The Deflationary Impacts of Bitcoin (w/ Will Peets)


TYLER NEVILLE: Here we are with Will Peets,
CIO of Passport Digital Holdings. I’m really excited about this one, because
we get to talk a little bit of macro. So, why don’t we start out with the Passport
view of the macro lay of the world right now? WILL PEETS: Sure. I guess there’s probably a couple areas, there’s
the broader, traditional macro landscape, and then maybe that that pertains to crypto. I think what got us attracted to- or initially
got our attention to digital asset space were a few themes that we were working on at Passport,
one of which is the concentration of human capital, that’s part of my Passport space
here in San Francisco. But we saw a lot of really talented people
moving into the digital asset space, whether that’s working on a protocol or a company
that’s associated with the ecosystem. We’ve also been very focused on the broader
deflationary impacts of technology. And we think cryptocurrencies and broader
distributed ledger technology will have that same deflationary impact as you see with lots
of other technologies. I think, also, just what’s going on in the
macro environment as it relates to indebtedness and amount of debt that’s trading out and
negative interest rates, it really starts to make you think about just the current monetary
system, and if that’s sustainable. And there’s a lot of association with what
you’re seeing there, and in digital assets as well. So, those are all themes thatTYLER NEVILLE:
Yeah, and I know John’s main one is invest in things that haven’t happened before. Right? WILL PEETS: Yeah, yeah, definitely. We’ve always been, I would describe it as
the macro thematic firm, focusing on big secular changes. Clearly, technological innovation over the
last number of years is a big secular change. Moving into a more deflationary environment,
I think, is also a secular change. And there’s this recognition by John, by the
firm that oftentimes, the market’s very poor at discounting events that haven’t happened
before. And so, I think as it relates to this space,
large portion of the market’s not paying attention to it. A large portion of the market doesn’t realize
the implications for what this technology will have and furthermore, doesn’t realize
how fast the change could happen. TYLER NEVILLE: So, in terms of deflationary
themes, we’re seeing yields dropping to their lows right now. And are you guys seeing a transfer from the
public equity markets to crypto, is that what you’re anticipating? WILL PEETS: Potentially. I think there’s a few different layers of
that. There’s things like the sharing economy, which
is allow for a more efficient utilization of resources and thus, you don’t have to produce
as more, or the cost of those resources goes down. So, you can see that in Uber and Airbnb, but
economic models enable the sharing of a lot of the resources more efficiently, whether
that’s compute or storage, so that can have a deflationary impact on just the cost of
things. Clearly, something like Bitcoin is deflationary
by definition, in the sense that there’s a finite amount. And then, yeah, as it relates to commerce
or money transfer or remittance, clearly, there’s large implications for any intermediary
as it relates to digital assets. So, if you’re a bank, and you’re charging
fees for remittance, or you just sending money with one another, stripping those fees out,
because you have this trustless peer to peer ability to send value, that’s another form
of deflation. So, you see it on a lot of different levels. We we’ve looked at two different themes. And not to get too off track, but decentralized
finance and what we call better finance, or better fi, and that’s the application of the
technology to the existing financial system. And you’re seeing a security issuance, tokenization
of real assets, trading of those assets, custody- all those things can potentially be done in
a more efficient manner with distributed ledger technology. And again, that shrinks the margins of the
likes of a State Street or Northern Trust, or these traditional banks and incumbents,
again, which is all deflationary. So, from all the different applications and
use cases, we see this technology is having potentially deflationary impacts. TYLER NEVILLE: So, let’s talk about custody
now that you went on to it. So, coming from big public hedge fund that
you guys have run for years and years, the crypto space is a little bit untouched in
terms of custody, are you guys- was your decision to get into crypto basically because that
custodian feel is growing in the ecosystem is more secure? WILL PEETS: Our decision to enter this space
was really first, the investment case for it, the investment thesis. I think, second is that we wanted to be an
early mover and bridge institutional experience with what’s currently a nascent asset class. And so, bring that expertise to this asset
class and getting to be the bridge for maybe some more traditional investors to make an
early investment. Clearly, there’s opportunity in being a first
mover. Certainly, the coming online of various custodial
solutions exchanges makes it easier for us to do that, reduces some of the friction. So, that’s part of the equation, and it’s
something that we’ve had to evaluate as we’ve got into this space. But yeah, if you believe in whether that’s
the potential for the technology and that institutional capital will come, certainly,
custody is a requisite for that capital to show up. And so, we wanted to, of course, position
ourselves before what we think this asset class will become much bigger. It is a little bit comical, in the sense that
custody is unethical to the purpose of the technology, like you and I can have self-sovereignty
over our assets, seemed capital peer to peer, but know and trust themselves enough to hold
your own keys and not have the ability to call the bank and say, hey, I forgot my password. So, it’s ironic from that perspective, but
I think quite predictable and sensible if you really want to have the more traditional
investors and real adoption of the technology, the capital to this space. TYLER NEVILLE: Are you guys seeing an easier
time raising capital from the more institutional capital players? WILL PEETS: What I will say is that the dialogue
over the last year has changed quite a bit. I think we’ve spent a lot of time educating
the broader institutional investor base. TYLER NEVILLE: Endowments, pensions. WILL PEETS: Exactly. And then there’s just a very notable difference
year over year in those discussions. We’ve had a lot of groups that have come back
to us, a lot of groups that have assigned individual or a team to do a deeper dive on
the space. And so, again, the awareness, the knowledge,
the understanding is materially higher than even just a year ago. I think it’s becoming too big to ignore. And certainly, with Yale and a few other pension
funds or endowments entering this space, that’s eased. It’s made it easier for others to reduce some
of that career risk and headline risk of being the first mover into, again, a very new asset
class where I’d say majority investing public is misinformed or underinformed at a minimum. So, yes, I think that’s progressing. I think we would have expected it would have
happened more quickly. But it’s directionally going in the right
way. TYLER NEVILLE: It’s so funny. It’s like back in 2017, I think that was the
big theme, institution want is getting into it. But everyone moves a little bit slower than
that. And now, it’s actually coming in, and it’s
like, no one cares. They’re starting to, butWILL PEETS: Yeah,
and I think we’ve still just at the tip of the iceberg of actual capital coming in. There’s been a lot of announcements over the
last year about the likes of Fidelity and Bakkt and now, you have TD Ameritrade and
Etrade offering. But those offerings are still in- they’re
just onboarding initial clients or they’re only offering it to a subset of institutional
clients. So, you really haven’t seen the floodgates
open. But you are seeing the groundwork as it relates
to infrastructure being laid. And these people are investing a lot of capital,
or these companies are investing a lot of capital to make these offerings available. TYLER NEVILLE: Do you ever ask them a question
like you’re investing in a bond that’s yield 7% from an unprofitable oil shale company,
verse a generational asymmetric upside. Does that conversation happen behind those
doors- or? WILL PEETS: I think that’s one of the difficulties
with making the investment case for the asset class is what are the applications? And I think there’s more applications that
people are starting understand, but even if you appreciate those, and you appreciate that
Gen Z is natively digital, and they’re going to grow into the world where they had an iPhone
and Day One and they’re just accustomed to digital payments. And if you buy all that, then it comes to
how do you value these different networks? And I think that’s a big sticking point for
a lot of people where I’d have to make any case to the investment committee as to why
we should have a 50 basis points allocation. TYLER NEVILLE: How do you value them? Just in Passport size? WILL PEETS: Yeah, I think it’s difficult. I think something like Bitcoin has potentially
many different applications. And each of those applications, you could
create a valuation model for, there’s these different narratives. So, there’s the digital gold narrative and
this store of value that somewhere to gold is independent of the broader financial system. And so, you could look at, well, what is the
valuation ascribed to Bitcoin if it’s a certain proportion of gold or takes that role? You’re seeing adoption in a lot of countries
that suffer from economic instability and hyperinflation. So, Venezuela, Argentina, Zimbabwe, South
Africa are all countries where you’re seeing early adoption. And so, you can start thinking about it from
the perspective of if Bitcoin replaces the monetary base, or the M1 in Venezuela, what
does that mean for the value of Bitcoin? I think right now, if you were to replace,
say, the top five countries by hyperinflation, it’s roughly 12,000 per BTC, just as a point
of reference. But then there’s, again, a lot of applications
of Bitcoin that people- I don’t discuss much from an evaluation perspective. So, an example. Microsoft just announced this digital identity
initiative and as part of that, I think they’ve announced a while ago, they just recently
announced that as part of that, they’re going to anchor this data set down to the Bitcoin
blockchain. So, you’re effectively just using the Bitcoin
ledger as this immutable data store or you’re taking a hash of this, your network, and you’re
writing that to the Bitcoin blockchain such that at any point in the future, I can look
back, check that hash and see if anything has changed in this database. So, in that case, again, you want to use it
for the utility of being an immutable ledger, you don’t really care about the value of Bitcoin,
they’re being used as a store of value or money transfer. But you do pay a fee to write a record to
the Bitcoin ledger. And there’s a lot of companies whether it’s
Factum, this company based in Barbados called Bit that use Bitcoin in a similar fashion. And you’d have this third party, immutable
ledger is a very powerful concept. And so, you use a little bit of Bitcoin to
pay transaction fee to use that utility. And if you get a lot of adoption there, then
that’s its own valuation metric that you can use. And then you have lightning network, which
is enabling payments on top of Bitcoin. And so, that could have a model that’s maybe
more comparable to a Visa or some other payments network. TYLER NEVILLE: It’s fascinating. Yeah. WILL PEETS: Depends on how it’s used, I think
it there’s lots of different narratives of what’s the value of Bitcoin and it’s varied
a lot over the last 10 years, I think it’ll continue to evolve. TYLER NEVILLE: So, how do you think about
your portfolio specifically? And are you investing in tokens? Are you investing in equity of companies? How does Passport do that? WILL PEETS: Yeah, so the strategies that we
run, first, focus more on token investments, whether it’s liquid or just early stage blockchain
companies. Going through last year, I think we’ve created-
our view, there’s a much clearer bifurcation between liquid in venture and so want to have
a more clear distinction between those strategies. And this is, again, tangent of what I view
the space as almost probably venture even though much of it trades just becauseTYLER
NEVILLE: Liquid venture. WILL PEETS: Liquid venture. But there’s this notion that if something
trades, it means it’s like a mature technology, like a stock is a private company, it is an
IPO. And that is an acknowledgement that it’s more
mature, has revenues, what have you, debt of larger companies also trades as much more
liquid. And so, I think there’s a little bit of a
misnomer on or misconception on the maturity of the technology in part because it trades
and not just because its native characteristic of technology. It allows you to transfer value peer to peer. And so, as a result, you have to exchange
these tokens and move them around. Where in reality, again, like most of the
technology is still very, very early even for Bitcoin, which has been around the longest,
there’s still a lot of new applications that are being discovered today or envisioned today. TYLER NEVILLE: And you’ve even said we might
even be in the first half an inning of an identity game, is that correct? WILL PEETS: Yeah, I definitely think we’re
still very, very early. People try to make analogues to development
of the internet and the overall internet cycle. I think that’s challenging. But yeah, we’re still building base protocols
for which other applications will be built on top of. One of the things that we’re very focused
on right now is investing in what I call financial primitives or these, again, very core base
building blocks that will enable additional innovation and development. And so, because you’re still investing in
the equivalent of HTTPS, or FTP, that’s where we are. And then, of course, as we’ve seen with the
internet, a lot of things are possible once these protocols are in place, but we’re still
determining how many base protocols do we need? And what are the appropriate ones to use for
certain use cases, et cetera? TYLER NEVILLE: And is the ecosystem- I think
there’s platforms like Tagomi now offer more custodial or institutional order management
systems. How is that evolving? WILL PEETS: Yes, there’s a lot of different
platforms that are coming to market that are anything from order management to portfolio
management systems to order execution. A lot of these groups are trying to pull liquidity
and provide best execution. So, Tagomi, SFOX, FalconX, Routefire- there’s
a number of different groups out there that are offering some version of those types of
services. I guess, as it relates to our own strategies,
what we’re most focused on his best execution and pulled liquidity. And so, whatever makes that the most seamless,
and then you can trade the API or programmatically, that’s a value to us. TYLER NEVILLE: Is liquidity there for big
blocks? And who are the main providers of that in
this space? WILL PEETS: Yeah. Certainly, there’s a lot of OTC desks that
provide liquidity for bigger blocks. In terms of the biggest players, certainly,
Cumberland, Genesis and Circle are probably the first three that come to mind in the US
that are large players there. You’re seeing more traditional groups like
Cisco HANA participate in the digital asset space as well. So, that’s a growing universe for the first
three I mentioned are some of the larger OTC desk that have been around for a few years
now, few years plus. But then, if you want to be able to do that
in trade programmatically, most of the OTC desks are still a Skype messenger or phone
call type platform. So, they are moving to be more electronic
and being able to do bigger size electronically. So, we’re in this transition period right
now, where even six, 12 months ago, that would have been difficult to do. TYLER NEVILLE: Stretching from liquidity to
more institutional, are you seeing like, how big is players like Fidelity? Because you see a name like Fidelity is a
trillion dollars in assets get into this space. Are we at this turning point where I think
you said, these types of people are going to be forced to invest in crypto eventually,
or have an allocation towards it? WILL PEETS: Well, I think longer term, there
are probably a lot of traditional investors who will enter this space. Groups like Fidelity have invested a notice
amount of capital creating the on ramps and being able to facilitate what they also perceive
as future demand for more traditional investors. So, I think it’s a great evolution, it’s great
to see someone by the likes of Fidelity enter this space. I think the other importance of them is that-
so if you look at startups within the digital asset space, Coinbase is amongst the largest,
most well-capitalized and name brand the people recognize, but they still are a Silicon Valley
startup company. And that’s very different than a Wall Street
firm that’s had 80 plus years. I don’t know how long Fidelity has been around,
but 80, 90 years of existence, and a really large balance sheet. And so, they’re already have pipes and plumbing
with large institutional investors, they have a balance sheet, they have name recognition
and trust. And so, that’s a game changing development
for this space. And again, that’s not a knock on Coinbase,
or other well-established players, but it is different, like they are bringing, again,
that Wall Street pedigree and familiarity. And so, it’s interesting to see how that plays
out, but I think, again, it’s a net positive for the entire ecosystem to have the likes
of a Fidelity and the likes of Bakkt whose parent is ICE enter this space, because it’s
clearly, they’re taking it seriously if they’re investing these types of dollars into it. TYLER NEVILLE: Are people using derivatives
at all yet? Or is that still too early to futures derivatives? WILL PEETS: So, it’s got two sides to that. There’s derivatives offered on exchanges like
BitMax, but they’re offshore exchanges, largely unregulated. And so, there’s a lot of derivatives volume
happening there. You are now seeing the more derivative products
on US regulated exchanges. So, again, there’s a whole host of players,
whether it’s Seed CX or Aeros EX, that are again, registered license and are looking
to launch derivative exchanges. I would assume that you’re going to see options
on futures contracts that are already listed on the CME at some point. So, that’s coming. There’s not really a lot of volume lease on
the regulated exchange side yet for derivatives. Ledger X was actually one of the earlier US
regulated participants that offers options. And, yeah, just for size, liquidity is still
a limiting factor. But given all the different players that are
entering that space, that’s going to come as well. And that’ll help the market as a whole as
it relates to price discovery and just efficiency and risk management and number of other things,
because right now, it’s just very difficult to hedge a portfolio in part because things
have to be fully collateralized or simply futures at 50% initial margin and so it’s
just it’s capital inefficient to quickly hedge. Custody also creates a problem like that,
because your prime broker doesn’t have- well, they don’t have the key, the private keys
to your assets, so they can’t pull back collateral if something moves against you on a futures
position as an example. So, all those things that we take for granted
in traditional and public markets are going to being rebuilt from the ground up. TYLER NEVILLE: So, fast forward five years-
it’s a tough question. But where do you see crypto? Where do you see public markets? WILL PEETS: Yeah. So crypto, I think, again, I think it’ll evolve
and have broad ramifications much faster than people expect. There’s a hedge fund manager that’s making
a cheeky comment that the internet would have been developed much faster had you had the
internet. If you had GitHub and all these tools that
enable collaboration, it makes it much easier to develop and evolve technology. And so, I think we’re starting in a point
like Bitcoin was released in the age of internet, where there’s already over a billion people
who had access to the internet. When Ethereum was released, you’re at close
to 3 billion people who have access to the internet. I mentioned, again, Gen Z, this digitally
native generation where everything that they’ve ever known is going to be something on their
smartphone. And so, just the adoption, the innovation
and the development can happen quite quickly. So, I think you’re going to see a huge portion
of total payments, for example, being done via messenger apps and the cryptocurrencies
that are being integrated with those apps, whether that’s Telegram or what Facebook’s
working on now. I think there’s a lot of these decentralized
finance platforms that allow for peer to peer lending, most of that right now is going to
be overcollateralized loans that are collateralized by crypto that enable you to buy more crypto
unleveraged or receive some liquidity without a taxable event. But as you enable different types of collateral,
as you enable loans, they don’t have to be overcollateralized, but are undercollateralized
as institutional loans are today. You’re just going to see an explosion in that
market. And so, I would say, the next five years,
the volume on those platforms will far exceed any of the peer to peer platforms that you
see today, whether that’s Lending Club or Prosper or patch of land or that type of business. And then as it relates to public markets-
I don’t know if your question was where I see as public markets going, or how I see
this technology impacting public markets? TYLER NEVILLE: Yeah. Just the latter. WILL PEETS: On the latter, again, I think
there’s a company here in San Francisco called Figure and they have a blockchain called Provenance,
but it’s effectively a permission blockchain for the issuance and trading of securities. So, they’re focused on home equity loan origination
first and those chains are issued, excuse me, securities are issued on chain and they’re
traded, held with a custodian there, securitization will happen on chain. And all these things that are done now in
the traditional loan market are being done on this potentially much more efficient permission
blockchain. And so, again, as it goes to the deflationary
impact of technology that we talked about earlier, that’s Northern Trust, and State
Street and all these incumbents that somehow participate in the ecosystem, and this technology
has the potential to greatly create a lot of inefficiency or excuse me, efficiencies
in that system. I think that’s just one example of many where
I think you’re going to see a big impact on public markets. And that’s either companies will adopt the
technology, or they’ll be just remediated or disrupted in some fashion. And then I think what’s going on in just the
broader global macro space is quite interesting as well. The existing financial system hasn’t been
around that long. And like this notion of QE in holding rates
low, we’re going to negative rates is not always just a big experiment. Because now, we have a lot of historic precedent
to see how thatTYLER NEVILLE: 11 trillion in negative yielding bonds. WILL PEETS: Right, right. TYLER NEVILLE: How does that work? WILL PEETS: And so, it’s not to say that human
ingenuity, and central bankers won’t figure out solutions for global indebtedness and
these other things, but you can also paint a picture where this existing monetary policy
doesn’t work out so well, in which case, I actually think there’s a lot of applications. That can be another catalyst for the adoption
of some of those technology. And again, you’re already seeing that in these
countries that have hyperinflation, or just inept central banks and a lot of volatility
in their native currencies. So, yeah, again, that’s- who knows? But to your original point on do people invest
on this as this asymmetric hedge? I think there is an element, if you have that
dire outlook on the macroeconomy for any assortment of reasons. TYLER NEVILLE: One of the narratives, valuations. WILL PEETS: Yeah, exactly. That could potentially play into that. And that’s actually really a catalyst for
the whole space in some ways, like Bitcoin’s being adopted in the likes of Venezuela for
that use case. TYLER NEVILLE: Or China. WILL PEETS: Or China. Yeah, I guess that’s another theme that I
would be bullish on is like regulatory arbitrage. You’re trying to control capital flows or
cryptocurrencies. A solution around that potentially. But yeah, Bitcoin’s been adopted in part because
of this macro landscape and how it’s impacting some of these EM countries. But Bitcoin has its own limitations, because
it’s volatile. And so, you’re neither seeing a handful of
stablecoins and a lot of other projects that are innovating on Bitcoin in some respects
which potentially are a better solution for some of these macro problems. TYLER NEVILLE: So, I love the way you think
about things at Passport. It’s always very logical and makes me super
bullish on what you guys are thinking so really appreciate it, I think it was awesome. WILL PEETS: Thanks, Tyler. TYLER NEVILLE: Really great conversation with
Will. Passport is the best in the business when
talking macro and it’s really fascinating to see how their logic winds from public equity
markets into the cryptocurrency markets and it’s really going to be interesting to see
where things are in a couple of years because I’d imagine they’re at the top of the pack.

15 thoughts on “The Deflationary Impacts of Bitcoin (w/ Will Peets)”

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  2. The total cost of the electricity of mining Bitcoins is a function of the total value stored in Bitcoin, ie, the price of Bitcoin. This effectively puts an upper limit on the total value of Bitcoin or other such cryptos.

  3. It is important to note, however, that one prominent figure within the Bitcoin mining industry is now noting that miners should prepare for the possibility that the halving will not propel BTC’s price higher.The quickest way to accumulate is by buying but the safest and quickest way to accumulate on a budget which is where most of us stand is by trading. I grew my 6 BTC by day-trading from 1.7 BTC because I was smart enough to use the services of a professional. Mr Benjamin Jackson trading (( [email protected] com & TELEGRAM @BenjaminJackson )) is a trader who provides trade patterns and signals for other traders.

  4. Uber bringing the costs down? Are you sure? All they're doing is wasting resources as they're spending cheap credit without earning a profit.

  5. Using bit coin as a encryption tool would be great for things like money transfers, messages and documents. But actually throwing your assets into it for long term growth???

  6. The price of Bitcoin drastically decreased in 2018 when the currency rapidly declined in value as opposed to previous years. But despite this, the price of BTC looked to gain positive momentum with a steady rise. Now, in 2019 and almost a year later, Bitcoin has proven its fierce value in the industry, and investor faith seems to be restored in the currency,But should you invest in Bitcoin, still? should your investments go in 2020? buy and hodl or buy and trade, for me i advice newbies to multiply the little they have with Paulo's strategy, i was able to make 7bt with I.5bt in 3 weeks with the same strategy, You can reach him on telegram Paulophilips440 orWhatsApp+1(919) 561-2988—

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