The Pomp Podcast - #499 Danny Masters on Asset Management in Crypto

Episode Date: February 24, 2021

Danny Masters is the Chairman of Coinshares, an asset management firm focused on Bitcoin, cryptocurrencies, and other digital assets.  In this conversation, we discuss inside baseball markets, digitization, driverless banks, distribution, digital asset investment strategies, and deregulated markets.  ======================= The Stacks 2.0 mainnet launched on January 14, 2021. Stacks, which you may recognize as Blockstack, is a layer-1 blockchain that uses the Bitcoin blockchain as a secure base-layer and enables developers to harness its power in new ways. Stacks makes Bitcoin more than digital gold, enabling apps and smart contracts on Bitcoin--unlocking innovation, new value, and a new way to earn BTC. Visit http://www.stacks.co for more information. ======================= Coinbase Wallets are adding support for .crypto and .zil domains through their partnership with Unstoppable Domains. Unstoppable Domains provides an all-in-one solution for blockchain domains. You can send money using these new domains instead of long Bitcoin wallet addresses, while also storing your domain in Coinbase's collectibles section. Go to unstoppabledomains.com in the dapp browser to register and manage your domains.  ======================= As one of the largest and oldest Bitcoin exchanges in the world, Kraken is consistently named one of the best places to buy and sell crypto online, thanks to our excellent service, low fees, versatile funding options and rigorous security standards -- but this is only part of the story. We’ve been on the forefront of the blockchain revolution since 2011: http://www.kraken.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. Danny Masters is the chairman of CoinShares, an asset management firm focused on Bitcoin, cryptocurrencies, and other digital assets. In this conversation, we discuss inside baseball markets, digitization, driverless banks, distribution, digital asset investment strategies, and deregulated markets. I really enjoyed this conversation with Danny, and I hope you do as well. Before we get into the episode, though, I want to quickly talk about our sponsors. First up is Stacks. Apps and smart contracts are coming to Bitcoin, along with a brand new way to

earn Bitcoin. Stacks 2.0 will give developers powerful new tools, including a smart contract language called Clarity that was made for Bitcoin and jointly developed with Algorand, as well as a new consensus mechanism that rewards the network with both Stacks tokens and Bitcoin. Stacks, which you may recognize as Blockstack, unlocks new use cases and functionality for the world's most secure blockchain, Bitcoin, without modifying Bitcoin itself. The door for developers and entrepreneurs to activate the billions of dollars of capital currently passively held on Bitcoin are now wide open. Proof of Transfer, or POX, is the groundbreaking consensus mechanism that makes this all possible. POX connects the Stacks blockchain to Bitcoin, opening up STX mining on

the network and enabling stacking where STX holders can earn regular Bitcoin rewards for supporting consensus. Stacks, apps and smart contracts on Bitcoin. You can visit stacks.co for more information. Again, if you want apps and smart contracts on Bitcoin, go to stacks.co for more information. Next up is Unstoppable Domains. They're absolutely killing it. They've developed human readable domain names or wallet addresses. So if you want someone to send you crypto, whether it's Bitcoin or something else, to a digital wallet, instead of having to send that long string of random numbers and letters, you now can send a .crypto domain. So for me, I have pomp.crypto. If I want someone to send me Bitcoin, I say, yo, send it to pomp.crypto.

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buy the name you want today. Whether it's your name, your company name, or something you think might be valuable in the future, unstoppabledomains.com. I got pomp.crypto. You can't get it, but go buy the name that you want. All right. Lastly is Kraken. K-R-A-K-E-N. Kraken. One of the largest and oldest Bitcoin exchanges in the world. Kraken is consistently named one of the best places to buy and sell crypto online thanks to their excellent service. They have low fees and versatile funding options and rigorous security standards. But that is only part of the story. Kraken has been on the forefront of the blockchain revolution since 2011. I've had Jesse, the CEO and founder on the podcast before. Others like Dan Held are there. They

are fantastic. They really, really adhere to the ethos of Bitcoin and the cryptocurrency industry. So if you want to trade on the largest and oldest Bitcoin exchange in the world or one of the largest and oldest Bitcoin exchanges in the world, head on over to Kraken. You can go to kraken.com, K-R-A-K-E-N.com, kraken.com. All right, let's get in this episode with Danny. 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 Morgan Creek 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've got Danny here with me. Thank you so much for doing this, sir. You're welcome. Good to be here. For sure. Let's just jump into your background. You've had a long storied career in the finance industry. Where did you start and what did you do before you found Bitcoin and cryptocurrencies? Well, nothing as interesting as Bitcoin and cryptocurrencies. I was a science, math science major graduate, postgraduate. I attended Imperial College Business School,

which actually led to a lot of opportunities in crypto, great crypto research lab they have there today. I did the thing that was de rigueur back in, I guess, 1990, which was you get a job at a big investment bank. Amazing how times have changed, but I started off with Salomon Brothers. These were the heydays of Salomon Brothers, the things they wrote the Liars poker book about and all of those characters I actually knew. I started in the commodities trading groups called FibroEnergy. I did that for 7-years and then I pivoted to JPMorgan, a different kind of approach to commodities but a much more well-heeled client base and a much bigger global footprint and reputation. I bought commodities trading to JPMorgan and ended up

running the global energy trading portfolio as well as various other functions within the bank. So I learned my craft during that decade or 12 years. And then I had the opportunity to start on my own, which, again, was very much what people did back then. You do your time with banks, you build your clients, build your reputation, and then you go on your own. I was fortunate enough to get a very big investment from Lewis Bacon, more capital to start us on our way. He seeded our program with about a quarter of a billion dollars, which was actually real money back in those days. in 1999, not anymore. We had a fantastic 10-12-year run and we had the general approach to do three things. One, explain what at the time, believe it or not, was a difficult investment

thesis for investors. Investors didn't really see commodities as an asset class, sort of a trading vehicle. Two, assemble a team of experts. Well, that wasn't hard to do because there were a lot of people in and around the commodities business. And then three, build vehicles fit for investment and sell those. So we did that. We had some big themes at the time. A lot of that has to do with commodities consumption growth in Asia. We told that story. We put that team together. We built those products. And we had a very successful run. But like a lot of things, know these things eventually reach you know a new valuation commodities did reach a new valuation uh again when we started oil just as one example was around ten dollars it was you know a hundred

hundred or so when we finished so you know a thousand percent rally not much in crypto land but it was big in commodities uh but then the interest kind of waned and so we were looking around for something else to do i happened across a chart a price chart and i looked at this price chart. And I didn't know what it was actually because it doesn't have a title on it. And it turned out it was Bitcoin. It was about $20 or $30, $40 at the time. And having looked at thousands of commodity price charts over a long period of time, took one look at that and I said, that market's got real energy. And I think it's going places. Let's figure out what it is. And that was my very first exposure. That was in 2012.

Do you remember how you found the chart? Was it like on a media site? I think it was flashed. I think it flashed up on CNBC sort of late at night, when no one was watching um and uh i i just sort of caught it in my eyes and whatever i was doing i just noticed it and i think it was on tv it's amazing um it's so funny to me it reminds me a lot of stories of um you know some of these uh kind of legendary macro traders where people say look they could sit down in front of a screen it doesn't matter what the actual asset is they just look at the charts and you know they get to work and start making money well the chart is very much the footprints of all the people that are in the marketplace, they leave trails. It takes a long

time to both develop the sort of pattern recognition in your mind and your eye, and it takes a long time to then be able to moderate, modulate your enthusiasm, your fear, and your greed to the point where you can then navigate a chart that you understand and actually walk away and make money. And that is an acquired skill. Some of the people acquire it easier than others, but I did manage to do that in my days. Yeah, it's amazing. When you think about what you're doing today, you're the chairman of CoinShares. Walk through us. How do you go from seeing that chart saying, wait, I should go look at this to today being a chairman of quite a large business? Well, I tell you, Pumps, sometimes it's more by luck than judgment, really. And I've got

be honest about that. If I had had something else to do in the 5 minutes where I saw that chart, I would not be having this conversation with you. I'd probably be one of the newcomers to crypto many years down the road, but what I did was I thought, I'm going to give that a try. I sent $10,000 of my own money to a Chinese agricultural bank that I'd never heard of, had no expectation of ever seeing it again or anything in return. But about 2-weeks later, I got a credit on this little known exchange called Mt. Gox and I started trading Bitcoin. That was fine and that was nothing really new to me. It was a pretty crappy exchange I realised immediately. Obviously, that was prescient. But what I did do is 2 things. I

I took the coins off the exchange and I put them in an armory wallet. I don't know if you remember armory wallet, but it was sort of the only cold storage wallet that was around back then. And I started to sort of, you know, make transactions, sign transactions, send them around. And I thought that's pretty cool. Secondly, I locked myself in a room for about two days and I hand solved the block and I had to get out my old math textbooks. But I actually hand-solved the block, did the secure hash algorithms, did the Merkle trees, you know, put the block headers together, came up with the magic number, and I went, that's pretty cool.

And, you know, as a student scientist, you know, you realize that a lot of scientific breakthroughs are actually building. Someone's put together the existing building blocks of other, you know, interesting math, and some of that stuff was actually pretty new. I mean, SHA was a pretty new thing. compared to, you know, technologies that build other, you know, sum up to build other new technologies. So I did that, and I'm like, well, now I'm sold on the tech.

And then I happened across Wentz's Cesaris, and I saw a talk that he did in person, and he was very inspirational. We ended up doing a lot of business together subsequently. He became the custodian for our original flagship fund. But, you know, he just went through the characteristics of money, the store value of the company of exchange and all the sub-characteristics and then scaled Bitcoin against fiat, against gold, against seashells, against tally sticks. And I was like, that was it. I was done. And what I thought about Bitcoin was,

just like in commodities, there are sort of two ways to look at the future. You can look at the future and say, this is going to happen at some point, but markets don't give you the time to wait. Markets always react before you get to the future. And I've seen that many, many times. So what you really want to do as a commodities trader is you want to say, is the story, is the narrative going to be believable? Is the narrative going to be bought on the basis of these future projections? Because if the narrative becomes popular, the commodity becomes popular. And I was just certain that the narrative around Bitcoin was, you know, before we proved anything or disproved anything. But the narrative around Bitcoin was very compelling. And so what began

as a punt, you know, just buy some Bitcoin and see what happens. I couldn't have imagined the segue into where we are today. So today, CoinShares is Europe's largest digital asset manager. Amongst other things, we have a series of very successful exchange traded notes that are traded all across Europe, partly under our XPT provider banner, but also under our CoinShares digital securities banner. We actually have a number of different products in that space. And today, I think we're pushing USD$4.5Bn in assets under management. We were very early to the space, we picked up a lot of the very early traffic. And what's been incredible is how few people have sold, despite the fact that their holdings have gone up in many cases quite dramatically.

These things turn over, it's a very liquid instrument and it tracks the price of crypto very, very well. But it is amazing that even through the ups and downs that we've had to get to where we are, how sticky the number of Bitcoins we have has been regardless. So that's one thing we do. The other thing we do, we didn't plan to do it, but we sort of had to do it. Back in the day, there wasn't a lot of market making in our type of security. So people were like, you listed a Bitcoin security, we don't touch Bitcoin. And today there are 25 market makers in our securities, but back then we actually had to do it ourselves. So we stumbled into a trading business where we now have 15 or 20 people employed full-time around the world doing

nothing but making markets, not only in our securities, but we're very big market makers on all of the big exchanges around the world, short-term, medium-term, very high frequency stuff and that all grew out of the necessity to actually be a market maker in our own product. So I think in 2019 we did about USD$2Bn in turnover, in 2020 we did USD$10Bn in turnover and I think this year we're going to blow that number completely out of the water. So those are really our two big businesses, okay? So it's exchange traded notes and trading. But we do a number of other things too. We have a great golden commodity, golden cryptocurrency index called CGCI that we built at Imperial College, my alma mater,

over a sort of two and a half year research project. That's got European benchmark status, and we're going to be issuing some products on that. In fact, the Lite version just went live on token sets. We are a stablecoin issuer, we issue a Gold-backed token out of Switzerland, about USD$25M of coins on both the Bitcoin and the Ethereum network that rail there, and we think that stablecoin issuance is very important. So that is sort of a proof of concept company that we have up and running and issuance now. We have a big activity with Komenu. Komenu is our registered licensed custodian and depository based in the Channel Islands. That's in partnership with Ledger Labs and Nomura, who are the major shareholder there, and it's an excellent product.

It's a high quality, robust, strong fiduciary custodian for digital assets and it's going to form a big part of what we do going forward. We do a lot of research and people like James Butterfield does portfolio research for investors looking to put commodity assets in their portfolio. Chris Bendixson really focuses on Bitcoin network, Bitcoin mining, has a real strong voice in that space. We do advisory, I have a broker dealer license in America. We're bringing some business to market as we speak, where we're helping various companies raise capital. So it's a vast array of of things that we're doing. I sort of could go on, but we're becoming, I think, almost like a boutique investment bank where we're advising, we're trading, we're structuring, and we're

listing products. When you think back to the early days of the commodity business, I know that there's a lot of similarities that you see. Maybe talk a little bit about the oil market and kind of what happened in those early days and how that compares to crypto today. Yeah. It's remarkable how much this rhymes with the past. So let's take the 20-year period between sort of, I don't know, 85 and 05 or something in that bracket. And at the beginning of that period, there was no oil price and there was oil, but oil was the regulated business really and regulated prices and the oil was $40, said the Saudis, and that was it. And then everyone would say, well, you're 40, I'm 35. And there was no freely traded market.

and I was actually in the oil market then, it was a logistics business, just had to get stuff from A to B. And then the price deregulated and all of a sudden it started to move. And with that, in came Goldman Sachs, in came Morgan Stanley, Drexel Burnham Lambert was around at the time, AIG, the insurance company, and they started to get involved. People started to build big trading companies that were trading merchants, not oil companies, not refiners, but people just sort of participating in the industry itself. Contracts started to grow, you know, one exchange, two exchanges, three exchanges started to build, derivatives started to build, options markets started to grow.

And that was a very steady increase in activity, let's say from the late 80s to the late 90s. And the market, you know, when I started in that marketplace, there may have been 100 people that traded oil in the world, I probably knew all of them. And by the end of that first phase, there might have been 1000 people in the world trading oil and I knew most of them. But then something very different happened, two things happened actually. One, the oil market went electronic. So it was no longer sort of a voice and over the counter, like a lot of other markets went electronic. But more importantly, a new this new thing, you started to emerge. Now the old way of thinking about commodities and what all the people in the I call inside baseball

section of that 20 years, the first 10 years of the 20 years, everyone talked to each other, everyone looked at the same thing. And they were looking at things like, is there enough oil in this particular arena, be it Europe, the Gulf Coast, Asia, for the next two, three, four weeks? And that was usually determined by is oil being arbitraged away? Is the weather bad and ships can't sail or can't load? Is OPEC doing something funny with the supply? Is there some political all strife, you know, is there a Gulf War going on somewhere? And it was all about what happens, you know, four weeks from now. And that's the only thing that mattered. In fact, there barely was a forward market in crude oil back then. It was all traded in that very spot period.

But what happened in the late 90s was we and others began to realize that there was a long term story about commodities, in particular crude oil, and it was to do with China. China, if you just did the simple math, you know, how many people live in this country now? What is the birth rate? How many people will be living there in 15 years? How many of them are driving cars now? How much gas are their cars going to use? It was very obvious that at the prices crude oil was, you could not fill that gap. And you could have said that about copper, about iron ore and about multiple commodities that China ended up consuming a lot of. What then happened was instead of a 4-week time horizon for the bullish bearish

narrative, it became a 10-year horizon for the bullish bearish narrative. That's when the institutions arrived. I feel that's the point we've been through since September, since Paul Jones' famous investor letter, which I think was a seminal moment in commodities. Funny enough, Paul and I did business way back in the commodity space as well. And so to see a guy like that, and he is smart, and he's very well funded, and he's a fabulous trader, to see him come into the crypto space, to me, that just rang a lot of bells back then. And clearly, it was the precursor to all of the things we've seen in the last 6-months or so. So anyway, along came, in this second phase, along came these institutions

who weren't worried about this 4-week horizon, but worried about the 10-year horizon. And that absolutely totally changed the way the commodity market even functioned and it led to a very protracted rally in prices and the technologies that were spawned on the back of it because the price of oil needed to go up to create the extra calories and the extra joules and whatever units of energy you want to use because at the prices it was before there just wasn't enough to go around. And it spurred technologies like wind farms, biodiesel, syncrude, energy saving, electric cars. I mean, all of these things kind of spawned from the fact that if oil was still $10 today, none of those things would exist. So not only was it a huge portent for the energy

business, but it actually changed technology and energy technology forever. When you think through a lot of what we're kind of seeing play out here, deregulation is obviously a very big part of the story, but also it sounds like the commodities business in the early days was this like inside baseball game, right? Inside baseball, not from a negative connotation, just like you had to be paying attention nonstop. You had to really be in the flow of things. You had to understand the nuances and details of the market and the people who did that had a significant advantage. It sounds identical to crypto today, right? If you're not paying attention 24 seven, you're likely not to do very well because there is so much nuance. Things change so quickly. Do you see similarities

between those two things? I absolutely do. Let's face it, a lot of us have been sitting around here for the last decade. We probably spent half that decade going, is there going to be an ETF? Is there not going to be an ETF? Is there going to be an ETF? It's just this craziness around whether there's going to be an ETF or not. Again, I think a lot of the people coming in now are just looking at a little bit of a demise of of the dollar and a little bit of loosening of this US dollar hegemony around the world. They're looking at debasement in the fiat money system, which usually happens to most fiat currencies over a long period of time, but maybe been accelerated by some of the balance sheet

damage done by the Fed and other central banks. They're definitely coming in and they're looking at this short-term dynamic. You've got the right clients coming in, but probably with the wrong dynamic. I think that what they're going to start to figure out is that the narrative around crypto is much, much bigger than that. And it's around re-plumbing the financial system and probably some other systems as well. But re-plumbing the financial system is long overdue. And I don't think even the most adventurous people coming to this market, like Michael Saylor, like the Ruffer Fund that bought a whole bunch of Bitcoin in one slug, and some of the other names you're seeing. They haven't been watching this market 24-7 for 10 years. You need to have a gut feel

about where things are going because there are so many moving parts. But I've begun to really develop this theory about where we're going to be in 5-10 years' time. I have to hang on to that when I guide the company, when we make long-term investments, when we take risks. That's something very much in my mind. But I think that's going to become much more common. And I think we're going to see, you know, I've sort of tried to concatenate these thoughts into the 3Ds, digitization, driverless banks, and distribution. And I think those are going to be the sort of north stars of where we're going in digital assets. I want to talk through these three Ds because it's fascinating to me. I've used different

terminology than you have, but I think that they're thematically dead on. Let's start maybe with digitization first. And can you elaborate a little bit on that one? Right. Let's start from the point of what happens in traditional financial systems. In a simplified version, you have a central bank that issues electronic money, layer one. Layer two is a commercial bank that performs banking services. And layer three is a distribution, which is normally your bank account. Now there are many flavors of all those layers, but that is basically the way it happens. I think we're going to move into the system where this all changes. And then the digitization bucket, what do we have there right now? We have about 1.5 trillion of digital

assets currently, but the vast majority of them are either native coins or some sort of ELC20 tokens that have some sort of utility like a Binance coin, for example. Those are what we really have. We have a smattering of Gold that Chad Cascarelli, myself and a few others have put out there. We have a smattering of securities that T0 and Open Markets and these guys have put out there. You've got a smattering of real estate and the St Regis deal and all these other bits and pieces. And you have actually quite a big slug in terms of fiat money, particularly Tether. Let's not go down that rabbit hole. And those assets are the ones that aren't native coins or just utility tokens, right? And that's 1.5 trillion. The next thing that will happen

is central bank digital currencies are going to go into that top bucket. And that's going to magnify that 1.5 trillion by 5, 10, I don't know, something like that. And not only will it actually boost dramatically the amount of stuff coming in the top of the funnel, but it will be a siren call for lots of other things to be digitized at a much higher kind of rate and much higher volume. So that, I think, is where we start in that digitization bucket. And I think, you know, I think it's important to say for those who, I don't think there are that many people left, but those who sort of question the usefulness of a digital

sovereign currency. The advantages for a central bank of doing a CBDC, when you look at the cost of running a physical money system, the slowness of reporting events in a real monetary system, the black market, the money laundering situation, the cutting people off of their money, let's not get into the libertarian side of it, but obviously it's desirable. But most importantly, digital money, assuming it's all digital money, gives a central bank the ability to impose negative interest rates, which you cannot do where there's cash in circulation. So there are huge advantages for central banks, and that's going to happen. So the digitization bucket will grow. When you think through how the digitization

of all assets ends up then interfacing with this idea of driverless banks, I've called it kind of automated finance in the past, but I think it's pretty much the same idea. How does that lead to the proliferation of these driverless banks? Okay. So again, let's go do the comparison. Who does banking services in the old world? Banks. What banking services do they do? They do borrowing, lending, hypothecation, derivatives, cross-chain operability like FedWire talks to SWIFT, custody, and trading. Those are what they do. Think about this crazy growth that we've seen in the last 9-months. Maker, Sushi, Uni, Yearn, synthetics, DYDX, all the big goes and anchorages and curves and so on. And also, there's great

platforms like Zerion and Zapify that actually kind of sit on top of all this stuff and can actually report what's going on with all the components. But if you add those companies up, up. You add those companies up, and they do what banks do. I think they do it extremely well. If you can imagine, it's widely reported yesterday, for example, Coinbase is stock now trading at $77Bn in the private markets. It'll be a 100-day one of listing at least. They've already been buying driverless bank companies. They bought BlockFi, which is an interest bearing platform. They bought Bison Trails, a staking service company that will similarly be generative for proof of stake networks in terms of generating yield.

I don't know how they go about getting involved with these other companies. They could buy governance tokens, they could buy equity, they could start stuff themselves, obviously. But if you take those names that I just mentioned, the driverless banking service companies, if you like, and you looked at all of their network value, I can't speak to their equity capitalisation, but their network value right now, take a half a dozen and you're probably going to get to USD$15B, add in USD$85 from Coinbase, USD$100B. At USD$100B, you'd have the 7th biggest bank in the United States and it would be a driverless bank. All of those things could happen essentially in your Coinbase wallet probably, and they wouldn't be a centralised bank,

it would be you want to borrow, you're borrowing from BlockFi, you want to stake, you do it with bison trails. You want to do something else, maybe you do it with compound finance or you want to trade, you do it with Uniswap. Who knows? But that's there. You could see that within a year, which is a stunning thought, really. When you think through centralisation versus decentralisation, can we get to a world where all of the infrastructure is decentralised and it's built on these open protocols, or do we still need centralised entities that are human-driven? It's a great question. I mean, it's something I've only been thinking about very recently. I think probably in the

first instance, yes, you end up with a centraliser. I think it's going to be someone like Coinbase, maybe even us, you know, that puts together, stitches together enough of the regulatory oversight and the fiduciary structure and the technology to sort of make that come alive. And I think that certainly something we're going to be looking to do in the next year or two, and I'm sure others as well. Ultimately though, if you look at the way, obviously the Ethereum network has its issues that need to be resolved, but if you look at the Metamask wallet, the iPhone Metamask wallet, and you look at how it connects with a lot of these DeFi companies and picking services from the shelf and just basically integrating them very easily within that wallet,

it's actually happening on a decentralized basis. So what is put in place with MetaMask is kind of a framework from which you can go pick and mix your banking services from any number of decentralized providers. So actually, I think there is a case for it happening in a decentralized way. Yeah. To me, what becomes really interesting is if you can get a truly decentralized system put together on these open protocols, you really start to change the way that people interface with financial services, right? So the easy example is just an accessibility play. Hey, anyone anywhere in the world, regardless of race, religion, geography, education, wealth, et cetera, get internet connection, you know, you're in the game. But more importantly, I think actually is

there's a lot of inside baseball that goes on on the wall street and kind of more exotic financial services side uh when that stuff starts to get uh kind of democratized you know there's good and bad that comes from that but but i think that that's the world that uh people aren't quite there yet like that's a kind of a second order effect and so what happens when all of a sudden there's now decentralized you know electronic trading and you're somehow able to plug into that or what about some of these exotic lending um you know mechanisms that are used right now by centralized intelligent people. What are you most worried about as we move to a decentralized world? Are there risks that you identify that you're like, hey, look, we got to be careful here?

Yeah. Look, the elephant in the room in this interplay between a totally decentralized investing and trading world versus Wall Street is really how much does the world need to protect investors from themselves. Now, I'm not sure what the exact answer to that question is. What I do know is we're definitely too far in one direction right now. And I think that the new generation, the post-millennial, the Gen X, Gen Z, whatever they are, post-millennial generation really don't think like that, want to think like that, want to be helped from themselves. So, if you think about how in the post-World Financial Crisis regulation stiffened and Dodd-Frank and Sarbanes-Oxley, where all of a sudden as a director of a company, you can go to

jail for financial misconduct and that sounds normal now, but it was kind of shocking at the time. But these rules have become really, really stiff and JP Morgan, the doyen and the leader of the Wall Street financial world. Last time I checked, it was pushing on USD$20B in fines. Now, I'm not saying JP Morgan is a bad company. Jay, I used to work there. It's a great company. What I'm saying is that there's kind of this unholy alliance between the regulators within the regulatory perimeter and the huge banks within the regulatory perimeter. And the banks are like, oh, please don't fine me USD$1B, Mr. Regulator, but they fine them anyway and they pay it because they can pay it and it just puts up this moat around that business where very few companies

can afford to trade because you can't make that kind of mistake as a small company or a medium sized company. So regulation becomes almost a defence to a business like JP Morgan and I think that's kind of putting the boot on the wrong foot and that's why it's all gone too far. On the other hand, let's take the episode with GameStock last week. Sure, there was probably a soft underbelly to that particular trade, a heavily overshorted stock, some smart people figured it out and they made that move. But I don't think the WallStreetBets community is smart enough to fight Steve Cohen at 0.73%. I'm sorry. I think they might win a skirmish, they might win a battle, but they're going to lose the war. It's that simple.

That's the other extreme. That's ultimate democracy where people are just going absolutely nuts on the internet and it didn't last very long. But there's a middle ground there somewhere. I think people are, and I think especially the younger generation, are a lot smarter than a lot of the big banks and a lot of the regulators give them credit for, and I think they want some more financial freedom. I think it behooves everybody, when we create this bright new digital financial system of the future, that we do not remake it in the same image of what went before. I spend a lot of my time working with regulators, moving their knowledge along. They've only just got their heads around Bitcoin. Some sort of DeFi

swap on a token versus an index is just way beyond their thinking right now. What we need to do more of as CoinShares and what we're going to do in our leadership role in this industry is where there are grey areas, we're going to exercise our judgment. We are fit and proper people. We are going to innovate. We are going to create new products. We are going to market them and trade them responsibly. And we are going to help the regulators understand what we're doing because they won't fit into buckets that they currently understand. And they'll never catch up with that, by the way, and the pace that things are going right now. And we're going to act responsibly. And if we trip and if someone says, oh, this falls into that regulatory bucket because we're

interpreting it this way and you're interpreting that way, we'll take it to court and we'll make some precedent. We'll make some precedent law and we'll try and blaze this trail where we actually form new rules and rules that respect the independence and the authority of the individual a little bit more, while still respecting the risk management for those people that would not otherwise be comfortable. Absolutely. The third D is distribution. So you have digitization, you have driverless banks, and then you have distribution. Elaborate on the distribution side? Going back to the old system as a parallel, this is really about who owns the customer. The customer is owned by the bank. You have your HSBC

account, your Bank of America account, probably your Fidelity account, and they own you. Pretty much all your investments end up there and all your payments come to and from there. That's why banks pay you to move from one bank to another because they want to be the endpoint for your financial activity. That's a valuable thing. And that's all going to change. So, who's going to own, and it's actually my friend, Charlie McGarrett, blockchain.com, who I'll credit this statement, who's going to own the endpoints? And the endpoints, I think, are fascinating. And if you look at what happened in retail, I used to go to the shops, right? You go to the shoe shop, I go to the cheese shop,

I go to the camping store, and now I just go to Amazon because Amazon owned me as a client. And Amazon is the endpoint for retail. So once they own you, it's actually behooving the producers to go through Amazon because they probably cannot find you as efficiently, and they certainly can't distribute to you as efficiently as Amazon can. And that I think is going to happen with digital assets. So the question is, who's going to be the Amazon.com? Who's going to own those endpoints?

So let's just talk about a few candidates. Candidate number 1 is the big exchange, Coinbase, Binance, Gemini if they get really lucky. Those are the kind of candidates we're talking about. Can they create enough wallets to bootstrap an ecosystem of endpoints like that? Probably not, in my view. Let's look at some native blockchain wallet people. My great friends, I'm glad to see Peter Smith at blockchain.com, very successful raise from some very high-quality investors, and blockchain.com have. I've followed those guys since they had 50,000 wallets. They've now got 80M wallets. It's not been an explosion. It's been an organic growth. It's been a little steeper or a little

shallower, but it wasn't like it doubled in 6 weeks. It's just grown and grown and grown. It's actually very illuminating about how you grow these networks organically. It's tough. you have to start early and you have to go for a long time. But they've got a lot of wallets, so they could become the end point. Then you've got people that haven't thrown their hat in the ring. Google, Amazon themselves, PayPal obviously are close to the space with lots and lots of end points. But perhaps the most interesting one is the Facebook Libra, Calibra DM project. Let's just do the math here. With 1.5M unique wallet operations in a given day versus 1.8 billion unique user operations on their platform, if they put a digital wallet

on your Facebook or your Insta or whatever it is, all three of them and WhatsApp as well, you could see the endpoint architecture of crypto blow up by a thousand fold in a day. And I'm not sure there's many other applications that would be taken up so quickly and be so global as a financial app on Facebook or WhatsApp. That is probably what's going to happen. That will open up an enormous corridor forward for all kinds of down that whole channel. You digitise at the top, you do your banking services with this cadre of people, centralised or with some human intervention, and it ends up in your wallet. And the only final point I think about there is these new concepts of individual domains.

So I own dannymasters.eth and what's happening is that these domain endpoints are now becoming integrated with individual blockchains. So I can send my ETH to my own address, but I can also send other stuff to my address. And if those end point domains ended up syncing with the Polkadot blockchain, the ETH blockchain, the Bitcoin blockchain, and so on and so forth, it's quite possible that those domains could just roll out natively. That's another interesting concept as well. I don't know quite whether they get the energy to do that, but that's a concept.

That I think is the distribution layer. I think it's probably the most valuable real estate in the whole ecosystem in terms of it be worth to the person that succeeds what you're basically describing is like the ultimate vision right it is a decentralized digital currency that is then being whipped around in decentralized financial applications and it's all done in an automated digital open protocol system uh that essentially says you know the banks the legacy system uh we are going to take all the great ideas you've had and the monopoly on profits that you've had and we are are going to bust open the wall and we're going to provide this to people around the world just

simply by having an internet connection. And I think that the big controversy or the big debate is that is kind of the most powerful and obviously value creation perspective to have is like that world's going to happen. We're nowhere near that today. And so the question is just how far along that spectrum do we make it, right? Does it end up halfway or all the way? And I don't think people really know but it sounds like that's really what you guys are focused on is pushing us as close to that as possible well yeah and and again it's you know we know the direction of travel um we know the direction you know we know you know we want to go down that path um and then it becomes a little bit tactical so you know what good example of you know how how this becomes sort of a tactical

battle is, for some reason, there is a big, bright dividing line between custodial services and non-custodial services. And why do we even need these custodial services? I'll tell you why, because blockchains as we've known them so far, and that may be changing, have been very much two-dimensional. You have your blockchain runs down here, your Bitcoin blockchain here, your Ethereum blockchain here, your EOS blockchain here, and they don't really talk to each other very well. What we've discovered is that there are huge benefits in cross-chain operability, and hence we have the whole wrapping phenomenon. Now, for example, our WDGLD, Ethereum-based Gold token, is based on our DGLD Gold-backed token, which is on the Bitcoin

network. I won't bore you with why, but there are good reasons to have the main net on Bitcoin and the Ethereum contract there. And so we do a wrapping, and there are other people doing much bigger wrapping. WBTC is $6Bn now with wrapped Bitcoin so that Bitcoin can travel similarly on the Ethereum network. How does that happen? Wrapped Bitcoin is usually you send your Bitcoin to BitGo. They freeze it on the Bitcoin blockchain for you when they reissue it on the Ethereum blockchain. I think there are some other people in that syndicate, but that's what they do. But they're pretty clearly performing custodial services because they hold the key to that bridge. I think that's a little bit of a vulnerability. That's where a regulator can come and say,

no, you guys aren't smart enough to run your own finances. You're not being truly transparent. There's too much cyber risk here. You guys are obviously all money launderers, so we're going to intervene or we're going to intervene because you're providing custodial services. We've actually privately invested, not just corporately, but some of our partners privately in the Keap network recently. And the Keap network is early stage and it's not huge, but it's moving into that sort of automated wrapping service where I can now get cross-chain operability from Bitcoin to a wrapped Bitcoin on the Ethereum network without anybody else holding those keys. It's a non-custodial function. And so now really, where's the surface area of attack

from the legacy world when they try and get purchase on the activity you're doing because I'm essentially doing that myself. I think those kinds of tactics are the way that we navigate this whole thing into this more digitized future. It's essentially trying to go around the problem rather than through the problem. I'm getting tired of making applications to legacy government quango type organizations to do stuff um they're not coming along fast enough i don't think they really understand it and it's happening anyway um so i want to participate it makes uh makes a ton of sense to me before i let you guys ask everyone the same three questions you'll get a chance to ask me one to uh finish up the first is what is the most important book that you've ever read

oh i wish you you you'd uh you'd uh give me a little notice here so i'm gonna have to think I think there's a family of books that I read all around trading and investing when I was younger. Things like Market Wizards, Liar's Poker, the Black Swan books, Blink, another Talim Kaleb book, and even Jesse Livermore's Reminiscences of a Stock Operator, which I was given as a trainee to JP Morgan, which was actually a very nice gift. But there was a book by Albert Vance called Portfolio Management Theories. And all those books I read around trading that had the biggest impact on me because unfortunately, it's Albert Vince I think, and unfortunately I think that book's now out of print, but what he does mathematically by

studying what's called the parimutuel betting system, which is a system of betting where there are 10 horses in a race and the odds of those horses are purely dictated by how much money flows into each horse. And then the house takes a cut and the rest is distributed to the pro rata to the people that back both the same horse. And what he proves mathematically is that you can beat a system where there is friction because they're taking 10% out as a rake for the house, but only if you bet on things that other people aren't betting on. In other words, the betting on the favorite will manipulate the odds of that favorite and therefore the return that you get to the point where in the long run, if you run that trial many, many times, you can't win.

But if you can find out what it is that people don't want to bet on, then you do. And I think if there was one thing that guided my commodities career, it was that. And actually, many people have asked me a question about Bitcoin, which I answer the same way. They say, what's the terminal price for Bitcoin? And I go, I don't know what the terminal price of Bitcoin is, but it will happen shortly after. Everybody I talk to loves Bitcoin. We're not there yet, but that is how that can be guiding. I tend to agree with you very, very much. Second question is a little bit more personal. Sleep schedule. So this comes from our friends over at Eat Sleep. They've got a thermoregulated bed that I used to sleep like six hours a night

and was an absolute monster to deal with probably on a daily basis. But after I started sleeping on the bed you can make it as hot or cold as you want i sleep on an ice cube and now i sleep like eight or nine hours and i'm much more pleasant uh what's your sleep schedule and how has that changed over the years um i think as a risk taker which i've always been um whether it's starting a crazy business in crypto uh or or just you know some crazy bets i've had on this that and the other over time. In fact, my whole family come from the gambling kind of background. But when you grow up under the spotlight of the JP Morgans and the Salomon Brothers of the world, and when you run a hedge fund of your own, as I did for over a decade, there is a huge spotlight

on you. And when it comes, particularly in the private investing world, when you're a hedge fund manager, I used to hate losing money for people with a passion. And I used to hate, you know, obviously your friends and family will be investors. And I actually refused friends and family towards the end of my career because it just makes the stress of investing even greater. And what I found with, you know, all my sleep pattern was determined by stress. And I used to get stressed about the stress. So if I couldn't sleep at 3 o'clock in the morning, I would get even more stressed. And I couldn't sleep even more. And, and you know what, I kind of slayed that dragon. And what I do now is, I'm awake when I'm awake, I'm asleep when I'm asleep.

And if I'm awake at three o'clock in the morning, I'll get up and I'll do something. And if I want to sleep and have a nap at three o'clock in the afternoon, I'll do that as well. And I just feel like I have to go with my body's own biorhythms. I'm definitely going to try out your temperature control bed because it sounds like it could definitely be only a plus. but, um, but yeah, I, I, I just, I know I'm in a, I know I'm in a tough business. Uh, I know there's a lot of demands on me. I think my body naturally kind of fights against that. I just try and go with it and not against it. I think that's the best way to do it. The other thing I've learned, uh, has nothing to do with like sleep aids is, uh, humans are just human bodies. And

so the best way to get good sleep at night is to make sure you're tired, right? Like just do things during the day that tire you out to to uh get deeper and deeper sleep so uh it's uh it's awesome that you at least understand kind of you know hey what your body does and you just succumb to it because that's probably the best way you need to yeah yeah the the last question is more fun uh aliens are you a believer or a non-believer um i have no doubt in my mind there's life on alien other planets i mean there's absolutely no doubt in my mind i'm hoping i'm gonna see it my lifetime you keep wondering, one of these probes to Mars is going to happen across a little centipede somewhere and bring it back. But again, I had a physics minor and I did some cosmology.

The vastness of it, I think, is lost on a lot of people. It's almost impossible to imagine it's not out there. Now, will these people arrive in green suits? Probably not. But I am really hoping in the next few decades of my lifetime, I actually do get to see that. That would be great. I love it. You could ask me one question to finish up. What do you got for me? I've got one for you. My daughter, Honor Masters, who did do a little spell in the crypto business and is now at Columbia doing her Masters, which is great. She happened across you in a real life event somewhere i think you may or may not have been speaking i'm not sure and i think at one point that she sort of tried to approach you and and she said that like somehow she got caught in

a crush of other people and and clearly you have some you know you you've you have some sort of a a rock star status uh in the crypto world and i want to know uh you know how's it been coping with that and can you assure me in the audience that you're not going to end up with your assets in conservatorship like Britney Spears? Uh, yes. The, uh, the one benefit I have is I have a, a very caring and, uh, and frankly, stern wife who, uh, who makes sure that I never, uh, you know, get a big ego for sure. Um, and then, uh, you know, look, I think I kind of take this approach of, uh, I'm trying to learn like this world moves so quickly. Right. And, uh, every single time you think you understand it, something changes. And then it kind of makes you question like, ah,

maybe that assumption I held or that narrative that I bought into, uh, was inaccurate. And so I think that that really kind of allows me to keep just constantly wanting to learn and keep that intellectual curiosity. The one other thing that I think is really fascinating when it comes to the democratization of access is you now don't just have kind of work, right? As I'm sure you and many other people listening to this, I've got friends who I haven't talked to for over a decade who all of a sudden text me and say, hey, what do you think about X, Y, or Z? Or, you know, some random person

I literally met one time DMs me on Instagram and it'd be like, you know, what price is Bitcoin going to hit this? Like, I don't know. And so what you start to realize is that that's a kind of warning sign of like, you also have to take great responsibility, I think, with, you know,

there's a lot of people listening, right? That there's a lot of kind of attention. And so I try my best to kind of share some of the messages that are, you know, look, don't invest more money than you're willing to lose, right? sure you're doing your own research like all the things that are timeless financial advice uh can get lost right because people are just so excited but uh but i think that's really kind of

the things i just spend my time focused on it's like okay so far you i and many of the people we know have been right about kind of the market dynamics that does not guarantee us that we're right moving forward and so you just want to make sure that uh that you're right over and over and over again for decades right that's kind of what makes you one of the greatest greatest investors it's not just being right this one time and so uh you know tell honor that uh next time she should just get some sharp elbows learn some lessons from you and move everybody out of the way but uh that's how i think about it where can we send people to find you danny or or find more about coin shares on the internet uh coinshares.com um it's actually you know growing into a really

nice site we we've got lots of really valuable valuable research there um i i'm not a huge Twitter guy. I'm Danny L. Masters, one series of letters on Twitter. I actually drive most of my traffic through LinkedIn, funny enough, which is, as you know, more of a professional network and less trolling, which suits me. Listen, we saw Steve Cohen get chased off the internet, basically, by trolls on Twitter. I'm definitely no better than him. If they can chase him off, they can chase me off. Awesome, man. Listen, thank you so much for doing this.

I think people will really enjoy this one and will have to do it again in the future. You're very welcome. Great to see you.