The Breakdown - Macro Investors Sound Off! Featuring Ari Paul, Spencer Bogart and David Nage

Episode Date: June 23, 2020

Today on the Brief: New Federal Reserve research suggests reaction to Facebook’s Libra basket approach was overblown Italian Banking Association pushing to test a digital euro U.S. housing has worst month since 2010 Our main conversation: Earlier this month, Messari hosted the Mainnet virtual summit. At that event, NLW moderated a session called “Macro Investors Sound Off!” featuring BlockTower Capital’s Ari Paul, Blockchain Capital’s Spencer Bogart and Arca’s David Nage.  The discussion included: The evolution of the Fed put and how it shapes the markets  How the collision of Bitcoin’s halving and the Fed’s reaction to COVID-19 created a powerful narrative moment Why the “Money Printer Go BRR” meme was so effective Why the Paul Tudor Jones letter was hugely influential within family offices Why these investors expect to see some significant announcements around bitcoin exposure from traditional investors in the months to come  Find our guests online: Ari Paul: @AriDavidPaul Spencer Bogart: @CremeDeLaCrypto David Nage: @DavidJNage Watch the rest of Messari’s Mainnet 2020 sessions.

Welcome back to The Breakdown, an everyday analysis breaking down the most important stories in Bitcoin, crypto, and beyond. This episode is sponsored by BitStamp and CipherTrays. The Breakdown is produced and distributed by CoinDesk. And now, here's your host, NLW. Welcome back to The Breakdown. It is Monday, June 22nd, and today's main conversation is actually a rerun of a panel that I hope hosted at Masari's main net earlier this month. It was called Macro Investors Sound Off and features Ari Paul, Spencer Boggart, and David Nage, and gets into a lot of the big picture topics that

relate to Bitcoin in the macro markets during these strange times. Before that, though, let's dive into the brief. First up on the brief was the fear of Libra fake news. What happened? The Fed released a new research report this morning called Global Demand for Basketbacked Stable Coins. It was written by Garth Bauman and Gene Fleming. And basically what happened is they ran simulations assuming that there was something like a Libra-like stable coin or Mark Carney's synthetic hegemonic currency, basically a stable coin that instead of being pegged to a single asset or a single fiat was backed by a basket of assets and a basket of other currencies. This has been proposed as a potential solution to some of the issues that we're seeing with a single national currency

being the world's reserve currency, and actually harkens back to John Maynard Keane's proposal for what he called a bank or at Bretton Woods, which again would remove the world reserve currency from pegging to any single national currency. So they took this idea, assumed it was real, and then ran a number of simulations. And here's what they found. And I'm actually just going to quote the report directly because it sums it up really well. First, because of general equilibrium effects of the basket currency on the volatility of currency values, overall demand for that currency is small. Second, despite scant holdings of the basket, its global reach may contribute to substantial

increases in welfare if the basket is widely accepted, allowing it to complement holdings of sovereign currencies. Third, we calculate the welfare maximizing composition of the basket, finding that optimal weights depend upon the pattern of international acceptance, but that basket composition does not significantly affect welfare. Fourth, despite potential welfare improvements, low-demand, for the basket currency from buyers limit sellers incentives to invest in accepting it, suggesting that fears of a so-called global stable coin replacing domestic sovereign currencies

may be overstated. Why does this matter and why is it worth bringing up? Well, the first is, I think there's a reasonable question about whether policymakers strangled the baby in its bed when it came to Facebook's Libro. There was a huge immediate reaction to the whole concept, and I think that unfortunately two different things got lumped together. The first was the idea of a basket-based stable coin in general. The second was Facebook as the originator of that idea, as the group or the company trying to bring that to market. Fear of Facebook is obviously tremendous, and especially in places like the U.S., Facebook

has a lot of unresolved issues vis-à-vis Congress, so it was never really going to get out of the gate easily. But it is clear that this basket approach was one of the major sticking points, especially in the U.S., and we can tell that because they... have subsequently changed their model to no longer have the basket of currencies approach. Still, the other part of why this matters and why it's worth talking about is that it is very clear that the Overton window on this idea is continuing to shift. We are having major important conversations in the key institutions of economic power

about what the future of the reserve currency system around the world looks like. And that's a really interesting thing to note developments within. Speaking of that, that actually brings us to our second point on the brief, which is that the Italian Banking Association announced last week that its banks are willing to pilot a digital euro. The association is 700 plus Italian banking institutions, and effectively they express desire to speed up implementation of a digital euro that would be backed by the European Central Bank. And in addition to just saying that they would support this, they shared 10 considerations for what a digital euro might look like.

So why is this interesting? Well, I think that this reflects an ongoing question of who within the European Union supports this type of digital euro experimentation and who doesn't. Earlier this year, we saw France send out a call for proposals for CBDC experiments. The Dutch Central Bank has announced that Netherlands is willing to trial something like a digital euro, similar to this announcement. On the other hand, Germany last year, the head of the German central bank warned that a CBDC could be destabilizing. So you're seeing these kind of interesting political fault lines, as with everything within the European Union and the euro system in general. And so it's not clear exactly what's going to win out, but the fact that there continues to be this conversation, this call for experiments, and some of these nations are now more aggressively pushing to see a digital euro, I think makes it more of a relevant topic for that economic zone.

And last up on the brief, let's bring this economic consideration back home to the U.S. and talk about some conflicting signals in the U.S. housing market. We got a report today that May home sales of previously owned homes dropped 9.7% in May. That's the lowest since 2010 and is more than 26.6% down year over year, which is actually the biggest slide year over year since February 2008. And the reason this matters is a couple things. First, obviously, this type of data is one of the most. most important economic signals that we have. Who's trying to buy and what are they trying to buy,

and what is it doing to prices, and what does supply and demand look like? These are really important telling factors, given how much a percentage of GDP and consumer expenditure things relating to housing are. Second, we are getting really mixed signals, because at the same time as you're seeing these really, really poor numbers in terms of sales, you're also seeing mortgage applications surging, which would suggest you would think some confidence going forward. But then on the flip side, you also see current mortgages and forbearance, which had seen better than expected rates of continued repayment, actually start to see those repayments dip. So really, the housing market is very conflicted, and in terms of the signals that it's telling us, and that actually

is a preview of the show for Wednesday. On Wednesday, I'm going to go deep on who I think has it right on the economy. Is it the bulls or is it the bears? And you won't want to miss that one. So if you haven't yet, now is a great time to subscribe. With that, let's flip over to the main topic. Macro investors sound off from the Misari Mainnet Conference. That conversation with Ari Paul from Block Tower Capital, Spencer Boggart from Blockchain Capital, and David Nage from ARCA is coming up right after a word from our sponsors. BitStamp is the original global cryptocurrency Exchange. Since 2011, BitStamp has been the preferred exchange for serious traders and investors, trusted by over 4 million customers, including top financial institutions. BitStamp is built

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compliance risks, you should start now. Learn more at cyphertrace.com. Welcome, guys. We've been here live for a minute. For those of you don't know me, I'm Nathaniel, NLW. I host The Breakdown, which is a daily podcast on macro, on Bitcoin, on the shifts of power in the world and what they mean. And so my interpretation of this session title, kind of these macro investors sound off or something like that, is that what I want to do with it, I guess, is basically let's have this kind of conversation about how the macro environment, how everything happening in the world is finding it. way into markets, be they crypto markets or traditional markets. And so I guess maybe as a way to kick that off, what have been your feelings? And maybe let's start with area. And then we can go to anyone else on watching first how the market has shrugged off COVID-19. And then second, how it has responded or not

responded to these protests, this new kind of huge batch of civil unrest. Yeah, so the markets are very explicitly reacting to Fed stimulus, which they're kind of assuming is infinite. So talking to like some of the biggest buy-side investors, the disconnect that we all see, you know, rising unemployment and yet a market marching higher, it's not complicated. It's, you know, you have a Federal Reserve that is that has a massive amount of money to buy corporate bond ETFs that basically says they'll buy equity if they need to. that infinite, you know, and we have a generation of investors who've been taught not to fight the Fed. For basically 20 years, you've been trained. Really the way to invest is just figure out where the Fed's going to push money. Eventually that breaks, but these things can take a really long time to break.

Personally, I'm skeptical that it's going to last much longer, but wouldn't shock me if we made new equity highs over the next six months before a collapse. And the thing that breaks it, whenever you have kind of a central bank, driving asset prices higher, is that can continue as long as faith in the central bank continues, which can be a really long time. Basically, making a bet that that will end is a bet that kind of the central banking backbone will itself crumble, which is a generational event, or far more rare than once a generation. So I do think we're headed for that personally. But that's why a lot of investors, they would say that's almost never a good bet to make. you're almost always better just betting the Fed can keep pushing things up if they have the political

will to do so. So that doesn't surprise me. And then on protests, historically, I frankly, I've been trying to catch up with my economic history and looking at market reactions to protests at different countries, different time periods. You can almost never locate riots on a chart. If you're looking at equity in almost any country, you can almost never find the riots. And I don't have like a really simple answers for why that is, except that they don't tend to have immediate, massive impact on corporate earnings. At the end of the day, markets do not reflect the economy. They reflect a handful of stocks, a basket of stocks. With the S&B 500 marching higher, it's basically five stocks going up and everything else going down. So yeah, the U.S. economy is, I was going to

use profanity, is doing very badly. But the earnings of a small number of giant companies have been doing reasonably well, companies like Amazon and Microsoft. And so when investors look at at the recent protests and riots, you know, is that going to impact Amazon's bottom line or Microsoft's? Maybe, right? But then we need to think about how much worse these things can get. I like to look at data, and obviously we all like to look at data. And so let's just, let's go from the top. So CNBC this afternoon after the close at 4 o'clock posted stock jump as Wall Street focused on the economy reopening, S&P 500, now up 40% from March lows. What has happened in that time frame? So we've had 1.8 million confirmed cases in the United

States. 414,000 have recovered over 107,000 deaths. We've had a global pandemic. We have been sheltered in place. That is why we're all on video and not together in person right now. What else has happened? We have had over 40 million jobless claims in the last 10 weeks and another 2.1 million file for benefits last week alone. So we've had this structural issue happen where all of a sudden this global pandemic has caused 40 million unemployed. We are now seeing things breaking down among society. And then on top of that, we've added a massive social unrest issue. And so I think my colleague actually wrote it really well, Jeff Dorman, the system is broken. You know, we've had the scariest pandemic in the last 100 years is below a what he calls a fourth

quarter lead, if we were using a football analogy. It's blown a fourth quarter lead, leading to racism and social injustice, which is then playing the second game of a double-header following a match between record unemployment and decades of wealth inequality. There's no fix any of this right now. And so for all of us that are obviously focused on digital assets, this is a cornerstone time for us because the system is breaking. We don't want things to break, but the system is breaking because it is structurally unsound.

And so when it is structurally unsound, you better have a place to go, you know, to move from that. and digital assets, Bitcoin and other digital assets, in my opinion and the opinion of others, is an untethered asset. And so that is why it is an important moment in time because the system is structurally unsound and it is breaking. And the trust system that we have is breaking and is broken. Spencer, what do you think?

Guys, I'm not sure if this is where I parked my car. Excuse me. I'm not a macro tourist here. No, but in all seriousness, you know, I'm deeply interested in macro topics here. You know, I want to note that I'm in no way an expert. I am absolutely a tourist. I do crypto venture capital. And, you know, certainly watch in the way that some of these things are tying back in.

I'm careful about extrapolating too far here. You know, certainly I think the biggest event here that's got, shouldn't say the biggest event because there are several larger events happening, including the current demonstrations as well as the pandemic. But the most relatable to our industry would just be the monetary response. Right? So it's, we don't even have to theorize about the amount of fiscal or monetary stimulus that we've seen so far in terms of will it be good, will it be bad? What are what are the implications going to be? There are a lot of reasonable hypotheses on a number of different frameworks there. I think that what's undeniable is that we are in uncharted territory and that involves some element of increased risk. And I think that there's an increased desire and appetite to hedge some of that risk. And I think that Bitcoin, crypto assets broadly are one of the vehicles that people can use to help hedge some of that risk. It's interesting. So I want to come back to the Bitcoin point that I think you're about, you're kind of making Spencer. But first, just going back to something that David said,

this idea of the system being broken is an interesting one, because something I've seen, an interesting analysis that I've seen from people like Ben Hunt are that actually the system is doing exactly what it's designed to do. It's just that if you haven't been kind of of exposed to and sticking your head debreckly in the mouth of what that looks like, right? The fact that these markets are relatively disconnected from the real economy, that they do care mostly about what Fed policy is going to do in terms of the cost of money, then it becomes jarring to see economic pain at the same time as, you know, something that is effectively an asset price increase machine and or a political scorecard or utility just kind of laid so bare

in front of you. And if that's the context, I think that part of what that contributes to is a narrative rupture that creates openness for something else. And so I guess my next question to you guys is, to put it bluntly, has there ever been a more significant narrative moment for Bitcoin specifically? I mean, digital assets more broadly, but I certainly probably by the way that I'm asking the question, you can guess my answer. But I'll let whoever wants to jump in first on that one. Or maybe let's actually go back to Spencer because I think this is kind of the point that you were starting to make. Yeah, sure. I'll jump in. Yeah, I agree with the leading question that, you know, I think in the last financial crisis of 2008, I was a very young trader and investor

and thought, man, that's it. This is the end of the modern, you know, fiat-based monetary system. We've laid bare the lie that Wall Street and the Treasury Department and the central bank kind of serve the country and it's very clearly a Wall Street bailout. These long regimes tend to last a lot longer than you think. And what ends up happening is people give up on betting against it. So you had a generation of investors and traders that basically tried to short the dollar after 2008, that tried to bet, that interest rates were to rise, that we'd get inflation. You had people looking at massive money printing in 2009, 10, 11, 12. And basically, those people got washed out. You know, people running hedge funds making those bets, went out of business.

And when the end finally comes, it usually looks weirdly inevitable in retrospect. So like think about the 2008 crisis again, we knew real estate was in a bubble. We knew it was going to crash. Everyone in that market knew it was a bubble that was going to crash. And yet it still crashes out of the blue and violently. And those people still lose their money. Well, how do they lose their money? Because I forget which I think was the Citibank CEO at the time said something like when the music's playing yet the dance.

There's this real, that's a real reality in markets and investing in that, you know, You can't be a decade early. You can't even be three years early on these calls. And so what ends up happening is we all see the end coming, and the warning signs become louder and louder and louder, and then it still is a really sharp crisis because people have been so thoroughly trained to buy every debt. They've been so thoroughly trained to just ignore the warning signs,

because the warning signs have been there for a long time. So, yeah, I think what's happening now is, you know, unprecedented gets used. The word unprecedented gets used a lot. But 10 years ago, 20 years ago, it was unfathomable. to have a president tweeting against central bank autonomy. It was unfathomable to have a head of the Federal Reserve saying, we have an infinite money supply and can print at will with no problem. It was unfathomable that Congress talk about proposing legislation

to print trillion-dollar platinum coins. Those are all truly mind-boggling crazy things, and we just become jaded to them because, you know, if, hey, if Congress talking about the platinum coin didn't cause the dollar to collapse, what will? But I personally am betting and think that the end up. end of that system is coming, that the lie's been laid bare, but it's still not an overnight change. I don't know exactly how this is going to play out. You think about the real estate

crisis. The stock market crashed kind of all of a sudden in late as 2008, but real estate had been crashing for a full year. CDOs have been crashing for a year. When I was a trader at Suspenter National Group, I was a young trader and one of the partners of the firm in mid-2017 ran across, he was like jogging across the trading floor. And someone said, I won't name him, But someone said, what's wrong? And he said, the markets are crashing in slow motion. And Susquehanna was a giant market-making firm that had their hands in kind of every liquid market. And the U.S. equities continued to make a new high into mid-2018. And yet, things were collapsing, like even as that was happening.

And not just in the abstract, markets were collapsing, just not markets that day traders look at. It was things like the Muni-Bond market was frozen. And if you even looked at Bloomberg, you didn't see it because what happened was, because the trading just stopped. Liquidity vanished. The bid-ass spreads became crazy. The prices didn't fall because no one wanted to sell their muni bonds at a 10% discount. They all thought, they were all hoping.

No one wanted to be the one to actually have to mark to a new market. So prices kind of just sat there for a year, totally illiquid. All the insiders knew they were broke. Like they knew, like, I won't mention a firm, but people who had billions of dollars in muni bonds knew that they had lost 20% of their value, but they were still marking them at the old prices. because nothing was trading. So I think we're in a very similar dynamic,

but with the monetary system as a whole. So with that to say, that's incredibly bullish for Bitcoin on a medium-term horizon, medium-term meaning a few years, possibly quite much sooner. But I say all that in that, like, I get asked a lot,

you know, R.E., Bitcoin isn't up a lot. I mean, obviously it is now since Black Thursday, but around Black Thursday, I would get asked by traditional media, Ari, isn't this the scenario Bitcoin is built for it? Or are you worried that Bitcoin's not up? And I would give this kind of an explanation as to why I wasn't worried.

I know that this takes longer to play out than you think. And what seems like it should happen in a month might take three years. Well, I'll say. I get asked a lot about that too, by the way. I just get that specific point to about Black Thursday. And, you know, a lot of people who are like, well, to Ari's point, why didn't Bitcoin perform, you know, relative to what you all have been saying, it is untethered, it is, you know, it is something that is uncorrelated to you.

And as we know, obviously when, you know, the VIX, went up as high as it went to in the 80s, effectively, you know, correlation all goes to one. So everything effectively tumbled at the same time. And so what happened in that specific case? And I think a lot of people still don't understand this from the outside. Remember, we are all in this world where we understand digital assets, where we understand, you know, blockchain, where we understand these projects. There is a massive world out there that still does not understand this. And that was obviously represented by what happened with Goldman Sachs a few days ago because they still don't get it. And so, you know,

there is this massive play out there. And effectively, you know, it's just, we're in a place right now where the information asymmetries are still very vast. And so it is still, you know, mind-blowing to me that people are asking me about why Bitcoin went to the way it was. It's because you saw every single person, every hedge fund manager, all the managers out there that were getting margin called, effectively having to sell any liquid assets they could to cover their margin.

And so that was the reason why. It wasn't because Bitcoin all of a sudden crap, and it wasn't because all of a sudden, every person out there in the world believe that Bitcoin was false. It was because holders of it needed to cover margin. And so it's actually really interesting, as I posted, CNBC, you know,

talked about the S&P rebound of 40%. If you look at the, you know, Black Thursday, you know, kind of recovery to now, Bitcoin has recovered 160%. And so, you know, again, that is something that a lot of people aren't talking about because, again, there's this information asymmetry problem. Yeah, I think one of the things that is interesting is the disconnect between

what time scale people are talking about when they're talking about relative asset performance, right? And, you know, Ari, what you were effectively just saying is that we're at the end of some type of super cycle, or you posit that we're at the end of a super cycle. And when the music stops, you know, as it inevitably will, you're not talking about kind of just a small shift. You're talking about a total reorganization of the way that we've designed markets. And that's why there's kind of, I think actually part of why, again, the question was leading from me and why I have such conviction of this moment and the narrative relevance of this moment has to do with the degree to which I'm watching people, the huge number of forces in

society making it so laid bare, it's creating this vacuum into which people are trying to, trying to figure things out, right? And Bitcoin is one of the few things that actually exists as a credible alternative, right? And I think is particularly appealing to a different type of demographic. You're seeing this all over the place with who you're seeing get involved. And it's, you know, you obviously have the Paul Tudor Joneses of the financial world. But you're seeing, you know, CoinDesk had its consensus event the other day. And you have, you know, Michelle Fan, who's basically invented YouTube influencers and then built huge companies in the beauty space, talking about how the decentralization of beauty and fashion that came from YouTube is now

the moment for the decentralization of finance and money is coming. And that's why she's so interested in Bitcoin and is invested in Lolly and these sort of things. And this is in some fly-by-night, random kind of pop culture thing. There's a much more significant thing happening. So I just think it's the intensity of this moment, I think, is creating more, more opportunity for, for kind of people to become open to something different than what we've seen in the past. Have you guys, I guess maybe let's turn that into a question. Have you experienced that with professional contacts, with personal contacts, with the people who, you know, have you gotten those text messages? Or have you gotten, you know, return emails from potential LPs that had, you know, kind of left you at the door

years ago or whatever, you know, obviously without having to get into any specifics, but, or is your, or is it still kind of too in the middle of everything to see that sort of, those changes? Yeah, go ahead and jump in here. It's been surprising some of the responses that I have seen from people that I didn't expect, honestly, people that aren't necessarily, you know, certainly we see a skew in terms of demographics towards slightly younger demographics. I've seen a lot on the older end of the spectrum kind of reach out in the,

midst of this. They're not gold bugs. They're not crypto people per se. I think everyone's a crypto person in reality, but they haven't gotten there yet. And if, you know, basically just said, how are we going to pay for these things? Like, where is this money coming from? And surprisingly, a lot of them have seen money printer go burr. And it's odd how much the bumper sticker works here. And so I've been surprised the number of people that have said, hey, can you help me set up like an account on the exchange. And particularly interesting, we've seen a couple saying, hey, I'm looking to buy some for my kids.

I'm just looking to set it aside. This is not going to be a huge portfolio allocation. I think this is important that I buy some and just set it aside for them. And that kind of caught me by surprise because I, you know, we're in this industry all the time. We're talking about it. Certainly I feel that way. But it's surprised me when I see people from far outside,

not even right on the fringe, kind of come in with those kind of comments. I will say, as many people know, I came from the family office world. And so I keep very. deep connectivity there. And so, and I've said this publicly on Twitter, the Paul Tudor Jones letter reverberated more than anything the last three or four years in my existence in this space. They read that letter, many of them read that letter. They saw him on CNBC. It was a very, very well-thought-out, disciplined approach to exposure into the Sastatic class, especially Bitcoin. Lorenzo Giojani, who is formerly the deputy director of the IMF, obviously co-authored that at

Tudor Investment Corp. It was incredibly well thought out. and disciplined in its approach. And so that in itself, in terms of hearing from people, hearing from potential LPs, hearing from investors out there, that really kind of resonated more than Bitcoin appreciation and price or anything else that's happening right now. Unfortunately, the way that most institutional asset managers, family offices and others out there,

they look at the cap table. And I talk about that in terms of a typical direct investment in venture. they look at the cap table and they say, who else is on the cap table? Because they want to know who else is there. They want to know who they can share ideas with, who they can share diligence with. And so it's the same type of approach that now that Paul Tudor Jones is on the cap table per se, that RENTEC, Renaissance technology is on the cap table, those things are massively important for the overall interest in adoption of Bitcoin and the asset class,

more than anything in terms of the price right now. How much do you think, let's push on that just a little bit, though. How much do you think that part of that is coinciding with the resilience narrative from the price rebounding so much? I mean, are you able to actually separate those two out? And this can be for anyone, not just, I mean, David, you're welcome to follow up too. Yeah, I don't think it's the price. You know, as Paul Turner-Jones' letter kind of examined the surrounding infrastructure

and what is supporting Bitcoin and other digital assets has matured. With the entry of Fidelity as a qualified custodian, of the entry of Coinbase, obviously, with their custody programs, the institutionalization of this asset class has been rapidly approaching for the last two years. And so no longer can institutional investors say, okay, I get it. I just don't have the bandwidth. It's always been a bandwidth issue. They always like to say, I don't have the bandwidth for this.

And that is obviously because it's too dangerous for me. I don't want to have anything associated with career risk right now. Now that that career risk is dissipating, now that they see other institutional investors kind of programmatically getting into this, now that they see the institutionalization and the platforms available to do this, that bandwidth issue is kind of dissipating as well, too. And so it's all kind of very lockstep. I think David nailed it. The only thing I can add is the interest that I saw was really tied to the MoneyPrinter

Gober and Paul Tudor Jones. I didn't see a pickup with the price rising. So I think, yeah, I don't want to just repeat David's well-articulated point about the career risk thing. David, I had a somewhat similar background. After sick, I was at an endowment where, yeah, I mean, your number one priority is basically avoiding career risk and kind of being responsible and prudent and what I can add to that. One thing I'll add is that one, interest has always been stymied by infrastructure. And whenever I talk with a lot with crypto insiders, with kind of like developers,

they're always skeptical about this because to them it's not that hard. Or some of them remember a time when running a Bitcoin node meant a command line. And like that was the only way you can use Bitcoin, right? People from 2010, 2011, and they're like, what are you talking about? Now your grandmother can use it. And your grandmother might be able to use it because your grandmother is okay using an iPhone app or a desktop wallet. But an institution is not. you think about the challenges that a family office faces or just any institutional investor,

one, it can't be any one individual who can control the keys. They have to have, they have to have a administrative kind of control hierarchy where usually it's like at an endowment, it's not like the CIO can just choose to move $2 billion. It, right, that goes through a whole series of checks and, you know, approvals. We still have a lot of work to do in the industry on security. You know, we talk about like composability in DFI, but even some of the, something, we still, we're now making inroads into prime brokerage, which I think is hugely important. But right, think about a family office or pension or hedge fund that, you know, has State Street and Goldman as prime brokers.

They can't yet do lending. They can't do borrowing, not in the way they're used to with a prime broker where counterparty risk. A lot of them can't onboard to the exchanges that have most liquidity. They can't get on Bitmax or Binance, both because those exchanges won't allow them and because they don't trust those exchanges. So what we've seen recently was CME future volume really picking up. And that's actually, I think, very significant. Because back, CME futures launched, what was it, early 2018. I actually remember, CBO was late 2017. I forgot exactly when CME did theirs. But there was so little volume that a hedge fund that wanted to buy $100 million worth couldn't. They would have been the entire market. They would have been pushing, they would have been creating an arbitrage that was massive.

So the liquidity on regulated instruments like the CME where you don't have any custodial risk, you're not having to deal with storage or administrative rights is actually really important and still a major impediment. Even things like accounting software and auditing software are still kind of, actually, I'll give a concrete example. With most assets, if you're a trading firm or a hedge fund, you can very easily delegate certain authority to a trader. You can say you have the ability, like when I was at SIG, I could trade $100 million worth of crude oil fuel. I couldn't walk away with barrels of crude. I couldn't withdraw assets from the company. We didn't really have software that allowed that in crypto until now there's a couple fairly new products

on the market that let a crypto hedge fund have cut those controls in place over a bunch of traders where the traders can't just walk away with the crypto. So we still have a ways to go on infrastructure, but we've made huge progress. The Any Future volume picking up is massive. Players like Fidelity getting into the custody game is massive. So now the more ambitious, the more ambitious,

those with a little more bandwidth who are willing to put in a bit more time to diligence. Now they can get in. Speaking of players getting in, what did you guys make of the Goldman Sachs piece? Everyone was kind of high off of Paul Tudor Jones. And that was announced a couple days early that they were going to do that presentation. And I remember a lot of tweets being like, here it is, number two, Goldman coming in. And obviously it was kind of the opposite of that. But what do you make of that?

Spencer, you want to take a step? Sure. I mean, I don't make a whole lot of it. You know, I mean, there's, I think that there are a lot of different takes that you could have on the space. I do not agree with theirs. I could say that it's lazy and misinformed, but, you know, that might just be derogatory tax. It's someone that takes another view. So, you know what?

Like, overall, I'm always glad that there's at least somewhat of a balanced discussion, even if I think that sometimes the other side is a little bit misinformed in this case. You know, honestly, I didn't spend too much time on it. I think there are a lot of positive resources on there. Certainly people will cite the Goldman research, but Goldman changes their views frequently, and be surprised to see them play both sides of the table on this one. I was quite disappointed, to say the least.

A lot of that research and a lot of those themes were, and Nathaniel, you talk about themes all the time. A lot of those themes were from 2016. and 17. That was what was disappointing to me. They effectively seemed to have missed the last two plus years of institutional buildout that I just alluded to. And the work didn't seem to really be there. And so, you know, if you're going to make claims that there are issues within digital assets, especially Bitcoin, there are things, there are structural issues for sure. There are platforms out there that offer massive amounts of leverage that cause disruptions all

a time. There are cascading liquidations that happen during March. There are, you know, obviously conversations about needing to have fail safes and having to have, you know, switches on very similar to we have on the NYSC. There are structural issues in the capital markets that you can obviously make and opine on that are more relative today than they are, you know, versus, say, 2016 and 17. And to, I think one of the things that was really disturbing to me and that was really upsetting to me is the inference that Bitcoin is used from ransomware. Ransomware that is also targeting people that are on the front lines that are trying to facilitate with the recovery of COVID. That was very disturbing to me, and I don't think that was appropriate.

And it just showed to me that they were having a very negative bias towards it versus having more of an objective bias, a more of an objective conversation about it. And again, redacking back to the Paul Tudor Jones letter, that call was a very good one. spurred on specifically by Paul Trudeau Jones's letter and his entry into the space. And so they had a few weeks of runway to really kind of figure things out. And it really was disappointing to see that they did not. Keep in mind that like the default, oh sorry, the default, let's keep in mind is that there's poorly informed criticism of our industry, right? Like that's been the default for a long time now.

So it's more notable when someone comes up and actually has either one, a really well-founded kind of support of it like Paul Tudor Jones does. or a really well-founded criticism is welcomed as well. But overall, when it's like, hey, another bank, one unit within another large bank publishes, like, poorly researched information on crypto, you know, I mean, the good thing here is that crypto is not really susceptible to this kind of like poor information, right? I mean, crypto grew out of literally six years of this and continues to do so and continues to gain more attention. So I'm not particularly concerned about the smartest money macro guys. are, are, have all been in personally for a few years and, um, I suspect a lot more will,

will announce the next quarterly letters that they're in Bitcoin. Um, a lot of, I haven't been privy to the calls, but, um, there have been kind of groups of calls of people like Paul Tudor Jones, like the very, very elite billionaire macro managers who've been talking about this for over a year. And they, they, they'll have like quarterly calls where they discuss strategy. Um, there, those guys are always long ahead of the private client, uh, advising. Um, it's a little disappointing as in the short term in that if Goldman came out and told other clients by Bitcoin, that would certainly be, you know, bullish short term. But I don't view it as existentially worrying. There's just a pattern to adoption, right? It's like, it's not surprising to me that people over 60 generally get into

crypto later than people who are under 30. You know, that's just kind of the pattern of any new tech, any new industry. Private client advising is a lot like endowment in the sense that it's much more about protecting your downside, whereas the guys like Paul Tudor Jones are collecting carry on upside. They're paid to take risks, private client advisors or not. They're paid to basically to risk minimize. So let's shift gears to going back, I guess, to even more kind of macro questions. After a year or half a year now of the unexpected becoming normalized very quickly, what are, you know, how are you making sense of these markets of everything happening? I mean, are you guys just sitting and kind of waiting to get more information?

Are you acting? Are you allocating? I mean, how do you think about just operating as investors in a time like this? I love crazy periods. Love them because during normal times, investing just in general, not even talking about crypto, but certainly applies for crypto, too. It's very competitive. You have a lot of people, you know, taking time to gather data, pouring over it, analyzing it carefully, fighting over, you know, in traditional markets basis points and crypto, a few percentage points. When things go crazy, I think it's just way, from my perspective, at least, it's way easier to outperform.

And by outperform, I don't mean that in a direct quantitative sense. I mean it generally in that, like, you know, you look at traditional markets in 2007 discretionary traders like what I was a Susquehanna were getting eliminated by algorithms. Not all of them, but basically if you were in a liquid market, you were getting replaced by machine learning algos. When you have a regime shift, when you have the nature of the game changes, that freaks a lot of people out. Humans tend to break down and the algos break down because they're trying to trade based on a one year, three, year, five-year data set. Right. Like, as an individual, you were able to beat Wall Street in 2008 for a few years because all of Wall Street was anchoring to 30 years of real estate data. If you just applied a little bit of common sense and said, this actually is different.

Like, I can't, you know, like, yeah, those quants, they might have PhDs, they might have teams of 100 quants pouring over 30 years of data to eight decimal points. All of that's worthless when you have something that doesn't happen in 30 years. So, like, Black Thursday, those times are incredibly exciting to me because you get to, it's less about extreme attention to detail and number crunching, and do you have every last bit of data. And it's more about applying, it's more about being cool, common collective, and applying common sense. And it's great because you have, you have this little window where you can so clearly. be greedy when others are fearful and vice versa. Like, normally that takes a decade to play out, you know, and it's often very tough. Like, I'd say that with equities right now, you know, are people greedy or are they fearful?

It's not super obvious to me. It's a mix. I'm personally bearish on equities over a five-year time frame, but it's hard to be. It's not like I can say that everyone in the world is super bullish equities or vice versa. Whereas Black Thursday, basically no one, there were obviously people buying that night, but for very clear reasons, people were freaking out. Right? Not just because they were fearful of the price, but because markets were breaking, because exchanges were breaking, because you would worry, you know, if OTC desks that had loans out didn't know if they were going to exist the next morning, they were still going to be solvent. So it's not that people suddenly became idiots. It's that these structural forces that are invisible to a lot of retail traders. If you're an individual trading Bitcoin, you don't necessarily even see this stuff happening. As one other example, I was a treasury bond trader for a while. And treasury bonds are hypothesized. So a prime broker will lend it out, and the same bond gets lent out and relent out and relent out a dozen times to the point that no one knows who actually has the bond. And every few months, this has gotten less than less frequent, but every few months you'll have what's called a failure to deliver where someone is owed a bond and another prime broker can't give it to them.

Because there was usually a minor administrative error somewhere down the line. And suddenly you have this whole cascading weird thing happen in the market where I might have short-sell to bond and I need to cover, but I can't get delivered. on it to actually meet my contractual commitment. And the way Wall Street deals with that is handshake agreements. Theoretically, that could end up in every Wall Street banks doing one another. It doesn't. Basically, they just say, we'll just kind of shrug it off and, you know, basically deal with a few basis points of lending loss.

But the point is that's kind of invisible to everyone else. But if you're a trader, if you're a treasury bond trader, your world is ending when that happens because you don't know if you're going to be able to meet your contractual, you know, a commitment to deliver a bond. So to me, those are really exciting times to be investor and trader. And it's actually for general retail traders in traditional markets and crypto, that's kind of the only time that I would suggest aggressively betting against the professionals because the professionals are handcuffed by their normal business. So like, right, if you have OTC desks that normally have 10 times the information most of us can have 10 times the liquidity, they have the cheapest cost of leverage, they have the best access to counterparties, they have every advantage. they're going to beat you in trading.

But their day-to-day business requires that they take certain types of risk. Counterparty risk, if they're doing arbitrages, they have positions on on exchanges like Bitmex and counter positions on Coinbase. And on those nights, when the market blows up, those OTC tests are forced to do the exact opposite of what they want to do. They don't have a choice because they're already overexposed. And if you have fresh money, if you have fresh capital, if you're a retail trader who doesn't have a bunch of giant arbitrage trades on, you can go onto Coinbase and buy Bitcoin at $4,000. And so you get this incredible edge. And the same was true in real estate and Wall Street generally in 2008. Same was true.

You know, crude oil just traded at negative $37. That actually wasn't easy to exploit as a retail trader. But just it's an example where every day, every Wall Street crude oil trader, not all of them, but plenty of them who were forced to trade crude oil every day, they were buying it $2 at $1, $0. And they're getting margin called and liquidated negative $10. That was actually pretty hard to exploit as a retail trader because the contract was expiring. You couldn't have just bought crude oil negative 10. But the point is you actually have kind of a luxury of not having to make a market every minute. Like if you're an options market maker like I used to be, you're legally obligated to constantly make markets.

And so what happens is if the market is moving in one direction, you end up with a long position whether you want to or not. Whereas someone with dry powder who doesn't, who isn't trading options every day, they get to step in and do a great trade when you're handcuffed by your day-to-day business. I just want to dip in. I know we're getting close to, I think we're close to 500. Tell me if that's right, Nathaniel, is that right? I think that's Ben will tell us, I'm sure, in the chat, if we screw it up. I think in terms of ideation, in terms of being able to find pockets, you know, right now, as we alluded to at the top of the hour, we're dealing with a situation in society that has not really presented itself. Not only do we have massive social unrest that harps back to 1968,

but we also have been dealing with a global pandemic where we are. We're questioning everything around us. We're questioning if physical fiat is dangerous to hold in our pockets because it might carry a virus. All those sorts of things are happening in real time and very, very fast. And I think one of my favorite quotes from Howard Marks, when we talk about Howard Marks a lot at our firm, you know, in order to achieve superior results, an investor must be able with some regularity to find asymmetries.

Instances where the upside potential exceeds the downside risk. That's what successful investing is all about. And that really just rings true with us. the ability to find those types of opportunities now amidst a global pandemic and massive social unrest are presenting themselves because more people in the public and the population out there are questioning the social paradigms that we've been dealing with for hundreds a year. You know, the only thing is, you know, about investing in these kind of climates. You know, for us, we operate venture funds and venture funds only.

So we're not trading. You know, we're not moving positions in these, you know, when we do see black Thursday like events, you know, it does give us an opportunity to deploy capital. You know, it's always scary time. So it's always kind of, you know, watch and see what happens. But, you know, always the idea is that we can call capital countercyclically, right? So, you know, when we see big market events, normally what happens is your investors are trying to pull capital from your fund. That means that you're a for seller at the bottom, right? Right, right when prices are discounted, right when you want to step in and buy, everyone yanks their capital.

Really, really, really painful. And the opposite is true as well, that like, it's exploded. We're in late 2017. They're saying, here, take more capital. Right as you're kind of saying, things are looking a little bit expensive right now, right? Like I'm a little bit nervous. And so, you know, given the liquidity profile, you know, venture funds tend to be very difficult to raise, right? We're asking our investors to lock up their capital for eight to 10 years. That is a very long commitment for them. But what it does allow us to do is stand there and invest kind of countercyclically relative to the market. And so, you know, for us, it's business as usual. We're making a lot of equity investments, have a term sheet going out later tonight. And otherwise, you know, keeping an eye

on several liquid assets as well. Well, it's been great talking to you guys. A friend of mine, Emerson Spart, so I think some of you might know, we had this conversation recently about punctuated equilibrium or moments of punctuated equilibrium. These are moments where things that have been bubbling for a while, all of a sudden have this massive push forward. And this is, it turns out how evolution works. It's not one straight line. It's very long periods of calm, followed by kind of explosive Cambrian explosion type moments. And I think we're living through one. And his assertion is that in those types of moments,

it's the only time when you can beat the smartest guys in the room because there are no smartest guys in the room. So I appreciate some of the smartest guys that I know being in this room for now. And yeah, it's been great talking to you and excited to see the rest of this event.