Pod Insights The Pomp Podcast Bitcoin Rate of Return: The Only Metric That Matters | Jeff Park About this episode Jeff Park is a Partner and Chief Investing Officer of ProCap BTC. In this conversation we talk about bitcoin, why the volatility is a feature, institutional adoption, opportunities or bitcoin treasure companies, and why bitcoin rate-of-return is so important. ===================== Independent Investor ConferenceMarkets are at all-time highs. Public equities are outperforming. And individual investors are driving it all. It’s officially the rise of the retail investor. On September 12th in NYC, I’m hosting the Independent Investor Summit — a one-day event built exclusively for self-directed investors. We’re bringing together some of the smartest public market investors I know for a full day of macro insights, market predictions, one-on-one fireside chats, and actionable investment ideas from each investor. This is going to be an absolute banger event. Join us if you like markets and think retail is two steps ahead of Wall Street.👉 TICKETS: https://www.independentinvestor.co/ (use promo code POMPYT25)======================From The Desk of Anthony PomplianoCheck out my NEW show for daily bite-sized breakdowns of the biggest stories in finance, technology, and politics: http://pompdesk.com/======================BitcoinIRA: Buy, sell, and swap 75+ cryptocurrencies in your retirement account. Take 3 minutes to open your account & get connected to a team of IRA specialists that will guide you through every step of the process. Go to https://bitcoinira.com/pomp/ to earn up to $500 in rewards.======================Core is the leading Bitcoin scaling solution, enabling you to lock in yield by locking up your Bitcoin. Simply lock it on the Bitcoin blockchain to secure the Core network, and get rewards. No bridging. No lending. Just holding. Still your keys. Still your coins. Now your yield. Start at https://stake.coredao.org/pomp======================TimeStamps:0:00 - Intro2:43 - How to think about bitcoin volatility 19:57 - Bitcoin is a retail investors dream 24:55 - Risks or opportunities with Bitcoin ETFs 26:06 - Expectation for bitcoin being injected into traditional finance 28:51 - How to think about bitcoin treasury companies40:20 - Why bitcoin rate of return is so important 47:19 - Takeaways from Jackson Hole conference
Transcript 10,024 words · 6 speakers
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1:02 Speaker 03 What's up, everyone? This is Anthony Pompliano. Many of you know me as Pomp. You're listening to the Pomp Podcast, which is my effort to find the most interesting people in the world and sit with them for hours while I ask questions in an effort to learn. So it would mean the world to me if you would subscribe to the show on your favorite audio platform, watch episodes on YouTube, and tell your friends and family about the podcast. My goal is to help millions learn from the world's most interesting people. So let's get into today's episode.
1:30 Speaker 04 Anthony Pompliano runs Pomp Investments. All views of him and the guests on his podcast are solely their opinions and do not reflect the opinions of Pomp Investments. You should not treat any opinion expressed by Pomp or his guests as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of his personal opinion. This podcast is for informational purposes only.
1:54 Speaker 03 Talk about like, what is Bitcoin rate of return to you? And like, why is it that you're like, okay, that's the thing that I think is the single most, you know, North Star metric to focus on?
2:03 Speaker 05 I think it's so important that we start to normalize the possibility of measuring things in Bitcoin as a way to think about a benchmark route performance. Even the dollar is not avoiding or inescapable from the general kind of fiscal dominance that is happening globally. And it's time for all investors and operators and people in the space here to think about returns denominated in something that's a little bit more pure, that actually stands for store of value.
2:35 Speaker 03 What's going on, guys? Today, we have a very special episode. This has long been something that everyone wanted. I have Jeff Park, the brand new Partner and Chief Investment Officer of Procap BTC. Procap BTC is the Bitcoin treasury company that will become Procap Financial once the proposed business combination with Columbus Circle Capital SPAC is completed. Now Jeff has joined me as we go to build this business and he is here to talk about his worldview around Bitcoin and volatility. We spent a lot of time on volatility because it's incredibly important, not only for Bitcoin, but for investors around the world. We also talk about the institutional adoption of Bitcoin, what's going on with things that are affecting Bitcoin, and how should investors be thinking about Bitcoin in their portfolios?
3:17 Speaker 03 And how Bitcoin treasury companies are going to use Bitcoin in order to generate more of it for their balance sheets? This conversation covers a lot of territory, and so just one conversation would be unfair to all of you for Jeff and I to only talk once very infrequently. So we are going to do this on a weekly basis and try to get you as much information as we possibly can every week, based on the current events that are happening in Bitcoin and traditional finance. So here's my latest conversation with Jeff Park. All right, Jeff, first conversation in person for talking about volatility and the importance of volatility. It feels like Bitcoin is really benefited from max volatility that is brought to the market, but also now there's certain things about the volatility of Bitcoin that are enticing the institutional investors and it's because volatility has been coming down.
4:02 Speaker 03 Talk a little bit of how you think about volatility, given kind of your experience with a bunch of derivatives and also, you know, generating alpha in this industry.
4:11 Speaker 05 Yeah, absolutely. Most of us, I think, in the financial services industry are taught to be afraid of volatility, or to think of it as something to be less desirable. But the reality is volatility, if harvested correctly, can actually be a very useful tooling for not just risk management, but also for yield generation. And at the core, Bitcoin's volatility is very much a feature. And it is really designed within its monetary construct as to the fact that there are really two trade-offs you can make in the design of money, which is that if you want price stability, you have to have quantity stability as the thing that you might have to trade away, which is the basic foundation of our monetary policy with fiat. But the flip side of this is actually if you fix
4:53 Speaker 05 the quantity, well, then by definition, the price has to be the outlet in which there is going to be volatility. And that is, in fact, a healthy thing. That is the natural design of what money can be. And so I think Bitcoin, it's garnered a lot of attention, mostly because of the volatility, in a way that in itself is a bit of an attention economy in itself. And the reality is, a lot of young people do gravitate towards volatility as a source of alpha, as a source of generating wealth. That is not exclusive to just Bitcoin, in my opinion. It's actually fairly present in the retail investing world broadly, within the way that people want to express views on small market cap exposures, or event-driven
5:34 Speaker 05 risks that are coming into play by activism and whatnot. So I think the unique opportunity here is, as institutionalization has taken Bitcoin to higher thresholds of ownership, what is the level of volatility that we can expect going forward? And there, I would say volatility is a nuanced definition and metric in itself. Most people think of volatility as the standard deviation in percentage terms of an asset's price, and that can be measured monthly, quarterly, yearly, et cetera. But it's a close-to-close observation.
6:08 Speaker 05 What it means is that it doesn't actually accurately capture intraday dispersion. So if a stock went up a bunch and then came down at 4:00 PM the same day, it would look like it's a zero vol asset. But we all know that was not a zero vol day. And intraday volatility in crypto is just as important as close to close volatility. So that's the first point I would mention about what's really unique about Bitcoin. And then the second thing is there's second and third, uh, third orders of magnitudes with volatility measurement too. So for example, volatility exists in a range of distribution, but just because it steadily exists in that range of distribution in a normal and predictable way, doesn't mean it's not a volatile asset either.
6:51 Speaker 05 Meaning the jump risks on the left and right tails also quite matter. So if something is steady for, let's say, a month where the volatility is 30, and then one day it has a 200 vol day. Some might still say that average blended volatility is not very high, but you and I as humans know, that was a volatile stock or a volatile asset or a volatile day. And the beautiful thing about Bitcoin is it actually exhibits a lot of fat kurtosis. There are days when Bitcoin gaps. This is when people get really excited and the volatility and spot relationship often changes during these moments of asymmetric performance. Today's actually a great example. Today's a great example that when Powell came out with his announcements
7:35 Speaker 05 on how he's redesigning and rethinking about the monetary framework for monetary policies, Bitcoin gapped. Uh, it was a big move.
7:44 Speaker 03 112,000 to like 116 or so.
7:46 Speaker 05 Yes, in a matter of basically minutes. And, uh, that is maybe not noticeable as a close to close rolling day observation of volatility on a daily, but on the intraday, if you are present for that price action, that was pretty important.
7:59 Speaker 03 Now, when you think about Bitcoin, uh, close to close, there is no close, which have always sounded very interesting.
8:04 Speaker 05 That's right.
8:05 Speaker 03 So, um, you know, uh, if you go and you say, hey, what was Bitcoin's price at on a certain day? Uh, usually in the stock market, people will look at what it, what it closed at for the day and they can kind of mark it. Uh, there are some ways people have tried to standardize this, you know, looking at certain time periods. But the fact that Bitcoin never does shut off in terms of that price movement, do you think that makes it more volatile, less volatile, or does it have no impact? In terms of in a stock market, you kind of pent up all this demand into the hours of operations, you know, Monday through Friday and when the stock market is open. But Bitcoin is really dispersed over, you know, 24/7, 365.
8:40 Speaker 05 That's right. That's right. And I think you're hitting on something really interesting here that all the quants, the ren tech, the two sigma guys model every day and think about, which is that volatility, by looking at price alone, is actually not good enough of a signal. What you actually need is volume because it's the combination of price and volume that can actually dictate whether there are trends or reversals. And when you look at kind of traditional market structure, you have huge trading volume at 9:30 to 10:30 and then you have huge trading volume between 3 and 4 p.m. That's generally when the activities take place. So it does make sense. People look at close to close for monitoring and modeling what they think are important attributes of volatility for stocks in this fashion, because that's actually what the volume is.
9:26 Speaker 05 Crypto is a little different, or at least it had been very different until institutional adoption of the ETFs, which is that volume can be dispersed. It can happen during US hours. It often also happens during Asian hours in meaningful ways. And that means 4 p.m. EST to 4 p.m. EST might not actually be when the volume happened for the observations you want to monitor. So a lot of times what you do see is quant strategies trying to model volatility using different time horizons where they believe the alpha actually sits where the volume is most proprietarily acute. And that's why I think even when you look at realized vol measures from Bloomberg versus Deribit versus Coinbase, they all spew different numbers, actually.
10:11 Speaker 05 You're precisely right that there's no standard metric here, but I think that's also why there's a lot of alpha. And the other point I would mention is more important than close to close volatility, in my opinion, is even if you want to use like a 24-hour window. The better version is actually knowing the spread between the highs and the lows of that day. We call this Parkinson volatility, but essentially that gives you the full range of actually the day's motion of the asset rather than just one point in time in that 24 hour observation window. This is not normalized in equities or fixed income markets, but I do think crypto is actually just such a unique asset that we are pushing the frontier of how to be more scientific of a volatility measurement.
10:52 Speaker 03 What I think is starting to happen in terms, let's just use maybe time arbitrage in the equity markets. There was for a while, a very simple trade. You bought the close and you sold the open and all of the overnight trading was pushing prices. And so if you're just long overnight, you made money. And as more and more platforms started to introduce overnight trading, you just saw that become even more of an attractive trade. Of course, the second that it ends up in the mainstream media, most of the return has been kind of arbed away by the people who've been doing this for a while. With Bitcoin, I am drawn to, I forget, I want to say it was Rick Reader did a podcast and maybe it was like David Rubenstein, but I remember if it was him, I remember him saying that they used
11:35 Speaker 03 to look at some of the foreign currency markets and they would basically pay attention either nights or weekends or whatever we're talking about, when there was very low volume because there was basically asymmetric pricing that would come when people weren't paying attention, right? There was just these moments where it was kind of like picking up pennies and everyone was asleep or on the weekends with their families or whatever. In Bitcoin, because it trades 24/7, do those types of opportunities exist where you think like, yeah, maybe there's a lot of trading at the open of the equity market or the close of the equity market, but maybe at two o'clock in the morning, east coast time, you know, that's an area where there's just low volumes. And so people are able to, you know, really drive kind of outperformance because they have some strategy that is able to kind of
12:19 Speaker 03 benefit from low volume periods?
12:21 Speaker 05 Absolutely, absolutely. So an example I would share with you, even when I was at Morgan Stanley, we would have structured products issuances that were very much dominant with Asian clients. So a very popular trade back then and still today is You can make a pretty decent premium and spread by selling vol in Asia and buying, sorry, selling vol in the US and buying vol in Asia. Because there was always a structural bid for protection with the US stock market. And Asians generally enjoyed selling vol in their own markets. So whatever indices were popular, the Nikkei and everything else, you could actually see that most people were selling vol in the derivatives market.
13:03 Speaker 05 And so paying attention to those flows, which tends to actually be structural because of the wealth management business, gave you tremendous insight into where the vol relationship would morph over time. You could actually do the exact same thing in crypto. It's just different. There isn't, of course, structured products yet. But actually, it highlights the real important role of derivatives. Because what you actually can do in crypto that you can't do in traditional equities market is have full transparency to where positioning is sized in the derivatives world. Which is why a lot of times you see on crypto Twitter so much focus on different liquidation levels and different open interests. And these are perps and options where because these can be liquidity black holes,
13:48 Speaker 05 people are very mindful of when those targets are nearing. And sometimes it does become a little bit of a self fulfilling prophecy, if you will, in terms of how the gravity of that attention to those metrics will pull people into certain trades. But I just so should highlight that derivatives are really important because they're actually just capital efficient ways to express more price exposure in a way that is actually why Bitcoin investors exist. And it's actually also why Bitcoin treasury companies have caught such an interest for investors. Because if you really squint hard enough, what Bitcoin treasury companies are doing is essentially harvesting a more capital efficient way to find exposure to Bitcoin.
14:30 Speaker 03 I think about volatility and I talked to friends about it. They always think of volatility goes up, right? And volatility goes up and goes down, both in terms of direction, but also what I would say severity. And so Bitcoin's volatility from a severity standpoint has been compressing over time. It's becoming a less volatile asset. Most people, I think, who bought it, you know, years ago, they're disappointed by that. They want, you know, it to be max volatile. They would like it to go up hundreds of percent every single year and they quote unquote are making money, you know, gaining economic value. What I find fascinating is that as the volatility has come down, Bitcoin now is in like the golden zone for these large institutions.
15:12 Speaker 03 Like it used to be too volatile. Now it almost feels like, well, it's more volatile than my stocks. It's more volatile than my bonds. It's more volatile than, you know, my alternative assets, but it's not so volatile that I gotta go back to my investment committee every week and be like, hey, you know, up 50, down 40, you know, kind of playing this ping pong game. So how do you think about that, given your experience in terms of, you know, the volatility coming down may actually have opened up all these new capital pools to want to allocate to Bitcoin?
15:40 Speaker 05 Yeah, yeah, yeah. Bitcoin volatility, I think, at levels this year has been pretty commensurate to the tech stocks and Nvidia, maybe actually below Nvidia in moments. Today, I believe implied volatility is around the low 30s, which is actually very affordable and realized volatility has even been lower. It's actually been in the high 20s. So those are actually levels that you can sometimes catch with the NASDAQ index itself. So in a way, it does make it feel safer. It does make it feel like there's a way to understand that risk if you're a practitioner of the traditional asset world.
16:19 Speaker 05 But what they don't know is that Bitcoin has a very interesting vol-spot correlation relationship that's different from equities as well. So generally with equities, you see a volatility curve that looks more like a skew, where people are willing to pay for protection more than pay for speculation, meaning puts are more expensive than calls. This is a pretty standard, normal trend, unless it's biotech companies, in which case people are speculating on phase trials and they may want to actually have more open interest to the upside. But all things considered, puts are more expensive than calls. Bitcoin is not that.
17:01 Speaker 05 Even today, even though vol is low and realized been low, even today, open interest for calls are much higher than puts. So actually, understanding some of that path dependency is really, really important because what ends up happening is when there is an accelerating and asymmetric price performance on Bitcoin to the upside, what you will see is the implied vol will also go up. And that relationship is the most perhaps sacred relationship of Bitcoin, as I think of, as a financial engineer and the value to appreciate. Today, even as Bitcoin went up to 116K, well, actually did drop, so implied vol went from 37 to about 32.
17:43 Speaker 05 And that shows you that maybe there isn't as much belief in the momentum behind the move that we saw today. But over time, what you see is if there's higher conviction, higher volumes, and the market depth of the order books start shrinking, where there's actually less liquidity to the upside, you will see that vol picks up with the price. And that positive correlation, very hard to see in stock, frequent in Bitcoin. And why do you think it's frequent in Bitcoin but not in stocks? Because stocks are, at some level, I would say, without being too overt, manipulated in the way that there's always structural bids and sellers for different reasons.
18:27 Speaker 05 And so if a stock goes up really high, what you might see is a company will come out and actually just issue more shares, right? If it's, if they believe it's overpriced and they think that's an opportunity to take lower return of capital to actually invest in something else. And so they can affect it, they can affect the issuance. Of course, you can't do that in Bitcoin, right? The whole point of Bitcoin is that it's fixed supply and that actually the supply cannot be manipulated. So sometimes you see that positive correlation with spot and vol in commodities market. You'll often see it in oil, for example, when there's a big news event that is driving price of oil, the vol will actually kind of go with it because there isn't an immediate release valve that will bring the supply back down. Of course,
19:08 Speaker 05 Over time, OPEC does release more or whatever, so it does materialize, normalize. But Bitcoin, it's truly independent. It's truly autonomous. And that's, I think, why we can expect that trend will stick. That even though institutions think that Bitcoin ball is coming in, and it's actually just becoming just like equities and just like whatever, it's not. Because the fundamental thing about Bitcoin is that it's fixed, and nobody can control the supply. And the third thing, just as important, is that the buyer base is global. And so the depth of liquidity is much deeper than just US stocks alone.
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20:27 Speaker 03 or starting fresh with a new contribution, the Bitcoin IRA team is here to help you get access to real crypto in your retirement account. And here is the best part. As a POMP Podcast listener, you can earn up to $1,000 in rewards when you add funds to your account before tax day. Search for Bitcoin IRA in the App Store or visit bitcoinira.com/pomp to join 200,000 Americans on their journey to upgrade their retirement. That's bitcoinira.com/pomp to upgrade your retirement today. It's funny that, um, was it 80,000 Bitcoin? I think were sold by Galaxy recently. I think David Bailey was talking about they were buying like a million dollars of Bitcoin a minute or whatever. And there's like no impact on price for any of these things. And again, a million dollars a minute
21:12 Speaker 03 isn't really something that I think people are like shocked that the Bitcoin market can handle. 80,000 Bitcoin, it's a pretty big deal. It's pretty big, yeah. To have minimal impact in the market. And so, um, have we seen anything like this before in terms of depth of market, you know, in 24/7? Like, I don't think that there is anything really that we can kind of point to. And so, maybe you can... Guesstimate like what's the impact you know on the world of having a macro decentralized asset that trades 24 seven that's hyper liquid that seems to hold some degree of volatility even though it's now measured in trillions of dollars like this seems like an investor's dream and not necessarily you have to be a long term holder but if you want to capture
21:57 Speaker 03 volatility if you want to you know expose yourself to volatility this thing seems like the the apex predator of all assets to go and express and kind of play with right
22:06 Speaker 05 Absolutely it's not just an investor's dream in my opinion it's a retail investor's dream because the kinds of information that is available in a democratized way for everyday user like yourself and I is actually the edge when you think about the commodities market it's fragmented the volume is often hidden between market makers and the producers play a really big role of course and so you can't often get like a very clean picture of that supply chain which is why there is so much outperformance and alpha to be had if you're an excellent commodities trader but in Bitcoin and crypto at large all of this is fairly public so my very good friend at Falcon X David LeWan he publishes the
22:45 Speaker 05 depths of market with kind of 5% moves and 10% moves and where the bid offers sit and he aggregates all these informations just using what is publicly available and that in itself is actually a really powerful signal to anticipate breakouts because if you see liquidity decreasing on these ask side and you're actually seeing the buildup on the bit side you can start to get a sense for oh yeah there's actually momentum here there might be a little bit of a supply shock
23:14 Speaker 03 And just in layman's terms as you're thinking about the bid ask what you're basically saying is like there's a lot of people who are lining up to buy something and there's not so much supply
23:23 Speaker 05 That's right
23:23 Speaker 03 To be there to sell to them
23:24 Speaker 05 Right
23:25 Speaker 03 And therefore prices that kind of clearinghouse and so in order to get more people to want to sell the price has to go up in order to kind of elicit the supply that will then satisfy the demand
23:34 Speaker 05 That's right that's right
23:35 Speaker 03 And how do institutions play into this like are they any different you know if they're standing you can use the analogy they're standing in line looking to buy do they Get like a special lane, right? Are they, you know, are they kind of the institutional buyers here? Um, or retail and institutions, maybe they're playing with different dollar figures, but they're all kind of just on the bid side and everyone's kind of treated equally.
23:55 Speaker 05 Yeah. So today institutions by and large have mostly accessed crypto products through regulated securities and commodities futures. So the ETFs play a big role, of course, and then the CME futures contracts play a big role, of which most of the derivative trading volume, I would argue, still happens offshore. And so when you look at the CME, for example, yes, there's open interest in the futures. And that often is used as a way to trade basis with spot. But the options market on those Bitcoin futures is actually pretty abysmal. There's actually no liquidity out beyond one month, almost zero. Um, it doesn't mean you can't trade there, but it shows your institutions are not there yet. And I think because of that, there are some unique opportunities where oftentimes I've found that the
24:40 Speaker 05 uh volatility surface for the Bitcoin ETFs are actually a little more rich. It's a little higher than Derbit. And that's actually counter intuitive for some few reasons. One of them is, um, if you believe that the implied volatility is a reflection of the Delta hedging replication portfolio based on Black Scholes, that means that you're assuming continuous hedging. And IBIT continuous hedging means nine thirty to four P M. You actually can't trade it from four P M. to nine thirty the next overnight. But you can with Bitcoin, you can with Derbit. So actually, if you really thought agnostically, what gives me more optionality for monetization of that gamma?
25:23 Speaker 05 Bitcoin spot does, not the Bitcoin ETF. And so in that sense, the Derbit options should actually, in my opinion, have a higher premium than the IBIT options. But it doesn't. And the reason is because institutions only can access IBIT. And if they want to take leverage, which sometimes this is the way they'll express it, is they can only trade IBIT options. Uh, so the real alpha is if you're able to trade both market, both on the crypto native side as well as a TradFi side, and actually build some of the conduits around that infrastructure for capital efficiency. There's actually a ton of opportunities.
25:56 Speaker 03 Is there risks or opportunity associated with the fact that you have an underlying that trades 24/7? And then you have an ETF that stops trading at 4 o'clock? And obviously, there could potentially be dislocation between Bitcoin goes up or down? When the ETF is not accessible to these investors? Like, how do you think through both risk and opportunity in any sort of dislocation there?
26:20 Speaker 05 Yeah, there's no risk in the sense of there being like a structural constraint that would cause operational issues on the ETF side. It will, you know, the ETF ultimately is a trust product that owns the underlying assets and reflects in that every day. I would also share today, actually, Bitwise had its first in-kind processing through the Bitcoin ETFs. And so we're actually experiencing what we've always wanted as industry for a long time, which is the ability to actually build that bridge a little bit more seamlessly by permitting in-kind token contributions rather than just cash from the APs. So all of these are steps moving in the right direction to minimize potential choke points or operational breakouts. And I think that's ultimately going to create more seamless markets.
27:06 Speaker 03 And when we look at this institutional adoption, I think what I've been most interested in is you have ETFs. Obvious that they want just exposure. You have these Bitcoin treasury companies, now all equity investors. Strategy, I think, has really been a pioneer in trying to figure out what are these Bitcoin-backed credit products? And so now you get kind of fixed income or credit investors. We have seen people like Newmark talk about doing Bitcoin in real estate. It just feels like they basically are saying like, what are the things we do in the traditional world? How do we put Bitcoin into this? And sometimes it is a Bitcoin product that just has the wrapper like an ETF. But other times, like the Newmark product, it is, no, no, it's a real estate fund that has now sprinkled Bitcoin into it.
27:47 Speaker 03 And so is it, should that be the expectation that we should see Bitcoin kind of injected into every corner of the traditional financial world? No different than dollars have been injected into every corner?
27:57 Speaker 05 Bitcoin is truly unique in many ways that every kinds of investors will come to realize its unique properties, mostly because there are certain trade-offs made within financial securities for which it's impossible to have all of these features that Bitcoin only has all. So when I think about it.
28:21 Speaker 05 Credit investors, for example, right? They invest in fixed income assets that are very liquid by dollar amount of investable, but maybe not liquid from like a trading perspective, right? You actually, the price discovery is a little challenging, but the market's large. And so because of that dynamic, you can move big dollars, but the volatility tends to be fairly benign. And when it is benign, it's generally because something's bad, right? Like a credit event's about to happen, or like a restructuring, or whatnot, such that the volatility itself is like, maybe like a negative thing for liquidity. Bitcoin's different because not only is it volatile,
29:04 Speaker 05 but it's got tremendous liquidity that is not associated generally with that volatility. And then you can also put large dollars at risk. So when you mentioned real estate investors, for example, what can they not do? Well, they have no liquidity. So you might be able to put a lot of money to work and there may be some volatility in the mark to market from the P and L you'll realize over time. But there's actually just no liquidity. But Bitcoin has all of it again. So I think every investor that I've spoken to, from global macro, ranging from real estate to private equity to venture to equities, all of them get to see that the trade offs they've been making versus their peers and the assets become all somewhat kind of general purpose for Bitcoin, where you can morph Bitcoin to whatever you need it to be
29:48 Speaker 05 by anchoring the one fixture that you're trying to remove it from.
29:52 Speaker 03 And then how did like the treasury companies? You and I are working on a treasury company. People will be very disappointed. It's not a lot that we can say, yeah, because the regulations, once a deal is closed, we will talk about it a lot more. But how do you think about the treasury companies in general in terms of, they may be one of the best examples of people saying, okay, you have a public company. You're taking Bitcoin, you're putting it on the balance sheet. Some people think about you're taking the company and plugging it into the Bitcoin network. And it seems like that has been a very big unlock for various capital market tools.
30:25 Speaker 05 Yeah.
30:26 Speaker 03 Just talk maybe like how you think about these businesses and, you know, maybe even you left. Your job to go and work on building one of these things. And so obviously, you're pretty bullish, I think, on what the opportunity is in the market.
30:39 Speaker 05 Absolutely. So one of the privilege I had at Bitwise was I got to pitch Bitcoin a lot. And I got to pitch Bitcoin to lots of different kinds of investors.
30:46 Speaker 03 Thank you, Jeff. Bitcoiners appreciate anyone who pitches Bitcoin.
30:50 Speaker 05 It's been a tremendous journey because I learned a lot, too, from that experience where I got to appreciate everyone's concerns, or where they're coming from, or how they're really thinking about the opportunity set. And one thing that I realized is that everyone has this blind spot. This blind spot is they're worried about the risk of owning Bitcoin when they don't realize the risk of not owning it. And so this blind spot can be explained with two assets. Think about real estate. Real estate is the best performing asset class in the world, particularly in the US, but generally in the world. And if you really think about it, it has tons of write offs, it has tons of depreciation, it has tons of reasons to make it look like the asset actually is falling apart, which it is, because actually,
31:35 Speaker 05 property needs lots of maintenance. So how could it possibly be that real estate continues to go up in value when actually it's getting all these favorable tax treatments? Is the wood becoming organically polymerized into super wood by itself? Is it becoming titanium and steel over time organically? No, it's actually not. And I would say the same thing with gold. Gold by its definitional element is not changing. So how is this thing constantly just going up in value? And if you really think about it, they're not going up in value. It's the dollars that are going down. Once you see that, it becomes really obvious that
32:16 Speaker 05 Bitcoin is actually a better asset imaginable to own for those same reasons of real estate and gold. And so what's the business of real estate, right? You borrow, and then you buy, and then maybe you build on it, right? And I use the same words to describe the opportunity in Bitcoin that a treasury company can do. You borrow smartly, you buy smartly, you can buy Bitcoin, or maybe you buy something else. And then you build. And if you have the most pristine collateral that is going to go up in value, you can afford yourself a ton of optionality to future-proof what the opportunities that might look like in the future. And that I truly believe is the remarkable opportunity of Bitcoin treasury
32:56 Speaker 05 companies, that the aperture for imagination just hasn't widened enough yet, but over time it will.
33:03 Speaker 03 When you think about that aperture widening, how much of it is what I'll consider like traditional market, you know, type things versus one of the things that we have publicly disclosed and are allowed to talk about is the idea of like a Bitcoin need a financial services firm. And so I think about capital markets and balance sheet really is, you have a balance sheet, you're using capital market tools to be able to borrow or raise capital to buy more Bitcoin on your balance sheet, right? The the action is the purchasing of Bitcoin. When you start talking about financial services built on top of a balance sheet of Bitcoin, now you're talking about essentially earning Bitcoin by offering a product or a service in the market and whether it is something where somebody is actually paying you revenue, or you are generating some
33:46 Speaker 03 sort of revenue through the product or service. Earning is done in a non-dilutive way to the shareholder versus the capital markets activity, whether it's equity or debt. It can be accretive, but there is still some dilution associated with doing that. And so maybe just talk through a little bit of the differences there. And like, when you think of expanding the aperture, is it both? There's opportunity to expand capital market, you know, activities and also financial services? Or do you think of it more as like the products and services is really the unexplored?
34:16 Speaker 05 Yeah, the the operation of treasuries actually is fairly simple. It's to earn a net spread on the assets that you're managing versus the liabilities that you have. This is true in corporate America. This is what Google does. This is what Amazon does when with their 200 people managing their giant treasury book and multi-dimensional FX risks they're managing across their global business.
34:36 Speaker 03 Explain a little bit more maybe what these businesses are doing. So I actually don't think sophisticated hedge fund managers and folks who have run these businesses understand. But for the average retail investor, I don't think they quite understand. You take 200 people at Amazon are managing their balance sheet, right? Like that people, I was like, well, what are those people doing? Right. So maybe talk through a little bit as to what's happening.
34:54 Speaker 05 Yeah, yeah, absolutely. People forget. I mean, these mega trillion dollar companies have tons of cash on their balance sheet. Tons of cash and that cash.
35:02 Speaker 03 You mean the 36% year-over-year growth of Facebook's like net income is generating real cash?
35:07 Speaker 05 It's a real business. I mean, we just don't call them banks, but they have tons of cash and every basis point counts in that business. So there's definitely verticals that are trying to optimize for financing to get the most bang out of their buck for their assets. And in that sense, you actually have bonds traders and rates traders all sitting at Google desks. They exist. It looks like it's like it's like a trading.
35:30 Speaker 03 It's almost like a hen. It's like a hedge fund, essentially, like, but they're using their own permanent cap, you know, permanent capital off their own balance sheet to be able to generate a return.
35:38 Speaker 05 Right, right. And I would say like endowments that are advanced and sophisticated do the same thing. When I was at Harvard, we had actually a team of 200 people internally managing our portfolio. These are not external allocations to third-party fund managers. Internal employees managing the books and records of Harvard's balance sheet itself. Which is, which is a pretty phenomenal thing. That's what treasury operations is, right? And so in Bitcoin, there's two opportunities. There is external arbitrage that is afforded by the fact that Bitcoin is often misunderstood. Or there's actually ways to provide different kinds of Bitcoin risk. And there's the internal arbitrage that's also possible with Bitcoin. So the external arbitrage is broadly the story that I think Sailor has perfected.
36:22 Speaker 05 Which is there's actually just a lot of mispricing and lots of structural inefficiencies. As to why Bitcoin can be externally arbitrage for the benefit of its shareholders. That's super exciting and I think there's tons of more work to be done there. And credit is going to play a big role in that. But the internal arbitrage is, well, now you got a bunch of Bitcoin, right? What are you going to do with that? And can that asset in itself be productive? And that I think is probably the most mission critical, important mandate of actually why Bitcoin treasury should exist, right? The same reason that banks exist is, you know, they have to do something with the assets on their balance sheet. And so from that perspective.
37:02 Speaker 05 The optionalities that's afforded is incredible. You know, I often joke that the very, very, very first Bitcoin treasury company ever created is actually not MicroStrategy. The very first Bitcoin treasury company was EOS, was Block 1. And if you think about that, and the exposure that had Bullish, for example, that just went IPO'd, and the ability to now have a participation in Bullish as a financial services company, as having been a Bitcoin treasury company five plus years ago, is a remarkable thing.
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38:17 Speaker 03 And if you want to see what your Bitcoin is securing, join millions of others in exploring the largest Bitcoin DeFi ecosystem. There are over 100 live apps in the network and the deepest liquidity in all of Bitcoin DeFi. Get off zero and start earning yield on even just 1% of your Bitcoin by going to stake.coredao.org/pomp. Again, that's stake.coredao.org/pomp, or go click the link in the description. So let's back up, because a lot of people won't have been around for that. You know, one of the most interesting stats is I think in 2021, at one point, more than 50% of the Bitcoin market had shown up since 2022, or since 2020. And so, you know, going back to 2016 to 2018, 2019 timeframe, they won't know this.
39:00 Speaker 03 EOS was a project or organization. They sold, I believe it was $4 billion in their token sale. It was the largest token sale by far. They did it over, I think, a 12-month period. At one point, they had a lot of capital for plus billion dollars. And they chose, at some point along the way, to basically take all of that and convert it to Bitcoin, or 90-plus percent, whatever the number was. Now, they just had Bitcoin sitting on their balance sheet, to your point, Bitcoin Treasury. It wasn't public, it was private. But they began to manage that. And at some point, they took a portion of the Bitcoin that they had. And they contributed it into what is now known as Bullish. And they took an equity stake in exchange.
39:45 Speaker 03 Plenty of people have invested Bitcoin into projects or companies before and taken equity. But this was kind of a very material, large, intentional thing that this is part of our company's strategy is to monetize this Bitcoin in a unique way. Bullish just went public, stock price went up quite a bit. And so your point, I think, is that is really an internal operation, even though they're interfacing with an external organization.
40:09 Speaker 05 That's right.
40:09 Speaker 03 It was almost a private equity investment, right?
40:12 Speaker 05 Yep.
40:12 Speaker 03 Different than Harvard's Endowment has a private equity arm. They do, you know, liquid trading and kind of all these other things.
40:20 Speaker 05 Yeah, that's right. That's right. I think the fundamental core belief here is that if you believe your crypto asset is valuable, then that is an optionality that is not just fighting fiat debasement, but there's upside capture that is actually possible as well. I might also add Ripple into that example, where the ability for Ripple to have potentially had acquired Circle. As you know, Circle, of course, IPO'd, but their worst conversation, Ripple would be in the bit for it. Is a pretty transformational thing. Imagine in an alternate apparel universe that Ripple actually did buy Circle, the largest stablecoin issuer here in the United States. That's what a crypto treasury company can do, as long as the asset is pristine and valuable.
41:02 Speaker 05 And they did, in fact, nonetheless, purchase Hidden Road. Hidden Road is a real business. So I think that is the big picture of opportunities. It doesn't mean that's the only strategy. But I think it just highlights that there's a lot of optionality that can be afforded if you can leverage Bitcoin in the correct way.
41:21 Speaker 03 So, and again, I don't want the lawyers to get mad at us. So we have to be very careful what we talk about. But I think that what you're saying here is there is internal operations where there can be an expanding for Bitcoin treasuries in general, kind of expanding the aperture. There is external operations, which really strategy, meta plan, and many of these companies have already done a great job in terms of pioneering and exploring, but there may be some other things that people will do there. And then there is this kind of financial services, the products and services built on top.
41:50 Speaker 05 Right.
41:50 Speaker 03 Kind of the three, three things. One thing I want to talk about is you and I went back and forth quite a bit on, okay, what is the, what is the North Star? What is the metric that we care about? And I think that, you know, when we came up with this idea of Bitcoin rate of return, people had started kind of talking about it, but I think you and I really were like, that's the thing. So much so that literally the ticker of the company that we've publicly announced is BRR, right? Bitcoin rate of return.
42:17 Speaker 03 Talk about like, what is Bitcoin rate of return to you? And like, why is it that you're like, okay, that's the thing that I think is the single most, you know, North Star metric to focus on?
42:26 Speaker 05 Yeah, yeah. I think it's so important that we start to normalize the possibility of measuring things in Bitcoin as a way to think about a benchmark for outperformance. It's very hard because we live in a very privileged country where dollars actually is very useful, very powerful. And day to day, it's, it's the utility to which we measure by. But at the end of the day, even the dollar is not avoiding or inescapable from the general kind of fiscal dominance that is happening globally. And it's time for all investors and operators and people in the space here to think about returns denominated in something that's a little bit more pure, that actually stands for a store of value.
43:11 Speaker 05 And so it's a little bit more natural when you step outside this country that you see people thinking about Bitcoin in that way. But to me and to all of the folks in the space, it felt important to me that we lead with that ethos of trying to right set the mind to, to imagine that possibility. And the thing that's important here is,
43:34 Speaker 05 Bitcoin, if it's meant to be productive in its own, will earn Bitcoin-denominated returns, actually, just the way all assets earn yield off of the fundamental underlying denomination. And so if we do more things in kind with Bitcoin, where Bitcoin is actually the thing for which we're measuring returns by, I think that is kind of the most ideal world a treasury company could be in. When you trade options on Derbit, for example, because Derbit's a global exchange, it's priced in Bitcoin. The calls and puts that you buy is priced in the units of Bitcoin that you would buy or sell, not dollars. And I think that shows you what the future could look like for a global citizen.
44:17 Speaker 03 The eye-opening stat that I saw, that I think, like, you know, and again, I had seen people talking about this, you know, I think people have seen me say many times Bitcoin's the hurdle rate, if you can't beat it, you gotta buy it, the whole thing, right? The S and P 500 since 2020 has basically doubled, denominated in dollars. If you denominate it in Bitcoin, it's down more than 90%. And when I saw that, I said, wait a second, that is like so black and white. If you denominate this in dollars, you made a lot of money.
44:44 Speaker 05 Yep.
44:44 Speaker 03 If you denominate this in Bitcoin, you lost a lot of money, right? It wouldn't be the same if it was, oh, you get 23% return versus 21. I mean, we're talking about a lot positive, a lot negative. And as I've started to talk about this publicly, I've had people, I've literally had a guy recently, who's an order gentleman, who's got a pretty, you know, well-respected career in finance, and he said, oh, stop it, this is nonsense. And my takeaway from it was, he's really saying, that's too hard, right? Outperforming this asset that has for a 10-year compounding of growth rate of over 85%,
45:22 Speaker 05 Yeah.
45:23 Speaker 03 that's too hard.
45:24 Speaker 05 Yeah.
45:24 Speaker 03 Um, yeah.
45:25 Speaker 05 Yeah.
45:25 Speaker 03 And I think it kind of goes back to this thing that, you know, Bitcoiners in particular, like, you should have just bought it, right? Now, that's backwards looking, and we'd benefit of hindsight. What I think you're saying, I think I'm saying in this kind of Bitcoin rate of return is, well, if this is going to be that benchmark, it is hard. And so owning the asset is kind of step one to capturing the return that Bitcoin will deliver. But then if you denominate everything in Bitcoin, now you start to shift your mindset into how do we generate more Bitcoin, which would be outperforming Bitcoin based on certain inputs to the formula.
45:58 Speaker 05 That's right. That's right. I think a very like intuitive example that just retail customers might appreciate is that Gemini's credit card in itself is actually a Bitcoin native financial institution service offering because when you buy with Gemini's credit card and you're rewarded in Bitcoin as a percentage of your cash outlay, your spending outlay, you're essentially measuring the points or the value transfer that you otherwise might think of in percentage terms of dollars into Bitcoin. So when people buy Chase Sapphire cards to spend on dining and travel because it pays more than actually just buying regular goods and it's 3% versus 1%. They play this game, right? Why do they play this game? Because they're trying to outperform something. They're trying to outperform their spending for some better offer than other
46:42 Speaker 05 credit cards based in dollars. If you're thinking about a Gemini card, yes, you're thinking about that a little bit, but what are you really betting on? You're betting on the fact that Bitcoin's going to basically double. And so whatever you thought was 3% is actually 6% and maybe it's actually 10% and 20% years down the line. That's a Bitcoin denominated return. That's a Bitcoin denominated mindset. And I think more financial institutions can think about these as ways to lure consumers and customers to normalize that as a way of thinking. And so I'm actually just very supportive of that initiative as a retail customer myself. And I think more Bitcoin treasury companies will be involved in the dialogue of offering these types of financial services to push that narrative forward.
47:25 Speaker 03 Now, these Bitcoin credit cards, my wife will always say, hey, those are dangerous. I say, why? And she says, because I had one at one point. And she's like, every time that you wanted to buy something, you would just go swipe say, yeah, one day it'll be free.
47:39 Speaker 05 I've actually done that math.
47:40 Speaker 03 34%, eh, Bitcoin will go up a lot.
47:42 Speaker 05 Yeah, yeah, yeah.
47:43 Speaker 03 It'll be free at the end.
47:44 Speaker 05 No, I have totally done this math. I've totally done this math. I actually told my wife, we need to pay for our kids' summer school, summer camp using our credit card because in 30 years it'll be free.
47:56 Speaker 03 But I mean, but the crazy part is that, one, There's no promise that it will actually happen.
48:03 Speaker 05 Right.
48:03 Speaker 03 But even if it's 50% discount 30 years.
48:06 Speaker 05 Yeah.
48:07 Speaker 03 That's pretty attractive.
48:08 Speaker 05 Yeah, yeah.
48:08 Speaker 03 So you start to think about a more long-term view, a kind of Bitcoin-denominated view. I think it does change the way that people, you know, kind of look through at these assets, right?
48:18 Speaker 05 Mm hmm. Absolutely.
48:20 Speaker 03 Last thing is you recently went to Jackson Hole and you're there for the Salt Conference. Anthony Scaramucci and the Salt team do a fantastic job.
48:27 Speaker 05 Such a great job.
48:28 Speaker 03 Saw Scaramucci and Eric Trump, they were making up. They're friends now. Congratulations.
48:34 Speaker 05 Indeed, indeed, indeed.
48:36 Speaker 03 What were your takeaways from the conference?
48:39 Speaker 05 Oh, man, that conference is perhaps my favorite of all the conferences. I went last year when it was their inaugural conference and it was so, so amazing because Wyoming is special. Wyoming is really special because actually it is the most doubted, undoubtedly pro crypto state in the country. And so you're able to bring in a lot of different constituents and have ready dialogue. You bring the industry people, of course, but you bring public policy thinkers, you bring regulators. And actually, the whole public-private partnership starts to feel very alive in Wyoming. It's a really special energy. And so last year, it was tremendous. You have to also remember last year, we had the great excitement with the Bitcoin ETFs.
49:19 Speaker 05 But Trump had not yet been elected. And so there was a lot of solidarity in us being present and wanting to fight for this moment. And so to go back again this year, where we're actually now at a moment of celebrating the outcome with all of those constituents and stakeholders was a pretty remarkable thing. At the same time, I would say the energy was a little different. The energy was a little different because now that we are in the seat to drive the agenda, it's becoming more important that we actually structure your agenda in which we actually drive results. And you start to see that there can be chasms even amongst the industry stakeholders as to what they want to value and prioritize in pushing forward.
50:01 Speaker 05 Last year was not palpable because we were all in it together to get the mission in. This time I did sense a little bit of that chasm in the sense of urgent. And prioritization of what people might agree or disagree on things being really important. Between stablecoin versus market structure versus private funds and the role of liquid crypto exposures versus venture capital. All of those things came more to light. And I think what it highlighted for me personally was that crypto has always occupied between two extreme worldviews. On one hand, you have financial nihilism, right? But the other hand is incredible optimistic views on technology.
50:43 Speaker 05 And those two things are both requiring a certain level of mental incongruence to actually find crypto to be the hybrid solution. And so a lot of the dialogues that I think we're now witnessing and we will continue to see through in DC is a bridging of these gaps. So there's a lot of work to be done, but it was also really exciting that we're finally talking about the substantive things that was long impossible.
51:10 Speaker 03 Did you change your mind on anything after the conference? Like you go there, you've got, you know, kind of your worldview, you've got your opinions about the industry, maybe things that will happen, won't happen. Hear a lot of smart people talking. Did you leave and change your mind?
51:24 Speaker 05 I think I was able to cement a view that I had that was still perhaps not totally confirmable, which is that crypto at large will still and always be driven by the people.
51:42 Speaker 05 Institutions and regulations aside, they're of course important players, but the sense I got was that crypto will move way too quickly. It'll move way too fast for actually institutional participation and regulatory participation in the way that we're used to. I was thinking about this in the context of AI as well. Part of I think why AI gets caught up in the same conversation with crypto is because they both exhibit the same qualities. I broadly think about it with these four As. AI is asymmetric in the outcomes that it will deliver. It is also accelerating in the path to achieve that asymmetric outcome. It's also agnostic in that it's general purpose and it can be used for a lot of different things.
52:21 Speaker 05 And so it's actually kind of hard to contain what specifically rules and laws would AI be barred or promoted for using. And the fourth. It's autonomous. So by definition, it actually is not even going to be palpable to the human condition. And crypto is actually the exact same thing. It's asymmetric, it is accelerating, it is general purpose and agnostic. And I think there is a world in which we'll find autonomy in that context. And so that felt more clear to me this time at the conference than ever, as we had the think tanks and the groups behind wanting to think about regulation and policy, because I see the exciting kind of commercial opportunities ahead on the other side. And when you think about internet capital markets as a topic
53:06 Speaker 05 that people are discussing, the exuberance is also met with this realization that we're going to need a totally new regulatory framework that I think we're still very early to cross that Rubicon floor.
53:18 Speaker 03 I couldn't agree more. Where can we send people to find you on the internet? Follow you on X?
53:23 Speaker 05 So I'm on X. My handle is DGT10011. And I also write occasionally on my Substack as well, which the link is in my profile.
53:31 Speaker 03 DGT10?
53:34 Speaker 05 011.
53:35 Speaker 03 Okay, where did that come from?
53:37 Speaker 05 So DGT is an acronym for Delta Gamma Trading.
53:40 Speaker 03 Oh.
53:43 Speaker 05 And DGT.
53:43 Speaker 03 First time I ever heard this.
53:45 Speaker 05 Yeah, DGT, maybe it's a little bit of inside joke with traders, but DGT is the way of expressing your P and L that is about risk-taking the day of trading. And of course, you have gamma, theta, rho, et cetera, but those are less important. DGT is where the action happens. So that's what that is.
54:02 Speaker 03 Incredible. Look at that little Easter egg right there in the Twitter handle. All right. Thank you so much for doing this.
54:07 Speaker 05 Thanks for having me.
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