Travis Kling: The Secrets of a Crypto Trader
The following is a transcript of a conversation between Anthony Pompliano and Travis Kling, Founder and CIO at Ikigai Asset Management, about token structures, price movements and outlook, value accrual, the importance of BitMEX in Asian algorithmic Market Makers, and what needs to change for crypto to have sustainability.
You can find the recording here: Off The Chain Podcast: Anthony Pompliano and Travis Kling
Anthony Pompliano: Where did you grow up? Where did you go to school, education, and then what did you do pre-crypto?
Travis Kling: Yeah. Grew up in Texas, and growing up in Texas, I’ve been out of college for 10 years, and nine and half of that was in energy investing.
Pomp: You really strayed really far from Texas.
Travis: Yeah. Got an undergrad in accounting, a master’s in finance, got out of school in ’08, took the financial crisis in the face, was doing oil and gas M&A for a couple of years out of college in Houston. Went to Magnetar Capital in 2011 doing long/short energy equities and non-control private equity and debt in the energy space. Pretty broad investment mandate, long investment horizon, highly illiquid or totally illiquid securities. I was there from 2011 through the middle of ’15, so that was like the go-go years in oil and gas.
When I joined, the energy business was managing 250 million. At Magnetar, when I left, we were managing 4.6 billion, so a pretty massive AUM growth over that period of time. Left in the middle of ’15 and went to Point 72 in New York, Steve Cohen’s hedge fund, and I was running a $200 million long short book there. Energy and materials equities. A little bit of commodity, a little bit of options, and probably a good way to just easily segue into crypto here.
Pomp: Why? Why jump into crypto?
Travis: I’m not a tech guy, I’m not a tech investor, and I’m not a tech person. I’m not an early adopter kind of guy. I’m not a futurist kind of guy. I’ve never been like that. So, the first time I heard about Bitcoin was when Silk Road got shut down. Just from a fascination perspective, like look at these crazy drug dealers that made this magic internet money to go buy drugs on the internet. That’s just wild. I joke around with my mom all the time where I’m like, “You know mom, it’s a good thing that I wasn’t into drugs when I as a kid, so I grew up to be an upstanding citizen.” But on the flip side, if I’d have been into drugs I would have seen Bitcoin early and I would’ve bought that shit in 2012.
Pomp: It’s true.
Travis: Same thing with video games. When I was growing up. I said the same thing with my mom too. I was like, mom, I’m kinda glad you didn’t let me play video games when I was a kid, which she didn’t, because now I read more than probably 99% of millennials out there. But then on the flip side, if you grow up playing video games and somebody pays $100 for a magic battle ax, and then you see Bitcoin come along, you’re like, this makes all the sense in the world, right?
Pomp: Absolutely.
Travis: Anyway, I was reading about Silk Road, just because it was crazy. Bitcoin’s part of the story. I probably read two hours worth about Bitcoin and my takeaway from that was magic internet money. There’s a math problem, the math problem’s really, really hard. It controls the supply/demand, and drug dealers trust it to use it as money. I’m like, that’s just nuts, right?
So now Gox got hacked not long after, and to me that was like, okay, this is not something I need to pay attention to, because I don’t have any way to mitigate or price in the risk. I wake up one morning, and somebody stole all my stuff.
Pomp: It’s like two strikes.
Travis: Yeah, and like being the like non-hardcore computer guy. I’m like, if anybody’s gonna get their stuff stolen, it’s probably me. So, I’m not into this. Didn’t think anything of it. Fast forward to the back part of 2016, price starts doing its thing. I started reading more about it. Early ’17, Ethereum and the ICOs started going crazy. I started reading more about it, and I basically came back from July 4th break last summer and fell down the proverbial rabbit hole and just started spending all my time reading about crypto. Go to the gym, listen to crypto podcasts. Go home, sit on the couch in the dark, read about crypto until the wee hours of the morning. Wake up, do it all over again the next day.
I started stacking out. You’re doing this self-study, and I really like behavioral economics and game theory stuff when I was in grad school. In grad school, I had graduate degree in finance, and they hammer efficient market hypothesis when you’re in school and then they do a little bit on behavioral economics and that made no sense to me because it was so obvious that markets aren’t efficient at all and behavioral economics is really what makes sense because people. Because of fear and greed in the context of economic decisions, humans constantly make mistakes, and behavioral economics is the study of that. I did a lot of self-study in school about that.
I circled back to crypto, and it loops in a lot of those aspects, and so I really got sucked into it. I did probably 4 or 500 hours over a couple month period of time and I went to senior management out of the blue at the end of September, and I was like, “Look, this blockchain thing’s gonna be completely revolutionary; it’s a once in a generation type of deal, and I don’t wanna be in equity long/short portfolio managing anymore. I’m gonna make a career change.”
Pomp: That’s awesome. All right. So, let’s back up. You came from, what I’ll call, Wall Street institutions. Whether it was energy trading pre-Point72 and then Point72, what is that like? When you’re inside of these organizations, how they view technology? How do they view these new asset classes when they pop up and some of them stay, some of them don’t? Just talk about being a more traditional institution, looking out at technology and new asset classes.
Travis: Yeah, so I was buried down in the … I was just doing my oil and gas thing, my energy thing. I did a decent amount of renewables as well, too, so I was focused in that one lane.
Pomp: So, you’re not looking at anything else out of oil and gas?
Travis: Energy broadly. Energy, broadly, was basically my career. I was 30 years old and knew as much about as oil and gas as any 30 year old you’re gonna find. That was just what I did. Working in institutions like that, I think one of the biggest differences that I think I’ve definitely taken with me as I’ve moved into crypto investing full time is I think people that haven’t worked at a hedge fund before think that it’s like an episode of Billions or it’s like Wolf of Wall Street or it’s like Boiler Room or something like that, and it’s actually way less sexy than that. It’s very, very process oriented, especially at Point72; you become an expert in how to build investing frameworks.
Pomp: It’s a machine.
Travis: Yeah. It’s a machine, and in the same way the Henry Ford used to crank out Model T’s, you can crank out attractive risk-adjusted returns on a repeatable basis like that, and simplistically, the way I think about it is you build this framework and then you put a bunch of processes inside of the framework, and then you build a bunch of tools inside of the processes to help you execute those. In the same way that Henry Ford used to crank out Model T’s, you can just crank alpha like that, and it’s like making sausage. You take a shit load of data, you stick it in the sausage maker, you turn the gears, and it spits out profits and you just do it over and over and over again.
Pomp: Just so we’re clear, that’s not what people thing is happening, what you just said, and then two is, that doesn’t sound very fun ’cause it’s not human-driven in terms of, I’m making a gut call left or right. It’s much more, we spent a bunch of time building what data sets we’re gonna do, clean it, structure it, build the machine, start stuffing the data through. There’s not a lot of dependence on the individual to have intuition or make mistakes or make the grand slam call, right?
Travis: Yeah. So, generally speaking, humans are pretty terrible at investing.
Pomp: Absolutely. Absolutely.
Travis: We have so many biases and we make tons of mistakes.
Pomp: We get tired.
Travis: Yeah, right. And so the term quantamental got thrown around a lot at Point72, which we’ve totally adopted into Ikigai Asset Management; it’s at the core of how we’ve built our investment business.
Pomp: Explain what that is.
Travis: It’s just the intersection of fundamental and quantitative investing, or said differently, harnessing the power of big data to help humans make investment decisions. Simplistically, you ask yourself the question, what exactly is it that a human does better than a machine when it comes to investing? The punchline is not all that much. This war has been waging for over a decade now in traditional asset classes, and the war is over, dude. The machines have fundamentally beat the humans when it comes to traditional asset class investing. Just look at the profitability of a place like Renaissance or Jump Trading or D. E. Shaw right.
Pomp: It’s because the machines are not only quote/unquote “smarter,” but they have the ability to do much more analysis more consistently over a long period of time.
Travis: Never get tired. No biases. Can crunch an incredible amount of data. Then you start layering in machine learning type of stuff and this, that, and the other. But the interesting thing about that, the quantamental aspect as you move into crypto is, a machine is only as good as the data that you’re feeding it. The data’s the food for the machine. If the investment decisions that the asset class is presenting are not quantable, they’re not able to be fed into a data stream format, then a machine’s not gonna be able to make very good calls. In my opinion, where we are in crypto assets, we’re not far enough along, and the most foundational pieces of this ecosystem haven’t been put in place yet.
Because of that, machines don’t do that well in that kind of environment and the data has a lot of noise in it. If I’m trying to run a stat arb strategy and a crypto stat arb strategy in September 2018 and it’s a strategy that was back tested against price action in the fall of 2017, what the hell does the fall of 2017 have to do with September 2018? It’s such a drastically different market because we’re so early and we’re still having these big seismic shifts in the way the market’s acting.
Pomp: I think what you’re talking about here is there’s two issues. One is the quality of the data or the reliability of the data. So, there’s just not that many market cycles to look at. There’s not that many great data sources that you have a high level of confidence in. The second thing is there’s also a lot of investment opportunities that there’s no data.
Travis: Right. Correct.
Pomp: So, early stage investing is really, really hard to quantify.
Travis: Correct. The way the humans do early-stage investing is like … So, I can’t have a view on Ethereum without having a view on EOS, and I can’t really have a view on either two of those things without having a view on Hashgraph. When you think about that spectrum of investing, a machine’s not that great at … humans are really good about taking this really broad set of data and taking this unrelated thing over here and being like, this kind of helps me think about how this is gonna be, and this other thing over here that’s got nothing to do with crypto at all. It’s like, oh, I read about the history of the internet and it helps inform my decisions about how I think some of this is gonna play out. Machines don’t do that that well.
Pomp: Multi-dimension thought process and decision making.
Travis: Right. So, the way that we’ve built it at Ikigai now, we’ve got one systematic strategy. We’ve got algorithmic market making that’s run by a piece of technology, and everything else is a human at the end of a line pulling a trigger, but you’re pulling the trigger … you’re making investment decisions informed by information that … quantitative type of data and things that look more like quant strategies that help inform the investment decisions that the human makes.
Pomp: Absolutely. Let’s go back real quick before we jump fully into crypto here. Let’s talk about Point72. Obviously, you can only say so much about it, but walk us through what makes that place special and what makes that place different from the repeatability of the returns they’re able to drive for decades.
Travis: Culture of excellence, incredibly high-caliber people from top to bottom, a stunningly strong operational framework so that, as an investment professional, the operations of a hedge fund are the foundation that you’re standing on and you’re trying to build a house on top of that foundation, and the foundation at Point72 is the most rock solid slab you could possible imagine. There’s like 1,000 employees at that firm. I don’t know what the ratio of back office to front office is, but it’s like 2:1, 3:1, something like that. So, you’re standing on this rock solid foundation, you’ve got every resource imaginable at your fingertips and it feels like you’re playing pro ball so it helps you elevate your game. It was a great culture and great environment.
Pomp: ’Cause the person next to you or down the hallway-
Travis: World class.
Pomp: Is not only world class, but they’re here to eat your lunch, right?
Travis: Yeah. I mean, it’s not … I feel like people sometimes think it’s … it was not this … it wasn’t cutthroat. Nobody’s trying to stab somebody else. It was not like that at all. I can’t speak to old… like early 2000s… you hear stories about that. I joined in the middle of ’15, fantastic place to work.
Pomp: Loved it?
Travis: Yeah.
Pomp: That’s awesome. It’s great, too, when you can leave a place like that and not only say I learned a bunch, I worked with great people, I had a great culture, and couldn’t speak more highly of it. So, that’s awesome. All right. So, what was the reaction from, either people at Point72 or just Wall Street in general when you said, “Hey, long/short equity, that’s great. I’m taking the full jump, going into crypto.” Are people excited for you or people think you’re nuts? Are they trying to follow you down the rabbit hole? What’s going on there?
Travis: I’m sure probably not to my face, I’m sure many, many, many people thought I was completely insane. My mom thought I was crazy.
Pomp: Moms always think that you’re nuts until you prove that you’re right, and then they-
Travis: You’re gonna do what? Well, what is this Bitcoin?
Pomp: They believed in you the whole time.
Travis: All I read about is it’s for drug dealers. I’m like, that’s not not true, but you gotta look out in the future, mom. My mom’s a small town Texas mom. I grew up in College Station, Texas. My mom grew up in College Station, Texas. My mom still lives in College Station, Texas. But generally speaking, I think people probably thought I was … it was early. I didn’t think it was that much of a risk. It didn’t feel risky to me. Again, not a tech investor, not a seed stage investor. That wasn’t my career path.
The only other time that I felt like I did when I really dove into crypto and started to understanding it was the first time I took an Uber when I was living in Chicago. Chicago got Uber really early. It was the second city after San Fran to get Uber. So, I think the first time I took an Uber was January 2011 or 2012, 18 months after they started or something. Nobody had ever heard of it. I don’t remember how I heard of it. Downloaded the app, black car comes and picks me up from my apartment, I got to a store, drops me off at the store, I’m standing on the sidewalk, drives away. I’ll never forget it. I was like, “That is going to change everything.” And I was positive about it. Positive about it. Sure enough, you watch what Uber did, obviously, over the coming years and I used to joke around, the day I took that Uber, I should have just quit Magnetar and walked into Uber’s office and been like, “Yo, I’ll push Microsoft Excel for you. I’ll do Biz Dev. Whatever.”
Pomp: Just sign me up.
Travis: Pay me in stock would’ve been a good career move.
Pomp: Beyonce’s got a line: pay me in equity.
Travis: Yeah, exactly. I would’ve been probably the 25th dude, whatever, at Uber, and that would’ve been a nice move. Only other time in my life I felt like that was when I really understood crypto and I dug into it, and I just didn’t have any doubt in my mind that this thing was gonna completely change everything. Specifically, I’m super unsure about how that’s gonna happen. It’s just I’m directionally, broadly, highly convicted. As bullish as you can be. It felt like a great bet to go make in terms of betting my career on it.
Pomp: It’s this idea of confident in the trend, details to be determined.
Travis: Yeah. So, what I tell people is there’s a nonzero chance that Bitcoin could be Netscape and Ethereum could be Alta Vista and we haven’t Google and we haven’t seen Facebook, Amazon, Netflix, Uber yet, and there’s a nonzero chance Bitcoin could go be the global, immutable, decentralized store of value and the world reserve currency, and one BTC could be worth 450K or 2 million or 3 million or pick a number and everything in between. I’m really not sure about specifically how that’s gonna play out, and so the way we’ve built Ikigai is to have malleability in our mandate and to have a clear look into how this thing’s gonna play out so you can make investment decisions accordingly. You just go with the strong opinions weakly held thing. You intake as much information as possible, you assess that information, you analyze it, you make investment decisions based on it, and when something new comes along, you change your mind, dude. You change your mind.
Pomp: How do you that, though? You’ve got conviction on something, you’ve got the strong opinion, you know that it’s loosely held, but what are the things that you look at that would change your mind? Is it data? Is it conversations? Is it gut? What are you looking at that allows you to change your mind, not necessarily on a dime, but pretty quickly to go after a different opportunity?
Travis: That’s a great question. It’s so many things. Yeah, it’s so many things. Coming from the world that I came from, I do latch onto any kind of data that I can; it’s pretty natural to me. Probably done more work in that than certainly not everybody. Hats off to a Nick Carter. The guy’s a beast with all that stuff. And Brendan Bernstein’s great. A lot of those guys, but I definitely have a tendency to take that … anything I can quantify, let me try and quantify it, and maybe I can’t draw an investment decision from it, but let me at least have it. Give me as many tools in my tool shed as I can get.
This space is very big on narrative investing. You track these narratives and start thinking through that, and you have to understand how these things are developing. A year ago, we were talking about … like, oh, we’re gonna use Bitcoin to buy a cup of coffee. Remember that?
Pomp: Oh, yeah.
Travis: That was a year ago. Oh, that’s what we’re gonna use Bitcoin for. Okay, got it. As people realized that wasn’t gonna happen anytime soon, it’s like, oh, no, it’s digital gold. I don’t know, Austrian economics. I get it. I get that. Ethereum, World’s Computer. Oh, it’s a decentralized computer, blah, blah, this and the other. Oh, it doesn’t scale. Oh, shit.
Pomp: What else can we use it for?
Travis: Oh, yeah, but it’s gonna scale ’cause we got Casper coming. Oh, wait. We don’t. Casper’s not close. Oh-
Pomp: Or we can save the world’s electricity ’cause we’re gonna go proof of stake.
Travis: Right. Right, right, right. But even from the very beginning, when I really went down the rabbit hole, just ’cause I am a really cautious guy. As an investor and as a human, I’m cautious. I’d never go skydiving. I’m not about that life whatsoever. As an investor, I’m very cautious in the way that I invest as well, too, and so the hundreds of hours that I spent in the beginning before I quit my job, a lot of that time I spent looking at all the problems in this ecosystem. I was like, why is this thing not gonna work? Why is it not gonna work? Why is it not gonna work?
I was looking at proof of work. This is obviously not gonna work on a large school, and then you look at this proof of stake thing. I’m like, but it’s not as secure, but then you start really digging into it, and a lot of the cryptography … people have been doing proof of stake as a concept and cryptography’s been around since the 90s. It’s not a brand new concept. Cyclic graphs. People were doing that work in the 70s, and now you’re just trying to weave it into computer science. That gives you a little bit of comfort that you’re not just trying to pull this stuff out of thin air.
Pomp: It’s what makes it so interesting to the smartest people in the world is it is the true polymath type environment, where you gotta have knowledge and some kind of experience or perspective from a whole bunch of different disciplines and you pull them together and it’s not just, let me pull economics, computer science, geopolitics, and the history of money on an even basis. I might actually only pull 10% from economics and 50% from psychology, whatever. How do you build that into a skillset that then not only helps you understand it, but then you can deploy capital against, right?
Travis: Yeah.
Pomp: And sometimes those two things actually aren’t the same, and I think that’s part of what draws so many smart people into this space is there’s problems that need to be solved and they’re not solved yet. They may never get solved, or they may get solved tomorrow.
Travis: It’s the puzzle of all puzzles ’cause there are so many aspects to it. It gives you so much to chew on. If you figure it out, obviously, from an economic incentive perspective, if you get it right-
Pomp: You’re gonna win the game.
Travis: Yeah, you’re gonna get paid on that. Not to get cheesy, but the societal aspect of it as well, too, was super important to me. Like Ikigai-
Pomp: Let’s talk about what you’re doing today and where the name came from.
Travis: So, Ikigai, ancient Japanese concept that means reason for being. Super old world. It’s, like, a 1,200-year-old word. There’s books and stuff written about it. If you Google Ikigai, you see this Venn diagram and the Venn diagram’s what you’re good at, what you like to do, what you deserve to be paid for, and what the world needs. I came across the concept randomly a year ago and I really liked it, and to be honest with you, I had a career in hedge fund investing, and I liked doing it. I was pretty good at it. I made a fine living doing it, but the world doesn’t need another hedge fund manager. If the world doesn’t get another hedge fund manager, the world’s gonna be just fine.
Pomp: Some would argue we could lose a couple and be okay.
Travis: And be just fine. But the world needs this technology, and the technology is a platform to effect societal change for the good. I’m much more of a realist than I am … you run across a lot of techno utopians type of person in this space.
Pomp: Of course.
Travis: A lot of those dudes. I’m much more of a realist, but what I saw society starting to recoil from these monopolistic abuses of power at various different levels, and you start seeing these trends. It’s like, Brexit, Donald Trump getting into office-
Pomp: Hyperinflation.
Travis: NSA stuff, Facebook election ads, Black Lives Matter, Harvey Weinstein, Cambridge Analytica. There’s a common theme that runs across all that, and you just to have to look at all the surveys of millennials. Millennials are the generation to have a deep distrust of governments, large finical institutions, large technology companies. Facebook takes your data and they do shitty stuff with it. Google takes your data and they don’t keep it safe. Apple takes your data and makes these other products and they hook you in and they box other people out. It’s pretty monopolistic the way they do stuff, and stuff gets hacked all the time. Equifax, right?
Pomp: Look, if you are under the age of 40, you might as well just admit or give into the idea that your data, your personal financial data and your actual personal data is floating around on the internet somewhere, and if somebody’s got money, they can buy it.
Travis: Facts. Facts. You can get 500 credit card numbers [00:24:30] for $5 on the internet, on whatever black market stuff. You look at just millennials in general, and the same way polls are showing you how much that distrust is, the older you are, the less you think Bitcoin makes sense, the more you think gold makes sense. The younger you are, the more you think Bitcoin makes sense, the less you think gold makes sense. So, you fast forward a couple decades from now, and millennials, we’re all 50, and what do you really think is gonna happen?
Pomp: Yeah. I mean look, we go and talk to these institutional investors all the time, and I always tell them, I say, “Listen, if you don’t take anything else from this conversation, understand that people under the age of 35 have an amount of their net worth in this asset class that would make you just absolutely disgusted. I’m talking mid double digits in many cases, where we’re talking 35, 40, 50, sometimes 70, 80% of their net worth, their total net worth, is tied up in digital assets.” Now, some of it is they put a little bit and they exploded it and value and so it grew, but I also know a lot of people who are taking 50, 60, 70% of their salary and they’re still buying. It’s a store value. It’s a medium of exchange. It’s the new stocks, the commodities, the bonds.
Travis: It makes sense. It makes sense.
Pomp: It just resonates.
Travis: The problems are gonna get solved. the hiccups with the industry are solvable hiccups.
Pomp: Absolutely and also it’s the opportunity cost. If you’re an institution, you gotta hit your 6 to 8% actuary assumed rate of return in order to pay out the millions of people who are depending on you if you’re an endowment for education or if you’re a pension for retirements, all this stuff. You’re not hitting that today in most cases. Well, if you can’t hit 6 to 8%, where do you go?
Uncorrelated digital assets is one are to look, and so millennials are saying, “Even if I could hit 6 to 8% in the public markets, debt, real estate, all this stuff, that’s not interesting to me. I can take a bunch of risk. I’m young.” So where do they go? They go for the 6, 700, 800% annualized returns that they just saw, and so they’re gonna continue to do that. It’s all of these forces at work that drive a huge amount of capital from a very specific demographic into digital assets. Everyone’s gonna follow. They have to follow. It may take longer, but it’s gonna happen.
Travis: Internally, we talk about it. It’s like musical chairs. Sovereigns, they have their game of musical chairs that they’re playing and institutional investors. Endowments, state pension funds, state plans, things like that. It’s like a game of musical chairs, and Bitcoin just stopped the music, or Bitcoin’s in the process of stopping the music. Nobody’s really sitting down yet. You hear whispers. There’s some people in who’s buying a lot of Bitcoin. You hear that. You hear whispers about stuff from a sovereign perspective. We know there’s definitely some large financial institutions that are definitely sniffing around and maybe got a little exposure here, little exposure there. Maybe something crazy happens, like Italy gets kicked out of the EU and the European Union starts looking like it’s questionable, which is not a-
Pomp: There’s a nonzero chance.
Travis: That’s a totally nonzero chance over the next couple of years. Totally nonzero chance. And then all of a sudden, it’s like you hear that the Swiss Sovereign Wealth Fund’s got some Bitcoin. So, now Switzerland just sat down and there’s not than many chairs. You got 21 million bitcoin, a couple million of them are lost, and so now people are like-
Pomp: Only 17 million have been mined. Game on.
Travis: All of a sudden, it starts looking like … it’s what we were talking about. It’s irresponsible to not be involved. The reflexivity and the price action, when some of that stuff starts catching on, the potential, I mean, it’s gonna be breathtaking if some of that stuff plays out.
Pomp: We actively tell these institutions it’s the best performing asset class over the last five years. If you had 1% of digital asset exposure into a global 60/40 portfolio, the returns go up by anywhere between 100 to 300 basis points, depending what it was, and the standard deviation of risk stays about the same and you get a double digit increase in sharp ratio. The second you start looking at that, where else can you get that? It’s not about how high can they go. It’s actually about managing risk of your overall portfolio, and if you have zero exposure to the asset class, you have to immediately get off zero.
You can imagine talking to a 50, 60-year-old CIO who manages billions of dollars and telling them get off zero. That’s the message right now, and I think to your point, there’s people who are starting to do it, but when the dam bursts, watch out.
Travis: Right. Totally.
Pomp: All right. So, let’s talk about some of the things that are happening pre before that happening. So, right now, I know that you’ve got some really interesting thoughts around BitMEX and some of these markets that are already here that people are already using today. What do you think is so interesting about those types of companies and markets that are being built?
Travis: So, earlier, you were talking about how do I change my mind? Part of it is you create all of these processes around in taking every aspect of information that you can about the development of this space and assessing that information and putting it into a broader mosaic framework to help it make investment decisions, and a lot of that is just thinking about market structure and year to date, the two 800-pound gorillas that have shown up from a market structure perspective, year to date is BitMEX and the Asian algorithmic market maker.
Pomp: Let’s go BitMEX first. So, explain what is BitMEX? [00:30:00] Why do you think it’s the gorilla, or one of the gorillas?
Travis: So, BitMEX is a non-licensed exchange, or unregulated exchange. They trade synthetic Bitcoin future. You fund only in Bitcoin. You can get up to 100 X leverage, long or short, on Bitcoin. It’s been around for a few years. Wasn’t that popular, especially in 2017 when everybody was going shitcoin hunting on Cryptopia and KuCoin and Binance, but as the market’s woken up year to date and realized all that stuff’s worth zero, BitMEX has become … I think they’ve got two or three times more volume than the number two exchange. You can get massive leverage on it.
Pomp: So, I really wanna talk about this leverage thing ’cause I don’t think a lot of people understand one, what is leverage and how do people use leverage in a positive manner and then what can that do to the market on the negative side as well?
Travis: So, specifically in the context of BitMEX, if I put one Bitcoin long with 100X leverage, that means I’m getting returns along 100 Bitcoin.
Pomp: So, you take out of your wallet or your portfolio, you take one Bitcoin, which is worth whatever, six, seven thousand dollars today, and you put it down and say, “I think it’s going to continue to go up in value as the bet,” but you’re getting credit for actually having put down 100 Bitcoin and saying these 100 are gonna go up. Why does BitMEX do that?
Travis: ’Cause humans love to gamble.
Pomp: What is the economic benefit to you when you put this 100X leverage on, and what is the potential negative side effect?
Travis: So, if the price goes up-
Pomp: If you’re right.
Travis: Right. Then you’re generating returns like you’re along 100 bitcoin, only putting up one Bitcoin worth of risk.
Pomp: Great risk return profile.
Travis: However, specifically on the 100X example, the way the margin works is is it doesn’t have … the way normal margin works in the real world, it’s a function of how much money you have in your account, and as long as you have money in your account, you continue to make … like at end of day, there’s margin calls and you make it up if you’re losing money every day to stay even in you’re account.
Pomp: So, you can basically pay down the margin? You can keep posting more collateral?
Travis: Your loses. And you can stay in a position forever. The way it works at BitMEX is the leverage is only specific to that individual trade. So, if you have 100X leverage on, you lose 1%, you automatically get stopped out and you lost the one Bitcoin that you put up. Or if you’re along 25X leverage, then you get stopped out at 375 bits, whatever the number is.
Pomp: So, great deal for BitMEX.
Travis: Oh, yeah. Arthur Hayes.
Pomp: Just absolute savage and just printing money right now.
Travis: One of the most savage guys in the space, period. Complete macho man Randy Savage.
Pomp: Yep.
Travis: Complete, complete, Macho Man Randy Savage.
Pomp: And we talked about it before, the part that I love is not only that he’s created these products, and he’s got them out there, and people are using them, but he out pounding the table saying, “We have them.” So he’s on Twitter, and he’s saying, “Look, good traders go both ways. Up or down, let’s see what you got.”
Travis: Yeah, and he introduced … so he started rolling out a new instruments. So he got directional Eth exposure, and up to 50X leverage on Ethereum, and you get paid in Bitcoin. You don’t get paid in Ethereum. If you make money on the short side, you get paid in Bitcoin. So you’re shorting Ethereum, making money in Bitcoin. Same thing-
Pomp: Which most of the shorts love.
Travis: Yeah, of course. You can now go long short on Ripple, Tron, Bitcoin Cash, Eos, Cardono, and with varying up to 20X leverage on some of them, 50X on others. And quantitatively a listing on Bitmex has been the kiss of death year to date.
Pomp: So I was just going to ask you, what do you think this is doing to the market?
Travis: What it’s done is, it’s given a venue to now have true price discovery, two way price discovery.
Pomp: Because previously you could only go long.
Travis: Well you could short on Bitmex, but you didn’t have enough liquidity. And now, there’s a ton of liquidity on Bitmex right now, so you can really express it. Except, which I’m glad you brought this up, it’s the worse kind of liquidity.
Pomp: Why?
Travis: Because it’s liquidity, except there’s extremely sophisticated quantitative investors, wall street guys, like-
Pomp: Like your old role.
Travis: Yeah, yeah. Not specifically point 72, but-
Pomp: Those types of people.
Travis: Like those types of folks, right. The best in the business form a quantitative perspective. I don’t want to name names. One of them rhymes with lump, the other one rhymes with BE raw. So these guys are doing liquidity modeling on Bitmex, and the way that works is, they call the network three times a second, and by calling a network, they’re pulling down very minute volume data. And then, I’m not 100 percent sure, but I think how they do it is, they can see where the price gets executed, relative to the specific volume at that moment, relative to the bid ask. I think they can backend to the amount of leverage that was put on for that specific trade at that specific moment, three times a second.
Pomp: Wow.
Travis: And they’re able to then map out where the stops are. And then you can map this out, and then they see where a bunch of stops start getting stacked up on top of each other.
Pomp: Foot on the gas.
Travis: Right, and it’s just like a Jenga game, except these really sophisticated quants are the only ones that can see the Jenga tower. Everybody just thinks it’s like, “Oh, there’s no blocked being pulled out yet,” but they see the whole thing. And then when they see all these stops that could potentially get pushed over, then all they got to do is go and the Jenga tower a little nudge, and then you run through all those stops. And so I you just look at the price action over the last handful of months, it’s so obvious that that’s the market structure that’s going on.
Pomp: And that’s when you’re seeing it. If you’re a retail investor, you’re seeing up, immediate within seconds, 400 price jump, right?
Travis: Right.
Pomp: Because basically you’re tipping it over.
Travis: Yeah. That’s right. And everybody gets stopped out. And then also Bitmex works just fine, until you really it to work, and then it doesn’t work anymore, because it gets shut down, because there’s too many people trying to trade. And then all these stops get run out, and then the really smart guys take all the retail guys money. So that’s terrible for the long term health of the ecosystem, which is why I wanted to talk about it today. You know those vines that wrap around the tree, and they kill the tree if you let the vine sit there long enough? That’s exactly, that type of stuff is happening right now. And so it’s really to the detriment to the long term health of the ecosystem. I’m guessing that it’s untenable in the medium term, and something’s going to happen. I don’t know what’s going to happen.
Pomp: But is it more so like a regulatory type solution? Or is it just that more people come to the space that are smart, and they all start commoditizing some of this, and then you get some relief?
Travis: Well the way I think about it is, if the quant is the bully, and the retail guys, like the small kid in school, everyday the small kids walking into school and getting punched in the guy by the bully, and he gets his lunch money stolen. After a while, you just stop going that way, right? And that’s exactly what’s going to happen. They’re just going to clear out all the retail money. It’s just going to be quant on quant crime, which I think it’s like … this is all happening in traditional asset classes. Quant on quant crime’s been happening for a decade now in traditional asset classes. And so that’s a problem. And the other things I want to talk about is Asian algorithm market making, which is the other 800 pound gorilla, which is also the vine that’s wrapped around the tree, that’s going to kill the tree if you let it keep going.
Pomp: So let’s just start with what is that?
Travis: Yeah. So I don’t mind-
Pomp: Let’s get the names.
Travis: Let’s see here, this one rhymes with left free he. Yeah, there you go.
Pomp: So there’s a couple of them, right?
Travis: There’s about 10 big boys. And they don’t sit in the United States. They’re not United States citizens, they’re businesses aren’t domiciled in the United States. So they’re out of the long arm of the reach, the long reach of US regulators.
Pomp: They’ve got some protections.
Travis: Which means you really can do whatever you want to. And it’s not illegal. And we call it … can I cuss on this?
Pomp: Yeah, of course.
Travis: We call it fuckery, cause it’s not illegal, it’s fuckery.
Pomp: And fuckery’s a combination of manipulation, and-
Travis: It’s morally stuff that you just wouldn’t do. And morals is a cultural thing. So I’m not trying to … look, they got a different set of cultural values than me, and if I was a Chinese guy that lived in China my whole life, and I could start printing money like that, I might do it too. I don’t know.
Pomp: You could view it as actually, “Hey, I’m getting back at you. You guys have been messing with us for decades.”
Travis: Whatever, right? Yeah. That’s what’s happening. So it’s one of the main reasons why the Asian ICO market, right now, as we sit here today, has decoupled so much from the US ICO market. US ICO market is almost ground to a halt. You got a small percentage of deals that you had earlier this year.
Pomp: Well it’s almost like the bully student example that you gave earlier. It’s like the teacher showed up in the hallway. It’s like, “Hey, hey, hey, knock off all the fuckery.”
Travis: Yeah, yeah, exactly. That’s a great point. That’s what is happening in the US ICO market. So now you’ve got Asian ICO, X, Y, Z token. They go raise like, 40 million dollars in their ICO. They take 10 percent of the tokens, and they just give them to the algorithm market maker. And not only do they give it to them, they also give them six million bucks in eth too. And then they get a coin listed on an exchange, and then they start wash trading. They start wash trading back and forth with each other.
Pomp: All right, so most people aren’t going to know what wash trading is. Let’s start from the beginning of, if you’re one of these tokens, you did your ICO. When you get listed on an exchange, you need liquidity. So there’s a couple ways to get liquidity in your token, or the trading volume on daily basis. One of them is wash trading. What is that?
Travis: So you have multiple accounts set up on the same exchange, and you’re buying and selling to yourself from yourself.
Pomp: So you own all the accounts on the exchange that are doing the high volume trading for the day?
Travis: Yeah. That’s right, you’re just executing trades amongst yourself with multiple account.
Pomp: Yeah, and that gives the illusion of-
Travis: The illusion that there’s volume, there’s real buying and selling that’s happening. And, by the way, they’re just driving price. You’re literally just manipulating price to get to a certain level. And these guys will contractually guarantee a volume, and contractually guarantee a market price in writing. Again, it’s not illegal over there. So it’s like, it’s fine. And they get paid hella money to do this. And then even crazier than that, they use WeChat over there, we use Telegram, everybody’s talking about it. So they’re I their WeChat groups, and they’re listening to all the technical indicators, like the TA guys, that are talking about the different indicators that are in this particular crypto, and they listen to whatever people are talking about, and then they just start painting a specific technical indicator.
So like, “Ah, it’s a bull flag. Oh we got a bull flag coming up. Oh, we got a rising ledge,” this, that, and the other.
Pomp: I mean, it really is a, it’s psychological warfare against retail investors to some degree.
Travis: Yeah, it’s terrible. It is the vine around the tree that will poison the tree. It is to the detriment of the health of this ecosystem as a whole. Now, the scary thing is that the exchanges are in on it. CZ’s in on it. They’re in on it, because in a bare market, they got to have these guys.
Pomp: They need the volume.
Travis: They go to have them. And if a X, Y, Z token gets listed, and they don’t have an Asian algorithm market maker on the backend, then the token, there’s a good chance it’s going to crash as soon as it gets listed, because the private presale investors that got into 80, 95 percent discount-
Pomp: Dump it.
Travis: … they’re dumping immediately. But the crazy thing is, is you’re giving 10 percent of the tokens away, and you’re giving 10 percent of the raise away to catch the volume on the backed. You see how not good that is?
Pomp: Mm-hmm (affirmative).
Travis: And how untenable that is, and not healthy for the overall longterm-
Pomp: It also, it is serving the number one used case for crypto today, which is speculation.
Travis: Yeah.
Pomp: Right? That’s literally what is happening here, is they’re taking tokens and they’re creating new speculation tools or products, and people are using them for speculation but not for the adoption that actually drives longterm sustainability.
Travis: Right, and the individuals or entities most likely to make a profit from that situation, are the ones that are the most sophisticated. The ones most likely to lose money … just the more realish you are, the more you’re guaranteed to lose money in this process, which is just not good. I am hoping, and I don’t know, maybe CZ are going to hear this, we’ll Tweet it to him. Does he like you? You homies with CZ?
Pomp: He retweets me a lot. We’ve never really talked.
Travis: I hope he hears this. When we get out of this bare market, which I don’t know when it’s going to be, but you got to cut the fuckery man. You have to self regulate. You have to self regulate. And you got to … this wash trading, the price manipulation, painting TA signals, you can’t have that.
Pomp: Here’s the one thing though that I think is really interesting. So the one thing that I’ll say to defend some of them, because I think that you’re probably right in that a lot of this is going on across exchanges. I think that it’s just what they believe, whether they’re right or not, needs to happen for the volume to be there, bare market, all that kind of stuff. So let’s just put all that in a box and set it aside for a second. The one thing though, that I think encourages me that that won’t be the longterm strategy, is all the tokenized security stuff. So you start to see a bunch of these guys saying, “You know what? Look, the token stuff, the speculations, it’s going to keep happening. We’re making a bunch of money today.” But longterm, regulators are going to step in in different jurisdictions, they’re going to draw the rules, and we’re going to have to play by the rules.
And so they say, “Tokenized securities.” I don’t, and I could be wrong on this, I don’t know if they’re going to be able to do a lot of that, wash trading, et cetera, in the highly regulated tokenized security world like they can do it now. Maybe they can get away with a little bit of it, but that gives me hope that there’s a light the end of the tunnel.
Travis: I agree with that.
Pomp: And tokenized securities will actually make this a much more traditional market.
Travis: I agree with that. And none of that stuff can happen. You can’t wash trade on Gdax, you can’t wash trade one Bitfinex. And they’ve got all kinds of technology to catch you. And if you do just a little bit of it, they will kick you off for sure. So Ikigai, so have an algorithm market making strategy, that makes money off buy and sell spreads, and very liquid tokens. And we also provide US regulatory compliant algorithmic market making as a service to tokens.
Pomp: Oh, interesting.
Travis: So if you want to do it, like in a regulatory compliant way, and it’s just buy and sell, it’s just a 24 … we’re the 7-Eleven. We’re open 24 hours a day, 7 days a week, nice piece of technology that’s sitting there. And if anybody wants to come by or come sell, we’ve a piece of technology that can easily execute those types of things. And your not manipulating price, you’re not doing wash trading. You’re obviously not painting any kind of TA signals or anything like that, because you do need a liquidity provider. Look at traditional asset classes. It’s an enormous business. Liquidity providers is a multi-billion dollar, many, many, many billion dollar a year business. And so, that’s not going to go away. You just need to do it in a manner that doesn’t bend over the retail investor.
Pomp: Absolutely. I completely agree with that. All right, so let’s switch for a second and talk about the evaluations of digital assets. Today, I think that there’s probably much more information, much more theory around how do we actually use data? And fundamentals to value individual assets. How are you guys thinking about this? Where do you think we are in terms of the maturation of evaluation methodology for digital assets?
Travis: Yes, this is a topic near and dear to my heart. I pretty much stopped doing anything other than valuing stuff when I was like, 19 year old. First up level finance class, my junior year in college, it’s pretty much all I’ve done since then. Done it in a bunch of different asset classes, done it in super liquid stuff, done it in completely illiquid stuff, up and down the capitol structure. And so, when I came into this space, it was incredible to me to see how early it was in thinking about, if I buy a crypto today, am I paying a lot or a little for it? If I buy Bitcoin today, am I buying a lot or a little? Well the price is $6500. Well that doesn’t tell you if I’m paying a lot or a little for it. It’s just a price. When I think about back to my old career path, if I want to buy a share a Exxon Mobile today, am I paying a lot or a little for a share of Exxon Mobile?
I’ve got 30 different tools in the tool shed to help me understand whether or not-
Pomp: And the way you’re coming to that conclusion, traditional markets, or in the digital asset world is, what is the price? And what is the value of the actual asset? And is above or below the value of the asset, the price I’m paying?
Travis: Price is not value. Price is what you can buy it for today, but you need some sort of relative valuation framework to think about, is this is a lot? Am I paying a lot relative to historical? Am I paying a lot relative to other assets? So you start needing to have this homogenized framework to start thinking about these kinds of things. And in traditional asset classes, there’s all sorts of stuff. I got metrics based on assets, and revenues, and cash flows, and earnings, and growth. And I want to buy a share of Exxon Mobile, I can take my oil price assumption and plug it into my model. There’s multi-factor models where you start breaking apart a stock, and it’s like, this stock is a function of … it’s a momentum stock, or a value stock, or it has high leverage. There’s all kinds of different valuation metrics.
And then I stepped into this asset class, and I’ve read probably 80, 90 percent of things that have been written about valuation and crypto period. I’ve read the vast majority of it. Nothing has been written about crypto asset valuation that older than 18 months old, which is crazy, because Benjamin Graham wrote the intelligent investor in 1949 or something. Still one of the most important books on equities and investing period. And when people look at PE rations for the S&P 500, you look at them 60, 70 years back in time. And you’re telling me nobody’s written anything that’s older than 18 months old talking about crypto asset valuation? So I started being like, how do we think about value in this asset class?
Pomp: Do you think it’s important to have the traditional market valuation understanding going into the asset class? Or do you think that there’s value in people not having that historical context?
Travis: I’m biased, but-
Pomp: All right, so what do you think?
Travis: These are public instruments, and they trade every day. And I wake up every morning, and I can buy or sell my entire universe every day. And not being involved in a specific name on the long or the short side is in and of itself a decision. That’s a position to not be involved. If I’m a tech guy, like if I’m a tech bro out of the bay area, that’s a developer or whatever, I have no understanding of that framework.
Pomp: What percentage of people trading crypto do you think have read the intelligent investor?
Travis: I don’t know man, way less than one percent. Right?
Pomp: Less than one percent?
Travis: Yeah.
Pomp: Wow.
Travis: Maybe, I don’t know. One percent maybe. And look, god bless those guys, because they have the vision for this shit that I didn’t have. I was slinging long short energy equities when these guys were all in this stuff. So I really appreciate that.
Pomp: Yep, different skill set, different perspective.
Travis: Yeah, and same thing with the VC guys. I really appreciate that perspective as well too. But the way VC’s invest is, you make 10 bets, seven of them go to zero, the eighth one breaks even, ninth on you make two or three times your money, the tenth one you make 50 to 100 times your money. The best VC firms in the world, they do like, one and a half standard deviations better than that. The shitty VC firms do one and a half deviations worse than that, but that’s VC math. And it takes three to ten years for that cycle to play out. So just imagine the skill set that you get investing in that type of world, verus investing, like I wake up every morning, and I can buy and sell my entire universe.
Pomp: And you have data to analyze and you have data to drive decisions, whereas a lot of the venture stuff, especially the early stage, you’re betting on people, you’re using intuition, you’re going after a whole different set of criteria on a yes no decision, versus the daily liquidity, data driven liquid market.
Travis: Right. And so that all feels comfortable to me. And so I started looking around for how to think about crypto asset valuation, and people like to use, total addressable market’s an easy one. Gold’s like seven and three quarters trillion dollars, so if Bitcoin gets half of that, it’s like seven hundred and seventy five billion, that’s up five times from here or more.
Pomp: Right, divided by how many Bitcoin.
Travis: Yeah, so that feels, that’s kind of helpful. And then people starting realizing that network value should be a function of network activity. And transactions per day, active wallet addresses, even things like community vibrancy metrics, which is like GitHub, GitHub Commits, GitHub Stars, lines of code written, net of lines deleted. People were looking at Slack channel members for a while, Telegram members, it’s way too easy to gain that. And there’s noise in all this stuff, which is a big problem with it, because it’s not, again, back to our quantimental approach, in trying to take in as many different … you got to use all these different tools in the tool shed.
So I can’t go hang my hat on, oh I got a strategy, I just wake up every morning and if there weren’t enough transactions on the Bitcoin network yesterday, I’m sure the … it doesn’t work like that. But it gives you something to try and help frame the overall mosaic approach to valuation.
Pomp: So here’s a controversial thought for you, I’m biased because I come out of this world, but I actually think that a group of people who have the best skillset for investing and trading in the crypto asset world, is people who worked on growth teams at large technology companies, because they’re used to the multi-disciplinary approach around statistics, psychology, user interface, community, growth, network effects, all this stuff. And they brought it together to drive growth of these assets. And so there was no price attached. So it’s really hard to say Facebook or Twitter, or whatever, hey our network value is X, and here’s our stock price. There’s none of that going on. But I think that the jump from that basic understanding to what price should do, is really easy compared to somebody who doesn’t have that understanding from a ground up perspective.
Travis: Completely agree. Glad you brought it up, because I want to unpack that. Because what your background is, is a boots on the ground experience of Metcalfe’s law, which people have taken Metcalfe’s, and tried to apply it to crypto asset valuation a lot, and-
Pomp: And there’s some truth there. And there’s also a lot of lies in there as well, by taking that one principle and trying to apply it.
Travis: Yeah, well true Metcalfe’s, which is the value or a telecommunication’s network is directly proportional to the square of the number of users, true modified Metclafe has never been shown to accurately describe the value of anything. But in 2013, I don’t know if you’ve read this paper yet or not, in 2013, some guys came out, I think Bob Metcalfe himself was actually involved in this. They put out a paper, either ’13 or ’15, where they introduced this modified Metcalfe concept called the Netoid Function, which is a S curve shape, which makes total sense, because you’re going to level out. Because if I’ve got five telephones in the world, and you add a sixth telephone, the amount of value that went up is totally different than if I’ve got a billion telephones and I add the billion and first telephone. Totally different. So it’s this S curve Netoid Function.
So this academic paper introduced the Netoid Function, and then, which instead of being true Metcalfe’s, it introduces this virality factor concept, and then introduces the percentage, it adjusts it for the percentage of users that have adopted relative to the total number of users that could adopt. And it introduces this S curve, and then they showed the Netoid Function to accurately fit the number of monthly active users on Facebook and 10 cent, to Facebook and 10 cents revenue growth. And that’s down. That’s super dope. And you were obviously front lines for that, right?
Pomp: Yep.
Travis: And so then that got super interesting in terms of thinking about crypto asset valuation, cause that feels like crypto. Totally feels like crypto.
Pomp: Part to it too, is not just where are we today in terms of what percentage of people are using something compared to the amount of people who could use it. So kind of addressable market and actual users, but also a lot of things that don’t get talked about around crypto, is what’s efficient. And things where like, every person who starts to use Bitcoin, how many other people can they bring into this system? It’s really hard to quantify that. It’s hard. So there’s some level of virality there, and as much as I joke around on Twitter about the virus is spreading, that’s really where it came from.
Travis: 100 percent.
Pomp: It was this idea that if I tell you about Bitcoin, and I tell three other friends, some percentage of you are going to say, “This is stupid,” some percentage of you are going to be like, “I’m all in and I’m going to go be the next crypto anarchist,” and some group says, “I want to learn more.” And so what does that growth look like as more and more people learn this? And what we find is, it really does capture the mental energy and attention of a whole demographic of people. It can’t be stopped. You cannot kill this.
Travis: Yeah, so the introduction of a crypto asset, what it does, is it allows for network affect to take hold in a completely different way than you’ve ever experienced in any other kind of instrument, or anything like that before. Because in traditional network affect, you’ve got, which is simplicity, any technology that drives significant portion of its value from network affect, it’s just the more people that come to it, the more the value goes up. And-
Pomp: Each additional user makes it X percentage more valuable as a network overall.
Travis: Yeah, that’s right. And it’s an S curve. And you get to the point where you hit critical mass, whether it’s a certain number of users, where in the network, where the average utility provided to each user, relative to the status quo become compelling. And then it takes off. And you hit parabolic phase, and then it levels off. It looks a lot like the Netoid Function. And so you have the bootstrapping phase problem with everything that has network affect. And that’s like, how do I get to a million users, five million users, twenty million users? Where you get to that compelling utility for each user relative to the status quo. And what the crypto asset does, is it allows speculators to stand at T zero, look out into the future, and make a bet about what that utility may be one day, if enough people come to the technology to use it.
And by standing there at T zero, and making a bet in the future, those speculators are able to receive financial utility today, and that financial utility you provided today, makes up for the bootstrapping phase, and they literally pull a technology into an existence via speculation. That is super revolutionary, dude. That is one of the big reasons I quit my job. When I understood how that worked, I was like, “I got to” … you’ve never seen anything like that before, ever.
Pomp: Yeah, the only analogy I can think of, and it’s completely different, is this idea with Facebook. So I forget the exact numbers, I’m going to mess it up, but you had to get 10 friends in the first 14 days when you joined Facebook. And so when Facebook realized this, what they was just getting a Facebook account, you had X percent chance to stay as a retained user over some period of time. If you got three friends in two days, you would have X percent, plus five, or whatever. And they eventually realized that, let’s call it 80 percent of all users, if they get 10 friends in 14 days, they’re going to stay for a year, or whatever it is. And so they sort of drive towards that metric. And so you join Facebook, you had no friends. They just inundate you, give us all your contacts, give us your email, do you know this person? Do you know that person?
Travis: Suggestions, suggestions, suggestions.
Pomp: They just overwhelm you until you start connecting with people. The second you hit that 10 in 14 days span, they back off and let you enjoy Facebook, because they got you. Then the data shows them that the lock in is there. And that network is going to pull you along to be a user. I think that social networks is very, very different than the technology we’re talking about on the digital asset side. There’s some comparisons or analogies, but the idea with money or economic value, it’s everything that these social networks did and we did for years, on steroids on a global basis. And I think that’s what’s pulling so many of these great minds in, is a whole new puzzle, it’s a whole new game, it’s global, and nobody has figured it out yet.
And the first groups that figure it out are going to not only personate a profit, but they are going to create inflation points to the technology that are going to be groundbreaking.
Travis: So that’s the things that’s actually, as a guy that was searching really hard for a valuation methodology, I got super fired up about a modified Metcalfe’s, read everything that’s ever been written about it, talked to professors, and shit like that. And started building my own frameworks around it, and I think the issue is that, and what really got me fired up is that the Netoid Function accurately representing monthly active user growth to revenue growth for 10 cent and Facebook. I was like, “Man, this could really be the answer.” But the introduction of speculation, I think may make modified Metcalfe approach just not really work, because the speculative aspect of it introduces the reflexivity that we’ve seen. And that’s a function of the velocity characteristics of speculators versus users. And we don’t have enough time to go into velocity.
I’ll just say, it’s totally a massive thing in crypto. Every once and while, I run across people that say it’s not a thing. They’re literally wrong. It is totally a thing, and the velocity characteristics of the speculator, I think may get in the way of modified Metcalfe’s acting the way it would in a social network setting. Because I’m not out there gambling with my Facebook users, like that kind of thing. And so that’s unfortunate.
Pomp: It’s different with each case. Yeah, absolutely. So let’s talk about, up till today, so 2018, we’re filming this in September of ’18. Let’s talk about price action from January 1st through September ’18. We just say 20 thousand in Bitcoin end of year. And also off sudden we get this huge 70, 80, 90 percent draw down across digital assets. What’s going on?
Travis: So it’s a number of things. And it’s kind of an aggregate. Bitcoin’s down 70 percent off the high, Ethereum’s down like 85 percent off the high. A lot of these tokens are down 90 plus percent off their highs. How do we get there? And it’s really an amalgamation of relatively, I think, unrelated things that an aggregate came to that. One, you had just a blow off top in late 2017. Price of Bitcoin went from 58 hundred to 20K in 34 days bro.
Pomp: You mean that’s not normal?
Travis: 34 days, 58 hundred to 20 thousand. And completely unsustainable.
Pomp: Probably one of the most epic price movements of the last 100 years?
Travis: No, ever in any instrument ever. Anything.
Pomp: Nuts.
Travis: Yeah. And so you had to back a lot of that out. And the price action got so drastically far out in front of it’s skis, relative to where the tech was. Top hundred aggregate market cap tapped out at like, 830 billion. 830 billion.
Pomp: It’s wild.
Travis: Wild.
Pomp: Because what is that, that’s like one eighth the size of the gold market?
Travis: Yeah.
Pomp: Something like that, give or take.
Travis: And the tech was not even remotely close to being ready. Nobody using any of this stuff for anything. So you had to back a lot of that out. Then you’ve got all these regulatory updates as well too. And the US has actually been, I would say, less heavy handed than feared. But there’s a lot of regulatory things over in … you’ve got China banning all kinds of stuff. India’s been super heavy handed.
Pomp: I mean, the US regulators, in my opinion, have probably been one of the best regulatory bodies across the globe dealing with this. If you told me in 2016, as all this was really starting to pick up steam, that we were going to be sitting in mid 2018, and they weren’t going to have really clamped on anything other than the people who egregiously violated a law around fraud, market manipulation, all that kind of stuff, I probably wouldn’t have believed you. And so they’ve allowed a lot of things to go on that were part of their learning process. And really saying, “Hey, what do people want to do with this? How does innovation evolve?” And I think that they don’t get enough credit for that. But now they’re getting to the point where they’re saying, “Hey, we got to figure this stuff out. We got to get some rules out there so the uncertainty goes away and now people can really start to build businesses in the United States, and they’re not looking for the regulatory arbitrages internationally.”
Travis: Right, but there’s been enough globally things happen from a regulatory perspective, it’s been a negative. The uncertainty, how things are going to get treated, it’s been a negative. It’s weighed on prices. Lack of institutional grade infrastructure, totally a thing. There’s the meme, in the back half of 2017, 2018, they’re like, “Oh, the institutional money’s going to come in the space. Oh, it’s all there.” How? Literally, how? Fidelity, you going to go buy a hundred billion dollars worth of Bitcoin and throw it on a dresser, and keep it in a filing cabinet?
Pomp: Abigail Johnson’s office.
Travis: Yeah, you know what I’m saying? How are they literally going to do that? You don’t have any of the major investment banks, can’t handle custody. The first that are handling custody aren’t big enough to take massive flows. We use BitGo for custody, but if somebody was trying to do a hundred billion in BitGo, they can’t handle that.
Pomp: And also the institutions that are building it today, I really do think that they’re looking at it as kind of like a commercial bank looks at a bank account. So if I build custody, and if I’m JP Morgan, Goldman, whoever, if I build custody, and I get you to use my custody solution, now I can sell you all of my services, trading, et cetera, around that custody service. It is the Trojan horse to customer stickiness. And so I think that not only do they need to build it for themselves, because that’s where they’re going to trust, that’s what they’re actually going to use, but then also it’s a huge customer acquisition benefit. And so if they can build this stuff they way they’re talking about building it, it may be the saving grace. It may actually give them a foothold into the market that allows them to really play as real players.
Travis: Yeah, we’ll get there. They’re throwing so many people, and dollars, and resources at solving all this infrastructure problem, dozens of projects trying to do it. So it’ll get solved, it’s just not here in 2018, so prices have been going down. And then volatility killed the store value thesis in the near term, there was that meme as well too. People thought we were just going to rock it up to like, 50 thousand dollar BTC, and then just hang out there, and you’re going to have, like, voila, digital gold. But like anything that goes up 14X in a year and down 65 percent in a hundred days, is not a-
Travis: A year and down 65% in a 100 days, is not a store of value. Yet, people are speculating that maybe one day will become a store of value, but it’s not yet. In the meantime, as people are waking up to that and like, you’re not gonna to buy a cup of coffee with Bitcoin any time soon either, right? It just doesn’t really make that much sense to do that.
Pomp: Well and time horizons matter, right? If you’re saying, “Hey, I need to store of value for the next year.” Probably not that attractive.
Travis: Right.
Pomp: Actually not attractive at all.
Travis: Right.
Pomp: If you’re saying, “Hey look, I want to store a high percentage of my net worth in this over the next 10, 20 years.” Now all of the sudden, you look at it a little bit differently, or your perspective changes on what is your belief of the future of the store of value properties.
Travis: Correct. Yeah. And so it’s like in the near term, BTC not really working as a SOV or a MOE. That’s hurt prices here to date. And then like, here come the stable coin parade too, right? Right? And you’re like, “Oh that’s how we’re gonna buy a cup of coffee, a decentralized stable coin.” And it’s not just shady Tether either, right?
Pomp: You think it’s backed up, one to one to dollars?
Travis: Whatever. Like, the Director of the FBI, said, it was like, okay … I’m like whatever happened in the past…
Pomp: That’s my whole thing, if at this point it’s not, right? You just, I mean, absolute, go back to your fuckery, right?
Travis: Right.
Pomp: If people have been speculating on this for how long, and then all of the sudden somebody goes to check today and it’s not backed up. It’s just complete stupidity.
Travis: Yeah, yeah. Obviously with all the fud around tether, it’s still the eighth largest Crypto by market capability, like $3.3 million of market cap in it or something like that. And so obviously there’s a really strong need for something like that. So there’s all kinds of people trying to solve that problem and you’re getting it. It’s like, what you got Andrews and Horowitz, it’s like throwing down hard on and paying capital ventures throwing down hard on it. Like, all these exchanges throwing down hard on it, so …
Pomp: I mean, what the biggest raise is probably Nater and the basis guys, right? So they raise like $130 million or something from the et cetera of the world. And then you’ve got on the other end of the spectrum, you’ve got the gemini, kind of regulated dollar, you know, stable coin. They didn’t raise any outside cap as far as I know. Right?
Travis: Right.
Pomp: So it’s two very different approaches. One’s an algorithmic central bank, the other is a, “We’re going all in on the existing laws, regulations, you know, Wall Street, et cetera. The scary part is, or maybe not even scary, just the interesting part is both could win. They could co-exist, right?
Travis: Oh yeah.
Pomp: There’s no kind of binary, one has to win one has to lose.
Travis: Yeah.
Pomp: Which makes it even more interesting.
Travis: Yeah. Yeah, so we’ll see how that plays out. Right? But I think that’s the introduction of the concept of a decentralized stable coin I think has hurt BTC prices here to date. Cause if you’re a Venezuelan farmer, or like, you know, you’ve sold your life savings into BTC at like, $19K, right … Well what you really wanted was like, US dollar, like you really wanted like a stable coin that’s like tied to US dollar, or whatever. So we’ll see how that plays out, but it’s certainly hurt prices here to date. And then also you’ve had this focus on valuation, and specifically token structure. And like, token structure in the context of value capture. Like, there was a general thought in 2017 that like, these ICO’s … Like, if more people come to this technology, the price of the token’s gonna go up. And it’s not that’s simple, right? And the vast … many, many, many, many …
Pomp: It’s also what every Ponzi Scheme believes as well, right?
Travis: Many, many, many of the like, 16, 17 vintage ICO’s, the token structure’s fundamentally flawed in it’s ability to accrue value over the long term.
Pomp: Yep.
Travis: And people didn’t realize that then, because no one was talking about valuation, and what really happened was, I think, was Chris Burniske wrote ‘Cryptoassets’, which was like a year ago. Literally a year ago. He wrote that book …
Pomp: And probably a top five recommended book in the space already, right?
Travis: Yeah, yeah, yeah. If you’re an introductory, you gotta read it.
Pomp: Yep.
Travis: And he threw out MV equals PQ. People got super fired up about MV equals PQ. And then like, 60 days after they got really fired up, people were like, “This doesn’t work, at all.” For A, B, C reasons. Which were valid reasons.
Pomp: Yep.
Travis: And what it did do was it shined a spotlight on the velocity problem. And people were like, “Aww.” There’s this thing, called velocity, all else being equal, a faster a token spends to the ecosystem, the lower the price needs to be for that token to satisfy the economic demand of the ecosystem as a whole. And it’s not something you plug into a model. You don’t use it like that, but you just know, directionally, if this thing … If people don’t … The mechanism design isn’t so much that people want to hold it or have to hold it or you have to stake it where you can’t move it for a while, or whatever reasons. If there’s a tendency to move it really fast, it’s gonna have a hard time accruing value over the long term. And that was kind of like, year to date, people have woken up to that. And so you’re just seeing this big drain in market cap, specifically out of, you know, BTC dominance has been rising for four and a half months now. You’ve gone from …
Pomp: What are we? Over like, 57 percent now?
Travis: Yeah, I think you’ve gone in a straight line from like 34 percent to like 58 percent or whatever, over the last four and a half months. The market’s obviously telling you something there. And you know, when I think about what’s a bottom in this market gonna look like …
Pomp: Okay, so that was year to date.
Travis: That was year to date.
Pomp: Let’s go outlook, right? So, are we at the bottom, and if not, where are we going?
Travis: So on coin market cap, I like looking at top hundred good market cap, minus BTC.
Pomp: Okay.
Travis: Which I call bottom 99 market cap.
Pomp: Yep.
Travis: That number peaked in the first week of January at $547 billion dollars, which is wild. That is an outlandishly high number, when you think about it.
Pomp: That’s like one fourteenth of the gold market?
Travis: Yeah. Yeah.
Pomp: For, by the way, 99 of those tokens, majority of the world couldn’t name a single one of them.
Travis: No, no. And nobody’s using any of this shit for anything cause it sucks, right?
Pomp: Yep.
Travis: And there’s 27 tokens that have 400 daily active wallets. Just saw that stat like a week ago. That’s a wild stat, isn’t it?
Pomp: Yeah.
Travis: 27 tokens with 400 folks thar care at all about this thing. And so that number …
Pomp: Win moon. Win moon.
Travis: Right. So that number currently is $89 billion, for the bottom 99.
Pomp: So it went from, we say 540 to 89?
Travis: 540 to 89. But 89 just takes you back to the first week in November. So shit was still super wild before then, right? Everybody [01:13:00] remembers that, right?
Pomp: Yeah. Yep.
Travis: Like, summer 2017 was still super wild.
Pomp: I mean, the barbers, the taxi drivers, they were all talking about it in the first week of November.
Travis: Yeah, exactly. So if I just go back and look at where that number was, you know, for example on July 17th, that number was 36 billion. In the first week of … September 15th, that number was 50 billion.
Pomp: Yep.
Travis: So, I kind of use that number to triangulate where a bottom might be, cause it’s actually easier for me to think about what everything below bitcoin should probably be worth.
Pomp: I mean, you’re talking about a you know, 50 to two thirds draw down to go down from here. Right?
Travis: Yeah, yeah. So I actually think there’s a good chance … I’ll put it this way. I think it would be healthy for the space for us to get cut in half again from here on the bottom 99.
Pomp: Yep.
Travis: Top hundred minus BTC. But then you look so then you can …
Pomp: And so if we get … Well that’s Bitcoin.
Travis: So then you triangulate that number, the bottom 99, with BTC dominance. And then I’ve got a chart that I’ve been looking at for months now, and then that backs you into what BTC price is gonna be. And so …
Pomp: What do you think? We won’t hold it to you, but what direction … Where you think we’re going?
Travis: Again, technical analysis is not the end all be all at all. This would be like the first quintuple bottom in like, the history of TA. Like, that’s not how TA works. The number doesn’t get tested five times, and then it holds. It’s just not really how it works.
Pomp: What you’re talking about here is, you know, let’s call it the …
Travis: 58 50.
Pomp: Yeah, 58, 59, whatever it is, right? We’re knocking at the door. We’ve knocked four times, and if we kind of stay at the 6,500 number and we go back down, is it the fifth, the sixth, the seventh, however many times we’re gonna knock at the door. Eventually, the door opens, we fall. Right?
Travis: Yeah. And it’s gonna be a function of getting dragged down by that bottom 99. When Arthur hays, the founder of Bitmex, introduced the Ethereum perpetual swap, he had a blog post called, “Ethereum, the double digit shit coin”. And Ethereum was trading at like, I don’t know, 400. Or three something.
Pomp: Off a cliff to what?
Travis: Off a cliff.
Pomp: What’d it go down to? 180? 150 …
Travis: 161. 161 on the bottom.
Pomp: Yeah. Jesus.
Travis: And I mean, you wanna talk about a dead cat bounce that we’ve seen over the last couple days, like that’s kind of the definition of a dead cat bounce.
Pomp: We’ve gone from 160 to like 250, 200, right?
Travis: Yeah, and now we’re sitting right there. So, I think we do probably go see a hundred.
Pomp: Yeah, at a hundred, Ethereum …
Travis: And that puts you at 10 B’s. That puts you at 10 B’s for Ethereum. And then you start backing into like, “Okay, where’s Ripple gonna be?” Ripple, like literally not a functional token. We all know that, right?
Pomp: Yep.
Travis: Bitcoin Cash …
Pomp: By the way, the Ripple army loves when people come on here and talk really highly of Ripple.
Travis: Shout out to Ryan Selkis, going on. That was some wild stuff, man. I love two bit, man.
Pomp: Listen, here’s my respect to how that guy is, because he doesn’t just talk about it on a podcast. He says, “Listen, Brad Garlinghouse, where you at? Let’s just talk about it, we’ll film it, let people decide what they wanna decide after that.” And so, look, there’s non-zero chance he’s right, non-zero chance he’s wrong.
Travis: Yeah.
Pomp: I think he would be the first to admit that. I actually tend to think that the Ripple crew is doing what they believe to be best, right?
Travis: Right.
Pomp: I don’t think that they’re, you know, out maliciously trying to screw people over or whatever, and so I’d love to see that conversation, because I actually think that there would be points scored on both boards. Right?
Travis: Yeah. So as a … Like, I’m agnostic in my views …
Pomp: Yeah, same here.
Travis: I don’t fall in love with any of this shit. I don’t fall in hate with any of it either.
Pomp: Yep.
Travis: And I think it’s really hard to be short Ripple here, cause I think the senior folks at Ripple realize that their token … You don’t need it for X Rapid. And now they know that the whole world knows that. So at any time, they could introduce new functionality on X Rapid, where you need … Or you kind of introduce this new concept where XRP, like there’s some compelling reason for it to exist in the context of X Rapid, and that thing will … That’ll be the quickest five-bagger you’ve ever seen in your life, dude. Totally, right?
Pomp: Right, cause what you’re talking about here is there’s like, price action, and kind of … There’s TA. There’s some of the fundamental stuff, or whatever. And then there’s just these wild cards in this market where the … I don’t even wanna call it price manipulation as much as just the ability to evolve the code and the kind of structure around these tokens in a night and completely change the landscape is unseen in almost any other financial market in the world.
Travis: Right.
Pomp: Right? If you’re Facebook, you can’t say, “Hey, we had, whatever, $400 billion dollar market cap, and we did, you know, $40 billion,” or whatever they’re doing now in revenue and overnight, “Oh, by the way, now we’re doing a hundred billion.”
Travis: Right.
Pomp: Right? That just doesn’t happen.
Travis: Yeah.
Pomp: And so the difference here is revenue isn’t necessarily driving the token price. And so it could be literally how it’s used. You change it over night. Bam, all of a sudden, completely different ball game, and we’re going up 5X.
Travis: Especially for a lot of these utility tokens, where a lot of people have realized that the initial token structure just doesn’t accrue value over the long term. So the way that we break up the world is you gotta think about your Web 3.0 stack, but then I think about … And we consider the top hundred and 50 Crypto’s by market cap as our universe. Those are the tokens that we collect data on, do analysis on, watch, everything.
Pomp: Yep.
Travis: You have the tokens that are vying to be store of value. Bitcoin’s obviously leading that. I put Bitcoin Cash in that bucket. All the privacy tokens go in that bucket. Decred goes in that bucket. And the value framework that you put those, it’s it’s own separate beast, right? Cause it really is that off-stream economics type of framework, right?
Pomp: Yep.
Travis: And it’s like, hard money versus soft, sound versus unsound, and that’s the kind of framework you put around store of value. And then you have the platform level protocols, so like, smart-contract platforms, [inaudible 01:18:54] platforms, payment real platforms. So like, Ethereum, EOS, Stellar, Cardono, Qtum, Rchain, ICON. I know I forgot some other ones in there.
Pomp: There’s a bunch of them.
Travis: But you get the point, right? And the value proposition for those, they’re a function of the activity that happens on top of them, right? You don’t write any Ethereum smart contracts. Ethereum ain’t worth anything, right? No payment’s going through Stellar. Like, it’s not worth anything. And so you think about the value proposition for those as a function of like, how have they build their specific sort of way that they’ve … You talk about the scalability trilemma, right? Like, how many transactions can it do? How secure is it? How decentralized is it?
Pomp: Yeah.
Travis: Where do they set those levers? To be the best home possible for the type of activity they’re trying to draw under that network. And the analogy that I use is when you make your own character, like on NBA2K. Right? Like if he’s got really good hops, he may not play defense that well. Or like, if he’s a great passer, like he probably doesn’t dunk that well.
Pomp: Yeah, we’re not looking for all NBA offense or all NBA defense. We’re looking just for all NBA.
Travis: Right, and so you’ve gotta set the levers at a certain point too be attractive to that certain type of activity to come on top of it. So that’s those valuation frameworks. Then you’ve got utility tokens. Specifically within utility tokens you’ve got productive utility tokens and non-productive utility tokens. Productive utility tokens are like war tokens. And that’s like Augur and Numeraire, where you can actually model those, and you can model them in the same way I used to do, like a DCF on like a company. Equity.
Pomp: Yeah. Yeah, yeah, yep.
Travis: And so the valuation framework for those actually kind of looks like the real world. So it’s easier to get your head around how to think about what those look like. And that leaves you with non-productive utility tokens. Those ar the ones we haven’t figured out yet. But what we do know, generally speaking, is that like, MOE tokens? They don’t accrue value over the long term. Like, if you’re just a Chuck E. Cheese token?
Pomp: Yeah, yeah, yeah.
Travis: You can’t put quarters in the video game, right? You take your five dollar bill, you put it in the machine, you get out Chuck E. Cheese tokens, put the Chuck E. Cheese tokens in the video game. But when you’re done playing Chuck E. Cheese, you don’t wanna hang around with the Chuck E. Cheese tokens. You’re like, “Give me my quarters back.” Right?
Pomp: Yep.
Travis: Do not accrue value over the long term. That’s a big problem for many of the ’16, ’17, early ’18 vintage ICO’s.
Pomp: But the problem’s also with … Like this the whole thesis around inflationary monetary supply. Right. Is that actually what they’re doing is they’re trying to incentivize you to spend. To not hold onto the cash because it loses value every single year as inflation hits.
Travis: Yeah.
Pomp: And so the deflationary model is the exact opposite, right? This whole idea of store of value, blah, blah, blah, whatever. But on the inflationary side, what we’re seeing is if we want you to spend, the price is artificially depressed because of the downward pressure. Like it is intentionally there because that’s how the structure becomes. So it’s a really bad speculative investment if you are trying to go long on the value of a token.
Travis: Yeah. And you know, we can keep going as far as … You know, you can go really far down that in terms of like, what do you need decentralization for in that specific instance, and like, in many cases like, don’t tokenize. Like, it’s not a good idea for you. But for utility tokens, non-productive utility tokens, we haven’t figured out how to make the token structure accrue value over the long term, and so … But at some point you’re gonna figure it out. I mean, the ecosystem will figure it out.
Pomp: Too many smart people.
Travis: Yeah. And then I think you could see a situation where if you’ve got a compelling piece of technology or a use case that exists today, but then the token structure doesn’t work, and it’s out there down 95% year to date … If somebody goes and figures out the token structure in another token, you may see just this massive swath of restructuring of token structures. And then they’re like, “Oh, look. We fixed it, and it works better now.” You know, like, “Come use our technology.” It’s hard to say how all that stuff’s gonna play out, but …
Pomp: It’s really scary. If you’re long or short, you don’t know what’s coming.
Travis: Yeah. Right.
Pomp: I think it’s really, really hard.
Travis: It’s hard to make money on the short side in this space.
Pomp: Absolutely. Alright, so let’s do a rapid fire here. What do you think is the most controversial thing you believe in Crypto. Right? So something you believe to be true, that you think of very high degree of other people would disagree with you on?
Travis: The bottom 99’s probably gonna get cut in half from here.
Pomp: You think so.
Travis: Before we bottom.
Pomp: And Bitcoin, the relationship to Bitcoin there is you think it’s getting dragged down 50% as well …
Travis: No. No, it’s gonna hang in better. The way … I mean, it’s really, really hard to say. I’ll just say that in that scenario, it’s hard for me to imagine that 58 50 holds as the low. Yeah.
Pomp: Yeah. I think that’s fair. I think there’s a lot of people who disagree with you.
Travis: Right.
Pomp: Right. Cause here’s the other part of this whole idea around price action and you know, where’s the bottom, and all this stuff we were talking about. I’ve never seen a market where there was bold-bear kind of cycle that turned over, and people still remembered the bull market, and you hit the bottom. Right?
Travis: Right.
Pomp: Like, from a psychological standpoint, if you go on Twitter right now, people literally think we’re going to 20, 30, 40, 50 thousand dollars by the end of the year. Right?
Travis: Yeah.
Pomp: And it’s just … I can’t believe that there’s no blood in the street, and we’re gonna turn it around. And so like, I came out and I said this and people all freaked out, you know, “Oh, you’re switching your mentality around all this.” And I’m like, “There’s just not enough pain yet?” Right?
Travis: Right.
Pomp: And when the pain gets really, really bad? I mean, people are gonna walk away. They’re gonna say, “This is over.”
Travis: Right.
Pomp: That’s when I think we are at least near the bottom. But we really haven’t seen that yet.
Travis: Yeah. I mean, I was an energy investor for seven years. Like, I’ve seen some major league in markets before, and if what we just had was the bottom, I’m gonna have to re-write my understanding of what bottoms look like. Like, I’m just being honest, man. I’m so willing to be wrong. I’ll text you. When that happens, I’ll text you. Like, “I think I might’ve been wrong.”
Pomp: Yep.
Travis: I’ll text you, and then you can tween it out to like, the millions of Pomp fan boys.
Pomp: Amazing. Alright. So what do you think is the most interesting or important company in Crypto, other than what you’re working on? I love the rapid fire. It gets the pauses in answers. Every time.
Travis: I’m not gonna name anybody specifically. I’m gonna say anyone working on mechanism design. And token structure. Anybody. Like, I know some … I got some buddies in token foundry.
Pomp: Yep.
Travis: The consensus is like, it’s kind of a mess, right? And everybody knows that. I’ve got some guys in there that are like crazy smart. Shout out Rocko. You know Rocko?
Pomp: Yeah.
Travis: Rocko’s the man, dude. Rocko’s … Right? And like, anybody doing that kind of work, digging deep on … Like, where’s the video game designers at, man? Where are those guys at? How are you not in this space?
Pomp: Yep.
Travis: Right? Where’s my Harvard PhD. mechanism design guy? What’s he doing right now?
Pomp: Dude, I’ll tell you. Listen. I keep going back to this idea. So the people who worked on growth … It was the badges, it was the streaks. It was all of the points and tokens and all of this crazy stuff that people have been doing for years are now tied to a value that can be traded. It is all of that design on steroids.
Travis: Hundred percent. By the way, I’m gonna retract my most controversial thing.
Pomp: Okay.
Travis: FOMO 3D, one of the best things to ever happen to Crypto.
Pomp: You gotta explain.
Travis: Again, complete scam. Literally a Ponzi scheme. The regulatory, the little drop down, like where you click through it on the regulations it takes you directly to the SCC’s website for definition on Ponzi Scheme. The website’s called ExitScam.com.
Pomp: Yeah, yeah, yeah.
Travis: Two months before I heard about FOMO 3D, we were talking internally about how we’re gonna figure out this token structure problem for non-productive utility tokens. And I said, I was like, “When we get it figured out, it’s gonna look like this gimmick. And it’s gonna look like this little thing, and when people see it they’re gonna be like, ‘That’s bullshit.’ But it’s gonna work.” And people are gonna be like, “ Wait, is that like a … That shouldn’t work, but it’s gonna work anyways.” Right?
And then the next thing you know, it’s gonna skyrocket some token to a hundred billion because it had that hook for mechanism design to like lock in that virality, and to economically juice network effect in a way that accrues value over the long term. FOMO 3D, again, not supporting it, but I’m saying that concept abstracted into part of a utility tokens design could very well end up being the key that unlocks the value accrual.
Pomp: The people who figured out growth hacking for the centralized internet won.
Travis: Won.
Pomp: The people who figure our growth hacking in the decentralized world will win by magnitudes more.
Travis: Fact.
Pomp: Right? I mean, it’s just gonna be fascinating. Alright. So you’ve got a magic wand, you can wave it, change one regulation. What do you change?
Travis: We’re not doing this with the Howie test. You’re doing it with something else.
Pomp: Oh, okay. On the security side.
Travis: Yeah.
Pomp: So not the… actually on the security side.
Travis: Yep.
Pomp: What do you think needs to get put in there that … Like what does the new one look like? What are some of the components that aren’t there that maybe you think should be there? Or are we too early we can’t tell?
Travis: I mean, you’re just using a piece of regulation that was … It was judicial precedent that was set …
Pomp: 1933?
Travis: Established, think it was, I don’t remember, but I remember it was about orange trees. Orange groves in Florida. Like, that’s the law [01:28:30] that we’re gonna use to govern magic internet money. About Florida orange groves. It just doesn’t make any sense. So if I could pull anything back, then you’d get a new law specifically about this.
Pomp: So it’s not getting rid of it completely, it’s just saying, “Look, we need something new.”
Travis: Yeah.
Pomp: Right? So we still need a [inaudible 01:28:44], it’s just what it looks like, we need to figure it out and probably need to regulate it, have a bunch more opinions …
Travis: And who knows. Maybe they’re gonna end up … They’re trying to like, shoehorn whatever like round hole, square peg this thing into making it work. And you know, what’s his name, Hinman, introduced the concept of sufficient decentralization. And they’re like literally gonna just like, layer that on top of a rule about Florida orange trees. Like, sufficient decentralization. Okay. Alright.
Pomp: Listen, is the orchard decentralized or not? Yeah. I don’t know.
Travis: I know.
Pomp: Alright. So one non-Crypto question: Look everyone loves aliens, right? Twitter goes nuts when I talk about all this alien stuff, and I recently had the thought of … Out of everything people thought about on the alien side, do aliens have pets? Right? So are there … You know, we always think of aliens as this equivalent to humans. Right? They’re gonna have some level of intelligence, they’re gonna kind of look like us generally, they’re gonna kind of all walk and talk and communicate and do all this activity, but we never think about on the animal side, right? So one animal aliens, and two is do they have pets? Are they showing up with some sort of equivalent to dogs and cats or what’s going on there?
Travis: I just try and draw from like precedent transactions on this one, and it’s like, I look at Chewbacca. Right? The guys is like basically like a really, really dope pet, right?
Pomp: Yeah, yeah.
Travis: I think, right?
Pomp: Yeah.
Travis: Did he have like, sovereign rights? Chewbacca?
Pomp: I don’t know about that.
Travis: I don’t know, anyways. I’d take a Chewbacca right now. So I figure if you’re an alien, like that’s probably how you’re gonna land.
Pomp: That’s how you’re gonna roll? You’re rolling up with a Chewbacca. Alright. I have not heard that answer yet. Alright. So I let everyone to close it out, as me one question. What question you got?
Travis: What’s the … I haven’t caught up with you in a while. What’s Morgan Creek. What’s y’alls like? What’s the next like six to twelve months look like for Morgan Creek?
Pomp: We are running around and banging our head against the wall to get every single institution off zero. So, you think, if you’re an institution, you’ve got no exposure to what is probably the best performing asset class over the last five years. There’s a bunch of data that shows if you take a 60/40 global portfolio, put one percent in digital assets, you get anywhere between a hundred and fifty to three hundred basis point increase in returns, depending on when you did it. And you get a near identical standard deviation of risk. You get a double digit increase in sharp ratio, and we actually …
Travis: That’s specifically for BTC?
Pomp: Digital assets is defined in a whole bunch of different ways. Some people done Bitcoin, some people have done top tens, top five, et cetera. That’s generally, or at least directionally where it ends up. Our argument is that if you are one of … Let’s take a pension, for example. You’re gonna have to do these future payouts. You’ve got a future obligation to fund all of your pension plan recipients. Your actuary comes in and says, “Hey. You’ve got a six, seven, eight percent assumed rate of return.”
So in order for you to pay out in the future, you have to hit six, seven, eight percent, whatever your specific plan is. Most of them are unperformed. Or underperforming that. So if you look out over the next ten years around stocks, bonds, currencies and commodities, it’s not gonna get you there. Right? Kind of what the class is. And so by no means do I think you should go put a hundred percent of your assets into digital, but what I do think that you should do is you should start to get some of the digital asset exposure. Because what it shows is not only does it keep the risk profile very similar volatility, you know, everything is attractive there, but you start to drive a higher return. Right?
And so that conversation is very, very different than like, “Buy Bitcoin, because it’s gonna be the global reserve currency.” Right? It’s taking the Crypto, Egos argument and speaking in a language that the institutions understand, and you know, look. I’m new to the institutional world, and so obviously Morgan Creek’s been a huge advantage in getting us in the room and having these conversations, and it helps to have, you know, friends like Mark Yusko, who’s got this long track record to be one of the people saying this. And what I’ve found is they’re incredibly receptive. They’re not as receptive to Bitcoin’s new store of value, digital gold, kind of what I would consider more of the qualitative arguments. The quantitative argument of, “You have to hit seven percent in order to fulfill your future obligations.” You’re not gonna do that with the current asset classes. This is a semi-, uncorrelated asset, and if you put some allocation here, we will get you closer.
It’s a data argument, right? And so, I think that we’re making end roads there, and then you know, we’ll announce a bunch of stuff over the next couple weeks. But I think that for the next at least 12 months, I mean, that is the campaign. It is, “Get off zero.” I can’t tell you what the right percentage is per portfolio. Maybe it’s 10 basis points, 50, 200, but I don’t know. You gotta look at each one individually.
Travis: What do you put them in?
Pomp: So, we literally say to them, “Look, you got a whole bunch of different capital pools.” So you’ve got your equity, got your debt, real estate, fixed income, whatever it is, we’re building a bunch of products that allow them to pick and choose. So if you’ve got an equity bucket and you’ve got ten percent of your allocation for equity, you’re only eight percent deployed, that means you’ve got 200 basis points that you can actually go and buy some equity, so let’s get some percentage into that equity bucket.
Maybe you’re fully deployed on the equity side, but you’ve got a debt bucket, you’ve got some under deployment there, “Hey, let’s make sure we’ve got a debt product.” And so building different products, we actually think that on the digital asset side, people are gonna build portfolios. They’re not gonna go … You know, you’re not gonna go a hundred percent cash. You never go a hundred percent into one real estate strategy. Right? So they’re gonna build this multi-strategy approach, or kind of portfolio construction in the digital world.
Now, here’s the counter-intuitive piece of this, and I’ve thought a lot about it in … So take the US dollar. 1970’s and before? Hundred percent paper notes. Right? Today, 92% of the supply’s not paper notes. So we’ve already had the digitization of a currency over time. The US dollar is probably the first digital currency that majority of Americans have interacted with. Right? Because it’s 92%. Right? So if you look at that, Bitcoin and other Cryptocurrencies, these actual currencies are just another evolution of that.
And then if you look at stocks, for example, used to be all paper, right? Then it went to electronic trading. Today, if you invest in a private company, most people are actually digitally signing for the documents, they’re receiving it through card or e-shares, you know … Angel List, whatever. They have an electronic or a digital version of that stock certificate, right?
And so, the idea that you’re gonna have a token in your digital wallet is just another kind of evolution of that technology. So what does that mean for like, capital allocators? Well, Robin Hood is actually a great example of somebody who has built asset management, capital allocation in a digital world. So it’s targeted digital natives. It’s got a fee structure that looks very attractive. It allows you to buy these digital or electronic public equities, and now they’ve added Cryptocurrency in there as well. Well, if all of a sudden tokenization of real estate becomes real, will they allow you just to hold your shares of real estate in the same wallet? Probably. Right?
Travis: Yeah.
Pomp: It’s just an evolution. And so, you know, when you start having that conversation with the institutional investors, I think that they’re generally like, “My kids telling me this?” Right? You know? “My 20 to 30 year old son or daughter is pounding the table and saying ‘Hey, this is real, I’m interested in this’ whatever.” That’s a little ways away from, “Hey, here’s a hundred million dollars.”
Travis: Yeah.
Pomp: Right?
Travis: Yeah.
Pomp: And so I think that’s like, next 12 months, we’re gonna see a couple of those checks get laid down. And when they get laid down, I think the dam breaks and game on.
Travis: Musical chairs.
Pomp: Yep. For real. Alright man, this was super fun.
Travis: Yeah, I enjoyed it.
Pomp: Thank you so much for spending the time, and hopefully we’ll get you on here again.
Travis: Cheers.
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You can find the recording here: Off The Chain Podcast: Anthony Pompliano and Travis Kling
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