Pod Insights Invest Like the Best with Patrick O'Shaughnessy Nikhil Kalghatgi – Moonshot Investing - [Invest Like the Best, EP.82] About this episode My guest this week helps me complete the first trilogy of guests on the podcast. His name is Nikhil Kalghatgi. Along with past guests Ali Hamed and Savneet Singh, Nikhil is a partner at the asset management firm CoVenture. If you liked those two conversations, you will love this one—it is somehow even more wide-ranging than the first two. Nikhil is the CEO of CoVenture Crypto, but he ended up there because of an overarching investing style that he calls moonshot investing, which we explore right from the start and in great detail. He is obsessed with productivity and happiness, and we spend a long time on those topics. One of the most interesting experiments I’ve heard about on the podcast is his Happiness project, for which he interviewed more than 100 of the wealthiest people in the world. The lessons he gleaned from those conversations are very helpful, and I won’t soon forget the lesson related to sacrifice. We also discuss asteroid mining, networking, shared experience, and philosophy. Oh and crypto currencies. Nikhil’s take on crypto has always been refreshing to me. In fact the first time I met him he was throwing cold water on a room full of enthusiastic crypto investors. Within crypto we discuss business opportunities, mining, and how new retail and institutional capital will affect the asset class.
Hash Power is presented by Fidelity Investments.
Please enjoy this sparkling conversation with Nikhil Kalghatgi.
For more episodes go to InvestorFieldGuide.com/podcast.
Sign up for the book club, where you’ll get a full investor curriculum and then 3-4 suggestions every month at InvestorFieldGuide.com/bookclub.
Follow Patrick on Twitter at @patrick_oshag
Show Notes
2:42 – (First Question) – What moonshot investing is
4:41 – Creating sustainable differential investment advantage
9:30 – Assessing the market for moonshots
12:15 – Types of people suited for moonshots
13:42 – The Happiness Project
17:45 – Commonalities among successful people
25:15 – The importance of humor in life
17:16 – Recipe for a good joke
28:00 – The night Patrick and Nikhil met
29:17 – His perspective on the world of venture capital
33:26 – What did Nikhil learn from his time at SoftBank
34:52 – Craziest thing Nikhil has done
40:27 – What he took away from his time in military intelligence
46:10 – The idea of manufactured serendipity
47:13 – Nikhil’s approach to investing in cryptocurrency and what he finds interesting about it
53:23 – How Nikhil reconciles the excitement of crypto with the lack of tangible asset
58:10– The timeline of retail and institutional investors becoming more involved in crypto
1:02:43– Exploring their liquidity strategy
1:04:10 – What happens if regulators shut down the cryptomarkets
1:09:48– The role of miners in crypto and how that might change moving forward
1:10:43 – What is the frontier of crypto mining
1:12:31 – What’s the most compelling rabbit hole in crypto
1:16:23 – How would the original creators of crypto currency feel about the current state of the market
1:20:01 – What Nikhil sees as the value proposition for the whole ecosystem.
1:21:00 – Kindest thing anyone has done for Nikhil
Learn More
For more episodes go to InvestorFieldGuide.com/podcast.
Sign up for the book club, where you’ll get a full investor curriculum and then 3-4 suggestions every month at InvestorFieldGuide.com/bookclub
Follow Patrick on twitter at @patrick_oshag
Transcript 14,564 words · 5 speakers
Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.
0:00 Patrick O'Shaughnessy? I know firsthand how complex the tech stack is for asset management firms. And seemingly every new tool and data source makes the problem even worse, adding more complexity, more headcount and more risk. RidgeLine offers a better way forward. One unified platform that automates away the complexity across portfolio accounting, reconciliation, reporting, trading, compliance and more, all at scale. RidgeLine is revolutionizing investment management, helping ambitious firms scale faster, operate smarter and stay ahead of the curve. See what RidgeLine can unlock for your firm. Schedule a demo at ridgeline.ai.
0:36 Patrick O'Shaughnessy? Hello and welcome, everyone. I'm Patrick O'Neal and this is Invest Like the Best. This show is an open-ended exploration of markets, ideas, methods, stories and of strategies that will help you better invest both your time and your money. You can learn more and stay up to date at investorfieldguide.com.
0:56 Speaker 02 Patrick O'Neal is the CEO of O'Neal Asset Management. All opinions expressed by Patrick and podcast guests are solely their own opinions and do not reflect the opinion of O'Neal Asset Management. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of O'Neal Asset Management may maintain positions in the securities discussed in this podcast.
1:32 Patrick O'Shaughnessy? My guest this week helps me complete the first trilogy of guests on the podcast. His name is Nikhil Kalgadi. Along with past guests Ali Hamed and Sadhneet Singh, Nikhil is a partner at the asset management firm CoVenture. If you liked those two conversations, you'll love this one. It is somehow even more wide-ranging than the first two. Nikhil is the CEO of CoVenture Crypto, but he ended up there because of an overarching investing style that he calls moonshot investing, which we explore right from the start and in great detail. He is obsessed with productivity and happiness, and we spend a long time on those two topics. One of the most interesting experiments I've heard about on the podcast is his happiness project, for which he interviewed more than 100 of the wealthiest people in the world. The lessons he gleaned from those conversations are very helpful, and I won't
2:16 Patrick O'Shaughnessy? soon forget the lesson related to sacrifice. We also discuss asteroid mining, networking, shared experience, and philosophy. Oh, and cryptocurrencies. Nikhil's take on crypto has always been refreshing to me. In fact, the first time I met him, he was throwing cold water on a room full of enthusiastic crypto investors. Within crypto, we discuss business opportunities, mining, and how new retail and institutional capital will affect the asset class. Like the Hash Power documentary, this episode and other Hash Power singles are brought to you by Fidelity Investments, a company that is constantly researching and experimenting with emerging technologies like crypto assets and blockchain to improve the lives of their customers. Fidelity provides a comprehensive set of products and services to individual investors, employers, and financial advisory firms. For more information, please
3:00 Patrick O'Shaughnessy? visit fidelity.com. Please enjoy this sparkling conversation with Nikhil Kalgadi.
3:14 Patrick O'Shaughnessy? So Nikhil, we're going to start with moonshot investing. You mentioned this as we were just chatting before we hit record. Maybe you could describe what that term means, and we'll get into some of the nuanced detail around how one might go about assessing whether or not something has moonshot potential.
3:28 Speaker 03 Moonshots are pretty much the biggest idea you can possibly muster. And everyone's moonshots are different than someone else's. So it's not like you're limited to actually being Elon Musk, or trying to go to Mars, or whatever it is. In my experience, the best gift you can give to an entrepreneur is to expand their mind and their goals and what they can achieve. This has happened to me when volunteering at inner-city schools, teaching entrepreneurship, to being a VC, and
4:01 Speaker 03 The best thing that I tried to do when I spent the last eight-plus years as a venture capitalist was ask entrepreneurs what their moonshot really is with their company. Not the vision of their current company, but what they're really trying to achieve in the five- or 10-year kind of horizon. And even if it's a really remote possibility, if that's what I could do to focus on helping them achieve their vision, then I've really found my edge in helping them succeed. So the reason I focus on moonshots is because, honestly, logically, it's the place where I thought I could be everywhere else. Because a company that's going forward on, I don't know, asteroid mining, that's like one example of a company that I've actually invested in.
4:43 Speaker 03 Now, that sounds like their moonshot is pretty close to what the literal definition of a moonshot is. But, you know, in the context of being a good investor, it might be something like changing the law could be something that I could do. That'd be my moonshot within the scope of them. It could be getting Obama on their advisory board. And then, all of a sudden, I figured out what my moonshot alignment is with their business. So actually, moonshot is really an investment strategy, not like a sector.
5:13 Patrick O'Shaughnessy? Say more about why that's an advantage. So that's not even really a term. I mean, it's a term, obviously, I've heard many times, but never talked about on the show. And I'm always fascinated by what creates a sustainable differentiated investment advantage, even if it's just like a niche. And this feels kind of like a niche, like you don't hear people focused on this. So maybe say more about how you think about it from, you said something you could do better than other people.
5:35 Speaker 03 Right. So it's an investment strategy, not a sector, is kind of like what it comes back to. So most VCs, most investors, and I invest across asset classes now, but most VCs, they join your board, they try to be helpful in a lot of ways, they try to be your best friend in some cases, they try to be your resource there when the going gets tough. But sometimes they just want to be money, and hopefully, they are as advertised. In my case, I've tried to invest all of my time in very, very, very focused areas. So my philosophy is I'm obsessed with happiness, obsessed with productivity, and on that productivity vein... Productivity is really just learning how to learn. And I learned that most VCs try to do lots of little things to help their companies.
6:18 Speaker 03 If I could just do the one thing that no one else in the world is willing or able to try, then I'll probably beat everyone else at that game. Because no one else is trying to play my game. So as an example, early on in meeting an entrepreneur, I would say something like, what is that one thing that would change your business by an order of magnitude, but honestly, the chance of probability is such that you can't address your time associated with it. It would be too risky to put a quarter of your time on it because you've got to pay the bills and get sales and hire employees and things like that. And let me focus all of my energy on that one thing. And if I succeed in a year, great. If I never succeed, I'll probably have made some progress towards your goal that you otherwise never would have. And maybe, if you're really lucky, you will get Obama on your advisory board or change
7:03 Speaker 03 the law, as in the case of Planetary Resources did, and a handful of others.
7:08 Patrick O'Shaughnessy? So obviously, the venture world in general is about enormous outcomes, but small probabilities. Usually, very few of the investments make the entire fund or make your career in some cases. Moonshots maybe seems like, let's take asteroid mining, for example. Maybe you could use that as an actual example of, how do you handicap something like that that just seems science fiction-like relative to another ad-supported social network or something like that that's a little more tangible?
7:33 Speaker 03 Trying to underwrite Twitter in the seed and Hyperloop, asteroid mining, companies like Ginkgo Bioworks.
7:42 Patrick O'Shaughnessy? What's that?
7:43 Speaker 03 They design organisms. They make stuff that you use every day, maybe in your deodorant or your perfume or this lacquer on the table you're sitting in front of. And all that stuff is usually organic and grown from other materials and plants are sown for acres and acres and reduced down to rose oil and then used in all these sorts of things. And instead, we may be able to shortcut the process by designing organisms like yeast, whose output is something that we're familiar with. We make beer all the time and we use a process that's quite similar. Now, if we could... Modify some of those organisms so that instead of producing a sugar, they produce something else. We may be able to make them much faster, better, cheaper, more efficient,
8:28 Speaker 03 more productive without ruining the earth or taking as long or being even a hundredth as expensive. So that was kind of the original vision of Ginkgo BioWorks. It was a company, a past firm I had worked at and I had helped lead the deal. And the idea for all these moonshots is can we change things by multiple orders of magnitude in terms of cost, efficiency, productivity? And in the case of some of these moonshots, it's really hard to know whether they're going to be 10x, 100x, 1000x, millionx sort of upside. I don't think anybody really knew the upside of Uber. I don't think anyone really knew the upside of Google at the earliest stages. Well, by definition. Exactly. But what you can see is that there's
9:12 Speaker 03 three types of investors in the world. And one of those types lends itself more to moonshot investors than others. The three types of investors are number one, markets, which is me. Number two, people, which is a lot of seed investors. And number three, business models. And for me, markets is everything. Tailwinds are a rising tide that lift all boats. I find it really easy to look at a market structurally and understand what's missing from it. You kind of have to take a holistic approach to venture capital, not a micro approach, which is really focused on the team. And, and don't get me wrong, there's no panacea here. There's different strategies for different investor types.
9:57 Speaker 03 And for me, I just found my type early.
9:59 Patrick O'Shaughnessy? So say more a little bit about assessing markets, especially as it pertains to moonshots. So like asteroid mining, like how do you, how do you think about the addressable market for something like that? And you mentioned productivity and learning. I want to get into that a little bit here as well. What are the actual stages that you go through to try to educate yourself on a market when you see an opportunity?
10:19 Speaker 03 So this is a really great question. I'm so excited about it because I get to talk about sci-fi and I love sci-fi. So in the world of measuring markets.
10:29 Speaker 03 The real question you should be asking is, three to five years, maybe even seven to 10 years down the line, will the macro trends that are absolute most important macro trends, will they result in a market opportunity that is in the hundreds of billions of dollars of size? That is the real question. Hundreds of billions of dollars of size of market opportunity. And is it a winner-take-all market or not? And why is it a winner-take-all market? And if it's a winner-take-all market, how do we ensure that what we're doing now allows us to have the elements of a winner-take-all?
11:05 Patrick O'Shaughnessy? To take it all.
11:06 Speaker 03 Exactly. Exactly. In the case of asteroid mining, or fish farming, or I can think of probably 20 or 30 other areas that I think are ripe moonshot sectors. In that case, the challenge you're trying to solve for is natural resource constraints. And we travel currently by combustible engines and fuel, basically. And jet fuel is really, really expensive. And it's limited supply. And if only we had nuclear fusion or some of these kinds of things, which are just unfortunately...
11:44 Patrick O'Shaughnessy? Moonshots.
11:45 Speaker 03 Yeah, unfortunately, they're, from a technological perspective, tricky, and from a political perspective, trickier. We are stuck with jet fuel, and rocket fuel specifically. And so, we know how to make rocket fuel from water, and a couple of other processes, but basically water. So, the real goal of asteroid mining is identifying water. That's it. It's really that simple. And if you can identify water, you have just created a natural resource in space that is on the order of magnitude of over a trillion dollars for a single asteroid.
12:17 Patrick O'Shaughnessy? So, say more about that. We have a lot of water, so...
12:20 Speaker 03 Not in space. Water's heavy. Water's super, super heavy to get out of orbit. It's actually much cheaper if you can find it somewhere else.
12:27 Patrick O'Shaughnessy? Got it. So, you can create new fuel in space.
12:30 Speaker 03 You got it.
12:31 Patrick O'Shaughnessy? You can refuel in space.
12:32 Speaker 03 You can refuel, you can see the galaxy, you can do all kinds of things that you want to do. And that's really the... Once you boil down asteroid mining, which is a nice marketing tool, into...
12:42 Patrick O'Shaughnessy? What it actually is.
12:43 Speaker 03 Yeah, which is a trillion dollars per target effectively.
12:47 Patrick O'Shaughnessy? So let's come back to close down the idea of moonshots. You mentioned asteroid mining Hyperloop, or I think you're an investor in Hyperloop. Maybe say a few words, although obviously the market analysis and the potential of the market to be massive is, sounds like the critical thing in evaluating a moonshot. Maybe talk about your experience with the types of people that tend to be well suited to running companies that are themselves moonshots and anything you've learned about the people behind these things.
13:12 Speaker 03 The number one way I measure entrepreneurs, early-stage, growth-stage, late-stage, is product velocity. High product velocity is everything. Why? Product velocity is learning. It's learning in the wild. You get feedback on your product in real time, all the time, and it's really hard to push product. It's probably the hardest thing. You know what's easy? Coming up with slide decks by comparison. So for me, it's not about delusions of grandeur or about being able to tell the biggest tale or being able to say it's a $10 trillion idea. It's about, okay, I have a crazy long-term vision.
13:55 Speaker 03 We may never get there, but what I can tell you is I know exactly what we're going to do in one week, two weeks, four weeks, eight weeks, 16 weeks. And looking backwards over the last 16 weeks, I can tell you the eight different major product revisions that we've done and what we've launched and pushing products no matter what, because that's critical to learning.
14:13 Patrick O'Shaughnessy? Let's take a total big shift. We'll come back to crypto and lots of other interesting investing stuff, but I'd love to hear a bit about the happiness project that you pursued. I think it was 18 months that you spent on this, and I have been maybe most excited to hear about this when we were going back and forth before our conversation today. Talk about the idea, what you did, and what you found.
14:33 Speaker 03 Sure. So my... As you can tell, I base a lot of what I do today based upon the experience I had when I was a kid. And my parents, my family are super important to me. Everyone around me knows that I'm a pretty happy-go-lucky guy, like tell lots of jokes. I taught a class on the business of humor at Stanford Business School. And happiness is a passion area of mine, absolute passion area. Everyone that meets me says I've got a big smile on my face pretty much at all times and constantly cracking jokes. And I get a lot of that from my dad. My dad unfortunately had a, let's call it a health issue, you know, some years ago. And as a result, it was a very challenging time for our family.
15:15 Speaker 03 I can recall times when I was going to school, you're going to visit him in the hospital, coming back and pretending like everything was fine, kind of rinse and repeat. So, you know, I made a promise to myself at that point in time that I would not be like that. I love my dad, he's an amazing guy, he's a fantastic grandfather, he's very, very, very good today. And so, you know, I decided to take it upon myself, this is very early in my formulation of how to learn to learn sort of process. Maybe it was probably the first big project that I'd ever done. And I said, you know what, I'm going to study happiness. I'm going to interview some of the wealthiest people in the entire world.
15:57 Speaker 03 I'm going to ask them how they define their happiness, how they practice their happiness, how they learn to be happy, if they're happy, all these kinds of questions. And then take this summary of information and incorporate it into myself. And it was an extraordinarily selfish act, right? It was purely for my own benefit. And that's okay, it's a place to start. There's nothing wrong with that. I said, listen, I just want to do this for me. I didn't tell anybody about it at first. And so I made a list of all the people I wanted to meet. They had to be sent to millionaires, on their first marriage, with kids, and observationally happy. Observation happy because no one really ever knows if someone else is happy, but you kind of, you know, hope. So my goal was to interview 60 of these folks over a year and a half.
16:41 Speaker 03 And I had to ask them the same questions. I took so many notes on them. And the pitch was really simple. Like, I don't care if you're a trillionaire or famous or, you know, obviously, everyone was pretty wealthy in this group because, you know, I had, you know, very clear aspirations when I started this project of who I wanted to be. And I realized at that level of wealth, most folks have actually had a chance to take a breath and think about what makes them happy. They've had a chance to define their happiness. And at about 60 folks, I realized, you know what, there's kind of a few similarities between all these folks. And at 100 people, I realized, wow, there's a lot of similarities now. I've got my, I got my list. And, you know, by 160, I was just being egregious and it was,
17:26 Speaker 03 it was just a networking exercise. You know, because it's funny, you call up, you call up an ultra high net worth person, and you're like, listen, I don't care how you made your money. I don't care that you're living on private islands and do whatever it is. I just want to be a happy person when I grow up. And they're like, oh, well, this is an interview I haven't done before. And I was like, it's not an interview. It's just for me. This is, there's zero, you get zero benefit from this, other than you might be helping me in the future. And they, they were like, yeah, totally, you know, as long as it was confidential.
17:56 Patrick O'Shaughnessy? Yeah.
17:56 Speaker 03 So they, they almost took me up every single time. And as a result, it began to create this massive network of really personal relationships with folks from, you know, they founded their own family offices. The other element I forgot to mention is that they created their own wealth.
18:10 Patrick O'Shaughnessy? As a criteria.
18:11 Speaker 03 Yeah, exactly. Which to me was really important.
18:14 Patrick O'Shaughnessy? So talk a bit about, as you started getting to 60 and 100, 160, like, what the, what the primary commonalities were that you found?
18:21 Speaker 03 So, everybody wants to be happy. Everybody always asks, do you have notes? You can write a book on it? Is, you know, what's, what came out of it? Probably the most common thing that came out of the Happiness Project for me.
18:36 Speaker 03 Is many of these folks had a very, very clear definition of their version of happiness. And they couldn't care less what other people's definitions were. It's not that they, I mean to say that they were mean or rude. It's just that they recognized that everyone's happiness is irrelevant to other people. And I can't define your happiness or anyone else's, nor could I ever possibly begin to fathom.
19:00 Patrick O'Shaughnessy? The formula is that there is no formula.
19:02 Speaker 03 Yeah, exactly. That I thought was really interesting and you really have to look, you know, do whatever you have to do to look inside yourself to realize what makes you happy is not someone else's. Therefore, you know, all the, all the things about don't judge yourself against other people and don't compare yourself really fall out of that. The second thing is, is that this group of folks consistently, consistently valued their relationships. And worked so insanely hard at their relationships. There was almost a consistency of diligence in managing their top two or three relationships. So generally it's your spouse is kind of the obvious one. In some cases it was their kids as well.
19:44 Speaker 03 But I asked them, how do you know you're giving the attention that they deserve? It's very easy to say you value relationships, but are you actually doing anything about it? And many of them knew exactly when they made their biggest sacrifices in their lives to focus on those relationships. And I thought that was pretty interesting. And looking backwards and thinking about what great sacrifice have you made for your relationships is a very hard thing to do.
20:09 Patrick O'Shaughnessy? No kidding. What a great question.
20:11 Speaker 03 And I hadn't even fathomed the idea of what great sacrifice have I made? Have I made a great sacrifice for my relationships? It makes you feel very small at first and you think, am I really even trying if I haven't made a sacrifice? And then they could go and they could point out, you know, a sacrifice that they had made and, you know, that was, of course, these are years, these relationships develop for a long period of time. These are not budding relationships, but they took that idea of valuing the closest relationships to you to a level that I hadn't even understood previously. I thought that was pretty interesting. The third thing that I had learned was many of these folks recognize that happiness is not a state of mind. It's not an end goal. It's not the result. It's a practice.
20:55 Speaker 03 And keep in mind, this is a very select group of people. This is not the entire world. This is not a recipe for everyone's happiness, by the way. This is just what I found in this hundreds of people. And the practice of happiness is basically one of constantly fighting a ball rolling downhill. I don't know what that says about the nature of humanity, saying that maybe we're all prone to fighting tensions and not that we're all prone to depression or anything like that, but you really have to work at it.
21:27 Speaker 03 And I think that happiness is basically a slippery slope. And if you don't pay attention to it, or you think everything's hunky dory, and you move on, you may find yourself all of a sudden at the bottom of the hill. So how do people practice? And that's really the nut. This third idea of happiness of practice is really where all my habits around happiness came, came out of. As an example, there's a book out there that talks about on your way to the office, whether you walk or drive,
21:56 Speaker 03 maybe once every other day, when you're not in a rush, take a new route. Explore a street you've never been down. And the question is why? Well, you might find something that you've never seen before. You may actually just enjoy the different route. And there's a little bit of serendipity there. And what is it about that, that practice of taking a different route? That is so helpful? Well, there's two things. There's the idea of manufacturing serendipity. You never know what you're going to find. And that becomes the idea of exploration, which you touched upon earlier.
22:24 Speaker 03 But to me, to me, there's this idea that people always overestimate the things that make them happy
22:33 Speaker 03 and underestimate.
22:36 Speaker 03 The value of the things that they're not sure make them happy. To make that more clear, if I asked you, what are the things that make you happy? You could name the 10 things right away. And if I asked you, what makes you unhappy? You could name them right away. And if I asked you, the things that make you unhappy and the things that make you happy? How confident are you in that those are the things that make you unhappy and happy? You're gonna say like 100%. You're so overconfident in this idea. But the reality is that you're, you're probably wrong on a lot of those things because you've mislabeled the category. And some of those things should actually be in that middle gray area. Here's a real world example.
23:22 Speaker 03 One of my mentors, Brad Feld, takes his wife on, I don't, I think they still do it, but for many years at least, they lived in a new country or new place, I should say, for a month, a year. And I don't think it was vacation. I think it was, you know, they lived there and they worked there. It was a really cool life experience to have with one's partner. I looked at my girlfriend at the time and I was like, we gotta do this too. This is a great idea. This is fantastic. I was like, we get to live in a new place together. We don't have kids yet. Let's, you know, experience life. It will still work, right? And we did it in San Francisco one time. We've done it in other places, other times.
23:57 Speaker 03 And on this very first time, we went to San Francisco. And I had this point in my time, this is years after the original version of the Happiness Project. And I said, you know what? I'm gonna document everything I do in my life. Again, I haven't done it in a while. Take inventory and the things that make me super happy, the things in the gray area and the things that make me unhappy. They don't all have to be tier one quality things. One example, there's this coffee shop I walked to on the way to the subway every day. The baristas know me, it's tasty, loved it. It was a great experience and I thought this is something I really enjoy. It doesn't have to be that important, but it was a part of a habit. It was ritual that I was doing regularly. When we moved for that month, I didn't have that place anymore. And I realized, well, that kinda sucks. I just lost something I really, really, that brings me a lot of like maybe, maybe superfluous happiness, but still happiness nonetheless.
24:43 Speaker 03 And so what do we do instead? It got replaced with eating breakfast with my wife every morning.
24:50 Speaker 03 And I realized, holy moly, I have been missing out on one of the greatest sources of happiness in my life ever since then. And to this day, we still have breakfast together on virtually every morning, save for travel. And now, you know, we have sober time together. Everyone else is fighting, you know, at their week to have dates with their wives. I have a date with my wife like almost five days a week, right? And it's sober, and it's a good moment of the day and all that kinds of stuff. And I realized this thing that was in the happiness category was actually detracting from my happiness. Because people overestimate what makes them happy and what makes them unhappy. And they've really never thought to think, well, you know what, by subtraction or by changing
25:33 Speaker 03 it, could it be something orders of magnitude more valuable in my life?
25:38 Patrick O'Shaughnessy? I love the three overarching lessons from the Happiness Project. The other thing that really piqued my interest was this idea about humor. And you mentioned that you taught a class on humor specifically. Maybe you can say a little bit about that?
25:48 Speaker 03 The study of humor is really, really, really an intellectual one. And people don't think of that. So the professor called me and I was like, listen, I've been studying humor for my whole life, not as a comic or anything like this, but honestly, I'm not the tallest guy in the room. I'm not the smartest guy in the room. But in a room full of ECs or a room full of, you know, hedge fund guys, I'm pretty decent at standing out, just based on keeping conversation light.
26:19 Patrick O'Shaughnessy? No doubt.
26:19 Speaker 03 Ridiculous.
26:20 Patrick O'Shaughnessy? No doubt.
26:20 Speaker 03 And I was like, that's kind of funny. I was like, why is that? And this was kind of the case, whether you're the class clown that can still get A pluses in in college or whatever it is. I was like, this is kind of interesting. As an example, when I was at HBS, you know, originally, I was still at a company when I started. And I realized, you know, how can I do this company and do investing and go to business school, you know, full time? I was like, there's no way to do this. Well, what if I somehow trick or charm, depending on your perspective, the professors into letting me, you know, babysit their kids or do an extra project on the side or whatever it is I got to do in order to get it done. So humor is partly that approach. And with this call this professor gave me, he was like, hey,
27:00 Speaker 03 Heard you you've thought a bit about humor. It's very unusual for a financial services and investor guy to have thought about this. I was like, I don't know if I've thought about it, but here's my principles of humor, X, Y, and Z. Here's a here's how I manufacture humor. Here's how I create surprise in conversations. Here's how I do self referential humor. Here's how I do all this kinds of stuff. And she's like, Nikhil, you beautiful idiot, you have accidentally derived our entire syllabus. And I was like, I don't know what you're talking about. I've never read a book on humor or met a comic for that matter. And they're like, like, this is exactly how you build a joke, exactly how you structure it. And I was like, interesting. I've been using it to get ahead in the professional life.
27:37 Patrick O'Shaughnessy? So how do you tell me how you structure a joke? What's the one minute version?
27:39 Speaker 03 Ah, man, this is so, this is like, this is like giving away all your secrets. No, I would, I would say you're constantly looking for the angle that no one else is expecting. And presenting that as like a reasonable option in conversation.
27:55 Patrick O'Shaughnessy? Surprise.
27:56 Speaker 03 Yeah, you can call it surprise, but it has to be a certain type of surprise. You can surprise someone by saying anything derogatory or negative. That's a bad surprise. It has to be in the same vein of like a good pun is like an example, but it has to be within the spectrum of acceptability, of course. And it also has to be responsive to that person.
28:19 Patrick O'Shaughnessy? I'll give a good example of this, which is actually the night that we met. So it was a dinner that I was putting on in New York City and it was for cryptocurrency people. And it was just meant to be like a bunch of really smart, interesting people the night before a big cryptocurrency conference that we were all going to. And you were there and it was the first time I met you. And let's just say that the cryptocurrency community at the time, this was a little while ago and the prices were near all time highs. They take themselves very, they were taking themselves very seriously. And you were kind of the one guy in the room that was like, this is a lot of this is just completely ridiculous. And that led to a conversation about like how much actual fiat money had gone into the cryptocurrency world at the time. And it was like, it kind of started as a joke, but it led to this really interesting
29:01 Patrick O'Shaughnessy? conversation. Like, can you believe all this hype and discussion and attention and seriousness for this relatively tiny amount of money at the time? So I can definitely attest to, to your style.
29:12 Speaker 03 Appreciate that. Appreciate that. It served me well, especially in that room where it was like, you're a millionaire, you're a millionaire, you're a billionaire, you're, you're a millionaire. And do you deserve it? And asking people straight up to their face. Cause you make a buck or two and people, I don't know, maybe it's their ego, maybe they feel they earned it because they had a hard, whatever it was. But the reality is we're, we're all way, way, way blessed.
29:33 Patrick O'Shaughnessy? Yes, no doubt about it. So let's spend a couple more minutes on kind of closing out a couple of other investing things. And I do want to spend some time on crypto specifically, which is obviously what you're focused on. I love that it's taken us a long time to get there. That's a good thing. So the first would be to kind of close out your thoughts on venture capital investing, generally speaking. We talked a lot about moonshots. I understand your philosophy there, but more perspective on having been in it quite a long time, having worked at a place like SoftBank, which has become sort of a juggernaut in the space and having been in and around kind of the East Coast, New York and Boston venture capital scene for a decade. How has it changed and what interesting ways, any, any like macro observations or interesting trends that you, you observed today?
30:16 Speaker 03 Venture capital is dead? I'm kidding. So I had a great, I had a great experience at SoftBank. I gotta tell you, extraordinary organization.
30:24 Patrick O'Shaughnessy? Why?
30:25 Speaker 03 Masayoshi's son's long-term approach, I think is peerless.
30:32 Patrick O'Shaughnessy? Maybe you should step back for a second, not take for granted that people know what SoftBank is. Maybe you could just give your description quickly of what it is.
30:38 Speaker 03 SoftBank is the world's most, I think it's the world's most profitable telco. It's a giant conglomerate and it's probably most well-known today for the Vision Fund, the hundred billion dollar private equity style technology fund, the World's Artist Technology Fund. But the reality is that's just another strategy that Masa, Masayoshi's son, who's a founder and CEO of SoftBank, he has taken in order to achieve his hundred-year vision. And by the hundred-year vision only pales in comparison to his 300-year vision. I don't know how many folks out there have a 300-year vision.
31:15 Patrick O'Shaughnessy? I have that one. Elon.
31:18 Speaker 03 Yeah, it's crazy by most people's standards, but.
31:23 Speaker 03 That's truly how he measures his success. So I was able to observe some of that really, really long-term thinking and incorporate it into my professional life and my personal life. So, you know, I think it was, there's a phrase, you can correct me, you can elaborate on who said this, but every major decision in your life, you kind of could just look at it from the perspective of your deathbed, presumably an elderly, many years down the line kind of scenario, and look back, you know, would, on my last breath, if I looked back, would I be happy with that decision or not? And so trying to look forward over 100 years and look backwards 100 years is sort of my rubric for most key decisions.
32:07 Speaker 03 And I've seen SoftBank, over and over and over again, take huge, huge, huge megarists from an outsider's perspective that have more times not paid off. And I was there when Alibaba went public, which was an extraordinary experience, when SoftBank bought Sprint and many other companies in the tens of billions of dollars. And my group was focused on venture capital, very, very early-stage stuff, but we sat next to the group that did the larger stuff, too. So it was a pretty extraordinary experience to see folks operate a huge, huge organization and still move very nimbly. That's actually why, actually one of the reasons we partnered with SBI Holdings, a
32:48 Speaker 03 large publicly traded financial institution in Japan, formerly known as SoftBank Investment. And we've been able to find a partner that actually fits the rubric that I shared with you earlier on how to evaluate early-stage companies that have moonshots. And the idea that a huge, huge, huge, public Japanese company has Silicon Valley Tier One product velocity. Is a combination that I don't think anyone in the world knows how to underwrite. Certainly, most equity analysts couldn't possibly begin to understand that. But even for a venture investor or the average shareholder, it'd be pretty difficult. But I can tell you that it's one of the most extraordinary things I've ever seen.
33:33 Speaker 03 A multi-billion dollar giant financial services regulated company that can push out product super, super, super fast.
33:40 Patrick O'Shaughnessy? So before just rounding out, any thoughts on the state of venture capital other than it being dead? What would you say you changed most about your investing style or philosophy pre and post SoftBank? So if you took that experience as a discrete period, what was the primary learning or change through that period?
33:57 Speaker 03 So the primary learning for me was that I was able to observe a culture and an investing strategy that was really, really inspiring, but it wasn't necessarily my own. And I had to discover how to value investors and how to value entrepreneurs. But I still, it took me years as a VC to really understand what is my value add, not what is the firm's value add. And for me, it was all about can I be that deep independent learner, become an expert on a sector, and become that consigliere to a founder to achieve that moonshot vision as well as be that moonshot investor?
34:41 Speaker 03 And honestly, I just really loved doing the stuff that no one else was willing to do. The crazy, outlandish, wild visions that no one else is willing to consider. And you know what? The irony is that that actually gives me a competitive advantage, not just because the upside is big, but simply because other people are undervaluing it. And if I see value in things that people undervalue, guess what? I have a pricing advantage.
35:03 Patrick O'Shaughnessy? What's the craziest thing you've done?
35:05 Speaker 03 What's the craziest thing I've done? Oh, man.
35:10 Speaker 03 That's the craziest thing I've done. What a wild question.
35:16 Speaker 03 So I was really, I was really fortunate to be invited on this trip with Richard Branson on vacation many years ago. And I ended up meeting three best friends off of this trip. These are extraordinary superstars. When I say superstars, I mean at the Elon Musk level. And they're, some of them are household names today. And we all became, we chat on WhatsApp and whatever else all the time about things from, ranging from divorce through love and getting drunk next time you hang out on some crazy place. Right? And I said, guys, this is ridiculous. We went on one trip together and how often do you make a best friend? When's the last time you made a best friend?
35:58 Patrick O'Shaughnessy? Been a long time.
35:59 Speaker 03 Doesn't happen every day, doesn't happen every year. And I said, what if we could create something that could manufacture other people to have best friends? That's insane. And out of that, two things came from it. One was I decided to do some business with these guys and, and I'm gonna tell you that story. That's my greatest failure. And the other one is I was like, you know what? We should just create an awesome, cool community that focuses on things that we're excited by. What are we excited by? I was excited by impact investing at the time. So we created this thing called the Necker Summit and we held it on Necker Island, which is Richard's private island. And we invited superstars that have their own family offices, that have these obscure businesses, some founders.
36:44 Speaker 03 And we said, what if we merge them together, create this insane experience that no one else had before? Do you think we could create new best friends? And then we would be the arbiter of best friends? That's, that's ridiculous. They would love us forever. Right? That's like introducing someone to their spouse. They owe you for life. And out of it came some amazing investing opportunities, some extraordinary relationships. And we still, we still do this trip.
37:07 Patrick O'Shaughnessy? Fantastic.
37:08 Speaker 03 So that was one. And then the second is one of those guys had this crazy, crazy, crazy idea. And the idea was, what if we could find the world's most undervalued asset?
37:23 Speaker 03 That would be such a cool thought experiment. And what if we moved it from a thought experiment to a capital? Campaign. A capital, a wealth creation activity at the same time. It might be the world's greatest wealth creation moment. And best story. Yeah, right. So I was like, wow, well, I don't even know how to think about this question. It's crazy. What is the most undervalued asset in the world? Is that a, I don't know, is it a person? Is it a idea? Is it a place? I don't know. And so we've kind of had to, you know, do this, like, it took like weekends thinking about it, talking to experts, academics. Again, this, you see this pattern of discovery, deep immersion.
38:07 Speaker 03 And eventually we found it. And, you know, we kind of looked at each other. I was like, is this, is this what it is? This is unbelievable. And it has to be valuable on so many different levels to be the world's most undervalued asset. And the one thing about the world that was among the top choices that was consistent across the world's most undervalued asset is that everyone believes they're unattainable. And that's why they're undervalued. Can't transact. Yeah. Completely illiquid, can't tran- untransactable. People think it's dead in the water. Impeditable. Exactly. It's like trying to buy the White House. Point blank, everyone will say it can't be done. Maybe that literally can't be done.
38:48 Speaker 03 But maybe there's something that is in that same bucket, but is actually with a lot of work, a lot of time, maybe some money, some political leverage, all that kinds of stuff. So we, my friend and with the help of myself and several others, tried to buy something called Roosevelt Roads, which is a former military base in Puerto Rico, owned by the Puerto Rican government. It's a beautiful, beautiful plot of land with fiber, underrunning the whole thing. We could build the world's largest mega yacht complex. It had an airport, but it's internationally zoned already. It's at the right latitude if we wanted to launch rockets into space.
39:33 Speaker 03 In Puerto Rico, obviously, it has tons of tax benefits, US law, it has, it's a departure point for a lot of the rest of the Caribbean. It has so, it's, the government is incentivized to do things for us. And we realize, holy moly, on like three or four different industries, we could make billions and billions of dollars.
39:51 Speaker 03 This is insane. And there's nobody bidding for it. Anyways, long story short, or long story long, we ended up helping write the RFP with the government, convinced them to sell it, responded to the RFP that we helped write. And someone else ended up responding to it, too.
40:12 Patrick O'Shaughnessy? Oh, no.
40:14 Speaker 03 And I won't go into details, but our $10 billion redevelopment project, you know, ended up being worth $0. But hey, what's $10 billion among friends?
40:28 Patrick O'Shaughnessy? Amazing, amazing.
40:30 Speaker 03 I built a lot of good relationships out of it, and it was a great experience. And I love Puerto Rico as a result of it.
40:34 Patrick O'Shaughnessy? Yeah, to touch on the couple of key themes that I'll take away so far, the moonshot maybe is what we'll call the episode or something like that. But looking for things that appear impossible, impenetrable, and just asking the question like, huh, maybe, maybe what if? Like, you never know. What a great story. I'd love to touch on a couple other mentors of yours before we get to crypto. And maybe specifically, starting with your career in military intelligence. So maybe talk about the mentorship there that led you into military intelligence, what you did and what you took from that experience.
41:06 Speaker 03 I've had a weird career. As an engineer, basically, I got recruited very young. I was still in college. And my, this person who also was an alumni of my school, she recruited me, became my colleague, my boss, a mentor, and really taught me about how to manage extraordinarily large organizations. I mean, the largest organization in the world, at least outside of China, the US government. And that is an unbelievably hard thing to do. And it's not just managing up, managing down, managing sideways. It's also managing outside your organization
41:51 Speaker 03 to help that manage inside. And it's this crazy game of thrones where you're having to leverage relationships outside your organization and ultimately massage your network in a way that the whole body of your career feels relaxed and is fluid.
42:13 Speaker 03 And so the thing that I came out of it was, you know, when I was in college, I don't know how big, how big was your network in college? If you had to measure it in people or any other metric?
42:21 Patrick O'Shaughnessy? Like real thirty?
42:23 Speaker 03 Right. Super tiny. And when do you think it exploded?
42:27 Patrick O'Shaughnessy? Three years ago.
42:28 Speaker 03 It's nonlinear. It's super nonlinear. And people don't realize when they are in a moment of explosion. They always realize it afterwards. But if you knew when you were in a moment of explosion, what could you do about it? Could you put more gas to the fire? I bet. Would you manage it differently? Oh, my God. People feel like they're drowning sometimes when they're in a network explosion moment. They just were on a podcast. They started a business. People are reaching out to them. You know, they achieved a new title, whatever it is. And they don't realize, well, maybe they can throw resources on it. And one of the things my mentor helped me do was, was realize, you know what? If you are really self-aware of your role, if you have extreme humility about it, you'll actually be able to get really, really far.
43:13 Speaker 03 So she encouraged me, you know what? Doesn't matter. Reach out to the four-star generals. Ask for a meeting. You are the lowest person in the totem pole, which basically means no one in your position has ever asked for a meeting with them one-on-one. And so having that brash sort of, it's not arrogance.
43:32 Patrick O'Shaughnessy? Just willingness.
43:33 Speaker 03 Yeah, just will it to happen? And sometimes it does involve going and showing up to a four-star general who was fighter pilot, astronaut, the whole bit, you know, has the ear of you name the president or former president and saying, hey, listen, I know he's only got 15 minutes between some meetings at some point today and work outside of his office, camp out, do the whole, do whatever it is you gotta do in order to get that meeting. And guess what? When you get the meeting, drill into exactly what it is you want to talk about for 15 minutes, just that one thing. Let them know you own that conversation. You have a clear objective. That's what you want. And fortunately, most of my stuff ended up being very, very personal sorts of objectives and stuff they wanted to talk about. So I was pretty lucky on, in that resolve.
44:16 Patrick O'Shaughnessy? I want to close out this idea of manufactured serendipity.
44:21 Patrick O'Shaughnessy? Maybe just put a bow on it. We've talked around it quite a bit. Effectively creating structures, almost like arbitrary structures, but just forcing yourself to do certain things, almost with the faith that following that framework will lead to luck or serendipity. Am I describing that the right way?
44:41 Speaker 03 Serendipity should be further defined. It's really serendipity related to your goals. And it has to be directly relevant and just undefinable. So to me, when I try to manufacture serendipity, it's a set of actions that I regularly take where I don't know what the exact outcome is going to be, but I know one of the outcomes is going to be, I know one of the outcomes is going to be positive. So when we decided to do this necker summit thing, I didn't know it wasn't come out of it. But I knew something good was going to come out of it. At the very least, worst case scenario, I get to invite people to an extraordinary place, even if they can't come and they decline.
45:26 Patrick O'Shaughnessy? That's still positive.
45:27 Speaker 03 They were given a gift. That's a great way to manufacture relationships. And some of those, by the way, still have reunions for these trips all the time. Some of them have led to putting in a lot of money into some of these companies, co-investments, profits, quite literal profits that I can draw a direct line to some of these meetings. Manufacturing serendipity, I mentor a group of folks. I don't really know what the benefit is going to be initially, but invariably the base case is I get to access a network that I otherwise would never be able to access. 21 year olds that I have no, you know, I don't hang out with 21 year olds normally, not in my social circle, but incredibly valuable from a recruiting standpoint, from understanding what's going on.
46:07 Speaker 03 If you invest in consumer products, I don't anymore very much, but ironically now cryptocurrencies are, are consumer products for 21 year olds. So I do unintentionally. If you're out there and you want to manufacture serendipity, the best thing you can do is figure out what your passions are. Figure out what it is that you are really, really great at, that you, you know, if you look at the last week of your time spent, what is it that you have done that you've done pretty much every week for every year of your existence?
46:42 Speaker 03 And for me, that was organizing events and it was collecting people. And I've always held these kinds of things, whether it was in middle school or high school or whatever it was. And I've just been a collector of unicorn people.
46:55 Patrick O'Shaughnessy? People experience, yeah.
46:55 Speaker 03 Exactly. And that's always been, always been something that I've done. It's not a job. I mean, if it was, probably wouldn't pay that much, but I love it. And it's a part of my existence. And I have turned that into a way to manufacture serendipity. And events is, you know, a lot of people can throw events, but can you curate experiences? That is, that's a much trickier leveling up of events.
47:17 Patrick O'Shaughnessy? Okay, crypto. Crypto. Finally got there. So what's the best place to start here? Maybe just with your experience approaching it. You've been an investor of all different stripes. This is the new, new thing. We've spent a lot of time on the podcast, talking about it, explaining it. And I'll try to focus on new angles so that we don't cover covered ground. But the best framing would be your own entree into it. How did you approach it? What is interesting about it to you, both as a, someone interested in impact investing, in technology, in the future, in long-term visions, but also as an investor trying to earn a return?
47:56 Speaker 03 So I'm a hardcore capitalist without question. And I originally did not value cryptocurrencies in the way I do now. Circa 2012, I want to say, there was an entrepreneur that I was introduced to, who I met, I flew out to see, came with rave reviews. And he said, Hey, Nikhil, this is a distributed ledger. And I'm like, distributed what? I have never heard. Good bless you. Did you sneeze? And he said, he said, yeah. And it's been 45, 50 minutes just explaining the real basic concept of what a distributed ledger is. And
48:40 Speaker 03 I didn't get it. 2012, keep in mind, like, nobody. Said the word blockchain back then. I didn't really understand it. I was, I was really deep in the throes of investing in other moonshots. Wasn't of the frame of mind even to be able to value what cryptocurrencies could be. That was Chris Larson, who founded with that company Ripple. And he's a very, very successful serial entrepreneur. He was by that point already, but I think now even more so. And I didn't invest. Whoops. You missed some. The partner I ended up working with did. My current partner, Savneet.
49:24 Patrick O'Shaughnessy? People have heard from.
49:25 Speaker 03 Yeah, he was on this. He's, he's been involved with the company. And fortunately, it took me a few years to come around. I say fortunately, because I had great experiences along the way. I don't regret anything of the sort. But it allowed me along the way to have many more touchpoints in the industry, firsthand experiences, seeing miners, seeing protocol development, seeing exchanges. And I say seeing, I mean either being an investor in, being an observer in, being an advisor to them, either myself or our Savneet. And that's a lot of firsthand accounts, seeing it grow. And really cryptocurrency comes back
50:03 Speaker 03 to my original passions that we spoke to, happiness and productivity. You might be thinking, how in the world cryptocurrencies have anything to do with happiness and productivity?
50:14 Patrick O'Shaughnessy? I'm thinking that.
50:15 Speaker 03 Well, it's really simple. Have you been to a crypto meetup?
50:19 Patrick O'Shaughnessy? Yeah.
50:19 Speaker 03 Have you seen the energy in the room? Have you felt the energy?
50:22 Patrick O'Shaughnessy? I sure have.
50:23 Speaker 03 Have you left being like, oh my God, this is the greatest thing since sliced bread. And it's not just drinking the Kool-Aid. It's cold, hard logic. And you recognize this is an industry where
50:40 Speaker 03 I don't know, what would you say, a hundred thousand computer scientists?
50:44 Patrick O'Shaughnessy? Yes, yeah.
50:45 Speaker 03 Yeah, at least fifty thousand.
50:47 Patrick O'Shaughnessy? Yeah.
50:48 Speaker 03 Somewhere in this range. Of the smartest people on the planet, right, who are leaving Facebook and Google, who are math Olympiads, who are leaving multimillion dollar a year guaranteed paychecks to focus their life on an industry in its infancy. That is unbelievably intellectually challenging, which I derive a lot of happiness from. And obviously, many of them do as well. There's a clear correlation between my happiness and the amount of reading and learning that I do on cryptocurrency. So, yes, happiness because it's a mechanism for learning how to learn. And it's not just the next shiny object for me.
51:25 Speaker 03 It's not like how space exploration and fish farms and genetics and whatever other diamond manufacturing, all these weird obscure sectors where I've gone deep into. This is not just another notch or anything like that. To me, this is a whole world of notches. This is a sector where I can do what I love to do, which is build financial app. Where I could, this is a sector where I can do exactly what I love to do, build financial firms. And I can build a financial firm faster, bigger than I could have ever imagined compared
52:10 Speaker 03 to venture capital or compared to even private equity, at least for me personally. It's a best fit scenario. So, that was a realization, again, based into what my passions are and then apply the lens of what kind of investor am I? I'm a markets guy. I look at the market and I'm like, this is an under-regulated environment, which makes it easier for a young startup-like business to play in. I'm very excited about regulation coming in, but again, I look for every angle that is beneficial to me. And you know, the fact that Goldman Sachs and big banks are forced to hesitate is an advantage for me.
52:55 Speaker 03 So, you know, I see $400 billion of retail investors coming into a market that's never happened before. Why is that? Well, there's a ton of demand, clearly. Maybe some of it's demand for the wrong reasons, you know, greed. But I think that's kind of a necessary part of the palette. You have to have that in a sector in order to incentivize enough parties to get critical mass to support an industry infrastructure. Same thing happened in the internet boom. Same thing happened when the top talent from MIT would go to financial services, right? For hedge funds, right? Some people go for that for the wrong reasons, but you do need all the service providers in there. You need the infrastructure in there. You need all these elements to kind of come together to make it possible to build what I
53:38 Speaker 03 intend to be the largest asset management firm for cryptocurrency.
53:41 Patrick O'Shaughnessy? How do you reconcile the excitement and the talent and all of that stuff with the, as an investor with other people's money at stake, the kind of, we'll call it like, near to midterm investing potential of these currencies? I ask the question this way because my DNA is as a more skeptical, like love to talk about technology and exciting kind of growth style investing, but really do virtually none of it because I always just feel like markets overprice hope and excitement. And I don't think that, it's empirically the case in markets. So, so how do you reconcile the fact that, and I'd love to hear like your taxonomy of different cryptocurrencies? I'm always interested by how people classify them.
54:26 Patrick O'Shaughnessy? But how do you reconcile the excitement with the lack of tangible, I can use it, feel it? There's no Uber, there's no killer app, et cetera? Feel free to disagree with that.
54:36 Speaker 03 No, there's no question that traders and hype are not users. And it's very easy to conflate the two. That being said, I heard your question and I'm going to change it. So you asked for a near to midterm, but I think you have to think long term when it comes to cryptocurrencies. This sector moves so, so, so fast, faster than any sector I've ever seen before.
55:04 Patrick O'Shaughnessy? Product velocity.
55:05 Speaker 03 Yeah, the product velocity across the sector is stupidly fast. And maybe that's because there are so many engineers working on this problem at the same time. And it's open source and people can push out and forking is encouraged. And all the other elements that define cryptocurrency inherently is a fast moving industry. In my mind, if you're trying to value cryptocurrencies fundamentally, you're going to struggle. And it's going to be really, really, really hard. That doesn't mean they're worthless or that they are impossible to value. I just think that many of these are young startups. And how do you value a young startup? There's sort of standard practices that are used, heuristics that are commonly used.
55:48 Speaker 03 What's a high price, what's a low price, depends how much money you're raising, all these kinds of things come into play. And the market bears the price that the market bears. Right now, that price is, I think, at a premium. We've seen it come down a lot. I have my own analysis of how to value cryptocurrencies. I think there's probably still room for it to drop. I do think over the medium to long term, with the amount of capital coming in from institutions over the next one to three years and retail investors over the next one year, you will see a dramatic increase in the amount of capital coming into the sector. What we are finding right now is Hype is dramatically increasing the interest.
56:31 Speaker 03 But in my experience in every other sector that I've been in that's gone from zero to hero in terms of hype, that stuff goes away just as fast as it comes. And I think we've seen this a few years ago in cryptocurrencies. Dramatic spikes in prices, dramatics that correlate with Google Trends and things like that. And we saw that in December. And if you look at all that data right now, you're seeing the Google Trends searches, et cetera, are below.
56:57 Patrick O'Shaughnessy? Real quick, the stock price.
56:58 Speaker 03 Yeah, they're actually below, you know, suggesting there's room. The bottom's not hit yet. Who knows? What I can say is I take a very medium to long-term view on the sector.
57:10 Patrick O'Shaughnessy? Let's go back and recreate that conversation I referenced earlier, which was, so we're, the scene is, we're at this dinner. We're talking about, you know, these things are up 20% a day at that time. I mean, it was kind of outrageous. A lot of smiling faces. And you're kind of looking around and I'm kind of following you because I think you have an interesting take. And in each of the conversations that we're starting, you're like, guys, like, have you ever tried to calculate how much money, like in US, if you converted stuff to US dollars? Like, how much US dollars has on-ramped into this world? And we kind of started doing these back-of-the-envelope calculations. And it was like a couple billion dollars at the time. It was like tiny. It was like tiny. It was nothing. With a market cap of $400 billion or something. So tell me about your thinking, given obviously you were thinking about it then.
57:55 Patrick O'Shaughnessy? And then you just mentioned retail followed by institutional demand, on-streaming demand. So talk me through why you think that's coming? How that happens?
58:06 Speaker 03 Sure.
58:07 Patrick O'Shaughnessy? Like the.
58:07 Speaker 03 Play it out.
58:08 Patrick O'Shaughnessy? Yeah, play it out for me.
58:09 Speaker 03 Never in the history of time has there been a financial, a liquid financial asset class entirely driven by retail investors, let alone one at $400 billion of size or whatever the price is today.
58:25 Speaker 03 So that's a really important concept to understand in order to look at the what happens next. Retail investors generally are much more fleeting than institutional investors. They're more susceptible to information flows in the media and things of that nature. They respond quickly. In an unregulated and under-regulated environment, you'll see the number of on-ramps for retail investors increase through private funds, as we've seen through explosions in the asset management sector. And I think you will find public vehicles come available very soon. Maybe not in the US right away, but eventually. When I say eventually, I mean, you know, in the next year.
59:10 Speaker 03 So I still see the on-ramps for maybe 180 global exchanges and probably 360 by this time next year. Right? I still see the number of retail investors coming on dramatically increasing. Okay. So for the foreseeable future, we can see more retail investors coming in. That's good news and bad news. For the reasons we just discussed, I think it's great that they're supplanting the market. I think it's bad because they're maybe less sticky than larger investors. So how do we move away from retail investors and allow the rest of the investing community into this? It's hard. Last year, we were in a pretty much permanent state of euphoria.
59:54 Speaker 03 And I was looking around the room and I was thinking, I can't be the only one thinking that this is too good to be true. And, you know, the only person at this dinner not smiling. You were though. I was like, this is not right. I got investors saying, how can I short? And I'm thinking, this is, this is crazy town. Prices are way overvalued.
1:00:16 Speaker 03 But again, if you look at it, we say, okay, there's three, I think we said there was three to five billion dollars of capital has come in. All right. Why is this number important? It's really important because if we can understand the entry point, the average entry point of investors, we can understand the tolerance level that they're willing to take when the market crashes. And there's one thing that I really, really believe in cryptocurrency more than anything else, and we have built our entire firm on one principle, is that liquidity is the kingmaker. If you can source liquidity better, cheaper, faster, structurally incentivized for your firm, you have a very clear medium-term advantage. And for the record, there's no long-term advantages in crypto today.
1:01:01 Speaker 03 It moves too fast. Medium's as far as we can get. So I began a exercise to figure out, okay, if I know in my deepest part of my heart that liquidity is the greatest challenge for cryptocurrencies, then how do we solve that? So the first part of this question is, how do we know that liquidity is a big problem? Well, look at 2008. People looked around the room and they said, hey, everything's going to hell in a handbasket. Where are you moving your money? How are you adjusting? What are you going to do if and when the banks shut down in three months? Implicit in those questions is the idea that you can get out, that there is liquidity inherently, even in an extreme down market.
1:01:46 Speaker 03 That is crazy. In cryptocurrencies, people will be asking, where were you when the exchanges shut down? And there was no liquidity, when you couldn't get access to your capital. So inherently, you can, liquidity is the greatest risk to cryptos. And so if you can do everything in your power to address that, I think you are creating a long-term, medium-term infrastructural advantages. So that's really where it started out. At that dinner... We're talking about $5 billion coming in at most. And I began thinking, well, if only a few billion dollars came in and it came in roughly around this time, then, you know, people will be willing to let the price drop down to this level before the market has that liquidity freeze moment.
1:02:31 Speaker 03 So to me, all these questions about capital coming in, the amount of capital coming in are, yes, a good way to value relative assets. If I know $100 billion is coming in, I got a pretty good sense that the price of cryptocurrencies is going to go up. But for me, it's actually the opposite, or I should say the inverse. I want to know at what point is there a liquidity freeze when prices go down? That's the problem I'm trying to solve for. And if I can increase my liquidity disproportionately more so than other folks, then I can handle a greater drop in the market. And if I can handle a greater drop in the market, I just created an opportunity to trade against.
1:03:11 Patrick O'Shaughnessy? So say more about how you developed that capability.
1:03:14 Speaker 03 So our business is a multi-pronged business. We've got many strategies.
1:03:21 Patrick O'Shaughnessy? This would be CoVenture Crypto.
1:03:23 Speaker 03 CoVenture Crypto. So I'm the CEO of CoVenture Crypto. We've got a variety of strategies in cryptocurrency. There are passive ones, there are active ones, there are ones that will be public, publicly available, and some that are private. We've got some that are higher frequency and small. We've got some that are larger and analog. But the piece that connects them all is that we focus on liquidity and security as our core tenets in every single thing that we do. And as a result of doing that, we want to be the most institutionally oriented asset
1:04:07 Speaker 03 management firm for crypto. It's very simple. We are most secure, most liquid.
1:04:14 Speaker 03 If we can offer a product that people walk socks and acts and feels like a normal product for investors, I think we're getting, we'll work with regulators, all that kinds of good stuff, as opposed to doing a more fly-by-night operation. You know, we've got, we've got folks around the table that have spent decades in, in asset management, and we take a very, very conservative approach to an asset class that is very avant-garde.
1:04:36 Patrick O'Shaughnessy? So let's say the exchanges do shut down. Let's, let's presume that future moment where five big governments coordinate and come out the same day with legislation that says, "Regulations are shut down." Talk me through that scenario.
1:04:48 Speaker 03 That's a, that's a, so that is what we in the industry would call a bad scenario. That might be a technical term. So if exchanges are shut down due to regulation, that's a bigger and very different issue than if they're shut down due to liquidity. If they're shut down due to regulation, then the question becomes, why are they being shut down? If the government says Bitcoin is illegal to own, look, that's...
1:05:11 Patrick O'Shaughnessy? Like gold was for decades, you know, in the US?
1:05:13 Speaker 03 Exactly. It's, that's a very different problem set, right? I don't anticipate that happening, but I could imagine there being other scenarios upon which exchanges shut down, for sure. So you need redundancy. You need redundancy across exchanges, you need redundancy across mechanisms to get out, you have OTC relationships. Here's a real-world example. We were about to launch one of our products, and it was Thanksgiving, literally Thanksgiving, and our, I have to make sure I don't disclose anything, I can't. Put it this way, one of our accounts was yellow-flagged by, by the exchange. Not yellow-flagged, but degraded, I guess. You know what I mean? And I was like, "Well, this is not ideal.
1:05:56 Speaker 03 This is going to severely limit our ability to do things." So what can you do? They made a mistake. That's okay. It happens. But still, it's our problem to deal with. And you have to get on the phone with the CEO of a company that's, I would say, doing three and a half billion-dollar run rate, that I'd never spoken to before, at 9:00 PM on Thanksgiving, to, for him to flip a button on his software, effectively. And you need to have, you know, the ability to not just call up, but you have to leverage, straight-up leverage, in order to get folks to do exactly what you need to do. And in, in the case of taking that strategy out to a more holistic strategy, I like to partner with...
1:06:39 Speaker 03 These folks, I want to, maybe I'm an investor in some of these exchanges. Maybe we partner up with folks like SPI Holdings like we have to get access to some of the greatest liquidity pools in the world for crypto, which is of course Japanese investors. Maybe there's an opportunity to do such extraordinarily large trades that the crypto foundations are the only people in the world that could be possibly doing those. Maybe we actually need to partner up with core developers that work on what's coming out next for protocols and help them build it such that the whole community can get access to the next feature that creates liquidity in the market. And when you do that, guess what? You're first in line to use that feature, to try out that feature.
1:07:24 Patrick O'Shaughnessy? Sure.
1:07:24 Speaker 03 Instead of being just one of a thousand people to have access to it. So it's not like a one trick pony. You have to constantly be working at it.
1:07:31 Patrick O'Shaughnessy? Let's talk a little bit about the ecosystem and who matters most or what matters most. So the appealing feature of this, you said distributed ledger, so distributed or decentralized is essential to this being interesting. Maybe we can start with miners. So I've spent almost no time talking about the ins and outs of mining as a business, where it's located, what forces are at play.
1:07:56 Speaker 03 Sure.
1:07:56 Patrick O'Shaughnessy? Maybe give me your interpretation of the importance of and role of miners and how that, how you think about how it may change.
1:08:02 Speaker 03 Miners are a critical part of the ecosystem today because they are incentivized to perform the consensus mechanism within a blockchain's value proposition. There's multiple different types of blockchains. You've got proof of work, proof of stake, and there is now, I don't know, 20 different permutations beyond that, some of which have significantly increasing popularity. In one type, in proof of work, miners are most popular. That's Bitcoin, Bitcoin Cash, and a whole host of others.
1:08:41 Speaker 03 And I don't know which blockchain types are going to be most popular 10 years from now. There's a theory that miners focused on proof of work will be around forever because Bitcoin will be around forever. I don't know if I buy into the idea that any cryptocurrency that's around today is going to be around forever, but I can say for the foreseeable future, meaning some years, miners are a critical part of the infrastructure, for sure, because we've got a blockchain and an ecosystem that's been around for almost a decade now, never been hacked, it's a very robust ecosystem. That never been hacked shouldn't, is not a throwaway line. That's super, super important to understand that
1:09:22 Speaker 03 the Bitcoin blockchain has never been hacked itself. And it's so robust, even with a relatively limited number of contributors. The idea that if 10% of the world's gold moves into Bitcoin, you've got a 700, maybe 800 billion dollar sized asset class that doesn't need to evolve in order to scale. It can handle that today, for the most part. It doesn't need to have a high frequency number of transactions or anything. It doesn't need to scale, as is the criticism of most blockchains, which inherently is an advantage. If they don't need to scale, then all of a sudden Bitcoin seems poised to be around for a while, and
1:10:05 Speaker 03 therefore miners will be around for a while. So I think those two are linked. They're tied to the hip, at least for the foreseeable future. In my mind, miners have geographically shifted a tremendous amount ever since China has put regulations around it. And I think many of them have stayed pretty quiet, for the most part. I happen to know some of the largest miners in the world. That's actually, after talking about Chris, the second group that I learned a lot from the cryptocurrency world was the largest mining group outside of China. And became very close. We've traveled the world, all that kinds of stuff. And they have now expanded their business significantly well outside of mining. So the diversification
1:10:49 Speaker 03 of cryptocurrency wealth creation strategies is
1:10:56 Speaker 03 Very hard to understand. The most successful players in the ecosystem today are not making money with a one-trick pony. They are expanding horizontally very, very, very quickly.
1:11:08 Patrick O'Shaughnessy? What's that frontier? So maybe first classify the value drivers to this point. So early miners, investors, et cetera.
1:11:16 Speaker 03 Miners, exchanges have been the two greatest source of wealth creation, in terms of EBITDA, actual EBITDA in the sector.
1:11:25 Patrick O'Shaughnessy? Okay, so that's what has worked. What's the frontier?
1:11:28 Speaker 03 Well, you've got asset management, for sure. That's where I've...
1:11:32 Patrick O'Shaughnessy? That's where you're focused?
1:11:33 Speaker 03 Where we're focused. You've got all of the blockchain technology efforts focused on financial services as kind of one big bucket, for sure. You've got the non-financial services blockchain-focused buckets, which in my mind are going to be very spotty in terms of success. They're spotty primarily because it's like trying to predict what from the internet is going to be successful five years from 1994. I don't think we really knew that it was going to be Amazon and Google and whatever else in 1994's time. So you'll find that some of those applications, the non-financial ones in particular, will be, I don't know, will there be a billion-dollar company a few years from now that's not an exchange? And I don't know what it is today.
1:12:17 Speaker 03 I have heard that there's a central bank now that has adopted cryptocurrency. There are endowments that have adopted cryptocurrency.
1:12:27 Patrick O'Shaughnessy? As investors.
1:12:28 Speaker 03 As investors, which is pretty game-changing in terms of the credibility that the sector is earning at this point in time. And of course, we're seeing state-sanctioned cryptocurrencies from a handful of places, none of which are America or the UK, but I still think those are pretty important demarcation points in the evolution of the credibility of crypto.
1:12:53 Patrick O'Shaughnessy? What's the most recent rabbit hole that you've gone down in crypto specifically that you find?
1:12:59 Speaker 03 Really compelling. So the obvious answer that folks will go to is alternative blockchain methodologies, things like Hashgraph. What's that? Hashgraph and companies like it are kind of like blockchain 2.0. And they solve a lot of the core issues people have with blockchains that they're slow and that you have to wait and transactions as a result are kind of in this purgatory period before they're officially approved instead of being instantaneous. So it's an evolution of blockchain tech. That's like one area. The second area that I'm really excited by is the ability to have hyper liquid markets
1:13:42 Speaker 03 and asset classes that are a little bit less liquid, whether that's people talking about real estate or people talking about data itself and all of a sudden. Like a numerai type thing? Exactly. Yep. Exactly. That I think is really, that's a rabbit hole that I've gone down in. Probably the most interesting rabbit hole that I've seen is the one that we chatted about at dinner, where we're trying to identify the amount of capital that's coming into a sector. I don't mean just through estimations. I mean, can we? Actually do the math. Do, can we go and do fundamental research and understand, okay, well, can I buy my way into some of that data? Can I become an equity owner in some of these exchanges, extrapolate it around the world and make assessments of the average account sizes, how, you know, the growth rate, how much is coming in through exchanges?
1:14:28 Speaker 03 Can I become an investor or partner with some of the OTCs and understand, okay, this is the amount of capital coming in, the amount of capital coming out? Can we do fundamental research on, okay, these are the wallet analyses? These are the wallets that are on exchanges. These are the wallets that are of miners. These are the wallets of speculators. These are wallets of people actually transacting and bucket them. And now we can understand, okay, well, these are the ones that are, you know, kind of money going in and out on exchanges, they don't really count. These are the ones that are people that are whales, that are holding on a long period of time. That's not, that, you know, would mean very little of that is new money coming in. They made maybe a billion dollar account, but their cost basis was. Nothing. Nothing, right? So, and can we make assumptions? Okay, now we can see the shift is moving from retail investors into institutions based
1:15:13 Speaker 03 on data. This is a rabbit hole that I'm in right now. And it's very hard. I'm not at the end of the tunnel. I don't have conclusions for you at this point in time. My best guess is that. I have changed my philosophy since about six months ago about how the industry will play itself out. I used to think retail and then first half of 2018 institutions are in. The phrase "the herd is coming" has been bandied about. Well, you know what I think? I think retail investors are great. I think we're going to continue to have a ton of retail
1:15:53 Speaker 03 investors come in. I just think that instead of it being retail institution, it's retail products distributed by institutions for retail investors, for the retail investors to become principal investors themselves.
1:16:06 Patrick O'Shaughnessy? Before the institutional investors.
1:16:07 Speaker 03 Before the institutional investors become investors themselves. And that's a really nuanced change, because what does that mean? What's a product that institutional investors distribute to retail investors? Well, that would be things on your E-Trade and things that are mutual funds, and it could be people's retirement funds, and maybe that's actually people trading ETFs. So I think we're going to see some of these products come out, and retail investors are going to have a new class of regulated products. I think that's going to be great for the ecosystem, for sure, instead of a few products limited just to qualified purchasers and things like that.
1:16:46 Patrick O'Shaughnessy? So your partner, Sav, had a great line, which is that this was this great distributed, decentralized, almost anarchistic, idealistic thing, and here you have the top company in the space is effectively a bank that's charging, Coinbase, that's charging you a lot more than any of your other...
1:17:02 Speaker 03 Any bank.
1:17:03 Patrick O'Shaughnessy? Than anyone else.
1:17:04 Speaker 03 Yeah.
1:17:05 Patrick O'Shaughnessy? So how well-preserved has the original kind of vision of these kind of cypher punks?
1:17:10 Speaker 03 Satoshi is rolling in his grave. Here's a couple of scenarios that could play out that would be, I think, mind-blowing for the cryptocurrency community. We had this idea that decentralized and these banks aren't necessary, and we can send money around without them and all that sorts of stuff. And that was all in the original Bitcoin paper.
1:17:35 Speaker 03 Hasn't really played out to Sav's point. What we have seen is the original founders or founder of Bitcoin has not really used their Bitcoin at all. It's been locked up for a while. My suspicion is that they, or him or her, have moved on to other areas of cryptocurrency. And I would not be surprised at all if one of those areas is actually in direct conflict with Bitcoin itself. Think another cryptocurrency
1:18:12 Speaker 03 that is extremely in contention with Bitcoin, which would suggest, if true, that there's tens of billions of dollars that could bet against Bitcoin and stay within the cryptocurrency world. That would be a shock to the system.
1:18:30 Patrick O'Shaughnessy? Competitive along which dimensions? So what's behind that opinion?
1:18:35 Speaker 03 Bitcoin has failed in many of its original ambitions. It may still be the biggest, it may still be the best, it may still be the strongest, but its community is...
1:18:46 Patrick O'Shaughnessy? Judged by its white papers.
1:18:48 Speaker 03 Right, right, right. Its community is very, very slow to adopt and evolve, which, as you can tell, many of the rest of the cryptocurrency community is not like that. Ethereum's whole ethos and many others are move fast and break things.
1:19:02 Patrick O'Shaughnessy? Yeah, ship product.
1:19:03 Speaker 03 Exactly. So I see there being, I see the evolution of the original vision of Bitcoin has, the founders' original vision has become a Frankenstein, relatively speaking, to the original paper. And that means a few different things. Like, I guess, in the world of allowing for forks, allowing for evolution, this was a feature of Bitcoin, not a problem. And so that's why I think things like Bitcoin Cash have come out and all these other Bitcoin killers, or whatever you want to call it. I think it's great for the ecosystem. I think it's really, really hard to measure Bitcoin on its original thesis. I think today Bitcoin
1:19:47 Speaker 03 is great. I think it's amazing, you know, digital gold. I think it will become a store of value. I don't think it's a store of value today, but I think it is the closest thing we have to a cryptocurrency that's a store of value. And for that, I think it'll serve its purpose for years to come. The other aspects of cryptocurrency round, you know, destabilizing governments and it'll replace currency, I think that's a farce. I don't think it will come to fruition in my lifetime is my guess. And those are elements that I can live without. And that's partly why I'm in cryptocurrency is because I think it actually can fit in today's universe.
1:20:23 Patrick O'Shaughnessy? So maybe it'd be helpful for you to state like your version of the value proposition of the of the whole ecosystem.
1:20:29 Speaker 03 Cryptocurrency is allowing for hyper product velocity and allows for individuals and businesses to transact at speeds that have never been seen before.
1:20:43 Patrick O'Shaughnessy? So it's capital formation and exchange.
1:20:45 Speaker 03 Exchange of capital and data faster than we've ever done before. Now, are we there today? No, but we're talking about the promise and the vision, not necessarily what's been done today. Have you ever sent cryptocurrency and had that magical moment where?
1:21:03 Patrick O'Shaughnessy? Yes.
1:21:03 Speaker 03 You have money in one account and then you send it and seconds later it's there. It is unbelievable. I have done this now with CPAs in front of me and lawyers in front of me and my parents in front of me and every time they're like, I don't understand, how is it over there? It's like, that's it. It's done. And that feeling is contagious, intoxicating.
1:21:28 Patrick O'Shaughnessy? So we'll return now to my closing question.
1:21:31 Speaker 03 So tricky.
1:21:32 Patrick O'Shaughnessy? Which is the kindest thing that anyone's ever done for you.
1:21:34 Speaker 03 Kindest thing. My wife for marrying me is the answer that I have to give and it is the most honest answer for sure. You know, you meet, you should come out with Cindy and I at some time or we'll come and visit you. The truth is that I wouldn't be here without her for sure. I hope other folks have a chance to meet her too.
1:21:52 Patrick O'Shaughnessy? Fantastic. Well, this has been wide ranging, fascinating, all of the above. Thank you so much for your time.
1:21:58 Speaker 03 Thank you. This is a pleasure.
1:22:01 Speaker 04 Hey everyone, Patrick here again. To find more episodes of Invest Like the Best, go to investorfieldguide.com/podcast. If you're a book lover, you can also sign up for my book club at investorfieldguide.com/bookclub. After you sign up, you'll receive a full investor curriculum right away, and then three to four suggestions of new books every month. You can also follow me on Twitter @Patrick_OShag. If you enjoy the show, please leave a quick review for us on iTunes, which will help more people discover Invest Like the Best. Thanks so much for listening.
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