitcoin without buying.

spot themselves. So it really created, filled this void of forcing people to worry about handling their own wallet, hot or cold, storage, custody, all the things that we remember pulling our hair learning about back in the day. And so it was very intriguing to us. And it was fortuitous that Mike Graham had a grasp on the space, like he said earlier. And we were able to put our heads together very early on, especially from the institutional standpoint, from a bank standpoint, we were lucky enough to be early in allocating resources and spending time learning about the space. Yeah, that makes sense. I mean, it's such an interesting product to trade, just all the gray scale products, really, because you're engaging with

a market that is maturing pretty rapidly. It is quite immature, right, the way that it trades on the spot market. So when you're talking about crypto, you're talking about Bitcoin to folks that might be in the financial services world, but maybe not as familiar with crypto, how do you compare this asset class? Do you compare it to fixed income? What is the analogy that you use when you try to explain how this thing trades? I guess, according to the SEC, Bitcoin's not a security, but GBT is a security. And what I think is really important goes for other products that trade that follow Bitcoin too. Of course, you have that. coin shares Bitcoin tracker, which trades in Sweden. They managed, I think, about two billion

crooner, which is like 230, 240 million USD. You have the QBTC Bitcoin Fund managed by 3 IQ in Canada that manages about $70 million in assets to see new products, tracking assets in the space. And you have the gray scale products, of course, which were the original. But the secondary market that trades over the counter. People have this stigma of over the counter. It might be the wild west. The reality is that it's extremely regulated. It's protected by FINRA and SEC rules and regulations. And many ways, spot trading is not regulated or protected. And so customers and investors, whether they be retail or institutional, that trade GBT on the over-the-counter market are able to transact in a very orderly market. Of course, that market wasn't always that way. Like you said,

it's mature and it has been awesome to watch that happen over time. But we're now at a place where, like I said, we're trading the markets handling $40 to $50 million notional a day. And that's a big enough market for most people to play in. Yeah, definitely. And one of the things that I would love to get your take on is we hear a lot of talk in the industry just talking about that premium, the premium to NAV that some of these products trade at. So for maybe those who are less in the weeds here, could you just explain sort of how the product works, why there is the premium and sort of what the impact of that premium is in terms of just people's activity trading some of these names? Particularly the three IQ fund trades at a premium, GBTC trades at a premium. To me, of course,

is my opinion. The reason that there's a premium in these products is because there's more demand in the secondary market than there is supply. And so while assets under management continue to grow exponentially for players in the space and notably for Grayscale, who manages over $4 billion now in crypto assets, there still is an exceptional demand from a myriad of investors for these products in the secondary market. Another important, of that is a lot of bull, you can hear people taking a position in Bitcoin. People like to do that in a tax-advantaged account or in a retirement account. And a product like GBTC or 3 IQ's product in Canada for that matter, allow investors to do that. So at the end of the day, if one of these

products is trading at a premium, so long as it follows and tracks the price of Bitcoin, I'm not so sure that the premium matters. Of course, the premium is going to oscillate, but it's been proven that GBT or any of these products do, in fact, follow the price of Bitcoin. Yeah. Mike, I want to kind of bounce it over to you for your reaction to some of the conversation around this premium. Obviously, there's been a lot of talk over the years around, are we going to see a Bitcoin ETF? We've seen various proposals over time that have fallen apart, kind of at the one yard line, some would say, around. just the maturity of this market. How do you think about just the breadth of products that are available now and what will happen if and when we see an exchange traded product? We've definitely seen interest wax and wane over the years. Most of it that has been really genuine, has been centered on Bitcoin and some different sort of investment use cases, I guess, for Bitcoin. I think one of those is just trying to catch an asset on the rise,

just a lot of opportunistic investors who were sort of looking for anything that's going up rapidly. I haven't seen a ton of interest in people Pat would know better, but institutions interested in getting short Bitcoin. You know, it's been mostly, I think, a long idea for them. But then the other real key area from the perspective of the institutional investor has been a hedge for an equity portfolio where maybe you don't want cash, maybe you want something different. The correlation dynamics that you would want with Bitcoin relative to equities have not been as strong as they could be. I think that can change over time. But more directly to your question, so there is some interest out there for some of these investment use cases.

And Pat can probably add to that list I gave you. But a huge part of the sort of limitation to some of that interest right now is just the friction, the administrative friction involved with trying to invest in these things compliantly and in a way that minimizes the risk, the fiduciary risk that these asset managers have for their investors. And so clearly an ETF would make things happen a lot more quickly. I think an ETF would draw a lot of interest into the space and would sort of make those two primary use cases that I mentioned a lot more accessible to the typical institution.

investor. I think that were that to happen, our phone would start ringing a lot more frequently. So yeah. And then at the same time, I think not to rewind the clocks too much, but I think people love to ask Mike and I and when is this coming back? One of the capital market is opening up again. And truly the driver of demand for Bitcoin has been the price of Bitcoin. While at some point that will change and I could probably make an argument that there have been more value type investors that have invested in the asset class over the past couple years. Our phones rang literally off the hook when Bitcoin went to 20. Mike can speak to it more because he ran these Bitcoin 101 301 type things where we had so many people dialing into these, Mike. I mean, you probably

remember, but you'll remember exactly. I know you will. But it was wild. How many, how much investor interest we had in just these sort of teach-ins and these these awesome we would bring in very, you know, influential people in the business to educate our institutional client base and family office client base. And, you know, the uptake from them was enormous. And I think if Bitcoin were to make another move higher, you know, that's something that would surely play out again. I think you're right, Pat. That was the old crypto university series. which we had some great folks on that. Professor Mike, we were calling him around the office.

And, yeah, interest was extremely high. We held a big event back in, I think it was 2017, but it might have been 2018 and had hundreds of investors there and a lot of the luminaries in the space. So one of the things, just going back to this idea of what institutional investors over, being an ETF, as we talked about, would be important. And another area, though, is just one of the real promises, I think, for blockchain networks in the financial services area is to be able to enable investing in smaller projects directly in a way that just makes sense, reduces frictional overhead in the transaction process.

And there was this really good chance that microinvesting in real estate projects might have been one of the things that would urge investors to do the work. to understand and to figure out custody and different solutions like that. And then for whatever myriad of reasons, none of those projects really sort of got over the hurdle. But I do think it's possible that you could see the opening up of that institutional channel as possibly not coming from Bitcoin, but coming from some other opportunity that is an asset class that's so compelling that these investors do the work to kind of get into the space.

Yeah, that's really interesting. You don't hear that perspective a lot, but certainly the crowdfunding dynamic of the ICO era, we are starting to see a maturity in that market and more compliant platforms being built to facilitate some of what you're talking about. So that's a really interesting point. One of the biggest feathers in Bitcoin's cap right now is the fact that it has survived as long as it has. And I think sometimes people lose sight of that.

There were many people that thought any number of the moves, Bitcoin made previously were just crazy bubbles that would never sustain themselves and who's going to be the next buyer. And every day that passes that Bitcoin sticks around, you see these about faces from some of the most well-respected people in the financial world like a Jamie Diamond. And I love to talk about his sort of journey through Bitcoin. But if you remember in like 2017, he came out publicly. And I think he said, and it was right. before Christmas because I remember I saw him on a ski hill and I wanted to approach. I was like, I've been having a good time. This isn't the right time. But he had said something along the lines of,

if I found out that any of my key people at J.P. Morgan were trading or investing in Bitcoin, I would fire that. Something like that. And then you fast forward a few months and he's on Fox biz or something. I don't think it was CNBC. And he said, I regret saying what I said. I believe blockchain technology are here to stay, I really do regret saying it's a fraud. And then you fast forward to 2020 and they onboard Coinbase and Gemini as clients publicly and they end up promoting that in-house FinTech guy to explore more opportunities in space. So we've seen sort of like these old prosaic banks in the U.S. doing about face, which is again, Bitcoin. point sticking around, okay, the big banks are coming around. It's not just the more boutiquy

banks like Canacord that are committing resources to the space. And then, of course, you'd be remiss to not mention Paul Tudor Jones coming into the space over the last few months. Yeah, I mean, that was actually going to be something that I asked the two of you about what impact has that Paul Tudor Jones letter had on your daily interactions. Have you had more inbound as a result of that? A little bit. Definitely created some waves. I don't know. that it's dramatically increased the call volumes, but it definitely helps when some of these luminaries start to endorse seriously looking at the space as an investment alternative. He's almost, if you had to draw up an investor that would get really excited, he's probably

somebody that you would, if you were a Bitcoin bull or fan, he's somebody that you would want in your corner because he's a household name. He's a recognizable figure in a tried and true value investor. And so I think it certainly created a lot of conversation. I think Mike's right. It made a lot of conversations. Yeah, that makes sense. Pat, one of the things I was going to ask you about is you talk about some of these bigger banks that have started to get active in the space over the past couple of years. Some of them got active when the CME released the futures contracts. That was something that people could actually access this market for the first time. They didn't really want to worry about self-custody or custody with a startup. And this was obviously before

we had qualified custodians in the market. And one of the things that I'm at least noticing now is that we're starting to see a huge growth in the options market in addition to the futures. So we're starting to see new venues pop up. CME is offering options. It's not huge yet, but you could imagine that if this follows the path of a traditional asset class, then the size of that options market is definitely going to grow over time. And I'd expect that that probably brings new opportunities for traders that are kind of looking for things to do in this space. What are you seeing on that front? Is that a good read? It is a good read. And again, I want to be clear we're not futures and option experts. We don't trade those products. We obviously follow them,

but I will totally. I was speaking to a really good client of mine the other day who's been very active in this space for going on three or four years now. And we were talking about the open interest in the CME futures. And the conversation sort of evolved, but we look back to April 2018 when these things started trading and there was 2,000 contracts open. I think we hit a high of, I'm looking at it here on my Bloomberg, almost 11,000 contracts back in May with about 7,500 open now front month contracts open, which is pretty incredible if you think about it. It's about a quarter of a billion dollars of Bitcoin exposure through these contracts. The options to your point, yeah, it's quite incredible. The options to your point, I believe there is something like

50 options contracts open, which is 5,000 Bitcoin. So obviously that's something that we're called, but the fact that CME futures open interest is up 4 to 5x over the first two years is another great sign for Bitcoin and crypto as an asset class. Yeah, yeah, agreed. Mike, kind of transitioning back to you, I mean, there's a lot of reasons to be excited about the space. There's a lot of narratives. You have the digital gold crowd. You have the kind of back office plumbing crowd. But you kind of come from this long history of covering internet companies. And so how do you think about what's going on in this industry just in the wave of kind of next phase of the internet? Internet utilities. How do you see it in that context?

Yeah, I mean, it's fascinating to me to think about what could happen and what will happen in the future, just a question of when and how. But there have definitely been, when you're talking about this consumer-facing internet and sort of what it's done for folks, there's definitely been a ton of evolution and revolution over the years. You look at what's happened when you've had this sort of 2009, 10, 11 cohort of IPOs that came out with Facebook and Snap and Twitter and, We've had this tremendous move towards a few companies really controlling not only the internet, but sort of the economy. We used to do this study where we would look back over time at the concentration of market cap within the top 10 companies and the top five companies in the stock market going back many years.

And you can do that same thing when you're looking at percentage of GDP and things like that. It really wasn't this current internet sort of crowd where you have. huge founder-led companies. Jeff Bezos and Steve Jobs, historically, and Mark Zuckerberg and all these folks, you know, the Google folks and everything, like founder-led companies that are really controlled by one or two people that are making decisions that have this massive impact. The last time you really had that was back in sort of the JP Morgan, Rockefeller, Vanderbilt era. And so this has been unprecedented in terms of just how much of the world, and the economy is controlled by just a really small handful of people.

It's been a real positive in many ways. I think that's been a great development. It's helped society. But we're sort of at this point now where I think we're getting possibly to a bit of a crossroads. The two main drivers of Internet over time have really been first advertising and then e-commerce or retail. And there have been a lot of other trends that have happened on, but those are the two gorilla trends. And e-commerce is still only 15 to 20 percent of retail, but advertising,

digital advertising is well over half. And it's growing at three or four times a growth rate of the advertising market overall. So in a few short years, it's going to be just a really dominant. And if you look at that digital advertising space, there's a couple of companies in there that basically occupy the whole thing. It's Google and Facebook and then a few smaller players. And not only do they control the advertising on their own platforms, but they kind of control the advertising everywhere else. They have the best data. They have the most users. They harness this data to target ads really well.

And so you've just had all this power sort of accrued to these few companies and platforms. And again, it's been largely a positive, but I think you're starting to see with some of the backlash and some of the focus on what these platforms are doing and whether it's good or bad. I think you're really sort of starting to see some of the stuff start to kind of reach a little bit of end of life. I think the internet in the U.S. is way more dependent on advertising than in other countries and is probably going to change going forward. And so I think all that really sets the stage for an opportunity to take some of this concentration of activity and of wealth and of data and of development resources. and start to kind of move that a little bit further out into the capillaries of the network. And so it's really hard to know what that looks like because it was sort of difficult to see social media coming until it was there.

And that's really sort of what created some of these monsters. I mean that in a good way. But so there's going to be some use case, some application, something that happens that gets going that Google and Facebook and Amazon are going to possibly miss. And then I think that's when you start to get this next wave of development. And it really is about pushing the development resources, making them a little more democratic. And a parallel development that I think is the structure of a corporation hasn't changed in quite some time. And a lot of people, when they talk about Bitcoin, they look at the historical perspective of currency.

We spent some time looking at the historical evolution of the structure of investing in a company. And you basically had debt and then equity and then that's been it. And now all these corporations are set up so that if you're an employee, if you're a software developer, the big company, the vast, vast majority of the value that you create accrues to the shareholders, that's not the worst thing, but it may not be the best thing either. And so we're keeping our eyes out for sort of a confluence of two trends. One is can a decentralized network create a development and evolution curve that is faster than what some of these concentrated companies can do and create a new experience that we don't

have right now? And at the same time, can that possibly aid or benefit from a new corporate structure also? So those are kind of the two big things we're keeping an eye out. And a lot of the research that we're doing now is geared around trying to track things that might tell us when something like that's emerging. So far, it really hasn't. But that's sort of how we're thinking about it. I love that answer. I mean, as you're speaking, I'm kind of getting excited because I think the industrial era is the perfect analogy to think about the big tech firms right now.

I've kind of recently been on a kick of reading biographies of Carnegie and Rockefeller and J.P. Morgan. And I think the similarities are really striking in sort of the monopolistic market structures. that some of those firms operated in back then. And if you think about what ended up breaking them up, a big part of that regulation, maybe that'll be the case for some of these modern monopolies as well. But the other thing is that you talk about looking back on hindsight and maybe things seem obvious, you could imagine a world where we look back on this current era and we say, well, Bitcoin was invented by Satoshi Nakamoto, and that gave us the ability to hold

self-sovereign our own money. And then not far after that, we had the ability to hold self-sovereign our own data. and it completely changed what the nature of the internet was. And we started to really disintermediate some of these large rent seekers. Do you think that that's kind of where this is going? And I guess the follow-up is sort of where are we in that evolution? I mean, what needs to happen? There's kind of always the risk of trying to invest in the streaming internet platform in 1993.

It's a good idea, but it needs a little time to marinate. So where do you think we are? Yeah, it's the central question. It's so difficult to answer it. I think it's likely that we are looking at the dominance of Fang or Famga or whatever you want to refer to it as and feeling like it's closer to the end than it really is. These things tend to like last a while longer. So I would say that still a few years away from some of the momentum really shifting away from those players.

But I think you're right that when we a few years into whatever is next and we look back on it, it's going to be like, yeah, that was the narrative just like the mobile device made Instagram and Facebook sort of so crucial to most people's lives. As far as we can tell, we are not close at all to identifying what that next use case or application or value creation mechanism is. It doesn't seem like it's anywhere that we can see. But in some of our research, we try to track activities on all these different blockchains and just try to see if we can get an early look at what might be evolving. And we spend a lot of time looking at the internet broadly at where users are going and where viewers are growing and shrinking and where use cases are developing. And it's kind of like,

I guess if it were a plane's dashboard, it's kind of like we're on cruise control and we're just sort of flying right now. But things can change quickly. Yeah. What I like to say is that if you use the internet analogy, then we're sort of in this battle for what is going to be the TCIP of this kind of category. And we're in this phase where there might be 100 competitors for that right now. And some may think that they've already won and we'll see. But it's unlike the internet in the sense that that protocol carries value, whatever that dominant protocol ends up being or the dominant kind of handful of protocols. There's not a strong incentive to give up on trying to be that protocol because you own a bunch of it.

Unlike previous errors where you had like decentralized protocols that nobody really profited from to centralized protocols where few people profited, can you have a decentralized set of protocols where a lot of people can profit from it is a key question, I think, too. Hey, Matt, first of all, both of you guys are really smart. It's really fun to listen to you. It's really fun to listen to you guys' geek.

And hear your more philosophical thoughts on the space and the evolution of it. question for you to was so Bitcoin as a protocol is potentially as transformative as or more so than Facebook or Google. But because of the centralized nature of it, that nobody actually owns that, it could potentially transform how these technologies, be it at social media or these technology platforms evolve in the future. Is that what you guys are getting at? Maybe I'll jump in first and then would love to hear your take on this. I mean, sort of how I see this is that you have a couple categories here that are really

interesting. I don't think we're going to live in a world where there's just one public blockchain. As much as some of the Bitcoin fans on this podcast would probably hate to hear me say that. I think that we have a strong leader in the use case around being non-sovereign money, this kind of digital gold. And to me, that's Bitcoin. And to the extent that Bitcoin can ossify at the protocol layer and just be really good at that, then I think the sky's the limit.

and there's a lot of things that will be built on top of that. Now, I think there will be other platforms that maybe don't develop a monetary premium, but that are really good at other things. And maybe some of these platforms even use Bitcoin's block space to just timestamp and anchor data into, just to prove the authenticity and to really have some of that immutability. But maybe they're seeking to do different things, whether that be application-specific things or whether that be more general purpose things. And so could one of those networks become a foundational,

kind of infrastructure layer to enable people to own their own social graph and to port that from site to site and to really reduce the kind of market dominance of Facebook and Twitter and basically allow for these platforms to be somewhat cooperatively owned. And so yes, you can still have an advertising-based business model, but it just makes it easier for the users to share in some of the upside of those networks. And share on the upside monetarily even perhaps by paying some of these users? Is that what you're implying? Yeah. So if the personal data of users on this platform is being used to make money, then can there be some sort of a pass-through? Because these systems are valuable because people use them. And individually, either one of us could drop off and it wouldn't

impact the value. But if half the network dropped off, it would be a lot less valuable. And so might personal sovereignty over data be something that can be kind of harnessed in that capacity? I think that's a really interesting use case. And obviously, you know, all these people that are building smart contract platforms are probably seeing some of this opportunity. They're really competing to try to be that protocol that can enable some of this. I totally agree with that. I think incentive structures can change and push development capacity into new areas. I think that's sort of the main thrust. Letting me ask a question on your podcast. No, I love it. I love it. That's a great question.

You guys are spending a ton of time in this space. What are some of the resources that you're pointing people towards in order to come up to speed so that you can sort of meet them where they are and curious if there's things that you recommend folks read or pay attention to. Besides on the Brink podcast. Besides on the Brink podcast, but feel free to show your own content as well. I'll let Mike handle that. It's been really at the forefront of that for us. I read a whole bunch of stuff in this area.

I am a huge fan of some of the work that Chris Dixon has done at Andres. I think that's been foundational just in terms of thinking about the space and there's just so much out there to read. I will take a minute to just describe the research that we're putting out in this area. I think it could be of interest to some of the listeners. We've had a lot of different publications in this area. And we've kind of distilled it down now to our digital assets quarterly product. And we track a ton of metrics in this report every quarter. A lot of it is geared around Bitcoin and what we're tracking are things like stuff that's available. Not all of it, but we try to present it in a way that kind of helps people gain a picture of the network.

Transaction volumes and hash rate. What we view is the Bitcoin mining break-even for a few different subsets of miners. We have a great partnership with Flipside Crypto, another Boston company that I think you know well, Matt. We work with them to put out some data around Bitcoin and circulation and how much of it has been traded within the last month. the last six months, the last year, the last five years, surprising, or maybe it's not surprising, but a huge portion of Bitcoins are sort of like frozen and just not changing hands at all. We look at Bitcoin activity in high inflation countries. You know, I think one of the most sort of clear and obvious use cases is trying to get citizens'

financial holdings out of these hyperinflation currencies into something a little more stable. So we track Bitcoin activity in Venezuela, Argentina, countries like that. all this is geared around just looking for breakout signals or early signs of momentum within Bitcoin. And then we also try to track what's going on in the broader ecosystem of digital assets. Again, in partnership with Clipside Crypto, we've got a DAP utility index, which takes the top 15 ERC tokens and looks at the activity levels in there. That activity level itself is a proprietary metric, but we just try to say, okay, what are the 15 most active DAPs out there and what is the collective activity level on those doing?

And there was a time when that was growing kind of modestly, but growing. It's actually started shrinking, which is interesting. So those are some of the things that we try to lay out in that product and trying to just, in addition to tracking developments and we're just trying to kind of give folks a dashboard they can use to see what's going on and look for breakout signals. I really like the report that you guys do because I think right now we're at this phase in the industry where everyone's trying to figure out what's the metric. Like what do I have to care about? And eventually we'll coalesce around five or six that really matter or that we're all monitoring. But the great thing about blockchains is that there's such a broad availability of on-chain data. So I think about this as this is like having the satellite image over the Walmart parking lot and knowing exactly how many people are walking in and out of it and how big is their back. I mean, you can really tell a lot. So I think to your earlier point, around transforming what the company looks like. This is also transforming how you even evaluate the company and how it performs. You definitely can see business activity or at this point just activity happening or not happening. And it's a real benefit if you pay an attention. Pat, how about from your

end, just in terms of kind of the big events or developments that you think would have a big change or a big kind of impact on kind of your pocket of the industry here? Of course, everybody has their eyes on a Bitcoin ETF or an ETN being approved and coming to market. That's the easy one. We spoke about it earlier. I won't repeat myself. Everybody kind of understands the machinations of what it might take to get there. I think we would be remiss not to mention fidelity here and their efforts in their fidelity digital assets and their custodial offering. If you think about the retail space, the broker-dealer space, it's dominated by the prosaic players are fidelity, Charles Schwab, Td Ameritrade, which is bought by Charles Schwab, which will combine together become the

largest. You have e-trade. Of course, you have some of these emerging players like Robin Hood, which have become much more influential than they were just six months ago, especially given the current work-from-home situation. They sort of transform this whole space by offering free trading, and you've seen Fidelity, TD Ameritrade go to, and Charles Schwab, I'll go to free trading now. having someone like Fidelity, which is a privately controlled company, dedicating the amount of resources they do to build out this custodial and institutional offering, I think it's something that doesn't get talked about enough and is not given the credence

that it deserves. It's so important to have a household name with credibility like Fidelity involved in the space. And having had the pleasure of working with them as a client, and as a customer for so many years, as well as all these other dealers, these other online broker dealers, it's going to take someone like Fidelity to get this to the next level. And if you want to think of a time where, Matt, you log into your Fidelity account, and I know you used to work there, and you can trade Google, Amazon, and now you can trade those

fractional shares, by the way, you don't have to trade roundlots anymore, which is, I would argue, and influence from crypto and certainly Robin Hood, but you have the ability to trade futures, commodities, equities, fixed income, mutual funds, and Bitcoin. When that day comes, it's going to, in my opinion, unleash the next wave of investor enthusiasm and a potentially huge new investor base upon the crypto space. Yeah, I mean, I couldn't agree more. And I guess you could look no further than some of the premiums on these grayscale products to show you just how much appetite there is in those channels, right? I mean, that's a pure reflection of how much people want these products. Yeah, sure. And like I said earlier, I think the premium, it is what it is.

You're buying a product because you want it to follow the underlying performance of either Bitcoin. I mean, they have nine funds now. Bitcoin, Ethereum, Classic, Ethereum, Lightcoin, Horizon, Ripple, D-Cash, stellar, and a digital large-cap fund. Same thing with the Bitcoin fund, the 3 IQ Fund in Canada that trades at a premium. The market is clearly telling us something here, which is people want access in their prosaic brokerage accounts to products that give them exposure to crypto assets. And look no further than anecdotally. Grayscale's most recent tweet was over $4 billion in assets under management.

I mean, it's been spectacular. Very clearly, that is not all retail money. It is predominantly institutional driven, family office driven. And so it's really encouraging when you think about the growth of the space and to kind of circle back and bring it full circle with the longer Bitcoin sticks around. The more accepted it will be and the more legitimized it will be when you think about fidelity, bringing custody to the space, one of the most household names and investing in the entire world, one of the largest asset managers in the entire world. It's very encouraging. Well, that's a great place to leave it, Pat, really well said. And I feel like I could talk to you guys for hours. And I hope I get to do it soon down in New York. Feels like it's been a long time since I've been down there. And I hope all local watering holes are still open when this COVID thing ends. But why don't we wrap it up by just talking about where people can learn more about Canacord and stay in touch? Yeah, Matt, thanks so much for having us. It's been great. We'd love to see you when you're down in New York. It's kind of dead right now. But hopefully we'll be back soon enough. If any, was interested in learning more about Canacord, the best place to go is our website, CGF for Canacord Genuity Financial, CGF.com.

And pretty much everything that you need to know is right there. Thanks, guys. Thanks for listening to another episode of On the Brink with Castle Island. To find out more about Castle Island, visit castle island. Visit castle island. To listen to all of our podcast episodes, please go to On the Brink dashpodcast.com or just click on the tab in our website. Thanks for listening.