The Pomp Podcast - #437: Nic Carter on Measuring Bitcoin’s Growth

Episode Date: November 24, 2020

Nic Carter is a Partner at Castle Island Ventures and a Co-Founder of CoinMetrics. In this conversation, we discuss Bitcoin’s market cap all-time high, GBTC’s premium, DeFi, Satoshi’s coins, Ray Dalio, and what metrics Nic checks every morning when he wakes up.  ======================= Want to sell your wonderful internet business? Tiny partners with founders to give them quick, straightforward exits that protect their team and culture. We’ll make an offer within a week, close the deal within a month, and keep your business operating for the long term. Get in touch at tinycapital.com, and we’ll let you know within a couple of days. ======================= Harvested Financial makes options incredibly simple. They’re the first options robo advisor, where you can build and customize a personalized trading plan that gets automatically executed. Options help you speculate in capital efficient ways, diversify your holdings with market neutral strategies, and generate passive income by selling premium. https://www.harvestedfinancial.com/pomp ======================= Pomp writes a daily letter to over 90,000 investors about business, technology, and finance. He breaks down complex topics into easy to understand language, while sharing opinions on various aspects of each industry. You can subscribe at https://www.pompletter.com

What's up, everyone? This is Anthony Pompliano. Most of you know me as Pomp. You're listening to the Pomp Podcast, simply the best podcast out there. Let's kick this thing off. Nick Carter is a partner at Castle Island Ventures and a co-founder of CoinMetrics. In this conversation, we discuss Bitcoin's market cap all-time high, GBTC's premium, DeFi, Satoshi's coins, Ray Dalio, and what metrics Nick checks every morning when he wakes up. I really enjoyed this conversation with Nick, and I hope you do as well. Before we get into this episode, though, I want to quickly talk about our sponsors. First up is Tiny.

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Options help you speculate in capital-efficient ways. You can diversify your holdings with market neutral strategies, and you can generate passive income by selling premium. You've probably heard about options, but you may not be an expert. And if you're not, but you want to try it out, go check out Harvested Financial. It's an options robo advisor. So you basically set in the parameters and they automatically execute for you. It's really, really cool.

So go to harvestedfinancial.com slash POM. Again, harvestedfinancial.com. It's an options robo-advisor, just like a regular robo-advisor, but specifically focused on options. You can speculate in capital-efficient ways, diversify your holdings with market-neutral strategies, and generate passive income by selling premium. Options should be part of your strategy, and you can do that with Harvested Financial. So head on over to harvestedfinancial.com. Lastly, don't forget that I write a daily letter to over 90,000 investors about business technology and finance. I break down complex topics into easy to understand language while sharing my personal opinion on various

aspects of each industry. You can subscribe at pompletter.com. Again, pompletter.com. All right, let's get this episode with Nick. I hope you guys enjoy this one. Anthony Pompliano is a partner at Morgan Creek Digital. All opinions expressed by Pomp or his guests on this podcast are solely their opinions and do not reflect the opinions of Morgan Creek digital or more concrete capital management. You should not treat any opinion expressed by Pomp as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of his opinion. This podcast is for informational purposes only. All right, guys. Bang, bang. I have Mr. Nick Carter here with us. Thank you so much for doing

this, sir. My pleasure. Great to be back. Episode appearance number two with you. Very excited. Absolutely. For those that didn't listen to the first episode, maybe just give us a quick rundown of your background and then what you're doing with Castle Island and with CoinMetrics. Sure. So I am a general partner at Castle Island Ventures. We are based in Cambridge, Massachusetts. We are a venture firm seed stage, primarily focusing on startups that are building their businesses on top of public blockchains. Much less of a token focus, much more of a focus on startup equity at the earliest stage. And our view, you could call us integrationists.

We think that public blockchains are going to become truly integrated into the financial services industry. There's going to be a convergence. We're seeing it happening already. We can talk about it today. That's, I think, one of the causes for this current bull run.

We're seeing that convergence happen in real time. That's what we're betting on. Those are the businesses that we fund. And also, I co-founded this capital markets data business focusing on blockchain data called Coinmetrics that emerged out of an open source project that I started when I was still in business school. I was solving my own problem. I needed data for my models.

I wanted to construct valuation models for digital assets. I didn't have the data, got together with a friend, made the data. Turns out a lot of other people wanted that same data. And then it became a whole business from there. Prior to doing all of this, I was Fidelity's first crypto asset analyst, their first dedicated crypto asset analyst, hired to work on a proprietary fund at Fidelity and to develop their view, develop an institutional research perspective on Bitcoin and other digital assets. I've since left Fidelity, but that was my first professional foray into the crypto industry.

Got it. And so I want to first start off with, you've recently put out a bunch of awesome research using the Coinmetrics data. One of the first things that you talked about was everyone is looking at the $20,000 price per Bitcoin as kind of the all-time high. You were one of the first people that started saying, wait a second, I don't actually think that's the best way to measure kind of an all-time high. If you look at market cap, it's going to be much lower in a price point, somewhere in the $17,500 range. Talk us through kind of why that market cap is so important and then kind of the issuance that affects the price per Bitcoin all-time high. Well, it's certainly valid to look at the unit price all-time high. I mean,

if you're an investor, that's what you care about. You care about returns. You don't care about the aggregate economic value of the system, which is what you would refer to market cap to for um but the point i was making there was look if you want to measure bitcoin as a system for storing wealth we're actually going to be hitting the all-time high well before we hit the unit price all-time high because the number of bitcoins that exist has increased uh in the last three years i mean it's increased from i think um you can correct me on this, but it's something like 16 million back in late 2017. Today, it's 18.5 million units of Bitcoin that exist. So the market has absorbed all that extra supply.

So if you hold unit price flat and you have more supply, that means the economic system, the economic significance of the system is increasing. So I was just pointing out the market cap all-time high is actually well below the unit price all-time high. That's the one I'm celebrating. You know, I'll celebrate the unit price all time high too. Don't get me wrong. Probably much, much more aggressively than I celebrate the market cap all time high. But it's still an important milestone. You know, we can now credibly say Bitcoin as an economic system is storing more wealth than ever, than ever. Absolutely. And you also then wrote a piece that kind of highlighted nine different metrics. We're not going to go through all of them now.

you've talked about them with other people, but some of them were really interesting. Everything from kind of foreign currency, so non-US dollar denomination hitting all-time highs, even to underlying kind of metrics in the system. When you wake up every day and you say, I want to look at how Bitcoin is doing, what do you actually look at? Are you looking at unit price? Are you looking at other metrics? Like what does Nick Carter wake up every day and the first three or four metrics that you check? You're probably the first person to ever ask me that, believe it or not, which is crazy because I'm looking at this data all the time. Not saying I have a special purchase on the data or anything, but I've been drowning in crypto data for years and years now.

It's literally part of the reason Coinmetrics exists. I had a rapacious demand for more crypto data. So I take advantage of that. I'll go to the analysts and the engineers all the time and ask for some new data feed. It's amazing. I recommend that everybody starts a data company. Highly, highly recommended. You get a ton of access to data. You're an investor. You invest in data companies too. It's very useful. There's so much though. There's so, so, so much. The crypto industry is the most data rich industry in capital markets, in my opinion, because these are open, transparent ledgers. That's the interesting, compelling thing about them. Every transaction is transparent. That doesn't mean we know who's making every transaction,

but it does mean that we can audit the money supply to the last Satoshi. We can find out what the velocity is in the most granular way. The measures of the broad money supply for dollars, those are all survey-based. There's a lot of estimates involved. The Federal Reserve Bank of St. Louis publishes all this great data on the FRED website. They don't really know how many dollars exist, probably not even to the last billion. So the availability and the abundance of data in crypto and Bitcoin is really amazing. I'm not even answering your question. Probably the answer is it depends what I'm interested in on that particular day. However, I typically start with coin metrics, look at adjusted transaction value for Bitcoin and a whole bunch of other

assets. To me, that's really the key, key thing. How much value are these value conveyance systems settling? How does that compare to the other settlement networks, to the other payment networks? I'll look at the supply of stablecoins, the distribution of stablecoins. What's happening? Are they contracting? Are they increasing? They're almost always increasing. I'm looking at measures of dispersion. What is the distribution of ownership on these blockchains? Is it contracting? Is it getting more distributed? More distributed is good. That means there's more people that are holding units. That's one of the metrics that I had in that nine charts piece. I'd look at that for Bitcoin, Ethereum. You know, I want to see, you know, what kinds of holders are owning these

digital assets? Are they small? Are they whole? Typically, is it sort of amounts that are consistent with retail investors? You know, where is the supply? If you divide it up by the size of supply and various addresses, where is that supply? You know, how is it broken up? Is Bitcoin mostly being held by whales or smaller individuals, encouragingly, the amount of Bitcoin that's held in smaller wallets is growing all the time, which is a great sign for me. And then I'll look at the more exchange-related metrics. I'll recommend the Blocks data dashboard. I don't know if you've seen this. It's really, really high quality. They aggregate a ton of data, coin metrics, and market data, all sorts of... I'll look at the premium on the Grayscale

product. That is certainly interesting information in there. I'll look at whether we're in Contango or backwardation. I'll look at the futures markets. I'll look at the volumes on the various exchanges, in particular CME. So there's a ton. I mean, recently I spent a week just looking at doing analytics data, trying to understand DeFi, what's happening on DeFi, who's using what, how many users are there, what's the liquidity on Uniswap. So it depends, but for whatever it is that I need, there is a data source usually free, which is the most amazing thing about this industry. The abundance of data is incredible. When you look at the grayscale GBTC premium, What are you trying to understand there? If it's larger or smaller on any given day,

what are the things that you think about? Well, there's two things that affect the premium, right? One thing is what happened six months ago, because the product, the trust, you create new units, it takes six months to mature and then you can sell it. So this is trade that's constantly occurring. I'm sure you've talked about on the show. Certain firms will borrow Bitcoin or they'll hedge their exposure somehow. They'll create units of the GBDC trust at net asset value. And then six months later, they can sell it at market price. So what happens today is partially a function of what happened six months ago, how many units of the trust were created. So it's a noisy metric, the premium is. Because the other metric that affects the premium

is how much retail investor enthusiasm is there for GBDC on these brokerages like Schwab, Fidelity, et cetera. And so those two things are smashed into a single metric, which is a premium, which makes them hard to disentangle. But for me, a persistent premium on the GBDC product, even though every fund and their uncle is doing this trade, constantly creating new units and selling them off at NAV, even though there's that constant sell pressure from the creation of units of the fund, the persistent premium shows me there's still retail investor, strong retail investor demand for this financialized version of Bitcoin, either because they want to hold it in a tax-advantaged way or because it's just convenient to hold Bitcoin on their brokerage where they

already have an account, where they already hold their equities. And to me, the kind of people that buy GBDC is a different profile from you and me. I mean, I own some GBDC, it's very useful, but I definitely own more spot Bitcoin than I own GBDC. But the kind of people that are going to put their portfolio in GBDC are people that maybe don't have the energy and the enthusiasm to learn what a full note is. They don't care. They just want exposure to the financial asset Bitcoin. To me, that's probably an older demographic, probably a slightly wealthier demographic. People that just want to interact with the brokerage that they trust. They don't want to make an account on Coinbase or any of the spot exchanges. And so that pressure to me

if this market's being led by GBDC, and there's some evidence that it is, that pressure is quite good. That's sort of a more traditional set of investors. There's a lot more capital there than there is from millennials. Yeah. One of the things that's really fascinating to me about that Grayscale product is that arbitrage trade obviously is a huge financial incentive for people to get exposure. And so for those that don't know, essentially, there's a number of different ways that you can arb the premium, everything from you can just lock in the premium through hedging, or you can actually take the Bitcoin price risk plus the premium capture by contributing kind of in-kind Bitcoin or whatever. What's interesting though,

is they are exploding in assets under management. And it feels like, you know, we could be pushing towards a liquidity crunch where just like literally there is so much Bitcoin being bought up that nobody wants to sell at lower prices. There's not any Bitcoin to be sold because the incoming supply has been cut in half. And so you actually get this like really weird, almost parabolic like price movement or something similar to that,

but it's not driven by like retail FOMO. It's literally just by market structure of there not being enough liquid Bitcoin and the financial incentive is so large in that GBT arbitrage trade that it has like a significant impact. Do you see that happening Or is that more, yeah, theoretically, that could happen, but not likely?

Yeah, people keep tossing around the phrase sell-side liquidity crisis, which just cracks me up so much. I mean, the level of creation of new units of GBDC is astonishing. I mean, they're tacking on hundreds of millions of dollars of Bitcoin a day. They passed $10 billion, I think, maybe yesterday. They're well above it now. I mean, the product is just going gangbusters. It's really not that implausible to imagine a world where Grayscale becomes $100 billion asset manager. I mean, you know, an asset manager on that top tier with other, you know, traditional asset managers. You know, one thing I will note, though, is that it's impossible to kind of run out of Bitcoin. You just sort of reprice the units as enthusiasm

for the asset growth. But one trend that we notice is in bull runs, the active supply, which is liquid and market available, increases. The unit price drags up that Bitcoin that's held in long-term cold storage. So fundamentally, it's the same thing that happens in gold, actually, believe it or not. When the unit price of gold goes up enough, people will melt down their gold jewelry. They will sell their investment gold. This is gold, which is semi-market relevant, but it's not on the market. The unit price of gold goes up enough. That gold that's sort of held in cold storage, so to speak, that can become market relevant again. It can get recycled into the market. We see the same thing with Bitcoin. Bitcoin's sort of one-year active

supply, though, is at a low. I mean, it's really comparatively low. So I think this new cycle that where it seems like we're entering here, will drag a lot of that inert Bitcoin back onto the market. So that's kind of the mechanism I see here. But there's latency. It takes a while. People have to go to their safety deposit box and do their multi-sig protocol to get that Bitcoin to be liquid again. And of course, a lot of long-term holders aren't interested in selling at current prices. Maybe they're only interested in selling at $40,000, $50,000. But I think that's really the mechanism to keep an eye on, seeing these older coins, seeing if they're coming back onto the market or not. I'm going to keep a really close watch on that. Got it. And so obviously

that one year, kind of 12 month metric around what hasn't moved, I think the high I've seen so far is around 63%, give or take. What is the metric you look at or the timeframe you look at to determine what won't come into the market? So regardless of price, is it 10, 20% of Bitcoin? is it 50%, 30%? Like, how do you think about what is the amount of Bitcoin that either is lost as one thing that so never coming to the market or two, it's held by such strong hands that regardless of price, it's just not going to come back onto the market. Is that a five-year kind of hasn't moved longer? How do you think about that? Yeah, I would use five-year in-art supply as the default heuristic there. That's the threshold that Coinmetrics picked. They created

this measure of free float supply. And you just kind of have to pick an arbitrary number at a certain point. They wanted it to be standardized across many crypto assets. So they picked the five-year. Interestingly, Ethereum just turned five. So according to that metric, Ethereum, their free float supply declined substantially when they hit that anniversary. But yeah, I would pick the five-year for that. My other rule of thumb would be about 20% of Bitcoin, we can presume is lost or truly inert. Of course, it's not verifiably lost. We did do an analysis of the Bitcoins that we know for sure cannot exist, are provably lost. They were either burned. There was a Coinbase output that the miner failed to claim,

which has happened on certain periods historically. You can look at Bitcoin that is included in op return outputs, which is provably unspendable. So there are categories of Bitcoin, which we can know for sure cannot be spent or lost, you know, Bitcoin that just gets bricked. But then the much larger categories, Bitcoins that we're presuming are lost. But of course, you know, Satoshi's Bitcoins, they can come back online. There's nothing preventing them. we were just assuming that whoever controls those keys is not interested in ever bringing them onto the market, given that they've never really moved any of them. They're still sitting in their Coinbase outputs of 50 a piece, a few thousand outputs like that,

never moved. But of course, we're just assuming that they're completely illiquid and they're not market relevant. It's not inconceivable they'd come back. Would that be a bullish or bearish move or are you indifferent to whether those coins moved? I think the market can absorb a million Bitcoins. I think if those coins started to move, they got all deposited on Coinbase, a lot of people would pile into Coinbase to buy Satoshi coins. That'd be some classic coins, right? I would do that. So I think they would get bought up. Probably there'd be some price impact. However, the bearish part of that, I would say, would be that, you know, clearly the entity Satoshi has returned and is selling out their coins.

So to me, just symbolically, it would be bearish because it implies that, you know, Satoshi has lost faith or they're just not interested in being involved anymore. I don't think it'll ever happen, but that would be the bearish element for me. Yeah. You mentioned earlier DeFi and you'd done kind of a pretty deep dive there. what did you find when you went and did that analysis? I recently wrote a chapter of a book on DeFi for a law professor. Her book is on open banking. I told her, look, open banking is interesting for sure, but DeFi is more open than open banking. And she asked me to write a chapter

on it. And I'm not a DeFi authority per se. You know me, you know I'm not a huge investor in DeFi. we have looked at DeFi deals for sure as a fund, but I figured I owed it to the industry to get smart about DeFi. I don't want to be ignorant about one of the more explosive trends. So I would say I divide DeFi mentally into two different interrelated phenomena. So one is the DeFi infrastructure, which is an infrastructure which permits a variety of financial transactions, swaps, interest rate swaps, permissionless leverage. Some people call it lending. I don't necessarily consider what happens on DeFi to be lending in the classic bank maturity transformation sense. That infrastructure is very sophisticated. Of course, there's

bugs and exploits, but it really has come a long way. And then you have these sort of quote-unquote applications, which are really, I would say, the financial products which are available to trade and get exposure to in DeFi, which are the pseudo equity tokens, the comps, the Uniswaps, the curves, the YFIs of the world, the things that people actually trade in DeFi. And those I probably have a lot more questions about, about the long-term value accrual potential of a pseudo equity is what I call it, because it has some of the features of equity. you have some control rights, some governance rights, and you have an implied claim on certain cash flows, right? If you own Uniswap or Comp, you might anticipate that the governance would

malliate that system such that the tokens would get a plausible claim on cash flows, whether it's a burn, a dividend, a distribution, whatever. I think that's kind of implied. This is very incipient. It's very new. There's a lot that needs to be hashed out. how does the governance work? What are the securities regulators going to say about it, if anything? Can this be a sustainable model, et cetera? So that's kind of my 50,000 view after a long period of looking at DeFi very seriously, mainly from a data-driven perspective. The infrastructure is at a very impressive state of maturity, honestly. And the UX of using DeFi, in some cases far surpasses using CeFi, especially for trading. But still open questions as it

pertains to the DeFi tokens. And when you mentioned the lending component of this, are you talking about kind of this like yield farming or are you talking about something else? No, I would say lending in the sense that you might get a loan on Compound, for instance. So you deposit some USDC and then you're earning some interest for that. And the reason I say it has disanalogies to banking is that there isn't really any credit occurring. I mean, there's no credit creation, right? Because I don't know who my counterparty is. I'm just interacting with a pool of capital, right? In commercial banking, the bank is performing diligence on the person they're giving a mortgage to, for instance. So the bank is just the

intermediary between the savers, the deposit funds, and then between the businesses and the individuals that they lend to. But they're performing diligence. And if that loan goes bad and someone defaults on the loan, they have recourse. They can claim your house, they can claim your car, they can claim your collateral, whatever you've stumped up. So that doesn't exist in DeFi land. There's no real world law enforcement legalese recourse if a DeFi loan goes bad. So you're really lending against liquid collateral all of the time. So Jake Trevinsky has talked about this. This idea is not original to me. I highly recommend the blog post he wrote about it on Bankless. But the point is, there's no credit creation because there's no persistent identity

and DeFi. And there's no real ability to get recourse if someone, you know, runs off with an under collateralized loan. Yeah. One of the other things I wanted to talk about is there was a recent blog post written by Jesse Feldler, who I think most of us, you know, really respect from a macroeconomic standpoint and an investment standpoint. But he basically said, don't ask me about Bitcoin. And he rehashed, depending on who you asked, kind of critiques from 2013 or 2017 I saw you responded on Twitter. Maybe just walk through kind of how do you think about people who are very well known in the finance world who maybe either one haven't done the work yet, but kind of come out as a critic or to have done work, but don't yet kind of get to the point of understanding or agreement that maybe you and I have. Like, is that something where we should focus on, like, let's go find all those people and kind of berate them until they pay attention? Is it something like, we just have to accept that that's going to be a trend?

Like, how do you just view that part of maybe where we are in the market cycles? Yeah, my opinion on this has evolved, for sure. Part of our job as capital allocators is talking to these larger pools of capital that might allocate to our vehicles and educating them about the industry. And you've done a great job of this. And this is something that I would say most people active in the sort of capital management side of this business do. whether it's a crypto hedge fund, crypto venture fund, people managing passive investment products, is perform this continuous education process because there's still this enormous gulf in understanding. So most people in our shoes will be intimately familiar with the process of going

to someone who's totally new to the industry, is maybe curious about it, but they haven't really given any real thought to it. They don't really understand it as an investment asset and coaching them up through that process of discovery. But what I would say is a necessary condition for that to be successful has to be some, you know, genuine enthusiasm, or at least a curiosity for the asset class. If, you know, it looks like Jesse in this case is sort of, you know, negatively disposed towards the industry. My current view on that is some people are probably not going to come around regardless. I mean, it may be that they lack the humility to publicly change their opinion on something, or they just, you know, are fundamentally opposed to crypto for philosophical

or ideological reasons. And so I don't think they can necessarily be converted. I focus my current energy on people that are curious, that are open minded. There's an unlimited supply of those people, you know, especially on Wall Street. I mean, lots of people, you know, that I talked to haven't thought about crypto for three years or so since 2017. Now's an opportune time to go to them and say, hey, look, it's back. Maybe you should be rethinking your prior assumptions about the industry. And I always have a lot of success doing that. I mean, I gave a talk at enormous financial institutions the other day. And I won't say which one, but my moderator was working on private blockchains that was part of their mandate, which is kind of crazy to me in

2020 private blockchains, but that's fine. And after the talk, she told me that she'd gone home the night before and bought Bitcoin for the very first time, even though her focus was much more on the enterprise blockchain side. So we can still make ground for these people. What's happening in Bitcoin is not that difficult to comprehend. I think if you zoom out, you're willing to take longer-term view, historical view of monetary assets and currencies and so on. It's just about contextualizing in the right way. But as I said, your counterparty has to be somewhat open-minded for that process to work. So you got to pick your battles, basically. For sure. And speaking of open-minded, if you had asked me up until last week, Ray Dalio would have fallen in the,

you know, we agree on all the problems. We don't agree on the solution. And he doesn't sound very open-minded, but he had this thread on Twitter where he basically said, look, you know, maybe I'm missing something. And if somebody wants to educate me on it, then I'm open to having my mind changed. And what was so fascinating to me was one, to say that publicly is a pretty big deal and goes to the humility you described. But also there's this element of, it almost feels like whale hunting a little bit, right? Like Paul Tudor Jones. Okay. Like he's it, right? Stanley Drunken Miller, he's in. The last one standing to some degree is Ray Dalio, right? It feels like, okay, if somebody gets Dalio to kind of capitulate and say,

you know what, this is real, then there's almost no Wall Street legend left to kind of go capture in the mythical game of convincing people of Bitcoin, right? We still have Warren Buffett, but I don't think he's ever going to come around. But Ray is a particularly interesting case, as you implied earlier in the episode, because he does have this view that we have an enormous debt overhang, dare I say a debt crisis in front of us. Debt to GDP ratios are off the charts. You look at monetary issuance in the long term and correlates with inflation one way or another. Ray has made all these points. He's as nervous as anybody is about the macroeconomic and monetary environment. He's got this long-term historical view. He doesn't think the reserve currency status

last forever. I mean, all of the intellectual toolkit is there, for sure. I mean, I was impressed that he would say that publicly, like, hey, now I'm open-minded and having my mind changed. He's in his 70s, right? I mean, he's still learning in his 70s. That's impressive. I've learned a ton from Ray. His book, Big Debt Crisis, highly recommended. Principles, I found to be a little bit dry, honestly. But Ray is there as far as having all that sort of those prior views that would make you amenable to contemplating Bitcoin as an investment. Whether or not he makes it the final 10% of the way there, I guess we'll see. Yeah. And it seemed like price was playing into some of the questioning of maybe I'm missing

something. But I've seen you tweet about this idea of like, this is like the quietest bull market of all time. And it's just this quiet rally. If you go out on the street and you ask somebody, what's the price of Bitcoin? 100% of people won't know where it is, but 100% won't think it's going to zero or near zero. You'll get kind of a mixed reaction, but you would have expected for an asset that has kind of rallied 500 plus percent off the bottom within a relatively short period of time, less than two years, there would be much more fanfare, especially for an asset that is generally controversial in financial circles, right? There's a media person once said to me, if I bring the 10 smartest people I know and I put them in a room and I leave and I say,

you know, basically debate Bitcoin, I'll come back, five will be on one side, five will be on the other. The only difference is with this asset, each side will think the other side is complete idiot for what they believe. Like it's just got this emotional kind of charge to it. How do you think about the media coverage kind of that quiet rally feel to this is this just natural for the start of a bull market and kind of you know let's be careful what we wish for because there will be this massive FOMO and and retail excitement later or is this maybe signaling that this time it might be different when it comes to the excitement around the price appreciation that's kind of underway Yeah. And I think the first thing to remember is a lot of people will have become familiar with Bitcoin that first time around in 2017. So if they hear about Bitcoin again, they're not necessarily going to Google Bitcoin this time, right?

So the faithfulness of that proxy metric, Google searches for Bitcoin, whatever it is you want the metric to be, that metric may not be tracking the real world adoption of Bitcoin or even the interest in Bitcoin that closely. And I would venture that that's the case. You learn about something new for the first time. You don't think about it for a few years. You return to it a few years later. you're not necessarily going through that same initial process again. So I would question the

kind of Google trends metric, but you're right. I mean, it's fairly quiet, all things considered, which is incredibly refreshing, by the way. In 2017, my predominant emotion with regards to the market was probably disgust. I mean, it was exciting, of course, but it was tainted by this misallocation of capital and the ICO drama, which was causing so much misallocation. And of course, most of those ICOs are defunct now. So I wasn't that excited by it. Of course, it was structurally exciting, but I was very worried about how enduring it would be if Bitcoin was just this pass-through asset that was being used to buy ICOs or buy sort of long tail altcoins, for instance. Today, I think Bitcoin rallying and becoming monetized into this

genuine global macro asset, that's exciting if you care about interest rates and the underlying story of Bitcoin and that long term multi-decade journey that we're on. It's probably less exciting to your average retail investor that is looking for a quick flip or a pump. They were excited by the potential of ICOs and altcoins in 2017. Probably less excited by Bitcoin continuing to steady march upward, which is fine. The other thing, a lot of people got terribly burned in 2017, 2018, and they sort of wrote off the asset class. So some people will just have decided to never participate ever again. So there's definitely some casualties of the bear market too. People that were active and making noise in 2017 that aren't active here. But I don't

mind the more quiet phase that we're in. To me, that's consistent with family offices getting exposure, rich individuals that are worried they need a hedge against the legal system failure or the failure of a monetary system. This is consistent with some of those larger allocators, they don't necessarily want to announce their purchases. They may never publicly talk about them. That's what we should want. Bitcoin is a tool for wealth preservation in potentially dangerous or extenuating circumstances. A lot of the classic Bitcoin allocators have no incentive to ever discuss their position. Totally fine with me. Absolutely. Talk a little bit about the Castle Island portfolio. Obviously, each company is a

little different and you can only share so much, but what are you excited about in the portfolio or what are some of the updates that you guys have had that you think people would enjoy hearing about? Well, as I said, our main focus is financial market infrastructure, although that's not our sole focus. And any of our businesses which involve brokerage or intermediation that give people access points to Bitcoin, to digital assets. All of those metrics are up and to the right. I'm sure that's the case really across the board in any of these brokers, but it's just fascinating to get that on the ground view of adoption. I mean, the current rally is really quite something in terms of traction at new exchanges, new brokers. One kind of structural

factor that I'm really interested in tracking very closely investing in would be this kind of crypto dollarization idea. And now Bitcoiners may not like me for talking about this because it doesn't have that much to do with Bitcoin, although it is related, is this idea that public blockchains are actually a really great alternative infrastructure for settlements and for payments that is completely not dependent on the correspondent banking system. And people thought you would use stable coins or other crypto tokens for remittance purposes. They've thought this for the last half decade. It's only starting to happen now. I mean, that was kind of the ripple hypothesis. People didn't really want to use a volatile asset for payments. There have

been tons and tons of coins that people thought would be good for payment purposes. I think stable coins or crypto dollars, whatever you want to call them, those actually really are suitable for that. Because they alleviate that volatility concern. They're in theory, most of them are redeemable for real dollars in bank accounts somewhere. And empirically, we're seeing public blockchains get taken over by stablecoins. I mean, I believe stablecoins are doing more transactional value than either Bitcoin or Ethereum. So in a certain sense, the blockchains themselves are getting dollarized the same way that actual

jurisdictions get dollarized. And what I think is happening here is that with stablecoins, this is interesting arbitrage where you get access to credible sort of the US banking system. You get access to that in an offshore way, in places where maybe you don't have access to dollars at all. and you know if you look at these historical dollarization events they had to happen with physical dollars in the past and that was always a constraint you didn't have enough bills you didn't have the right denominations of bills if you use digital dollars crypto dollars that's not a constraint at all you can seamlessly import as many as you like it just becomes more of a ux challenge and getting people up to date on the technological kind of usage modes but so that's one thing I'm tracking. That's one thing we're investing in. And I think that's going to be an

enormous phenomenon. I think fundamentally crypto is actually pretty good for the dollar. People think it's bad for the dollar. I think it's good for the dollar. I think it means that it's a distribution point for dollars to the general public worldwide. I think it's going to accelerate the collapse of a lot of those sovereign currencies that can't stack up against the dollar. I know we give the dollar a lot of stick, but it's probably one of the soundest of all the sovereign currencies at least. Is this what China you think is trying to do is basically they identify that this is a path that the dollar could take and their belief is if they can kind of beat the dollar to the punch, if you will, and have the nation state actually behind the push, maybe they can have

their currency become that crypto currency, if you will, or kind of nation state currency adopted globally rather than the dollar? Or do you think that there might be more kind of the surveillance and other things is driving their interest in a lot of this. Yeah, and you see they kind of beat the US to the punch in terms of actually launching a CBDC, so to speak. But of course, the big, big difference between the DCEP, which is the Chinese CBDC system, and a kind of private sector crypto dollar

is a crypto dollar comes with pretty good privacy assurances. It comes with some fair stipulations against just having your dollars seized arbitrarily. you know um if you look at the you look empirically at how many times um usdc freezes accounts it's very rare it's very sparing and it's only i believe if they get a letter from a judge or from a court or something like that uh with the chinese digital currency you have no such assurances uh you in you'd imagine that that would ultimately be bundled with surveillance facility um and you know the question is will that be adopted i think it could totally be adopted

as part of sort of the belt and road initiative uh as a tool of you know surveillance i mean if you control your population's spending output what they can spend money on you basically control them completely uh so if you're a you know a wannabe despot in you know some country somewhere and you want tools of surveillance, you could maybe introduce a Chinese digital currency to your population and sell them on the convenience while also backdooring in a measure of control and surveillance. So that could be a package that China chooses to export to its strategic partners globally, which seems to be growing by the day. but you know a crypto dollar a private sector crypto dollar that we've seen

the fundamental value proposition there is actually transactional autonomy you know the ability to transact freely without constraints of course there's no replacement for bitcoin in terms of transactional autonomy but crypto dollars are pretty good uh and you know you get fair privacy with them not every transaction is surveilled only the transactions where you're creating or redeeming that stable coin with the ultimate issuer. Those are the ones where there's kind of KYC obligations. The unhosted wallet transactions, the kind of peer-to-peer on-chain transactions, there's no KYC obligation there. So they kind of look structurally similar. They look cosmetically similar, but they couldn't be more different

in terms of what they empower users to do. Opposite ends of the spectrum there. Yeah. When we look forward to kind of the crypto industry in general, whether it's equity, Bitcoin, CBDCs, etc., what are you paying attention to from a milestone standpoint over maybe the next two or three years? Are there specific things that you're like, you know, it would be a big deal if X happened? And I'll give you an example, like maybe a Bitcoin ETF, that would cause an inflection point for Bitcoin and crypto overall. Are there other things that you would kind of put in that bucket that you're kind of awaiting? Yeah, Bitcoin ETF would obviously, that's, we've been waiting for that for what, half

a decade now. I certainly thought we would come earlier. We're really, the regulators running out the clock on that one. We'll see what happens there. um i think the ability to buy bitcoin spot bitcoin and withdraw at a major brokerage a major kind of retail brokerage in the u.s would be colossal um maybe even more so than etf because you know the withdraw functionality is key paypal could could do that they could layer on the withdraw that would be key the real you know the only true way to own bitcoin is to know the keys

and to own it on-chain. Something else would be changes to the tax treatment of Bitcoin, for instance, a de minimis exemption for transactions such that you don't have to recognize the capital gains whenever you make Bitcoin, when you buy something with Bitcoin. In theory, under the way that the IRS treats Bitcoin, treat it like property, you have to recognize the capital gain if Bitcoin has changed in price since the time that you bought it and the time that you're spending on something. My tax returns are a total mess as a result of that, because you have to look at when you acquired that unit of Bitcoin, you see what you spent it on, see if the price changed, then recognize that capital gain. It's terrible. Potentially reclassing

Bitcoin as a currency, as opposed to a form of property for tax purposes. That would be really interesting to see. I don't know if we'll get it. As far as, you know, commodities regulation or securities regulation, Bitcoin is already very well understood by the CFTC. They consider it to be a commodity. No structural change needed there. Those are kind of the big things I'm looking forward. Obviously, there's sort of price and market cap milestones. But yeah, we still have a long ways to go in terms of market infrastructure with an ETF being the key thing. I'd be interested in seeing stablecoins issued against base money. So seeing the full hybridization of central bank currency and stablecoin issuance. To my knowledge,

that isn't really occurring yet. I mean, when you use a stablecoin, the reserve tends to be commercial bank liabilities, right? But what if you could disintermediate the commercial banks and have an entity issue stable coins directly against base money, which is a liability of the central bank. To me, that's quite interesting. So I would like to see that happen at some point. That'd be something else I'm looking forward to. Other than that, are there specific types of companies

or some sort of products that you guys are out on the hunt for? And if somebody listening is building it, they should reach out to you guys? Yeah. So anything that pertains to making the experience of using digital assets more convenient for regular folks, whether that's brokerage, key management, exchange, custody, any of that, we're always on the hunt for those. Anyone that's building a new exchange in some jurisdiction that's underserved, that's a big focus for us right now. This is a global phenomenon, not just US. It is giving people the opportunity to opt out of their local monetary regime, opt into either a dollar token or Bitcoin. So anybody that's bringing those assurances to jurisdictions that don't have great connectivity to the crypto industry, we're absolutely looking at those. And then

And anybody that's using, you know, blockchain is an interesting and scalable way. You know, so we look at startups that are using the blockchain for timestamping or proof of publication purposes for a variety of, you know, non-financial use cases. I know people say it's primarily a financial phenomenon. I say that too. But there are also pretty valid non-financial use cases in order to just enhance trust in, you know, supply chain processes, for instance, to prove that something existed at a certain point in time. So those would all be categories of things that we're sort of actively looking at.

Yeah, I love those. Where can we send people to find you on the internet or read some of the stuff that you've been writing? I'm on Medium. I don't know exactly what my username is. Just search Nick Carter. The archive of all of my content is my personal website, nickcarter.info. That's where everything is. And then of course, our firm's website is castleisland.vc.victorcharlie and you can obviously find me on Twitter. Not hard to find on there. Awesome, man.

Listen, thank you so much for doing this. You have been absolutely killing it and every time you write something, I run to read it because it makes people think. So we'll have to do this again in the future. Thanks, Anthony.