John Pfeffer - Adapt and Evolve - [Invest Like the Best, EP. 262]

My guest today is entrepreneur and investor, John Pfeffer. John was a partner at private equity firm KKR in the 2000s, Chairman of leading French IT company Groupe Allium in the 90s, and now invests his own money through his private family office, Pfeffer Capital. John is one of the smartest investors I know, and our conversation spans all of John’s experience and investment ideas. We discuss the difference between value creation and wealth creation, why John has made such a big bet on one asset, and why adaptation is more important than ever. I hope you enjoy this conversation as much as I did. For the full show notes, transcript, and links to mentioned content, check out the episode page here. ----- This episode is brought to you by Tegus. Tegus has built the most extensive primary information platform available for investors. With Tegus, you can learn everything you’d want to know about a company in an on-demand digital platform. Investors share their expert calls, allowing others to instantly access more than 20,000 calls on Affirm, Teladoc, Roblox, or almost any company of interest. All you have to do is log in. Visit tegus.co/patrick to learn more. ----- This episode is brought to you by Lemon.io. The team at Lemon.io has built a network of Eastern European developers ready to pair with fast-growing startups. We have faced challenges hiring engineering talent for various projects and Lemon.io offered developers for one-off projects, developers for full start to finish product development, or developers that could be add-ons to the existing team. Check out lemon.io/patrick to learn more. ----- Invest Like the Best is a property of Colossus, LLC. For more episodes of Invest Like the Best, visit joincolossus.com/episodes. Past guests include Tobi Lutke, Kevin Systrom, Mike Krieger, John Collison, Kat Cole, Marc Andreessen, Matthew Ball, Bill Gurley, Anu Hariharan, Ben Thompson, and many more. Stay up to date on all our podcasts by signing up to Colossus Weekly, our quick dive every Sunday highlighting the top business and investing concepts from our podcasts and the best of what we read that week. Sign up here. Follow us on Twitter: @patrick_oshag | @JoinColossus Show Notes [00:03:08] - [First question] - John’s background and the experiences that shaped his worldview and sparked his curiosity [00:07:34] - Aspiring to grow with a lack of inertia [00:10:31] - Why he invests primarily in technology and technology dependant businesses [00:15:22] - What it’s felt like being a tech investor from 2011 leading up to today [00:19:26] - How he defines good and bad business [00:21:24] - Why good businesses don’t often have technology disruption risks [00:22:26] - An (Institutional) Investor’s Take on Cryptoassets; key points from his paper [00:35:28] - What else is interesting in the crypto space and potentially strong business models that exist outside of Bitcoin [00:48:46] - How capital has changed over time and what makes capital efficiency or formation superior [00:51:51] - Value creation and why a shift in value can affect your returns [01:01:12] - Whether or not crypto and the founding protocols will fade out of the public eye [01:11:52] - A consensus on store of value in crypto and how it could change [01:18:03] - Why he is so heavily allocated to Bitcoin compared to other tokens [01:25:19] - General take on the nature of buying and selling capital and European markets [01:35:28] - The interconnectedness of the globe and the future of globalism [01:39:46] - Why he doesn’t ask people where they’re from and how he prefers to get to know people that can sometimes be unorthodox [01:41:59] - Market index investing and why it may not be the best strategy going forward [01:47:36] - The kindest thing anyone has ever done for him

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

• 0:00Patrick O'Shaughnessy?

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• 0:43Patrick O'Shaughnessy?

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• 1:26Patrick O'Shaughnessy?

  $300 per call, not the $1,000 or more that others charge. If you're curious about Teegus, call the top performing investment manager you can think of. They're probably already a Teegus customer and they'll point you in the right direction because customers, myself included, love Teegus. Visit tegus.co/patrick to learn more. This episode is brought to you by lemon.io. The team at lemon.io has built a network of Eastern European developers, ready to pair with fast-growing startups. We have faced challenges hiring engineering talent for various projects and lemon.io offered developers for one-off projects, developers for full start-to-finish product development, or developers that could be add-ons to an existing team. Check out lemon.io/patrick to learn more.

• 2:11Patrick O'Shaughnessy?

  Hello and welcome, everyone. I'm Patrick O'Shaughnessy and this is Invest Like the Best. This show is an open-ended exploration of markets, ideas, stories, and strategies that will help you better invest both your time and your money. Invest Like the Best is part of the Colossus family of podcasts, and you can access all our podcasts, including edited transcripts, show notes, and other resources to keep learning at joincolossus.com.

• 2:38Speaker 01

  Patrick O'Shaughnessy is the CEO of O'Shaughnessy Asset Management. All opinions expressed by Patrick and podcast guests are solely their own opinions and do not reflect the opinion of O'Shaughnessy Asset Management. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of O'Shaughnessy Asset Management may maintain positions in the securities discussed in this podcast.

• 3:03Patrick O'Shaughnessy?

  My guest today is entrepreneur and investor John Pfeffer. John was a partner at private equity firm KKR in the 2000s, chairman of the leading French IT company Group Allium in the 90s, and now invests his own money through his private family office, Pfeffer Capital. John is one of the smartest investors that I know, and our conversation spans all John's experiences and ideas. We discuss the difference between value creation and value capture, why John has made such a big bet on one asset, and why adaptation has become more important than ever. I hope you enjoy this conversation as much as I did with my friend, John Pfeffer.

• 3:40Patrick O'Shaughnessy?

  So, John, this is going to be a wide-ranging conversation. We had a really fun preparatory conversation last week, and I've been looking forward to it ever since. Because of your interesting, unique background, a completely open investing mandate, meaning you can invest in anything and do across the world, that understanding the lens through which you're coming at all this via some of your formative investing experiences would be a great place to start. Let's begin there. Maybe give the audience a thumbnail sketch of your background, and maybe do so, if you can, via what you view, looking back, as some of the formative investing experiences that formed your worldview and inform your curiosity about the world.

• 4:17Speaker 02

  Yeah, I've lived in ten countries, spent time in many more, but actually lived in ten different countries. You know, they did different industries. I was in the video industry in the nineteen eighties, the tech industry in the nineties, then private equity and in the two thousands. Now we're building a retail business of all things. And so obviously, living in different language bubbles, which tends to be what media information often structures around to some extent and perceptions of the same facts vary quite a lot when you do that. When you're consuming information in different languages and different countries and different perspectives and so forth. And then having changed networks successfully over my life.

• 5:02Speaker 02

  When you say changing industries, that's one thing, but also what that does mean is I'll decide to do something, to build a business in something, and I'll go build it, and I'll build this network, and I'll build a reputation and be somebody in that space. And then make the determination that it's time to sell, or time to exit, or time to move on, or that there's something more interesting or whatever, and do that, and then go off and do it all over again, create an entirely new network. And every time I do it, my prior network thinks I've completely lost the plot, usually for years, and then maybe as much as ten years later, say, five to ten years later, then you suddenly realize, oh, wait, I was really on to something. And of course,

• 5:43Speaker 02

  the new network doesn't know who I am. There's no context. I don't easily fit, epithetic type. And I don't understand why people put themselves in that position. I think it's the craziest thing that most people live their lives and have careers that it becomes this massive path dependency on what really was probably an almost nearly completely random thing of like where their first job was out of university. Maybe you chose your first job, you clearly didn't choose where you were born. I never get why people anchor so much around the one thing in their life or just about that they had zero control. But shifting away from that, my point about the changing networks is

• 6:26Speaker 02

  I have made these changes, and I think part of that's because I have very low need for status and security and social context. I'm happy to go and do my thing. When I was a teenager, backpacking and going different places and all of that, I had this game. Walk by and sort of glance inside of somebody's window or whatever, wherever I was in the world, and sort of go through this kind of thing and say, well, I could be that person. And then like, kind of play that out and what that would mean, or I'd walk by and I, one of the things I realized is, let's say, you know, population of eight billion, you know, there's maybe only like a hundred thousand, maybe it's five hundred thousand people that I just really couldn't be. Physical reasons, or they're just so much smarter than I am, or something else, there's no way to replicate.

• 7:11Speaker 02

  And that sort of practice of doing that probably reflects in how I think as an investor in the fact that I try to be flexible and try to move on. And in fact, when I'm focused on pushing myself to improve, I think in terms of probabilities and updating probabilities as new information comes, as opposed to certainties or whatever. When I think about how to improve, it's how do I update my probabilities faster? And getting that balance right. I link that, of course, to this trying to be flexible and willing to change worlds and change environments based on what's going on. If you think about the extremes, if you never update, it's dogmatic ideology and so forth. Okay, so that's clearly not good. The extreme is everything that happens is updating your view of the world.

• 7:56Speaker 02

  You're always going to have a consensus view. I do think where I am is still on the margin, being faster to update will benefit me.

• 8:06Patrick O'Shaughnessy?

  It almost sounds like, I think of the fixed versus growth mindset as almost like this is a third category that's an open mindset or something where inertia is this incredibly powerful force in all of our lives. And one of the distinguishing features of you is your literal physical movement between countries as part of your normal course of existing. You're certainly not fixed, but you're also not just purely growth on one trajectory. You can grow with inertia. And what's distinguished you is you're building something. It's not just in the wind, constantly changing your view, but you just have this very open lack of inertia that's quite different than just about any investor that I've encountered. Is that a fair summary?

• 8:48Speaker 02

  I mean, let's put it this way, I hope that I lack inertia, whether it's less than others is, I'll let you judge, but I aspire to that. And for all kinds of reasons, one is just because it's fun, to be honest, and interesting. And the other one is that, let's start from the premise that a long time ago, even though it might have been exponential, the rate of change relative to human lifespan was incredibly slow. So the dominant strategy would have been to conform and collaborate. The kinds of things that you would select for would be, obviously, people who can work together, but also then tend to conform, because it was really low payoff, high risk to suddenly go out

• 9:31Speaker 02

  and do something different if progress was relatively slow compared to human lifespan. Now, of course, we're in a part of the exponential, you know, part of the curve, where change is very, very fast and steep relative to human lifespan. And so it seems to me that the dominant survivor's strategy shifts to being adaptable. And collaboration remains super important always, but it's more adaptable than conformist. And that might mean completely changing sectors. And there's clearly hugely successful people who say the opposite, like Bill Gates, who famously says, look, you want to do one thing and do it well and stick with it and all of that. And obviously, he's done better than I have, so fair enough. But the ability to adapt is the dominant strategy.

• 10:16Speaker 02

  And it's interesting that when I look at our portfolio and all the companies that we invest in, the funds that we invest in, the percentage of founders, managers, whatever, who are immigrants is insanely high. I mean, obviously, that's an emergent thing, it's not something that we think about. But I think that one of the reasons, probably somewhat emergent, is that it kind of makes sense that people who've adapted or been forced to adapt or chosen to adapt at some very profound, if at a personal level, are probably pretty good at creating new things. They're pretty well suited to what the world is like today and more and more every year,

• 10:59Speaker 02

  because it's just going to get faster and steeper.

• 11:02Patrick O'Shaughnessy?

  As you think about the unique background that you've had then leading up through to today. So you mentioned video, then technology, then private equity. Now you're building a supermarket chain in Europe is one of the several things that you and your family are working on. But a huge investor in technology, we're going to talk a little about cryptocurrency. Like you've had a remarkable set of experiences. What is your way of thinking through why technology and investing in technology dependent businesses or focused businesses? Is the sort of universal theme of the portfolio, maybe the supermarket set to the side, we'll talk about that as well. But my understanding is the vast majority of the assets in your family's portfolio are technology focused in some way.

• 11:41Patrick O'Shaughnessy?

  So just talk us through this as a big idea juxtaposed against this 10 countries, five industries, seven networks. Like you've done all this stuff, but you are, I think today focused on one big theme. So walk us through that.

• 11:54Speaker 02

  So I mentioned I was in private equity. So I was a partner at KKR and then decided to do something new, but I just said, you know, it's time to do something new, but what? And I had this intuition. Okay. So I've been in tech in the nineties in France for 10 years, the intervening decade. I'd been in private equity, you know, leveraged buyouts and stuff like that, you know, and which is fascinating, fascinating and an amazing investment product. But again, I'm not vocational about anything, so I didn't do it because of vocationals, because I thought there was a great opportunity post.com bubble in private equity because of falling interest rates and shift back to cash flow. And that turned out to be right. And, you know, so I came at it as just another product and another business.

• 12:37Speaker 02

  And after a decade, it was like, now what's going to happen next? I need to kind of reframe and part of reframing is one, it is to kind of force stuff to really step away from your prior frame. Cause your prior frame is going to tend to dominate, can be very hard. The people you know, they're sort of like your Twitter feed. I mean, all kinds of stuff is sticky. And so you've got to decisively move away at the same time, say, what am I going to get? So I had stumbled across, I'd read a New York Times article about this thing called the Singularity University that Ray Kurzweil and Peter Diamandis had put together. So this was in Q1 2011. And I said, you know what? I'm going to go do that. And it just happened coincidentally

• 13:18Speaker 02

  that the opening dinner of the week-long executive program at the University was the evening of my last day at KKR. So I literally handed in my badge or whatever the heck it was and walked into this university dinner. And like the most binary, kind of very clear, leaving that, now what's this? It's been a week immersed in and understand exponential technologies and where they're heading and kind of how they relate and all of that. And rather interestingly, first time I heard about Bitcoin and so forth. And I just thought, this is right. The root is Wright's law, which is the experience curve.

• 13:58Speaker 02

  This relationship between exponentially declining cost of production every time you double the cumulative units that you produce of something. And in Moore's law being a derivative of that, a lot of things are driven by Moore's law, but also other examples of this. That's such a powerful thing that it overwhelms kind of anything else in terms of potential investment drivers. And of course, within that, there's things like your software, which again, you kind of see threads of that through a lot of different tech verticals. Just have this phenomenal economics, insane sort of zero marginal cost. And then to kind of realizing that we're actually at a unique time in human history. And it just seems to me that notwithstanding the fact that sure market values get out of whack and

• 14:41Speaker 02

  whether or not things are overvalued or undervalued currently, or the fact that in hindsight, they were at least temporarily overvalued in the late nineties or whatever. This is the overwhelming thing. The other thing is, by the way, there's a corollary, which is, given a moment, you think that maybe there's too much of a consensus around that and valuations are too high. What are you going to do as an investor? You're going to invest in not tech? Ingenuity doesn't seem exciting to me. I had this sort of cheat code, which is that we're just investing our funds and therefore. We have an infinite investment horizon. When you stretch investment horizon to infinite or whatever,

• 15:22Speaker 02

  then a lot of things in an investing collapse and become quite simple. With a long enough investment horizon, risk is literally limited to just having to leave the game. You just worry about blow up. You say, well, okay, I don't want to be levered, or at least not much. I don't want to go short. And then all of a sudden, you sort of say, well, it's actually pretty easy. I want to be looking for things that maximize returns. I don't really care about vol. And that also probably tends to push me towards being a bit of a convexity junkie.

• 15:53Patrick O'Shaughnessy?

  Talk maybe through the experience since that first dinner at Singularity University through to today. What the experience has been like? Obviously, it's been an incredible run for if you just look at simple indexes for technology companies. So if you've been a technology investor in the last 10 years, it's been really hard to not do really, really well. We're going to talk less about valuations, more about the fundamentals behind all of this stuff. Because I just think it's more interesting, like you said, on an infinite horizon. What has it been like being a technology focused investor between that 2011 dinner? And today in early 2022? Just again, to set the stage for the forward looking part of our conversation. Maybe we can introduce your early experience with crypto.

• 16:35Patrick O'Shaughnessy?

  I want to talk about comparing crypto to businesses and the business models of crypto and things like that. What has it felt like? What has been the felt experience to you of being a technology investor since that dinner?

• 16:47Speaker 02

  Easy and hard, easy in the sense that the trends that I described a moment ago are such powerful tailwinds that some level, just doing almost anything, as you've said in the last decade, in that direction, has paid off in absolute relative terms. At the same time, it's hard. And it's hard in the sense that it's very much of a power law. The best investor is going to have massively higher returns than the second best, let alone the 10th or the 100th or the 1000th. So it's easy in the sense that it's easy to probably get up the initial part of the curve. And it gets, and the curve gets really, really steep. And it gets really, really, really hard to keep moving up the curve. But the rewards for that are extraordinary. Again, I'm an investor, so it's my sport.

• 17:32Speaker 02

  I think in terms of returns and measure in that way. There's always room to get better at it and there's a real reward for it. It just gets harder and harder. I think I'll link that back to my comment earlier, but I think of that a lot of it in terms of my ability to update my probabilities faster. When I look back at the last decade, I'd look back and say, well, good thing I focused in this way. But then I can also say, damn, that opportunity was sitting in front of me and I didn't take it. Or I was a bit slow or I should have been more focused on this or I should have gone even longer on this and that. And of course, it's a bit of hindsight and careful beating yourself up over that stuff.

• 18:14Speaker 02

  But I can identify that where I feel I've left opportunities on the table, it was because I just didn't update fast enough. And that's to me, like, the key thing for me to get a little bit higher up the curve is just training the muscle of updating faster. And then there's also just the fact that it's a lot to learn. You can't be an expert or anything. You have to pick your shots. And I think what that means is for me, given that I'm not investing, say, a fund that is saying to investors, we're going to do X. I'm sort of deliberately diversifying because that's our money. I want to be doing things that maybe I can't be an expert in and so forth. It's sort of picking and saying, well, where do I want to be an expert and where do I want to rely on others? And then how do I figure out the right people to rely on? And that in itself is a power of all.

• 18:59Patrick O'Shaughnessy?

  Does the who to rely on thing boil down to the same attribute of adaptability today? If you're allocating as an LP to someone's fund, is the primary feature in a team or a person that you're allocating to that ability to adapt to changing conditions?

• 19:14Speaker 02

  Let's put it this way, adaptability is destined to be a good feature of people that we trust in terms of managers of funds. And the reason I hesitate a little bit is there will be some cases where you naturally, especially in this space, need and want real domain specialists, like especially life sciences. You need somebody who's got a PhD because it's hard for that person to be, oh, and yes, I do this and oh, yes, I do that. And then it's my job to say, okay, at a portfolio level, I've got some people who I need to not be multi-tool in their approach and their expertise is essential. I'm going to have to be the person who says, well, how do we wait to that and so forth.

• 19:58Patrick O'Shaughnessy?

  I'd love to understand the lens of good business and bad business in just really simple terms, because I think these are some concepts that we can then start to apply as we get more and more specific here to different interest areas of yours and places that you put capital. Maybe just canonically describe what good business and bad business means to you against the backdrop of rights law and some of these other things that are true about the world. Just at a high level, define those two ideas for us.

• 20:24Speaker 02

  Typically, a good business has characteristics where it's growing, it benefits from sustainable barriers to entry, it probably not in a highly fragmented market, some degree of market concentration, it's not exposed to frequent technological disruption, it has comfortable margins, it's typically not very capital intensive, and as a consequence, has very good yields, returns on capital, and so, and pricing power in whatever it's doing. The bad business would be the not of all of that. It would be, well, it's not growing, there's technological disruption, quite thin margins, especially gross margins. I should have mentioned in the good businesses,

• 21:07Speaker 02

  maybe there's some kind of self-reinforcing effects like economies of scale or whatnot. And then again, bad businesses is typically capital intensive and those kinds of things. And so, generally speaking, investing in good business is better than investing in bad business. You know, obviously, you can try to say, well, I'm gonna invest in bad businesses but buy them so cheaply. I've learned that that's a really hard way to make money and maybe an easy way to not make money.

• 21:33Patrick O'Shaughnessy?

  How often is it clean? I mean, like, how often do you see something that's just like, oh, this is just one of those good businesses that ticks all those boxes versus has some of the bad features?

• 21:43Speaker 02

  There are things where you don't know, especially in the early tech and all of that, where you don't know yet. There's like two things. One is the is it or not this and this, and where does it kind of score on these different dimensions? The other one is how confident I am over time of where it will score.

• 21:56Patrick O'Shaughnessy?

  How do you square the focus on technology with the fact that good businesses tend to not have technology disruption risk associated with them? It seems like this catch 22, you could pick your part of tech, whether it's like database technology or something that for a long time, even still today, a lot of the same database companies dominate, but there's tons of new database technology companies coming out. How do you think about that weird conundrum?

• 22:17Speaker 02

  There was a fashion, which I totally didn't ever understand, I still don't understand, in like the mid 2000s in the private equity industry, they were buying Yellow Pages businesses. We knew it was there. It was kind of like, really? And so I think that the cases were just so blatantly obvious that there's real disruption risk that I think you just, you want to knock those out. Once you're in the world of saying, well, we have now competing technologies and maybe how long will this technology be a superior technology? At least you're in the right ballpark to begin with. And then, okay, you gotta take views and there's risk. But I think in the absolute, at least it felt that lens filters out a lot of things you clearly don't want to invest in.

• 22:58Patrick O'Shaughnessy?

  I'd love to apply these cool ideas to crypto. So I think those that are in the audience that are familiar with some of your thinking, many might have read this very famous paper that you wrote in 2017, I think is when it came out, which is sort of this institutional investors lens or view on Bitcoin and crypto. And maybe you could outline what the key points of that paper were. I think you still believe a lot of those same things about that world. But one of the things I've enjoyed talking to you about in the past is applying this idea of business models and the best quote unquote businesses that protocols themselves might represent. And that'll give us an excuse to talk about some of the specifics today. But before we do that, give us the sort of major points of that paper, which really made the rounds as one of the dominant thought pieces is back

• 23:43Patrick O'Shaughnessy?

  in 2017.

• 23:45Speaker 02

  So I actually was reintroduced to Bitcoin in 2016 by my friend, Vincenzo Casades. And he explained to me in a few minutes, then I kind of got it. I immediately said, great, this is a venture that I get it, will make this investment. And funnily, I remember at the time, because when I called the office, look, we're going to put X amount into Bitcoin. They were like, what? Look, this is a ready-fire aim investment. We can always sell it. We can always sell half. We can always buy more. Let's just do it and we'll see what happens. Then what happened? It started going up and this was in early 2017. A lot more buzz, of course, it was already two years after it launched, but about Ethereum and smart contracts. And then you started having ICOs and all of that. I said, wow, that's great. I bought some ETH and did a bunch of other stuff.

• 24:30Speaker 02

  And this was all going up. And I said, okay, well, now I really need to understand it. I realized that I really couldn't just read the stuff that was being published on the internet. And I couldn't take it at face value, whether it was poor quality or frankly, there was an agenda. That remains a constant issue, which is that in anything, but especially in crypto, I would always say, whenever you read something, first filter is, what does this person have to sell me? And then the answer is there's almost no content that isn't produced by someone who has something to sell, whether it's a fund or token or their own equity or whatever. And so I went back to like, so I'm going to read white papers and documentation and your homestead documentation of Ethereum and all this kind of stuff.

• 25:07Speaker 02

  And really, so I kept thinking about it from first principles, from an economics perspective and coming at it from the view of when you're investing in technology and venture, because of the convexity, of course, you're thinking as an optimist. You've got to be thinking in terms of this tech is going to work. Am I going to make money if I do this thing? If it works, of course, think a little bit about maybe why it might not work, but you don't want to be stuck there. You're not a bond investor. And so came at it from the perspective of saying, let's assume all this works. Where's value going to be captured? And there were two big central debates in 2017 that I focused a paper on, which were number one, this fat protocol thesis.

• 25:48Speaker 02

  And on the one hand, which is saying that, well, value will accrue to these utility tokens that are circulating a script in the protocols to do X, whether it's run smart contracts or store files or whatever. On the one hand, and then the other hand, there was this big debate about in terms of the money side of things, means of exchange, sort of store of value, the three functions of money, store of value, means of exchange and unit of account and kind of debate about how the importance of means of exchange. And that led to this block size war at Bitcoin and the forks and whatnot. And so a lot of my paper focused on that. I said, let's take a technologically optimistic view. Think about those two issues from an investor perspective. And acknowledged the fact there's other stuff.

• 26:30Speaker 02

  And I remember, it was roughly around that time that we made an early investment in St. Dapper Labs. NFTs, of course, that's a thing, but it's like a different thing. Let's set that aside in the paper and we can talk about it some more today. But those are the two key issues. And basically, my thesis on the former was to say, well, the really key breakthrough the Bitcoin made is obviously that you had built upon many, many prior attempts at creating digital money. And it managed for the first time to solve this problem of how do we create additional money without a trusted intermediary? And it did it through the Nakamoto consensus, which sort of solved this disenthe general problem of coordination under uncertainty, but also when you can't trust all the participants in the network. And it did it this incredible way.

• 27:13Speaker 02

  And all of a sudden, we have digital money without an intermediary. And that's really, really profound and remains today. I think the most interesting and profound thing about this space. But the characteristic of something that is open source software is the good news is that open source software is you can build primitives, you can solve something. And then it's out there in the public domain for everyone and anyone to build on, to compose and to compound innovation on extremely fast. And that's like a really big deal and hugely exciting. And then you think about how that world will look. And you think, well, we're going to make this great progress. We're going to have this open source software. It very likely gives me a lot of interoperability.

• 27:57Speaker 02

  You're going to have very fast innovation waves and new things being done, building on the last thing. But also there's some specific characteristics of all this stuff, which is you can fork it. And if you, for example, if there's too much rent capture, can say, well, I actually want to fork it and have less rent capture. And at the time I sort of described this and a lot of people were like, ah, that's nonsense. And now we actually have a term for vampire forks. And is what Sushi Swap did to Uniswap. And so these things have kind of kind of passed. Now we're seeing, oh, we have this. Increasing interoperability, we have Vampire Forks, we have all these kinds of things happening. We have competition between alt-layer ones and Ethereum, where the alt-layer ones are making different choices in terms of the trade-offs

• 28:42Speaker 02

  between decentralization, security, and performance, some of which may not really scale, but right now they're useful. And I think it all shows the conclusion that I had at the time, which is what ETH and Sol and these things are, which is the circulating script on their protocols and the problem that that represents. But that broader thing means that it's not actually obvious how great the value capture is going to be. So Linux is like 99% of the world's software runs on Linux. I'm sure someone out there will correct me in the internet, but to my knowledge, I think really the value capture was like the Red Hat deal, which was like a $5 billion deal. And so it's not obvious a giant open source software movement is going to be great at value capturing, but it's not just sort of a given.

• 29:24Speaker 02

  And so one of the things that I should mention, because it's actually the biggest one, is that the other issue that I identified at the time, or talked about, I shouldn't say I was the one who identified it, but was that, and I'm using ETH as an example, but it's the most well-known one, is a circulating currency. And what does that mean? Well, one of the things that really, really most annoys me is when people think of ETH like a share, like equity. You own a share of the network. Listen, if you own ETH, that gives you no more ownership over the Ethereum network than owning US dollars gives you over the US economy. It's a circulating currency, it's not a share in the thing. Imagine that you and I were bullish about the US tech sector.

• 30:09Speaker 02

  We're two friends sitting in wherever the world and we say, oh, we're bullish in the US tech sector. And you say, well, I'm going to go buy a portfolio of FAANG stocks. And I say, I'm going to go buy some US dollars. You know, some kind of very, very weird loose way. That's not like completely disconnected. It's a US tech sector early booms, you know, somehow maybe the dollar, but it's extraordinarily weak. And why is that? Well, because circulating currency, it obeys Fisher's equation of exchange, which is that the money supply equals the GDP divided by the velocity, which turns over. And the trick of that is, is the more it changes hands, effectively what happens is if velocity increases, then assuming a fixed money supply, then for a given amount of actual economic

• 30:53Speaker 02

  real activity, Q, then in order for the equation to still balance, you basically have to increase prices. If the denominator V is increasing, P has to increase commensurately, which means that you sort of have hyperinflation. Rising velocity is effectively, if it has nowhere else to escape, is going to increase inflation, which of course is going to devalue that asset relative to other currencies. You'd have less inflation. And I pointed that out and said, look, that means that unless people really hold this as a store of value, this asset, it's going to be treated effectively as working capital, because we do that. Companies, of course, do it consciously. Individuals do it subconsciously. We don't just arbitrarily

• 31:36Speaker 02

  accumulate inventories of groceries and petrol. And we're doing this like operations research equation of optimal inventory size in our heads. And so either it's going to change the store value, or it's going to be treated as working capital. I mean, it's treated as working capital. The ability for velocity to go very, very high is incredible. This is my point in 2017. And therefore, you could have a very successful protocol in terms of the amount of economic activity being conducted on it, but very, very poor value capture through the native crypto asset ETH for Ethereum. And we're very much seeing this today, this combination of, first of all, moats are shallow and narrow. We've got a lot of competition.

• 32:16Speaker 02

  The big buzz in 2021 was about all these alternative L1s, taking market share and competing with Ethereum. And, you know, it's just interesting how easy it is to do that, combined with interoperability in terms of value and state, meaning that we'll be able to update state across, state being just what the ledger says people own, right? From one to the other. And with that value will move, that asset will move from one to the other. It's going to be quite easy. You can understand why we would all be working in that direction. And so that further undermines most. We've got the velocity problem that we always had. We've got actual examples of vampire forks.

• 32:53Speaker 02

  And all of those things together, I think I was talking about happening at the time, and now are very much talked about. You know, there's a really great podcast between Hasu and Tuchu, Uncommon Core, that talked about this late last year. And they talked about this issue and amongst other things. And I think that just means that, as I thought at the time, this whole fat protocol utility token as the great value capture thing pieces is really poor. And I think that it's going to be not great at value capture. There'll be a bunch of other stuff that's just great. And then I said, well, store of value is great. It's logical that people would choose something that wins on store of value

• 33:33Speaker 02

  terms, which is maybe it's really hard to seize or to censor. It's maybe super secure and all of that. And what's intriguing there is what I just described in terms of these L1 assets, I think, is describing a bad business. Bad business, not in the sense of the technology. I actually hugely bullish about Ethereum. I'm hugely bullish about all of these things. I think they're going to scale. I'm a huge bull from a technology perspective. Question is, as an investor, am I a bull? In owning those those assets. And I think they're not great businesses to own as assets. There is, however, this great business, which is store of value money. It's not only a great business that it's going to capture a lot of value, but also it's actually quite simple.

• 34:16Speaker 02

  The tech risk isn't that high, and so it's a good business in many respects. And Bitcoin is laser focused on that and does it extraordinarily well. There's a tremendous consensus around that fact. And no one's really competing with that. Rather ironically, subsequent to my paper, it's kind of funny that the Ethereum community, I think, must have internalized my paper quite deeply because they came up with EIP 1559. And now they're trying to shift this, which is great, interesting, and certainly an improvement. And in many respects, but now they're sort of trying to shift the narrative from world computer to ultrasound money. That creates this tension, by the way, that they talk about Hasu and Insu in their podcast about this.

• 34:57Speaker 02

  What you end up with is this tension between, well, we're trying to be this world computer that everybody's going to use, which means we've got to be onboarding lots and lots of new users, but we're going to structure it in a way where there's a lot of rent captured by the old gangsters who owned it before, and we're going to call it ultrasound money. There's inherent conflict there that I think is actually risking for them to kind of fail at both, which would be a shame. So I know that was probably fairly dense, but on that issue of what I was talking about in 2017, I think it's all more true today. And I think what's fascinating is, is that as an investor, Bitcoin has got this unique hole on this uniquely good business.

• 35:37Speaker 02

  And I think some other things that people are a little bit enamored with right now, I've thought and continue to think aren't really great businesses. And by the way, Bitcoin is going to scale in terms of means of exchange through Lightning Network and the other things you should have later to. And frankly, I think there's a good chance that stable coins will be a big part of the means of exchange market, and that's fine. I think that's a relatively low value market.

• 36:00Patrick O'Shaughnessy?

  What are the other potentially good business models then in this space? So if I were to summarize back what you just said, Bitcoin is fundamentally different than the other layer ones. It's after a different job to be done, store value. There's really no competition for it. You and I have talked in the past about is Bitcoin the right measure of opportunity cost just real large for investors? Should we be thinking about our other allocation decisions in Bitcoin return terms? Which is maybe something we can talk about here, quite interesting, but that the others are of a different type entirely. I think you've told me before, like, no one's investing in electricity, like the raw thing. Or no one's investing in rabbit futures or big futures or something really as like a thing to earn a return on.

• 36:41Patrick O'Shaughnessy?

  But there are characteristics of that that are similar to some of these other layer ones that are ultimately like utilities for compute. What other good business models then are there? You don't just think Bitcoin is interesting. You also think some of the, you'd mentioned Dapper Labs, which I think it was like the application layer, which is where all the web two money was made was in the application layer, the FAANG stocks themselves. So what else do you think is interesting in this space, generally speaking?

• 37:04Speaker 02

  I think people wrongly perceive me as a Bitcoin maximalist, which is not at all the case. Because I think, by the way, maximalism is different kinds of maximalism. One is both first of all in tech and the other one is in terms of your investment portfolio, which I separate. I'll repeat the fact that I think, for example, Ethereum's scaling roadmap is super exciting. Because EK rollups and these things are just super interesting, phenomenal things. I think, by the way, they're rather obviously bad for the value of ETH. They're tremendous for the adoption of Ethereum. And by the way, just to be clear to everyone, when I say Ethereum, I'm talking about the protocol. When I say ETH, I'm talking about the asset. Those are two different things. So it's unfortunate that it's a very tribal space.

• 37:44Speaker 02

  So I'm going to basically manage to piss off everybody by saying, not only do I think that it's not just Bitcoin, but also I question whether the ETH or SOL or whatever is going to be long term a great investment. I've literally pissed off the entire universe with that couple of sentences, which doesn't make any sense. My base currency is Bitcoin in terms of how I think about how to measure wealth. And that is tough because that means that the rest of our portfolio is kind of losing value. But I think it's a good thing to keep us honest. I think in terms of Bitcoin is a cost of capital. I think that's right. And that makes us selective in terms of what we do.

• 38:24Speaker 02

  I also think that what's changed about the world since 2017, and 2017, I think the universal question was, is it too risky to own Bitcoin? And I think now is it too risky not to own Bitcoin? It'd be sunk. That's Bitcoin. Regarding other stuff, let me start by saying, so there's this term that's being used, Web3. There's a lot of really articulate, smart people out there to listen to or to read about on this. Matt Huang and Fred Ursim and Chris Dixon and Malachi Fribinovsin and Naval Ravikant. I think you've interviewed some of them and there's all great resources to talk about all of that. So I was a, rather than me trying to explain all of that, go to those podcasts.

• 39:03Speaker 02

  And I would say that from a technology perspective, again, I agree with the vast majority of the views that they express and a hundred percent excited about all of that. Maybe it's worth, therefore, move the conversation forward a bit, rather than just repeat what other people are probably going to be able to express better. I do think it's interesting as an investor, as an investor, you can't just stop. At the general thought of Web three is inevitable. Yes, okay, fine. You only have to be making discreet investment decisions. And so you have to do something with that. And making a discreet investment decision requires some thought as to is this a good business or a bad business? If this thing is successful as a tech, will I make money?

• 39:44Speaker 02

  And you can donate all the money you want to Wikipedia and we all should, if you're not do it. But you're not going to get a financial return on that, no matter what happens. So there's a lot of things that have network effects that don't capture value. I talked about Linux where it's a little bit, but not much. And so it is useful to therefore think about, well, is there a mechanism here for value capture? And I would just caveat, because I know there'll be a lot of commentary. I said in my paper, I thought that the layer one smart contract protocol native crypto assets could be worth tens or hundreds of billions, and I still think that's true. So by no means is that zero. The only problem is they're already worth hundreds of billions. So the return is maybe not great. And frankly, even if it's worth low single digit trillions, question is it really worth the risk?

• 40:29Speaker 02

  That's my main question. But moving on from that, there's so many other things that are interesting. So I'll, I'll touch on a few. I don't get the controversy around non-fungible tokens, to be honest. I mean, discrete physical objects have value, subjective and objective value. Why is it therefore that troubling for many that discrete digital objects should have value? Or might have value, subjective or objective? I think it's obvious that they can and should. One thing might be Picasso, another thing might be a collectible spoon. But fine, it's not a philosophical thing. Now, that's a little bit like we were sitting here talking about investing in equities. And I said, and by the way, I'm really into Basquiat.

• 41:11Speaker 02

  Well, okay, that's like a totally different pursuit, being an art collector. There are platforms like companies and business like Dapper and OpenSea and so forth. But there's a lot more than that. Again, yes, we're gonna, I'll call this optimism, be living more and more in our lives in the digital realm. The whole notion of unique digital objects is going to be more and more important in terms of all kinds of things and how we present ourselves and status and all kinds of other things. Right now, let's say you collect watches. Okay, well, you got your watch collection. It kind of sits there and you got to wind them. But otherwise, it's a dead asset. Whatever the NFT equivalent is, well, you can, and more and more will be able to stake that asset to borrow against it. You'll be able to fractionalize it.

• 41:52Speaker 02

  And you can do it in ways where because of, if all this is programmable, wouldn't have been practical before. It's like before, okay, you know, you could have on paper said, I'm going to sell one one hundredth shares of my Basquiat. And people may or may not buy it. And you're going to have paper moving around to do that. And what does that really mean? In this environment, I mean, there's a really great paper or series of papers that Dave White at Paranoid wrote about Martin Gale shares. And where he describes a market mechanism where effectively, and I'll put it in my terms, you can fractionalize an asset where the price at which minority stakes should trade won't necessarily include a minority discount. And it's actually something that would be incredibly problematic to implement in traditional financial markets. We know that the price of one Apple share is very different from fifty one percent of Apple shares.

• 42:37Speaker 02

  There's a control premium. There are all kinds of reasons why that's kind of hard to get away from. But once you're dealing with permanently fractionalized assets, you can implement market structures, which maybe only existed in academia before, which change things in a very fundamental way. And we haven't even begun to see those things manifest. And then, of course, from there, you can bridge into things like gaming where it's kind of obvious that unique digital assets are linked to that. I'm not a gamer, so I'm always at a big disadvantage in some sense. I think in another podcast with someone on sort of gaming economics and so forth, it would be a good listen to just reference here. But we've had these successive gaming platforms, whatever. And I can't remember the order, but it's like, yeah, the stuff in the arcade, the big things in the arcades.

• 43:22Speaker 02

  And then you had those PCs and then consoles or consoles and PCs. And then mobile came about. And really it was something like Angry Birds. It suddenly made everyone get what was unique about that new platform, which was the touchscreen and how that really was super engaging for gamers. And then exploiting that and then creating a new economic model for gaming, which wasn't just here. Go spend forty euro or whatever to buy this cartridge or this game or this download credit. But rather you download it free and then you're going to pay extras in the marketing of freemium models and all of that. And it was hugely powerful. None of that's been figured out yet, I think. So you've got pure successes, but still, I think we haven't yet figured out what is the uniquely compelling from a gamer perspective, from a player perspective thing about this.

• 44:06Speaker 02

  And maybe it's the economic incentives of ownership and all of that, but who knows? Maybe there's something else. But then also kind of what are the economic models that will really stick? It sort of seems to be obvious that's going to be huge. I talked about why things that function as a circulating script, I don't think are great at value capture. But if you have a token that is actually a claim on a fee stream, that is both obviously valuable and able to be valued. You can actually just project forward a set of fees based on your assumptions and then discount those back and have a view on value. And it's not zero. Now you might say yes, but maybe it's not that strong and I'm going to ding my projections because of vampire forks. Maybe my discounted value of Uniswap is somehow affected by the fact that sushi swap is possible.

• 44:50Speaker 02

  And then use that as just an example of something that happened, but fine, but it's not controversial. And so there should be valuable things in the space, seems obviously, but it may go beyond that. I'm going to come back to some of the stuff I said about financialization of NFTs here. The build out of these primitives in DeFi and composing these things into new things over time, I think, is going to massively increase capital efficiency in the economy. Sam Bankman-Fried had a blog post about how already in the centralized finance world of FTX, they use sort of an on-chain architecture in a way that increases capital efficiency. But the potential for these primitives to be assembled and composed and built on

• 45:33Speaker 02

  a way that's going to compound very rapidly in terms of innovation and the potential to implement new market mechanisms. Not, yeah, I mentioned NFTs, but maybe it's not just NFTs. Maybe it's all kinds of assets where we're now, we're having Martin Gale shares. We've eliminated minority discounts and all these other things. It's hugely potentially powerful. And so my gut feeling is we can't even kind of anticipate how all of that will create value and that there will be things within that where there'll be some value captured that will be perhaps compromised to some extent by the open source software nature, but there'll be some that will just be real value capture. Another thing I think is super interesting, and obviously, the thing that I'm mostly focused on is, they do think Bitcoin owns the stuff in the store of value space,

• 46:18Speaker 02

  but there's also a lot happening in terms of becoming a better means of exchange through Lightning Network. And that will have more and more uses and applications. I think that's an interesting area to focus on, and that's not just buying Bitcoin, that's investing in venture capital and stuff like that. I've talked a little bit about blockchain scaling, and that's super exciting. Compromising on centralization and other things, and I think there's a good debate out there that others have had, you know, more particularly than I could explain here, about whether scaling will come from just lots of layer ones that may or may not be that centralized versus layer two scaling through things like ZQ rollups.

• 46:57Speaker 02

  Regardless, it's going to happen, and it's very interesting, and there'll be some things to do, and investing in venture capital in those spaces is interesting. We alluded to the joint stock company and limited partnerships and so forth, there's these forms of organization. Well, there's a new one, which is a DAO, right, the centralized autonomous organization. And it's a little bit like saying, oh, we've just invented the joint stock company. You can't just invest in that. It's going to enable a bunch of stuff, some of which will be interesting in investing, and some of it won't. There'll maybe be a whole industry of support for that new economic organizational structure, which is interesting, so you can invest in companies or ventures or protocols that will provide that support.

• 47:40Speaker 02

  You may invest in specific DAOs because what they're doing is interesting, and others, if you won't. But I think there's an interesting point there, which is, in my mind, in the same way we haven't yet figured out, in my mind, what's compelling about blockchain gaming from the gamer's perspective, I don't know that we've really figured out what's uniquely compelling about DAOs, what they're really good for. And so that'd be interesting to see what it is, and you want to be on top of all of that. That's a ramble on the different things that I personally think are super interesting, including Bitcoin, which is the bedrock of a portfolio, in my view, and then Bitcoin becoming more and more of a means of exchange through layer two. But then a bunch of other things that I think are hugely interesting and where there will be value capture.

• 48:25Speaker 02

  Securities tokens, to me, I think that the controversy may just be, well, you always have to be a little bit skeptical when you're dealing with, you're putting something in a blockchain that is actually in the physical world at the same time because you're going through a lot of hoops to be in this decentralized digital world. But then you've got to go back through a court system or something to enforce in the real world and going back into the need for an intermediary. And so I think that it's always something to keep in the back of your mind. Having said that, again, you know, you could see not only some back office improvements, which I think is of all of the stuff we've talked about, not that interesting, but still there of using this tech for whatever, trading shares in a company or in a piece of real estate or whatever.

• 49:10Speaker 02

  But I think it may be more interesting is again back to what about putting some of these new market mechanisms that have only existed in academia to work?

• 49:18Patrick O'Shaughnessy?

  Why would that be good? Like thinking about capital efficiency itself? I think everyone listening would assume, oh, more capital efficient equals better kind of through history. I'd love to just talk about capital. Like we've talked before about, do we want to be a buyer or seller of capital itself? How has capital changed? Is it the formation of capital, the classic funding the ship in the early days? And that's where carried interest came from in the LLC. Is capital formation fundamentally what's valuable? Or is using less capital, which I think of as capital efficiency for the same outcome more valuable? Why is this good?

• 49:50Speaker 02

  Capital efficiency is good simply because assuming the stock of capital is finite, using it more efficient is good.

• 50:00Speaker 02

  And of course, capital grows over time, but in any given instant, there is X capital and therefore you want to be using it efficiently. Flip it around, you don't want to be using it inefficient. And we do, traditional finance markets are egregiously inefficient with settlement periods and the way it deals with risk and margin calls and loan to value and all these different things, which in a programmable environment. You can push the limits so massively. And these things are become at some point kind of logarithmic. So the benefit from going from ninety eight to ninety nine percent efficiency can be similar to going from eighty to ninety.

• 50:39Speaker 02

  So back to these coral effects, even as the incremental efficiency gains, I think, will be quite profound. So why is capital efficiency good? Well, what are we going to do with this capital? Well, we're going to make stuff. We're going to invent stuff. Humanity will progress. We're going to be able to invest more in research and development and in capital stocks and infrastructure and doing things that today we can't even. And obviously, I'm getting way ahead of myself, but I'm taking it to kind of an extreme because it's usual sometimes to frame things in extreme. And you see it already in terms of the amount of capital it took for the first moonshot versus what it takes Elon Musk today to get a person into space. But I do think that there was a while I was kind of worried.

• 51:25Speaker 02

  And I came out of the singularity era, it's kind of thinking, well, gee, if this abundance thesis plays out, then capital is suddenly. Capital is only valuable because it's scarce. So if we have abundance and there's no more scarcity, capital is worthless. That's kind of bad for me because I've got some capital. And I was like worried about that, literally, you know, it's like funny things to worry about. And then I realized, no, you know what? We will always come up with new applications for whatever capital stock we have. And that will be the thing that will set the return on capital. There's no end to that, I think. This is, by the way, another interesting topic we might want to touch on is speculating a little bit on if all this stuff plays out. What does it mean for like value and like equity markets and other stuff?

• 52:09Speaker 02

  So it'll be value shifts, massive value shifts, and what's one thing is worth is another thing, but also who owns what stuff and who captures value? There's going to be huge massive shifts and that's going to be pretty wow. But we'll always have uses for capital.

• 52:22Patrick O'Shaughnessy?

  I'm going to save my buyer versus seller of capital question for a little bit after because I don't want to lose this thread of so much of what we talk about is what gets enabled faster velocity, more efficiency, more use cases that aren't skeumorphic, to use Chris Dixon's term, the angry birds of the future, like things we couldn't do before that we can do now. That's all super interesting and exciting. What about that impact on, for those that never own crypto and say to themselves, for some reason legally, let's say they're not allowed to own crypto. So they're like, well, what does this matter to me? I think the way it matters most is, well, if you own the S and P, you own banks, you own media companies, you own all these other stuff. So how do you think about that shift of value? That, I love sportif, the ways in which all of this, even if you're not exposed to it

• 53:06Patrick O'Shaughnessy?

  as an investor, could still very much affect your investing returns?

• 53:10Speaker 02

  I'll start by saying, I think this tech, in terms of value creation potential, is the same order of magnitude as the internet itself. And maybe it's even more, or maybe it happens faster because it's even more composable and the bedrock of the internet is open source, but a lot of what's built on it isn't. This will be maybe much more universally open source and as a consequence will compound faster and even better. Maybe it's even creating more value, but it'll say order of magnitude similar. Again, because of all the characteristics I've talked about, maybe by value creation, I'm talking about all surplus in microeconomic terms, including consumer and producer surplus. This is all surplus. Maybe for the reasons I've cited, it's an order of magnitude worse than the

• 53:51Speaker 02

  internet in capturing value. I think there's an argument for that. But then, an interesting thing, again, the third leg of this little framework is, it perhaps takes an order of magnitude, yet less resource to create that value. So because of this composability and the compounding of open source, the amount of developer hours it takes to create Uniswap versus what it took to create some of the big web two, it's insane because they're building on so many different open source components and so forth. So interestingly, that would imply that returns are to order of magnitude higher, notwithstanding the worst value capture. But I think it's directionally useful to think about. Now, that's just in

• 54:36Speaker 02

  terms of aggregate value, you're thinking about value creation and capture and returns. But another question is, there's going to be a massive shift in who it accrues to. So if you kind of think about who are the constituents, you've got investors and you've got employees, developers, entrepreneurs, and you've got users. This tech is, if you kind of index to a hundred, is rather obviously going to be giving a lot more value to users than legacy tech did. Probably more value to developers, TBD, you know, there are obviously investors as well, and then investors probably less at some level. That would make sense.

• 55:19Speaker 02

  Now, maybe that's not been quite what's happened to date, but you would think that that would be the outcome of something where it's open source and it's interoperable and it's forkable and all this kind of stuff. So point one is, again, that maybe captures less, but returns are higher because resource is less. And point two is distribution across those three constituencies, I think, is going to be different and much more towards users than legacy. I think another interesting observation is that, let's say, as a public markets investor, you're going to really struggle to benefit from this. In fact, you're going to be on the receiving end of a heck of a lot of disruption. There was a newsletter, I've been thinking about this for a while, but it's interesting, I saw a newsletter from a hedge fund at Bishop's Gate that has been historically quite skeptical

• 56:04Speaker 02

  in crypto, and they're basically making the point, this is really, really bad for equity as a whole. And I would nuance that by saying that I think it's bad for like public equity, perhaps in the aggregate. It's the way we sort of express ourselves is we own a bunch of Bitcoin and then we do a lot of crypto VC. So I think that there will be pre-orders of magnitude tiering that I said, less resource to create a lot of value, you capture less. I think crypto VC is a great way to capture that. But the public market investor is going to be on the wrong side of a lot of that, potentially. And it'll vary by sector.

• 56:42Patrick O'Shaughnessy?

  And the way this manifests, just give like maybe one example of this, and maybe it's banking or something like that. There's huge economic equity value today, but this technology could fundamentally change where that resides. Do you think that banking is the best example? Is media the best? Like, what are the most obvious ones to you?

• 56:59Speaker 02

  Well, let's go through each one. And this is like 3am dorm room level of massively speculating. But I think that we talked about DeFi and how excited I was about what it could mean in terms of just capital efficiency in the economy and so forth. So what that means for just economic growth is potentially tremendous. Gains in capital efficiency will just have cascading effects across the entire economy. Let's differentiate. And we talked about where this could be the biggest impact is kind of markets, lending, brokerage, investment services. It'll be massively expansionary because it's usually beneficial in terms at the macro level of the capital efficiency. It's very expansion in terms of the financialization

• 57:39Speaker 02

  of everything. I was talking earlier, saying, if you have a, again, if you collect watches, it's just a dead asset. If you collect CryptoPunks, you can stake them and fractionalize them and financialize them. And also the fact that we're shifting from markets that are open, whatever, seven hours a day, whatever it is, 4.6 days a week, taking out holidays or whatever, to markets which are 24/7, 365. That actually is not trivial in terms of what it means to macro efficiency. And so I think that it's going to expand the pie insanely. It will have huge macro benefits for economies globally, but it's going to be really bad for the shares

• 58:20Speaker 02

  of traditional finance businesses. And there'll be some equity value captured by, like, say, Coinbase, but I don't think it'll come anywhere close to the equity value destroyed. It'll be overall a huge net win, but you're going to really struggle to be not a net loser expressing yourself through public equity. First of all, you really want to just be a user. You just want to kind of be a member of the economy. And as an investor, you're going to have to invest in venture-level equity, perhaps some tokens which will capture value for some of the mechanisms I've talked about earlier, fee capture or whatever, and investing early enough that you're going to make money, notwithstanding the relatively poor value capture. I've given analogy there.

• 59:06Speaker 02

  It's like, I suspect that the seed round investors in Pets.com did pretty well. Provided that they sold timely. The fact that that was like a terrible long-term value capture, they were early enough. They probably did pretty well, and I think there's a lot of that. Maybe I'll be more generous, things that just go bust. Things that maybe were overvalued and never fully recovered. That if you were a seed round investor, that was still okay. You know, but media, so let's put that maybe into gaming and other media. Gaming, I think it's unclear. It really kind of depends on how compelling it is as a gaming experience in the end and what economic model develops. I think it's just too early to tell. There's certainly potential for it to be bigger and greater, but it's still, in my mind, too early to tell.

• 59:49Speaker 02

  I'd be bullish, I'd be optimistic it'd be bigger and better, but that's going to depend on somebody figuring it out. Social media impact is also kind of unclear. I think it's kind of first order destructive for equity, but maybe new economic models that are created, which are net additive. Maybe this one a little bit tougher to guess. But then I want to come back to something you alluded to a minute ago, which is the Chris Dixon'schemorphic or non-schemorphic point, which is excellent. In the same way that Twitter didn't replace other forms of news. Maybe it took market share, maybe whatever, but it grew the market. Uber didn't completely exterminate hail taxis or even driving your own car.

• 1:00:30Speaker 02

  I think it's wrong for us to just think in terms of web three being. There's going to be things that will replace a web two equivalent. My guess is that they'll be additive. And also, I think the most interesting things are things that we can't even yet really imagine. And in the late nineties, even if you quote got the internet, except I'm sure for some very smart people. Most smart-ish people like me would have said, well, okay, great. I can read a newspaper online, I can maybe order a book if I keep trying to check out until finally they take my credit card number and all of that. And I would have said those things would get better. I don't know that I could have imagined Uber because we didn't have mobile yet. We didn't have the bandwidth yet. We didn't have mapping, all these different prior innovations that were required.

• 1:01:15Speaker 02

  And the same is going to happen here where we need scalable blockchains. We need to figure out some economic questions and so forth. That will suddenly lead to things that are going to be non-schemorphic innovations, which will probably be the most valuable. And again, when you say most valuable within not Bitcoin, I mean, I want to be careful because I'm talking about a lot of stuff. I always want to come back to the fact that I think that the native money of the internet is the no brainer bedrock underlying all of this, but I'm talking about all the other stuff.

• 1:01:43Patrick O'Shaughnessy?

  So Johnny, we've talked a lot about the different interesting angles on investing in versus being a believer in the technology of non Bitcoin layer ones. But I'd love to just dive with a couple interesting ideas, a little bit deeper to put a finer point on some of the concepts. And the first is this idea of sort of crypto fading into the background, like so many of the protocols that fuel the internet that 99.9% of people, you know, no one's ever heard of SMTP or, you know, I guess HTTP everyone's heard of. But usually the history is that protocols are abstracted away. No one cares. I'd love to hear your thoughts first on whether that is going to happen in crypto as well.

• 1:02:21Speaker 02

  Whenever we make an analogy to say the dot com bubble and all of that, you've got to be careful that you don't overweight analogies because things are different. Nevertheless, I think here there is an interesting reference, which is remember back in the 90s, late 90s, we talked about literally, like we talked about dot coms. We talked about, are you investing in dot coms, dot com stocks or whatever. And even that term references the fact that the common characteristic of these businesses or whatever was that they had a domain name and it ended in dot com. That was like the foreground. The destination was dot com. Today, when's the last time you heard somebody talk about, do you invest

• 1:03:06Speaker 02

  in the internet? Are you investing in internet businesses? Well, we don't because it's everywhere. It's embedded in everything. And okay, there are businesses which live completely on the internet. We still don't talk about them as internet businesses. We talk about a social media business, or a search business, or maps business, or a payments business, or e-commerce business, or whatever. And then there's the reality, which is the internet is a part of every business to differing degrees. Not because that happened, do I think that's going to happen here. But I think that there are lots of reasons to believe that a similar thing is going to happen where crypto today is seen as a destination. There's a shift underway that I think will ultimately go as far, if not further, of crypto being the background.

• 1:03:51Speaker 02

  It's hard to believe, let's assume this tech has all this tremendous success, which I believe it will have. And that we're going to have its billions of users, the billions of users of Web three, or whatever we want to call it. Spending their days effectively day trading some huge number of crypto assets and taking speculative positions in all these different crypto assets. One is a thing to do, but also is part of getting whatever it is that they want to get done, done. And that doesn't seem, first of all, very attractive. That'd be like a huge ask on users. It doesn't seem very likely. It seems, you know, much more likely that what will happen is a couple of things.

• 1:04:35Speaker 02

  One is everything that sort of makes all this work is probably going to fade into some kind of background of bots. Where we'll have tools that we use to manage our, whatever it is that we're trying to get done. And we'll say, I don't know, I need to do X, I need to, whatever it is, I've got my collection of whatevers and I want to do X and Y, or I need to store some files or whatever. And just kind of ask the bot to do it. And the bot will go out and figure out how to best execute, probably across multiple blockchains.

• 1:05:12Speaker 02

  Each of which is tuning to optimize for different needs that will be interoperable, that will be compatible to greater or lesser degrees and all of that. Will that bot be programmed to hold it, to speculate on crypto assets? Or say, yeah, I'm going to do some kind of AI positional trading? No, it's going to be programmed to execute at lowest cost and for capital efficiency. And the lowest cost will be, how much does it actually cost to get my operation done? But capital efficiency is coming back to this notion of if you're not a dominant store of value, you're working capital. Meaning. Companies, entities, people think of our wealth and store it in something, in a thing,

• 1:05:57Speaker 02

  and measure it in that way. And there's a bunch of other stuff that we need and use that we treat as working capital. We're optimizing inventories and really only holding as much as we need in order to ride out replenishment delays, standard deviations of risk around replenishment and all this kind of stuff intuitively. That's actually what the operations research formula will tell you, but that's really what we're doing. And those bots will be programmed for that. And what that's going to do is drive anything of that backbone infrastructure nature, I think, is going to be managed in the background by software that's probably going to be programmed for capital efficiency. And that's just going to drive even more towards this notion of these things being working capital, which results in high velocity, which is obviously problematic for anything that function is a circulating script, as many of these things do. Again, I'm not talking

• 1:06:41Speaker 02

  about things that actually have a claim on a cash flow. I'm not talking about unique digital assets that may have collector value or other some kind of value. I'm not talking about things that aren't that, but a lot of these layer ones are. People will say, yeah, but wait a minute, there's staking and there's EIP 1559 and burning, and that's all true. And that was clearly a step in the right direction towards trying to reduce velocity. But I still think that whether it's enough or not remains to be seen. I do think it's a step in the right direction, so I don't dismiss it. I would say, though, there's this conflict. Either you want to be the most efficient decentralized software backbone for the global economy and as such be cheap and high performing in order to

• 1:07:22Speaker 02

  constantly recruit new users and new use cases, or you want to extract rents in order to reward existing holders of the currency, which is this ultrasound money narrative that's cropped up in the Ethereum community. And I think those things are hard to do at once. In fact, I think they're contradictory. And so I'm not convinced. And I would also just add the fact that people are excited about it becoming a fixed income instrument is fine. But you still have to ask, what's the rate of return versus the risk of holding?

• 1:07:58Speaker 02

  Remember that the rate of return is being generated, not because the ETH is being invested in productive things and those productive products are paying interest. But rather it's that the non-stakers are bearing the inflation generated to reward the stakers. So it's like squeezing a balloon. You're basically pushing the velocity on part of the money supply as you move it away from another part of the money supply. But the other thing is, is that, you know, you could offer me an interest rate of whatever 3% in Argentine pesos. I probably still wouldn't put my savings in Argentine pesos, meaning not necessarily enough. So I think it's a step in the right direction. I'm not convinced that it's by itself enough. In any event, we're going to have, again, this fades into the background.

• 1:08:43Speaker 02

  Bots are going to be optimizing, moving across multiple chains. And it's going to be exceedingly easy to resist rent capture by these things. I'll make a couple of other points on this topic. One is what I've just said has been the opposite of correct over the last year. Meaning we've seen a huge performance in layer one crypto assets. And it's very much the narrative of the moment. And let it be clear that this view is not at all what we're seeing happen right now. It's a view that might be true in the future. And all I'm doing is kind of explaining what would be the drivers of that and why I think that's the case and why I struggle to see the opposite.

• 1:09:26Speaker 02

  So I'm very much accepting the obvious criticism, which is, yeah, but John, you're just like, let's see over the longer term. And obviously investors have different time horizons. So if you're a short-term horizon investor, listening to what I've just said would have been highly self-defeating. If you're a longer-term investor, maybe it's right. And I would give you an interesting, again, I'm going to risk analogy here, but it reminds me a bit of, we think about these kinds of comical egregious cases, you know, boo.com and pets.com. And if you actually remember the big giant internet darling stocks, the ones that really, really were big market cap in crazy multiples were, first of all, things like Deutsche Telekom, Allianz, Cisco, Intel.

• 1:10:09Speaker 02

  And in particular, there was a subset, which was telecom stocks. Telecom stocks were hugely popular and you would have been derided for questioning the obviousness of the fact that, well, all this internet traffic is going to have to travel over pipes. They own the pipes. So there's going to be this massive exponentially growing demand for bandwidth. And as a consequence, there's no multiple too high for valuing Deutsche Telekom. But in fact, literally, if you'd come out in nineteen ninety-eight or nineteen ninety-nine and said, that's a bad thesis, you'd be laughed at. But on the other hand, they were sort of knowingly bad businesses. So let's take in telecom, it's like, yeah, they own pipes. But really, what is it?

• 1:10:51Speaker 02

  It's a highly capital intensive commoditized business, subject to wave upon wave of technology advances and prone to cyclicality because of overbuilding. And what ended up happening was, anyone who's old enough to remember, was the internet bubble included a telecom bubble and then it crashed. And a lot of those companies went bankrupt. So basically, the debt holders ended up owning this. It was called dark fiber that ultimately was lit and it ended up having some value, but not for equity holders. And then take a Deutsche Telekom, which again was this huge darling. It's like trading still seventy-eight percent below its dot com peak. And it was a pretty intuitive thesis. Well, of course, let's own the pipes.

• 1:11:34Speaker 02

  But it's very analogous to, well, let's own the layer one that all of this is going to be built on. And the reasons are different. So the other one was because of capital intensity and cyclicity and all of that. Whereas this is because it's a circulating script and it's forkable and copyable and the motor shop. So it's a different set of drivers and therefore could get a different outcome. But nevertheless, there's a whole series of reasons to believe, similarly to the telecom business, which weren't great businesses, these aren't great businesses. I've been looking back to twenty seventeen. At the time, ETH was overvalued relative to Bitcoin and that was a good trade. Last twelve months, both ETH and these other layer ones have performed extraordinarily well. I'm talking about ten years hence, and I have no idea what's going to happen over

• 1:12:17Speaker 02

  the next months or even a couple of years. But I would have that in the back of my mind. Is this Deutsche Telekom?

• 1:12:23Patrick O'Shaughnessy?

  What piece of information do you think would most upend this view of the world for you?

• 1:12:29Speaker 02

  I think that there's a consensus now compared to 2017, and I think that I don't think anyone will disagree that any of these circulating currency type assets to have value, they need to be a store of value. I think everybody's accepted that. So the debate is around what becomes that store of value and whether there might be more than one and their relative size. I think now that's not really controversial. People have to hold on to it and velocity has to go down for this to work. So that's why Ethereum moving to proof of stake is trying to bring velocity down. And fee burning is trying to create incentives for holding the currency. It's because they're directly addressing that. So I think that's, I believe, consensus now. It wasn't perhaps when I wrote my paper. And then the question is, okay, but what makes it a store of value?

• 1:13:11Speaker 02

  So I'm saying that, well, I'm sort of assuming people are rational and that they're going to choose store of value based on the same criteria that I would choose store of value, which is I want to have the thing with the most security. So Bitcoin's hash rate, which is a measure of the security of the network, is crazy orders of magnitude greater than anything else. It's the most decentralized, it's stable as a protocol. So you know what the monetary policy is, but also in other respects, it's stable. So your tech risk is extraordinarily low on a relative and absolute basis. And these are the things that I think would make an attractive store of value relative to things that would not follow that. There could be a consensus that forms around something else being a store of value.

• 1:13:55Speaker 02

  And in that regard, money is a little bit of a meme in that there are some objective reasons why gold has been money for so long. But it is. Could it have been platinum? I guess. It's kind of like we use platinum in catalytic converters and gold is money. I mean, there's a bit of monetary premium, but it's not the thing. Why is that? Well, you know. There's probably a parallel universe somewhere where that might have happened. And in the same way, there's probably somewhere in the multiverse, a parallel universe where Ether, another layer one, there's a consensus formed around it being, notwithstanding the arguments that I think make Bitcoin more attractive, seen as the store of value. It's not impossible. Look, there's also somewhere in the multiverse, there's one where it was Dogecoin. What I do with that as an investor, I don't know.

• 1:14:39Speaker 02

  I think you can hedge, so you could say, well, I'm going to own a bit of both. I think you have to know that though, there are all these other arguments as to why it might not be a great long-term hold, or you just see it as a part of your overall portfolio. But I think that would be the main reason. The main reason would just be that, you know what, everybody just kind of says ETH is the store of value and don't care about the fact that it has a changing and inconstant money supply and don't care about the fact that it's fairly centralized and don't care about the fact that proof of stake is a very different kind of security than proof of work. Don't care about the fact that the protocol is changing frequently, there's a lot of tech risk. It's possible, not completely unreasonable. I have my view, and so me explaining is going to sound a bit one-sided, but I do

• 1:15:23Speaker 02

  think that reasonable people could come to a different view, and that would be the main reason why I think I could turn out to have made the wrong bet on, which is going to be the store of value.

• 1:15:32Patrick O'Shaughnessy?

  I love the prompt to the audience to think about it in equity terms, like a good company does not necessarily make a good investment. There can be a price which destroys any return. I think the idea that something which is incredibly dominant and useful and a key utility in the world, Deutsche Telekom, eighty percent below its 2000 peak, can also not be a good investment. We don't know what's going to happen, but it's just a really, I think, interesting and important idea that's very against the current narrative. You know, that activity on a blockchain or demand for state on a blockchain is some sort of proxy for potential return. And I think people just want to be responsible and separate those two ideas when making investment decisions. I just think that's super neat.

• 1:16:14Patrick O'Shaughnessy?

  Very often, I love learning, I love talking about all these things, but there's often nothing better than simply asking someone what's in their portfolio. And you and I have talked before, and today I think it won't surprise people to learn that like eighty-five percent of your crypto portfolio is Bitcoin, the remainder is crypto VC, which we've talked about already. Maybe just lay out there for us in an absolute simple sense, the reasons behind such an obvious large bet on a single asset in a space that's full of assets.

• 1:16:41Speaker 02

  There are different ways to come at this space. Some people who come at it ideologically. There's a lot of reasons why that is appealing and important. There are people who come at it purely from an investing perspective. I do come at it as an investor, which doesn't mean I'm not sensitive to some of the super important non-financial implications, but I'm going to lead with an investing answer and then maybe talk about the rest because I do think it's important. Look, as an investor, I think that Bitcoin is just this incredible no-brainer investment. There will be a money of the internet. There will be a digital store of value and means of exchange and so forth. And that is going to be super valuable. That's fairly intuitive.

• 1:17:24Speaker 02

  And Bitcoin has correctly identified the highest value piece of the function of money, which is store of value, and really nailed it and doesn't really face, in my opinion, real competition for that function. And it has the added benefit of being a fairly simple. From a technical perspective, there's already product market fit. You don't have to believe that Bitcoin is going to jump through a whole bunch of further technical hoops to get there. And so you've got this thing that is going to happen. If it happens, it will be valuable. And there's this thing that's doing it really well, that already has product market fit, that is not really facing tremendous competition. That feels to me like just a no-brainer investment and something that you want to be significantly exposed to

• 1:18:09Speaker 02

  and a great bedrock on the one hand. So that's sort of category one and why it's so heavily weighted. Now, interestingly, it is also true that in, let's say, 10 years forward, it's likely that Bitcoin will be actually a smaller part of our portfolio, whether it turns out that Bitcoin succeeded or Bitcoin failed. I mean, Bitcoin failed, it's obvious why. You know, we'll lose a lot of money. But if it succeeds, right now, it's a risk asset because it's a venture project that aspires to be a more stable store of value. And what's exciting about it is participating in that monetization. But if it succeeds, at some point, it will become a more stable store value. It will go up relative to the growth of the economy and the kinds of things that you think of as store of value.

• 1:18:54Speaker 02

  At which point, progressively, it makes sense to shift perhaps into higher returning assets. If you look back 15 years ago, I didn't have this proportion of assets, of a total asset, sitting in, say, gold. Because why would you? It's fine, but it's either not in your portfolio or a smaller part because you're doing a bunch of other stuff. So same thing will happen here. And what we're doing in that regard is incrementally investing in others. Bitcoin cost of capital is high, but there are things that happen. And when they do, that's a good reason to, you know, that's a legitimate reason to sell Bitcoin as opposed to, say, a target price. Crypto VC is also part of that. That's sort of this other bucket that I talked about is the fact that there will be a lot of other stuff built. Talking about valuation is tough, but at least if you're investing in the VC stage, you're investing at the lowest.

• 1:19:39Speaker 02

  Your values are lower than if you're investing after the VCs. And so, given that there will be stuff of value built, and that includes, by the way, layer ones, which I don't think should be zero value. I'm just saying, I'm not sure I would buy them in the liquid market today. And all of the stuff I said earlier about why they're not great investments. That's very different from saying, would I be invested in a VC that might invest very early in one of those protocols? As well as all the things we talked about where there's a claim on fees or unique digital assets or DAOs or all these other kinds of fantastic technologies. If you get early enough exposure at low enough values, that's great. And so we have an allocation to that, and that will grow over time, meaning on a relative basis, I think that will surely shift. What's missing, of course, is that middle ground of other liquid assets, alternatives.

• 1:20:24Speaker 02

  Part of that's because of what I said is, I think that there's a lot of arguments as to why some of those things won't be as good a business to be invested in as people may currently think. Other things may be good businesses, and then there's a question of relative valuation. It's exponentially riskier because there's a lot more uncertainty compared to, say, owning Bitcoin. A lot more uncertainty about tech and competition and so forth. You didn't have to worry about when and what price to buy at, when and what price to sell at. There's a lot of things to keep track of. There are information asymmetries, as in any market, but certainly here.

• 1:20:59Speaker 02

  Whereas I think that the asymmetry to the upside of Bitcoin is super compelling. I think the asymmetry to upside in crypto VC is super compelling. All that middle ground I find is a little bit more evenly balanced at best in terms of upside downside, but with exponentially more risk and complexity. And there are some people who do it extremely well. Some of those people have the talent, some of them maybe have some information asymmetry as well, which helps. I want to come back to this thing I put a pin in around the non-financial aspects. I mean, Bitcoin is sometimes lost on people who live in countries where their monetary regime is pretty stable. They have confidence in their currency, the institutions that govern them and so forth. But that's a very small minority of the planet. And having a decentralized sovereign money, and I'm actually flipping my terminology.

• 1:21:44Speaker 02

  I talked in my paper about non-sovereign, but as I thought about, I think it's going to call it sovereign money. And since it's self-sovereign, that the world can use is really important. And the fact that anyone can access it is super important. And actually, in terms of just human rights and so forth, and I think that's really important. And one of the other things that makes it so interesting. And while there will be other things built, you know, web three, which will have similar, especially around media and information and censorship and so forth, which will have similarly profound applications beyond just making money. This is a really big one and worth investing in and supporting. What we do apart from investing is, for example, we're quite active and philanthropically supporting,

• 1:22:26Speaker 02

  and as are a number of other people in the community, philanthropically supporting Bitcoin open source development, which depends on developers, you know, it's a computer program. It's a bunch of code, maintaining it. And then with the tremendous conservatism that is the nature of the Bitcoin community, making improvements or adding features to Bitcoin is, has just happened. And an important upgrade or additional functionality was added and so forth. And some people who do that don't require any kind of financial support. And some people do, and I think that's a really good thing to support. And there's a number of ways to do it. There's some charities that you can give to, for example, for US listeners, US registered charities.

• 1:23:06Speaker 02

  And so that's something else that we're very committed to, of course, because it's supportive of our investment, but also because we think it's something that's really valuable for the world.

• 1:23:15Patrick O'Shaughnessy?

  You said something there, which is, I think, really critical that I want to highlight because I remember going through the journey of understanding gold in my twenties and wondering, should I own some gold? And my conclusion being like, why would I want to store value? Like, I want to grow value. And the best way to do that is roughly global equities. And like, that's going to be my conclusion. And that it is interesting that gold today versus 100 versus 500 versus 1,000 years ago, like its purchasing power has been pretty constant. It's wild over very long periods, you know, measured in decades, it's kind of all over the place. And I'd rather grow value than store value, but I think your point is critical that, yes, the ambition is to be a store of value. But it is at 700 billion, still some tiny, relatively small fraction of the market value of just gold.

• 1:23:57Patrick O'Shaughnessy?

  You could argue it should overshoot that, given it's a better version of gold in some ways for the digital era. But I just think that's a critical idea that you expect maybe to own less of it as it gets bigger and achieves that outcome. And shift it into things that's more owning growth versus owning value. I just think that's so interesting.

• 1:24:14Speaker 02

  For people who own Bitcoin, there's this question about when do you sell? And people immediately start talking about like target price and all that. And my answer to it is I would only sell, or I would, I would only sell, but also willingly in order to make more attractive investments. So that's the answer as opposed to what's my target price. And that could happen for a couple of reasons. One is there are simply potentially higher returning opportunities. And I do think that, why are we 15% allocated right now to crypto VC? Well, it's because the things that we're investing in that space and the managers that we're investing in are going to outperform, to be honest. Even my bullish views on Bitcoin, where they think they got a good shot at it.

• 1:24:52Speaker 02

  And that's only going to increase over time because this tech broadly is going to continue to grow and of course, it'll be more and more things built and so forth. And again, because I do think Bitcoin will be successful, it's going to monetize it recently. And Some point, the pace of return will begin to slow. By the way, something I had noticed today, I was reading, there's this Bloomberg assessment that suggested CZ Zhao, or CZ Chao, I think would be the right way to pronounce it, is a founder and CEO of Binance, is in fact a lot wealthier than the press acknowledged a year ago. And because of the value of Binance and is the exchange, and it's kind of interesting that when asked, what crypto do you own personally, because he also owns a fair amount, he only

• 1:25:35Speaker 02

  owns Bitcoin and his own token, which is interesting for someone who's built what is perhaps the world's largest fortune through trading of this long tail of crypto assets. One of these things of, don't focus on what I say, focus on what I do with my portfolio.

• 1:25:51Patrick O'Shaughnessy?

  There's this really interesting question against all of this, where, again, because of how you live your life, you mentioned your game is investing. So you're always looking for interesting ways to think about opportunity cost, and Bitcoin plays a part in that, and deploy capital in an effective way, not just to create value, but to capture a lot of it. We've talked a lot about these concepts. Given today's environment, it seems like an interesting question to explore the supply and demand of capital itself. And this kind of notion that I've had, which is, look, in the technology space, it seems like you'd rather be a buyer than a seller of capital. We talked about this the other day, and you said, yeah, that's true, but the fact is, you and I both have a lot of capital, we have capital to sell, right? So like, as an investor, you're selling capital. So talk me through this, again, against the backdrop of a really cool, interesting

• 1:26:36Patrick O'Shaughnessy?

  career, the buying versus selling of capital question to me is really interesting, and I'd just be curious for your general take on it.

• 1:26:44Speaker 02

  I inevitably get people who contact me asking for advice about, you know, breaking into private equity, whatever, because that was like what I did two industries ago. It's a great risk-return activity, but right now, in the current environment, you'd much rather be a buyer than a seller of capital. If you can do it, and by seller capital, I mean investing, and buyer capital means building a new business that consumes capital. The highest level is just obvious that you, in the current environment where capital is relatively abundant, yields are still negative, massively negative, and okay, maybe now they're going to become somewhat less negative, but they're probably going to stay negative. Real yields are going to stay negative for the foreseeable future. Kind of obvious that you'd rather be a buyer than a seller of something

• 1:27:27Speaker 02

  that whose price is negative. Now, of course, the challenge is for maybe people like me, who are someone in both sides, with an investor, but also building a business, and you do the same thing. So in practical terms, a little bit, the challenge is, yes, I mean, that's the right answer. And you still kind of say, what I do with the capital? Well, you know, you could just like park it, and maybe that's the right thing to do. But to me, the difficult thing is that you can't say, I've got this much money, I'm going to go start different investments, I'm going to go start 20 different companies that I'm going to build using 5% of each of my capital pool. Your constraint is not you're going to be,

• 1:28:08Speaker 02

  your capital is going to be your top. And so that's where I find tension. And that's what unfortunately, I think, means that if you've got capital, you're kind of, it's hard to get fully away from selling capital at some point, as much as that would be the optimal thing to do, if you want to be diversified.

• 1:28:25Patrick O'Shaughnessy?

  I'd love to use it as an excuse to talk about the supermarket experience in Europe. So you're a buyer and seller of capital, in this case, your own. You're a seller of a nice chunk of your time. There's, there's a lot going on here, and it's non-technology in a core sense. Tell me this story. I'm just fascinated by the fact that you're doing this alongside everything else we've talked about.

• 1:28:45Speaker 02

  First of all, the business is a pan-European outlet supermarket, and it's unique, but actually fairly straightforward in that the key innovation is the way it sources. And so what it does is it's fairly typical supermarket. It doesn't include fruit and vegetable or whatever, but it covers other kinds of food and drink and health, beauty, cleaning. It sells top brands, and it does so at about a 30% discount to the discounters. And the way it does that is, is that it's a dynamic assortment, so it's buying opportunistically as opposed to on a systemic contractual basis. And it does in Europe, and the core principles of the EU is free movement of goods and free movement of people.

• 1:29:24Speaker 02

  And so this really builds on a free movement of goods to the extreme, which is we have a team of buyers who are buying opportunistically across all of Europe, taking advantage of over stocks, production problems, whatever. And then matching that with the market to create what feels like a really premium supermarket experience. It's just, this is what's happening and this is why it can be that premium experience while being thirty percent cheaper on average. And it's innovative and it's working quite well, thankfully, and growing very fast. We open a new door every, say, nine days. It's a great business. I think it has tremendous potential across Europe.

• 1:30:02Speaker 02

  And the story behind it was I was working with a great friend and someone who had worked with originally while at KKR, who had run a couple of portfolio companies, Tony DiNuncio, who's a very prominent retailer, because I'm not, obviously. Been friends for many years and we were talking about looking for ideas and business models. And this was whatever back in twenty thirteen and identified this as an idea. And then met the CEO of the business, Carlos Bizarro, who built a big supermarket chain in Brazil. He's from Spain, but he built a big supermarket chain in Brazil. So he had this both sort of tremendous industry experience, but also experience as an entrepreneur.

• 1:30:43Speaker 02

  And so we launched it and actually the original format wasn't quite what it is today. We had to iterate and figure it out exactly what it ended up being to get something that I think is really, really great. It's true, it's not tech. In fact, it's rather intriguing, literally physical retail. It is not even e-commerce. It happens to be a segment where really it's not threatened by e-commerce. And I think, look, yes, okay, why? Well, sometimes life is not all top down. Sometimes it's bottom up, sometimes there are opportunities and you see them. And that's from just a business and financial perspective. And I think it's going to be a very good investment and I know it already has been, but also.

• 1:31:22Speaker 02

  It's good to have your mind also think about something that's so fundamentally different with a chunk of my time. So I think that's really good from that perspective. The only material non-tech thing that you do is Capital Solutions, Special Sits investing in Brazil, actually. And that's just like a whole other thing. I've got just these amazing friends and partners there. And it's not at all tech, interestingly, because it's like Capital Solutions, Special Sits. Now I'm going to bring a whole new idea into this thing, but I look at it as my deflation hedge, which is when I say Capital Solutions or Special Sits, you're talking about typically debt equity hybrid securities. One of the challenges of thinking about the uncertainty of the next year is over inflation versus deflation

• 1:32:06Speaker 02

  is the assets you would want to own in an inflationary environment are they're opposite from what you would want to own in a deflationary environment. And while most people are worried about inflation, there is deflation scenario out there. Maybe it's unlikely, but it's not zero. Again, Kathy Wood at Art talks about this and tech kind of being a driver. I'm probably over intellectualizing it, but the fact that it's these hybrid debt equity securities for a percentage of our portfolio is kind of a nice hedge in case that came to pass. It's also just fun.

• 1:32:38Patrick O'Shaughnessy?

  Can you just describe why that is? Why it would be fun?

• 1:32:41Speaker 02

  Let's say that we get into a deflationary environment. Well, the asset you want to own is, kind of think about it, it's fixed in now. You want to get your capital back plus something. But the problem with that is in an inflationary environment, that's exactly what you don't want. If you're unsure, it's like, well, we might get inflation, we might get deflation. It's like driving with one foot on the gas and one foot on the brake. To have a portfolio that does those two things, whereas this, because it's hybrid, if there is inflation, the equity component of the investment will mature that you make money in real terms, notwithstanding inflation. But if it turns out there's deflation, the debt component of the investment means you're going to get your capital back plus something in nominal terms. So I kind of like that. And by the way, let me just riff a minute on deflation.

• 1:33:26Speaker 02

  I think public blockchain crypto is a deflationary technology like no other. You can kind of derive that from all the stuff we've been talking about, but first of all, compared to the status quo, as I said, much more of the value created will go to users and maybe the developers rather than investors. Rent seeking is going to be really hard. Because of velocity, open source, interoperability, copying, forking, and you've got software-style economics. I mean, but in my 2017 paper, I talked about, sort of said, well, in the end, layer one blockchain crypto assets are going to converge on the cost of compute, and then that cost of compute is going to decline based on Moore's law. But what in fact is the case, it's better than that from a user macro perspective,

• 1:34:09Speaker 02

  and worse than that from an investor perspective, in that it's Moore's law, you get whatever doubling of compute every three years or whatever it is right now. I forgot the pace, or two and a half years, I forgot where it is right now. But the software economics, it's like orders of magnitude faster. And I'm just going to allude here to ZK rollups. In that Ethereum economy of we need gas to conduct a certain amount of economic computations or transactions on the blockchain, it's not like ZK rollups are twice as good or twice as efficient. They're many orders of magnitude more efficient. And what ZK rollups allow you to do is to run your computation,

• 1:34:52Speaker 02

  your smart contract, your program off-chain, then delivers back a proof that the layer one can validate. And the consequence of that is that the amount of gas, which is the, you know, we're getting into how Ethereum works, but you actually pay miners gas, which is this internal currency on Ethereum that you buy with ETH to pay for computations or whatever. This basically means all of a sudden, you need like orders of magnitude less gas to do a whole bunch of computation. You're just basically paying for updating state, and you're doing it for this massive amount of off-chain work. And this is massively deflationary. So you've got this kind of stuff, which means that the efficiency of this technology

• 1:35:37Speaker 02

  is seriously going to grow much faster, because it's again, it's software-style economics instead of even Moore's law hardware-type economics. And so the interesting thing about that is, you know, coming back to, well, let's say we really do move a big part of the economy onto this tech. I think that it's going to become massively cheap, and it's going to capture really infinitesimal value relative to economic activity going on.

• 1:35:59Patrick O'Shaughnessy?

  As we start to kind of wind down our conversation, I want to appeal to something that we started the conversation with, which is about this unique experience that you've had, living in 10 countries, visiting a million more, speaking different languages, the ability to shed past pairs of clothes for new ones in a distinctly quick way, let's say. With all that in mind, how should we think about the nature of the globe and its interconnectedness? We've talked a lot about tech interconnectedness and the interoperability and the composability of it all, and how much that speeds things up. It seems like maybe there's a countervailing force in the world of politics and countries and geographies where globalization, which has provided us with a lot, may be going the other direction, that countries may be becoming more insular, especially the United

• 1:36:44Patrick O'Shaughnessy?

  States, where most of the listeners are to the show, trading less, less dependent on global trade relationships or whatever. As someone that is a very worldly person, do you think that that's true as a concern? Is it something you think about in your portfolio? Say a word on just the nature of countries and globalization and the future there.

• 1:37:01Speaker 02

  I'm not sure my opinion is any more biased than anyone else's on this, but I would say the following. First of all, as you can imagine, personally, I love globalism. I think there should be freedom of movement everywhere and don't like this whole, really reject notions of nationalism and all of that. It is somewhat more that way than it was, but whether that's a trend and how stable that trend is in historical terms, I'm talking about very short timeframes. I would temper some of this by saying, things are cyclical and cycles are getting shorter and faster on everything for a bunch of reasons.

• 1:37:42Speaker 02

  One of them being that the environment is changing fast. The technological world that we live in is changing faster and faster. So I might more say, I'm not so much sure that I think it's going in one direction or the other than to say, I think that both the range of potential outcomes, the amplitude is greater than ever, and the speed at which we'll cycle through stages and maybe pendulum swing back and forth will get faster and faster. And therefore, it's really, really, really hard to predict, meaning I can sit here and rattle off innovations that will probably come to pass this decade that are so profound to begin with, that it's difficult to imagine how one of them affects our existence, let alone the combination of them.

• 1:38:28Speaker 02

  And that means that it becomes absurdly difficult to guess the social, political responses to that. And it could be all over the place. And one of the things I found fascinating about pandemic, having seen it from many different countries and whatnot, is how literally we all have the same facts. You can go on the internet, they're all the same infection rates, you know, hospitalizations, all the data, it's all out there, it's all on the internet, we all have the same information. How radically different that data is interpreted in terms of opinion, public opinion and political opinion in media is just staggering. And in that, you know, and so as we are in a world that's going to be changing faster and faster,

• 1:39:13Speaker 02

  I find it really, really hard to guess. And so I actually had this conversation with our younger founding members. We've got this big extended family and we're all sitting around together over the last couple of weeks and talking about some of this, and it's actually the same question came up at the table. We were talking about how things are going to change. And I was a young person prepared for that. And I said, well, look, don't know, but here would be some thoughts. I think one is be data driven, be analytical, learn to be a problem solver, be aware of and consciously fight against your cognitive biases. And also be a Bayesian. Think probabilistically, update your probabilities. Don't think in terms of certainties. Update your probabilities fast.

• 1:39:58Speaker 02

  Don't anchor yourself where you don't need to. And recognize that that you're probably going to be doing so many different things in your life. It's those things that are going to be the core skills as opposed to something you're going to specifically learn, or even whatever PhD you're doing right now. I have no idea where things are heading, but I think it just drives us back to being adaptable.

• 1:40:17Patrick O'Shaughnessy?

  I have a strange question for you. Why don't you believe in asking people where they're from? Which seems to be the most common opening question that we ask anybody.

• 1:40:26Speaker 02

  I think it's literally the least interesting thing about a person. And the reason is because knowing something about a person that they had no control over.

• 1:40:38Speaker 02

  Gives me no information. What I want to know about are the choices that they made and where they're going. There is this kind of saying in the family, which is, don't ask me where I'm from, ask me where I'm going. Because that tells me who this person is. And so I find it really weird. This question, not only is it devoid of information, but really strangely besides the point and something that we should all stop focusing on.

• 1:41:02Patrick O'Shaughnessy?

  Are there any other things that you like to focus on getting to know somebody that you think are unorthodox? Things about their life or what they're working on or just favorite questions of yours that you find yourself returning to?

• 1:41:15Speaker 02

  There's this kind of actually quite annoying cliche conversation question, which is, what are you working on? But maybe just looking for less annoying ways to ask that. First, I think if you just have the discipline of saying, I'm not going to ask where somebody's from, because when you ask somebody where they're from, where they were born, what's really happening is your animal brain is looking to not make effort. And by not making effort, it's looking to, with a minimum amount of information, put somebody into a box, which we do because brains consume energy. And so we like heuristics because they save us time and energy. And if someone answers whatever they answer, we immediately assume a bunch of stuff about a person. That's the reason we do it, which is just laziness.

• 1:41:55Speaker 02

  So just simply refusing the laziness of saying, I'm not going to ask that. And then saying, so, you know, it kind of forces you to ask about, so what are you doing? Where do you spend your time? What is your attention? What are you planning on doing new and different this year? I don't know. Hopefully, less obnoxious ways of phrasing, what are you working on? But that kind of thing is, to me, far more interesting as a way to get to know somebody, far more informative.

• 1:42:20Patrick O'Shaughnessy?

  I find it amazing when I saw that Larry David episode about hating small talk and just trying to get to medium talk as quickly as possible. It's a story of my life. Sounds like yours, too. My second to last question is about building portfolios kind of writ large in this private group that I've been a part of creating called Frontier, where you're talking, one of the discussion points was called, why not SPY? Which is this idea that as a default place to put your capital, maybe SPY is wrong, maybe Vanguard Total Market Fund, you know, that costs three basis points or something is the right answer, but global equities or domestic equities. That has been an incredibly good thing to invest in. It's been a very high bar to beat. Most have been unable to do so over long periods of time, if your horizon is long enough.

• 1:43:02Patrick O'Shaughnessy?

  But a lot of what we've talked about today potentially could put that in new light or make it a little bit harder to view that as the default asset. How would you think about that idea of why not SPY? Applied to just the general investor out there?

• 1:43:16Speaker 02

  Look, it's hugely unsettling to me, that thought, to be honest. I've always been a big indexer in public equity markets and just sort of said, you know what? Well, I recognize efficient market theory is not accurate to the extreme. It's close enough. It's like a good model and it's close enough, meaning that I don't know that I can be operating at a level of stock picking where that imprecision of the model versus reality is going to help me out. So that was great because it made one part of my life easy. Now, I do think that this whole discussion around the fact that this new tech, rather uniquely, is going to maybe in some subsets, sub-applications, I should say, some applications

• 1:43:59Speaker 02

  that will be great at value capture, some sub-applications, it will be poor value capture. Point one, point two, the distribution of that value will be very different. And point three, it's not going to accrue in the form of equity nearly as much, at least not public equity, maybe private equity through venture. That one, two, three would suggest that you just take your retirement account and park it in the SPY or the Vanguard Total Stock Market Index, which would have been the right answer for most of the 20th and 21st century, as long as those products existed. And I think they've only been around three or four years, you know what I mean? I think that there's a strong argument that that won't work. But again, that kind of comes back to this point of it's too risky not to own Bitcoin. And I would send everybody there first.

• 1:44:44Speaker 02

  And this whole conversation again, because the nature of the questions, I've talked a lot about everything else, but I would just come back to the fact that to me. That is a store of value as the native money of the internet. Bitcoin is the biggest no brain investment out there. Next question is how much of your portfolio and that depends a little bit on your tolerance for volatility. And everybody's different because it will remain volatile for some time, but I think that remains a thing. But then within this world, what would I do? And I kind of break it into three buckets. It's like, there's Bitcoin, there's crypto VC, which there's an access thing. Not everybody unfortunately can access, especially not the quality funds you want to be in. And I can assure you that the best funds are much, much better than the second best funds.

• 1:45:27Speaker 02

  And it's total power law and those funds are extremely hard to access and so forth. And then there's this other thing, which is kind of the other liquid stuff. The middle is tough because it's complex. It is not a muchness. You know, one of the fallacies of the space is is that people look at that list of crypto assets on, you know, whatever. Coin market cap or something. Imagine if you just log into Bloomberg and it was just one long S T file dump of every conceivable investment. They didn't like nothing to do with each other. And I think investors are beginning to discern and realize that Bitcoin is different from a layer one. Crypto asset is different from a Dow is different from all these different things that they're beginning to. But still, I fear silliness like owning an ETH is like owning a share in Ethereum.

• 1:46:12Speaker 02

  No, it's not. I think we're going to have to become much more discerned about this. And it takes a tremendous amount of energy. It's extremely difficult. It takes a lot of information access. You know, human beings are, they can very quickly be like dogs chasing squirrels in the park. And you never catch one because there's always another squirrel to chase. And it is true that, oh, well, you know, there'll be a headline that will say, you know, this, this crypto asset outperformed Bitcoin and did this and that. And then people start chasing that stuff. Question is, okay, but look back over many, many years. There's really not much from say the 2017 crop that is even still there, let alone out from Bitcoin.

• 1:46:52Speaker 02

  Take when I wrote my paper, Ethereum was trading between point zero nine and point one five ETH per. BTC. It's right now trading at about point zero seven five, meaning below in Bitcoin terms. Everybody's like, oh, these outperformed. Well, no, not good to what your timeframe is. Looking back from the summer of seventeen, it's underperformed Bitcoin. If you look back from one year ago, it's outperformed Bitcoin, but that's like the exception. And if you go to pretty much everything else that was on CoinMarketCap in twenty seventeen, it's massively underperformed or even disappeared. So I'm confident people underestimate how,

• 1:47:32Speaker 02

  by how many orders of magnitude more risky investing in liquid crypto assets other than Bitcoin is compared to investing in Bitcoin. And they say, yeah, but it's maybe higher term. Yeah, but the thing is, is that it's like orders of magnitude more risk and maybe higher return or maybe lower return depending on what you do. So I don't think you're getting paid for that. That would be my comment. Sorry, I was very long with an answer to say, yeah, I think you've got to diversify out of equities. We do. But I think within that, I think you'd be need to be very thoughtful about not letting that be translated into, and now I'm going to go day trading altcoins.

• 1:48:07Patrick O'Shaughnessy?

  John, every time we've talked, I've learned a tremendous amount about thinking through the perspective returns as investors, but behind that, all of the interesting things that are going on in the world. And I think this, what I'll remember most about this conversation is this dislocation of the traditional equilibrium between users, labor, developers, whatever, and capital investors, and how that may shift around going forward and just the impacts that all this stuff could or may have on our lives as users, which I think is very good. As investors in our portfolios, it's just been such a neat, wide-ranging conversation. My closing question for everybody is to ask the same thing, which is, what is the kindest thing that anyone's ever done for you?

• 1:48:45Speaker 02

  Oh, gosh. My wife agreeing to marry me.

• 1:48:48Patrick O'Shaughnessy?

  Simple.

• 1:48:51Patrick O'Shaughnessy?

  Can you tell that story?

• 1:48:52Speaker 02

  It's comically unromantic, but so we met at a friend's birthday party and it was classically funny. Literally within thirty seconds, I knew this was the love of my life, the woman of my life. I was completely convinced and she, within five minutes, kind of got up and walked away. And it took me, it took me like a month to get her to even go to dinner with me. I managed to break through and then what happened was we were, it was in Buenos Aires in nineteen ninety four. And for business reasons, something came up where I had to, it was like, well, there was an opportunity in Brussels. And I said, well, this is really interesting. Why don't we move to Brussels?

• 1:49:35Speaker 02

  And she's like, you're nuts, you want me to, she was an elementary school teacher and just finishing up a degree. And you want me to quit my job and move to another country? And I was like, yeah. And that night I dreamt, and I don't know if anyone's old enough to remember this, but I dreamt of us walking off of the Sabina, which was the old Belgian National Airlines airplane into the old Zandtum Airport, which was really art. And so I'm in a dream, we got off and she literally turned around and just got back on the plane. So I woke up that next morning and I said, you know what? I was thinking we should get married. Literally my mind was thinking, I need a signed contract. And she was like, no, I was thinking now we should just live together for a while.

• 1:50:20Speaker 02

  No, no, no, you don't understand, we gotta get married. And then it went back and forth like that for a few weeks. And then finally I said, look, I gotta, we gotta decide what to do with this opportunity. So we gotta set a deadline and we decided on that deadline, we would get married. So it was a comically unromantic, but that was clearly the kindest thing anyone has ever done for me is my wife agreeing to marry me.

• 1:50:42Patrick O'Shaughnessy?

  With the same lens of infinite time horizon, what do you think are the most actionable keys to cultivating a good marriage over a long period?

• 1:50:50Speaker 02

  So we've been married now for coming on 28 years. And of course, we got married relatively, I mean, you know, I'm 53 and we got married pretty young. And so I talked earlier about all the different changes, countries and industries and all this change. And what has been great is that we've really grown up together. And the best analogy, the three-legged race, two people who put one leg into a burlap sack or whatever, and then you try to run together. And the whole funny thing about it is, is that you gotta stay synced and then you get a little bit out of sync and then you have to get back into sync. And if you don't, you fall down and you have to get back up and stay in sync and that's the game.

• 1:51:32Speaker 02

  To me, it's that we sort of get out a little bit of sync sometimes, but then we both have one leg each in the same burlap sack. And so we resync pretty fast. So one of us will kind of go off in some direction and it'll be like, whoa, wait a minute. Let me come back into the rhythm or person two adapting rhythm to person one. And it's worked really, really well. And I think that useful kind of mental image for us. And I think that there's this whole kind of thing about we get very, very young and obviously, and in a very kind of simple way, you met somebody at a party and it was sent an instinctive and all of that. And I think that people overthink these things and I overthink most things, but not those things. And I think that we don't trust our instincts enough.

• 1:52:18Speaker 02

  Think about it in evolutionary terms, when we're talking about most of the stuff we've talked about today, our ancestors 100,000 years ago on the savanna were not confronted with these issues. And our brains are not evolved in a way where our intuition is going to help. On the other hand, 100,000 years ago, we were mating and forming families and raising kids and these kinds of things. And therefore our intuitions probably aren't very well evolved for those types of things. And so our existence today requires us to be super analytical and all of that. But that doesn't mean that you should apply that reflex to things that we're actually evolved to deal with intuitively.

• 1:52:55Patrick O'Shaughnessy?

  What a cool closing thought. I'll think of the burlap sack, three-legged race often. I think that's a perfect analogy. I was married young too. And 12 years in myself, so I love the idea. I've loved our conversation. John, thanks so much for all your time.

• 1:53:07Speaker 02

  It's been a pleasure.

• 1:53:10Patrick O'Shaughnessy?

  If you enjoyed this episode, check out joincolossus.com. There you'll find every episode of this podcast, complete with transcripts, show notes, and resources to keep learning. You can also sign up for our newsletter, Colossus Weekly, where we condense episodes to the big ideas, quotations, and more, as well as share the best content we find on the internet every week.

• 1:53:30Speaker 02

  You