The Derivative - The Bull and Bear Cases for Bitcoin with Meltem Demirors & Nic Carter

Episode Date: February 5, 2021

Bitcoin started the year with a bang, rising up above $41k before falling back into the 20ks, and settling in the mid 30ks lately. It was at $5k in March 2020! Yet it feels way different, and dare we say – less volatile – this time. How are we supposed to interact with bitcoin, how do you capitalize on the volatility, and where does it fit into investor portfolios overall? We have two big-time bitcoiners on with us today to go over it all – Meltem Demirors, Chief Strategy Officer at CoinShares, and Nic Carter, Partner at Castle Island Ventures and Cofounder at Coinmetrics. In this episode we’re talking about: finally not being the most volatile asset, bitcoin futures contract, crypto buyers jumping to options & vice versa, ethos of decentralization, your digital footprint, capturing volatility, risks in owning bitcoin, bitcoin as a trading game, adding bitcoin to your portfolio, is bitcoin too expensive right now?, the future of crypto regulation,  the bitcoin price ceiling, bear case of bitcoin, and whether the opportunities are in the coin or the peripheral services. Chapters: 02:14 = The Strange Digital World 16:32 = Backgrounds, Booms, and Busts 32:08 = The Next Iteration of Crypto & Bitcoin Nation 46:56 = Bitcoin as an Investment 01:06:10 = Defi, Crypto & The State of Bitcoin Success 01:23:04 = Favorites Follow along with Meltem at @Melt_Dem and CoinShares and with Nic at @nic__carter, Castle Island Ventures, and CoinMetrics. Here’s the Star Wars infographic mentioned. And last but not least, don't forget to subscribe to The Derivative, and follow us on Twitter, or LinkedIn, and Facebook, and sign-up for our blog digest. Disclaimer: This podcast is provided for informational purposes only and should not be relied upon as legal, business, or tax advice. All opinions expressed by podcast participants are solely their own opinions and do not necessarily reflect the opinions of RCM Alternatives, their affiliates, or companies featured. Due to industry regulations, participants on this podcast are instructed not to make specific trade recommendations, nor reference past or potential profits. And listeners are reminded that managed futures, commodity trading, and other alternative investments are complex and carry a risk of substantial losses. As such, they are not suitable for all investors. For more information, visit www.rcmalternatives.com/disclaimer

Thanks for listening to The Derivative. This podcast is provided for informational purposes only and should not be relied upon as legal, business, investment, or tax advice. All opinions expressed by podcast participants are solely their own opinions and do not necessarily reflect the opinions of RCM Alternatives, their affiliates, or companies featured. Due to industry regulations, participants on this podcast are instructed not to make specific trade recommendations nor reference past or potential profits, and listeners are reminded that managed futures, commodity trading, and other alternative investments are complex and carry a risk

of substantial losses. As such, they are not suitable for all investors. Welcome to The Derivative by RCM Alternatives, where we dive into what makes alternative investments go, analyze the strategies of unique hedge fund managers, and chat with interesting guests from across the investment world. So you have a certain supply elasticity. Bitcoin is by design, and to my knowledge, really the first, I would say, commodity ever that is perfectly inelastic from a supply perspective. So any increase in demand can be manifested exclusively in price, not supply.

The supply progresses at the preordained rate. And that, I think, causes some of this outsized volatility because, you know, with gold, for instance, the volatility can be moderated somewhat by the supply response to demand shock. That's not present in Bitcoin. Some people say that's a bad thing, right? If it wants to progress to a medium of exchange. But from a trading perspective, that's part of the attractiveness is it's extremely pure. Demand is very purely expressed in price. Hello there.

Before buying out of the money calls on heavily shorted stocks was the hottest game in town. There was a little thing called Bitcoin going up above $40,000 per coin. So we're asking how are investors supposed to think about Bitcoin? How are hedge funds using Bitcoin and harvesting the volatility there? How real is this move in Bitcoin overall? We found two of the most non-lunatic Bitcoin believers around to share their deep and surprisingly rational knowledge on the space. We've got Meltem Demirz, the Chief Strategy Officer at CoinShares, and Nick Carter, a partner at Castle Island Ventures and founder of CoinMetrics. Welcome, Meltem. Welcome, Nick. Thanks for being here. You're a brave person, Jeff.

So I've been told. For having you both on at the same time or just for having you on which one well both Nick and I think Nick you're pretty feisty wouldn't you say no I I try to stay stay calm but uh yeah we can be a handful anyway thank you for having us yeah thanks for being here so I'll start by asking both of you what it feels like to not be the most volatile asset on the street so far this year with GameStop and Wall Street Bets taking all the crazy headlines from you. Is that a new a new gig? I mean, my whole take is after six years of doing this professionally and getting laughed at, mocked, ridiculed and basically, you know, it feels like punched in the face almost every single day of the last six years. You know, I kind of miss the pain, which probably makes me a masochist. I'm like, people like Bitcoin, like, the weirdest thing is,

and Nick will get this, because he's a far more prolific writer than I am but people will like say my own words back to me and I'm like what and they're like yeah I read this thing you wrote like five years ago and I love it and I've been using it I'm like that's wacky what why are you agreeing with me so it's just been interesting, just the fundamental shift in sentiment. I kind of miss being the little guy fighting the man, but now Bitcoin's like establishment. So I don't know. I feel like I need to find a new way to be like edgy. Nick, what do you think? And you think that's because the rest of the world's gotten crazier and Bitcoin stayed level or Bitcoin has become more stable? I just think nothing matters anymore. And the world is crazy and normal doesn't exist anymore. Like the spectacles just keep getting bigger, right? We have entered the bread and circuses phase of like modern democracy. So the spectacles need to be bigger to keep the people distracted

from the fact that we are witnessing the greatest consolidation of power in modern human history. So the spectacles are just going to get bigger. And the Bitcoin spectacle is just not that big when you look at the shit show that's going on outside your front door every day. Love it. Nick? I don't know how to follow that. You gotta open your front door and see the shit show out there. Well, I don't know how to follow that, but I do. Open your front door and see the shit show out there. On the volatility front, it's something you just get used to. I don't know. I don't know what Bitcoin's annualized volatility is right now.

Something ridiculous. It's always fairly elevated. I don't know if it'll ever decline. Usually around like 80% or something, right? Yeah, that sounds right. I think we're usually usually triple digits like 110. okay well either way it's high and it's something that eventually doesn't phase you i think and i always find it interesting when you have these big moves in silver or you know certain stocks and people treat them as catastrophic

when we just deal with this absurd volatility and this incredibly cyclical industry all the time. And I think you just get emotionally kind of numb to it after a certain period of time. Do you think the same retail people that were buying crypto have jumped over to playing options and whatnot, or are they two disparate groups? Honestly, I couldn't tell you if it's the same people, but I think the motivation is grounded in the same thing, which is that

people feel that there is a monetary debasement occurring, and they realize that saving cash is not really going to work as a strategy here. And so they decide to either seek inflation hedges like Bitcoin or gold, or pile into financial assets, which I guess are also being perceived as inflation hedges. So I think they're actually grounded really in the same sort of underlying phenomenon here. Love it. And I had a quick question on what would each of you do if you were that Stephan Thomas guy who needs the 250 million? What does he have? A couple more chances? Well, Stephan Thomas is really wealthy independently of that because he's one of the original Ripplers. So if I was him, I would go to the beach, basically, and not worry about those X many Bitcoins. Or if you were someone like him.

But I don't know why people feel the need to publicize the fact that they own a lot of digital assets. Like there are all these Forbes rich lists. Forbes has been doing a crypto rich list for a while now, and I've never understood why anyone would submit their name to that. It's like the dumbest possible thing you can do in this day and age to dox yourself and out yourself. So I don't understand the motivation for Stefan Thomas in doing a whole PR campaign around it um i've never really understood people who feel the need to advertise you know um in that manner so i guess i just don't really understand what like why why what maybe because he wants someone to call him and be like have you tried um xyz123. He was like one of the earliest Bitcoiners.

Honestly, he created that website We Use Coins back, I think, in 2010. So regardless of his lost stash, he's doing fine, I assure you. And talk to that a little bit, because you mentioned you're in an undisclosed location, Meltem, and like, is there more risk or more perceived risk with owning Bitcoin or whatnot of, you know, that it could get physically stolen from you, that it could get digitally stolen from you? Talk a little bit about that need for privacy. I just think generally, if you work in the Bitcoin industry, or really in today's modern age, one of the beautiful things about the last 12 months is we exist purely in the digital realm, right? Like I don't hang out with Nick physically in person, but I see Nick's lovely face on a regular basis online and I hear his

voice on Clubhouse. So the beautiful thing about the digital world, and this is actually why I think Bitcoin is so fascinating, is we can be pseudonymous. Bitcoin is not anonymous. This is actually a popular misconception that I want to dispel. It's a myth I want to dispel. And being pseudonymous and having certain degrees of freedom in which to live your life and having the ability to have an element of privacy in your location, in your communications, in your financial transactions, in your interactions, gives you a degree of freedom. And I am all about preserving as much of my freedom as I can. And so I think being a Bitcoiner for the last eight years has certainly taught me a lot about the importance of privacy and maintaining a pseudonymous identity. Even like the persona you have online, right? I would say my online persona is pretty consistent with me in real life.

Like Nick knows, you know, my smarmy-ness is translated from the internet directly into real life. But I do think it's very important in this day and age for people to be very deliberate about what they choose to disclose about themselves. And so that's sort of where my concern comes from is why create unnecessary risks why create unnecessary risk vectors there is no need for you to expose yourself to that potential risk so why do it at all that's my view yeah which which is almost outside of bitcoin or anything anyway just digital footprint be careful out right? There's bad actors out there. Well, the difference I would say is that cryptocurrency

is a digital bearer asset and like cash, once a transaction is made, there's no recourse, it's final. So you can't exactly steal someone's stock certificates from them and take final ownership of them

but you certainly can they have to be bearer bonds like in die hard right right and that's why bearer bonds are used in all of those old timey films uh you know as the mcguffin or whatever because you're making me feel calling die hard an old timey film, but I'll give it to you. Yes, I did recently watch it for the first time. It's totally worth the hype. It's great. Yeah. But that's, you know, that's the thing.

You're like the anti-boomer. How have you not seen Die Hard? I've seen it now. So I'm up to date. But, you know, the point is crypto folks are carrying around wealth, which for better or for worse, once those transactions are made, that's final. And so it's the equivalent of carrying enormous duffel bags of cash around with you. Obviously, there's more sophisticated ways to manage your exposure to those keys. And, you know, there's a number of different ways to split up keys and get more sophisticated about it and, you know, have

geographically sharded key setups and so on. So, but, you know, fundamentally the innovation here is the digital bear asset. So anybody that's associated with that industry is going to come under more pressure, heightened risk. All of my investor friends, we're having conversations about how do we manage our operational security in these risks? How do we physically protect ourselves? I don't think that's the case in many other industries. I know it's not just a matter of there being lots of newly wealthy individuals. It's newly wealthy individuals with the equivalent of duffel bags of cash, unfortunately.

Yeah, and I've long said that's part of the problem we can get to later, but in the futures world and the not being physically settled because it's so much of a risk, like all these FCMs that settle futures trades, I don't think have the setup to protect the, if it was physically settled, have the digital setup to protect those, that settlement and make sure, right, once it's, if they make a mistake, it's a big mistake. But I'll just add, Jeff, maybe a counterpoint to that. I also think a digital bearer asset that settles with finality presents really interesting

opportunities. And so what I'm excited about, just sort of shifting gears away from the risks, is the opportunities that are created in capital markets when you no longer need a trusted intermediary, you no longer need a PB, you potentially don't even need your FCM anymore. In terms of, you know, clearing and margining and providing escrow and attestations and proofs of reserve. There are a lot of really fascinating things you can now do because of this, this property. And, and so yes, yes, there are risks, but also there are opportunities.

So I kind of view this as, when the internet first came out, I accessed the internet at first through AOL. And then I was a little baby degenerate Meltzer, I was playing video games and I wanted to find all the good cheat codes. So then you got into IRC and all of these like weird forums all over the internet.

But as you were navigating the internet, there was a bunch of immersion and new behavior that had different types of risks. And then we learned about those risks. But over time, with the internet facilitated in terms of opportunities far outweighed many of the risks, which is why we all carry these nifty little supercomputers that are always connected to the internet in our pockets. Similarly, like money and capital markets haven't seen real technological innovation in 40 years, maybe not since the advent of electronic trading. And arguably electronic trading, you know, for all of its benefits is still constrained by a lot of the legacy correspondent banking system and some of the legacy rulemaking that exists around capital markets. So in my view... Any of our listeners who send wires on a regular basis are like, is this really where we're at? I don't send wires anymore. It takes me three days to send a wire. And in fact, my wires often get

blocked by my bank and they call me and ask me questions or I have to go into a bank branch with two forms of ID to ask to send my money. I send digital dollars on the blockchain. I send dollars, USDC, on a blockchain and it takes about two seconds to settle and I don't need to ask anyone for permission. Yeah. We settle our venture deals in stablecoins for the most part now instead of wires. And the startups that we're investing in pay their employees in stablecoins in many cases. And some of them collect revenues in stablecoins or crypto. So now we have the full loop of financing and payroll and working capital management all happening in crypto terms. It's far, far superior to the kind of legacy system, I suppose you call it.

Let me back up. I buried the lead and didn't let you guys do a little bios and intros. So Nick, I'll start with you since you had the mic there and you mentioned your venture deals and whatnot. Give a quick background on how you got here and what your firm does. Yeah. So we're Castle Island Ventures. We invest in C-stage startups in the public blockchain industry with a focus on financial infrastructure. So there's a lot happening in the crypto landscape. We tend to focus on one more narrow element of that, which is really exactly what we've been discussing, managing people's exposure to these new digital assets and

helping them get access to it and making that transition from the established monetary and financial system to the crypto financial system. So I also co-founded a data analytics business called Coinmetrics, which basically understands these as open, transparent ledgers and tries to find interesting economic information within them. And prior to that, I worked at Fidelity. I was on their crypto team. I was their first sort of dedicated crypto analyst over there. All right. And what's an example of some of the analytics you pull out of that data

or some of the data you pull out? So the amazing thing is that because every transaction on a public blockchain is effectively public, it's not public who is making the transaction, but the transaction itself is publicly surveillable. You can derive the equivalent

of the macroeconomic data that you might see on the FRAD website, Federal Reserve, St. Louis data website. Instead of waiting to get that data on a quarterly basis, you can get it on a literally real-time block-by-block basis. Equivalently, there are some entities now that are kind of pseudo equity. We're seeing effectively corporations that exist in a blockchain context. And to the extent that they have financials, you don't have to wait for quarterly reporting. You can see real time cash flows accreting to these entities and flowing to token holders. So you can see the innards of the corporation on the blockchain in real time

on a per block basis with no latency. So the transparency you get from having cash flows existing on chain is really unbelievable. It's hard to imagine. It's like hedge funds paying for credit card data and building a model of what... Yeah, similar. Yeah, except imagine not just credit card data, but first of all, more democratized

because really anybody can get access to this as opposed to just hedge funds paying inordinate sums for it. I use Coinmetrics. I paid for my API key. But I think the other cool thing, Nick won't say this because he's extremely humble. Coinmetrics has also done a great job in other types of assets. Again, I think the transparency of having a public ledger allows for a level of analysis that we haven't had with many other assets. And so for those who are interested, we use coin metrics a lot in our research, and they've done a great job defining new metrics. And then on their blog, they break these down in a really detailed and nuanced way.

So, Nick, I'll shill it for you since you want it. Thanks, Melton. He can return the favor after you tell us what you're doing. I'll say nice stuff about coin shares, too. Right, coin shares. Well, coin shares. Melton, give us your. Yeah, go ahead, Melton.

Yeah, so I'll keep this really brief. I am Chief Strategy Officer of CoinShares. We are a digital asset investment firm. We operate across seven countries. We have a number of different product lines. We have exchange-traded products that trade in the European market. We have $4 billion in assets under management on our ETP platform. We have an ETN as well as an ETC. For those who

are familiar with those different product constructions, we also have a very active capital markets business that functions much like a traditional FIC desk. We provide liquidity to other players in the market and are very focused on electronic trading and market microstructure. For those who want to delve into that, that's, you know, core area I spend my time on. I manage our active investing. I also do a lot of our acquisitions, M&A, strategic partnerships. And then we also recently launched a custody business in partnership with the investment bank Nomura and the cybersecurity company Ledger that has close to 4 billion assets under custody. And we work with banks, asset managers, institutions, and now also governments. So for us, where we sit, we try to bridge the gap between traditional financial services and the world of crypto. Prior to that, I was on the early team at Digital Currency Group, which is one of the largest

investment firms in the crypto space. Spent three years there managing proprietary investments and growth and acquisitions. And prior to that, I was in the energy industry. I started my career trading physical ethanol and methanol. So I too have seen the time of the dinosaurs. I used to be the woman with two blackberries and two phones clinging to my ear, just sitting there like this. I traded my way through the 08 crisis where we traded a lot of distressed cargos. And then I started a carbon desk where I worked. And after that went into oil and gas M&A, ended up at ExxonMobil in corporate treasury trading overnight rates. So, you know, have kind of walked the path of TradFi and then got really deep into the crypto rabbit hole, got really into Bitcoin and decided to do something crazy with my career and my life and spend it working on bitcoin

and now you're wearing these 17 hats it's got to be heavy um and which is it fair to say both of you are more um right like you're selling the picks and shovels to the not necessarily the miners but you're kind of invested in and looking at the industry as a whole instead of just i love bitcoin i'm going to own as much of it as possible and is that the real opportunity i mean i i'm a you know big time big corner so i'm i'm always trying to accumulate as much as i can through whatever vehicle is possible but the more productive thing you can do with your resources is to finance the entrepreneurs that are actually building the stuff to make it useful. And then, sorry, go ahead, Mel. I would say, you know, over the last six years, I've invested in 250 companies in this industry. First, Digital Currency Group Balance Sheet,

as an angel, now CoinShares, both Balance Sheet and our Venture Fund. There are a lot of different themes you can invest in. For us, capital markets is a big theme. Like we're re-architecting capital markets with some of these businesses we're investing in, and it's really exciting. We're also heavily investing in the future of our global economy. The future is really about semiconductors, silicon and access to compute. And so I think in this new landscape, like there's a lot of really interesting dynamics that play out and Bitcoin as a network has some really fascinating characteristics that make it just a very attractive area to invest in. Like it's Bitcoin as a way to price access

to compute and connectivity because you have to pay fees to get your messages through the Bitcoin network. And there's an active fee market, which determines how your transactions, the data you're putting on the network is prioritized. So I think there's a lot of really interesting opportunity there for people who are listening, who've looked at, you know, the history of cloud compute and earlier efforts to create cloud compute futures. You know, if we go back to the Enron days, even they tried to create a market for digital connectivity and to price bandwidth. And they sort of tried to do Netflix before Netflix. You're the only person I've heard of like saying good things about Enron. I love it. Look, Enron was a hot mess, but I think conceptually, like

they were onto some really interesting ideas. It's just that they couldn't actually do what they said they would do. And then they lied about it, right? It's like not positive things, but the idea that they had that markets would be digital interconnected and that there would be a market for everything, anything and everything. I think that's actually the future we live in now, you know, 21 years later. So that's an area we spend a lot of time on as well. I think it's very important coming from an energy background and working on the physical side of the oil and gas industry, like pipelines and refineries. Every every compute network every financial network has physical infrastructure underlying it and routing topology underlying it and routing logic and

structure underlying it so i think for me that connection to the physical infrastructure that supports bitcoin and makes it possible is fascinating because that in and of itself is a multi multi billion dollar industry that's going to grow, I think, exponentially in the coming years and decades. But that's interesting to tie it to the energy because that's total boom and bust, right? Like energy prices are high, borrow a bunch of money, build a bunch of infrastructure. And oh, yeah, I did the first few pipeline mlps like talk about like so and just well we see the same kind of boom bust cycle of right bitcoin's at 35 000 yeah let's build out as much infrastructure as possible it goes back down to 10 crap we're underwater on this

um well we see that same cycle i mean i i mean we can we can talk a little bit about cyclicality. I'm sure Nick has thoughts on this. Yes, there are cycles in Bitcoin, but they operate so much faster than cycles in other industries. new highs are higher and the new lows are also higher. So the trend line, right, if you normalize it and you take out a lot of that volatility, the trend line is up into the right and the supply demand fundamentals of Bitcoin, I think, continue to make that the pattern. But Nick, you have opinions on this, I know. Yeah, it's very cyclical industry. I prefer when we're in the downtrend and things get quieter. And frankly, deals aren't as competitive. Right now, everyone's attention is on crypto and it actually gets more challenging to operate. Even though obviously the bright side is that the amount of talent that we're seeing flowing into the industry right now is unbelievable, especially from established institutions and traditional finance. The outflow is really considerable.

But yeah, as Meltem says, we're talking about the secular process of monetization of a new, fundamentally new digital commodity from scratch. And in my view, it's going to take decades for the world to get fully accustomed to this thing and truly understand it and what it's like to own value in the form of information. But in the short term, it is absolutely very cyclical. But if you compare this cycle, for instance, with 2017, it is materially different in terms of the caliber of participation, the macroeconomic tailwinds that are present today that were not present then, and the quality of the plumbing, which folks like Meltem have materially improved such that the industry can actually take on meaningful capital in a way that it simply could not before. So every cycle brings us a new level of sophistication and maturity.

But I think the other piece I'll add, so from a trader's perspective, right, that volatility in Bitcoin is actually one of its very attractive characteristics. In terms of market participants coming in, I spend a lot of time dealing with hedge funds and active trading firms. And we have electronic trading systems that they can plug into and connect. Like we're one of the few shops that actually has a fixed API. Most people are still doing like email and voice brokering,

which like, I don't know who does that. It's preposterous. And then I think we've even met with you on our algo suite, right? To be like, hey, the next step is algorithmic execution of that screen. Yeah, just plug it in, right? Like we don't employ a single sales trader. It's all mathematicians and engineers, right? So in terms of people who want to deploy like a Delta one market neutral strategy, there's actually a lot of really attractive opportunity in this space that is a result of some of the unique financial contract structures that have been developed.

So for example, like the perpetual swap, it doesn't exist anywhere else. And the fact that like people have this fundamental misconception that there is a lot of leverage in the crypto ecosystem. And Jeff, you'll empathize with this. Everyone's like, oh my God, crypto is so much leverage. And it's like, no, you don't understand. You can buy highly levered products. You can buy 100X levered product.

But in terms of actual leverage, there's no margining. There's no cross-margining. There's no central clearing. The cash borrow is extremely expensive. And the funding rate on a perpetual swap can be as high as 10% to 15% in dollars per month. So actually, there's not enough leverage. There's basically zero leverage and the cost of borrowing cash is actually the primary constraint. So I think there's this really interesting misconception that people have

from the outside looking in and then they come in and they're like, this is absolutely wild. I've never seen anything like this in my life, which is why I think new capital coming in sees the space and is like, wait a minute, I have dollars that are sitting here at zero, right? My rate is zero. And inflation just hit 2.5% in the US, right? 2.6%. So I can lose dollar value, I can use purchasing purchasing, lose purchasing power, or I can sit over here and use my cash to fund Bitcoin trading activity. And I can do 15 to 20% a year just because I have cash and cash is so constrained. Even if I don't trade a single dollar and I just lend it out, I can net six to 8%. I used to trade rates at three percent and I thought I was super cool.

You weren't. I wasn't. I'm a loser. Sorry. It's a great point, though. I mean, just look at the interest rate. The crypto native interest rate is structurally high. And to me, that speaks to the dynamism of the industry. And it is important that there is a cost of capital. We don't have that in the traditional financial system. Because you have Fed-given rights. The Fed decides who gets the direct plug into the money pipe. The distribution channel is Fed to bank, to SIFI, to smaller bank, to broker, to retail. Here, the pipe goes direct to whatever venue you want to build on top of it. Like that structural shift, I think, is so critical.

So a few things. I want to back up in the volatility and the trading. Like to me, you could have created Bitcoin in a lab with a bunch of Chicago prop traders, right? Of like, I think they were at a bar and like, I'm smarter than you. No, I'm a better trader than you. And they're like, let's create some digital currency that we can trade against each other and I'll prove who's smart enough. Right. And it's just become that trading game and capturing that volatility is huge in a bunch of these prop firms now. So it's almost a perfect product for them to capture that volatility.

And I don't, some of them have a view on where it's going up. But the other thing, I'm not a TA person, right? Like technical analysis, I call it lines and triangles. I'm not that person. Respect to all the charting people. But all the technical analysis people love Bitcoin because it charts beautifully, like because there's such a wealth of data. And again, like Coinmetrics, Kyco, all of these data providers are providing super rich data. And all this data is like on chain. You don't actually

have to try to figure out who's doing what. It allows for an entirely different level of the game. My thesis is actually that finance is becoming the ultimate game, right? Like capital markets are the ultimate game and we will have markets for everything and everything will be financialized, right? Because we at our core are, as humans, degenerate gamblers.

Many of us are, even if we don't know it yet. Even in games, right? I was looking at a crazy stat the other day. Even in these like massive multiplayer online games like Roblox, the most popular place in the game is the marketplace. Yeah. And so I fully agree with you. I think this is just the next iteration of this. And it's such an important component of what I think capital markets will start to look like. And it's just so fundamentally exciting. Like if you've ever traded anything and then you trade using crypto,

like every neuron in your brain just lights up. I don't know if you had that experience, Jeff, when you started interacting with crypto. Like I just felt like every cell in my body was like, yeah, yes, like give me more. It's so good. Nick, is that what you get? I'm actually not.

I'm a terrible trader, full disclosure. So I just try and accumulate as much Bitcoin as humanly possible. And that's it. But there's one interesting point on the volatility, which I'll mention, Bitcoin is the first commodity such that there is no supply reaction to price increases. So unlike gold, if the gold price goes up a lot, gold mines will come online and produce more gold. Same with silver, same with every commodity, basically. So the supply can increase at a slightly faster rate to moderate an increase in demand. Hogs are the all-time example of that, right? The price of hogs is high, you go slaughter

your hogs. And the market now there's less hogs and the supply-demand works. So you have a certain supply elasticity. Bitcoin is by design, and to my knowledge, really the first, I would say, commodity ever that is perfectly inelastic from a supply perspective. So any increase in demand can be manifested exclusively in price, not supply. The supply progresses at the preordained rate. And that, I think, causes some of this outsized volatility because with gold, for instance, the volatility can be moderated somewhat by the supply response to demand shock. That's not present in Bitcoin. Some people say that's a bad thing, right? If it wants to progress to a medium of exchange. But from a trading perspective, that's part of the attractiveness is it's extremely pure demand is very

purely expressed in price. Right. Well, in theory, right. And Jason Buck, Mutiny Fund was talking to me about this. I'm like, you need the elasticity because humans make mistakes and because human ingenuity, like if they come up with new ideas, they need that elasticity of money in order to fund those ideas. What do you say to that? Well, I think it's worth trying to have a digital commodity which is perfectly bounded

in its supply. I mean, to me, all of the real problems with the money system come from the insertion of discretion into the supply. And it's often well-intentioned, of course, but then you can see it out of control. Right, it's five commissioners deciding what happens in the world. Yeah. Do you prefer cryptography? Do you prefer proof of PhD in order to determine the money supply?

Well, not even PhD. I mean, I'm sorry, but do we see the people running this country? Like, I'm not really sure that I'm on board with that. Like, maybe we should have different qualifications. I think the other point that Nick makes, I'll be a little bit of like, not a contrarian, but I'll just sort of push the boundary a bit. I think what we're going to is, like, historically, our world and everything that happens in the financial system has been predicated on trust, right? And financial institutions and governments have repeatedly violated this covenant of trust, repeatedly. But there are no consequences, because there is no

option to exit, right? And Nick, I think you've written about voice and exit before as well. So people voice and this is why we saw like Occupy Wall Street and protest this time around, right? We had five times the money printing that we had during the last financial crisis and no one was in the streets. Why? Well, we couldn't leave our houses, number one. And number two, people just didn't care. The spectacles get bigger. The distractions get greater. We now live in the bread and circuses era. But for the first time, we have an opportunity to exit. The exit is Bitcoin and this parallel sort of financial system that's been built over here. Over the last six years, the financial system

and the market structure that's developed around Bitcoin, you have to remember, was developed completely isolated from Wall Street. And a lot of the early pioneers who built Bitcoin trading platforms didn't come from the street. They came from the gaming community. And so a Bitcoin trading platform can support tens of millions of users at the same time. They were pricing tens of millions of contracts or these perpetual swap contracts in real time. Like the amount of compute that takes and the amount of latency and throughput these exchanges are processing is orders of magnitude greater than traditional exchanges. But this whole parallel financial system has gotten built. And so for the first time, I think what's fascinating to observe is people have the

opportunity to exit and to choose to do something different because in its purest form, Bitcoin is an experiment in the separation of money and state, which we haven't had in three or four millennia. And then if you take that sort of a step further, I think what makes Bitcoin so unique, in my view, is I'm no longer being asked to trust an institution or an individual or an authority. I am being asked to trust math, and I can verifiably prove that what someone tells me has happened has actually happened because we have a public ledger. state of extreme dysfunction. And I'll be, you know, I will tell you my observation when I step outside my door is like, this is deeply dysfunctional. And in my view, as you know, someone who's now in their mid to late

30s, is Bitcoin is an antidote to dysfunction dysfunction from a monetary perspective. I can own it, I can trade it, and I can choose not only to use my voice, but I can choose to exit. But if enough people exit, won't the government say, hey, we're losing control and I'm going to start to tack on controls? But what's the government going to do, Jeff? Well, you tell me, right? They've already said like you have to report all the transactions and right. But as Nick articulated, I no longer like there's this great meme that's like, oh, but when Bitcoin hits a million dollars, like how will I sell my Bitcoin? And it's Neo and Morpheus talking and Morpheus says, Neo, when it happens, you won't have to.

So as Nick was articulating, right now, I can do everything I normally do as a venture capitalist without ever touching the U.S. correspondent banking system. But they could take, right, couldn't they go into like, well, you can't have your license to transact whatever business you're in, right? So then I'll leave America and I'll go to one of dozens of jurisdictions who would love to have my business. Yeah, but I'm saying from America's standpoint, that could get messy, right? But that's the whole point of like, yeah, break the banking system. Well, Jeff, I don't think it's in America's interest to really interfere with crypto.

I mean, quite the contrary. The crypto industry is, it's not exclusively American, obviously, but it is quite American in nature. I mean, this is a global phenomenon, but the US is, in my view at least, and I don't want to sound chauvinistic about this, probably the leader in terms of

where Bitcoin is custodied, where the major Bitcoin institutions are. Coinbase is about to go public, maybe 50-ish billion dollar valuation, really marquee IPO, where a lot of the core development occurs here in the US. Bitcoiners are contributing to the tax base of this country. The IRS totally understood Bitcoin from day one. They treat it as property. You have to pay your capital gains on it. So it's quite well understood in this country. And at this point, probably over 10 million Americans hold Bitcoin. So to really interfere with it would be to interfere with the property rights of American citizens. And that has happened historically, for sure. But I don't know if

that would be politically tractable today. I mean, if you look at the last time we saw monetary repression, like really meaningful monetary repression in kind of the 30s, gold ownership was made illegal. That was a different context politically. That was the middle of the Great Depression. FDR, I think, was in charge, I believe. You had a lot of concentrated power in the executive. To me, I look at Washington today, I don't see that same level of power, even though there is a consolidation of power. To me, that is happening more in Silicon Valley. I don't see the state- You could argue the power is with the billionaires and the corporations, right? And then they're making the laws. Well, the corporations make laws. That's the thing.

We don't live in a nation state. We live in a corporation state. But if it starts to threaten the corporations, they'll change the laws, right? Get the laws changed. Well, I mean, a lot of corporates are getting on board with crypto fundamentally. I mean, that's Facebook's Libra, PayPal's on board, Visa's on board. So I think they've seen this phenomenon for what it is, which is a non-state monetary system, and they're interested in it. But I think the point that you're making, Nick, here is a really important one. We also have to take the macro context into consideration. We no longer live in a single currency world.

We used to have US dollar hegemony. I don't think most people realize that we no longer live in a world denominated in dollars. It's already happened. We live in a multipolar currency world. And yes, the US dollar still has much of that market share. But China, the renminbi, especially the digital renminbi that's now being launched is going to be a big part of the story. Russia is making a push to move away from the dollar and is denominating in rubles and euros only. I think the Middle East is realigning. We see fundamental shifts in alignment around the world. And I think many countries look at the success of Bitcoin and it's an inspiration. It sparks an idea, right? It's if a group of people online can bring a new monetary system, a new non-government operated monetary system into existence, right? How do we as groups of countries or groups of loosely held political alliances, or even groups of individuals create monetary systems

that reflect our principles, our values, our beliefs. And so I do think we're entering into a new era that will be defined by a multipolar currency world. And one of the polls will be a non-government entity. And it's the Bitcoin nation. It's this group of people, tens of millions, if not hundreds of millions of people around the world who not only hold Bitcoin, but believe in a specific set of ideals when it comes to monetary and fiscal policy. But what are your thoughts? So they would still pay taxes to fund the army and the police from attacking the mining facilities and the internet facilities, right? Like, so it has to tie back to the state

in some way would you agree or not i don't see bitcoin is incompatible with the state function uh to me bitcoin is just a big argument against it of like it's gonna take over and kill the state like they have to coexist right yeah i don't like the catastrophizing kind of rhetorical stance. I mean, like, ultimately, we're not proposing the abolition of the state by any means. I'm proposing a modernization of effectively the gold standard and an improved approach to that. The gold standard was not fundamentally hostile to the state. It was actually highly effective and synergistic with state objectives. There was a long historical epoch, really much longer than the current fiat period, where we had the lack of monetary discretion, gold-based monetary standard. Bitcoin is just a revised and updated and more technologically advanced version of the same thing. I see it as restorative

rather than progressive, fundamentally. And let me shift gears for a quick sec. So I'm a big family office. You guys are coming in. Tell me the bold case for Bitcoin and how much of it I should own. I can start. So we employ a sizable research team and we publish a lot of research on www.coinshares.com. Based on our research for folks who are allocated to a traditional 60-40 portfolio, we found that a 4% allocation to Bitcoin leads to both optimal diversification effects as well as optimal risk return balance. So we found that allocation to Bitcoin resulted in a 5x increase in performance over the last five years. Now, again, temperament is very different, but that 4% number, I think for us is a good starting point and an opener to the conversation. I think zero is definitely the

wrong number and 100 is probably also the wrong number. There's a sliding scale, but four is a good place to start. But what's from just plain language, what's the, is it, well, you need to own it because it's going to keep going up or what from just plain language? What's the is it? Well, you need to own it because it's going to keep going up. Or what's the plain language reason besides the price appreciation? Yeah, look, it's it's a very cheap call option on a potential future where Bitcoin is a global reserve currency or is a serious player in this multipolar currency world. So if you think about it from a risk reward perspective, the risk of not owning Bitcoin is greater than the risk of allocating to Bitcoin. Although it's, some would say, right, it's too expensive now, but you're saying whatever, just buy a smaller percent. Sorry, on that extensive point, Jeff, what I

would say is a Honus Wagner card, which is a rare baseball card just sold for $5.3 million. Yeah. It had already shattered a record in December. A Wayne Gretzky hockey card sold for $2 million. Right. Collectibles are selling at record highs. A Porsche, there are 300,000 Porsches produced in Europe. Porsche retails for $100,000. There are going to be 300,000 Bitcoins mined this year. A Bitcoin retails right now for $38,000. You look at those numbers and you tell me that Bitcoin is expensive. It isn't. It's so cheap at $38,000. Well, I'm just saying if you're 4%, just whatever the price is and divide it by your 4%. The unit price doesn't really matter uh the unit price is

completely arbitrary satoshi could have divided bitcoin up however they liked really um that you should be looking at the aggregate capitalization really you should be looking at the liquid capitalization because certain bitcoins are lost uh and right now it's something like 600-ish billion. You compare that to gold, about 10, 11 trillion. And gold is at a historical low ebb because it's been demonetized for a long time now. So I look at it as a share of the various means that we have of storing wealth in society. Obviously, the number one, the true gold standard is US treasuries right now. And those are in the many tens of trillions. So if you believe that Bitcoin will be a monetary asset of consequence,

it still has a lot of room to run. But in terms of the pitch, the simplest pitch I would give is, sure, it's a call option on this Bitcoin crypto financial system and it's a bet on all the entrepreneurs and the smart people that are building here. But to me, it's a very pure exit valve from monetary oppression, should it occur.

If you expect that there's going to be inflation or expropriation or devaluations in your country, to me, Bitcoin is the best way to combat that. But not guaranteed, of course. Nothing's guaranteed, but it doesn't have, right? There's a basis risk there of like inflation could happen and Bitcoin doesn't appreciate, right? It certainly could. Yeah. I mean, I see it as contextual. So, you know, Bitcoin has varying relevant levels of relevance based on where you are in your monetary context. So if you live in Venezuela, this is going to sound cliched, but Bitcoin is highly relevant there. People actually use it to acquire dollars, believe it or not.

They use it as a bridge currency. If you're in Lebanon, Bitcoin and gold, those are very relevant commodities to you. In the US, less so today, right? Not as relevant. Our financial system functions fairly well. It's not entirely politicized yet. There's not rampant inflation. We're not seeing yield curve control, the likes of which we saw in the 40s, anything like that.

But that could all change. And a lot of people are allocating to bitcoin with the expectation that it will change because the time to fight monetary repression is before it occurs you don't want to be caught with your pants down that's that's actually also the best time to buy bitcoin the best time to buy bitcoin is yesterday but since i don't have a time machine the second best time to buy Bitcoin is yesterday. But since I don't have a time machine, the second best time to buy Bitcoin is today. And the worst time to buy Bitcoin is tomorrow. And now you guys don't do this too often. But tell me the bear case, right? If you had to peel back and find some words, what words would you find? We do the bear case all the time, like at three in the morning, the only other person I know, who's ridiculous enough to be online and like be having a low key anxiety attack is Nick Carter.

So tell me what those moments are when you wake up sweating like, holy crap, what did we do? Why are we in this industry? There's a lot that can go wrong with Bitcoin. I mean, the price progression measures how much Bitcoin has been de-risked over time, but since it's still relatively small, that's the signal that there's still some embedded risk there. I would say the Bitcoin transactional network losing vibrancy would be the biggest risk. The Bitcoin ends up being transacted on other networks because we need fees to pay the miners. That's kind of esoteric critique that you'll hear sometimes. I think the other big risk, if I can add, Nick, is actual protocol level risks. Like, I think people have this perception that Bitcoin just runs and operates, but it doesn't.

The protocol, the Bitcoin code base is an open source software project. And right now, Bitcoin core development and the security of the Bitcoin protocol is being maintained by a bunch of developers who are either employed by companies or funded through initiatives like the MIT Digital Currency Initiative and others. So funding continued open source development and ensuring that high quality talent, like the devs who really understand the Bitcoin protocol are incentivized to continue working on it is a huge challenge. Open source communities have long had sort of this incentive and free rider problem and Bitcoin is not absent of that. We are working on that at CoinShares and we'll be sharing more news about that in the coming weeks and months. And I think the second risk is really at the network level.

So if we talk about the physical instantiation of the Bitcoin network, meaning machines, i.e. silicon consuming electricity to run the Bitcoin core code. There are also some really interesting questions there. Obviously, one of the questions that comes up most, well, two questions is one, will Bitcoin boil the ocean in terms of its energy consumption, which, you know, that's, you know, a ridiculous sort of idea, but unfavorable are very active in the physical instantiation of the Bitcoin network. How does that impact its security sort of on the geopolitical stage? So I think those are two other things that I think about a lot is how do we diversify Bitcoin mining and how do we utilize renewables, which actually, you know, renewables are the prevalent source of energy for Bitcoin mining. I think there is a lot of work to be done there to minimize the information gap and

just some of the fundamental misunderstandings that continue to be perpetrated. That's more just because it's cheaper, right? Instead of like, they're trying to save the earth. No, it's 100% an economic problem. I mean, the best way to mine Bitcoin is with renewable energy. Yeah. Which I've heard a conspiracy theory that it was started by the CIA to destabilize oil countries, right? And then, Meltem, I know you got to go soon. So I'm going to ask you, we do at the end, but I'll ask you now your favorite Star Wars character.

A little off topic. I'm going to break your heart. I'm not a star wars person well you have to know one of them right i don't know any of them zero oh no i confused star wars and star trek do you have they're like not the same star wars is george lucas right yes melton this is brutal i'm not this person like i'm into anime and like fantasy and like sci-fi they're coming out with an anime one on disney plus for star wars yeah i watched the mandalorian I'm not this person. Like I'm into anime and like fantasy and like sci-fi. They're coming out with an anime one on Disney plus for Star Wars.

Yeah. I watched the Mandalorian. Look, I'll go back to Mandalorian. Yeah. When I was a kid, my dad did make me watch all the Star Wars. And I always liked the Ewoks, like the little furry creatures.

Yeah. They're really cute. So I'm going to go with Ewoks, which is lame. But if you wanted to do like anime characters we could go into that or like video game characters outside my room and then i just want to ask you real quick before you go meld them of this movement to uh basically tokenize hedge fund investments to be able to split it into smaller pieces i mean look we've

been doing securitization um for a long time and there are a million one ways to securitize an asset. And then really the whole objective, it's really not the securitization, it's the ability to use these new forms of up into smaller pieces. It's really about your ability to use assets in a more productive manner. And so or obtain leverage or make these things more liquid or use them as a lien against which you can borrow cash. So I think we're focusing on the wrong problem by thinking about how we can slice stuff off and assign ownership rights. I think it's really more about the entire system around it, which is how do you make anything and everything usable as collateral to obtain leverage. And as I've said, I will not rest until I can securitize my soul. I will sell it to the highest bidder so that I can use it as collateral to obtain leverage so I can buy more Bitcoin. If you would like to give me a price, I am taking open bids

on Twitter via... You already sold your soul a little by starting out in the energy world, right? I mean, I've reclaimed some of it back, I'd like to think. I worked at the Death Star for a brief period of time. There's a Star Wars reference. This is what we used to call Exxon's headquarters in Irving. It's the Death Star. So I feel like I've clawed back the little bit of my soul that was left behind in the Death Star. Yeah. But for me, the hedge fund side is more about like going around regulation or whatnot of like, if you need to be this super accredited investor, QEP, but if you securitize and tokenize

it, then any retail investor could buy it for $500. Yeah, I believe in permissionless financial innovation, the fact that we allow people to mortgage, remortgage their houses, so they can gamble at a casino, but we won't let them invest. It's like incredibly, A, it's patronizing and incredibly offensive. But B, like, it's completely illogical. You know, I could say so much. Some of our clients, I'm like, you must have found your money in an alley. There's no way, right? You check off all the sophistication boxes per the SEC, but whoa.

But full circle to where you started, right? Like you could have all the diplomas, you could have as many pieces of paper as you like, but those pieces of paper don't mean that your ideas are good. They don't make you a good investor. I know plenty of people with lots of pieces of paper in their name and lots of letters behind their name and all sorts of certifications and couldn't invest their way out of a paper bag. So, you know, it's not being offensive, just being realistic here. But look, if you believe in permissionless financial innovation,

you also have to accept the fact that there are going to be things that happen that are also, you know, potentially negative. And at the end of the day, I think it's just a question of balancing the risk and reward. And really, that's what we're trying to find here, right, is a balance between this like new world of permissionless financial innovation, and this very pedantic patronizing model of, you know, people sitting in ivory towers, telling Americans who are living on stimulus checks that they can and can't do with their money out of safety, or regard for their safety. I mean, so there is a balance, I'm probably not the best person to advise on what

that balance should be because I never want to be a policymaker. But I do think the balance has shifted. We saw that last week. Like you can take our freedom, you can debase our money, you can make us wear masks and stay inside. But if you mess with my tendies, i.e. if you don't let me invest in meme stocks, like we will mess you up. I think that was perfectly emblematic of the moment we are living in. So and then do you have four more minutes for one more question? The on the just circling back to futures on Bitcoin and now they just launched the Ether contract. So it's going to launch in four days.

I'm so excited. Monday. I have my calendar marked. I literally I'm such a loser. I have my calendar marked for Monday. But how are you in terms of all the because I love market stats. So here are three really interesting things that have been happening. So we talked a little bit about sentiment, sentiment drives demand. And as you know, demand drives changes in market structure and market activity. Here's what we're seeing. Number one, market trading hours used to be dominated by Asia trading hours, we've seen a dramatic shift to UK and US trading hours. So more trading activity happening during UK and US trading hours. That data is sourced from Keiko, which is a market data provider. It was in their December research report, if anyone wants to look it up. The second trend

we're seeing also from the same Keiko report is trade pairs. The USDT, the tether Bitcoin trade pair, used to be the dominant Bitcoin trade pair. We've seen a 7x increase in the USD, regular old dollar Bitcoin trade pair, since last August, signifying that we have more institutions and more traditional investors who are engaging with the traditional banking system, accessing the Bitcoin trade pair. And that's happening through regulated venues and regulated brokers and regulated jurisdictions. The other trend, C&E contract, Bitcoin contract is the only USD cash settled contract that's really traded at scale, broke all time highs in December. Again, in January, there are 110 large participants on that contract, 330 similar types of participants in the gold market. So in terms of large institutions that

are allocating to Bitcoin, it's catching up to gold and very quickly. And in terms of volumes, we're seeing this massive. We did $3 trillion in derivatives volume in 2019. We did close to $20 trillion last year. I think this year we'll top $100 trillion, which is wild. And if people are interested in the derivatives side, I highly recommend checking out Paradigm. A hundred trillion in crypto derivatives? Yeah. And notional volume in crypto derivatives. Yeah. At least, right? And I highly recommend Paradigm.io, I believe, or Google Trade Paradigm. They're one of my portfolio companies, full disclosure. It's basically the trade web of crypto, single screen execution across all derivatives platforms in the crypto space, as well as multi- multi dealer RFQ, which is, as you know, like putting everything on one screen is

really important. They did 11 billion in one day in January, and all their stats that you can see on their their website, it's pretty cool. But they're doing like 30 to 40% of daily options volume in the Bitcoin space. It's the stats are mind blowing, like the market is changing, is changing so fast and is changing in such fascinating ways. I think the launch of the Ether futures contract is going to blow some people's minds. I'm definitely very excited. Like I said, it's on my calendar. And the last trend certainly we can't miss is what's happening in the DeFi or decentralized

finance space. We have tens of billions of dollars every month flowing through peer-to-peer exchanges and decentralized order books. Again, you know, this thesis we've long had that you should be able to trade anything with anyone, anywhere, clear how you want, margin how you want, and settle how and where you want. That world now exists in the world of DeFi. It's absolutely amazing. And I think it's opening people's eyes to what capital markets in the future could look like, which means you're no longer, you know, stuck in one trading environment with your leverage and your, your trading,

your price discovery, and your clearing and your settlement and your margin with one broker. You can actually do it wherever you want with whoever offers you the best price. And that's pretty exciting. That makes Wall Street quake in their boots, right? That's my side hobby. Of making people quake or Wall Street in particular? I think that, look, I think the street looks the way it does because there are some really perverse incentives at play. My incentive here and what I'm excited about is how do we take these ideas and apply them to the world of markets? markets. I think markets are so fundamental to human civilization. As I said, you know, the marketplace is always the heart of any culture, whether it's in real life or even

in virtual worlds where people are spending a lot of time in marketplaces. And so this idea that anything and everything can be a place where the marketplace exists and anyone with a phone connection or an internet connection can participate in the marketplace, whether they're human, an avatar, a pseudonym, a machine, you know, a node in a network. It's fundamentally exciting. I'm really thrilled about it. Awesome. All right. You got a drop or you can hang up. I'll leave it. I'll leave it to Nick because Nick is a, smarter than me, B, funnier than me, and C, I don't know. I was going to say something else flattering that I already feel like I've said a lot of nice things.

You've said enough, Meltem. Yeah, I can't follow the knowledge drop that you just did on market data. That was very impressive. That was. I love it. It's fun. If you ever want to have no life at all, you can come hang out in my house. We talk about market data and

market structure is very boring and everyone in my household hates me. I'm in that world. So I know those topics. They're exciting. They're like perversely exciting. Thank you, Jeff. Nick, take it home, my man. Okay. Take care, Maltem. Thank you, guys. Thanks for having me. Thank you.

Yeah. So, Nick, what are your comments? What are your thoughts on the whole DeFi movement and how that, to me, it's kind of separate of like, is that having to do with crypto or not really, right? They're sort of blended together in a perverse way. No, I mean, I would say DeFi is crypto. It's probably actually the thing, the corner of this industry that is marshalling the most excitement and attention and capital right now. It's completely unconstrained. There's no real attempt to bring any of these products or structures into concert with the various regulatory regimes in the US that would pertain to them. the growth of the Bitcoin exchange industry, et cetera, because those were eventually subsumed under the sort of appropriate regulatory constructs.

With DeFi, the objective is to completely disintermediate a number of complex financial processes, lending, like the acquisition of leverage, swaps, insurance, all kinds of much more complex products. the acquisition of leverage swaps, insurance, um, all kinds of much more complex. But how does it differ from FinTech is trying to do the same thing, right?

But are right. What's the crypto time? DeFi does this without a regard with no regard for, you know, the appropriate licenses. And then, and I'm not saying that in a pejorative way, that's just like this Uber model, right? just do it and then figure it out later and defy uses fundamentally

different plumbing i mean fintech is a front end on top of the you know actual banking system whereas defy envisions a world where you are transacting on a peer-to-peer basis on blockchains or you're pooling liquidity with other entities, typically on Ethereum, with no third party which has control over the system. So you're really just engaging with a contract that's deployed on-chain. So it's a fundamentally different experience, even if maybe some of the outputs kind of look cosmetically similar. Yeah. So, I mean, like GameStop, that whole thing, like, hey, we can just trade with each other through XYZ yet to be created DeFi platform.

Yeah, I would say DeFi isn't quite there yet in terms of being able to host the trading of real securities. There are a number of synthetic products on DeFi that try and create synthetic versions of real equity market securities. But that is going to be a really difficult question. Can you actually tokenize real stocks and trade them on this permissionless infrastructure. To me, I'm not sure that would work because you need an intermediary or go-between. And that intermediary would probably come under pressure for facilitating the trading of equities in a completely unconstrained way.

I'm not sure that would work. There are pseudo equities that trade on DeFi, effectively crypto native tokens that resemble equity in some ways. They have cash flows. They have governance rights. So they have some of the pieces of equity, but they're not codified as equity. So it's a very interesting situation. You have crypto native equity, which is sort of developing basically.

And those are the main things that would circulate on DeFi alongside, you know, the major crypto assets. And then how do you square? It's always weird to me, right? They're big coiners kind of be like the more institutional we can get and the more custodians and all this, the, the bigger it'll get, but the whole ethos is to be decentralized. So it's kind of this, you know, against each other the more centralized we become we get better but we're supposed to be decentralized

it's paradoxical to a certain extent i mean it's first of all like the institutionalization of bitcoin is positive for the price of course so it's like an opiate right it feels great but it's not necessarily good for you yeah yeah exactly however that said malcolm and i we invest in this rapprochement in the uh the integration of the financial system and the crypto system i don't envision them as distinct i believe that they will be integrated um i think think the point where I would say we might escape the perils of what happened to gold in terms of gold getting trapped in these walled gardens, the reason we might escape that fate would be because it's so much easier to take physical

delivery of a cryptocurrency because you can verify an inbound Bitcoin payment really easily by running a full node, for instance, whereas taking delivery of ingots of gold is challenging. And once you remove it from the walled garden, then to reinsert it, you have to sort of assay it again and verify that there's no tungsten in the gold or whatever. Yeah. I've heard you say that before the spectrometer or what's the tool? Yeah. XRF spectrometer. So that would be the analogy for the full node. The point is that gold ended up centralized because it's costly to verify, whereas any crypto asset is trivial to audit and verify. So what that means is potentially we would have a greater ability

to hold these custodians and intermediaries accountable and withdraw our funds from them should they misbehave. So I think the structure of the underlying collateral in the system is such that we would be able to have more accountability from the intermediaries. But yeah, I completely see your point about it being somewhat paradoxical that we're just engaging in re-intermediation. Yeah, I just like it with friends. They're like, you got to own it as soon as these institutions get it. Like they just say it out loud within two sentences of each other, this paradox.

Well, there will be a conflict at some point between the effectively institutions that don't need the more cypherpunk qualities of Bitcoin. They don't necessarily need it to be this gray market commodity that flows freely, and they would prefer it to be fully surveilled. So there will be a conflict of... And isn't there a new US company that's trying to be, basically, they'll only accept blocks that are fully verified or whatnot? Yeah. mining kind of ofac compliant mining yeah it's it's perturbing frankly and i've got friends on both sides some of them are sharing that and some of them are horrified by it uh so yes this will come to a head at some point 100 and then i want to take back on that big

family office you're trying to convince me like Like, it's hard for me to understand. Should I just buy the coin or should I invest in these companies that are doing things around the coin or both? Like, what's the bigger opportunity? Good question. I think the law of large numbers is going to kick in at some point with Bitcoin. So it can't probably grow another 100x from here, just because of how big it is currently. I certainly have a very positive view of Bitcoin. But to me, in terms of the return profile, I look at Bitcoin versus a startup. If I'm investing at the seed stage in a startup that's

building some really interesting application on crypto rails, potentially, Yeah. Excuse me. That startup might have a better return distribution than just owning Bitcoin. Fundamentally, I think you have to, if you want to be a real crypto market participant, and a lot of people's attitudes had to change around this, you should be doing a bit of both. Frankly, the coin is a bet on it's sort of the index for the whole system as a whole. It's the beta in the industry. And then startups are a way to bet on the dynamism of founders and a way to finance things that need to get built. Bitcoin wouldn't be where it is today without the accompanying startups that make it usable. And obviously the startups value is predicated on people wanting exposure to the coin.

So it's mutualistic, which is why as a firm, we do both. And do you see allocators saying, hey, it's not in my mandate. I can't buy crypto, but sure, I can do a private equity type investment into these companies, right? So you could almost get the exposure you want without having to convince a committee that you're buying crypto. That's what we saw first. We saw that from pensions first. The first thing they did was they invested in crypto venture firms. Then some of them did direct investing into

financial institutions that were building in crypto. But then interestingly, more recently, we've actually seen some of these endowments investing directly into the assets themselves through some of these newer, really credible providers like Coinbase, NYDIG, Fidelity Digital Assets, where I used to work. So it is interesting. We've actually seen this normalization of owning the asset directly. But certainly there was a long period of time where the mandates had to be kind of shuffled around a little bit so that these institutions could make sense of what the assets even were. Yeah. And then I'll finish with what's success look like, right? If you're out, you said decades. So say we're 40 years from now. What does success look like?

What is, where does it stay? What side by side? How does this all look? Does it replace gold? Does it replace the US dollar? A lot of Bitcoiners envision success as the collapse of the US dollar, but I don't see it that way at all.

I think Bitcoin will compete with sovereign currencies. And I believe its major effect will be as a disciplinary force, effectively forcing central banks to engage in tighter monetary policy, because the penalty for them being extremely loose will be an outflow of capital to crypto assets and other tokenized sovereign currencies. So we've already seen in many countries, crypto dollarization beginning to occur. When China goes notably, right? China, Venezuela, we actually have invested in startups doing this in Latin America, basically using crypto rails, acquiring dollars, so relatively hard currency by comparison with their soft local currencies. So what I see is a

globalization of the most credible currencies and an enormous amount of pressure put on the weakest and least credible currencies. So I mean, to me, it's clear that the dollar system is somewhat degenerating. I don't expect the dollar is going to go away, though, anytime soon. I think Bitcoin is just going to become one of those other media of exchange that trade finance is settled in at the international level. It's going to become one of the more consequential and important stores of value globally. But I think it'll exist alongside the major sovereign currencies. But I do think this notion of democratizing access to effectively foreign exchange in a really cheap way is going to put a ton of pressure on some of the weakest

sovereign currencies. And I'm sure we'll see a lot of currency crises relating to that. And so that's usually fixed by like interest rate differentials and whatnot, right? So but Bitcoin doesn't really have an interest rate. So how do you think about that? Well, it has a crypto native interest rate. If you look at any of the providers that lend or borrow Bitcoin, the interest rate for Bitcoins is typically six to eight percent in these markets. And so that sucks capital in. Right. Yeah. But yeah, I mean, central banks have tools they can use to defend against these things. But we're talking about all you need is a smartphone and the Internet in order to engage in the crypto economy.

So that's a very challenging thing to defend against. Even if you outlaw exchanges and outlaw peer-to-peer exchange, all you need is Telegram or Signal, a chat app and an internet connection and crypto denominated commerce can occur. And so we see it happening in the black market, in the gray market, in the gray market, in places where it's formally banned. Like crypto commerce still. Yeah. I mean, China's kind of a gray area because there are exchanges that operate in China. So it's not even clear to me that it's 100% banned. But yeah, in virtually every jurisdiction worldwide, you can't really suppress it. It's kind of like a weed at this point. And so, but if I'm the U, if I'm the U.S. government,

I come out with my own U.S. crypto coin, whatever, crypto dollar, right? Does that supplant Bitcoin or you still have the same issues if there's a Fed and there's interest rates and there's... Yeah, the crypto dollar, the USD, the CBDC, for instance,

that doesn't really compete with Bitcoin in the ways that Bitcoin is interesting. Because what Bitcoin lets you do is make transactions that settle quickly, are relatively private, and gives you full transactional freedom, transactional autonomy. A Fed-derived crypto dollar or central bank digital currency most likely would not have transactional privacy. All of the tea leaves that I'm reading indicate to me that it would have some measure of sort of embedded KYC. So it would have that surveillance capacity built in, maybe just as a contingency measure, but I believe that surveillance would be inbuilt. And additionally, I see the bank sector getting more politicized. Generally, it seems to me that's the trend, the way these things are going. So if there's political discretion built into a central bank digital currency system,

that's another axis where it would underperform relative to Bitcoin in terms of the attractive characteristics of money. So I see it as inevitable that there will be fully digitized sovereign currencies that probably exist in a tokenized format at some point. But to me, they actually don't really compete that directly with cryptocurrency. It's just a new technological wrapper on the existing system, basically. And then would you say the same if like Amazon launches a token or something, right? Of like, they've got more power, some might say, than the US government. So if they launched a competitor, it might still not be a store of value it's just for transacting on their

platform or whatnot yeah they're free to i don't see them as having the fundamental credibility to launch a new monetary system from scratch you know i wouldn't trust amazon coin for instance um i don't believe two more people right have prime memberships than go to church or way more than own Bitcoin. Yeah. Well, I think worldwide. Yeah, I'd say worldwide is about the best estimates I've seen of about 100 million people own cryptocurrency. But yeah, I mean, it's a good point. The question is, though, Amazon is a corporation.

Can they underwrite a global monetary asset of consequence, can they create something that people in Nigeria and Vietnam and China and Saudi Arabia would trust? Probably not. They would be seen as a tool of US imperialism, right? Is Bitcoin trusted in these places? Yes, because there's no one entity that controls it. And all you have to trust is that the rules of the network are being adhered to. So that's the difference, I would say.

Bitcoin globalizes innately. Maybe Apple instead of Amazon. Apple might be the best. Maybe if the 10 most trusted brands globally came together, even then, I would say a value neutral, sort of politically neutral system, which is fully organic like Bitcoin outcompetes on the domain of political neutrality, which is the really important question for money as far as I'm concerned. All right. I think that's it. Any last thoughts? No. Am I going to get the Star Wars question too?

Yeah, definitely. Yeah, usually we go through a whole list of favorites. So I'll just ask you your favorite book, which can be a crypto book if you want or just any type of book. Okay. Favorite book. Well, I have a whole list of great crypto books, but my favorite book period i have a whole list of great crypto books but my favorite book period so many choices probably fooled by randomness by uh by talab i know that's a popular investing

answer but i love it talib's turkey yeah exactly and then your favorite you you're born and raised in boston or you've just transplanted there? Technically, I'm British by origin and birth. And then I grew up in D.C. and now I'm here in Boston. So favorite Boston restaurant that you can go back to once the quarantine's over? Oh, that's easy. It's got to be DeLuca's in the North End. Yeah. Which is an amazing Italian.

Yeah, it's great. North End's fun. And then lastly, we asked all our guests' favorite Star Wars character, or it seems like you might have characters. I mean, I'm not a Star Wars mega fan or anything, but I am more of a fan than Meltem, clearly. Right, you need to know one name at least, Meltem Khan. Well, she knew some names.

This is a cliched answer, but i would have to go for jango fett because he is just really cool and a good marksman so uh tough way to go in front of your son that head cut out um yeah i love it i'll send you behind me is our star star wars fans guide to investing was an infographic we did i can see it i can see it uh and it was years and years ago and my uh bitcoin was jar jar binks unfortunately that's tough that is uh that's a tough comparison and the line was you really expect us to take this seriously um there's that theory there's that theory that jar jar is darth sidious i guess though right yeah have you seen that fan theory i have seen that i i have a thing i read all the fan stuff on like mandalorian and all the non uh main core stuff but the core

movies if there's a new one coming out i don't read any uh i don't want to hurt my opinion coming into it right well the bitcoin is jar jar comparison is maybe apt because it was seen as very clownish and, and silly for many years. And it was comic relief. So that was definitely befitting for the first stage of its life. That's for sure. Yeah. It might be like the rebel Alliance now or something,

right? It's getting, it's got a foothold. It's fighting scrapping. We don't call it a peaceful revolution for nothing. You know? I love it. Well,

thanks Nick. We'll put in the show notes where to get ahold of you and keep up the good work and we'll talk soon. Thanks, Jeff. This has been really great. All right. Thanks. You've been listening to The Derivative. Links from this episode will be in the episode description of this channel. Follow us on Twitter at rcmalts and visit our website to read our blog or subscribe to our newsletter at rcmalts.com. If you liked our show, introduce a friend and show them how to subscribe.

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