“It's just pretty much at this point, generally accepted this asset class is here to stay and everyone's trying to figure out where this fits within their portfolio construction.”
Michael Sonnenshein is the Managing Director at Grayscale Investments, the world’s largest digital currency asset manager with more than $5.9 billion in assets under management across its family of 10 products – all of which provide access and exposure to the digital currency asset class in the form of a traditional security, without the challenges of buying, storing, and safekeeping digital currencies directly.
Dan Morehead founded Pantera Capital in 2003 – managing a billion dollars in hedge fund strategies. He previously served as Head of Macro Trading and CFO at Tiger Management with Julian Robertson. Dan began his career as a collateralized mortgage obligation trader at Goldman Sachs. Dan graduated magna cum laude from Princeton University with a B.S. in Structural Engineering and received the Carmichael Prize for his thesis.
While many take a Bitcoin maximalist position, there is reason to think multiple digital assets and currencies will ultimately emerge as long-term viable options. Bitcoin has demonstrated itself as the best digital store of value, but there are hundreds of other use cases for which blockchain-based assets can be designed. One digital asset may specialize in cross-border currency or property titles. “I think you're going to see a single digit number of important blockchains 10 years from now, not one and not 500, but it will be a handful.”
Bitcoin represents the launching pad for global financial inclusion. The Internet moves all kinds of data all over the globe and a reliable e-cash system represents the final piece of that puzzle. Financial value can now be moved seamlessly without going through the expensive and obstructive intermediaries.
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SPEAKERS
Michael Sonnenshein
Managing Director
Grayscale
Dan Morehead
Chief Executive Officer
Pantera Capital
EPISODE TRANSCRIPT
John Darsie: (00:07)
Hello everyone. Welcome back to SALT Talks. My name is John Darsie. I'm the Managing Director of SALT which is a global thought leadership forum at the intersection of finance, technology, and public policy. SALT Talks are a digital interview series that we launched during the work from home period with leading investors, creators, and thinkers. And what we're really trying to do during SALT Talks is provide the same type of experience we provide at our global conference series, The SALT Conference.
John Darsie: (00:35)
Our two guests today, we're very excited to have them on, have both spoken at our in-person SALT conferences and we're looking forward to having them back at our next in-person SALT conference hopefully in 2021. But what we're trying to do is really provide a window into the minds of subject matter experts, as well as to provide a platform for big ideas that we think are shaping the future. We're very excited today to bring you a SALT Talk focusing on the digital asset space featuring Michael Sonnenshein and Dan Morehead.
John Darsie: (01:04)
Michael Sonnenshein is the Managing Director at Grayscale Investments, the world's largest digital currency asset manager with more than 5.9 billion in assets under management across its family of 10 products. Michael oversees the daily operations and growth of the business, in addition to maintaining many of the firm's key client relationships, including with financial advisors, family offices, hedge funds, and other institutions, as well as managing the development of Grayscale single asset and diversified digital currency products.
John Darsie: (01:34)
Prior to joining Grayscale, Michael was a financial advisor at JP Morgan Securities and prior to that he was an analyst at Barclays Wealth. He earned his bachelor in business administration from the Goizueta School of Business at Emory University which is also my alma mater and his MBA from the Leonard Stern School of Business at New York University.
John Darsie: (01:54)
Dan Morehead our other guest today founded Pantera in 2003 managing a billion dollars in hedge fund strategies, primarily focused on the digital asset space. Pantera is the first institutional investment firm focused exclusively on bitcoin and other digital currencies, as well as companies operating in the blockchain tech ecosystem. Pantera launched the first cryptocurrency fund in the United States when bitcoin was trading at $65 per coin in 2013. And Dan, thank you so much for calling me in 2013 to tip me off about this great new technology called bitcoin. But we'll talk about that offline after the webinar.
John Darsie: (02:32)
The firm Pantera subsequently launched the first exclusively blockchain venture fund and recently concluded raising its third venture fund. In 2017 Pantera was the first firm to offer a pre-auction ICO fund. Pantera's bitcoin fund has returned over 16,000% in seven years and has returned billions of dollars to its investors. Pantera currently manages around 700 million in capital in seven funds and three product groups, including a passive fund, a hedge fund, and a venture capital fund.
John Darsie: (03:05)
A reminder if you have any questions for Michael or Dan during today's SALT Talk. You can enter them in the Q&A box at the bottom of your video screen on Zoom. And hosting today's talk and making his SALT Talks debut is Brett Messing who is the President and Chief Operating Officer at SkyBridge Capital, a global alternative investment firm. And with that, I'll turn it over to Brett for the interview.
Brett Messing: (03:26)
So I'm going to start with you Dan. You and I sort of crossed paths at Goldman Sachs years ago. We're the same age. I'm very new to bitcoin but I have the zeal of the converted. You're sort of a bitcoin OG. So can you tell us how you made the path from Wall Street into bitcoin?
Dan Morehead: (03:45)
Yeah. I spent my career in global macro. Last year I was with Tiger Management where I worked with Julian Robertson looking for interesting disruptions around the world, Russian privatization or Argentine farmland or Tesla Motors. Every three or four years something like that would come up. And in 2011 I got introduced to bitcoin.
Dan Morehead: (04:05)
It took me a year or two to get my head around it because it's a kind of a trippy concept to have non-state sponsored money, but ultimately came to believe it was going to disrupt finance, wealth storage, dozens of different industries in a way that the internet had disrupted everything else but hadn't really touched finance or gold or money. And all those things are the largest markets on earth, and so the opportunity was going to be orders of magnitude bigger than all those previous trades.
Brett Messing: (04:35)
Wow. Well, I'm late but I'm happy to be here. Hey Michael, you're so young that we understand why you're in bitcoin so I have a different question for you which is today Grayscale announced some incredible fundraising numbers. In your digital fund you guys raised a billion dollars this quarter, 2.4 billion this year, which is just fantastic, great for the space.
Michael Sonnenshein: (04:57)
Thank you.
Brett Messing: (04:58)
Can you just talk a little bit about where you're seeing the funds flowing from and what sort of catalyzed that sort of substantial increase?
Michael Sonnenshein: (05:07)
Sure. Yeah, this morning we released our third quarter report which looks at investment activity across our 10 products. This is kind of ... Not kind of. This is our third record-breaking quarter in a row. About 80% of the investment that we're getting is coming from institutions. A lot of that is being done by hedge funds. And I think what's really interesting, particularly for those who attend SALT or who are allocators or who are at funds is that we're realizing and trying to put this message out there that it's not for any one kind of investor which I think a lot of people think that it is. I think the broad swatch of investors engaging in our products getting exposure to digital currency are everywhere from global macro funds to risk arb funds to value, momentum. It's really all across the board.
Michael Sonnenshein: (06:03)
And so I think for us the rate and the pace at which we're seeing investment, not to mention that investors are not only just looking at bitcoin but also diversifying across other digital assets has been really encouraging. And so it's just pretty much at this point generally accepted this asset class is here to stay and everyone's trying to figure out where this fits within their portfolio construction.
Brett Messing: (06:26)
All right. That's a good sort of launching off point. So the name of this talk is Digital Assets, and I'm going to out myself as a bitcoin maximalist. Right. We have one search engine, Google. We have one mobile provider, Apple. We have Amazon. Why do we need anything more than bitcoin? I'm going to go to Dan first and then I'll come back to you Michael on this here.
Dan Morehead: (06:49)
Sure. Yeah, I would say that you just listed a couple of different interesting use cases. There are lots of different use cases in cryptocurrency. There's wealth storage, the digital gold version of it. There's cross-border money movement. There's the property titles on the blockchain. There's hundreds of different use cases. And when a technology is disruptive, they call it a category killer. Blockchain's a serial killer. It's going to go through dozens of different industries.
Dan Morehead: (07:16)
But they don't need to be all the same. Bitcoin's amazing at wealth storage, is digital gold, but it's not very good at smart contracts or other programmable money type of applications. So I think you're going to see a single digit number of important blockchains 10 years from now, not one and not 500, but it will be a handful.
Dan Morehead: (07:35)
And one of my thoughts on that would be it's kind of like in the '90s being a Yahoo maximalist. Yahoo was a good company but there were 20 other really important companies you needed to invest in. The same with bitcoin. Bitcoin is very important, but there's some others that you should have some exposure to.
Brett Messing: (07:51)
Okay.
Michael Sonnenshein: (07:53)
I think that's exactly right. I think Dan has been in the space even longer than I have. I'm coming up on seven years. And I think we both agree that while probably today the killer use case for something like bitcoin may be that digital store of value or digital gold, that there are so many other use cases out there to be developed for bitcoin and other digital assets that we're pretty much probably still at the beginning or maybe bottom of the first inning of kind of where this asset class is going to go.
Michael Sonnenshein: (08:22)
We don't believe that it is a winner take all scenario Brett. I think that as this asset class evolves, there will ultimately be some cohort of digital currencies that exist side by side as a family, the same way you might look at the precious metals family. And each of those assets will likely have different use cases, different adjustable markets, different prices all part of building out a bonafide asset class around digital assets and it's just too early to say who the winners will be, who the losers will be, but certainly I think investors now appreciate that and that's one of the reasons we're seeing a lot of diversification, although for most investors their first foray into the asset class usually still is bitcoin.
Brett Messing: (09:07)
Mm-hmm (affirmative). Okay. What's interesting is a guy as I said I am new to it and buying bitcoin felt like a big deal. My interest in buying anything else at least right now, maybe when I learn more I'll feel differently, and I just, it just seems to me that for the next leg of growth is probably more people to look like me. But I'm new so I'll defer to you guys, but that's just one person's perspective. Can you ...
Brett Messing: (09:34)
One of the things that I think is challenging about bitcoin, we were talking about a little about this before we started or digital currencies just generally is explaining it to someone. I actually taught at UCLA for a while and I used to tell people, "You have to be able to explain something in one or two sentences or you don't understand it." I'd like each of you to give our audience your sort of why bitcoin, why buy it now, your sort of elevator pitch if you don't mind. I think that would be helpful.
Michael Sonnenshein: (10:01)
I'm going to answer that Brett with my kind of aha moment around bitcoin which was that I think that I believe that bitcoin can be the springboard to financial inclusion. I think the fact that the world has gone digital, money by and large has not. Everyone around the world has a phone, whether it's a brand new iPhone 12 or a simple feature phone. All you need is a phone or any kind of connectivity to send and receive bitcoin in much the same way that the advent of the cell phone totally leapfrogged the communications game, especially in the emerging markets where there weren't landlines. Bitcoin in a digital form of money that's global and borderless and basically lets you move value instantaneously and for free should be one of the catalysts that creates financial inclusion globally.
Dan Morehead: (10:57)
And Brett, I'd say that the way I think it's easier for people to get their head around it is, it's essentially the final piece of the protocol puzzle that is the internet. The internet has all these protocols like TCP IP that move all kinds of data around. And in the '90s Milton Friedman said the only thing missing was a reliable e-cash system. And that's essentially what bitcoin is and what these other blockchains are. It's a way to move financial value around without the very expensive intermediaries. Those intermediaries really haven't changed. If you think about how much the internet changed everything else in our lives, shopping, social, all these things are completely different. But banks, remittance companies, credit card companies, they're pretty much the same as they were in the '60s. A credit card is a piece of plastic with some eight-track tape glued to the back of it and very expensive. So it really hasn't been hit by the internet and that's basically what blockchain is.
Dan Morehead: (11:52)
And the analog I like to use is it's going to do to finance what VoIP did to the telecoms monopolies. Back in the day when we were in college it was really expensive to make an international phone call because every American had to use AT&T and every Brit had to use British Telecom. When we realized you could route Voice over the Internet, VoIP rates went down to essentially zero. It's free to stream Netflix on your iPhone now, and the quantity of calls went up so much that we don't even have enough copper on earth to run the internet if we were still running on copper. And that's basically what bitcoin and blockchain will do, it's going to route money over the internet, so money over IP.
Michael Sonnenshein: (12:28)
And Dan, I think you bring up a really good point which is that this whole system we have today around moving value, it's all based on mistrust. I don't trust you. You don't trust me. That's why there's a bank in the middle or that's why we have a credit card processor or whoever it is in the middle of everything we do. And bitcoin completely democratizes that and allows totally unknown parties to transact with each other in a way that is trusted. So it can really eliminate a lot of those frictions and time and money that go into moving value.
Dan Morehead: (13:02)
It is. It's not just between you and I who live in developed economies-
Michael Sonnenshein: (13:07)
Oh sure-
Dan Morehead: (13:07)
... with great financial services. I like your point about financial inclusion. There's three and a half billion people on earth that have a smartphone and only one billion of those have banks like you and I would recognize, those types of accounts. So there's several billion people that a lot of people call unbanked. But in my mind that word itself is an anachronism. It's like calling them unlandlined. They never got a landline. They went straight to mobile phones. They're not going to get a bank. They're going straight to mobile money. And bitcoin is the solution.
Brett Messing: (13:41)
There's been a lot discussed about the use case for countries where the currency is collapsing. I guess bitcoin is at an all-time high against the Turkish lira, it's in an all-time high against the Argentine peso. Is there any evidence that there are flows coming from these countries, in other words, or is it just like an academic concept that will this [crosstalk 00:14:03] for them?
Michael Sonnenshein: (14:05)
There's empirical data there. I mean, I think the analog that Dan and I are talking about is only made worse in geographies where governments are inflating their currencies or manipulating their currencies. I mean, a lot of people in these areas of the world wake up and whatever value they had yesterday, they wake up today and it's worth 20% less and nothing really happened that they were in control of that caused that to be the case. So those types of folks in those parts of the world are looking for really any way to protect their purchasing power and they have a serious mistrust of their government and their government's ability to regulate and administer their currency.
Michael Sonnenshein: (14:50)
Our parent company, Digital Currency Group has investments in digital currency exchanges all over the world, including in parts of South America, Southeast Asia, et cetera, and the volumes continue to just demonstrate in all of these companies how much growing interest in their user base and people actually using bitcoin in a lot of these different geographies. So it is really happening.
Brett Messing: (15:14)
Part of the reason why I asked, Michael, you and I talked about this, is as I said, I just bought bitcoin and we talked about this being sort of this trust, system of trust. It's weird to buy it in terms of it's on my phone. I got two-factor authentication. Now I got a security key. I've never bought anything that I've had to spend so much time thinking about protecting and I finally have it in place that I think is protected. Can we discuss what you see in terms of when Grayscale has done this, but it feels like we need easier on-ramps and I'm sitting here in Manhattan and that's why I wonder if I was in Turkey what's my on-ramp look like and are they, again, because it feels like I've invested in a DraftKing's account and there are too many zeros there for a DraftKing's account. So do you have any reaction to that?
Michael Sonnenshein: (16:06)
Yeah, I mean every day that goes by it is becoming orders of magnitude easier for folks to buy, transfer, hold, and safe keep digital currencies. Dan's business, my business, we're trying to eliminate a lot of those frictions and open up access to folks so they don't have to navigate some of that. But pretty much every geography you can think of around the world, there is an exchange or exchanges or order books where individuals can buy and sell digital currencies against their local fiat money.
Michael Sonnenshein: (16:42)
And you're totally right. Digital currencies are not for the faint of heart. There are complexities around them that make them more challenging for a lot of folks than handling cash or handling a stock or handling a bond because they are a bearer instrument. So I think one of the things that we're excited about and monitoring very closely is how all that infrastructure is being built to make it more foolproof and user-friendly for folks to handle digital currencies as seamlessly as they might handle airline miles, their Apple Pay, or even just SMS-ing bitcoin from one user to another if you don't live in the developed world and you're just using a simple feature phone. So a lot of that is being built out, but it's again, still early days and that exact experience you're having is evidence again of how early we are in the cycle of where everything is probably headed.
Brett Messing: (17:37)
And Dan, do you think we'll get larger, either more regulatory relief coming with a new administration or will I be able to buy this in a Schwab account? What do you see in terms of the regulatory and on-ramping landscape if you will?
Dan Morehead: (17:55)
Yeah. It's obviously a really important issue for institutional investors what's happening on the regulatory front. I think we have to be conscious that the US government has been pretty far ahead of this curve, and even in 2013 made a lot of rulings that are very positive for bitcoin and blockchain. The IRS ruled in 2013 that if you hold it for more than a year you get capital gains tax treatment which is way better than you get with holding gold which is a collectible, and normal currencies, fiat currencies are always ordinary income. If you held the euro for 20 years and sold it at a profit, you have to pay ordinary income tax on that. So most of the regulatory bodies have ruled.
Dan Morehead: (18:33)
The last one released, the SEC it hasn't been completely clear on when things are securities and when things are not securities. But the last big announcement is the OCC has given permission to any nationally chartered bank to custody crypto. That's wild. Like your issue with, yeah, you got all these two-factor authentication things you have to deal with. Going forward you're going to be able to discuss your bitcoin at your nationally chartered bank and then the kind of the brain friction you were just talking about goes away because it's just going to be like any other account you have at your nationally chartered bank. So most of that regulatory stuff is really behind us.
Michael Sonnenshein: (19:09)
Yeah. And Brett, I don't even think most people even know what the OCC is, or maybe at least didn't before this announcement came out, the Office of the Controller of the Currency. And I think for folks like Dan and his team and folks like my team and others around us, this is a very, very meaningful announcement from the OCC. When you think about regulatory clarity or lack thereof, we're not hearing that from investors anymore as it being a gating item to them deploying capital into this asset class. They actually feel that there is quite a bit of regulatory clarity, and that's not what may hold them up from investing.
Michael Sonnenshein: (19:48)
But thinking about holding digital assets at a nationally chartered bank is also causing all of the banks who I think for a long time have developed working groups and sandboxes and proofs of concept to move off of Zero and realize that they're actually going to need to deal with this asset class, and there isn't a better time than now for them to figure out what's their approach going to be and are they going to be late to the party or stand to lose business to other banks who move faster than they do.
Brett Messing: (20:20)
So it seems like we're getting de-risked from a regulatory standpoint. I guess Dan, you've been in this for a bit. Over the last three years are there other risks that had tended to be gaining items for people that you think have been mitigated meaningfully?
Dan Morehead: (20:37)
Yeah. There was one final one, custody. Five, six, seven years ago I was evangelizing institutional investors on investing and some did and got rewarded. Our first fund's up 140x. So there definitely was some reward for taking the risk. But custody's been a legitimate gating item for institutional investors. As I said, the regulatory stuff mainly went away a few, four, five years ago. But the custody thing was a real issue. And in the last two years have been some massive regulated custodians that have come out and it makes it just so much easier for a fiduciary to allocate capital to the bitcoin space. You have the New York stock exchange's parent has a company called Back that does custody. Fidelity does custody. Coinbase is now massive and well trusted. BitGo is one of the largest custodians within the blockchain space. And all those are highly regulated, have all the regulation that institutional investor would want. I think that's really helped open the door to much larger institutional investment.
Brett Messing: (21:47)
I have a question I'm trying to ask both of you which I ask with love as a bitcoiner which is we have this sort of amazing macro environment for bitcoin where incredible fiscal stimulus, monetary stimulus. We have Paul Tudor Jones putting 2% of his fund in it. We have Microstrategy, a public company putting 425 million in. We have Square putting $50 million in. We have Grayscale vacuuming up almost all the bitcoin that's mined. So it just leaves me wondering why aren't we above last year's high on the bitcoin price? Do you want to go first Dan? You have any thoughts on that? It just, it doesn't ... It feels like as bitcoin you couldn't have asked for a better sequencing event in this year, and yet we haven't breached the high of 19.
Dan Morehead: (22:36)
Yeah. So that'd be my main argument for why someone should put 2% or 3% of their networth into bitcoin is you love being invested in an asset where people are complaining it's only up 60% year-to-date in a global depression pandemic crisis. So that would be my argument, is it's up 100% from four or five months ago. It's up 60% year-to-date. And over the next year or two I think it will hit new highs. The bitcoin market goes in these two or three year cycles. It averages 209% compound annual growth rate over the last nine years with all the macro tailwinds and the fundamentals. I would think it's going to outpace that over the next couple of years, so it's a nice problem to have that we're kind of griping that it's only up 60.
Dan Morehead: (23:24)
And the bitcoin maximalist in you would lead me to point out that other things in the blockchain space are massively outpacing bitcoin. We're very bullish on bitcoin but other things have done well. Ethereum's up almost 200% year-to-date. So the blockchain space is really surging. Kind of a good mix of all the assets is a fund we run that invests in all the major currencies, trades them on a long short basis, it's up 122% this year. So the market is ripping. In the next couple years we'll probably see more of that.
Brett Messing: (23:59)
Right.
Michael Sonnenshein: (23:59)
I think, I've been through quite a few bubbles and bursts in the bitcoin price. And if you kind of look at the repetitive nature of this, bitcoin kind of goes through these big bubbles, it bursts, it kind of bases for a while, and then kind of makes its next move. I think certainly one thing that we probably would not want to see is just one of these parabolic moves out of nowhere because they're just not sustainable and they don't necessarily inspire a ton of investor confidence. But typically, when you see bitcoin going through this kind of range-bound time where it is now, flirting between kind of $10,000 and $12,000, it usually predates a pretty dramatic move in the bitcoin price, either to the upside or to the downside. And I think one of the reasons why we're seeing a period of more sustained price movement just kind of being in this range bound area really has to do with the development of a much healthier two-sided market.
Michael Sonnenshein: (25:01)
One of the things that I think has been a catalyst to draw a lot more investors into this asset class is the development of the derivatives market around digital assets, bitcoin and others are really healthy lending and borrowing market, the ability for folks to short. I mean, a lot of the institutions that we deal with would not be making their bitcoin investments in the way or the magnitude that they are if they weren't having the ability to put on a bonafide hedge against those positions. And that really again speaks to kind of the build out of the infrastructure. And to Dan's point, whether it's custodianship, the development of the futures on CME Group, what Bakkt is doing at NYSE, all of these are really important developments.
Brett Messing: (25:46)
Mm-hmm (affirmative). No, it feels like it's grown up a lot. In addition, you have very big four accounting firms willing to write audits about it, and Microstrategy and Square submitting SEC filings with it on their balance sheet, so I think it's interesting.
Brett Messing: (26:07)
It feels like more and more people are talking about it as digital gold. Dan, is that the right way to think about it, and does the macro trader in you like the idea of a long bitcoin short gold trade?
Dan Morehead: (26:20)
Oh yeah, I love that trade. Gold's been awesome for 5,000 years, but it's a little past its sell by date. And bitcoin is the 21st century version of gold. You can do everything the same as gold, is a fixed quantity. It's like the gold standard. But you can send it in one second to anyone anywhere on earth essentially for free, which is different if you have a lot of your savings as a brick of gold in a vault in Zurich. So digital gold is one of the many use cases of blockchain. Bitcoin's fantastic version of that. And you're seeing it in countries. Like China used to be one of the largest importers of gold. It's now one of the largest importers of bitcoin. It's just a great way to store your wealth, get it out of banking systems that might be suspect.
Dan Morehead: (27:05)
So I think one of the great use cases of bitcoin is digital gold. And with all the money printing that's happening right now, it's very much front and center all the gold bugs that I know are at least shifting some of their assets into bitcoin. And you mentioned Paul Tudor Jones. He wrote his investor letter a few months ago. It reminds him of gold in the '70s. And I think that's a great analog that in the '70s we were heading into a period of very high global inflation. The US even had the long bond go to 13%, and gold performed very well. I think we have even bigger version of that now.
Dan Morehead: (27:41)
And if you're talking about the global macro story, the numbers that the US is printing are literally off the charts. In June the United States printed more dollars than they did in the first 200 years of our country's history. So if your choice is own dollars, own gold, or own bitcoin, I would go all bitcoin. But if you're a normal investor that hasn't spent eight years thinking about it, you might as well put 3% or 4% of your assets in bitcoin.
Brett Messing: (28:10)
Right.
Michael Sonnenshein: (28:11)
Yeah, I think that's exactly right. Brett, I don't know if this predates your getting involved in the bitcoin space and becoming a bitcoin maximalist, but my team actually devoted the better part of last year to a national advertising campaign called #dropgold. We feel quite fervently that the next generation of investors, those who haven't even hit their prime earning years yet will not be investing in gold. It doesn't resonate with them. It's not something that they are going to have had a tangible experience with the way that they are buying things like Apple and Netflix and are growing up in a time when the things that are important to them are their airline miles and their credit card points and paying their friends on Venmo and buying bitcoin.
Michael Sonnenshein: (29:05)
So we think that with over $68 trillion passing over the next 25 years from older generations, baby boomers down to millennials and younger generations, that the way that those assets are currently postured today are going to change as that generational wealth transfer happens. And we're not going to go out and say we think all 68 trillion of it is moving into bitcoin in digital currency, but we'd be hard-pressed to believe that some portion of it doesn't make its way into crypto. And that's already starting to happen. Schwab put out this survey last year looking at what the top 10 equity holdings were for millennials, I think gen x-ers, and then baby boomers. And you guys wouldn't be surprised what they're invested in. They own stocks like Apple and Disney and Berkshire Hathaway, but noticeably the millennial segment, their fifth largest holding was Grayscale Bitcoin Trust. They're already allocating to this asset class and the empirical data is there.
Michael Sonnenshein: (30:08)
That's kind of our view on it. While gold is as Dan said had its time, we do believe that digital gold or a digital form of inflation hedge, things like that, bitcoin can really serve that role in a lot of investors portfolios.
Brett Messing: (30:24)
Well, I guess in the spirit of sort of the world changing, I saw yesterday that PayPal's market cap is bigger than Bank of America's and Square's is bigger than Goldman Sachs' which is amazing to me. It makes one think that why shouldn't bitcoin be bigger than gold, which I guess is a good transition point too. Dan, how does someone value this? How do you think about it in terms of it's undervalued, it's overvalued? I don't know that we have time to get into the stock to flow model but there are different ways that people are trying to value it by analogy. I don't know if they make sense but I'll be curious in your thoughts and then yours also Michael.
Dan Morehead: (31:09)
Yeah. I had a fun argument with one of my Tiger Cub friends who runs a big TMT fund. He said, "Hey, there are no cash flows to discount, so we can't invest in bitcoin." And I just, I love that mentality. It's like, "Well, where the cash flows of gold?" And it's worth $10 trillion. Everyone's gotten their head around that.
Dan Morehead: (31:26)
Part of the argument is just supply and demand. There's 21 million bitcoins. 8, 10 years ago there was probably 50,000 people on earth that thought bitcoin was interesting and they should own a bit. A few years ago was 500,000. Now it's probably 50 million people. And if five years from now it's 500 million people, the price will be higher. It is as simple as that. People, you don't really even need to know why people want to use it. Some people are using it as migrants sending money back home to their parents in their home country. Some people are using it to store wealth because they think their banking system might be bankrupt in their country. There's hundreds of different use cases. And the more people that do that.
Dan Morehead: (32:11)
You can do relative value analysis between the different blockchains. So you can say, "I think Polkadot is cheap relative to Ethereum," or, "I think bitcoin is cheap." Bitcoin right now is 58% of the entire market cap of the industry. That's been as high, recently as almost 70, and it's been as low as 33 so you can make those kinds of views. But ultimately, it really is a bet on whether you think at 350 billion, which is the total market cap of the entire blockchain cryptocurrency industry, is that appropriate? It's a very small fraction of what gold is. Currencies are 100 trillion and there's a lot of really crappy ones out there. So bitcoin could definitely take market share over. There's 200 currencies on earth. Bitcoin could probably replace about 150 of them. There's some really bad currencies out there.
Dan Morehead: (33:05)
To my mind that's the easiest way to value it, is to think, "Hey, it's a 350 billion. It's competing with things that are tens of trillions, hundreds of trillions. And if it has a 20% chance of getting a 20% market share in cash, it's going to be a 10x type trade." So that is the basics.
Dan Morehead: (33:24)
You do see some Wall Street firms trying to do very fundamental analyses of adding this and that and discounting it and stuff. I'm very suspect on those. I think it's more of a speculative trade, is definitely very volatile. But if you choose to invest you're thinking, "I'm risking 1x my money and I might make 10x, 20x, 30x my money."
Michael Sonnenshein: (33:46)
I think Dan's exactly right. And the way he just started that off with a friend of his sharing that, he couldn't come up with a traditional model to try and value bitcoin is actually exactly where we end up as well. It's frustrating that a lot of investors are trying to take an asset like bitcoin which didn't even exist 10, 12 years ago, and trying to throw it through the same kind of valuation models and metrics that they would for Bank of America stock or a municipal bond or whatever it may be. The truth is that as an investment bitcoin doesn't have any of the same attributes as those do. So when you look at trying to value it, you really have to take that entire lens off and look at it in a very different way.
Michael Sonnenshein: (34:33)
My team just authored a report called actually Valuing Bitcoin because we're experiencing this so much with our investors. And in the report we probably go through about 8 or 10 different metrics that individuals and institutions can look at to try and determine the health of bitcoin and whether or not there are certain signals that we can pay attention to help determine bitcoin's value. Some of those things include dormancy. We can look at how long bitcoins are being held. The blockchain gives us that forensic tool to allow folks to understand. Are people holding onto their bitcoins longer or are they moving around more? Are more bitcoins sitting on exchanges, meaning that they're more likely to be bought and sold? Or are more of them sitting off exchanges and in wallets because people are holding them and speculating on the price movement?
Michael Sonnenshein: (35:25)
There's a lot of different analytics that we can look at and they just don't resemble anything like a discounted cash flow or anything of the sort. I think outside of looking at blockchain analytics, a lot of folks do look at bitcoin to Dan's point on Wall Street about maybe markets that bitcoin stances disrupt. So if there is a couple hundred billion dollars worth of bitcoin in existence today, maybe just look at the market cap of gold. There's a couple trillion dollars of gold. If you apply some percentage that you think bitcoin is going to take of the gold market, with some probability you get to some pretty crazy number quite quickly if bitcoin captures 1%, 2%, 3%, 5% of the investable market for gold. So a lot of folks start messing around with metrics like that or taking share of the M2 money supply, things of that nature. But ultimately, the best way that we've seen people really look at this is looking at the underlying metrics that the blockchain provides.
Brett Messing: (36:25)
I think people need to realize that it's just bitcoin. It's just a new thing, and you can't value it the way ... All the these analyses feel somewhat torture to me, you know what I mean? It feels like it's likely to go up and trying to figure out how much it will go up feels like, you know?
Michael Sonnenshein: (36:44)
How do you value a Honus Wagner rookie baseball card.
Brett Messing: (36:48)
There you go. Exactly.
Dan Morehead: (36:50)
One of the examples I love using on that when people say, "I'm not to buy bitcoin because there's no intrinsic value." First, the US dollar has no intrinsic value. They just printed a trillion of them in June. There's nothing behind that. But the better example would be the intrinsic value of a Jackson Pollock painting's 40 bucks. There's some house paint, some canvas, but it's got a 70-year track record of appreciating so it's a good asset to hold. Bitcoin's track rate's only 11 years so I'm not saying it's as good as Jackson Pollock, but 10 years from now that'll be 20 years, and every decade that it adds, it adds more credibility to its long-term compounding annual growth rate.
Michael Sonnenshein: (37:31)
Yeah. And I think Brett, one of the things that we've been talking about with a lot of investors especially in this environment is bitcoin's verifiable scarcity. People are looking often at how much fiscal stimulus is being injected into the system and contrasting that with the finite amount of bitcoin that will ever enter circulation.
Michael Sonnenshein: (37:52)
It's almost as though when supply and demand typically intersect to create price discovery, bitcoin supply is known and predictable and so that doesn't really become much of a variable with respect to its value. So it's much more of a demand driven asset, which I think again is a different lens that folks need to look at it through when thinking about value.
Dan Morehead: (38:12)
And the last point I want to mention Brett, something we talked about before the show started is it's basically the demand is monotonically increasing all the time because people evangelize you. And then you buy some, and you read some more about it and then you start talking to your co-workers, and then they buy some. And there are very few people that ever actually just exit the market. So you're always attract ... It's like a one-way valve. You're always attracting buyers and there's very few people that ever sell.
Dan Morehead: (38:40)
One of my main thoughts is there's so many incredibly intelligent professionals like you that once you read about and you actually spend a couple days, you end up buying it. There's really very few people to go, "Oh, this thing's just a bubble. I'm going to get short." And you occasionally see a curmudgeon like Warren Buffett doing a one sentence negative thing about bitcoin being rat poison, but I've never seen like a multi-page negative report on bitcoin. Literally, I've been in this business for nine years and I've never seen anyone actually write a well-thought-out, very long thing on why one should be short bitcoin. And that's basically proof that almost everybody that actually does the work ultimately ends up buying it and getting long. And if we all just keep getting long, it probably just grinds up.
Brett Messing: (39:27)
No. Well, last thing, I know John has some viewer questions, but do you think it grinds up? Dan, in a prior life I traded oil. And it seems like in commodities, when you have a fixed supply, when the demand comes, Michael, whether you like it or not, it tends to get parabolic. And I agree that you want buyers to validate higher prices, but doesn't that seem quite possible here just given the [inaudible 00:39:54] dynamic?
Dan Morehead: (39:56)
Occasionally a bunch of things all come together and it's on TV all the time and it shoots up at a rate that's too fast. And one of the best stats about bitcoin is it's had a lot of down 80% bear markets. In the normal world like oil or whatever, that would scare people to death. The wild statistic is in nine years of its existence, bitcoin's only had one year where the low for the year was below a prior low. So even though it's had five down 80% years, even at down 80% it's higher than it was the prior year.
Dan Morehead: (40:31)
Bitcoin's definitely volatile octane stuff but it's grinding up at such a fast rate that you net-net come out. Anyone that's owned bitcoin for three and a quarter years has made money. It's one of those things. Which is not true your favorite market oil recently went negative. You had to pay people to take your production and essentially oil hasn't done anything for 30 years. It's basically flat. Bitcoin is the polar opposite of that type of asset class.
Brett Messing: (41:01)
No. I guess, so just to make your point Michael, I think that at 20,000 is almost like a straight print in an equity trading market. You just don't ... It almost shouldn't be counted. It was one month up and down. And if you took that off the chart, it looks much healthier, the upward grind that you guys are sort of talking about.
Brett Messing: (41:21)
Anyway, John, do we have a question or two-
John Darsie: (41:22)
Yeah. We have several emailed questions and some questions in the chat that I think are interesting. Obviously, we have now the cryptocurrency skeptics lining up to poke holes in this conversation about crypto. But the first question is, obviously you had the whole situation with Silk Road and some of the origins in terms of public perception of bitcoin being around sort of the nefarious exchange of money on black markets for things like drugs or whether it be weapons or whatever it may be. So it has that perception that continues to dog it. So how long term will digital currencies like bitcoin overcome that stigma and also overcome real issues like anti-money laundering, tax related issues, and other financial regulations?
Michael Sonnenshein: (42:05)
Yeah. John, whoever asked that question, respectfully has not looked at bitcoin recently, and they're holding on to some preconceived notions about this. Bitcoin, the best analogy I can think of is every time somebody uses bitcoin, it leaves a digital breadcrumb. So it is quite frankly the worst mechanism possible to use if you want to do anything the least bit nefarious or something that you wouldn't want to be known for doing. Today our parent company, Dan's firm, we've all invested in blockchain forensic and analytical tools, companies that have developed products and services around monitoring tainted addresses, tainted coins, and who are the biggest customers of these companies, the FBI, the CIA, the Treasury, you name it.
Michael Sonnenshein: (43:01)
So this idea that bitcoin is somehow for the underbelly of the world or nefarious activity is ridiculous. Not to mention that you've had now several auctions by the US Marshals Service actually auctioning off bitcoin that they've seized. If they thought that this was an illegal or illicit asset that they were auctioning off to the general public, I have a hard time believing they would be doing that if they didn't somehow believe that this was something that was permissible and was not going to be saying they were going to crack down on and that they got the right comfort around the asset in order to conduct multiple auctions.
Dan Morehead: (43:38)
John, I was involved in that prosecution, and the truth is actually the exact opposite of what your questioner is supposing, is there is a permanent paper trail of every transaction that's ever happened on bitcoin. It's published every 10 minutes to the public. We all know every transaction that's ever happened. That's really a terrible feature for committing crimes. And in the Silk Road, obviously the Silk Road guy was taking bitcoin. Everybody knows that. It makes the newspapers a lie.
Dan Morehead: (44:04)
The real story which doesn't sell a lot of newspapers so not that many people know is there were two US federal agents on the Silk Road task force that went rogue and were actually extorting money from the Silk Road guy and other criminals and laundering it. And they laundered it through five big banks and a big mutual fund complex in the United States and they also laundered it through Bitstamp which is the largest exchange in Europe.
Dan Morehead: (44:29)
I was the chairman of Bitstamp at the time and the CEO said, "Hey, I think we have a federal agent laundering money on our website." And I'm like, "You guys watch too many Tom Cruise movies. That's just not happening." So I went through all the data and I'm like, "Oh, that's bad. We got to report this." So we reported it to a second federal agent and he quit that day. And I'm like, "Oh, that's not a good sign. Why'd the federal agent resign today?"
Dan Morehead: (44:52)
And so we reported to a third one, and the punchline is, the first two were stealing money from criminals and laundering it with bitcoin. And we have every transaction that's ever happened. You could look it up yourself. It's all public, and they pled guilty and immediately sentenced 10 years in prison. That's the truth of using bitcoin for committing crimes. It's terrible.
John Darsie: (45:14)
Right. That's a pretty thorough answer. And I think it's something that the public is still getting comfortable in terms of mass adoption with bitcoin, but as you said, fidelity backed which is affiliated with a large institution, the custody situation, everything's moving in the right direction for certain.
Dan Morehead: (45:33)
Yeah, I think if the government had the choice today to approve either bitcoin or cash, there's no chance they would allow cash. Cash is mega sketchy. People do all kinds of bad things with it. And bitcoin really is terrible for committing crimes.
John Darsie: (45:47)
You can't catch coronavirus from bitcoin but they say you can transmit it through cash. I have another question. It's around China. It's sort of a multi-layered question around China. I know in the early life of bitcoin, as you mentioned Dan, a popular use case for it was people moving currency out of a country in which they didn't trust the future of that currency and that I know happened in China. People were evading capital controls. But then China while at first was attempting to regulate bitcoin and potentially stamp it out, they realized the power of distributed currencies and they're now trying to launch a sort of regulated digital currency. Why do you think they went through that evolution and what do you think if any is the future of regulated digital currencies? Would that undermine a truly independent digital currency like bitcoin or do you think it's a step in the right direction in terms of building multiple parallel blockchains that can act as a more efficient means of financial transaction?
Dan Morehead: (46:45)
Yes, a super important question. China has very unique nationalistic policies to build state champions in all the different industries, essentially freezing out western technologies and replicating them. They're doing the same with bitcoin. Bitcoin is a global technology and they're essentially replicating it within their own borders. Their announcement of their own national cryptocurrency was not a coincidence that came out three days after Facebook announced their Libra project which is a similarly identical to what China's trying to do.
Dan Morehead: (47:19)
It's essentially game on now. China is definitely developing a cryptocurrency that they would like it to be the payment rail of their citizens and then obviously their region and maybe the rest of the world. So now other countries, other regions need to get engaged and roll out a competitor because as much as you would love to get the toothpaste back in the tube, it's out. There will be a blockchain payment system in the world and it's essentially a question who you want managing that one.
Dan Morehead: (47:51)
The other projects like stablecoins like USDC that Circle does or Facebook's Libra, those will be popular. The former chairman of the CFTC, Chris Giancarlo, had a great op-ed right after the Chinese announcement. He said it's our Sputnik moment in currency that it's now a race between the superpowers of the world and the West should get engaged.
John Darsie: (48:17)
Michael, do you have anything to add?
Michael Sonnenshein: (48:19)
No, I think one of the big overhangs for a lot of folks has really been that they think that so much of the mining power is concentrated in China. We just publicly came out with one of our subsidiary businesses called Foundry which is a digital currency mining and staking business and really working to bring a lot of that hash power back to the US. The folks that, again, this is kind of similar to folks that may be looking at bitcoin or digital currencies from a couple years ago. A lot of that has been shrugged off and this has really been something that has been turned into a global phenomenon and that there's global participation around. So I think over time you'll see that even more evenly distributed around the world.
John Darsie: (49:07)
All right guys. We'll leave it there. I think we could go on for several more hours about this topic, and I think we're going to need to have you guys back maybe after the election as the regulatory landscape continues to improve and maybe bitcoin continues to trade higher. It's been a fascinating conversation. Again, it's an area that both from a SALT perspective and a SkyBridge perspective is of growing interest to us, and you guys are two pioneers in the space so it's been a real treat to have you guys on.
Michael Sonnenshein: (49:33)
Thank you.
Brett Messing: (49:33)
Thanks both.
Michael Sonnenshein: (49:33)
It's been great.
Dan Morehead: (49:34)
John, Brett, thank you.