The Future Of Crypto Investment (w/ Dan Morehead And Joey Krug) | Interview | Real Vision™
For. Bitcoin there, isn't a whole lot you can do with it you can send money around and you can hold it as a store of value but. It doesn't really let you do much in finance, itself and so I think when you see products like a theory I'm come out then, enable you use these things called Smart contracts, where you can send money to a computer program and you. Know remove the lawyers in the middle then, I think that's where we actually started to see this huge flourishing, of people starting to build new projects, I just, think of their assets is their opportunities, to invest I don't, think the typical investor needs to worry whether there are securities, or not securities, if there's not a market for what you want to trade on you, can actually create a market for that which. I think is actually the most powerful juice because. Up, until this point that's not really feasible. Our, fund has returned hundred and forty X so it's it is possible, and that's why I think investors, should put a few percent of their portfolio, in crypto, could. Go to zero maybe but you. Know it's very asymmetric. Risk reward. Mike. Green for real vision I'm excited, to sit down with two of my favorite people in the Bitcoin space Joie Krug and Dan Moorhead of Pantera Capital Joey. Is a brilliant, young investor, focused, in the Bitcoin space is going to tell us some exciting news about that and Dan brings an incredible experience with, Bitcoin, and the general, cryptocurrency, environment, I'm really, interested to hear how things are developing for the two of them Mike. Green I'm here in San Francisco and I get to spend time again with Joey Krug and Dan Moorhead two, guys who are as deep. In the crypto space as just about anybody on the planet, and. I wanted to catch up and see what you guys are thinking about these days Dan, you're. From Pantera Capital is one of the first to launch a crypto, oriented, fund in particular, you were focused on the store value, dynamic, you know speculating. Not to not to use the word in a pejorative sense but speculating, on the the appreciation, in crypto. Coins back, he launched in 2013, or so. Obviously. Spectacularly. Successful it's. Been an, extraordinary investment, and your returns of far outpaced, what. Has been seen for the individual coins a lot. Has changed in, the world since we last talked last fall, in. Terms of prices appreciating, sharply, and then having corrected. What. Do you think happens next where, are you and the the crypto is a store value of, a dynamic, I think that's an important question back, in the day there was just Bitcoin no. Other currencies, not really any equities you can invest in now, there's 1500, projects you could invest in plus maybe, 500, different equities that, you could buy and so I think it's sensible approach for a. Investment. Is not just buy one thing because that's not the way you would trade stocks you'd buy a basket, of things and I think people should avoid. The temptation of worry about is it bitcoin that's gonna win is it a theorem that's gonna win or is a big one cash or, ripple and get. A sensible portfolio. Of assets whether, it's crypto currencies pre-auction IC O's or venture. Investments. So. When you when you answer. In that way. You're. Thinking of these as securities, at this point I mean this is it is a collection of assets some of which I've coin or currency, like characteristics, some. Of which are purely, equities. Some, of which maybe dividend-paying, entities, and in terms of capturing. Usage, fees etc but. You think we're at that point now where, it becomes a. Securities. Market, as compared, to a well. It securities, is very loaded work has very legal, definition, in certain countries I would say that most, of the icos.
We've Invested, in are, valuable. Only because of their utility and they're very far from the definition of a security, I just think of their assets is their opportunities, to invest I don't, think the typical investor, needs to worry whether they are securities, or not securities, and so, at, this point though the idea of is Bitcoin going to a million dollars or is bitcoin going to zero, dollars it, sounds, like your answer, to that is but I don't think it matters right. I mean that's that's one component of, 1,500, different. Possible, permutations. That you, could explore. You. See it as a series of option, like bets, within. A broader portfolio yeah I think that's the right way to look at it and in my, 30. Years of investing, this is by far the most asymmetric, trade I've ever seen obviously, you could lose substantially. All maybe even one X your money but, you could make 50 X or hundred X on many of these trades, and it sounds ludicrous in the normal, securities, market to say those kinds of things but our fund has returned hundred and forty X so it's it is possible, and that's why I think investors, should put a few percent of their portfolio, in crypto, could. Go to zero maybe but you, know it's very asymmetric, risk reward so. I've spoken with others about this idea that that, crypto. Is. And. It's thought of as an asset, class that people. Associate with gold etc, or. People. Have labeled it you know calm, type dynamic, you. Know it, feels to me and in summer, are, out there saying you know this is only 1994. And the internet analogy, etc it, almost feels to me like this is so much earlier right there were still I was. I was speaking to somebody else about the idea that like this is maybe 1982. Right people are still like gluing stuff together in their garage and a lot of ways there's a incredible. Amount of experimentation. Where. Do you where you draw the analogy if you're thinking about it I'm, glad you said that because very few people go. Before 1992. When they do their internet analog, and, if you think about it DARPA net was around from the 70s, and only. 1% of the world used it in 1992. They, created it browser, made it easy for the rest of us and it exploded, into use right and I think that's the way Bitcoin is right now there's a couple percent of the world to use it so it is potentially. The eighties internet, rather than the is it, 95, versus 99. Argument. And, again there. I had, a fascinating, debate on CNN with an academic who's, a very rare breed of an animal a super. Negative academic. On Bitcoin and had. Written a paper our IP Bitcoin, it's time to move on it's failed it's pets calm in, the. Story, there is the, article was written was at 400 bucks and now, you, know it's at 9,000, so you're really missing, this massive, asymmetry, in the leverage, and then. Again to to call it pets comms really. Forgetting. Who was the majority investor in, pets calm this, guy who saw a very disruptive technology, want to invest in a lot of different ways to use this disruptive, technology, one, was selling pet, food on the internet didn't, work the other one was selling books on the Internet it worked and so, that's what people should view, Bitcoin aetherium XRP, not. All of them are probably going to work but if you have a portfolio of them and it's as disruptive as we believe the, portfolio, will do quite well well I think we, can actually name that individual, or Jeff Bezos and.
Not. The founder of Barnes & Noble but, it's so, I agree. With with. That that, people need to think about it from a portfolio perspective. There. Is this interesting, question. About, you know we've been doing it and the, analogy, in terms of time horizon, also helps. To address what, people are pushing back on right you know one. Of the the rallying cries for those who are super bearish crypto assets is we're 10 years in and there's not a use case yet right well as, somebody who grew up in in Silicon, Valley you, know there was no use case for the time that I spent banging away on. A trash. Eighty right it. Was a it, was a you know total, waste of my time as my father was was very happy to remind me but it, ultimately grew into something that was. Totally unrelated and Radio Shack is now bankrupt and there Tandy Corp as it was back then but it's, something that we use every single day and, and, again. Crypto. Seems difficult to look, at and think that it's not going to be a feature of the universe whether. It's Bitcoin or Bitcoin cash or, smart. Contracts, in the form of aetherium you, know these all seem like things that are absolutely. Destined. To happen yeah. Part of that is the misunderstanding. Of how the, protocol in the application, are gonna derive. Value in the post, internet world so. In, the current, internet it's the protocols, that have no value in as applications, it's like you know money out of their customers, somehow on top of it they get all the value so, everyone's saying hey there's no killer app of Bitcoin they, missed the point that bitcoins. The killer app of Bitcoin, there's hundreds. Of thousands of transactions, have any everyday moving you, know billions, of dollars around the world using, it as the application, layer you don't need to pay, somebody else to you know you don't need some rent-seeking, you know company on top of that so there, will be really cool things built on top of all these block chains but the protocols themselves are very valuable well. That's that's an area where, I have, a slightly different take right which is that the use case of Bitcoin I agree with you is Bitcoin it.
Happened, To arrive at a time period in which criminal, enterprises in Russia and China needed mechanisms, for getting money abroad very, easily so. I'm I'm very skeptical. Of that dynamic, but I agree, with you that. There. Are absolutely use, cases in the form of it is used for, money laundering for example and that's certainly not the only thing that it's used for but it's. A primary use but. It. Opens up so much else right and I know you disagree with me and and and feel free to push, back you know instinctual, responses oh it's so great for crimes. And. Hate maybe years ago was pretty anonymous and it was okay for crimes but, its features, prominent, features every ten minutes a ledger. Of every, trade that's ever happened is published with a permanent paper trail of every. Step in that ten-minute process, that's a really bad feature for, committing crimes, all. Of your transactions, are there and it's very well known that the Silk rogue I use Bitcoin right very. Few people know that there were two federal agents, that went rogue and we're extorting money from the Silk Road guy independent. Of each other in the, same task force stealing. Money from other people on the internet doing all kinds of bad things they. Wired a million, dollars through five major banks, in the US and one mutual, fund company none. Of whom filed, a suspicious, activity report when. You have a federal worker pain is mortgage off in one pay check. Writing. $30,000, checks to Cash that's, suspicious, right, it was to, peer. To peer companies venmo, and bitstamp, that reported, these both, of these people to the, authorities, and I'm actually on the board of bitstamp and they were telling me this there's, a federal agent laundering money on, their site I'm like you guys watch way too many Tom Cruise movies there's no chance that's actually, happening I looked, at this stuff and I was like oh crap we got to report this so, we reported it to another, federal agent, that. Got resigned, that day and we're like oh no, that's a problem so both of those people were rogue and the, deal is when the prosecutor, Katie hunt dropped the, whole list of all their crimes from, the blockchain, on. Their desk they had to sign guilty, pleas like there is there's, no way to even remotely, even go to trial because you have a list. Of all the crimes so I think. Law. Enforcement already, knows the Bitcoin is terrible for crimes so. I again, I am, not disputing any of that and you. Know the interesting, dynamic, as I. Would, articulate, what I've seen on the Bitcoin front from from China in particular, is. That it is a misuse of subsidized. Electricity, in China and, in the process, of mining. To. Create that but that's not my focus actually, it's just it's it's, it's. An interesting dynamic on Bitcoin itself which has captured people's attention because the price has risen so spectacularly. Fallen. And now the debate is what happens next right that, is totally, separate from the. Crypto, universe, and. You. Know one of the first people. That I talk to that I thought was so, fascinating, this was actually Joey right and it was it was really interesting. Listening, to somebody, who is much younger than either of us right. Who has. Had. An immediate impact in this space and so that's. The other area. That you've been very focused on is making the investments, and either the picks, and shovels or, the individuals, that have a tremendous. Amount of capability and talent, within this type, of. Developing. Industry. Joey, you. Started. Auger out of your dorm, room right, I left, college dropped out and then we started, in LA and and.
Last Time we talked I. Told. You how proud your grandmother must have been of you for what you've managed to accomplish in this but from. That point not, only have you been continued to work on auger but. You also have been managing with. Dan a fund. That thinks about Krypto from a value, standpoint. Effectively, or from an investment. Standpoint which is one, of the complaints that a lot of people how do you value these things how do you think about how do you think about that what, have you been doing yes the way I think about it is you know we have on the fun side on the trading side we really have two main strategies one. Is for investing into new cryptocurrencies in there. I think the way we approach valuing them is you, know do they actually need to be a new currency or new token do they need to have a super token, do. The economics make, sense, and does it actually, benefit. From using this tech and then, after passing those filters which is kind of specific, to this investment then. We look at all the regular stuff you look at with any investment like product team market, things, like that on the, other fund which, is more quantitative, the, sort of stuff we're looking at there are. More, kind of like little individual, things that you can basically use to form a quant model so, things like sentiment, data you know what's the sentiment around these currencies. Things. Like how, many transactions, are flowing through a given chain at any point in time transaction. Flows across the block chains themselves. You. Know as well as you know other kind of warps gear things so. My other point I said I was just in New York a nice meeting with some tiger cut friends that are on the equity side they're, all like hey we don't touch crypto currencies, because there's no cash, flows to discount, we've, no idea how to value it and I think there's the one time I would go with cryptocurrency. Analog. Is this like the fiat currency market where, no cash flows to dollar-yen you, have to figure out what, factors. Drive it like current account and interest rates or whatever, and use, that to say hey this currency is cheap that one's rich it's, the same with crypto currencies, transactions. Per second, how many fees are being paid all those types of data will, give you a sense, of which ones are cheap and which ones are rich so. That's. Interesting because I actually think about fiat, currencies, as. Equities. They're effectively the equity of the country right or the the. Debt of a truly sovereign, entity of which they're very few can really be thought of as the debt of the country right so are they you. Know taking, the money and spending, it appropriately, investing, in human capital and, improving, the, underlying conditions. Under which business, can be done or profits can be generated, this. Is really similar I mean you're, thinking about it in the same way right, you're saying what's the infrastructure, and who are the participants and. What's, the respect for property rights and does it create something new and compelling right is it does, it mean something you know does north northern, Japan and southern Japan would those be two viable countries, no there's, Japan, right. And so that's you're. Approaching, it from a very quantitative, and. Securities. Analysis, type framework right yeah. I think the way the way we think about it is you know we've kind of drawn from both. Stuff that you can you, can analyze sort. Of any assets like we looked at you know ways to analyze commodities, securities. Currencies. And then there's some stuff as well that's specific, to this asset class but. The thing I think about quantitative, analysis is a lot, of the same sorts of things work. Across multiple asset, classes I. Think, there's you know no reason to believe and empirically. We've seen, that they, seem to work on in crypto as well so. That would play, to the idea that these are these are similar to equities, at least in terms of how you should be thinking about them and obviously quantitative. Tools, and techniques you, know work across assets, but there is this, underlying dynamic. Of being able to evaluate, yeah. I think the one big difference is you know as Stan said most equities you can attach.
A Cash flow to them and so when you look at an equity there's all this sort of stuff you can get from the balance sheet and here, there's not really any balance sheet so, you know that it does make the more challenge well challenging. To. You know values in it than any given equity in my opinion that, also makes it a lot more fun and challenging, as well I think although, the use word fun right because that's that's, part of the search for alpha is effectively. What which, should be happening a lot, of guys I know are not having fun in the regular securities, market so that's because there's like 10 million people all staring at the same things and they're getting tiny tiny, little crumbs, that are picking up and, I was just talking at a quantitative. Hedge. Fund conference, and I was thinking back when, I started trading seed CMOS, in. The 80s people are managing the, book once a week to market on a yellow pad with a pencil so, huge opportunities, but now there's so many people applying so much capital to the normal securities markets the opportunities, are tiny we're. Trying to apply you. Know state-of-the-art, techniques. To a very primordial market. The crypto currency markets are have enormous amounts of alpha opportunity, so. So you mentioned this idea that it's you know challenging, and more fun but there aren't traditional. Balance sheets the soda I mean I would, I would challenge that a little bit right because the balance sheet is just a measure particularly. The structure of a balance sheet it's, just a measure of the staying power all, right and so it's you, know obviously, compared it's a stock versus flow dynamic, as you think about the income statement the cash flows but, you're effectively saying how committed are they to this what's the tenor of the optionality, that I have you, have something very similar within the crypto space which is how, much cash do they have and how committed are the developers, to this project I mean it seems. Like you're thinking in very similar terms so, that I. Have. A great you have disagrees there so there's, some stuff where that's definitely true especially, on the kind of ICO side where we're investing in these projects very early on on the, flip side though there's a lot of assets at the quant fun trades where, there, is no actual, you know formal, company behind it providing. Developers for it they're, actually just much more organic, community different, projects and. So for those ones you don't really have you know there, it literally is no real balance sheet back in it it's, just you know but, there are things you can look at right if you look at how many developers are contributing to it how, much is is you. Know getting merged into the code base how many improvements are happening stuff like that so, you have data it's, just sometimes different, right like if, you're looking at a public company for, the most part it's on her don't look at their github when, when evaluating, the equity right but, here it's actually you know fairly relevant, so. You. Know again the analogy goes back to the 1980s, if, you you're, you.
I Don't think you'd been conceived at that point but there, was a. There. Were a series of things called BBS's right, which I'm sure you're familiar with the term BBS, but it's bulletin, board and with the early chat boards, etc there's, a group called the well that ultimately provided, much of the underpinnings of what became CompuServe, right so a real company grew. Primordial, II out of this community type dynamic, that you're talking about and again this feels very. Similar feels like we've been here before. It. Just sounds like people are awfully, impatient for, you know there's lots of opportunities, to create value there was lots of technology, investing, going on in the 1980s it, didn't just suddenly spring forth with the Internet in the 1990s, even. Though the same underlying companies, and the servers and the network technology, and the memory chips etc were all linked. It, feels. Like what you're doing alright is that does, that feel fair to you yeah, I think it does I mean if you if you you know everybody wants to compared to the Internet and so it's sticking with that for a moment I think if, you think about the Internet there were a couple decades of R&D. That happened before it there was mostly relatively quiet you know some academics, knew about it but not that many people did I think, if you draw the comparison here you know that coin came out 2009, I, think, that's kind of that R&D period, and the. Reason is you think of the ARPANET, it, was relatively kind of just, relegated to institutions, no, actual, public member people had access to it and for. Bitcoin there, isn't a whole lot you can do with it you can send money around and you can hold it as a store of value no, I think those are both huge markets and very powerful but, it doesn't really let you do much in finance, itself, and. So, I think when you see products like a theory on come out then, enable you to use these things called smart contracts, where you can send money into a computer program and you. Know remove the lawyers in the middle then, I think that's where we actually started to see this huge flourishing, of people starting to build new projects, and. So I think that's kind of you, know maybe it's late 80s Early 90s sort, of scenario where, you actually see people building stuff on top of it so. People. Talk about these dynamics, of smart contracts on the idea of removing lawyers which I'm. Sure lots, of people with this, is a personal. Aside I have a letter. Between. General, William Tecumseh Sherman and his brother John Sherman who is the secretary, of the Treasury in the 1870s. And the entire letter is William. Sherman, bitching, about lawyers, - John Sherman so the, idea of getting rid of lawyers predates, us all. The. The. Struggle I have with a lot of these smart contracts though is that lawyers play. A very valid role in most of the, transactions. That they're involved with all right so pre. For. Discussions. About you, know how, do I know what, to even put into a smart, contract which, will play into a discussion, of augur as we move forward. Lawyers. Play an incredibly important, role there it's not just you know filling. Out traditional. Forms etc right. What. Strikes me is most interesting, about the potential for smart contracts, is. Introducing. Legal, contracts, in, areas, where we've dispensed, with them because of the cost I was, talking with John Burbank earlier about you. Know magazine, subscriptions, right, you used to receive a again, you're too young to remember this but used to receive a mailer and you'd fill it out and that was a legal contract right that said I will pay $17. A year for 12 issues, of you. Know Newsweek, magazine. And. We dispensed, with that because the cost of, actually. Enforcing, somebody's viewing Newsweek magazine when it moved digital was. Just too high right, but. The. Potential, for smart contracts, to reintroduce, that. Type of exchange so that I can get rid of the. Much hated Universal.
Advertising. Type. Vehicle, that's, that's really how, you guys are thinking about things like smart contracts, it's not getting, rid of lawyers on an MA for a 50 billion dollar or transaction. Yeah. I agree I mean I think you're, you're, not gonna get rid of lawyers, and done it all they're still gonna be around and still be very relevant in fact, do you have any technology that can do that. Right. But. I think in, there even gonna be relevant towards helping write better smart contracts as well I think if you fast, forward future, as a legal profession 10 20 years in the future we'll, see a lot more who have CS degrees I think it's gonna be very relevant to this sort of stuff I think, the main benefits of smart contracts, though are once. You have a solid, contract written and it's, open-source there's. No need to involve. A lawyer after that point for that given contract, and, they also make it really easy to do things in a very generalizable. Way so. You can create a system that allows, people to create things like new, financial markets in a very systematic way. Where. You don't eat a lawyer to customize, every single aspect of it so let's let's. Jump in that direction because I'd, mentioned, earlier you had founded auger and. You. Told me before this interview that that's about to go live yeah. That's right July 9th so this was one of the very first if not the first I see oh is that is that correct that. First one I hear you the very first one on ethereum and you. Go live in July and so what is that gonna mean what. Will that practically, mean yeah. So, what what that practically, means is right, now augers running on a test network version of aetherium with fake ether and fake money and in. July it'll, be on the main network version which real money essentially. When. You say it's gonna be running with real money right. Cryptocurrency. First, of all. So. I will need to buy, some aetherium in order to transact, on augur and. What. Can I actually do on augur yeah. So there's, basically three things you do but I think 99%. Of users will do one of two and. Those. Two things are one, is you can trade in a financial market on augur so. The way it's set up is there's actually a. Built in community. Curated, category system or, you can also just search for whatever you want to trade.
On And then, the second piece is if there's. Not a market for what you want to trade on you, can actually create a market for that which, i think is actually the most powerful piece because. Up, until this point that's not really been feasible. Like if I wanted to create a market on you. Know the price of a, pound of onions, rolling. Up for you every month you, know that's, just not possible today in, the United States it's actually illegal in the UK it's you know tons, of start-up costs to get it off the ground so. That that's, actually a really great. Example not, the onions but the the, cost for the onion market will be a runaway success. But. You, know we're all familiar, anybody. Watching this has probably watched the movie the big short and. There's a classic example of this type of dynamic, I encounter this all, the time because I deal with OTC, swaps or I deal with OTC options, over-the-counter, options which. Are customized, contracts, right so I approached, Goldman. Sachs or Goldman Sachs approaches, me with. Somebody who has made a bet in the opposite direction the. Price of onions. Are going to be greater than $5 but these markets are expensive, to set up they require Goldman. Sachs trained PhDs. There's, require, the goldman sachs pound of flesh and they. Tend to be very illiquid, and they they are the observation. Is is often. Somewhat, difficult requiring, tons of legal interventions, and language, that runs several pages but, this is effectively, you, know what the, character, there. Was the individual played by Christian Bale was was doing in that. Scene. In the movie where he says you know I'd like to create an option, I'm going to have a bank create an option, for me on home prices, so. This takes, that and. Democratizes. It is an overused expression, but it radically, lowers the cost yeah how. Do you see this launch I mean is this is this instantly, going to take the world by storm and replace OTC, options, or, not. In the beginnings I think I think the way to think about it is you know there's, actually a good reason why it well why, it shouldn't grow, fast but, I'll just that in a second so the first thing is you know on aetherium you can only do about ten transactions, or so per second so, in the beginning it's, primarily going to be used for things that I think where you're, not super actively trading so. Maybe some of these sorts of you know swap agreements where you do, an agreement once and then a month later it resolves, or. Maybe like betting on a you know sports match or an election or something but, you're not going to be trading say a derivative on Apple in the beginning just because, of the fact that people who trade derivatives on Apple want to be able to trade pretty quickly, over. Time as a 3m scales that will change, the. Other reason it's it's good that it hopefully, won't grow super fast in the beginning is, since. This code is all open source it's. Very likely that it actually has security vulnerabilities, in it so, it's good that if this, is something attacked it gets done in the beginning when there's relatively little, pennilyn system so, that we can work out those kinks and problems yeah even Bitcoin you. Know had a big vulnerability, in 2010, where, somebody created you know like I think it was like quadrillions, an extra Bitcoin and they had to you know roll it back and, so I think it's important that it that it grows slowly in the game facet. I mean that's tremendous, awareness, of the challenges that can be created, there and. It is one of the advantages right, so I mean dan was referring earlier to the aspect in solving. A criminal case right but that, ability to rewind. The world. You. Know and go back to the point at which a violation occurred. And correct it is. A somewhat unique feature, of cryptocurrency. So forensic accounting, does but. You. Know blockchain. And other technologies, associated, with it effectively again, democratize, that are radically lower the cost of that type of forensic accounting, ya, know a blockchain, in, one of its, many. Attributes. Is an immutable paper, trail of every transactions, ever happened so something, a lot of it's there's. A lot of cool things that you can get out of it so. Joey. Is overseeing. A fund. And how, actively involved are you and in the augur launch at this stage mostly. Just kind of overseeing. The future direction and, vision out the project I don't, actually you know write write code for it anymore we have a team of about 20 people who works, on it and so. What, are the projects, like, augur do you think we can be looking for over. The course of the next couple of months that it should, change the way ours begin to change the way people start to think about this use case dynamic, honey, Joey's best good - sure it's I, think another big, one is.
You. Know for, these sorts of financial applications, on aetherium you, don't necessarily want to use ether as underlying, currency, because it's very volatile. So. One really important application, that's actually went live a few months ago as a project called maker I which, is a collateral backed cryptocurrency, that became it aims to be stable relative, to the u.s. dollar, actually. It's relative to. The. Special. Drawing rights of the IMF, but practically. Speaking that's basically basically, the dollar, and, I. Think God will be really powerful because then every. Other project on etherium can all of a sudden use this it's, basically very stable very low volatility, to. Back their underlying contracts. You, know besides that I think we'll see some. Stuff it's just very practical and kind of fun use cases so in the beginning of the internet you saw a lot of people create gambling sites same, thing is gonna happen here there's, a project we invested into called funfair which, is an online casino on aetherium there's, also one called virtue poker which, is decentralized poker, on aetherium and. Those. Are both kind of really low hanging fruit cool use cases for today you. Have a few problems one is you have to trust online poker site not, to cheat not, to have the not to you know deal, the hand in a malicious way on. The online casinos, that are just trade up gambling you, have to trust that they're actually telling you the odds honestly. They're not they're not screwing you over like in. Regular because you know you know they have a payout ratio and they get audited and stuff like that online that doesn't really happen so they could say their payout ratio is you know whatever, and they can be completely lying about it versus, if it's all open source on the blockchain you can easily prove whether they're being honest and the, fees are also much lower you know those aren't the most revolutionary, things in the world but I think that's sort of stuff we're gonna start to see you come out first no but it's actually a really interesting point right because we have a Nevada, licensing, committee for example, their controls, and, monitors, always same thing New Jersey right that it's you, require a large, infrastructure. In order to maintain. You. Know the regulatory environment around, this and suddenly you're talking about evaporating. That and turning it into you. Know a a piece of smart contract, for all intents and purposes right. You. Know how do you think about, the. Regulatory, apparatus, reacting. To that alright, cuz there's, nothing that prevents us from putting one arm Bend it's on the, same dynamic. And wiping, out the need for very. Well-paying, jobs in the Nevada regulatory. Environment. Well. I guess the important, point is peer-to-peer. Gambling's. Always been decriminalized, so, if you're having a poker game in your living room and that cops can't kick the door in and arrest. You and don't. Smart, smart. Contracts allow you to do peer-to-peer, gaming. Without having a central, a party and that's basically it I think it a funfair or you know a project.
Like This are a great example of how simple smart contracts actually are because, all the stuff, about you know smart contracts, and it sounds very high-tech, but, it's basically telling the computer here's you know $10, worth of cryptocurrency. If the roulette wheel stops, on double, zero you pay this guy if it doesn't stop in double zero you pay the other guy and that's, how simple smart contracts can be so. That's a wonderful. Articulation, of it, there. Is this element of if I get cheated by a casino, all right there's two ways that I can I can, play, this right, one. Is I can seek restitution all. Right and the second is I can you, know make sure that they're put out of business right from a reputational, standpoint that's very easy to do in in, the, blockchain world, all, right just be basically. Raise a flag say these guys are you. Know criminal, operators, or unfair, operators, and that's been proven and. It becomes extraordinarily tough, for them to to. Get back into business again right but. How do you go about, capturing. Restitution. Right I mean that's where the lawyers come back in that's a traditional, court system, etc how. Do you think about that development. In that dynamic who who, turns into the policeman, and the court, system in. The. Blockchain and crypto world, yes. I think one thing is it it depends on you. Know first of all it depends on whether you actually have an operator or not. Due. To the fact that smart contracts are run on a bunch of computers around the globe a lot, of these applications don't actually have a central operator that's you know really controlling anything, so, at that point the, kind of institutions. And argument from because. It's very different you, could say you know we could sue, the developer who wrote it I don't, think that quite makes sense it's kind of like suing. The author of a book because you had a really bad thought after you got to a certain chapter it's. It kind of goes against free speech in a sense code. Has, been protected, by as, under, free speech at the Supreme Court in the past. So. I think another. Another dynamic at play too is these, systems are very global. You. Know if you think of a regular casino is generally relegated, to a specific, location. Whether that's Nevada you know city, or. Whether it's you know they're usually physical, locations, all the online ones are usually one, country, so it's very easy to kind of figure out what court system any sort of problem falls under in, these blockchain based systems you know it's kind of like well who, has jurisdiction over, say aetherium I. Think, there's. Kind of you know two, possible answers of that right there's what, regulators, may think the answer is and there's, a second answer which is what practically, speaking who actually does I think, in the practical standpoint right, now it's really the community of developers miners. People who are using it and building on top of it a, practical. Example for what happened in a scenario like this is when. The dow smart contracts in 2016. Hacked, a bunch, people lost their money and the. Network basically voted, they, voted on whether to rollback, that transaction, and basically. Hard fork to it to universe where that person didn't see all the money or. Voted to let it continue and they voted to actually roll it back. That's. That's interesting for a couple reasons one is because they're, actually able to make an effective governance decision, in a relatively short period of time without, getting you know a bunch of regulators involved, for a huge, long court process on the, flip side you look at the mouth cox case no.
One Has gotten the money back still. And they actually have more than enough money to pay all the original deposits, and, so it's kind of an interesting comparison, between the. Old existing legal system and and kind, of how fast you can move from the tech side it's not to say there's not downsides, but it's. Pretty interesting i think yeah, the important point is there's provably. Fair gambling, odds so if. It, ever diverts from that people just stop using that site and they go to one that was provably, fair so it's, not like finding out oh the casinos been ripping people off for 12 years and there's, an enormous amount of you know back restitution. We have to make in, the unlikely. Event that, a online. Crypto. Casino is doing something wrong people knows that quickly and, darwinism. Go somewhere else well. The the other. Dynamic. Though that that. That. That creates, right, is. You. Would expect to see systems. Very rapidly, converge, so casinos. As you mentioned would be low-hanging fruit right so people would very rapidly, converge, to a fair. System right. Online, poker would, potentially, it, would be very difficult for example for an Indian casino in, central California, to, justify, why their video, poker machines, are not linked to the blockchain, alright. How. Do you think about that type of disruption and and. Again to. Your point how regulators, choose to react to it, yeah. So that the Sager point is kind of like people. Will start demanding to. See the same level of accountability for regular casinos yeah. I think that's something that will happen I think you know since they're kind of larger institutions. And. Generally, like the slot. Machines aren't super upgraded. Super frequently and because he knows if you walk around in Vegas they tend to look pretty old. But. I think people will start demanding it and over time I think we will start to see more transparency from, them I. Don't. Think there's really much of a downside, from. Anybody's. Perspective, because from, the regulator the enhanced transparency. Makes. Makes, basically, their job a lot easier from. The user the better they, actually know what's going on in the, casino if, you do it in a smart way it, shouldn't require them to do much extra. What. I would expect to see in that sort of scenario sort, to vote with their feet right. That ultimately, the. Odds are better in the online casinos, and people would attend. Indian. Casinos, less and they would either have to choose to shut or, to make the investments, to move themselves on to the blockchain but that's that is gonna take time and there. It does feel that there will be a. Regulatory. Pushback, and potentially, a variety. Of areas Manhattan. How, do you guys think about that when does the reaction, happen, alright I mean because that's that's, been one of the big questions, is when. Or the authority, is going to step in and prevent the rise of, alternatives. To fiat currencies, which allow them to collect taxes, or various other things, well I think your analog spot on people will vote with their feet because they're gonna want more transparency better. Service. And a much lower fee that's, basically we saw when we started routing voice over IP we. Used to have national monopolist. To control each country, 18t. Used to be sixteen percent of the market cap of the entire United States and now, nobody even thinks about the cost of. Kinect. The phone, network that's, basically we're gonna see gambling. Or the, other you know twenty five interesting use cases a crypto, is the. Cost for consumers is going to go way down and the quality is gonna go way up it's. A great analogy and it's it's one that I love because it takes me in the next direction which is where. Do you guys see huge. Investments, that are being made similar. To the AT&T analogy. And really you, know AT&T, established a price umbrella. Under. Which companies, like Global. Crossing or, the. WorldCom, had his own issues but you know created a price umbrella under which an incredible, amount of investments, level three would be a good example. Where. People made huge investments in, infrastructure, in. In. Physical. Construction, etc that. Ultimately, failed. To deliver on, the. Underlying promise, and this is particularly a problem in the debt markets. Because. The prices were so deflationary, and they just collapsed, all, right do. You guys see areas where people aren't making those assumptions today.
That. Is a negative case for. For. Where, you see investment occurring I'd, say that I don't see it as a negative case but all. The payments monopolies. And oligopolies have. Very high, rents. And there's. A lot of blockchain oriented, solutions, that will undercut them yeah I think you. Know maybe one area kind of and it's kind of a categorical statement but I think if you look at just. Businesses, in general they're. Not focused, enough. I'm. Kind of migrating, to, certain. Technologies particularly blockchain tech that. Can drop their costs of operation, down a lot instead. Of just kind of focused insane in the same place operating, with very high operating costs. -, a good example - examples, of this or like MoneyGram in Western Union, you. Look at them and you actually look at their balance sheet and then profit and loss statement they're. Actually not that men thinking in the sense that it's, just actually really expensive for them to operate because, they're so dang inefficient, and so, if you're a company like that instead. Of just continuing to funnel billions of dollars in cash into your operating expenditures, without, trying to make any part of your process more efficient you, should try to make it more efficient undercut. Your competitors and increase your margins and margins, all at the same time I think, it is possible for a company like that to do that in Pratt, I think it won't happen and they'll get displaced I think, that's probably biggest mistake I see in general well some money grant would be an interesting example right because the stocks down 92%. Or something from its peak it's gone from being a 16 billion dollar company does 700 million dollar company I think you, know that would would very clearly, be one but, if you think the, visas, of the worlds which, are networks, that. You. Know that control significant. Rent-seeking dynamics. In terms of payment processing. Very. Efficient, in terms. Of a number, of transactions. Relative, to an etherium or certainly. To a Bitcoin. And. Operating. At a low, cost, perhaps not as low as we can get in a crypto world you, know certainly efficient, and showing that as a sixty plus percent profit margin right I mean it really, really attractive. Businesses, if. Those, are going to give way that's. Gonna have a meaningful, impact on, how. People think about this space is that something that you see happening. Within. An investable, time horizon, or is this just a headwind that those, industries. Are going to those platform, companies are going to face I think. On, that one that specific, use case I think it is kind of more of a headwind it's, really hard to invest in that specific use case right now because it's so early but. I do agree that. It's. Also one of the most impactful, but it's probably gonna happen towards the end of the list of stuff and I. Think you look at the impacts of it you, know two to three percent for Visa MasterCard, looks, small on paper but, if you're say a retail business or a small business in the United States your margins are typically three to five percent anyway so. You can almost double your margins if, you can cut that few cut, that middleman out and. So I think over time we'll, start to see more and more of that fees, and MasterCard are interesting because they. Actually would benefit even using blockchain internally, because, they've pay so much to the banks that they work with they, actually don't take very much of the fee for themselves a lot of it goes to the banks so, you could get credit card fees in my opinion down to like 0.5%. If they. Just switch to using an underlying blockchain, alone you, know whether it goes lower than that if everyone switches, away from them or not I don't know you know 0.5% may be low enough people are okay with it. I think, that's something that those companies will migrate. To and do eventually it just makes a large since in, my opinion and. So what. Do you think is holding them back from making that change now because if they could get to 0.5% obviously. It'd be foolish not to do so there. Is an element as you're saying you, know one.
Of The first situations. Where redressing. Very, popular 90s phrase the the innovators, dilemma right where, them making that transition, would, actually be bad for their prior partners, the banks might. Help forestall. Some. Of the inroads, of a, blockchain and a crypto based solution, right a peer-to-peer, based, solution, well, what. Do you think is keeping them from doing that yes. I think you know that they've announced they're working on stuff internally, I think, the question is you know why is it not in production I think the reason for that is if. You, think about it what, they would have to do to, credibly kind of take the bank's away, would. Be to have something it's very very trusted, and even. Though people trust Visa MasterCard, I don't, actually think that they trust them enough to. Allow them to operate say, a private blockchain, where they process all these transactions. I think, the banks would just be so mad they were working, with them and so I think that for this to actually work they, probably would have to do something that was generally public open, to people to see and. Be able to audit it and so I think in that scenario the scalability, problems haven't been solved yet I think, once you get to that point you, can kind of try to credibly, tell the banks to go away because, if, your Visa and MasterCard you can say hey look this is publicly, auditable, like we don't need you to oversee, us anymore we had this public ledger that anyone can view, versus. That they said hey we're gonna do it all in-house then. Visa MasterCard, kind of lose the argument of hey, we had this huge consortium, of banks that audit us and make sure we're being honest and. I think Visa has been pretty forward-thinking. Giving, their you know their legacy. Business they have a deal with one of our portfolio, companies chain comm to build a private, blockchain, prototype. And but these things do take a decade. Right you know the hugely. Important. Financial systems, don't change overnight well, one of the dynamics that people often talk about within disruption, right it's is that it's nowhere. Near as exciting to work for Visa as, it is to work for a start-up right, and. The best talent, tends to converge. On, the, opportunities, and the innovation, as compared to working for the large institution. Is. That is. That a risk for the existing, institutions in your mind or am i overblowing that dynamic, you. Have to whisper they're just downstairs, it's their headquarters. No. I think you know they're they're all evaluating. When is it time to bring the, fee structure down that hasn't changed in 50 years and has a 60% operating, margin versus. You know when will the outsiders, you know make headway and I agree with Joey that. Retail. Processing, is one of the absolute last things that blockchain. Will do there's, massive, Network effects you, know visa master her do their job really, really well, and, so we haven't invested, in any credit, card processing type competitors, in the. Companies. We've invested in over six years and I think you, know that, will be one of the very last things that gets, disrupted so, we talked about the prediction market some things it effectively, could replace many many markets like OTC, swaps etc. And. Options, markets. And. I. Mean again just like reiterate, when you know something like augur there. Will be companies, I would, imagine that will become participants, that might have a particular, need because. Of an expiring contract. On, a legacy basis. To. Have a particular. Option that expires on. 11:35. On, the, level of the S&P on Thursday. You, know June 17. 2023. Right which. Is something. That I can go to Goldman Sachs and have them create for me today, but, it's not something that's easily available, in in. An exchange-traded, basis. Right so I am involving. A lot of lawyers I'm involving a lot of resources, I have to have an is the agreement there's, you know tremendous.
Costs And setting something like that up and so I would, expect there to be use cases like that to begin to emerge relatively. Soon, on a. Platform like augur, where. Else should we be looking for early disruption. Where. Have you guys identified areas. That you think are particularly important, yeah. I think so, I think we will. Actually. See, some stuff in payments ignore. The visa mastercard stuff not disrupting, them at this point but, more like there's a lot of businesses that actually can't, accept credit cards they, can't process them and they're just forced to accept cash today or they're forced to do these things, where. You relay. The money through like a Cayman Island company and they charge you 10 to 15% in credit card processing fees, this, can be anything from a gambling business to things, that are much much more you know considered legitimate respective, businesses like Airlines if you start up a new airline you. Actually can't process. Credit cards if your American Airlines yeah you can basically bully visa into into letting you use their network or, if you're a startup one it's, actually very difficult most card networks actually ban them and so, there's a huge swath of these businesses, that can't process payments, today I think, that's one area we actually will see the tech start, to be adopted in the short-term mid-term just, very quickly so it's a not. Knowing the particular dynamics, behind that is that effectively just a bad actor dynamic because the. Visa network, through its member banks bears, the cost of fraudulent activity so, somebody. That a that collected, large cash payments, in exchange, for services, to be rendered in the future that would be an area that would have high risk of fraud or yeah, exactly so it's it's anything that has high fraud risk which to visa and mastercard is basically you know greater than four, or five percent, and. The cool part about crypto, is if you're paying up front and it's, crypto and you can't reverse it the fraud risk basically doesn't really exist well you can reverse it you're saying so like you could say that. Wasn't a legitimate, transaction, they failed to deliver the service, well they you you can still have like in, traditional dispute, mechanisms, and stuff just, like you you have in a regular business model but, it's different in the sense that like someone, can't arbitrarily, charge you back so. Like for instance say I booked a flight on this new airline and I.
Was. Unhappy with it I have to go through customer support or something to get my money back am I paid in crypto versus. In the visa mastercard scenario, you, can just do a charge back and, that. Cost trickles through the system and causes. Them to pay more so. You're, saying from the business operations standpoint, right I would then have to dispute that with the member banks and with Visa, that, would incur costs, that would ultimately, impact. My bottom line yep, and if you have too many disputes they'll actually just shut you off. Which is kind of you know then, you're kind of out of luck and, are just forced to accept, cash, okay. So so, early, in the payments, effectively. Address in the bad actor, dynamic, and anything else. Almost. All countries a domestic, electronic, payment is pretty much free in pretty much real time but. Whenever you cross a border it gets really, slow and really expensive even. From say the u.s. to the UK to very sophisticated countries. Across. Forty five bucks do a wire you have no idea how many British pounds are gonna pop out the other end there's, four or five banks to take a little bite out of your trade. As it's moving and with. The, blockchain particularly. Bitcoin you can do. Cross-border, money movement that's, within. Tens of minutes and you know exactly how much money is gonna pop out the other end get, a mid-market FX rate and you normally pay say one point five percent fee. Rather than you know several percent, so. If you were a public investor, if you were sitting. In my seat or you were sitting in a retail investor seat how would you choose to invest in this space put. It all on oversight dock all on over so I'm just kidding. I I don't, really think there is a public markets trade right now, all. The blockchain, enable. The companies are still private so there, isn't yet, a big, public, strategy, it, did fit again that analogy, feels correct to me that we're earlier, in this process, than most people think we're, nowhere close to the Netscape IPO. Yeah. One. Thing to put perspective. - there's 30 protocols. That, are unicorn. Sized right you know there's a lot of big investable, things they're, just not listed, on the New York Stock Exchange, do. You see regulation, changing in that way we talked about a little bit about augur being an early ICO on the etherium platform, do.
You Think icos are coming to the public markets or to the equivalent, of the public markets where they will be. Accepted. In I, will be able to deposit it in my Schwab account. At. My opinion anyway is is you know probably not I think you probably will see sorts of things we're like you, can buy into an ICO on an alternative, transaction, facility or something but, I don't think we'll see them on like, nice your Nasdaq at, least not not anytime, soon. Just, because I think they're such weird assets they're kind of so idiosyncratic. And they're all very different and so unique that's. Really hard to kind of categorize them in any sort of box I think, the best any sort of regulatory body it's done so far is, the. Finiman regulators in Switzerland I've, kind of come up with three categories, they came up with you know equity currencies. And then things that are what, they consider to be utility, tokens which is kind of either, of those I, think. That's a decent approach but. Even there they're not trading on the public markets they're you know kind, of each. ICO is different, and unique, fast forward a decade maybe that changes but I think for the next foreseeable few years it's, probably gonna be each, on, its own so. When, you encounter, somebody who's a passionate, you, know Bitcoin, fanatic. How. Do you think about that is that's just somebody who's made money in the past and is now created and an argument. That they'll, make money in the future or, is that you. Know is is there something there that, the, rest of us are missing I. Think. This is a new asset class and in ten years every institutional. Investor will have a blockchain team, to, have a blockchain mass asset. Allocation, and, you. Know we're just kind of in that you know, interregnum. Period, between you, know early, adopters, and very institutional, investors and so. To. You, know use the internet analogy, on that right today. Everybody has a technology, team today everybody has a technology allocation. But, nobody has shares in globe.com. Isn't. If. You were to think about the vehicles that are out there today aetherium certainly, sounds like one that you're very interested, in. Certainly. Within the context, of maker, having, created, a stable reference point. Would. You be surprised if Bitcoin went to zero over, the next five years. I'd. Be extremely, surprised. If a basket, of cryptocurrencies. Was. Not worth a lot of money in five or ten years Bitcoin. Vs. Bitcoin cashiers aetherium just, lots of arguments on all different, parameters. And any. One of those could potentially, go to zero but, as a whole if you have a half a dozen of them it's. Very unlikely, and. That's very different five years ago I used to tell people you, could lose it all because, crypto. Could be a dumb idea, the, g7 could outlaw it something. Really bad could happen, given. That there's. Been a crypto application. Number one on the App Store an apple and you know 60 million people or have it I think it's reached escape velocity so, it's probably not going to zero zero, but. Any. Individual, one could theoretically. Well. You yeah, I'd say I'd. Be very surprised at Bitcoin itself lintons you're over the next five years where. I'd not be surprised about though is if Bitcoin. Has a percentage of the overall cryptocurrency, market, cap continued, to lose market share over the next five years and. You, mentioned g7, outlawing, and are there any regions, around the world where you're particularly concerned about the. Legal framework of the legal outfit outlook for crypto I'd, say that ninety-five percent of the countries are totally neutral they don't do anything to help crypto that and they don't do anything to hurt it there's, a few countries like. Luxembourg they're very progressive and in promoting crypto. And then, there's a few countries like. China that have national. Policies that you know might have their own self-interest, at stake but, 95. Percent of countries don't really. Care either way and so I mentioned, China early on you, just you brought it up how do you think about China and and Bitcoin. Right because if, I understand correctly roughly. 70 percent of the hashing is currently done and, mining. Is currently being done in China for Bitcoin, is, that and, any statistics, that I say wrong please correct me.
On That but. How. Do you how do you reconcile, that right cuz China has been one of the most restrictive and yet paradoxically. It, has one of the most active at. Least traditional, crypto. Space. Environments. Yeah, I think of the earlier comment, was you know an electricity. Consumption and there might be pockets. Of China where electricity's, near, zero cost, and that subsidizes. Mining. And then the demand for. Cryptocurrency. Saving. Vehicles. Is very strong in countries like China. That that have potentially, weak banking, systems and the citizens want to save China's. Been one of the largest importers of gold for decades because the citizens want to save and something other, than the banking system and that might be one. Of the rationales, but. I don't put. Myself out as an expert in Chinese policy. Joey. If I were to think about. What's. The coolest new. Technology. That you've seen emerge in this space in. The past six. Months. What. Would be your pick yes. Am i my only me this project called. Seller make, sure if people understand sellers, Cele, are it's not stellar it's, a project they came to us a few months ago and it's team about five PhDs, and. Who also worked at Google and YouTube and what, they're working on is a scalability, solution, for botching tech so. We talked about in this conversation how mostess definitely does ten transactions, per second there's. In this idea that's been kind of circulating, around the past three or four years called, payment channels or alternately called state channels and it's. A really neat idea for doing lots of transactions, off chain and then settling on chain once in a while the, problem with it though is that you. When. You're sending payments around yet they're about these payments through a network and. Up. Until now it's been an unsolved, computer science problem of how to do that so, the best solutions today typically. Require about 10x the, collateral you would you would need to do a simplify like a $5 payment requires, City dollars in collateral locked up that's, not kind of work these. Guys have come up with a optimal. Solution like theoretically. Optimal you can prove it with with mathematical, proofs they. Come up with the solution to this problem so. It's the most exciting thing I've seen in the past you know six months because. It actually gives me quite, a bit of confidence that we, will see those transactions through but numbers increase. Versus. If you ask about about that question two years ago I would, have been much more bearish on the space scaling. Fantastic. We. Did this roughly, a year ago I'd love. To do it again. You. Guys willing to sit back down and six months to a year and and catch, up on what's new in the crypto space what's going on Pantera and I'd. Love to follow up in particular, on how augur is developing, and we can talk through some of that in detail as we talk next time full yes, thank, you very much, thanks. Thanks. Dan. And Joey gave us some really fascinating, insights in terms of the cryptocurrency space. In. Particular, we get to look forward to the augur launch in July and that's going to be one of the exciting first icos, on the etherium space that goes live can't, wait to see how that develops I'm, also really interested in Dan's general, thought that the cryptocurrency space, is developing, that the probability. Of the overall, space turning out to be a di