Ari Paul, CIO of BlockTower: The Current State of Crypto

Ari Paul is the CIO of BlockTower, one of the best known crypto investment firms. In this conversation, Paul and Anthony Pompliano discuss his previous work at a university endowment, what Ari thinks about the current state of crypto, and how he sees digital assets performing during a global financial crisis. ----- Join the Off the Chain newsletter. Pomp's daily email analyzes the crypto market for institutional investors. Simply, it’s the best crypto newsletter delivered to your inbox every morning. No frills. No bullsh*t. Just everything you need to know in a 3-minute read. https://offthechain.substack.com/ ----- BlockFi BlockFi allows you to keep your crypto, put it up as collateral, and receive a USD loan funded directly to your bank account. They do loans ranging from $2,000 to $10,000,000, and they're perfect for helping you reach your financial goals of all sizes. Visit BlockFi.com/Pomp to learn more about putting your crypto to work without having to sell it. ----- If you enjoyed this conversation, share it with your colleagues & friends, rate, review, and subscribe. This podcast is presented by BlockWorks Group. For exclusive content and events that provide insights into the crypto and blockchain space, visit them at: https://www.blockworksgroup.io

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

• 0:02Anthony Pompliano?

  What's up everyone, this is Anthony Pompliano. Most of you know me as Pomp. You're listening to Off the Chain, simply the best podcast in crypto. Let's kick this thing off.

• 0:14Anthony Pompliano?

  Ari Paul is the CIO of Blocktower, one of the best-known crypto investment firms. In this conversation, we discuss his previous work at a university endowment, what Ari thinks about the current state of crypto, and how he sees digital assets performing during a global financial crisis. I really enjoyed this conversation, and Ari is very intelligent and articulate. I hope you enjoy it nearly as much as I did. Before we get started, I want to talk about one of our sponsors, BlockFi. These guys are doing really interesting work in crypto lending. What they allow you to do is keep your crypto, put it up as collateral, and receive a US dollar loan funded directly to your bank account. They do loans ranging from $2,000 to $10 million, and they're perfect for helping you reach your financial goals of all sizes. You should visit blockfi.com/pomp.

• 0:59Anthony Pompliano?

  Again, that's blockfi.com/pomp. Again, one more time, type it in, blockfi.com/pomp, if you'd like to learn more about putting your crypto to work without having to sell it. Definitely do it. We all know legendary venture capitalist Tim Draper. He's one of the earliest supporters of Bitcoin, and has done a ton of work to drive crypto adoption. Many people don't know about one of his newest endeavors, though, Draper University. If you're an entrepreneur looking to launch your idea in crypto, you can apply to attend their pre-accelerator program and learn how to build successful global companies from Tim. And for all you corporate executives out there, you don't need to feel left out either. Draper University also has a week-long intensive program that will get you educated on all things blockchain and crypto. As we know, knowledge is power, so don't get left behind. You can check out draperuniversity.com.

• 1:44Anthony Pompliano?

  Again, that's draperuniversity.com, and let me know what you think. If it's good enough for Tim, it will probably be good enough for you. And as Nike says, just do it. This podcast is presented by Blockworks Group, the only blockchain event and media production company I trust. If you're an investor, lawyer, accountant, or entrepreneur, and want to attend exclusive events and dinners, visit them at blockworksgroup.io. I promise you won't be disappointed.

• 2:11Speaker 01

  Anthony Pompliano is a partner at Morgan Creek Digital. All opinions expressed by Pomp or his guests on this podcast are solely their opinions and do not reflect the opinions of Morgan Creek Digital or Morgan Creek Capital Management. You should not treat any opinion expressed by Pomp as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of his opinion. This podcast is for informational purposes only.

• 2:38Anthony Pompliano?

  All right, guys. I'm super excited. I've got Ari Paul here. We've got a lot to talk about, so thank you for coming.

• 2:45Speaker 02

  Thank you for having me, Anthony.

• 2:47Anthony Pompliano?

  Absolutely. All right. Let's just run through your background real quick and kind of what you guys are doing at Block Tower, and then we can get into the good stuff.

• 2:53Speaker 02

  Sure, yeah. Really quick, was a poli sci major in college, played a lot of poker. Both of those things are actually kind of applicable here. Then was a market maker and active trader for Susquehanna National Group and a couple of prop desks. Then was a long-term investor for University of Chicago Endowment. So portfolio manager, risk manager. And then launched Block Tower, which is a crypto investment firm that does kind of anything and everything in crypto that we think we have edge in.

• 3:17Anthony Pompliano?

  Got it. The endowment world is very risk averse to some degree. They think much, much longer term than most investors. They've got permanent capital to an extent. What got you excited about crypto and then eventually forced you into jumping in?

• 3:38Speaker 02

  A whole bunch of things. So from the endowment perspective, our job as endowment investors is to find, to find alpha and to do many other things like manage risk. But investing has become hard. It's a very competitive space. You know, whether it's U Chicago, where I was, or Yale or Harvard, you've access to the best fund managers in the world who are brilliant, incredibly hardworking, and yet they really struggled outperform the market. So the best managers in the world in public equities, for example, might add 2% or 3% alpha a year. And that, you know, I don't know if that's a lot or a little, but if you're thinking about some of the smartest people in the world and you're thinking about a market where it seems like there should be more opportunity. So something we try to think about is where does alpha come from and where should we look for it in an active sense?

• 4:24Speaker 02

  So US equities are easy to invest in. There's very little barriers to entry. It's very easy to understand GAAP accounting. So it's very competitive. So there's very little alpha. Basically, the alpha gets competed away. Frontier markets, emerging markets, there's less liquidity, there's regulatory risk, there's less transparency, there's more complexity. You literally need to spend more time. You need to do physical travel. Even things like physical travel actually are a source of alpha because there's a lot of managers who don't want to leave their families in Greenwich and spend six months sitting in, you know, South Africa, Zimbabwe, or Venezuela, or wherever. And so I tried to take the mentality of thinking actively like, where is there not competition? And crypto kind of jumped out at me as there's all these reasons why it's incredibly hard

• 5:06Speaker 02

  to trade and invest in crypto, right? Custody, regulatory clarity, complexity of, you know, there's almost no one in the world who actually understands all the relevant pieces, no economic models, there's a lack of data. All of these are very real obstacles and therefore make it potentially a really attractive place to find alpha. So, you know, before 2017, this was like a $5 billion asset class, or at least started 2016, it was about a $5 billion asset class, wasn't investable. So we were an $8 billion endowment. By late 2016, I thought, okay, I think this is getting ready for primetime. I'm seeing the start of institutionalization. I think this is going to be parabolic. I think in a year, this is going to be investable by endowments. Let me start laying the groundwork. Let me socialize the idea. Let me educate my colleagues so we can get in hopefully before kind of other, it's not even other

• 5:50Speaker 02

  endowments. I actually wanted all endowments to capture some of the wealth creation. I didn't want it all to go to Silicon Valley types and VCs. I wanted nonprofits to capture some of it. So I produced some educational materials at UChicago and shared them with some other endowments because it's not really competition, right? I mean, I'm pretty happy if Harvard and Yale also benefit. And so that was kind of the angle of finding alpha. And then for me personally, it's a kind of a trader's playground. So traditional markets trading is pretty difficult. Again, just competition. And then in crypto, it's hard. So you have counterparty risk to exchanges. You had, you know, there are a lot of very reasonable reasons why a good trader wouldn't want to have a ton of money sitting on exchange like Mt. Gox. And so that provides opportunity. Algorithmic trading is incredibly hard because exchange

• 6:33Speaker 02

  JPI connections are terrible. That's another barrier, you know? So all those barriers make it very attractive if you're willing to put in that time and effort to overcome them. And then the last, which was what originally got me into crypto in 2014, was the kind of original cypherpunk vision of this is a tool to fight oppression. This is a tool for the 1% of the world who, or I think it's a tool for everyone in many ways. But first and foremost, primarily, primarily, the most important element to me at least was this is a tool for the 1% who for some reason can't use other forms of money. So the state refuses to give them bank account, or it's a refugee fleeing Syria or Iran with the shirts on their backs. And the state won't, literally, physically, will not let them leave with fiat.

• 7:14Anthony Pompliano?

  Yeah.

• 7:15Speaker 02

  Or gold.

• 7:16Anthony Pompliano?

  It's funny, I don't know this stat, but Bitcoin or other crypto currencies has already surpassed some currencies in the world, right? So it's not the bottom. It may be the sixth to the bottom, seventh to the bottom, whatever. But over time, if it continues to move up the charge, right, that's progress to some degree. And what you're talking about is it's not attacking the developed world's currencies. It's not going after the US dollar, you know, euro, etc. It's going after the weakest, right? It's kind of killing those off or surpassing them in places like Venezuela, etc. And I think we've got to see more of those weak currencies die off over time. But really, why is that happening? It's because people are opting in, right?

• 7:56Anthony Pompliano?

  It's this idea that it is better, it's better serves them to some degree, whatever they're trying to accomplish.

• 8:02Speaker 02

  Definitely. So that's a little bit of a, of kind of a connected but different use case. So I'm talking about kind of the ability to flee with your money. I think the way Bitcoin potentially kills off currencies, and we've seen this in Zimbabwe and Venezuela, not killing off the currency, but being much more widely adopted there than elsewhere percentage wise. And that's the depreciation resistant use case, which if your, if your US dollars are being inflated away at 3% per year, there isn't much pressure. If it's 100% a year or 500% a year, that's a, that's a real good incentive to look for alternatives. So definitely, the weakest currencies are the ones where there's the most pressure for people to, to learn how to, how to Bitcoin.

• 8:38Anthony Pompliano?

  Absolutely. Let's talk a little bit more about endowments, right? So everyone keeps talking about the institutions are coming, institutions are coming. We've obviously talked to a bunch of them. We've got some that, you know, are in our funds, but. Why are more of them not in? Right, so we've seen, at this point, I think we've seen Harvard, Yale, MIT, Notre Dame, Stanford, UNC, so a good number of the kind of forward-thinking, best-known, best-performing ones, but why hasn't everyone else jumped in so hard?

• 9:05Speaker 02

  So I think there's one more step to how this always unfolds, which is you need the success data point, that then, the phrase I like that applies in so many circumstances with anything kind of market psychology or investor psychology is fear versus FOMO. What is the driving force for the investor at that time? Is it fear of loss, fear of career risk, fear of looking stupid, or is it fear of missing out? So now that the first wave of bets have been made, if you get one quarter or one year where Yale's tiny allocation, I don't know what they allocate as a percent of their entire portfolio, but it's probably trivial, it's probably less than 0.25%, if that little piece in a quarter, let's say, is up 200%, that may return more than the other 99.5%

• 9:48Speaker 02

  of their portfolio, that'll result in a news story, then suddenly every other CIO and investment office around the country is being asked by the president of the university why they passed on that investment. Why did you pass on the best investment Yale's made in the last decade? So suddenly it shifts the burden from, why are you investing in tulips? Why are you crazy, this massive risk, to the risk of not. That doesn't happen until you get the successful data point.

• 10:10Anthony Pompliano?

  Can't you say that already, right? So one of the, a couple of stats that we like to talk to these institutions about is, look, it's the best performing asset class in the last 10 years, it's the best performing asset in the last five years, it's still up 400% in the last two years, right? It did have a big drawdown in 2018, or according to this, end of November of 2018, but the performance has still outperformed everything else in your portfolio with those drawdowns. Why is that not good enough success data point? Is it because the institutions weren't actually in, they can't say, we evaluated the situation, we made the decision, and here's our specific returns versus like backtesting? Or what's the thought process there?

• 10:49Speaker 02

  Yeah, so I, I'm not, I don't like this because I think it leads to poor results on behalf of endowments, and this is true of basically all, most investment decision-making is bureaucratic to some degree. You rarely have just an individual controlling billions of dollars of capital, and the decision-making, it plays out like this, it's, you're not looking in the abstract, you're competing psychologically against specific players. So in the endowment world... Harvard and Yale and U Chicago and UPenn, they don't care how a sovereign wealth fund in Dubai did. They don't care how a pension fund in Japan did. They care how 10 other endowments in the US did because that's what they're benchmarked against. That's what their alumni compare them to.

• 11:29Speaker 02

  And so if those top 10 endowments weren't in crypto last year, the results never happened. Didn't matter. There's no psychological pressure to follow the herd because the herd is those 10 endowments for those 10. Now, for a sovereign wealth fund in Singapore, I don't know what their benchmark is. Maybe it's the Dubai, maybe it's the Emirates sovereign wealth funds. In other words, like there's different herds. The endowment herd is kind of its own little herd of like 10 to 20 top endowments. And they really view themselves as isolated from everything else.

• 11:57Anthony Pompliano?

  Got it. Let's talk about the market for a second, right? You've got this unique view that no one's really talking about of there's been a complete retracement of the market back to like September of 2017 levels. Talk about that a little bit.

• 12:11Speaker 02

  Yeah, so I did not, I don't claim to have called this bear market explicitly or well. So this is not a like patting myself on the back as a call. This is just kind of more of an explanatory framework, I guess. There's this temptation by a lot of people to say, in fact, there was an article with this as the headline. Jamie Dimon and Rubini proved right. Crypto is dead because it's down 75 or 80%. So there's this framework of like, how could an asset be down 75, 80% if it wasn't fundamentally broken? And that's just like silly. So Bitcoin was at 3,000 last September. It was at 3,000 last September.

• 12:51Speaker 02

  And from a technical analysis perspective, that was the start of the retail parabolic bull rally that was a speculative short-term bubble. And we've just retraced that. We basically retraced a two-month speculative parabolic move. In other words, you don't need a fundamental change to do that. You just had people who got over-levered, overzealous, they were momentum chasers, and you retraced that move. The unusual thing is in stocks, when the same thing happens, it just happens to such a smaller degree. So I mean, we saw it with cannabis stocks and that was kind of extreme. That was a rare case. But the key thing I always try to remember is crypto assets are The price movements are logarithmic, meaning you get these 10x advances, you get these 80% collapses. It's just a hyper volatile asset. That's not unique to crypto. You see the same thing in

• 13:34Speaker 02

  pink sheets, in any kind of hyper volatile speculative asset where fundamental value is unclear, and especially where there's kind of these intrinsic vicious and virtuous cycles. So this gets into kind of a whole interesting area of something that is fundamentally different about crypto from, say, equities is you don't have a liquidation value. And in fact, it's the opposite. It's kind of bad. So as Bitcoin falls lower in price, it is less valuable. So it has less liquidity, it's less useful as a medium of change, it's less useful as a store of value. Its security worsens. So hash power is tied to price. The best case scenario is that hash power falls gradually with price. That means it's a less secure network and less valuable. The worst case scenario is that you face elongating block

• 14:16Speaker 02

  times, you face greater risk of 51% attack, you face potentially a "hash power death spiral," which, by the way, I think is an exaggerated risk that is very unlikely to cause the death of Bitcoin, but it could absolutely cause 40 minute block times and rising transaction fees, which fundamentally is a less valuable network. So there's this natural momentum to crypto assets that actually they are more valuable when they're worth more and they're less valuable when they're worth less, which accentuates this hyper volatility. So the big picture is you need to be the equivalent, like if Microsoft goes up 2% in a day and then down 2% the next day, we're not all scrambling to figure out why the hell did that happen. We get that there's some noise, there's some volatility. In crypto, that 2% is more like 20, and a normal market cycle is like an 80% down or a 500% up.

• 15:02Anthony Pompliano?

  Do you think that that volatility goes away at some point? Like, is it just market maturity, more liquidity, kind of more institutional investors, maybe some algorithmic trading that goes on that kind of smoothes that volatility? Or you think it's the same? Or I've even actually seen people who say, "Look, it's gonna get more violent."

• 15:20Speaker 02

  I think for the foreseeable future, meaning the next decade, I don't expect a radical change, so it's going to stay hyper volatile. Now, so Bitcoin volatility has been trending down for the last 10 years. So as volatile as it's been in the last year, it's less volatile than it was in 2010 or 2014. So it may become, you know, that we may get that same thing in five years. We may say, okay, it's a little bit less volatile, but it's still, instead of a 10x and then 80% down, maybe it's a 6x and then a 70% down. Or I think, and the reasons for that are what I just kind of talked about. There is this fundamental intrinsic momentum to Bitcoin. And then most other crypto assets are like seed stage VC investments, which are naturally hyper volatile. They're experiments, they're early stage startups. As long as you're, so if we're talking about a crypto asset that is basically a startup, it's going to be volatile like a startup.

• 16:05Speaker 02

  If we're talking about a crypto asset that has these ingrained kind of momentum driven network effects, it's still probably going to be volatile. I also think we're so far from maturity, in air quotes, so far, right? I mean, we have 30 million people in the world maybe who own Bitcoin. We have a lot of regulatory challenges, and I mean that in the abstract sense. So a phrase from, I think it was Naval Ravikant, was that this isn't, we haven't seen the final boss yet. The final boss being some state level attack in a way that's far more serious than like China banning, you know, mining kind of thing. So there's a lot of that stuff ahead of us that are, we're going to have more hard forks, we're going to have more hash power wars. In many ways, the scale of the battle is just increasing.

• 16:46Speaker 02

  You're going to see far more shrewd actors, far more tenacious sharks entering this game. I was having a conversation last night, we were talking about, with some developers, and we were talking about how rare engineering based attacks on crypto networks are. So there's so many buggy crypto networks, and there's so many known vulnerabilities. Why aren't those bugs exploited more often? Why aren't people constantly, like, you know, there was the Verge mining attack where people gamed the Verge algorithm and created artificial inflation. There've been zero day attacks. But why aren't there many more of those? I actually think a big part of it is psychological. The hackers in the space, the engineers, the devs who know how to do that. They're not, some of them are ethical and some of them are just uninterested in killing a network, but they're also just not that kind of mindset of sharks who are looking to make every penny and doing whatever they need to.

• 17:31Speaker 02

  And now the Wall Street's getting in the game, now that, you know, the financially minded people, now that you have the ability to short, now that things like, I mean, so you can short Bitcoin with futures, but most assets you can't really short, but as things like DYDX come out, if I can put on a meaning, like, let's use Verge as an example. If I could snap my fingers and destroy the Verge network, there's almost no way for me to profit from that. I can't short Verge, so I have no incentive to do it. If I could short $20 million of Verge, then maybe I do a zero day attack. So I'm not saying I would, but someone probably would.

• 18:00Anthony Pompliano?

  That's the logic.

• 18:01Speaker 02

  Right, right.

• 18:02Anthony Pompliano?

  You know who actually reminds me of this a little bit is Arthur Hayes, right? So Arthur, you know, I joke all the time, I say that dude thinks differently, right? And in like a super positive way I say that, right? Of just when you hear him talk, he has a more aggressive kind of bent to the way he thinks. And some of it's, I think, some of the, you know, the Wall Street type mentality, et cetera. And to your point, as more of those people come in, I think that it changes the dynamic of the market because the participants are willing to look at risk differently, they're willing to become more aggressive, you know, there's all these different components to it.

• 18:43Anthony Pompliano?

  And, you know, I wonder if that actually washes out some of the people who aren't willing or aren't expecting to have to do that, who have been, you know, the traders and the market participants before that happens.

• 18:55Speaker 02

  I don't, I don't know if it'll wash them out, but I think it's funny, like battles in crypto so far have mostly been kind of internet trolling, like, oh, you said something mean to me on Twitter.

• 19:04Anthony Pompliano?

  Billionaire mode.

• 19:06Speaker 02

  Yeah, yeah, or good luck. And now what we see with Bitcoin Cash, for example, is like Calvin Iyer, the Bodog billionaire. And, and this is kind of the first, I, the SVABC battle has been fascinating and it's, it still feels a little amateurish to me. So this is not like quite Wall Street level yet in terms of playing chicken and price wars. And you look at what, what some of the, I mean, you would like United Fruit Company basically assassinating dictators in South America in the 1960s with the help of the Dulles Brothers to increase profit margins. That's where crypto's headed. Like, that's just, that's just humanity. That's just the nature of the world. If you have enough money at stake, and in crypto, there's a natural, it's funny, it's a lot of public blockchains, a lot of transparency, it's also inherently less transparent. So the fact that you can potentially, if you're a world-class hacker...

• 19:50Speaker 02

  Destroy 20 billion dollars of value from a remote computer in Estonia and maybe get away with it is incredible. Whereas United Fruit Company had actually like sent helicopters to South America. So it's incredibly tempting and in some ways easy. And now you're getting the financial incentives to do it. You're attracting that kind of person like we've seen with Calvin and I are partnering with Craig. People who are looking for opportunities to get their hands dirty in that way.

• 20:14Speaker 02

  So what are the conclusions of that? So one is if you're a trader, the nice thing about trading and investing is you can only be taken advantage of if you trade. Right? So you can't get whipsawed or you can't get chopped up by market makers or by shenanigans. Basically, if you buy an asset you fundamentally believe in and don't touch it, won't necessarily be the best result. And I'm not saying people should be passive, but you don't have to play those games. You don't have to guess at what's going to happen with SV and ABC. You don't have to try to be the fish at the table. You can just kind of not be at the table.

• 20:47Speaker 02

  And then.

• 20:50Anthony Pompliano?

  What do you think about the ETF?

• 20:53Speaker 02

  I have no insight here. I would put it at 50 50 that it happens in the next.

• 20:59Speaker 02

  I was gonna say six months, call it nine months, 50 50 in the next nine months.

• 21:02Anthony Pompliano?

  So let's say that whether, you know, at some point it's gonna happen, that could be six, nine, could be three years, right? Who knows? But what do you think the impact is when it happens? Is it kind of what the consensus at this point around ETF gets approved, price appreciates? Or do you think that there's another, you know, potential outcome there?

• 21:20Speaker 02

  So definitely on the announcement Bitcoin would skyrocket. I mean, I would personally be bidding it up at least 50%. Like I think it, I don't know, does it go up 100% or 200% or 30%? I'm not sure. And then the question, so what happened with the futures was we had this massive parabolic rally into the release of the CME and CBOE futures at the end of last year. And then all of those people had like, they were anticipating the futures and then sold into it. The high was almost exactly with the launch. So we might get that again with an ETF. So for example, if Bitcoin rallied from, you know, wherever 4,000 to 12,000 on the announcement. And then six months later, the ETF came out and Bitcoin was at 30,000. That might be a great time to sell. It might be a great time to try to, you know, because basically the market will have been pricing in a year or two years of inflows into the ETF.

• 22:04Anthony Pompliano?

  Yep.

• 22:05Speaker 02

  But long term, I think it's huge because it's a massive, it basically settles the question in everyone's mind forever of regulatory status of Bitcoin, which sounds stupid because you and I know and your listeners know that Bitcoin, there really is regulatory clarity. It's not a security, it's totally legal, it fits under existing commodity infrastructure, or commodities like CFTC regulatory infrastructure. But to a lot of people, they don't really believe that, whereas you have an ETF which is done. This is safe, it's clean, it's fully endorsed by every regulatory body in the US, which means every, most countries around the world will follow suit. And then you get a little bit of passive exposure and pensions, and it becomes very hard to ban. Because suddenly, this is a big question that gets asked, like, why are Bitcoiners like you and I, who believe in decentralization, believe in some of the

• 22:49Speaker 02

  cypherpunk ethos, why are we championing an ETF and banks that are getting into space and fidelity and custody? And the answer for me is that the game theory of Bitcoin long term, which Satoshi understood, was you need to gradually get more and more people to have skin in the game, and that's the only way we win this war long term. That if this is 30 million people against all the governments of the world, we lose. Period. We lose. So the game here is to almost trick the world into gradually adopting it without them knowing how big of a threat it is to the existing status quo.

• 23:18Anthony Pompliano?

  So this is super interesting because, I actually haven't said this publicly yet, but one of the things everyone seems to be underestimating is this Ohio accepting Bitcoin as crypto. And it's not because, oh, now that answers the question of like, it's accepted to pay taxes, so it's a currency type thing? I think that's one data point. But a government official went in and created a rule that legitimized a digital decentralized currency and said, we as a state entity will accept it. How does the US government come behind and ban it? They could. They could say federally, we can ban this.

• 24:02Speaker 02

  Yep.

• 24:02Anthony Pompliano?

  I think it becomes really, really hard to do when you have states that got ahead of you, Wyoming, now Ohio, etc., and they're accepting it, they're embracing it, they're championing it. It just becomes hard for the federal government to come in and be the bad guy now.

• 24:18Speaker 02

  Certainly makes it harder, especially, yeah, if it starts getting framed as like a states' rights versus federal rights. Although, although we do see that somewhat ironically, and the political parties have flipped on this. It's now the Democrats who are for states' rights. So like with cannabis, right? So you have the FBI raiding legal California dispensaries, which is the most absurd thing, right? You have a regulated legal entity in California that, you know, is paying taxes. And then you have the FBI raiding it and shutting it down.

• 24:43Anthony Pompliano?

  Claiming that it's illegal.

• 24:44Speaker 02

  Claiming it's illegal, right? So it's bizarre. So, but the point is, it can't happen. I wouldn't, but I think it's a really meaningful data. It is a meaningful data point as part of this trend, which is just a little more buy-in, a little more legitimate, little legitimization psychologically, which is huge. Finance is all about trust. Trust, people talk about the Lindy effect way too much in crypto, I think. It's, it's just.

• 25:05Anthony Pompliano?

  Why?

• 25:06Speaker 02

  So as a concept, it's basically a handwavy, soft-science stylized description. It isn't predictive, it's descriptive. There's no science to it. There is no, like, I mean, there's literally no science to it. It's a description of an empirical observation with very, very weak evidence. Basically, it's a fancy way of saying, things that have been around a while are more likely to be around a while. And it's a way of making that kind of truism seem scientific. And, and, but I think if you actually dig into it, like, why is that true at the margin? So I think it is a little bit true. And why is it true? I think it's largely psychology of trust, which is, why do we, so JP Morgan almost every year gets fined for money laundering. For a Citigroup just, or Citibank just got fined for creating like 30,000 fake customer accounts.

• 25:50Speaker 02

  And yet, no one wonders if Citibank's going to be around next year. No one is worried about Citibank ceasing to exist. Why? Because, because we just kind of know that, like, we trust that things that have been around for a while will continue to be. And that gets into like the nature of power. So basically Citigroup has so many lobbyists and there's so much skin in the game in that regard. And there's so many voters who work at Citigroup or bank there that politicians are very unlikely to shut down. Regulators are likely to be friendly, is it too big to fail? So there's all sorts of like sociology and political science, whatever that goes into that. But as humans, we just know that something's been around for 30 years, it's probably not going away next year. And so establishing that trust with Bitcoin, and that's one of Bitcoin's biggest advantages over its competitors, because you can't leapfrog that. You can't replicate time. You can't, right? You can't create a 10-year track record in six months. You just can't.

• 26:34Anthony Pompliano?

  So this gets at this point where people always ask, you know, is Bitcoin always going to be the king? Is it always going to be the winner? All of that. And I tend to answer normally with, anytime you've got a currency that is the de facto or default, it got ahead, it has the notoriety, it has the hash rate, it has the adoption, it's got kind of the mental capture, if you will, right? If another currency was to leapfrog that, people would always look over their shoulder with the second currency, saying, is there a third that's going to leapfrog that? Right? It's really hard to store your wealth in something that you've seen get replaced, and then not worry about it being replaced again. I don't know if that's actually true, or if it's a slick way to explain some game theory, that, you

• 27:17Anthony Pompliano?

  know, there's hints of truth in it, but it doesn't actually apply. What's your take on on that?

• 27:21Speaker 02

  Again, I think it's descriptive, not predictive. And what I mean by that, it's a little bit like in 2007, when I was talking with colleagues about, hey, and I was actually a huge fan of Norbert Orbania at the time. It wasn't that he timed the financial crisis, he actually called it like six years too early, but he actually laid out a really deep understanding. So I was talking to colleagues, and I said, guys, I'm reading this Norbert Orbania guy, I'm doing some fact checking, it seems logical, and I think I've confirmed some of the big data points. He says we're going to have some prime brokers failing. And they would say, if a prime broker fails, it's the end of the world, therefore it can't happen. It's like, it's like a weird circular reasoning. It's like, I mean, it'd be the equivalent of saying like, I'm on a plane, if the plane crashed, I'd be dead, therefore the plane won't crash. It doesn't actually make sense to say that. So the argument that

• 28:05Speaker 02

  Bitcoin can never be replaced, because that would be the end of crypto, doesn't mean Bitcoin doesn't get replaced. That isn't predictive at all, right? What you can maybe say is, either it's Bitcoin, or it's nothing, that could follow. I actually strongly disagree, though. So

• 28:18Anthony Pompliano?

  Why?

• 28:20Speaker 02

  The same logic applies for almost any strong network effect-based technology that requires faith and buy-in. With money, it's more, but Bitcoin's not money. Yeah, it's speculative. No one is using it as money. Anyone who has half their net worth in Bitcoin is not thinking that they're storing half their net worth in Bitcoin. They're just huge believers that they're going to get ultra wealthy by doing that.

• 28:40Speaker 02

  I think the way that we've seen this play out, this is every tech boom in history is you get a crisis of confidence, the early movers die. And not always, not every early mover, but usually most of the first movers die. And then there is a crisis of confidence, and it takes people a while, and it takes a long time to recover that confidence and rebuild it. But it happens. So in this scenario where, let's say there was a critical bug found in Bitcoin tomorrow that just in some way just wiped out the network and could not be forked, could not be fixed. And even the core devs, even the true believers washed their hands. They're like, you know what? Failed experiment, a huge fundamental flaw in Byzantine. It's not Byzantine fall tolerance or whatever. I think you'd have a massive crypto depression where everything's down 99.9%, where the industry basically ceases to exist. You'd have, it would probably go back to what maybe it looked like in 2010 or 2011.

• 29:25Speaker 02

  So you'd have some hardcore cypherpunks. You'd have maybe, you know, a couple hundred thousand people who are passionate believers. And then they would gradually slowly resuscitate the industry over a decade. And, you know, it's not that different from the 2000 tech crisis, except it would probably last longer. It'd probably be a deeper shaking of confidence. It might take 20 years to restore confidence at the retail level. I actually don't think it would take 20 years, though, because people have short memories. I mean, and people said the same thing. It's a much weaker effect with something like Friendster to MySpace to Facebook. But it's the same idea, which is people have to invest time and onboard to something. And then when it fails, they're disillusioned. And it's true, as investors and as users. But people get over it. Because if the value is clear and you have a small number of people

• 30:09Speaker 02

  who start growing those grassroots and believe in it, then you create new confidence from scratch, almost.

• 30:16Anthony Pompliano?

  All right, before we continue with this conversation, I want to mention our sponsor again, BlockFi. Remember, they do crypto lending. So you posted your crypto as collateral, they give you a US dollar loan, and you can use the US dollars to do whatever you want. You should visit blockfi.com/pomp and then tweet at me that you went. If you tweet at me after you went to blockfi.com/pomp, maybe I'll throw you a like, a smiley face, or the fire emoji. The fire emoji's the best. Remember, go to blockfi.com/pomp, and I'll see you on Twitter.

• 30:47Anthony Pompliano?

  What do you think the probability of Bitcoin failing is? So you can't say it goes to zero because as long as somebody's running it, it's running, right? But failing in the sense of it's no longer the dominant crypto, it's lost majority of its value, etc.

• 31:02Speaker 02

  So there's no real way to quantify this, or it's unknown unknown. Like, I don't think, I think you can apply some really high level heuristics, but very hand wavy, right? So I'll be very honest about it.

• 31:11Anthony Pompliano?

  That's fair. That's a fair characterization.

• 31:12Speaker 02

  The number I throw out, and this is, this maybe is just directional, is I say 50/50 that Bitcoin is, basically exists in 20 years. And by exists again, as you said, like it'll probably exist in some form, but I mean exists as, I don't know, we could define that as having at least $10 billion in total network value or something. So how do I come up with that? So first movers very rarely win with new technology, especially if it's tech, because tech becomes obsolete. Tech innovates or it dies. Now Bitcoin's not only tech, of course, but that first key element that what are the odds the first Byzantine fall tolerant consensus mechanism ever implemented is the best? And what are the odds we're not going to find something 10 times, 100 times, 1,000 times better?

• 31:54Speaker 02

  Very unlikely, in my view, just knowing the history of technology, right? What are the odds that the first distributed ledger form, architecture, used for a cryptocurrency is the best? What are the odds blockchain is the best type of distributed ledger for this? So blockchain's arbitrary. So it's a type of DAG. Fun little data point, by the way, in crypto, we talk about DAGs as separate, directed acyclic graphs, we talk about like IOTA, or what are some of the other, there aren't that many, but there are a few. I'm totally blanking on the name of one of the other big ones, but technically a blockchain is a type of DAG, it's a narrow case of a DAG. Crypto doesn't have to use a blockchain. There are lots of other distributed ledger types that may be more efficient. What are the odds that Satoshi, in basically his first attempt, kind of lucked on the best type?

• 32:39Speaker 02

  Now, I know it wasn't his first attempt, he built on 50 years of previous work, but point is, this is a new technology. What are the odds that we, it's like the 10th car off the assembly line is the best one that can ever be made? So that's one side, that's why it dies. Now, why does it live? Because this isn't a technology. That's one key part, but it's also, it's money, right? And so money, the creation myth is probably impossible to reproduce.

• 33:03Anthony Pompliano?

  The immaculate conception story of Bitcoin is so underrated.

• 33:09Speaker 02

  I actually would argue that is the biggest network effect in all of crypto. That is the biggest mote, sorry, that is the biggest competitive advantage. So, open source code is easily forked. The network effects are minimal. So Bitcoin ATMs could add Iota or Ripple or whatever they want pretty quickly. You could, NASDAQ can launch Ethereum futures or anything else very quickly. The dev community, people, I think, it's very important in short term. It's trivial long term. So if we're going to have 100,000 crypto developers in 20 years, we don't need a single Ethereum developer to be in that group. And I'm not trying to attack Ethereum, it's just the developer community. It's, here's my favorite analogy. Facebook didn't need a single Friendster user to win.

• 33:50Anthony Pompliano?

  I love that.

• 33:51Speaker 02

  Yeah, like, if you're talking about an addressable market that's going to involve a billion people, you don't need the current 30 million people to be part of that, at all, literally at all. And the same is true for the developer community. So, on that side, Bitcoin as the first mover, as money, as capturing mindshare, as a global brand, as having this creation story that's extremely hard to reproduce, if not impossible, is incredibly powerful. And then, I think this is critical. Bitcoin probably just needs to be good enough. So, when you think about incumbents in any trust-based model, like Lloyds of London Insurance, they're not competing at the margins. So, a slightly better technology, if I can buy Coca-Cola for 10% cheaper, I don't kill Coca-Cola. If I can be Lloyds of London with slightly better customer service, I don't kill Lloyds of London. Because it's really about trust or brand.

• 34:36Speaker 02

  You need something much better to kill that. So if I could produce Coca-Cola for 5 cents a can, I could probably kill Coca-Cola. Or if I could be Lloyds of London with, you know, open 24/7 with branches everywhere, maybe I kill it. So what does that look like for Bitcoin? How much better does something have to be? Because of Layer 2 and interoperability, the answer might be near infinite. So, this is something I don't have a clear view on, but basically, so Bitcoin at, now it's roughly 13 transactions per second. Transaction fees will rise exponentially if Bitcoin succeeds, in a good way. That just means there's actual demand for space on the blockchain. I very much think we're going to have technologies that support with equal security 1,000x the transaction volume and 1,000th the price. But that might just be able to be added as a layer two. And so if the base, so the big, here's where

• 35:21Anthony Pompliano?

  Wait, before you keep going, let's do one thing so people understand this because again, layer two, layer three, I think people shake their head, oh yeah, I know what that is and they have no clue. So maybe just go through the network being layer one and what layer two, layer three means. And maybe we can even compare it to like money, Visa, etc. Just spend like two minutes on that real quick.

• 35:37Speaker 02

  Sure. So first, the trickiest thing to newcomers is often that Bitcoin, you have the Bitcoin protocol, which is a network and a communication language by which computers will communicate with each other. And then you have Bitcoin, the currency, which is a little annoying that they're the same name. In Ethereum, you have Ethereum, the network, Ether, the token. And that's critical because then you have a layer two, which is a separate protocol that can literally be very different. So Lightning Network is a layer two protocol on Bitcoin. It is a separate protocol, meaning like if you literally look at the code, it's very different. The way it functions is very different. The way communication messages are transferred between computers are very different.

• 36:17Speaker 02

  It's layer two because of how it sits on top of Bitcoin where you use Bitcoins in Lightning Network. And your Bitcoins used in Lightning Network are, I'm not a good definer of Lightning Network, but Lightning Network basically locks to the Bitcoin blockchain. It snaps on top. Now Lightning Network could snap on top to other networks. You can do Lightning Network on Litecoin. You can do Lightning Network theoretically on basically anything. So Lightning Network doesn't have to use Bitcoins, but if it's if it's layer two on Bitcoin, it uses Bitcoins. And the nice thing is we can add these layer twos that do anything. So you can do, and one way to think about this a little bit, and I'm lumping a lot of different technologies together because the functionality is very similar in this context.

• 37:00Speaker 02

  State channels, side chains, these are all ways of basically creating a separate protocol or separate network or separate self-contained box to do that has the features, the trade-offs, the security, the costs, the transaction speed of whatever technology allows. And then you can link that back to a base chain in a cryptographically secure way. So there's, I don't, I don't, I don't need a, terms like atomic swaps. There's some very interesting cryptography that allows you to prove and link and lock that that relationship. But basically I can create the standalone network that has any, any trade-offs or functionality I want. And so Bitcoin as the money, as the currency, uh, may be able to win and survive even though Bitcoin, the protocol becomes horribly obsolete.

• 37:45Anthony Pompliano?

  Well, so I, I think the comparison that I usually use and you shoot holes in it is Bitcoin, the network is very similar to the physical paper dollar, right? And it is something that can be, or I'm sorry, a bit like the original Bitcoin, right? So not the network, but Bitcoin itself and a physical dollar. You can use it for some things, you can move it around. It's pretty inefficient though, if you want to do global commerce, things like that. When all of a sudden you start to build the layer two, layer three technologies on top of that. Visa, for example, is a layer three type technology that allows you to move the equivalent of those physical paper dollars, but you actually don't have to have physical paper dollars and you can do it in a much more efficient, lower cost way, if you want to do global commerce.

• 38:27Anthony Pompliano?

  The things like Lightning and, and other layer two, layer three technologies will allow you to transact Bitcoins in a much more efficient, lower cost way without actually having to make Bitcoins themselves obsolete. It actually builds on top of it and improves it without changing that core component. Um, but I don't think that we're there yet. There's things that are being built and they're interesting. It's unfair for us to have to answer the question today. Well, how come Bitcoins aren't used the same way Visa is used, right? It's a, it's an apples to orange comparison that if you're not super deep into technology and don't understand this stuff, you actually don't understand, yet you're asking the wrong question, right?

• 39:10Anthony Pompliano?

  Kind of talking heads on television, et cetera.

• 39:13Speaker 02

  Sure, sure. Uh, yeah, I mean, I think one of the things that, uh, is such a constant thing trying, like since getting into crypto, I've done a lot more reading on specifically tech booms in the past and, uh, history really repeats in this regard. Every single time, everyone, and I'd say I fall prey to this a little bit too, is we get very excited about world-changing technology. We're right that it's going to change the world. We're right directionally. It takes five to 10 times as long as everyone thinks. So, you know, you look at the 2013 boom in Bitcoin, everyone was convinced that we're going to be buying coffee with it the next day. And like, five years later, we're still not, right? And then you look at Ethereum and the massive bubble in Q4 with all these dApps coming out, and it's like, oh, we're gonna have, I mean, I'll pick on a success

• 39:58Speaker 02

  case. So, Augur, great team, great vision, they executed, they delivered a product that works, and has like 100 daily active users. And Augur may still, may conquer the world. So, they're improving the UI, they're improving Ethereum, basically it needs to be on a more scalable platform to have lower costs. There's all sorts of incremental improvements that they can and will make. So, I'm not saying that it's a done deal and a failure at all. But, here's an example where people who invested in Augur almost four years ago, so the Augur white paper, I think preceded the Ethereum white paper, or was almost at the same time. It took like four years to launch a product that no one wants to use. Is that a failure? And I would say no, Augur's a success case. It just takes a really long time to produce world-changing technology.

• 40:37Anthony Pompliano?

  You set the little, a company and a product.

• 40:39Speaker 02

  But I would extend beyond that, because you actually are trying to bootstrap entirely new network effects. A good analogy here might be Tesla, where not only do you need a new company and a new type of car, and to educate a consumer, you need to build a network of charging stations across the entire country. And to think that, you know, to say like, well, electric cars haven't replaced gasoline yet, therefore they never will. You know, we have 100 years of gasoline-powered cars, or maybe not quite 100 years, but, you know, network effects that take a long time to spread. So, the best example of this, email was invented in 1972. In 1982, almost no one in the world used it. In 1988, some big companies used it. In 1992, well under 10% of the world had access to email. It was about 10% of

• 41:21Speaker 02

  Americans, it was about 1% of the world. 20 years after email was invented, you could have looked at it and said, it's been 20 years, 1% of the world uses this thing, clearly it's never going to get used, it's a failure. It's a niche hobby. And this stuff just takes a long time. And as investors, we make that mistake over and over and over. We get over optimistic, we invest in things that are too early, evaluations that imply they're going to be cash flow positive in a year or two, when it's actually a decade away. A concern I have as an investor is that first mover question, which is... Is, okay, I look at the landscape right now, actually, I'll use, I'll use as a very concrete example, security tokens. So hugely popular right now, it's the sexy thing. It's, it's like the thing that people have confidence in, in a bear market where no

• 42:02Speaker 02

  one's using DApps. When I look at that space, which I haven't, I haven't spent a ton of time diving really deeply, my main, security tokens absolutely are going to be a thing. Like, there's no question, I actually think regulators are going to require security tokens.

• 42:14Anthony Pompliano?

  Same.

• 42:15Speaker 02

  Because they're going to require that regulations are, can be programmed into securities. I actually think they're going to require it, but that might be 20 years away for their required. So when I look at the landscape and you look at some of the players right now, my concern is, what if none of them are the ones that win? What if in five years, none of them exist and it's new entrants who actually capture that market? Because I think meaningful security issuance is going to be a slow and steady gradual kind of increase. And I don't know that any of the existing entities are the winners. So it's a little bit like, if you wanted to invest in Facebook in 1996, well, it wouldn't be born for eight more years. And the startups you would have invested in all failed. All the social media startups prior to 2000 failed. So you had the right thesis, the right idea, the right long-term vision, you were so early, the winner didn't exist. That's a serious concern for a crypto investor.

• 42:59Anthony Pompliano?

  The search engines, same thing.

• 43:02Speaker 02

  Totally.

• 43:03Anthony Pompliano?

  Right. Is, what was it, 22nd, 23rd one, I think, Google, that if you had literally invested in the first 15.

• 43:10Speaker 02

  Yeah.

• 43:11Anthony Pompliano?

  You, you still struck out.

• 43:13Speaker 02

  It's tough. So, so, so how do you solve that as an investor? You can take the VC approach and kind of scatter shot, you know, so you, you have a portfolio of 25, you know, plays and, and you're hoping one or two of them are big winners. You can try to be an active trader who kind of responds in real time. So you're not going to catch Google in its seed stage, maybe you wait till it's exchange listed, but, um, so I'll tell you a big thing, I spent a lot of time trying to think about, if something kills Bitcoin, what will it look like? Because here's one way to think about investing in crypto. I'm actually, I'm not recommending this as a strategy, this isn't quite what I do, but I actually think it's not like a terrible base framework, which is, okay, I'm going to have most of my crypto money in Bitcoin as, as kind of the market leader with also

• 43:55Speaker 02

  probably air quotes, the safest, not saying it's safe, but probably safer than most. And then, I'm so confident that crypto is going to conquer the world, I want a non-trivial amount of my net worth in it, that's really a bet I want to make. But I know that Bitcoin isn't 100% to win. So I'm not going to invest in, this is all hypothetical by the way. This is not how I invest. But you can say, I'm not going to invest in tangential use cases like decentralized file storage, decentralized computing, decentralized whatever. There's going to be value there, but I'm just not going to pay attention. I'm not spending all my time diligencing those. So I'm going to be in Bitcoin and I'm going to make tiny, tiny bets early in the things that I think might credibly kill Bitcoin. And so maybe I'm 90% in Bitcoin, 10% over time, you know, 0.2% in each one, these things that could kill Bitcoin. So the idea there is you're probably going to underperform Bitcoin.

• 44:40Speaker 02

  That 10% is probably going to go to zero. But if Bitcoin goes up 100x, I don't care. I'm very happy making 90x on my money instead of 100x. The worst scenario is you're right on the thesis crypto conquers the world and you lose your money because you weren't in the thing that wins. So you don't want to stupidly diversify. That's not a reason to just throw your money into things that will go to zero because they're broken. But it does make it sensible to kind of focus on that. If you have a clear thesis that there's going to be something like a winner take all and you're very confident crypto is going to conquer the world, then think in terms of what does the winner have to look like almost?

• 45:09Anthony Pompliano?

  How would an index type strategy fit into that?

• 45:13Speaker 02

  This is tough. So I'm a big fan of passive indexing, which sounds weird as an active manager who is financially incentivized to say the opposite. But I mean, I want financial markets to serve people. Like the issue in crypto, so my first job at Susquehanna, actually not quite my first, but a year in was to profit off of ETFs that held commodities in a very mechanical way.

• 45:37Anthony Pompliano?

  Okay.

• 45:38Speaker 02

  USO is a commodity that is an ETF, exchange traded fund. It trades like an equity and it holds crude oil and it holds crude oil futures. And investors in that passively just get to hold USO. And what the ETF does is every month it rolls from holding the first month futures to the second month futures. And so my job was to basically buy the second month futures before the ETF and then sell right after. That was like one of 50 trading strategies, but that was one thing. It was wildly profitable in 2007, 2006 through 2008 until basically every other trader in the world figured it out. So if you invested in USO, You underperformed crude oil because of people like me, because of traders who took advantage of this bad index construction.

• 46:19Speaker 02

  So the issue here is that every index is gamable to greater or lesser degree. A really well-constructed index will have very minimal slippage. Traders won't be able to make much money off it. A poorly constructed index is a playground for traders who will just... Like, I gotta tell you, as an active manager, I can't wait for there to be huge money flowing into indexes because I'm gonna wreck them.

• 46:39Anthony Pompliano?

  But explain that more.

• 46:42Speaker 02

  Yeah, and let me say, by the way, I don't want retail to get wrecked, so I'm actually going to actively advise every index on what it is they're doing wrong. Like, I'm gonna try to actually advise and warn them not to do things that would allow me and other traders to take advantage.

• 46:56Anthony Pompliano?

  It's like Ari Paul, the white hat trader.

• 46:58Speaker 02

  I'm not gonna say that, I'm not gonna pretend that I'm doing good. It's just, the point is, the goal is, I would like no one to get wrecked, like genuinely. But if there's an index that's gonna get wrecked, that's kind of my fiduciary obligation and job to find trading opportunities. So, I'm sorry, what was the question of how? How you... Gotcha. So let me give you an example. So let's say you do a top-five index, and you have a very illiquid coin that on very little volume, it's currently, let's say, the 30th coin. I can make it the fifth biggest coin. Let's say, let me give you an example. You say you're gonna make an index of top-five coins, and you're gonna calculate that based on CoinMarketCap.com at midnight at the end of the month. So, let's say there's someone in Estonia who's a market manipulator, and what they

• 47:41Speaker 02

  do is they take the 30th biggest coin, they take Bitconnect, and in that one-minute period, they manipulate the price up. CoinMarketCap reports it as the fifth-largest coin. You, as the index, now have to buy that coin, and you have to buy it at this massively inflated market cap. The next day, the thing falls 80%. At the end of that month, you then sell it. Rinse and repeat. Every month, you would put massive money into Bitconnect, and at the end of every month, you would sell after you've lost 90%. Very easy to see that happening. Now, that's kind of a stylized case. That's really extreme. But that exact thing is almost guaranteed.

• 48:11Anthony Pompliano?

  How does an index prevent that?

• 48:13Speaker 02

  So there's no perfect solution. A few things. One, people, this sounds weird, but actually having human discretion, I think, is part of the solution. Any set of really clearly defined rules is gamable. So this is true with the S and P 500, with the CME futures. There's always a committee that has the ability to overrule. So in the event of really clear market manipulation, or let's say it's defined as coremarketcap.com and CoinMarketCap is hacked, you want there to be a human who can say, you know what, maybe DentaCoin is not the biggest coin in the world. So having some element of human discretion to overrule when there's clear market manipulation, or just clear failures in whatever the system is, having very, very gradual rebalancing. So if you have a one-minute window to define

• 48:55Speaker 02

  when you rebalance the index, that's very gamable. If instead you make it a, if you make it based on the price that is a time-weighted average over five days, far harder to manipulate, much more expensive to manipulate. Those are the biggest. And then there's execution. So if you're rebalancing on a day, that's easy to game. If you rebalance averaged over time, averaged over a week. So the ultimate here would be continuous rebalancing. So if you say, we are going to continuously redefine what's in our index and continuously trade to rebalance, that's very hard to game. It's also harder to execute. It's more expensive. You're going to have to charge higher management fees. But that's probably the thing I, as a trader, would look at and be like, I don't know what to do with this.

• 49:32Anthony Pompliano?

  How does crypto perform during a global recession? So we've seen crypto do incredibly well from a return standpoint, even with the big drawdowns through what's been the longest bull run in the equity market ever. How do you think it performs? Or how would you, from a mental framework, evaluate how it will perform during some sort of economic retraction or recession?

• 49:58Speaker 02

  So I think it entirely depends on the nature of the drawdown recession. Now, the vast majority of equity sell offs in recessions are deflationary in nature, and that that probably is a safe assumption that that will generally be true going forward. In a deflationary recession, crypto sells off. There's no reason why it wouldn't. It's a risk asset. In deflation, you actually, that means the dollar is gaining value. Now, I think that inflationary recessions are far more likely over the next 20 years than they've ever been in the past. We have unprecedented debt. We have unprecedented money printing. We've had very, very, I would argue artificially low inflation over the last decade in the face of massive money printing for a lot of reasons, including tech advancement and outsourcing of labor to developed markets where there's very, very cheap labor who

• 50:43Speaker 02

  basically export deflation. So all these reasons, I think an inflationary equity sell off is more likely than usual. Maybe it's 50/50 or 70%. In that scenario, crypto potentially does very well. So Ray Dalio is the founder of Bridgewater, one of the biggest hedge funds in the world. He's viewed as one of the best investors of all time. He's up there with Warren Buffett. He's been making the rounds recently, saying that he thinks the US dollar will lose global reserve status, or at least have that publicly threatened in about two years.

• 51:11Anthony Pompliano?

  That is so wild for a majority of Americans to think about.

• 51:16Speaker 02

  Yeah, it's weird.

• 51:19Anthony Pompliano?

  And I'm not saying he's wrong, right? I'm not saying he's right or wrong. I'm just saying that idea that the US dollar is a global reserve currency could be threatened in 24 months is incomprehensible to majority of Americans.

• 51:31Speaker 02

  Totally. Well, I think most Americans frankly don't even know what that means. I don't mean that as an insult.

• 51:36Anthony Pompliano?

  Absolutely, completely agree.

• 51:37Speaker 02

  I think they don't, like, what does that mean in a very raw, like, average person sense? It means that, like, most people, if they're tourists and they travel anywhere, their US dollars are good.

• 51:49Speaker 02

  We've actually seen, but like that story among macroeconomic, among global macro hedge fund managers, among macroeconomists is not at all surprising. I think, here's the psychology right now. People have been saying this for 10 years, to the point that it ceases to feel real. But we've had data points for 10 years. It just, these things often take a really long time, and so people stop saying it. So if you were an economist who was predicting this 10 years ago, and 8 years ago, and 6 years ago, eventually you give up, because you've just been wrong. I actually wrote an essay about this, I think in 2009, about how I thought it would happen in about 4 years. And at some point, you just stop writing about it, because like, you know, you don't want to be the guy who cried wolf every year, right? So Dalio, this is the first time he's ever said it, in a kind of a concrete way. He seems very thoughtful about the timeline and the triggers. We see tons of data points

• 52:32Speaker 02

  on this. So China is very actively trying to make this happen. So they have bilateral trade deals with Russia, with Japan. So it's not even just, it's not like just the evil axis countries that we think of. Japan is pushing hard, which is frankly, a little bit weird to me. And I'm not really, like, I used to be much more up to date on global macro, but it's weird, because they own a massive amount of US debt, so I'm not sure what their incentives are. But they've entered bilateral trade deals that are basically international trade not denominated in US dollars, crude oil being denominated in gold. There's a lot of these data points around the world of people making this happen. And then you have the geopolitics of the Trump administration using, here's a good line, the Treasury Department, no, sorry, the SWIFT system is the military wing of the US Treasury Department.

• 53:12Anthony Pompliano?

  [laughing]

• 53:13Speaker 02

  So if we don't like a country, we cut them out of the global banking system. We've done that with Iran, we did that with North Korea, we, I think we did it with Venezuela.

• 53:23Anthony Pompliano?

  And it is wrapped in the bow of sanctions, right? You ever seen, I can't remember if it's Kevin Hart or Chris Rock, but they talk about insurgents, right? When we go to war, right?

• 53:36Speaker 02

  Oh, yeah.

• 53:36Anthony Pompliano?

  But like, no one's like, oh, we're gonna go kill humans, right? There was like, oh, we're gonna kill insurgents. And everyone's like, I don't know, insurgents, fine, kill them all. Like, it's the way, the vernacular we use actually dehumanizes it. Same thing with sanctions, right? Like, oh, you're gonna apply sanctions? I don't know what that is. Sure, knock yourself out, put sanctions on them.

• 53:54Speaker 02

  Right, right. If we phrase it as, we are going to turn off their money. Very different, far scarier. And yeah, and there's a, I mean, it's very real. So that like the SWIFT system, it's so first, if anyone listening to this, if you try to Google search the SWIFT system and actually understand how it works with public information, it's remarkably difficult. It's actually a very secretive, air quotes, kind of process. And I say secretive, like, that's kind of literally true. There's remarkably little that's public about how it actually works. I love diving into trying to figure out actual axes of power. So for example, the internet, I think, is kind of owned and controlled by the US. And there's some data points. So ICANN, which is the literally, they actually control domain name registration. It's a company based

• 54:39Speaker 02

  in California. They fall under California laws. But they actually used to be entirely US-owned, and then they were like equity ownership was transferred to an international consortium that's a nonprofit. And so like I had a debate, like, like, should we think of it as US-owned? Because it, you know, it's like the United Nations is on US soil, but you know, it's probably not US-controlled. SWIFT, I'm actually not sure who really controls it. So the US certainly has massive power there. And probably the US has access to every single transaction that flows through the network. So there've been a few lawsuits, including between countries involving the US and the EU over SWIFT spying. So the US has actually got in trouble for getting caught for spying on European countries transferring money between each other.

• 55:17Anthony Pompliano?

  Interesting.

• 55:18Speaker 02

  But exactly how much control the US has over SWIFT, I don't know. Is it like soft power, we just convince our European allies? But the point is, if you're almost anyone, it's a little bit concerning. And if that weapon starts getting wielded more frequently, if it becomes almost a common thing, that, oh, the US is going to disconnect a country from global money. Massive incentive, massive reason for those countries to start thinking about cryptocurrency.

• 55:41Anthony Pompliano?

  For sure. Before we wrap up, a quick fire of questions, and then we'll end it. I always let everyone ask me one question. What is the most important company in crypto other than Block Tower right now?

• 55:54Speaker 02

  I would call this one of the least important. The devs really do the important work.

• 56:00Speaker 02

  Oh, what is the most? I'll give a shout out to Lightning Labs, which is one of the, I don't want to insult any of the other Lightning companies because there's plenty of people doing great work, but Elizabeth Stark runs the company. They're building the Lightning Network on top of Bitcoin, which is so critical for Bitcoin to achieve consumer adoption. And what's great about Lightning is they've partnered with Square, who are really consumer people. So the Lightning Labs team has some world-class engineers, but I don't know if they have world-class UI developers. Maybe they do. I'm not trying to insult them. But then you bring on Square and it's like, wow, these guys really know how to make a consumer product. So I think when we talk about what crypto might achieve mass consumer adoption next year or two, it's not the sci-fi use cases. It's not DAOs.

• 56:44Speaker 02

  That might be happen in 10 years. It's the simple vision that Satoshi had. It's just can we actually use this thing for remittance and P2P cash? And Lightning is such a critical part of that.

• 56:52Anthony Pompliano?

  Awesome. What's the most controversial thought that you have about crypto?

• 57:00Speaker 02

  You know, it's such a fractured community. It really depends on who I'm talking to. Saying that Bitcoin is 50/50 to die is certainly very contentious to some people. And it's funny, when talking to non-crypto people, they're like, you're that bullish? You really think the first crypto and first technology is 50% to live for 20 years? Oh, here's one. Here's one. Proof of work as a consensus mechanism may be basically proven to not work, to be maybe debunked. So it has all sorts of game theory vulnerabilities, many of which Satoshi explored. You have things like Eclipse attacks and, you know, we're seeing SV and ABC play out in real time now. And what's scary about that battle is the low dollar cost. So the cost of doing a constant threat of a

• 57:42Speaker 02

  reorganization attack where you basically erase an indefinite amount of transactions and replace the Bitcoin ledger with empty blocks or blocks of your choice, it's actually not expensive. It's almost shockingly cheap. And that's for SV and ABC. For Bitcoin, it's something like roughly 10x the price to do the same attack. So we're not at state-level prices yet. We're at not even billionaire prices yet. We're at like, okay, you got $500 million and you want to erase a day of Bitcoin transactions? You can do that. How many times does that have to happen before people say, you know, proof of work, the idea that the ledger is immutable? Are we really going to believe that after the ledger is mutated five times? Probably not. We probably can't say that anymore, right? So there's some chance, this is not a black and white thing. It's not an engineering question. These are well-known game theory attacks.

• 58:26Speaker 02

  The question is really, how does that plug into human psychology, to business, to economics, to vested interests? Here's a very specific example, or a critical point of this. Before shorting was possible in size, a rational economic actor would never do a reorganization attack on a blockchain. So 51% attacks, the defense against it could be mining diversification, or it could just be rational economic actors. If Bitmain had 100% of Bitcoin hash power, their incentive is to be a good actor, because they have this massive investment in fixed ACIT cost. So the fact that they have 100% shouldn't scare you, as long as they're a rational economic actor who can't short. The minute you have the ability to shorten great, great size, a rational economic actor who owns 100% of Bitcoin hash power may destroy Bitcoin. And that could mean also a cartel.

• 59:10Speaker 02

  So if you have five entities that each control 15%, they are actually potentially incentivized to do these game theory attacks of proof of work.

• 59:17Anthony Pompliano?

  Yep.

• 59:18Speaker 02

  Not a prediction, just saying, that's certainly a contentious view to say, guys, this isn't like, you know, let me rephrase it this way. It's not that we're, I'm not claiming that we're not sure proof of work is sound. I'm making a stronger claim. We know for certain that under certain conditions that don't seem that extreme, proof of work is not sound, as it stands today. So the question is just, how realistic are those edge cases?

• 59:42Anthony Pompliano?

  Got it. I think that is fairly controversial. It's pretty good. What's your favorite book, or the most important book you think people should read?

• 59:50Speaker 02

  Oh, I'd recommend The Sovereign Individual. I love that it starts with a horrible prediction about the Y2K bug, which just sets the stage. Because there are books like that that are incredibly convincing. You read them and I'm like, wow, they just told me what the next 30 years are going to look like. And of course, No One Is a Crystal Ball. So it starts with a horrible prediction, which is just wonderful. And then it's incredibly thought-provoking about the interrelationship between politics, military power, and economics long-term. And it talks about how the average size of nation-states is likely to fall, that instead of being towards, that currently, I was a polysem major, so I love this stuff. We have been moving towards a world where the thought was we're moving towards like one global democracy, like more towards, you know, global power and more democracy.

• 1:00:32Speaker 02

  And this makes the opposite argument that, and which is my intuition, that giant democracies just don't work and don't make sense. They're tyranny and majority. Or you have minority representation and then they're just gridlock. Instead, the idea is that people will vote with their feet. You'll have a lot of little nation-states and instead of changing your country, maybe they're all dictatorships, but you get to choose which one you want to live in. And you get to choose your rules in your community and it's democracy via that means. So really, really thought provoking.

• 1:00:58Anthony Pompliano?

  Let's admit that there are aliens. This is my one non-crypto question. Every time they're depicted, they're always depicted as human comparables in sci-fi, etc. What are the odds that there are alien animals or alien pets alongside those human comparable aliens? Or is there just one single species of aliens?

• 1:01:25Speaker 02

  Oh, man. I guess this, I would say pretty high, but I'm probably just projecting. I think whenever we try to imagine any alien life, we have to assume that their consciousness is in some way comparable to ours. And humans, we're, we are social animals that demand companionship. So my assumption is that other intelligent life would, and I know that's an assumption, but, and then from companionship, I think you get something like pets.

• 1:01:50Anthony Pompliano?

  I think it's fair. I'm always fascinated. The reason why I ask this question, I never said this before, but the reason why I ask this question is not because I actually care what the answer is. I'm fascinated by the way people back into their answer, right? What's the logic behind it? And I think that's a very rational way to think about why there would be pets. All right. What one question do you have for me?

• 1:02:12Anthony Pompliano?

  No question? Great.

• 1:02:13Speaker 02

  No, no, no, no, no. I was just thinking through a few. I'll pick the one. So you're known for being a cheerleader of the securitization movement and process and, you know, seeing that vision. What do you think, let's say, let's say that I'm fortunate enough to be invited back on your podcast in two years. What does the securitized token landscape look like at that point?

• 1:02:36Anthony Pompliano?

  If you asked me this 12 months ago, I'd been like, oh, man, there's gonna be tons of volume, liquidity, there's gonna be all these assets, etc. Like, my one mistake, or one of many mistakes in thinking through this stuff, is the timeframe. So, you know, Bill Gates quote of, "We overestimate one year and underestimate in 10 years," I think is, like, perfect for what people in 2017 were looking at the tokenized securities. I tend to agree with you that regulators at some point are going to mandate it. So, I wrote, I think it was either earlier this year in 18 or end of 17, that, you know, SEC's gonna mandate this thing. Everyone's like, "You're crazy. Why would they ever do that?" blah, blah, whatever. And my thought at the time was, you know, XML, I think they mandated in like 06, 07.

• 1:03:22Anthony Pompliano?

  The use of Edgar, like, 92, 93, you know, sometime in there. Like, they're actually pretty far ahead of a lot of this technology in getting people to use this stuff. And so, to your point, like, the ability to program the law into code, which then takes the regulators from being reactive, right? So, who are you guys? What did you do that's illegal? Let's build a case, spend all this time, money, and resources, and then go and force on you and, you know, convict you. It's really expensive, time-consuming, etc. If they can just prevent all of that and be proactive by having the code prevent us from making that, you know, illegal or non-compliant trade, that's really interesting to them. Right now, they gotta trust the code. There, you know, there's a whole bunch of things that are the inputs or assumptions going into that. So, I tend to think that will be a big driver of this.

• 1:04:06Anthony Pompliano?

  But before you get there, I think you gotta see some data points, some success stories around, you know, the market actually wants this, right? And so, you gotta see some issuers do it. You gotta see some investors that are on the other end of that trade. We're starting to see it, but I've changed my mind a little bit from, I used to think it was all gonna be equity-based. I'm becoming much, much more bullish on the bond market, on blockchains, these blockchain bonds or smart bonds. And it's this kind of intersection of, the current bond market is horribly inefficient, right? In terms of, it's super expensive, like, I think it over, I think the stat is over 80% of US bonds are traded over the phone or via chat service.

• 1:04:45Anthony Pompliano?

  It's 2018, right? Right? That's pretty egregious. It's a huge market. So US bonds, I think, is like 41 trillion international. We add in, you know, get to the global number. It's like over 120 trillion or something. And then the third thing is it's very, very easy to take the issuance of a bond and put it onto a blockchain and make it a digitally native asset. So with equities, there's all sorts of edge cases and kind of complexities that bonds don't have that will actually, in my opinion, make it easier to tokenize the bonds and ensure cheaper, faster, more secure, kind of less manipulation, et cetera, than, let's say, the equity markets.

• 1:05:29Anthony Pompliano?

  And then the last piece that kind of ties some of those all together is just the current equity market, like public equity market, actually works pretty well. Right? If you and I want to go buy equities, like we can do that. We know how to do that. Maybe we don't like the fact that it's got two-day settlement time or whatever, but it serves our purpose. And yes, there are people in international jurisdictions that maybe have a hard time buying public equities, et cetera. But for the most part, it serves its purpose for a majority of the people who want to participate in that market. I can't say the same thing about bonds, right? Because there's just higher barriers to entry. There's much more kind of

• 1:06:06Anthony Pompliano?

  it's less education. There's just a bunch of issues there. And so it feels to me, the more that I kind of dig into this stuff, that bond market is going to become tokenized, digitized, whatever you want to call it, faster. And it actually is where the institutional capital is likely to flow first. If you were to tokenize both assets, I actually think that most institutional capital would go more towards that fixed income type stuff.

• 1:06:31Anthony Pompliano?

  That's all I got for you.

• 1:06:31Speaker 02

  It's a great answer. Thanks for joining the podcast.

• 1:06:36Anthony Pompliano?

  I usually get questions like, how do I go viral on Twitter and stuff?

• 1:06:42Anthony Pompliano?

  But no, I think.

• 1:06:43Speaker 02

  No, well, I learned something from that. So I'm glad I asked a more, you know, I don't know, meaningful question than Twitter.

• 1:06:51Anthony Pompliano?

  Absolutely. All right, man. Thank you so much for doing this. We'll have to do this periodically because I think you've got a unique view on the world. Thanks.

• 1:06:57Speaker 02

  Thanks for inviting me.

• 1:07:00Anthony Pompliano?

  All right, you reached the end of the podcast. Congratulations. I appreciate you listening all the way to the end. You deserve a trophy. But before I hand out the virtual trophies, remember to go visit blockFi.com/pomp. They're the crypto lending leader in the US. They do it in 45 states, interest rates as low as 8%. And you can use the US dollars funded directly to your bank account to do whatever you want. You should definitely go visit blockFi.com/pomp. You know you want to do it, so just do it. BlockFi.com/pomp.

• 1:07:31Anthony Pompliano?

  Before I let you go, though, I wanted to mention Draper University one more time. Remember, Tim Draper is one of the most legendary venture capitalists in the world. He's funded many of the biggest companies that you've heard of. Today, they have two separate programs around blockchain at Draper University. The first is for entrepreneurs looking to get their idea off the ground, who can attend their pre-accelerator program. And the second is a week-long intensive program for corporate executives looking to learn about blockchain and crypto. You can check out draperuniversity.com and apply there. The deadline is approaching fast because the programs are in January and February. So definitely check out draperuniversity.com. Again, that's draperuniversity.com. And one more time, draperuniversity.com, to make sure that you can apply. Thanks so much, and I'll see you next time.

• 1:08:18Anthony Pompliano?

  Hey, everyone. Pop here. If you liked this episode of Off the Chain and want to help us take crypto to the top of the Apple, Spotify, and other podcast charts, please do us a favor and rate, review, and subscribe. To review, simply go to the Off the Chain homepage, scroll down until you see the five blank stars. Taking 15 seconds to fill those stars in and leave a quick review goes a long way in helping us take the entire crypto ecosystem to the top of the charts. I appreciate you listening and see you next time on Off the Chain.