On The Brink with Castle Island - Weekly Roundup 03/05/21 (GBTC discounted, Private Blockchains are Back, the Last Cycle?) (EP.188)

Episode Date: March 5, 2021

Matt and Nic are back. In this episode: More cured meats drama The Singapore sovereign wealth fund invests in Anchorage Will they or wont they - Goldman edition Bitcoin completes Paypal's original vision Schwab looks to add support for crypto Kings of Leon NFT Are NFTs the first truly mainstream application of blockchains? Are today's centralized public blockchains just a return of private blockchains? Citi releases the case for bitcoin GBTC trades at a steep discount to NAV and what it means Is the GBTC arbitrage trade over? Should startups hold Bitcoin on their balance sheets? How does 2021 feel compared to 2018? Are we likely to see another 70%+ drawdown? Content mentioned in this episode:  Bloomberg's Crypto Outlook, Mike McGlone Understanding Bitcoin, Jurrien Timmer Bitcoin at the Tipping Point, City GPS This episode is brought to you by Sovryn, DeFi on Bitcoin.

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.

Welcome to On the Brink. I'm Matt Walsh. And I'm Nick Carter. And we are setting a new trend. We have people sending us cured meats to our office now. We have a four pack of salami from New England, charcutory care of the host of the encrypted economy, Eric Hess. And I have to say, I love this trend. Yeah.

So, I mean, to be very clear, I have not taken physical deletreepardy. delivery of the cured meats yet. So Matt is currently hoarding them. You will, you will get delivery. You were in Miami. I would like to take delivery. I was, but I also want my cured meats. Now that I'm back, please deliver the meats. Oh, well. Teddy Fusaro started a really positive trend here, you know, with the soupy. And then I think people just needed to get on it. And so New England charcuterie, I give it a 10 out of 10. The one problem is that I lost a filling because I took a big bite and had an issue there. So it was not without collateral damage. That's the inherent risk in all cured mates. I don't think we can call it a

trend until there's three though. So we do need a third listener to step up to the plate here if you've enjoyed our shows. But we're not talking like Slim Jim. It needs to be high quality, cured meat. I would totally accept Slim Jim, some big Slim Jim fan. Well, what a week. Busy week. wasn't really going up, but a lot of news happened. And it feels like there's a slow burn here of institutions just quietly making moves. And so a lot to talk about. Yeah, we also have a new sponsor. So I guess we can talk about that. Talk about before we get into the deals. Talk about sovereign. Yeah. So we have mad sponsors on the show now. It's hottest show in town. Actually, we did have our best month ever by a lot last month. So thank you for listening. Sovereign.

is Bitcoin Defi. So obviously you've heard about defy and Ethereum. Defi built on Bitcoin. They use the root stock chain. So they let you earn, borrow, and trade without giving up control of your coins. You can earn interest on Bitcoin with their loan facility.

You can pledge funds to a liquidity pool and earn trading fees, trade up to 5x leverage on their decentralized exchange. Bitcoin is sovereign money and sovereign app is that free market on top of Bitcoin. So you can find them at Sovereign. Dot app.

Sov-R-Y-N, Sovereign. It's hard to infer the spelling from just hearing it being pronounced. That's right. It's a lot of crypto words like that. Yeah, value, obviously one of our startups, also hard to know how it's spelled just from listening to it. Well, this week was still a busy pod week. We had an episode with Brian Flynn,

who's the founder and CEO of Rabbit Hole, one of our portfolio companies. So they're a platform for driving customer acquisition for defy application. And so this was a timely one because Brian's really knowledgeable about NFTs and the state of defy. So check that one out earlier in the week. Yeah, and that was it for us this week as far as podcasts. So we've slowed our pace slightly, but we have some good ones coming up. In terms of deals, there were so many.

There are a ton of deals and including a very large one to start. So tax bit, which is a cryptocurrency tax software company, they raised $100 million. in a Series A from Tiger Global Paradigm and others, including PayPal, WinkleVos, PAC Capital. Congrats to Tax Bit. What a big round. Yeah, Monster Deal. Another big deal, Anchorage, of course, most of you will be familiar.

They're the custody and trading firm. There is an $80 million Series C from GIC, Andresen, Blockchain Capital, Lux and Indico. Really, really notable that the Singapore and sovereign wealth fund is, investing. So we're seeing more kind of state level entry into crypto infrastructure. Really, really cool and exciting. Yeah. And this is interesting for Anchorage too, because obviously they started as a custody platform and they obviously still do custody, but moving up the stack into trading. And really, we're hearing a ton of positive reviews about their trading product. And you'd have to think that part of this $80 million will go into enhancing some of

that trading and prime services. So excited to see what happens with this money. So next up, we have BCB group. They're London-based startup. They provide banking services to crypto firms. So we talk about the convergence between traditional finance and crypto finance. They raised $4.5 million from our sister Island Island Island, island fund, North Island ventures. If you're going to be on an island that's not Castle Island, you better be on North Island. Big fan. Island funds of the world unite North Island Ventures, blockchain.com, Pantera, L1 Digital, and PAC Capital.

I put this one in the newsletter, even though it's not a traditional venture deal, but MIT DCI raised $4 million to continue their funding for just core R&D around Bitcoin Protocol. And so this is super important stuff and had some high-profile backers, I believe, Meltem, and Fidelity and John Feffer were all part of this as well as others. So congratulations to MIT DCI doing some pioneering work.

Yeah, really important work, which I think has been underinvested in, the work on maintaining Bitcoin's long-term security. You know, there's a lot of sort of unsexy work that needs to be done to make sure the Bitcoin Protocol is absolutely hardened. And sometimes it can't happen in a corporate context. Sometimes you do need it to happen through nonprofits or academic entities like the DCI. So I'm very glad for the state of affairs. We also have this newcomer of the scene, Brink, John Newbury's nonprofit.

They're doing a lot of work to get new developers on board. So we've been saying it, but the sort of patronage environment around Bitcoin is in a really good state right now. Agreed. Next one up is Compass Mining, which is a company building a market. marketplace for hosted mining. They raised $1.7 million from Galaxy Digital, CMT, coin fund, Rarestone, and Zach Prince. And then we have sovereign itself. They, as you now know, are a Bitcoin-based Defi protocol. They may raise $10 million in a pre-sale. Next one up is yield, guild games. That's kind of hard to say. A project that is focused on

NFTs, yield guild games, rolls right off the tongue. They raised $1.3 million. from Delphi, Scalar, BlockTower, Gumi Cryptos, and others. I would just call that YG. Yeah, not the easiest to say. Lastly, we have two un-prefixed deals. So we have unslashed finance. No prizes for guessing what they do. They're a crypto insurance startup.

There is $2 million from Lennonis cap, P-2-P capital, bit-scale capital, and chain layer. And then we have another on unchain capital. We've had Parker Lewis on the pod before. There, of course, that custody and lending startup, they raised $5.5 million from Nydig, ecliptic capital, starting line, platform ventures, and a number of others. Big fan of those guys doing a lot to make Bitcoin custody, you know, work for everyone. I like what these guys are doing a lot.

And this deal also included a significant. debt package from Nidig to fund some of the loans it looks like. So Nidig is just quietly building a monster over there. So if you're not paying attention, you probably should be. And we will see if we can get them on the show. Oh, hint, hint. They're very, very quiet historically, but they're getting a little louder. Well, they're getting louder because they have a lot of customers and assets on the platform. So they have a lot to talk about. So there's a ton of news this week. There's the classic, the latest iteration in the will there, won't they drama with Goldman.

Yeah, so what is this? It seems that they will. Maybe they will get involved in crypto markets. So Goldman is reportedly restarting their cryptocurrency trading desk. I did have to check if this was a headline from 2014, 17, or 21, because we do get it every few years. But maybe they're coming. I think, you know, this time it's going to stick. I'm going to go ahead and put that on the record.

I think Goldman is going to be active and stay active in crypto markets from now on. All right. Well, you heard that prediction first. The rumor mill is heating up around a bunch of things. So right now there's a rumor out there. It's being reported on by CoinDesk that PayPal is in talks to acquire curve, which is, of course, the crypto asset custody workflow company. this was after there was rumors that they were buying Bitco a few months ago.

And so I think there's going to be a big consolidation here of custody providers. And there aren't that many left. If you look around and if you think about all the banks and broker dealers that are going to have to acquire custody capabilities, the question is how will they acquire them? Will they build? Will they buy? Will they partner? And, you know, there aren't that many to buy.

It's interesting to see PayPal's level of commitment to the crypto space. You know, initially they started with just owning a Bitcoin IOU on the platform, and then they move to, well, we're actually going to let you settle transactions with merchants with crypto assets. And now they're buying or potentially looking to buy, you know, software tools for full custody. So they're getting more and more aggressive. It's really fascinating to see PayPal start to treat crypto assets as an alternative reserve asset and an alternative payments mechanism. There was a great interview that Dan Schulman, the CEO of PayPal, did with DeCript this week. And he talks about their new crypto business unit. And he talks about it in the context of like a mega app.

I forget the exact word that he used. But basically the types of apps that you have in China that are doing. multi-dimensional things. So, you know, payments and lending and facilitating basically a bundle of financial services in e-commerce. And it seems like they view crypto through that lens as maybe enabling technology to allow them to introduce a new direct-to-consumer, like new front door to financial services even. And of course, PayPal, the original vision was very similar to Bitcoin, about a global currency, you know, unencumbered by sovereign borders. And there's a real symmetry in PayPal coming back around and embracing this truly open

protocol. Yeah, the original vision of PayPal was just incredibly disruptive. You could argue that, you know, the path they ended up taking was kind of incremental, although obviously it was a huge success and made a fortune as a public company. But yeah, the original vision there was almost a strong. start a Bitcoin-like network. And is it a coincidence that members of the PayPal Mafia are, many of them are Bitcoiners? Well, they just Peter Thiel, Elon Musk.

They had the necessary preconditions to understanding this. You know, it's hard to jump right into Bitcoin without understanding some piece of it. You know, some people come at it from a political ideology front. They understand why non-state money is exciting. Some people come at it from a computer science. perspective and some people come out from a cryptography perspective. But if you have one of the things that is an ingredient to Bitcoin already as something you understand, you're probably predisposed to understanding Bitcoin itself a little bit better if that makes sense.

So going more towards the traditional brokerage world, it looks like Schwab is being reported by the block to be exploring brokerage solutions for crypto assets. So this convergence is really happening at an accelerating rate? I, you know, get ready for a wave of these traditional retail brokerages, adding solutions for crypto assets. And I'll just say that it's only about three years late. I mean, their customers are in mass going to places like BlockFi and River and Coinbase to establish accounts.

And so they're just responding to the fact that they're losing a generation of customers by not having this capability. I mean, I'm sure Schwab saw Coinbase's S-1. They saw that eye-popping figure of 42 million accounts. I'm sure it's, that was a Q4 figure, so I'm sure it's higher now. And they thought to themselves, wow, that's 42 million accounts that we probably don't have. Yeah, I think that's probably right. Did you see the report that Cracken is in tax to raise capital at a valuation of over $10 billion?

dollars? Yeah, if you look at relative volume on the two platforms between Cracken and Coinbase, last I checked their volume was something like 20, 25% of Coinbase's, but if Coinbase goes public at a 70 plus billion dollar valuation, it's interesting, Cracken, I don't want to say it looks undervalued, but on a relative basis, Coinbase is certainly getting a premium from the markets when you compare their volume profile. in other news the kings of leon are releasing an album as a non fungible token is this the first musical nfti i actually believe that they're not the first to do it but probably the most high profile band ever honestly i'd you know i must say i think nfts are the first

crypto application to go truly mainstream to really penetrate into the cultural consciousness in a way that even Bitcoin never did, I would say. Is there any reason why you wouldn't go to like a Patriots game and have an NFT as a ticket at some point in the future? I mean, it just makes so much sense that you'd have a provably scarce asset that would theoretically address a lot of the counterfeiting issues. And then if there's a secondary sale, like a scalping of it, then the like the Patriots would be able to actually make money on that.

It just seems like a no-brainer use case. There's scalability questions 100%, but the theory makes a ton of sense to me. I think it would also defang the ticket masters of the world, which is great. It just seems like a no-brainer use case. And yeah, the base layer blockchains can't support it now, but don't bet against that working at some point. Yeah. I mean, there's, I've seen a lot of ticketing stuff. startups floating around.

I think that's what Tari was meant to be. There was also this wave of like private blockchain ticketing things that obviously didn't catch on because private blockchains didn't make sense. But maybe that idea on a public chain infrastructure ends up working. Well, I would actually maybe contest that a little bit. I actually think most of the quote-unquote public blockchains that we're seeing get traction now are effectively permission blockchains. I mean, look at Binance chain, like, that is a chain that is not trustless, right?

It's basically administered by a single entity. So what is the real difference between that and Hyperledger? I think this is an interesting point because if you look at flow, for instance, it's, you know, you could make a serious argument that is just a centralized blockchain, but they're on a path to decentralizing and they have a, you know, a plan or whatever. But yeah, I guess a lot of these things kind of certainly Binance chain is just, to like a centrally run blockchain. So, yeah, what is the difference?

This is the apotheosis of private blockchains. They made it. It's just it wasn't the ones that were being pitched in 2015. Yeah, it's just like Corda should have really, you know, issued a token. Issued a token and traded on exchange infrastructure. But yeah, I don't see a huge material difference between, for instance, a Binance smart chain and any of those old school private blockchains. So the lines are really being blurred here in a really big way, especially as we have these new base layers that basically regular folks cannot run nodes for. Side note on private blockchains,

someone needs to catalog how much cumulative time was wasted talking about private blockchains in the financial services world. It is an unbelievable amount of time. And just you'd have these rooms with people sitting around a table and talking about private blockchains for syndicated loans and all these use cases. And then you'd have these firms that were just engaging at it from various levels. So you'd have firms that were totally understanding what was going on. And then you'd have firms like, so where are the miners? Like I don't get it.

Like, where are the miners? How does this work? Just talk about a waste of time. Well, that is the consequence of the late stage of the credit. cycle that we're in. Well, I... It was that, but it was also a lot of innovation groups that just wanted to say they were doing blockchain because they didn't like Bitcoin, but they love the underlying technology.

Is it safe now to come out in favor of Bitcoin? I don't think so. I don't think it's safe. I mean, I read a, I actually read an SEC filing by, I think it was CIBC group, the Canadian Bank, and they talked about threats to their business. model around disintermediation. They talked about, you know, Bitcoin and public blockchains. And they said, you know, this isn't really a threat. I'm paraphrasing, but they said, basically, this could be a threat, but it's too volatile and there's no regulation. So it's like, don't think that people understand

this stuff yet. A lot of places don't. I want the incumbents to underestimate Bitcoin. You don't want them to estimate you. You want them to think that you're not a threat. One thing I will say, though, there are some banks, investment banks that are coming out with some pretty favorable Bitcoin coverage. So city, yeah, the Citigroup report Bitcoin at a tipping point is not only well researched. It has a ton of jam-packed information just about startups and the market infrastructure around public blockchains. I thought that was terrific. Yeah, I thought it was really, really outstanding. and lots of coin metrics data in there.

They've been doing their research, looking in the right places, clearly. That is very fair. You know, it wasn't massively biased on one side. You know, I've actually had a lot of engagements with folks at City over the years, and I thought that they've taken a very measured approach to the asset class. I don't know who's left. What's the next investment bank left for us to hear the case for business. Bitcoin from them. Well, the thing is, I don't know, let's get a bunch of these research reports out.

That's great. You know, have the research group spin up a bunch of POVs, but you got to put capital at risk to really be in the game here. And so, or at least you get to open up a pathway to your customers accessing these things besides just buying micro strategy. And so the game has yet to start, I think, as it relates to just building out this infrastructure. I mean, you know, Goldman reportedly starting a crypto trading desk. That's fine. but let's wait till it's real. So that's a very fair perspective. One thing I thought was quite notable was Urien Timmer,

Director of Global Macro at Fidelity, who's been on this show before. He put out a paper on Bitcoin. That's not part of FDAS. Yeah, Urien's in asset management. Urien is one of the clearest global macro thinkers there is in the world. And it's exciting to see him engaging in big.

Yeah, I thought this was notable because he's not actually part of the Bitcoin group over at Fidelity. So it's just the continued normalization of Bitcoin as, as you know, macro trade, as an inflation hedge or, you know, rates bat, you know, that's the way people see it these days. I think we were early on the Uri and Timberstock. We had him on the podcast right after COVID started and talked about Bitcoin. He caveated before we came on the podcast. He's not an expert, but he looks like he's done a. ton of work since then. It was a great piece you put out. Yeah, we might have piqued his interest. That's absolutely right. I actually really liked Bloomberg's recent note from their commodity

analyst, Mike McGlone. I thought it was really well done. It was entitled, Bitcoin Making Gold Redundant, somewhat provocatively. And there were some good points in there that I want to repeat. So the first one is Mike looks at the GPDC discount, which is we're actually, I believe, an 11% discount to NAV right now in GBDC. So might actually be the largest discount ever in the history of that instrument, which is like six years old or something. And he finds that those discount periods are excellent buying opportunities historically. Well, let's talk about this for a second. So this is a dangerous place to wait into because there are people that are practitioners

on the trading side that know a lot more about it than we do. But, you know, if I had to venture a guess here, I think this discount to NAV is a function of just alternatives on the public markets in Canada, potentially. Would you think there's any validity to that assertion that basically there's just a better way to buy this on an exchange, obviously not at a premium via some of these Canadian ATFs. And so that's driving down the, you know, the premium. Yeah, it could well be a market structure issue, but a discount this steep. I mean, typically closed-down trusts do trade at discounts. They do. It actually should generally be discounted. It kind of speaks to the enthusiasm

for Bitcoin in a tax-advantaged way that it typically is not discounted. But yeah, I think it's a fair point to say, like, look, there's a bunch of competitive trusts. You have the Ospreet trust, the BlockFi trust, Bitwise trust, and the multiple Canadian ETFs. So yes, but an 11% discount seems dramatic. Well, it's on sale, really, at the end of the day, right? I mean, it's on sale. I mean, it's not directly redeemable, but I think ultimately you will be able, there are bitcoins, you know, underneath it.

Yeah, I mean, you trust, you might be able to get out one. You trust gray scale to, you know, run a solid operation and have a good custodian on the back end. And so as long as you trust that, then they're on sale. Yeah, it's like a Gawks claim. I mean, not to compare Grace Guild of Gawks, but a Gok's claim you're buying some underlying at a discount, at least the hedge funds like Fortress and off the chain that did that were doing that.

And so you might imagine if you believe that ultimately the shares of GBDC are redeemable for Bitcoins in some sort of global settlement mechanism that, yeah, You're buying an 11% discount. Yeah. Well, what's interesting is I wonder how this is unfolding for the, you know, the funds that are very active in that trade. That'll be, you know, we'll see. Can they sustain a prolonged discount? Yeah.

And they have to pay for the privilege of borrowing Bitcoin in order to execute that trade. So that is a tough spot to be in right now. Talk to a few of them who's still. tend to believe that the trade is not really going to be lucrative anymore. So it might be the end of the infamous gray scale trade, which was a trade that worked for five years. Yeah, it was a great trade. I mean, it might not be over. Did you see this news? So BitGo came out and they revealed that they hold $250 million worth of Bitcoin on their balance sheet. BitGo, of course, is the large crypto asset custodian.

to me this just obviously makes sense from a couple different perspectives it was picked up in the press in the same vein as other corporate treasury purchases like micro strategy and square but i think there's a practical reason why is a large custodian you just want to hold bitcoin and that's just in case something bad happens you have bitcoin to make your customers whole i mean it's i think of that is obviously they also have insurance but you have this kind of liability in bitcoin if something bad happens. And so why not have it almost as a hedge on your balance sheet by holding a bunch of Bitcoin? Yeah, that's an interesting point. I don't remember who tweeted this, and I should be crediting them, but someone tweeted that certain firms like Bitcoin put their

reserves, their balance sheet into Bitcoin and never had to raise again. So I actually don't believe this is a new development. I think this has been something that they've had for years now. Well, this has been going on in the industry for a very long time with venture-backed companies putting Bitcoin on the balance sheet, but for some of them, it's actually been catastrophic. And so it just depends on when you've timed the cycle. And so there have been some that, yeah, that had to go back to market to raise much, much quicker than they plan to because they catastrophically mismanaged their treasury. Yeah, and we're going to sound like heathens for saying this, but we actually don't typically recommend that our startups convert their balance sheet

or working capital into Bitcoin or crypto for that matter. But it has paid off in some instances, you know, infamously, I think Blockstream held some Bitcoin, and apparently Bitcoin, too. I think you have to really take a corporate treasurer approach to it, and you have to think about what are your liabilities denominated in, and what are your liabilities? And so you have liabilities in the form of payroll that are, you know, paid in U.S. dollars. And so, you know, you better not get yourself off sides with being able to meet a payroll or, you know, bringing the runway in.

But, you know, if you are in the crypto economy and you have liabilities that could potentially be dominated in Bitcoin, makes a ton of sense. So Blockworks, the sort of media organization, they came out with a profile on us, of all things. I mean, we hate to be self-promotional, but what a profile. Yeah, there's some interesting cover art. I guess the question is, is it accurate? It's mostly your words in there, actually. So is it an accurate and fair portrayal? I thought it was a very good profile.

It was basically just the facts of how we started our careers. I guess I thought it was interesting that they contrast, you know, early 2018 when we were raising the fund to today. And I suppose it is very different. I mean, the market's much more mature. There's just more to the sort of crypto phenomenon. There's more macro forces at play. But in a sense, if you remember that, it was the waning days of the 2017 bubble. There was plenty of enthusiasm for the asset class back then, too.

Yeah. It was just less, it was like more diffuse and not as well defined as today. Yeah, these cycles are kind of crazy. And I do wonder what the next cycle is going to look like in terms of just people falling out of the industry in general. I do worry that people aren't prepared for the inevitable 70% drawdown in public blockchain asset prices that we see every cycle. This thing doesn't always go up into the right. And I remember in 2018 and 2019, a lot of people got disenchanted and left crypto, a lot of fun. went bossed. A lot of people blew up on leverage. I mean, countless, countless people left

crypto for greener pastures. And I'm sure the same will happen again. And, you know, before this cycle began, I thought that this might be the last one. It might be a much more measured rally, but things are not measured. Things are actually completely crazy and insane. I would say actually crazier than 2017. Because there's so many things going on at once, right? You have the thesis for why this stuff matters. You have the infrastructure is being built out that's resulting in choppiness because you have big counterparties that are onboarding.

And there's a lot going on, the regulatory environment. I mean, there's more capital at play in the markets. There's more retail investors, frankly. Maybe not as a percentage of capital, but in terms of absolute numbers. There's more retail. NFT has crossed the chasm to the mainstream. Obviously, defy is still happening.

And then Bitcoin itself has reached, you know, a new audience. So I was hopeful that we were just kind of sort of grow gradually and we're going to plateau. But to me, the magnitude of the rise and the aggressiveness, I think, think it's inevitable that we have another collapse at some point. I'm not saying, you know, next week or next month, but I don't think we're going to escape it. And so we're going to have another one of these cycles. Well, sometimes the cycles are good because they allow the real people that are committed to it to hunker down and build. And that's when the best companies get built. I mean, you think about the last cycle, you know, BlockFi was being built and just these

generational businesses. So, yeah, we welcome the cycles. Oh, yeah. I mean, and we were lucky almost, I would say, to be deploying in late 2018 and all throughout 2019 when enthusiasm was really low and capital wasn't focused on, you know, early stage private equity in crypto. So that was the best time to be deploying, in my view. Hopefully we get another one of those moments.

All right. So I think that's it for the week. It'll be a busy next couple weeks of podcasts. We've got a bunch of good ones in the hopper that we've already recorded. Yeah, we did one with Matthew Mnzukish of Crypto Voices talking about how to measure Bitcoin versus fiat currencies. And as it turns out, that is the hardest question ever to answer. But he does have an answer. So we're going to cover that. So we're going to cover that early next week. And we have a couple other. surprise ones for you. It will be a busy next couple weeks. We're excited and we will see you next week.