The Crypto Meltdown — with David Yermack

David Yermack returns to discuss everything we need to know about the crypto market crash — including where we’ve seen a meltdown like this before, what happens to over-leveraged investors, and where regulation needs to come in. Scott opens with his thoughts on the power dynamics between the information age labor force and the corporation. He also discusses Snap’s potential subscription product. Algebra of Happiness: know what you don’t know. Learn more about your ad choices. Visit podcastchoices.com/adchoices

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:01Scott Galloway?

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• 0:49Speaker 01

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• 1:17Scott Galloway?

  Episode 172. The Godfather premiered in 1972. My father was supposedly in the Scottish mafia. He kept making me offers I couldn't understand.

• 1:28Speaker 02

  Get over here, you old mill savage. I'll give you a wee thick ear, I will.

• 1:33Scott Galloway?

  Oh, God, that part of my brain with accents is dying.

• 1:36Speaker 02

  Go, go, go!

• 1:46Scott Galloway?

  Welcome to the 172nd episode of the Prop G Pod. In today's episode, we speak with David Urmack, a professor of finance and business transformation at the Stern School of Business. And I sort of go to on all things crypto. David is a colleague and just one of the most respected academics in the world of finance and just infinitely reasonable, which I find is a breath of fresh air and also I find is really great and you'll notice this in the most elegant polite way possible saying, no Scott, you couldn't be more wrong, which I appreciate and respect. He joins us today to discuss the meltdown in the crypto markets, including other examples where we see kind of delevering in the markets, the role of regulation and why you need to look

• 2:30Scott Galloway?

  beyond the headlines. Okay, what's happening? What's going on here? SpaceX fired several employees who wrote an open letter denouncing Elon Musk's recent behavior. The letter, per The Verge, reads, "Elon's behavior in the public sphere is a frequent source of distraction and embarrassment for us, particularly in recent weeks. As our CEO and most prominent spokesperson," I'd argue is our only spokesperson, anyway, "Elon is seen as the face of SpaceX. Every tweet that Elon sends is a de facto public statement by the company. It is critical to make clear to our teams and our potential talent pool that his messaging does not reflect our work, our mission, or our values." The New York Times reported that SpaceX's president and chief operating officer, Gwen

• 3:13Scott Galloway?

  Shotwell, said in an email that the company had investigated the situation and fired a number of employees involved. Okay, so are these employees right? Correct that his statements likely damaged shareholder value or distraction? Or should these employees who wrote this letter be fired? I think the answer is yes. There's always a tension between capital labor and in this instance, the information age labor force felt it was their right to criticize openly their CEO. Okay, that's fine, but nobody is making them work at SpaceX. There's all these ESG, which is total bullshit. Talk about a word that's become meaningless and weaponized and SpaceX did not make one of these ESG lists yet

• 3:57Scott Galloway?

  General Motors or Exxon does. And I'd, it'd be interesting, as my colleague asked about the motor and asked, find out how many people at Tesla wish they worked at General Motors. How many people at SpaceX want to work at NASA? It's probably an interesting point, or Boeing. So I want to be clear, I'm by no means talking about workers who make real sacrifices to gain better wages and working conditions. You know, I've seen Norma Rae, I think unions, I think there are a lot of brave people in the 60s and 70s, well, actually all throughout the 20th century, who put real economic livelihoods at risk because they felt like they were being abused at work. So the right to organize has been a huge component of labor and pushback. And if you want to just see how bad things were for the workers, read a book I was forced

• 4:41Scott Galloway?

  to read in high school and give me a different view on labor called The Jungle by Upton Sinclair. Having said that, and I've said that often on this show, I don't think unions are a construct, they're effective, I just think they're a 20th century mechanism that's no longer effective. But anyways, having said that, you do have people who put their livelihoods at risk and they've had a huge impact. Now, what I find strange about this, if these individuals thought they were doing this for the good of labor, they really felt this was the right thing to say, more power to them, and by the way, you should have expected to be fired. This is not a public platform. A lot of people are pointing out the irony, and I was tempted to, of a guy who's constantly

• 5:21Scott Galloway?

  preaching about free speech on the Twitter platform and the fact that then these folks, quote unquote, express their view and they're summarily fired, there's a difference. One is a platform, I don't think free speech has anything to do with this platform, it too is a private company. But if you're at a company and you put out a public letter and you embarrass the CEO, expect to get fired. Because here's the thing, and I'll use a personal analogy here, I went on the board of a very iconic public media company, and in the first board meeting, I said, "Why the fuck do we own these assets?" I don't think I said fuck, but why the heck do we own these assets? Let's sell them, divest of them. And then that night, the angry CEO called me and said, "You know, if you're disruptive like that, again, I'm going to remove you from the board."

• 6:05Scott Galloway?

  And I'm like, "Let me just, let me just tell you how this works." The board removes the CEO, not the other way around. We get to decide if and when to fire you. And then the nominee committee, à la the shareholders, decides who's on the board and who isn't. And as you can imagine, our relationship sort of devolved from there. But when you're in a company, there's a hierarchy and the CEO is hired and fired by the board. In this case, that's probably not true. Elon has his buddies, his family members, because he has such a reputation, we're adding so much shareholder value and our, you know, our dialog tree of innovators, he doesn't really have a board. But having said that, he still gets to fire who he wants and these employees are at will. They don't

• 6:49Scott Galloway?

  have any sort of guaranteed right in their contract saying, I can, I can do what he does. He shitposts about people. He's allowed to. He gets to play by different rules. Okay? It sucks to be a grown up. So if you're an employee that embarrasses your CEO, okay, fine, but expect to be, expect to be fired. And by the way, you might be right, but that doesn't mean you won't get fired. I think what's interesting about this story is it might signal kind of a high watermark in terms of the advantage of the leverage that workers have in the ecosystem, especially in the information age ecosystem. I've always found it just sort of obnoxious, these walkouts at Google where people say, oh, I'm upset about the, the stand or the lack of a outward, public facing viewpoint on a social issue

• 7:33Scott Galloway?

  that this company doesn't take. So I'm going to walk out. I think at some point soon, most likely, they're going to walk out and their security badges are going to be turned off and they're going to be like, you know, my sister, my brother, just keep walking. I find a level of expectation, and this is, I've realized a very boomer statement among kind of younger information age employees is pretty extraordinary. Where else are we seeing this tension? What are the front lines of the tension as we try and reshape the relationship between capital and labor, specifically return to work or remote work? Or when does remote work end or does it end? And that is Howard Schultz is basically pretty famous or was reported begging people to come back to work and most have said no. And this is entirely a function of leverage.

• 8:17Scott Galloway?

  Jamie Dimon and David Solomon head up firms that have incredible leverage because people want to work. As much criticism as they fall under from the media, a lot of it is jealousy. But the reality is these are fantastic firms to work for. They're incredibly well compensated. The currency that you earn at these firms has real value in the marketplace. If you've worked at JP Morgan for five years or Goldman, you have just a lot of opportunities that are presented to you. So there's a line out the door of people who want to work there. And so, quite frankly, JP Morgan and Goldman have a lot of leverage and they can say, get your ass back into work. And there's probably more legitimacy to the claim than in financial services. We need more of that human contact, that bumping off of each other, that ability

• 9:02Scott Galloway?

  to shout across the desk. What is the tenure, whatever it might be. What you also have is, what we need is a recognition that there should be, in my opinion, a different classification of worker and companies should provide some respect and additional resources for that classification of worker. And I would call that classification of worker and what I would like to see is a caregiver. And that is someone who's either responsible for kids or plays a disproportionate role in the care for those children, is taking care of an elderly parent. They themselves might be struggling with something. And this is a real social externality. And a lot of the people making these decisions and deciding that, oh, you

• 9:45Scott Galloway?

  should come back into the office are generally white men in their 50s and 60s. And I realize that's a generalization, but that doesn't mean it isn't true. If they're in a position to make these sort of far reaching decisions, it means they're powerful. It means they're senior in the company. What does that mean? It means they make a lot of money and they can likely live near the office. It means that likely they have outdoor plumbing. See above, they're a dude, meaning, meaning that most likely they have a disproportionately smaller role in care around parents and kids. And if that sounds sexist, it is. And guess what? Women still adopt or are charged with a disproportionately greater

• 10:27Scott Galloway?

  Responsibility for caregiving, both up and down generations. So the individual who is used to having the money to get into work, the individual who doesn't have to oftentimes, or isn't charged with responsibility for caregiving, has decided that everyone should be back in the office. Well, good for fucking you, boss. At the same time, a 25-year-old who's just decided, you know, I want to be at home with my dog. All right, my brothers and my sisters, just wait till the, you know, enjoy it while you can. Because when the pendulum swings back, and I think it is swinging back violently, you're going to see more and more companies like SpaceX say, you know what? Fine, you're fired. You want to work from home? How about not work from home? How about being unemployed from home? Where am I headed with this?

• 11:11Scott Galloway?

  I think we have seen an unprecedented seeding of advantage or leverage to information age workers. I think some of that leverage is about to leak back. I think we need a different classification of worker that companies should invest in and make accommodations for. And also, these information age workers who have become used to pet bereavement time off, or bringing their cat to work, or walkouts, or believe they can openly shitpost their CEO. Yeah, Elon is a jerk. Yeah, you are probably right. And yeah, Ms. Shotwell was was correct in firing it. All right, what else is happening? Let's move on to some business analysis. Snap, get this, Snap. Hello, Snap. Snap, Snappy. Evan Spiegel, I met him at Cannes. He's dreamy. He's dreamy.

• 11:57Scott Galloway?

  He's kind of got that Lys kind of young, dreamy look going on. Anyways, the organization of the social media platform headed by Lys and Dreamy is testing a paid tier on Snapchat called, wait for it, Snapchat Plus. Oh, my God. And they have something called No Mercy, No Malice, streaming on Snapchat Plus. That is not true. That is not true. Anyways, the paid tier offers pretty lame features, in my view, including Pin a Friend as a number one BFF. Oh, what a thrill. For faster and easier communication with them, access to exclusive Snapchat icons, and the ability to see your friends' locations in the last 24 hours. Hmm, what do they call that? Stalker chat? Anyways, TechCrunch reported that Snap Is growing its user base faster than its social media competitors Meta and Twitter?

• 12:42Scott Galloway?

  Good for them. But as we've learned from what happened in Netflix, these firms are obviously concerned about growing revenue. Snap did indeed increase revenue 38% year-on-year. It's pretty healthy when it reported last earnings in April, but that was below estimates. On top of that, the CEO even warned that its earnings would disappoint investors, sending the stock down significantly. It's currently down, get this, 73% year-to-date. The social media platforms that don't have the scale, Facebook and/or Meta and Google, who are both down, I think Meta's off 50% since its high, Google's probably off 20% or 30%, I'd tell that better. But the smaller guys, the Pinterest and the Snaps of the world, have just gotten taken to the laundry. I mean, they're 75% off, which begs the question, what would Twitter be right now if it didn't

• 13:26Scott Galloway?

  have, oh god, I can't believe I'm gonna say his name again, if it didn't have Musk claiming that he's gonna pay $54.20, which he's not going to, but again, another talk show. So, the move to subscription is a smart one. Why? Because going into a recession, and good or bad times, but let's talk about bad times. You want a product that is very hard to give up, that is an essential. How do you make a non-essential product essential? Simple. Apple moves to subscription. And that is, I might not upgrade to the iPhone 14 if I don't have as much money. I might just hold on to my 13. But if they can elegantly transition me to an iOS Plus user, meaning I pay 30, 50, 100

• 14:09Scott Galloway?

  bucks a month based on my economic and product weight class, and I just have all of my Apple stuff taken care of. I have my iPhone, I get the newest one when it comes out, they're maybe 30 days before anybody else, I have my AirPods, I have my Apple Music, I have my Apple TV Plus, it's all taken care of. And I pay what feels like a reasonable monthly fee. A recession hits, I am very likely not to upgrade as fast to iPhone 14. A recession hits and I have Apple Plus, which is my subscription, I'm not giving that shit up. It becomes more enduring. It goes from being a discretionary item to an essential. So, moving to subscription is the gangster move. We've been preaching about that for a long time. Here's the thing about going to subscription, though.

• 14:52Scott Galloway?

  You're competing against Netflix, so unless it's really compelling, like uber compelling, people would rather just stick at the buffet and go back à la carte. This incredibly compelling hurdle has not been cleared by Snap with Snap Plus, and it's not going to work. Subscription is how you make a company more enduring. It's probably been over invested, which makes the bar incredibly high. But if you want to move to this more enduring, better business model, you have to make the offering, not even an offering, but an IQ test.

• 15:26Scott Galloway?

  Okay, we'll be right back for our conversation with David Yurmak.

• 15:33Scott Galloway?

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• 17:21Scott Galloway?

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• 17:53Scott Galloway?

  Welcome back. Here's our conversation with David Uremak, a professor of finance and business transformation at the Stern School of Business. Professor Uremak, let's bust right into it. The crypto meltdown? Question mark. What? Give us a sense for the underpinnings here. Why is it happening now? What impact do you think it has in the broader market?

• 18:16Speaker 03

  What is happening is sometimes called deleveraging. There was a lot of crypto that was basically bought on margin. And sometimes it was fairly exotic, where people would deposit crypto and take a loan in stable coins. They would use that loan to buy more crypto. And if your collateral, the original coins that you deposited, if it drops below a certain ratio, you get something that looks a lot like a margin call. And these things have been part of finance for a long time. But what's happened is that people have had these events where they're out of ratio. And then they find that the stable coins they borrowed, or maybe themselves now stable,

• 19:00Speaker 03

  or maybe they bought something else that has dropped in value even further. So you're seeing a lot of distressed sales and a lot of platforms where large numbers of customers have this problem. So they've even had to cut off withdrawals and some of them look like they may fail, not unlike what happened to Lehman Brothers in 2008. This kind of deleveraging is nothing new in finance. It's ugly when it occurs, but it actually doesn't have so much to do with crypto as just the overall rise in interest rates and the attempts by central banks to rein in consumption spending in the name of controlling inflation.

• 19:38Scott Galloway?

  So use Celsius as a use case for what's happened here.

• 19:43Speaker 03

  So Celsius, you know, essentially seems to have had customers who can't pay back their loans because they took those loans out probably to invest in other crypto assets, you know, to leverage up their positions. And then they found that the value of their investments dropped even below the face value of their loans. The, the old fashioned description is that in an entity like that, the assets are less than the liabilities. And we call that something that's insolvent and needs to enter some type of financial workout or settlement that often in finance, a firm like that gets merged into a healthier firm.

• 20:23Speaker 03

  This is what happened to Bear Stearns in March of 2008 is it, it got nailed, it, it was merging to JP Morgan at a fire sale price. And there seems to be a number of crypto entities, especially over the past weekend that have kind of entered this territory where they don't have positive net worth and need to find some type of a rescue plan to wind up their positions.

• 20:49Scott Galloway?

  My understanding is when the term staking, staking is similar to you take a hundred dollars, you buy a certificate of deposit and they give you 2% interest rate, $2. But instead, what they were doing here is when you staked your Bitcoin, they issued you sometimes 15, 17, 18%, but not in more Bitcoin, in a coin that was issued by them. So you were getting, you were getting apples instead of oranges. And sometimes these apples fell faster than the original oranges you staked. Is that an accurate description?

• 21:26Speaker 03

  Yes, I think that is not off the mark. There were people essentially lending their assets. You can call it staking, but it's really just a form of lending. And they were earning a rate of return from decentralized finance pools that may have been paid out either in a stable coin or the native governance token of some of these pools. And these things can lose value rather quickly. What, what you were not getting was US dollars or more units of the same thing that you had staked. And you can get these self-reinforcing, sometimes called death spiral situations, where one thing drops in value and it's security or income for something else. And so it drags down the value of the other thing.

• 22:11Speaker 03

  And you know, pretty soon the correlations are very high and everything falls in value together.

• 22:18Scott Galloway?

  So in the, in the kind of 2000 to 2008, when I just started teaching at Stern, I used to advise hedge funds on their technology and media investments. And when, quote unquote, the shit hit the fan in 2008 and they, these funds were levered up. They weren't, my understanding, at least the funds I were advising, were, it was a misnomer to call them a hedge fund. They were basically levered long. They were levering up sometimes 2 for 10 to 1.

• 22:47Speaker 03

  Yeah, very few hedge funds actually hedge. They speculate.

• 22:51Scott Galloway?

  That's right. And they're levered speculators.

• 22:53Speaker 03

  Yeah.

• 22:54Scott Galloway?

  At least the ones I were advising.

• 22:55Speaker 03

  Long-term capital is probably the leading example of this, but there have been many.

• 22:59Scott Galloway?

  But it's, it's a great business until it isn't, right? And then. And so the fund I would, one of the funds I was advising, when people started saying, oh shit, sending the fan, I want my money back. They said, okay, we have so many positions that are not that liquid, that if we sell everything right now, it's just going to create a downward spiral. So rationally, in order not to create a panic and ultimately diminish everyone's value, we're putting up a quote unquote gate, meaning you can't get your money back on the terms. The liquidity we claimed or promised you, we are reneging on that promise and we're putting up gates and you cannot redeem. And my, my basic experience was the moment you did that, you were out of business.

• 23:44Speaker 03

  It makes the problem worse. Yeah.

• 23:46Scott Galloway?

  Right. Cause once the gates come down, everyone's like, I don't want to hang around for the next gate. And they take all their money out. When Celsius put up its gate, doesn't that effectively, isn't that essentially the death march for Celsius?

• 23:59Speaker 03

  Yes, absolutely. And they're not the only ones. There were, I think, three or four entities over the weekend that halted customer withdrawals. And when you do that, you're pretty much saying, you know, that we're in a wind down or a workout situation. With hedge funds, you often have the luxury that capital can't be withdrawn for a certain period, that there's a minimum holding period can be as long as three years before you can take your money out. But you're right, that if the, if the gate is up and legally people are entitled to the money, as soon as you tell them the gate is closed, you're very unlikely to come back from that. And I think that many of these financial situations

• 24:42Speaker 03

  hope to find a marriage partner, you know, that they can merge into, somebody will provide liquidity who perhaps sees value in their investment positions. But many of them are going to end up settling customer accounts for some fraction, you know, 80 cents, 60 cents on the dollar, whatever it turns out to be. And as long as the markets are continuing to drop, the, the news can get worse and worse by the day. You kind of, you hope the markets stabilize and at least for the last day or two, that seems to have happened.

• 25:14Scott Galloway?

  So my understanding is one of the things that Sarbanes-Oxley did was these stress tests are essentially scenario planning for banks where banks say, okay, or the government says, let's imagine a black swan event and let's make sure there's not a run on the bank. And if there is a run on the bank, you can, you have liquidity. My sense is nothing remotely similar has happened here. Is this a lack, is this a failure or a lack of regulation from the same people who said, we're too cool for regulation? And that's really what is bringing everything down?

• 25:48Speaker 03

  Yeah, the banks were required to write what were called living wills. So, you know, after the last financial crisis, banks have to have essentially standby plans in place to to wind themselves up in the event that things go bad. With crypto, you're not really in any jurisdiction legally, and you're not running a bank, you're not running a registered representative for investors. You're, you're in a new area, new asset class that doesn't have a regulator. So the belief was that self-regulation would be perhaps better than government regulation. I think that's a very naive belief and that

• 26:31Speaker 03

  most of the customers never gave it a second thought. But to call it a failure of regulation would probably not be accurate, simply because no regulator had the responsibility. And given that these are decentralized platforms in the cloud, I'm not sure that you could ever really assert jurisdiction over them the way you could over a bank or a stock exchange. This is, you know, a major issue with crypto is that it's designed by its very nature to be beyond the reach of any national regulator. And you can pass all the rules you want, but the enforcement of those rules is very difficult when you're talking about decentralized organizations that are run by software and not run by

• 27:12Speaker 03

  people. So there's really nothing to hold accountable here, but a, but a computer program that was designed to allow an awful lot of leverage to occur within the organization.

• 27:24Scott Galloway?

  Just some pushback. It strikes me that if regulators wanted, they could say, all right, if we can't regulate you, you can't trade with a US IP address. You can't transmit funds touching the SWIFT net. I think there are ways to say, okay, fine, you want to pretend you're in Malta, you can't do business in the United States. And I see this, and tell me where I have this wrong, is that the Republicans or innovators who feel like regulation gets in the way of their blitzscaling have been very smart at emasculating the regulatory bodies by ensuring they don't get any more resources or money. And quite frankly, the SEC just doesn't have the bandwidth. If

• 28:07Scott Galloway?

  they said, okay, we need to get more aggressive in terms of preventing a tragedy of the comments and start regulating and kind of commanding the space we occupy in terms of regulation, we would need an additional 4,000 people. I mean, there are 11,000 coins, hundreds of not thousands of platforms. So it's sort of, isn't it sort of a default for them to say, our plate is full? Until something like this happens and there's public support for the regulation and resources required, we're gonna take a hands-off approach.

• 28:40Speaker 03

  Well, there's a lot to unpack in what you just said, Scott. And I'd begin by observing that some of the things you suggested already are in place, that crypto is largely cut off from the regular banking system, that this has been controversial for a long time. But you can't really deposit crypto in the banks and the banks don't transmit crypto assets. There really have been firewalls in place. And I think by and large, those have kept this damage to a relatively small group of speculators, that this is not spilling over into the regular economy. It's not threatening the health of the banking system. And that was by design. It's also true that many crypto entities have opted into regulation,

• 29:23Speaker 03

  or at least have done far more than required to be transparent. And most of the big crypto exchange operators and custodians, the Coinbase's and Gemini's, Fidelity Investments and so forth, they haven't been touched by this at all. So there is a high end of the market where people have gone out of their way to be transparent, to comply with Know Your Customer regulation, to opt in even to regulation that they're not necessarily covered by. And I think that an investor would have done well to leave their money with them. There are these offshore decentralized exchanges that provide for a lot of leverage and, you know, they, they hold the lack of regulation out as a badge of honor.

• 30:08Speaker 03

  But this is very much caveat emptor, that anyone who sought out positions in the, you know, the, the Netherlands, the far reaches of the crypto markets, um, shouldn't be surprised that there's no oversight and that the prices can drop very quickly. The SEC has tried to assert a role regulating crypto, even though crypto assets, in my opinion, rarely meet the definition of securities. You know, the SEC covers securities, which classically means stocks and bonds. And there's case law that outlines what is and what is not a security. A crypto token very often is not a security. And I think that the SEC, in fact, has overreached into this area.

• 30:52Speaker 03

  But if Congress wishes to involve them, yes, they would have to give more resources to them. And above all, the SEC would have to invest in very different levels of expertise. They have a lot of lawyers, but they don't have the forensic people that we're, would, would be ideal for regulating this. It's, um, it's a very different animal that is conveyed on a blockchain, not an order limit market, and really requires a very different portfolio of talents than the regulator has. So Congress does have bills before it. Um, the latest one would actually give jurisdiction not to the SEC, but to the CFTC, the commodities regulator, which arguably is the proper regulator to begin with.

• 31:35Speaker 03

  But I think there's never been a willingness in Washington to regulate this stuff on its own terms. You know, they've tried to fit it into categories that doesn't really...

• 31:47Speaker 03

  Don't really meet the design features. You know, crypto is not really a security, not really a commodity. It's something new. And if you're going to try to regulate it, you need a different kind of regulator with different skills.

• 32:01Scott Galloway?

  I want to talk a little bit about this notion. People keep using the term, we want to move to a trustless economy, or that the trust is disseminated, or dispersed, or decentralized to you. And I've found that that's a weird word, because I find in every market, there are middleware, middle people, middlemen who pop up to provide additional layers of trust. And this is no different, but it ends up, many of them, we shouldn't have trusted. I'm curious what your thoughts are around this notion of a, of trustless being a feature or a bug.

• 32:36Speaker 03

  We cover this on the first day of class, because when Bitcoin was launched by Satoshi Nakamoto, 2008, it was promoted as a trustless payment system. And it was held out as an alternative, essentially, to the banks and the credit cards, in the belief that people never should have trusted them, and certainly didn't trust them in 2008, because they had led us into the global financial crisis. So, what you said is true, that the financial markets have forever depended on third-party middlemen who you're asked to trust. But the record of these people is very poor. They, they play favorites, they overcharge people, they make stupid loans that require

• 33:19Speaker 03

  bailouts by the federal government. The banks have been unworthy, by and large, of the trust of the public and the depositors for hundreds of years. Now, what Satoshi was asking you to do was trust mathematics and cryptography, that we would pay each other on a peer-to-peer basis with no middleman, and what you would be trusting is the algorithm that would be used to settle accounts. And for sure, Bitcoin was extremely clever in using game theory to get people to behave correctly, to keep the books correctly. But what ultimately has evolved is a network of new third parties that very much resembles the one that Satoshi was trying to get rid of.

• 34:01Speaker 03

  You see these crypto funds that look a lot like hedge funds. You see crypto brokerages that don't register as brokerages, but look a lot like them. And I think if Satoshi could see the landscape of the system today, you're really being asked to trust some people who have not been regulated, don't necessarily have professional credentials, thumb their nose at the system that they're trying to replace, but are really not doing anything different than the banks and the funds did that have crashed the system over and over again. So a lot of people have hijacked the crypto market and the idea of trustlessness really requires an algorithm to be in place that will settle accounts.

• 34:45Speaker 03

  But many times you're really just being asked to reenter the old financial system in the hands of people who are maybe even less trustworthy than the people that were so frustrating back in 2008, 2009.

• 35:00Scott Galloway?

  We'll be right back.

• 35:04Scott Galloway?

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• 35:49Scott Galloway?

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• 36:12Speaker 01

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• 36:42Scott Galloway?

  The notion of sometimes perception becomes reality or headline risk. One of the things I find interesting about this is it's dominating the headlines. It's an interesting story. There's some schadenfreude here. There's some very interesting characters. It's just fun to talk about crypto. It's fun to see it go up 400%. It's fun to kind of watch it crash, if you will, if you're like me, if you're a no coiner. What it reminds me of is in, I think it was, I don't know, the early 2010s. Remember all the fear around Greece defaulting on its debt? And that that might create a contagion and a domino effect and take Europe down, which would take the global economy down. And it seemed like we were talking about it every day.

• 37:26Scott Galloway?

  And then someone pointed out that Greece represented 2% of European GDP, that it could just stop operating and it wouldn't really mean that much to the larger European economy. Is there an equivalence here? Because when I think about, all right, the entire asset class has gone from 3 trillion to 1 trillion. The headlines here are vastly disproportionate to the actual economic value gained or lost here. Isn't this just a giant? It's like when we look at domestic box office release. That's a, it's a small shitty business. It's like a $10 billion business, domestic films. Box office, whereas video games are 120 billion, but we don't seem obsessed with

• 38:06Scott Galloway?

  the opening weekend of World of Warcraft. Isn't this, isn't there more juice and squeeze here?

• 38:12Speaker 03

  I agree with you that the news coverage of this has been over the top. I don't mind it one bit because I teach crypto and this, you know, helps my enrollments and gets an audience for my research and so forth. But you're right, this is small and it's confined within a relatively narrow class of people who tend to have high incomes and high net worth anyway. So I'm not sure the risk of knock on damage is all that high. The real story here, as always, has been not the coins and what they're worth, but the technology behind them and how it might improve the regular financial system. You know, from day one, when we've taught our course, we've stressed that the blockchain, the consensus

• 38:55Speaker 03

  protocols and so forth, probably have a role to play in the central bank, the commercial banks, the stock market. And there was a story that ran about a week ago where JP Morgan said that they're thinking of setting up decentralized finance pools to trade things like US treasuries and blue chip stocks and bonds. And the ability to migrate that technology from the DeFi world into the Wall Street banks is a very interesting opportunity. You see the central banks looking at the stable coins and thinking, maybe we should recreate the sovereign currency on similar blueprints. And those efforts are well underway. It's already gone live in China, in fact. And the nature of money is probably going to

• 39:40Speaker 03

  change due to the influence of crypto and Bitcoin. But none of this has anything to do with the value of all these crazy coins and platforms, that they are providing a very interesting technology that ultimately all of us are likely to become customers of. But it will be in the hands of JP Morgan, of the Federal Reserve and entities like this, who are not going to engage in, you know, crazy margin lending and, you know, allowing people to get, they'll have to comply with the regulations already in place that prevent excessive leverage that require disclosure and so forth. So, you know, I continue to stress this to the students that you've got Very interesting technology here and an infrastructure that in many ways looks

• 40:22Speaker 03

  far superior to how we've traded stocks and bonds and issued money for hundreds of years. And I think because of that, it's a very interesting time. But the crypto speculation, it's a pure sideshow. And I think a lot of people have gotten rich and now a lot of people are going to lose some of the fortunes that were made, but it just doesn't affect you or me or most other people. I'm also a no coin.

• 40:47Scott Galloway?

  So one thing that struck me was if you just read the headlines, you would think that Bitcoin was near zero. And about less than two years ago, I had Michael Saylor on this podcast, and Bitcoin was at $18,000. And he said, Scott, why don't you just dip your toe in and try a little bit? And one of my many flaws as an investor is I can never buy anything unless I think it's on sale. And so if it's at 18,000, I think, okay, I'll wait till it's at 10. And of course, it shot up to 65. Now it's back to 20 or I think it recovered a little bit over the weekend, maybe 20,521. And if you look at

• 41:27Scott Galloway?

  it over the last two years, that means it's up 10 or 12%. And granted, it's off 60% from its high, but there are a lot of people right now that would take 10 or 12% over the last 24 months. And every time, every time there's been a quote unquote crash, it's been a buying opportunity. Do you think across the big ones, Bitcoin and Ether, do you think that this represents a buying opportunity? Or is this, is this, is this displaying or revealing the flaws of the asset class in sort of a, you know, a canary in the coal mine?

• 42:05Speaker 03

  I never make recommendations about when it's a good time to buy, but the history of Bitcoin goes back more than 13 years. And the crash that you've seen in the last six months, if you want to call it a crash, this has happened already five or six times in the history of Bitcoin. The, um, the price path that you've seen recently is a lot like 2018, and that looked a lot like 2013, the first half of the year. In other words, a lot of people who are crypto investors have seen this kind of volatility before. And as long as you follow the age old advice of finance, be a buy and hold investor, you've done pretty well in crypto.

• 42:47Speaker 03

  So I don't know if we're at the bottom, is it a good time to buy or a bad time to buy? But the kind of volatility you've seen lately is very characteristic of what we've seen for more than a decade. I don't expect it to change anytime soon. And there's every chance it could go back up and there's every chance it could fall further. But this has all happened before many times. And if you're a veteran crypto investor, you shouldn't be terribly unnerved by seeing it repeat because you've been through this many times.

• 43:15Scott Galloway?

  It feels as if there's something different about the complexion and the tone of the major figures in this asset class. You know, when I think of Michael Milken, or I think of Warren Buffett, or I don't know, call them the the voices, the evangelists for certain types of investment strategies. They're just, to be blunt, not as obnoxious. And I have found that the quote unquote crypto bros, A, they're usually bros, B, they're usually, I mean, they look just strikingly similar. And I find that it's very much like, I'm just much smarter than everyone. And you're either all in or you're an idiot. And I wonder if that has

• 43:58Scott Galloway?

  hurt the asset class, that everyone's looking to poke fun of it, at it, and or write disparaging articles. I don't, A, do you believe, am I just, am I, emerging asset classes, do you always have these robust outspoken evangelists, or is there something different here?

• 44:15Speaker 03

  I'm just going to have to respectfully disagree and recommend you go back and reread Bonfire or The Vanities. You know, the, go watch Wall Street again or read Liars Poker. The, the kind of language you're using is exactly the language that was used to describe the investment bankers of the eighties, that the Gordon Gekko class, you know, the arrogance, the lack of respect and humility and the, you know, extremely rapid accumulation of wealth to in the hands of people who seem to have done little to deserve it. People like this have existed in finance as long as I can remember, you know, people like Charles Ponzi or the folks of the roaring twenties and so forth.

• 44:59Speaker 03

  Um, I see crypto speculators as just the modern reincarnation of people who've been circling the financial markets for years. And the lessons are always the same, that being a patient buy and hold investor who diversifies, that the tortoise beats the hare.

• 45:17Scott Galloway?

  Last question, David. What are your sources of information? What are your go-tos for understanding what's happening, especially in the crypto markets?

• 45:26Speaker 03

  I read an awful lot of both the legacy media, the Financial Times, the Wall Street Journal. I read specialty news sites, especially CoinDesk, I think is pretty comprehensive for crypto. And I talk to a lot of people in the industry, people who are entrepreneurs, maybe business school classmates, or guest speakers, even regulators from time to time. I have the privilege of having people reach out to me and sometimes seek my opinion, and those are often two-way conversations. So, over here in the Netherlands, I was out to dinner on Saturday night with a former student who's now an entrepreneur, talking about some of his investments and businesses he's still trying to build up.

• 46:10Speaker 03

  And you get a lot of granular detail from folks who are on the ground, working for a living, and interacting with the markets. And I try to bring this both into the classroom and into my research as well. But there's no one source. I really, I'm aggregating information over as many channels as I can conveniently reach.

• 46:31Scott Galloway?

  So, one thing I underestimated in terms of how rewarding it would be in terms of teaching is alumni. Once you have sort of a decade of students under your belt, you run into them, they reach out to you, they become, you know, they inform you of stuff. It really is rewarding. I didn't anticipate that. And David Urmack is a professor of finance and business transformation at the Stern School of Business, where he's taught since 1994. Professor Urmack's primary research areas include boards of directors, executive compensation, and corporate finance. He's also a faculty research associate of the National Bureau of Economic Research, and has been a visiting scholar at the US Federal Reserve Bank. He joins us from Rotterdam. Go have whatever the local food is there, Professor.

• 47:15Speaker 03

  The Dutch food is exquisitely good.

• 47:18Scott Galloway?

  Well, that's, I like that you're taking a stand there. I get it, you're a Dutch food evangelist. David, I really appreciate your time.

• 47:25Speaker 03

  Thank you, Scott.

• 47:35Scott Galloway?

  Aspirin of happiness. So, one of the things I registered when I was speaking to Professor Yermack is that he is great at pushing back and thoughtfully saying, you know what, Scott? You're wrong. And here's the difference. Communication is with the listener. And are you a great communicator? A key to good relationships is great communication, and communication is with the listener. What do I mean by that? When I was a younger man, whenever I made a statement, the moment the statement was done, I saw my objective was to advance the veracity of that statement I'd made and be proven right, even if I've

• 48:15Scott Galloway?

  been arguing and going on and on and on. That is not how you evolve. That is not good communication. When you're speaking to somebody, especially someone who has more domain expertise than you, see above, Professor David Yermack, listen to what they say. And it is a gift when they push back on you in a thoughtful way and say, this is where you might be wrong. The key to our species is evolution. I am taller and have broader shoulders than my parents because of evolution. Now, I don't know what the fuck happened to my hair. That's like, that didn't evolve. What the fuck happened there? That didn't evolve. Anyway, anyway, point is, how do you evolve in relationships? How do you become

• 48:57Scott Galloway?

  a better man? And specifically, men have a problem with this. Listen, listen. The majority, I believe the majority of relationships, especially marriages, logistically, they end oftentimes because of financial strain. But sort of the peanut butter and chocolate of a relationship ending, especially when you speak to women, is that the dude was incapable of listening and evolving.

• 49:25Scott Galloway?

  As you get older, as your life changes, you are going to need to evolve and you're going to need to listen to that person and understand what they're upset about, or what it is about your behavior that is upsetting them. At work, when someone disagrees with you, that is a blessing. I mean, if they're disagreeing just to be an asshole or because they don't like you and they're constantly trying to highlight what an idiot you are, okay, that's another thing. But most of the time, when someone disagrees with you, the initial thing is, and I used to be this way, how dare they? How dare they? I'm the boss, I'm a baller, and I'm the smartest person in the room. And that might be true, but the way you get there, the way you go from good to great in terms of professional success, in terms of emotional success, in terms of having great

• 50:09Scott Galloway?

  partnerships, is you listen to people when they disagree and you think, okay, is this an opportunity for me to evolve? Is this an opportunity for me to learn and have a more thoughtful viewpoint? I have found professionally and in terms of emotionally, there's so much gray. And unless you take the time to understand different viewpoints, it's just striking, it's striking how much you don't know. And what is intelligence? I have found that intelligence, or a key component of intelligence, is knowing what you don't know. Do you know what you don't know? Our producers are Caroline Shager and Drew Burrows.

• 50:54Scott Galloway?

  Claire Miller is our associate producer. If you like what you heard, please follow, download, and subscribe. Thank you for listening to the Prop G Pod from the Fox Media Podcast Network. We will catch you next week.

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