On The Brink with Castle Island - Walt Smith (Standard Crypto) on VC Investing in Bitcoin (EP.666)

Episode Date: September 16, 2025

Walt joins the podcast to discuss the current state of Bitcoin and what is investable in and around the Bitcoin ecosystem. In this episode: Austrian economics and Bitcoin Bitcoin's strengths and limitations when it comes to innovation and durability The modern role of decentralization and trust Whether nation-states will fully adopt BTC The role of Bitcoin in network states Owning BTC and other cryptoassets directly vs in equity wrappers Assessing the monetary value of cryptoassets BTC for payments?

On today's episode, I sat down with Walt Smith, an investor and thought leader in the Bitcoin and crypto space with experience at Galaxy Digital, cyber fund, and standard crypto. Walt and I discussed the current state of venture activity around Bitcoin and what is exciting for Bitcoin looking forward. Without further ado, I hope you enjoy our conversation. Matt Walsh and Nick Carter are partners at Castle Island Ventures. All of these expressed by them where the guests on this podcast are solely their opinions and do not reflect the opinions of Castle Island Ventures. Guests and hosts may maintain positions in the assets discussed in this podcast. You should not treat any opinion expressed by anyone on this podcast as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of their personal opinion.

This podcast is for informational purposes only. Brought down by bad mortgage investments, Lehman, which has 25,000 employees, will be liquidated. The federal government loans American International Group, AIG, $85 billion. This is a different kind of market, and the Fed is asleep. The federal government is stepping it to stabilize Fannie Mae and Freddie Mac, the two mortgage giants that have been threatened by the House. in crisis. The bank of England has pumped 75 billion pounds more into 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 a Bitcoin. Bitcoin.

Walt, thanks for coming on the pod today. I want to kick off. How did you get into Bitcoin and crypto? Well, thanks for having me on as well. I was in college and thinking about going to med school and had been reading autobiographies and biographies of doctors and stumbled my way into a econ 101 class with this guy Jeffrey Herbner at Grove City College and didn't really know much about economics, but had heard classic public school or charter school history course that the Great Depression ended World War II. And I asked him a question about it. And he started laughing at me and said, do you think bombing half of Europe and forcing all the Americans troops over it and killing a ton of the population and using all the producer goods to build tanks that would never be useful again

was what ended the Great Depression. And I realized I was an idiot. Fast forward, I ended up majoring an econ. That guy was my advisor. He was actually supposed to be Ron Paul's Treasury Secretary, had Ron Paul won the 2008 election when he ran. And through the school, I got introduced to Austrian econ. The school is the first to never take federal funding. So it's very libertarian, and it has a very small but vocal Bitcoin minority on campus. A ton of people in the space went to the school. And from there, I leapfrogged into the startup world and realized medicine's very bureaucratic. The world's very bureaucratic. And startups are fighting the fight against that. And Bitcoin's leaving the charge in terms of monetary startups.

So you like the lack of bureaucracy and the individual agency of Bitcoin. Yeah, I think the idea that you don't need the Federal Reserve to provide a put on your savings count or your 401k or a put on the S&P 500. And we don't need to structure the world to have this index mindset where everyone has exposure to this equity in the U.S., but people are gay kept from it outside of it, and the U.S. benefits from pumping out its dollars into the world and then having the most valuable tech companies or companies in the S&B 500. I think Bitcoin is really this idea that you can radically control your savings and your net worth and have personal accountability and sovereignty.

Which economists or which economic school have thought do you think is most aligned with Bitcoin then? That's a good question. I've never been asked that. I would say the Austrian school, if you go back to the Bitcoin Doc forums, is by far the most quoted from guys like Ron Paul who are politicians to the fathers of the school, like Carl Manger, back in Austria, Ludovamisi's in Austria who fled to Switzerland and then ended up at NYU, Hans Sennholds who taught at Grove City College. Of course, you have the more radical ones, Bastia, Murray Rothbard, who was friends with my undergrad advisor. But I would say, you know,

the classical school in the Chicago school is still pretty libertarian. So I think they're like open to the idea. They do have the money equation, which says inflation needs to happen. Otherwise, we'll have a credit crisis. I'm not a huge fan of that outlook. That's a good question. I can't really think of another school of thought that's more pro-Bitcoin. Yeah, I thought it was very high eccentric in terms of having non-sovereign money. I was having this conversation with someone at one point. It seems to me like even beyond Bitcoin will hopefully have this escape of sovereign currencies being the canonical store of value. That's my hope for on-chain finance more broadly, is that I could have money in an index of U.S. housing, and that's one form of currency, and I could have money in

index of natural gas, and that's one form of money, versus this reliance to your point on state-issued money. Hayek was very much a student of Ludovramis, who was a student of Carl Manger, and this idea of the theory of money is, what is the good that has the features or the application that has the features that is going to make it the best form of money. And everyone starts using it, and there's a bit of a network effect there, you'll have exposure to housing. If a housing producer, if someone comes up with tiny homes, and now we have super cheap housing in America, thank God, then you'll have exposure just by holding the most scarce, the most secure

thing. I think that's what Bitcoin's really getting for. I agree with you generally, but I throw a high act in there with the Austrians. I think the hardcore Austrians would say he was a little bit of a turncoat, but I don't care enough to label him as something else. The denationalization of money, that's the book I'm thinking of, which I think is worth a read for any cryptocentric person. That's a good wreck.

Yeah, put it on your list. Speaking of Bitcoin and speaking of, let's call it, emergent new currencies, what do you think is investable or can be new in and around that? I think proof of work and proof of stake are the bedrock of understanding any network, but I'm open to there being other civil designs. I don't love the top-down UBI centrally plan. centrally planned outlook. I think Sam Altman has his one.

Elon has tweeted about getting UBI. I think it'd make a lot of sense. He's a little bit of a... What's the line from Larry David's fight store? He's spiteful of who Sam Altman is, so he might copy him a little bit. Do you see universal basic income and proof of stake or proof of work blockchains

is being interrelated? Yeah, I think the idea is like, let's have central issuance versus proof of stake is like, let's have some form of distributed at issuance, and proof of work is like, like, let's have totally scarce supply and figure out the security later on. I think there could be like a proof of personhood version of UBI where you uniquely prove your personhood. I think WorldCoin

tried to do this and some other people have as well, but there's really big issues with how do you verify is the hardware tamperable? How do you re-verify the person so they can't spread the currency around? So I'm open to there being alternatives to Bitcoin, but what I found is a lot of networks are still test nets for Bitcoin. We're going to have EVMs on Bitcoin. I think within 10 years we'll have Salada tethered to Bitcoin in some form or fashion, whether it's a fork or not, it doesn't really matter. So I think ultimately it has the right properties to eat everything else in the world, at least in the Cryptosphere. I do worry about how does it buttress against the issues that cold had, where gold was easy to seize, or like easy to stop at the point of sale because it's

very hard to carry. And I think Bitcoin could run into that in a world where it's mass adopted in more of its own 401Ks. Can you actually spend it? Does that matter? So to rewind a little bit, And let's go piece by piece there. The newest use cases of cryptocurrencies, which I think of as being a lot of these financial apps that might let you send money across the world, there's the stable coin boom. The questions they ask of on-chain finance

are, is it fast and is it cheap to move money around? And for better or for worse, there's not a lot of consideration of the design of these on-chain systems at the moment, I would say, from a lot of these new builders. and you start to get more federated blockchain systems like a Canton network. How important do you think people should think of the settlement systems, like a proof of work governance system, proof of stake for an on-chain system versus not,

especially when we're looking at the emergence of more currencies and also where Bitcoin will move in the future? I think it's incredibly important. Why? I think this is an important point for us to touch on. Well, I think the clearest difference you could paint is a permission validator set versus a permissionless one. And whether that's entry or exiting the validator set. And I think if you have a permission set, that it's not fluid, it's less synonymous, and people can't exit the network.

And at the same time, those validators are an easier choke point for governments. It's an easier choke point for them to censor. We saw the OFAC stuff of 2022 on Ethereum. So I think if you have permissionless entry and exit, and over time, running a different point, node or mining is cheaper or it's more open or it's the set of participants that are doing it. If it's 100 participants, but they're all going through one pool, it's not great. But if you have 100 and they each have their own pool or they have some accountable pool, then I think the users have really good guarantees and there's a really good competition for including users' transactions.

And if you have a form of geographic decentralization, then governments are going to have a hard of time top down. I think the Ethereum meme is World War III, but I think Bitcoin has energy as the input and energy is fully distributed. So this is Bitcoin 101, but explain the risks of a centralized validator set. I think it could be like who's making the chips. I mean, we've all seen this China, Taiwan thing forever, specter over people, especially around April. It could be for the manufacturer, which doesn't have to be the same as the actual chip fab.

It could be at the pool level. But if you have a consortum that's really strong, it's a lot easier for the government to just show up and be like, oh, tell this consortium what to do. We saw this with Libra. Libra got shut down in Congress. I don't think you could shut down Bitcoin in Congress. China tried to, and the network kept running. People still had their money, and people could still move their Bitcoin around.

Like in Venezuela and fleeing in 2020 during the elections or like around them, didn't have to worry about the Chinese miners getting shut down. I do also see a certain world, though, because I think that the powerful financial institutions will be incentivized to create these federated chains or financial networks where assets transact on their chains. So one outcome I could see here is they accumulate as much Bitcoin as they can, essentially put it in cold storage,

and then Mint essentially claims on a Bitcoin. It's almost like a stable coin where a claim on a Bitcoin can move across their blockchain. Do you see something like that as a functional risk? I think we've had this. I think it's different, but we have CBBT, we've had Rap Bitcoin. The majority of the world has projected that. And I think if you look at really early Bitcoin amps, things like Lava, things like Odin Fun, there's significant traction, even though their early versions or early prototypes.

I think those founders are doing a job, but I don't think so. I think the people who are buying it in the 401k are not going to use it to begin with. I think they're just a long-term supply, which is great. And maybe they'll start thinking about the rest of their portfolio differently when they hold the coin in their 401k for 10 years and it goes up. But the actual users, I think, have projected the custodial model. I don't think they'll care who and what financial giant or like fintech giant is orchestrating the network. So then in that vein, another belief some people hold is that you'll get this equitization of Bitcoin

and that eventually people will own Bitcoin through these equity wrappers, through TFs, and that will spread more broadly. Do you reject that over the longer term? I want to be an empiric this year where anyone who's rejected this for the last five years has been totally wrong. Thanks to Mike Baylor. I think Bibmex put this out a couple of weeks ago, so the number's likely higher. But Vanguard, which famously hates Bitcoin and crypto, owns 8% of strategies, like 8% of the stock. And it's like, okay, if you don't believe in the equitization of Bitcoin, sure,

but if you look at the traditional financial plumbing, you know, we have all these passive buyers of micro strategy in the S&B 600. And if they get into the 500, we're going to have even more. And that's just issuance that's like I'll have. The stock is very special. It's a clever ETFs. It has a bunch of advantages that no trust. Treasury Coe could really copy intentionally. I think it just fell into Sailor's lap. I don't think he even knew what was going to happen. But yeah, I think we're seeing the equitization of Bitcoin. I don't think we can say it's not going to happen when micro strategy has 3% of this fly. It potentially opens up new business models for how to approach all this idle Bitcoin then

because you have all these passive holders. Do you believe that? Yeah, I do. I was going to ask you as well, do you think there's a risk-free rates of Bitcoin? or is there presumably a way to earn a yield of long-term interest on your Bitcoin? So it begs that question. But in theory, you'll have all this Bitcoin that is then just sitting somewhere. Not to be too much of it appears. I think you can look at Ethereum and be like, where does the yield come from? A lot of its issuance, there's some execution fees.

There's some congestion fees. There's native staking rewards, though. Yeah, issuance. So I think if you look at that, then you can be like, what would the rate of Ethereum staking be without issuance? if it was just execution or if it was just pure lending, and it's not a great lending rate. And I think you see this in the Bitcoin OTC lending market. It can be as high as 14%.

You can get better terms. If you make a permission list, you open the set of lenders to the world and more retail dollars can come in, sure. I think that's what a lot of the private credit people are hoping for by putting private credit on chain. But I think the risk-free rate is not really risk-free because you're taking on U.S. dollar risk. So I think it's like a misnomer.

So I would just say there will be a benchmark rate. It will be like the Bitcoin lending rate. That'll provide all the other rates with something to go off of. What about funding rates for perps? That's an interesting question. I think if you're asking if you could architect Athena with Bitcoin and get a stablecoin out of it, I would just say no, because there's no staked either. No, but I think people are trying to build Bitcoin funds around this idea.

Yeah, the market has some really good products. You have CME futures and you have Bitcoin Perps on finance and you can get basis trading and cash and carry trading. That's healed. Yeah, I'm less convinced it'll be something that's durably there because I think with the 401 case, in Fidelity and everyone buying Bitcoin in their retirement accounts, it's going to semi-stabilize. Bitmex also has this other good research post on their historical funding rates.

And every year, the gaps between the extremes of funding get narrower and narrower. If you go back and look at 2019 or 2022 to today, the funding rate slowly collapses. I don't know how to think about the funding rate relative to the lending rate. I think that's an interesting question. So you think that trade goes away over time, essentially. Yeah, or it's risk that people are comfortable taking because you need access to an exchange of some sort. That makes sense.

What do you think of innovation around Bitcoin in the last year or so? I'm looking forward to the next year. I think if you're a cryptographer, it's probably been extremely interesting seeing the guys at Alpin Labs, the guys at Citria, the guys working on like BitVMX, or like Robin Linus from Zero Sync, which led the charge initially. Jeremy Rubin's also done some stuff at Char. there's a ton of guys really pushing the edge on what they think they can do in terms of

ZK optimization. Outside of that, I don't think there's been a huge amount of stuff going on. And end users don't see that yet. The hope is that they will in a couple years' time. Yeah, and I think if you're a cryptographer or very passionate about Bitcoin having L2s that can provide more scale, that's self-custodial, it's been terrific. I think companies like LightSpark and Arc have been doing different approaches that look a little bit more like traditional lightning channels. And there's some. seems to be a lot of momentum there, but nothing is at the users yet, so it's pretty hard to judge anything without cohort data from users. And in your view, is the biggest end goal they're making

Bitcoin for payments? Is it similar to the Lightning View? Yeah, I think we've talked about this before, but I think if Bitcoin doesn't get a velocity where people can actually spend it in size and use it around, it could run into the same problems Gold had in the 1900s where starting with FDR and ending with Richard Nixon, we had progressively higher and higher restrictions on gold, eventually ending in private investment in gold being illegal essentially until 74. And that made dollarization and inflation and exporting debt to enable the government to bring in a lot of welfare programs and waste a lot of private resources possible. And I think Bitcoin wants to help people get the dollar out of their life. And to do that, you need velocity.

It's interesting, though, because the Bitcoin ETF, as we both know, was one of the most successful ETF launches ever, if not the most successful, in terms of a product. And the demand that came in from that was not at all contingent on Bitcoin's use as a payment method or having velocity. None of that Bitcoin is used for that use case. And we haven't seen that use case take off. So therefore, I would conclude that the demand we've seen for the Bitcoin ETF has not been because Bitcoin can be functionally used as a payment method right now.

I love this question. It goes back to like, why did it matter that the Medici's were clipping gold off of gold corn 1400s? The idea is fundamentally that inflation is a silent killer. People hear like, oh, inflation's 2%. And now after COVID, maybe it's 3% median worldwide. That's half of your money in 24 years. And that's 75% of your money's value over 50 years, which is probably the average career length.

So your earnings are actually 0.24% of what they should have been. But people don't think about this in those terms. They think about the here and now and have pretty low demand, elasticity or time preference. Or they're just too busy to think about it or like track it. And I think if gold was really easy to spend and still had its same properties, then people would probably just use gold. It'd be a lot harder to get people to use dollars. And then if people are using dollars, there's this whole very complex treasury market where you can inflate.

And people aren't even really aware of it. And then the official measures given by Big Brother in the Sky are always tampered with. And there's no really universal basket to actually track inflation. I always tell my sister when she asked me about this stuff is the official measure since COVID is, I think, 34% or something. So if you make 100K, you need to make 10034K. But if you look at the McChicken at McDonald's and went from a dollar to $2.74. So I'm like, which one is it?

The McChicken Index. So I like this grounding in inflation or like comparing it to what, theoretical rate of inflation actually is, or even just the idea that people don't like inflation. With that in mind, do you think the spending use case is just I'm Walt and I would rather hold most of my money in Bitcoin and therefore I want to buy my McChicken using Bitcoin? Is that why the velocity in the spending is important? Or is it for some other reason? I think there's a mix of reasons. I think you get like a compounding beneficial effect where if your medium of exchange is also your savings unit and your payment unit, then,

the value of the thing itself goes higher. I think if people have gold and they were plying with gold bullions, they would have some reserve balance of gold in their wallet. People have savings account. They have like their emergency fund. That's all in cash and it's all getting into the way. I think that would be more like reserve demand for Bitcoin, but I think it would also create more point of sales demand. And if it was fast enough, you would be benchmarking your dollar spending to spending something that doesn't have inflation. And I think the price stability would also get better. So there's a lot of these things would compound together. That makes sense. No, it would improve the landscape in multiple ways. Do you use Bitcoin for payments? No, I do not.

I have at certain moments, but I think there's this issue with the payment operating system where people have tried to use lighting there for years and it's been really hard to get restaurants or grocery stores. I would say I think of Bitcoin as like my ultimate savings account, I don't own a lot of cash and I never will. But no, I think the friction is there for me. Do you think we get the Bitcoinization of any nation state in the foreseeable future? That's a great question. I think the network state stuff feels like it needs Bitcoin to succeed in order to succeed. Why?

I think if you're just starting a new nation, you can have a mix of well-off people and not as well-off people, and they just built a new country. We've seen that happen hundreds of times in history. But if you're like, we're going to intentionally create something that is competitive with San Francisco, and it's going to be in T1 in Mexico. and we're going to like induce interstate competition. Those people are used to pretty high quality of life. They're used to having a job at a good startup that's well funded. And that's the idea. How do we fix America by like injecting this competition between states?

And that's special economic zones. That's network states down in Honduras. And I think to do that, you need a capital asset that is really valuable so that the private investment can actually scale and have a really good user experience for being a purchasement in the network state. So then I think without having a really ideologically aligned, strong, it's that denationalized money, but it doesn't really work. But yeah, I think we're starting to see it. There's one in Costa Rica. There's the one in El Salvador. I know guys already who like completely live on a Bitcoin standard. Interesting. Are they going to stay doing that, do you think?

Or is that temporary? No, I think 100%. They will. I think if you return to tradition and reject modernity and are off the grid and surf a lot. And the thing, you pay for is always going up in value and you live on a beach in Costa Rico. I don't see a reason you come back to society. I buy that. I think you pretty much fully subscribed at that point. What do you look at as the biggest challenge or challenges for Bitcoin? And is the security budget elite issue in your mind or what stands out to you? I view Bitcoin as the most capitalist chain. Bitcoin is never going to add features where if you build a protocol or a company or a payment thing on top that it's going to eat you someday, because it's pretty

falsified, even getting pretty simple things like CTV or like OPCat. Shout out our investment tabber wizards fighting the good fight for OPCat. It just takes an insane amount of political willpower to push those things through, which is ultimately a good thing. But I think the danger I do see is that we don't get velocity, that we don't get payments. I don't think it's like 401k balances. I think that's ultimately a good thing that people own some Bitcoin and start to think about why does my Bitcoin keep going up in value and why does my house in dollars keep getting more expensive. But I think if we don't get payments, I think the traditional financial specter is always going to try and extract and insert itself. And maybe it's paper

Bitcoin that's fake. I know like the laser-eyed folks are pretty nervous about that. I don't think it's the security budget. I think because it's so unexpressive, we'll always be able to add things and tack things on that'll secure it, whether it's a finality gadget for proof of work, whether it's people up in the mountains who are heating their homes with A6. There's a bunch of startups working on that. I think it's a really awesome idea, seeing Key as a beneficial byproduct, not as a bad thing. So yeah, I'm not worried about the security budget. Do you think stable coins or other on-chain assets are threatening to Bitcoin? You know, this one I struggle with. I feel like I've thought about this since I used to trade at Galaxy and would talk to traders. I think right now,

if you're an import exporter in Nigeria or a guy with a savings account in Venezuela, getting access to the dollar is awesome, and Bitcoin is probably too volatile for you. I think if Bitcoin is less volatile and let's say it's worth $20 trillion or whatever in market cap, I'm not saying that's going to happen, but in this theoretical world, I do think it would be an alternative to the dollar and it will lose some people to the door. Ultimately, though, I think we really don't know how this is going to fall because we haven't seen nation states tackle the stable coin thing with their own legislation, which is to say we've seen Middle Easterns try and fight the petro dollar. We've seen in the 90s, the Federal Reserve and also European central banks, we're pretty

nervous about the euro dollar market. Stable coins are big and they really benefit the U.S. We have not seen a government say, oh, we're actually going to put the same capital controls that Japan has used for its entire history to stop its citizens from using the dollar. I think until you know that, you don't really know how to think of it versus Bitcoin at scale. Yeah, I'm generally compelled to think if the entire world were on stable coins as opposed to If you have money, it would be beneficial to Bitcoin. And therefore, it should be beneficial to Bitcoin in theory. But my counter argument is, I think it does threaten the monetary status from an

opportunity cost perspective. Sort of like you said, I think you see this Ethereum in the alt coins. Like, I think stable coins on Ethereum have directly or indirectly harmed ETH's price value, because people just carry that asset more now or they speculate using it. Yeah. I think Tron is also a really good example. People are in L, TRX's money, but like, drop a terrific amount of stable. Yeah, it's a great example.

So I would echo that. I think if you're also looking for, like, one world government, one of the best things you could do is be like, let's let everyone use a stable coin that's tied to the U.S. And we'll have Tether be like the biggest treasury buyer in the world. So implicitly, the citizens of the world are fostering the U.S. government from becoming even more Machiavellian and this Leviathan. that nothing can slay. So I want to circle back,

especially as we start to close out here, Bitcoin for payments. You and Jack Dorsey maybe can jam over that one. What gets us closer to that or what happens structurally with the Bitcoin market? And is there anything else that you think needs to happen or people should be caring about when it comes to Bitcoin? Yeah, I'm not going to be like we're at the end of history for designs.

But I think if you look at L2s on Ethereum, if you look at base, a lot of people have built payments infrastructure around base because it's cheap enough. And I think if we get a form of non-custodial, if you have a full-on forced exit hatch that works from a Bitcoin L2 down to Bitcoin, whether that's using a new ZK verification op code, whether that's using some form of a bit VM or what people are calling Glock now, whether that's using something that looks like Cavian, Tapper Wizards, is what worked on. I don't think it matters. I think it's just if you have low enough payments, people will start to build the payments infrastructure. And then I think over time, it'll evolve to like a more

fractured network where you have L3s on top of L2s. You have multiple L2s that are connected. And that'll allow geographic payments, almost looking like a traditional database architecture where you co-locate things where they need to be, but they can still connect. It's the old idea of sharding and like a traditional database. Just where it's permissionless and non-custodial, that feels like what we need. Well, Waltz, we'll leave it there. It's been a pleasure. Thanks for coming on. having me, Wyatt. Thanks for listening to another episode of On the Brink with Castle Island. To find out more about Castle Island, visit castle island.Vc. To listen to all of our podcast episodes,

please go to On the Brink dashpodcast.com or just click on the tab in our website. Thanks for listening.