On The Brink with Castle Island - Weekly News Roundup 1/24/20 (Ray Dalio, Bcash, DigixDAO and more) (EP.36)

Episode Date: January 24, 2020

Matt and Nic from Castle Island Ventures review the top stories of the week in the cryptoasset industry. This week's topics include:  - new SPAC for Blockchain Co's - DigixDAO treasury liquidation - Bitcoin Investment Trust is now an SEC reporting company - Bcash dev funding proposal and much more news of the week

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 a Bitcoin. Bitcoin.

Welcome to the On the Brink podcast. I'm Matt Walsh. And I'm Nick Carter. And we're playing an away game. We're in San Francisco. We're in the Blockchain Capital podcast studio, which I must say is an extremely nice studio. Major shoutouts to Blockchain Capital, in particular, Kingel, because we were supposed to record this somewhere else right down the street, and we couldn't get in. And on a dime, we're in the studio at Blockchain.

So thank you Bcap. They have a very nice office. There's lots of brick in here. And they have some pretty cool art too. They sure do. Okay. So why don't we hop into it? Busy week, but not really a busy week on the deal front. There was one deal that I want to highlight here, and that was a blank check acquisition vehicle. So a SPAC, a special purpose acquisition corporation, has filed for a $50 million IPO. So this happens all the time, except this is a legal entity that is called UTXO Acquisition, Inc, and it's led by Chinese blockchain entrepreneur Wei Huang. And so as the listeners probably know, UTXO stands for unspent transaction output, which is the underlying data model that Bitcoin uses.

So it looks like we've got a acquisition corp that's about to go buy some blockchain companies here. Pretty cool. Pretty cool. You know, read that filing. So it didn't specify if they were just going to buy Bitcoin or actually buy other corporations? It looked like they're based on what I read of the filing and people should check it out on the SEC's website. But it looks like they're going to be going to acquire blockchain companies. All right.

So we'll see. We'll see how that goes. We'll see if they get it right. Why don't we jump into the news of the week? There's a bunch of stuff this week. Do you want to start with this gray scale Bitcoin investment trust news? Yeah. Yeah, so grayscales Bitcoin Investment Trust is now an SEC reporting company.

This requires a lot more disclosure, and it also shortens the window for the shares in GBDC to mature and become publicly tradable, which is pretty interesting. Yeah, I think this is kind of an interesting development here. So the trust has historically published quarterly and annual reports. They've had audited financials, but the implication now is that they're going to start filing 10Ks, 10Q. in current reports with the SEC. And, you know, people are honing in on this fact that the shares of GBTC have historically

only been able to trade after 12 months due to Rule 144. So the idea is you buy it at NAV and then you sit on the shares for a year and then you can trade them on the OTCQX. What this is going to happen now, now that they're an SEC reporting company, is that window will now be six months. But I think the bigger story here is potentially just that. this might open up the universe of potential investors into the actual product itself, because there will be some institutions that presumably, I think,

will be more comfortable investing in an SEC reporting entity as opposed to a non-reporting entity or private company structure. So I think it's a good development. For sure. And we've talked about the fact that a lot of the inflows to GBDC were in-com. and, you know, in fact, in Q2 of last year, it looked like in the trailing 12 months, about 70% of the implosive been in kind, as in units of Bitcoin being converted into shares of the trust, and in Q3, about 80% of last year were in kind.

So our hypothesis here, or in fact, you know, I guess conventional knowledge, common knowledge, is that a lot of the assets in the fund were chasing this premium play. So now that the maturation of those shares is accelerated to six months, A, you know, you'll most likely be able to forecast when a lot of those shares will mature just based on the disclosures they did in Q4. And B, it looks like those days of a high premium might be behind us because of this accelerated maturation period. Yeah, maybe.

I guess that would be the conventional wisdom. It'll be interesting to see what happens to the windows of when they're actually selling the Bitcoin Investment Trust, the NAV product. Right now it's only sold during certain windows because Grayscale is running commercials. I think there's probably a couple other reasons. I think there's an idea that maybe that window would always be open. And so, yeah, you would expect potentially some compression versus nav there. So it'll be interesting to see. We actually have Mike Morrow on the podcast on Monday.

So we talked a little bit about this. Mike is the CEO of Genesis Capital and Genesis Trading, which is the trading and lending subsidiary of digital currency group. I would expect that the premium will be permanently suppressed now because the arbitrage cycle is just shorter. It's shorter, but this is still the only investment product that holds pure, quote unquote, exposure to Bitcoin that you can buy on a retail brokerage. So there is some school of thought that there would always be a premium there until there's just more competition. or an ETF. So interesting news this week, really fascinating to me, and it appears very few other people,

is this Digix Dow situation. I thought it was fascinating, too, for what it's worth. So I loved this case study. I'd expected it to happen for a long time, and then it happened, and I was just so pumped about that. So set it up for people that don't remember this ICO, because this one happened in 2016, I believe. Yeah, so 16 or 17, don't remember exactly, but so it was a monster early ICO on Ethereum.

They raised about 400,000 ether, which was only worth six or seven million dollars in the time. It was a $7 million raise in 2016. It was a small dollar raise, but it was a lot of ether because ether was very cheap back then. And the idea was to create essentially gold-backed token. So your DGD token would be a claim on gold in a vault, I believe, in Singapore. So, you know, popular idea. We've seen it done in lots of other places. Pryptonomicon.

What's that? That was the idea in the book. Oh, okay. Yeah, I haven't been reading my Stevenson, clearly. And I think a lot of people that don't like Bitcoin kind of liked the notion of a gold-backed token because it has intrinsic value. And then you also have the nice, like, properties. So that's all well and good. There was also a Dow element, you know, as you might imagine from the name.

so token holders would vote on stuff. This year, the leadership proposed this Ragnarok idea. Ragnarok is like this Viking mythology for like the end times, you know, the rapture. And they said, well, look, we don't recommend doing this, but if you want, you can optionally trigger a liquidation of all the ether to give token holders a prerotic claim on the ether and the treasury. So lots of people had pointed out that many of these tokens traded below, you know, at a kind of a quote-unquote price-to-book ratio of less than one

because their treasuries were worth a lot more than the tokens itself. But then, you know, other people would point out, well, being a token holder doesn't imply that you have a claim on the assets in the treasury, right? There's no formal claim. In this case, they actually instituted that claim or the possibility of one. People didn't strictly expect, or the founding team didn't strictly expect that this would get triggered, but lo and behold, it did. So the token holders voted to trigger this release, basically a dissolution of the project.

$64 million worth of ETH. Yeah. And the amazing thing is, as this became more and more certain, the market cap of DGD converge to the value of the Treasury, as you'd expect. It was actually rather slow. So even after the announcement, the premium, you know, the amount you could have made on that trade was about 60%. which, you know, if you think about merger arbitrage situations where this happens all the time, if there's an acquisition, typically the premium available is much, much lower. So I pointed this out at the time, and then I was amazingly gratified when it actually happened.

So really fascinating case study. So what I like about this is, A, it's a fun case study in how information gets priced in over time. and how uncertainty is expressed in the premium here. I also like that it's setting this precedent for token holders to have to claim on the assets of treasuries, and I've long waited for activist funds to come in and pressure projects to do this, to perform this like capital return. Yeah, I think it's academically really interesting. I think the issue is that so many of these things were just unregistered securities offerings,

and so these funds don't really have some of the legal powers that would be at the at the disposal of a traditional hedge fund in an equity activist situation. But maybe we'll see more of this. But this is a precedent, right? I mean, you would imagine that token holders would be able to pressure teams into potentially doing liquidations like this, especially if the assets held on the balance sheet were really large. Right. So why don't we talk about a couple of SEC and regulatory issues?

It seems like there's an SEC case every single week these days. and, you know, no surprise there was one this week. So the SEC has charged another ICO team with conducting an unregistered security's offering. This project is called Opportunity. They spell Opportunity OPP-O-R-T-Y. So I guess the only takeaway from me is that in addition to spelling the name wrong, they also forgot to register their non-dilutive capital race. So, yeah, we'll see more of those.

And then another one that is interesting is Reginald Fowler, this is the guy that used to be the co-owner of the Minnesota Vikings. He's reportedly going to plead guilty to providing illegal banking services under his company Crypto Capital. So CryptoCapital probably sounds familiar to some because it was the back office fiat on ramp for a bunch of exchanges, including Bitfinex, Quadriga, and others. And it was processing payments for tether. And so the whole BitFinex tether situation, which required a bailout. when Tether broke the buck and it had $700 million, I believe, in capital vanish, in dollar capital vanish, that was crypto capital.

So this one's still playing out right now. And this is a crazy story. I wonder if we're going to start to find out more and more of what happened. But hundreds and hundreds of millions of dollars were going through crypto capital rails. And who knows where it went. Yeah, you wonder, you know, if they just absconded with the funds how they thought they get away with it. It's really, really crazy. And the whole Quadriga thing is also interesting because, you know, that guy might still be alive. Who knows? Gerald Cotton. Yeah, it was something

interesting I learned about Quadriga is that they had terrible accounting practices, of course, but they also lost money thanks to the likes of crypto capital, who these basically crooked payment processors that knew that they were an easy mark, basically. Yeah, I mean, these guys were really the only game in town if you're running an unregistered exchange offshore and you didn't want to do proper verification checks and you couldn't get a bank account. It seems like crypto capital is just satisfying this kind of, I don't know, like organized crime payment processing organization or something. It's really a crazy story. All right. Another one this week, this is just a kind of an odds and ends type of one, but another company quit the Libra Association, so Vodafone.

I'm getting kind of sick of all these people quitting the Libra Association. I'm not the biggest fan of Facebook, but like, come on. This is just people are just bailing on this thing. Yeah, when the going gets rough, you know, the, what is it? The consortium members quit? Yeah, that's exactly how that goes. That's the same, right? That's exactly how that saying goes.

I mean, one wonders why a phone company, like a telecom company, was in the Libra Association in the first place. Yeah, I mean, some of the same. these organizations are probably just hopping in there for for the press release in the first place and then once it becomes clear that this thing is under a lot of heat they bail but have a little conviction man come on like stick with it yeah seriously um all right why don't we did you see ray dahlio on squack box this week from davos i didn't but i did see the outrage twitter commentary okay so yeah i'm curious your thoughts on this one so um for those of you that didn't see it

And of course, Ray Dalio, he's the founder of Bridgewater, which is one of the most successful hedge funds out there. And I think he's one of the most cohesion thinkers in the world. And I've especially been following him over the past few months as he started to write and speak more about the longer term impacts of quantitative easing and how we're going to start to see inflation in the value of financial assets, not necessarily overall inflation, but just the price of financial assets going up. And his take is that investors should be seeking exposure to gold. So stronghold assets that are stores of value in a time when the printing presses are continuing to churn. And so in this interview, he was, you know, he was actually asked by Andrew Ross Sorkin,

you know, if you're espousing gold here, what do you think about Bitcoin? And his take was that Bitcoin is too volatile to be a store of value asset and it's too volatile to be a medium of exchange. And so probably not surprisingly, at least to me, is, you know, he didn't take that opportunity to encourage millions of people on national television to go buy Bitcoin. You know, I think that would have been probably a little bit irresponsible. But I'd love to know what his personal account looks like right now. Yeah, you know, I remember reading his, his posts on LinkedIn of all places. Right. About, you know, how the world was going to hell in a handbasket. And every Bitcoin there was like, yeah, he's got to be accumulating Bitcoin.

and I kind of had the feeling we were going to be disappointed when someone finally had the gumption to ask him. But so his point here is that, you know, seek exposure to store of value assets. And look, gold is clearly more established as a store of value asset. Bitcoin is an option. We talked about this with John Feffer on the podcast a few weeks ago. So Bitcoin is an option bet on a store of value asset. It's not a store of value asset yet. And so I think it was quite reasonable for him to,

talk about gold. He also, by the way, wasn't just a pure gold bug type of thing. He was saying that investors should have exposure to high growth tech stocks and things of that nature. So he thinks that there's a kind of a productivity gain story to be had here in the tech sector. So I thought his comments

were quite reasonable. I didn't see too much of the outrage. So were the Bitcoiners just all fired up? Yeah, then they were mad. But, you know, I don't strictly blame him. I mean, if you want certainty, Bitcoin is not going to give you certainty. I mean, you are certain of what fraction of the supply you have,

but, you know, it just fundamentally hasn't established. You know, it may be a long enough track record for someone like Ray Daly to be interested, and I think that's fine. Yeah, it's been around for 11 years, and it's kind of a venture type of bet right now. Yeah, like, you know, like a Series C startup, maybe. Yeah, I think, well, Pfeffer said it was a Series B.

I think it's a Series B. Well, we'll get to the Series C at some point. Oh, we might get their student rather than later. Yeah. We're on a good path. But anyways, you know, Ray Dalio, I think, is really worth following these days. And we're in uncharted times here from a quantitative easing standpoint. And I don't really see it stopping.

So keep on following him and try not to get too outraged. Did you see Ria's piece this week? So Ria Batoria, the director of research at Fidelity Digital Assess. Did you read that? Yeah. I thought it was so good. So it was called the omnibus model for custody. Yeah, and it was really a history of how custody developed,

especially custody of securities. And there was a huge industry involving couriers, in fact, just sending stock certificates back and forth between the big banks back in the day. The paper crisis. That's why the DTCC was formed. And they actually used to lose shares of stock, which is amazing. And then you had clearinghouses

emerge, you know, literal clearing houses. I love the history of this stuff. And then Ria also got into, you know, how custody works now, of course. And then into a discussion of proof of reserve, which was great. Shout out proof of reserve. You are the biggest fan of proof of reserve. Proof of reserve crew. Get in here.

So there's like a half dozen of us that like proof of reserve. Our numbers are growing all the time. I think it's getting to start to happen. It'll happen. If I complain on Twitter enough, it'll just eventually happen. Someone will capitulate. Someone said the other day that you're trying to meme it into existence. That's how all great things have started these days. It's true. So anyway, I mean, proof reserve really makes sense. I think Ria touches on a few of the reasons. It is technically still, you know, maybe difficult. There's no single established standard, but we basically need an exchange to take the plunge. I think there's a few

interesting ways that this could happen. It's also going to get a lot more complicated. And I think we're just going to see custodians roll out different custody types, so different account options. So you could imagine a large custodian charging you for an account where they show you proof of reserves, but maybe they would give you an account that actually is an interest-bearing account if you agree to have your Bitcoin re-hypotheated and lent out. So this landscape is probably going to change a lot in the next couple of months out. imagine. Yeah, and I think as some of these exchanges or crypto banks essentially stop playing the out-coin listing game and focus more on providing real financial services to their users,

namely Bitcoiners for the most part, I think we'll see more sophistication and a greater array of kind of depository products here. You know who had a great tweet storm this week was Max Bronstien over at Coinbase, just talking about how asset-based lending in the form of Bitcoin lending, is going to be one of the biggest drivers of institutional adoption in this asset class over the next couple of years. Some Bitcoin has really hate the notion of credit, but unfortunately, you know, you can't really stand in the way of markets, and there just is an inescapable demand for Bitcoin-denominated loans. I mean, Bitcoin is the best collateral you could ever imagine. With another asset, if you're having collateral tied up, and you have to liquidate it,

as Max kind of pointed out in that tweet storm, you're going to have to have coffee. associated with going to market and trying to get rid of the asset. With Bitcoin, it's super liquid and you can auto trigger a liquidation. So from a financial asset standpoint in holding Bitcoin as collateral, you can't really imagine a better asset. So another story that I just found to be a total joke, curious, your perspective on this, did you see what's going on with the Bitcoin Cash project right now? I mean, I haven't paid attention to this piece of crap project. in a very long time, to be honest. Yeah, what a drama.

I mean, it's like they wanted to outdo Bitcoin SV in terms of getting some of that outrage-driven attention. But, yeah, so basically the long and short of it is a few of the larger entities that have influence over Bitcoin Cash, namely some of the larger mining pools, put out a medium post. So BTC top, amp pool via BTC, Bitcoin.com. they put out this medium post saying that they were going to siphon off 12% of the blocker award to support quote unquote infrastructure funding for Bitcoin cash.

Very unclear what that would actually entail. And also, if you didn't comply, you would get reorged. So your compliance is all about right there. Your compliance is not optional. This is like one of the funniest things I think I've ever seen. So it's basically trying to, maybe they just see the Zcash template and they say we're going to go do that. Is that sort of what's happening here? Except, you know, in Ccash, that's kind of part of the social contract from Reception here.

They're just bolting it on. And we talk about this on the podcast a lot, actually. So, you know, I talked with Press Switch when he came on about the way that protocol developers can exploit their protocol proximity in subtle ways. This is like the least subtle way I've ever seen it. This is a blatant cash grab. There's no, you know, community assent here. There's no, you know, like reaching out to stakeholders to see if they would agree with this. This is literally siphoning off the protocol rewards for some like slush fund to perform, you know, like who, you know, God knows what with no oversight whatsoever.

Do you think that this will actually make the project token a security? You're relying on a third party to backstop the value. value of the coin at this point. So honestly, one of the worst moves imaginable. I understand that people always talk about like funding for public goods. Siphoning off protocol rewards, especially in a way which violates the social contract like this, is got to be one of the worst ways you can do it. And this makes me so grateful for the existence of many, many patrons in the Bitcoin world,

which just give no strings attached financing to Bitcoin developers, which means that we have sustainable development funds without having to siphon off funds from the protocol, which just ruins the social scalability. Yeah, I mean, I think we've exhausted our allocation for time talking about the Bitcoin Cash project for the full year, just with that piece. It continues to be a joke of a project.

Yeah. You know, expediency comes directly at the expense of the long-term credibility of the project here. And to me, this looks like, you know, the project being in its death throws and trying to throw anything at the wall and see what sticks. Agreed. All right. So that's it for the news this week. As mentioned, we're out in San Francisco. We are recording a ton of good podcasts out here.

So we have a lot of good content coming in the weeks to come. Yeah. we have over a month of content queued up now. So we're super pumped. Some of these guests are really outstanding. Well, all of them even. All of our guests are equally outstanding. And we'll be back next week, recording from Cambridge, as usual. And thanks again to blockchain capital and to Kindgel for letting us record on a moment's notice in their space. That's it for the week. Have a great weekend, everyone.