The Breakdown - The Year of Institutional Bitcoin, Feat. Galaxy’s Alex Thorn

Episode Date: December 22, 2021

This episode is sponsored by NYDIG. On this edition of “The Breakdown’s” “End of Year Extravaganza,” Galaxy Digital’s head of firmwide research discusses the key trends that shaped 2021.  Find our guest on Twitter: @intangiblecoins  NYDIG, the institutional-grade platform for bitcoin, is making it possible for thousands of banks who have trusted relationships with hundreds of millions of customers, to offer Bitcoin. Learn more at NYDIG.com/NLW. Enjoying this content?   SUBSCRIBE to the Podcast Apple:  https://podcasts.apple.com/podcast/id1438693620?at=1000lSDb Spotify: https://open.spotify.com/show/538vuul1PuorUDwgkC8JWF?si=ddSvD-HST2e_E7wgxcjtfQ Google: https://podcasts.google.com/feed/aHR0cHM6Ly9ubHdjcnlwdG8ubGlic3luLmNvbS9yc3M=   Join the discussion: https://discord.gg/VrKRrfKCz8   Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW “The Breakdown” is written, produced by and features Nathaniel Whittemore aka NLW, with editing by Rob Mitchell, research by Scott Hill and additional production support by Eleanor Pahl. Adam B. Levine is our executive producer and our holiday theme music is “Spike The Eggnog” by Two Dudes. The music you heard today behind our sponsor is “Dark Crazed Cap” by Isaac Joel. Image credit: Westend61/Getty Images, modified by CoinDesk.

We're talking sovereign wealth funds. We're talking pension plans and endowments. It's crazy. I mean, we take these meetings all the time with these allocators. And the folks that they send at these meetings, they know what they're talking about. They're asking about how long it will take for wallets to upgrade for tap root support. The differences between Solana and Avalanche. They're asking about what layer two adoption on Ethereum is going to mean for scaling in light of Ethereum 2.0.

These are smart people and they're really digging in. It's just that their committee schedule. and allocation approvals take a long time. 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 Nidig and produced and distributed by CoinDesk. What's going on, guys? It is Wednesday, December 22nd, and we're back with another episode of The Breakdown's End of Year extravaganza.

I am excited to be joined by Alex Thorne, the head of firm-wide research at Galaxy Digital. Now, Alex is a super, super interesting guy. He was at Avon Ventures previous to this, which is the venture capital arm of fidelity, one of the institutions that has been the most prescient when it comes to crypto, especially relative to their peers. Alex has an extremely broad view of markets. He's been looking at it from an investor perspective, from a research perspective, and so is a perfect type of person to have this end of year conversation with. I know you're going to enjoy it. Let's dive in. All right. Alex, welcome to the breakdown. Sir, how are you?

I'm excellent, Nathaniel. Good to see you, man. I'm very excited for this conversation. And so I've been mostly just diving in, but I want to give people a sense because you're one of these, crypto is full of people who are very, very loud and out there. And then also, like, quietly involved in a huge number of things. And I think you are in that second category. And so you have this really interesting perspective. And I want to ground people in that as you're digging in. So you are at Avon doing venture stuff, which is a part of Fidelity before.

You shifted over to Galaxy research. Explain kind of like what you were doing and that transition and what you're doing now. Yeah, I was a venture investor at Avon Ventures, which is Fidelity's CryptoVC fund. I was director of blockchain research at Fidelity before that. And then now at Galaxy, where I've been all of this year, we're building out a huge research operations. So we've got a lot of clients, mostly in the institutional world, looking to understand this space, understand Bitcoin, Ethereum, how these things interact with each other and then emerging trends, both in the technology and in the markets. And I mean,

it feels like at Galaxy, we're at the center of the universe. I'm not trying to use too many, you know, astronomical terms here, but it's been a lot of fun and we're just growing like crazy. I love it. Okay, cool. Now that people have that sense, let's start. What was the most important thing to happen to the crypto industry this year? I'm going to say two, if that's okay. First of all, I mean, genuine institutional interest and in some cases, adoption of crypto assets in their portfolios, I think is a major, major trend that's only going to accelerate in 2022.

You know, it started perhaps in, you know, May 2020 with Paul Truder Jones's letter about, you know, Bitcoin being the fastest horse in an inflationary environment. But it's really expanded quite significantly beyond that now where we have major endowments and pension allocators looking seriously at this space. And we're going to see a lot more of that in 2022. The other one I wanted to point out that I think it's just been really remarkable to watch is the political acceptance and even support of the cryptocurrency industry. We've seen an enormous increase in attention and education and IQ among policymakers and legislators. You saw that last week at the House Financial Services Committee where it was obvious. that both constituent and industry outreach has made a huge dent in the sort of mine share of

crypto on the hill. And I'd like to see us do a lot more of that too. I want to dig into both of these a little bit more. But let's talk institutional because you have now a very longitudinal view of how the institutional relationship with Bitcoin and the entire industry has changed. So hearing you say that that's a major shift, I think is significant. Obviously, we've seen kind of the headlines around, you know, institution X does Y with this or pops in in this way. Do you think there's a more, or from your perspective, a broader kind of maturation of people's perspectives on it as well, even if it's not showing up as specific action yet? Yeah, absolutely. There's been a total leveling up in IQ among traditional capital allocators.

I mean, I think that's where people don't realize, you know, they think hedge funds, And all the hedge funds are involved in some way for the most part, right? They think institutional investors mean RAAs or sort of just non-retail click traders on Fidelity.com. But really, there are giant, giant pools of capital in this world. And most of those are, we're talking sovereign wealth funds. We're talking pension plans and endowments. And some of them had had exposure, most likely through venture investments as LPs. But we're really seeing teams set up.

up inside these organizations to look at crypto, to understand the trends happening in Bitcoin and how it can play a role in a large diversified portfolio like never before. And it's crazy. I mean, we take these meetings all the time with these allocators and the folks that they send of these meetings, they know what they're talking about. They understand the space. They're asking about, you know, how long it will take for wallets to upgrade for taproot support.

They're asking about the differences between Solana and Avalanche. They're asking about what layer two adoption on Ethereum is going to mean. for scaling in light of Ethereum 2.0. So these are smart people and they're really digging in. It's just that their committee schedules and allocation approvals take a long time. So you actually kind of jumped in a little bit to my next question, which was to what extent they are actually differentiating different parts of the industry and seeing it kind of interacting with them on their own terms, right, versus just trying to kind of lump everything into either oars or are all part of one same thing?

I mean, there's a range of strategies we're seeing, but they're absolutely at the more sophisticated shops. They are looking throughout the space. I mean, they've got sophisticated strategies that involve multiple, multiple coins, multiple investment strategies, whether that's funds of funds, venture, liquid trading. They're looking at that, you know, on the more sophisticated side of that sector. It's not just a Bitcoin story there. There's a lot of Bitcoin.

I think for good reason, of course. But it makes sense because cryptocurrency awareness has expanded so dramatically among retail people and the principles that these organizations are people. So it's now been years of that crypto guy rallying support for his cause or her cause, right, that crypto person. And that makes a dent after time, especially invalidated by so much external adoption, right? Whether it's by major corporations, investors in general. the general growth of the asset class.

So that's making a real impact. Let's go back to the second kind of major story, this idea that regulators are engaging with this space in a different way in a more positive way, or at least we're seeing some of the shift. What do you attribute that to? I mean, you mentioned some of the advocacy, but do you think it's a broader set of factors as well? On the regulation side, there's a growing awareness that something needs to be done by governments.

I mean, they want to do something, right? It's not purely an oddity. see growing adoption. They see increase in asset prices. They see that some of the groups I've talked about are getting interested in crypto, right? And so they know that it's here to stay now. And so from a regulatory standpoint, whatever machinations were in process have been accelerated. There's no doubt about that. I mean, I do think that the Federal Reserve's involvement has been really interesting. Powell said just yesterday that he doesn't see cryptocurrencies as a financial stability concern today, but he does see stable coins as potentially problematic if they grow very large.

I mean, that's sort of that narrative about stable coins really came to the forefront this year. But when it comes to legislators, that's where I've been really excited, where the industries had made a real dent. I mean, you see a lot of support now for cryptocurrencies and Bitcoin on the Hill. You know, how that plays out between regulation and legislation remains to be seen. I think there's been regulators calling for increased legislation. the Presidential Working Group report called for Congress to act as well. So these two things are going to combine.

But I think they both are born out of a realization that Bitcoin and cryptocurrencies are here to stay. And that message has really been taken to heart this year as the markets have grown. NIDIG sponsors this podcast and they're integrating Bitcoin into everyday life, not only for Wall Street, but also for Main Street. Because Nidig is built for Bitcoin and Bitcoin is built for everyone. Learn more at nydig.com slash nLW. That's nydig.com forward slash nlw. One of the things that's been fascinating to me is that I think coming into this year,

I would have expected a lot more discussion around central bank digital currencies. And it was actually kind of a quiet year. If you view that as a conversation limited to what central banks are specifically doing to issue their own versions of digital fiat, If you expand that conversation to the implications to the U.S. dollar of U.S. dollar denominated stable coins, it's a little bit different. And I think that's playing out in the regulatory sphere right now as well. Yeah, let's limit it to CBDCs as sort of a pure play issued currency from a digital currency from a central bank. And I totally agree with the premise of your question, Nate, that we haven't really seen much. I mean, and I think there's a couple of reasons. One, they really truly lack a clear use case, in my opinion, unless you make it. a panopticon surveillance regime the way China's digital yuan has been developed, in which case, sure, I can see why an authoritarian government might like it. But that doesn't really square with Western values and certainly not American political values. And so I think that is off the table

today in the U.S. So absent that, it's really not clear what the benefit is. There's also questions of political meddling in the currency, if that were to be the case. And also, you know, again, if we do, something like what the digital yuan is working towards with the People's Bank of China, that disintermediates our, you know, large swaths of our banking system, which Jay Powell has specifically said he doesn't want to do. So it's not really clear to me exactly what the benefit would be. I mean, perhaps you could more narrowly fine-tuned monetary policy with something like a CBDC, but they can do that pretty well today. There are also technical challenges. And of course, the Fed has been delayed with, you know, changes at the top and at the various branches. But,

But I don't think we're going to see something totally dramatic. I think I'm on the sort of dove-ish side, I guess you might say, of this debate, which is that, you know, I think if we see something in the U.S., it'll mostly be underwhelming. 99.9% of people will never notice it. Maybe it's an upgrade to the Fed's back office technology and not much more. But it does remain to be seen. I'm on the record as saying that I think what happens is at some point someone says, you know, if we feel behind, all we have to do, is look at USDA denominated stable coins and the activity there and include them in the analysis and discover that U.S. dollar stable digital dollars are way more used. And hey, look, the entire

history of banking innovation in the U.S. is basically a combination of public and private. And what does it look like to just sort of absorb that system in some meaningful way? Yeah, I think that was sort of my takeaway from the presidential working group report, which basically called for banks to be the ones that issue stable coins and for stable coin issuers to be banks, was that that sort of perhaps is the vision of a digital dollar, that it is in concert with, you know, private industry, that it is actually, maybe the Fed provides some guidance for, you know, commercial banks on what technologies they should use or how they should issue these digital versions of the dollar. So I'm totally with you on that.

What are the crypto trends that you've been most fascinated by? And I use fascinated specifically, you know, they don't have to be things you like. or enjoy her participating in, but just have been interested to watch Develop this year. Yeah, I mean, one that was really just shocking and I don't want to understate its importance was the hash rate migration from China. You know, I wasn't surprised as a longtime watcher of Bitcoin, the network, that it was able to react and persevere through, you know, downward difficulty adjustments. But the outright level of hostility in China towards Bitcoin surprised me.

and the sort of swiftness with which the industry reacted was heartening, but also surprising as well. I'll also throw out that as another one, the rise of NFTs really did catch me off guard. I mean, I've been investing in the space for three years in startups. And I met in past on plenty of companies that were working on NFTs, including many that are very, very valuable today. I mean, we were wrong about that. And it's been really crazy to see, you know, profile pictures trade at thousands of dollars. or hundreds of thousands of dollars. It doesn't surprise me.

To me, I think we'll look back on it and think of it as an oddity that proved an important concept. And not just for art. I mean, we'll see NFTs be used, I think, widely for a variety of uses. But, I mean, the swiftness with which the industry brought NFTs to the mainstream, to the point where brands are buying NFTs, major brands. And basically every sports league on Earth is doing something in this space. That fascinated me and surprised me.

So let me pull you down that rabbit hole a little bit more just in terms of trying to understand why. Because I don't think you were alone in how fast that happened. It's fascinating to watch, I think, how success in one area of the crypto industry begets a bunch of new wealth that wants to find its way back into other areas, right? And this is very natural for investing. Silicon Valley has constantly been a rotating cycle where a group of entrepreneurs get rich together with a wave of technologies. And then they invest in the next set of things. And that propagates the next set of people who make it and so on and so forth. Right.

And there's these kind of like classes almost. I wonder to what extent DeFi summer, this, you know, this thing that happened in 2020, where defy went from total market cap under a billion to, you know, 10xing that, you know, very quickly was part of the thing that enabled sort of NFTs to take off is that all of a sudden a huge number of folks. It wasn't like they had to wait around for Bitcoin to hit new. all-time highs because they had already had a bull market in this particular area the summer before. Something I've thought about, but I haven't had a lot of conversations around.

Yeah, there was a lot of wealth created, no doubt, in DFI summer. And then over the next, you know, six months as well, right? I mean, I think there's nothing in my mind wrong with wanting to collect something that's rare. I mean, people have been collecting. I've got a, I've got an original copy of the first issue of Bitcoin magazine and plastic behind me, right? I mean, like, you know, and so, and block space is rare and hash is can be rare. And I understand that. So it didn't surprise me once it happened, right?

When I think about it. But you're right. I mean, there's a lot of wealth. I mean, a lot of people were brought into this space for one reason or another. And they said, you know, what do I like here, right? What do I want to be a part of? And what do I want to own? And, you know, I mean, Cryptopunks is that first sort of like, I think, you know,

real wave that set that off. And people looked and said, wow, this was the original sort of NFT collectible artwork. It wasn't actually the first, but it was, you know, OG and on Ethereum, so easy for the defy wealth to interact with. And yeah, I think that played a role, definitely. I mean, just thinking about defy, Nate, too. I mean, I think it closed maybe defy somewhere around $9 billion in total value locked. Today it's $248 billion.

And that was supposedly the summer that set defy off, right? I mean, we're just, that thing's been on a rocket ship ever since. Let's do a couple of quick hits on things that happened this year that were interesting. El Salvador Bitcoin. What's your take now? We have the benefit of a few months at least to have wrapped our head around this. Incredibly powerful to watch. I mean, a country of any size, let alone, you know, one with such an interesting economic

and political history like El Salvador adopt something like Bitcoin, which is both monetary, economic and political, right, by its nature. one quick thing I'll say that's been that I'm really watching for is by making Bitcoin legal tender and requiring that it be accepted alongside U.S. dollars, I mean, there are plenty of major U.S. corporations like McDonald's and Starbucks that are in El Salvador. And they all also have to accept Bitcoin. Many of them are accepting it over the Lightning Network. And so that could actually be the canary in the coal mine or the, you know, the sort of Trojan horse for how Bitcoin becomes more widely accepted as a payment method because these corporations, are going to have a lot of practice doing it. Maybe they see a lot of benefit. Awesome thought on that front. I think that's an under explored area of this so far. Next one, quick kick, Constitution Dow.

I don't know if you paid any attention to it. So if you didn't, no worries. I did pay close attention to it. I thought it was awesome. I thought it was silly and fun. And I thought it was a great example of how capital can be raised by Dow's. I think we're going to see a lot more capital raised by Dow's for sort of on the ground style operations. I mean, this one was, there's a fascinating, you know, question about how a Dow can

affect something in the physical world, right? We know there's a lot of DAOs that are governance Dow's that control defy protocols or that collect NFTs or other digital assets, but how a Dow and people can form a Dow and organize online and then affect change in the physical world is going to be really interesting. I think one area will see that happen in 2022 to great effect is political campaign donations. I expect there to be some major and large and deep-pocketed super-packed Dow's in the future. That is a bet that I would I would bet because I anticipate probably being a part of some of them. And even just today, I mean, connecting the dots in a different dimension, I think I saw, it was just before this, so I haven't had a chance to read it,

but some politician I think who's running for Congress releasing a series of NFTs or, you know, it's like these things, these worlds are going to collide, you know, no doubt. Yeah, absolutely. Shout out Erica Rhodes, who's running against Brad Sherman in California, by the way, Big Bitcoin are great, great candidate in general. What's one thing that you're paying attention to that you think other people should be paying more attention to? That is a phenomenally good question. I'm still looking for improved market infrastructure in this space. We've made such leaps in strides. If you think about 2017, there was no prime brokerage, no settlement, no lending, no custody for an institution, right? But there's still a long way to go for this. I think prime. brokerage is an area where institutions really don't have an offering that they really love.

And no one's really nailed that yet. We're working hard on it at a galaxy. But this is something where you bring together lending and margin and agency trading and all these things, capital introduction, all under one roof. Everyone in the institutional space has been working towards that. I think whoever does well there is going to be absolutely massive in the space. What's a prediction you have for next year? I think we'll see another nation or possibly multiple adopt Bitcoin in a meaningful way,

whether that's central banks buying it as to hold on their balance sheet or legal tender along the lines of what El Salvador did. I think that's something we'll see. I think we'll see fintech will be sort of the first wave, fintechs and neobanks that get involved in defy. I think you'll see some of those companies offer yield to their clients. but using defy on the back end, and along the same lines, you'll see more institutional on-chain involvement in the defy ecosystem. And just one more.

I mean, I don't know if we'll see it in 2022, but this is more of an aspirational. I would love to see tokenization and NFTs expand beyond digital collectibles. And again, into more of the physical world. I mean, I was looking at tokenization back in 2015 and 16.

We were hoping we'd see equities on a blockchain, right? There were all those companies back in the, that era trying to do real estate and private equity and whatever else. But I still hope that we'll see that. I think it's clear to me, clearer than ever, that NFTs help prove this case, as we have them today, that public blockchains are superior for tracking and moving ownership and value. Alex, super fun to go through this with you. I can't wait to do it again next year, just especially, you know, in your role doing research with Galaxy, like you literally get to look at the full galaxy of digital assets and what we're doing. So it would be fun to see what we missed,

what we didn't even talk, what we look like fools for not even mentioning on this show. I'm sure a lot. For now, I really appreciate the time and it's always great to talk to you. Absolutely, Nate, you too, man. Just want to say a big thanks again to Alex for that great conversation. I'm really excited to see whether his predictions around Dow's and political action committees come true. As I mentioned, I'll probably end up involved in some. And who knows, maybe you'll maybe you you guys will as well. Whatever the case, until tomorrow, be safe and take care of each other. Peace.