On The Brink with Castle Island - Peter Johnson (Jump Capital) on Fintech Investing (EP.72)

Episode Date: April 27, 2020

Peter Johnson, Head of Fintech and Crypto Investing at Jump Capital joins the show. In this episode we discuss: Peter's fintech thesis and the categories that he is most excited about Jump Trading's crypto journey and how Jump Capital works with the core trading business Cryptoasset market infrastructure and the categories that need to exist in order for this industry to thrive Learn more about Jump Capital at www.jumpcap.com and follow Peter @TheChicagoVC

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If you're ready for security upgrade, you can get started with a membership for as little as $10 a month. and as a special offer, use the coupon code Castle to get 10% off. Head over to keys.casa to get peace of mind that your Bitcoin is safe. Today's conversation is with Peter Johnson, head of fintech in crypto investing at Jump Capital. Peter is one of the most thoughtful fintech in crypto investors out there, and I was really happy to spend some time with him today talking about how we both see this market unfolding. In this episode, we talk at length about our areas of mutual focus, including crypto asset exchanges, custodians, and data companies. We also spent some time talking about stable coins,

the evolving trading landscape, and other areas within Peter's fintech focus where he's most excited. This conversation was a lot of fun, so without further ado, here's our conversation with Peter Johnson. 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 into Britain's ailing economy

with a new round of quantitative easing. And print a couple trillion dollars and all of a sudden people start to worry. So out of this worry, we have something called a Bitcoin. Bitcoin. Peter, thanks so much for joining the pod. Great to be here, Matt. Thanks for having me. I see you have a nice home office set up here.

How are things going? How are you adjusting to working from home and these current conditions? Adjustment hasn't been that bad for us at Jump Capital. We already do a lot of our work on Zoom. We've invested in companies that we've only met the founders, our key people on Zoom before. So we'll continue to do that and hasn't been that big of an adjustment for us. Biggest adjustment is working with our portfolio companies

as they adjust to the new times. Obviously, some companies, you know, if you have exposure to retail or small businesses, is a challenge. Really interesting in the fintech, the crypto space, which are the investment areas that I lead. actually it's been a great quarter for a lot of companies, which has been really interesting to work with those companies. Companies like Trading View record signups and customers coming to the Trading View site,

and on finance and personal capital and the wealth management and trading spaces, both kind of record quarters in Q1. So kind of some surprising impacts happening throughout our portfolio, but definitely a wide spectrum that we're helping companies work through. Yeah, I love to hear that you guys are open for business and doing a lot on Zoom. What's that been like trying to get to know founders without like meeting them in the flesh? Has it been a challenge? It's different.

There's something about sitting down with somebody and having dinner and getting to know them that you just don't get over Zoom. But it's still, it's pretty good. We feel like we can operate over Zoom and get to know people well enough that we're comfortable to invest. So it's not ideal, but it's definitely workable. Yeah, I've heard of some folks doing Zoom happy hours with prospective investments. It's kind of a good idea. The software turns out it works great. So it can make it pretty easy.

If this happened 10 years ago, I think it would be a different story. Yeah, for sure. So we'd love to start off. And we're going to get into a ton of stuff about Jump and FinTech investments generally in crypto, certainly. But we'd love to start out with just hearing a little bit about how you came to lead fintech and crypto investing at Jump and what your career path was before this. I started out as a management consultant doing strategy operations and new product

development work mainly for banks and insurance companies, asset managers, and brokerages. Did that for a few years. Then I went over to Morgan Stanley and became an investment banker, did MNA and financial structuring work for banks, asset managers, brokerages, and then met the two founding partners of Jump Capital and was given the opportunity to join those guys just as they were starting Jump Capital and was a really unique opportunity to be in at the very beginning and build a new venture firm, lead FinTech investing for that firm, and come into a situation which was really unique, too, with the connection with Jump Trading, which we'll talk more about, which gives us a really interesting resources on the trading side, as well as the capital base that

we're investing from. So that's how it came to be at Jump Capital. That was about seven, a little over seven years ago now. And then over the last seven years, we've built Jump Capital to be one of the largest and most active venture investors in the middle part of the country. We are based in Chicago. and in the areas that I lead, which are fintech and crypto, we are by far, I would say, the largest and most active venture investor in those categories in the middle part of the country. And it's been a great seven years so far. I didn't realize that you were a management consultant before this. I was actually a management consultant as well.

During the last crisis, I was working at Arthur D. Little. It's funny. I often think back to management consulting and I had no idea I would eventually be in the venture industry when I was doing it. But turns out that it's a great way to learn the frameworks and how to do it. diagnose a business, how to understand a market and how to really, really diagnose whether or not something's a good investment. Curious if you kind of had that experience as well, and did that prepare you for your job now? Absolutely. Yeah, I think the great thing about consulting is that

it really teaches structured thinking, which is if you're breaking down a market, breaking down an investment, I think that just structured approach to thinking about things is very helpful. And yeah, I was a consultant during the OA crash. I actually remember I was out in Boston at a large asset manager in town at that time. Oh, man. Well, it's a good thing you're not a consultant now. I remember when we're going through the last crisis, staying billable was the big challenge. The management consulting firms, if you're not billable, you can be really on the chopping block for a layoff.

So I think you're in a better seat now than you were then. Absolutely. So talk a little bit about Jump. So what's the focus of the firm and how does Jump Capital fit into the core business and how do you liaise with the operating business? So jump capital for a Chicago-based venture capital firm, we're industry-focused and thesis-driven, we're operating-centric, and were funded exclusively by the owners and employees of jump trading. So we can break that down a little bit more. So what does that mean?

So industry-focused and thesis-driven. So we invest across fintech, IT and data infrastructure, B2B SaaS, and media. Those are four sectors we invest in. I lead our fintech vertical, which includes crypto. And within each of those industries, we have investment, DHS, and we have investment, that we're continually refining and going after investments that align with those theses. The second part is being operating-centric.

So what does that mean? So our team at Jump Capital, we have a 12-person team, seven of us on the investment side, and the majority of the investment team are folks that have built and run businesses in the past from startups all the way up to public companies and have great operating experience. We also have five operating partners on our team that spend 100% of their time working with our portfolio companies on things like recruiting, especially data science and engineering, on sales and marketing, corporate development, finance, M&A, capital raising. So I have a whole team of people that are dedicated exclusively to helping our portfolio companies

scale and grow. And then the last piece is our capital, which obviously makes us unique. We do invest capital that comes exclusively from the owners and employees of jump trading, jump trading for folks that might not be familiar with the firm. it's an immensely successful global quantitative trading firm, one of the largest traders in the world in many asset classes. So the capital that's provided there, we recently raised our most recent fund. It's a $200 million fund that we closed about six months ago. We'll invest that over the next three years or so and then raise our next fund. And in my role, leading the FinTech and crypto

investments, I work very closely with folks on the trading side, especially anything having to do with Crypto is an area that Jump trading is very active, is involved in the market in a number of ways. So work closely with those folks on anything that we're doing. In crypto, as Jump is involved in the crypto markets in three ways. One is trading on exchanges, market making and doing what they do on Central Limit Order Books, which is kind of the history of the firm. They have a direct business where they work directly with counterparties and are a wholesale liquidity provider to those counterparties.

And the third part is the venture investments, which is the part that I do. And oftentimes there's opportunities to work across there where there's exchanges we're working with, our counterparties, vendors, etc., where we can be both a partner, a customer, liquidity provider, and also make a venture investment. And those are types of opportunities that we love to do. I remember when I was at Fidelity, and it was probably, I don't know, 2015, 16, we started to have some discussions with some folks at job just around how they were seeing the market. And you guys, I think at that point, we're starting to quietly get a lot more active on the trading side. So curious what your perspective was just on the evolution of

the firm in terms of getting involved in crypto. Like how does something like this get championed at a firm like jump where someone says, hey, this thing is really ready for us to start getting involved in. We can start trading this. There are some moves to be made here. How did that work? Yeah, it was really, for me, a fortuitous confluence of events that I started jumping in 2013, 2014, started looking at crypto from an investment perspective. I actually hired the general counsel from one of Eric Borges' first startups to come work with me in 2014 to start looking at investments in the crypto space. So we were doing that on the jump capital side, jump trading was starting to look at trading

at crypto. And the way that that started on the trading side is that they had accumulated some coins, the owner said. And also we have this research lab down at the University of Illinois, Urbana-Champaign, where we have students, interns, professors, all working on things that are new cutting edge, etc. And one of the initiatives we had down there is that we were looking for new markets for folks to look at, to build out.

And crypto was this new market, which was a really interesting opportunity because you could have folks like build a whole new trading infrastructure and strategies for this whole, like, entirely new market that you're building from scratch. So it was a great opportunity from a trading perspective to get people involved in doing that. And at the time, it was something, we started it at this research lab down at UIUC. It might turn into something. It might not. Luckily, it did.

So the work that we were doing down there in 2014, 2015, was this positioned to jump trading exceptionally well for when the run-up happened in 2017. They were already connected with all the exchanges. They were already trading. We were just really well positioned to take what was a R&D effort in 2014, 2015, 2015. and become a core strategy for the firm a couple years later. Yeah, it's great to have that positioning. And people forget what this industry looked like in 2017 in the run-up. And just having that connectivity already to the exchanges in the market makers,

that was really what made all the difference, I think. It would have been really hard to onboard with everyone in the middle of that run-up. Things were just breaking left and right. I would agree, like 2017 was people probably might not remember just how difficult it was for, like, if you didn't have account open, like, you couldn't open an account in 2017. So just having that infrastructure in place, put jump trading in a really good position. Totally. So I want to talk a little bit just maybe about FinTech more broadly. Within FinTech, what categories are you the most excited about?

Where do you spend most of your time, maybe outside of crypto? So invest across wealth management, capital markets, lending, insure tech. area that I'm most excited about would be investing in wealth management. That's where we have some fantastic investments companies like Trading View, M1 Finance, personal capital. And it's just a market that you are very familiar with as well. And it's a massive market and a lot of room for better solutions to help people invest their money better, to save money, to be smarter and more informed with the way that they invest. One of the things that I've been monitoring for years and we to talk about a lot at Fidelity was just this idea of having new front doors to financial services

emerge and specifically with the tech firms. And so what would it look like for Google or Facebook to move aggressively into financial services? What are you seeing there? Is that a realistic scenario where you start to see tech firms move into things like retail brokerage and asset management? What's the state of play? It seems like it. It seems like we're going in that direction. And I think it makes sense as you look at how these tech companies, companies want to get more data about their customers and also want to monetize their customers in new ways, that they're going to embed financial services in their offerings, whether that's payments or banking or insurance or brokerage. There's some regulatory challenges that obviously

go along with getting into that, but it absolutely seems like that's the trend. Talking about Facebook, do you see this as a logical first step if they were planning on making larger financial services related bets? You know, start with payments and then build from there. Maybe you could see them building investment product features into a mobile wallet at some point. How would you think about that? It seems like there would be a natural extension for them or any of the other large social networks, but in particular, at Facebook, to start with what they're doing, which is largely payments, and then building banking, building brokerage, building other financial services. It seems logical. It's also something that if you look back over time,

people have talked about large tech firms getting into financial services for a very long time. Microsoft was expected to do it many, many, many years ago. Never really happened. Others have been expected to do it. So while it seems like it wouldn't, should happen, it's hard to say for sure. Yeah, this crisis happens at a really interesting time just for financial services where you've had quite a few of the retail brokerages have moved trading fees to zero. Probably at just the wrong time, right, because we've had record trading volumes for the past few weeks. I'm sure they wish they hadn't. And then, of course, you have margin compression with active management being eaten by passive. And who knows how that plays out. Maybe we'll have a resurgence in active management, maybe not.

How do you think these sort of trends impact fintech startups kind of more broadly? Is this something that you think the revenue base shifts a little bit? How do you think they're advantaged or disadvantaged by some of these big moves that the incumbents have made? Yeah, I think it creates a great situation for fintech startups to come into this space because they have business models that are built under the assumptions of this new reality instead of having existing business models and cost structures that were not built for the way the world is operating and are trying to fit into that. The obvious one is Robin Hood, which is built for no fees versus others having to adjust their

businesses for no fees. Same thing, M1 Finance and in our business. portfolio is built for from the ground up, no fees, fractional share trading, super low cost margin that you can use at any time, connected with a debit card, just a really compelling offering that I think others will probably look to replicate over time, but it's always more difficult to take existing business models and revenue models and cost structures and retrofit them than it is to have something that you're building from the ground up and technology that you're building from the ground up for the way that the world is heading.

Yeah, certainly not having that large cost base associated with legacy infrastructure would be tremendous advantage. Assuming you can keep your infrastructure up and running, which I guess is also, that can be a challenge. It can be a challenge. So speaking about infrastructure, let's talk about some infrastructure for crypto assets. And I know you're super active here. Where do you see the biggest opportunities just within that kind of financial infrastructure

for crypto? So the biggest trend that we're seeing and taking part of for financial infrastructure for crypto is that we're seeing an unbundling of the crypto exchanges or what we have historically called a crypto exchange. If you look at something like Coinbase, it's an exchange, it's a brokerage, it's a custody of provider, it's a clearinghouse, it's kind of all parts of financial infrastructure from the traditional world all in one company. I think that works for some companies like Coinbase.

what we are increasingly seeing from other exchanges and brokerages is that they are focusing on what they are best at, what their core competencies are, and outsourcing different parts of what they do to others that specialize in that. The most obvious example of that is custody, where most exchanges, brokerages probably shouldn't be custodying customer assets. It's a very high-risk type of activity, and they're probably best served by outsourcing that to someone like Bitgo. You can then also go to, okay, liquidity. How do you want to build liquidity that you provide to your customers? You can build your own central limit order book and get market makers on there, or you can work with a wholesale liquidity provider, somebody like jump trading, and that's what we're seeing a lot of folks do.

You could build your own charting and trading interface tools, or you could just use best and class tools from somebody like trading to you. So what does that lead us to? What are exchanges and brokerages actually? What are their core competencies? And it's largely regulatory compliance, customer acquisition, and banking relationships, even though I could see banking relationships be potentially cut out too by firms like BCB, which are looking to make it easier for crypto firms get banking services.

So that's what we're seeing is that this kind of unbundling of the crypto exchange. And I think that is something that we're really excited about because from the trading side, jump trading can come in there and provide liquidity to these types of companies. and then firms that were invested in, companies like BitGo can come in and provide the custody part of it to those types of firms. So that's certainly a big trend that we're watching from untapped opportunities in the infrastructure space. I think data is a big opportunity that's just starting to be tapped into.

You're very familiar with this, coins like coin metrics, which I think are in a great position. We're investors in a company called Digital Assets Data, which I think is also really well positioned as the data around crypto becomes more and more important. And if you look at traditional markets, data is where a lot of the revenue is actually made in those markets. I think you're going to start to see that in the crypto markets. And then prime brokerage is something that people talk a lot about. And I think we're starting to see more movement and better solutions in that space.

There's certainly challenges on having a robust prime brokerage solution without a large balance sheet. But I think we're getting closer to real prime brokerage type solutions there. I love that answer. I think we think about the world in very similar manners. I want to maybe double click on a couple of those. So within custody, it's interesting because if you think about global custody for non-crypto assets, it's kind of this low margin business. It's very established.

These firms are changing share, but they're changing kind of market share at the best of large asset managers that are sort of maybe negotiating for pennies is a good way to think about that. Very, very different in crypto. We see a firm like BitGo growing very rapid. There is, it's monetizable very largely. I think over time, maybe that margin will compress. But the custodians seem to be really well positioned to move into prime brokerage and some of these higher margin products. Do you think that that's where we're going to see the prime brokers start to

emerge from the custodians or do you see this evolving differently? I think that the custodians are the best position to provide those types of services, that they're already holding your coins. And now that they're holding your coins, can they, for instance, start lending against those coins? Can you hold those coins with a custodian and have buying power against various exchanges? Can they provide settlement services? All these things that you would typically expect out of a prime broker, the custodians are probably the best positioned to do that. So yeah, if you look at what Bickgo is doing, some of the acquisitions that they're making, they are certainly moving in that direction. and I think that that is where you're probably going to see the most success from a prime

brokerage style offering, at least in the near term. I think it's a really underappreciated narrative just around how quickly some of these firms are growing like a BitGo. Folks that operate in traditional custody world, I think would be very surprised at the growth there. At what point do you think it starts to make sense for some of these global custodians to pay attention? I mean, are they paying attention, first of all?

And then what are some of the regulatory things that need to happen in order for competition to emerge from that side? Because from where I sit right now, you have a couple firms that are just kind of running away with this market. Yeah, I think that the large global custodians in the traditional market, they're paying attention. But I don't anticipate them to jump in real quickly. I think that the market is just too small for them at this point to really move the needle for them. So to watch and wait and see. and then eventually this market's going to get big enough, and then they'll look to enter, and I expect them to partner with a BitGo or a curve or those types of players

or potentially acquire them at that point. But I think it will probably be some time before those really big global custodians actually come into this market in a meaningful way. It's interesting because you also look at just what market structure looks like in a traditional asset class. And in a lot of ways, there are people in crypto that want to rip all of that up and just recreate something from scratch. But the more you dig into it, a lot of these things are around for a reason. And there's a pretty good reason for most of these things. These things have evolved over

hundreds of years with risk controls and bifurcations of duties between firms. But one thing that maybe is totally unique about this industry is that the assets themselves are bearer assets, at least the public blockchain assets. So if you think about custody for a bearer asset, it's one thing if you lose a stock certificate, you can always reissue it. The company is not going away. There's some redundancy there. But if you're a big custodian and you get hacked and 10% of your Bitcoins are stolen, that's a huge problem. So in a lot of ways, maybe the ideal setup for a custodian would not be for the one custodian to hold all their keys, but for some sort of a consortium or partnership to emerge where you have a BitGo with one key and maybe you hold one key and maybe another

custodian holds a key. The problem is this is just not contemplated by existing regulation. So I'm curious your perspective on, is there any benefit to thinking about things like this? Is it a critical risk that you think the industry should be kind of pondering and just more broadly where you see it unfolding? Yeah, I think you make a great point that the crypto custody business is very different than a traditional security custody business. In the crypto space, this is largely a security business model in play. That is the utmost is the data security. You're protecting private keys. So how does this play out on is it best that you have single large global custodians that are holding very large percentages of the world's crypto? There are certainly benefits to that.

And if you're looking at how do you want to do settlement in the future, which we might talk more about, all the assets are held with one custodian that makes settlement very, very easy. But as you mentioned, that is, is it more secure to have it spread over multiple? I think there is certainly merit to that. If you ask Mike Belchie, the CEO of Bitco, he would agree with that, that there should be multiple custodians and that it is good to have diversification across custodians, whether you are diversifying yourself to the customer or your, those custodians are working together to split up keys or shard keys or whatever it is to make that happen.

I do think that there is certainly a regulatory regulation certainly just don't contemplate what does it mean for a qualified custodian to shard private keys amongst themselves is not contemplated, and I don't think it will be for a while. Yeah, unfortunately. I mean, it's hard enough time just defining possession and control in the eyes of the SEC. I think it's going to take a little while to explain multi-sig, but they should be pretty quick to understand it once they hear the benefits. Let's talk about exchanges a little bit. So this is a category that you've been quite active in.

I think there's a ton of strategic overlap with Jump's core business there. in particular, there's just a ton of growth happening internationally. So how do you think about investing in some of these exchanges? That's an area we're very excited about. One of our theses is that crypto is going to change the way that value is moved around the world and that these on ramps and off ramps in key jurisdictions around the world will play a key role in that because you will need to interact with the existing financial system.

You're going to need to be regulated. You're going to need to have customer acquisition. Those things that are core competencies for the local exchanges and brokerages are going to be extremely important as more and more value is moved around on these crypto rails. So we look around the world and look for exchanges and brokerages around the world that we can partner with, that we jump trading can bring their liquidity to and their trading expertise and hopefully somewhat play a kingmaker in some of these regions. So we've done this in a number of regions, been very successful with it. Some of them are not publicly disclosed. Some of our more recent partnerships are. For example, BITZO in Mexico, we partnered with barely recently.

They've been extremely successful. It's something like close to 5% of remittances to Mexico are now going through BITZO, which is absolutely incredible. Daniel is the CEO of BITZO thinks that could get up to 20% at the end of the year. So those are the types of partnerships that we're really excited about. We think they're great from an investment perspective and that we can also bring a ton of value from the trading side of the firm. I agree. I think this is a huge opportunity.

And I think one of the things that could be a huge catalyst here is stable coins. So if you look at just the strength of the dollar over the past year, but especially over the past month, now that the Fed is really starting to take extreme measures and you see almost a flight to quality on a global scale here. So I think you're going to have an insatiable appetite for folks outside of the United States that traditionally can't get access to the U.S. banking system to have, have exposure to dollars on a mobile wallet and transacted through exchanges. And I think we talk about Bitcoin being the apex predator of money, but it's really dollars right now. I mean,

that's really what's going to drive a ton of adoption in my eyes, at least. So curious if you agree and then just generally how you think about stable coins as potentially one of the first killer apps here. Yeah, absolutely. Completely agree. I love the mini series that you Nick did on a crypto dollarization. That is fantastic. And yeah, I think that that is, it seems like for a while people were asking like, what, what is the killer app for crypto? The first killer app for crypto is digital dollars. It's stable coins, open network dollars. Like that is clearly the killer app you're seeing. I think it's eight or nine billion dollars today as the market cap of stable coins. I think that's going to just grow exponentially.

I could see $100 billion of stable coins by the end of the year. Because as, as a lot of, you said, there is an insatiable desire for folks outside the United States for dollars. And there will continue to be that. And this is one of the, really the first way that a lot of these folks can get dollars. It's the first time that there's truly open network dollars. Cash is an open network, physical cash, that you can hand anyone cash. But all other digital dollars are effectively close networks. Bank accounts, Swift, Bedwire, on the consumer side, Zell, Benmo, and

PayPal, you know, they're all closed networks. You need to get into that network to get dollar value transfer to you. Stablecoins are an open network. Anybody can get a crypto wallet and get Tether or USBC or Pactos transferred to them. And that is just incredibly innovative and new and I think is going to change the world. So yeah, that is by far one of the things that I am most excited about in the coming years is the impact that stable coins have. Yeah, I think it's going to be fascinating and potentially just really disruptive to the geopolitical order too, right? You could see this type of thing leading to people just losing full confidence in fiat currencies in their local jurisdictions and just dollarizing in a way that like Panama has,

for instance, over the years, just using dollars. And maybe remittance corridors are just denominated in dollars as opposed to having that interchange at some point. You could see crypto just gobbling kind of huge swaths of this. And sort of the elephant's in the room, I guess, is Libra. What are your thoughts on Libra? Do you think it has a viable path here of launching with the refinements? I think it does. I think that they are clearly being very responsive to regulators and how they change their approach or modified their approach. They have the incredible inherent advantage of having two and a half billion users across the globe in Facebook that they can roll this out to. So I think it is very, very likely that Lever will be successful.

I do find it somewhat disappointing that the new version of Libra, at least as it will initially be implemented, is not a open network. They're going to launch it as a closed network, and then they have plans to have it become an open network with some controls on the dollar amount of transfers and other things for the open network side of it. But the initial launch, it looks like, will be a closed network, which I think is less innovative and disruptive than true open network money. but at the same time understand that they are doing what they need to do to make this palatable for regulators. I think about this sort of institutional adoption from a couple different lenses. One is that you're just going to see a lot of infrastructure built out to support this dollar use case.

So you're going to see exchanges do really well there. Custodians do really well, brokerage firms that enable this on and off ramp. Then there's sort of this other category around just buyside participation in crypto assets more broadly. And the big question there, after this infrastructure gets built around custody and trading and exchange and data, you know, at the end of the day, you have to have a dominant thesis for why you'd actually want to hold some of these things. And so there's various camps in our industry. You have the Bitcoin people, digital gold, the clear use cases just buy it and hold it. There's only 21 million of these things. So that's pretty easy to understand. And for my money is probably where the first wave is going to come from here. I find the other thesis around. kind of Web 3 to be a little bit harder to explain to a traditional kind of byside participant, like explaining the differences between the 12th and the fifth most used smart contract platform. Like that to me is just really an uphill battle. So where do you see this sort of

status of these long only byside participants in terms of what their thesis is and what they could get excited about on maybe a closer term time horizon? I completely agree with you. I think that The investment thesis that they're coming in under and that they will continue to come in under is digital gold, that this is a scarce asset, that it will do well in high inflation rate in the environments, and that it will have a low correlation with other assets. In the future, right now this is a bet on it becoming a multi-trillion dollar asset that acts like digital gold. It's not there yet, but that is the bet that people are making.

And I think that that will far in a way be the investment thesis that the buy side long only folks coming under. Because as you said, I think that the investing behind the smart contract platform, world computer, it's much more nuanced, complex, difficult investment thesis. Whereas I think that the digital gold narrative is much easier and just makes a ton of sense, especially in today's environment where the money printers around the world are all going for at the same time. It's really crazy. It's totally unprecedented. We've never clearly seen something like this. I guess we're all MMT people now. We didn't really have an option to be, but we got put into that category. One of the things that's obviously happening on the institutional level a lot quicker is just the presence of more established firms that are trading, either the underlying asset or the futures contracts. And you've seen futures and other derivatives start to become more prominent over the past year. or so. Last week, Renaissance Capital had an SEC filing that indicated that the Medallion Fund can now trade Bitcoin futures. I think they're trading the CME contracts. What do you make of this? This got some press. Do you think we should be paying attention to things like this? I think we should. I think it's a great sign. I think it doesn't surprise me at all.

The Renaissance folks are very smart people. So the fact that they're coming into the market, I think it's a very good sign. I think that the market is still small for them and a lot of funds of their size, if you just look at the size of the Bitcoin market versus their assets, it's not likely to really move the needle on their funds in the near term. But the fact that they're getting into the market, probably more of an R&D fashion, right now, I think is indicative of where this will go. And I think that they will follow the same path as folks like Jump and Cumberland and others that got in in 2014.

It started as smaller efforts. And over time, it built, and it became a course strategy for the fund. I think that you're going to see a lot of these large macro-type funds follow that same path over the coming years. Do you see any of these large macro funds getting into the spot market or do you think the derivatives markets are more palatable? I think that the derivatives markets are easier because it's an investment structure that is more familiar to them. Their systems are set up for it. Trading in the spot market is a whole different challenge. and there's a whole bunch of other risks,

technology work that needs to be done. It is very different. I think that's one of the reason that proprietary trading firms were able to come in earlier than others because it is just the capital of the owners of the firm that allow them to be more leading edge

to potentially take more risk on getting into new markets, whereas when you're managing other people's money, it's much more difficult to be fast on doing that. So I do think that they would eventually get into the spot market and I think they will eventually get into the spot market, having more investment products that are more familiar to these types of firms, things like an ETF,

I think will be very helpful on getting more market participants in, though. Yeah, certainly you don't want to be worried about things like custody, if you're just dipping your toes into this for the first time. Having to explain away loss of funds related to an operational error on a custody side would be kind of a nightmare scenario for a lot of these folks. The ETF is an interesting point. What's your view on what needs to happen in order to see some of these products introduced? I think it will happen eventually.

I think it should happen. I think it is a great product. If you look at the products that are in the market now, the ways that people can get exposure, they're largely imperfect product. I think that it does investors a disservice to not be able to effectively get exposure to this product. And I hope it happens soon that there's an ETF that facilitates that when it happens who knows, very hard to even speculate. I had a lot of conversations this week with folks talking about oil in the way that some

of these oil ETFs have really just broken over the past couple days. And it's crazy to me still that you can have these 3x levered ETFs on commodities, but stay away from the Bitcoin ETF. It's just crazy. Crazy. You can't get the Bitcoin. I don't know. It doesn't make any sense.

It really doesn't. So talking a little bit of maybe one of the things that is a real. reason, I think, that the SEC hasn't acted here is just around how the spot markets function for this asset class. So if you read the Bitwise denial and if you read some of the earlier denials from Winklevoss, they talk about the percentage of the market that is surveilled and kind of happening on these central limit order books. This is obviously an asset class that trades on central limit order books, but it also trades pretty vibrantly on the OTC markets. And there's a lot of evolutionary kind of discussions here. We have people in our portfolio.

to even disagree violently about this in terms of is this trending towards a central limit order book driven market and how prominent will that kind of OTC world be? Do you have a point of view on this? You see this breaking in one way or the other in terms of the prominence of the central limit order books versus just direct bilateral trading? I think it will continue to be both and there will be large markets for both of them. If you look at the history of jump trading, they are historically by and large on order book, Central Limit Order Book trading firm that really exceeds and excels in that environment. And when Jump Trading got into crypto trading, that's where they started, is being a very large

volume on exchange trader. What they saw over time is that there were large counterparties that wanted to work directly because it gave them advantages from a pricing, from a settlement, from a credit perspective, and just more flexibility on being a direct counterparty with Jump instead of going through a Central Limited Order Book. So they have built out those direct wholesale liquidity partnerships over the last several years and been very successful with those types of partnerships. So I think you're going to continue to see for large market participants working directly with wholesale liquidity providers like Jump Trading often is the best way to operate and then makes a ton of sense.

Well, at the same time, a central limit order book is almost by definition, a very efficient market structure. So I think you will continue to see that continue to be a very, very large portion of the market. So I think both will be there. I don't see it kind of breaking definitively one way or the other. How about the settlement after the trade on some of these things? That historically has been challenging. In the early days of this market, it was sort of the largest participant in the trade got to dictate the terms in terms of do you send crypto first, you send cash first, who's on the hook there.

How does that work now and where do you see that going? It's you send first. No, you sent first. Who's going to send first? Who's going to take the risk? That's historically how the market was. That is changing. You have companies like BitGo, which are offering automated, centralized settlement services

where they just get dropped copies of trades. They move the crypto. They move the cash. There's no hers set risk of one side, not delivering on it. I think that that is increasingly where you're going to see the market move to these more centralized clearing counterparties, which will largely be the large custodians, which is a much better business model than calling somebody up and telling them where to send the crypto and then you send a wire and those types of things. Yeah, you have these people that have

spent their entire career in middle and back office and they take a look at how the crypto markets function. This is probably more true two years ago. And it's the type of thing that would give them heartburn and keep them up all night, just worrying about some of the counterparty risks. It's unbelievable how a lot of the market has operated, especially a couple of years ago. You looked at trades for OTC trades. It was largely, you know, having over Skype and things like that. And then you send a wire, you send the coins. Luckily, I think what you've seen is like how traditional markets evolved over many, many years.

The crypto market has kind of compressed that down to like two years and gone from like a very early immature market to a fairly immature market now, where it still has some maturing to do, but it's getting much closer to what traditional market structure looks like. And the way that I think about that from an investor perspective is you have these visions of what you think or you know that the world's going to look like. I mean, you know that there's going to be this appetite for Bitcoin or something like it to be a store of value asset. It's not there yet, but you can clearly see that there's an appetite there. So you have a ton of infrastructure between now and that point in the future when it is a true store value that needs

to get built. Same thing for stable coins. So really the flip side of this, as we talk about how crappy the infrastructure is, is that's the nature of the opportunity. There's going to be some great companies that emerge that build these pipes and they become very, very valuable. Yeah, absolutely. And that's what we're looking for on the jump capital investment side is who's building the infrastructure that's going to support Bitcoin becoming digital gold, stable coins becoming the new way that money moves around the world, what are the companies that are going to capture value from this shift, which I think fairly clearly is going to happen in the coming years. One of the spaces that I know that you spend a lot of time on, and to be honest with you, we're probably

less active in this space, is D5, so decentralized finance and just the trading of these instruments in totally decentralized manners that don't involve central limit order books and trusted custodians. So speak a little bit about your views on Defi and what the company is doing around understanding the space a little bit more. So Defi is really fascinating. It's showing us things that are possible for the first time that never were possible before because you can have these totally decentralized application, whether that's trading or lending or derivatives or things that are completely run by smart contracts, which are fascinating. I would say for us on the investment side, we're looking at it.

If you look at our investments, most of our investments have not been in the area. And on the trading side, it's an area that I would call an R&D effort at that point. And I think most trading firms are probably in that same situation where it's something that is incredibly interesting. It's a very, very small market at this point, but there's a lot of interest on what's involving in that space.

So one of the things that we recently announced, along with CMT Digital, Cumberland, DV trading, CD Amerit trades, and some others is the Chicago Defi Alliance, which is basically there is a very large concentration of proprietary trading firms, trading firms in Chicago that are all looking at this defy space and are interested in interacting with the Defi community and helping to bridge that gap between Defi and trading firms,

because there's certainly as often a gap where you talk to Defi founders who are typically technical people that don't come from the trading world, and they are looking to, how do I get Jump in Cumberland and CMT, to trade on my new decentralized exchange or to put loans into my lending protocol or whatever it is. And there is just a significant gap on kind of how they would like to interact with these firms and what you actually need to do to potentially get these firms interact with you. So the Chicago Defi Alliance is an effort to close that gap and hopefully get trading firms more involved in Defi and also get D5 founders more educated about what it actually takes to actually get trading firms to work with them.

That's a good idea. I mean, it reminds me as you're saying it, that Matt Levine and his newsletter is always talking about technical folks discovering finance for the first time. And you see a lot of that in Defi where it's like, here's how we're going to do it. It's like, actually, that's just recreating something that's existed in financial services for the past like 40 years. Absolutely. And there's a lot of things that are happening in defy, which are fascinating and interesting, but aren't necessarily better than centralized solutions. Part of it is finding that real product-type market fit on, is this actually a better way to do things and understanding how things operate in the traditional world before trying to replace them?

I find myself at risk of being sort of a Luddite because at one level, I operate a venture fund that we focus exclusively on companies that are building stuff for public blockchains, which is about as far out there as you can get if you're talking to a traditional person. Most venture firms that are not in this space kind of see that as a fringe activity. but then I look at Defi and I sound like one of those haters almost or one of those Luddites because I'm looking at it and I'm saying hold on a second. I mean, if you don't have a KYC here, like how are you actually going to onboard customers? And if you introduce some of these centralizing functions, what do you actually have? Isn't this just a centralized function anyway?

If any part of the system is centralized, the whole thing cannot by its very nature be decentralized. So I'm trying to find a way to thread the needle between being really excited about what's going on and then just be. a little bit sober with my assessment on, are these things actually investable yet? Absolutely with you there, and that I'm probably out on the far end of the spectrum, on being bullish on crypto and how this changes the world. But a lot of defy, things that are happening in defy are exciting, but at the same time, far out there from an investment perspective. And we're watching and waiting.

No, that makes sense. Yeah, it's a little bit different, I guess, than from the internet, because of the internet, you could have these views, but you weren't talking about moving value. you're talking about moving information. So it just has these different, the look and feel from a regulatory perspective is just a lot different. So I'm always excited to talk to folks that are studying it in depth. Moving on, maybe a couple closing questions.

I'm curious outside of crypto, what you're most excited about just in the fintech space as you look out over the next year with some of these seismic shifts that are happening in a COVID world. Where are you spending most of your time? In the current environment that we're in, I think that the trading space is really exciting. You're seeing that with the adoption of Trading View, for sure. Trading View, it's the largest financial community on the web. And their website is on the cusp of being more popular than ESPN.com right now. Wow. Yeah, which I think shows you that people's attention

are turning to, like people like things that are competitive, that they can talk about in the way they talk about sports. And I think markets are becoming that right now with sports all shut down. So I think that trading is an area that obviously is close to what we do on the other side of the firm, but also I just think is really well positioned for the environment that we're in today. And I think a lot of new folks are being pulled into the trading world, both that's in crypto or just in traditional assets or in oil and trying to figure out what is going on in that market right now. What does that all mean? And there's their opportunities.

So that is an area that we are very excited about. One that's maybe less sexy is a compliance angle. We're investors in a number of great compliance companies. You mentioned market surveillance earlier. We recently invested in a company called Eventus, which is a market surveillance company. They work with most of the large crypto exchanges, as well as many, many traditional exchanges, banks, brokerages, etc. Just a huge opportunity there in the compliance world. Regulation certainly isn't going anywhere.

If you look at what happens coming out of crises is that there's typically more regulation. So that is an area that we are significant investors in now and over the construction. coming year or two, I think that we're going to be increasingly spending time on reg tech and compliance type solutions. That's fascinating. Talking about the trading, it's not surprising to me that something like that would be a lot more like trading view being more popular than ESPN makes a ton of sense right now. If you look at barstool sports, which historically talks about sports, Dave Portner is out there day trading on live feed all day, right? Like this is a new sport. Yeah. Losing a lot of money. It's appealing that audience. Yeah.

Yeah. So we're all in this. So we're heading in. So we're heading in. to a Bitcoin-having event, I think it's slated for the 11th or the 12th of May at this point. How are you feeling about Bitcoin right now? I feel really bullish about Bitcoin. Probably the most bullish that I've been since early 2017. No one knows what is going to happen to the price of Bitcoin. I certainly don't know. But if you look at just both the macro and micro things that are happening in the market, from the supply side to happening is obviously cutting supply. I think the conversation, around the demand for Bitcoin is changing, that it is mentioned in the same breath as Goldfowl.

And people are very serious about it as having those types of characteristics, having a place in a portfolio. I think that the conversation has changed around Bitcoin, especially over the last few months, which I think is a huge positive. And then from a just like a micro perspective on the market, we just went through the biggest de-leveraging in the Bitcoin market that we've ever seen with liquidations happening on BitMex, CMB features, et cetera, coming down. obviously was brought down the price of Bitcoin as we went through a de-leverging cycle,

but now we've gone through that cycle and we've set ourselves up for the next cycle. And I think that that is a very positive development for Bitcoin. So if you look at all of the elements, both from a micro and a macro perspective, hyper bullish on where we are in the Bitcoin cycle right now. I'm with you. I think it's going to be fascinating to see how this thing trades heading into the halving. You have the efficient markets folks saying, look, it should already be priced in. but the reality is there's a lot of infrastructure getting built here. And the 21 million is a pretty

hard cap. And it's getting scarcer and scarcer by the day. What is it? The quantitative hardening. I've heard some people call it. I think that's a good way to talk about it in the context of other assets that are certainly not hardening. Quantitative hardening. I love that term. And yeah, I think that Bitcoin is a long way from being an efficient market at this moment that we'll get there. But I don't think anything is fully pricing at this point. Well, we could talk about this for hours. this has been a ton of fun. Peter, where can people follow you and stay in touch with Jump. They can check out Jump Capital at jumpcap.com. Follow me at the Chicago VC on Twitter. And yeah, message me on Twitter. It's probably the easiest way to get me. It's at the Chicago VC.

That's awesome. Well, I'm looking forward to doing the next installment, hopefully in person, post-COVID. So thanks so much for joining today. Thanks, man. I appreciate it. Thanks for listening to another episode of On the Brink with Castle Island. To find out more about Castle Island, visit castle island.vc. 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.