On The Brink with Castle Island - Weekly News Roundup 3/13/20 (Markets in Turmoil, Deals and more) (EP.51)

Episode Date: March 13, 2020

Matt and Nic from Castle Island Ventures review the top stories of the week in the cryptoasset industry. This week's topics include:  - Market Turmoil - Market Infrastructure - Deals 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 into Britain's ailing economy with a new round of Concentive 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 On the Brink. I'm Matt Walsh. And I'm Nick Carter. And this is our first remote on the Brink episode. Well, it's our second, right? I think this is the new normal, though.

Yeah, we're probably going to be fully remote from now on into the foreseeable future. So I think we're set up to do these pretty well, though. We have our equipment. We're actually staring at each other on a Zoom link right now. So you've got to maintain eye contact to be. you know, a good podcasting pair. That's the rule. Yeah, I think so. Hopefully the audio quality works out, but everyone's kind of working from home. I'm actually in the Coin Metrics office right now, but I think I'll be working from home pretty soon. The cool thing about working from home is that you can

wear your Bitcoin T-shirt. Oh, you got the Bitcoin T-shirt on. We should get a picture of that. Yeah. Someone actually just sent that to me because they liked my tweets. Fun fact about that T-shirt. Just randomly. That's bad Opsack on your part. Yeah, that is bad OPSEC, you know. But I moved since then, so I'm safe. Oh, that's good. Well, we did have a couple exciting podcasts this week. Maybe before we get into all the market turmoil, we can just give a plug for those.

So we had Matthew Lemurrell on Monday from blockchain co-investors. That was a really good podcast, talked about a range of issues, talked about institutional adoption, Bitcoin in developing countries, talked about the fun to fun landscape. So check that one out. And then on Tuesday, we sat down with Jeremy Allaire at Circle. And that was a lot of fun as well. We talked about Jeremy's entrepreneurial journey,

talked about stable coins, USC. They actually rolled out a new suite of products and services this week. Tough week to launch a new product, but this is a really cool one. Makes it easier for developers and businesses to integrate with USC and do things like payroll and just use it for merchant processing. So a lot of fun. And then we also rolled out a new website for the podcast.

Yeah, I mean, it's technically still under construction. but oh I think it's on our website already though I think I've just went on it you can also get it on the brinkpod.com so that's pretty easy to remember so there you go and worth noting the allaire podcast when we do Jeremy allaire that is the first in our series on crypto dollarization and we've actually recorded all the episodes in that series already so it's going to be really cool. It's exploring this topic that, you know, stable coins and tokenized fiat, essentially, are a potential killer app of blockchains. I know a lot of bit corners aren't going to want to hear that, but kind of the data is undeniable. This is what people are using them for. I mean,

you know, that doesn't take away from the non-sovereign asset narrative, but that's definitely an intermediate narrative, which is going to get a ton of play in the next couple of years, in my opinion. Well, let's transition into what's going on in the market. At the time of this writing, week over week, we're down about 35% or the total crypto asset market cap and all of this being driven by the coronavirus. What are your thoughts? Well, it's worth noting that the plus token liquidators have been at it again. So they're like committed sellers, right? So that's part of it, I would say.

I mean, that's not all of it, of course. Bitcoin's behaving like a risk asset. People are freaking out. They pay a mortgage. They're weak hands, you know, SMH. And they have to sell off whatever's most liquid. Bitcoin happens to be extremely liquid, very available, unencumbered. You know, it's typically not encumbered in any special vehicle with the special tax treatment or anything.

And it's being sold off as people are basically moving to Fiat, moving to cash. Yeah, I think this is an important point. I mean, you often hear this store of value narrative, but I think it's important to understand that it's an option on a potential store of value as opposed to a store of value itself. If Bitcoin was a true store of value, it would not be worth $110 billion. It would probably be closer to $10 trillion. So John Feffer, I think, put this quite well on the podcast a few months ago

when he talked about this is more of a series A or a series B bet on the emergence of a non-sense. sovereign store value. Yeah, these things take time, and Bitcoin is still at the early stages of its monetization. I don't even know how long it took gold to attain its monetary qualities, probably hundreds of thousands of years. Of course, I think it's going to happen in an accelerated way with Bitcoin, but we're only 11 years into this thing, and only, you know, maybe five years into it really being financialized.

I think the, you know, the story is unchanged. The tech is getting better. I mean, if you were at the Bitcoin Expo last weekend, which is maybe a nexus for the virus now, you know, there's a lot of really interesting stuff coming down the pipe with Schnor, taproot, you know, lots of improvements to Bitcoin script in the pipeline, things that'll make Bitcoin more extensible, safer to use, more standardized. All of that is like, is quite good. But yeah, Bitcoin's definitely exposed just to who the whole.

holder bases. And if the holders are panicking and they need to liquidate for to pay their mortgage, it's going to go down for sure. Yeah, everything is really correlated to one when you're in a risk off situation. Even gold right now is down about 5% day over day. So that's bouncing around. The volatility is crazy. I think you bring up a great point on some of these microstructure issues in the market. So plus token had a large sell-off on Saturday it looked like. It looked like it was about $101 million worth of Bitcoin at that point. that coin desk had a pretty good coverage of that. But all of this market infrastructure is really nascent.

And so to the extent that we see an exchange or a market maker below out here, you should expect to see more volatility on the downside. Yeah, the plus token thing is quite interesting. So they scooped up about 200,000 bitcoins, right, and a whole bunch of ether. And they've distributed 130,000 of those bitcoins, it looks like. With a lot of it going to, you know, regulated exchange. to who will be Oakex. So that's kind of interesting. So there's about you know, there's about 30% of those BTC waiting to be liquidated by the plus token, you know, whoever's managing

those accounts. Whether they'll liquidate all of them or they'll stop at some point, I don't know. If you look at the coins, some of the coins stolen from Gox have never moved. Some of the coins from the Bitfinex hack have never moved. So they don't always get liquidated, but in the case of Plus token, they did. But we could be, pending a few more liquidations, we could be a light at the end of the tunnel kind of situation in terms of getting rid of this huge liability. Yeah, so we have some dedicated sellers there that, you know,

there is probably a light at the end of the tunnel. Now, on the flip side of that, I think things could get interesting for some other dedicated sellers, which would be potentially hedge funds. So we might start to see some hedge fund, redemption, some liquidation, some forced selling. managers that don't want to get out of these positions, but we'll have to sell some Bitcoin. And that could happen.

The other thing would be minors. You think they could be potential sellers as well? Yeah, so it's hard to know where the minor break-even is. I was talking to some miners today. They actually tend to have a couple different break-evens. So one would be the full amortized fixed cost plus variable cost with the fixed cost. In some cases, being electricity, insurance, power. staff, rent. And then there's the other break-even point, which is just the variable costs.

And miners will run their A6 at a loss in some cases if they think the price is going to recover and that they're going to be profitable overall once again. So, however, you know, there's a point at which miners throw in the towel. Some of them might have inventory of Bitcoins at that point. And so when they collapse, you know, the whole firm goes into liquidation and they sell off. To me, that is likely what was behind this collapse from 6,000 to 3,000 that we saw in late 2018, I believe. That could be what has happened just now or could be happening again. So like, but there's all these sources of reflexivity in Bitcoin situations where you have momentum that carries the price too far one way or the other, especially on the downside. And then the other interesting thing is that this latest

collapse might expose some insolvencies at exchanges. So that was kind of what happened to Kudriga. They were insolvent for a long time, but it didn't become clear until Bitcoin's price had, you know, really collapsed. And, you know, because even if you are fractionally reserved, you can still disguise that if things are going well. So it's my guess that might be. exchanges especially the kind of shady or offshore ones are just covertly running a fractional reserve in the case of a panic where people might want to draw their coins or they may not be as inclined to gamble in some of these exchanges these hidden insolvencies could be exposed so look out for that you know over the next

few weeks we'll see if any of those happen so we're getting really gloomy here so if you take a step back you know my My take would be things actually could get a lot worse before they get better for the crypto asset market. So markets hate uncertainty. I think what we're starting to see here is just more and more uncertainty just around quarantines and all businesses are going to be impacted by this. But I do think it's important to zoom out both on the price and the thesis.

So if you think about this from the perspective of the price, on this day, last year Bitcoin was trading at 39, 15, something like that. So, you know, it's up quite significantly. It's a 24-7 priced market. And so I think there is the temptation to just stare at the price all day, which is probably not the best idea. But more importantly, I would say zoom out on the thesis. There's really nothing different.

You talked about some of the innovations at Bitcoin. There are smart people working on all different angles in this industry. There are people that are after this for the non-sovereign store of value. There are people after this for smart contract platforms and working on disrupting data monopolies. There are other people that are building things to attach real world assets to public blockchains. So all of the talent is still there. It's a very mission driven industry in the sense that people will work on these things for free. They're continually pushing new product innovation. So I would say just zoom out. Nothing has really changed. Nothing is fundamentally shifted around the

technology and what we're trying to build here. And if you look at the broader macro picture, you know, what is likely to happen here if a lot of these Western nations have huge fractions of their population that are effectively quarantined for, you know, a few months at a time. There will be a demand for mass welfare programs, right? People can't work. Some people are hourly. Some people have blue-collar jobs that require them to be outside of their homes. We're going to see massive amounts of fiscal stimulus, is my guess.

You know, that entails potentially helicopter drops, right? We're talking really unorthodox and really aggressive, probably both fiscally and from monetary perspective, reactions to this crisis. We're probably going to see banking systems, some insolvencies and, you know, traditional banks. We're going to see cases where users, savers are not able to withdraw their funds. These are all things that force people out of the traditional financial system and into this parallel monetary system, which has been built. So the catalyst there are as germane as ever. The reasons that people like alternatives to the financial system, those will become very

apparent quite soon. That's my guess. Now, I don't know if it's quote-unquote good for Bitcoin, good for crypto, but I certainly see another, you know, potentially very significant dislocation in the traditional financial system here. I think that's right. And, you know, You have to remember that during the last crisis, that's when Bitcoin was invented. So there's probably someone working on some very interesting project and technology right now that is going to have a huge impact over our lives in the next 10 years. Maybe not to the scale of Bitcoin, but who knows, there's a lot of talented people that are going to be cooped up just building things.

And the other bright side, the silver lining here is that if we work from home, we can spend time with our dogs all day. So I know you don't have a dog, but, There's a, there's a, there's a, there's a Pratt said. So do you want to transition into some deals and some news of the week? Yeah, the deals almost seem, you know, like they faded into the background here, but there have been some deals that have happened in the last week. A lot of these deals were probably, uh, happened a few weeks ago, but were announced this week. So it'll be, there'll be a trickle of deals maybe in the weeks to come. But, uh, let's dive into it. So Arjong, which is a cryptocurrency wallet company, they raised 20, $12 million in a round that was led by paradigm.

So congrats to those folks. This is a wallet mostly focused on decentralized finance. Yeah, it's actually quite a good wallet I've used it. It's designed to give people sort of easy access to things like Maker and Compound. And they do some interesting stuff in terms of key recovery with kind of social key recovery. It's definitely part of a kind of a new generation of wallets that are more focused on usability. and appealing to kind of a mass audience. The next one is first digital trust.

This is a crypto asset custody company. They raised $3 million in a round that was led by Noggle Capital. So another crypto asset custody play there. The third one of the week is Horizon Blockchain Games. So this is a game company that's building a collectible card platform. They raised $5 million in a round that was led by initialized, had some participation from Polychain, Consensus, DCG, and others. that theme is only getting hotter, this notion of using blockchains for collectibles,

for in-game assets. I know people, lots of people are skeptical of this idea, but if I had to guess where the next sleeper hit or killer app comes from, that's it. It's a very powerful idea, and it's just a matter of time until someone gets it right. Actually, I heard that the Farmville folks were working on something similar. recently. I mean, you have to think that actually in this day and age, especially this time period with the coronavirus, where you can't go out and play Magic the Gathering in person, that maybe it's the right time for something like this? Yeah, this is one of those ideas that lots of people

will be skeptical of and have been skeptical of. It's, you know, they derived the ideas of, you know, a trivial use for a blockchain. But I think it's just a revealed preference. that players like to have much stronger guarantees over the ownership of their digital assets and their in-game assets. It's not that you can have perfect ownership the same way that a private claim entitles you to some Bitcoin, you know, relying on no one else. There's still some sort of counterparty risk because typically these games have administrators, they have studios, you're still sort of reliant on the existence of the game.

But you can protect yourself from the developers. you can protect yourself from the debasement of these assets in a certain way. You can protect yourself from counterfeiting. And you can give these in-game assets a history. So those are all quite interesting things, which aren't really provided by the current, you know, by current game studios. So there are some differences to the status quo there. I think it's a really exciting category. And then the last deal of the week is grain chain.

So this is a company that's building a platform for the agricultural industry. They raised $8 million from Medici Ventures, which is Overstocks venture arm. So those are the deals with the week. I'd say there'll probably be some more deals next week, but, you know, there's a time lag here. We're not going to see a ton of deals over the next month or so, is my guess. How can you not love something called grain chain? It's a blockchain, but for grains. I think the reason that supply chain blockchain got so popular, just the idea of it, is that it just sounds nice from a phonetic and rhetorical perspective.

Supply chain blockchain? Yeah, so this is another case of that. It's like, of course, put grain on the blockchain. It just, it sounds right. I think it's easier to put a grain on the blockchain than what was the, it was lettuce, right, that IBM was doing? Yeah, tomatoes. Tomatoes. They paid for TV ads during the Super Bowl. I remember seeing those. Just AI and blockchain. I was astounded, yeah.

All right, so what else happened this week? Did you see Bloomberg's article about the private equity-backed power plant in New York? They're operating a Bitcoin mining, at-scale Bitcoin mining operation at this power plant? Yeah, it's really interesting. It's something that a lot of Bitcoiners have been talking about for a while. Bitcoin is a buyer of energy at a certain price. probably in the, you know, 5 to 7 kilowatts or cents per kilowatt hour price, assuming you have A6. And if you have a source of energy, which you're not able to use or monetize on a 24-7 basis, Bitcoin can cover the shortfall, right? And so for producers of energy that might have intermittent demand, Bitcoin's actually quite interesting as a way to backstop that demand.

And this appears to be another case of that. So pretty cool. So in other news, we referenced this on the last podcast, but I finally gave it a listen. You were on what Bitcoin did talking about Bitcoin FUD, fear uncertainty and doubt. Yeah, I don't love the word FUD because normally FUD is used to attempt to defray valid criticism. But I'd see the ratio of valid to invalid criticism on Bitcoin is very low, unfortunately. So this episode was all about, it's part of the Bitcoin for Beginners series, which is really good, actually. I think Peter's done a great job with it. And he got

me on there twice, actually. But so this one was all about the somewhat maybe less credible critiques of Bitcoin. So there's all the I also covered some pretty good critiques, you know, questions around the security budget and the long term. That's an open question. I'm not, I'm fairly optimistic on it, but it's an open question. The question, which a lot of people bring up is just simply the volatility. If you talk to economists that are pro-alternative monetary regimes, they might be skeptical of the Fed, but they also do. don't like Bitcoin, the volatility is often a stated reason for that. That's what turns people away because it's hard to have a monetary unit of account, which is volatile. I think that's just the

truth of it. And so that's another wait and see situation. Bitcoin's certainly not becoming any less volatile today. In fact, I think actually Ethereum had its largest percentage drop, intraday percentage drop ever today. I saw that. It's still up year over year, though, right? I mean, it's still not at the base levels. Though I see it, like there is complete supply inelasticity. So there can be no supply response to changes in demand, which contrasts with something, even things which are ostensibly hard monies like gold or silver. What happens with gold is that the price goes up a lot, people fish through their drawers and they sell old gold jewelry that they may not need, so that brings more gold on the market.

Also, gold mines, some gold mines that may not be viable at a certain price become viable at a higher price, so they get turned on. So they're idling and then they become active. And that increases the rate of production. So that's the case for virtually every asset that exists in the world. If the asset becomes more in demand, becomes more valuable, people become more entrepreneurial. They try and figure out how to obtain or create more of the asset. That's the case for virtually everything that exists.

That's not the case for Bitcoin. The difficulty adjustment takes care of that. So Bitcoin has this extreme hardness, which manifests in this extreme volatility. So that's why it has this peculiarly high rate of volatility. So that's just, you know, that's the cost of, of the system. That's just the way it is. What's the best fud out there right now? What's, what's some good fud? Actually, so I think a lot of people would say the best fud is, you know, how is Bitcoin going to pay miners in perpetuity? I actually wouldn't say that's the number one most compelling critique of Bitcoin.

For me, I would say it's actually Bitcoin is likely to have someone. more existential crises where it's not clear what values underscore Bitcoin and it has a fork situation, which is damaging. And people talked about forks a lot in 2017. I thought the two, you know, the major forks in 2017 were without merit, but it's very possible that there's a real split in the community. It might be over the issue of privacy. Might be something else. But, um, I think maintaining internal consistency and a single identity in a system that's super chaotic and has no governor, has no administrator, is the number one difficulty, basically the number one risk.

That makes sense. So I think that's it for the week. I guess, you know, we're going to be doing this remotely. We're going to keep on doing the podcast. We'll be here every week. We might be able to hop on and do a couple random 10-minute episodes if big news happens. Yeah, and you know, we're right down the street from that biogen office in Cambridge, but we're still here. We're not going anywhere.

Yeah, it's the biogen meeting, I think, is really the epicenter here. And so I really hope that everyone is staying safe. It seems like this is going to get a lot worse before it gets better. But as I said at the outset, when we're talking about the price, I think it's important to just take the long view here. we're a resilient country. The world's going to bounce back from this to these animal spirits that are driving the market down in every asset class

will reverse. Talent works on a mission-driven basis and this is a phenomenal industry, phenomenal technology. We're going to get through this. Yeah, now one thing I would say is like if you look at equities there was just a huge amount of leverage

built into that system. Valuation ratios were at all-time highs. regardless of whether you're looking at price to book, price to earnings, aggregate market cap to GDP, corporate debt to GDP. So, you know, that system is incredibly leveraged. So to me, like this financial panic we're seeing is not just a consequence of Corona. I think Corona is a catalyst.

But if you look at crypto asset prices, there's not as many ways to insert leverage into that system for sure it exists in some cases like Ethereum the price was propped up because of ICOs back in the day and people bought Ethereum to buy ICOs so you had this there was certainly some embedded leverage in the price of Ethereum back then but with Bitcoin it's I would say it's less exposed to like a de-leveraging event because there is to my knowledge not a lot of fractional reserve banking that exists in Bitcoin there definitely are some sources of reflexivity, which we covered, but I would say not as much as, you know, would characterize like the standard financial system. Yeah, I think that's spot on. All right, well, that's it for the

week. Have a great weekend, everyone, and we will talk to you next week.