Bitcoin’s price is a lie, says Morgan Creek Capital chief

Transcript

Angie Lau: Is it too late to buy Bitcoin? How is it reacting to TradFi events and the metaverse? What’s next? 

Welcome to Word on the Block, the series that takes a deeper dive into blockchain and all the emerging technologies that shape our world at the intersection of business, politics and economy. It’s what we cover right here on Forkast.News. I’m Editor-in-Chief, Angie Lau.

Well, inflation is knocking on the doors of the global economy. The U.S. Consumer Price Index rose by the fastest annual pace in nearly 40 years. Now, Bitcoin has been given the title of ‘safe haven asset’ or ‘hedge against inflation.’ But it’s kind of been acting strange lately, and its prices have been reacting to traditional market events, seemingly. So, has Bitcoin grown too fast to live up to its safe-haven standards? How will its 21 million total supply measure up against the reality of inflation? Twenty-one million, or as my next guest’s Twitter profile measures, 2.1 quadrillion Satoshis. He’s the founder, CEO and CIO of US$2 billion hedge fund Morgan Creek Capital, co-founder and partner at Morgan Creek Digital. He’s a Bitcoin bull — Mark Yusko. Mark, welcome to the show. It’s great to have you.

Mark Yusko: It’s great to be with you, and I appreciate the kind introduction — and really excited to talk to you today, given all that’s going on in the crypto world.

Lau: Yeah, what is going on? I blink and it’s almost as if everything that we thought was standard, was the trend, was the trajectory, gets flipped upside down. But that is our space, Mark. What’s going on right now in your view?

Yusko: I think we have a little challenge between the cyclical and the secular, and all the things you mentioned in the opening are fundamentally true. Secularly, we’re in a secular trend of movement from one safe-haven asset — gold — to a new safe-haven asset — Bitcoin. And that doesn’t mean gold goes away. It actually does have some properties like physical coinage and jewelry and things like that, that will always be there, but for the monetary uses of gold, I really do think Bitcoin is better.

Part of it is just lighter weight. All the gold in the world takes two Olympic-size swimming pools. It’s really heavy. All the Bitcoin in the world fits right here (Yusko gestures). I don’t actually have all the Bitcoin in the world on that phone. I don’t keep any on my phone because I’ve been SIM-swapped. But the reality is that it’s very divisible — I said down to 2.1 quadrillion Satoshis. And you take a bar of gold… you and I want to split it… it’s just really hard to get it exactly cut in half. So I think that’s the secular move.

But then we have the cyclical. And the cyclical follows this four-year cycle around the halving events. And one of the things that I really love about (pseudonymous Bitcoin founder) Satoshi (Nakamoto), whoever he or she… they… actually are, is just the elegance of their design. Everything from the 21 million cap to the way mining works to secure the network, the way it’s designed to actually prevent a 51% attack from ever happening because the moment you stole something, it would immediately go to zero and you’d have no value of what you spend all the money to steal. Just so much elegance. 

But the halving cycle might take the cake. So, think about it. If you’re a miner — which basically means you just run a data center to secure the Bitcoin blockchain and you buy computers, plug them in, rent that computing power to an algorithm and get paid block rewards to do so — if you think about that, if the block reward gets cut in half, your input cost — electricity — doesn’t change. Either you’re going to go out of business or the price needs to rise to equilibrate the system, and so there’s this built-in price increase over the long term.

Well, what price movement does is it attracts us hunter-gatherers. Now this is a male-female thing. So, like, if my wife says, ‘Go find the ketchup,’ I open the refrigerator door, there’s no ketchup. I can’t see it because it’s not moving. If it were moving. I could see it. But that’s just the nature of us hunter-gatherers. And so price movement tends to bring speculators, and the speculators then drive the price higher. And then we get these periods where it can be above fair value (or) below fair value. 

And I think what we’re seeing now is it should be no surprise to anyone that over the past year, Bitcoin is up a lot — well over 100% — because the central banks around the world printed too much money. The U.S. central bank, the Fed, printed — I love the stat — 40% of all the dollars in the history of the republic. Two-hundred-and-fifty-five years came into being in the last 18 months, so it shouldn’t be shocking that the price of an asset denominated in dollars rose.

And this is the part that I think a lot of people forget. One Bitcoin is one Bitcoin, and it will always be one Bitcoin. But you and I don’t buy Bitcoin in Bitcoin. We buy it in something else — we buy it in dollars, we buy it in yen, we buy it in euros. If we look at the price of Bitcoin in dollars, it’s materially higher today than it was at the beginning of the year. It’s materially higher than it was a year ago, or two years ago, or 10 years ago, or at the inception. That’s not necessarily because Bitcoin got better. It did become more broadly adopted, but more importantly, the dollar continues to get worse, or the yen continues to get worse, or the euro continues to get worse. That global race to the bottom is the secular trend that’s going to push prices higher, along with these halving cycles.

This is a long answer to your simple question, but it’s a really insightful question. The reason we’re seeing this cyclical pressure, I believe, is because of the release of the futures-based ETF. So all these companies bid to start an ETF and you could have a spot ETF, or is it actually increased demand for Bitcoin itself? They’re not going to prove that anytime soon. But they did approve … a futures-based ETF. A futures-based ETF doesn’t actually change the demand for Bitcoin. All it does is allow me to create a paper version of Bitcoin, which is completely independent of the 21 million supply — well, 19 million today, 21 million someday. And that contract then allows someone to go short on the other side.

So we’ve seen this movie before. January 2017, Bitcoin peaked right around US$20,000 on December 18. That was the day the (Chicago Mercantile Exchange) launched Bitcoin futures. Not shockingly, a bunch of people started shorting. Prices went down a lot over the next year-and-a-half, the bear part of the cycle. This time, within days of the peak at US$68,000… a couple of days before, was the issuance of (ProShares Bitcoin Strategy ETF) BITO. And I believe a bunch of banks and others have gotten short on the other side, and they’re pushing the price down a little bit. So that’s cyclical versus secular.

Lau: So they’re pushing the price down a little bit right now, and that’s the U.S. version of that play — the futures Bitcoin ETF. You take a look more globally. You even look to the neighbor (Canada), to the north, and you have Bitcoin ETFs that are in-market. You have Bitcoin ETFs and other financial instruments that are popping up around the world. How does this bring in more of that network effect we always talk about, that liquidity that’s underpinning some of the rise that we’re seeing in the activity, especially this year.

Yusko: Again, really important question, Angie. If you think about Switzerland, for example. A company that we actually are investors in, 21 Shares, they have actual spot-based (Bitcoin) ETFs. And so that’s increasing demand for Bitcoin as money flows into that ETF. Canada has that, as well. There’s one about to launch in Australia. That’s positive for the ecosystem — that increases demand for physical Bitcoin, increases participation. It increases that network effect and it gives us rise to that Metcalfe’s Law parabolic curve that we’ve all seen, where the value of the network rises proportionally to the square of the number of participants in the network.

But it’s such a globalized world — again, American exceptionalism: we think we drive everything in the world and Bitcoin, but we’re really, like, 25% of the market — and there’s still activity in all these big markets around the world, including China. And so, ‘Oh, but China banned Bitcoin.’ Well, yes and no. I mean, yes, they did. But there’s still some very large exchanges that operate (under) Chinese jurisdiction. Actually, they got kicked out of China’s jurisdictions, but they were started by Chinese nationals, as this global footprint. And some of them allow investors to take imprudent amounts of leverage — I believe it’s imprudent — and a week ago, Saturday, we saw that. That was the day after the options expiration on Friday. Futures contracts were rolling and we had that three- or four-hour, 20% drop on late Saturday night or early Sunday morning.

Lau: And for those watching at some point in the future, we’re speaking on December 13, 2021. 

Yusko: So it was that … roll of the futures and option expiration in November. So what happened here is interesting in that there are a whole bunch of people who had accounts that were heavily levered, and priced them down a little bit, and they got a margin call, couldn’t make it, got liquidated. And over a million accounts got liquidated. And I think that’s a countervailing problem to the long-term trend that we all want to embrace. Bitcoin, to me, is all about the next billion. We have 200 million-ish people worldwide that use it and believe in it, and we need the next billion to come in and use it.

Now that’s only going to happen when the (user experience) is improved, when the technology itself becomes kind of invisible, like you and I are using voice-over-internet protocol. And 20 years ago, voice-over-internet protocol was a big deal. The telecom companies did not want voice-over-internet protocol because they really liked the fact that if I wanted to call you in Hong Kong, I had to pay US$3 a minute to have a chat and, voice-over-IP, it’s free. So they didn’t like that. But today it’s invisible. We use it every day, no problem.

‘Value-over-internet protocol’ — way bigger, way more important than voice-over-internet protocol. But it disrupts even more powerful people — the banks. The banks do not want value over internet protocol. They do not want a future where (like) in the old days, you and I want to exchange value. I have a bank account, you have a bank account. I want to send you some money. I send it using a wire. Now here’s the problem, because it crosses international borders. The Rothschilds, in their infinite wisdom, wrote a treaty a couple hundred years ago that says they, through two banks that they own a big piece of, have to get paid. Every dollar across international borders, they get paid. A good deal. So, you might get 70 cents on the dollar, if I send it Western Union. You might get 90 cents on the dollar if I sent it through a bank SWIFT transfer. But there’s friction. Now, that’s the old days. If I sent you a Bitcoin, it could go for free, but you have to have a Bitcoin account and I have a Bitcoin wallet.

Lau: Right now, the transaction fees… it’s not free. That’s the problem right there. But that is the problem, isn’t it? So, it’s a store of value. Obviously that’s the play. A lot of hedge fund activities are crowding your space, Mark. They’re coming in. They’re not thinking about how I transact with this — that’s another conversation. Bitcoin is a store of value, as an inflation hedge, as a TradFi hedge. How are you having these conversations right now? How do you regard, just, this flood that we’re seeing from hedge funds’ interest into this space?

Yusko: It really has to do with this secular and cyclical dynamic. The really smart funds, and the really smart legendary investors — (hedge fund managers) Paul Tudor Jones, Stanley Druckenmiller — they’ve said, ‘I’m going to put 2%, 3%, 4% of my wealth into Bitcoin as this store of value to protect some portion of my wealth from the ravages of the fiat fiasco,’ where global central banks are going to print money at will to devalue the currency to get out of the big debt problem they have. And so they’re putting it in their hedge funds, they’re putting it in their personal portfolios. And that trend is not going to change.

Now, there are also hedge funds that have been trading Bitcoin, and it’s a beautiful trading instrument, partly because it’s still controlled by humans instead of the machines. So the spreads are still wide… you still have exchange differentials. So, there are a lot of arbitrages out there, (quantitative trading firms) Susquehanna, Jump Trading and others that really make huge profits trading and providing liquidity into the market. And so there are all different use cases for the tool. To your point, I don’t think many of them are thinking about how (they) can use it as a medium of exchange. And I actually don’t think Bitcoin is a good medium of exchange. 

I think the Bitcoin blockchain is a tremendous rail for doing medium exchange like the Strike app, of which we’re investors in — Jack (Maller)’s company. And I can take dollars and send them and convert them into any currency in the world instantaneously across the Bitcoin blockchain for free over the Lightning Network. In fact, I’m even wearing my Lightning Network socks today. But I’ll spare people climbing up on my desk to show everybody.

But it’s interesting that in the short run, when prices fall, as they have in the last few weeks, people start to get a little antsy and start to question these long-term trends and fundamentals. And I was on CNBC a number of years ago — I don’t remember the exact date — but the (Bitcoin) price had fallen from US$10,000, like literally before I went on air, to US$8,000, by the time I got to my segment — and it’s funny, they call them blocks, just like blockchain, they call them blocks — by the time we got to my block. And I remember (TV anchor) Melissa, very nicely, says, ‘What should we do? It just fell as you buy it.’ There’s this look of incredulity, like, ‘What do you mean buy it? It’s going down?’. I say ‘No, no, no. You should buy it today and buy it tomorrow and next week, and we don’t buy it all at once.” Dollar-cost averaging over time.

And I say the same thing today — what matters is that any of us own a piece of the most valuable computing network that the world has ever seen. The Bitcoin blockchain is the most powerful computing system the world has ever seen, and owning a piece of it is really important. The daily price, the minute-by-minute price, is meaningless. Price is a liar. I stole that from John Burbank. Picasso said: ‘Good artists borrow. Great artists steal.’ That’s the most important thing. It is not what is the price today, or tomorrow, or the next day. It’s what was the value a year ago? What was the value two years ago, five years ago, eight years ago, 10 years ago? Is the value continuing to accrete up? Yes. Is the value likely to continue to accrete upwards? Yes.

And one of the best measures, in fact, is the model that has the very best correlation to the price of Bitcoin. So, there are lots of models that people use. There’s the parabolic Metcalfe’s Law models, about 95% correlated. And it just says (as) the number of people that have wallets increases, the price should follow a path, and it follows the path about 95% of the time. There’s the stock-to-flow model that everybody talks about that (pseudonymous analyst) Plan B created, and now everybody is all upset because he said it would be US$100,000 by the end of November, and it’s not. That means the model is broken. I say, ‘No, that just means price is a liar.’ The model is still accurate. It just means now the price is undervalued relative to the value. That [model] is about 95%, 96% correlated. The most highly correlated is actually the value of Bitcoin related to gold. How many ounces of gold does it take to buy a Bitcoin? That’s 99% correlated.”

The most highly correlated is actually the value of Bitcoin related to gold. How many ounces of gold does it take to buy a Bitcoin? That’s 99% correlated. Why? Because gold is money. For 5,000 years, gold was money. It was the only money in the world. And money is something that exists in the absence of a liability. Everything else is not money — it’s currency, and currency is backed by debt, government debt. And part of a problem with currencies is they eventually all fail. There have been 775 paper currencies in the history of the world — three-quarters of them no longer exist. The rest will eventually go away because governments, left to their own accord, become democratic, capitalist, crony-ist dictator-ist, blow-up-ish. 

And the way it goes is they will overspend. And all empires — whether it’s the Roman empire, the Ottoman empire, the British empire, the American empire — they all disappeared because they’re profligate spending. Then the only way out is to pay back your debt? Can’t do that. Restructure it? Can’t do that. No one would take the deal. Default on it? Can’t do that, because then you get kicked out of the office. Or devalue it through debauching your currency? So that will happen.

And so if you look at, say, U.S. stocks… new all-time highs. That’s because we denominate in a depreciating asset — the dollar. In gold, if I take the S&P 500 divided by gold, it’s dead flat since 1996. Think about that. Dead flat since 1996. Yet the ratio of how many ounces it takes in gold to buy a Bitcoin has gone from less than one to 20-something today. That continues to rise. That has a 99% predictive power. And so, as gold, as a store of value, as monetary aggregates increase and gold stays constant. Give us an estimate of where Bitcoin prices are going to go, but at an increasing rate because of this global substitution effect of gold for Bitcoin.

Lau: I want to ask you about new fundamentals from this perspective. A few months ago, the Bitcoin exchange reserve hit a three-year low, which means more people were withdrawing Bitcoins, taking them out of the market. In other words, we saw globally a decreasing Bitcoin exchange reserve, and that’s often associated with the rising number of what we in the industry call HODLers, the long-term players. Is that a bullish move, but with bearish characteristics?

Yusko: Yeah. It’s hugely bullish. Because if you wanted to sell your Bitcoin, most times you have to put it on an exchange. Now, in the old days, you could put it on a stick and you could go meet somebody in the back alley, and you could exchange paper notes for your stick. There was ‘wrench risk,’ where someone clubbed you over the back of the head and stole your stick and didn’t give you the money. So, probably not the best way to sell your Bitcoin. It still happens all over the world where people trade local Bitcoins for real things.

But the better way is to put your Bitcoin on an exchange and facilitate that transition through CeFi (centralized finance). We’ve got TradFi. We’ve got CeFi, and then ultimately DeFi — decentralized. But decentralized exchanges, I think, provide a good resource for that exchange of value and broadening the ownership. But as people pull it back on chain, they’re basically, ‘I don’t want to sell. I want to HODL.’ Now, that’s true, by and large, but there are some that say that concentration is a bad thing. In order for Bitcoin to really be successful, you need to have broader ownership. And so we need more of it to be distributed to the masses, as opposed to just a handful of people HODLing and pumping up the price.

So, I’m willing to admit that there have been a number of instances where whales — and not any individual, but some whale — certainly have been guilty of pump and dump. That’s certainly been the case, and we can show lots of examples — usually  when it was less of a robust market, back in 2010, 2011, again in 2013, again in 2017. And there are some that say all of those big parabolic moves up were really one or two big whales manipulating the price. Today, I think it’s much, much harder. I think there’s a broader distribution of ownership. There are still some big whales out there. But I do think what’s happening now is… the number that I heard lately was 50% of Bitcoins were owned (for) less than 12 months. And the problem with those short-term owners… they tend — not all of them — but they tend to be people that follow basic human behavior.

Human beings in investment do two things really, really well. We buy what we wish we would have bought, and we sell what we’re about to need. And you see it. JPMorgan has studied this. If you look at JPMorgan data, (over) 20 years, stocks made about 9%, bonds made about 5.5%. So if you just did a typical 60:40 and you made 7.5%, 8%. Oh, no, no, no. What does the average individual make? Two percent. How’s that possible? All you need to do is pick one or the other and hold it. You did better. Or have a balance and rebalance. You did better. But no. Humans… we buy what’s moving and then we sell what just went down just at about the time it’s about to transition.

So, unfortunately, when you get these parabolic moves like we saw in January, February, or again here a couple of months ago after the summer, it tends to attract people to buy at the wrong time, not really understanding the relationship of price and value. And they’re not looking at the underlying value of the network and the fundamentals. They’re just looking at the price making highs.

Lau: I think, when we talk about volatility, that speculative behavior is seeing this as an asset class, this is a hedge fund play. ‘I need to make 10%, 15%, 20%, 10x my money.’ It’s in this space that we really see that kind of volatility. We’re also seeing it react much more to traditional finance events, because I do think they’re interconnected. There’s a spillover effect. We talk about decentralized… well, it’s centralized with the participants in the market. So if they’re holding something in equities, they’re also holding something in crypto. This is the point of vulnerability right here. It’s the investor.

And then there’s the long vision, of which I would put you in that corner — bullish in the long term. You see, obviously the macroeconomic vulnerabilities, which we could talk about until we’re blue in the face. But what are the innovative vision and the innovative fundamentals that you see as underpinning your long-term bullish view?

Yusko: So, I think first and foremost, is this innovation, and (former Google chief) Eric Schmidt — I’m just stealing his line, which is, Satoshi — he, or she, they… whatever… what they created, Bitcoin is awesome. It’s awesome. But that’s not the big innovation. The big innovation is to create a digitally scarce asset, a unique asset in the digital world.

So what does that mean? Well, go back to — you’re not old enough, as I am old —  record albums. We had record albums, and then they went to MP3s. Now, if I wanted to lend you a song, I could make a copy and I would send you the copy, and you listen to it, and you were fine and I was fine. But the record industry was not fine. They want you to buy your own original. So they outlawed Napster.

How did they do that? Well, in a centralized system, we lever the smartest brain by building a hierarchy, and everybody supports that CEO at the top. So when there’s a CEO in one home office and one server, if you want to stop it, what do you do? You arrest the CEO and blow up the server. So they arrested Sean Parker, blew up his server… end of Napster. Music industry is happy.

Well, now in the digital age, if you want to listen to the song, and I want to listen to a song, we both get a streaming service and we rent the digital, unique asset. And the cool part of that is the innovation — is that the artists are actually getting paid, the writers are actually getting paid. That’s pretty cool, because we can code it all into the smart contracts. So, creating an asset that’s digitally scarce. 

So, people had tried to create e-gold or e-money for a long time. The Crypto Anarchist Manifesto was written in 1998. It laid out the whole plan for having digital money. But the problem was it was written by an anarchist, and he sat up in the mountains by himself and nobody listened to him. So, 20 years went by. Finally, Satoshi came along and said, ‘Hey, I have a solution.’ And it was better than e-gold and better than… whatever the other one is called, the e-gold-something.

And the difference was this digital scarcity — that it was true digital scarcity. You couldn’t copy it. Like if I could take my money — my paper money — and turn it into electrons, and then make copies of them and send them around, then I’m committing fraud, but I can’t do that with Bitcoin. If I want to send you a Bitcoin, the network, all the nodes say, ‘Yep, Mark has Bitcoin. Two, he sent it to Angie. Three, she got it. Now, Mark no longer has it.’ And that becomes part of an immutable, permanent record.

That is amazing. So, you apply that to all kinds of things in the world, and we’re about to go through an exponential growth period. (On-demand finance TV channel) RealVision talks about this. I talk about it. We all talk about it. The exponential age. This is real. And the problem is that most people are really bad at math. Sorry, it’s just true. And we’re really bad at high-level math. So, if I say two times two, everybody says, ‘Four, yes!’ Although it reminds me of the great joke of the guy interviewing accountants and he says, ‘First person come in. What’s two plus two? Four? Thank you very much.’ Second person comes in. ‘What’s two plus two? Four? Thank you very much.’ Third person comes in. ‘What’s two plus two? What number do you want it to be? You’re hired.’ And that’s kind of how accounting goes these days. But two times two, everybody listening here would say, ‘Four.’ If I say, ‘What’s 17 times 23?’ I’ll wait.

That’s the limit of human intelligence. The average person cannot do that in their head. They need a calculator. So if I say, ‘How is your nonlinear regression?’ Not very good. And here’s the thing — non-linearity is the most powerful thing in the world. If I take 20 linear steps across the office, I get to the other side. If I take 20 exponential steps, you and I get to high-five twice. I go around the world twice — and I know you’re not in Hong Kong today — but we still get to high-five because it’s big. And so, I use paper folding. Fold this piece of paper, fold again, fold again. When you get to seven folds, you’re done. You can’t fold it again. A human being cannot actually physically fold a piece of paper eight times. If you could fold it 20 times, it’s as tall as a house. If you could fold it 30 times, it’s to the outer reaches of the atmosphere. If you could fold it 50 times — which is not a lot — 50, 50 doublings, it’s to the sun. And a hundred is the known universe. So exponential growth is really, really big.

And so, what’s happening here is we’re going to go through a period where these innovations around digital scarcity are going to apply to everything. Every stock, every bot, every currency, every commodity, every piece of art, every piece of real estate, every private business, every everything. All US$700 trillion of assets in the world are going to be tokenized, digitized, and they’re going to trade in this tokenized form and non-fungible tokens… ‘Oh, they’re just funky JPEGs’? No, no, no, no — everything will be an NFT. Your identity, my identity, my marriage license, my driver’s license — everything that I own, every piece of title, every piece of art — it’ll all be an NFT.

I don’t like the term NFT. I want it to be called ‘digital property rights’ — DPR. But we’ll see what happens. But everything will be digital property rights. So as that happens, Bitcoin and other cryptocurrency projects and other digital asset projects will become increasingly more important.

And look, I think Bitcoin is unique. It’s a store of value. It’s digital gold. It’s never, I think, going to be a payment mechanism, because in computing, you can be fast or secure — never both. Visa? Very fast, not very secure. How many times have you had to get a new Visa number because someone stole your card? Yes, it happens. Bitcoin? Been up 13 years… not one fraudulent transaction. Not one. How is that even possible? A lot of people have tried to hack in… not one fraudulent transaction. So (it’s the) most secure in the world, but it’s not very fast. But we can do layer-2 on top of it and then layer-3 on top of that. I mean, Visa’s really a layer-2 on top of the money system.

So, all of these innovations are going to drive incredible wealth creation. It’s the greatest wealth creation opportunity I’ll see in my lifetime. It’s why I went from being an asset allocator and CIO to a venture capitalist. I spend all my time doing venture capital. I spend all my time investing in infrastructure around digital assets and liquid protocols themselves.

Because — here’s the cool part — internet TCP/IP, which you and I are using right now, couldn’t actually explain how it works. I’m talking to a metal box and you are getting everything I say in real time, in HD, which I have a face for radio, so you’d probably rather me be blank. But how is that possible? And it’s in little packets and then they get reassembled. I can’t explain it, but it works. TCP/IP, on top of that, FTP for files, SMTP for email, HTTP for websites, and WWW-dot ties it all together. No one owns that. It created trillions of value for (Facebook co-founder Mark) Zuckerberg, and Apple and Facebook — now Meta — and they don’t own that. (World wide web pioneer) Tim Berners-Lee invented it, (internet pioneer) Vint Cerf invented it. He invented TCP/IP. Tim Berners-Lee invented WWW-dot. They’re not super-rich.

This time, if you take all the big wins in crypto — (exchanges) Coinbase, Kraken, Gemini, BlockFi — all of them. There are US$300 billion. The protocols are US$3 trillion. That’s where the value is getting captured. So, owning the protocols, in addition to owning the equity of the assets, is critically important. And we’re just getting started. I used to say, ‘Yeah, we’re in the first or second inning.’ And then some said, ‘Oh, Mark, come on. The players just entered the stadium. We haven’t even sung the national anthem.’

Lau: And the cool thing is it’s decentralized, so anybody can have a piece of that protocol. They’re decentralized autonomous organizations (DAOs). You could be part of the governance, if you will, the trajectory of whatever protocol that you choose to participate in in a meaningful way. I have a question for you, Mark. Maybe this is posed differently. Everybody asks you about your very famous prediction, US$250,000 for Bitcoin in five years. That’s not my question. My question is: If I were to give you US$60,000 today, would you buy Bitcoin? And if not, why not? If yes, what would you buy? So there you go.

Yusko: Awesome. All right. So US$250,000, five years, easy, and US$500,000 beyond that in a decade, easy. And those two numbers are simply a monetary value goal, US$5 trillion. So that’s a five X from here, and then total value, gold, which includes jewelry and coinage… US$10 trillion. Those are easy. (Investment firm Horizon Kinetics CEO) Murray Stahl makes me look bearish. Because he’s like, ‘Oh, forget that mark. We’re going total global monetary aggregates — US$86 trillion.’ And that’s, well, over US$10 million a Bitcoin. So that’s awesome. And I actually can’t argue with him. It’s pretty cool.

But if you gave me US$60,000 and said, ‘That’s all the money I’m going to give you’… and it’s an issue because we’re raising our third venture fund, and we put 30% of it in liquid protocols. In our first fund, we bought Bitcoin, which we held as a series-B in 2018. Ethereum, which we held as a series-A. We did a little Solana through (Multicoin Capital co-founder) Kyle Samani and a little bit of (protocol) the Graph. All done great. Fund two, two years later, we made a mistake. We put it all on Bitcoin, and we should have done more DeFi. We should have done some of the other things. But we all make mistakes. 

So now I’m fund three. Now we’ve got a pot of cash and we can choose what we want to own.

So, it’s your money. You give me US$60,000. I certainly would buy some Bitcoin and I would tuck it away in a drawer and it would be my core. In liquid protocols, I talk about the base. There’s Bitcoin, there’s Avalanche, there’s Solana and Ethereum. Why is that the base? Well, Bitcoin, I think, is the base layer. It’s literally like TCP/IP. Then you have Filecoin, which is kind of like the equivalent of FTP. Then you’ve got Ethereum, which is the WWW-dot. And then Avalanche and Solana, as well as Cosmos and Polkadot, are competing for that SMTP, HTTP layer.

So, to me, they’re the base layers of the trust net, as I call it. So we had mainframe computers, 1954… 1968, the microchip… 1982, the personal computer… 1996, the internet… 2010, the mobile net… 2024, the trust net, as I call it. So those are the base layers of the trust net. Beyond that, I invest in DAOs. I would buy some DAOs. I think DAOs are going to change everything. They will be the only method of ownership going forward because they’re just a better form of ownership and there are a lot of interesting projects there.

The metaverse is a monster opportunity. I love Axie Infinity, for example. I mean, Axie Infinity is changing the world. ‘Mark, you’re ridiculous. No, it’s a game.’ No, not a game. It is a microeconomy. It is the first metaverse economy. Well, actually, Roblox probably is. And, actually, before that, World of Warcraft probably was. But that aside, Axie Infinity — you can buy the token. And actually you can buy Roblox stock. But these are real microeconomies and they’re amazing. And so play-to-earn is a massive opportunity. So, there’s probably some things that are picked up along the way.

But at the core, everyone needs to own Bitcoin. How much? And I mean, everyone. My hashtag is ‘Get off zero.’ You can’t have zero. You have to have some. So I used to say 1% to 3%. It’s probably light. It’s probably 3% to 5% for everyone. The younger you are, the higher that is. So if you’re like me, in your 50s, you should have 3% to 5%. If you’re in your 30s or 40s, maybe that’s 8% to 10%. If you’re in your 20s, I can make an argument for having a lot, because I think long term. I don’t know if there’s any asset that I’m as confident will have as high a return. I think there are other projects that will have higher returns, but I can’t tell you which ones. Like, it’s possible something could come along and replace Axie Infinity. I don’t think that’ll happen. It is possible something could come along and bump one of the other projects. But I’m comfortable that Bitcoin is that absolute base layer. 

Then, I do like Ethereum, because it’s got a very large, installed developer base. However, it’s not as fast as Solana. The problem is that Solana… it’s not perfectly accurate. So, for gaming? Awesome. Accounting? Less awesome. Polkadot and Cosmos are interesting, though probably a couple of other projects that come up. But it’s the interesting thing about investing, and it’s counterintuitive to what we’re taught about investing. We all study capital asset pricing, models and diversification. Well, that’s once you’re rich. If you’re already rich, yes. Diversification and stocks and bonds and some crypto and some venture capital.

But getting rich is different. And when you’re young, that’s the whole idea. And so every great pool of capital in the world that I’m aware of came from concentration. Concentrated business ownership, concentrated stock position, concentrated real estate position… all of it. Now, how do you create a small fortune? Start with a large fortune and stay concentrated so you can’t overstay your welcome. And it can go the other way. So, once you get concentrated and do well in a project you believe in, in a project you have expertise in, then I think you should diversify again as you get older. I wouldn’t just own Bitcoin. I think Bitcoin is a 10x from here. Easy, like easy, easy, with very low probability that doesn’t happen.

Lau: Look, your answer reveals the opportunity cost of accepting that 10x. It’s not that. In the traditional equity markets, if you make that play and if you make that bet, that’s a great bet. But your answer also shows the opportunities that are in the space, which are astronomical, which is why we’re talking. There is a risk. We often talk about strength, weakness, opportunity, threat. What is that threat in your mind?

Yusko: Let’s break them down. There’s lots. There’s the age-old technological threat. Something will be invented and do better. Yes and no. It will. But the difference is that we now live in an open-source world. So unlike MySpace getting beat by Facebook because it was better, if somebody comes out with something better than Bitcoin, like Taproot or SegWit, you just copy-paste, and now you’re just as good. So the open-source world changed that technology risk.

So, I don’t think there is a technology risk there. (Former World Bank Chief Economist) Paul Romer’s right. Paul Romer won the Nobel Prize three years ago for the law of increasing returns. It’s not the best technology that wins, it’s the technology that gets critical mass first. And so I’m comfortable with Bitcoin there. I’m comfortable with Ethereum, mostly. There are some risks with Ethereum. And that is part of the reason I like Avalanche and things like that. So the tech risk I don’t really worry about. 

Regulatory risks, government bans and things like that? Yes and no. Again, every technology that became disruptive in history has been fought with regulation. Every single one. When the horseless carriage was invented, the horse and buggy companies actually got a law passed. This is crazy, that you actually had to have someone walk in front of the horseless carriage with a red flag waving it. So it wouldn’t kill a horse and buggy. So they tried to slow it down. Well, today, there are a few horses and buggies in New York City, but that’s about it. So when my grandfather-in-law left the safe job at the train company to go work for the upstart American Airlines in 1938, his parents were horrified. I mean, ‘Why would you leave this safe company for this crazy company?’ And the train companies passed out pamphlets saying if you got on an airplane, you would die, because your body would cave in on itself when you went faster than a certain speed. OK, so FUD. And they tried to pass regulations that limited how far you could take a plane and all this kind of stuff.

So, regulations will always be used. But at the end of the day, true innovation prevails. I ask people all the time — name me one great innovation, true innovation that once it got critical mass, you could put it back in the bottle, stop it through regulation. Cable TV? The networks did not want cable TV. We got cable TV. Cable TV didn’t want streaming. We got streaming. Net neutrality? I mean, they tried really hard to stop it through regulation.

The banks are going to try really hard to stop this image, because here’s the thing: What the internet did… and go all the way back. If you go back into the medieval times, the church had a monopoly on information. So the church gave us our views once a week from the pulpit. You had no access to information. You couldn’t read, couldn’t write. They gave you what to think, how to feel, how to live your life. The printing press busted that monopoly wide open. Now people still didn’t read, but you could now print a book, and you could read stories to each other, and you could pass the knowledge on, and it busted the monopoly. So then the government seized it and they told us what to think through state-owned media — and not state-owned, like three networks in the US, still kind of state-owned.

And then the internet broke that media. I use the example that if I want to know what’s happening in the Argentinean election, I do not wait for a reporter to get on a plane to Buenos Aires and write a story, send it back to her editor in New York and have him give it to the senior editor and have her publish it two days later. I go on Twitter and watch a periscope and watch them chant (Argentinean former president Mauricio) Macri’s name and say, ‘That dude is going to win.’ So it made information bi-directional. And that disrupted all of media and all of commerce — pretty big businesses. But people fought it. Regulation tried. They fought it.

Now what Bitcoin or blockchain does is makes value bi-directional and it disrupts financial services. Financial services is way bigger than media and commerce. Equity market? Big. Bond market? Bigger. Currency market? Bigger. Derivatives market? Monster. And it’s all going to get disrupted, so the banks are going to fight. And I tweeted this out a couple of weeks ago. I said, look, 2009, 2015 — and this is not a Gandhi quote — I guess it’s somebody else, and I can’t remember his name — but it gets attributed to Gandhi. ‘First, they ignore you. 2009 to 2015, crazy people doing Bitcoin, whatever… 2015 to 2021, then they laugh at you. Oh, look at those stupid kids playing with their stupid magic internet money. Then they fight you.’ (From) 2021 to 2026, they’re going to fight us, and they’re going to fight hard. But then you win, because they’re going to lose. But it doesn’t mean they’re not going to fight. So it doesn’t keep me up at night. But it does mean we have to be prudent about cyclicality. It means we have to be prudent about putting all our eggs in one basket in the short run… maybe be a little more diversified.

And then the last one is, the other FUD. The energy FUD, dumb. Proof of work is a beautiful system. Everything in our life is about turning energy into value. All of it. You and I right now, we’re converting energy to value. We fuel our bodies, we’re having a discussion. We’re trying to create value. That is converting energy to value. That’s what digital assets are. They’re converting energy to value, and they do it much more efficiently than mining gold, way less efficient than Bitcoin. Banking industry? Way less efficient. I will drive by an empty bank branch on my way home today. No one will be in it. Not one person. No one ever goes in it. Why do they still have it? It’s just dumb. Does it make me feel better that they have bricks and mortar? It’s just dumb. I don’t need a brick-and-mortar bank to bank. I can be my own bank now.

So, all of that says that the risks are real, but they don’t matter long run. They matter short run, because that will increase volatility. But remember, volatility — I usually have my ‘embrace volatility’ shirt. Volatility is your friend. The thing you want as an investor is a highly volatile asset with low correlation to other assets. That’s what you want to own, lots of them. And the more volatile, the better.

And I use my Amazon example. People have heard it. They’re tired of it. Amazon being a public company — 24 years. It has had a double-digit drawdown every single year, including this year. The average drawdown is 31%. You can check all these numbers out. Five times more than 50%, twice more than 90%. When was the right time to sell Amazon? That would be never. Who owned Amazon since the beginning of time? Jeff (Bezos), his mom, his dad and his ex-wife. I learned the fifth person this weekend at RealVision. (Investor) Bill Miller. Bill Miller actually has owned it since IPO and never sold, so there are five people in the world. Everyone else got shaken up by the volatility. Here’s the cool thing — Amazon compounded 113% for 24 years with 80 vol. Bitcoin’s compound at 212% for 13 years with 80 vol. It’s kind of cool.

Lau: You have eyes and ears in Asia — presumably through Forkast, but also you have some boots on the ground in Shanghai. What are you hearing? What are you excited about in China, in Asia?

Yusko: I’m most excited about growth equity in China. We have a growth equity team. I met with this group the other day. They’re based in Shanghai. Their last two investments are so boring yet so beautiful. Like, I want to put so much money in them. One is called Fat Bear. It’s basically the Home Depot of China.

And I used to use the example that there’s a company, Sysco, in the U.S. They deliver all the food to restaurants, and you probably ate some of the food. I probably did today. It’s a big company, but China’s never going to let Sysco in China. So we had a chance to invest in the Sysco of China. And I’m known for hyperbole. I’m known for saying things too forcefully. And my wife says, ‘Frequently wrong, never in doubt.’ I’m like, occasionally wrong, never in doubt. 

OK, I am certain — 100% certain — the people in China are going to eat out more in the future. I’m 100% certain. So, owning the company that delivers food to those people makes money. Fat Bear — same thing. I am certain that the 700 million people that entered the middle class over the last 30 years, move up. They’re going to buy homes and renovate their homes, full-stop. And buying Home Depot 30 years ago in the United States was a really, really good investment. So you should buy that.

So, growth equity is what I’m most excited about, partly because China is run by geniuses. ‘What are you talking about there? They’re criminals and they’re bad people.’ No, they’re geniuses. They think long term, they have 30-year plans. We don’t even think like 30 weeks in the United States, let alone 30 years. And I always use the example that (as) China’s plans go, we’re arguing how to set up the checkerboard. And the 30-year plan from 1990 to 2020 was a harmonious rise. I love that. So non-threatening, so beautiful. Let’s move people out of abject poverty into the middle class. Harmonious rise.

The new 30-year plan is (to become a) global superpower. That’s a little different connotation, and they’re going to get there. And so why do they ban Bitcoin? Simple. Alibaba set up a money market account on Alipay five, six years ago, US$90 billion left the banking system and went into this money market, and they said, ‘Oh, that’s bad. Our banking system is pretty overleveraged, so you can’t do that. Change the rules. No more.’ Ant Financial’s like, ‘All right, we’ll just change the legal structure. We’ll reopen it.’ ‘OK. You don’t get to go public. You’re done.’

So, same thing here. They said, ‘All right, if you can’t put it in Ant Finance in Alipay, we’ll just put it in crypto.’ ‘Oh, wait a second. We need the money in the banking system. So you can’t put it in crypto. So we’re going to ban it.’ ‘Why?’ ‘Well, because we want a (central bank digital currency) and the RMB (yuan). The digital RMB … already exists, but it’s going to be a big thing. I believe I have this number right. There are already today more holders of digital RMB than Bitcoin, and within a year there will be a billion owners of the digital RMB.

It’s a surveillance tool. It allows you to control the money supply very directly. You can program money, which is a little dystopian. I mean, imagine this… imagine you get your paycheck, but you happen to jaywalk that morning and you only get 98 cents on the dollar. Or what if they say, ‘You know what? We really need you to buy Chinese cars. So unless you spend the money by next week on a Chinese car, it goes down by 10%.’

Lau: How is that any different from what the Federal Reserve does with monetary policy?

Yusko: Oh, exactly. Well, the only difference is it’s very direct. By saying, ‘If you don’t spend your money, we’re going to inflate it away and make it worth less.’ Completely the same. But to be able to say, ‘You have to do this,’ like, these four places are legal, and a kind of credit social score, that’s a little more dystopian. Again, it’s genius, and it will work in terms of command and control and growth.

And here’s the thing, I actually don’t think it’s sinister. I think it’s all designed to take this 700 million people, 300 million of which are millennials — twice as many as in the United States — and — no, no, no, no, I’m sorry — four times. I do my math, Mark. There’s 80 million in the U.S. and 320 million — four times more than in the United States. And these people are going to accumulate wealth, and they’re going to migrate from a manufacturer economy into a consumer economy. And so having control of that monetary system is really in their best interest. So I don’t think it’s as dystopian. The people I worry about are the Europeans, and the Japanese, and the Americans, that have a much more difficult problem. We don’t have any young people. We have mostly old people. And while the ‘echo boomers’ will eventually get there, it’s still only going to replace the baby boomers and not have a bigger number.

So, all of that comes back to this idea that I think China is exciting in a lot of areas, but it’s hard for other people to invest there because if you read the Western press, you’re going to think it’s not such a great place.

Lau: That’s right, which means a diversity of coverage is super-important. But also, to your point, it really shows that there is an underpinning to something else — another system that is coexisting right now. And, to your point of regulators coming in and trying to bigfoot, this is, I think, the stage in which we are right now. I don’t know who the winner is, and I’m rooting for the little guy. That’s what I know.

Last question. Forkast Forecasts. This is, at the end of the year, as you reflect on the year that was, what was the key development in your mind in 2021, something that you think, ‘Whoa…’ This really sets us up for your prediction in 2022. So let’s start there. What was the critical event in your opinion in 2021?

Yusko: Again, really fantastic question. It’s easy for 2020 because it was the lockdowns in response to the pandemic. A little more subtle this time, in that I think it’s the knock-on effects that were revealed from the lockdown. I think the lockdowns will go down in history as one of the dumbest things that governments globally have ever done. I mean, there are some bad ones — the inquisitions, they’re probably worse, and probably a few things in the past that were probably worse. But this is going to go right up there in terms of really dumb decisions. Look, we’ve had skyrocketing suicides, a massive increase in drug overdose deaths, people who have died because they were afraid to go to the hospital. I mean, terrible human tragedy because of bad policy based on bad data. That Imperial College study was a travesty, and the fact that people reacted to it and made decisions on it… heinous.

So, I think now what we saw was that the supply chain disruptions were deeper than people thought. The impact on growth was deeper than people thought. And therefore, the need for government stimulus was going to be higher than people anticipated. But I think the development was despite the jawboning that these central banks were going to keep printing money at the same rate as they did in 2020 — that rate has now been falling, particularly on a global basis. There’s actually countries around the world that are tightening. It doesn’t make any sense, given that we’re seeing slowdown everywhere. 

There’s a great chart — the China Credit Impulse — and it basically has an 18-month kind of lead on global economic activity. And I was a high-school wrestler and my coach used to say, ‘If you want your opponent to do something, just move their head that direction. Because where the head goes, the body follows.’ If you move your head this way, the rest of your body is coming with it. There’s no way to stop it. And if you look at that chart, it collapsed 12 months ago, and it’s showing no signs of letting up. The U.S. bank lending chart just collapsed, and those two declines in global liquidity… and there’s a great firm called Crossborder Capital that tracks this as well, and all their global liquidity monitors are collapsing.

And so where that head goes, the body’s going to follow, and I think next year is going to be a very, very challenging year economically. I think earnings are going to plummet. I think this move toward nationalism and populism is again stupid. We need globalism. Adam Smith was right. Comparative advantage works. And there is an interesting, little sinister kind of side school of thought that a lot of this policy response was actually engineered in China to slow down the competition, to let them kind of ‘insource,’ like chip manufacturing and all the things that they need.

Because here’s the thing — 10 years ago, the United States and China had to make one big decision. They’re the two kinds of superpowers, and they had to make a decision. ‘What do I want to be really great at?’ And we chose to be really great at social media — and we are awesome at Facebook and Twitter and Instagram and Snap… we’re awesome. China decided to be really good at 5G and artificial intelligence — like 96% of AI citations are in China today. So those technologies, I believe, are more important. And the reason this is so important is — for basically the last kind of 700 years, the global superpower was determined by world reserve currency status, and that was determined by naval superiority. So in the olden days, in the 1400s, it was Portugal, because they had the tallest trees — therefore they had the fastest ships. Spain takes them over. They get the trees. France takes them over. And then the Netherlands. And then the British got the steamship, and then we got nuclear power. So we are at the top of the apex predator food chain.

But here’s the thing. China figured out — I believe 10 years ago — that the next war will not be fought with ships. So it’ll be fought with chips, and everything in the world revolves around chip superiority and the metaverse, and all these things coalescing where our physical and digital lives come together. We’re not going to have another hot war. We’re at war right now, but it’s a war over chip control and supply and assets and digital assets.

And I think — unfortunately, well, not unfortunately — it’s unfortunate, since I’m an American and I’m not Chinese — but I think they’re kind of in the lead. And I think our leadership is bad. I think their leadership — and this is not a judgment of their ethical character, leadership skills, Chinese leadership skills — I think, are way better than American leadership skills today. And a lot of countries around the world. And I think they’re just executing better. And so I’m not sure I even answered your questions

Lau: It’s a wake-up call — 2022 and crypto has a role to play, there’s no doubt. Mark Yosko, Morgan Creek Digital, thank you so much. This was more than an illuminating conversation. I thoroughly enjoyed it. Thanks for joining us.

Yusko: No, thanks for having me. And I love the fact that we color-coordinated for the Christmas colors here with the red and the green. So, lots of fun. We’ll do it again sometime in the new year.

Lau: Absolutely — 2022, it’s a date. And thank you everyone for joining us on this latest episode of Word on the Block. I’m Angie Lau, Editor-in-Chief of Forkast.News. Until the next time.