Unchained - Why Nothing Is More Viral Than a Store of Value - Ep.168

Episode Date: April 21, 2020

Cathie Wood, CEO and CIO of ARK Invest, and Yassine Elmandjra, ARK's thematic analyst, discuss their investment strategy with disruptive innovation, and how blockchain technology, especially Bitcoin, plays a major role in it. They explain why the unique market circumstances due to the coronavirus have led to more correlation between crypto and the traditional financial markets, but also why, in the long-term, it will ultimately be uncorrelated. We cover why they think crypto in the age of COVID-19 will see new opportunity, and when there will be a recovery of the larger economy. They also share, from an investor standpoint, their growing conviction in Bitcoin due to its long-term value proposition compared to other chains like Ethereum. Plus, we talk about the future outlook for central bank digital currencies, and how Libra will launch, albeit differently, than expected.  Thank you to our sponsors!  Crypto.com: https://crypto.com/ Kraken: https://www.kraken.com Episode links:  Cathie Wood: https://twitter.com/cathiedwood?lang=en Yassine Elmandjra: https://twitter.com/yassineARK  Yahoo Finance interview on ARK’s big ideas for 2020: https://finance.yahoo.com/video/cathie-wood-talks-ark-invests-222723696.html Keynote on State of Digital Assets at Volt Capital summit: https://www.youtube.com/watch?time_continue=2729&v=c50TMCKsktA&feature=emb_logo ARK’s Q&A video conference on COVID-19: https://ark-invest.com/research/bis2020?utm_campaign=BIS%202020&utm_medium=email&_hsenc=p2ANqtz--kCZDJ0VuIxNViHjN7KR7qOryEusndZqMfNp7JMkD4AIZJCv8otUtZm8YgPdmVYTZb3ylv4ysbxt8fRIUvngkRLcyvIw&_hsmi=85729999&utm_source=hs_email&utm_content=85729999&hsCtaTracking=14ee7e75-5bf4-46f8-8c8c-f5aeb84b32a7%7C5f5d3a43-f10e-4792-92de-96ef495eb5c6  Feature on Cathie Wood: https://www.bloomberg.com/opinion/articles/2020-02-18/cathie-wood-s-tesla-bet-puts-ark-invest-in-spotlight Her views on Zcash: https://www.theblockcrypto.com/post/12660/cathie-wood-on-the-block-the-crypto-revolution-is-coming-jump-on-or-get-out-of-the-way Learn more about your ad choices. Visit megaphone.fm/adchoices

Hi everyone. Welcome to Unchained, your no-hype resource for all things, crypto. I'm your host, Laura Shin. If you enjoy Unchained or Unconfirmed, my other podcast, which also features a weekly news recap after every interview, please give us a top rating or review in Apple Podcasts or wherever you listen to the show. Cracken is the best exchange in the world for buying and selling digital assets. It has the tightest security, deep liquidity, and a great feat. structure with no minimum or hidden fees. Whether you're looking for a simple fiat on-ramp or futures trading, Cracken is the place for you. In response to the challenging times, Crypto.com is waiving the 3.5% credit card fee for all crypto purchases for the next three months. Download the Crypto.com app today. Today's guests are Kathy Wood, CEO and CIO of Arc Invest and Yassine Elmandra, ARC Invest blockchain crypto analyst. Welcome, Kathy and Yacine. Very happy to be here, Laura. Great to speak with you.

Great to be here, Laura. Thank you for having us. Kathy, let's start with you. Arc Invest focuses solely on disruptive innovation. How do you define that and why do you believe that blockchain technology is one of those disruptive technologies? Well, we define innovation platforms with three characteristics. The first thing, one is that they follow a declining cost curve. They're technologically enabled. They have learning curves and they follow a declining cost curve. Think Moore's law, except we have adapted a different law. It's a relative of Moore's law. It's called Wright's Law. And I can get into that if you'd like. Yeah, go ahead. Oh, okay. Rights law effectively developed by Mr. Rott's law.

in the early days of airplane manufacturing, says for every cumulative doubling in the number of units produced, cost decline at a consistent rate for any new technology. And so you can see how it's a relative of Moore's Law. Moore's Law is a function of time, and Wright's Law is a function of units or production. And so, and it's much more reliable and can be applied to any technology. It's even more reliable for the semiconductor industry, again, because it's a function of units as opposed to time.

And there's been a slowdown recently in semiconductors. So that's the first, a learning curve or declining cost curve. And from that, we are able to learn when a new technology is ready for prime time. And the way we find that out is we say, okay, for every percentage decline in costs or price, how much does demand increase? And what you found in the early days of the Internet or in the Internet bubble, you found that we weren't ready for prime time for a lot of things. And the most provocative example there is, you know, we thought we were going to sequence every person, genome with DNA sequencing technology because we had just sequenced the first human genome and we were going to have precision medicine, ideal for each person. And of course, the first whole

human genome took $2.7 billion to map. And it took 13 years of computing power. We were not ready for prime time. We're not ready for prime time. We're just getting ready for prime time now, below $1,000, soon to be $100, and a health care world is going to transform completely. So that's the first. Cost declines rights law. The second is that these platforms cut across economic sectors. And the reason that's important is because every time costs go down, you really would like to unleash more and more demand. So the more sectors that an innovation platform touches, the bigger the opportunity to transform the world.

And then the third, even in, well, we'll continue with DNA sequencing then. Many people think that is just for health care. It is not. It is also for agriculture. Very importantly for agriculture. And any living organism, you know, whether it's animals or plants or fish or what have you. So it's going to touch a lot more than human health care. And health care here in this country is 20% of GDP.

So that already is a big prospective market, TAM, total available market. But then you must think beyond that to anything that's a living organism and can be sequenced. And then the third characteristic, so rights law, cutting across sectors. And then the third characteristic is it becomes a launching pad for more technology, new technologies. So just to follow with the healthcare, the sequencing one, DNA sequencing has been the launching pad for CRISPR gene editing. So gene editing or, I mean DNA sequencing can read the genome. and we are able to identify mutations that evolve in our genomes from year to year, and CRISPR gene editing ultimately will be able to correct those programming errors and cure disease.

Now, we're in the early stages of that now, but we think it's extremely promising. Could not have happened without DNA sequencing, and DNA sequencing couldn't have happened without the computing age. So these technologies are building one on top of the other. This is just so fascinating because, like, as you're talking, I can already kind of map how those three criteria, you know, led you to Bitcoin. And I know that in September 2015, ARC became the first public fund manager to invest in Bitcoin. So can you walk us through, like, how that happened? Yes. Okay.

So, absolutely. when we started the firm in 2014, we had broken the platforms out by DNA sequencing, robotics, energy storage, and next generation internet. And as we were evolving the research associated with each of those platforms, we were doing more and more research on blockchain technology and Bitcoin. And as you know, Chris Berniske was our first crypto analyst, Yassine Elmandra, handpicked by Chris, our second. And so we said, as we were exploring it and understanding it more and more and really understanding Bitcoin too, you know, that this wasn't just next generation internet technology. this was, you know, potentially the first digital currency and the first global means of,

whether it means of exchange, store a value unit of account, we said, we have got to break this out and separate it from the next generation internet because it could influence every sector as we began to understand what this really was. And it is going to be the launching pad for much more innovation going forward. So it started as next generation internet. Hey, this is interesting. The internet was never conceived with commerce in mind. In fact, until 1991, people forget this. Even I forgot it until I heard Steve Case, a given presentation before I gave one. and he said that it was illegal before 1991, and I believe it was called the Communications Act of 1991,

there was some act. It was illegal for consumers to transact over the Internet, to do anything over the Internet. Consumers really weren't supposed to be using the Internet. This was for academia. It was for research. It was for government. It was for DARPA.

and then we unlocked it in early 91. So back then, the Internet was never conceived with commerce in mind. And so it never included a payments platform as a part of the infrastructure. And we were then looking, as we learned more and more about Bitcoin and blockchain technology, we said, okay, this is the missing link. you know, what we've been doing over the internet paying for things with credit cards and, you know, that's clugy and there are all kinds of security risks and what were we thinking? Well, we were thinking about it appropriately in the early days because the knock on the internet

and on Amazon is nobody was going to transact over the internet. It's totally insecure. And then, of course, convenience trumped security. and each of these companies who developed on top of the Internet understood that security was mission critical for them. So they each had to develop their own form of security, right, or make sure to harness all the security software out there and then, you know, encrypted or make it their own in some way, shape, or form.

Well, this is this was what blocked, or this is what should have happened in the very early, days of the internet. Now with Bitcoin and digital currencies generally and, you know, blockchain technology, I believe we're going to reorient how we do things even around the internet going forward. Yeah. Yeah. And it's already happening. Before I forget to kind of echo Kathy's point there, I think what we're starting to realize now is that really the frontier of economic activity is increasingly pushed into this digital world. And so now kind of the need for these new novel institutions to reliably enforce and provide

what we like to define as assurances to wealth become increasingly important. And so I think beyond just this idea of a native bunny, understanding that crypto networks, and in particular, Bitcoin, are these novel social and economic institutions that unlock these new modes of human organization becomes all the more relevant in the context of kind of Kathy's dissemination of the history of what got us here to begin with. Yeah. So Yassine, why don't you give us the background on how you came to work at Arc and what it is that you do there? Sure. So I cover crypto assets and blockchain at Arc. I joined in July of 2018, so shortly after Chris, Arc's former crypto analysts left to start placeholder. And so really Chris handed me the

baton, and I've been very fortunate since to have a chance to fall into the crypto rabbit hole as a full-time job. Prior to that, I was in school, so I went to the University of Pennsylvania and double majored in systems engineering and finance. And during my time in college, I was very fortunate to intern at a venture capital fund in the valley, in which they kind of gave me an opportunity to look into crypto from both an investment in tech perspective. And I found that what I was studying really, this marriage between management and technology, between economics and technology, seemed extremely symbiotic with kind of the crypto space more broadly. And so there I was like, I definitely just want to do this full time. And believe it or not, I found ARC through Twitter.

I had seen Chris at one of his book signings. He had posted a tweet. that he was going to have a book signing in New York. And so I, the next day, booked a ticket 5 a.m. to go up to New York. There I met Chris and I had met Kathy for the first time as well. And I would say the rest is history. And I have heard you talk about how you initially got in a Bitcoin, then discovered Ethereum, but then came back to Bitcoin. So what do you mean by that? And why did you come back to Bitcoin? Sure. So, I think a few things. I would say that I initially kind of got in actually just as my father had come to me randomly and said,

are there any interesting investment opportunities that I'm not, that I'm currently not aware of? And, you know, Bitcoin was always in the back of my mind. I'd never really kind of fallen deep into the rabbit hole and was given kind of that opportunity to do so. And so when I look, when you look at it from kind of an investment perspective, I was very kind of fascinated by what many consider to be this new asset class and looking at kind of Bitcoin as really that starting point, but not really the most interesting thing out there. Enter Ethereum, where Bitcoin has extremely, is limited in its capabilities and its performance and provides specific guarantees, but that obviously comes at the cost of being, quote-unquote, scalable. And so when you think about kind of new forms of these decentralized information networks like Ethereum,

they provide kind of massive amounts of feature sets that something like Bitcoin cannot provide. And so intuitively, it seemed like Bitcoin would be something kind of far less interesting than the thousand other crypto assets that were out there. And really Bitcoin was the MySpace to Facebook. As I started to kind of realize from an investment standpoint where I think most value is going to accrue and kind of, of what made Bitcoin so unique and why it had specific value propositions that, quite frankly, I think are very difficult to replicate. It goes back to really what these represent. And so in this idea of providing kind of assurances to wealth, where, you know, the transition to a digitally dominant economy has brought rise to these institutional technologies that are supposed to provide,

you know, specific assurances that can. with financial institutions that compete with governments, that compete with markets, that compete with firms. And so this idea of kind of having an accessible digital foundation that offers strong assurances and consistently enforces these assurances was something that became, I would say, much, much more compelling than kind of the thesis that we tend to see in things beyond Bitcoin. So as we transition into this digitally dominant world, I think having these assurances to wealth, from kind of reducing the risk of expropriation and seizure to, you know, reducing the risk of arbitrary rules to monetary policy, everything from kind of lowering barriers to freely

transmit and store value. And doing all this in a really auditable and native way, to me, felt much more compelling than kind of trying to reverse or flip the internet stack. And so that's ultimately why I came back to Bitcoin and find that to, at least for me, be the most interesting thing in kind of this space that that that is very interesting holistically. Yeah. And this, so this space is like wild on its own. But then obviously now for the last month or a few months, we've had another wild car thrown into the mix, which is the coronavirus. And I, when I was doing the research, even like very recent articles, just, you know, when I was reading them, I was wondering, hmm, I wonder if, you know, Kathy would

answer or, or, you know, if either of you would answer the questions the same way. And so Kathy, actually, I saw that there was this Bloomberg article about ARC from February, and it praised your ARC innovation ETF as, quote, the best performer among 584 funds with at least one billion dollars of assets in the global equity market, crushing the likes of Black Rock with a return of 165% over the past three years. And then it said that you beat 99% of the others in your category since ARC became a registered investment advisor in 2014. And just looking at it, I was like, okay, so February is such a different time from now. And with such an ETF where you're placing bets on newer technology, which by definition,

are riskier, how does something like that perform at a time like this? And, you know, I don't know what you would call this time. Like, would you say we're in an economic crisis? Like, I'm kind of curious how you would characterize what's happening. Okay. So I will separate this into two parts and talk about what we think is going on and then how we've performed. Okay? Yeah. Okay. So my background is economics, and that's why it was so easy for me to be taken by Bitcoin, by the way. I think it's a really good background to have in order to understand what's going on on the Bitcoin front. And my mentor is Art Laffer. I don't know if that name rings a bell. He's in the economics world. He's famous for something called the Laffer Curve and Supply Side Economics.

And he actually is advising President Trump pretty regularly now. So because I've been in the business for so long, I started in college in the late 70s, I've seen 10 crises, and that includes recessions. And they vary. Some are recessions. And others are shocks. I would categorize what we've just been through as a shock. It's an exogenous shock, a health care crisis.

This did not start with the economy. It started with the coronavirus. So a shock. There have been two other shocks in my experience as an investor. The first was in October of 1987, and there was something called a day called Black Monday. During Black Monday, the stock market dropped almost 25% in one day. which is worse than what has happened this go around in any one day. And the reason was there was something called portfolio insurance that had been developed at the time.

And it had become so popular that when everybody started, you know, basically relying on the insurance and trying to get out the door at the same time, it failed. And that's what took the market down. There was a panic. And the second shock was 9-11. 9-11 was, you know, a terrorist attack, a terrible thing. But again, exogenous. So both of these were exogenous.

One was a portfolio insurance gone wrong. It was not well designed and maybe not even honestly designed. I don't know. And then the second was a terrorist attack. Neither of those were started because of failures in monetary or fiscal policy. They were from outside the economic system. And what happened during those periods was the trends that were in motion before those shocks took place basically remained in motion.

You went through maybe a two, three, four-month period where the shock had people on edge and activity was subdued, but we got through that. And in the 80s, we continued along the bull market and very strong economic growth. In the early 2000s, 2001, we were in the middle of the tech and telecom bust. We continued along that line for another 18 months. And this time around, we had entered with the economy. in an extremely strong position, and it was from a couple of angles. The consumer spending was very strong, and the consumer saving rate was

8%, roughly 8%, very high by historical standards. It had doubled in the last five to eight years. And so the consumer had a nice, not all consumers, of course. This is devastating what's happening now. for certain consumers, but on average, the consumer had a good level of savings relative to historical standards. You can go into the early parts or the later parts, I think, of 90 and early parts of 2000s and see a saving rate of 1 or 2%. So much higher than traditionally has been the case. At the same time, you had had businesses who were, they were fearful.

of a few things and had been actually pulling back on inventories and capital spending for almost 18 months. And it wasn't a straight pull back in that inventories went down. They just weren't keeping up with demand. And the reason for businesses were so concerned is that we were in the middle of the China-U.S. trade conflict. And the yield curves had inverted. And yield curves historically, within 12 to 18 months of an inversion, a yield curve, an inverted yield curve, was a harbinger of recession. Well, the recession wasn't happening, wasn't going to happen. But you had businesses very conservatively postured. You had consumers in a very good mood, record confidence, very high saving rate, felt good, you know, felt secure. And suddenly, the shock.

If we're right, and if both the Fed and the administration have done the right things, and they're not all the right things, they're throwing too much at this, but we think in terms of fiscal policy, the loans are a good idea to keep businesses intact so that there's an infrastructure for employees to go back to. So we think that they're doing enough of the right things and will continue to do enough of the right things, including perhaps a payroll tax holiday for the rest of this year to encourage much more activity to come back this year. So we think that both of them have, and I think this is the reason the stock market has been doing so well. It could correct any time because we've moved up so quickly here. I do think the trend that was in motion beforehand will continue after we get through these three to four months,

we'll end up in a V-shaped recovery, very strong, and businesses will have to race up to race to catch up to consumer demand. And actually, one question I wanted to ask about that because, you know, in the various comments I saw of yours online, some of them were from kind of earlier before the unemployment figures that we have now, which at the time of this recording, are at about 17 million. So has that changed your view at all about that V-shaped recovery? Well, what I will say, no, actually the V-shaped will is because of this. So just to explain that a little bit and in the context of the prior two shocks, this shock is like the prior two combined, and then you add some to it. So it is the biggest of the three shocks.

And I think that I was concerned in the beginning when I saw the government, there was a little bit of chaos there, and I thought that that would cause a lot of bottlenecks in terms of getting checks out there and getting loans out there, but they seem to be working through those. And so I just heard recently that if you look at multi-dwelling residences, 90% are paying their rent, which is much better, given the number, you know, the 17 million that have filed for unemployment insurance claims, you know, these people are expecting to keep their jobs and want to continue to live in the same place.

And commercial tenants, at least for this one organization, which is very broad-based, are paying 100%. And this is as of yesterday, well, early April, I will say. They are 100% paying their rents. The biggest problem is in the retail and restaurant area where only 30% are paying. And that's where the help is targeted as well, a lot of the help. So I think if we just hold these businesses intact, which is what this administration is trying to do, and now that the Fed is actually buying commercial paper and taking a lot more of the short-term funding risk out of the market, again, all of this is trying to tide us over for the next three to four months so that these companies are still intact.

They may not be operating at a very high capacity, but they're in terms. and there is a place for these employees to go back and we can start up again, I think, and especially the way the task force has been educating people about what's going on. They're saying, look, we're going to come back really strongly. Now, President Trump is saying, you know, V-shaped, we're coming back stronger than ever before. Mike Pence will temper that a bit and say, yeah, we're going to do this safely and so forth. So you have a little bit of that going on. I do think by the end of this year, we're going to be surprised at how strong this economy is.

Okay. Well, so we're going to dive a little bit more into how the coronavirus will impact also the crypto markets, but first a quick word from the sponsors who make this show possible. In response to the challenging times, crypto.com is introducing three measures to help the community. First, the 3.5% credit card fee for all crypto purchases, will be waived for the next three months. Second, you could get up to 10% back by using the MCO Visa card on food delivery and grocery shopping at merchants like Uber Eats, McDonald's, Domino's Pizza, Walmart, and more. Don't have a card yet?

Buy gift cards on the crypto.com app from merchants like Whole Foods, Safeway, Burger King, Chipotle, Papa John's, Domino's, and more. And get 20% back on food and 10% back on groceries. This is a global offer, so check out which, merchants are available in your country. Download the crypto.com app today. Local news is in decline across Canada, and this is bad news for all of us. With less local news, noise, rumors, and misinformation fill the void, and it gets harder to separate truth from fiction. That's why CBC News is putting more journalists in more places across Canada, reporting on the ground from where

you live, telling the stories that matter to all of us, because local news is big news. Choose news, not noise. CBC News. With the RBC Avion Visa, you can book any airline, any flight, any time. So start ticking off your travel list. Grand Canyon? Grand. Great barrier reef? Great. Galapagos? Galapago? Switch and get up to 55,000 avion points that never expire.

Your idea of never missing out happens here. Conditions apply. in RBC.com slash avion. Today's episode is brought to you by Cracken. Cracken is the best exchange in the world for buying and selling digital assets. With all the recent exchange hacks and other troubles, you want to trade on an exchange you can trust. Cracken's focus on security is utterly amazing.

Their liquidity is deep and their fee structure is great, with no minimum or hidden fees. They even reward you for trading, so you can make more trades for less. If you're a beginner, you will find an easy on-ramp from five Fiat currencies. And if you're an advanced trader, you'll love their 5x margin and futures trading. To learn more, please go to crackin.com. That's KRAK-E-N dot com.

Back to my conversation with Kathy Wood and Yassine El Mandra. So in your view, how do you think, you know, obviously like for years now and I think Chris Berniske actually was one of the people, or he and Adam White wrote a paper that called this out all the way back in, I think it was 2016. Yes, it was. It talked about how, yeah, the crypto markets, or really it was mainly Bitcoin back then, were uncorrelated to traditional markets. And I was wondering if that's still held here in the time of the coronavirus or, you know,

how you think this virus will impact the crypto markets? Sure. So I'll start and then hand off to Yassim because he's been updating that study as a matter of fact. And we're going to put it out fairly shortly. But just to start out, I was obviously, we all were watching what happened to Bitcoin, you know, going down more than 50% into the 3,000s when everybody assumed, that the 200-week moving average, which everyone had been trained on, and we had started out that way, actually, at pointing out that, hey, it held, even in the riskiest of times. It didn't hold. It broke

through that in March. And, you know, there was so much going on with the rest of our world in equities that, you know, I was just looking at the corolle. I said, wait a minute, Yassin, gold keeps going up. Bitcoin has just crashed here. What the heck is going on? So it certainly wasn't correlated to, it was inversely correlated to gold, which was also a big surprise. And, you know, you usually get these breakdowns when everybody assumes they've nailed it. Like that 200-week moving average, when you've got so many people, it's a little bit like portfolio insurance that I described in, in and you can even say the same in the equity market. There were a lot of low volatility strategies and risk parity strategies that fell apart in

this period. They weren't supposed to. Why did this happen? It's because there was too much capital chasing that objective and there was too much comfort that they had nailed it. In other words, they thought the risk was out of the system and out of their portfolios in some great way. When it came to Bitcoin,

I noticed, and we talked, Yassine and I talked a lot about it, I noticed that, okay, we got to the 200-week-moving average, around, you know, it was in the high 5,000, 6,000, and it kind of just stabilized there, and everybody was getting used to the idea that, yep, that's it. It has held, if you look, go back to 2015, when we initiated our position, we initiated it when it hit the 200-week moving average, and it then continued to hug it. There is so much more capital now involved in this space, and it's hedge fund, speculative capital, and the leverage that there were apparently, and I didn't even know about these people, Yassine, of course, did, but apparently there were, I will call them traders or speculators, who were using 100 times leverage, and Bitmex was one of the places this was happening, 100 times leverage and they were considered apparently, you know, as though they could do no wrong. You know, in our business, in our business, I know if I ever feel like I, this is so easy, this is getting so, we are on to something big here.

I, that makes me cringe. It makes me shudder. I start looking for all of the risks. And I actually start taking risk off when I start feeling that way. I think the people who were involved in actually got to 100 times leverage were so inexperienced in terms of what leverage can do. They had no idea that it was going to shut down their firms. They had no clue. I guarantee you they had no clue.

If I had known that there was that kind of leverage out there, Yassim did. But again, he was in that circle. It wasn't something we talked about in terms of leverage. And in that circle, these people had become very. popular, very famous. But if someone had told me, look, there's something out there, you know, a fairly nascent asset that is being leveraged 100 times, I would have said, okay, get me, you know, let me just tell you where the weak link in the system is, and those guys will go down, and they did. So I know Yassine knows a lot more about this than I do, and also knows a lot more

about the correlations, but the only last thing I'll add is that it makes sense. You've got so many more hedge funds involved who are not only involved in crypto assets, but also equities and bonds. They're multi-asset managers that when you get this amount of capital moving in, it is logical when there's a crisis in one market and there are margin calls and there are margin calls all over the place in all kinds of assets that they're all going to go. the correlation is going to go to one in that moment in time. But I think Yassin has surfaced some more interesting insights about the correlations in and around this period that I think will explain that we're still very early stage in terms of this asset class. And the correlations are still fairly low.

So Yassin? Sure. I think that sets it off quite nicely. it really has been interesting to see the evolutions of narratives around kind of the crypto space more broadly during coronavirus. I would say for Bitcoin specifically and Laura, to your point, there have been really two competing narratives that have been questioned during this first quarter of 2020. The first is obviously kind of Bitcoin as this uncorrelated financial asset. And then the second is Bitcoin as this safe haven asset. I think that, you know, it was a shock to many of us to see Bitcoin during this time suffer.

for its second largest daily drawdown in history. And I think it was fewer than 15 minutes. We saw Bitcoin drop from 7,200 to less than 5,400. It broke its 200-week moving average. And that hadn't happened in seven years. And then it continued to sink touching, I think, $3,800. And then to Kathy's point, the largest contributor to this sell-off appeared to be these Bitcoin liquidations to satisfy margin calls on the Bitmex's of the world.

Bitmex during that time saw almost a billion dollars in liquidations of its perpetual swap in the most over a 24-hour period in almost two years. And so the sell-off was definitely severe, and it was in tandem with an equity market sell-off. And so questions have definitely been raised around Bitcoin's legitimacy as an asset-worthy of allocation, especially if it's claimed to, fame narrative has been its non-correlation and kind of the safe haven aspect. If we dig into the numbers and actually coin metrics, it's crypto asset data provider and

Kathy was talking about, we're updating, we're collaborating on a white paper with them. And they actually recently released the report showing kind of the historical correlations and updating that into the coronavirus. virus. And so if we look at like kind of the history of Bitcoin with, let's say, the S&P 500, we see that it has been relatively uncorrelated. Since 2012, the correlation has stayed between 0.15 and negative 0.15, which signals kind of little to no correlation. And then, but over this last month, we saw kind of this correlation reaching new all-time highs. And so is it fair to ask then does this recent correlation suggest that Bitcoin and the S&P 500 are now suddenly correlated?

I would say no, because although the short-term correlation did shoot up, I think it was still under kind of very unique market circumstances. You had kind of a lot of news about the spreading of coronavirus in which investors across every asset class rushed into cash. And so really what we need to look at is correlation shot up between most assets. in March. And in fact, to Kathy's point about gold, even the correlation between the S&P 500 and gold was also its highest since 2013. And so I would say over the long term, I expect the correlation between, let's say, Bitcoin and the S&P to see some sort of aversion to the mean and then return to that range that we've seen since 2012. But at the same time, over the short term,

But I think that, you know, we very well may continue to see kind of relatively high correlation between the two, especially since we've seen kind of strong correlation across all asset classes. And then, yeah. No, I was just going to add one more thing, Laura. I think that this was a really good lesson. I think it will add to the maturity of the ecosystem because it's, so clear that the willy-nilly leverage is not to be trusted. And so you will have more scrutiny of leverage in many of the crypto-acet ecosystems. And I think that's a good thing.

Yeah. And one other thing I did want to add was there were a few circumstances on that day that contributed to what happened on BitMax 1 is that their systems actually suffered a D-D-D-D-D. during this whole March 12th, Black Thursday liquidation period. So that also affected things. And then the other thing is that there were a lot of arbitrage opportunities because the price of Bitcoin diverged wildly, you know, between the different exchanges and markets. But the blockchain itself became so backlogged as people were trying to move money around to take advantage of the arbitrage opportunities that.

they weren't able to. And so I imagine that there are some liquidations that happened that maybe would not have happened if it weren't for the fact that the Bitcoin blockchain itself was clogged. And the same happened with Ethereum. And for listeners who did not hear the episodes I did with Kyle Simani, where he kind of breaks those down. And then Antoine Le Calvei of Coin Metrics, who was on unconfirmed, both of them in the... there shows it kind of dissected what happened. So one other thing that I wanted to ask you about was Kathy, I did see in a Yahoo finance video that was about ARC's big ideas for 2020. You talked about how your conviction in Bitcoin has only grown since the downturn from the last big bubble

at the end of 2017. And I wondered why that was and how you look at its future outlook, like what analysis you make to say that. Yeah, I think at the peak in 2017, Bitcoin, and I know these are not precise numbers, but whatever errors are being made are being made all the way through. So Yassin can refine this a bit afterwards. But at the time, we were looking at the total network value of the crypto asset ecosystem. And we noticed that, you know, Bitcoin had gone down to the low 30s as a percent of the total. As a Bitcoin price and all crypto asset prices kept coming down, Bitcoin's share started to rise and it rose to, I think, the low 70s. I'm not 100% sure where it is now. I think it's high 60s, although after the crash, it may be higher. And what that

told me, again, bringing my economic roots back, is, you know, Bitcoin is the reserve currency of the crypto asset ecosystem. And that's what a reserve currency is. The dollar, the dollar right now, I think, is about 65%, 60, 65% of global currencies. Bitcoin getting up into the low 70s said, okay, this is the reserve currency. This is the strongest currency. This is the most secure. That's one of the things it told me. And I also think we were learning, we were doing a lot more research on, wow, confiscation of wealth. This is a perfect antidote. And at the time we had the MBS, as that is his name, MBS, arrest his own cousins in Saudi Arabia and lock them up in a hotel.

I'll bet there are a lot more. not just in the Middle East, but in emerging markets, in any emerging country or even developed country where individuals fear there will be confiscation of wealth, either in a direct way like it was in Saudi Arabia, or in an indirect way, think Zimbabwe, the hyperinflation, Venezuela, Argentina, 50% inflation, that's crazy. So I think that this idea of confiscation of wealth, you know, we can take out this insurance policy. We can carry it around in our head in terms of the key to unlock it instead of around with us. With all the hotspots flashing around the world, you think about China, Hong Kong, the protests in Hong Kong, what did they think is going to happen finally?

we just began to do more work, and I think, Yassin, the work you've done said, just if you took the individuals in the world with, I think we said, an investable wealth of $1 million around the world, and they bought out an insurance policy, which basically suggested that, well, there's a 5% chance in your lifetime. that you're going to see full confiscation of wealth. That total was about $3 trillion, just that use case. Just that use case.

So the store of value certainly, and this reserve currency role, there is no more important role for money, and there's nothing more viral than a reserve currency when you're talking about currency markets. So, Yassin, you might want to add to that. I would say another additional point is actually around kind of the infrastructure and credibility amongst financial institutions and the community more broadly that has been accepted since 2017. So, you know, Kathy often likes to reference the Cambridge Associates report that came out around portfolio allocation specifically in how Cambridge recommended that institutional investors begin exploring these crypto assets more broadly, obviously with Bitcoin at the forefront. front of that. You have, you know, institutions like Fidelity, who are now understanding and

recognizing that there's, that there could be an institutional appetite. And in order to fuel the demand, you need to have kind of regulated custodial services. And you have, you know, Fidelity, it's been mining Bitcoin for, for years now, now entering that space, seeking to meet that demand. We saw the recent launch of kind of backed everything around price discovery and market infrastructure. And I would say another one that a lot of people are dismissing or have not really looked at how profound the implications could be is around square. And what they've done, in particular what Jack Dorsey has done as the CEO of two public companies who genuinely understands the value proposition of Bitcoin and is really doing everything he can with the resources

that he's been able to build over the last few years to kind of fuel demand for Bitcoin. I think the launch of Square Crypto, you know, launching that first open source Bitcoin initiative could, and we've seen it's become a precursor for open source development from other institutions, obviously questions around kind of sustainability of funding for developers. That puts that to rest. And so when you have kind of a lot of momentum that's kind of being. built around the institutions that are now deeming Bitcoin credible, combined with the fact that now you're seeing kind of these recent trillion dollar injections from the Fed, it is possible that

we are in the midst of this crucial inflection point for Bitcoin, I would say if central banks continue to inject money into the economy at these rates, in which something like the narrative that we saw in 2017 will kind of pale in comparison to what we might see in the next few years. Okay, so I'm going to do, sorry, Laura, I'm going to do just a little bit of a reality check on that because, and Yassine agrees with what I'm about to say as well,

but what we're seeing, and this is from personal experience, is institutions, while the infrastructure is being built around them right now, institutions are not ready to move aggressively into this space. We have had, you know, we manage money for institutions. We have one of our largest institutions owned GBTC and was trying to figure out a lower cost solution. And we were trying to help them do that in the form of, you know, more of a private fund, which would be much more efficient for,

from an expense point of view. And they had trouble getting over the hump. They were almost there until they realized that it would be broken out as a separate fund and that they would be on the line as effectively espousing Bitcoin. And they just didn't want to do that. So they stuck with GBTC, even though they had started us on this, search for a better alternative for them. So institution, and they trust us. I mean, this institution has been with us. It's one of our longest lasting clients, we're of our first. And so they trust

what we're doing and they know we know our stuff when it comes to, especially to Bitcoin. And they wanted a lower cost solution. But they, the optics of actually seeming to support it with being included in a much broader portfolio was something they couldn't take. I also have, you know, we know this is an issue. And I was with a group. I had an opportunity to meet with a group to try and talk through this institutional issue. And, you know, I think the most important thing we have to do is educate, educate, educate. That's why Yassine is updating that white paper.

the original one was Bitcoin ringing the bell for a new asset class. We're updating it because we really do feel like it is time now that we've gone through these perturbations and maybe much more than that in these markets from a price point of view. And yet, if you look at Bitcoin on any kind of moving average basis, it's still appreciating year over year. So from year to year. So we're bound and determined to become a part of the solution to that problem. And, and, you know, one, you asked my confidence, one other thing I wanted to point out is I also had the, uh, luxury of meeting some of, some of the core developers in the space. And, um, for Bitcoin, you know, yes, in the Bitcoin space. And because my, my, my education was in both economics and finance, uh, I was able to, you know,

able to, you know, see how much they understood about economics. I was blown away by the sophistication in terms of understanding economic theory and understanding monetary policy, monetary theory, Austrian economics. And I have to say that has also boosted my confidence. I believe they understand how important that 21 million unit limit is, especially in the context, of what started happening in 0809 in terms of opening the floodgates, it never turned into inflation. So many people say, oh, fine, we can do that again. And we just have.

And it's still not going to turn into inflation. I disagree. And I disagree for the same reason portfolio insurance didn't work and low-val strategies didn't work. When everybody thinks something is a sure thing, it's usually wrong. And I think to look at 0809, 0809, and to see inflation coming down, actually. It came down after that. Why was that?

Think about it. It was because the velocity of money collapsed. Consumers started saving more. They were spending, and the spending was going at a good clip, but they were also saving more all along the way. And businesses had become very conservative, very, very conservative. And what I mean by that is from an operations point of view. Some of them were leveraging up to buy back stock, which turned out to be a very bad idea. But that's why I think this notion that inflation is dead, to the extent I hear that more and more, just because it has been, means it will be, I will become more convinced we're going to have an inflation problem because these reserves, both from 08 and 09,

And now again from today, we're going to go up to $9 trillion in reserves. We started before 08 at $850 billion. We went up to $4.5 trillion then. And now we're going to go to $9 trillion. Those reserves are sitting on the balance sheets of Central Reserve banks. And they are kindling. They are the kindling. When banks start competing against each other to make loans,

that kindling will be lit. And, you know, when everybody feels we're free and clear. And I don't think that's anytime soon. I don't think inflation is a problem for the next two years at all. But I do think to dismiss it as a potential problem is a big mistake. Okay. So yeah, I mean, you guys have made a strong case for Bitcoin, but I did want to ask you about Ethereum because, as you probably know, that does have more developer mindshare. And I wondered, you know, even though you can, I'm sure, see that, I believe the last big report I saw on this show that they're about four times the number of developers in Ethereum as in Bitcoin. You know, I was curious to know, why does that not translate into investor conviction on your part? And one other thing I wanted to throw in there was because I saw

you seen co-wrote a medium piece where I'm just blanking on what the matrix was, but it was something like unconstrained and constrained. And I also heard Kathy give a talk where she talked about the East Coast way of looking at the world and the West Coast way. And I just sort of wondered if that had anything to do with, you know, your views on Ethereum or really any smart contract, any cryptocurrency is affiliated with a smart contract? Okay, I'll start and I know Yassine has a lot more to say about it. But as an investor, I have to, and because I'm not solely in the crypto space, I have to pick my spots and we run concentrated portfolios. So I typically go with the highest conviction names in any space, in any innovation.

space. And Bitcoin, bar none, is that for me. Ethereum, yes, we get back into that West Coast, is this technology, is this software technology, or is this money? And I think that the value in these ecosystems is going to be dominated by the currencies, and Bitcoin being the reserve currency, would be where I'd allocate most of our assets in this space, although I could see over time if there are other currencies that evolve. And some people think Ether could evolve into the kind of currency we're thinking about, you know, the equivalent of the euro, the yen, or the yuan, the pound, what have you. I'm as again, having to pick my spots, I'm going to focus in the cryptocurrency space where I think most of the value will accrue anyway. And I'll leave the technology side to others. But Yassine?

Sure. So I would say just to add on to that, I think what we've seen really the most salient distinction between crypto investment philosophies and it touches on this idea. of like constrained versus unconstrained visions of crypto networks is, you know, looking at looking at these networks as kind of a software first in which I kind of coined them as innovation maximalists or kind of money first in which kind of you can coin them as monetary maximalists. In which case, if you look at it from a software first mindset, kind of the killer app is definitely not money and the killer app is definitely not Bitcoin. In fact, you know, the idea that you, you, you you have some sort of that this whole space has nothing more to offer than the slow and volatile form of sound money, to a software-first mindset seems quite anticlimactic.

And so when you look at it from that mindset, the, and from an investor-focused's mindset, you start to see that, yes, there are certainly limitations with Bitcoin. The investor focus should rather be on kind of creating these expressive, upgradeable base layer protocols with these large feature sets. And that the network infrastructure priorities should be around scalability and no, not having this very slow yet reliable mechanism to transfer very, very small pieces of data. When you look at it from kind of a money-first mindset, then you start and kind of end with Bitcoin, in which case kind of the investor focus is really around kind of that assurance theory of money

and looking at this really from a monetary view. I would say that from an investor standpoint, there is this kind of discrepancy that people are kind of failing to realize between kind of value capture and value creation. And that's where I would say our views on Ethereum are differ in terms of where value is going to end up accruing long term. So the best analogy that I can actually give for this, and actually Placeholder was the first to bring this up, was actually in the context not of Bitcoin versus Ethereum, but actually of Ethereum versus Ethereum killers. And so if you kind of look at this as, okay, coming into this year, you had kind of a number of Ethereum killers that kind of plan to launch their main nets.

and so, and we've seen kind of the, the algorithms and the hash graphs of the world who have been able to sell this dream of, look, our technology is a lot superior. Well, that hasn't really been reflective in where value has accrued. Obviously, in bull markets, you tend to see that these are kind of levered beta plays, and so you would expect them to trade up. So at a time when Ethereum was trading at like $130 billion of market cap, you had, you know, EOS and Cardano that weren't even launched but had kind of tradable tokens that were trading at $10 to $20 billion in market cap.

Now, in bear markets, the disposition is a lot different, especially I would say if the fundamentals are questionable. And so I think that very similar to how Bitcoiners view Ethereum's odds of kind of usurping it by using, let's say, the developer activity as a metric, Ethereum's view Ethereum. killer's odds as you're surping it as in very, very similar ways. And that is, it's really hard to justify valuations based on kind of superior technology and feature sets alone. And so you first have to understand kind of what is supported, I would say, by Ethereum and Bitcoin's market cap before you can, you can justify why these Ethereum killers merit higher valuations.

And there are things that simply something like, like the developer activity or feature sets can't really replace as a value proposition. And so I would say to Ethereum's credit, it has built out an extremely robust set of stakeholders. And I am bullish on the idea of experimentation on Ethereum. I think that there's very, very interesting experimentation. But I remain hesitant to think that most value is going to accrue in the long run to things that kind of aren't proven forms of money. All right. So we're going to, we're a little bit over time, but do you guys have a few minutes

to just do a lightning round of three last questions? Sure. Okay. So one thing that I was curious about was I saw that you guys are also bearish on cryptocurrencies with privacy features like Zcash, but at least for the, you know, privacy cryptocurrency crew, they would say, oh, the investment case for these is. that financial institutions want to, you know, use these crypto assets, but they don't want all their transactions to be public. They want to have privacy features built in. So I was wondering, like, do you disagree with that? Like, do you think that that isn't going to be something that, you know, enterprise or institutions will have demand for? Yeah, I'll start. And then, and then,

so, yes, just because I know where this came from, uh, sure, I, I gave a presentation in, Boston where I said the fully dark coins I would be concerned about mostly because I think the government from a privacy point of view and especially, you know, everything that's going on in the rest of the world right now, I think this is even more of a risk. They are going to want some transparency for themselves. Now, I know that certain of the coins are, you know, they will allow that, you know, it's the users who are enable, you know, the transparency. Yeah, the transparency.

So I'm not saying point blank 100% across the board. That I wasn't really trying to say. And I do think that they will, you know, iterate to a point where, you know, there has to be some oversight, I believe, you know, to prevent nefarious actors, which, you know, really everyone involved should want. But, Yassin, you, I'm sure have more. Sure, I'll take it from the lens of, yeah, I'll take it from the lens of more, like, privacy as a technology. I would say that really the stance on being more skeptical about privacy coins is really, like, if you consider privacy privacy to be like an implementation of a technology, I think that, like, in the open, in the open source world,

I think that it's nowhere near as defensible as what we would traditionally see. And so the big caveat to that is if larger assets, let's say like a Bitcoin or an Ethereum, end up assuming the same privacy features as these privacy focus coins, then I think over the long term, there is less of a value proposition for these privacy coins. But there is a big question on, let's say, should we implement confidential transactions on Bitcoin's base layer? And that may come at the cost of auditing monetary supply. And so we see kind of the limitations with Zcash and its ability to audit monetary supply,

but at the same time having confidential transactions at the base layer. So there are these questions, and I think that ultimately we haven't reached an equilibrium. And then I would say from an investment standpoint, there is an argument to be made where if privacy coins or if a coin has the only feature of a private. of a coin is privacy, then they could actually end up just being glorified mixers in which, you know, you want to mix your coins, you go into a privacy coin, and then you come back out and you've effectively cleaned your coins, in which case, you know, there's high velocity in the privacy coin. And so from a value cruel standpoint, it would seem kind of less interesting

as opposed to pure store values. And one other thing I want to ask about, of course, is a big event coming up on the horizon, which is the Bitcoin having. And obviously, it's coming at a really kind of crazy time in the history of the world. And, you know, not only the crypto markets. So what is your outlook on what will happen at that time? Yeah, we have had a few brainstorms about this. And I would say about five months ago, coming into this year, there was a lot of talk about the having, and I began to feel like, as we, I think we hit 14,000, I began to feel, okay, they're pricing this in, because it is a positive. First of all, it will be another proof point that we're heading for 21 million, you know, a successful

software update. And I think, you know, if you're, you know, if you're, diminishing the supply relative to demand, I think that's a positive force. I'm glad that the discounting of it has been shaken out because if we were still at 14,000 or what have you, I'd say, I don't know how much is priced in, but given what just happened, I don't think much is priced in. Yes,ene? Sure. So I think this is a really interesting topic. Honestly, I don't have a straight answer. I think that two camps have definitely formed. There's one camp that believes that the happening is priced in, like you citing the efficient market hypothesis, and then the other camp believes it's not. What I can say, or what I do believe is that we, I think we're going to

likely see kind of minor-led selling pressure, and in which case, unless like the price of Bitcoin doubles, you'll start to definitely see like minor-led selling. pressure is in that there will be kind of these miners that will be below their break-even cost. And so I do expect kind of a drop in the network's hash rate. But assuming that price, that demand for the Bitcoin remains the same, having kind of a having in this selling pressure could lead to increases in price. I think that the Bitcoin, cash having is going to be, it sets interesting precedent for what to expect for Bitcoin. We definitely saw kind of a lot of minor lead selling pressure for Bitcoin cash, particularly

from their kind of just shutting off miners. But again, you know, this is the third having that the market will witness. It's experienced only two havings in its history. Obviously, those two havings have tended to be kind of catalyst for bull runs. But beyond that, I, beyond that, I'm not sure what's going to happen. Well, I'm very curious. Yeah, yeah, me too, especially with everything going on. All right. So last topic I just wanted to make sure to touch on before we said goodbye is to talk about Libra and Central Bank digital currencies, which, you know, that was such a huge topic last year. And then, you know, it sort of looked like the future was a little bit cloudy, at least for those. But then with all the coronavirus stuff, now at least central bank digital

currencies are getting a little bit more life in them. And I wondered not only what your outlook was on those, but also just how that would interact with what's going on in the economy. Because for instance, I did see that the Financial Stability Board has been warning regulators about disruption that could happen from them. So I kind of wondered how you thought the coronavirus crisis or the impact of it would interplay with this push toward central bank digital currencies. Yeah, Yassine, you want to start on that one? Sure. I would say largely what's been very interesting,

the Libra in general, I think, has been a very interesting catalyst, putting kind of the term or the label crypto or crypto asset or cryptocurrency on the map. It's been very interesting to see kind of the evolution of the narratives and how seriously regulators were taking it post-Libra announcement. I think we've definitely seen a lot of slowings. down in the momentum on creating kind of this reserve-backed asset of which the basket is up to Facebook to decide. We've seen kind of, we've seen a lot of pushback from kind of the EU. We've seen pushback from the United States. There are some that speculate that kind of Libra is never

going to launch. I expect it to launch, but I expect it to likely look a lot different than what what it was initially presented as. I've heard kind of through the grapevine that, you know, the best solution is to actually just have a fully USB-backed Libra, in which case, you know, you appease regulators in the United States. But that, that, I would say shed's light on, I would say one of the most interesting use cases in crypto, especially amidst this recent uncertainty. And that's around stable coins more broadly. It's been really interesting to see how how the supply of all stable coins has grown to all-time highs around coronavirus. And this is during kind of Bitcoin's massive drop. I think that the most recent statistic was the stable coin market

cap is around 7 to 8 percent of the total of Bitcoin's market cap. And so we're starting to see this trend pick up. And, you know, Kathy referenced emerging markets like the Venezuela, the Argentinians of the world, they would much prefer holding the U.S. dollar than they would prefer holding Bitcoin. And for having some sort of coin dependent on whether or not you could export your private keys, I'm not sure Libra is going to enable that. But if it does, this could serve as a very, very interesting use case for emerging markets. And we're starting to kind of see how the stable coin growth is really a signal that investors are piling into these kind of crypto cash equivalents in times of uncertainty.

The irony is U.S. dollar-based. We've just had this conversation about inflation. This would be another indication to me that people do not believe that what the Fed has just done and other monetary authorities will, that the belief is that it will never turn into inflation. Another indication of sort of the complacency out there find it very interesting. Yeah, and one other thing I was going to add is that the most recent episode of Unchained is an essay by Mariano Conti of the Makerdowne Foundation who is Argentinian. And he talked about his, you know, road through cryptocurrency, basically. But kind of earlier on, he discovered it because, you know, in Argentina, the value of the U.S. dollar you get through the banking system is different from what you get on what we would call the black market. apparently in Architaine, it's called the Blue Market. But anyway, and so through that, he, you know, got into, I think it was Bitcoin at first. And then later, when stable coins came about,

he, you know, for his freelance work started getting paid in Die. And now he's, that's just for him, the way to go. And so, you know, that's literally just, I mean, of course, it's just one person, but still, like, you know, through that story, you can see like, oh, okay, this, is, you know, where this is being useful. This is somebody who says, like, this is superior to what's available to me. So anyway, okay, well, it's been so great having you both on the show. Thank you so much for coming on Unchained. Thank you very much, Laura.

Thank you, Laura. Thanks for tuning in. To learn more about Kathy and Yassine and Arc Investment, be sure to check out the links in the show notes of your podcast player. Some of you have heard the weekly crypto news recaps I read on Unconfirmed and have asked me for the links to the story. I mentioned there. You can also get them delivered right to your inbox with my weekly newsletter, which comes out Fridays. Go to Unchainedpodcast.com right now to sign up. Unchained is produced by me,

Laura Shin, with help from fractional recording, Anthony Yoon, Daniel Ness, Josh Durham, and the team at CLK transcription. Thanks for listening.