Unchained - Want to Diversify Your Portfolio? Try Bitcoin, Say ARK's Chris Burniske And Coinbase's Adam White

Episode Date: July 12, 2016

Invest in oil and gold? In this episode, the co-authors of a compelling white paper explain the four reasons why they believe you may soon be investing in digital oil and digital gold instead. Find out why their analysis prompted Burniske to say of bitcoin, "That's an investor's dream," why White mentioned the saying, "On the blockchain, no one knows you're a refrigerator," and how well ARK's investment in bitcoin has performed. Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to Forbes Podcasts. Hi, everyone. Welcome to Unchained, a Forbes podcast produced by fractal recording. I'm your host, Laura Shin, a Forbes contributor recovering blockchain, digital currencies, and fintech. Thanks for tuning in. Today, I have two guests. First is Chris Briniske, blockchain analyst and products lead at ARC investment management, which is the first public fund manager to invest in Bitcoin and the only one offering

ETFs with Bitcoin exposure. Joining Chris is Adam White, Vice President of Business Development and Strategy at Coinbase, which runs a popular Bitcoin consumer wallet and an institutional exchange called G-Dax. Welcome, guys. Hi, Laura. Thanks for having us. Chris and Adam are here today to talk about Bitcoin and, more generally, cryptocurrencies, as a new asset class, a topic they explored in-depth in a white paper they co-wrote.

But before we dive into their findings, Chris, can you tell us a bit more about yourself in Arc? Sure. So, ARC is an investment manager that was founded about two and a half years ago, and we were founded with the mission to inject the open source ethos of software development into Wall Street research and asset management. What that means is we share all of our research and publish every single trade we make so that the public can see everything we're doing and question our actions, which makes us better and keeps them informed. We focus on the innovations that are shaping our future, so things like autonomous vehicles, robots, cloud, and of course, blockchain technology. And so we use those investment themes to create ETFs,

as you mentioned. And so I am both an analyst and a products lead, so that's a combination of research and business development. And I've written a number of white papers in the blockchain space now. While I'm bullish on blockchain technology generally, I'm most bullish on permissionless innovation. Great. Adam, tell us about yourself, Coinbase, and G-Dex. Sure. So I lead partnerships and strategy at Coinbase.

Coinbase is one of the easiest places to buy, sell, and store Bitcoin. So for context, we've done almost $4.5 billion of transactions for our customers. I've been with Coinbase for almost three years. I was originally focused on bringing Bitcoin to merchants like Overstock, Expedia, and Dell computers. And more recently, I've been heading up. product for GDax, which is our institutional exchange and one of the most liquid trading exchanges in the U.S. and throughout the world.

Great. So let's talk about your white paper. In order to determine whether Bitcoin represented a new asset class, what criteria did you look at? So initially, what we did is we reviewed a bunch of the preexisting literature out there. As with most research, it's important to first know what's been done already. And so one of the seminal papers is a paper written by Robert Greer. I'm amused by the name. It's called What is an asset class anyway?

And what's pretty clear on that paper is while there are some well-known characteristics, there's still a lot of work to be done in precisely defining what an asset class is. So building upon Greer's work and a few of the other notable names out there, we came up with four key metrics. One was investability, and assets must first meet that metric, and that's broken into two things. One is sufficient liquidity, so enough volume turning over every day, and then the second is mechanisms to invest. If an asset meets that, which it's pretty clear Bitcoin does, it trades over a billion dollars a day in exchanges and arguably just as much OTC, then we went on to look at three other things.

One was the politicoeconomic profile. And that's something we can get into later, but it's the basis of value, the governance, the use cases. Next was the correlation. So how does Bitcoin move in relation to other assets in the capital markets? When it goes up, do other assets go down and vice versa? And the last one was the risk reward profile, which is a combination of absolute returns

and volatility. And I'm sure we'll get into that as well. And when you looked at the data, what did you discover? I think we were surprised to find just how neatly Bitcoin differentiated itself from other asset classes. So like Chris commented on, one of the first things we looked at was, what's the basis of governance for Bitcoin? How is its value created when you compare that to other asset classes like precious metals, commodities like oil, foreign currencies, even things like the equities market. And what we found is that Bitcoin are more largely digital currencies

really kind of differentiate themselves uniquely. So one is the price behaves very differently to market forces. So essentially what we did is we calculated a one-year rolling correlation among these varied asset classes and looked across the board and Bitcoin had near zero correlation to all of them. So what that implied to us is that Bitcoin, doesn't follow in line with other assets. For example, if the price of equities are moving up, does Bitcoin move up with it or does it actually move in the opposite direction? We found that it does

neither. So to us, this idea of diversifying one's portfolio with an alternative asset class like Bitcoin could be a prudent move for many asset managers or individuals. The other thing we found that was really unique was looking at the risk, the risk reward profile. What that basically is is a measure of in the form of price volatility to reward, which is essentially just the absolute returns of Bitcoin. And when you compare those two, you get something called the Sharp ratio, which is just a measure of return per unit of risk. And what we found is that Bitcoin better compensates investors for the risk they're taking three out of the last five years. So there's always a lot of talk about Bitcoin being inherently volatile or far too risky of an investment. And what we wanted to do was measure that against the return of Bitcoin.

And while there's no doubt that Bitcoin is more volatile than other asset classes, we've seen two things happen. We've seen that volatility decrease over time, over 50% in the last few years. But we've also seen the return of Bitcoin outperform that amount of risk. So to us, two big takeaways were that not only was Bitcoin differentiated in the fact that it wasn't correlated to other asset classes, but it really provided a nice return to investors. And Laura, I'll add on to to out. Adam there. I think from the qualitative side as we worked to define the asset as well, as Adam mentioned early on, this idea of governance. So when I talk with people within the financial services space, one of the first things they always ask me is, who's controlling this? And it's kind of this

mind-blowing concept of there technically is no single person controlling this, no single entity. It's a balance between all the stakeholders. And that's really not something that we've seen with most any typical capital market asset. And the other one is use cases. And this is really greenfield territory for Bitcoin in terms of, you know, I wouldn't use Apple stock to necessarily transfer ownership of my house. But I could potentially use Bitcoin, especially as we roll out SegWit and we see a more flexible scripting language in the future. Okay. And just unpack that a little bit at the end. What, like, what did you mean when you talked about a scripting language and Segwit.

Okay, yes. So Segwit is shorthand for segregated witness. It's actually something that should be activated within the core Bitcoin software in the coming weeks. And what it does is it does a number of things. But most importantly, by segregating the signature that goes along with every transaction, it both allows more transactions to be fit into a block about 60% more. But it also allows a more flexible signature types, so to speak. So you can do more varied forms of transactions.

Okay. And so for the less technical part of members of our audience, essentially it means that it's going to make Bitcoin more efficient and in a certainly more flexible to be used for other assets. Is that correct? Yes, and use cases like the Lightning Network, which will allow high-speed microtransactions, and then also this whole idea of sidechains

where you start to connect other blockchains and anchor them in Bitcoin, or you can exchange assets between different blockchains. This all gets deeper in, to the technicals, but I think the important thing for the listener to realize is that Bitcoin is very flexible. It gets this bad rap in terms of being rigid compared to Ethereum, but in time, I think we'll see the two become very flexible and compatible with one another. And essentially, the takeaway for investors is that soon they'll be able to trade different

types of investment products that are digital currencies. Is that the thinking? Yeah, I think that's generally our philosophy and mine as well, is that right now what we see is Bitcoin is the first prime example of this new asset class, which we refer to as digital currencies. But even that name itself doesn't quite capture what the underlying asset is. While Bitcoin is kind of used as a currency, I can send you money just like I can send an email to anyone. It's this idea of an international network for value transfer. Like Chris alluded to, there's other assets that you could also move through Bitcoin. It could be proof of ownership. It could actually be something like a security or even land registry.

So in larger context, we look at Bitcoin as the first example of a digital currency. But I think our belief is that we're going to see a world where there's not just one master digital currency being that Bitcoin. We may see a world where there's multiple digital currencies and each one's solving a different problem. We're seeing this happen with Ethereum coming online and having a higher order scripting language to create things like smart contracts, which Bitcoin itself is not incapable of doing, but it's just more difficult to do at this stage. But at the end of the day, all digital currencies are, is programmatic money.

It's a way for machines to essentially talk to one another and move value in an distributed manner. I think what we'll see is a world where there's many digital currencies, but they all settle and clear programmatically with one another, and the end user isn't going to have to worry about, am I holding Bitcoin? Am I holding ether? Am I holding something new all together? It's the same way that when I swipe my credit card to buy a cup of coffee at Starbucks, I don't understand the inner plumbing of how a

credit card network functions and an issuing bank and acquiring bank. All I need to know is that values move for my account ultimately to the merchant, and in return, I'm benefiting from that service or product that I wanted to acquire. Well, that's interesting because normally I think of, you know, when you have a cryptocurrency, you're spending like just that Bitcoin or, you know, in the same way that I would think about spending dollars or euros. But you're saying that eventually someday they'll be used in the background and whether you have ether or Bitcoin or whatever, it won't matter. And it will just be, oh, that's fascinating. I think that's exactly right. One of the things I always think about is potentially Bitcoin succeeds when no one knows they're using it. So a good example of this

is like we like to think that payments find the path of least resistance, right? The most frictionless way to move value. Right now when I use Apple Pay, I have a credit card tied to my iPhone. So when I tap my phone, values transfer through that credit card network. But credit card networks carry with them high fees and other things. Digital currencies do not. So over time, I think we could see a world where when I tap my phone, I'm ambivalent that instead of value moving through my Visa card, it's now moving through Bitcoin. Because at the end of the day, I'm not even focused on what that rail is. I'm just focused on the end product or service that that value transfers is providing me with. Okay. Yeah. And there are some startups that are using Bitcoin in

exactly this way to move money in the background, like Circle or Abra or Align Commerce. Exactly. All right. So actually, let's move away from some of the consumer applications and talk about what professional traders are doing. Are we seeing them approach digital currencies as an investment? I think we are. I think we're still in the early days. of how investors are creating a thesis around this emerging asset class called digital currencies, but we very much are seeing greater and greater interest in the investability of Bitcoin. Early on 2013, 2014, I think most of the focus was on the applications of the technology. So we saw people using Bitcoin in a transactional medium.

Those were the merchants accepting Bitcoin as a form of payment. as that really demonstrated a viable use case for Bitcoin, I think what we've seen are more individuals and institutions alike come online and say, hey, this idea of a blockchain has value. And Bitcoin is just one example and the largest example of a public blockchain. There's real value into owning a piece of that, a token that helps power the network. And what we're seeing is that transactional volume compared to trading volume is actually shifting. that we're seeing greater number or greater value of Bitcoin moving into the trading world than we are in the actual transacting. A good example of this is on a worldwide daily basis, we see well over a billion dollars of Bitcoin traded globally per day.

And that's not on par with some of the equities and obviously FX markets of the world. But it is a good sign that this market is not as ill-liquid and thinly traded as many believe. we're really seeing it emerge as a global asset that many people can and do trade. And Laura, I mean, part of what led Adam and I to actually brainstorm around this paper and write the paper was this idea of institutional interest and institutional investors and validating with academic rigor the many ways in which Bitcoin is displaying asset class characteristics. And so, as Adam alluded to, when you look at the trading to transacting ratio for Bitcoin, it's currently just under 10, whereas global fiat currency is a tad over 20.

So what we're seeing is a building amount of liquidity in terms of Bitcoin's trading volume, which is dropping volatility, as we mentioned earlier. That's bringing in more institutional interest. And then also very topical right now, right, is Brexit. And so I was on CNBC recently because a lot of institutional investors are freaked out about the capital markets at the moment. People are fleeing from equities to bonds. There's negative interest rates. And so people are looking for areas to protect themselves. And while Bitcoin is still volatile. It's been about as volatile as oil over the last year. It's increasingly being used, I like to call it, as a disaster hedge within the capital markets for capital market participants. And so again, that's why we're seeing a lot of volume, both from exchanges but also over the counter, which is a darker pool. But some people are positing that over-the-counter is on par with exchange volume, which you could therefore argue Bitcoin may be trading almost $2 billion a day. Now, there's a lot that goes into that and people are concerned about how much volume goes through China, which is something we can get into.

to I see it as all good for the ecosystem. But again, this is part of what let us to write the white paper. So there are a few things I want to actually dive into a bit more in your answer. Why don't we keep going with this, you know, talk about Brexit? I think Adam was saying that he pulled some interesting data about, you know, what was happening in terms of Bitcoin around that time. What did you end up seeing? Yeah, first off, let me just caveat this and say it's really difficult to separate how Brexit is affecting the Bitcoin world because there's a lot going on right now. We're seeing China continue to devalue the Yuan. We have something called the Bitcoin halving event coming up, which is a change in how much a new Bitcoin's introduced

every day. So there's really a lot of happening. But what we did at Coinbase is being one of the largest Bitcoin retail conversion services is we said, let's take a look at our customers in the UK, and let's see how their activity patterns have changed over the last week. And essentially what we've seen is a double-digit increase in the number of new user signups, as well as the amount of Bitcoin purchased. So very specifically, what we saw is the number of daily signups that usually occur doubled on the day of the Brexit announcement. So we saw a lot of people in the UK start to say, you know what, maybe there is value in being part of this global interconnected, inherently international payment method called Bitcoin. And we saw essentially a doubling of new users sign up.

For our existing users, we saw a 3.5x increase in the amount of Bitcoin they purchase on a daily basis. So while I think it's too early to still say Bitcoin is really this new safe haven investment, I do think we are starting to see initial signs of people approaching it that way. And even more generally, that people are discovering the value of a secure alternative investment when we see times of like global economic turmoil. And Adam, correct me if I'm putting words in your mouth here. But I recall from prior conversations we've had when we had the Greek debt crisis in summer of last year, didn't you guys see a similar pattern in terms of increased interest from that area?

We did. The numbers were actually eerily similar. So we saw what looked like a doubling of new user signups. as well as even a greater number of Bitcoin purchase. So when we were initially talking Grexit about a year or so ago and now Brexit, we're seeing very similar patterns with the way our users and new users approach digital currency. And what about other world events? Those, you know, obviously, Brexit and Brexit are pretty similar.

So are there other world events where you've seen, you know, driving other kinds of behaviors? So Adam mentioned one, right? And that's the fear over devaluation of the yuan. There's, because roughly 90% of the volume driven through exchanges is coming through Chinese exchanges. There's a lot of hypotheses out there. And we do see instances of either when there's chatter about devaluation of the yuan or when it actually manifests, we do see some spike in volume there. Did you have any other thoughts around that, Adam? Not so much of the global macroeconomic environment. I do think very unique to Bitcoin. You have this thing called the having, which is what I alluded to a few minutes ago. It essentially says that everyday new Bitcoin is minted or mined,

very similar to how gold is mined and brought into the world on a daily basis. But that amount or that rate in Bitcoin is actually set at the protocol level. So it's not something any individual or entity controls. It's written core into the code of the software. And what we're seeing is in about 10 days, the amount of Bitcoin created is going to be cut in half. And what's really interesting is watching how the market is actually pricing this in to the price of Bitcoin. At a high level, I think it's already largely factored in. This is something that's been known.

It's very transparent from the earliest days of Bitcoin, right? So it's not a central bank-like event where they announce kind of quantitative easing or a new inflationary target rate. This is something that everyone's known from the get-go. But what we are seeing is a lot of interest leading up to this event because regardless of what happens, if the demand stays the same, what we know is the supply of new Bitcoin is going to be cut in half that may have an upward effect on the price of Bitcoin.

All right. Great. So I want to circle back to what Chris was talking about when he mentioned that you guys had the idea to work on. on this white paper because of institutional behaviors you were seeing. Can you tell me a little bit more about how you came to work together and how you came out with the idea to write the white paper? With Amex Platinum, you have access to over 1,400 airport lounges worldwide.

So your experience before takeoff is a taste of what's to come. That's the powerful backing of Amex. Conditions apply. Sure, I'll take that one. I mean, as most things start, it's not as romantic of a story as I'd like to be able to tell. It was essentially reading the news and watching how Ark Invest took a very public. And I thought a very important stake is introducing GBTC into one of the first ETS, if not the first ETF, that was publicly tradable. Can you tell people what GBT is?

Sure. Chris, let me turn this over to you because you did a lot of study on this. Yeah, great. So, GBT is an over-the-counter security. So what that means, you can kind of think of it like a publicly traded equity like Facebook stock. It's a little different, but that is what GBT is. And it tracks to one-tenth of the value of one Bitcoin.

Now, the way that GBT is created is investors that, exit from the Bitcoin Investment Trust, which is a private placement trust, those investors can sell into the public markets and exit their private placement, sort of when a company comes public, that private equity gets sold into the public markets. That's sort of the process from the Bitcoin Investment Trust into GBT. Now, the thing with GBTC is it's a quasi-close ended fund. So what that means is only when investors sell out from the Bitcoin Investment Trust into the GBT is more GBT created. And so that's why we actually see GBTC often trading at a premium to Bitcoin's price. Now, interestingly, since we invested in GBTC in early days for that product, it was

September of 2015, we had instances where we bought GBT at a discount to 1-10th of a coin. And it has since gone 5X for us. We have it in two of our ETFs, our next generation internet ETF, ARKW, and our overall innovation ETF, ARKKK, and it's grown to a top 10 position in both. I think in terms of building on what Adam was saying about how we came together, you know, obviously Coinbase is a thought leader in the space and ARC has been building its way towards being as much as well. And we connected on an intellectual level, both curious about everything going out in the space, both realizing that a lot of education is still needed, especially to bring this back around to your more typical investor or a more typical world

citizen. And so that's what was the genesis for this white paper. And we'll be, we'll be be working on future white papers here in the near future. And so do you want to finish the story about... That's it. The only part that Chris left out is that we originally connected over a bowl of thaw in Midtown Manhattan. And like he said, discovered a shared interest in how the investment community was approaching digital currencies and specifically decided to dive into Bitcoin and bring kind of a unique perspective from both sides. Chris and Arcside, obviously, with thematic research and really understanding kind of institutional investors.

And Coinbase's perspective, which has a unique insight into what our 4 million customers are doing with Bitcoin around the world. So let's talk about other digital assets. There have been hundreds of so-called alt coins developed. Some of them are well-known are Ether, Lightcoin, and XRP, which is by Ripple. Many of them languish in value, though. What separates Bitcoin from these other alt-coins that have not increased in value? Yeah, I think it's really kind of three things. Number one is Bitcoin has a first mover advantage. So we have to remember Bitcoin itself has only been around for seven years, but it was the first to introduce this idea of a decentralized blockchain. From that, you have things like network effects, right? The more people use it, the more valuable it is for others to use it. That is a tremendous first mover advantage that Bitcoin has over other digital currencies. Second is it's also the most well-known.

Obviously, a lot of the press and public became first aware of Bitcoin in 2012, 2013, when we saw some of its meteoric rises in value. And since then, it's always been on the radar of people's interest, I think, much more so than other more obscure or newer digital currencies. The second one is that it has a clearly differentiated value proposition. When you look at other alt coins, many of them, for lack of a better term, are really just copycats to Bitcoin. They take what's essentially Bitcoin's open source protocol and tweak something very minor,

such as the time to discover a new block or the amount of digital currency that's introduced over time. These really aren't differentiated value propositions. And so there's not a unique or compelling case for people to shift from using Bitcoin to another altcoin. Third is Bitcoin's track record of success, right? This protocol has been around for almost seven years. It's really the first one introduced. and it's been vetted and tested what's essentially the largest white hat hacker program in the world, right? Because if anyone can figure out how to break the Bitcoin protocol, there's a tremendous prize on the other side of that.

Up to this point, no one has. We've definitely seen Bitcoin companies built on top of Bitcoin have been hacked or compromised, but Bitcoin itself never has. that trust, that belief that Bitcoin has a very solid foundation is why we believe we continue to see people interested in Bitcoin rather than alternative digital currencies. And I agree with everything Adam said there, and I want to emphasize one of his points, and that's the idea of network effects. This is something that we maniacally focus on at ARC, because the basic idea of the network effect, right, is best exemplified by the telephone.

I alone have a telephone, then that telephone is pretty useless. However, if Adam has a telephone and I have a telephone, it gets more useful. And Laura, if you have a telephone, then it gets even more useful because we have three people with telephones. Now, with Bitcoin, it has two really great network effects. One is the network effect of more users, the more people that I can send Bitcoin to, and that can send it to me, and we can use it in different ways, the more valuable it becomes. And then there's the network effect of developers, right? Developers like working with other really smart developers

and building cool products for people. And so these two network effects feed back into one another. I think what we've seen with a lot of the other altcoins or public blockchain cryptocurrencies out there is that while they come out hot, they don't get that flywheel effect going of the network effect. And so it's easy for them after a period to fade into obsolescence. I think, you know, Ethereum has done a great job of getting over that hump or that activation energy, so to speak.

And it's actually something that we follow very closely. It's, you know, we've had some developers shift from Bitcoin to Ethereum. And so as an investment manager that holds Bitcoin, we very closely track these user and developer trends. Are there any other factors that investors should look at when they're deciding whether or not to put their money in a new cryptocurrency, aside from network effect? Yes, definitely. I think this is where looking at things from a holistic perspective, from an investor's entire portfolio is really important. Because the rap that Bitcoin always gets is, oh, it's too risky. And risk is quantified most commonly by volatility. How much does this go up and down every day?

As Adam mentioned earlier, volatility has been dropping significantly, but Bitcoin is still a volatile asset. Now, when you combine looking at volatility with this idea of correlation of returns, what's interesting is let's say on one day, Facebook stock goes up, but on that same day, Bitcoin stock goes down. or Bitcoin itself goes down. And on the next day, it's vice versa. What actually starts to happen is those price movements

counteract one another. And so the entire investment portfolio becomes less volatile and therefore less risky. And this is kind of a mind-blowing idea, but it's one of the cores to modern portfolio theory. And it's basically this. You can have a more volatile asset, but if it's zero to negatively correlate,

with other assets in your portfolio, it can actually decrease the overall risk of your portfolio. And we have seen instances of this with Bitcoin in the past. For example, if you had swapped 1% of equity, so stock positions in your portfolio into Bitcoin in late 2014, you actually would have seen both the overall risk of your portfolio decrease and the absolute returns of your portfolio increase. That is, you know, an investor's dream, and that's something that's really important for people to realize when they're thinking about putting this into their portfolios. So speaking about risk, before Brexit, the cryptocurrency community poured more than $150 million into crowdfunding the Dow, which is what's known as a decentralized autonomous organization.

And that is essentially an entity whose actions are governed by a series of bylaws that are programmed into computer code. But loophole's in that code allowed about $60 million of the Dow's currency, which was called a Dow token, to be stolen. When looking to invest in cryptocurrencies, how can investors protect themselves from adverse events like this? I think the answer is a very simple one. It's investors have to do their homework. They have to understand the risks. They have to know the idea of the investment they're entering into, and there's no substitute other than spending the time and energy to understand what that is. Many times, and for example, in our white paper that Chris and I wrote, we pointed to Satoshi Nakamoto's original white paper is one of the first sources that all interested investors should read.

For things like Ethereum and Dow tokens, I think that holds up as well. I don't think there's any investment manager out there or individual necessarily. that would invest in an asset class, they don't fully understand. So first and foremost, you have to do your homework. The caveat to that is, I'm acutely aware, and I think many are, that's not always possible when we're looking at things like smart contracts or decentralized autonomous organizations that raise essentially crowdfunding in a decentralized manner. This is really pushing the envelope of technology and capital markets.

However, there are those out there that have the ability to, read and understand code. And that's the beautiful thing about digital currencies like Bitcoin and Ethereum and digital assets like Dow tokens. The structure, the protocol for how that asset is governed is entirely open source. And I look at it much like learning a new language. I may not invest in something that I can't understand. But if I can learn the language to read and understand that, I think it'll help me make a more informed decision. So really at a high level, you've got to do your homework and you've got to understand what you're investing in. And I do want to point something out here with the Dow, and it's something I think investors

should take into consideration when they're looking at these different assets, and that is the underlying security, right? So the Dow was an application that rode on top of Ethereum. So we can think of Ethereum or Bitcoin and Ethereum's blockchain and Bitcoin's blockchain, sort of as an operating system, right? And just as I have to, I have. have my Mac operating system and I have applications on top of that operating system, those are fundamentally different things. And so while the Dow was compromised and it looks like they are going to resolve things, that is a very different beast from the security of Ethereum's blockchain. And so this was actually something I focused on a different white paper and that

was looking at the long-term security of how the underlying compute infrastructure is incentivized. And so that's something, again, as Adam was saying, investors need to do their homework. And it's upon us that are involved in the community to make sure that we do our homework and really educate everyone as best we can. Yeah, that's right. I think the Dow and really Ethereum are still an experiment, right? Ethereum, the blockchain, the worldwide computer in essence, has really only been around for about a year. We'd be remiss if we said, this is absolutely going to be here to stay.

I think users need to explore the technology. They need to test with it. They need to experiment. They need to play around. They need to get their hands dirty. And this is really what Coinbase's mission is all about is let's provide easy, unfettered access for people that want to acquire a little bit of digital currency, whether as an investment or whether they actually want to use the application. They actually want to use the network to send and remit value. There are services like Coinbase that try to do this in a very simple, easy to do way.

But ultimately, we're in the early endings of this kind of new wave of digital currency. Aside from Bitcoin, the most well-known, or at least the most popular cryptocurrency is Ether. Have you looked at the investing behavior around Ether? How is it different? So I can head that off. I think one of the things I find interesting about, ether is early days. I mean so Vitalik Bouturane he announced it in January of 2014, which actually coincidentally was the same month that Ark was founded. And early on the

core developers of Ethereum and Ether is the cryptocurrency that rides atop Ethereum, they said this is not meant to be used as an investment. Ether is converted into gas and gas pays for computational units which perform operations within Ethereum's world computer and the smart contracts they're in. So I think of ether more as digital oil and Bitcoin more as digital gold. Now that said, you know, people invest in oil and people invest in gold in the quote-unquote traditional capital markets. These are just digital forms of those things. I think when I look at ether long term. So I got lucky enough to invest in it in January of 2016. And so I've been a happy investor. But when I look longer term, it's going to be slightly inflationary.

That's sort of the equilibrium thinking there. And that slight inflation rate should match roughly the amount of ether that people lose through different manners, whether they lose their private key or ether is burned or whatever it may be. So that's one thing that people should realize. The other thing for an investment manager from ARC, and as Adam said, it is such early days for Ether that institutional investors have a much harder time getting access to it or getting comfortable with it.

The liquidity is a fraction that of Bitcoins. And there's no instrument. Like even if ARC wanted to own Ether right now, there's no way we could possibly do that. And so I think, again, as we have seen with Bitcoin, it's just going to take time. There's going to be this flywheel effect. And it should become, you know, I see no reason for it to be any smaller than Bitcoin. What developments do you expect to see in the future in terms of cryptocurrencies as an asset class?

I think one most notably jumps out to mind, and that's greater institutionalization. I think up to now, it's really been difficult for investors, whether they be individuals or institutions to have exposure to this asset class. Companies like Coinbase try to make it easy for people to buy a little bit of Bitcoin and store it. But what we're seeing is an emergence of the infrastructure, the exchanges that allow liquidity and trading for that price discovery process to happen. The infrastructure is coming into place. And I think we're going to see greater institutionalization in the form of new products, mainstream access, and really Bitcoin and digital currencies will look like any other asset that investment managers may want to add to their

portfolio. What's going to be driven from that, though, is that this idea why someone wants to invest in Bitcoin is going to move from a belief that the technology is going to be used greater in the future to actual reality. We're going to see that happen. What we're going to see are greater applications actually using Bitcoin and digital currencies. The use cases, things like using Bitcoin for micropayments or machine-to-machine payments. I think we'll see those come to fruition. We're going to see that end value to the consumer actually in practice. And I think that's only going to add a flywheel effect to investors realizing that Bitcoin

and digital currencies are here to stay and that it's something that they should look at investing in. And an example of a machine and machine payment would be like if we're driving in or not driving, but we're riding in autonomous vehicles. And I want to go faster than your car. I can pay you a little bit like in a micropayment. to pass you. Exactly. That's one of my favorite examples. There's this kind of saying that's being tossed around that on the blockchain, no one knows you're a refrigerator. And what it kind of represents is that in reality, in the real world, I actually need to use my credit card

or use a authorized payment credential to be able to complete a transaction. But Bitcoin at the core is just programmatic value transfer between two endpoints. And opening that up to machines to do things like lane passing for self-driving cars or having my refrigerator order a new gallon of milk and having it delivered to my house, I think we will see Bitcoin be integrated at the protocol level of the Internet of things from the ground up, and it's going to open up tremendous possibilities we can't even imagine. And Laura, I just want to add on there. I think when we look back to 2016 and 2015 and 2014 and we're in the 2030s or whatever it may be

we're going to realize what early early days we were in. When the internet was getting started there wasn't the internet to disseminate the information about everything going on. With Bitcoin and blockchain technology right now all this information is flying around and so people get frustrated why isn't it doing this? Why isn't it doing that? Well, this is a fundamentally new technology. It's a general purpose technology. So on par with the steam engine, with the internet, with machine learning. And these things take a long time to build. So a refrain you'll hear a lot in the space is we're in the like 1993 or 94 of the internet where Mosaic came out, the first internet browser. And so there's two sides to that. One side is there's a really bright and promising future in front of us. The other side, side is there's going to be a lot of mistakes made, a lot of pain, and a lot of learnings,

which will drive the system. And I think over time, we will see an interconnected web of chains, much like the internet is composed of a massive system of intranets. And it's going to be that inter the different blockchains that is going to be really important for the overall value. out of this system. What do each of you most hope people will take away from your white paper? What I hope is that people begin to understand that, well, the technology may be difficult to understand. The pieces to develop an investment thesis are there. Our attempt at this paper was to say, you can very quantitatively measure the performance of this asset class and make

an informed decision whether or not it's something an asset manager or an individual once to add to their portfolio. So my hope very simply is that people use this paper as one of the pieces to start developing their own investment thesis. Chris? And I follow along very similar lines as Adam. It's really important to me that people realize this is no longer a fringe technology or a dark asset.

This is a innovation that is something that deserves utmost respect. And atop that technology, is this asset that displays really awesome characteristics for someone's portfolio. And it's pretty clear to me that while Bitcoin is the first of its kind in this new asset class called cryptocurrencies, there's going to be more to come. And people should definitely be attuned to everything that's going on in this space. And Chris, where can our listeners find more of your work or contact you? Yeah, so ARC's open source ethos allows us to put all of our research on our website.

So that's ARK-Invest.com. And people can contact me directly on my Twitter handle, which is at ARK blockchain. And Adam, what about you? Yeah. So if for the listeners out there that are interested in purchasing a little bit of Bitcoin or soon Ether to get started to experiment with the technology, very simply, you can go to Coinbase.com. Alternatively, for the institutional investors and sophisticated traders out there, we operate a platform called G-D-D-D-X, Global Digital Asset Exchange, where you can get started

with a full-spot exchange order book. And that website is just G-D-A-X.com. This has been a truly fascinating conversation. Thank you both so much for coming on the show. Thank you, Laura. Thanks, Laura. The pleasure was ours. Thanks for joining us today. If you're interested in learning more about Chris and Adam's white paper, check out the show notes, which are available on my Forbes page, Forbes.com slash sites slash Laura Shin. And please review, rate, and subscribe to the show in iTunes if you like what you're hearing. Thanks again. You just enjoyed a Forbes podcast. To learn more

about our other shows, visit Forbes.com slash podcasts. Thank you.