Unchained - Ari Paul on Why Bitcoin Is a Good Value Buy Today - Ep.95

Episode Date: December 4, 2018

Ari Paul, CIO of BlockTower Capital, explains why he likes how short-term trades concentrate risk in investment, why, "no matter what," he thinks Bitcoin is a good-value buy today, and how big university endowments investing in crypto now could eventually lead institutions to go from having a fear-of-loss attitude about crypto to having FOMO. He also dives into why he's not as excited about generalized mining as some of BlockTower's crypto fund peers and who he thinks is really well-poised in that space. We also discuss why Bitcoin futures didn't have a positive impact on the price and what effect Bakkt and Fidelity launching their crypto products could have. Plus, he responds to people who accused him of insider trading when a private conversation in which he mentioned Stellar was acquiring enterprise blockchain startup Chain was released. Thank you to our sponsors! CipherTrace: https://ciphertrace.com/unchained Altlending: https://altlending.com Episode links: Ari Paul: https://twitter.com/AriDavidPaul BlockTower Capital: https://www.blocktower.com Harvard, Stanford, MIT endowments invest in crypto: https://www.theinformation.com/articles/harvard-stanford-mit-endowments-invest-in-crypto-funds Yale endowment invests in a16z and Paradigm: https://www.cnbc.com/2018/10/05/yale-investment-chief-david-swensen-jumps-into-crypto-with-bets-on-two-silicon-valley-funds.html Bitcoin Cash hard fork recap: https://bitcoinmagazine.com/articles/week-2-how-bitcoin-cash-hash-war-came-and-went-and-not-much-happened/ Unconfirmed episode on Bitcoin Cash hard fork with Aaron Van Wirdum: http://unconfirmed.libsyn.com/the-bitcoin-cash-hard-fork-bitcoin-abc-vs-bitcoin-sv-ep046 Unchained episode with Riccardo Spagni of Monero: http://unchainedpodcast.co/coinfunds-jake-brukhman-and-multicoins-tushar-jain-on-generalized-mining-ep92 Unchained episode with Jake Brukhman and Tushar Jain of Multicoin Capital: http://unchainedpodcast.co/coinfunds-jake-brukhman-and-multicoins-tushar-jain-on-generalized-mining-ep92 Unconfirmed episode with Fidelity's Tom Jessop: http://unconfirmed.libsyn.com/fidelity-digital-asset-services-tom-jessop-on-why-its-serving-institutional-clients-first-ep043 Ari's private conversation in which he mentioned Stellar was acquiring Chain: https://hackernoon.com/ten-questions-for-ari-david-paul-of-blocktower-capital-dcd8d81ef27e IMF managing director Christine Lagarde's talk on the case for central bank digital currencies: https://www.imf.org/en/News/Articles/2018/11/13/sp111418-winds-of-change-the-case-for-new-digital-currency Learn more about your ad choices. Visit megaphone.fm/adchoices

Hi everyone. Laura here. A quick note before we dive into today's show. The 100th episode of Unchained is coming up. I know, hard to believe. Side note for those of you keeping score at home, included in the count where special recordings from conferences. For the 100th episode, I want to hear from you. Send me a voicemail or an audio recording telling us your name, where you're from, and anything else you'd like to say related to the show. Whether it's what you've learned from Unchained, your favorite moment or guest, how you listen, or whatever else you like to say. Then finish it off with a prediction about what will happen in the crypto space in 2019. You can easily record a message on the voice memos app of your smartphone or using an app on your computer.

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December 20th. I look forward to having you guys take over the show. Hi, everyone. Welcome to Unchained, your no-hype resource for all things crypto. I'm your host, Laura Shin. If you've been enjoying Unchained, pop into iTunes to give us a top rating or review that helps other listeners find the show. Within months, cryptocurrency anti-money laundering regulations go global. Are you ready? Avoid stiff penalties or blacklisting by deploying effective anti-money laundering tools for exchanges and crypto businesses, the same tools used by regulators. CipherTrace is securing the crypto economy. The future of lending is here. Altlending enables companies to leverage their Bitcoin or Ethereum assets to borrow U.S. dollars. To learn more, go to Altlending.com and use

promo code unchanged for offer details for an interest-free month. Crypto-collateralized altlending.com. My guest today is Ari Paul, CIO of Block Tower Capital. Welcome, Ari. Thank you very much for having me, Laura. I want to start with your background. You played poker seriously, if not exactly professionally. You then were a professional trader. And in crypto, everyone's always talking about this mystical, quote, institutional money because people seem to think that when big financial institutions get into crypto prices will go up and everything will moon. However, you used to be institutional money. So tell us about your pre-crypto background in more detail and how you draw on those experiences as a crypto investor. Sure. Before launching Block Tower, I was a portfolio manager and risk manager

at the University of Chicago Endowment, which is an $8 billion pool of capital. And the endowment world is kind of its own little island where most endowments follow what's called the Yale model because it was pioneered by the Yale endowment 20, 25 years ago. And that model is mostly a fund-to-funds model. So these endowments typically have teams between 15 and 30 people and then they'll allocate to external managers. And the idea is that if you have eight billions of eight billion dollars that you want to allocate, you could either have a really big team doing it. So for example, the Harvard endowment is kind of the exception. And they had, I believe they've been downsizing, but they had a team of over 400 people. And they were kind of like a hedge fund, a global hedge fund that did everything.

That's actually one thing that I've always been really focused on is why really smart, hardworking people make bad investment decisions. And it's almost always structural. So here's this is a really good example of this. One of the main reasons why other endowments didn't try the Harvard model is because of this kind of very key bureaucratic element, which is if you want to attract the top talent in the world, which you do to manage $8 billion or in Harvard's case closer to $40, you have to pay them a lot, right? That person is an incredibly rare, valuable talent. That's the person who would be running their own $8 billion hedge fund and collecting massive fees potentially to do so. And it's really unpalatable for university, a nonprofit institution, to be paying, you know,

the president of the university maybe a million year, maybe $5 million year, and then to pay some hedge fund manager a hundred million a year, right, or $500 million a year. It's very hard to have that as a budget item that, you know, it's like, why are we paying 50 times this hedge fund person, what we're paying the president of university, it doesn't feel fair. And the reality is that you kind of have to pay that to the world's best money managers, or you just can't get them. You're going to pay it one way or another.

But it's easier bureaucratically to pay it through fees than through salary. So in the UChicago and the Yale model, they are paying that same price, but they're paying it indirectly through fees, right? So they pay no salary to a hedge fund manager they hire. What they do is they say, okay, we're going to give you $100 million. And if you double it, you get 20% carry, let's say. So we're going to pay you $20 million. dollars. But that 20 million never appears in the budget anywhere. Instead, what the university sees is

the endowment made 80 million, right? So the investment made 100. 20% of that went to the fund. And so the endowed, the university says, oh, great, you made 80 million bucks. Whereas if they were directly employing that hedge fund manager, it would be, wow, we're paying this person 20 million dollars. That's crazy, right? So a lot of decisions in the world in general, but especially in the investment world, get made because of that kind of, the term that gets used as optics. which is, you know, appearances. A lot of decisions get made due to appearances. And sometimes those decisions are not the best investment decisions. So that was a little bit of a tangent that I find interesting and that I think about kind of, and I'll connect it to the crypto world. But

to use Chicago, we function very much like most other endowments, which was mostly hiring external managers. Our job as investment staff was to first set high level allocation. So how much of the endowment do we want in cash, treasuries, real estate, how much do we want to be in the U.S. West versus global. And then once you pick an area, so you say, okay, we want to have, you know, 5% of the endowment in non-U.S. real estate. Then you say, okay, who do we hire to actually allocate that? Who do we hire to buy specific commercial real estate buildings to, you know, to buy specific real estate complexes? And then, and you look for the best in the world, and you spend a lot of time doing diligence to understand, are they really as good as we hope they are.

So my job at the endowment was a bunch of things. I wore a lot of hats. One was participating in those kind of high-level strategic allocation decisions. Another was vetting individual managers, doing on-site visits, due diligence, spending many, many months. Generally, the process is six to 12 months to invest with a new manager. It's a long getting to know you process. The main reason for the length of time is that the people who are selling you, in this case, the hedge fund manager or the real estate manager, the venture capitalist, they're really smart people who know what you want to hear. And how do you differentiate a really smart, hardworking person who knows what you want to hear from the person you really want to invest in? Because they can all say, basically,

the first hour of conversation is identical between the good one and the bad one. And the answer is there isn't really a magic bullet. It just, if you spend a lot of time over months and months and months talking to the same person, if their story is contrived, if they don't really believe it, if it's not really accurate, eventually holes appear. Eventually, there's a red flag. There's something minor they slip up or something minor, you know, you're talking to the executive assistant or the assistant trader or the CTO, and they say one little thing that contradicts something else you heard or contradicts the story in your head. And then you dive into that. So it's a really long, drawn-out process. Typically, it can often be years of getting to know a manager before the investment

is made. And so that, I knew that sales process. I knew how slow and ponderous the allocation process is for these institutions. So in early 2017, I was at the University of Chicago and And I started the process of trying to, over the long run, get UChicago and other endowments into crypto. Because I thought it was, you know, in our interest as endowment. And so I, and I knew that it would be a really long process. And my thinking at the time, literally this was how I framed it to my colleagues, was if I don't do anything, I think UChicago invests in crypto in 18 months. And if I do a really good job of convincing people, maybe it's 12 months. And that's six-month difference.

If UChicago can be at the front end versus the back end of institutional investing, I think we'll make a big difference in terms of our return. You know, so I wasn't really naive about it, and yet I still underestimated how slow and long of a process it is. You know, so we've had the headlines recently of many, many large endowments investing in crypto in different ways. So Harvard and Yale, there have been public reports out that they have allocated to some of the newest crypto funds. Indirectly, many of these endowments were actually in last year because they were invested, for example, in Andresen Horowitz, and Andreessen Horowitz had invested in crypto funds. So indirectly, the endowments had crypto exposure last year, but this year was the first time a few months ago when they

directly allocated to crypto funds. And in their heads, what the endowment say is they did not consciously invest in crypto yet. What they've done is they invested in trusted managers. So these are endowments that have had, you know, decade-long relationships with Indrisen Harowitz, for example, and they invest in every fund that Indreason comes out with. And Indreason said, hey, we're doing a crypto fund. You know us, you trust us, you know the part of it, partner, Chris Dixon is a great investor overall who is a proven track record in both crypto and non-crypto. And so they framed it as this is not a new category. It's not a new asset class. It's not a new type of investment. This is just the next and Driesan fund. And it's the next

kind of fintech focused investment. That's a major difference. And so understanding that psychology makes me think that endowments are not racing to fund 10 other crypto funds. You know, it's going to be a slow process. Similarly, it, you know, the way this always works is you have kind of the trailblazers, you have people who will make that first small investment, and that kind of makes it okay. But it's a slow process. So, okay, Yale is investing. Well, now it's responsible for every other endowment to at least look at it. If Yale posts a good quarter, so if Yale invests in this first wave of crypto funds and maybe they only put, I actually don't know the exact numbers. I don't know if they're public, but, you know,

they put a tiny bit of their money, a tiny, tiny bit. But if that tiny bit earns an outsized return over the next year, suddenly it shifts from, the thought process at every other endowment goes from, man, if we invest in this and it goes wrong, we're in trouble. We have to justify basically investing in Bernie Madoff or tulips. We're going to face ridicule. We're going to face career risk. Suddenly the concern shifts to the opposite end. Suddenly the concern is, why did we miss this? Right. Were we doing our jobs? If Yale, if our leading peers, if the largest and most respected competing asset allocators, chose to make this investment,

and it did really, really well, we then are on the hook to justify why we passed. And that change in thinking, from one of fear of loss to fear of missing out, happens fairly quickly. It's not on a dime, and it requires a few things to happen. So the first thing happened,

which is Yale made the investment. Now, the next thing is that has to go well. It has to go well. And I don't know exactly what that means. Maybe it's a great quarter that gets written up in the New York Times as Yale put 0.1% of their capital in and earned a 400% return in a quarter, you know, could be something like that. And suddenly

that becomes a discussion point at every other endowment. And now, now they have to justify not doing it. And so let's, let's talk a little bit about Block Tower strategy, because that's different for some of the other crypto funds, because you guys will actively trade on events and short-term price swings. And so just so listeners know, I don't normally reveal when we're recording in relation to when this will come out. But we are recording during this period in which Bitcoin has dropped below 5,000 for the first time this year. Ripple has overtaken Ethereum by market cap. And this morning, when I took a like a coin market cap, every single crypto asset was down,

except the stable coins, which were all up by less than 1%. So on a day like today, when there are big price swings, what does that look like for you? What are you doing? Yeah. So first one kind of copy-out, there's all sorts of really complicated regulation around in the investment world. So there's a lot of things that I can't talk about. What I can talk about is kind of a really high level way we think about investing at Block Tower. So my kind of high level thesis on crypto from the beginning from a portfolio management perspective has been, this is hyper, hyper volatile.

And that fact in and of itself actually leads to a lot of decisions. So one really interesting dynamic is the nature of compounding and rebalancing. So here's an example. If someone is a hundred percent long crypto and crypto is up 100 percent in that year, you would think that's a pretty good strategy. And if instead, I'm only 50 percent long crypto and crypto is up 100 percent a year, I'm probably going to underperform. That sounds like a loss, right? And it actually isn't necessarily true. So if there's enough volatility over the course of that year, and if I rebalance, whether actively or passively, so let's see, I have 50 percent crypto, 50 percent cash, and I say any time that split, so if crypto rallies, what's going to happen is my crypto's worth more,

my cash is worth the same. And so I now have more than 50% crypto, right? I might become 60% crypto, 70%. If I say every time it gets to 70%, I'm going to rebalance back to 50-50, and every time crypto falls and it becomes 30%, I'm going to rebounce back to 50-50, that may actually outperform the 100% long portfolio, even in a bull run, even in an upmarket. It's a function of what is the rally and how much volatility is there. So a key thesis of mine for, I know, three, four years has been this is a hyperbottal market that's going to stay. hyper-volatile for the foreseeable future. And I still very much believe that. Over time, the volatility is falling. It actually, as volatile as it is as it's been in the last year,

it's less fallible than it was in 2010, in 2014, but it's still, you know, extremely volatile. And so the first way I approach situations like this is kind of with that in mind, which is to say things can go further than we can almost imagine. The idea, you know, when Bitcoin is at 19,000, if you had said Bitcoin's going to be at 6,000, that felt like the end of the world. It was like that is such a cataclysmic scenario. It's hard to imagine. You know, then with Bitcoin at 6,000, it's like, okay, well, what is really blood on the streets?

What's really the worst thing we can imagine? And it's maybe 4,000. It's, you know, we almost got there, you know, that was very close to the low. And now it's, well, what about 2,000? You know, what's an unimaginable number that we, that there's crypto's dead, right? And the reality is that it's almost always more extreme than we think. The same was true in the financial crisis in 2008, where people, said, you know, it's unfathomable for a prime broker to fail. It's almost not worth thinking about

because it's such a bad scenario. It just means the world is over. And of course, the world wasn't over. It was a really bad scenario. It might have felt like the world was over. But you needed to be a prudent, kind of thoughtful investor throughout that. And you needed to think about, you can't say this scenario is so bad. I'm just not even going to think about it, right? You have to incorporate those scenarios in your thinking. It doesn't mean that you can predict them, but you definitely want to have that as part of your plan. So in a situation like this, there's kind of two thoughts. One is you don't want to fall into a value trap. You don't want to say just because something is down 90% or 95% that doesn't make it a good buy.

Maybe it's worth zero. Maybe the fundamentals have changed. Maybe it was worth, you know, maybe Ethereum was worth $1,000 earlier in the year and maybe something's changed and now it's only worth 50. But if you have conviction in the fundamentals, if you think it's largely a technical or market psychology-driven sell-off, then what you need is a plan of where and when you're going to buy. And that's how I approach it, which is generally kind of gradual. lagging in, gradually scaling in, because I can't pick-pick the exact low, certainly. And so kind of gradually accumulating, thinking through what happens if, right? If Bitcoin fell to 2000, what do I, what position do I want to have in that scenario?

Do I want to have dry powder to buy there, or should I have put all my dry powder to work first? So I can tell you, in this scenario, my thinking is kind of gradually scaling in, thinking hard about which assets to scale into. It's not automatic that the thing I loved a year ago, I, you know, it's not like, oh, well, I liked buying this thing a year ago at $80. Now it's $10. Therefore, that's a sale. Well, maybe not, you know. So kind of fundamental underwriting of what do we like owning and then scaling in intelligently.

And then I know that your fund allocates to both short-term and long-term trading. So how much is allocated to each bucket? Yeah, so we actually can't talk about, it's actually problematic from a regulatory perspective to talk about any specific investment vehicles. So you can talk about a firm, but. not about a specific investment entity. Well, can you say so, because my next question for you was, since I know that you actively trade on forks, I was curious to know how you traded the Bitcoin Cash Hard Fork.

Yeah. So it's, again, it's distinguishing talking about trading versus talking about kind of a vehicle for that. So the, with the Bitcoin Cash Hard Fork, we spent a lot of time. I love hard forks as tradable events. I love kind of event-driven trades. And the reason I love them is because you get to make a bet around a very concentrated time frame. So if I think, for example, an asset is, I'll use a concrete example.

So disclosure, we own Minero. If I believe in Minero long term, or I like it as a long-term investment, and I'm going to buy it and hold it, and I don't really have a clear sense of timing or catalysts, I'm exposed to a lot of risk, a lot of idiosyncratic risk. There's a lot that can happen, having nothing to do with Monero, like, you know, as we saw, also, Menero is selling off with the market, and I don't think it's that there's anything. I don't think it's that it's Minero selling off. I think it's that Minero is selling off with the market. So that bet on Minero is exposed to these other risks. It's exposed to what's happening in Bitcoin.

It's exposed to what's happening with regulation over a long time frame. And that's just a lot of risk. If instead I get to say, I think over the next week, Manero is going to be higher, I get to make a short-term concentrated bet that leaves me less exposed to things that aren't really part of that bet. So hardforks are great for that. because there's a date or a block height that you get to make a bet on. You can make a bet on around two weeks saying of how you think it's going to play out. I also think it's a spot where I'm not a cryptographer or an engineer at all. There's a lot of areas in crypto where there's smarter people in the room than me and people who have far more knowledge and experience.

One of the few areas where I think we can really compete well is kind of the game theory side, the poker side. You mentioned I was a poker player playing kind of semi-professionally in college. in many ways crypto is a poker game. It's a small number of holders, a small number of whales, a small number of key decision makers who determine outcomes. You can identify them. Sometimes you can name them and speak with them.

And they won't necessarily just tell you what they're going to do or what they hold, but it's kind of like poker. It's trying to figure out what cards do they really hold. It's like you see the bets they're making, and you have to read between the lines. And you can't do it perfectly, but you can take educated guesses. And then it gets more complex because it's not a heads-up poker game. It's not that you have one opponent. You're trying to figure out this complex,

web of interactions of how every one of those poker players thinks about what everyone else is holding, because that's going to impact their decision-making. So I love looking at hard forks. With Bitcoin Cash, with this hard fork, frankly, I found it very challenging to decipher. We spent a lot of time digging into it, trying to monitor the variables in real time, trying to understand the signaling. We actually ended up not making major bets. We made a couple really, really, really small bets, but frankly couldn't get a handle on kind of what we thought was really going on and driving things and the decision-making. The way I think of it is it's mostly a game of chicken between probably Calvin, Craig Wright's very wealthy friend with a gambling fortune,

and Jehan, Calvin Erring, and Jehan of Bitmain. And it's a game of chicken, meaning the best case for both of them is if the other gives up quickly. And that's the best case, but it's a prisoner's dilemma. if neither give up for a long period of time, they both cost themselves and each other huge amounts of money. So the game is signal to the other side really, really aggressively and powerfully that you are in it for the long haul and you're going to lose as much as you need to and you are going to win this and convince the other side to back down quickly. That's what we've seen very clearly, especially from the Craigorai Calvin Iir side, which is, you know, they've publicly committed over and over that they are going to spend hundreds of millions of dollars on this, right? Calvin is saying, I'm going to spend my own fortune funding unprofitable hash power mining because we're going to win this. And we're willing to throw away an unlimited amount of money and unlimited amount of time to do this. And Jahana Bitmain has said similar things, although not quite as strongly on the ABC side.

Now, the reality, do either of them really mean that? Very hard to say. Because either way, whether or not they truly intend that, it makes sense for them to say it. Like, that's the game theory. no matter what, they should be saying that, whether they mean it or not. So do they actually mean it? Very hard to say. And it's also dependent on their level of belief in whether the other person means it. And that depends, among other things, on ongoing signaling. So I'll give an example of something that I thought was weak signaling. So Roger Vair, for example, through a huge amount of hash power to Bitcoin ABC from his mining pool. And he did so publicly and announced it. But he announced that it was going to be, at least part of that, was a one-day exercise. That one-day gave ABC a lead in terms of total work done, which was critical. It produces a little bit of a margin of safety. But by signaling that it was only one day, it's not that credible, right? So it's a kind of one-time thing. It's not an ongoing threat.

In contrast, one of the things that N-Chain and Craig Wright-Calvin's side is doing is they've created this ambiguous threat of a block reorganization. They've hinted that they are mining in secret and mining the ABC chain longer than the kind of public ABC chain. And no one really knows if that's true, how true it is. It's very hard to quantify the exact cost of doing that. No one's sure if they actually have the mining power to make that happen. And that vague ambiguity, that kind of ominous ongoing threat, the fact that it has no expiration date is very powerful. Basically, we don't know when we're safe. And by we, I just mean anyone who's investing in ABC or part of the ABC ecosystem. because it's a threat that almost can't be falsified because it's very hard to disprove

that that threat still exists in a month or six months. And because we know it's going to be hard to disprove that threat, that's a major kind of powerful negotiating position. Let's switch to your longer term investments. You recently hired someone from Ex-Bud ahead of your venture investments. And yet I know that you've also been tweeting and talking about how it's not really certain yet how to value crypto assets. So given that uncertainty, what is your venture strategy or what is your current thesis on how to value crypto assets? Sure. Yeah, a few different questions in there. So I think one important thing to note is VCs very often, the early stage ones, the best ones, are investing under extreme ambiguity.

So my favorite example is the VCs who invested in Yahoo in the mid-90s in 1995, 1996, there was no business model for Yahoo. There was no model to value it. So that was the time of eyeballs, and it was early in thinking about eyeballs. So, you know, there were people who said, okay, we know that the internet, I mean, there were people at that time who even doubted whether the internet would be a big thing. But even if you said, okay, we get the internet's going to be a big thing. We're not sure exactly what. And at the time, it's important to remember, the internet wasn't a big thing yet.

Fewer than less than 10% of the world had internet access at that point. So, you know, it was that the internet was not anything like what we think of as today. And there were a lot of naysayers and people who said, okay, the internet is mostly for pornography and looking at pictures of cats, and maybe it's an incremental improvement. It's a faster way of communicating, but it was hard to match, for many people, it was hard to imagine the revolutionary impact. But even if you accepted that the internet is going to be this huge, massive, world-changing thing, and you said, well, search engines make sense.

We need ways of organizing that information and finding it. How do you value a search engine? How big will that be? What's the competitive strategy element? Is it winner-take-all? Are you going to have 100 different search engines? What are the network effects? And then even if you have winner-take-all,

all. You have a couple search engines that conquer that. How do they monetize it? What is the dollar value per user? No one had good answers to this. And the idea of monetizing eyeballs was genuinely an unknown. You know, when Facebook launched even, and that was much later, Eduardo Savarin, the co-founder, was going door to door trying to sell Facebook ads to local butchers. You know, it wasn't obvious, how would you monetize Facebook users? And yet, yet these very smart BCs invested in Yahoo, and how do they do it? So I think the, I'm not a venture capitalist by trade or experience, And so everything I say on this is a little bit superficial. But with that copyout, the general approach is you say, first, what is the addressable market within an order of magnitude? Within a, in other words,

if I'm trying to come on an exact number, we're trying to say, is this a billion dollar market or a $100 billion market? And so the smart VC said, okay, we think the internet is going to be massive world change in global. We think search is going to be a massive, massive market more than $100 billion. Then the question becomes, okay, call it $100 billion addressable market. Let's say we think that network effects and kind of the natural way we think about this business model suggests there probably won't be that many winners. This probably won't look like dry cleaners where you have privately owned dry cleaners on every street. It probably looks a bit more like kind of winner take all markets. You know, maybe of one or two or five winners. In that case, let's assume that the leading search

firm captures half that market, so $50 billion addressable market. And then the question is, well, how are they going to monetize that? What percentage of that market can they capture? And that's really tough with eyeballs. And so you look at traditional advertising models. and you try to in some way extrapolate. So you say, okay, maybe like the physical, the value of a physical visitor who sees a bus stop at, what's that value? And maybe we try to draw some comparison to the internet world, however bad that comparison is. So we say, okay, we think of every person using it, it's likely that Yahoo can create

at least $3 a year of value per user. And it's going to be a back of the envelope estimate. You won't have tons of confidence in. You come up with some number. Then you say, okay, we've come up with some estimate for what we think potentially this business is worth of maturity. what are the odds Yahoo captures that? What are the odds Yahoo is the winner? And that last piece, I actually think, is the hardest? It's the one that's the most vague, because it's so hard to identify, is this the early stage team that is going to conquer this massive world-changing use case. And the really good VCs, I think that's the part their best at, and frankly, that's the part on more stat, which is why we brought Eric on to our team, because that's his experience and not something I'm good at. And evaluating is this a team that has a credible potential to be the winning team? So then you say, okay, we think this team has a shot. And we don't know if that shot is 5% or 20%, but whether you explicitly

quantify it or just in your head, you're assigning some number to it. Call it 10%. This is the team that does it. So then you multiply those numbers together. So you say, 100 billion dollar market, the winner we think takes half of that. We think that's this many users at $3 per user. That gives us cash flow or a valuation for the business. And then we say we think this team has a 10% chance of getting that. So we're going to divide that number by 10. And you come up with kind of a present value. And then when you're looking for that present value to be massively over the valuation of the business. So you have a chance to invest in Yahoo at a 50 million valuation. If that number you just came up with is 75 million, that's not that interesting because you know all

your numbers are imprecise. You're not trying to get, you know, a little bit of value here. But if the number you came up with back of the envelope is $5 billion, well, that $50 million maybe looks interesting. And a lot of your assumptions could be off substantially and it could still be a good investment. So crypto, I approach it the same way. I can't tell you what the fair value of Bitcoin is today. it will be in 20 years. But I have, at Bitcoin's actually one of the few coins that I have kind of a

clearly coherent model. I can't tell you if it's right, but at least I have kind of a really clear thought process here, which is, I think the addressable market for Bitcoin is probably at least to start the offshore banking, offshore banking use case, which is roughly $20 to $30 trillion. And offshore banking gets used for a lot of things, including tax arbitrage. But one key use there is people want a way to store their money that can't be seized arbitrarily. So the example Like if you're, because everyone, the answer everyone gives is, yeah, but that's for criminals, right? And the answer is no, every large U.S. company makes use of it. Why? Well, Amazon, if Amazon had all of their money in a New York bank, then if, let's say an employee or a supplier sues them and accuses them of doing something wrong, a judge, a single judge in New York could freeze all of Amazon's assets pre-trial. And then Amazon's out of business the next day, because they can't make payroll. And that doesn't feel like a fair legal process or something Amazon wants to expose themselves to. So Amazon, you know, they're going to be held accountable by the law. They know that. They don't want to avoid that. But what they want is to have their day in court in front of many judges. And so Amazon has assets all over

the world. And so if that New York judge freezes their assets, they can instantly freeze maybe, I don't know, the number, 1%, 10% of Amazon's assets. And then that judge would try to apply that judgment around the world. And that would be like a five-year process. And over that five years, Amazon would have a chance to appeal and appeal and hear their case heard in jurisdictions around the world. So that's a really powerful use case that I think most people can kind of intuitively understand that you want to have your day in court and potentially in front of multiple judges. That's just one use case, but it's kind of a clear example. And so the way my thinking is, okay, 20 to 30 trillion dollar addressable market. Let's say I think that Bitcoin,

let's say I think the winning public cryptocurrency is likely to capture at least half of that, which I do. That gets us to call it 10 trillion. And then here's the big question. What are the odds Bitcoin wins that use case? And that's very subjective and debatable. In my head, if I, you know, if we kind of pick an arbitrary number, let's say 10%, that gives us a value of 1 trillion at maturity. And then we take a present value of that because we know we're taking risk. We know there's a time value of money. So maybe that comes down to a present value today of something like, you know, $300 billion, let's say, as a Bitcoin value.

So that's just an example, all of those numbers that I stated might be wrong. Maybe Bitcoin's chance of success is 50% or 80%. But basically, almost any way I run those numbers, I come up with. with a bullcase for Bitcoin from, or I don't say bullcase, I come up with Bitcoin being a good value by today. Probabilistically, it could fail, but in my eyes, that's the model I'm applying, and that's why I think, and disclosure here, I am long Bitcoin. That's why I think, probabilistically, Bitcoin's probably a good investment at today's levels. So, but to answer your question about the VC, other coins are more complex to model. In VC investing in crypto, you can

invest in companies that are very traditional. So Coinbase is a traditional company in terms of how you value it. They have cash flows. They have future cash flows. They provide products and services. They have costs. The challenge is it's in a fast-changing industry with a lot of questions and variables and regulatory complexity. But it's really not that different than investing in any tech startup in the 90s if you're investing in a company. We're going to talk more about Wall Street entering crypto. But first, I'd like to take a quick break for our fabulous sponsors. A startup that completed an ICO and looking to leverage Ethereum for working capital. A miner looking to buy more rigs without having to sell Bitcoin. Altlending can help. Altlending enables companies to leverage their Bitcoin or Ethereum to borrow US dollars while retaining ownership of their crypto assets. We bring years of financial and technological expertise to the blockchain space. Access to institutional capital means borrowers don't have to wait weeks to receive a loan. Our simple and efficient vetting process makes getting a loan easy. No membership tokens or complicated signups required.

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Far less actively than the peers you just mentioned. It's funny. So the coin fund team are great, Jake Bruchman and Alex, and I've learned a lot from them on this point. It's something that we're spending a lot of time thinking about from every angle. So one is the question of participation. So, you know, we own major crypto assets and how do we participate in those networks from a kind of profit-making perspective. So to what degree should we be mining? or staking or doing staking as a service. And then also from the kind of VC side. So there are a number

of generalized mining startups that are getting funding now. And do we want to invest in them? And how do we think about investing in them? I honestly don't have a really clear thesis in terms of modeling this or thinking about it from a competitive strategy perspective. I'm skeptical of the economic model a bit. So generalized mining is definitely going to be a thing. It is a thing. It is real. It is valuable. The people who participate in it will be adding huge values to the networks. The challenge I face, at least on the investment side, is it's very hard thinking about, like, a question that I think people in crypto generally don't ask because very few people kind of come from this competitive strategy background that's very common in the business world, which is it's not enough to, I think I'll frame the mistake. The mistake is to say, this is a clear use case with clear demand, there's going to be value created here, this is a great team tackling it, therefore it's a good investment. The problem is, I'll use the airline analogy. So over 40 years, basically from around 1960 to 2000, airlines as an industry lost money. How's that possible? Because airline, the revenue growth was fantastic. Consumer, it was clearly a real use case, right? I mean,

people fly. There's real value there. Consumers got tremendous utility out of it. And yet, the industry as a whole didn't make money. Why? Because of competition. What happened was the airline travel is relatively undifferentiated. People don't really care whether they're flying on Delta or American for the most part. And so they price shop. And it's a race to the bottom on prices. It's fee compression. There's also rising cost competition. So if the Delta Union negotiates an increase in pay, the American Airlines Union tries to match it and is very likely to be successful. So basically, you're competing, all these airlines are competing against each other on both

the cost side and the revenue side. And the result is that they end up with zero profits. The profits get competed away. That's great for consumers. It's potentially good for the employees who are able to negotiate pay raises, but it's really bad for the investors. So what you generally want to invest in are things that have some type of monopoly. And that monopoly could be a natural monopoly. So for example, if there's a great hotel on Miami Beachfront property, well, there's only so much Miami Beachfront property.

It can be a monopoly around brand. So Coca-Cola, for example, they have created this kind of brand monopoly where if I came out with Arikola and it was exactly the same quality and 5% cheaper, I'm probably not taking that much market share from Coca-Cola. Because Coca-Cola, it's really their brand that's their monopoly. And sometimes it's a supply chain model. So Walmart, for example, they have these relationships with suppliers that are partly due to economies of scale, partly due to logistical expertise that it's very, very hard to compete with. If I try to compete against Walmart and source toothpaste at the same price as them, I'm just not going to be able to. They basically have a monopoly on kind of getting the lowest price supplies from a few different angles. So with the generalized mining, here's the problem.

You get a really smart team, and they can do it really well, and they can provide the service. the question is why won't their profits basically get competed to zero? Because there's going to be other smart teams competing. What is the differentiator? What's the natural monopoly? And it gets worse because in this case, there's a natural player who has an incentive to basically offer the service for free. And that is exchanges and custodians. So a very probable outcome here, I think, is very similar to what we saw with this kind of same thing in the prime brokerage model in traditional finance, which is using stock lending, for example. So there's a business. where if someone wants to go short in equity, they have to borrow that equity from someone else, and they typically have to pay to do so. Well, that's a business, and you could think there could be independent service providers who serve as that kind of middleman, right? The reality is you can't do it as a small provider because the big prime brokers, they are basically paid by people to store, to hold on to their assets because they're the most trusted. So State Street, for example, in New York is, I believe, the largest custodian on the planet.

And people pay them to hold their stock for them because they trust State Street. And State Street is then sitting on all of the stock that they basically get for free. And so they have an incentive to lend that out at a very, very, very small profit margin. You know, it's kind of like a free role for them. They don't need to charge a high price because it's kind of free to them. And so if I'm trying to compete with State Street, I have to compete with someone who just for free has, you know, a trillion dollars in assets. custody. I actually don't know the number they have custody, but very, very hard to compete against State Street at that business where they have such a natural advantage. So the problem with

generalized mining is you look at a Coinbase. Well, Coinbase right now, I don't know with the decline, but they're probably sitting on something like $5 billion in crypto assets. They have every incentive to put those assets to work, to be staking those assets to earn a return. And I don't know how this business model will evolve. It may be that Coinbase can keep that return for themselves. It may be that the people with assets on Coinbase will demand to receive most or all of that return. It may be a hybrid. I'm not sure. But for me to compete with Coinbase and generalized mining, it's going to be very hard for me to charge basically the same fees because Coinbase is sitting on $4 billion of assets that they kind of have for free. They're kind of paid to custody of those assets.

So how do you compete against Coinbase at their game? And I think the custodians, as we see more and more third-party custodians over the next year or two, you know, Fidelity is saying they're going to launch Bitcoin custody in Q1, they're probably going to do something like Bitcoin lending. I don't know their plans. I don't mean to assert. So that's the challenge. Where do the profit margins come from? Yeah, the one thing is that I do think, because I had to Shar and Jake on my show talking about generalized mining, and they talked about it as a loss leading activity. So I think it's, you know, it's for them. It's just like helping to ensure that their investments do survive and thrive. But actually, because you mentioned fidelity and back to, and I'm just conscious at the time I do want to move on.

So last year, a lot of people felt that Bitcoin futures would lead to a rise in the price of Bitcoin. And they definitely, I think, gave Bitcoin some sort of symbolic validation, which led to this short-lived bubble. But as we've seen this year, the existence of Bitcoin futures has not helped the price of Bitcoin. So why not? And then how do you think that will be different? Or do you think it will be different from the impelifted? that we'll see from backed and fidelity launching. Yeah, you know, I have to admit to being somewhat naive on that element as well.

I thought that the Bitcoin futures would have a more meaningful impact than they had. One way to tell the story of last year's bubble, so Bitcoin peaked almost exactly with the launch of the futures. A common trend is that speculators will buy, you know, it's buy the rumor, sell the news as a common statement investing and trading. That's kind of exactly what happened here. there were a lot of people who had large speculative positions that in their heads were short-term. So they were kind of weak hands. They were betting on an event. And the bet was, I'm going to buy ahead

of the futures, and I'm going to sell to the institutions who are buying via futures. What happened was just we didn't get much net buying from the futures. It's very hard to know, every time someone buys, that means there's a seller. So with futures for every buyer, there must be a seller. But so it's very hard to know was there net buying or net selling. And what does that mean? Well, what it would mean is if there were a lot of institutions who had never bought before who were suddenly buying Bitcoin futures, for every buyer there's a seller, but what it would mean is there would be arbitrages selling the futures and buying the underlying. The underlying in this case just being actual Bitcoin. It's hard to know what the net kind of trading was in futures.

There's a commitment of trader report that kind of breaks that down, but doesn't do a great job. But long story short, we didn't get much net selling. There wasn't much general buying by of futures, which surprised me a bit. It, I think, highlights just how many obstacles there are to institutional adoption. The futures did fix a lot of that. So you don't have to custody of the futures. You don't have, you don't deal with security issues. There's a lot you don't have to deal with. But institutional investing is a very slow, gradual decision making process where, I mean, something we hear a lot, for example, is, okay, great, the future's launched. Let's see them go three months without a major crisis. So let's, you know, let's see if the futures are limit up or limit down

every other day. Let's see if they successfully track Bitcoin. I mean, what happens if the futures are trading a massive premium to Bitcoin? There's just a lot that people need to see empirically. Trust is built empirically. What I mean by that is, let's say, and this is true on the custody side. So if a new custodian launches, doesn't matter if they do everything perfectly. They can have a sock one audit. They can be audited by the best financial firms. They can have insurance. They can have every possible process in place, there's no way to really fully convince people they're trustworthy except time. Why do we trust JPMorgan or State Street or Fidelity? Is it that we're all really doing deep diligence? No, it's that, you know, if someone's been up and running without its

incident for years and if they're trusted by other key players for years, then we trust them implicitly. So I think there's an element of this gradual and there are a lot of wrenches thrown in, right? So as soon as institutions were maybe thinking they would trust Bitcoin as a long long-term investment, you get a really, really sharp fall and you get headlines of SEC regulatory action that do not impact the Bitcoin at all, but that to someone casually observing, that's not as obvious. You know, it's maybe scary. You get this hash power war where there's a concern about, you know, you have Craig Wright saying, first he's going to take over ABC, then he's going to take over BTC. And, you know, you and I might say that's not a credible threat, but to the endowment looking

at the space, it's very hard for them to gauge. And just out of curiosity, was Block Tower trading the futures. And then also I just want to reiterate that other question about what effect you think back to infidelity will have. Gotcha. Sorry. We were not active future traders. We are set up to trade them and actively monitor them. Basically, right after they launched, they've traded almost entirely in line with the underlying, the underlying being actual Bitcoin. So what we'd be looking to do with the futures is potentially arbitrage them. But we're not really an arbitrage-focused firm. That's just not kind of what we're best at. And so, and trading the futures against the underlying Bitcoin is pretty simple arbitrage most of the time. And so there's

a few firms. For example, there's some big Chicago trading desks and some big market-making firms elsewhere that are really world-class arbitrages. They have, you know, the world's best electrical engineers to optimize latency. They have the best computer scientists to optimize on the software side. And they can do it in a very efficient way. And my hope actually, from a trading perspective is that at some point you're likely to see a massive divergence. It's a little bit like, so in 2007, you had something called the quake where you had all of these algorithms running on Wall Street that were keeping markets very efficient air quotes. And efficient in this case just means there was base, there was very, very, very little arbitrage

profit because the minute there was a penny, someone grabbed it. But then in 2007, the algorithms kind of broke. There was a, there was a like four standard deviation event that seemed minor to the outside. Basically, all the algorithms were doing the same thing. They all kind of got caught on the wrong side of a trade. They all lost a ton of money, and many got turned off. And so suddenly, the arbitrage profits skyrocketed. Suddenly, there was a lot of money to be made if you weren't in the bad position of having

just lost a lot of money with your algorithms and having to justify that to your bosses and explaining why your algorithm shouldn't be turned off forever. So I think we're likely to see that at some point with the future. Something will go wrong. Here's an example. So if there's an airdrop or a hard fork with Bitcoin, futures will probably be mispriced because instead of it just being, you know, under normal conditions, it's a really simple arbitrage. The Bitcoin future is the same as Bitcoin through some period of time. But if there's

going to be a hard fork, well, what is the future really? Right. So if I own Bitcoin and there's a hard fork, I get both assets. If there's an air drop, I get both assets. With the future, it's not clear if you're going to get that second asset. So the fair price of the future will diverge from the underlying in complex ways. And that, I hope, will create opportunity. on the question about backed, I don't think it's going to be a sudden meaningful event. I think it's going to be slow and gradual. Backed, fidelity, all this stuff. And this was a mistake that I made, by the way.

Something I was saying for most of this year is that we see this really clear path of institutional infrastructure being built, and I think it's going to be bullish. And I have to concede that that was kind of a bad call by me, that the institutional infrastructure is playing out as I expected and explained. But it's, I better understand. see that empirically the psychological way this plays out with institutions, which is just, it's as slow as you think it is, it's even slower. A trader on Twitter earlier this year posted screenshots of a private conversation you had with

him in which you appear to be trying to glean tips on his technical analysis and then also dropped some quote-unquote insider information about stellar, which was the fact that it was acquiring chain. Insider trading, the definition of it specifically applies to securities. However, within cryptos, there is some uncertainty about which ones could be considered securities, and many people believe that Ripple and Stellar are those that are more likely to be considered securities than not. So if that turns out to be the case, then your conversation with him would constitute insider trading. So how do you defend your sharing of this inside information? Social media is a weird place. I actually haven't really talked about this publicly because it's a very

Well, I answered a couple of the criticisms, but some elements of it are very hard to address briefly because people don't understand the laws and the regulations at all. So this is actually kind of like the first time, I guess I'll talk about it, or a piece of it. So I guess I'll address the point you raised. I was thinking through of kind of like all the nonsense the guy raised. So on Stellar specifically, we've actually never ever traded Stellar, ever. And I could have just said that on Twitter. I could have just answered. I had like 50 people being like,

did you trade seller or blah, blah, and I never answered because I don't want to be in a position of justifying individual thoughts or trades or positions to people on Twitter. It's social media. That's not who I'm responsible to. That's not who I'm a fiduciary of. And I'm not going to be accountable in an ongoing way to saying, what is my current position or P&L to random kind of people on Twitter.

So I thought it would set a very bad precedent to directly answer it. But the reality is we've actually never, ever traded Stellar, and insider trading requires trading first. Second, assuming that seller is a security, let's assume that, people don't understand, this is like an awkward thing to explain, but it's actually kind of fairly simple legally, which is what is insider trading? It's actually slightly complex because it differs for different types of assets and depending on your fiduciary position. But the classic example people use is if you overhear information in the Goldman Sachs elevator, you're probably legally allowed to trade on it. So it may be insider information, but it's not illegal insider trading because you didn't

do anything wrong. So what does it mean to do something wrong? So if you had a fiduciary obligation, or if anyone had a fiduciary obligation with that information that you received, then it's probably illegal for you to act on it. So for example, if I pay someone to give, if I pay someone at a chain or stellar to give me information and it was illegal for them to divulge it to me, or as a of obligation and I then trade on it, that's illegal. If I don't trade on it, it's not illegal to report or share information, of course. That's protected speech. But even if you do trade on it, let's assume that let's take the case of trading. If you paid for it or if there was any kind of of exchange or if it was a, if there was any fiduciary breach in any chain of kind of that

process, then it's illegal. If you accidentally gain information and the way you gained it, no one broke any rule at all, no one broke any obligation, then you're entirely allowed to trade it. Now, I'm even hesitant to say that because it's more complex than that, and that's not entirely accurate, and that's why this is a tricky thing to discuss. But, so I guess the real answer here is, insider trading requires trading, which we didn't do. Insider trading requires a breach of fiduciary obligation, which there wasn't. And insider trading requires it to be a security, which I assume it is actually. So there's nothing, it's kind of nothing, I guess, is the way to put it. Now, if we had wanted to trade on it, we have like three external legal providers, and I would have consulted with them on the exact specifics of how I got the information in terms of whether it's legal. We didn't. So there was no real question to ask. The reason I was even hesitant to use that series of explanations that kind of make it very clear that we didn't do anything legally wrong is because I also care about ethics. Right. It's not, legal is not the only thing. I don't just want to be a legal actor in space. I want to be an ethical actor in space. So then you get a question of, well, is it wrong? Is it wrong?

for me to share that information. And that, I guess, is a little bit subjective. You know, my own view on this, I guess, is it comes back to that obligation. So I received the information from a source who had, who had, it was kind of this accidental find. And I didn't violate anyone's trust in sharing it. The person who gave it to me didn't violate anyone's trust in sharing it. So like who I'm, I'm not sure who I'm who's trust I'm violating or who I'm hurting or who I'm ethically violating. But I can imagine that there is subjective opinion. like, here's another way of framing it. So if someone is a retail speculator who doesn't have people to share information with, who doesn't have resources at their disposal beyond what they see on Twitter or what they see on CoinDesk, they could say, yeah, but that's not fair. It's not fair that you have information I don't have. And that's always the case, of course, in markets. So the job of a investor is to find something others don't have, either information or analysis, right? That's how you beat the market. That's how you put on a winning trade. For every buyer, there's a seller, you're trying to, you know, buy when other people shouldn't be selling. So you're

either trying to get information or analysis others don't have, but of course there are ethical and legal limitations around that that I take very, very, very seriously. So I don't want to, so, you know, it's a complex discussion. I can say, like, we really hold ourselves the highest legal and ethical standards that I can think of that in the industry. And I can't say that we'll never make mistakes, but certainly on this, it's about as far as you can get from anything that I would regret or have a guilty conscience over. It's all, you know, this is the nature of social media, right? It's awkward in that to publicly defend myself from accusations that the people making them don't really understand what they're even saying, it's very awkward. And then people say,

oh, yeah, well, prove it. Prove you never traded seller. Well, there isn't really any way for me to prove it on Twitter, right? I could present audited financial statements and people would say you photoshopped it. And of course, it's not a good way to run a business to present audited financial statements to random internet trolls when they asked for them. So, you know, it's a very awkward challenge. I'd say the one other thing that was kind of funny to me, because this is something I'm really, really consistent on. More so, I think probably that almost anyone in the industry is disclosure and honesty about the economic relationships. So whenever I ever recommend an investment in any form, I always disclose the relationship.

So if I'm an advisor to a project, this is even true in private. So when I introduce another fund manager to a project, I say, am I receiving any in any way economic benefit from this introduction? In other words, are we just an investor? And if we're an investor, are we likely investing at the same price you're investing? Or did we get a sweetheart deal? I try to proactively disclose all of that because we really want to be kind of at the highest level of ethics in this industry.

We're in it for the long run. Reputations matter. So I'll be honest, that fiasco was very, very frustrating to me because we're working so hard. And in many cases, not doing profitable things because we want to be ethical and we want a reputation for ethics. So then to have that maligned in a very complex, in an ignorant way that's complex to explain was frustrating. And so tying to the disclosure thing. So the other thing that was part of that was I was accused of like pump and dumping, which was the exact opposite of the actual kind of conversation. So the ethical way to talk up an investment is what Warren

Buffett does, what Ray Dalio does, what, you know, what anyone does from their fitness world, which is you tell the world, I own this thing, here's why I own it, here's why I believe in it. That's the, that's called ethical disclosure. That's what you're ethically required to do. That's the right way to do it. That's the moral thing to do. And of course, there's nothing wrong with saying, I own Bitcoin. I intend to hold it until I die. And I think you should too. And here's why. what a pump and dump is is where you tell people to buy and you sell into their buying. You try to induce them to do something and you're doing the opposite. That's unethical.

I have never done that. I will never do that. So if I ever say on a podcast or on Twitter that I'm bullish something, it means I'm genuinely bullish on it and I will be adding, not selling into that tweet. Now, with that said, I almost never make public investment recommendations, partly for this reason. It just gets complex. Like, here's a scenario. Let's say I tweet, I'm bullish on Monaro. And then let's say 12 hours later, something fundamentally happens that's horrible for Minero. Well, I'm now in a very awkward position because if I then change my mind and sell, I get accused of pump and dumping or

market manipulation or something like that. And if I don't sell, I'm potentially hurting our investors, right? It's not fair to our investors for me to not take intelligent investment action because I tweeted something. So the answer that I've come up with is don't tweet investment recommendations, you know, don't tell people to do things. So I almost never, in any forum, recommend investments. I almost never disclose our positions for the same reason. Even disclosing a position in the sense of, like, as I did today, so I disclosed that we own Bitcoin and Monaro, and those are actually kind of two exceptions I make because I view them as long-term buy and holds. That's how I genuinely view them. I think that's unlikely to change. But I'm even

reluctant to say that, because if I tell you I own these five other assets, well, what if I change my mind the next day, someone might accuse me of saying that I own those assets as an investment recommendation. So I don't want to be in that awkward ethical dilemma of do I serve my investors or do I serve kind of the people I told this to? So the answer in this case is just kind of being quiet. We're getting close to the end of 2018. What trends or events do you expect to happen in crypto in 2019? Oh, real, real change of topic. Let's see. Well, actually, so, you can make this answer about anything you want. But I've had to jettison so many questions while you were chatting that one thing I would like you maybe to touch on is why it is that you think

games is one of the first areas in which crypto could take off. So if you could include that in your yeah. I'll touch on both. So I think, let's see, on the bullish side, I think one theme will be institutional adoption. It just won't be a line in the sand. It won't be sudden. It's going to be gradual. And I think it'll game steam over the course of the next year. Another theme, I think, will be the first, first hints of real use cases outside of kind of the store of value Bitcoin type use cases, meaning the first DAPs, the first usage of decentralized applications at a meaningful scale. So right now, there's a lot of decentralized applications, some of which work like Auger, that just don't have active usage in a meaningful sense. And that's discouraging. Like, it was almost better when we didn't have DAPs because we could hope.

The problem is if a DAP launches and it works and no one wants to use it, that's kind of the worst scenario. right? Because what are we hoping for? So I and there's a lot, there's been a lot of obstacles to adoption. There's been scalability, poor user interfaces, uh, consumer education and marketing. There's a lot of elements to this, but I'm very optimistic that in 2019 we'll see the first minor killer DAPs. I think they're likely to come in gambling, uh, or something like remittances. I'm not sure it might be monetization of social media networks. It's likely to be things that aren't world changing, but that are simple and easy to adopt and, and a very clear improvement of the consumer experience without requiring major changes of consumer behavior.

So I think that'll become a story of, okay, we've got a proof of concept. We have these one or two daps. Not that they're used by 100 million people, but maybe they have 200,000 users, right? It's kind of a proof of concept. The third that I think, I don't know if it happens next year or the year or after, but Ray Dalio is the CIO founder of Bridgewater. Bridgewater is one of the biggest most successful hedge funds in the world. Ray Dalio is a brilliant macro economist.

and he has recently been going on kind of a publicity tour talking about how he thinks the U.S. dollar is going to suffer. Its status is global reserve currency will be brought into question. And he thinks that will actually lead to a potentially a financial crisis in the next three to five years. That story, I think, is very bullish crypto and Bitcoin and any crypto asset that is competing directly with Bitcoin for store value. Because right now, the story of you should own Bitcoin because central. banks can depreciate fiat. That's not a very powerful story.

If I'm an American, I'm seeing my purchasing power erode at 2% a year, even if you think inflation is much, much, even if you're hidden inflation is much higher and it's 5% a year, there isn't a sense of urgency. Okay, 5% of years a lot, but we just saw Bitcoin lose 70% of its value. That doesn't seem like a great alternative. If instead, the story starts becoming, wow, that 5% might become 10% a year, 15%, 20%, people are, the story might be, we may enter a period where people are losing faith. in the largest fiat currencies. We may enter a period where the U.S. dollar doesn't become

something like Venezuela or Zimbabwe, but maybe it becomes something like Argentina or halfway to Argentina. That story, I think, will lead at the margin to meaningful flight of capital out of fiat and into cryptocurrency. And it's hard to, the timing of that story depends on a lot of things having nothing to do with crypto. But I would make a concrete prediction that that will be kind of a story that people are buying crypto, that hedge fund managers like Ray Dalio are buying crypto in the next three years as a hedge against the dollar losing global reserve status and fiat currencies in general being mass depreciated. Yeah, I think I used to follow that train of thought. And I still can, but after hearing Christian Lagarde's remarks the head of the IMF, where she

basically talked about these central bank digital currencies, and I realize that, you know, could happen maybe sooner rather than later than I started thinking like, oh, maybe. Because as we've seen with services like Facebook and other big tech companies, I feel like people don't really care about decentralization or privacy or things like that. And so I feel like if you end up with a digital version of one of these big fiat currencies, then we could just sort of see cryptocurrencies marginalized. But do you have any thoughts on that? Yeah, totally. So there's a few, so I agree with the comment on privacy. I think so like here, here are the core crypto use cases and they really haven't changed, certainly the most likely ones of the next few years. So one is the privacy, censorship seizure resistance. Demand for that, I think, increases in contrast to crypto fiat. So as China rolls out crypto yuan, a type of money where they can monitor in real time with big data analytics, where they have the ability to instantly with a click of a bureaucratic button, freeze your assets. I think that will, increased demand for effectively black market money for an alternative. And Bitcoin or crypto generally,

I think would be very attractive. Now, that only gets you so far. So most people will be law-abiding. Most people will be happy with crypto yuan and other countries will roll this out. But that probably does potentially support something like a 10x of the crypto markets, that and of itself, just having Chinese people view Bitcoin as like the thought process is, okay, I trust the government, I like the government. Crypto-Yuan is a good innovation. overall, but there is a scary element here. And having a little bit of the equivalent of gold, I think this was the mentality of a lot of Americans 30, 40, 50, 60 years ago of, okay, I trust the government generally, but I'm going to have a bar of gold in my buried in my backyard kind of thing.

So I think you do get a little bit of buying from that, and a little bit could 10x the tiny crypto market. The bigger use case in this regard is probably depreciation resistance. So even as you move to kind of crypto private currencies or crypto fiat, to the extent there's a concern that central banks will increase supply of that and will be devaluing that in an ongoing way, more and more people will be looking to, you know, maintain their wealth, to store value, or at least to hedge against aggressive mass depreciation. That's probably, I'll say a comment. So I've had a fun conversation with a young fund manager named Marad, who has articulated very

aggressively, the idea of depreciation resistance as the use case of Bitcoin. And I'm not sure that's going to be the biggest one, but it's definitely a big one. And that's kind of the story we're talking about over the next three years as Fiat potentially is continued to depreciate. Yeah, we'll see. That's another thing where I'm not sure people really care unless they're in places where there's hyperinflation. But so we're basically out of time. So where can people learn more about you and Block Tower? Probably Twitter is a good. Anytime I write anything in any forum, I end up posting a link there. So it's at Ari David Paul on Twitter. I have to say in researching this podcast, I was impressed by the sheer volume of tweets.

I was like, wow, Ari spent a lot of time on Twitter. But there is a lot of really interesting stuff on there. So I do urge people to check Ari's Twitter timeline. You know, Twitter's amazing in that like when I'm on Twitter all day, it's usually when I'm traveling and it's like, I'm in a cab for five minutes. What can I do? Well, Twitter's kind of the only thing, you know, where it's like, I'm sitting in an airplane boarding, but they're going to close the gates in 10 minutes, you know? So it's like, okay, I can't. I'm about to lose Wi-Fi.

I got 10 minutes. Or I'm standing in front of an elevator, and I pull out my phone. And it's like, okay, respond to a telegram message, look at Twitter. It just, I think of it as, it's like sand. If you have a glass of marbles, sand kind of, you know, adds more volume to the glass without increasing the size of the glass. It kind of fits in between. So it's like, I can hop on Twitter for 30 seconds.

and write a tweet. Also, I write really quickly. So I'll do like a 20 tweet tweet storm in like literally two minutes. It's not, I don't put a lot of time into crafting this stuff. Huh. That's interesting because it feels more substantive as if it took you some time. But anyway, all right. So people check out Ari on Twitter.

And thank you for coming on Unchained. Thanks very much, Laura. Thanks so much for joining us today. To learn more about Ari, check out the show notes inside your podcast. player. New episodes of Unchained come out every Tuesday. If you haven't already, rate review and subscribe on Apple Podcasts. If you liked this episode, share it

with your friends on Facebook, Twitter, or LinkedIn. And if you're not yet subscribed to my other podcast, Unconfirmed, I highly recommend you check it out and subscribe now. Unchained is produced by me, Laura Shin, with help from Raitland Gallupale Factor Recording, Jenny Josephson, and Daniel Ness. Thanks for listening.