On The Brink with Castle Island - Tom Lee (Fundstrat) (EP.13)

Episode Date: October 30, 2019

Tom Lee, the Managing Partner and the Head of Research at Fundstrat Global Advisors joins the podcast. He is an accomplished Wall Street strategist with over 25 years of experience in equity research, and has been top ranked by Institutional Investor every year since 1998. Prior to co-founding Fundstrat, he served most recently as J.P. Morgan's Chief Equity Strategist from 2007 to 2014, and previously as Managing Director at Salomon Smith Barney.  We discuss the state of institutional readiness for cryptoassets, the state of the market, Facebook's efforts and much more.    Learn more about Fundstrat at https://www.fundstrat.com/   For more information please visit our website at www.castleisland.vc and follow us on Twitter @CastleIslandVC.

Welcome back to On the Brink with Castle Island. This week we sat down with Tom Lee, the managing partner at Fundstract Global Advisors. Tom is one of the best known individuals in the crypto industry, and he's frequently seen on CNBC talking about Bitcoin and other things. Fundstrat doesn't just cover crypto. They're an independent research firm covering a great number of themes for Wall Street clients, including macro, portfolio strategy, policy analysis, and a bunch of other things. We were super lucky to get an hour with Tom. He's well known for appearing on TV, but he doesn't do a lot of podcasts. Luckily enough, he made an exception for us. In this episode, we got to hear from him on a bunch of topics. We talked about how he made his way from covering telecoms to running funds tract, and relatedly, whether some of the network defined valuation models and telecoms map over to crypto at all. So we got his thoughts on a couple popular models people used to think about Bitcoin, including the famous Metcalfe model and the stock-to-flow model as well. We talk about how he deals with getting flack for being such a public commentator on such a volatile market and how he thinks about the tension between the cypherpunk origins

of Bitcoin and the movement to incorporate it into the financial industry. Tom is a really original thinker and he frequently departs from conventional wisdom. So we pressed him on some of his controversial views, including why he thinks that Bitcoin is likely to remain retail-dominated in the near term, why speculation is a totally valid use case for Bitcoin and why he remains bullish on the S&P 500, and why he thinks Bitcoin is likely to be correlated with the U.S. equity in the future. This is a fascinating conversation. Tom is a very original and broad thinker. We learned a lot, and I think you will as well. 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 concentrated 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 a Bitcoin.

Bitcoin. So we're sitting here in the offices of FundStrat in York, with Tom Lee. Tom, thanks so much for being on the podcast. Yeah, good to sit down with you guys. We also have Matt here. Oh, thank you, Nick. So Tom, you're one of the best known, you know, Bitcoin Bulls or Bitcoin commentators, and you have this unique role. You sort of bridge the traditional asset management world and the crazy world of crypto finance. Probably you actually sort of uniquely occupy a spot in this. But so I guess a lot of crypto people don't know about your kind of professional history prior to Fundstrat. So we were curious to hear about what you did

before Fundstrat and your emergence on Wall Street. Well, yeah, glad to share. I've been in research since 1993, so it's now 27 years, which is a full generation, you know, when you think about it demographically. And I got my start at Kidder Peabody, which wasn't, you know, one of those White Shoe original investment banking firms and was in the Equity Revenue. research department doing wireless. And it was kind of a cool industry at the time because wireless was sort of a subcategory of telecom services. Telecoms today is very different than it when it was in 1993. In 1993, telecom was somewhat exciting because it was an industry that was a monopoly, but because of a consent decree in 1984 was forced to divest. So telecom

suddenly went from being just 18 to a bunch of these regional bells. and one of the new areas that these telecom guys were looking at was wireless. They were given licenses from FCC, and then another set of people were given a competing license. So it was called a duopoly structure. And at the time, you know, me being young, I was kind of interested in something that was kind of growing and exciting. So I was excited to be part of wireless research. There were only 34 million cellular phone users back then. today there's four and a half billion so that's kind of like the number of bitcoiners there are yes that's right

35 million maybe a little bit more yeah exactly i think it's a great analogy because i think when you think about how it's going to scale you know visa master cards four and a half billion users so i think bitcoin over time should have the same penetration so yes so the growth profile looks exactly the same and i think my lessons because i did that for almost 17 years covering wireless and I was very fortunate. I think success, a lot of success in life is luck because I happen to have really been involved with an industry that grew. But I think I also was lucky because I had the advantage of being young.

Being young, covering wireless, to me was exciting and I could see how useful it was for young people. But in the investment business, people tend to like the incumbents. Incumbents have a lot of advantages. So telecom's thesis for many people was, oh, cellular is this gimmick. technology for yuppies. It's eventually going to be free because the landline companies want to protect long distance and local exchange. Whereas the thesis we had back then was, you know, wireless is transformational, it's productive, and it was a tough thesis to share because

the wireless companies were borrowing tons of money, losing money. The strategist had once commented that they should not even be public companies because they were chronic money losers. But, you know, fast forward 30 years, wireless is now bigger than landline. It's surpassed everything. Those are like some of the grotesquist level to the big tech companies today, that they are just cash burning machines. Yes, that's right. I think what people take for granted is that they'll look at a snapshot of anything today, like they'll look at the landscape of finance today, and assume the giants stay giants and all the new entrants are just fighting for crumbs. And, you know, the real opportunity is with the right set of circumstances and luck, some new

entrant becomes the next generation's incumbent. Right. So when you started to talk about Bitcoin, what was it that initially drew you into this industry? You were one of the first people from quote unquote traditional Wall Street that started to pay attention to the stuff. How did you decide to do that? Yeah, I would say we've had a mixed sort of path to really look at Bitcoin. You know, I was strategist for JP Morgan and I'd been at that firm since 1999. But in 2012, you know, Bitcoin, you know, Bitcoin sort of came up there. And it was brought up by our FX team. And at the time, they thought there was potential. But the takeaway from our sort of internal discussions was that Bitcoin

was being used for fraudulent purposes, and it had no intrinsic value. So for me, as a strategist, then, I didn't have much interest because, one, my purview was really large-cap equities, not cryptocurrencies. But fast forward, you know, FundStrat, we started. We just celebrated our fifth anniversary this year. So, congrats. Yeah. So, you know, like, you know how they say 95% of restaurants fail after five years? So we're the lucky 5%. Pass that. But a couple years ago, my team and I were like, well, you know, this thing that people talk about Bitcoin is still around. And it was in 2017. And it was doing quite well. So we're like, look, let's just revisit the thesis around this thing because, you know, I understand growth stocks and generational shifts and how technology

favors new entrants. So we just wanted to see whether Bitcoin made sense. And so we kind of went back and then and realized, look, if someone just made a simple thesis around Bitcoin as a digital version of gold, and that was our original report, Bitcoin had a lot of potential. So that was the start and I think, you know, it's been met with, I would say, mixed reviews from our traditional clients. Some think you're crazy for covering it? Yeah, most. I would say most initially thought it was insane. But every day or every week, rather, the Bitcoin gets inches closer and closer to acceptability, right? With these clients, is that kind of a fair characterization? Yeah, I mean, that's right. I think that taking a step back, you know, Bitcoin has already established itself, I think,

with critical mass, you know, whether you look at volume on the blockchain or the fact that it's part of the lexicon, you know, in a dictionary. That's a huge deal. But for clients today, in the traditional world, Bitcoin doesn't exist because there's not a simple investment strategy for them to pursue around it. Yeah, that's been something that's hamstrung us for a long time and probably isn't going to change anytime soon, right? Yes, that's right. I mean, it's an opportunity, because Because as you know, if people believe in the growth profile and network effects, then what's really holding large-scale institutional allocation is the sheer lack of size of crypto today. And that's an opportunity for anybody who's early.

So, Tom, your career trajectory is so interesting because you came from telecoms, and now, you know, FundStra does a lot of macro stuff. And then, you know, Bitcoin, people often try and value it based on, you know, the network, the nature of the network as kind of a network. asset. You know, the Mechalf's law is very popular, looking at some proxy for the nodes the network and trying to back out evaluation. Have you used any of the models or the insights from thinking about telecoms companies in the context of Bitcoin, or does it demand an entirely different discipline? It's a great question. You know, I think one thing people have to keep

mind is valuation frameworks for investments have changed dramatically in last 25 years. So I give you an idea like in 1993 and I freshly out of Wharton, at the time, you know, 92% of companies that were going public made money. So it was unheard of, this is data from the University of Southern Florida. Like it's unheard of for companies to go public that don't make money. Today, over 90% of IPOs are actually unprofitable businesses. You know, in the early 90s, it was unheard of for central banks to own equities. Today, multiple dozens of central banks own equities.

And in some countries, they own a large percentage of the float. Japan, for instance. Yes, exactly. I mean, the stock market in Japan is largely, you know, owned by the BOJ. And, you know, like things like credit default swaps, which back then were being introduced was really a gambus, I don't want to say, it was essentially a speculative tool on a default risk. it was all done in spreadsheets. Today, CDS, well, CDS at one point was larger than cash bonds. So frameworks change, and I'd say in the early 90s, one thing that people absolutely

did not accept back then was subscription-based models. So, you know, like today, every unicorn, every growth stock is a subscription model. In 1993, the first subscription models were cable and cellular, and people didn't want to give a perpetual value to a subscriber. They said, look, if you don't have something on your balance, sheet, it's not worth anything in the future. So it was always tough for us as a wireless guy because we're like, hey, the spectrum's got value, you could lease it out, you know, you got subscribers and everyone gave it a zero value.

So for crypto, I think when people say Bitcoin has no intrinsic value, that's, that I think is actually incorrect because we find that there's a really high correlation, for instance, between Bitcoin's network value and active addresses. let's say that the relationship is explained 71%. So correlation is you take the Metcalf law, the square value of the active addresses explains 70% of the move of Bitcoin. That's incredible knowledge or information. I mean, no stock in the equity markets has 70% of its value change explained by any factor.

Right. So that's telling us that, you know, network effect is important for currencies. and it's Bitcoin's acting like a currency. And mining similarly, you know, if you look at Bitcoin's incremental mining cost, so use a break-even proxy, which our quant team calculates, Bitcoin trades on average two and a half times its mining cost. And so that is explained Bitcoin's relative price and actually forward returns whenever it trades at a discount to mining.

So there's this big debate in Bitcoin land, which you just hinted at, which is whether, you know, hash rate is a causal variable in price or the other way around, whether the cost to mine a Bitcoin, whatever it is, constitutes the actual value of that Bitcoin, or whether miners are just reacting to the price moves. My views on this have actually changed over the years. I used to be a really staunch hash rate follows price kind of guy, and I've actually moderated my views, and they've become a little bit more nuanced over time. But I'm curious to see where you stand on that debate.

Yes. And one thing to keep in mind, Bitcoin is still in its earliest days. One way to judge it is what percent of the universe that could own Bitcoin owns it. I think it's less than 0.5%. So I think it's much earlier in its penetration than people realize. And so what influences valuation from the 0.5% to 5% penetration is not going to be the same influences when it's going from 5 to 50%, just like the wireless industries or internet metrics all changed over time.

Mining hasn't had enough time for us to have a durable thesis around it, but we'll see really with happening what it actually does impact price. I think that's really going to be the next big test. But to us, you know, the thesis our team had at the time around mining was a minor actually don't sell when price is low. Really? Yeah, but they sell when prices are high. Interesting.

So it's actually, in your view, it's a countercyclical force. Yes, and when you talk about scale miners, that's what indeed they do, because when the price is low, they're inherently believers in Bitcoin, that's why they mine, and they're going to huddle it. But at higher prices,

they're incentive to actually sell it to buy more equipment. So at higher prices, they're actually a source of supply, and that's what's going to keep the price of Bitcoin around the production. And when it's low, they're not selling, so they're withdrawing supply, and it's supporting it on the downside. Oh, that's, so that's an interesting way to causally link the cost of production to the price. I actually had the opposite intuition. I thought, just anecdotally, that miners were pro-cyclical in that their fiat-denominated costs would increase in Bitcoin terms as the price dropped,

and also some miners would go bust if the price really drop below their, you know, their break-even line, and the action of them going bust would mean they would have to liquidate all their bitcoins. Yes. I mean, I'd say, like, in the generalized logic, what you're saying makes sense. But what you have to remember is the diffusion, because very few people, nobody really has the same break-even. So the break-even we're calculating is based on six-cent per kilowatt-hour.

So someone at two cents at these low prices is kind of incented to hold Bitcoin because they know other people who are high-cost producers have to sell exactly for your reason. So it's a diffusion, so fewer are motivated to sell at low prices. But at high prices, as you know, equipment depreciates. At high prices, you're better off trying to buy more equipment and mine and try to have a higher probability of getting a Bitcoin. So you're going to actually sell to buy more equipment. So there's this other big debate, which is actually raging on Bitcoin Twitter these days,

which is about the stock-to-flow model. I presume you've seen this, which is a model essentially saying that Bitcoin's price can be explained by the, essentially the scarcity of, or rather by the rate of Bitcoin issuance, you know, essentially the inverse with some modification to make the lines overlap. as you might imagine from my tone, I'm actually not a huge fan of the model, because I don't really think that ultimately the rate of issuance is the main driver of the Bitcoin price. I think it's probably a mistake to model Bitcoin's price is a function of supply, which is pretty much known as opposed to demand, which is the unknown things. But curious to get your thoughts on it. Yeah, I think I would fall into the same category as you, which is, you know, if you look at the driver of any asset, it's not. the issuance that causes price change. It's the demand and the interest in holding it. And in fact, if supply was changing and people were behaving around that dynamic, it would

create the incentive for people just to be selling. So in other words, I don't think, yes, I agree with you. I think it's the independent driver is demand, which is attracted to owning Bitcoin because of its unique characteristics relative to other assets. So it's, has nothing to do with supply. Although one of the nice characteristics is the fixed supply or fixed with essentially vesting over time. Yes. You know,

and I think like if you're looking at commodities, trying to look at supply does matter because with silver, for instance, if the price goes up a lot, there's a supply shock in response to that, right? All the mines that are only profitable

at a certain threshold come online, right? And so that kind of floods the market with new silver. But with Bitcoin doesn't happen, because of the difficulty adjustment. And, you know, we just follow the predefined schedule. So, in my view, supply is not as relevant in terms of modeling the price. Yes. So you touched on the Metcalfe model with active addresses.

I mean, I have the exact same intuition. I really believe that ultimately we're going to find answers to valuing cryptocurrencies in terms of their actual fundamental usage, even though it's difficult. I'm still of the opinion that we haven't had our sort of Graham and Dodd moment. so to speak. No one's ever written a canonical textbook on valuation, although there have been some attempts. You know, where do you think we are? Do you think that this is already a solved problem? It's just that the information hasn't proliferated, or are we still sort of waiting for a really, really robust model to explain prices of these things? That's a great question. You know, in the equity world,

Graham and Dodd is, like you said, it's canon, and had guided investment. strategies for more than 50 years. But here's the interesting thing. If you were following Graham and Dodd for the last 50 years, you underperform the market so dramatically that you've rewound 50 years of relative price gains. So in other words, for 50 years, Graham Dodd was guiding investment philosophy. And then for the last 50 years, you had to do exactly the opposite. Because value factor didn't do well. Yes. So, yes. So we had 50 years of value. crushing growth that peaked in 1982 from 1982 to now, so it's, you know, 35 years, growth has absolutely destroyed value. So it's interesting that even though intuition tells me

Gramaddud makes infinite sense as an investment strategy, it's, you know, it's been negative alpha, the last 35 years. So that would sort of imply that you just have to be nimble and realize what kind of market environment you're in and what your fellow, you know, investors are thinking. Yeah. I think it's actually, so I'm going to kind of backwards answer this. So one of the things I learned in covering markets for 27 years, and I've covered wireless, I was involved with Internet in the earliest days because wireless and Internet essentially

were twins and cousins. And then, of course, you know, I've done more macro for the last, more than the last decade. is it's important to let the market tell us what signal versus noise, whereas a lot of people think that they can tell the market what to do. Like sometimes I have the feeling that some people are shouting at the market to say, like, listen, do what I'm telling you to do. And the market's... People are like Bill Ackman, I guess.

Yeah. And the market's a lot smarter than us collectively. So it's a great question. Like, you know, if, for instance, if in the next 10 years, crypto, the key performance metric that people care about is active addresses or some activity measure, and that's what's driving the stocks, that will have to embrace as the fundamental metric, even if it defies what we think makes a lot of sense. That's interesting. I like the humility there. I guess that comes with being in markets for really long time. Yes.

As they say, pride is the sin before the fall when it comes to investing. You know, the problem I have with on-chain metrics, even though I obviously love them and find them very interesting, is that what we've seen is that people will try and manipulate them if they come to realize that investors are looking at them. And there's countless examples in crypto already. I won't even go into detail. There's just so many. I don't know.

I haven't found one that's robust to manipulation. Yeah, I agree with you. That's the thing. is that once people know something as a KPI, then people will try to game it. I mean, security spend on the network maybe being one of the more robust metrics that is difficult to forge. That is basically a function of price and issuance, yeah. Right. So switching gears maybe a little bit, Tom.

So you've been around the emergency, you mentioned CDS, which I think is a really interesting comparable. We're always trying to look at other markets from a market infrastructure standpoint and trying to figure out what crypto assets. look like. And so CDS comes to mind as a, you know, an asset class that emerged. You had niche data providers like what became IHS market that became really large due to the growth of that asset class. What do you make of the state of affairs for the crypto asset market right now when you look at some of the infrastructure around exchanges and custodians? Is this ready for institutional participation as currently designed? Yeah. Today, the value, when you look at activity levels and value capture, you know, so the profit produced by activity around crypto,

especially with exchange and all the activity around exchange, whether it's custody and wallets, it's a very robust business. So it tells me there's real money moving around. You know, so, you know, if you take like the three largest crypto exchanges, their net income, which is not faked, right? Let's say the largest, I think, has made around $700 million. and net income. That would rank it as the fifth most profitable exchange in the world. So larger than a Hong Kong stock exchange, more money than London stock exchange. Only ICE and NASDAQ and a few others make more money. So crypto in the business today, which is just absolutely tiny, is capturing quite a lot of value. And I think that when you look at who's creating this infrastructure,

look at the teams. They're really all veterans of financial markets. It's not. like someone was in a band, you know, like in the Eagles and they decided to start a crypto exchange and they become giant. I mean, these are former derivative traders or people, you know, who know, understand traditional markets. And so I think the infrastructure is actually quite high grade. But I don't think that that's the gating factor for institutional participation. Interesting. And so logical follow up, what is the gating factor for the people that you're speaking to? You know, and I think people use institutions like in a really wide to cast a wide net. So I think that what they do is they say, anybody who's not a dentist is

institutional in a way. Like they'll say, hey, a fund that's organized is institutional or a high net worth family is institutional. And the institutional vernacular of traditional markets, those aren't institutions. To me, institutions would be large asset managers, pension funds in a broad sense, not handful and, you know, hedge funds and, you know, very, very sophisticated investors. To me, crypto is not attracting those institutions because the size is simply too small. You know, Bitcoin's a $100 billion network value. Equity is $66 trillion. So if, you know, you took a passive strategy, what's your allocation to crypto, you know,

it would be 0.001% or something. So until, this is sort of backwards, until network value is a trillion and stays above a trillion, institutions think the market's too small for them to bother. And the second, of course, is institutions want to manage risk. Now, risk is defined a couple ways, but the primary risk that institutions face is a sanction against them for doing something, or to own an asset that could go to zero. zero because of a regulatory change. Bitcoin, in my opinion, doesn't have sufficient regulatory protection in the U.S. today. I think it still faces the potential of a ban from the White

House, and that risks, I mean, I think what happened with vaping, it really, to me, was a little seismic because it just shows me there's no, there's nothing that's an overreach for what the White House could ban. And so I think someone could have a $100 million position that could be banned and it goes to zero. But the second, of course, is that I think that there isn't, crypto today isn't sanction proof. I think someone who owns it still takes reputation risk by saying, hey, look, what if the SEC decides, you know, crypto's really bad, or it shows up that Congress decides to legislate against trafficking and so they ban Bitcoin. So I think this is the, this is really the issue.

I think it all centers around the U.S. And you add those things on top of maybe not having a robust thesis yet on even what's interesting about the space, whether it's digital gold, whether it's the emergence of smart contract platforms that disrupt tech monopolies. It's unclear that there's a cohesive thesis, maybe beyond the digital gold. I know you've spoken a lot and written about just some of the activity that's happening with people's personal accounts on the street with respect to this asset class. Is that happening in size? Yes. To me that's, you know, to me that's really the leading indicator. And what you're referring to is, you know, when people think about institutional money, they tend to think of it as what is a fund actually allocating to. But I think what people have to keep in mind is the employees of the financial industry are, have actually accumulated a significant amount of wealth. To give you an idea, like I think in a typical investment bank, whether you're talking Morgan Stanley, Goldman Sachs, JP Morgan, at least. least 25% of the equities owned by the current or former employees. So, and as you know, the

largest stocks in the S&P 500 are financial institutions, which means, you know, some of the wealthiest individuals are really employees of these firms. Those folks have a lot more risk tolerance, a lot less hurdles to go through to make allocations, and, of course, a lot less concern about what could be outlawed or not, because, you know, they're used to. to sort of taking diversification bets. And so those folks are authentically interested in crypto today and making investment. So to me, that's really where you're seeing the fiat to crypto conversion. Fascinating.

It's interesting. When I talk to traditional finance guys about crypto, the point you raise about, you know, this thing can potentially still be banned in the U.S. is typically one of the main critiques or responses. and a lot of these guys are pretty smart about crypto. So they kind of know what they're talking about, but the one thing that will keep them from participating will be, I guess one of two things for the most part in my experience is the risk of illegality

or reputational risk and the fact that for the most part they feel there's no way to value these things. And, you know, the latter point always flummoxes me a little bit because it's like, how do you value, you know, an emerging, you know, global currency? I don't know if you could. You know, I know we have proxies, but it's hard. But, you know, the fact that we hear this so much about the risk of bans is really kind of indicative. And it kind of speaks to this tension, I think, in the industry.

You know, on the one hand, we have, you know, some financial institutions that are trying to build tooling to help people use or hold Bitcoin and other cryptocurrencies. On the other hand, you know, the industry was born with this kind of anarchist cyberpunk. aesthetic and a view to resting monetary policy away from the state and to empower individuals. And some of that comes with, you know, gray market activities or even black market activities. And there's this big tension that happens when those two things collide. You know, I think it's maybe the biggest tension in the industry that, you know, Bitcoin is meant to be, or in practice, it's used for the things that you're not allowed to do. And then meanwhile, we have the financial industry trying to build some tooling to let people use it, but in a more regulated and surveilled and controlled way.

And, you know, some people think that this tension is actually going to be fatal to the industry, you know. It won't survive this process of being captured and potentially neutered by, you know, legacy finance or traditional finance. So I don't know if you had a view on this at all. Yeah. It's kind of a difficult tension, in my opinion. Yeah. It's the challenge with what you observed, and I think I agree, I think that that's hotly discussed and debated.

And in some ways, you know, part of this, the tribalism and clashes that you see, even within crypto, it involves trying to have a view and belief in what the future looks like. And so I think that's why sometimes, you know, those are some of the areas that will tend to not focus on because, one, we don't. know the future. And secondly, it may not affect what happens to ultimately to network value anyways. And I guess the best sort of way I could give some perspective is the world is increasingly generating real growth from digital, native digital activity. So if you think about like 50 years ago, 100 years ago to today, the proportion of economic growth and value capture that's associated

with purely digital has really changed. So if you did like your best guess, for the last 20 years, over 50% of global GDP growth was native digital. So think about like, it's not movement of goods. It's really the repurposing of information and the capture around it and the movement around it.

And in the next 20 years, it's probably going to be 75% easily. And then, you know, at some point, it'll be the only real economic value capture even though there'll be a lot of movement of goods, that's not going to have any value. It's really going to be capturing your information. So in that world, does centralized government systems and centralized money work effectively? I would say it's going to be pretty archaic.

You know, I mean, like, why should a price of a good have a regional price when it's just the movement of information? So, you know, so I don't have an answer. But to me, you know, does the dollar have its dominance in that world? and is the U.S. geographic GDP definition going to survive? Maybe not, you know. And so in that world, you know, all those who originally thought Bitcoin was designed for a purpose, you know, it's actually going to be the central thesis. Well, I don't think that's a pitch for Bitcoin I've ever heard before, actually.

I read this good book the other day. I think it's called capitalism without capital. Kind of very much aligns with what you're saying that right now society doesn't produce physical goods for the most part. It produces sort of IP and immaterial things of that nature. So I guess it kind of stands to reason that the internet native currency is just going to be value encoded as information. Yes. Yeah. One of the, maybe switching gears a little bit, one of the things that I thought was fascinating about your most recent report was there's so much talk about the institutions coming into this market. And you have a different take on that a little bit.

You think that retail is actually the next big step-up wave here. And you have some interesting data around maybe there are fewer people in this market than have been represented by some of the larger players, larger infrastructure players in terms of total number of customers actually doing things. Yeah. So sometimes we'll have some thoughts that are unpopular. And it's not because we think the prevailing wisdom is wrong. It's just that the prevailing wisdom is describing too much information to what they believe. is there a few? And one of the things that we believe here at FundStrat is the number of actual active holders of Bitcoin is grossly overstated. I think I've seen numbers as high as 50 million,

and we think it's less than 500,000 today. Of what, really active holders? Active holders of Bitcoin, so that they would have actually done something with it in the past 12 months. Okay, so not just holders, but kind of transactors? Yes, they're active users. And part of this, and again, I don't want to be too revelatory, is we've had many discussions and sat down with a lot of large wallet holders and large exchanges. And in general, like when you look at traditional analog markets, whether it's gaming or stock brokerage, typically 2% of the clients generate 80% of the activity.

that's really the rule. So in other words, if someone has, even whether it's Facebook says they have, or YouTube has this many users, it's only 2% that really drive the business. And even in an economy, generally, I would say it's probably true that only 2% of the citizens of any country really drive the economy. But in crypto, I think that number is a lot smaller than 2%. And in our view, it's really bullish, more bullish to our thesis, because so much, when you look at growth, businesses, current size versus future growth determine upside price. I think that if indeed crypto was 50 million people today, Bitcoin's not as exciting. Because, you know, how are you going to get it to a billion people? But if it's half a million, doubling that to a million is a

4x change in network value for Bitcoin. So to me, Bitcoin's base is grossly lower, which means its upside is vastly higher. That's fascinating. And so it would follow that more on ramps and more access points through traditional brokerage channels would really be a conduit to see that ramp up. Yes. And in fact, you know, to me, again, this might be kind of, I would have, I think Lieber would have really blown the gates open on crypto adoption.

I actually think it's still going to happen. And when you say blow the gates open, you mean now we have public, private key infrastructure in the hands of three billion people. and yes, you can hold Libra, but you could also hold Bitcoin. You could transact in other assets. Yes, it's provided a way that provides like a social mental insurance policy, because now you have Libra, which is a fairly well-supported organization. But more importantly, I think people sometimes misunderstand how money is actually used.

So, like, for instance, when people talk about, oh, well, something's a currency, so it solely should be used to buy goods and services. So the dollar is an example. Everyone's like, oh, well, the dollar's used to buy a cup of Starbucks. Well, the U.S. economy is $20 trillion. Maybe $22 trillion when you account for exports and imports. That's the use of the dollar. If you look at just dollar activity measured in terms of use of payments across exchanges and money flows,

for every dollar that's used to purchase a good in service, it's used 95 times to speculate on a financial asset. Is that right? Yeah, so the primary use of any currency is people to use it to speculate on trying to make money on something else. So Libra as a stable coin, and stable coins in general, the primary use is not going to be to store value or to buy Starbucks. It's going to be used to speculate on the purchase of another asset. I love that point, actually, because one thing that I hear so much is, oh, you know, like, what are all these on- chain transactions for like they're just for people sending money to exchanges and then people will

typically follow up by saying so we have to discount all those because they're not real transactions the only real transactions are like using bitcoin to buy alpaca socks or something and I'm sitting here saying no that's a real thing I mean that's real use case I mean you know that's like a genuine piece of economic activity people want to buy alcoins and they want to go and 100x long on Bitmax. Yes. You know, that's what Bitcoin's used for. You're used for betting on the price of Bitcoin.

Yeah. You know, it's a little recursive, but it's a permissionless casino, at least that's part of what it's used for. Yeah, exactly. Humans are boring speculators. I mean, even, like, let's say someone doesn't invest. Well, hey, I got a great bargain on a sweater. Coffee's on sale.

I bought it. That's speculation. You're acquiring something at a discounted price to what you think it is. That's price speculation. But of course, you know, imagine in the liquid markets, bond, stocks, real estate, they're all traded 100 times for every real underlying economic activity. Like Facebook stock trades more than Facebook generates in revenues. It's all the world exists and currency exists for price speculation.

And so back to Libra, if you were to prognosticate, do you think that this thing gets out of the gate as currently designed? Yes. I think Libra, there's been obvious missteps because that's the fury of Congress. and the fury of regulators. And, you know, part of the Fury is part of the fact that this project was launched without going through the right channels. And I would say it's almost like having to work your way through military supply chain. And, you know, are these irrecoverable errors? Are these fatal errors for Libra?

I don't think so. In some ways, I think it's really going to require Facebook and Libra project leaders. to really engage Congress at the district level to show that this is creating jobs or opportunities or it's good for voters. And I think that that's the only way to really have Lieber survive. Because as you know, the incumbents,

whether it's financial infrastructure providers or banks, are going to clearly push against this. But if Congress can see the need for the unbanked and they see it at the district level, I would think they'd be wholly convinced. Yeah, not to give Libra. unsolicited advice, but I kind of felt that they could go the pro-patriotic angle and say, look, we're going to fill this basket with dollars.

And Libra is going to be a mechanism to basically export dollars throughout the world using Facebook's distribution rails and get these, you know, basically wrapped dollars in the hands of billions of people that might otherwise be using rubles or the Naira or the, you know, just all kinds of inflationary currencies. Yeah, I think that's a great point. And, you know, that would definitely be very convincing to the Treasury Department, White House. And you're right, it's national security.

It's also maybe equally compelling if someone says, hey, look, you know, I work 50 hours a week, and my bank's just totally ripping me off. And Lieber would be a way for me to actually save a lot of money. And because that's true, that's really what Lieber's trying to do. And I think that would play well on Main Street, and it would help at the district level. But that's, you know, maybe they just have to play a different PR game. It seems like they should hire you as a consultant. Yes.

You know, we do a lot of consulting for a lot of interesting entities. So, yes, if Facebook is interested in consulting with us, we'd gladly speak with them. So, Tom, everybody that knows you knows that you're on TV a lot. You have a bit of reputation for that. It also comes with some downsides. You know, people will chronicle everything that you say and then put it on a price chart. and so on. And, you know, people can be pretty tough, actually, you know. So, you know, what's that like? I mean, do you kind of regret making price calls, or is it something that these TV and media

organizations kind of, they want out of you anyway? So almost like you're a Patsy and in some ways you have to make calls for them. What's, what are your reflections on that? It's a great question. You know, our objective when we do media is really not to serve our clients because, you know, our clients, you know, Fundstrat has 150 institutional clients in 16 countries, and we communicate with them daily in essentially a closed system. And so they have really access to our nuanced views on a continuous basis. To me, you know, media, you know, is really my, I'm interested in trying to help, you know, the general public have a better understanding of how markets behave and provide them some insights from what I see in the institutional world, but to sort of share it

in a way that's understandable. But as you point out, the drawback is I might only be on media once or twice a month. And I might say something that in the course of nine months or year, things have turned. And the downside, of course, is someone's like, oh, gotcha. See, Tom Lee said this would happen. But then, of course, you know, a meteor hit the, you know, Empire State Building and King Kong came back. I mean, what the heck, this guy's a turkey. Thus proving him wrong.

Yes. And that's the reality of being an advisor, is that our clients continuously see us be incorrect in what we believe is our best judgment of the future. I mean, being correct 50% of the time, it's tough. I mean, I don't think anyone's correct 100% of time. And I think the problem in Twitter is everyone thinks you have to be right 100% of the time. And, you know, the number of people that have done it are the ones who've never said anything. But what's really important in our view is that when we're correct, that the amplitude or the benefit of being right offsets the problems for being wrong. So that's only, you know, that's how we measure ourselves.

But again, we're using media really to try to help generally educate people. Right. That's what I was going to say. Traders often fixate on like a win ratio where it's like what percentage of trades did they win versus lose. But as you point out, what really matters is you pile into your. high conviction trades. So the ones that you're right on, you're right in a big way. Yes. And time is probably the biggest friend of anyone who's going to be an investor. You know, so, for instance, if someone could live to 100 years and they were investing since

1930, the Dow would have beat almost everybody who tried to actively manage the stock market, because the stock market is one of the best compounders. And in fact, you know, from a generation perspective, if everyone just bought internet stocks in 2000, didn't touch them, you'd be richer than everybody who did that could be launching their own rocket to space right now. Even if they would have a bunch of losers in there anyway. Yes, in fact, we have a study that we showed a client said, if you bought a basket of internet stocks, 97% went to zero. So you only had a 3% win rate picking stocks, you beat the S&P.

And of course, as you know, the average stock pickers closer to 5%. 50. So if you got 50% right when you did your basket, you'd be, again, sending your own rockets to the moon. And yeah, so our message really is, you know, over time, you've got to be tilted long and then buy on the dips and then ignore the noise most of the time, including us. You know, we're, you know, whatever we say is going to be noise because I don't know the future. Yeah, that's the interesting thing about, you know, particularly the equity market, you know, there's lots of people that are permabairs, but you pretty much guaranteeing that you're going to lose. long term if you're a permabare because growth exists right and typically markets go up over the

very long term yes and I've learned that when someone wants advice they actually want critical advice they want a skeptic to say everybody's a moron and you know everyone's wrong so someone who might say look you know an optimistic message is not generally well received by someone who's looking for critical advice and so you're right perma bearers and bearish people tend to be lauded as smarter, but I think keeping it simple and understanding that network value is a driver, network value is independent of what happens day-to-day in Bitcoin's price. So, Tom, you had a pretty famous actually SMP 500 call, or you just made a positive call on the market index a few months ago, and to the best mine knowledge, it played out kind of

the way you expected. And a lot of people were saying, you know, a lot of Bitcoiners are bearish on the stock market and vice versa. So I guess you're kind of an exception. I'd love to hear just your thinking on why you had such a sunny view on the index and then subsequently why it was basically proven right. Yeah, it's a 2019. It's been an interesting year because first of all, if you look at year-to-date returns for the S&P 500 and that you know, that's the equity market for the U.S. The S&P is actually on track to have its best year. since 1998. So the best year in 22 years, even better than 2009. And what's interesting at the start of this year, we told our clients that even though people thought we were on the precipice

of a collapse, that 2009 would be the best analogy for this year. So our sort of working thesis this year is that this is the start of a new bull market. And as you know, over the summer, the markets faced a huge test because we had inverted yield curve, collapse of interest rates, China trade war got escalated to the point where you thought it was like mutually assured destruction. In fact, Trump orders companies to come home through an executive order. And the ISM, which is a measure of economic activity, fell below 50. These would exactly be circumstances that should cause a collapse in the equity markets. But our thesis to our clients was, if the markets don't break down here, we're about to have a massive

breakout in the equity markets. And so I think indeed that's kind of how it's playing out, that everyone is bearish because they all have 2008 hammers looking for 2008 nails. And they were saying, hey, look, the nail in the coffin is this repo market. And it hasn't happened. In fact, the S&Ps looks like it's trying to break out to the upside. It's been kind of one of those unpopular than observations that we've made is, you know, Bitcoin isn't going to go anywhere until the S&P breaks out. And the reason it's unpopular is that I think many crypto people were hoping the S&P would collapse, and that would be a catalyst for Bitcoin to rally.

And I think the opposite's true. I think if the S&P crashed, I think Bitcoin's price would have gone into another nuclear winner. So this is interesting because, you know, a lot of the way the Bitcoin is pitched to, you know, holders of regular financial assets is that it's not correlated. but in your view, it is going to become increasingly correlated or is already. Yeah, so and maybe as a just a little bit of a backdrop, you know, our general thesis in the equity market is that this stock market bull market will last at least 10 years.

And so what we're seeing this year is the consolidation before what I think is a massive breakout in the equity market. It's taking the S&P to maybe 19,000 from 3,000 today. So massive, massive run coming in equities. In that world, you actually want Bitcoin to be positively correlated because of it's negatively correlated, Bitcoin's going to zero. But the reason I think it's correlated is because our working view is that Bitcoin is only held by half a million people. And if you want to say, okay, well, where will the next 500,000 come from? I think it's going to be people who say, look, I made a lot of money in stocks.

I got a little house money to play with. I'll buy it through Coinbase. And so I think retail is the incremental buyer of crypto, and they're not being driven to it because they hate banks. They're being driven to it because they think it's a really neat technology that's quite useful, and they believe it can go up. So it's someone who is essentially positively correlated to the S&P. And your extremely positive view on the S&P, is that a function of your assessment of the monetary policy wins here? or something else. Yeah, so our equity view is it's really grounded on a lot of, we do a lot of cycle work

and demographic work at Fundstra. I mean, in fact, that's really helped us with our consulting business because, you know, we have a lot of good demographic data. But I think what people don't appreciate is how important a generation is to market movements. And so the millennial globally is about 2.4 billion people. But in the U.S., it's the single most important cohort. and they're now entering a period where they're going to be using credit expansion to buy a house car. But this movement of millennials, and we have a lot of data on this, is equivalent to how boomers

created a credit impulse from 1970 to 1999. So we're talking like a multi-decade period where demand for credit is going to expand, which is reflationary, drives real growth, makes the U.S. the set of, of economic activity. So what was 20 years, the past 20 years, focused on China and EM, I think it's reorienting back to the U.S. That's massively bullish for U.S. equities.

But the same generation is a digital generation that doesn't trust banks. In fact, the biggest change of this generation versus the last generation, which is my generation, Gen X, is the distrust of the banking system because of the massive foreclosures

from the financial crisis. And in general, a much savvier generation who realizes banks charge a lot of money. So they're natural buyers of Bitcoin. And again, I think the penetration of millennials is really small today for crypto. So Tom, wrapping up here, some closing thoughts, what are you the most optimistic and excited about in the crypto asset market over the next couple of years? You know, I think what I'm most excited about the next five to ten years is that a lot of great ideas and a lot of great projects that we had no idea were useful and necessary are the ones

that are going to be winners. And so while our view generally is that Bitcoin is an important driver and it's going to be critical to the survival ecosystem, I think people have to realize Bitcoin needs to break out before crypto really recovers. I think that there's room for a lot of new projects. And where can people find out more about FundStrat and learn more and follow you? So if you're interested in engaging with us more closely and you're, you're an institution, you should find this through FundStrat.com. If you're an individual and you want to get a lot more nuanced information from us, fsinsight.com is our site for individuals.

Or if you just want to abuse me on Twitter, you can find me on Twitter at Funstrat. And we can usually see you on TV too. Yes, that's right. Well, thanks so much for joining the podcast today, Tom. Great. 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 Castle Island.V.C. 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.