#202 Ari Paul: BlockTower Capital and the Cryptocurrency Opportunity

Transcript

[Music] hello and welcome to episode of the show she talks about the technologies projects and startups having a centralization and the global blockchain revolution my name is fran fog and crane today we will talk to ie David Paul who is the co-founder of block block tower capital cryptocurrency investment fund will talk work replicants investment funds their incentive structures specifically the thesis that the block tower capital has re welcome to the show

hi guys thank you so much for having me so before we begin tell us how you got interested in the cryptocurrency space you know I am a slow learner it took me a while to really appreciate you know what I think we all kind of now appreciate so what happened was after the financial crisis in 2008 the Federal Reserve started printing a ton of money their balance sheet went up for X and I started thinking that while currency depreciation inflation wouldn't happen right away because you these massive deflationary forces eventually that was gonna be a problem so by the time we got to like 2011-2012 I was thinking how do I get out of US dollar I looked at the euro and the yen and they looked even worse how do I get

out of fiat currency how do I get out of the way of currency depreciation and it's a while but then kind of Bitcoin was such a clear answer here's money that can't be debased by a government there was one other angle that really made it attractive to me so when I talked to two Americans about the idea of censorship resistance or an unseasonal storm al you they often look at me weird and say oh so it's for criminals but I had relatives who had to flee Nazi Germany with with you know valuables sewed into their clothes and when I talked to other people in crypto community often there's some connection they had a relative who is a flee Pina JS Chile or Mao is China where the Khmer Rouge they have to flee some country and so they appreciate that sometimes you're

able to escape a country but not with your assets not with your wealth not with and by I don't need a lot of wealth I mean enough money so that you don't start to death so I mean right now we have some refugee crises there you know Syrian refugees Syrians at the flee the country and many of them were middle class these are people who had a home a business a car but they weren't allowed to take it outside the country so the idea of having a a store of value a way of storing your wealth you can access from anywhere in the world with just a password kept in your head it is very attractive that GUI it's such a powerful concept it's incredible right if you think about okay let's say this had existed during Nazi Germany it would have been a very different situation

right very empowering for those people definitely so you know I came across Bitcoin it's funny I recently I searched through my email see it was the first reference of cryptocurrency and I had a friend a brilliant investor friend named Arun who worked at PIMCO at the time who forwarded me a near Times article this was when Bitcoin was three dollars and and he said this is interesting take a look and I responded definitively saying electronic currency will never have value because value comes from either a long history of value like old or fiat backed by guns and you know took me a while and that's it's funny we still see that kind of response from people like Robert Shiller and Howard Marks and Mohamed el-erian these are big names in the financial community who and it so I'm sympathetic

when I see these people saying that these kind of things it's like well I was saying the exact same thing you know five six years ago and it took me really two years to wrap my head around you know the unique value proposition and a great line I think it might have involved who for said this that cryptocurrency is kind of like a graduate 400 level course with prerequisites in game theory computer science economics there's a lot of relatively simple questions so you know everyone like when you're introduced or first you ask well why can't more more Bitcoin be created right and the answer to that we all kind of know that we it feels like an obvious answer the most at this point but like it took me a while to understand why more Bitcoin can't be created how does the game theory work

what is consensus really mean what does decentralization really mean you know so it took me a while to get it and then you know what people are worried there's a question of is it a bubble well people are asking the same thing when the claims $100 cuz it did just rally from $1.00 right it was a hundred X and so I looked at in 2013 and I said man I don't know if this is starting to look old interesting me but it's not 100x how do i buy and then in 2014 bitcoin crashed seventy percent you know so fraud happened GOx happened and in early 2014 it fell from 1,200 to $40 and the trader the contrarian in me was really intrigued because it's like wow this thing she probably should have died right there were these things that should have killed it and it didn't

survived and it sounds seventy percent from its highs so maybe this is an interesting point to buy so i started buying just a little bit started learning about it started reading you know joined some of the sub reddits and read the white paper for the first time and and very gradually started learning about and appreciating and i think for a lot of people myself included etherium also helped us understand the broader broader use cases that are possible where you could then start thinking of it beyond just money but in terms of you know an entire ecosystem cryptocurrency as rewards points as loyalty mile as sorry as as airline miles or rewards points or as utility tokens you know all of that kind of brought in the scope of what this can be try to being involved with

cryptocurrency what what did you do so i started my career as a trader so i was a market maker of equity derivatives for Susquehanna national group what that means was I was basically like the casino for options on the S&P 500 I was buying and selling all day balancing order flow managing risk I then traded just about everything I traded FX currencies I traded commodities crude oil natural gas I traded Treasury bonds I even traded electricity Fords they're actually financial contracts for electricity so I was very much a trader as opposed to an investor a trader you're betting on short-term order flow you're mostly thinking about what are

other people going to do in the next hour or day or B and and where's money gonna flow so I did that for a total of six years got an MBA you Chicago and then I joined the university cago endowment which is a eight billion dollar endowment which is totally the other end of Finance you're thinking very long term you're thinking about how do i construct a portfolio that is humble of these you can't be nimble so as a trader you can go in and out of positions in an hour you can change your mind as endowment you really can't you can't move six billion dollars kind of out of local real estate for example so you have to create a portfolio that has humility kind of built into it where I don't know what's gonna happen I don't know how my views are gonna change let me create a base

portfolio but I think we'll do really well over ten years how do I want to be allocated where does return come from how do I manage risk in a long term sense and then within that construct how do I find ways to add value kind of in a little bit of a shorter medium-term idea when did you choose to leave the University of Chicago endowment and how they have come about and your decision then to start a fund specifically focused on the blockchain space so I actually left less than three months ago we've been moving very very quickly because we appreciated just how fast this industry was was growing and professionalizing from many many angles what motivated me to leave it was kind

of an interesting path so I became gradually more knowledgeable and more convinced and more invested in cryptocurrency over kind of a four year period by the by towards the end of last year I started talking to my down and colleagues about can we invest in this can we can we you know earn attract the Alpha in this and at the time all of cryptocurrency was only about thirteen billion dollars right tiny market cap from the perspective of an eight billion dollar endowment is almost uninvested it's so small um it was also so lacking in professional services right so you if you if you think about well how am I gonna buy cryptocurrency can I trust an exchange what if I put my money on Mount and it vanishes so I started exploring and I started producing some

educational materials for my colleagues started to try to familiarize them and myself and I also talked to all the funds I could find that exists in the space which at the time was like four there were very very few funds around a year ago and one thing that stood out to me was a few of the funds were run by very talented engineers and I I'm friends with with them I think they're gonna do very well I think I would recommend at people invest with them but it was clear that the endowment UChicago wouldn't and couldn't invest with them because frankly they didn't know how to pitch they didn't know how to frame the investment in the terms that we needed to hear them Frank so for example you take a brilliant blockchain engineer who's very good at reading protocol and finding innovative cryptography and you

ask them how much of your return comes from alpha and beta and they look at you with wide eyes right those are terms they don't care about they're not familiar with it just it's awesome it's an uninteresting question to them and they don't that's not how they think about investing and that's fine this is not meant as a criticism but from I knew that I wanted you Chicago to profit from the opportunity set I wanted the Red Cross and other endowments and pensions and foundations and it was clear that the most of the existing managers really weren't offering that opportunity and so after spending a few months kind of thinking about this I actually I wrote page long recommendations to a few of the existing managers as to how they could pitch us how they you know this is what you guys need to say this is the

window-dressing you need to add this elegant one here's a simple example so having an advisor for example with legal expertise because an obvious question is you know how do you deal with the regulatory issues and being able to demonstrate credibility that either you're an expert or at least you're in touch with experts is important to get an endowment to invest so I tried to help some of the existing managers do that and but it was clear that there was this opportunity to create an institutional quality fund to create a fund the UChicago could invest him the other angle was all the funds I spoke to actually every single one were long-term buy and hold they were saying we believe cryptocurrencies gonna become multi trillion-dollar asset class we believe in this long term story and we're gonna

buy you know 10 or 20 cryptocurrencies and hope that we have one of the winners and that's a fine strategy that's the venture capital approach it works well and equity if you know how to do it but I was trading cryptocurrency myself and you know 20 minutes a day kind of an evening and was the most inefficient market that I had ever seen all the strategies that I used in trading bonds and commodities electricity worked in crypto currency because shorter term they trade like currencies so if you can anticipate where money's gonna flow you can here's an example if you can anticipate that a cryptocurrency is going to be added to a large exchange that will facilitate retail buying you can anticipate that the price will go up and so those strategies worked and I actually didn't see anyone doing them and that's really I'm not a venture

capitalist I'm certainly not an engineer but I am a trader in a portfolio manager and so I thought that that by building the right team around me they could fill in kind of the gaps my own expertise we could offer that that shorter term alpha opportunity set to investors and how are you what kind of funds do you want to build in the longer term do you see this becoming like a very large fund that will run kind of a hedge fund model in this space or do you think it will go into some different direction so our long-term goal is to build a firm that supports a series of funds and the intention is to bring on the right people so for example the current our

current fund offering does not invest in equity at all and the reason for that is that that neither I nor my co-founder Matthew GATS were not venture capitalist we don't have experience doing private equity deals and that really is a separate unique skill set and I'm a big believer in this idea of circle of competence probably the single most important thing to being a good investor is knowing what you don't know you don't need to be good at everything you don't need to know everything you just need to know what you know and then you can narrow in on that invest in that right to be a great investor you don't know anything about real estate as long as you don't invest in real estate so long-term the plan is to bring on the right partners who have the expertise needed for each investment category and

to build out a firm that does eventually cover everything in the cryptocurrency space and the reason for that is I think there's some natural synergies so for example we're not I co focused we have a small portion of the portfolio roughly kind of set aside for ice Tio's but it's a small portion but I have to spend a lot of time looking at new projects because let's say I'm invested in ether well I need to know about tezo's I need to know about us I need to know about rootstock because all of those could potentially be disruptive they could potentially kill the incumbent so I'm already looking at those projects I'm already talking to those developers I'm already kind of in that deal flow I get 10 white papers a day in my inbox all offering you know a 50% presale discounts so you know there

they're kind of these natural synergies where if we have a separate fund that was more focused on that I think both of our funds would kind of benefit from from that expertise as well as from access to deal flow access to information and long term this industry will consolidate so what you're seeing right now is kind of a million flowers blooming you're seeing many many new funds launching many new projects launching and and that's great I'm a big believer in experimentation and entrepreneurship but over time this will start looking more like a traditional asset class you will have a few giant leaders in the space that have advantages that make it hard for others to compete so for example if you're trying to launch a traditional bond fund a two billion dollar hedge fund it's really hard to compete against the giant

hedge funds because they have all these they have the cheapest capital they have a brand that lets them attract the best employees they have connections throughout the world for better deals sourcing they have large organizations that let them have their finger and everything and have their finger on the pulse of everything going around the world so right now what we're seeing is tremendous collaboration I'm calm on the phone constantly with other fund managers we share ideas we share best practices on security we share our service providers and we also share our ideas because we're all small organizations and and at the moment most of this industry is retail money so it's possible for every fund manager in the space to do well because we're not controlling that much money but over time you know if you have a few funds that have 20 employees 30 employees it's

gonna be hard to compete with that if you know if you're trying to be a one-man shop or even a 5min shop so our goal is to build kind of a leading institutional quality firm and cryptocurrency space cool and like what kind of opportunities would your first fund pursue so my own skill set is is short and mediums from trading so not high-frequency or organic algorithmic trading but kind of everything that's longer-term than that that's also currently pretty low-hanging fruit in this in this market and the reason for that is through these tremendous barriers to entry to that kind of a strategy so if you're if you're pursuing a venture capital approach it's not that hard operationally you sign a saft a

simple agreement for future tokens maybe you receive tokens and you put them in cold storage and then you wait three or six months Smike it's quite much harder from a security and operational perspective to be actively trading because the market is illiquid so we constantly have to think about how do we get the best film if I want to do a large trade I need to do that every few days I spent a lot of time thinking about how do I minimize the slippage or the transaction fees I pay security is also harder exactly move cryptocurrency into and out of cold storage so those are I spend a huge amount of time on that I'm constantly consulting with the best security experts in the industry to make sure that we're really at the forefront of that and while it's a huge pain frankly it's not it's not fun to do I recognize

that it's a barrier to entry it keeps a lot of other people out it keeps a lot of the professional traders out it keeps a lot of the existing funds away from the space because it's it's a it's both a day-to-day challenge as well as an expertise that they don't really want to develop it also has a unique set of risks so traditionally most investors like an endowment they're not used to taking the risk that money might be lost on and change they're not used to taking security risk with assets right they're not they're you know they're not thinking about their investment in Microsoft stock being stolen and so in this space all of those risks are real and you know I kind of grateful for that because at the moment that's one of the reasons why I'm mostly competing against the retail investor who really has no

idea what they're doing the person who just as an example people were as we headed into the Bitcoin hard fork heading into August people were asking me my thoughts and what would happen and I said I really don't know I have a guess I have an opinion but you know there's a small group of Chinese miners who have a lot of control here and I don't know what they're discussing in kind of a dark room amongst themselves and I have maybe some contacts but but the reality was that how many people in the world understood the bit 148 bit 91 bit 141 kind of timeline very few right there were very few people on the planet who were actually following blocks as they were mined by miners and watching

the signaling so at the moment I don't think of it of us as competing with other funds it's more like the small group of funds controlling a small amount of money we're all just paying a little more attention and then the person who's buying or selling on coinbase and we can all kind of benefit from from just bringing a little bit of expertise and and even just frankly attention literally just watching the blockchain and watching the minor signaling and having spent a few hours to understand what does it mean if miners are signalling that 91 what's the timeline what's the deadline can you can you can give us an idea of how you would construct the cryptocurrency trading portfolio so what kind of opportunities what do you pursue and how do you balance such a portfolio

sure I don't think there's a right answer to that a big part of of where we hope to add values investors is in deciding that in an ongoing way so I don't know what this industry looks like in five years I don't know what this market look looks like in five years we've been going through some very short regimes so I think it's actually a really important concept in investing people will often rely on if you're an algo trader you rely on a data set if you're more of a traditional investor like a value investor you rely on a set of heuristics a mental framework and usually you're drawing on what's worked in the past so you say you know buying low P low price turning stocks works well or buying a Warren Buffett made a

lot of money buying assets that had hot large cash flows so you say okay well I'm gonna do that the problem is in traditional markets regimes tend to last for a pretty long time five years ten years twenty years sometimes 50 years in cryptocurrency they don't and they and I think that's for fundamental reasons that this is a constantly transforming both technology and asset class at one example on that was nine months ago a huge amount of trading volume was in China and cryptocurrency was probably best thought of as mostly a US and Chinese phenomena and now it's China something like five to ten percent of trading volume and maybe that will be lower tomorrow and Japan and Korea are huge players and and it's kind of spread more globally

generally we're seeing interest in Argentina and Venezuela and Brazil and India is starting to come online and the person who's investing it's a different person so you're starting to fund managers like myself who bring more of that Wall Street experience and approach the market differently you're starting to professional Rogers who trade across exchange you're starting to have people who are doing quantitative modeling we're trying to apply fundamental valuation metrics to things like vial coin so all of that dramatically changes kind of how this market is likely to work the patterns of the past will not necessarily repeat so all of that is I guess a huge asterisk that I don't I don't believe in there being kind of a set approach to managing a crypto portfolio right now I think I can tell you kind of my current mindset

but I'm very humble about it an opportunistic and that very very willing to change this view if the market seems to suggest I should so from January to May the theme in the market was a theorems explosion and value and then a recycling of those profits into everything built on a theorem you had a lot of people you had basically Silicon Valley elites you had wealthy entrepreneurs people who had gotten rich taking a company public or who were early Facebook employees who were buying aetherium and pushed the valuation up and then you had a lot of people who they had put 10 or $20,000 into aetherium and suddenly they had a million dollars and they were looking for their next 20s and they were looking they were excited about aetherium theorem seem to be working as an investment idea what what can they invest it's an extension of that and so

they put money into things like auger and gnosis at very very high valuations and then you know now we're in I think kind of a different period we're in a so I'm constantly thinking about where is the money coming from where where's new investment coming and I think we're right on the cusp of an explosion in first retail money which we're seeing with with 35,000 new coin base accounts a day and the opening of new exchangers in Korea in Japan that facilitate retail buying and we're also on the cusp of institutional buying so we now have a we have a Bitcoin etn exchange-traded note there are a few in multiple currencies there's gbtc in the US there's a few in Europe we're probably going to have an ETF and maybe six months if not in the US then probably in in May Macau or

Singapore or London we're gonna have Bitcoin futures within the next few weeks and Bitcoin options so ledger axe is launching the CBOE is trying to launch Bitcoin futures there's a bunch of others that have a request into the CFTC so all of that is I think dramatically changing kind of the the framework so ok so now let me really enter your as at least how I think about it so I think there's you can kind of think about the market or cryptocurrency as an asset class along a few different lines you have the cryptocurrencies that are competing to be money store value and actually I should separate money into two things you have money as a story value which is really a separate use case from money for payment and I think it actually is likely to be separate in

cryptocurrency I might be wrong about this I say this you know kind of humbly but so you have something like Bitcoin that is pretty good as a store of value because it's a stable protocol it's relatively decentralized I say relatively where there's constant debate over mining centralization but it's relatively decentralized it's relatively distributed in terms of ownership and but a key point I think is is that stability of protocol so people forget code is buggy right so you have cryptocurrencies that are hard forking every other day there will be big bugs found there will be massive problems in the protocol that that destroy billions in value so if I want to know that a Bitcoin today is a Bitcoin in ten years I can have some confidence in that

there's probably not going to be that big of a change whereas a lot of other cryptocurrencies they're pursuing more of a move fast and break things mentality they're competing on features so this is how I very broadly bifurcated for story value which I think is the biggest use case which i think is going to be a ten trillion dollar use case whatever wins is going to look like a Lloyd's of London it's going to look like a giant old insurance company your bank you won't necessarily have the lowest fee it will necessarily have the fast confirmation time won't necessarily be the the cleanest code the prettiest code one of the most features but it'll be stable and old and trusted for most other use cases you're competing on features it's a bit more like being Netflix or over or Facebook where something with better features might

come out so you have to be innovative you have to be constantly improving the protocol improving the code so I think you have the stored value as part of a well-rounded portfolio and and you can either be there's kind of two approaches to try to capture that value you can take the venture capital approach and say I'm gonna buy ten things and hope one of them wins I'm gonna buy Bitcoin and and whatever else you think might win that use case a problem with that though is what if it hasn't been invented yet so what if what if this is 1990 and you're trying to invest in the winnings well Google didn't exist what if it's 1995 and you're in ask Jeeves or actually don't know when ask Jeeves was created but you know what if the winner doesn't exist yet or what if maybe it

exists but it's tiny and it's not on your list so you can either take the BC approach and maybe have a good shot of capturing it my approach and this is just because it's my skillset is I am I'm constantly updating with new information so I'm constantly evaluating every day every week what is the life most likely things that are going to fill that store value and I probably if something were to kill Bitcoin and capture that 10 trillion on market I probably wouldn't be the first one to know it I wouldn't necessarily get in at the presale or if it even had an ICO it would necessarily get in when it's 20 million dollar valuation but I would hope I would realize it when it was at a billion or five billion and if it ends up being that ten trillion dollar asset you know I'm still doing

fine and and the benefit of that is I miss a lot of losers right I'm not I'm gonna get in a little worse valuation but I'm not going to invest in a lot of things that just died before even you know getting any network effect so there's that and then you have this whole area of the market that is I think of as more like companies so utility tokens you can generally think of as as software as a service or as airline Li miles or Rewards points or I think there's a lot of those that deserve to be eventually a hundred million five hundred million a billion that are but but they're almost in a totally separate category for me it's the token is almost best viewed as whether or not it's legally equity or security it's best

thought of as really how big is this market you know so if you have something that's like a decentralized casino well that could be very lucrative that could be very profitable that's not a trillion dollar token probably right or it's unlikely to be because there are no trillion dollar casinos there's nothing anywhere near even close to that and so you have to you know you'd have to make a very strong case that by tokenizing it there's much much greater network effects than anything we've ever seen on the planet which maybe that's case right so yeah I mean very broadly it's things that are more equity like and then store a value I'm kind of rambling on this point because it touches on so many different things so the one other thing I'll add to kind of how do you construct a portfolio in this is I think there are

for me at least I think about themes in an ongoing way I think about where things in stage of development or like the Gartner hype cycle so there are a lot of projects today that are I see owing that are probably five years away or longer from being usable the things like where it's the equivalent of a pets comm so pets.com is kind of famous example from 1999 just a horrible idea that people value ate too much the reality is pets calm wasn't a bad idea we now have pet smart we now have pet food over the internet it was just way too early you couldn't haven't had Facebook in 1990 so I think you viewed some projects like the Oracle projects that were just too early they were good ideas they were good teams they just didn't have the stack built and they didn't yet have the

demand so there's some projects that I've been evaluating recently that are decentralized cloud computing or decentralized databases and things like that that you have to think about very much as a VC meaning this is not going to be usable in the next year or to buy usable I don't mean that the code won't work I mean there's no real fundamental demand for it because first you need decentralized applications to become prolific and consumers to be using those and then those will demand these services and so you know we usually the kind of keep in mind where are we really in the cycle and to something that is brand-new with no network effects in a very early stage software and technology it my confident can I get confident that's going to be an ultimate winner to value it so highly today fantastic well that was that long

thorough but very very interesting and good answer now one thing I would like to talk about a little bit so you wrote this you started this series of blog posts which is something about this you know kind of principles or your faults in general about this investment landscape and the first course is very interesting right because you essentially ask the question right like why have such good returns have been made in this space because obviously right there anybody who has been investing in this industry looks like a genius right if you put probably compared to a traditional money manager right so people have made insane returns

so you know why do you think that is and do you think that's going to continue or with with your fund lip-locked our today what kind of returns are you expecting aiming for hoping for so I I think the the the blog posts that you're referencing I was trying to develop this idea that um as investors we get returns in traditional finance the ideas you get returns for only a very small number of things you don't get returns in traditional finance for taking what's called idiosyncratic risk so if I for example buy by let's say there's a biotech stock and it's going to either a get an FDA approval and go up hugely in value or it's not will go to zero that's

very risky but Finance theory says I don't get rewarded for taking that risk because everyone in the world if it's a good bet should make it just 1% of the portfolio for 0.5% of portfolio so that risk because it's idiosyncratic because it's uncorrelated because it is nothing to do with anything else your portfolio it's not really a risk right if I have it we can take it further if it was 0.1% of my portfolio is being bet on this coin flip it's not really a risk because if the FDA doesn't approve it I lose 0.1% it is nothing to do with anything else so the risks that investors care about are correlated risks the risk the basically the entire portfolio goes down and that's called that's called systemic or structural risk and the traditional finance idea is that you get rewarded

only for those and those are beta which is kind of exposure to the market duration exposure to credit and interest rates and maybe illiquidity so if you're willing to lock your money up yet return reward it's that mindset that is leading a lot of people to call cryptocurrency a bubble in the traditional finance world because they say there's no reason for good currency to be doing as well as it is and my counter-argument is there actually is those people who were early investing in crypto are earning a return for good reason they're earning a return for taking a different set of risks for taking a operational risk for taking complexity risks right these are these are new and hard to understand they take time and and frankly for taking career risk so if you're an endowment investor

right now so like if an endowment had put 5% of their work or 1% of the portfolio into cryptocurrency two years ago it would be in the top performing a down in the country well why I would argue because that investor was willing to take career risk that if this idea doesn't work even if it just loses 1% of the portfolio they look like an idiot they look like they invested in Bernie Madoff to their peers and maybe they lose their job or they're tarred and feathered in the industry so I think I think that that that pattern of kind of the operational complexity all those risks we've got another few years right it's still scary it's still hard it's still like when it becomes easy here's kind of something I said as a joke but I actually kind of believe we're probably not at peak ico until someone can buy it

on an iOS store app so you flew a mayweather in paris hilton hawking these icos how many of their Instagram followers can buy any of their icos right like the love of Floyd Mayweather's Instagram followers who wanted to buy the ICO of he was pitching how many were able to you know probably 1% or less because it's hard right it's hard to participate in ICO if you're brand new to the space so I think we have a few years left where it's going to become easier to invest and that means more money will flow in and as investors will be rewarded for having taken the time and effort to do this early do you think you're taking career risk when switching to to do cryptocurrency definitely um I mean definitely so if I was investing in

equities and equities fell 50 percent or 90 percent knowing things worse of me for it right at what you're supposed to invest in equities everyone invested equities everyone lost right by doing this if cryptocurrency were to collapse and go to zero right which I don't think anyone here probably no one listening thinks is possible but you know if that were to happen I would look like a pretty big idiot to my colleagues back I mean down the world right it's like you know you left and you you lost investor money on buying tulips you know but part of it is I've left the endowment right when I had to take a lot of risk to launch a firm right I put a lot of my own money in I'm you know not good not

taking a salary for years you know there's a lot of risk inherent in that if I had stayed at the endowment and somehow you know convinced my colleagues to invest very aggressively to be the first endowment in and really push that hard and put my name on it and said you know this is my bet and we've gone poorly would have been career risk it would have reflected poorly on me I don't know if I would have been fired for it but it definitely would have been you know it yeah yes yes now with blog terror right so you in endowment but I guess this is kind of special into the investment institution our blog tower is basically like a hedge fund right so do you think this is the appropriate structure to

invest in this industry or do you think we will have to have some new kind of fund an investment structure so there may be new fee structures new new type of agreements with their own investors like what's what's the best way to invest into space from an institutional perspective I think the the traditional bifurcation into VC and hedge funds still make sense I haven't heard a better idea yet so the basic idea here is if you're trading something that's liquid that is daily valuation a hedge fund structure works well and the main difference here is a hedge fund structure is evergreen what that means is there's generally one fund that has a perpetual life and that can take in new money any time it wants so any any at

the end of any mantra and a quarter new investors can come in and that's not a problem because what you're investing in is entirely or mostly things where you know the fair price because the fair price is whatever is trading at on an exchange if you're investing in things that are illiquid that are not Exchange listed you can't really do that because you don't know what the things worth so imagine if I'm let's say I invest it in all of my money in something like cosmos network I see oh well today that investments probably worth more than when I when I first put it in and if I accepted new investors into the fund they would effectively be buying at the price from five months ago so and they would be diluting the initial investors which is not fair to the initial investors but there's no fair way to do

it because we don't know what it's worth today there is no exchange price right we would just have to guess and so if you're investing in illiquid things use a venture capital structure and the way venture capital structure works it's the other term is a drawdown structure is you have a fund you accept money you close the funds you're not accepting any new money you make your investments and then the fund and then over time you liquidate the investments and you give money back to investors and if you want to raise more money you do a new font so a firm like a Sequoia has Sequoia won Sequoia - Sequoia 3 Sequoia I think they're up the Sequoia 18 because every time they want to raise new money they launch a new fund so I think in crypto it really depends on what you're doing because

we're more actively trading because we hold basically nothing in illiquid assets it makes sense for us to be structured as a hedge fund but if you're investing mostly in pre-ics or icos I think you really have to do the VC structure cool I'm just saying you but actually it's interesting that the way you phrased it right because you say ok in a hedge fund it's no problem if new people come in because you know the fair value but how do you think about the liquidity risk here because if you if you are in somebody tokens okay Bitcoin either you know liquid enough so you know you can sell your position probably but if you're talking about other assets do you price that in oh it's interesting question so with things

that are I had a conversation actually with our fund administrator about this about hypothetically if we had a position that rocketed up but that we could in but that I felt was almost mispriced by the market and we were taking a new money what's the right thing to do there the so the answer is is the default is to treat the exchange price as the real price you need to make a pretty you need to be really confident to do anything otherwise because that is the price the market is giving you cryptocurrency is is unusual in destroyed art because you have a few individuals you have sometimes you have a fund that buys up a huge percentage of all the tokens right they may buy up 10% 20% of all the tokens that exist pre IC or IC o---- so then you have a price on

the exchange that really doesn't reflect that it doesn't reflect this mass or it actually sometimes is much worse I mean you have some some tokens where a single individual owns 40% of all the tokens and and so the price that you see on the exchange is not real if that individual was trying to liquidate almost anything so there's no great answer to this so legally what does a fun matter I'm allowed to do is basically apply a liquidity discount so if we had if it's something like 50% of the fun was in some very very illiquid asset that we were very gradually selling out of what we thought that it was a fair price was something like lower than the market we could talk to our administrator would be a conversation so that's kind of the legal answer be from a liquidity perspective it's part of

trading and you know it's a huge part of trading it's we're constantly evaluating the liquidity and what that means and is this price real and it works in both ways so sometimes the Allah quiddity is really great for us because if an asset is really really liquid it means that it can overshoot or undershoot a reasonably fair value very sharply so and we even see this in things like ether where like with the flash crash for example so ether flash crashed on Qi tax which is coinbase is exchange and actually fell to something like 11 sets well that's great if you're a trader right you you know you've loved buying for 11 cents or $1 or $50 or $100 and then immediately the price was back to where it had been before because it was just a result of very temporary liquidity when you have

traditional money managers you generally have benchmarks to compare their performance against right so in equities they would compare it against maybe the S&P and so on in in the crypto space what do you compare hedge funds against what is how do you measure your performance so there's no objective right way to do it part of the answer is I think as a fund manager you are giving a particular product to investors so there's some investors who want a beta 1 product they want 100 percent exposure to cryptocurrency and you're hoping to

add alpha beyond that by selecting the you know the best cryptocurrencies and in that case your benchmark probably should be you maybe total market cap or cryptocurrency there are other investors who say I mostly want to be invested in the biggest and and what they think of as best so I want to be invested in Bitcoin in ether and but I'm willing to let you invest a little bit around that so then maybe the benchmark is 50/50 Bitcoin and ether or maybe it's top 5 and then there are people who say their market neutral their high-frequency trading and then the benchmark is probably a zero percent return or some kind of almost risk-free rate you're competing with hedge funds doing high-frequency trading in equities and bonds so I don't know so first there's no right answer in terms of I think I think it's what you pitch your

investors what product you're offering and different investors want different things beyond that it's really hard because we're going to face hindsight bias so for example let's say ether does phenomenally well let's say Bitcoin Andy through the ultimate winners let's say in five years Bitcoin and ether both multitrillion-dollar assets and nothing else really is anger close investors are gonna ask me how did you compare to a 50/50 portfolio of Bitcoin and ether and almost certainly all underperform that because those those who were though we're the winners you you couldn't have done better than just buying you know button hold those two and the act of trading that we do to try that alpha it's gonna be hard to surmount two assets that are just going up a thousand

percent to be hard for us to add enough alpha to compensate for basically the risk management um but you don't know ahead of time that that's gonna be the case it's a little bit like asking morning Buffett how did you do against just buying and holding Amazon well he did pretty badly compared to that but you didn't know that Amazon was gonna you couldn't have known that Amazon was gonna be Amazon 30 years ago you could have said it had a shot at it maybe you had a premonition maybe you thought it was a good team or something but so in crypto currency it's kind of the same where I fully expect people to benchmark me against whatever it does best but their reality a priority looking forward the way I think about it is I kind of have three benchmarks that are incompatible with one another so one I

have to beat Bitcoin long-term - I have to be total crypto market cap long-term because if Bitcoin fails let's say Bitcoin goes to zero and something else for faces place no one's gonna be happy that I was down 90% in Bitcoin was down 100 no one's gonna say good job Ari right so another is I kind of need to capture the crypto a producer but the third is absolute return I have all my own money invested in our fund and I don't want to lose my money and investors don't you know investors may say they're buy-and-hold and they believe in the long term but we just don't crypto currency it's fallen 70 percent numerous times you know we just saw Bitcoin just fell 40% peek to trial most investors are not really comfortable with the idea of losing 70 percent of their money in a month and so

the third is not what don't lose money so of course those are challenging to reconcile because how do I capture the full upside while reducing risk and making sure I don't capture the full downside so we're constantly trying to balance those three objectives and how do you deal as a fund right if you feel like okay the market is turning right this is not no longer a good environment do you are you prepared to take large short positions as well or would you potentially just kind of liquidate positions and stay in cash or how would you handle that yet right now the answer is that we liquidate positions and we'll hold more cash so we're generally

trading into and out of cash you can't use shorts for us management right now because you can't collateralize a short I have to leave a short on in exchange which means that counterparty risk and these changes go down quite frequently right even the better even like gee tax goes down for eight hours at a time which means I can't trust stop limit orders so if I put in a short position I may not be able to cover it I'm gonna be able to close the position when I want to another is you can't reel to an idea in shorting that's a little bit unfamiliar to people outside of Finance is you can short using a derivative like a future but if you short the underlying the actual asset in this case if you want to short Bitcoin itself that means you're borrowing it from someone for me

to sell a Bitcoin I need someone to give me a Bitcoin to sell so the way that works is if I'm on an exchange someone who has Bitcoin on the exchange is lending me their Bitcoin I pay them some kind of margin and I'm able to short it there isn't that much liquidity the exchange there it's individuals who are doing the shorting if I want to short twenty million dollars worth of really anything it's gonna be hard for me to get that liquidity on an exchange so at the moment shorting is not really a viable risk management approach but that will change so Bitcoin futures may be a way for us to quickly hedge exposure so for example if a let's say a headline came out that said you know all governments the world ban all cryptocurrency and I'm like oh man I need a reduce exposure right away

selling Bitcoin futures would be a good fast way to do that and then and then kind of thing about how do I reposition the portfolio as a whole also cash lending so you're gonna have a professional basically prime brokerage where I'll be able to actually source and borrow tens of millions of dollars of cryptocurrencies to them sell all of that is probably some of the futures are coming within the next probably month or two the cash lending my guess is probably something like four months I guess that kind of leads into one of the next question is so so we've talked about this in quite a few ways already the you know the situation with institutional money and and just new sources of money slowly coming in and trying to get in like what time line do

you see your happening here when do you think different sources of money will come in and in which ways so right now we're seeing retail Japan and Korea exchanges coinbase accounts I think that's gonna continue aggressively there's a lot of people who are still learning getting interested looking for dips to buy looking to onboard to coin base for example we have to go through a fairly long AML process to get your account approved as well as other service providers like that we're seeing a lot of interest from venture capital firms and family offices so family offices are kind of a private it's almost like a private hedge fund or endowment for wealthy families and what the individuals most of the large family offices in the US have invested in

cryptocurrency in the last year but small amounts many of them are looking to invest much larger and we're also seeing high net worth individuals so you know the average American millionaire currently owns zero cryptocurrency that's going to change I think or maybe not even the average but but a meaningful percentage of wealthy people in America and around the world want to have some percentage of their net worth in crypto currency so I think we're gonna see large inflows there on the institutional side endowments I think you're gonna have the first endowment check into cryptocurrency in the next three months probably a small check and then I think really over the next nine months after that it'll become a story you'll become big meaningful cheques pensions are still 18 months away the main obstacle is custodial services so

right now managers have to self custody assets that means that managers have have access are storing the assets and can basically steal them the venture capitalists are used to trusting entrepreneurs with money they're used to writing a check of a million dollars to an entrepreneur and know they can run away with it but endowments intentions aren't used to that and that they're very uncomfortable that and so there's a huge push right now in the industry as fund managers like myself say hey we desperately need we want custodial services we want third-party custody so that we can doing downloads and pensions and other institutional investors and and give them access to this opportunity I don't know how far away that is it's it's complex both from a regulatory perspective as well as a technological perspective but you have a lot of companies like like ledger that's doing

kind of early-stage on that so I'm optimistic that maybe in six nine months we'll have it yeah thanks so much for this answer now there was another article I wanted to talk with you about that that you wrote so this is this question of table selection so you used to be a poker player right and we said okay what you were good at is just understanding what's the right game to play where do you need to be and of course it's interesting to carry over this idea to the cryptocurrency space and in particularly there's one aspect in which I'm wondering how you think about this so we've had a bunch of early funds that started you know professionally investing in blockchain space you know one of them one of the

earliest once was poly chain because we've talked about all of before I think when we had him on the podcast you know they were just managing ten million or something and then you know soon later he was on the Forbes cover and two hundred million and so it's blown up right but still I mean he and the people in the fund a fit most part at least are blockchain people right and so there's I think a lot of blockchain people today they are investing they've set up their own fund so they're they're investing money they've made from Bitcoin or from ether and then there are people like you coming in right who are professional money managers and who have the experience on the financial side so how do you think this is gonna play out do you think there is a substantial benefit

for you know an advantage for one party versus the other so I think what we're seeing already is people are finding ways to build the teams they need to fill in their weaknesses so it isn't necessarily happening with hires it often happens through just communication so for me I'm not an engineer and I don't pretend to be one and while my training focuses shorter term I never want to be on the wrong side of fundamentals so how do I fix that well I'm not reading the protocol myself but I'm talking literally every day the blockchain engineer or developer and I've worked hard to establish good relationships with the industry leaders that the very very smartest you know people in space who do read the

protocols who are developing the protocols so I've developed a very strong expert network where you know it's almost like having a much much bigger team similarly the people who are the engineers the blockchain engineers the the smart ones are either partnering with someone with some traditional financial experience or similarly their talk like one of the reason those developers talk to me and there's some other fund managers who are engineers and and they give me their insight and expertise and then they ask me questions and I talked to them about risk management portfolio management derivatives you know money flows all of that stuff so at the moment I think the people are approaching it intelligently they're bringing their skill sets at the table and they're talking to the best in every other skill set and trying to

create synthesis um bigger picture than that I think it really depends on where you think your edge is coming from so I don't want to be on the wrong side of fundamentals but I'm never claiming that the Alpha we're trying to generate comes from me being better it's judging the consensus mechanism than another fund manager that's never that's not the claim that's not what we're trying to do well what we're saying is well we don't to make any dumb mistakes in that regard we want to kind of know what the consensus is among the engineers but where we hope to have values with the shorter term understanding of market psychology and money flows as well as gaining access to information on the other hand there are people who are VC focused who are trying to pick the best pre I SEOs and I SEOs and they kind of think they need to make

sure that they might not be a legal expert but they need to make sure they're not on the wrong side of the law and they might not be an expert on derivatives or change flows they want to make sure they're not getting into something that they can never get out of but where their value add is comes from is that deep deep expertise in the protocols or the business strategy or thinking about the ecosystem and so that's their focus so in traditional asset classes you don't need to be good at everything there are a lot of ways to profit from so here's an example one of the most successful firms of all time is Ren tech Ren Tech is a high-frequency trading firm it's mostly computer programmers they trade equities they trade commodities they trade bonds but when they're trading Microsoft stock they don't necessarily know that much

about Microsoft they probably have someone on the team who the news who reads the financials but that's not where they're adding value that's not where they're making money what they're doing is they're trading Microsoft every second they're buying and selling and buying and selling and they're using quantitative signals and all that and alternatively Warren Buffett doesn't look at quantitative signalling and Warren Buffett doesn't look at rhythmic trading he doesn't look at all these other things right so I think there isn't a single right answer and how to profit from this you you mostly need to make sure that you're bringing something exceptional to the table and you're not doing anything really dumb in the areas in which you're not an expert and you can do that by coordinating with other people now on the table selection if we so we can we can of course look after look at the

cryptocurrency space in the blockchain space so the overall as a table you can say okay as an investor right there are all these different tables you can you know you should do a query investing or there's two cryptocurrency table but you see within the blockchain space also like what are the kind of different tables you think about there and where you see interesting opportunities yeah so gotcha so first of all I'll tie the the kind of broader crypto ideas just in a sentence or two and then kind of get specific so um I did view cryptocurrency generally as a very attractive table because of these barrier to entries because it's so hard for other traditional financial people to get in the space there's a big learning curve in many many ways both about

cryptocurrency itself as well as the operational security areas so you know I think cryptocurrencies a whole they're all there's a tremendous opportunity set because there aren't that many people involved yet for these kind of clear reasons within cryptocurrency table selection is is subjective it really depends on your skill set so for me to compete so so one of the things that I saw a year ago was that most of the funds in the space were venture capital focused if I had a VC background I might still have gone into that game I might still have tried to compete with them but it wouldn't have looked quite as nice of a table to me because I'd say okay well I'm competing against I mean I have a lot of friends who are launching crypto funds I already have who are really really sharp engineers and or

theses or putting together a team of a VC plus an engineer and I kind of don't want to compete against them like that you know I think they're gonna do a great job what I see as a great table to be at right now is this kind of a little bit more shorter-term focused because they're just literally aren't that many people doing it and the opportunities are pretty broad and and deep it is subjective to your skill set here's an example so they're massive arbitrage is between US exchanges and China and Korea China is of course a bit more dangerous now exchanges are about two maybe about shut down and I say may some definitely are maybe all of them we don't know but um that was true three months ago you had large arbitrage is in Korea you have

large arbitrage opportunities and those are because of capital control rules by large I don't mean 2 percent I mean a 30 percent discount to buy Bitcoin or or premium to sell Bitcoin in Korea to the US that exists because it's not easy to move money so it's it's not easy to you can't just trade on two exchanges because you can't actually get one out of the country of Korea and I say you can't because realistically probably you Brian can't and it's not I can't right now but there are people who can so there are firms that are for example global trading firms that have subsidiaries in Korea and they have local relationships and there they have connections in the government and they're potentially well-suited to actually take advantage of that

arbitrage so I I have friends for example who are Korean who are doing that arbitrage at small-scale with you know they have a million dollars themselves and maybe they're making $100,000 a month doing it and they're doing that that that opportunity is available to them because they have friends in Korea and they know businesspeople in Korea so if someone was listening to this and they are well-connected in Korea and they have a little bit of their own personal money that's a week that's a great table for you that is a great opportunity set for you to take advantage of and the reason why it exists why it's so lucrative for you right now is because it's hard for me to do because I don't speak Korean I don't know about that many people in Korea and for me to overcome that barrier to entry will take a major

investment yeah so I think it really depends if someone's looking to get involved in cryptocurrency generally again I think it really depends on kind of your skill set you don't have to launch a fun there I just had a call with a friend who was kind of asking for you know insider connections in terms of what he wants to do next in the crypto world and I was saying you know I think working at something like a cash lending facility but because of this guy this gentleman has both operational experience financial experience and crypto experience which is a very unique set of a unique combination of skills in this industry and one way to take advantage of that that kind of that point of synthesis is to launch a fun but another is you're gonna have a lot of businesses that are created that are

100 million dollar businesses 500 million dollar businesses to do traditional finance things in the crypto world things like prime brokerage things like being a sell side analysts at a Wall Street bank is gonna is about to become a real thing here's an example things like auditing of exchanges or or doing third party custody those businesses are going to be very lucrative opportunities that most people in the cryptography world can't do because they don't have the operational background they don't have the financial background so yeah I lost very short it really depends on what you bring to the table so one of the interesting themes that Ryan and I sometimes discuss above and we'd like your opinion on is if you

if you look at the markets today like equities are actually quite pricey right so there was recently this article from Robert Shiller the economist there so Robert Shiller has this measure code B which we call C a p/e cyclically adjusted price earnings ratio and the equity markets are on that on that one that particular metric they are higher than they've ever been with the exception of 1999 and 1929 right so the markets are quite quite pricey we haven't had a huge recession let's say at least in the United States for the

for the past eight or nine years and and there's there's many people that suppose that they could be a broad market recession coming sometime so if if a situation like that does materialize how do you think cryptocurrency will behave I think it really depends on the source of the downturn so if if we have a deflationary recession most recessions are deflationary and what that means is the velocity of money Falls money is circulating more slowly people are not making loans or accepting loans businesses are not expanding businesses aren't hiring in that scenario I think

cryptocurrency probably false it gets hurt it's hurt because everything gets hurt I think everything from not only do equities fall art Falls the price of wine Falls the price of expensive cars fall and the reason for that is everything is competing in the individuals portfolio so if I've only just lost a huge amount of my net worth that my wealth has evaporated because I had a lot of equities well I'm gonna look to see where I can get money that I can spend day to day and a lot of us in the crypto community we like to talk about Bitcoin as money for example but it's not good right it it's not things are not yet priced in Bitcoin so what ends up happening is you liquidate anything and everything even things that

shouldn't so maybe the price of real estate shouldn't fall but it does because it's just another asset that people hold that they then used as a piggy bank cryptocurrency will be the same and I actually think that effect will grow worse over time as more institutional investors under the space because when Bitcoin fell 85% at 20 of 2013-2015 it was a hobby for most people there were very few people who had their livelihoods connected to cryptocurrency if you had half of your net worth in Bitcoin you probably had a day job you were probably a programmer at Facebook and yeah maybe you just lost 100 grand a Bitcoin maybe more but it was kind of this thing at the back your mind if you're managing a portfolio and cryptocurrency is part of that or if you're wealthy individual were cryptocurrency is 25 per se net worth or

more suddenly that starts being part of your portfolio as you think about your portfolio I think for example if an endowment has 5% of their money in cryptocurrency in ten years and everything sells off they'll use it like a piggy bank they'll sell their cryptocurrencies so that they have more cash or so they can buy more equity and so they can rebalance that's a deflationary recession where cryptocurrencies may be a very good hedge and very attractive as as an additional portfolio isn't in a inflationary crisis or an inflationary recession which I actually think is more likely and that's contented so let caveat here is basically known as good at predicting either inflation or recessions like no one and I don't claim really to be different but my guess is that the next serious problem we face economically is

inflationary driven or at least currency depreciation driven so the u.s. dollar may lose global reserve currency status over the next five years there's some major data points China and Russia are both trying to push that to happen very aggressively and if that happens what you'll see is not necessarily wage inflation you want to certainly see wages skyrocket but you may see the price of things increase and in that scenario cryptocurrency probably acts like gold it probably acts as a hedge against the value of your US dollars or your euros or your francs depreciating so I think in an economic downturn that is inflation inflationary or currency depreciation driven crypted as well maybe very well actually so a hedge fund manager Kyle bass suggested that he thinks that a likely

scenario is the US dollar losses global reserve currency status and cryptocurrency goes on 10x in a very and within an 18-month period he thinks it's almost like a step function it's gonna happen fast and it's gonna be a sudden realization around peeta people all over the world that there's no longer a single currency if you can trust as a store of value recently there were these news in China right that China is well they they moved against I cos and they moved against some exchanges right it looks like they're gonna shut down some exchanges maybe many changes you wrote some interesting posts on that like what are you thoughts about the China thing both maybe the particular and about what it illustrates about some of the larger trends we are seeing so China's

fascinating and I think this is very very first it's important to recognize that there is no China there's no Chinese government there is no monolithic body the Chinese government is composed of competing interests some of whom own cryptocurrencies some of whom were invested in bit mein others who don't so I think even the Chinese government doesn't know what they're going to do because there's power struggles behind the scenes there's kind of conflicting interests with that caveat out of the way I think this is mercantilism I think what's happening is China is saying not they don't want Bitcoin but that they don't want Bitcoin leaving the country so if you look at what they're doing they've they've they've temporarily banned icos and what they've said is they're going to put a regulatory scheme

in place basically so there aren't scams so people don't just their money's and thrown away they're closing most exchanges but they're going of a licensing scheme for exchanges we don't know how many of the license maybe only one but but I bet that in six months there is at least one giant Chinese exchange that basically you have a liquid exchange in China whether it's a 1 or 3 I don't know and they're saying that it seems like there's conflicting information about mining but I've seen no evidence that they're gonna shut down online so it seems either they're going to again have a licensing scheme where they license only one or two or three or four miners that's the most draconian they're gonna go so it may be they say bit main is the Chinese miner or there's

a Chinese state miner but I think they want to do as much mining as they can I think they want control over Bitcoin and they just don't want those bitcoins to get mine to leave the country because this is all part of the broader play of destabilizing US dollar and replacing it as a global reserve currency I don't think the the people there's some people who have this view who think this is the grand play China is obsessed with Bitcoin and hoarding it all and I think that's probably unlikely I think this is probably one of a dozen place for them Bitcoin is tiny to China right it's it's a seventy billion dollar asset but I do think they see I think what's going on is they say this could be a real issue this could become a trillion dollar currency and if it is we sure as heck

want to control it let me sure as heck one as much of it within our borders as we can have cool so so if you look at like this here like I guess you know as you mentioned like things happen like the main theme this year was the rise of youth helium and then the investments into into into the further icos now the capital space has gone up a lot what do you think the next like few months look look like what's going to be the major theme there you know it's it's tough on things change so quickly in a space that both from a market psychology perspective as well as just new information

new news that it's that's part of why I like being an active trader because I can adjust the new information very quickly and the fact that I'm likely to make a wrong prediction right now won't necessarily hurt our investors because I can hopefully yes that the head of the market whenever new information comes out with that said there's I think I'm actually more comfortable making a one year prediction than a two month prediction I think there's a massive force of money moving into the space that is extraordinary in its size so a total market cap this morning is 130 billion dollars I think there's more than a hundred billion dollars it's going to be flowing into the cryptocurrency over the next year and that's an extraordinary statement like

you think about what that means for valuation right um but but the counter so that this is how I think about this market every day you have new marginal buying you have a new buying hold retail investor not a new trader but a new coin base account who just buys one Bitcoin and holds it provides a tenth of a Bitcoin or you know or by some aetherium or some ether or some light coin than on coinbase or on a Korean exchange buys one of the five currencies they can access so cryptocurrency goes up every day then you have speculators who see it's going up every day and they say this is free money why don't I just leverage this why don't I max on my credit cards why don't I go long on a changes with margin that's when you get a parabolic rise well then it starts

turning down all of those speculators run for the exits you get a short-term crash but you still have this upward trend line you still have a fairly steady rally you know with maybe a lot of volatility around that so what causes the more major crashes what causes a bear market like we had in 2013 of 2015 or even what's happening right now also you could also point to maybe what happened heading into the heart Fork in July so what happens is some exogenous of that some some shock that is external of the system and I say external I mean a hard fork is not really external but you know a regulatory fear China closing exchanges may be a major SEC division that spooks people may be a huge you know when people are constantly asked by investors what are the risks what could what are

the existential risks what could really destroy this what could kill ether what could kill a Bitcoin and there's a long list so for example you know these are tail risk these are small probabilities I don't need to say that anyone is likely at all I'm not predicting any of this but but they're nonzero risks those are a lot of them so the theorem is going to have a hard fork right what if there's a major bug in that protocol Bitcoin may have a hard fork in November that may need to replay attacks and blowback attacks between the chains what happens there what happens if another major base protocol yes there aren't that many others I'm thinking of so crypto node for example had a major bug found that the Monaro team discovered and they handled it very very well but the point is bugs can be found protocols a state

actor could attack a network let's say let's say I'm totally wrong I'm I read on China and China actually decides they want to kill Bitcoin and they start doing DDoS attacks on every node they can find and they start double spending with mining and they start doing all these things I don't know if they can kill Bitcoin but they could certainly tank the price quite a bit heck if they just confiscated bit mains Bitcoin and market sold them Bitcoin would fall ninety five percent and they could hold it there for at least a few days so there all these exotic events that can happen that make it you know short term create this massive volatility that's very very hard to predict so in a year I think everything is higher I'm not sure which protocols win but base case is that almost everything is higher in a

year because money flows of everything that's not an outright scam or a totally buggy protocol or garbage everything is higher his money flows in and lists all tides over two months unless certain I think things are higher I think that story still plays out over the next two months but there's genuine uncertainty I don't know about the Byzantium fork of aetherium I don't know how November plays out I can only guess I think November won't be catastrophic but you know I'm really speaking out of ignorance on that like with many crypto people when I talk to many early crypto people when market events happen they they create some kind of learning in the people that were in those market events

right so so when you talk to early crypto people they're they're kind of psychology is colored by what happened in 2013 14 15 and 16 so like a massive rally followed by this two year winter money left things left things were super bleak this was gonna die and and for for them like this situation feels eerily similar like this here is really good and then you start to saying maybe the next like next two or three years are going to be like very bearish and there's going to be another wind toughest you tend to sake like it's going to repeat in some way but from from from your conversation it looks

like there is like genuine money coming in and we don't have as high a probability of suffering to another long winter it's very hard for me to see at this point in time another long recession and crypto because there's so many people waiting to buy the dip and getting it so like as in for our firm I was worried that this I mean Bitcoin fell forty percent over a week basically you know five thousand to three thousand that's a huge move in traditional markets that's insane and I thought and I was Bitcoin other things fell more I thought that might really freeze investing I thought the investors we were talking to we were pitching

might say this is too crazy I'm gonna wait this out but it actually had the opposite effect into two things one there were a lot of people who were worried about buying the peak they were thinking man this thing's gone up and up and up I'm worried about buying Bitcoin at five thousand because maybe a corrections ever do this pullback feels healthy to them this feels like okay look I might not be I don't know what the fair price is I don't know what a great price is maybe we're gonna fit in order but at least I'm not an idiot who's buying the top at least I'm not the guy buying the hype I mark right on so there's that and then the other thing that I've been kind of pleasantly surprised at is when things are going vertical as a fund manager it's very

very hard to make a case like people like why don't I just buy if you're even hold it it went from ten to four hundred why don't I why do I need you for it right when I just buy here even hold it it's a lot easier for me to then say to that person well yeah but if theory I'm just felt a hundred thirty-five dollars from four hundred it just lost more than 65% of its value this is not a one-way street this is not easy free money if you bought a theory that four hundred today you're still massively underwater right so and it's not a foregone conclusion that aetherium will end up at a thousand dollars you might like it as a bet you might think it's gonna be Google or Facebook but maybe it's exciting maybe it's you know geo cities so um you know I so it's a

little bit it helps us make the case kind of as for active management but you do have all of this interest that is slowly moving in space every at most of the large endowments in the country are actively diligent saying funds to put money into and they will put money in retail investors are still getting on board it onto coinbase people who bought one Bitcoin when was a thousand and we're kicking themselves for not buying more they're buying more now and they'll buy more in 2000 and they'll buy more in 1500 because they'll see it as a second opportunity to get into this this kind of trend that they missed and that they're now starting to understand well Ari thanks so much for joining us today I was super fascinating talking with you super interesting to get your perspective and hopefully we can we can

do this again at some point because I'm sure lots more will change and this will be a never-ending conversation with a lot of interesting developments it was really my pleasure thank you so much for having me on and of course we're gonna put in the shownotes link to Aris blog he's written some some nice posts and and his Twitter he is extremely prolific on Twitter so that's probably for people who want to follow up with him and he does this really a wonderful job at describing a lot of the events in the market so and developments in the cryptocurrency space so I recommend checking out his Twitter and yeah thanks so much for our listeners once again tuning in so we are part of let's say

paper networks if running this show and Auto Show unless so click on calm and yeah if you want to support show you leave a slight chance for you and we look forward to being back next week