The Breakdown - A Web 3 Company Just Bought a Stake in a TradFi Giant

Starting point is 00:00:04 Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. The breakdown is sponsored by nexo.io, Abra, and FTX, and produced and distributed by CoinDesk. What's going on, guys? It is Tuesday, January 11th, and today we're talking about a Web3 fund that just bought a stake in a traditional finance giant. Before we get into that, however, if you are enjoying the breakdown, please subscribe to the show. Give it a five-star rating, review it if you use an app that has reviews, or if you want to get deeper into the conversation, join the Discord.

Starting point is 00:00:50 You can find the link in the show notes, or you can go to bit.ly.ly slash breakdown pod. There is a growing conversation there, more channels than ever. It's really, really getting to be a fun community, and I would love to have you there. But let's dig into today's show. And today's going to be one of those sort of grab bag shows where I go through a bunch of different items from the last couple days or weeks that I think are important for you guys to know about. And let's get started on the fact the acknowledgement that the mood has been a little bit down. Ever since the Fed FOMC Minutes came out last week and the markets took a dive, it has been a little

Starting point is 00:01:26 bit gloomy. You have people trying to compare early 2022 to early 2018, which, by the way, I think is a very ill-fitting comparison, but that's not the subject of today's show. However, for all of that doom and gloom, all of that fear on the Fear and Greed Index, it hasn't gotten down some of the biggest traditional finance champions of Bitcoin. Let's look, for example, at Bill Miller, legendary value investor. So that word legendary gets thrown around a lot in traditional finance So let's talk about what it actually means in this case. Bill Miller was the chairman and chief investment officer at Leg Mason Capital Management, and one of the funds he was in charge of was the Leg Mason Value Trust.

Starting point is 00:02:09 The Leg Mason Value Trust is the only fund in mutual fund history to outperform the S&P 500 for 15 consecutive calendar years. That took place between 1991 and 2005. On top of that, Bill Miller has a ton of other accolades. Morningstar.com, for example, called him the fund manager of the decade in 1999. After Leg Mason, Bill went on to found Miller Value Partners, which is a long-horizon value-focused firm. MVP has $3.1 billion of assets under management, and if you go to millervalue.com and read up, it's very clear that this is not some wild renegade firm.

Starting point is 00:02:51 The strategies that Miller value employs at first blush couldn't be less like the wild world of crypto. Except in this case, Miller's thing isn't crypto per se, it's Bitcoin. It's a simple, clear, and unique store of value, a digital gold for a new age. Miller has been public about his bitcoinser status for at least a year now, since at least last year. But in December, Miller did an interview with WealthTracker where he revealed that 50% of his net worth is now in Bitcoin, 50%. And boy, were the quotes juicy. He pointed out that on average, Bitcoin has gone up 170% every year for the past 11 years. He said, what do you have in your portfolio that has this kind of track record, is very underpenetrated, can provide a service of

Starting point is 00:03:43 insurance against financial catastrophe that no one else can provide, and can go up 10 times or 50 times? The answer is nothing. Apparently, Miller started buying some Bitcoin around $200 after seeing a presentation about it way, way back in 2013, 2014. However, he also started re-buying around $30,000 in the spring of last year. He said, quote, my reasoning is that there's a lot more people using it now. There's a lot more money going into it in the venture capital world, and there are a lot of people who are skeptics who are now at least trying it out. Now, all of this is fascinating, but here's the other crazy part. The other 50% of Bill Miller's personal portfolio is almost entirely Amazon. Lynn Alden tweeted, I'm trying to wrap my head

Starting point is 00:04:28 around the fact that Bill Miller has a half Bitcoin and half Amazon portfolio. Alex Gladstein from the Human Rights Foundation responded so funny. In 2018 and 2019, when I was doing executive education for Singularity University about Bitcoin, the CEOs would ask how much to invest. and I would half jokingly say go half into Bitcoin and half into Amazon. That way they were hedging freedom in the surveillance state. All joking aside, I think that in some ways, Bill Miller's 50% allocation might be more convincing to a certain part of the population than a Michael Sailor type.

Starting point is 00:05:02 Now, of course, we need the sailors who are willing to have this loud, all-in perspective. It's really important. But Miller represents something very different. He has a common-sense perspective in energy. an argument for Bitcoin that requires no big rejection of the old system. And his thesis, that common sense thesis, got him to half of his net worth into BTC. Now, when it comes to expansion of these assets, it really does take all types. People are more convinced by people who seem like them, who share a similar perspective. This also provides a nice counterpoint to some of the gloom

Starting point is 00:05:36 as I started with. The level up expert tweeted, Bill Miller, one of the most prolific investors the last 40 years, announced he has half of his net worth in Bitcoin, yet you're selling because Joe 453 2 on Twitter says it's a bare market. Speaking of Tradfai, here's something of a crazy one. Citadel Securities is taking its first ever outside investment. Yes, this is Citadel Securities, best known for payment for order flow, for running the trades for Robin Hood, etc., etc. up. Its first ever investment, which is $1.15 billion at a post-money valuation of $22 billion, is coming from Sequoia, which is already weird enough, right? You get a real blend of Silicon Valley and Wall Street there, but then also from Paradine. Yes, the Web 3 leading crypto VC firm

Starting point is 00:06:23 paradigm. So Citadel Securities is owned by Ken Griffin, like Citadel the hedge fund, but is a separate firm from that hedge fund. As I said, it's probably best known for being the firm that handles U.S. trades for Robin Hood, at least around these parts, and Ken Griffin is most recently best known as the guy who outbid the Constitution Dow for the Declaration of Independence. As you might expect, there are a heck of a lot of hot takes on this one. Citadel doesn't exactly have the best reputation among many in the crypto space, but at the same time, there is already at least a counterpoint that says this has to suggest Citadel wanting to get into crypto. Joe Wisenthal from Bloomberg tweeted, has a crypto company ever invested in a tradfai company like this before?

Starting point is 00:07:04 feels historic. I will admit to being surprised by this. However, I'm going to reserve judgment. I could play out and give scenarios on why it's bullish, why it's bearish, and everything in between. But for now, I'm just going to say that this is clearly the beginning of the story of whatever's going on here, and the best bet is likely to just pay attention. Nexto is a trusted and easy-to-use crypto platform, where you can buy cryptocurrencies at the touch of a button, and start earning up to 17% annual interest. that is paid out daily. They support all of the major assets on the market

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Starting point is 00:08:54 You can trade NFTs with no gas on FTX US, and gas is subsidized when you withdraw off the platform. Help support the breakdown and visit FtX.us today. That's FtX.us. One more on the Tradfai side of things, I gave the bullish Bill Miller take, but I should complement it with a little bit more bearish data on fund flows. Last week saw $207 million of outflows from digital asset investment products. The lion share of that was Bitcoin with outflows of $107 million, which makes sense, given that Bitcoin makes up the majority of these products. This is a continuation of a trend that began in mid-December. In the last four weeks, outflows have totaled nearly half a billion

Starting point is 00:09:40 $465 million. And over this four-week period, these investment products have represented 25% of total Bitcoin trading turnover, which is higher than normal. So the point of all this, take this with the Bill Miller piece, is not to minimize that there is some definite short-term churn, as the market makes sense of what's going on with the Fed and the shift in policies, but that doesn't mean that everyone's getting bearish. Speaking of what's going on with the Fed, Fed Vice Chair Richard Clarita is leaving with only two weeks left in his term. On the one hand, yeah, it's two weeks, but it's the symbolism that matters. He's leaving clouded in controversy and scandal. Last year in October, there was a mini scandal when it was announced that Richard Clarita

Starting point is 00:10:23 bought about a million dollars in shares of a U.S. stock fund just a day or so before Powell announced effectively that the Fed was going to go ham on printing to preserve the economy during the COVID crisis. What we didn't know and what we discovered last week is that, you know, that only three days earlier, Clarita had sold at least a million dollars in shares of that same fund. And this is the really dicey part. Homi spent a year hiding the sale part of this, and a seven-figure swing inside three days is not a normal thing to do. You're already talking about questions about buying an asset when you know that the Fed is going to announce major support, but the fact that you dropped an equal amount of that asset just three days earlier is zoo.

Starting point is 00:11:04 So let's be really clear on the timeline. And this is from Brian Chapata. at Bloomberg. Friday, 221.20, stocks fall from record high. Monday, 22420, sell stocks. Wednesday, 226.20, Clarita had calls with board member and regional Fed president. Thursday, 227, 20, buy stocks. Friday, 2820, Powell hints at rate cuts. Now, this sort of controversy has been an ongoing concern with the Fed and with Congress. Eric Rosengren, the Fed president in Boston, and Robert Kaplan, the Fed president in Dallas, both resigned in September. And while Rosengren cited health concerns, both were largely caught up in the public backlash around their disclosure of stock trading during the pandemic emergency response from the Fed. Last October, Jerome Powell announced

Starting point is 00:11:53 new guidelines that included banning purchases or sales during times of market stress, and there is currently a probe of Fed trading underway by the Central Bank's Inspector General, although the Clarita revelations are bringing up questions about the scope of that investigation. Elizabeth Warren was hammering this point ahead of Jerome Powell's confirmation hearing, which is happening today. And obviously the question here is one of institutional trust, and it's just so low right now. As I mentioned, this isn't just the Fed. In the U.S. last year, only three out of 38 major hedge funds managed to outperform the S&P 500, which, by the way, wow. But according to new data compiled by unusual whales on Twitter, 35 out of 535 members,

Starting point is 00:12:37 of Congress outperformed the S&P 500. This was largely bipartisan as well, 16 Republicans and 19 Democrats. Nancy Pelosi made headlines in December for defending the rights of Congresspeople to trade stocks, saying, we are a free market economy. They should be able to participate in that. Of course, the question, a skeptic might say, isn't free markets. It's access to information that others don't have sooner than anyone else has it. Travis Kling pointed out this hypocrisy in a tweet that said, we now have three Fed board members that have resigned due to the egregiousness of their insider trading during the COVID market crash, but they won't let you participate in air drops worth thousands of dollars because you need to be protected. All right, last one to wrap

Starting point is 00:13:18 up and then we'll be off for the day. PayPal is exploring its own stable coin. This came out a couple weeks ago because a developer had found a PayPal coin logo hidden in the app. PayPal said it was from an internal hackathon, not something they'd finalize plans for, but the SVP of Crypto told Bloomberg, we are exploring a stable coin. If and when we seek to move forward, we will, of course, work closely with relevant regulators. The markets take kind of falls into one of two areas. The bullish is represented by this tweet from Forculus. So Facebook changed its name to meta, PayPal is launching a stable coin, and a new billion dollar fund is announced weekly and people think 2018 is going to repeat? On the other end of the spectrum, the skeptical, Michael Doherty

Starting point is 00:14:00 wrote, SEC and a bunch of other predators wouldn't let it grow further than a plan. Definitely, it will be regulated hills overhead. I don't exactly fall into either of these camps. I think PayPal is smartly positioning itself for the possibility that regulators this year say, okay, to stable coins, but force an incredibly high compliance burden on them that it's extremely difficult for today's crypto industry players to meet, or at least will take them a very long time to. In other words, if the government comes back with rules that say, more or less, banks are the only legitimate issuers of stable coins, I can see PayPal trying to sneak in as the or less while the existing crypto providers get blocked out. PayPal would leverage its much longer history and

Starting point is 00:14:44 market to sneak in a quickly closing door. Whatever the case, though, I will say it's interesting at how quickly things have evolved. When PayPal announced last year it was getting into crypto, it was major headline news. This time, barely a peep. That could be the that the ins and outs of stablecoin policy is just two in the weeds for most, but it's still interesting to note. Anyways, I want to say thank you again to my sponsors on this show, nexo.io, Abra and FTX. And thanks to you guys for listening. Until tomorrow, be safe and take care of each other. Peace.

The Breakdown - A Web 3 Company Just Bought a Stake in a TradFi Giant

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