[REPLAY] Crypto for Institutions 1: Eric Peters – The Macro Case for Bitcoin (Capital Allocators, EP.180)

Eric Peters is the founder and CIO One River Asset Management, where he searches for high conviction strategies coming out of his team's expertise trading and investing in thematic macro, volatility, systematic, and inflation strategies – each as it turns out, turned his focus on study bitcoin and cryptocurrencies. Eric made news in November when he executed a $600 million purchase of bitcoin, then the largest public transaction to date. He has called bitcoin the most interesting macro trade he's seen in thirty years in the business, and we kick off this mini series, Crypto for Institutions with his macro case for the digital asset. Our conversation discusses the intrigue of Bitcoin as a form of money, how digital currencies will somewhat ironically increase the power of governments and the likely co-existence of bitcoin with government digital currencies in the future. The then turn to the development of institutional infrastructure for digital assets, Eric's perspective on bitcoin as an investor and a trader, the reflexive nature of bitcoin supply, and the risks in the asset. Lastly, we discuss the story of Eric's big trade, the future of bitcoin, and institutional interest in the space. Please enjoy my conversation with Eric Peters in this first of four episodes in the mini-series Crypto for Institutions. Learn More Subscribe: Apple https://podcasts.apple.com/us/podcast/capital-allocators/id1223764016 | Spotify https://open.spotify.com/show/3q6PrjHVfRzpD2lN1g2XRU | Google https://podcasts.google.com/feed/aHR0cDovL3RlZHNlaWRlcy5saWJzeW4uY29tL3Jzcw== Follow Ted on Twitter at @tseides https://twitter.com/tseides?lang=en or LinkedIn https://www.linkedin.com/in/tedseides/ Subscribe Monthly Mailing List https://capitalallocatorspodcast.com/capitalallocatorspodcast.com/signup Read the Transcript https://capitalallocatorspodcast.com/subscriptionsignup/

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

• 0:01Ted Seides?

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• 0:46Ted Seides?

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• 1:24Ted Seides?

  Capital Allocators is also brought to you by RidgeLine, the investment management platform built for firms who are rethinking how work gets done. You're at your desk looking at a line graph of your firm's growth. The line is moving sideways, linear growth, and you know exactly why. You're constrained by your operational bandwidth that's been the same for so long, it just feels like the cost of doing business. RidgeLine is built to change that line's trajectory, to be the inflection point that takes your growth from incremental to accelerated with the team you already have in place. RidgeLine is the only AI-native investment management platform that brings together

• 2:06Ted Seides?

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• 2:47Ted Seides?

  the operations partner trusted by the leading private market GPs. One theme that keeps coming up on the show is GPs that build the strongest and most durable relationships with LPs are the ones that have both strong returns and strong operations. AI raises the stakes on operations and having Juniper Square as your operations partner helps ensure your data is organized, accurate, and accessible, so you can unlock operational alpha. That's why thousands of GPs trust Juniper Square. Learn more at junipersquare.com/capitalallocators.

• 3:32Speaker 01

  Hello, I'm Ted Seides and this is Capital Allocators. This show is an open exploration of the people and process behind capital allocation. Through conversations with leaders in the money game, we learn how these holders of the keys to the kingdom allocate their time and their capital. You can keep up to date by visiting capitalallocatorspodcast.com.

• 4:02Ted Seides?

  My guest on today's show is Eric Peters, the founder and chief investment officer of One River Asset Management, where he searches for high conviction strategies coming out of his team's expertise trading and investing in thematic macro, volatility, systematic, and inflation strategies. Each, as it turns out, turns his focus on studying Bitcoin and cryptocurrencies. Eric made news in November when he executed a $600 million purchase of Bitcoin, then the largest public transaction to date. He has called Bitcoin the most interesting macro trade he's seen in 30 years in the business, and we kick off this mini-series with his macro case for the digital asset.

• 4:47Ted Seides?

  Our conversation discusses the intrigue of Bitcoin as a form of money, how digital currencies will somewhat ironically increase the power of governments, and the likely coexistence of Bitcoin with government digital currencies in the future. We then turn to the development of institutional infrastructure for digital assets, Eric's perspective on Bitcoin as an investor and as a trader, the reflexive nature of Bitcoin's supply, and the risks in the asset. Lastly, we discuss the story of Eric's big trade, the future of Bitcoin, and institutional interest in the space.

• 5:28Ted Seides?

  As you'll hear in these conversations, the infrastructure for institutions to participate in the space is firmly established and led by service providers whose names may be new to institutions. We're pleased that some of the leaders across research, trading, administration, and fund management have joined Coinbase in sponsoring this mini-series. You woke up Monday morning and 149,000 Bitcoin flowed into exchanges over the weekend. $7.5 billion worth of cryptocurrency is moving fast, and you don't know why. With Chainalysis Market Intel, you'd know this is only the seventh time ever that weekend inflows have surpassed 145,000 Bitcoin.

• 6:13Ted Seides?

  You would also know that these large inflows are followed by price declines, and you'd be ready to trade. But you haven't subscribed yet, so you don't have this insight from Chainalysis chief economist Philip Gradwell. Don't be left behind. Subscribe today at chainalysis.com/allocators. FalconX is a leading crypto financial services company providing institutions trading, credit, and clearing across all major crypto pairs. Fortune 1,000 companies, family offices, and asset managers turn to FalconX as a trusted partner in the cryptocurrency market. FalconX currently services over 250 institutions globally,

• 6:55Ted Seides?

  and its backers include Xcel, American Express, Coinbase Ventures, and Fidelity. Visit falconx.io to sign up and supercharge your crypto trading abilities.

• 7:09Ted Seides?

  Since 2014, MG Stover has been the leading fund administrator for digital asset funds. With proprietary technology and dedicated teams focused on this asset class, MG Stover has proven expertise to streamline your crypto accounting and reporting needs. Give your investors peace of mind and go with the most trusted firm in crypto, MG Stover. The Bitwise 10 Crypto Index Fund, ticker BITW, is the first and largest publicly traded crypto index fund in the US. The fund is managed by Bitwise Asset Management, a leading provider of crypto funds based in San

• 7:49Ted Seides?

  Francisco with over $1 billion in assets. BITW primarily holds Bitcoin and Ethereum today, along with smaller allocations to up and comers like DeFi assets. The index fund rebalances monthly to keep you on the right side of the fast-changing space. To learn more, search for ticker BITW or visit bitwiseinvestments.com. Please enjoy my conversation with Eric Peters in this first of four episodes in the mini-series, Crypto for Institutions.

• 8:24Ted Seides?

  Eric, great to see you.

• 8:26Speaker 02

  You as well.

• 8:27Ted Seides?

  And this is kind of unbelievable that about a year ago, you came on the show and it was one of the first virtual ones I did. And now I'm super excited to actually be sitting across a big table.

• 8:37Speaker 02

  It's very weird. We both took a COVID test. We're all good.

• 8:40Ted Seides?

  Yeah. The impetus for this was this paper that you wrote and your relatively new interest in digital assets. And I'd love to just get your perspective on how you started thinking about the case for cryptocurrencies blockchain investing.

• 8:57Speaker 02

  It's something that I've thought about for a very long time. I've been fascinated by Bitcoin in particular, less so the extended ecosystem. Just

• 9:06Speaker 02

  It's mainly because I've just been interested in money, not money for the sake of money, but just the study of money and interest rates and fiat currency. And I've spent my whole career on it, right? So something new comes along and you're naturally going to be pretty intrigued by it. There have been other, I think, attempts at digital money, but Bitcoin was the first thing that seemed like it was very real. And initially, look, I thought it was so real and it was so important that it would never be allowed to survive. And the reason that it wouldn't be allowed to survive, in my mind, was regulatory, was governments would look at it and just say, well, you know what, senior riches are a great power. Why would we ever give that up? There's no reason to give it up. And governments, generally speaking, are mass power. They don't shed themselves of different powers.

• 9:51Speaker 02

  So I thought that it was initially something that governments would watch carefully. They would determine which thing in the private sector ultimately proved to be most robust. And then they would effectively take it over and kill the private market for it and then just turn that into their form of money. But, you know, over the last few years, my thing on that has changed. And that's when it became much more interesting from an actual investment perspective.

• 10:16Ted Seides?

  So when you circle back a couple of years before you were looking at it from an investment perspective, what was it about Bitcoin that felt real to you as it relates to this concept of money?

• 10:27Speaker 02

  It was very clearly a robust system in the sense that it was decentralized and it worked. And when I say it worked, it's interesting, a lot of people will look at the volatility that Bitcoin has had over its life. And to date, it's had six discrete boom bust cycles. And they would say that's a weakness. And I would just point out that I think that that's an enormous sign of strength, actually. Weakness is Pets.com, you know, the sock puppet stock that went to the moon and then collapsed and then basically flat lines at zero, right? To have something accelerate the way Bitcoin has over its life and then have deep corrections and then stabilize and then make new highs, that's something that's very interesting, right?

• 11:10Speaker 02

  And so the more people who I got to know who had either become invested or become just passionate about it, the more intrigued I became. And so then you do the, like, I always do thought experiments with things. So I'll look at, say, something like, I don't know, oil. And you say, are we really going to all be using fossil fuel in 100 years? The answer is kind of pretty clearly not. And then, and then you kind of start winding back and then it forces you to kind of think about, well, how quickly will transitions happen? The same thing for money. In 100 years, are we really going to be using paper dollars and copper pennies and things like that? It's like, obviously not, right? So then, so then you start winding it back and you go, okay, well, how quickly will that transition take and what will it look like?

• 11:54Speaker 02

  And one of the interesting things that I concluded when I thought through things that way is that money will become digital precisely because it gives governments more power. And we can talk about that in a minute. But so then the question is, well, can Bitcoin or digital assets, will they be allowed to exist next to digital fiat? That was the important transition for me to start recognizing that the answer to that is yes.

• 12:19Ted Seides?

  So let's start with that concept of government power and digital currency. Play that out for me.

• 12:26Speaker 02

  I think we're observing now what the government is doing with the dollar and the SWIFT payment system. The US has had enormous power because the world uses dollars and uses that payment system. And for all the talk about things like Bitcoin being used for dodgy purposes, the reality is cash dollars or euros or any currency, now, once they're printed and they're distributed, they're very difficult to track. That's reality. Every transaction that's ever happened in Bitcoin's history is available. It's in public ledger. You can see every single transaction that's ever happened and will ever happen. So. Why would governments want digital currency?

• 13:06Speaker 02

  Well, I think they'd want digital currency because if you can force everyone, and by the way, I'm not trying to present governments as being just universally evil and bad. It's just, I think governments act a certain way, right? If you're the government and you want to stop money laundering, it's a public good to stop money laundering. It's a public good to stop terrorist financing. It's a public good to stop criminals moving money around for all sorts of reasons. So if you really want to control those things, then force everyone into a digital system where every single transaction will be tracked in perpetuity. And then force everyone to have a wallet or a bank account that is registered. And then guess what? Once you've moved people off paper money, there's no place to hide.

• 13:50Speaker 02

  And so that's how the government acquires power through that. Because once they do that, well, think of all the things that you can do with that, right? One of the things you can do is you can stop money laundering and stop dodging movements. You can confiscate people's money. You can tax people. You can impose negative interest rates on some group of corporations or people. You can give other people subsidies. I mean, the government has enormous power. Once it associates a person and a corporation with a wallet and then can track every transaction.

• 14:21Ted Seides?

  So that presumes to some extent that the government controls that ecosystem when the whole ethos of Bitcoin is a decentralized system. So come back to that notion that you came to the conclusion that Bitcoin can and will exist alongside of whatever governments choose to do digitally.

• 14:37Speaker 02

  That's one of those fun questions to think through. And also something that, as I've become more active in the space, I've come to see as being one of the reflexive elements in Bitcoin. So there are a number of reflexive elements in this asset class that I think are really unique. This is one of them. So initially, I think it is pretty much unambiguously true that most people who were attracted to this tended to, let's just use Bitcoin. Because, by the way, a lot of what we talk about, we'll talk about Bitcoin, can be extended to other assets. But let's say the case of Bitcoin. Initially, I think that most of the people who were attracted to it were attracted for a whole Host of reasons, many of which included libertarian type reasons where it's like, okay, well, this is

• 15:19Speaker 02

  this is an anonymous form of value transfer, new world form of money, governments can't touch it, etc. That attracted a certain type of person and a part of my brain is that kind of person, by the way. Some of those people acquired very large positions, some just kind of traded around. But as this asset class has matured, and by the way, it's just beginning the process of institutionalization. So there's been a lot of maturation that's happened up to get up to this point, but through that process, what's happened is it was in some sense so unreliable and so threatening to governments in its then existing form that as more people entered it, they recognized there were needs for certain types of infrastructure.

• 16:02Speaker 02

  And as they started building those businesses, they realized that it takes a lot of money to build this business. As you build a business that requires a lot of money to build, you start thinking about, well, I need to make sure there's a valuable business. I mean, you make sure there's a return on this capital. And what you eventually get to is you get to an industry which starts building out the major structural pillars that turn it into a real industry, a real asset class. And each one of those requires huge investment. And so the people who are doing it recognize that in order for their investments to pay off, they actually ultimately need the industry to become institutionalized, which means you need to draw that institutional capital in. You need to get the regulators to sign off on what you're doing.

• 16:44Speaker 02

  And if so, if you're not the kind of person who can do that, you've kind of been left behind in this industry. If you are the kind of person to do that, you're the type of person that builds Coinbase, which is, is an example, which is most recently, the values I've seen in the private markets are $70 billion, right? So now, if you're someone who's built a company like that, you don't want the dodgy characters in it. So as this market has matured.

• 17:07Speaker 02

  What's happened is the bad money has gotten pushed to the side. It's been ostracized, the bad actors, the bad players. And the regulators have had to take it more seriously and they have started to get more comfortable with where it goes. And so, you know, a number of years ago, the regulators could have destroyed Bitcoin. They can no longer destroy it. They could do various things, but can't destroy it.

• 17:29Ted Seides?

  Really, people started paying attention, say 2017, when Bitcoin price ran up and then later collapsed. What are those key building blocks that have come into place over those last three or four years?

• 17:40Speaker 02

  So, big one is custody, institutional custody. And you still see the headlines, I don't know, it was a headline a month or so ago about some poor guy who lost his password for his computer and, you know, his $20 billion or $20 million or whatever, it doesn't matter. They make for great headlines, great stories. But you go back to 2016, 2017, you really didn't have great custodial solutions. And so, it was rather nerve wracking. And so, if you're an institution and there are bad headlines about, I don't know, drug deals being used or arms dealers. We know what all the early adopter bad headlines look like, right? But you needed to have things like custody, you needed to have good places to trade these

• 18:24Speaker 02

  coins, you need to have some regulation come in and kind of start getting a sense for how regulators are going to treat this. You needed to have things like PayPal, you know, their deal to basically to create a retail on-ramp into these assets that integrates it with the existing payment systems. And then you need firms to kind of create the on-ramps for institutions. Because, like, for instance, we speak with institutions all the time. And by and large, some have very small investments in the space, either through a venture deal that they did, or maybe with, there was someone at the investment team that had great foresight and said, listen, we should start learning about this, make a very small allocation. Those things have happened, not at scale. By and large, most institutions have not gotten comfortable with the players in the

• 19:09Speaker 02

  space. Institutions need someone to be able to feel like they can get access to the asset class without taking all of the operational fiduciary risk that they felt exposed to. But these are all issues that have, they started really being solved post 2017 and they're being solved at an increasingly fast pace right now.

• 19:28Ted Seides?

  So if we take for granted the operational infrastructure component of it for an institution... How do you start thinking about value? We know this isn't a cash flowing asset. Or how you think about Bitcoin in particular, in the context of a portfolio?

• 19:46Speaker 02

  So I partition my brain as part investor and part trader. Sometimes that can confuse even me. In some ways, you're thinking about different timeframes and different drivers. One of the things really unique about this asset class and this opportunity is that what I see as a trader and what I see as an investor are completely aligned and highly convex. The easy answer is to just throw a number out there. I mean, we can talk about numbers, but I won't throw one out there initially. I'll just tell you how those different parts of my brain think about it. So when I think about it as a trader, when we decided to get into this marketplace and made, at the time, which was the biggest institutional asset allocation in this space,

• 20:28Speaker 02

  we wanted to figure out what were the best sources of liquidity to quietly get the exposure, anonymously get the exposure and get it on quickly before anyone figured out what we were doing and ran the price up on us. And so this goes back to early November with Bitcoin around 15,000. So we called all of our counterparties, which shall remain nameless. One of them, we asked to get a line to trade futures. So now let's imagine that we need 10,000. I'm just going to make up the numbers. We need to be able to trade 10,000 contracts and we need to get our papers. We want to do it quickly and get this on before news leaks out. So let's figure out, can we get all the paperwork done in the next few days? And can we get the position on really quickly?

• 21:13Speaker 02

  And we basically learned that it would probably take, I don't know, four to six to eight weeks to be on boarded with this and that we could probably trade 10 contracts. Okay, we need to trade 10,000. So if we wanted to do anything in S and P futures or treasury futures or anything else, the competition for our business is extremely high. So as a trader, what does that tell me? It tells me that the biggest institutions in this space do not yet have high appetite to be transacting and helping their largest clients transact and get size on in this space, for whatever reason. So I would tell you that the traders mind, the day that I have the biggest banks calling saying, we want to give you 10,000 lines and 100,000 lines or whatever it is to get your business and we'll get it done right away.

• 21:59Speaker 02

  That's one of a whole bunch of different trail markers that I would have to be like, "Okay, we're now at a different place," right? So what does that tell me? It tells me that the on-ramps have been built, they're being utilized, they're being leveraged, and so the world is operational. So forget about the price. I will tell you that, given the institutional interest that you read about every day and that we see as a firm, until those on-ramps are built and until I'm getting those calls from the biggest brokers and investment banks, there's that. Of course, there's downside. There's always downside in any market, but I don't think there's much sustainable downside until we at least get to that point. So forget about what that price is, because that price, by the way, I said that when

• 22:43Speaker 02

  we were at 15,000, we're now today, I think we hit 50,000 today, right? But that would be equally true at 100 or 150,000. It's just the price would be higher, but that feature that I just described of market function would not have changed yet. It takes time, okay? So that's the trader in me. The investor in me is, look, this is the future of money. If it's allowed to survive and coexist with digital fiat, which I strongly believe it will be, then we're at the outset of a decade or 100-year journey in terms of what this asset class will become and new money will become.

• 23:23Speaker 02

  And is it likely that before any of these on-ramps are built and investors are fully allocated? Is it reasonable to think that, from an investment perspective, that you've already discounted the price of all of that innovation that's going to come on top of this platform already? And I think the answer, I mean, to me, the answer is unambiguously no. So. I haven't given you a number. I mean, we can talk about numbers, but the numbers are much, much higher. And the thing is, there's no negative carry. You're not, you know, see, if you size it right for institutions, it's inevitably going to be very modest, and that's fine.

• 24:03Ted Seides?

  So you mentioned earlier the importance of reflexivity in this asset. And anytime we talk about money, you end up talking about faith in whatever that money is. How has reflexivity played out over the last couple of years?

• 24:19Speaker 02

  Well, one of the ways is good money chases bad money out. That's really important. And as that happens, this is one of the great ironies, I call them inversions in this space. I believe that the price will become less volatile the higher it goes. And so, that's kind of interesting, right? Because you, you look at something that it's difficult to wrap your head around the value of something because it's, it has no intrinsic value. It's like the purest play on faith that you have. Now, by the way, you could say the same thing about gold. It's just, we have so many thousands of years where, for whatever reason, we've

• 25:01Speaker 02

  looked at gold as having intrinsic value, and convinced ourselves of various things about it, that we think that it's real and you can touch it. It has substance. This doesn't even have substance. This is just stripped out all, it's like stripped out all the noise and said, okay, let's call money what it really is. It is faith, okay? Dollar bills you can hold as well, and you feel like there's substance to them. But it's silly. I mean, the Fed can create infinite amount of money with electronically in the banking system. Just the same way that you could theoretically create infinite amounts of digital assets. The thing about Bitcoins, it forces you to look at something that just says, look, there are only going to be 21 million ever, okay? And we could argue around, will that code ever break or something happen? But the highest probability is there only ever

• 25:44Speaker 02

  be 21 million. And so, you look at that and you go, okay, well, it has no intrinsic value. So what should its value be if we want to assign this common faith as a store of value globally? And this is one of the super interesting things. I think it's probably, it might be the most important thing about Bitcoin in particular, is that because it has no intrinsic value, but it's a finite supply.

• 26:10Speaker 02

  Its value could be anything. And so that's been a really important thing for me to wrap my head around. And I think it's maybe the least understood. And maybe it's one of these things that I've just taken too many long walks to think about this, but the reality is Ted, everything that you and I have ever traded in our lives, every single thing has a supply reaction to higher price or lower price for that matter. It just does. There's a supply response in every single thing we've ever traded and things that we don't really feel like we're trading, like our house. Housing has that supply. The price of water has that supply. The price of condos in New York, the price of gold, the price of oil, like the equities. You and I were just talking about SPACs, you know, the market's finding a way to create more supply, right?

• 26:54Speaker 02

  So everything we've ever traded has a supply response. If the price of Bitcoin goes up 3X like it just did, or 30X, there literally won't be more that's mined. There'll be more, people will compete more aggressively to mine it, but it won't increase the pace of that supply. Same thing if it goes down, by the way. And so the reflexivity in that just means that there's this new dynamic that people can't wrap their heads around, which leads to a situation where if prices do start going up, the only way you can create more supply is to push the price sufficiently high that these people who have held through perhaps six boom bust cycles that have been utterly

• 27:39Speaker 02

  gut wrenching and most human beings couldn't possibly hold on to through that, who have thought this is going to go up a long way, you have to actually move the price far enough for these people to go, yeah, you know what? You got me. Like at 50,000, I'm going to let a bunch go. Okay? And so there's reflexivity in that because the higher the price goes, the more money you suck in, the more money you suck in, the more institutionalized it gets, the more institutionalized it starts becoming, the more the regulators have to focus on it, the more the regulators focus on it at higher prices, hopefully the more sensible the regulation becomes, which invites more money in. And then you have this reluctant kind of supply response as prices go higher.

• 28:19Ted Seides?

  Where along the path did you decide it was sort of time for you to start buying?

• 28:26Speaker 02

  Our clients are broadly speaking, they think a lot about how to build robust portfolios to all kinds of market environments, you know, big market ups, big market downs. We've expressed views that it's highly likely that the late stage of this long economic and market and debt cycle will lead to a large monetary debasement, essentially, which, by the way, if you're a market historian, that's kind of obvious that that happens. The question is, when does it happen, really? And so I think this latest, you know, the pandemic and the policy response coming out of the pandemic seems very clearly to us to mark the beginning of that cycle.

• 29:11Speaker 02

  That's incredibly important for every investment strategy out there and every portfolio out there. But one of the things that's extremely difficult is if you have the Fed and the Treasury in many respects co-joined and the Treasury is issuing a lot of debt and the Fed is creating money to buy that debt and then it's being spent and kind of pumped into the economy. And the Fed is actively trying to keep interest rates low so that the real interest rate is deeply negative, then you kind of know your bond portfolio, you're guaranteed to lose money. You're either going to lose money slowly by owning it in the front end and just having your real interest rate work negatively, or you might lose money fast in the long end where, you know, the bond market really tanks and you get destroyed.

• 29:53Speaker 02

  So our clients have been really focused on that and by November, it seemed that we had the right time and some of our clients were really interested in actually making that kind of allocation. We'd just gotten through the election and I think as you saw these assets increase in value from the March lows, it became clear that policy was just going to continue to move toward this highly accommodative phase. And so these assets looked really interesting in that macro quadrant where you think about what policy is really doing. These assets are just uniquely positioned to do well. By the way, gold should do well as well, except these are just this really interesting, highly convex version of gold that's, I think, just deeply discounted.

• 30:37Speaker 02

  So that's what got us in and thankfully we were able to and we did.

• 30:41Ted Seides?

  Have your clients thought about the use of Bitcoin, maybe other cryptocurrencies, in the context of their portfolios?

• 30:50Speaker 02

  You speak with all the same people. I think one of the major struggles that guys are contending with is, okay, let's say everyone in the world has a 60-40 portfolio that they dress up in one way or another. Maybe they leverage it and it's some form of risk parity. Maybe they amplify it with private equity, whatever, but it's a 60-40 portfolio in one way or another. The problem is, the 40 just doesn't work anymore, right? And the reason that you love the 40 for the last few decades, our entire trading career, your and mine, has been that interest rates have been declining and they finally got to a point where they just really couldn't decline meaningfully. So investors are looking at their portfolios, and by the way, this is, I think, a slow and painful realization because it lacks

• 31:34Speaker 02

  great answers or great solutions. But they're slowly realizing, it's like, okay, so I own a lot of equities. I need to make 7% ish, and maybe it's 6 or maybe it's 8 or whatever, but it's in that zone. Equities are really expensive. My 10-year bond yields 80 basis points. The math just does not work. So they're looking at that and they're going, okay, so how do I think about a more robust portfolio? And some of them are thinking about the risk to monetary debasement and inflation, and that's very scary risk, right? Because then your bonds turn into losers. And if you look, you can try to convince yourself that equities are going to do okay in a mild inflation, but if inflation is even a little bit more than you'd hope, as a fiduciary, you can't help but look at the 1970s and go,

• 32:18Speaker 02

  that could happen too, right? So your equities might lose money and your bonds lose money. Some of our clients think deeply about gold and some have allocations to gold. The ones who are thinking about digital assets are thinking about it in kind of that debasement hedge part of their portfolio. And it's really attractive because it is highly convex. So you could have a relatively small allocation and it could go up 10x or it could go up more than 10x. And so at a 2% allocation, that, by the way, that saves you from a lot of portfolio pain elsewhere in that kind of environment. So I think that's what I was thinking about it. The last thing I'd say on that is, they're also looking at this differently from gold in that you kind of have this

• 33:02Speaker 02

  Call option on technology when you buy these assets that you don't have in gold. Like gold will be the same in 2,000 years as it was 2,000 years ago. But these assets are going to be different and improved in a year and 10 years and 100 years. So you have that, you have exposure to that.

• 33:22Ted Seides?

  We're going to take a quick break in the action to tell you about Brookfield. Brookfield invests in the thing behind the thing behind the next big thing. Their focus across infrastructure, energy, real estate, private equity and credit is helping to build the backbone of the global economy. Brookfield combines deep operational expertise with disciplined, long-term investing, uncovering value and partnering alongside clients to shape tomorrow's economy today. Invest in the businesses that shape tomorrow. Learn how you can own what's next at Brookfield.com/own.

• 34:00Speaker 03

  This is not an offer to sell or investment advice. Investing involves risk, including the loss of capital.

• 34:05Ted Seides?

  And now, back to the show.

• 34:09Ted Seides?

  How do you think about the historical analog of Japan in their zero interest rate environment for whatever it is now, 20 years, where it seems like they've continued to do just fine?

• 34:22Speaker 02

  I'd say that's something really important to get right. And anyone in your seat or mine has thought about that probably their whole career. Let's look at a couple of differences, okay? So Japan, while it has a big economy in the world, it's a very small nation and it's aged very rapidly. US isn't. And Japan is a very homogeneous society. US is kind of tearing itself apart right now. There are a whole host of differences that we could also go through. You know, Japan is sitting right off the coast of China and China had a big boom. And so Japan was kind of able to spend a couple of decades just churning away really

• 35:03Speaker 02

  and dealing with its aging demographics and some of its internal issues, but had this big customer right off its coast that it was supplying machines to as they industrialized and things like that. So Japan kind of had it easy because they were the first to go through this. The world pretty clearly doesn't have it so easy anymore and the US definitely doesn't. So when you look at the US and you look at Just the massive deficit that we ran last year. This year's deficit is going to be 15 to 20% with an economy that's actually bouncing back to life. I think it's pretty clear that the whole world got to this place where Japan had gotten to, which was very low rates, in some cases negative, like Europe. Monetary policy really wasn't lifting the economy anymore.

• 35:48Speaker 02

  Nothing was working and every central banker in the world was pounding on the table for the last two years and saying, we have to borrow a lot of money. Fiscal policy needs to be involved or monetary policy won't work and it's barely working anymore. They didn't want to say it doesn't work anymore because then the markets would have freaked out, but they, they said it's, we need your help. And so now you have this global catalyst, which was COVID, and you've broken through this mental barrier that we, over the course of our career, there's been this economic orthodoxy that said you have to have an independent central bank or all hell will break loose. Well, guess what? We no longer really have independent central banks. They're working together with Treasury and politicians are looking at that as a solution right now. And inflation hasn't taken off.

• 36:31Speaker 02

  So I think that we're just in a different mental framework at this point from a policy perspective, and that makes all the difference. It really does.

• 36:39Ted Seides?

  Let's talk a bit about what could go wrong from here. You highlighted some of the risks in the earlier years of Bitcoin with the infrastructure in place. How about going forward?

• 36:50Speaker 02

  There definitely are risks like there are in anything. And I think when, when you consider the investment proposition in anything you do, there obviously are going to be risks and you have to, I think, you have to try to understand what they really are and then ask yourself, are they well reflected in today's price? And so, so let's go through the risks. I'd say that one of the big obvious risks is the regulatory risk. And those risks differ around the world, by the way, because theoretically the US could outlaw the holding of Bitcoin and that would. By the way, they could not make Bitcoin illegal. It's this decentralized network that exists globally.

• 37:34Speaker 02

  You'd have to have every country in the world deem it to be illegal with harsh consequences. And it probably still wouldn't go away. The price would be a lot lower. So let's just talk from a US perspective. It's possible that the US regulators or this government or a future government could come in and say, it's illegal to hold it, just like at a point in history, they said it's illegal to hold gold. That would knock the price down a long way. And then I think what would likely happen is that that decision would harm the US interest to such a degree that that policy would be reversed, just like it was in gold eventually. But that's a risk, so that could, that could happen. I think I've gotten much more comfortable with it as I've gotten to understand the regulatory environment and have interacted with them.

• 38:18Speaker 02

  I think that what people misunderstand is the intent of regulators is to create a sound foundation for digital assets upon which American entrepreneurs and financial institutions can innovate and can build. And financial services are a super important part of the US economy. And so if you were to allow the foundation to be filled with cracks, and cracks are just bad actors, you know, illicit activity. If you allow that to happen, you undermine the potential value of everything that you can build on that foundation. Whereas if you come up with sensible regulation, which doesn't mean everyone's going to love it. And that's the thing in this industry.

• 39:01Speaker 02

  A regulator will come out and say something and most people in the digital asset community will react very negatively. But really, it's just, that's a normal push and pull between private and public sector, right? But at any rate, I'm comfortable that they will not do that, but that's a risk. Another risk is that there's some kind of flaw in the code or major attack of some sort that takes the whole thing down. This has got to be the most hacked or this piece of software, this protocol has got to have withstood more attacks than probably anything in the history of mankind by super smart people. And they're also very smart people who are constantly working to fortify it. It's almost like a living. Technology system that has not viruses, but it's fending off attack.

• 39:44Speaker 02

  And so that's one of the other reflexive features is the more money, the more valuable this becomes, you could say, the more it becomes a target. I mean, it's almost a trillion dollars, a big enough target, right? The more value that people have in this, the more incentive there are for the people who hold their assets to make sure that it's as strong and robust as possible. So I think that there are some risks there, but the system is incredibly anti-fragile. And so would bounce back from some type of attack that was moderately successful. There are ways that that this can bounce back from some type of awful attack. And then I'd say the other risks are more around the custody of these assets, you know, things being stolen, because they're, at the end of the day, they're bear securities, right? They're bear securities, by the way, that can be tracked everywhere.

• 40:28Speaker 02

  So even if someone steals something, a huge theft, you can see where that money goes. You can see what wallets it travels to. And the FBI and law enforcement and SEC, everyone's going to be all over that. But if there were a large theft of some sort, then I think institutional investors could say, you know what, I'm not going to touch it for three years and the price would go down. And so incidentally, that's one of the risks that we seek to mitigate with our fund structure to kind of insulate our clients from that. Because to the extent that we can educate clients about why these risks are overpriced in the market and we can also help mitigate these risks, I think as a fiduciary, we're doing the right thing because I think the market is overpricing all these risks and

• 41:11Speaker 02

  that's why the price is low relative to where it will be.

• 41:15Ted Seides?

  So I know in November, there was a story that hit the news about the big trade that you did and the work you're doing with Brevin Howard. I would love to hear the story of the trade. So walk me through the trade, what it was like being in those markets, what you saw and learned.

• 41:32Speaker 02

  Sure, it's fun to tell trading stories, I guess. This is definitely the most fun trading story that I have because it was incredibly important that this be super secret, just because you're dealing with an illiquid market. So I knew that we had to be super secretive and so pretty much I only knew how much we were gonna buy in terms of anything external. And we worked with the Coinbase team. We selected them, having done due diligence across the whole industry, everyone in the field, and we felt most comfortable with them as an initial partner for us. And we've, we've since started diversifying our holdings elsewhere, which was always the plan, and there are other great firms. It's just if we were to do the one significant transaction and do it with a team that I

• 42:16Speaker 02

  had high conviction would, would have great discretion. It was with that team and with that solution where they have an agency desk, meaning I was able to interact with their institutional trading desk. They don't have a proprietary trading desk, they don't take principal risk, which just meant I knew that unless someone there leaked information, and I only dribbled information to them, so they didn't, never even knew exactly what we were doing in its full size, but unless someone leaked information about what we're doing, there was no one over there to try to front run our orders, which is always the terrifying thing when you're trying to do a big transaction. And incredibly, to their great credit, they put a very tight team together. We had a code name for the project and I spoke with Brett Teshball, who runs their institutional sales, and he's fantastic.

• 42:58Speaker 02

  We've done business in the past, so I knew him professionally and he's just outstanding. And so he kind of delivered the firm to One River. We had this very tight group of people and I spent five days working with their institutional trading desk. And so what you discover with this asset class is their pockets of liquidity, their pockets of illiquidity, it's 24/7, 365. So I spent five days working with these guys and we tried all different types of things. So there are all these great algorithms that are available through their Togomi system. And so I used those, but I also kind of brought in

• 43:33Speaker 02

  I want to say old school 90s FX trading, but kind of really. So you know, it's like what you discover is if the market goes up to certain levels, there's so many algorithms in these markets. The market hits a certain round number, let's say 15,100, for instance. And if it starts backing off, there are all these algorithms that come in and just drill the price down. And so we'd observe that and we'd let things like that happen. Or one of the things that was kind of fun is, as I was speaking with the team there, I was like, well, why don't we put some really big chunky bids in on the market? Like, well, you can't do that. It's like, well, why can't you do that? Well, if you do that, then it'll be all over Twitter in two seconds. It's like, well, why is that bad? It's like, well, that's bad because then people will raise the market up. But our view was that the price was pretty high at that point. And what we were trying to do is get the position on when everyone

• 44:18Speaker 02

  was worried that the contested election was going to tank stocks and bring Bitcoin down with it. And so what I really wanted to do is get some big holders to think that someone stupid was in the market putting big orders in and make it look like we were really dumb money and then drill it through. Because oftentimes people do that, right? They'll drill it through those big orders, hoping that they hit stops below. And then we would let those stops get hit below. They weren't our stops. And then we put even bigger orders down to try to scoop up all the stop-loss selling. So there are all kinds of games that we played, which was fascinating to see. It was really helpful to understand the liquidity of these markets. But yeah, it took five days. And by the way, we barely moved the price.

• 44:58Ted Seides?

  And so what was the total size of that purchase?

• 45:01Speaker 02

  We bought, I think this is all public information, but we bought over $600 billion of digital assets.

• 45:07Ted Seides?

  It sounds like when you talk about buying Bitcoin and having to be sensitive to Twitter, it's hard not to raise the alarm bells of what's happened with all the crowdsourcing convexity of these assets, Robin Hood and whatnot. How have you thought about what that means for cryptocurrencies?

• 45:28Speaker 02

  It's a good question. I would say that there's a near term and a long term answer for that. The near term answer is that It's just a feature of the market and there are a lot of people saying all kinds of things in the marketplace. We've chosen to be very selective. This is the fourth formal thing that we've done in this interview with our activity in the space by design because we're kind of treading very cautiously into what to say and when to say and how to say it. And it's been interesting because I think we're viewed as having important insights into what institutions are doing. So each time, well, the first three times, you know, that we've said anything Bitcoin has moved by 15 to 25% within a couple of days, which is

• 46:10Speaker 02

  kind of wild. But I think that that's, if I were to think about like what's really moving the market and I look at the various things that have happened, obviously Elon's announcement was really important. I think those times that we've had something to say, not because it's one river, but because it reflects what we've done, the first large institutional transaction, I think are seen as being knowledgeable in that space. Those have had real impact. So my view is don't say a whole lot. I think a lot of the Twitter stuff that people say so many things that it's part of the landscape, but does it really mean anything? I think Elon's thing was important. I think Michael Saylor, some of the things that he said have been important and he's like bought a lot, right? So those are all important things. I think

• 46:53Speaker 02

  longer term to me is more interesting because everything I just described is kind of market noise, whether markets move because Elon did something or someone else said something. Maybe they move faster than they would have moved, but there, it's not like that's sustainably moving markets and keeping them in a place. Markets move because there's some underlying factor that's being priced in. And I think that underlying factor is the realization that this is part of the future and they're just wildly underpriced for that. And so that's why we're seeing kind of a repricing move. But I think for the longer term, one of the things that could surprise everyone is what a world looks like when you have billions of people who can move money on their phone.

• 47:38Speaker 02

  And are susceptible to information, are susceptible to misinformation. You know, I think if you asked Mubarak whether he was surprised that there were flash protests and riots and that some of these new forms of social media combined with cell phones could ultimately topple his regime, I think he would have said that was impossible, right? Which is probably why it happened. So I don't know what's impossible and what is possible. If you think about where the world will be in, let's say, 10 years. In 10 years, I have a high degree of confidence that almost everyone on the planet will have digital wallet on their phone. And they'll view it as being as secure as Citibank or anything.

• 48:23Speaker 02

  And they'll be able to move money between currencies, both government fiat currencies globally, they can already do that, or in cryptocurrencies. But at that point, the little, like the Twitter chatter, I don't think that will matter because I don't think that stuff ever matters. But in big events, maybe it does matter. Maybe there's a run on a currency in Japan or, you know, I don't know what happens. But I think it's interesting. Things will be able to happen in a decade that today is impossible for them to happen. So it doesn't mean that wild things will happen, but new things will be enabled by this functionality.

• 49:00Ted Seides?

  So when you imagine what that might look like a decade from now, what are some of the things that you're envisioning?

• 49:06Speaker 02

  Well, I always think about risks and opportunities. I think in its fullest form, out a decade, it's hard for me to see that the ability for people to move money like that, it'll provide a lot of information to governments about, in a sense, how people vote with their feet around government policies. That'll be something really interesting because...

• 49:32Speaker 02

  If you were in Switzerland and you weren't happy with what the Swiss National Bank was doing with policy and you felt like, well, literally in 30 seconds, I could move all my money from Swiss francs to euros or vice versa, that's could be kind of interesting, right? And I think some of that stuff will happen. What probably will happen is those countries that have the most reckless policies will find that there is a greater check on them. And so historically, those have been countries like Argentina or Venezuela. But maybe what will happen is that that group of countries that have more check and balance because of these private systems of moving money around, they may find that their policies are scrutinized more.

• 50:17Speaker 02

  And that's probably a good thing, by the way. I'm a big check and balance kind of person. So I think what's important is that these currencies don't ultimately threaten sovereigns. And here's why I think that they won't. And so it's important for me to add that because I don't want to... I think I do the industry a harm by trying to suggest that these assets are such a check and balance on governments that governments lose control. I don't think that that's the case. I think there'll be powerful checks to a degree, but they will not overwhelm a big sovereign country. And here's why. Because the force of regulation right now is moving toward making these wallets and these systems transparent to government.

• 50:59Speaker 02

  So initially, when we started the conversation talking about all these markets were anonymous and you could move money anonymously, all those things are still true technically. In practice, before I moved my coin into our fund, I had a PA, I had Coinbase account. And I'm sure if I did something wrong, that they would turn me in. So there will probably be some people who continue to have anonymous accounts and they'll live in places like Venezuela and Argentina and Turkey and wherever. But I think that by and large with these big credible nations like the US, what will happen is the regulation will make sure the government knows where money is. And then if we had an event which...

• 51:42Speaker 02

  Push the price of Bitcoin to make up a number, a million or three million or $5 million or some crazy number. Well, guess what? These guys can tax us. And you know what? They can also, if they're unhappy with how that's developing, they can say, we're going to take the long-term capital gains on cryptocurrencies from whatever, 20% to 30 to 50 to 80. They can do whatever they want to do. So they actually, they actually have not lost control, but there is this check and there'll be a pressure, like their costs of changing tax codes like that. People go, why are you doing that? And there'll be a lot of people that say that's not fair. But the reality is, in a world where these guys are proactively trying to debase the currency, the dollar, having an account where they can tax a capital gain,

• 52:26Speaker 02

  ironically, becomes this new source of revenue for the government. This isn't Bitcoin gone wild and take over the world. I think in some nations that are very weak structurally, that could be the case, puts a lot of pressure on them. Place like the US, not the case. Place like EU, not the case.

• 52:41Ted Seides?

  And in the last couple of months, Michael Saylor's out of MicroStrategy, talking about it. We've seen Elon Musk do a huge purchase for Tesla. What are you hearing and seeing from institutions of their interest going forward?

• 52:55Speaker 02

  There's enormous interest and intrigue, really, I mean rightly so. And that's driven by a lot more than just the price of this stuff going up. And I know that just because, I don't know, let's go back to the dot com bubble, which we lived through. When we have calls with investment firms, it's often the case that we have 10 to 15 people, that they're all the senior investment people at every area of a huge firm. And the questions that are asked are a lot less about, what do you think is the fair value of this or anything? It's, they tend to be more questions about what's going to be the impact of these assets in the future of finance, in the future of our company, in the future of the insurance

• 53:38Speaker 02

  industry? How do we think about this in a portfolio context? Can we really go into some of the currency debasement risks and what happens with inflation? So they're, part of the discussion is on, this appears to be a new asset class, is I think what most people are recognizing, and they want to make sure that they At least have a baseline perspective on what it might mean so they can kind of go and do further research. I think some portion of them will allocate and some will wait and then eventually will allocate in some way. There really is enormous interest.

• 54:13Ted Seides?

  We've talked a lot about what you did in Bitcoin. And without going too much into it, because we'll do that over the next couple of conversations, how do you think about extending that to other either cryptocurrencies or blockchain assets?

• 54:27Speaker 02

  So after we did this first purchase of these assets afterwards, only after, I called Alan and just said, Revenon's at stake in our firm. And I just said, it's important for all of our clients to have an allocation to this space. It just is. What I've learned through this process is that there just aren't good vehicles for them to invest in, which is not to say there are no vehicles, right? Because you could go directly to Coinbase, you could go to any number of firms, or you could go to some of these firms that have built their businesses for the last five years in digital assets. And there are a number of them, and they're great firms. Some of them, I'd say, look more or less like venture capital firms. Some of them look more or less like investment banks. But there's no firm

• 55:11Speaker 02

  that really looks like One River, which I would say, if I were to create a parallel, it'd kind of be the vanguard of digital assets. And so I think that there's, in any new ecosystem, you need to have, you need to have strong players in each of those. You need to have strong venture players. And of course, you're going to, you need to have strong investment banks, and you're going to, they're great trading counterparties. You need great custodians, and those things have been built. Agency trading desks or OTC trading desks. But then you need a vanguard to kind of bring the best in class parts of the ecosystem together into a well-structured product where your client goes, okay, I'm dealing with One River, they're a great fiduciary, they're QPM, they've built ERISA compliant

• 55:53Speaker 02

  funds, like all that stuff. They have diversified custodial relationships, they've got diversified sources of liquidity. So I know I'm going to get best execution, my assets are going to be safe, all those things. So my discussion with Alan was, The industry needs this, and so I'm going to build this out. And both Alan and Aaron Landy, who's the CEO of Brevin, who's just terrific. We all chatted about it and it made a lot of sense. I didn't need to ask permission, I was going to do it anyway. But Alan just threw his full weight and Brevin threw their full weight behind what we're doing because they agree. And Alan's deeply knowledgeable in this space. He has all kinds of investments throughout the ecosystem and is probably the earliest hedge fund person in this space. So we agreed on that.

• 56:36Speaker 02

  And so where that leads from a progression standpoint is, I think, the most important allocation that can be made right now, given this valuation level, and I said this at 15,000 and I say the same thing at 50,000. The upside versus downside is so skewed to the upside that the most important thing I can do is a fiduciary for my clients, which are big institutional investors, they're not small mom and pop punters or Robin Hood investors. They're just institutions. So the most important thing they could do is get beta exposure to, I think, Bitcoin and Ethereum, which is not to say that there aren't other interesting assets. It's not to say that there aren't going to be assets that for periods of time outperform those two.

• 57:15Speaker 02

  But it's probably the case that a lot of those assets over time won't even come close to the performance that I see out of these two assets. And so if we get our clients invested into this space, we are now deeply knowledgeable about these assets and are building the firm around that capability as well. We will effectively, I think, learn and kind of evolve as this asset class evolves and be able to be, I hope, a step ahead of where the industry goes. And then as different opportunities unfold, our clients can participate in those with us. Some will be big and scalable. Being in the beta is big and scalable. There'll be other niche year ones that will have more limited AUM products, but that will happen over the coming years.

• 57:58Ted Seides?

  All right, Ercle, I can't get together with you without asking you a couple of closing questions. And we did run through most of them, but I just got a couple for you. What is your most important daily habit?

• 58:08Speaker 02

  Making a cup of coffee for my wife, definitely, definitely. If I don't do that, it's not that I'm in trouble, that's just, I wake up, that's just what I do.

• 58:15Ted Seides?

  And what is your favorite book?

• 58:18Speaker 02

  I wrote about it recently in an anecdote, so I'll throw out there, Moby Dick. I love the classics and speaking of Mara, my wife, she always makes fun of me because I have so little time to read that when I read novels, I like to read things that have just really stood the test of time and I enjoy, and it's a big part of what I love about markets and this industry is I love studying human behavior and I think the classics, they're filled with nuggets that are just great insights about human behavior.

• 58:44Ted Seides?

  All right, Eric, one more. What is the biggest mistake you've made and what did you learn from it?

• 58:48Speaker 02

  God, I've made so many, Ted. I won't go into details because it's personal and family, but it's an instructive lesson. So there was a time in my life, I think I did a very poor job of, for most of my life, was really being very transparent and I felt like I had to keep things that I was thinking about and keep who I was kind of guarded. And my wife Mara, just she persuaded me that that was exactly the opposite of what I needed to do. And so the great irony is, is I feel like I've become one of the more transparent people in the industry through my writing, but it's been liberating to kind of be transparent. And one of the things that you discover, I mean, number one, she was, of course, like almost everything in my life, she was completely right and I was wrong. And I didn't even realize

• 59:30Speaker 02

  how non-transparent I was, but once you start becoming transparent with people and relationships that you have and are just open yourself up to looking foolish or whatever it might be, you end up having much more meaningful relationships and that's been one of the greatest things in my life. But the reason it's probably the greatest mistake is it just, it took decades to figure that out. And so it's like, I'll never get those decades back, but that's okay.

• 59:56Ted Seides?

  Well, Eric, it is really great to see you.

• 59:58Speaker 02

  You as well.

• 1:00:01Speaker 02

  Hopefully we don't, we both took COVID tests, but hopefully we don't, you know, didn't just get it yesterday and now we're, yeah.

• 1:00:07Ted Seides?

  Sounds good. Thanks so much.

• 1:00:08Speaker 02

  All right, great. Thank you.

• 1:00:10Ted Seides?

  Thanks for listening to this episode. I hope you found a nugget or two to take away and apply in your investing and your life. If you'd like what you heard, please tell a friend.

• 1:00:20Speaker 04

  And maybe even write a review on iTunes. You'll help others discover the show and I thank you for it. Have a good one and see you next time.

• 1:00:29Speaker 04

  This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. All opinions expressed by guests on this show are solely their own opinion and do not necessarily reflect those at their firm. Manager's appearance on the show does not constitute an endorsement or investment recommendation by TED or capital allocators.