The Future Trajectory of Cryptocurrencies (w/ Raoul Pal & Dan Morehead)
RAOUL PAL: There's several big ecosystems out there between Bitcoin, Ethereum, Ripple, EOS, how do you see the evolution of those and how do they all play together? I'm incredibly concerned how tribal it all is right now, but I know in a pragmatic world that there's a space for everybody. What's your view on all of that? DAN MOREHEAD: Yeah, it's a fascinating question. I'm sure there's some great movies made about this someday. I would say there isn't a space for everybody but there isn't a one take-off. That's a really frustrating lukewarm water answer to your question, is that we have 2000 tokens right now, I don't think we're going to have 2000 and I don't think we're going to have just one. There is a bit of an almost religious fervor in this space where the disciples of one group will be really, really excited about the other group. The punchline of this call long, I think there's going to be single digit number of very important blockchains. Each one's going to have its own use case, and it's already starting to shape up where you're seeing Bitcoin, not really changed very much, but being really good at storing wealth and so people like to call it digital golden, and I'm fine with that. You see Ethereum be really dynamic and you've already got an Ethereum 2.0 and it's really changing, really ambitious and then you have the next generation of things like Polka Dot that are coming that are doing very ambitious things. Then Ripple's taken an enterprise SAS version of this and trying to work with all the banks and work with all the regulators to essentially replace Swift. They probably don't like it when I say it like that, but I think it's easy shorthand for what they're trying to do. I think there's space for eight or 10 of those use cases in the long, long run. The main point is, we're not going to have hundreds and hundreds of very similar "all coins". RAOUL PAL: What is your view of tokenization? My particular view is that what we know of equities and fixed income won't exist within x period of time, whatever that period of time is, because tokenization can do a whole lot of things that currently equities can't do, or fixed income can't do. You can isolate-- I always use a great example, like a company like Exxon, maybe you want to buy their upstream and I want to buy their new green energy business and somebody else wants to have an investment in some of their assets, in their physical buildings. The idea of a corporation, which is to turn a company into a physical person by legal rights, I don't think has to exist in this world. I think that there's a huge change coming on what can be tokenized. We've seen it with people, obviously sports stars have started to tokenize themselves. There's a number of things. I just think the securities markets that we know of old, if we go into the future 20 years, will not look anything like the securities markets that exist today and have existed for the last hundred years or so, 200 years. DAN MOREHEAD: The things that don't work very well now, like say, music world rights, well, blockchain can add a ton. That's a great example of where like there's millions and millions of transactions happening every day. Each one's worth a fraction of a penny. There are often dozens of different people who own a piece of that work that's being streamed somewhere. Then you have a whole industry of these middlemen, accountants, agents, whatever that are processing payments. They call it Hollywood accounting for a reason, like the money always seems to get lost, and the artist ends up with a very small fraction of it. The blockchain could do an amazing fix to those broken systems like that. I think those are going to be really, really important. Replacing existing IBM shares or whatever, I'm less bullish on-- again, going back to DTCC does a great job, it's almost free. It takes only a day or two, so it's not really broken. I started my career as a CMO trader so you're slicing up cash flows, like you were talking about on upstream versus downstream. There are some uses for that. There are some people that want that, but I'm not sure it's a big enough use case. There was a huge push to do securitized illiquid market assets like real estate a couple years ago. We invest in a couple projects and looked at a ton of projects. There was a lot of talk about if you invest in commercial real estate, it's really illiquid and if you tokenize it, it'll be completely different. Some people did some projects and you realize, oops, maybe not everybody wants to buy a fraction of a building in South Carolina. Just because it's a token doesn't mean there's going to be 1000 people lining up under a Buttonwood tree somewhere to start trading it. That would be my only caution is that just because it's a token doesn't mean there's going to be 1000 people that are excited about trading it. RAOUL PAL: No, there's no liquidity and it's very early days. I'm just conceptually interested in where this could lead to because if this is, essentially an invention and a revolution all combined, well, then most of us will not be able to forecast the probabilities of the outcomes. The outcome is going to be very different than we think with something so life changing as this, much like the internet, we had no idea where that was going to go. DAN MOREHEAD: The one thing I would say on securitizing actual normal physical assets is it might not change your and my life because we have accounts in the United States and trade those things. If you're one of the 6 billion people that's not involved in it, securitizing it would be great. Like if you think back to the dot-com boom, if you want to buy a share of pets.com, you actually had to be an American citizen, even like a wealthy German would have a hard time figuring out how to get a hold of some pets.com stock. Here, anybody with a smartphone can buy a tokenized security. It will massively open up the access across borders for securitized assets, even IBM shares, somebody in Indonesia with a smartphone could be able to buy a tokenized version of that. RAOUL PAL: Looping back to the macro scene where we are right now, people are confused why Bitcoin's not done so well, because I think they're thinking of it as a hedge to traditional markets and I say slightly different now, serve as a call option in the future on a future system but how do you perceive it? What do you think about the price action of Bitcoin and how this might evolve over this, call it next 24 months? DAN MOREHEAD: That's a great question. Obviously, that's what we spend our time trying to figure out. The one thing I would say is, I don't think I would have called it a hedge to the global macro. What I would have said is it's uncorrelated with global macro. That is, I think its strongest advantage is over long periods of time, it has very little correlation to everything else to gold, oil, S&P 500. In the down spikes, there've been five down spikes since Bitcoin really became tradable. In each of those, it spent an average of eight weeks correlated to-- with 0.5 positive correlation to the S&P. When the markets gapped straight down, Bitcoin does gap straight down with it, but over a period of weeks, that correlation starts to break down. It starts to trade on its own based on its own fundamentals. When this crisis started, we actually reduced risk in our hedge funds, but we've already covered that back and are now fully long in our discretionary funds. Because as the dust settles, the correlations are going to break down again, like they have historically, and it'll be able to trade on its own. Then when people see oh, Bitcoin and other blockchains are actually quite useful when a bunch of these other systems are starting to get hampered by all the restrictions in the physical world. People will start realizing the fundamentals are not only affected by this crisis. They're actually quite positive for blockchain itself. Our forecast is Bitcoin's probably going to do very well, but it's over the next 12 months, not the next 12 hours. We send our investor a letter couple weeks goes, we think it's going to take two or three months for institutional investors to basically just triage the damage to their existing portfolio assets, just trying to figure out what the heck has happened. Then it's going to take three to six months to really look at new opportunities like distressed debt. There was 10 years of no distress at all and now, there's going to be all kinds of amazing opportunities. There's going to be things like gold and cryptocurrencies. I think it is going to take six to nine months for the markets really to get going, but I think everything-- we've taken a super sober look at this and there's some really big economic impacts, but the only conclusion we can come to for cryptocurrency is that in the say six to nine-month timeframe is going to be very positive. RAOUL PAL: One of the things that that correlation that picks up to the S&P is simply liquidity. It's everything gets correlated, has a correlation to one an illiquidity event, and that's okay. As you say, then decouples very quickly, then it has zero correlation, which is extraordinarily powerful as an asset that has, yeah, it's not a huge asset, still whatever, 200 billion or just under, but it is very powerful to have an uncorrelated asset in this world. Everybody I speak to is definitely becoming interested, the family offices. I don't know a family office, really, that doesn't have a bit of it now. DAN MOREHEAD: We've taken that thought process one step lower in our analysis and within blockchain, we have very similar phenomenon going on, is that in the immediate down spike, everything becomes highly correlated, and Bitcoin typically outperforms, and so it has outperformed everything else in these stressed markets. One of our first moves was to increase, basically double our Bitcoin exposure at the expense of the smaller non-Bitcoin assets. Then we also increased our systematic trading, which does well in very stressed markets. Another view we hold in crypto is that Bitcoin is going to outperform, again, for a period of say, three, four or five weeks, that order of magnitude, not months or years. Then over time, we'll reduce that and get back to our normal allocation.