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We have spent the last few weeks focused on Bitcoin, both the financial and regulatory perspectives, but I am often asked what other aspects of the industry intrigue me. The answer to that question is best articulated by sharing the four core theses that Jason Williams, Mark Yusko, and I formed when we first became interested in Bitcoin, blockchain, and cryptocurrencies.
Bitcoin is a better store of value — These types of assets are likely to become important given the macro environment we are operating in, especially with central banks addicted to cutting interest rates and printing money. At the beginning very few people will trust the cryptographic security and algorithmic monetary policy of Bitcoin, but demand will drastically increase as more people get comfortable with these advantageous features. Since Bitcoin is a fixed supply asset, increases in demand lead to USD price increases because of supply and demand economics.
ICOs are great for entrepreneurs, but not great opportunities for investors — This has been our most controversial thesis, but one that has served us well over time. Whenever an entrepreneur can raise non-dilutive capital (that doesn’t endanger the incentives involved in building the company), they should heavily consider it. However, as professional investors, we constantly evaluate risk (how low can it go?) and we are still not comfortable holding tokens that don’t act as equity, debt, or claims on cash flow.
Every stock, bond, currency, and commodity will be digitized/tokenized — Digital assets have been in existence for a long time, but only recently (with the solution to the double spend problem) have digital assets been able to act as financial assets. This breakthrough is essential for automation to reach mass adoption, because without digital financial assets, the machines can’t use the legacy electronic or analog stocks, bonds, currencies, and commodities.
Infrastructure provides the best risk/reward opportunity — This has been true throughout history. The scalability and economics of infrastructure or platform businesses open the door for 100X+ upside, which is what we are looking for as venture investors.
If you analyze these four theses, you will notice that numbers one and three are investment themes related to blockchain technology, while numbers two and four are merely frameworks for specific investment types to avoid or pursue. Since we have spent so much time on investment thesis number one (Bitcoin), I want to take the space below to talk more about number three.
The importance of every asset being tokenized is not immediately obvious to those outside the finance industry, but there are a few key advantages to settling stocks, bonds, currencies, and commodities on a blockchain-based system:
24/7/365 markets — The US stock market is closed more hours a week than it is open. This makes sense when the system participants are humans, but doesn’t make sense when the majority of participants are machines. As we move to a machine-based financial system (i.e. automation), expanding the hours of operations will be necessary. With that said, a blockchain doesn’t make decisions on hours of operations, but the crypto industry’s default state is “always on,” whereas the legacy system is not (related: crypto is much more global than the Western-centric legacy financial system).
T0 settlement times — The legacy financial system consists of multi-day settlement times. Take the Depository Trust & Clearing Corporation which settles quadrillions of dollars of asset transactions a year. The two-to-three day settlement times of this centralized service are equivalent to a fax machine before email. Every user thought the fax machine was much better than the previous options, but the forward-thinking users realized the instantaneous nature of email would ultimately disrupt the fax machine. T0 settlement times will eventually disrupt the multi-day settlement times of today.
Lower fees — When financial assets are digitized (not just CUSIP representations of the assets), we can automate transactions end-to-end. This is important because it removes middlemen and drastically reduces fees.
More security, transparency, and compliance — Blockchain technology creates trust between parties by introducing the ability to verify various aspects of the transaction that was previously reserved only for centralized authority verification. This transparency, along with the cryptographic security, is a drastic improvement over the legacy system, and one that will ultimately decrease fraud, money laundering, and other nefarious behavior.
Before I go further, it is important to call out that many people will disagree with the advantages that I just described. Some argue that tokenization is not important, because the underlying asset has not changed and you have merely changed the form factor — they are correct that you only changed the form factor, but we disagree on the importance of this. Others argue that tokenization is an unnecessary improvement because the current system works, which would be equivalent to someone saying “No one wants to shop at that store that has cheaper prices and faster checkout lines….the expensive, slow stores work just fine!”
Regardless of the detractions, the key takeaway is that every stock, bond, currency, and commodity will be digitized because that is what is necessary for full automation of the financial system.
To highlight the importance of this, I want to share two examples with you:
MYBank in China — A recent Bloomberg article perfectly summarized what Jack Ma has built: “Using real-time payments data and a risk-management system that analyzes more than 3,000 variables, Ma’s four-year-old MYbank has lent 2 trillion yuan ($290 billion) to nearly 16 million small companies. Borrowers apply with a few taps on a smartphone and receive cash almost instantly if they’re approved. The whole process takes three minutes and involves zero human bankers. The default rate so far: about 1%.”
Figure Technologies in Silicon Valley — Mike Cagney and others have built a blockchain-based company that is issuing Home Equity Lines of Credit (HELOCs). Applicants can receive up to $150,000, are told whether they are approved within 5 minutes of applying, and have the HELOC funded within 5 days. The company has gone from $0 to $85 million in loan originations per month in the first 18 months of existence. (note: we are investors in Figure).
Both of these companies understand the same thing — the automation of the legacy financial system is inevitable. They are currently approaching it in different ways (one with a blockchain and the other without one), but each of them is implementing software to replace functions that were previously done by humans.
We live in a world where 80% of the $50 trillion corporate bond industry is still traded over the phone. Yes, you read that right. $40 trillion of assets are traded over the phone. Digitizing and automating these transactions presents incredible opportunity.
But although debt is an obvious place to start, I anticipate that the entire financial system will ultimately be automated. So while I consistently talk about Bitcoin and a decentralized digital currency, it is important to remember that the same disruption happening to money will happen to stocks, bonds, and commodities.
There will be those that fight to keep control out of the hands of the machines, but that effort is likely to be futile. The machines are smarter, more disciplined decision-makers. It is just a matter of time before they are running the financial world.
The “Off The Chain” podcast has been downloaded in every country in the world, with more than 1,500,000 combined downloads. You can listen to the latest episode with Kyle Bass, Founder & CIO at Hayman Capital Management here: Click here for Off The Chain podcast
The IRS Is Tracking Down 10,000 Crypto Owners to Pay Back Taxes: The Internal Revenue Service is warning more than 10,000 holders of cryptocurrency that they may be subject to penalties for skirting taxes on their virtual investments. The IRS has begun sending letters to taxpayers who potentially failed to report income and pay taxes on cryptocurrency transactions, the agency said Friday. The IRS said it obtained the names of the taxpayers through “various ongoing IRS compliance efforts.” Read more.
Buffett Lunch Mystery Deepens as His Crypto Entrepreneur Date Apologizes: Chinese cryptocurrency entrepreneur Justin Sun, who cited health issues in postponing his charity lunch with Warren Buffett this week, issued a broad apology to just about everyone for touting the plan to dine with one of America’s richest people, noting it raised concerns among authorities. In a lengthy post on Weibo, Sun, who turns 29 this month, said he acted immaturely and set a bad example for the public while “excessively” promoting the event. “It has produced a lot of consequences that I completely did not expect,” he said, without elaborating on what they were. Read more.
Bitcoin-Rewards App Lolli Expands to 900 Retail Locations: Online shopping app Lolli is on a growth tear, expanding off the web and into 900 retail locations. Company CEO Alex Adelman announced the partnership with Albertson’s subsidiary Safeway in an interview with Yahoo! Finance on Thursday. The expansion enables users to order groceries, beauty products, or pharmacy items online at Safeway.com for pick-up. “We saw a demand from users to earn bitcoin for every day expenses like food and pharmacy,” said Adelman. Read more.
Huawei CEO Calls on China to Create a Rival to Facebook’s Libra Crypto: Telecommunications giant Huawei’s chief executive has said that the time is ripe for China’s government to preempt Facebook’s Libra. Speaking in an interview with Italian media outlet L’economia, CEO Ren Zhengfei remarked that China has the capability to pursue such an undertaking. He was asked a question about U.S. global hegemony and Facebook’s issuance of an international currency specifically. Ren was quoted as saying (according to a translation): “Even China is able to issue such currencies, why wait for Libra? The strength of a state is greater than that of an Internet company.” Read more.
Abra App to Restrict Services for US Users Over Regulatory Issues: Crypto investment app Abra has been forced to make changes services to U.S. customers over “regulatory uncertainty and restrictions” in the country. In a blog update on Thursday, the firm said the adjustments come “in an effort to continue to be compliant and cooperative with US regulations as they currently exist” So what does it mean for affected Abra users? The firm says: “Specifically, for Abra users in the United States is that we have to make some system modifications around our smart contract based synthetic assets. As a part of this effort we are migrating any synthetic assets to a native hosted wallet solution. On Abra, these are defined as anything other than Bitcoin, Ether, Litecoin and Bitcoin Cash.” Read more.
Kyle Bass is the Founder and Chief Investment Officer of Hayman Capital Management. He is known as one of the best macro investors in the world and I was thrilled to sit down with him to hear his thoughts on a variety of topics. Kyle didn’t disappoint and I highly recommend you listen to this wide-ranging conversation.
In this conversation, Kyle and I discuss:
The housing short trade that made him famous
What it was like to buy millions of dollars of nickels
What he believes is happening in Hong Kong today
What the structural issues that he sees in the global economy are
What Kyle's thoughts are on Bitcoin and the future
I really enjoyed this conversation with Kyle. Hopefully you enjoy it too.
Here are my tweets from yesterday:
Muneeb@muneebAfter Github’s ban on developers in certain countries a decentralized alternative is inevitable. Git protocol is already decentralized. All we need is decentralized login, storage, and social graph on top.
Interested in crypto research? Look no further. The premier research firm in the space, Delphi Digital, has two subscription offerings for individuals and institutions alike. Take a look at their Bitcoin and Ethereum reports to get a taste of their analysis. [Click here]
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Nothing in this email is intended to serve as financial advice. Do your own research.