On The Brink with Castle Island - Spencer Bogart (Blockchain Capital) (EP.02)

Episode Date: September 24, 2019

Spencer Bogart, General Partner at Blockchain Capital, joins the show to discuss his current views on Bitcoin, Smart Contract Platforms, Ethereum, and advice for those who are looking to enter a career in the cryptoasset industry. For more information please visit our website at www.castleisland.vc and follow us on Twitter @CastleIslandVC.

Hello and welcome to the On the Brink podcast with Castle Island. I'm your host, Matt Walsh. So this one is our first interview episode, and I'm really excited that we were able to sit down and speak with Spencer Bogart. A lot of you will know Spencer. He's a general partner at blockchain capital. In previous to blockchain capital, he was a vice president at Needham and company. And Spencer has a rich history in this ecosystem and has been publishing research since 2014 at Needham on Bitcoin. And so we spent a lot of time talking about that, the early days, thinking through valuation models of how to think about Bitcoin and other crypto assets. We got into some discussion around smart contract platforms and what the investment thesis is for that category. We spent some time talking about Bitcoin, not surprisingly, and talking about some of the fud for Bitcoin, both merited and perhaps unmerited. And then we spent some time talking about Libra.

And so it was a great conversation. Really hope you enjoy it. Spencer was very generous with his time, and let's take it away. Brought down by bad mortgage investments, Lehman, which has 25,000 employees, will be liquidated. The federal government loans American International Group, AIG, $85 billion. This is a different kind of market, and the Fed is asleep. The federal government is stepping it to stabilize Fannie Mae and Freddie Mac, the two mortgage giants that have been threatened by the housing crisis.

The Bank of England has pumped 75 billion pounds more to Britain's ailing economy with a new round of quantitative easing. You print a couple trillion dollars, and all of a sudden, people start to worry. So out of this worry, we have something called the Bitcoin. Welcome to the On the Brink podcast. I'm lucky to have Spencer Borgart, general partner at blockchain capital. Thanks for having us, Spencer. Thanks for having me, Matt.

We're in your podcast studio. This is very nice in here. Thanks, yeah. I always like coming to your offices because I can see the old mining equipment. It's kind of a reminder that that is a little bit of a deathbed of startups in the space. that's exactly why we keep it around is a reminder of like every time someone comes along and wants to say that new money printing machine, which is basically what all kind of mining pitches end up being to be careful. Don't touch the fire. Friends don't let friends invest in

some of those startups. Yes, exactly. So we'd love to jump in and start by giving the listeners a sense of what your career trajectory was. We've had a relationship back to when I was at Fidelity and it was interesting because I started by reading your research. So we'd love to just give the background on how you got to where you are right now. Prior to joining Needham, actually going back a couple of roles, I was working at a fund of hedge funds. And this was basically straight out of college. And it was basically just digesting a lot of the research that was coming out of all these hedge funds that this family office was investing in. And I was blown away by the research.

I thought it was some of the most interesting things I've ever read. And I couldn't believe that people were paid and paid well to do that. And so I said, okay, how do I find a way into a role like that? So coming out of the fund of hedge funds, I started earning my CFA charter. I went to a relatively small startup that later became known as ETF.com and was ultimately acquired by FACSET. And at ETF.com, we built kind of a first of its kind, ETF analytics platform so that you could understand the nuances and intricacies of any particular ETF. At the time, most tools were really built for mutual funds, but with an ETF, you have to consider liquidity. You have to consider a lot of other

factors that are really different from a mutual fund. So that was really interesting, good startup experience, interesting from understanding that research is very difficult to sell. So we We started off selling that as a platform subscription. Indeed, as we see time and time again, selling research is just extraordinarily difficult. So while the company had decent traction, that was a particularly difficult endeavor. So from there, with eyes on kind of that hedge fund type of a role or by side investor kind of a role, went to Needman Company, which is a kind of mid-sized investment bank, and joined the equity research team. That would mean, in my case, I was covering a particular sector, which was SaaS companies, SaaS and a little bit of internet,

software as a service companies, if you're not familiar. And you have kind of of 10 to 12 companies. You cover their earnings reports. You write research. You try and do channel checks on how things are going with the company. Basically try and pump out research that you publish semi-publicly, mostly to buy side investors who then want to kind of call up and debate things with you. So at Needham and Company, that started to be the first kind of like publishing a lot of fundamental equity research and then eventually found a way to kind of segue that into blockchain and Bitcoin, which I'm glad that you were a reader. Yeah, it was funny. When I was at Fidelity, I remember for the longest time, I was an early evangelist there.

and we're trying to get people excited about it. And I remember being able to point to a Bloomberg terminal and pull down a research report by you or from Gil Luria. Yes. Wed Bush was doing some work in those days. And I remember that was a real impactful thing to be able to send it off to someone. And it gave certainly an error of legitimacy to some folks internally. How did that all come to pass? Like how did need them get into Bitcoin?

For one, big hat tip to Gil Luria, who I'm very envious that he was the first on the street to beat me to publishing research and putting a price target on Bitcoin. What happened for me was actually going back to the ETF.com days when I was at that ETF startup. We do kind of morning research meetings. And then in, let's see, it must have been kind of end of 2012 or early 2013, Bitcoin came up in one of our morning research discussions. I think it was when it hit parity with the dollar. So when it hit one dollar, someone on the team mentioned it. I was in this extremely ambitious stage where I felt like I need to know more about everything than everyone, which is obviously very unreasonable, but it irked me that I hadn't, I didn't know about Bitcoin. This is the first

I was hearing about it when I hit a dollar. So, you know, as with everyone in the space, you go deep down the rabbit hole. And then at Needham, you know, after we kind of went through the whole 2013 cycle, and then you're kind of 18 months after that. And the fact that Bitcoin hadn't died had really caught my attention. I'd been following it kind of on the sidelines, watching what was going on Reddit, some of the message boards on Bitcoin talk and stuff. But realized that there was a time when this was coming back in a big way. So started, again, realizing that for one, anybody approaching the space, they didn't have any good way to kind of make a lay of the land. Like, who are the companies? Right. So traditionally, like a lot of investors, they look at a

industry report. So if they want to understand anything, they go in, explains kind of like, what is this new technology? What areas is it disrupting? Who are the major players in here? What are some of the trends that I can kind of watch? And I couldn't find anything on the blockchain industry. So I decided to put it together just for myself. I didn't really plan for Needham to publish it. I was just going to kind of release it anonymously online and figured hopefully one or two other people might get some value from it. But fortunately, a copy had kind of circulated internally as I was getting some review on it. They said, you should definitely publish this here. So, you know, big hat tip to Needham and Company for looking at that and saying like, hey, you know what,

this is actually a really interesting trend that's going on. We should definitely be publishing research on it. You're now the person that's publishing research here. Go ahead and write on blockchain at large and then more specifically started spending all the time on Bitcoin in particular, as it was clearly the most interesting thing going on. That's fascinating. I think we're about the same age. I think a lot of people took what was perceived to be a big career risk around getting excited about Bitcoin and the blockchain industry.

Turns out that I think when you're young and you're breaking in, it's less of a career risk than if you'd been at a place for 25 years and all of a sudden you turn into the Bitcoin guy. That's it, 100%. Definitely that risk reward ratio looks a lot better when you're a little bit earlier in your career. And just the fact that I'd say some of that risk is. in a way subsidized by personal interest. This is so interesting to me, and I spend so much

of my time thinking about it that the opportunity to spend a significant portion of my professional day also doing it, not just my personal time, it's just a huge tailwind. When you go back and read some of these reports, I think they're remarkably prescient in terms of your understanding of Bitcoin at the time, and certainly that's probably evolved a lot. So how were you originally thinking about what Bitcoin is and how would you ascribe value to it? How are you building up these valuation models, and then compare that to where maybe you would consider Bitcoin to be right now. And if you had to go back and think about some of the work you were doing, would you be doing it the same way? Yeah, that's a good question. So, I mean, let's see, when I first published research

on Bitcoin put out a price target, it was $650 kind of price target. I think Bitcoin was trading around 400, 450. So it was, you know, seemingly to the street from what they're used to. Price targets tend to be maybe 10, 20 or 30 percent higher. But having something that's 50 percent plus higher, but having something that's 50% plus higher than what it's currently trading is a little bit absurd to most byside investors. What I really did when I wrote that was, again, just trying to drill in to explain what is Bitcoin and understand a lot of its core differentiators. But then the hard part was really building the financial model around it because Bitcoin is still to this day, very, very difficult to model. So again, what I did was build on Gil Loria's kind of model and

the foundation that he had built. The big problem with Gil's model was it had been built entirely on Bitcoin ascribing value as a payments network. So what I did was said, okay, well, it seems like it's, you know, moving much more towards a digital gold. I guess for listeners nowadays, that probably seems like absurd. But this was a big distinction at the time. It was just starting to emerge, really. So what I did was really value most of Bitcoin around like, okay, let's assume that it can get some percentage of the gold market. And then started to kind of layer on some additional payments utility value as well.

How is that shifted to today? I would definitely ascribe little to no value currently to its payments utility. Other ways that shifted is having a deeper fundamental understanding of the value of the network. So, you know, we've talked a lot in the past about strong assurances, about non-sovereign property rights and about how important those are. So that was definitely a major one. Some of the other things that changed were just appreciating the size of the store value market. So, you know, originally just thinking about it relative to gold in a $9 trillion market, but then also layering on some things like, again, art and collectibles markets,

which are probably, you know, roughly a $2 trillion market, layering on the fact that a substantial portion of the real estate market, anywhere from probably, like roughly 5%, is probably ascribed to real estate as a store of value asset. That is something that is actually scarce. Those are all kind of the major shifts. Yeah, that's fascinating to hear you say that. I'm going back and I'm thinking about some of the companies that were started back in the 2013-14 time frame that were really startups that were born out of this understanding of, hey, Bitcoin is a payment rail and we're going to build a payment rail type of company on top of it, a merchant processor. are a payment-oriented business.

And what you're saying really highlights that core risk of not fully understanding what the protocol is good for. And certainly there was a civil war eventually fought in Bitcoin over, is it a payment rail or is it digital gold. So coming to those understandings early on is pretty remarkable. Well, it's very fortunate, too, because a lot of that was because the industry was so much more nascent at the time, getting access to a lot of the smartest people in the space was a lot easier at that time.

So, you know, I would give big credit to people like, Dr. Adam Back at Blockstream, who's cited in the Stoci White Paper. I mean, a lot of people like that that, you know, had very extensive long discussions and were very generous with their time to help educate me about, like, why, okay, if you go, if you go left here and you try to become a better payments rail, like, why that's going to result in something that's far less interesting than what it could be. I wish I could say I discovered all that in my own, but it was really from, you know, standing on the shoulders of the really intelligent people in the space.

And there really is such a generosity of time in this industry. It's one of the most remarkable industries I've ever been associated with. I often think that it's just such an idea of meritocracy, too, where you see these young people that just burst onto the scene. I mean, Derek being a Kenjol, perfect examples. Those are a couple of our analysts, by the way, here at blockchain capital, and all of whom have earned their positions in their own right by discovering the space, diving deep, getting access to people that were more experienced in the space and then ultimately being able to formulate kind of their own opinions. And there's countless examples, but those are two great ones,

yeah. Switching gears a little bit here, you have an analogy that I really like. It's a Bitcoin as a platypus. Talk a little bit about what you mean by that. And you introduced this analogy a couple years ago. Let's talk a little bit about that. A little bit of background on the platypus. So it's probably the most bizarre creature on the planet. It's a venomous egg lane, duck-billed, beaver-tailed, otter-footed mammal. Like, those things aren't supposed to go together, like, none of them. When someone first kind of said, like, hey, I found this animal and described it as such with all these features, the leading scientists at the time really thought this is a fraud. And then apparently at the time,

that was kind of rampant that people were kind of like making up animals. like winged Pegasus and stuff like that and trying to trick people into believing that it's real and you have to come to this corner of the world, namely, I think it was Australia where the platypus was kind of discovered and might still be native. And it was interesting at the time

because, again, people had this kind of cognitive dissonance around it that such a bizarre creature couldn't possibly be real. And then once people even, they finally got a specimen of it, the leading scientists, I think, who were back in Europe kind of at the time. Even once they got a specimen, they said this is just a really intricately sewed together thing,

like it can't possibly be real. And then finally even once it was accepted, as a real animal, then ensued a lot of discussion debate about, okay, well, what category of animal does it fit in? Because it has all these attributes of different animals. And then ultimately had to create its own category for it because it was extremely unique. And now I think there's a couple of other animals that fit in that same kind of category. Bitcoin is similar in that, and that exhibits characteristics that cross several different asset classes. So at times it can be used for payments like a currency. It's scarce, kind of like a commodity. At times,

as distributed, quote-unquote, special dividends like an equity. And it also derives kind of additional value from developer activity in the way that maybe a technology platform would. So it kind of resembles all these different characteristics. And when I talk to a lot of by-side institutional investors, and again, going back to those Needham days, the great thing about doing sell-side equity research is when you publish, people call you and they like to tell you that you're wrong about something. Publishing on Bitcoin, I got a lot of people calling me, telling me either just one that I'm crazy or here's why this will never work. And a lot of it revolved around people trying to fit it into their neat mental buckets. I talked to the currency

people or the FX traders and they said, this couldn't possibly be a currency because I don't see goods widely priced in it. And it's too volatile. Definitely can't be that. When you talk to the commodity investors, you know, they said, for one, it's not tangible. I can't touch it. So it's definitely not a commodity. And even more importantly for some of them, because even a lot of the commodity investors are skeptical of gold would say it's not consumable. It's not an industrial metal that's used in production. It's not an agricultural commodity that people can consume. And likewise, when you talk to people about it being maybe a technology platform or company, they said, okay, well, who's the CEO and where's the headquarters and how can I get in touch with them? And when you point out that there is none, they said, okay, well, it's definitely not a technology platform either.

The point being that it doesn't fit neatly into any of those buckets, and that causes a lot of traditional investors to dismiss it. They say, okay, well, it does not fit in my bucket. This is what I do. I do commodities. This doesn't quite resemble all the other assets that I'm looking at. So I'm going to dismiss it. In reality, I think that Bitcoin is an entirely new type of asset. Of those, it's probably closest to a commodity.

And I think now is widely accepted as a digital gold. Like the platypus, it had to create its own kind of category here. And now, sure enough, we see a plethora of other assets that fit in that category as well. Yeah, it's a fascinating analogy. You know, I wonder if over time there's going to be more use cases that come out and more analogies that make this more digestible. That was definitely one of the harder things as we were pushing forward at Fidelity just to explain what is this stuff.

And so you had a whole wave of time in 15. and 16 where it was about the blockchain and not about Bitcoin. At that point, I think Bitcoin was almost a Trojan horse. You'd go in with the blockchain angle and then you'd say, well, you know, but actually the real thing here is Bitcoin. And then, you know, we had the colored coin zero, which was about asset issuance on top of Bitcoin. A lot of that narrative ended up getting soaked up by ERC20 standard, at least in my opinion. 100%. It's evolving quickly over time. And I'm curious what your views are, is this digital gold narrative, the enduring narrative? Or do you think that will evolve more towards unforgeable property rights, new governance mechanisms, new organizing principles?

Kind of a big question. That is tough. Yeah, that is a big question. I definitely think that the digital gold narrative is the strongest one for now. I think we'll continue to be for the foreseeable future. I think that notion will continue to underpin Bitcoin for a very long time. I think that you can also layer on things about, again, having these like non-sovereign objective property rights. We talk a lot about why that's particularly important. But I think there's also somewhat of an opportunity longer term for it to evolve and do more of a currency. I think particularly as adoption increases at some point of Bitcoin goes the way that you and I think it's going to go, Bitcoin will be so large that daily movements of capital in and out of Bitcoin will not have

the same effect on price that they do today. So it'll become drastically less volatile. It'll make it a little bit more useful for as a currency, potentially at a point where there's much less upside than there is today, people are more willing to spend it. A lot of that could start to change. And I think that to the extent that it does, it won't really resemble most of the currencies that we're familiar with today and that it's completely non-sovereign, that is not issued by any particular government, and that it's programmable. While people in a lot of other ecosystems like to talk about programmable money, Bitcoin is highly programmable. Today, the most used smart contracts are probably multi-signature smart contracts. The fact that I can send Bitcoin to an address and specify either with a

multi-sig address or a time lock that this Bitcoin cannot be spent unless, say, three or four people or five out of ten agree, or that it can't be spent until a particular point in the future. I think those are examples of things that in the legacy world, you probably would have had to go and set up a trust. You would have had to do something like this. And instead, that's just a couple lines of code in Bitcoin. I think that's extremely powerful. I think that people are going to extrapolate that functionality out, but I don't know exactly

what they're going to build with it. That's part of what makes the venture investing in this industry so interesting. I love talking to you because I think we could just pump each other's tires on Bitcoin so much. As you're talking, I'm thinking about the percentage of US GDP that's tied up in these trust brokers and these intermediaries that are doing things that theoretically with better property assurances could be targeted. But I want to take this in a different direction because I think we can fanboy out on Bitcoin for a while. And my partner, Nick has the fud dice, which is essentially it's for those who are not familiar, just Google fud dice. But they're basically. list critiques basically of Bitcoin that you would hear from the Paul Kroogmans of the world, the kind of intelligentsia. Obviously, we think that a lot of these critiques around what doesn't scale at the base layer or mining is destructive to the environment and that's not going to work. We have answers for these questions. I'm curious what your perception of what some valid fud is for Bitcoin. What are some things that you worry about? That if you were to wake up five

years from now and things went south. What would that look like? That's interesting because I think you frame that question exactly right that most of the critiques that you hear, there are just very, very good responses to, any of the ones that you mentioned, anything that's on the fud dice, really. That's the reason why I love them is that it really reduces it to something that's kind of fun. So when we have someone come in the office and they mention one of the fud items, are like, here, roll the dice. Yeah. And then they're like, oh, wow, you've like actually like somebody made dice for my particular concern that I thought was going to be like an Achilles heel of Bitcoin and like you guys are making a joke out of it in some ways. We're on the third run right now. There's a lot of great critiques. There are. I guess mine

would be one that I don't hear come up as much, which would just be, you know, kind of, I don't even think they'd be successful, but just social and political attacks, maybe the best way to mitigate adoption of Bitcoin is to convince people they don't want to own it. So not to literally attack it, not to talk about how it won't work for X, Y, and Z, but just to try to convince people they don't want to own it. That could be done a variety of ways. What we saw in 2013 was very much a narrative around, you know, this is a drug dealer coin. Since then, people have learned that it's really actually not that useful for those kind of purposes. Potentially, one concern would be if I started to see a very concerted effort to brand Bitcoin as a

terrorist coin or something like that, something about child abuse, anything like that, that people have basically like a pure and understandable need-jerk reaction to of like, hey, if I think for any reason, whether it's true or not, that this is associated with any of that kind of activity, I'm going to run the other direction away from it. And again, I think that's a reasonable response, except that you'd have to actually examine in the underlying critique and see, like, is it actually used for those things? I mean, of course, we all know that the main tool of funding for any kind of terrorist organization or for any child abuse rings for that matter really revolves around US $100 bills. It is a baseless claim, but most

people don't have the time to evaluate every claim they hear. And it certainly has some sticking power if people just, you know, start to label it as something like a terrorist coin or something like that. I think that would instill some fear in people. So that's a little bit of a softer attack. And I think something like that coupled with just trying to so division, within the Bitcoin community itself. I think that united the Bitcoin community or any of the kind of maybe broader crypto community has lots of ways to kind of address these concerns. I mean, we can, we can track some of these things. We can address and put them into actual quantifiable statistics. But again, if you were able to divide the community to some extent, then you don't have a united front

anymore and you have a very active kind of social or political attack against it. I don't think that would actually stop Bitcoin from being successful. I mean, Bitcoin was at a much more nascent and fragile state in 2013 when it was broadly labeled as a drug dealer coin. And that didn't kill Bitcoin then. So I don't think a similar kind of attack on a different front would really be successful longer term. But it does concern me about how long it would take to recover from that kind of a narrative. It would certainly set it back. Yeah, I think about the social attacks a lot. And I think, you know, it's great that we've been through 2X at this point. If you think back at how crazy that actually was, you had some of the largest. And for those who are not familiar, so the 2X debate,

essentially a scaling debate around the block size that really divided the community and eventually resulted in Bitcoin Cash Fork and several derivative forks have emerged from that. But if you think back on that, that was such a crazy time where you had some of the leading CEOs in this industry really pushing forward, and the leading developers too at the time, or at least perceived as the leading developers. 100%. They were at the time, yeah. Bitcoin was able to withstand that. So I'm not trying to say that that is not some good fun.

Maybe I'll throw one at you and just see what you think of this potential fud. So one thing I think a lot about is just the stability of the block reward after the senior age period is effectively over. And so if you think about how miners are compensated right now, a big part of the minor revenue is the block reward. So new Bitcoin is coming into existence. Over time, that will asymptotically that will fade and will have to emerge a fee market if we want it. So I worry that we might need to start thinking about the stability of the network in terms of security. Is that just, I shouldn't be worried about that right now. We'll worry about that in 20 years once it's actually a reality.

It's one of those things that I'm very glad that people are digging into it and spending a lot of time thinking through these things. And my general take is it's not a realistic problem that we run into, you know, from all I can see until about 100 years from now when, you know, seniorage actually runs out here. when block reward shifts entirely to transaction fees away from block reward. For one, there's that. I don't think it's ever worth really addressing trying to address technology problems that are 100 years in the future today. If you tried to do that, go back 100 years and try and solve technology problems that existed there for today, it would be a completely fruitless endeavor.

But that said, I think that maybe people that would advocate for that as an issue would say that the issue actually comes in place much before 100 years. So we've already, the block reward has already fallen. 75% since launch and it's going to fall another. Again, issuance will cut in half in May 2020, so only a few months from now. So maybe there's some soft period in between there. I guess that's also one of the reasons I'd push back on on that notion is like, okay, well, new issuance has already fallen 75% and the network seems to be doing better than ever. So is there some magical threshold between falling 75% and falling 100% where all of a sudden it really changes the dynamics?

I'm not 100% sure, but it's definitely not something that's keeping me up right now. If we actually encounter that problem, then we can deal with that. There's certainly ways to adjust it. And for one, I also, this is somewhat of a controversial opinion, but I think Bitcoin would have been okay if it had launched with tail inflation, if it didn't have a strictly absolute supply. That said, you know, now that it has launched with an absolute supply, I think changing it would be, without there being like an imminent threat or some imminent risk to it, I think would be extremely premature, I'm an ill-advised. But we'll see. Yeah, I've heard Peter Todd say similar things on another podcast. I tend to agree. I also agree with the fact that at this point, $21 million is really

a religiously ingrained part of the protocol. 100%. As much as I think it would have been okay if it had some permanent tail inflation, perpetual tail inflation, it certainly gives you a stronger kind of shelling point or talking point around having an absolute scarcity of the asset. Even if it had been okay, would adoption have been slightly more limited early on without absolute scarcity potentially? Would we be quite where we're at right now? Maybe not. not, but again, without a parallel universe, pretty hard to tell. What are your biggest fight items? Or like, what keeps you up?

I think that the stability of the block reward, first of all, I worry a bit that, and I don't think that this would impact Bitcoin at the protocol level, but I find myself frustrated around just the slow market infrastructure build out here. I think it's pretty clear if you believe that public blockchains are going to be a thing. Most people believe that they will be financialized in some way and that they will have to there will always be this cyphor punk element that can operate outside of the traditional financial services system, but there will also be this interlaping framework with custody and regulated exchanges. I really see two categories here being pretty critical to start building out as soon as possible,

and one is a qualified custody. Fidelity's made great strides with that. Gemini has had a product in market. Anchorage is another company that's doing some great things. We need to, see a qualified custodian that can operate under SEC guidelines and that can meet the definition. And the SEC also needs to give some clarity on what it takes to hold a digital asset in a good control location under 15C3-3-3. And if you read the Bitcoin ETF denial for the Winklevoss ETF, it calls out qualified custody and it also calls out regulated spot market exchanges. And so I think that we need to see more development there. So again, it's not a Bitcoin issue, but I think that there has been a remarkable reticence on behalf of a lot of major financial

services institutions to get into this space. And it's kind of baffling to me. It's probably baffling to me because I've been on the inside of a very forward-thinking company. But you take a typical retail brokerage or a custodian, so you have custody fees that are trending to zero for traditional assets. This is an asset class where you could command orders of magnitude higher than that, currently. Absolutely. You have customers. We're about to be a lot of business. We're about to experience one of the largest intergenerational wealth transfers in the history of the world with the baby boomers passing their wealth on to their offspring. Those people are going to have a new front door to financial services. They're not going to interface with the same financial services

that their parents did. And by the way, those are the people that are really keyed into Bitcoin and crypto assets. And so I think there's some real economic incentives to start to care about some of this stuff. And I hope that that goes faster. So those are the things that I think. about. Yeah, no, I think that all makes sense. And I think that most people in the industry would have expected that maybe some of the infrastructure would have been established, at least before now, when we're starting to see some of that come online. So it's encouraging, and it's always one of those things that with a new technology, with an entirely new type of asset attached to it, things just take a little bit longer than people would expect. But I think it'll continue to

play out. Hope so, hope so. So switching gears may be giving you the flip side of that question, and then we'll get off of Bitcoin. We're not going to talk about Bitcoin all time, although it's tempting. What excites you the most about where Bitcoin is right now? And talk a little bit about maybe the macro environment that we're operating in and where you see Bitcoin fitting into that. Yeah, the macro environment is absolutely fascinating right now. So, I mean, for a long time, I thought the biggest experiment in money right now is Bitcoin, but central banks have found a way to one up the experimental status. Bitcoin is incredibly steady and very reliable, ultimately at this point. But where we're headed in terms of central banks, competitive monetary devaluation,

the fact that we have 16 trillion of negative sovereign yielding debt in the world. These are places that we've never been before. I think that multiple central banks are starting to admit a little bit more that we don't have any playbook for this. We've never been here. And that's a fascinating environment for Bitcoin to be at the stage where it is today. As much as I would love to say that I think that Bitcoin is a risk-off asset and that if we had another financial crisis that somehow Bitcoin would be a savior for many people

and would be this amazing tool for people to use. I'm not totally convinced that the price will react that way. I do think it has that utility value in that you could shut down all banks for a week and you could still use Bitcoin. So it definitely still has a lot of that kind of utility value in this kind of severe downside scenario. But again, from a price action standpoint, you know, the fact that if we end up in true liquidity crunch scenario, like people sell the most liquid assets they can to meet their liabilities.

One of Bitcoin's great attributes is that it is actually highly liquid. So it would presumably be something that would sell off. But in the broader environment, environment of every central bank in the world trying to devalue its currency more than the others, because devaluing at the same pace as everyone just means that we're all still at the same level is an absolutely fascinating time for Bitcoin to be alive. And to provide, again, not saying that it's a silver bullet for any of that, but at least provide some alternative and something else for people to potentially be able to hedge some of that risk. That makes a lot of sense.

So maybe switching gears and moving on to another category of crypto assets. So smart contract platforms. Let's talk about those for a while. And so there is a just a ton of money pouring into this space. There's, as far as I can tell, there's close to 15 to 20, quote unquote, Ethereum competitors, smart contract platforms. What is the investment case for this category? I mean, how do you even think about what this category is? And it doesn't have to be your investment case, but what is getting people so excited such that they're pouring billions of dollars into these type of public protocols. Yeah, so again, I guess I'll start with something that's not my own view, but I think, you know, from talking with other venture investors in the industry, that it would

be considered by some, maybe potentially many as kind of a, the next computing paradigm and see it as all of future applications we've built on this because it's simply superior architecture. I'm not totally convinced of that yet as venture investors in the space. I would like for that to be the case. You know, I think that we already have a very large investable opportunity, but that would explode it out by 100 times. The big challenge with most of these things is that we really haven't seen a whole lot of demand for decentralized applications to date.

Many would say that that's because of throughput concerns, scalability concerns, and that once the right platform emerges, that we're going to see some of those begin to actually drive user traction. But so far, I haven't quite seen the types of decentralized applications that new users are really going to care about.

So far, most of what we see, and this might just be a natural part of evolution, is that most of the things, most useful decentralized applications today. Well, for one are only kind of semi-decentralized, but that's a separate factor. But they serve inside the community, right? So they serve people who are already holding Ethereum that are already holding XYZ token. And they don't necessarily appeal to any new users to come in and say, like, wow, that's amazing. I couldn't do that before. Let me get in here and participate in this new network. Overall, we've been relatively skeptical

of most new smart contract platforms. But, you know, again, I hope that many of them are successful. and would certainly not hesitate to invest them if we start to see some more traction. Some uptick. And by the way, you mentioned the kind of insular nature of some of these economies in the D5 space is what I think you're referring to. So great blog post a couple weeks ago by Albert Wenger over at USV talking about some of those dynamics with Ethereum. I think is Ethereum, the AOL of crypto.

So check that out. But maybe moving back just to the category more broadly, one of the things that I've struggled with in just looking at these smart contracts. platforms is, you know, you could easily imagine a world where they work from a technical perspective, but the token itself does not retain value. The seminal piece of thought on this is by John Feffer with his piece, the institutional investors take on crypto assets and goes into the equation of exchange for how you would evaluate a currency, basically. So the monetary base is equal to the price times the quantity divided by the velocity of the currency. In his argument,

which I think is a very sound one, is that if the underlying asset is not treated like money, if there is no inducement to hoard and to actually save it, like you would save a dollar or a gold, then you would be induced to only provision the asset on a just-in-time basis. And so you need to procure file storage, get the proper crypto asset on a just-in-time basis, and do your application. But, you know, normal people don't hoard canisters of old. oil in their backyard or big barrels of oil. They put some in their car when they need it. So the argument would be that if you do not have that holding preference, if the asset is not treated like money, then the token just would not be worth a lot. So then maybe that's an argument against

the fat protocol thesis and says that the protocol might not be the very valuable. I mean, what do you think about this? Is this, is there validity to this? Do you think that these smart contract platforms can exist if they're not treated like money? That's a very good question that don't have a clear answer to. I'm inclined to believe that Fephyr's view here is correct. From direct experience with this, again, you know, and tying us back to our earlier conversation about publishing financial models and publishing research on Bitcoin trying to arrive at a price target for it. The big boge in there was like, what do you assume for velocity? You adjust velocity a tiny bit and it has a massive impact on like what your expected price is. And I don't know what to

expect for the velocity of Bitcoin, but I do know that a lot of people want to hoard it, like you said, and they are very hesitant to spend it at all. So I definitely think that gives it a huge competitive advantage on that front. Whether or not every smart contract platform is dependent on that, I think it's a very, very reasonable thesis. I'd give it an above 50% chance of being right, but I'm open to seeing otherwise. Yeah, I think you have to be open-minded to look at these things. I mean, one of the things that I often talk about with Nick is that every venture fund missed Ethereum. So it was one of the biggest misses of all time in terms of a new category being created. You know, and who knows, it might not pan out long term. But I think there's been this massive overcorrection into the category based on missing that. You know, and one thing I think about is, could any of these smart contract platforms ultimately be successful and be treated as global non-sovereign money if a venture fund owns 20% of them? If Castle Island Venture, venture, owns 20% of smart contract platform 37, are people internationally going to actually want to use

this thing? Or would they rather use the currency that was born without a initial ICO? I'm inclined to believe that that makes it extremely challenging. Is it an absolute non-starter? Probably not. I mean, if you made something that was truly, really useful in an asset that people really, really valued and wanted to hold, would they really care if a particular person on 20% of it? I think that you could get over that hump, but it's certainly, creates a significant hurdle to get over. Yeah. So I largely ascribed that same thesis. I just trying to be too close-minded to it. I think that that's right. So I guess it comes back to the classic Strong View Weekly-held. If I see proof otherwise, I'm very happy to be wrong there, to be

honest. So on Ethereum, you're doing a lot of work just understanding these development paradigms with where the talented developers spending their time. My perception is that there's still an awful lot of things going on in the Ethereum ecosystem. Just curious your views, generally on what's going on in that ecosystem and where you see some challenges, but also some bright spots. At the highest level, I think that most of the Ethereum killers are overrated. I think they're overrated in the same way that many of the Bitcoin killers were overrated in early days. And the fact that having a fair launch, having a significant network effect already established around it was a meaningful advantage and that improving a little bit on throughput,

improving a little bit on speed, improving a little bit on privacy, these were not things that were zero to one moments. These were things that either took us from kind of a one to a one point one, or in some cases even backwards. Some of them I think were actually just, they weren't improvements at all, took us from one to zero point nine. And I think that that's what you see with a lot of the, you know, quote unquote, Ethereum killers today. I think that actually Ethereum has an above average chance of continuing to persevere. And I don't even know that it necessarily needs, I think all the efforts around ETH 2.0 are great. I think there's also an underappreciated angle where Ethereum might potentially just scale on 1.0 in layers, the same way that Bitcoin's kind of going.

Really uncertain there. I think that the biggest threat would be something around like a Libra or something like that, really because if you're going to go and build in the space, you want to build for users. I don't think maybe a few developers, but not most of them come in to build an application that nobody's going to use or very, very few people are going to use. In general, people want traction. They want users. They want to deliver something to the world. And obviously having a user base of 2 billion is extremely compelling if you're going to come and build the space. Similarly, I think that applies for Ethereum today, though, relative to all of its killers. You very much end up with this kind of a game theory type problem of even if all the developers looked at a new platform and said, okay, in some ways, yes, that's superior. Everyone's still already

over here. You already still have all the tooling, you have the dev tools. And there are serious network effects around those things. I mean, we do see, again, as much as it does tend to be relatively insular. Some of the applications are being built. Like a lot of them do, they play off each other. They build on each other. And I think that's a competitive advantage for Ethereum relative to new smart contract platforms that are launching. So while we tended to be relatively bearish on Ethereum during the 2017 bull run, now that I've seen sentiment really collapse around it and people really jump on the bandwagon of either new smart contract platforms are none at all.

I'm continuing to see a lot of staying power around Ethereum. We don't hold any eth. I don't own the ETH currently. But I think the future is more bright than maybe current sentiment allows. Yeah, yeah. I think you always want to be contrary. when people are so bearish. You brought up Libra, and we'd love to talk about that briefly.

I certainly think it's been the top story of the year. Whether it launches, time will tell. How do you see this playing out? I mean, first of all, who do you see it competing with? Do you think it'll launch? What do you think they're trying to do? You know, I think before they made the official announcement, just trying to pick up any kind of rumors that I could hear around it,

obviously the team was extremely secretive around the entire project. But as we picked up bits of information, had the probability of launching as extremely, extremely high. I think it's run into more political opposition than we would have expected. So I think that has significantly lowered the probability at launch. And honestly, I have a pretty wide spectrum on what I think probability is to date. Anything from, you know, at times around the David Marcus hearings in front of Congress, I think mentally that was probably dropping towards like 20% or 15%. Today, I'd probably put it back above, above or around 50% launching, at least by kind

of maybe a mid-2021 sort of time frame. So I think it's going to take a while. That gives us like a little less than two years from today. But who does it compete with? Well, I mean, short term, I think it probably competes with something like an Ethereum. I think that the move programming language from what I understand is actually extremely compelling, and it works quite well. And again, people want to build for a large user base. So, you know, I think that Ethereum's network effects could be relatively trivily overcome and that Libra could see serious adoption on something like that. But longer term, of course, the story here is could it compete with Fiat money? And really remains to be seen how. how something like that plays out. There's so many different dynamics from the individual members of

the Libra Association to the basket that underlies it, that it's just extraordinarily difficult to tell what direction this is going to go. I guess one of my big concerns around it, because overall I'm very interested in the project. I would like to see it get off the ground. In general, I like all the experimentation. So even if I'm somewhat dower on a particular blockchain, I'm always glad that they exist because it's always a new front of like, okay, let's get this out in the wild and let's like test it and let's see if this differentiation matters. So I'd love to see Libra get out there. I think it would be a great online. ramp to the crypto community at large. I think it would be, it's already been a huge catalyst for

financial institutions and large technology companies really figuring out how they can participate. So for a lot of them, they've leaned into building infrastructure, a lot of critical things that we've already discussed here, right? Right. So again, I think the knock on effects are very, very large, but it's direct impact remains to be seen. Yeah, certainly agree with the infrastructure point. And I think we're seeing entrepreneurship attempted at a level that we have never really trying to compete with fiat money is about as ambitious as it gets. 100%. I mean, and you think about all the new developers entering the space. I mean, we've certainly seen the influx of new quality developers, despite a lot of prices being down. And that's always very

encouraging. And, you know, I try to think about what is the framework for particularly new, new talented grads that are exiting the space. And a lot of them, obviously, they want a very successful career. They also want to do something that's very meaningful to them. So when it comes down to do I want to work on ads at Google or do I want to work on the future of money, I think the latter is strictly more compelling. Couldn't agree more. Couldn't agree more. So that's a nice, transition into our closing round questions that we, the segments that we ask every guest. Yes. So let's do a little bit of overrated, underrated, inspired by Tyler Cowan's podcast here.

So touch on some categories and you can say whether or not you think it's overrated or underrated based on its current hype. Privacy coins, Monaro, Grin, Zcash. Can I specify the question? Underrated or overrated from a price or utility perspective? From a current hype perspective versus what it actually will be. And specifically with privacy coins, I'd be curious to your perspective on long-term Bitcoin incorporating some of these features. Right. 100%.

If you're going to force me to pick, I'm going to go underrated, but that's not an easy one. Some things I can right away tell you it's overrated or underrated. That's a tough one. It's not an unknown niche anymore, right? Like people are well aware of privacy coins. It's one of the main categories people discuss. So relative to that level of hype, I think it's probably about appropriate. I think privacy is extremely important.

I think probably what I should have gone back to when you mentioned critiques of Bitcoin. fungibility has always been my biggest concern. That's the one that I really should have mentioned. That's always been the one for years that have kept me up. You know, basically just to summarize that kind of basic argument would just be, if we end up in a tiered market where some bitcoins are worth more than other bitcoins, I think it could start to compromise the value of Bitcoin itself. So if one is more tainted because 10 transactions back, it was used by some criminal, then that starts to become an issue. So in that vein, privacy coins would be a great solution. So if Bitcoin actually like all of a sudden started to suffer from something like this,

privacy coins where you just don't get that history, something like a Monaro, or something like Grin even maybe could be potentially really compelling. But absent something like that, I think they're mostly an interesting playground for building up good privacy technology, which I think is extremely important. And I think there is some opportunity for Bitcoin to incorporate some level of privacy technology. I think it'll be extremely challenging to do with the base layer. Many people have talked about this would be the next civil war when I think that's probably accurate. As much as I would be in favor of it, I do think it would be a hard-fought battle. And so we might instead be forced to privacy solutions on other layers. Right. We could do a whole

podcast. Yeah, sorry. I really diverge there. Really thoughtful. You asked me underrated or overrated, and I just spoke for five minutes about fungibility. It's a great answer. It's fun. It's a great answer. Overrated, underrated, this new pseudo equity construct of exchange tokens. So BNB, Leo, these cryptocurrency exchanges issuing their own currency. So the notion of kind of pseudo equity, without naming the particular assets, I'd say underrated. Those assets may or may not be overhyped, really difficult to tell. But I would say that the broad concept is underrated. I wouldn't necessarily advocate a bunch of people to go and buy a bunch of pseudo-equity things because you do get a lot of protections with equity investments. But I definitely think there's something interesting going on there and I'm

excited to see how it plays out. So I'll go underrated. Underrated for exchange tokens. Last one, token ecosystem funds. So the idea. So the idea here for the listeners is projects that have raised a large war chest in a token sale or some funding mechanism, having a venture fund to invest in the development of those ecosystems. So it sounds like you're bearish on this. Yeah, I'll go overrated. Not because I don't think that they shouldn't try and do it. I certainly think that trying to encourage development, trying to pay for people,

like it might be your best chance at trying to get adoption. But I think as a concept, you know, if we rewind kind of 18 months, the notion was like, oh my gosh, these war chests are so huge. you know, X, Y, and Z new blockchain has a billion dollar war chest that's very substantial. They can pay a lot of people to come and build on them and really easily catch up. I think you have a huge adverse selection problem with something like that. The highest quality teams want to build on something that's going to last and that people are going to use. It's difficult to just buy their entrepreneurship, basically.

Even remove crypto and blockchain. We've seen a lot of different ecosystem funds, Slack did an ecosystem fund. And most of those have not really proven to be big successes. Mediocre at best. I think a lot of them were straight up failures. So, overrated. Overrated. All right.

So final question. So what advice would you give to a young person that's trying to break into this industry right now? You know, earlier in the conversation, you touched on the fact that it's such a meritocracy out there. And I think you really need to leverage that. So I think any young person coming into the space, you know, there's any number of skills that are needed. Everything from design, user experience, to engineers, to economists, to just across the board. Like almost literally any skill set that you have, is a simple. applicable in some way here. So I would just encourage anybody that's thinking about it to think about

something that they're, they don't have to be the best in the world at it, right? But something that they're pretty good at and try and find a way to apply it into the space. And particularly for me, it usually comes in areas where I'm looking at something and I start to get very frustrated when you start to wonder, why are people not discussing this or why are they discussing this too much or why has nobody gone and built this? And that's usually probably leading you in the right direction of something that maybe you should do. Because maybe it seems obvious to you and like everyone else should have thought of the same thing, but, you know, I think there's a lot of unique chance, and you might be the one that just kind of figured that out, and you should run with it. Yeah. I think you've been very

generous with your time with a lot of people that are trying to break into the space, and I love how you guys are recruiting folks by having them write about the industry and pick a particular topic. I think it's great to spur people in. Whenever people ask me, I always say, just start blogging. Yes, 100%. Start doing something, start tweeting. Start tweeting. Start tweeting. Start tweeting. I mean, again, like, good ideas are picked up and they're circulated. I mean, the number of times when And we have a research team here that's nine people strong in the number of times that, you know, we'll sit around the table and have a nine-person discussion around a blog post by, it's either some name that we've never heard of, and someone that might not otherwise

be known in any particular field, but presented some very compelling ideas or some synonymous avatar character, cartoon character. And then we're sitting around talking about it. It's pretty funny. It's how this all got started, right? Yeah, exactly. So, Spencer, where can people follow you, find out more about blockchain capital? If you're an entrepreneur, where can they find you? So let's see a few places on Twitter.

You can find me at Cremde la Cripto. You can email me at Spencer at blockchaincaptal.com. And you can find our website at blockchaincaptal.com. Thanks so much for joining us. Thanks for having me. This has been another episode of On the Brink with Castle Island Ventures. To learn more or to subscribe to our newsletter, please visit castleisleisland. And a big thank you to all of our listeners, except those of you who believe in the underlying blockchain technology.

but not cryptocurrency. You know who you are.