The Pomp Podcast - Travis Kling: The Secrets of a Crypto Trader

Episode Date: September 19, 2018

Travis Kling is the founder and CIO at Ikigai Asset Management, an investment firm focused on crypto assets. He previously was a portfolio manager at Point72 where he traded Long/Short Energy Equities.  In this conversation, Anthony Pompliano and Travis Kling discuss token structures, price movements and outlook, value accrual, the importance of BitMEX, and what needs to change for crypto to have sustainability.

What's up, everyone? This is Anthony Pompliano. Most of you know me as Pomp. You're listening to Off The Chain, simply the best podcasting crypto. Let's kick this thing off. Travis Kling is the founder and CIO at Ikigai Asset Management, an investment firm focused on crypto assets. He previously was a portfolio manager at Point72, where he traded long-short energy equities. In this episode, we cover a lot. We discuss token structures, price movements and outlook, value accrual, the importance of BitMEX and Asian algorithmic market makers, and what needs to change for crypto to have sustainability. This may be one of the best episodes we've ever recorded, so I hope you enjoyed half as much as I did. 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. Before we get started, I wanted to tell you about our sponsor, Block Estate, a security token project in the $200 trillion industry of real estate. They've partnered with Polymath and Coinlist Comply API to create one of the first tokenized real estate funds, and they have a unique buyback and burn model. To learn more,

visit blockestate.com. All right, guys, it's going to be an awesome episode. We've got Travis here, who's got a pretty interesting background and jumped all in in crypto. And you probably have some of the wildest ideas of what's going on in the market and kind of some of your strategies and stuff. So I think it's gonna be fun. So thank you for coming. Glad to be here. Appreciate it. Thanks for having me. I'm a little under the weather right now. Sorry for the hoarse voice, but we're going to be able to power through it here. You're going to be just fine. All right. So let's go through background, right? Where'd you grow up? Kind of where'd you go to school, education, and then kind of what'd you do pre-crypto? Yeah. Grew up in Texas and growing up in Texas, I've been out of college for 10 years and nine and a half of that was in energy investing. Right.

And so you really strayed really far from Texas, got it, got out of underground accounting, master's in finance, got out of school in 08, took the financial crisis in the face, was doing oil and gas M&A for a couple of years out of college in Houston, went to Magnetar Capital in 2011, doing long, short energy equities and non-control private equity and debt in the energy space. You know, pretty broad investment mandate, long investment horizon, highly liquid or totally liquid securities. I was there from 2011 through the middle of 15, so I was like the go-go years in oil and gas.

So when I joined the energy business, I was managing $250 million at Magnetar. When I left, we were managing $4.6 billion. So I had pretty massive AUM growth over that period of time. Left in the middle of 15 and went to .72 in New York, Steve Cohen's hedge fund. And I was running a $200 million long short book there energy and materials equities a little bit of commodity a little bit of options and um uh probably a good way to just easily segue into crypto here why why why jump into crypto yeah so like i'm not a tech guy i'm not a tech investor and i'm not like a tech person i'm not an early adopter kind of guy i'm not like a futurist kind of guy i've never been like that so first time i

heard about bitcoin was when silk road got shut down just from a fascination perspective like look at these crazy drug dealers that made this magic internet money to go buy drugs on the internet that's just wild um i joke i joke around with my mom all the time where i'm like you know mom it's a good thing that like i wasn't into drugs when i was a kid so i like grew up to be like an upstanding citizen but on the flip side if i'd have been into drugs i would have seen bitcoin early and i would have bought that shit in 2012 but um it's true same thing with video games when i was growing up i said the same thing with my mom too i was like you know mom i'm kind of glad you didn't make let me play video games when i was a kid which you didn't because

like now i read more than probably like 99 of millennials out there but then on the flip side it's like if you grow up playing video games and like somebody pays a hundred dollars for a magic battle axe and then you see bitcoin come along and you're like this makes all the sense in the world right absolutely um but anyways yeah so i so like i was reading about silk road just because it's crazy bitcoin is part of the story i i probably read like two hours worth of bitcoin and about bitcoin and my takeaway from that was um magic internet money there's a math problem the math problem is really really hard it controls the supply demand and drug dealers trust it to use it as money i'm like that's just nuts right so the mount gox got hacked a few uh like not long

after and to me that was like okay this is like not something i need to pay attention to yep because like i don't have any way to mitigate or price in the risk i wake up one morning somebody stole all my stuff it's like two strikes yeah and like being the like non sort of like like like you know hardcore computer guy i'm like if anybody's gonna get their stuff stolen it's probably me right so like i'm not into this didn't think anything of it fast forward the back part of 2016 price starts doing his thing i started reading more about it early 17 ethereum and the ico started going crazy i started reading more about it and i basically came back like from july 4th break last last summer and fell down the proverbial rabbit hole and just like started

spending all my time reading about crypto go to the gym listen crypto podcast go home sit on the couch in the dark read about crypto to the wee hours in the morning wake up do it all over again the next day and like i started stacking up like you know you're doing this self-study and like i really like behavioral economics and and like um game theory stuff when i was in grad school and in grad school i got a graduate degree in finance and like they hammer like efficient market hypothesis like when you're in school and then they like do a little bit on behavioral economics and that made no sense to me because it was like so obvious that like the world's not like markets aren't efficient at all and behavioral economics is like really what makes sense because

people because of fear and greed in the context of like economic decisions humans constantly make mistakes right and behavioral economics is kind of the study of that and so I did like a lot of self-study in school about that so then I circled back to crypto and it you know it loops in a lot of those a lot of those aspects and so I really got sucked into it I did probably four or five hundred hours over a couple month period of time. And I went to senior management out of the blue at the end of September. And I was like, look, this blockchain thing is going to be completely revolutionary. It's a once in a generation type of deal. And I don't want to be an equity long short portfolio manager anymore. I'm going to make a career change. That's awesome. All right,

so let's back up. You came from what I'll call like Wall Street institutions, right? So whether it was energy trading, kind of free, point 72, and then point 72. What is that like, right? So when you're inside of these organizations, how do they view technology? How do they view kind of these new asset classes when they kind of pop up and some of them stay some of them don't just just kind of talk about you know being a you know kind of more traditional institution looking out at you know technology and new asset classes yeah so i was kind of buried down in the um like i was just doing my oil and gas thing my energy thing i did i did a decent amount of renewables as well too so i was like kind of focused in that one lane um so you're not looking at you're pretty

much not looking at anything outside of oil and gas energy energy yeah yeah energy broadly was was like basically my career. And like, you know, I was like 30 years old and knew about as much about oil and gas as like any 30 year old you're going to find, right? Like that was just kind of what I did. And, and, um, but, but, but working in institutions like that, I think one of the biggest differences that I think I've definitely taken with me, you know, as I've moved into crypto investing full time is I think people that haven't worked at a hedge fund before think that it's like an episode of billions where it's like wolf of wall street or it's like boiler room or something like that and it's it's actually way less sexy than that and it's it's um it's very very process

oriented yep and especially especially at 0.72 they just they just have like you you become an an expert in how to build investment frameworks yep it's a machine yeah it's a machine and like in the same way that henry ford used to crank out model t's like you can crank out attractive risk adjusted returns on a repeatable basis like that and simplistically like the way i think about it is you build this framework and then you put a bunch of processes inside of the framework and then you put a bunch of tools you build a bunch of tools inside of the processes to help you execute those and in the same way that henry ford used to crank out model t's like you can just crank alpha like that and it's like making sausage you take a shitload of data you stick it in the

sausage maker you turn the gears and it spits out profits and you just do it over and over and over again and um there's um it's not but that just so we're clear right like that's not what people think is happening what you just said and then two is that doesn't sound very fun right because it's not human driven in terms of i'm making a gut call left or right it's much more we spend much time building what data sets we're going to do clean it structure it build the machine start stuffing the data through there's not a lot of dependence on the individual uh on the individual to have intuition or you know make mistakes or make kind of the the grand slam call right yeah so so generally speaking like humans are like pretty terrible at investing absolutely

absolutely and we have we have so many biases and we make tons of mistakes we get tired and yeah right and so like the term quantum mental got thrown around a lot at 0.72 which we've like totally adopted into ikigai asset management's like it's at the core of of how we've built our investment business um explain what that is yeah so it's just it's just the intersection of fundamental and quantitative investing or like said differently like harnessing the power of big data to help humans make investment decisions yep and and like simplistically it's like you ask yourself the question like what exactly is it that a human does better than a machine when it comes to investing and like the punch line is it's like not all that much and and like this war has been

waging for over a decade now in traditional asset classes absolutely and like the war is over dude like the machines have like fundamentally beat the humans when it comes to like traditional asset class investing just look at the profitability of a place like renaissance or jump trading or or de shaw right and um um and it's because the machines are not only quote-unquote smarter but they have the ability to do much more analysis more consistently over very long period of time never get tired yep never don't make by no no biases yep um you know can crunch an incredible amount of data then you start layering in like you know machine learning type of stuff and this that and the other but but but but the interesting thing about that you know the

quantum mental aspect as you move into crypto is a machine is only as good as as the the data that you're feeding it right like the data is like the food for the machine and and if if the if the investment decisions that um that the asset class is presenting are not like quantable like they're not able to be sort of fed into a data stream format then a machine's not gonna be able to make very good calls yep and like in in my opinion where we are in crypto assets um we're not far enough along and the most the most foundational pieces of this ecosystem haven't been put in place yet and so because of that machines like um don't do that well in in that that kind of environment and the data has a lot of noise in it, right?

And, like, if I'm trying to run, like, a stat arb strategy and, like, a crypto stat arb strategy in, like, September 2018, and I'm, like, it's a strategy that was back-tested against price action in, like, the fall of 2017. Like, what the hell does the fall of 2017 have to do with September 2018, right? This is such a drastically different market because we're so early and, you know, we're still having these big seismic shifts in the way the market's acting, but, you know.

Well, I think what you're talking about here is there's two issues. One is the quality of the data or the reliability of the data, right? So there's just not that many market cycles to look at. There's not that many kind of great data sources that you have a high level of confidence in. And then the second thing is there's also a lot of investment opportunities that there's no data. So early stage investing is really, really hard to quantify. And the way that humans do early stage investing is like I can't have a view on Ethereum without having a view on EOS. and I can't really have a view

on either two of those things without having a view on Hashgraph. And when you think about that spectrum of investing, a machine's like not that great. It like, like humans are really good about taking this really broad set of data and kind of like taking this unrelated thing over here and being like, this kind of helps me think

about how this is going to be. And like this other thing over here that's got nothing to do with crypto at all. Kind of like, it's like, oh, I read about the history of the internet and like it helps inform me, and form my decisions about how I think some of this is going to play out. Machines don't do that that well.

Yeah, multi-dimension thought process and decision-making. Right. And so the way that we've built it at Ikigai now, we've got one systematic strategy. We've got algorithmic market-making that's run by a piece of technology. And everything else is a human at the end of the line pulling the trigger. But you're pulling the trigger. You're making investment decisions informed by information

like quantitative type of data and things that look more like quant strategies that help inform the investment decisions that the human makes. Absolutely. So let's go back real quick before we jump full in into crypto here. Let's talk about 0.72, right?

Obviously, you can only say so much about it, but walk us through what makes that place special and what makes that place different from the repeatability of the returns that are able to drive for decades. Yeah. Culture of excellence, incredibly high caliber people from top to bottom, a stunningly strong operational framework so that as an investment professional, like the operations of a hedge fund or the foundation that you're standing on. right? And you're trying to build a house on top of that foundation. And like the foundation at 0.72 is like the most rock solid slab you could possibly imagine, right? I mean, there's like,

I think there's like 1000 employees at that firm, right? And, you know, I don't know what the ratio of like back office to front office is, but it's like, two to one, three to one, something like that, right? So you're standing on this rock solid foundation, you've got every every resource imaginable at your fingertips and and um um you just it kind of feels like you're playing pro ball it helps you kind of elevate your game and um you know it's a great culture and a great environment because the person next to you or down the hallway is not only world class but they're here to eat your lunch right yeah i mean it's not i feel like people sometimes think it's it's not it was not like this like it wasn't like it wasn't like cutthroat it wasn't like nobody's trying to like

stab somebody else it was not like that at all so i can't speak to like old sack right like early 2000s sack you know you hear stories about that but i joined in the middle of 15 a fantastic place to work loved it that's awesome yeah it's great too when you can leave a place like that not only say hey i learned a bunch i worked with great people had great culture and couldn't speak more highly of it yeah right so that's awesome um all right so what was the reaction from you know either people at 0.72 or just wall street in general when you say hey monk short equity that's great i'm taking the full jump going into crypto are people excited for you are people thinking nuts are they trying to follow you down the rabbit hole what's going on there um probably a d i'm

sure probably not to my face i'm sure many many many people thought i was completely insane you know my mom thought i was crazy right my mom's always think that you're nuts until you prove that you're right and then they told you you're gonna do what what is this they believed in you the whole time all i read about is it's for drug dealers i'm like that's not not true but you got to look out in the future my my mom's like a small town texas mom i grew up in college station texas my mom grew up in college station texas yep my mom still lives in college station texas so like you know it's it's um no no but but but but generally speaking um i think people probably thought i was it was early yep um i didn't i didn't think it was that much of a risk

to be it didn't feel it didn't feel risky to me it was there so like again not a tech investor not a seed stage investor that wasn't my career path and um the only other time that i felt like i did when i really dove into crypto and started understanding it was um the first time i took an uber and chicago when i was living in chicago chicago got uber super early it was the second city after san fran to get uber so i think the first time i took an uber was like you know january 2011 or something or 2012 something like 18 months after they started or something nobody'd ever heard of it i don't remember how i heard of it downloaded the app black car comes and picks me up from my apartment i go to a store drops me off the store i'm

standing on the sidewalk drives away i'll never forget it and i remember i was like that is going to change everything and i was positive about it positive about it and sure enough like you know you watch what uber did obviously over the coming years and i used to joke around like the day i took i took that uber i should have just quit magnetar and walked into uber's office and been like yo i'll push microsoft excel for you like i'll do biz dev whatever just sign me up pay me in stock right would have been a good career move um uh beyonce's got a got a line pay me in equity yeah yeah exactly right i would have been probably the the 25th dude you know whatever at uber and like that would have been a nice move only other time in my life i felt like that was was when i

really understood crypto and i dug into it and i just didn't have any doubt in my mind that this thing was going to completely change everything and um specifically i'm super unsure about how that's going to happen it's just i'm directionally broadly uh highly convicted as bullish as you can be and i was like it felt like just like a great bet to go make in terms of like betting my career on it yeah it's this idea of uh confident in the trend details to be determined yeah right yeah Yeah, so what I tell people is there's a non-zero chance that Bitcoin could be Netscape and Ethereum could be AltaVista. And we haven't seen Google and we haven't seen Facebook, Amazon, Netflix, Uber yet. And there's a non-zero chance that Bitcoin could go be the global immutable decentralized store of value in the world reserve currency.

And 1BTC could be worth $450K or $2 million or $3 million or pick a number. And everything in between. Yep. And I'm really not sure about specifically how that's going to play out. And so everything, the way we've built Ikigai is to have malleability in our mandate and to have a clear look into how this thing is going to play out so that you can make investment decisions accordingly. And it's like you just go with the strong opinions, weakly held thing, right? Yep. You intake as much information as possible.

You assess that information. You analyze it. You make investment decisions based on it. And when something new comes along, you change your mind, dude. You change your mind. How do you do that, though, right? So you've got conviction on something, you've got the strong opinion, right? You know that it's loosely held, but what are the things that you look at that would change your mind, right?

Is it data? Is it conversations? Is it gut? Like, what are you looking at that allows you to change your mind? Not necessarily on a dime, but pretty quickly to, you know, go after a different opportunity. That's a great question. It's so many things. Yeah, it's so many things. I mean, coming from the world that I came from, I do latch on to any kind of data that I can. it's pretty natural to me probably done more work in that than um certainly not everybody like hats off to like a nick carter right like the guy's a beast with all that stuff and and you know brendan

bernstein's great a lot of those guys but but i definitely have a tendency to just take that like anything i can quantify let me try and quantify it and maybe i can't draw an investment decision from it but let me at least have it let me give me as many tools in my tool shed as i can get right and then this space is very big on narrative investing right so you kind of track these narratives and start thinking through that and you and you have to understand how these things are developing um like a year ago we were talking about bit like like oh we're gonna use a bitcoin to buy a cup of coffee remember that oh it was a year ago right oh that's what we're gonna use bitcoin for okay got it and then you just like like as people realize that wasn't gonna happen

anytime soon it's like oh no it's digital gold it's digital gold right i don't know austrian economics and i get it right and like and i get that and then it's like you know ethereum you know world's computer right oh it's a decentralized computer blah blah this and the other oh it doesn't scale oh shit what else can we use it for oh oh yeah but it's gonna scale because we got we got casper coming oh wait we don't know casper is not close oh oh no we can say the world's electricity because we're gonna go prove a stake right right all right but but but even from the very beginning like when i really went down the rabbit hole just because i i am a really cautious guy like as a like as a investor and as a human i'm cautious like i'd never go skydiving or like i'm not

i'm not about that life whatsoever and as an investor i'm like i'm very like cautious in the way that i invest as well too and so the hundreds of hours that i spent in the beginning before i quit my job a lot of that time i spent looking at all the problems in this ecosystem i was like why is this thing not going to work why is it not going to work why is it not going to work and i was looking at you know proof of work like this is obviously not going to work on a large scale and then you look at this proof of stake thing i'm like but it's not as secure but then you start really digging into it and like a lot of the cryptography like people have been doing proof of stake is a concept and cryptography has been around since the 90s like it's not a brand

new concept a lot of this cryptography like directed acyclic graphs people were doing that work in like the 70s right and now you're just trying to weave it into computer science and so like that gives you a little bit of comfort that, that, um, um, like you're not just like trying to pull this stuff out of thin air. Well, it's what makes it so interesting to the smartest people in the world, right? Is it is the true like polymath type environment where you got to have knowledge and some kind of experience or perspective from a whole bunch of different disciplines and you pull them together. And it's not just, let me pull, you know, economics, computer science, uh, geopolitics, and like the history of money

on an even basis. I actually might only pull 10% from economics and 50% from psychology and 30, whatever. And so how do you build that into a skillset that then not only helps you understand it, but then you can deploy capital against, right? And sometimes those two things actually aren't the same. And I think that's part of what draws so many smart people into this space is there's problems that need to be solved and they're not solved yet. They may never get solved or they may get solved tomorrow right and it's it's the puzzle of all puzzles right because there are there are so many aspects to it and and um yeah that's why i mean it gives you so much to chew on right and um if you figure it out obviously from an economic incentive perspective right like

if you if you get it right like you're gonna get you win the game yeah yeah you're gonna get paid on that so um and and like you know not to get like cheesy but like the societal aspect of it as well too um was super important to me because like ikigai yeah so let's talk about what you're doing today and kind of where the name came from yeah yeah so so ikigai ancient japanese concept that means reason for being super old where it's like 1200 year old where there's books and stuff written about it if you google ikigai it's um you see this like venn diagram and the venn diagrams like what you could what you're good at um what you like to do what you deserve to be paid for what the world needs and i just came across the concept randomly like a year ago and i really

liked it and like to be honest with you is i had a career in hedge fund investing right and i was i like doing it i was pretty good at it i made a fine living doing it but like the world doesn't need another hedge fund manager right the world doesn't get another hedge fund manager the world's gonna be just fine and uh some people would argue we could lose a couple and be okay and be just fine right but like but the world needs this technology and and and the technology is a platform to go affect societal change for the good and like i'm much more of a realist than i am like you know you run across a lot like techno utopians you know the type of person in this space a lot of those dudes right um but but but um i'm much more of a realist but what i saw

was um society starting to to recoil from these monopolistic abuses of power at various different levels and you start seeing these trends right it's like brexit donald trump getting into office um you know hyperinflation nsa's nsa stuff like um uh uh facebook election ads right um black lives matter uh harvey weinstein um cambridge analytica like there's a common theme that runs across all that and you just have to look at it at all the surveys of millennials millennials are the generation to have a deep distrust of governments large financial institutions large technology companies right like it's like facebook takes your data and they do shitty stuff with it google takes your data and like they do they like don't keep it safe right and like

apple like takes your data and like you know like makes these other products and they hook you in and they like box other people out so it's like it's pretty monopolistic the way they do stuff and like stuff gets hacked all it's equifax right like what i mean look if you are under the age of 40, you might as well just admit or give into the idea that your data, your personal financial data and your, and your actual personal data is floating around on the internet somewhere. And if somebody's got money, they can buy it. Facts, facts. You can get like, you can get like 500 credit card numbers for like $5 on the internet, like on like whatever black market stuff. But, but you know, you know, you look at, you look at, um, you look at just millennials in general and,

the same way that that polls are showing you how much that that distrust is the the older you are the less you think bitcoin makes sense the more you think gold makes sense the younger you are the more you think bitcoin makes sense the less you think gold makes sense so you fast forward a couple decades from now and millennial like we're all like you know 50 and like what do you like what do you really think is going to happen yeah i mean look i uh we go and talk these institutional investors all the time right and i always tell them i said listen if you if you don't take anything else from this conversation, understand that people under the age of 35 have an amount of their net worth in this asset class that would make you just absolutely disgusted, right? I'm

talking mid double digits in many cases where we're talking, you know, 35, 40, 50, sometimes even 70, 80% of their net worth, their total net worth is tied up in digital assets. Now, some of it is they put a little bit in and it exploded in value. And so it grew. But I also know a lot of people were taking, you know, 50, 60, 70% of their salary and they're, they're still buying. Right. And they just, it's a store value. It's a medium of exchange. It's the new stocks, the, you know, the commodities. It makes sense. It makes sense. It just resonates. And problems are going to get solved. The hiccups with the industry are solvable hiccups. Absolutely. And also it's the opportunity cost, right? So, you know, you know, if you think of

your, if you're an institution, you got to hit your six to 8%, you know, kind of actuary assumed rate of return in order to pay out the millions of people who are depending on you. If you're an endowment for education or you're a pension for retirements, all this stuff, you're not hitting that today in most cases, right? Well, if you can't hit six to 8%, where do you go? Uncorrelated digital assets is one area to look. And so millennials are saying, even if I could hit six to 8% in the public markets, debt, real estate, all stuff, that's not interesting to me. I can take a bunch of risk. I'm young. So where do they go? They go for the six, 700, 800% annualized returns that they just saw. And so they're going to continue to do that, right? And so it's all

of these forces at work that drive a huge amount of capital from a very specific demographic into digital assets everyone else is going to fall they have to fall yeah right it may take longer but it's going to happen yeah we internally we talk about it um it's like musical chairs and um sovereigns they have their game of musical chairs that they're playing and like institutional investors right like endowments um state state pension funds state plans things like that it's like a game of musical chairs and like bitcoin just stopped music right or they're in bitcoin's in the process of stopping the music and like nobody's really sitting down yet you hear whispers right like there's some people in the middle east buying like a lot of bitcoin right

you hear that right like there's like you hear whispers about stuff from a sovereign perspective like we know there's definitely some like large financial institutions that are definitely sniffing around and like you know maybe got a little exposure here a little exposure there and it's like you know maybe something crazy happens like like italy gets kicked out of the eu right or and like uh the european union starts looking like it's like questionable which is like not not a there's a non-zero chance that's a totally non-zero chance over the next couple years totally non-zero chance and then all of a sudden it's like you hear that like the swiss sovereign wealth fund like it's got their long some bitcoin right so now now switzerland just

sat down right and there and there's not that many chairs right if you got 20 you got 21 million bitcoin a couple million of them are lost right and and so now only 17 million have been mined right yeah and and all of a sudden it starts looking like um it's it's what we're talking that it's irresponsible to not be involved and the reflexivity and the price action when when some of that stuff starts catching on the potential i mean it's going to be breathtaking if some of that stuff plays out look we actively tell these institutions right it's the best performing asset class for the last five years if you add one percent of digital asset exposure into a global 60 40 portfolio the returns go up by you know anywhere between 100 to 300 basis

points, depending when it was. And the standard deviation of risk stays about the same and you get a double digit increase in the Sharpe ratio. The second that you start looking at that, where else can you get that? Right. And so it's not about how high can it go. It's actually about managing risk of your overall portfolio. And if you have zero exposure to the asset class, you have to immediately get off zero. Right. And we literally, I mean, you can imagine talking to a, you know, 50, 60 year old CIO who manages billions of dollars and telling them get off zero. Right. That's the message right now. And I think to your point, there's people who are starting to do it, but when, when it actually kind of the, the dam burst, right. Watch out. Right. Totally. Right.

All right. So, so let's talk about some of the things that are happening kind of pre before that happening. Right. So right now, um, I know that you're, uh, you've got some really interesting thoughts around like BitMEX and some of these, uh, markets that are already here that people are already using today. Like, what do you think is so interesting about those types of companies and markets that are being built. Yeah. So, so earlier you were talking about like, how do I change my mind? I mean, I mean, part of it is, is you create all these processes around in taking every aspect of information that you can, um, about the, the development of the space and assessing that information and putting it into a, you know, a broader kind of mosaic framework

to help make investment decisions. And a lot of that is just thinking about market structure And year to date, you know, the two 800-pound gorillas that have shown up from a market structure perspective year to date is BitMEX and the Asian Algorithmic Market Maker. Let's go to BitMEX first. So explain what is BitMEX, why do you think it's the gorilla or one of the gorillas? Yeah, so BitMEX is a non-licensed exchange or unregulated exchange. They trade a synthetic Bitcoin future. You fund only in Bitcoin. You can get up to 100x leverage long or short on Bitcoin.

It's been around for a few years. It wasn't that popular, especially in 2017 when everybody was going shitcoin hunting on Cryptopia and KuCoin and Binance. But as the market's woken up year to date and realized that all that stuff's worth zero, So BitMEX has become, you know, I mean, I think they've got like two or three times more volume than like the number two exchange. And you can get massive leverage on it. So, OK, so I really want to talk about this leverage thing. I don't think a lot of people understand, one, what is leverage and how do people use leverage in a positive manner? Right. And then what can I do to the market on the negative side as well?

Yeah. Yeah. So, so specifically in the context of BitMEX, like if I put, if I put one Bitcoin long with a hundred X leverage, that means I'm getting returns like I'm long a hundred Bitcoin. So you, you take out of your wallet or your portfolio, you take one Bitcoin, which is whatever, six, $7,000 a day, and you put it down and say, I'm going long. I think it's going to continue to go up in value as the bet, right? But you're getting credit for actually having put down 100 Bitcoins and saying these 100 are going to go up. Why does BitMEX do that? Because humans love to gamble. All right. Yeah.

And so what is the economic benefit to you when you put this 100x leverage on and what is the potential negative side effect? Right. So if the price goes up. If you're right. Right. then you're generating returns like you're long 100 bitcoin only putting up one bitcoin worth of risk however great risk return profile however specifically on like the hundred the hundred x example the way the margin works is it doesn't have the way normal margin works like in tradition

like in the real world it's a function of of how much money you have in your account and as long as you have money in your account you continue to make like at the end of day you make there's margin calls and you you like make it up if you're losing money every day to kind of stay even in your account you can basically pay down the margin you can keep your losses right and you can stay in the position forever the way it works at bitmex is um uh the the leverage is only uh specific to that individual trade so if you have 100x leverage on you lose one percent you automatically get stopped out and you and you lose the one bitcoin that you put up or if you're long 25 you know if you're long um um like 25x leverage then you get stopped out at like you know 375 bits whatever

the number is right and so great deal for bitmex oh yeah right arthur hayes man i mean just just absolute savage right and just printing money right now one of the most savage guys in the space period yep complete complete macho man randy savage look and we talked about it before uh i mean the part that i love is not only that he's created these products and he's got him out there and people are using them but but he is out pounding the table saying we have them right so he's on twitter and he's saying look you you know good traders go both ways yeah right up and down let's see what you got yeah and and he he introduced um you know so he started rolling out uh new um new instruments right so you got directional uh eth exposure you can get up to

50x leverage on ethereum and you get paid in bitcoin you don't get paid in theory and if you if you make money on the short side you get paid in bitcoin so you're short in the theory and making money in Bitcoin. Same thing, which most of the shorts love. Yeah, of course. Right. You can you can now go long short on Ripple, Tron, Bitcoin Cash, EOS, Cardano, and with varying up to 20x leverage on some of them 50x on on others. And and quantitatively, a listing on BitMEX has been the kiss of death year to date. So I was just gonna ask you, what do you think this is doing to the market? Well, what it's done is it has given a venue to now have true price discovery, two-way price discovery. Because previously you could only go long. You could short on Bitfinex,

but you didn't have enough liquidity. And now there's a ton of liquidity on BitMEX right now. So you can really express it, except, which I'm glad you brought this up, it's the worst kind of liquidity. Why? Because it's liquidity, except there's extremely sophisticated quantitative investors wall street guys like like like your old world yeah yeah like not specifically 0.72 but like those types of people like those types of folks right like the best in the business and from a quantitative perspective um you know i don't want to name names one of them rhymes with lump the other one rhymes with b e raw so these guys so these guys are doing liquidity modeling on BitMEX. And the way that works is they call the network three

times a second. And by calling the network three times a second, they're pulling down very minute volume data. And then I'm not 100% sure, but I think how they do it is they can see where the price gets executed relative to the specific volume at that moment relative to the bid ask i think they can back into the amount of leverage that was put on for that specific trade at that specific moment three times a second wow and then they're able to then map out where the stops are and then they you can map this out and they see where a bunch of stops start getting stacked up on top of each other and foot on the gas right and it's just like a jenga game except except these really sophisticated quants are the only ones that can see the jenga tower

everybody else just thinks it's like oh we're just there's no there's no blocks being pulled out yet but they see the whole thing and then when they see all these stops that are that are could potentially get pushed over then all they got to do is go and give the jenga pile a little nudge and then you run through all those stops or you and and and so if you just look at the price action over the last handful of months like it's so obvious that like that's the market structure that's going on and um and that's when you're seeing it if you're a retail investor you're seeing a immediate within seconds 400 price jump right right you're basically you're tipping it over yeah yeah that's right and they and everybody gets stopped out and then also bitmex bitmex works

just fine until you really need it to work and then it doesn't work anymore because it gets shut down because it gets there's too many people trying to trade and then all these stops get run out and then the really smart guys take all the really the retail guys money so that's it that's that's terrible for the long-term health of the ecosystem which is why i wanted to talk about it today because it's really like like you know those vines that wrap around the tree and they kill the tree if you let the vine sit there long enough like that's like exactly what like that type of stuff is happening right now. And so it's really to the detriment of the long term health of the ecosystem. I'm guessing that it's it's untenable in the medium term and something's

going to happen. I don't know what's going to happen. But is it more so like a regulatory type solution or is it just that more people come into the space that are smart and then they all kind of start commoditizing some of this and you get some relief? Well, the way that I think about it is like if the quant is the bully and like the retail guys like like the small kid in school like every day the small kids like walking into school and getting punched in the gut by the bully and he gets his lunch money stolen after a while like you just stop going that way right and like that's exactly what's going to happen like they're just going to clear out all all the retail money it's just going to be like quant on quant crime which i think it's like oh this is all happening

traditional asset classes quant on quant crime has been happening for like a decade now in traditional asset classes and so um so so that's a problem and the other thing i want to talk about is is asian algorithmic market making which is like the other 800 pound gorilla which is like also the vine that's wrapped around the tree that's like gonna kill the tree if you let it keep going all right so so let's start with just what is that yeah yeah so so um i don't mind like let's go let's get the names uh let's see here this one rhymes with uh left free he Yeah, there you go. All right, so there's a couple of them.

There's about 10 big boys. There's about 10 big boys, and they don't sit in the United States. They're not United States citizens. Their businesses aren't domiciled in the United States, so they're out of the long arm of the reach, the long reach of U.S. regulators. They've got some protections.

Which means that you really can do whatever you want to, and it's not illegal, and we call it, can I cuss on this? Yeah, of course. We call it fuckery, because it's not illegal. It's fuckery. and and um and fuckery is a combination of manipulation and it's it's like morally it's like morally it's stuff that you just wouldn't do right and like morals is a cultural

thing yep so like i'm not trying to like look you got a different set of cultural values in me and like i mean if i was a chinese guy that like you lived in china my whole life and like i could start printing money like that like i might do it too i don't know but like um you could view it as actually hey i'm getting back at you you guys been messing with us for you know decades whatever right like yeah but but like that's what's happening and so like it's one of the main reasons why the the asian ico market right now as we sit here today has decoupled so much from the u.s ico market u.s ico market is like almost ground to a halt right yep got like a small percentage of deals that you had earlier this year well it's almost like the the bully uh you know

student example you gave earlier it's like the teacher showed up in the hallway right it's like hey knock off knock off all the fuckery yeah yeah yeah exactly that's a great point that's what's happening in the us ico market so now you've got like like asian ico xyz token they go raise like 40 million dollars in their ico they take like 10 of the tokens and they just give them to the algorithm a market maker and not only do they give it to them they also give them like six million bucks in eth too and then they get a coin listed on an exchange and then they start wash trading they start wash trading back and forth with each other all right so uh most people aren't going to know what wash trading is right uh let's start from kind of the beginning of uh if you're one

of these tokens you did your ico when you get listed on an exchange you need liquidity right so uh there's a couple ways to get liquidity on you know in your token or kind of the trading volume on a daily basis one of them is wash trading what is that yeah so that's you have you have multiple accounts set up on the same exchange and you're buying and selling to yourself from yourself so you own all the exchanges or all the accounts on the exchange that are doing the high volume trading for the day yeah yeah that's right you're just executing trades amongst yourself with multiple multiple accounts yep and that gives the illusion that there's volume there's real buying and selling that's happening and by the way they're just driving price like

you're literally just like manipulating price to get to a certain level and these guys will contractually guarantee a volume and contractually guarantee a market price like like in writing again it's not illegal over there so it's like it's fine they get paid hell of money to do to do this and then even crazier than that they'll get in like the they use like we chat over there we use telegram right everybody's talking about it so they're in the we chat groups and they're listening to all the technical indicators like ta guys they're talking about the different um indicators that are like like in this particular crypto and they listen to whatever people are talking about and then they just start painting a specific technical indicator so like oh here's a

oh it's a bull flag oh we got a bull flag coming up oh we got a you know whatever a rising wedge like this that and the other i mean but it really is a uh it's a psych it's psychological warfare against retail investors to some degree it's terrible yeah yeah it's it is the vine around the tree that will poison the tree it is to the detriment of the health of this ecosystem as a whole now the scary thing is that the exchanges are in on it cz's in on it right they're all they're in on it because in a bear market they got to have these guys they need the volume they They've got to have them. And if an XYZ token gets listed and they don't have an Asian algorithm,

they market maker on the back end, then the token, there's a good chance it's going to crash as soon as it gets listed because the private presale investors that got into 80%, 95% discount, they're dumping immediately. But the crazy thing is you're giving 10% of the tokens away and you're giving like, you know, whatever, 10% of the raise away to catch the volume on the back end. you see how like not good that is right and and how untenable that is and like not healthy for the overall like long-term well and it also uh it is serving the number one use case for crypto today which is speculation yeah right i mean that's literally what is happening here is they're taking tokens and they're creating new speculation tools or products and people are using them right

for speculation but not for the adoption that actually drives long-term long-term sustainability Right. And the individuals or the entities most likely to make a profit from from that situation are the ones that are the most sophisticated, the ones most likely to lose money. It just like like the more retailish you are, the more you're guaranteed to lose money in this process, which is just not good. I'm I am hoping and I don't know, maybe CZ, you're going to hear this. Well, we'll tweet. We'll tweet it to him. He like you. You know, he's a CZ. He retweets me a lot. We've never really talked to in depth.

I hope he hears this. When we get out of this bear market, which I don't know when it's going to be, but you've got to cut the fuckery, man. You have to self-regulate. You have to self-regulate. And you've got this wash trading, the price manipulation, painting TA signals. You can't have that. Here's the one thing, though, that I think is really interesting.

So the one thing that I'll say to defend some of them, right, Because I think that you're probably right in that a lot of this is going on across exchanges, right? I think that it's just what they believe, whether they're right or not, needs to happen for the volume to be there, bear market, all that kind of stuff, right? So let's just put all that in a box and set it aside, for example, or for a second. The one thing, though, that I think encourages me that that won't be the long-term strategy is all the tokenized security stuff, right?

So you start to see a bunch of these guys saying, you know what? Look, the utility token stuff, speculation, it's going to keep happening. We're making a bunch of money today. but long-term regulators are going to step in in different jurisdictions they're going to draw the rules and we're gonna have to play by the rules and so they say oh tokenized securities i don't know right and i could be wrong on this i don't know if they're going to be able to do a lot of that wash trading etc in the highly regulated tokenized securities world like they can do it now maybe they get away with a little bit of it but you know that gives me hope that there's kind

of a light at the end of the tunnel and and uh tokenized securities will actually make this a much more kind of traditional um market i agree with that yeah and none of that stuff can happen like you can't wash trade on on gdx right you can't wash trade on bitfinex um and they've got all kinds of technology to catch you yep and like if you do just a little bit of it they will kick you off for sure so like ikigai so we have an algorithmic market making strategy that makes you know makes money off buy buy and sell spreads and very liquid tokens and we also provide u.s regulatorily compliant algorithmic market making as a service to tokens so if you want to do it like in a regulatorily compliant way and it's just buy and sell it's just a 24 right we're the 7-11

we're open 24 hours a day seven days a week nice piece of technology that's sitting there and if anybody wants to come by or come sell we've got a piece of technology that can easily execute those types of things and you know you're not manipulating price you're not doing wash trading you're obviously not painting any kind of like ta signals or anything like that because you do need a liquidity provider i mean look at traditional asset classes they have i mean it's an it's an enormous business. Liquidity providers is like a multi-billion dollar, many, many, many billion dollar a year business. And so that's not going to go away. You just need to do it in a manner that doesn't bend over the retail investor, right?

Absolutely. I completely agree with that. Before we move on, I want to tell you about our sponsor, Block Estate, a new security token project in the $200 trillion real estate market. They've partnered with Polymath and Coinlist Comply API to create one of the world's first tokenized real estate funds. Tokenization is the process of creating a digital token that represents ownership in a real world asset. You've heard me say it before, but a clear use case for this is real estate. Block Estate aims to bring increased liquidity to this massive market. We're really, really thankful to the Block Estate team for their support. So we'd appreciate if you checked out their website at blockestate.com to learn more. If you're intrigued

by what they're doing, feel free to reach out to them or give them a tweet on Twitter. Thanks so All right. So let's switch for a second and talk about the valuation of digital assets, right? You know, today, I think that there's probably much more information, much more kind of theory around how do we actually use data and fundamentals to value individual assets? How are you guys thinking about this? Where do you think we are in terms of the maturation of, you know, valuation methodology for digital assets? Yes, this is a topic near and dear to my heart. Like I, i pretty much stopped doing anything other than valuing stuff when i was like 19 years old like first upper level finance class like my junior year in college it's pretty much all i've

done since then done in a bunch of different asset classes done in super liquid stuff done in completely illiquid stuff um up and down the capital structure and so like when i came into this space it was incredible to me to see how early it was in thinking about like if i buy a crypto today, am I paying a lot or a little for it? If I buy Bitcoin today, am I paying a lot or a little? Well, the price is $6,500. Well, that doesn't tell you if I'm paying a lot or a little for it, right? It's just a price. When I think about like back to my old career path, like if I'm, if I want to buy a share of ExxonMobil today, am I paying a lot or a little for a share of ExxonMobil? I've got like 30 different tools in the tool shed to help me understand whether or not.

And the way that you're coming to that conclusion, traditional markets or in the digital asset world is what is the price and what is the value of the actual asset? And is it above or below the value of the asset, the price I'm paying? Yeah. Price is not value. Yep. Yeah. Price is what you can buy it for today, but it, but, but you need some sort of relative valuation framework to think about, is this a lot, is this a, am I paying a lot, you know, relative to historical? Am I paying a lot relative to other assets so you start needing to have this like uh you know a homogenized framework to start thinking about these kinds of things and in traditional asset classes there's all sorts of stuff right i got like assets you know metrics based on assets and revenues and

cash flows and earnings and growth and like you know if i want to buy a share of exxon mobile like you know i can take like my oil price assumption plug it into my model there's like multi-factor models where where you start breaking apart a stock and like it's like you know you know this stock is like a function of like it's a momentum stock or a value stock or it has high leverage or like you know there's all kinds of different valuation metrics and then like i stepped in this asset class and and i've read like you know probably 80 90 percent of the things that have been written about valuation in crypto period like i've read the vast majority of it nothing has been written about about crypto asset valuation that's older than like 18 months old

which is crazy, right? Because like Benjamin Graham wrote The Intelligent Investor in like 1949 or something, still one of the most like important books on equities investing period. And when people look at PE ratios for the S&P 500, you look at them like 60, 70 years back in time. And you're telling me nobody's written anything that's older than 18 months old, talking about crypto asset valuation. So I started being like, well, like, how do we think about value in this asset class? Do you think it's important to have the traditional market valuation understanding going into the asset class? Or do you think that there's value in people not having that

historical context? I mean, I'm biased, but. All right. So what do you think? I mean, these are, these are public instruments and they trade every day. Yep. And I wake up every morning and I can buy or sell my entire universe every day and not being involved in a specific name on the long or the short side is in and of itself a decision, right? That's a position to not be involved. if I'm a tech guy, like if I'm like a tech bro out of the Bay area, it's like a developer or whatever. Like I have no understanding of that framework. What percentage of people trading crypto do you think have read the intelligent investor? I don't know, man. Way less than 1%, right? Less than 1%. Yeah. Wow. Yeah. You know, maybe, I don't know, 1% maybe. And even, and even,

and look, God bless those guys because they had the vision for this shit that I didn't have. Like I was there, I was like slinging long, short energy equities when these guys were like all in this stuff so like i really appreciate that yep and different skill set different perspective yeah and same thing with the vc guys right like i really appreciate that perspective as well too but like the way vcs invest is you make 10 bets seven of them go to zero the eighth one breaks even ninth when you make two or three times your money the tenth when you make 50 to 100 times your money the best the best vc firms in the world they do like one and a half standard deviations better than that like the shitty vc firms do like one and a half standard deviations worse than that

But like that's VC math. Right. And it takes three to 10 years for that cycle to play out. So just imagine the skill set that you get investing in that type of world versus investing like I wake up every morning, I can buy and sell my entire universe. And like and you have data to analyze and you have data to drive decisions, whereas a lot of the venture stuff, especially early stage, you're betting on people, you're using intuition, You're going after a whole different set of criteria on a yes, no decision versus the kind of daily liquidity data driven, you know, liquid market. Right. Yeah. And so and so that that all feels feels comfortable to me. And so I started looking around for how to think about crypto asset valuation. And people like to use like total addressable markets, an easy one, right? Like gold's like seven and three quarters trillion dollars.

So if Bitcoin gets half of that, it's like $775 billion. That's up like, whatever, like five times from here or more from Bitcoin. Divided by how many Bitcoin. Yeah. So that feels like, okay, that's kind of helpful. And then people started realizing that network value should be a function of network activity. And transactions per day, active wallet addresses, even things like community vibrancy metrics, which is what you know it's like uh github yep github commits github stars lines of code written

line you know net of lines deleted people were looking at like slack channel members for a while telegram members that it's it's way too easy to game that and there's noise in all this stuff which is like a big problem with it right because it's not again back to like our quantum mental approach and trying to take in as many different sort of you got to use all these different tools in the tool shed so it's like i can't go hang my hat on like oh i've got a strategy i just wake up every morning. And like, if there aren't any, if there weren't enough transactions on the Bitcoin network yesterday, I'm sure the, like, it doesn't work like that. Right. But it gives you something to try and help frame the overall mosaic approach to, to, to evaluation. Um, so here's a controversial

thought for you. Uh, I'm biased because I come out of this world, but I actually think that a group of people who have the best skillset for, uh, investing in trading in, in the crypto asset world is people who worked at, uh, on growth teams at large technology companies, because they're used to the multidisciplinary approach around statistics psychology user interface community growth you know all the network effects all this stuff and they and they brought it together to drive growth of these assets and so there was no price attached right so it's really hard to say you know facebook or twitter or whatever hey our network value is x and here's our stock price there's none of that going on but i think that the jump from that basic understanding to what

price should do is really easy compared to somebody who doesn't have that that understanding from a ground perspective completely agree glad you brought it up because i want to unpack that because like what what your background is is um a boots on the ground experience of of metcalf's law right which which people have taken metcalf's and try to apply to crypto asset valuation a lot and um and there's some truth there and there's also a lot of lies in there as well right but by taking that one principle and trying to apply it yeah well true true metcalfs which is which is the value of a telecommunications network is directly proportional to the square of the number of users true modified metcalfs has never been shown to accurately describe the value of anything but

in 2013 i don't know if you've read this paper or not in 2013 uh uh some guys came out i think metcalf and bob metcalf himself was actually involved in this they they put out a paper or either 13 or 15, where they, they introduced this modified Metcalf concept called the netoid function, which is an S curve shape, which makes total sense, right? Because it's gonna, you're gonna like level out, right? Cause like, if I've got five telephones in the world and you add a six telephone, the amount of value that went up is totally different than if I've got a billion telephones and I add the billion in first telephone, totally different, right? So it's this S curve, netoid function. So, so, so this academic paper introduced the netoid

function and then which instead of being true metcalfs it takes um it introduces this virality factor concept and then introduces like um the percentage it adjusted for the percentage of users that have adopted relative to the total number of users that could adopt and it introduces this s curve and then they showed the netoid function to accurately fit the number of monthly active users on Facebook and Tencent to Facebook and Tencent's revenue growth. And that's dope. That's super dope, right? And you were obviously front lines for that, right? And so then that got super interesting in terms of thinking about crypto asset valuation, because that feels like crypto, right? Totally feels like crypto. And part of it too, is not just where are we today

in terms of what percentage of people are using something compared to the amount of people who could use it right so kind of addressable market and actual users but also uh a lot of things that don't get talked about crypto is like what's like the the uh k coefficient right right and things where like you know every person who starts to use bitcoin how many other people can they bring into the system it's really hard to quantify that hard right and so there's some level of virality there right and as much as i joke around on twitter about like the virus is spreading that's really where it came from 100 was this idea that if i tell you about bitcoin and i tell three other friends, some percentage of you are going to say, this is stupid. Some percentage are going to be

like, I'm all in and I'm going to go be the next like crypto anarchist. And some group says, I want to learn more. Right. And so like, what is that growth look like as more and more people learn this? And what we find is like, it really does capture the mental energy and attention of a whole demographic of people. It can't be stopped. You cannot kill this. Yeah. Yeah. So, so the introduction of a crypto asset, what it does is it allows for network effect to take hold in a completely different way than you've ever experienced in any other kind of kind of instrument or anything like that before because in in traditional network effect you've got you know which is you know simplistically any any technology that derives a significant portion

of its value from from from network effect it's just the more people that come to it the more the value goes up right and um each additional user makes it you know x percentage more valuable as a network overall yeah yeah that's right and and it's an s curve right and and you get to a point where uh you hit critical mass where there's a certain number of users where in the network where the the sort of average utility provided for uh to each each user relative to the status quo becomes compelling and then it takes off right and you hit that parabolic phase and then it levels off right that it looks a lot like the netoid function and but but and and so you have the bootstrapping phase problem with with everything that has a network effect and that's

Like, how do I get to a million users, five million users, 20 million users, where you get to that compelling utility for each user relative to the status quo? And what the crypto asset does is it allows speculators to stand at T0, look out into the future, and make a bet about what that utility may be one day if enough people come to the technology to use it. And by standing there at T zero and making a bet in the future, they, those speculators are able to receive financial utility today. And that financial utility provided today makes up for the bootstrapping phase. And they literally pull a technology into existence via speculation. That is super revolutionary, dude. That was one of the big reasons I quit my job. When I understood how that worked, I was like, I got it. I got it. That's, you've never seen anything like that before ever. Yeah, the only the only analogy I can even think of, and it's completely different is this idea of with with Facebook. So I forget the exact numbers, I'm gonna mess it up. But it was like, you know, you had to get 10 friends in the first 14 days when you joined Facebook. And so when Facebook realized this, what they saw was just getting a Facebook account, you had x percent chance to stay as a retained user over some period of time. If you got three friends in two days, what are x percent plus, you know, five or whatever. And they eventually realized that, you know, let's call it 80% of all users, if they get 10 friends in 14 days, they're going to stay for, you know, a year or whatever it is. And so they started to drive towards that metric. And so you joined Facebook, you had no friends. They just inundate you, you know, give us all your contacts, give us your email, right? Do you know this person?

Do you know that person? Suggestions, suggestions, suggestions. I mean, just overwhelm you until you start connecting with people. The second you hit that 10 in 14 days, bam, they back off and let you enjoy Facebook because they got you, right? The data shows them that the lock-in is there and that network is going to pull you along to be a user. I think that, you know, kind of social networks is very, very different than the technology we're talking about on the digital asset side. There's some comparisons or analogies. But the idea of with money, right, or economic value, it's like everything that these social networks did, right, and we did for years on steroids on a global basis, right?

And it's just, I think that's what's pulling so many of these great minds in is just, it's a whole new puzzle, it's a whole new game, it's global, and nobody has figured it out yet. And the first groups that figure it out are going to not only personally profit, but they are going to create inflection points in the technology that are going to be groundbreaking. So that's the thing that's actually, as a guy that was searching really hard for evaluation methodology, I got super fired up about a modified Metcalf's, read everything that's ever been written about it, talked to professors and shit like that, and started building my own frameworks around it. And I think the issue is that, and what really got me fired up is that the NetOid function accurately representing monthly active user growth to revenue growth for Tencent and Facebook. That's what really, I was like, man, this could really be the answer. But the introduction of speculation, I think, may make a modified Metcalfe approach just not really work. because the speculative aspect of it introduces the reflexivity that we've seen. And that's a function of the velocity characteristics of speculators versus users.

And like, that's a whole, I'm not, we can't, we don't have enough time to go into velocity. I'll just say it's totally a massive thing in crypto. Every once in a while, I run across people that say it's not a thing. They're literally wrong. It is totally a thing. And the velocity characteristics of the speculator, I think, may get in the way of modified Metcalf's acting the way it would in a, in a, uh, like in a social network setting. Right. Because like, I'm not, I'm not out there gambling with like my Facebook

users. Right. Like that kind of thing. And, and, and so that's unfortunate. Different use case. Yeah, absolutely. So, all right. So let's talk about, uh, up till today, right? So, uh, 2018, uh, we're, we're filming this in, uh, September of 18. Let's talk about price action from January 1st through 18, uh, September 18. We just saw 20,000 in Bitcoin right at the end of the year. Uh, and all of a sudden we get this huge 70, 80, 90% drawdown, uh, across digital assets. What's going on? Yeah. So it's a number of things and, um, it's kind of an aggregate like, it's like, it's like we're down, whatever Bitcoin's down 70% off the high Ethereum is down like 85 off the high a lot of these tokens are down 90 plus percent off their highs um how do

we get there and it's really it's really an amalgamation of relatively i think kind of unrelated things that in aggregate sort of came to that um one you had just a blow off top in late 2017 yeah price of bitcoin went from 5800 to 20k in 34 days bro 30 that's not normal four days 5,800 to 20,000 right and um completely unsustainable um probably one of the most epic price movements of the last hundred years no ever in any instrument ever anything nuts yeah and um and so you had to back a lot of that out and and the price action got so drastically far out in front of its skis relative to where the tech was right uh top 100 aggregate market cap tapped out at like $830 billion, dude.

$830 billion. It's wild. Wild. Because what is that? That's like one-eighth the size of the gold market? Yeah. Right, or something like that? Yeah, yeah, yeah.

Give or take? And the tech's not even remotely close. Well, it's not even remotely close to being ready, right? Nobody using any of this stuff for anything, right? So you had to back a lot of that out. And then you've had all these regulatory updates as well, too. And the U.S. has actually been, I would say, less heavy-handed than feared. but there's a lot of like regulatory things over and you have you got china banning all kinds of

stuff you've like india has been super heavy-handed right i mean the u.s regulators in my opinion have probably been one of the best regulatory bodies across the globe dealing with this if you told me in 2016 as all this was really starting to pick up steam that we were going to be sitting in you know mid 2018 and they weren't going to have really clamped down on anything other than the people who like egregiously violated a law around fraud, market manipulation, all that kind of stuff, I probably wouldn't have believed you, right? And so they've allowed a lot of things to go on that were part of their learning process, right? And really seeing, hey, what do people want to do with this? How does innovation evolve? And I think that they don't get enough credit for

that, but now they're getting to the point where they're saying, hey, we got to figure this stuff out. We got to get some rules out there so the uncertainty goes away. And now people can really to start to build businesses in the United States and they're not kind of just, you know, looking for the regulatory arbitrage internationally. But there's been enough sort of globally things happen from a regulatory perspective that it's been a net negative.

The uncertainty, how things are going to get treated, it's been a net negative. It's weighed on prices. Lack of institutional-grade infrastructure, totally a thing, right? Like, there was the meme in, like, the back half of 2017 that, like, 2018, like, all the institutional money is going to come into space, right?

It's all, they're all going to, it's like, how? Like, literally, how? Yep. Fidelity, you're going to go buy $100 billion worth of Bitcoin and throw it on a treasurer and keep it in a filing cabinet? Abigail Johnson's office. Yeah. You know what I'm saying? How are they literally going to do that? You don't have any of the major investment banks can't handle custody. The firms that are handling custody aren't big enough to take massive flows. We use BitGo for custody, but if somebody was trying to

do $100 billion in BitGo, they can't handle that. And also the institutions that are building it today, I really do think that they're looking at it as kind of like a commercial bank looks at a bank account, right? So if I build custody, if I'm JP Morgan, Goldman, whoever, if I build custody and I get you to use my custody solution, now I can sell you all of my services, trading, et cetera, around that custody service. It is the kind of the Trojan horse to customer stickiness, right? And so I think that not only do they need to build it for themselves because that's what they're going to trust, that's what they're going to actually use, but then also it's a huge customer acquisition um benefit right and so if they can build this stuff the way that they're talking

about building it it may be the saving grace right it may actually give them kind of a foothold into the market that allows them to to really play as real players yeah i mean we'll get there i mean they're throwing so many people and dollars and resources at solving all this infrastructure problem dozens of projects trying to do it right yeah so it'll get solved it's just not here in 2018 so prices have been going down and then like volatility core killed the store value thesis in the near term right there was that meme as well too right people thought we were just gonna rock it up to like fifty thousand dollar btc and then just hang out there and you're gonna have like voila digital gold yep but like anything that goes up 14x in a year and down 65 percent

in 100 days is not a store of value yet people are speculating that maybe one day it will become a store of value but it's not yet and then like in the meantime as people are waking up to that and like you're not gonna buy a cup of coffee with bitcoin anytime soon either right just doesn't really make that much sense to do that well in time horizons matter right so if you're saying hey i need to store a value for the next year probably not that attractive actually not attractive at all right if you're saying hey look i i want to store a high percentage of my net worth in this over the next 10 20 years yeah now all of a sudden you look at it a little bit differently or your perspective changes on you know what is your belief of the future uh store

of value uh properties correct yeah and then and so it's like in the near term btc not really working as an sov or an moe and then so that's hurt prices year to date and then like here come the stable coin parade too right right and you're like oh that's how we're gonna buy a cup of coffee a decentralized stable coin and it's not just shady tether either right and it's like you think it's backed up one to one to dollars oh whatever like the director of the fbi like said it was like okay i'm sure i'm like whatever happened in the past like so that's my that's my whole thing is if at this point it's not, right. Just, I mean, absolute, you know, going back to your word, fuckery, right. I mean, if people have been speculating on this for how long, and then all

of a sudden somebody goes to check today and it's not backed up, it's just complete stupidity. Yeah. Yeah. And, and, um, you know, obviously with all the FUD around Tether, it's still like the eighth, the eighth largest crypto by market cap, like $3.3 billion in market cap in it or something like that. And so obviously there's a really strong need for something like that. so you know all kinds of people trying to solve that problem and you're getting it like it's like what you got like andreessen horowitz it's like throwing down hard on it bang capital ventures throwing down hard on it like all these exchanges throwing down hard on it and so i mean what the biggest raise is probably uh nader and the basis guys right so they raised like 130 million or

something from the entries in spain's etc of the world and then you've got on the other end of the spectrum you've got the gemini kind of regulated dollar you know stable coin uh they didn't raise any outside capital as far as i know right and so it's two very different approaches one's an algorithmic central bank the other is a you know we're going all in on the existing laws regulations you know wall street etc the scary part or maybe not even scary just interesting parts both could win they could coexist oh yeah right there's no there's no kind of binary one has to win one has to lose yeah which makes it even more interesting yeah um yeah so we'll see we'll see how that plays out right but i but i think that's the introduction of the concept of a decentralized table coin i

has hurt BTC prices year to date. Because like if you're a Venezuelan farmer, like, you know, you sold your life savings into BTC at like 19K, right? Well, what you really wanted was like US dollar, like you really wanted like a stable coin that's like tied to the US dollar or whatever. And so we'll see how that plays out,

but it's certainly hurt prices year to date. And then also you've had this focus on valuation and specifically token structure and like token structure in the context of value capture. and like there was there was sort of a general thought in 2017 that like these icos um like if more people come to this technology the price of the token is going to go up and it's not that simple right and um you know the vast many many many it's also what every ponzi scheme believes as well right many many many of the like 16 17 early 18 vintage icos the token structure is

fundamentally flawed in its ability to accrue value over the long term and people didn't realize that then because nobody was talking about valuation and what really happened what really happened was i think was chris bernitzky wrote crypto assets which is like a year ago literally a year ago he wrote that book top and probably a top five recommended book in the space already yeah yeah if you're an introductor you got to read it yeah um and he and he threw out mv equals pq and the people got super fired up about mv equals pq and then like 60 days after they got really fired up you were like this doesn't work at all for abc reasons which were valid reasons yep but what it did do was it shined a spotlight on the velocity problem and people were like ah there's

this thing called velocity all else being equal the faster a token spends the ecosystem the lower the price needs to be for that token to satisfy the economic demand of the ecosystem as a whole and we don't and like it's not something you plug into a model it's not you don't you don't use it like that but you just know directionally if this thing if people don't if there's not a if the mechanism design isn't such that people want to hold it or have to hold it or you have to stake it where you can't you can't move it for a while or you know whatever reasons if there's a tendency to move it really fast it's going to have a hard time accruing value over the long term and that was kind of like year to date people have woken up to that and so you've just seen this big drain

a market cap specifically out of, you know, BTC dominance has been rising for four and a half months now. You've gone from 57% now. Yeah. I think you've gone in a straight line from like 34% to like 58% or whatever over the last four and a half months, the market's obviously telling you something there. And, um, you know, we, when I think about, when I think about like, what's a bottom in this market going to look like where are we all right so let's that was year to date let's go let's go outlook right so uh are we at the bottom and if not where are we going yeah so i like to look at um no regrets called the bottom he he says that uh he says we hit the bottom uh a week ago or a couple days ago what do you think no grass is a nice guy no no comment

there all right shout out david namdar too i like namdar i love namdar he's uh he's one of the best all right so where are we going so so so on coin market cap i like looking at um uh top 100 aggregate market cap minus btc okay which i call bottom 99 market cap yep um that number peaked in the first week of january at 547 billion dollars which is a wild that is an outlandishly high number when you think about it. That's like, uh, one 14th of the, uh, of the gold market. For, for, by the way, 99 of those tokens, majority of the world couldn't name a single one of them. No, no. Oh, and nobody's using any of this shit for anything cause it sucks. Right. And, uh, there's 27 tokens that have 400 daily active wallets. Just saw that stat like a week

ago. That's a wild stat, isn't it? 27 tokens of 400 folks that care at all about this thing. and so um so that so that when moon when moon right so that so that number currently is 89 billion for the bottom 99 so it went from we say 540 to about 540 to 89 but but 89 just takes you back to the first week in november yep so shit was still super wild before then right everybody everybody remembers that right like summer summer 2017 was still super wild the barbers the taxi drivers, they were all talking about it in first week of November. Yeah, exactly. And so, so if I just go back and look at where that number was, you know, for example, in July, on July 17th, that number was 36 billion. In the first week of September 15th, that number was 50 billion.

Yep. So, so I kind of use that number to triangulate where, where a bottom might be, Because it's actually easier for me to think about what everything below Bitcoin should probably be worth. I mean, you're talking about a, you know, 50 to two thirds drawdown to go from here, right? Yeah, yeah, yeah. So I actually think there's a good chance. I'll put it this way. I think it would be healthy for the space for us to get cut in half again from here on the bottom 99. Yep.

Like top 100 minus BTC. So then you can trade. That was Bitcoin. So then you triangulate that number, the bottom 99, with BTC dominance. And then I've got a chart that I've been looking at for months now where that, and then that backs you into what BTC price is going to be. What do you think? And so I, you know. We won't hold it to you, but what direction, where do you think we're going?

You know, again, technical analysis is like not the end all be all at all. Yep. This would be like the first quintuple bottom in like the history of TA. Like that's not how TA works. like like a number doesn't get tested five times and then like it holds it's just like not really how it works so you never know what you're talking about here is you know let's call it the 58 50 yeah 58 59 whatever it is right basically we're knocking at the door we've knocked four times right and if we kind of stay at you know the 6500 number whatever and we go back down

is it the fifth is the sixth the seventh however many times we're going to knock at the door eventually door opens we fall yeah right yeah and it's going to be a function of getting dragged down by that bottom 99 when it went when arthur hayes the founder of bitmex introduced the ethereum perpetual swap he had a blog post called ethereum the the double digit shit corn and ethereum was trading at like i don't know like 400 or three or three three something off a cliff to what would it go down to 180 161 161 on the bottom and i mean you want to talk about a dead cat bounce that we've seen over the last couple of days. Like that's kind of the definition of a dead cat bounce.

It was gone from one 60 to like two 15 to 20. Right. And now we're sitting right now there. So like, I think we do, I think we do probably go see a hundred. Yeah. And so a hundred,

a hundred Ethereum. And that, and that puts you at 10 B's that puts you at 10 B's for Ethereum. And then you start backing into like, okay, where's ripple going to be ripple? Like literally not like not a functional token. Right.

Yep. We all know that Bitcoin cash. By the way, the ripple army loves when people come on here and, and, uh, talk really highly of, uh, of ripple. Shout out to Ryan Selkis going on. Dude, that was some wild stuff, man. I love, I love two bit, man. Listen, here's why I respect the hell out of that guy is because, uh,

he doesn't just talk about it on a podcast. He says, listen, Brad Garlinghouse, where you at? Let's, let's, let's just talk about it. We'll film it, let people decide what they want to decide after that. And so, you know, look, there's a non-zero chance. He's right. Non-zero chance that he's wrong. I think he would be the first to admit that I actually tend to think that the, the Ripple crew is doing what they believe to be best, right? I don't think that they're out maliciously

trying to screw people over or whatever. And so I'd love to see that conversation because I actually think that there would be points scored on both boards, right? So as a, like I'm agnostic in my views. I don't fall in love with any of this shit and I don't fall in hate with any of it either. And I think it's really hard to be short Ripple here

because I think the senior folks at Ripple realize that their token, you don't need it for XRapid yep and they and now they know that the whole world knows that yep and so at any time they could introduce new functionality on x rapid where then you you you need or like you like kind of you introduce this new concept where xrp like like there's some compelling reason for it to exist in the context of x rapid and that thing will hit that would be the quickest five bagger you've ever seen in your life dude totally right well and because what you're talking about here is there's like price action and kind of uh you know there's ta there's some of the fundamental stuff

whatever and then there's just these wild cards in this market where the the uh i don't even want to call price manipulation as much as just like the ability to evolve the code and the the um kind of structure around these tokens in a night and completely change the landscape is unseen in almost any other financial market in the world right right you can't if you're facebook you can't say hey we had you know whatever 400 billion dollar market cap and we did you know 40 billion or whatever they're doing on revenue and overnight oh by the way now we're doing 100 billion right right this doesn't happen yeah and so the the difference here though is you know revenue isn't necessarily driving the token price and so it could be literally how it's used you

change it overnight bam all of a sudden completely different ball game and we're going up you know 5x especially for a lot of these utility tokens right where people have realized that the initial token structure just doesn't accrue value over the long term and so the way the way that at ikigai the way that we like break up the world is um you kind of think about your your web 3.0 stack But then I think about, and we consider the top 150 cryptos by market cap as our universe. That's the, those are the tokens that we collect data on, do analysis on, watch everything. You have the tokens that are vying to be store of value. Bitcoin's obviously leading that.

I put Bitcoin cash in that bucket. All the privacy tokens go in that bucket. Decred goes in that bucket. And the value, the value framework that you put those, it's its own separate beast, right? Because it's like, it really is like that Austrian economics type of framework, right? And it's like hard money versus soft, sound versus unsound, and that's the kind of framework you put around store of value. And then you have the platform-level protocols, so like smart contract platforms, DAB platforms, payment rail platforms like Ethereum, EOS, Stellar, Cardano, Qtum, Rchain, Icon. I know I forgot some other ones in there, right?

A bunch of them. You get the point, right? and and the value proposition for those they're a function of the activity that happens on top of them right you don't write any ethereum smart contracts ethereum ain't worth anything right you don't no payments going through stellar like it's not worth anything and um and so you think about the value proposition for those as a function of like how have they built the specific sort of way that they've you talk about the scalability trilemma right like like uh like how many transaction is going to do how secure is it how decentralized is it yep where do they set those

levers to to be the best home possible for the type of activity they're trying to draw onto that network and like the the analogy that i use is like when you make your own character like on nba 2k right like if he if he's if he's like got really good hops like he may not play defense that well or like if he's a great passer like he probably doesn't dunk that well yeah we're not looking for all nba offense or all nba defense we're looking just for all nba right and so you You've got to set the levers at a certain point to be attractive to that certain type of activity to come on top of it. So that's those valuation frameworks. Then you've got utility tokens.

Specifically within utility tokens, you've got productive utility tokens and non-productive utility tokens. Productive utility tokens are like work tokens. And that's like Augur and Numerare, where you can actually model those. And you can model them in the same way that I used to do, like a DCF on a company, like an equity. and so the the the valuation framework that you think about those actually kind of looks like like the real world so it's easier to get your head around how to think about what those look like then that leaves you with non-productive utility tokens those are the ones we haven't figured out yet and but what we do know generally speaking is that like moe tokens they don't accrue

value over the long term like if you're just a chucky cheese token like you know like you can't put quarters in the in the video game right you got to take your five dollar bill you put in the machine you get out chucky cheese tokens put the chucky cheese tokens in video game but like when you're done playing Chuck, Chuckie cheese. Like you don't want to hang around with the Chuckie cheese tokens. You give me my, your quarters back, right? Do not accrue value over the long term. That's a big problem for many of the 16, 17, early 18 vintage ICOs. But the problem is also this is like, this is the whole thesis around inflationary monetary supply, right? Is that actually what they're doing is they're trying to incentivize you to spend,

to, to not hold on to the cash because it loses value every single year as inflation hits. Yeah. And so the deflationary model is the exact opposite, right? And this whole idea of store value, blah, blah, whatever. But on the inflationary side, what we're seeing is the, if we want you to spend, the price is artificially depressed because of the downward pressure, right? Like, like, like it is, it is intentionally there because that's how the structure becomes. And so it's a, it's a really bad speculative investment if you are trying to go long on the value of the token. Yeah. And, and, and, you know, you can, we can keep going as far as, you know, you can go really far down that in terms of like what do you need decentralization for yep in that specific instance

and like in many cases like don't tokenize like it's it's it's not a good idea for you and like um but but but for utility tokens non-productive utility tokens we haven't figured out how to make the token structure accrue value over the long term and so but at some point you're going to figure it out i mean the ecosystem will figure it out to be smart people yeah and and then i think you could see a situation where if you've got a compelling piece of technology or a use case that exists today and then but the token structure doesn't work and it's out there you know down 95 year to date if somebody goes and figures out the token structure in another token you may see just this massive swath of restructuring of token structures and then they're like oh look we fixed

it and it works better now you know like come use our technology it's hard to say how all that stuff going to play out. But that's really scary. If you're long or short, you don't know what's coming. Yeah. Right. I think it's really, really hard to make money on the short side in this space. Absolutely. All right. So let's do a rapid fire here. What do you think is the most controversial thing you believe in crypto? Right. So like something you believe to be true that you think a very high degree of other people would disagree with you on? The bottom 99 is probably gonna get cut in half from here you think before we bought them yep and bitcoin the relationship to bitcoin there is you think it's getting dragged down 50 as well or no it's gonna hang in but it's

gonna hang in better though i mean it's really it's really really hard to say i'll just say that in that scenario it's hard for me to imagine that 58 50 holds is the low yeah yeah i think that's fair um i think there's a lot of people disagree with you right because here's the other part of this whole idea around like price action and and you know where's the bottom all the stuff that people are talking about. Uh, I've never seen a market where there was bull bear, you know, kind of cycle that turned over and people still remembered the bull market and you hit the bottom. Right. Right. Like from a psychological standpoint, if you go on Twitter right now, people literally think we're going to 20, 30, 40, $50,000 by the end of the year. Right. And it's

just, I can't believe that, you know, there's no blood in the street and we're going to turn it around. Right. And so like I came out and I said this and people all freaked out, you know, Oh, you're like switching your, your mentality around all this. And I was like, wait, there's just not enough pain yet. Right. And when the pain gets really, really bad, I mean, people are going to walk away. They're going to say, this is over. Right. That's when I think, you know, we, we are at least near the bottom, but we really haven't seen that yet. Yeah. I mean, I was an energy investor for seven years, right? Like I've seen some major league chop in markets before. And like, if, if what we just had was the bottom, I'm going to have to rewrite my understanding of what

bottoms look like like i'm just being honest man i'm so willing to be wrong and i'll just i'll text you when that happens i'll text you i'll be like i think i might have been wrong yep i'll text you and then you can tweet it out to like the millions of pop fanboys amazing all right so what do you think is the most interesting or important company in crypto other than what you're working on um i love the rapid fire it gets the pauses and answers every time i'm not going to name anybody specifically okay i'm going to say anyone working on mechanism design and token structure anybody like it's like i know some i got like some buddies uh in token foundry yep the consensus like consensus is like it's kind of a mess right and everybody knows that

like i got some guys in there they're like crazy smart shout out rocco you know rocco right and and like anybody doing that kind of work digging deep on like where's the video game designers at man where are those guys at how are you not in this space yep right where's my where's my harvard phd mechanism design guy dude i'll tell you this is this is the girl listen i keep going back to this idea of so the people who worked on growth it was the badges it was the streaks it was the you know uh all of the points and tokens and all this crazy stuff that people have been doing for years are now tied to a value that can be traded it is all of that design on steroids A hundred percent. Oh, by the way, I'm going to, I'm going to retract my,

so my most controversial thing. Okay. FOMO 3D, one of the best things to ever happen to crypto. You got to explain. Again, complete scam, literally a Ponzi scheme. The, the regulatory little, the little dropdown, like when you click through it on like the regulations, it takes you directly to the SEC's website for definition of Ponzi scheme. It's like the website's called exitscam.com. Yeah. um two months before i heard about fomo 3d we were talking internally about how we're going

to figure out this this token structure problem for the non-productive utility tokens and i said i was like when we get it figured out it's going to look like this gimmick and it's going to look like this little like this little thing and when people see it they're going to be like that's bullshit but it's going to work and people are going to like wait is that is that like a like that shouldn't work but it's going to work anyways right and then the next thing you know it's going to skyrocket some token to 100 billion because it had that that hook for mechanism design to like lock in that virality and to economically juice network effect in a in a way that accrues value over the long term FOMO3D again not supporting it but I'm saying that concept

abstracted into part of a utility token's design could very well end up being the key that unlocks the value accrual. The people who figured out growth hacking for the centralized internet won. Won. The people who figure out growth hacking in the decentralized world will win by magnitudes more. Fact. Right. I mean, it's just going to be, it's going to be fascinating. All right. So you've got a magic wand. You can wave it, change one regulation. What do you change? We're not doing this with the Howey test. You're doing it with something else. Okay.

Oh, so on the security side, right? So not the accreditation, but actually on the security side. What do you think needs to get put in there that, like, what does the new one look like? What are some of the components that aren't there that maybe you think should be there? Or are we too early? We can't tell. I mean, you're just, you're using, you're using a piece of regulation that was, it was judicial precedent

that was set 1933? Established, I think it was I don't remember, but I know it was about orange trees, orange groves in Florida. Like, that's the law that we're going to use to govern magic internet money, about Florida orange groves. Like, that just doesn't make any sense, right?

So if I could pull anything back, then you'd get a new law specifically about this. So it's not getting rid of it completely, it's just saying, look, we need something new, right? So we still need a test. It's just what it looks like we need to figure it out and probably the regulators have a bunch more opinions and who knows maybe they're going to end up they're trying to like you know shoehorn whatever like round round hole square peg this thing into making it work and that you know uh what's his name

hinman introduced the concept of like sufficient decentralization and they're like literally going to just like try and layer that on top of a rule about florida orange trees like sufficient decentralization okay all right listen is is the orchard decentralized i don't know i know um all right so uh one non-crypto question uh look everyone loves aliens right twitter goes nuts when i talk about all this alien stuff and uh i recently had the thought of uh out of everything people have thought about on the alien side do aliens have pets right so are there you know we always think of aliens as like this uh equivalent to humans right they're gonna you know have some level of intelligence. They're going to kind of look like us generally. They're going to kind of

walk and talk and communicate and do all this activity. But we never think about on the, on the animal side, right? So one animal aliens, and then two is, do they have pets? They, are they showing up with, you know, some sort of equivalent to dogs and cats or what's going on there? I just try and draw from like precedent transactions on this one. And it's like, I'm, I look at Chewbacca, right? I'm like, that was like basically like a really, really dope pet, right yeah i think right yeah yeah did he have like sovereign rights chewbacca i don't know about that i don't know anyways like i'd take a chewbacca right now so i figured that if you're an alien like that's probably how you're that's what you're rolling you're rolling up with a

chewbacca all right i have not heard that answer yet uh all right so i'll let everyone uh to close it out uh ask me one question what uh question you got oh um what's still i feel i hadn't caught up with you in a while like we're like what's morgan creek like what y'all's like what's the next like six to 12 months look like for Morgan Creek? Uh, we are running around and banging our head against the wall to get every single institution off zero. So if you think of your, if you're an institution, you've got no exposure to, you know, what is the, probably the best performing asset class over the last five years. There's a bunch of data that shows if you take a 60, 40 global portfolio, put 1% of digital assets, uh, you get a, anywhere between 150 to 300 basis

point, you know, increase in returns depending on when you did it. Uh, and you get a, a near identical standard deviation of risk you get a double digit increase in sharp ratio and we actually specifically for btc uh digital assets is defined in a whole bunch of different ways if some people have done which is bitcoin so we've done top tens top five etc that's generally or at least directionally where it ends up um our argument is that uh if you are one of let's take a pension fund for example you're going to do these future payouts you've got a future obligation to fund, you know, all of your pension plan recipients. Your actuary comes in and says, hey, you've got a six, seven, 8% assumed rate of return. So in order for you to pay out in the

future, you have to hit six, seven, 8%, whatever your specific plan is. Most of them are underperforming that. And so if you look out over the next 10 years around stocks, bonds, currencies, and commodities, it's not going to get you there, right? Kind of with the traditional asset classes. And so by no means do I think you should go put 100% of your assets in digital. But what I do think that you should do is you should start to get some of the uh digital asset exposure because what it shows is not only does it keep the risk profile very similar volatility you know everything is attracted there but you start to drive a higher return right and so um that conversation is very very different than like buy bitcoin because it's going to be the global reserve currency right it's

taking the uh crypto ethos and argument and speaking in a language that the institutions understand. And, uh, you know, look, I'm new to the institutional world. And so obviously Morgan Creek's been a huge advantage in getting us in the room and having these conversations. And it helps to have, you know, folks like Mark Yusko, who's got this long track record to be one of the people saying this. And what I've found is they're incredibly receptive. They're not as receptive to the bitcoins, the new store of value, digital gold, kind of what I would consider more of the qualitative arguments, the quantitative argument of you have to hit 7% in order to fulfill your future obligations. You're not going to do that with the current asset classes. This is a semi

uncorrelated asset. And if you put some allocation here, we will get you closer. It's just a data, it's a data argument, right? And so I think that we're making inroads there and then, you know, we'll announce a bunch of stuff over the next couple of weeks. But I think that for the next at least 12 months, I mean, that, that is the campaign. It is get off zero. I can't tell you what the right percentage is per portfolio. Maybe it's 10 basis points, 50, 200, but I don't know. you got to look at each one individually. What do you put them in? So we literally say to them, look, you've got a whole bunch of different, uh, capital pools. So you've got your equity, you've got your debt, real estate, fixed income, whatever it is. We're building a bunch of products

that, uh, allow them to pick and choose. So if you've got an equity bucket and you're only, you know, you got 10% of your allocation for equity, you're only 8% deployed. That means you got 200 basis points that you can actually go and buy some equity. So let, let's get some percentage of that into the equity bucket. Maybe you're fully deployed on the equity side. And so you've got a debt bucket and you've got some under deployment there. Hey, let's make sure we've got a debt product. And so building different products, we actually think that on the digital asset side, people are going to build portfolios. They're not going to go, you know, you never go a hundred percent cash. You never go a hundred percent into one real

estate strategy. Right. And so they're going to build this very multi-strategy approach or kind of portfolio construction in the digital world. Now here's the counterintuitive piece of this. and i've thought a lot about it in um so take the u.s dollar 19 you know 70s you know and before 100 paper notes right today 92 of the supply is not paper notes right so so we've already had the digitization of a currency over time the u.s dollar is probably the first digital currency that majority of americans have interacted with right because it's just 92 right and so if you look at that bitcoin and other cryptocurrencies the actual currencies are just another evolution of that. And then if you look at stocks, for example, used to be all paper, right? Then went

to electronic trading. Today, if you invest in a private company, most people are actually digitally signing for the documents. They're receiving it through Carta, eShares, AngelList, whatever. They have an electronic or a digital version of that stock certificate, right? And so the idea that you're going to have a token in your digital wallet is just another kind of evolution of that technology. So what does that mean for capital allocators? Well, Robinhood is actually a great example of somebody who has built asset management capital allocation in a digital world so it's targeted digital natives it's got a fee structure that looks very attractive uh it allows you to buy these digital electronic public equities and now they've added

cryptocurrencies in there as well well if all of a sudden tokenization of real estate becomes real will they allow you just to hold your shares of real estate in the same wallet probably right it's just it's just an evolution and so you know when you start having that conversation with these institutional investors i think that they they're generally like my kids telling me this right you know my 20 to 30 year old son or daughter is pounding the table and saying hey this is real i'm interested in this whatever that's a little ways away though from like hey here's 100 million dollars yeah right and so i think that's like next 12 months we're going to see a couple of those checks get laid down and when they get laid down i think the damn breaks and game on musical chairs

Yeah, for real. All right, man. It's super fun. Thank you so much for spending the time and hopefully we'll get you on here again. Cheers. Thanks again to our sponsor, Block Estate. To check out their tokenized real estate fund, you can check out www.blockestate.com. Hey, everyone. Pomp here. If you like this episode of Off The Chain and want to help us take crypto to the top of the Apple, Spotify, and other podcast charts, please do us a favor and rate, review, and subscribe. To review, simply go to the Off The Chain homepage,

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