On The Brink with Castle Island - Matthew Le Merle and Mitch Mechigian (Blockchain Coinvestors) on Predictions for 2025 (EP.581)

Episode Date: December 9, 2024

Matthew Le Merle and Mitch Mechigian of Blockchain Coinvestors return to the show. In this episode we run through the Blockchain Coinvestors 2025 Predictions for the digital asset industry. To learn more about Blockchain Coinvestors visit their website. To view the full Blockchain Coinvestors 2025 Predictions webinar visit this link.

Today on the podcast, I sat down again with Matthew Lemurrell and Mitch Machegian of blockchain co-investors. In this episode, we talked about their predictions for the industry in 2025. This is always a fun episode to do. I think it's the third time we've done an episode like this with the blockchain co-investors team. So I hope you enjoy this one. Without further ado, here's my conversation with Matthew and Mitch from blockchain co-investors. Matt Walsh and Nick Carter are partners at Castle Island Ventures. All of these expressed by them or the guests on this podcast are solely their opinions

and do not reflect the opinions of Castle Island Ventures. Guest and hosts may maintain positions in the assets discussed in this podcast. You should not treat any opinion expressed by anyone on this podcast as a specific inducement to make a particular investment or follow a particular strategy, but only is an expression of their personal opinion. This podcast is for informational purposes only. 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. 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 into Britain's ailing economy with a new round of quantitative easing. You've printed a couple trillion dollars and all of a sudden people start to worry. So out of this worry, we have something called the Bitcoin. Bitcoin. So Matthew and Mitch, welcome back to the podcast. What is this? The third year we've done this and probably the fifth time that blockchain co-investors has been on the podcast. So excited to dive into the 2025 blockchain predictions with you guys.

Yeah, it's great to be here, Matt. It's time to be here. So for those maybe new listeners this year, it would be great to just start off with an introduction on what is blockchain co-investors before we hop into the predictions. Yeah, fantastic. So my name is Mitch Mishig,

and I'm a partner at our firm, which is called Blockchain Co-Investers. I'm joined by Matthew Lemurl, who's the founding partner. And basically, blockchain co-investors is a specialist asset manager. We've been investing into early-stage venture in the blockchain asset class

since 2014, as a dedicated strategy since 2019. And basically our principal strategy is a fund of early stage venture funds. So we've backed now more than 40 blockchain focused venture funds. Full disclaimer, we are an early investor in Castle Island and Matt Nix firm. And so we're really excited about backing this technology asset class from the early stage. And so we thought the best way to do that would be a fund of funds where we get broad, diversified exposure at this asset class, make sure we're in, at least in some small way, all of the emerging unicorns in the space. And we're really proud of what we've done. Now we have

more than six funds, including two direct investment vehicles as well. But through those funds, we're investors in more than a thousand individual portfolio companies. And as you'll see today, we're also investors in dozens of unicorns. So we're very committed to the space, very focused on early stage venture, our partner funds, and we've had a lot of success so far, but we think there's a lot of success to come. That's awesome. And you guys have been great partners to us at Kessel Island, so we appreciate it. So it was funny. I was going through last year's 2024 blockchain predictions. And you guys had some great ones talking about the developing world, talking about some of the wallet growth. One of them was the U.S. competing to drive

regulation. And I guess we got that done just in the nick of time for 2024, I guess. Can you give us credit for that? Yeah, we had that one marked as one of the ones that we didn't think we got quite right. We do a post-mortem every year on our predictions, and most years we get most of them right. But when it comes to 2024 predictions from last year, we feel that there were seven that we got absolutely right, one that we got absolutely wrong, and two that were question marks, and the US driving regulation. I don't think we can claim we got that yet. Not yet, but I guess 2025 is setting up pretty nicely on that side of things. Absolutely. And congratulations to you and Nick. I mean, we listen to your show every time you record an episode. We learn a lot. But what's for sure

is the two of you have really helped drive this whole regulatory conversation in Washington and the work that you've done on choke point and on SAB 121 and all these other issues, I think, has been very influential. So thank you for the two of you from us. from the whole industry. I really appreciate it. I really appreciate it. All right guys, well, this is the exciting part. I'm going to hop right in. We'll put this in the show notes so that people can maybe read along and see what these predictions are. But first one up is crypto adoption will exceed 750 million users. Let's dive into this. How do we quantify this one? Thanks a lot, Matt, for asking. This year, we're trying to take a somewhat more disciplined approach

to our predictions in two ways. The first is we've organized them into essentially what we think of as a dashboard. So the first four predictions are to do with fundamental drivers of the usage of blockchain and crypto globally. And we'll talk through what these are. And I'll address Matt's question in just a second. The following four have to do with the measures of whether or not the leading use cases, the applications of blockchain in terms of real products and services, are they really taking off? And then the last two have to do with value accretion in the space because we're investors and Matt and Nick are investors. and we're always interested in are the companies and projects we back, becoming more and more

valuable because people love them and use them and so on. So with that as a framework, you can almost think about this year's predictions as being a little bit of a balanced scorecard for ourselves and our industry. This first one is a fundamental driver of growth. Every time someone opens a wallet anywhere in the world, taking a step towards entering the world of digital money's commodities and assets and crypto and blockchain. And so even if they don't activate that wallet, it's an important demonstration that they're coming on board. And we know that this particular metric has some issues

because Matt or Nick might have five or ten wallet. So wallet count is not a one-to-one with user count. But back in other days, we've tracked this and it's been very helpful. So we're finishing the year. with a little bit more than 600 million open wallets according to Statista. And we're going to predict that we're going to get to over 750 million by the end of 2025, which would be a 20% growth rate. That's a little bit more than most years' growth in our sector.

But we think we're now coming to an inflection point, Matt. So on our side, we think that the of growth of wallets is about to steepen. it will become very steep because the other side of this coin is there's 8 billion people in the world and most of them do not have a wallet. Only 600 something million at maximum have a wallet today. And we think eventually all 8 billion will have at least one, if not many. So anyhow, that's the prediction. Wallets will exceed 750 million according to the statistic source by the end of 2025. I told you I'd be a little bit spicier on this year's episode. I will take the over in a big way on this number.

I think if you look at stablecoins and just where stable coins are achieving product market fit, I wonder what this number would look like if Airbnb and Uber were to implement stablecoin payments to the users of that platform. I think you guys will be proven right on the 750. Maybe I'll go 850 on mine. Okay. We're going to write that down, Matt. And then one other question here, Matt, is I mean, how do we count users?

because I think one of the areas we're really excited about, which we don't have a specific prediction on, is obviously AI agents and their ability to operate these wallets. So I think there is kind of a long tail here that you could see this number increased dramatically, but maybe it won't be human control per se. That's a great point. I actually don't see any reason why every app on your phone wouldn't have an embedded wallet at some point. Receiving stable coin payments across almost any application seems like something that is very technologically achievable. now with these embedded wallets. So the thing is a great point. It doesn't tie one to one with human

beings. That's correct. And in fact, that's obviously a bit of an issue with this metric. What we've seen before in the internet days is things like bot farms. And going forward, those will be AI farms. And they may open thousands of millions and tens of millions of wallets. It doesn't necessarily mean that there's a sentient human being behind the wallet. But in terms of measuring blockchain usage, that's fine. I mean, if it's peer-to-peer payments between, connected artificial intelligences, it's still going to drive transaction volumes and transaction fees and gas and other things. And so we should be conscious of both points. And unfortunately, right now our metrics are pretty blunt. We only know total active crypto

wallets. We don't know who stands behind them. Yeah, that's a great point. That kind of dovetails into number two here. So the second prediction that you guys have is monthly average users will exceed 300 million users. So the graph that you had in your webinar is really interesting here, looking at the plot of internet usage over time as well. So maybe talk a little bit about what we mean with this metric and how you think about that prediction. Yeah, absolutely.

And the graph you're referring to is the great chart that A16Z put out in their 24 state of crypto report. And basically what it shows again is that the growth curve of monthly active users of blockchains is keeping up with maybe even slightly outpacing. the internet adoption of the 90s. And we think that's really an important point to note, because it also just reminds us of how early we really are into this technological revolution. I actually think sometimes blockchain technology gets graded unfairly. I mean, the internet had about 30 years of development from DARPANet in the 60s to the 90s, where there weren't

really any users, right, outside of maybe a few academics, perhaps. Then you get Netscape Navigator, and 94 and the general public starts adopting. So by the time the late 90s roll around, actually email has been around for about 30 years. Now pivot to Bitcoin and Satoshi White Paper, this is just 2008. So we're just about 15 years since that first Bitcoin block. And we already have 220 million active users. That's really remarkable. And I think it's just important to maintain that perspective.

So it kind of dovetails with the first prediction, but we really see the use of this technology expanding rapidly. particularly in emerging economies, and you can see that adoption curve there actually growing quite quickly because of the use cases being quite salient. And then also you can see that the monthly active adoption curve is actually growing faster than our previous prediction, which is total wallets. And what that really tells us is that more people who maybe were just holding assets and not really doing much with it are now actually engaging with the ecosystem as well, actually using stable coins, actually using defy. And so that's really driving this chart as well.

Yeah, this is an interesting one. It's maybe the same comment as the first. I think this could be a lot higher potentially. And you guys are involved in a company that we're also investors in called Yellow Card, which is essentially dollarizing the African continent. But you start to see the metrics coming out of companies like that. And it makes you very optimistic that this is a very achievable number in terms of 300 million users. The other thing to kind of double click on to go back to the AI point, well, AI might spread dozens of bots and bot farms. but it also is going to make it easier for real humans to use these things, right? So there could be a world where as a user, you don't need to interact with public-private keys, you don't need to interact with smart contracts and have sort of the stress and bad user experience that we have today. You might be just paired in with an LLM and just kind of instructed in plain English to move stablecoin to a friend of yours.

And then that software is basically able to function in the back end. So I think we're really poised to see actual use on chain really increase as well. And if I could just add to that, Matt, I'm excited that you're ambitious and I hope that you're right. But just to put this into context, if I went to any company in the world and told them that their total number of buyers, users, customers was going to go up 25%. And the monthly average connected users of your products was going to go up 50% in a year, they would not believe it. And if they did believe it, they'd be one of the most valued companies in the world in terms of their growth trajectory. And so this is already phenomenal. And we think that we're still at the inflection point.

So the rate of growth of blockchain is going to go up 2026, 27. If we're being conservative with the points that we're highlighting for year end, we'd sooner be wrong. You've proven right. But the point I'm trying to make is value accretion in blockchain is poised to go up very fast. That makes a ton of sense. Coming from an asset manager prior to starting Kessel Island, I really like this next prediction. So you predict that 45 of the top 50 asset managers by AUM will adopt crypto. Talk a little bit about what you're thinking there. Yes. So now we're moving out of individuals to institutions. And as we all know, in the world of value, institutions do matter.

So a lot of blockchain is about enabling everyone in the world to have access to monies and assets in a fair and equitable way. And we care about that. And I know Matt and Nick care about that. But on the other hand, when we talk about value, it's very concentrated. And for better or worse, most of the world's money and most of the world's capital is in the hand of institutions. And they have been very negative about blockchain, if you go back five and seven years. we track the top 50 asset managers in the world twice a year in a report that you can download for free about institutional adoption. And what we specifically track is whether they are actually

deploying products and services built on blockchain rails. So do they actually have a digital wallet or a digital custodial solution? Are they actually providing stablecoin access? Do they have ETFs for Bitcoin and Ethereum that they're making available to their customers. So it's more important to watch what institutions do than what they say. And so basically, as we finish up 2024, it's already true that a good number of institutions, the world's largest, are already making blockchain-based products and services available to their customers. And obviously, that includes people like Black Rock and Fidelity. It actually includes almost every major Chinese bank and so on and so on. And so this prediction is that by the end of this year,

almost no one will have not got started. And so today, Vanguard is a great example of an institution, the second largest in the world by assets under management that really hasn't got started. But there are very few. By the end of this year, we think 90% or more of the world's largest financial institutions will have more than one live product or service built on top of blockchain Rails. I mean, talk about career risk if you're one of these CEOs that is not doing anything in the space right now. It is mind-boggling to me that some of these firms just haven't done anything. I mean, Matt, having come from fidelity, I mean, not to put you on the spot, but if you look at a firm like Vanguard, which was a competitor to you previously, like, what do you think the thought

process is on them not jumping in the race? And I guess they're just missing out on massive amount of fees from participating in this. I think it's just not listening to your customers. Ultimately, I think you need to be guided by what your customers are asking for, obviously within the bounds of suitability. But there's some really bad knock on effects here to not participating at all. Obviously, just getting surpassed in terms of the league tables is one thing. But also just the things that your customers will do to get exposure,

if you're not offering them direct exposure to, say, even like the Bitcoin ETF. So Edward Jones comes to my. you cannot buy the Bitcoin ETF on Edward Jones, but you can buy micro strategy, which is trading at 2.5 to 3x premium to the Bitcoin price. So is that really what they're going for? It's very perplexing to me. Yes. It's perplexing to us as well. And in fact, the last four years have been perplexing because there isn't any really clear good reason why an industry was set upon by an administration. I don't want to speak for Nick. But my bet is if Nick was with us today, he would say something like financial and fiduciary intermediaries should do a good job of helping

their customers access legally compliant investment opportunities. But you should not be taking the moral stance that you're not going to allow your own users to invest in things they want to invest in if they are legal and valid. And that was Operation Choke Point. It's not okay for the government to close down a valid industries, and it's no more appropriate for an institutional asset manager to take a moral stance that, in their opinion, Bitcoin is not investable. It's legal, it's compliance, it's a commodity, and anyone in the world who's an investor and who wants to invest should be allowed to do so, and the institutions should not be closing down that without, just because their moral judgment is that they don't want to make it

accessible. So that's our view. And by the end of 2025, we expect there'll be at most five out of 50 and maybe even less who are still holding out. It'll be really interesting to see who those five are. I would tend to very much agree with this prediction. The next one's really interesting, too. So 100% of the top 25 financial centers will approve crypto legislation. I like the sounds of that. Yeah, I mean, this is obviously a huge value driver as well. and clearly accelerated by the U.S. election. But let's say prior to the U.S. election, I mean, really you have one key global laggard, and that's the U.S. Europe has passed MECA, also called Markets and Crypto Asset Regulation. That actually goes into effect at the end of December of this year.

And, you know, it's not perfect, but it does create a passport system so that regulated crypto entities can do business in any of the 28 member states. So at least you know the rules of the road, and if you follow them, you can do business in a compliant way within the EU. The U.S., which is home to many of the world's largest financial centers, particularly New York, has been a clear laggard here. Right. And so the election was so exciting because not just at the top of the ballot, but really because we have the most pro-crypto Congress ever elected.

And so it seems clear that the U.S. should be able to get both stable coin legislation and a market structure bill in the next two years. both of those things have massive value creation implications for a few of our predictions later on. And so it's really going to open up activity and really important. And we're big backers of this being a global industry. But when the world's largest capital market has been sitting on the sideline effectively, and now that gets open, really exciting things can happen. I guess the second order effects on this one are going to be fascinating.

Because if you just look at the banks and the broker dealers in the United States, by and large, they haven't been able to do anything. And so it's a zero to one moment where it's almost like you get thrown in and you have to be going 70 miles an hour right away. So it'll be interesting to see the M&A that starts to pop up here just in order to get these products to market after this regulatory clarity. Yes. And if I could just add to that, 20 years ago, we did a lot of work around stop the internet now. And people tend to forget that there were a good number of people in Washington who wanted to close down internet access as late as in the zeros. What we discovered back then, and Google was a client back then, was that regulatory uncertainty chills

entrepreneurs, innovation, and investing in innovation. It's very hard for entrepreneurs, innovators, and investors to really get started in a world of regulatory uncertainty. So, So the other side of that coin is once you lift regulatory uncertainty, you take away that hurdle and it allows innovators, entrepreneurs and investors all to do more in their homes rather than have to travel in order to set up their company offshore and so on and so on. Well, imagine that. I think around a lot of Thanksgiving tables tomorrow, a lot of families will be chatting about this space.

and a lot of them will say it's too late. It's too late. I missed it. And it couldn't be more wrong. Just contemplate this. More than 90% of sovereign wealth funds, enterprises, pension funds, retirement systems, wealth advisors, family officers, have no exposure. So if after Thanksgiving, you decide to get started, you're going to be one of the earliest, not one of the latest. that the elimination of regulatory uncertainty will unlock enormous and very exciting innovation globally and in particular here in America. I'm just excited to have a Thanksgiving where no one asks me about SBF. I just really hope we can get through Thursday.

Now they're just asking you whether they should buy Bitcoin. That's right. Yeah, that's right. Well, the next predictions about stablecoins, which we talk about a lot on this show, as you know, the prediction is stable coins will exceed $250 billion issued in $7 trillion in annual volume. So how are we going to get there? Yes. So this is an interesting one, Matt, because you'll remember we overshot this last year.

So last year, we said the private sector stable coins will exceed $250 billion issued. And I remember Nick last year was thinking that was a bit of a stretch and probably a little unlikely. So we're coming back this year with essentially the same prediction, except we've added in transaction volume. When you think about stable coins, there's two things that matter. One is the number that are issued, but the other is how much they're used. And in fact, it's the second metric that's actually more important. So this year, we're saying that total issued volume will exceed $250 billion.

Most people are saying today there's probably somewhere between 175,000. and 200 billion issued. I believe your coin metrics minutes last week said 200 billion or close to. So you get a sense that we're not necessarily arguing there'll be a huge number of dollar denominated staple coins issued in 2025. But we think the velocity of their usage will go up significantly. And so when you measure transaction volumes, you have to make a decision who you're going to trust in terms of getting the information. We're actually going to use Visa on-chain analytics.

And what they do is they basically take transaction volumes and they adjust them so they get rid of anything that could be deemed as not a real user-to-user transaction. So by the visa measure, we're currently at about $4.6 trillion. And we're saying it's going to go over $7 trillion. And once again, by any measure, that would be huge. I mean, that's sort of like a 70% increase in a single year in the usage of stable coins. And if you compound that year on year, by the time you go out four years, everyone's digitally working with international remittances on stable coin rails. That's where we think this is heading. So the annual prediction is 4.6 going above 7 trillion. But the multi-year prediction is that there will not be any

paper-based, fax-based, people-intensive, international remittances anymore, it will all go on stablecoin rails. And we think stablecoins will be the winner relative to CBDC rails, but that's a different conversation. Yeah, I've been thinking about this prediction a little bit. I think this is a very reasonable prediction for where the market is today. The X factor to me is, let's say you get the stablecoin bill, which I think we will get. Could you imagine a world where stable coins are used in a wholesale institutional manner to settle overnight repo transactions or corporate bond transactions, things like that. And if it gets even a little bit of uptick in one of those institutional use cases, that's where I think this number could be maybe an order of

magnitude higher on the total transaction volume. If you just look at how big those numbers are in the institutional settlement channel. This is one vector of enormous growth math, but there are many. Because, of course, if we're intellectually honest about this, we have to say, well, what's a stable coin? And our prediction is really about fiat dollar-backed stable coins. But then you get something like BlackRock Biddle with Securitize, which is a tokenized money market fund, dollar-backed. And we don't normally think of that as a stable coin. So fair enough, that isn't. But is a gold-backed token a stable-coin?

is a carbon-backed token, a stable coin? And should we be throwing those into this category? So that's one question. What is a stable coin? And does it have to only be backed by a fiat currency? Or can it be backed by a derivative there or some other commodity? And then linked to that is your question, which is, well, what are the use cases? And we're agreeing with you.

Right now, tether over tron is mostly about individuals and small. business people in the developing world, Latin America, Asia and Africa. When we turn on stable coin usage for institutional to institutional transactions, then the dollar value goes up incredibly quickly. Will that happen in 2025? I'd probably be a little bit less confident. So our prediction is sort of a little bit more of the same. But I think you're raising a really good point. By the time we get to money center banks transacting with each other on stable coin rails, then these transaction volumes will go through the roof. And we shouldn't forget, Biddle is built on Ethereum. So if we get that huge volume uptick, then you can see that rippling all the way down to the underlying

protocols on which these are based. That's a great point. Next one, Bitcoin ETF, what a story this year in terms of the growth here. So the prediction is Bitcoin ETF, AUM will exceed $250 billion. I haven't checked today. Where are we today? So I think as of November 15th when we made this prediction, it was something like just under $100 billion. And you know, this one is actually one of my favorites because I think it's sort of is building on just how far off sides traditional finance and the general public really were on what you might call the crypto blockchain trade pre-election. And that's why we really anticipate this increasing more than 2.5x. And the really interesting thing here for me is that prior to the

election, I don't think people, and some very well-educated, very well-versed financial people, friends in private equity, I don't think they really understood just how difficult an environment was that we were operating with. We basically had the federal government severely restricting the industry. And for those of us sort of in the know in the industry, you know, following your podcast, know about 2.0, but it's quite obvious that what we're seeing now in terms of Bitcoin price action was going to happen if the election went a certain way. And in the background of all this, thanks to providers like BlackRock, but also companies like BitWise were investors alongside yourselves. The pipes had been laid for traditional financial players, whether it's institutions

or just individuals with their retirement accounts, to move large amounts of capital into the space. So now with the environment having shifted really violently, you could say, right, the prospects for the industry look much, much better. You have a massive highway set for traditional capital to flow into the space. And so that's really different in terms of a setup than in years prior, where to buy Bitcoin you needed to at least onboard to a new provider like Coinbase or know how to self-custody. And so for many institutions, and I think frankly we can say older people as well, they just aren't going to do that.

So now there's this sort of perfect storm where this sector is going to grow dramatically and capital can flow from the world's largest capital markets providers and the institution investors in the U.S. directly into the ecosystem. So this is really exciting. As investors, we are big believers in self-custody and back a number of custodians as well. But we do think the Bitcoin ETF sort of is a way to track the capital flowing in, particularly from the institutional side of the market. Yeah, this is an interesting one because you just look at the market structure for this today. And a lot of these wirehouse banks, you actually can't get these products yet. So just lighting it up as an available option on some of these platforms, you would think would

have a material impact on AUM. Yes. So inertia in all things financial, more than there should be. But when it comes to this particular issue, it's only just getting started. And I won't repeat what I said earlier on about the 90% of people and capital is still on the sidelines in detail. But the reality is, if you were to buy Bitcoin today, you are still a pioneer. We only have a few hundred million people in the world that have direct exposure to Bitcoin because they own the keys and they have their own wallet. And even indirect exposure, such as through a Bitcoin TF, we still only have less than probably 10% of the institutions in the world with any exposure for any of their customers.

So if you buy Bitcoin today, relative to most investors in the world, you're a pioneer. And so 250 billion by year end sounds like a realistic expectation. And this is a very easy one to track. Anyone listening into this can go to Hoddle 15. We like a lot or any other of the sources that are tracking this. And day by day, you can see the increase in the ETF balances. But let's not forget, Bitcoin is not just about ETFs. It's a lot harder to track all of the self-custody end of the spectrum, but that's going up to.

Well, I guess the asset price itself is also a factor there, which kind of leads me to the next one. And if you're right about this next prediction, I think the AUM and the Bitcoin ETFs will be materially higher than $250 billion. But your seventh prediction is that the U.S. government will hold over 400,000 Bitcoin in its Bitcoin strategic reserve. So I'm on record as saying this just seems too good to be true. I would love to see it happen, but you think we have a shot here? So why have we put this one on the list? It's not because of the specific prediction. It's because this is a bell cow for the entire world. If the US government declares that Bitcoin is a appropriate asset to include in its strategic reserve,

then it's probably the case that every other central bank in the world and every enterprise in the world needs to come up with a very good reason not to do the same. And so we're tracking this because this is one of those tipping points issues. The US who has probably been the most negative government in the world on Bitcoin if it becomes the most positive. And this would be an example of how the US would be absolutely on the other end of the argument, then we think that that ripples through every other central bank and every other CFO and board conversation in the world. So today, the US government does actually hold over 200,000 Bitcoin. And unlike the German government, it hasn't been selling them down very rapidly, but it hasn't been hoddling them either.

I think President-elect Donald Trump has already said he's going to stop the selling of the Bitcoin. So that would just mean that we would hold on to the 200,000 we have as a country. And obviously, if we were to seize any more by closing down bad actors and bad activities, then we would huddle them. This prediction goes to Cynthia Lumas's Senator Cynthia Lumas's Bitcoin Act of 2024, for where she's proposing for the next Congress that they approve an actual strategic Bitcoin reserve. And if that were passed, then the idea is every year for the next five years and another 200,000 Bitcoin would be purchased by the US government at whatever the price was

at the time and would be dropped into this reserve. We actually think that will pass. So at Stand with Crypto, which we're big supporters of, you can go to their website and you can see that about two out of three, roughly, of the Congress people and the House representatives and the senators who have just entered through this most recent election, they're pro-crypto. And so when this comes up, no doubt it will be debated, but are those newly minted representatives of the US people going to turn down this as their first act? We think it's a little bit unlikely, so we think it will pass.

And that's why we're predicting that by the end of this year, we'll do the first. $200,000 US government purchase, and that will take it from over 400,000. Wow, that would really be something. It would be. And then I just want to say, just as a point of reference for everyone listening in, this is not a new idea. Famously in the British world, I believe it was Pitt, the younger, wanted the British government to create something called the Sinking Fund. And the sinking fund was going to essentially work off the notion of compounded interests so that if the government put into a reserve a fast-growing, compounding assets, just the simple mathematics of compounding would mean that that fund would become larger than the debt of the country and the debt of the country could be retired over a relatively short period of time, i.e. decades, not centuries. And I think that's the way we should think about this. There is a possibility that if Bitcoin continues to go in the direction some people are predicting,

if the U.S. government has a strategic Bitcoin reserve and it compounds at the expected rates, the value of that Bitcoin reserve could begin to solve our debt problem in a dramatic way. And certainly we need help with the accumulated debt of the U.S. and how to solve that. I guess on that point, in order for that to happen, you'd be looking for Bitcoin to be made legal tender probably so you wouldn't need to liquidate the Bitcoin. You could effectively use the Bitcoin to make the debt payment. Am I thinking about that the right way? I don't think you would need to do that.

I mean, if you just do the mathematics, and I'm not necessarily going to predict that Bitcoin gets to a million per coin, but there's a lot of people who are saying that. So take the 200,000 that the American government already holds and say they're each worth a million. And I think you've got 203 trillion. Did I do that, math, right? Yeah, I see what you're saying. And how much debt do we have? I think we have 37 trillion.

Don't quote me on those numbers. So it's simply the compounding. If Bitcoin compounds much faster than the accumulated interest in the growth in the debt, you roll that forward a decade or two. And then the question is, can you net one off against the other, which is you'd sell the Bitcoin Reserve and you'd pay down your debt? That would be the case, at least according to Pitt the younger. Interesting. All right. Well, if we do this one, then I really hope that we do it in a way that is not reversible in four years if the executive branch turns over. Well, yes. Next one up is interesting. So defy total value locked will exceed

$200 billion. I guess what are the last all-time high in defy TVL was probably in the $180 billion range. Is that right? Yeah, that's right. And, you know, I think defy centralized finance, it's sort of been a forgotten part of the industry almost these past years, you know, at least in the more general conscience. I think meme coins have sort of been sucking up the air and liquidity. So you haven't actually seen token price appreciation of major players like Ave or Uniswap, really? We're kind of far off all-time highs. So all that being said, we think that people are definitely sleeping on the sector. And so we see the total value locked basically surpassing its previous all-time high, going above $200 billion. We're probably well on our way.

I think when we made the prediction of that $120 today or something like $180. And I think people just forget that Defi still represents the single largest use case by activity of daily active addresses in the sector. And it is sort of successfully underpinned billions of dollars of value for many years now. And so really the setup here, I mean, it's very related to what we were talking about previously with regulation. But if we get some sort of market structure bill, you may even see sort of the shackles ripped off this sector. Right. So right now it's in a very sort of ambiguous gray area. Many of these tokens are basically not providing any value to the holders to try to position themselves as non-securities. And if we have some sort of clarity there, one, you may see.

many of those asset managers actually move into the space knowing they're dealing with a compliance sector. But you also could see things like fee switches turned on that could actually move some of the capital that's accumulating. And many of these protocols are highly fee generative. So they're basically accumulating millions, if not billions, and fees. Those are sitting in treasuries, and it's not really clear how they return that to the token holders. And so if we get some regulatory clarity there, you may see things like buybacks happen. And that creates a really interesting dynamic in Defi where tokens could actually be valued almost like traditional businesses based on the cash flow. And so for us, Defi is still one of the most interesting

areas in the space. There's been a lot of innovation historically in it. We're still seeing things like restaking prediction markets. And so we're kind of nearing the right setup for a sort of renaissance here. Yeah, I think the fee switch is such a good point. I mean, just having more utility in these protocols and actually having the ability to think about them and conceptualize them from a valuation perspective using discounted cash flow analysis could really drive this one. I guess the other thing that would drive this would be, could you have an account type on a centralized exchange or a centralized brokerage firm, right? Could you have an interest-bearing account on Robin Hood powered by defy yield or something like that? I would think that that would

materially increase the TVL of the whole ecosystem? Yeah, no, I think that's a great point. I think there's a bunch of different avenues here. And I think it's just really exciting that you may actually get traditional investors looking at the space with their traditional valuation lens and getting really excited. Because at the end of the day, enterprise SaaS, people are excited about this sector because they have really high gross margins. Well, a lot of these chains, the actual marginal cost of adding the next user is effectively

zero in some cases. So they actually have really high margins. They're really capital efficient. A lot of these businesses were not set up with hundreds of billions of dollars of funding. So the setup here could be pretty interesting from a value creation perspective. These last four predictions, as I said at the outset, these are measures of the major use cases to see whether users are really finding them beneficial. And so we said stablecoins, Bitcoin ETFs, the strategic reserve as a measure of where the governments and enterprises would find this of value, and then defy. Obviously, there's others we could have chosen. So Pollymarket would be an example of a different type of use case. Blockchain-based gaming would be another use case. Social platforms

built on top of blockchain rails, that would be, or Web3, that would be another. We chose these four because we think if these four go up tremendously in 2025, then we've really broken the back of escape velocity, because at that point, if you think about these four, blockchain rails are driving microtransactions globally. Bitcoin is viewed as a real store of value in all of the world's treasuries. The world's biggest governments and enterprises and treasurers have all begun to accept that this is all legitimate and worthy. And then the decentralized distributed community is ramping up their activity too. So by the time you get through these four, we're out of escape velocity into a real world of digital value being moved globally. But I just wanted to

highlight, we invest in things like foreign market and things like blockchain-based gaming as well. And we're very excited by those two. We didn't exclude them because we didn't think that they were worthy, it's just because we had to keep the number down to 10 predictions. That makes sense. And the next prediction that you have ties to some of those underlying companies. So the prediction is that there will be more than 250 blockchain unicorn companies or projects. Where are we today?

Thanks, Matt. We're moving now into a different type of metrics. So now we're talking about tangible value accretion in the space. And as investors, ultimately, we're doing this for a variety of. reasons. We're doing it because it's good for the world. It's good for the people of the world, but we want to make money too. And as investors, how do you measure whether you're making money? Has the value of your investment gone up? And do you see a light at the end of the tunnel in terms of exits and liquidity events? For venture capitalists specifically, and obviously Matt and Nick

at Castle Island and we're a venture capitalists, for us, at the end of the day, one of the ways of knowing if you're going to have a successful fund is have you backed projects or companies that become very valuable. And if you look at Sequoia or N-E-A or Kleiner, that comes down to unicorns. Did they get into an early round of a company or project that turned into a billion-dollar-plus situation? And that tends to drive most of their financial returns. So I said all of that because we track the blockchain unicorns for two reasons. One is the value creation in our space, in the blockchain space, and the second is, as a way of measuring whether we're doing a good job, are we actually getting capital into the projects and the teams that will go on to be most

valuable? So that's why we're doing it. We do it twice a year. You can download it for free at our website. And going back to Matt's question, as of mid-year, 24, there were about 186 blockchain unicorns. 108 of them were what we call enterprises. So they had issued equity and they were enterprises. That's the traditional definition of a unicorn. And they represented about 15% of all the world's unicorns. And then there were another 78 crypto projects trading at more than a billion

dollars of value. And here, technically, we agree those are public liquid. They're not a private anymore, but we include them in the report because obviously blockchain is different from most other types of innovation because it's not all equity based. Obviously, the projects really, really matter. So I've said a lot, but our prediction is that we'll get to more than 250, which means we're saying not quite a doubling. And where's that going to come from? Well, we think that we're going to have an alt-coin boom in 2025. When you analyze the cycles of the last 12 years, we tend to lead with a Bitcoin recovery and the price of Bitcoin goes up. And then there's a second phase when the all-coins catch up. And we've seen that through three cycles now. And if that were to occur,

Again, so if in 2025 we saw an all-coin recovery as it catches up with the Bitcoin price surge, then a lot more of the alt-coins will go up and trade at more than a billion dollars of value. So that's the driver of the 250. On the enterprise unicorn side, and that's more what I guess Matt and we invest in, There, 2022 and 2023 were very bad years to try and raise capital if you were a blockchain company, particularly if you were a mid-stage or late-stage company. We just haven't seen that many mega-rounds, large amounts of capital at high valuations. We think that will come back in 2025.

So we think that we will see late-stage and mid-stage investors come back and be willing to write large checks for the leading. blockchain companies, and that will push a good number of them above a billion dollar valuation. And this is great news for everyone who's listening who's at one of those firms. I won't name any, but there's an awful lot of firms where you've been worrying a lot about could you get some incremental capital into the business? Because you're doing a great job. You've got great products and services. Customers are really, really happy, but you need more capital. We think that 2025 there'll be an unlocking of capital for the blockchain space. From what I'm seeing, I think this is going to be spot on in terms of just the total number here.

So definitely a lot more late stage capital. And I guess that dovetails into your final prediction, which is public liquid tokens will have a market cap of north of $5 trillion. And there will be more than 35 public companies in the space, which to me, IPO sounds like a great thing here. I'd love to see this one come true. What are we thinking with this one? It's a great point. Yeah. So another way you can track value creation in addition to what Matthew is,

just going through is looking at the public markets. And as he mentioned, this is sort of the light at the end of the tunnel in most cases in our industry. Of course, there's also M&A. But really, venture capitalists, you want those big outcomes, the long-tail outcomes, and those tend to be in the public markets. And in our industry, there's two ways for value to be expressed in public markets. One is via tokens and the other is via public equities. So on the token side, the market cap of all tokens, including Bitcoin,

coin is something like $3 trillion today. So we see that nearly doubling next year. And really the drivers there are going to be twofold. You're going to have massive ETF flows as we've been speaking to, both in Bitcoin and Ethereum, but also you may see a lot of excitement and kind of still top 10 assets like Solana or Ripple. And then in addition to that, it's sort of alt-coin reticons or a lot of rotation into these other projects that we've talked about, whether that's DFI or rather sort of interesting use cases. And so we think, again, the industry is really poised to grow on that front. And a lot of the projects that the venture capital firms that we back, what they invest in, those are tokenized projects. And so having to help these sort of public token market is really

important for our industry and our sector. On the public equity side, I'd say we're just as excited. And there are so many great companies strong and growing revenue, hundreds of millions of revenue and profitable in our portfolio, and we know that they would be fantastic public companies. In the last three, you could say four years, it's been a really difficult market for IPOs. Spacks, direct listing has also been really difficult. So the U.S. has just been a pretty difficult place to go public. And then you add that the SEC, they were essentially shadow banning blockchain companies from going public.

And they did this by just slow walking the S1 process. It was sort of like a choke point 2.0, but via the registration process. So basically you would file to go public via IPR spec, and the SEC would just never respond to you, or they would lead you on a sort of winding chase through two years of comments. So because of this, we saw companies, great companies, like Circle and E Toro, sort of ultimately abandoned their going public processes. So now, again, you flip forward to today, we're sort of shaping up to have not just in blockchain, but a massive amount of companies in tech in general, but particularly our sector,

who want to access the public markets. And that's really good for our industry. Obviously, we're big backers of decentralization, Bitcoin, and tokens, but having public companies in the space helps normalize the space, helps legitimize the space. And it's really good to bring that public market capital, those public market investors, into the space as well. And And then, of course, as Matthew pointed out, we are investors. And so it's great for the venture capitalist weeback and the company's we back. So it's great for firms like Castle Island because it's going to help you all realize your returns and then distribute capital to your LPs, which for us is obviously what we're really focused on as investors.

Guys, well, this has been outstanding, really like the predictions. And we'll make this an annual tradition. For folks that want to go deeper on any of this, where can we direct them to learn more about blockchain co-investors? Well, for us, we're very transparent. So you just go to blockchain co-investors.com. We publish a lot, all the reports we've mentioned are downloadable. There are webinars, free newsletters. We are trying to educate as much as invest. And so there's a lot of available material. And then we listen to Matt and Nick every week and we encourage you to do the same. I appreciate it. Well, guys, this is awesome.

We'll see how these predictions go. So thanks for coming on the podcast. That was good. Thanks, Matt. Thank you. Thanks for listening to another episode. episode of On the Brink with Castle Island. To find out more about Castle Island, visit castle island.vc.vcelson 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.