Why Bitcoin? The Future of Our Financial World with Mark Yusko — Transcript

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Evolvement: The Financial Podcast

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Jan 20, 2019

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This is a transcript of the Podcast — Why Bitcoin? The Future of Our Financial World with Mark Yusko — You can listen the audio here

N: What is going on everybody, what is going on. As always it’s your boy Shill Nye, and welcome to the next episode of the Evolvement podcast where we talk about Bitcoin, cryptocurrency and the future of our financial systems. Today I am really excited to have the man Mark Yusko on the phone, what’s going on Mark how you doing?

M: Great to be here and thanks for inviting me on the cast.

N: Glad to have you on you know, we were talking right before we jumped on the recording I have been following you for a while, I have been super interested in what you and Pomp, Anthony Pompliano, and the other guys are doing over at Morgan Creek Capital.

But I have specifically been following you a lot heavier recently because I’ve been learning more about our economy, learning more about how our financial systems are actually working, as I get deeper into this Bitcoin stuff and you have a lot of insight into that so I am really excited to have you on the Podcast.

M: Well I do appreciate the opportunity to talk about this, it’s one of my favorite topics. You know one of my messages out there is, is we are in the emerging state of what I’ll call crypto capitalism and it will replace the existing financial system with a new financial system, now it’s not going to happen tomorrow so everybody doesn’t have to freak out, but we are at a technological evolution, so love the title of this podcast I think there is a lot to talk about.

01:50 | 1:10:45

N: Sweet, sweet yeah that’s like exactly what I want to dive in and what I want to talk about, but before we get into kinda the deeper heavier stuff, let’s just start off with the super basic question, why Bitcoin? What’s so important about Bitcoin?

M: Yeah, so we could spend the whole hour just talking about this, this one simple question, but here’s the interesting thing, so you know I came out of the Endowment Foundation world, I worked for a couple of Endowments, Mild and Moderate Notre Dame and then University of Carolina Chapel Hill where I still reside in Chapel Hill North Carolina, and started a company that really did the basic manager manager / fund to funds and hedge funds, private investments, venture capital and have invested new technology for a long time, coming up on my fourth decade, and what’s interesting is I come across this cycle of technological evolution, and it runs 14 years and I haven’t been able to actually figure out why its 14 years.

But started back in 1954 with the invention of the mainframe and then 14 years later we had the microchip, towards miniaturization then 82 the personal computer, everyone gets a computer in their home, then Steve Ballmer’s Mum said ‘honey don’t join that company! no one would ever want a computer in their house’ he’s got 18 billion reasons to say Mom I was right. And then in 1996 the big one which was the internet and 14 years later 2010 the mobile net where we all had a super computer in our hand, don’t call it a phone cos no one actually talks anymore, and then in 2024 is the blockchain era or the trustnet as I have dubbed it and we can talk about that a bit later.

But why Bitcoin was your question and here’s the thing, if you go back to 1988 there’s this guy Tim May and he wrote this really cool thing called the crypto anarchist manifesto, and if you read his, you know one pager, it basically outlines everything that was gonna happen over the next 30 years, and interestingly right around that time, 1988 the cover of the Economist Magazine said we would have a global currency, it would be called the Phoenix and it had a little picture of a gold coin and the date on the bottom of the coin was 2018, kinda where we are today right.

So for 20 years nothing happened, we had a couple tries at digital currencies and they all failed because they had a single point of failure right, they were centralized and they couldn’t solve the double spend problem and in 2008 Satoshi son whoever that may be, he, she, they Came along and created this just incredibly robust and elegant solution to creating a truly borderless, global currency.

And it really started to catch on and you know the first five years caught on slowly, but really in the last five years people have started to realize the power of this technology, and it is a technology its not a thing its a technology. And who says ‘oh I love blockchain but I hate Bitcoin’ well that just makes you sound stupid because Bitcoin is a blockchain, it’s the first application of blockchain technology and it is I think the beginning of this new financial system, I think it will be the rail upon which everything else is built over time. So that’s a good start on what I said we could talk about this for five hours if we wanted to.

05:33 | 1:10:45

N: Interesting, interesting, so you think it’s going to be, like I mean I agree with you this is pretty much the beginning of something big, and even to like touch a little bit more on the 2024 kinda comment you made there, which is the 14 years after 2010 with the mobile phone era that you were discussing, what do you see is going to happen then? Is it going to be, are you saying like, that your kinda like, I mean I don’t want to use the word predicting, but your kinda predicting that’s going to be the time we’re actually utilizing blockchain and its part of our everyday lives, is that kinda what I am catching with that statement?

M: Yeah so if you think about it in every one of these cycles, we reach the point at which there’s ubiquity of the idea and everybody is talking about it and everybody realizes, but that’s not how it starts right, it starts with the innovators, with the developers, the believers you know, the people that actually put the technology together. It’s only a couple percent of the population and that’s where we’ve been, and if we, I think today that we’re somewhere you know in the early 1990’s of the internet, of the dial up phase of the internet, or we’re in 2005 when Google bought Android and everybody laughed at them, ‘what are you doing buying Android? What is that?’ Well it’s only the dominant mobile operating system on 90% of mobile phones, you now everybody is all excited about iPhones and Apple and you know one of the biggest companies in the world, first trillion dollar company, its only got a 10% market share, globally of operating systems. It’s just absolutely crazy.

So you think about where we are in this really early development phase and it’s like the dial up modem phase of blockchain, so I think in five years time when we hit 2024 were gonna have this ‘Ah ha’ moment. People are going to realise that blockchain technology is the 6th epic, you know we had the steam engine, we had the you know electrification, we had the age of the internet and ecommerce and then we’re gonna have the blockchain era and what everyone is going to realise is that blockchain technology is just that, it’s a operating system and what it does is it goes from you know- DOS allowed computers to operate, IOS and Android allowed mobile devices to interconnect, but what blockchain does is it allows the internet of things and the connected world, you know five years from now most people won’t even recognise how connected everything is. You know the estimates are even within two years there’ll be 200 billion connected devices around the planet, that’s 30 for every man woman and child on the planet. And you know 50 years ago there were no connected devices not one. So as we develop this operating system, this blockchain system, so many things are gonna evolve.

You know think about the first time people heard about Netflix, you were suppose to get a dvd in the mail and you kept it for a couple of days and you sent it back, and then they were going to do this thing called video on demand and you tried it and it sucked. Right, it was horrible because it was slow because nobody had really high bandwidth capacity yet, everybody thought Netflix was gonna fail, it was on the verge of bk and today you know, it’s one of the Fang stocks and everybody loves it and its grown like a weed, and hundreds of millions, coming up billions of customers around the world. And it’s because the internet capability grew into the vision for the system, and the the same thing is going to happen with blockchain.

So were at the very, very beginning of the ‘S curve’, I just wrote a long letter about this called ‘Patience is a virtue’ and were at the very beginning of the ‘S curve’ of adoption of this technology.

10:06 | 1:10:45

N: And when we do hit 2024 and even beyond that, do you think that bitcoin is still going to play a role? Or is this just kinda like the base currency or the base use of this technology, that introduces, is this like the Myspace of cryptocurrency?

M: Absolutely not, it’s a great question and one we should all think about, but the difference is open source vs closed systems.

So I live in North Carolina and we had the big merger of IBM buying Red Hat, you know I was an original investor in Red Hat through Benchmark Capital. When they first came to us with this idea. You know ‘don’t you want to invest in a company that’s going to give away software for free’ like huh?- Sounds like a really bad business model. ‘No no we will make it up on volume. You know the old joke about you know Amazon you know — ‘We lose money on every book but we will make it up on volume’ and everyone’s like Jeff that doesn’t work. But it does, but it does, cos people forget that if something free then they’re the product. And there’s data that can be collected and sold and there are other applications that you’ll buy that cost money and then there are machines and all kinds of things you can monetize, and Red Hat just got bought I think for 32 Billion dollars from nothing fifteen years ago,

So when you think about what, So Myspace had technology and Facebook came along and had better technology and it had better connectivity and it had better use case because they were smarter about the way they created the connectivity through College campuses and it was kinda invitation only and ‘Oh you know I got invited to be in the Facebook’ . And so the difference is in an open source world, let’s say some new technology comes along that’s a little bit better than Bitcoin, Bitcoin can literally go out and copy/paste the code and put it into their tech and be better and so open source gives you this ability to take all the great evolutions in technology and add them to your core and so the winner in networks.

And this is the big difference, is people think a bitcoin wrong, or incorrectly, they think of like a company and they try and compare it to a company, it’s not a company its a network, and networks grow very differently, they evolve very differently and in particular in an open source world networks can grow exponentially and then can get like a rocket boost, or a nitro boost, like from you know Fast and Furious type movies, you know you hit the nitrous and suddenly this thing is going to take off because I can take a side chain network or I can take a, think about, again I don’t know if listeners remember this or not but when the internet was first getting started it was slow and clunky and it really wasn’t that easy to use, and there was this professor at MIT and he created this algorithm back before algorithm meant anything, and he created something called Akamai, and it was pretty simple technology, elegant but simple and it basically sped up the calculation of you know things that allowed the packets and switches and all the things that operated on the internet, and I’m not techy enough to know exactly what it did but it was this amazing boost in performance.

And thats what’s going to happen with Bitcoin, and the reason I think Bitcoin wins is Paul Romer just got the Nobel prize this year, I read a paper from him when I was in business school back in 87, it was called ‘law of increasing returns’ and I said these guys going to win the Nobel Prize someday, and I have been saying that for 30 years so thank god he won because I was starting to sound silly.

But I wasn’t wrong I was just early, story of my life and what was interesting was what he said in the paper was ‘Its not the best technology that wins its the technology that reaches critical mass the fastest’ and that’s the genius here is Bitcoins already won, the miracle of Bitcoin is not that it went from a thousand dollars to ten thousand dollars, or ten thousand to twenty thousand, or twenty thousand to three thousand. The miracle is it went from .0003 cents to $10, the fact that it survived at all. And there’s this thing called the Lindy effect which says that the longer something stays alive, the longer it will live, and we’re rapidly moving up the parabolic curve on Bitcoin and people just don’t seem to pay attention to every one of these cycles.

There have been 5 of these parabolic moves and crashes, in every case the high is higher than the previous high and the low is lower than the previous low. And so if you just bought and held and didn’t pay attention you’ve made a hundred times your money, two hundred times your money, a thousand times your money, depending on how early you got in. And the people who are freaking out are these speculators who came in chasing the price and not understanding the value of the network, so.

15:38 | 1:10:45

N: Agreed, 100% agreed. And I mean I think that kinda leads into my next question which is kind of around the value of Bitcoin right, so right now in the community there’s a huge separation, there’s a huge division between, is Bitcoin a store of value, is it a currency, is it both, or is it something that we haven’t even discovered yet. And I think, I’m kinda leaning towards something we haven’t discovered yet, I think that the whole community is constantly evolving and the thought process around Bitcoin is evolving, what’s your opinion on that?

M: Yes, yes and yes. So is it a store of value? Yes absolutely. Its digital gold, it’s far superior in many ways to gold, and look golds been money for 5000 years, that’s a long time, and one ounce of gold for 5000 years bought a fine man’s suit, go to Savile road on London find a mans suit, 12- 1300 bucks or whatever gold price it is so as really good a store of value relative to other currencies and you know is gold a commodity or a currency? Yes sometimes it’s a commodity and when its viewed as a commodity the price is very volatile and sometimes gets depressed and when it viewed as a currency like you know after the global financial crisis it rallies a lot.

And so gold is great but the problem is, and I don’t know if you have ever seen the movie a Knight’s Tale and you know Heath Ledger, and he’s the jousting knight who wins this gold calf at one of these jousting awards or jousting events, and he throws it to his paige and says ‘do what you do’ you know and the guy hammers it on the table and knocks off one of the legs and gives it to the blacksmith.

That’s not a very exact way to divide the gold right, and you know you think about, if you want to carry gold, its heavy, its bulky, It’s hard to carry across the border, it’s really easy for the border agents to find. If I want to carry bitcoin across the border on my phone, jeez it’s really hard to find. So it’s infinitely divisible down to 8 decimal points or a satoshi, so it’s much easier to transfer small amounts than gold. So as long as people utilize it in that way and the more people utilize it, the more people will utilize it.

You think about this if you ask anyone under the age of 35 ‘do you own gold?’ the vast majority will say ‘are you kidding me, why would I do that?’ You ask people over the age of 35 ‘do you own any Bitcoin ‘are you kidding me, why would I do that?’ and so there’s this digital divide between the geezers like me and the young people like you and everybody else and what I think is so crazy about that is that for whatever reason people are not paying attention to demographics which is the echo boom, which are the kids of the baby boomers is bigger than the baby boom. And yes the baby boomers have all the wealth right now, but you know- were all eventually going to pass away and transfer that wealth down to our kids, the echo boomers. And the echo boomers aren’t going to put it in gold they’re going to put it in crypto, and that’s crypto assets. So cryptocurrencies, crypto commodities, ultimately crypto equities and crypto debt. So there will be crypto assets of all kinds, maybe even crypto collectibles as a fifth asset class. And it’s a long answer to your simple question but you know, is it a store of value?- no question. Is it a medium of exchange, is it a currency? — no question.

Every single day people use Bitcoin for transactions. Where is it most commonly used as a medium of exchange? In countries where wealth has been in, you know destroyed through the dictator playbook, what’s the dictator playbook? Dictator gets in charge, they take all the assets for themselves and their cronies and they devalue the currency and steal all the wealth from the people. It happened in Zimbabwe so I have in my office right around the corner from where I am talking to you a 100 Trillion Zimbabwe bill, wouldn’t buy a loaf of bread. 100 Trillion, with a T, remember a Trillion is a dollar a second for 31,710 years!It’ss big numbers. So 100 Trillion Zimbabwe dollars wouldn’t buy a loaf of bread. And Mugabe got really rich and everyone else got really poor.

Best performing stock market last year was Venezuela and yet nobody made any money because the dictator took all the money and his cronies, and everybody got really poor and people were dying because they couldn’t get medicine and food. But what did people start doing? They started using Bitcoin, it went from two thousand dollars a month to three or four billion a month. You look at Turkey, and you look at Argentina and you look at places where money is no longer sound and they’re using Bitcoin which is sound money, it’s a deflationary currency instead of an inflationary currency. Inflation is the greatest cause of income inequality and wealth inequality in the world, its what impoverishes people its what causes slavery, debt slavery, and so again topics we can talk more about later. But then the question is, is bitcoin something we haven’t even anticipated yet and the answer is yes, possibly.

There’s all kinds of use cases but at the end of the day I really believe we will get to the point where it is the fuel of the digital age, where it is the you know payment rail for micro payments and you know you’ll drive your car over a charging pad, it will charge, the car will pay the charging pad, you won’t ever get out, you will be doing your work in the back, the car will drive you away and it will all be good you and it will be done with Bitcoin and why Bitcoin? Because wins, you know, first mover is the first winner in this type of technological innovation.

21:58 | 1:10:45

N: I love that, I love that and I mean the main argument right now is against the store of value is the fluctuation of price, we are in a market that is extremely volatile, it’s still extremely new even though we have been around for about ten years now, But the most basic argument is it can’t be a store of value ‘we’re fluctuating from 20K down to 3K all in the matter of 12 months’, what do you say to something like that?

M: Again, you know people just either don’t study history or ignore history or, just don’t pay attention but you know from 1776 to 1913 a dollar, a US dollar was worth a dollar. But there were lots of times where it fluctuated 50/60/80% because of war and disease and riots and you know Americans are this funny group right, we had this exceptionalism about us. I always joke that Americans are like Notre Dame football fans, they remember a past that never was. You know us Notre Dame people we think we win all the time and the reality is we havent won all the time in fact we haven’t really won all the time since the 1940’s and what I think is really funny is people forget that United States in the 1860’s was an emerging market run by two gangs, the Irish gang and the Italian gang and it want until 1929 when the Italian gang knocked off the Irish gang and now we’re just run by the Italian gang.

And we think that we’ve always been the superpower right, it’s just not true. Our money hasn’t even been the world reserve currency only since 1944 for the 70 years before it was pounds sterling, before that it was from Spain and before that it was Portugal. Portugal had the world reserve currency because it had the fastest ships and best Navy cos it had the tallest trees, and then Spain took em over and they became the world reserve currency.

And so there’s all this applying our current view of the world to something that’s brand new and I always say you have to think of it in terms of capability to potential ratio, so what’s the capability of a nine or ten year old? It’s not really that high, what’s the potential of a nine or ten year old? really high. And that’s the same thing with a technology, what’s the capability of Bitcoin at coming up on ten years old, it’s OK but not really that high so yeah it’s gonna be volatile and its price is going to fluctuate, and again price is not value and that’s a big point that I will get to in a second but the capability doesn’t tell us about the potential, the potential is vast as we get to 20 years or 30 years or 40 years.

And so all is like gold, imagine being the first guy, so you’ve got food right and this guy comes and says I have got this shiny yellow rock, why don’t you give me some of that food for this shiny yellow rock, you know like, get the fuck out, no I am not doing that. So, yet it did catch on and it did create a store of value, but there have been plenty of times in history where gold fluctuated hugely and wildly. Look at the fluctuation from kinda 1979 to you know 2000 it was monster decline, relentless bear market in gold, then it went straight up and now golds out performed stocks over the last 20 years, so again that’s a long rambling answer to this idea that, the reason that the price of Bitcoin is so volatile right now is because that’s the way networks work, as they’re being adopted, as you go from the innovators and the believers and then they convince people like myself, the converts, which is kinda the second 10% so the first 2% comes in then the next 10% are converts and they follow the believers and then you have this wave of speculators, now why do the speculators come? Well the speculators come because once the converts come, now people are saying wait a second there’s something there there, and then the price starts to move and that draws speculation and the speculators come in and you create this frenzy and in every S curve you’ll have this frenzy of activity and you get this speculative boom, you know you had it in the internet bubble in the 90’s. You had companies like Puma technologies go up to 100x, you had this company we invested in called Art technology group we bought in this company for 50 cents, and it went public, it rose up to $100 so we’d made 200 times our money, this was a company that helped other companies put the .com on their name. That was it, that’s all they did, their revenues were 6 million dollars, their market cap was 6 Billion dollars. We sold, we locked in the 200x gain, the stock fell to $4 down 96% now it still would have been an 8x from our original cost of 50 cents. But that was really volatile, why was it so volatile? because the speculators went away and they got burned.

Now starting in 2000 was that a bad time to invest in the internet or a good time to invest in the internet? A really, really, really good time. All of the great companies today that exist in the internet, multi hundred billion dollar, first trillion dollar company Apple was basically, you could have picked it up for single digits, nobody wanted to own Apple, nobody wanted an Apple machine in their house. Before they invented the IPod you couldn’t be caught dead unless you were a geeky nerdy guy like Bill Gates, well actually Bill Gates took Microsoft, but you know he had to be a nerdy guy that you know Apple kinda, photo shopping and publisher stuff. So now it’s one of the most valuable companies in the world.

So I think we’re at this really interesting inflection point when the speculators getting puked out and the builders are going to come in and this is what happens in every S curve, again I wrote about it my last letter, is you have a discontinuity, you have a crash and then the builders come and we build the great companies of the next era.

N: I love it, I love it. I mean I think the thing that is the most interesting to me here is you really talk about education, you know I really think education is the key here. It seems like before you were a little sceptical and now via education and things like that your starting to see the potential of all this, I mean you probably see it way better than I see it.

28:46 | 1:10:45

N: How did you get started in crypto, where did you first hear about it and tell me ike a little bit about the process of, I mean I was watching a couple of your videos and you said you were previously a sceptic and you moved from being skeptical into where you are now, which is obviously very bullish on this technology can you just talk to the audience and share with me and them a little bit about how this process happened?

M: Yeah look it’s such a great point and I am glad you picked it because look I’ve not met anyone in my crypto journey over the last five/six years that didn’t start skeptical right. And I mean an intelligent person would start skeptical of any new technology, when the internet first came out there were alot of smart people who said ‘oh it will never be more important than a fax machine’ or you know ‘why would we ever want to do anything except put an encyclopedia on the internet’ So you know Steve Ballmer’s Mum ‘Why would you want to go work for that company they want to put computers in peoples houses’ So there’s lots of skepticism and that’s normal and I wrote about this a couple of letters ago when I said I had my crypto Eureka moment, and I was, you know riding around this Summer in an RV with my family, actually in Eureka California, and had this Eureka moment about what we were about to go through which is the digital gold rush, you know the gold rush in California and I think we are having the digital gold rush now and, what you truly want to do is own the picks and shovels and be able to build the infrastructure.

And I went into you know, where did Eureka come from? This guy Archimedes and he sat down in the bathtub and the water you know displaced and he called it Archimedes displacement principle. So I call this the ignorance displacement principal, so we all start ignorant of anything, of any new technology, new information we start ignorant. I don’t mean that with a negative connotation, I just mean we don’t have any knowledge and as we gain knowledge we displace that ignorance and we become more interested and we seek more knowledge and displace more ignorance and then suddenly we are full of knowledge and we start to get excited, so my journey started five plus years ago, I had this good friend Dan Morehead -Pantera Ventures one of the early pioneers and I’ve known him for 25 years, he worked at Tiger, I was very tied into the Tiger network, Julian Robertsons been a mentor for most of my career and helped me start Morgan Creek, so Dan worked for Julian and decided he was going to spin out and form a fund called Pantera Macro, I was one of his first investors and he built it up to a couple of Billion Macro Hedge Fund, I was out visiting him in California and he said Im shutting down the fund and I am going to start a Bitcoin fund and a blockchain infrastructure fund I mean ‘your going to do what’ your going to return money where your getting paid very handsomely, your going to do this thing called what? I mean I knew what Bitcoin was this was 2012, so I kinda knew what it was but I really didn’t and long story short I made the first of my many bad decisions in crypto, I said well look I don’t really understand BItcoin today and I havent displaced enough ignorance so I am going to go with the picks and shovels. So I put money in his infrastructure fund, that funds a 9.6x, pretty good. But I should have put the money into Bitcoin because that’s up 86x including the, best performing hedge in the history of hedge funds.

Now I didn’t do that and that’s fine, so couple quarters later you know Bitcoin had had the big run from $100 to $1000 and it crashed in the first Q1 2014, I write these long letters and you know they are 50/60/70 pages and I wrote one paragraph about Bitcoin is a special situation and I had people calling me up saying ‘what are you doing talking about that internet magic money, we should fire you, you know your talking crazy stuff’. Woo it was one paragraph, I mean 1, I am surprised you even read it, 2, come on it was one paragraph out of 60 pages. But you know when it went from $400 down to $166 I thought maybe they were right, but then it started cruising back towards $1000.

And my son had graduated from college in early 2015 and I sent him out to meet with Dan and meet with a couple of companies, he met with a couple of the big companies out there, and he said ‘I don’t know Dad I think I’m just going to go with KPMG its safe, gets me to California, and last Thanksgiving we were talking and I got fine Dad you were right I should have gone to coinbase or something. But he said ‘you are not as smart as you think you are’ and I’m like oh yeah why not, He said you didn’t lever up the house and buy Bitcoin… I was like Hmmm OK And so we got a chuckle out of that, and so that’s about the time, kinda early 17 that little before that I had met Pomp, Anthony Pompliano from North Carolina we had invested together in a private round of Lyft and we do alot of private equity investing and he and his partner Jason WIlliams had invested in Lyft in a special purpose vehicle we had put together, we didn’t put together but we were both investing in a special purpose vehicle to invest in Lyft.

But we met twenty minutes, didn’t think anything of it but about six month later first part of or second part of 17 I came across him on Twitter, like, like, like. Hey I would have said that, that sounds like something I would say it was like talking to myself, I was a younger better looking version of myself, but like talking to me, everything he said I agreed with. I thought I gotta meet this guy, so we got together, we had breakfast, we had another breakfast, and we had another breakfast and after about two weeks of meeting every other day its was like, we should do something together.

So we decided to go down this path of building a blockchain infrastructure fund, so we merged their Full Tilt Capital into Morgan Creek and created this new business called Morgan Creek Digital Assets to really go after what I think is you know the next really big opportunity.

I say it this way right, my chapter 1 is I work for NFP, so I work for universities I help manage their endowments, Chapter 2 is I built a nice fund to fund business at Morgan Creek, and my Chapter 3 is really building this Morgan Creek Digital Assets franchise and we want to be known as one of the trusted advisors in the digital age.

35:51 | 1:10:45

N: I love it, I absolutely love it. So that kinda leads me into a bunch of things right, I want to talk a little bit about the traditional markets, I want to talk about the economy. But before we get there I know you guys are obviously very bullish on Bitcoin, but what do you think about the rest of the crypto market?, specifically I heard you talking multiple times about “Zombie companies” and while your kinda talking about that in the aspect that these companies have much more debt than the revenue they are bringing in, so kinda dead companies walking. I see the same comparison to a lot of these crypto startups that raised a lot of money during their ICO phase but actually have no revenue models. And I think it’s a major issue we are seeing in the space and its caused a lot of over saturation in terms of investments but also in terms of focus for the community, what’s your kinda opinion on the whole rest of crypto currency besides Bitcoin and what’s going on right now?

M: Look it’s a really important point, and so that zombie company point is really, if you look at the S&P 1500, so the 1500 biggest companies in the US. About 14% of them can’t service their debt with their EBIT (earnings before interest and tax), so the money they make, they can’t even service their debt let alone pay off their debt.

So they’re just dead money walking, they are going to fail as soon as we have a recession and its going to be ugly.

And so you come over into the crypto world and well the trouble I have is, you know people throw around terms, and they can flate things a lot and I think it’s really important for people to differentiate between cryptocurrency, all the word crypto means is cryptographically secure. And there are crypto assets, there are cryptocurrencies, there are crypto commodities, eventually there will be crypto equities, crypto debt. But the other problem is you have is cryptocurrency, people use the term to refer to all tokens and that’s just not accurate.

In my mind, a cryptocurrency is either a store of value or a medium of exchange, there’s about a dozen or so, I don’t know the exact number but it’s basically Bitcoin and you can decide whether you think Ethereum is in there, then you got Monero and Dash and Litecoin and a handful of others but those are the only crypto currencies, everything else in the crypto landscape is a utility token. And utility tokens are essentially just crowdsourced venture capital.

And it was a great idea, the problem was it was a really great idea for the companies and not so much a great idea for the investors, so let’s say you and I are going to start a business and we are going to call it “marknye coin’ and we go out and we issue the marknye coin and we tell everybody right, we are going to come back to you in six months and tell you what your going to get for your coin, and you and I go and we buy a bunch of real estate, and we buy a bunch of buildings and we build arcades, we build Chuck e Cheese arcades. And then we issue the marknye coins and we give them to everybody and say alright guys go knock yourself out and play games in our arcades. Now they get some utility from those tokens, but they would have been way better off saying hell no, I want half your business, I put up the money so I want equity in that business. I want to own a piece of the real estate. And so utility tokens were just a structure, kind of like covenant like debt, if you loaned someone money with no covenants your never going to get your money back because you have no way to enforce it. If you give somebody money with no rights to equity, debt or cash flow, you’re basically giving people money and they’re going to spend it and your going to get nothing for it. So it’s not surprising, two things are not surprising. One, 90% of pre seed stage and seed stage venture projects fail. So right off the bat 90% of ICO’s should go to zero. Now the other problem, the other 10% that are really good companies, or good projects, or good ideas- the problem is the ICO structure did not allow the owners of the tokens to own equity, so even if those projects become wildly successful it may turn out to be really good for the sponsors but not very good for the investors.

So I think the ICO model got a little ahead of itself, you know Pomp and Jason were famous for saying ‘We’re never going to do an ICO’, I mean we didn’t do any ICO’s at Morgan Creek. They got a lot of shit for it when they did it or when they said it, and you know my view was, I’m not going to give anybody money if I don’t get equity, debt or cash flow, that’s the way I was raised. Look I’m an old guy thats the way I view the world.

Then you got security tokens, now security tokens are going to be big, huge. I mean there’s seven hundred trillion dollars of global assets, private businesses, real estate, you know stocks bonds. All that’s going to get tokenized, all that’s going to end up digital securities. People used to say security tokens, now people don’t like the word token because of utility tokens so now their trying to change to digital security offerings or DSO’s instead of STO’s. I don’t really care what you call it, at the end of the day moving from analog world to the digital world we are going to tokenize or securtize or whatever you want we want to call it, or digitize every piece of ownership in the world, in the coming decades. And we’ll no longer trade paper, we’ll no longer have paper stocks or certificates or paper certificates of title. Like I’ve got a paper certificate of title for my boat trailer, I think it cost them more to make that title than my boat trailer is worth.

So just silly, but all that’s going to be digital, so that’s going to be a huge opportunity. And the infrastructure and the trading systems. Look the IMF estimated that there’s 1.7 Trillion dollars of inefficiencies of rent seeking middlemen with their hand out in the middle of the banking Kabul.

And what blockchain technology does, and what Bitcoin and other security tokens and cryptocurrencies allow us to do, is have true peer to peer exchange with no trust to third party, no rent seeking middlemen and all that wasted money is going to accrue to the benefit of the owners of the ideas and the owners of the companies. And I think it’s going to make us all more efficient, it’s going to make us all wealthier, I think it’s going to decrease income inequality and its an incredible social good. In fact I heard this fantastic presentation by Jimmy Song and I was just spellbound at how he made the case that Bitcoin in the ultimate social good, and I absolutely positively believe, because it breaks this cycle of that debt enslavement, when you work for a Salary you basically are a slave.

Because the government can devalue the currency and steal your wealth, whereas if you own assets then the asset value goes up with inflation so in a deflationary currency world, in a true cryptocurrency world which is what I think crypto will replace Fiat over the long term you get a much more even distribution of wealth and a much more level playing field and you allow people to spend less time kind of serfdom and more time focusing on instead of working, The best line of his presentation was ‘when you graduate from school and you have your training, instead of saying I want to get a job to pay the bills in my depreciating currency, you say boy what does the world need that I am good at, that I could provide’

I mean it’s just brilliant.

N: I love that, I love that! And I love what Jimmy Song talks about, I’ve been watching a couple of his tweets recently and one was talking about how really the control of fiat money and the control of being able to print money is funding the wars, and if you really want to be an activist against war, then cryptocurrency and digital assets are kinda the way to go. So I am with you there.

And the STO markets actually really interesting, so I sat down, our second interview on this podcast is with my buddy Heslin Kim, he is the Vice President of Business development over at Polymath. And as you know they are working heavily in the security token industry. I think that it’s something that just isn’t heavily educated yet I don’t think people understand the large scale impact of what security tokens can do for the industry, what it can do beyond the industry and into the world, its something I am super interested in seeing more about.

M: We are so really in this technological evolution and that’s why I get so excited and look I am prone to hype verbally, you know my wife tells me all the time ‘You can’t say things like that’ Im like what? She goes ‘You say it like you are so certain’. I said ‘So what’s wrong with that?’ ‘Well people believe you” and I’m like ‘Well that’s kinda the idea’

But we are at this inflexion point and the speed at which we begin to change all these things that we’ve known for so long and shift the power structure, you know there are a couple things that are fine, one is I did a CNBC hit a couple weeks ago and they said ‘Why do you like Bitcoin?’ I gave them my technological explanation, and they said ‘What do you think about this’ They put up a clip of the wolf of wall street guy you know saying it was a scam, I said ‘well first of all he’s talking about ICO’s it’s not Bitcoin’ and second they said ‘Well what do you think of you know Warren Buffett saying its like rat poison or Jamie Diamond saying its a fraud’ I’m like ‘Thats just ignorance right’ back to the ignorance displacement, I’m not saying they are ignorant people, I’m saying they’re just ignorant about this technology and about what’s going to happen.

And just because Warren Buffet is a great investor doesn’t mean that he knows everything about technology right, he didn’t invest in the internet boom, he’s done Ok for himself I am not taking anything away from him, but that’s not his forte and the fact that 46% of Berkshire Hathaway’s are banks, he absolutely positively does not want Bitcoin to be successful.

So I always say you need to consider the source, and you should never ask an incumbent what they think about new technology, so don’t ask a candle maker what they think of Mr Edison’s wonderful glowing orb, and don’t ask the train manufacturer what they think of this wonderful flying aluminium tube.

And this new technology displaces people and those people don’t like it. And so there’s a saying, and I am not going to attribute it to the right person it basically says ‘You know the quality of an idea by the quality and the vehemence of the opposition’ So if you have an idea and nobody disagrees with you it’s probably not a very great idea. If you have an idea and everybody disagrees you are probably onto something.

So think about Galileo back when he was telling people that the world was round, he had a lot of opposition right.

48:17 | 1:10:45

N: Yep, yep a tonne of opposition, a tonne!

Let’s move away from cryptocurrency just for like a quick second here, I want to move kind of into some other things that I have been listening to you talk about which is the traditional markets, the effect on the overall economy, and what do you see is going to happen?

Are we headed towards another crisis? And to bring it right back if we do have another crisis what do you think is going to happen with crypto and how do you think crypto is going to be affected by it?

M: So, we are definitely on the verge of a correction, you know I’ll hesitate in calling it a crisis because I don’t feel like we have the level of leverage in the system to cause the kind of crisis, you know we are definitely not going to have a global financial crisis 2008 type debacle, because other than a couple of banks in Europe we just don’t have that kind of leverage in the financial system.

Consumers and some companies have too much leverage but its small relative to what we had in 2008.

I think we’re much more likely to repeat, and this has been my game plan all year, that I think this year is very much like 2000, next year will be like 2001, the year after that like 2002 and if you think about the way that played out, it was 2000 you had the tech bubble, you know markets rolled over in March they rallied back to September then they rolled over again, they finished down about 9% for the year, then we had the recession, first quarter was negative GDP(Gross domestic product) second quarter was actually a little bit positive, third quarter was negative so even though we didn’t have two consecutive negative quarters they still called a recession, but it was shallow.

Then we had 911 and that triggered some additional weakness.

But 2002 was the big blow up year, the market was only down about 14% that year, when I say the market I mean the S&P. The next year was down 22% because we had the debt bubble burst, they had WorldCom and Enron, Global Crossing and all these over levered tech companies and telecom companies that went bust.

And so I think that’s the way it’s going to play out here is you know we had this tech bubble, we had the fangs trading it just stupid, stupid valuations. I mean Amazon and Netflix 300 times earing, just silly. And those have already started to burst and we’ve had some of the really tough technology you know get walloped and Bitcoin as technology got walloped down 80%. So we’ve had this tech correction but the overall market is only down single digits and next year we will have a recession and I think it will be shallow, it’s kind of already started.

Japans in recession, Europe’s on the verge, they’ve had one negative quarter about to have two.

Emerging markets, a number of them are on the verge of recession and so I think we have this global kind of shallow recession, that causes markets to back off a little bit.

And what people are forgetting is that markets all around the world are already in a bear market, you know we’ve got emerging markets down 30+%.

Like in China where they took their medicine, they pulled out a lot of liquidity from the system and had a recession, you know everybody thinks its about trade war and Trump, it has nothing to do with Trump, you know China pulled a trillion dollars of liquidity out of their economy and they crashed their market.

That’s what happens, so liquidity drives markets you add liquidity like they did in 2016, market go up a lot, you take liquidity out, market goes down, very simple.

So I think next year we have you know crappy markets, technical term. And a little recession, then I think it’s 2020 when we have the big crash and the big wall of debt comes mature and companies just cant pay it back.

So, the question is what happens to crypto? Well in that environment I think it actually does quite nicely, because first of all its already had its correction, you get to buy whats on sale, second, crypto is not correlated to stocks and bonds, stocks and bonds are driven by economic growth, interest rates and GDP, GP economic growth and interest rates and inflation. Crypto is driven by network value, network value is driven by adoption and regulation and technology change and all those things are positive.

I mean every fundamental indicator of crypto is higher today, there are more wallets, there are more users, there are more transactions on a daily basis, it’s more global, there are more exchanges, there are more protocols, there’s more people coming in.

You know big exchanges, you just saw the one this morning with Germany following NASDAQ. So there’s all these positive developments and what I think is going to happen is people realise that stocks are no longer a store of value, and no longer a safe haven. They are going to look around the world and say what’s cheap, and this is where I get to price v’s value.

So the value of a network is pretty easy to determine, it has to do with the number of participants in the network and the number of users and the average transaction volume.

And it’s pretty simple to track using a Metcalfe’s Law model, what the value of a network like Bitcoin should be.

So last year in December you know the value as we saw it was around $10,000 and the price got to $20,000 and we tweeted out and wrote about it, and said guys there’s going to be a correction and you need to step to the side, you need to wait until first or second quarter next year, maybe they will solve the custody issue, we thought it would go right back to fair value around $10,000 and could even go below.

And I’ll admit I was wrong, I thought the low was $5,900 in February, I didn’t think we’d go below that. What I missed was this rehypothecation issue, or this you know you can basically sell more future’s than you have. Which is a bummer because you put downwards pressure on a price and quote un quote, manipulate it.

And that too shall pass as the markets get deeper and broader.

But there was a lot of manipulation in the stock market in the early days, and in the bond market and the options market.

Particularly when there was two options market like the West Coast and Chicago exchange right, so they finally shut down the West Coast exchange because people were abusing it.

So in the early days of market you are always going to get manipulation and I think we have seen that.

So I misjudged where the bottom was but I think we’re close to a bottom, and I think as people realise that stocks aren’t going to keep going up, they’re going to come back to crypto assets.

Look I’m not saying you should put all of your money there, Im saying one, three, five percent, the younger you are the higher that percentage is.

Because you’ve got all your income, your future income and your life ahead of you to be your fixed income component, so you don’t need as much, you know low volatility stuff.

I think the biggest mistake that young investors make, is they have too conservative a portfolio, when your in your twenties or even your thirties, the bulk of your wealth ,and you dont have alot of wealth but the bulk of the wealth that you do have should be in high asymmetry assets like private investments, venture capital, crypto, that’s where you should be spending your investment dollars.

Because your future income is like a big long duration bond, which balances the risk of your portfolio.

N: Interesting, interesting. Ok cool I feel better about my portfolio now then!

M: Excellent, I am glad.

N: So we’re coming up on an hour here, there is really one more big topic that I really want to talk with you on, we kinda touched on it in the beginning and we were talking a little bit about the future of our financial system, creating a whole brand new financial system.

LIke you said in the beginning, this isn’t just going to be something that happens overnight this isn’t going to be something where we see it emerge in the next six months or even a year probably, but I think that we are laying the groundwork for that, I think that we are starting to build infrastructure with these cryptocurrency technologies, with STO’s, with all of these different things.

56:40 | 1:10:45

N: What does the future of our new financial system look like to you? Is it this digitized system where all these assets are officially digital and tradable instantly across the world? Is it more than that? Whats your opinion?

M: Look, it’s absolutely a digital world, so today we still use four hundred year old technology, we have analogue stock certificates, paper stock certificates. There held at DTCC and we have an alphanumeric CUSIP, that looks electronic but at the end of the day we still have paper. So all of that has gotta go away, we have these trusted third parties, these rent seeking middlemen you know the banking Kabul that’s been in charge for millenia and we have now a technology through distributed ledger technology to essentially wipe out the old financial system, and this is not new right, in the pre 1860’s we had a single entry ledger system, they had this system around something called Tally Sticks and you know I want to lend you money, we took a stick we broke it in half we calved a notch in a stick and I knew how much you owed me. And if you were a really rich guy, because women couldn’t own these things, it was still a Paternalistic society back then, if you were a rich guy you carried around a bunch of sticks on your belt and you were a really wealthy financier.

And the UK government got in a bunch of debt problems, because they did what governments do they over spent, and waged war and did a bunch of stuff, and they said ‘Oh right were going to cancel all the debt’ and so they collected all the Tally Sticks and they burned them and they literally burned parliament down while they did it, it was kinda funny.

And they said ‘Alright, to create a new financial system we have to have something other than single entry accounting so let’s take the Machis dual entry accounting, just been created in the 1400’s, but they adopted it in the 1865 and so since 1865 we’ve used dual entry green ledger pads to do accounting. And the reason that worked was it forced us to have banks, because you have a debit on one side, a credit on the other.

If I want to transfer value to you, you have to have a bank account, I have to have a bank account and there’s a debit on the one side, a credit on the other and then the bank takes a fee on both sides and its great for them.

Well in a distributed ledger technology world, or blockchain era world, we can have a triple entry ledger, there’s a single source of truth which is the blockchain, you no longer need a trusted intermediary, rent seeking middle man.

And you and I can exchange value instantaneously, objectively on the blockchain directly at literally no cost.

I’m not saying zero cost is the right answer because we need some profits in the system to incent people to work in it, but when you think about, if you want to transfer money across an international border it costs 12% today with Western Union and that’s because there’s a 400 years old treaty that says two banks have to get paid every time money transfers across international border.

I can send Bitcoin for zero, now zero is the wrong number, but 12% is the wrong number too.

So all of that’s going to change and as we digitize all of the assets, all the stocks, all the bonds, all of the real estate, all of the companies, as we digitize those cap structures and those cap tables and those certificates of ownership and all things of value, now we can trade 24/7 globally, were borderless, were frictionless, transaction fees go down, global markets increase which means price discovery rises which means prices actually go up.

I would use the example of the Plaza hotel in New York, icon hotel, you know Home Alone hotel. And, how many people would like to buy that hotel, I don’t know, a couple a thousand, gotta come up with 600 million dollars.

Only few wealthy people can do that, but how many people would like to own a slice, a fractional share of that iconic piece of real estate? A million, a hundred million, a billion.

And geez you know the New York stock exchange is closed more hours than its open, how about we don’t say that American hours are the only good hours, your sitting on a different part of the world than I am, and so why are my hours better than yours, that’s just stupid.

We should have global 24/7 tradable markets and people can trade when they want, where they want, how they want.

And so this new financial system is based on trust in code, not trust in people and this all started from, and to wrap this conversation up, it all started from the banking crisis 2008, we have a banking crisis into 2009, Satoshi emerges and what do they do to create the genesis block, a headline on a bank bail out. I mean its absolute poetry, it’s poetry.

And it’s because we have lost trust in that financial system that has been abusing us, it’s been abusing our trust, it’s been stealing our wealth through inflation, it’s been impoverishing. And they’re like ‘no no no, we’ve taken so many people out of poverty’

No, that’s what a command economy in China did, right. They took the people out of poverty. There are more people in poverty in the United States today than ever before. We have 44 Million people on food stamps in the United States. And yet the rich have it great, the middle class have it great but the poor, they don’t have it so great.

I was in the car the other day going to CNBC hit, I was in the car for 30 minutes, there were six adds for debt relief, tax relief, don’t pay your credit cards back, we’ll help you fight them.

That’s scary, if we have the world’s greatest economy, why are there so many adds trying to help people get out of debt and pay off their leans against their property?

So it’s such an opportunity for us to break free of the shackles of that old financial system that basically, I call banksters for banksters, banksters have won for all of these years, they created central banks so they could control the money supply.

There’s this great cartoon about the Aldrich Plan, you know Aldrich was John D Rockefeller’s father in law who was the Senator that created the Federal Reserve. There’s this picture of this octopus and its got its tentacles around all the companies, and the banks in and its then upchucking all the money into the central bank, and it’s just a beautiful metaphor for what the central banks have been doing to all of us for all these years.

So we can break free of banks, we can go to sound money, which is what Bitcoin is and we can go to a global financial system based on trust. And peer to peer exchange no rent seeking middlemen, that sounds pretty good! Sounds like being in Bali to me.

N: Sounds awesome to me, sounds great. I mean I think the real big issue that we have especially in our financial system and your talking about people that are in the lower class, I think lower, middle and upper class, the biggest issue right now is education.

Specifically for the younger generation as well, I mean I am 26 when I was 21/22 I started to take out a lot of credit card debt, a lot of credit cards. And found myself in what was for me, was a very large amount of credit card debt that I couldn’t pay back.

And that held over my head for two or three years until I finally figured out a way to work my ass off and get out of it.

But the reason that I got in that debt was the lack of education that I had around. A, how to utilise my own personal financials, how to properly budget things into my financial wealth for my financial health, and even beyond that, I never learned any of this stuff in school Mark.

M: No we don’t, here’s the problem, we could spend another whole, maybe we’ll come back and do another podcast sometime, but here’s the problem.

Our system was designed for a different age, it was designed for the industrial revolution where we wanted excellent sheep to sit at their machines and make money for the masters, and the Rockefellers and the Gettys and all these guys, the Carnegies and the JP Morgans all got rich and the sheep went to their jobs 9–5, and didn’t complain.

And our whole education system is about regurgitation of information, it’s not about learning how to ask questions, about how to answer questions. We don’t teach people about finances, we don’t teach people about life skills, we don’t teach them how to balance a cheque book, we don’t teach them how to negotiate a lease, and those are the things that matter in life.

And so you are absolutely right we need to totally revamp all of this, and at the end education is what creates freedom, the more educated you are, and that’s the beauty of the internet, it puts the ability to get educated at the tips of our fingers.

The best professor in every topic in the world is available to anyone in the world at any time.

You can sit and listen to Sal Khan, which I do occasionally for hours, the guys an amazing teacher and everyone in the world can listen to him at the same time, they don’t have to go to Harvard or Princeton or Stamford.

So this is again, bigger conversation for another time, but we do need to rethink how we educate, where we educate, who we educate and what were educating for.

And this idea that everybody needs to go to a four year degree and pay a lot of money, and get in alot of student loan debt is absurd.

There are so many jobs that really don’t require a four year or even a two year education. There’s a lot of apprenticeship jobs, there’s a lot of jobs that you could train solely on the internet, there’s so many ways for us to leverage all this technology that we’ve created over the last two decades.

And now what we’ve got is the ability to go beyond just information and media and commerce to digitizing and programming money and value, and what it does is it frees us up to spend more time ideating and communicating and collaborating, and less time doing the mundane.

And you should never have to balance your cheque book because we’ve got technology to do that.

So again, topic for another day but education is a big passion of mine, I think your right on to say that it really does all come down to education.

N: It really does man, I wish someone taught me, I mean even how to save money or to do my taxes you know. As a highschooler that would have been important to me, to at least get some basic knowledge around, before I started getting into the, as a working class citizen in the economy.

But anyways, I really want to dive into that topic more but let’s save that for another podcast for sure, I would love to have you back on Mark, it’s been fantastic chatting with you.

Part of the reason I actually am creating this podcast and doing this is so A, I can learn and B, so hopefully other people that are tuning in can learn as well and your probably, I mean you are the most educated person I’ve had on so far so I really really appreciate you coming on Mark.

M: Thanks for having me I enjoyed the conversation and I wish you all the best in your sojourn that you happen to be on at this particular moment, and I look forward to getting together when your stateside sometime in the future.

1:09:15 | 1:10:45

N: Cool thanks! Where can people learn more about Morgan Creek Capital and more about yourself?

M: So we’re easy to find at morgancreekfunds.com or morgancreekcap.com

I’m at @markyusko on Twitter, course you might get tired cos I tweet a lot, as my wife says ‘way too much’

And there’s a bunch of stuff out there, I’ve written a lot and it’s all out there on the internet.

And I have a YouTube channel ‘Around the world with Yusko’ it’s got a lot of presentations and slide presentations on the economy, and investing, and I’ve got three on crypto, I’ve got one on blockchain 101, one on crypto capitalism, and one on ‘Get off zero’, which is telling institutions that they need to embrace crypto assets in the future.

So just go to YouTube and type in ‘around the world with Yusko’ those will pop up.

N: Awesome Mark, thanks so much for coming on, really really appreciate it. And everybody this has been another episode of Evolvement the podcast where we talk about Bitcoin, crypto and the future of our financial systems. Mark’s an awesome guest, really glad to have him on and we will catch you guys next time.