Episode #43: 🇨🇳 Impressions of Crypto China With Chris Dannen

Chris Dannen, who mines and manages a crypto fund (Iterative Capital), talks about a research trip to Shenzhen and Beijing

Coin Talk
Coin Talk
Sep 11, 2018 · 31 min read

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Aaron Lammer: Welcome, chris dannen. Wow, going straight for the 5-hour Energy.

Chris Dannen: If I can get it open.

Aaron Lammer: This is that crypto power breakfast over here. Okay, so you’re saying your life has mostly been consumed by crypto at this point.

Chris Dannen: Yeah, but in a good way.

Aaron Lammer: I have, I feel like, a theme of people that I know who are at all interested in crypto, as they reach some critical mass, either in a positive or a negative way, and they’re like, “I’ve quit my job and I’m doing this full-time now,” or just like, “It’s dominating my mind while I’m at work.” How much of your brain is dedicated to crypto right now?

Chris Dannen: Oh, all of it, but I would put a caveat on that to say that I’ve started to see everything through a crypto lens, and I think that’s because I’ve been bothered for the longest time with the question of why Bitcoin exists and why anybody would make such a thing and why they would make it the way that they made it and-

Aaron Lammer: And why now?

Chris Dannen: … and why now. And you get a little insight into that in the Genesis block, but that isn’t inherently … What Satoshi put or one of Satoshi’s collaborators put in that Genesis block, that little chance around the brink of bailout for banks, that isn’t inherently political. It’s a finger in the eye to, I don’t know, everybody’s understanding of the way the world works and I think, all the time, was it not enough to consider and build this elaborate system, this incredibly original system, did you have to put the one-liner in the Genesis block? There’s something about that that just sticks out and it’s salient in my head. And so, to your question, why is everything in my mind seen through a crypto lens, it’s because I have been taunted by this idea that there is something more going on than purely Ron Paul economics. You know what I’m saying-

Aaron Lammer: Yeah.

Chris Dannen: … that there’s something deeper there.

Aaron Lammer: But there is that weird, creeping feeling at times that maybe it is just Ron Paul economics.

Chris Dannen: I never get that feeling.

Aaron Lammer: Oh, really?

Chris Dannen: No, because I don’t think that people really care about that stuff.

Aaron Lammer: It’s interesting. I feel like, between the two of us … I know you as a person. Anyone who didn’t hear Chris’ first appearance on the show, I encourage you to go back, but he owns a fund, is deeply involved in mining. I don’t have quite the same essential faith. I can definitely wrap my head around it and believe it at times, but, as the ship starts taking on water at times, I’m like I do experience, was this all a mirage?

Chris Dannen: Yeah. Yeah, a very elaborate wealth extraction game?

Aaron Lammer: Yeah, because, if you just stop the tape right now, if the world was vaporized in a nuclear attack and you were like, “Well, that was the end of crypto because humanity mostly died off,” I think you would say that the primary winners so far have been giant mining conglomerates and exchanges, plus some thieves.

Chris Dannen: A lot of thieves, yeah. No, it’s true. We haven’t gotten to the point where humanity is really effectively benefiting yet, which brings up an interesting question, which is why does it continue to grow if no one’s really benefiting? It’s axiomatic that nobody uses the stuff in commerce, so why is it growing? It’s this that bothers me. If the stuff is just an experiment or this is just a fun, one-off, digital collectible, why are really serious engineers evading their work projects during the day to look at Bitcoin and study Bitcoin? Why are people leaving their jobs, people who have really great jobs and great benefits? Why are they leaving to do open source projects or open source companies or to work on open source? That question, I think, strikes at something much deeper about the state of work in corporate tech companies.

Aaron Lammer: I think of it almost akin to ideas like communism at times, or a more modern example might be ISIS and certain forms of terrorist groups, where they just spread. There’s something about them that is viral, as an idea, around the world where you have ISIS groups in the Philippines taking over cities or, in the case of communism, I remember I was reading about these Maoist guerrillas in India who are semiliterate, totally unfamiliar with the works of Karl Marx, but somehow just the meme of communism has reached them and totally changed the area where they live. Bitcoin has a little bit of that fervent feeling, where sometimes it can feel unstoppable, even though I can’t really explain why it’s spreading in that way.

Chris Dannen: Yes, exactly. If it’s just as simple as a greed mechanism, like a little greed function that it hits in people, then why do people get so much pleasure out of reading about it, out of building things with it, and why do the people who are the most into it care the least about the price? And it’s not just because they’ve had it the longest and they’re already up. I don’t really buy that. I think there’s something else fundamental happening.

Aaron Lammer: Well, when I think we talk about the attitudes about Bitcoin and crypto, we’re really talking about the American attitudes about Bitcoin and crypto for the most part, just like everything else we talk about. When we talk about politics, when we talk about gender relations, any of these things, we’re basically talking about the American or, at very least, Western version of them. And I do think that, I don’t remember exactly what the Anthony Bourdain quote is, but basically that travel is the greatest antidote against bigotry and limitation of perspective. You recently were in China?

Chris Dannen: Yes. Yeah.

Aaron Lammer: Is this your first visit to China?

Chris Dannen: It is.

Aaron Lammer: Before you visited, what was your impression of what crypto in China was going to be like?

Chris Dannen: I expected fear to be characteristic of everybody that I met in China.

Aaron Lammer: Yeah, like people don’t want to tell you where they live?

Chris Dannen: That or they don’t want to say it where a government agent might be listening, like that there would be fear of enforcement or fear of regulation or fear of punishment from the state or from an individual administrator or whatever. But, actually, that wasn’t the attitude that I came across at all. The attitude that I came across was a knowing satisfaction among the top … and I’ll call them the top Chinese crypto investors. We’re there mostly for, at least for investor meetings, we’re there on social calls. Our real work is done in Shenzhen, where we are diligencing machine manufacturing. But when we’re in Beijing, we meet and talk to other investors, and we had a lot of really formal, nice lunches in Chinese that I-

Aaron Lammer: Is that a very heavy lunch, when you have a business lunch? How much food are we talking about eating?

Chris Dannen: It’s not a lot of food, but, and I’ve found this in many countries that I’ve done business in where the lunch is a pretext to challenge me, the Westerner, to eat something that they think I can’t or won’t eat. And so it’s all very nonchalant, of course, but a pigeon head arrives on your dish or a rabbit head or some part of a turtle and, of course, it’s coated in chili oil. And they’re stereotype of Westerners is that we can’t really handle spicy food and that we don’t like to be grossed out. And so, boy, are they disappointed when I just dive into this stuff head first. I can eat as much chili oil as any Sichuanese that I’ve met so far.

Aaron Lammer: Okay. First of all, do you have translators for these meetings?

Chris Dannen: Yeah, our head of research is Chinese-

Aaron Lammer: He’s Chinese, okay.

Chris Dannen: … so he translates.

Aaron Lammer: Is this like sizing each other up, challenging each other’s knowledge of crypto? What’s the small talk like with someone in a meeting like this?

Chris Dannen: We talk about smaller coins. We talk about altcoins. For one thing, we have nothing to sell these folks and they have nothing to sell us, so it’s a little bit of a low stakes situation. I wouldn’t say anybody’s trying to outsmart each other or get the upper hand, but two things that I noticed, like a recurring pattern. One was they really wanted to hear us elucidate our thoughts on Bitcoin, and Bitcoin particularly, and then the rest of the coins as they relate to Bitcoin, like what do we think these things are, why do we think they have value, why do we want to be in this space, how did we get into this space, all the questions you might expect. And then the other thing that people always want to know is what are the altcoins that English speakers are talking about?

Aaron Lammer: Right. And my next question was going to be what are the altcoins that Chinese nationals are talking about?

Chris Dannen: Let’s see. That’s the right question to ask because their universe is somewhat filtered by the English language bias of the ICO boom. Obviously, there’s tons of people in China that speak and read great English, but it’s not every person and it’s not every person in every firm. And so what we notice is that they are more keen to hone in on a platform, like they’re all very interested and curious to see what EOS does in the next year. They were all keen to tell us that NEO, which was, last year, bandied about as the Chinese Ethereum, is just shit and I shouldn’t pay attention to it. They were very clear on that.

Aaron Lammer: It’s interesting. I can’t count how many different nationalities of Ethereum exists and no one from that nationality has ever given their regional Ethereum a good review.

Chris Dannen: No, it’s true. Yeah.

Aaron Lammer: Okay. That all, more or less, makes sense. Are these people primarily coming to Bitcoin from a mining perspective or from a trading perspective?

Chris Dannen: I would say from a trading perspective. It’s still pretty divorced. The folks that are in the big office towers in Beijing are not the same folks that own and operate these really gritty mines in southwestern China. It’s a little bit of a mystery to them too, and, actually, we know more than they do, which feels funny. The venture funds in China got involved in this stuff, I think, much more readily than the venture firms in the U.S. and so they have a very well-established pattern of how they buy tokens, how they invest in tokens, and they have a pretty rigorous checklist. It’s a very practical checklist. It’s all about liquidity basically, like have you paid to be listed on an exchange and have you paid someone to make markets in your coin? This is the primary thing that we care about when you launch this thing.

And I can’t remember if we touched on this last time, stop me if we did, but, here in the U.S., I’ve never heard an American VC ask a team, “Hey, are you paying the exchange to support the price of this?” because that would implicate them, right, in some kind of market manipulation. And, as a result-

Aaron Lammer: Wait. Can I pause you there?

Chris Dannen: Sure.

Aaron Lammer: Tell a listener what it means to pay someone to hold or support an exchange. That would not be legal on some U.S. markets, right-

Chris Dannen: Correct.

Aaron Lammer: … or any U.S. markets?

Chris Dannen: Any U.S. markets, yeah.

Aaron Lammer: How does that work?

Chris Dannen: It’s a brilliant scheme. Again, I should probably caveat all this by saying that I’m not a Chinese expert-

Aaron Lammer: No.

Chris Dannen: … in Chinese crypto. I don’t speak any Chinese. This was my first time in China. We spent less than two weeks speaking to these folks. There are definitely people that are better qualified to talk about this.

Aaron Lammer: And, of course, none of this is investment advice. If anything, this is more like a hazy peek through the gauze of market manipulation that, I would say, I’ve never had a guest who would totally deny exists, nor have I had a guest who’s been like, “I totally understand exactly what’s happening.”

Chris Dannen: Yeah, which is how I felt until I had some of these meetings. And I should say that the folks that we met with, generally speaking, they’re real VCs, in the sense that they’re much more interested in equity. They’re not really interested in the token game, but there is a preponderance of these smaller, token-based, quote-unquote VC funds, and, when I talk about this, I’m talking more about them. These little pop-up token funds, essentially what they do, they approach you as a team, let’s say you’re launching an ERC-20 token, and they offer you a six figure investment. It’s usually 100K U.S. In return, you have to give them back 120K. It’s one of these Nigerian prince formulas, right, where they give you some money as a confidence man type of move, and then you give them more money back.

First of all, you’re doing the investment in the first place to say that you’ve got this investor and to put their logo on your website, so that’s why the transaction happens in the first place. The 20 grand that you give them back on top of their investment return, and of course that’s clandestine, is to pay for support in the markets. Presumably, these investors have relationships at exchanges or maybe they’re running the market making bots themselves or maybe the fund is, and they essentially extract a fee to support a certain price level of your coin after it’s listed. And there’s many variations on this scheme, but the idea is generally that you’re going to take in half or two-thirds what I’ll call sucker money, which is money that is not being paid directly back, and that goes to offset the money that you’re essentially paying to the VCs to use their name and to use their market-making bots.

Aaron Lammer: It’s not a dumb idea. If you just look at the last 10 people who did it, okay, this person paid 120%, got back 170%, 190%, 10,000 … but these are mostly tactics to launch a new coin. This is how to get from zero to your first 2X, at which point, you’re on your own, but you’re somewhere and someone just saw your coin doubled in value and maybe they think it’s going to double in value again, which it probably will.

Chris Dannen: Yeah, yeah. That’s the idea.

Aaron Lammer: They are not holding those bags though. They’re not retail buyers of those bags. They’re basically only involved in the fee extraction for the launching of coins on a certain level.

Chris Dannen: Yes.

Aaron Lammer: Interesting.

Chris Dannen: Again, I don’t know the specifics of a lot of these deals because I try not to ask too many specific questions. I don’t even want to know how this stuff works. But my sense is that the VC gets a bunch of tokens for free along with that exchange, so there’s actually very little money that changes hands, but free tokens are granted and it’s the same way with advisors and other folks that are paid to pump up the [crosstalk 00:15:55].

Aaron Lammer: As someone who invests in Bitcoin and coins yourself, what is the flow of fiat dollars into Bitcoin, into people buying these coins as there’s fake support from a Chinese company at the bottom? What do you make of that for the overall marketplace that some of the dollars that go into crypto eventually are getting sucked up by this pay-for-play scheme at the very bottom?

Chris Dannen: When I first came to Bitcoin, I was struck by the feeling that I had nothing to really to add. I’m not a stellar C++ engineer and I don’t have any cryptography training. As a result, what can I do except build applications that I need or that people like me need or just talk about it? And there is a segment of people that that was not good enough. They wanted to play another game. They wanted to find a way to make money around the success of Bitcoin. And that’s, in addition to being unethical and many other things, probably illegal even in China in some ways or another, it’s a stunningly original path of action, I guess you might call it, so I don’t really have a moral judgment on it. I’m always impressed by human folly and human ingenuity because they’re two sides of the same coin.

Aaron Lammer: It’s amazing how elaborate we’ve been able to work things like that out without being able to work out things like basic operational apps and things you can do with crypto. The fact that there’s a whole industry of getting coins from zero to one, but there’s not a Ethereum game store seems a little strange at this juncture of history.

Chris Dannen: Yeah, it’s true.

Aaron Lammer: One thing I have trouble wrapping my head around, and I’m all bit naïve about the Chinese form of socialist capitalism, when I think of the average American crypto archetype’s political ideals, they’re like “Free markets for everything, decentralize it all, and get the man out of my business.” That does not seem like a Chinese outlook. Are Bitcoin people Chinese libertarians or does the common Bitcoin guy have a different vibe in China?

Chris Dannen: Oh, boy. You’re taking me to dangerous territory, into very opinion-based territory, but I’m happy to opine. We drank with a lot of these guys, because this is part of the culture. You really need to drink with people before they show you any kind of vulnerability or-

Aaron Lammer: What kind of drinks?

Chris Dannen: It was all scotch whiskey-

Aaron Lammer: I bet crypto has been good to the Hong Kong high end whiskey bar economy.

Chris Dannen: Oh, yeah. We were probably not the only people with crypto money at a few of those rooftop bars is how it felt. And it is a very small community. These guys recognize each other at restaurants and stuff. I guess, to get back to your question, one of the things that I was curious about is how this fits into Chinese ideology and, actually, one of the interesting things that’s happening in China right now is it’s becoming clear that economic growth is not enough to hold the country together. In lean times, you need a uniting thread and narrative or something that is more consistent and keeps people headed in the right direction together. And the government, according to the people that I met and spoke to, the government’s actually reintroducing Buddhism in a lot of parts of the country and you can actually see Buddhist, I don’t want to call it propaganda, but you’ll see billboards with giant Buddhas on them and it’s not there to sell tourism. It’s there to harken back to some sense of inner peace or something and to calm everybody down.

On the one hand, they know that all that’s been sustaining them culturally is the desire to get rich together as a country. The folks that I talked to don’t have any ambition to burst out of the chest of communism with some kind of libertarian Bitcoin-based economy. They don’t think like that or talk like that. If anything, they’re wary of more destruction. Even the people that are our age are still cognizant of how much was destroyed during the culture revolution, how much was lost, thousands and thousands of years of interesting stuff that was just destroyed, and maybe for the better. Maybe it had to happen. I don’t know. I don’t have a dog in that fight. But they’re not keen to throw over everything all over again. That was too recent.

But the one thing that I heard consistently was there is a spirit of entrepreneurship there that is coalescing and becoming connective tissue between people in this space where it’s less about politics. And, actually, I don’t really think it’s about politics here either. To my earlier comment, I don’t think anybody really cares about Ron Paul economics. It’s like when they’re falling asleep at night, you know what I mean, and they’re thinking about, “Oh, I’m going to die someday. What really matters? Oh, Ron Paul,” I think that’s not even in the pantheon of what people really, really get emotional about. I think they do get emotional about communities of other like-minded people being able to grow their wealth and do things that they want to do and realize potential. I realize that’s all very fluffy and vague, but there is a spirit like, “We want to build things. We don’t necessarily know what we’re going to build, but we know that this is a foundation for something, a very interesting building, and nobody should stop us from building this.”

And, actually, the Chinese government, to their credit I think, is pretty tolerant, to the extent that they cracked down, they cracked down on illegal electricity use, where people are just squatting in hydro plants in Sichuan and using them without authorization. They’ve eliminated that, but everything we’ve heard is that if you’re obeying the laws and you’re paying what you’re supposed to pay, that you’re not going to be kicked out. It’s an interesting culture.

Aaron Lammer: In terms of what the Chinese government will and will not allow, the narrative in America has been from the most contentious Chinese national ICOs to, it seems like the least contentious, mining. Mining has probably been the part of crypto that China’s most associated with and it’s also something the government, despite rumors, has never really cracked down on that I know about. Are you going there to buy mining equipment?

Chris Dannen: We go there to do diligence, just broadly, on a lot of different projects. Some of those are hardware projects. Some of them are more real than others. But the whole hardware game is there and-

Aaron Lammer: This is in Shenzhen we’re talking about?

Chris Dannen: In Shenzhen, yeah, in particular, the whole, what they call, the Pearl River delta, which is the area northwest of Hong Kong. In any case, I happen to think that there’s going to be a hardware boom in crypto currency, in crypto infrastructure, crypto development, before there’s a software boom. I think, and this is probably not a popular opinion, but I think we need dedicated hardware. At the very least, we need dedicated desktop software, like a dedicated browser or a dedicated set of almost like a IDE for the desktop. I don’t think that we’re going to get by with Chrome extensions and mobile apps on conventional devices.

Aaron Lammer: You’re not talking about Brave, you’re talking about something far more all-encompassing?

Chris Dannen: Yeah, probably more all-encompassing, although I like the Mozilla Foundation and I support them, certainly, over other proprietary software, but, yeah, I think something that’s a little more imaginative. The web sucks and it’s getting worse and you may as well not bring with you the whole HTTP experience if you’re going to build a new interface for experiencing apps and services. I don’t think you necessarily need to hew that closely to what we have today.

Aaron Lammer: Do you, as an American investor and a person who, on some level, believes in Bitcoin and these other coins that are being mined heavily in China, do you see the huge percentage of the mining that’s happening in China being a vulnerability for Bitcoin and other coins?

Chris Dannen: I might have a couple of years ago. If I had known what I know now then, I might’ve been alarmed. The reason that I don’t worry about it is because, for one thing, all these groups have made inroads in the U.S. and Canada because they know that the government could flip a switch at any time. They don’t think it’s likely. No one I spoke to thought that was likely. And the reason it’s not likely and the reason that, for now, there’s not an immediate cognitive dissonance with this situation is that cryptocurrency, on the whole, still brings a lot of money into China and that’s another facet of running your pegged fiat money game is that another ancillary game you got to play is get revenue, have a trade imbalance. You better.

Aaron Lammer: Get us some of that Western currency. Go trade for some U.S. dollars, please.

Chris Dannen: Yep. As long as that’s happening, as long as the net inflows are still positive, I think the government’s going to let it lie. And they know that, if it’s internet-based, that they have a pretty good shot at throttling it anyway because they’re throttled everything else.

Aaron Lammer: I think that’s the vulnerability, as an American, is what happens if the Chinese government throttles out mining all of a sudden? The elastic system idea is that mining would just spring up elsewhere in its wake, but when you see the dominance that a company like Bitmain has over, not just actual mining itself, but the hardware that’s being used in mining, it could be pretty disruptive if Bitmain disappeared, which seems very unlikely at this point since it just IPO’ed. How much does Bitmain loom over everything in China?

Chris Dannen: Oh, they loom. They definitely do some looming, but, at this point, everybody knows their game, and it’s just a question of taking it apart brick by brick and reproducing it elsewhere. A lot of the manufacturers that we spoke to, they understand Bitmain’s model really well, and many of them know that they can’t get away with the amount of self-mining that Bitmain does. I looked at their IPO documents and they say, I may be recalling this incorrectly, but they say that less than 10% of their revenue, or maybe even less than 7% of their revenue, is self-mining, meaning operating their own machines. We just know that’s not true.

Aaron Lammer: Yeah, that seems crazy.

Chris Dannen: Yeah. Just looking at their pool, at least historically, there’s no way that could have been true last year, but nobody bats an eye at that. They all know what Bitmain is actually doing and they all know that Bitmain runs their own machines and they have a 30% failure rate and they do a volume business. And now it’s up to the other ASIC manufacturers to find vectors of attack which are maybe similar but qualitatively a little bit different here or there. And it actually occurred to me that, I was very young in the eighties, but consumer electronics got really big when we were kids, and I have a faint memory of them being shitty. I have a faint memory of uncles’ and cousins’ stuff having expensive tape decks that broke pretty quickly or you couldn’t really get to work right.

I think that the quality of consumer electronics, it’s not so good today because everybody’s an honest actor, it’s so good today because all the bad actors were eventually run out of business by companies who ate away at their market share by making a better product. And I think if Bitmain is on its heels in a couple years, it’s going to be because other ASIC manufacturers are rolling out machines that don’t fail 30% of the time, which is horrible, or are cheaper to repair, maybe you can repair yourself, or they have better customer service. They sell you brand-new machines instead of machines they’ve been using. These are the incremental steps towards a mature, consumer-friendly marketplace. And I can see it. It’s like a foothill towards someplace where retail people feel comfortable, and that’s the point where no manufacturer can really get away with making shitty machines and still selling a lot of them.

Aaron Lammer: It’s interesting. I thought you were going to go a different direction with your cheap eighties electronics metaphor, which was I remember the same period where it was like, look, if you want a really Walkman, you need to get a Sony. If you get one of these knock-off brands like Walkman, it’s just going to eat your tape, going to ruin your tape.

Chris Dannen: Exactly, it’s going to eat your tape.

Aaron Lammer: It’s going to unspool it. You’re going to be in a commercial with an unspooled tape.

Chris Dannen: Rolling.

Aaron Lammer: And that was how my parents thought about Asian electronics. And now you can go on Amazon or you can go into any store and it’s like giant, 74-inch Sony TV, 74-inch Huawei, off-brand, rip-off TV, also a very good product. And I would say that’s because it’s not that hard to steal other people’s ideas and that once one person can make a high quality 74-inch TV, basically, everyone can make a cheap 74-inch TV and the margins just get thinner and thinner and people figure out how to make them cheaper and cheaper and that also potentially is going to happen in the mining market, that Bitmain doesn’t have some secret sauce that other people don’t have access to. Well, maybe they kind of do though.

Chris Dannen: If it’s one thing that I came away from from this trip, it’s having a deep respect for the people that have experience designing this particular type of semiconductor, because there are engineers in this space in the U.S. and China and all over the world, who have been doing this for 20-plus years. You better believe the people that make Bitmain chips, they are very experienced. They’re very experienced. They are not just crapping out some commodity board that anybody could make. That’s for sure. It doesn’t mean they’re the best in the world, but it does mean that there’s a finite talent pool for all this stuff. It’s easy enough to copy and get quality that way, but I think companies would rather … that kind of world only exists where everyone in the ecosystem, let’s say both the manufacturer and the consumer, understand the product life cycle really well.

TVs are a great example, and actually it’s topical, because I think it was Avalon that just came out with a TV that mines Bitcoin. I don’t know if you saw that.

Aaron Lammer: I was just going to say a lot of TV are probably mining Bitcoin in the background without people realizing it, or Monero.

Chris Dannen: Monero, yeah, exactly. But this thing actually purports to mine Bitcoin on purpose, for you even. And, immediately, I was like, man, the Bitcoin miner life cycle is like anywhere from nine months to 18 months, and I know, from previous technology jobs, that people buy TVs, on average, once every eight years. If you know that people buy TVs every eight years, you know they’re expecting to get eight years out of your brand of TV, if you fall short, they’re not going to come back to you. But that kind of marketplace only exists where everybody really understands what a TV is and what people use it for and how long it’s used for before it gets long in the tooth.

And with ASIC miners, we’ve hurdled so far into the future of this stuff with alternate coins and with machines and Harbor wallets and there’s still not a really strong common narrative on what cryptocurrency is and what it’s for, so I think that’s one of the reasons why you still see, even after there’s commoditization of the tech, you’re still going to see hardware companies try to punk people because they can, because this is no man’s land still at this stage.

Aaron Lammer: It’s still easier to scam someone than it is to sell them something.

Chris Dannen: Absolutely. It’s way easier to do that than to make a real product that people love and to support it with fanatical customer service.

Aaron Lammer: It seems to me, almost in the way that you’ve talked about the Chinese attitude, that they may be a little more in on the scam than we are-

Chris Dannen: Yes.

Aaron Lammer: … and we’re a little bit more stuck in the righteous idealism. The area where China, as far as I’ve heard, actually is using Bitcoin is in money laundering and money moving out of the country. And we had a Korean expert on the show who we were asking like why are these … Remember there were those crazy spreads in the Korean market where Korea was just trading way, way out ahead of America-

Chris Dannen: Yeah.

Aaron Lammer: … and they were saying, “Well, that’s probably Chinese money and they don’t really care what they’re paying because they’re washing the money and it then gets transferred back to crates full of goods, which flow back to China.” In your exposure, is money laundering even being discussed by the people who are professionals?

Chris Dannen: It never came up. And I think that’s, if I could say this, a credit to us and the groups that we run with. We look for people who are compliant, let’s say, and really above board. Actually, going back to the way I was saying the ICO game works, where these VCs give you a titular investment, but then you give it right back to them plus 20%, the people that do pay for these ICOS, and I suspect, in many cases, are people who want their money laundered, and they’re looking to get a token back for their cash so that they can either sell it to somebody on a secondary market or just dump it on an exchange or something.

Aaron Lammer: That was going to be one of questions. What’s the coin base of China? If you’re a consumer in China who wants to exchange fiat for a coin, how do you do that?

Chris Dannen: My sense is most people go over the counter. I didn’t investigate the exchanges a lot while I was there. I don’t know how good their fiat liquidity, their [RMB 00:33:25] liquidity is and if they offer it, but OTC is huge in China. There are some desks there that absolutely dwarf Cumberland and Circle and these other guys and they’ll trade anything. Cumberland and Circle will make you market in Bitcoin and maybe one other thing, Litecoin or something. The same with us, we only trade proof of work coins because, in the United States, and we have very good lawyers who have helped us make this determination, in the United States, if something is proof of work mined, and it’s not sold at ICO and it’s not free mined and then given out to people in some kind of preferential way, if it’s purely proof of work mined like Bitcoin, you’re pretty much in the clear as far as it being a security.

There’s almost no, and, again, I’m not a lawyer or a Chinese expert, but there’s no way that proof of work mined coins are in danger of being declared securities the way that, let’s say, something like a Ripple almost certainly is. And so we don’t trade Ripple. If you come to us and ask us to trade Ripple, we tell you go somewhere else.

Aaron Lammer: Wait a minute, but Brad Garlinghouse said that the Chinese control Bitcoin.

Chris Dannen: Yeah. He probably says a lot of stuff.

Aaron Lammer: Shots fired from Brad Garlinghouse.

Chris Dannen: Have you looked at the structured payout schedule of his personal Ripple holdings?

Aaron Lammer: No.

Chris Dannen: Oh, man, he’s going to hate that I’m telling the world this. This is public information. Anybody can get it, but people, for whatever reason, don’t know it. He is legally precluded from selling certain amounts of Ripple up into certain dates and, until the present, those amounts have been fairly small relative to the total volume. Starting in 2018, I don’t remember the exact date because I looked months ago, but starting in late 2018, he can start to dump billions of dollars of Ripple on the market.

Aaron Lammer: Yeah, he’s going to be a very rich man.

Chris Dannen: He’s going to be a very rich man.

Aaron Lammer: Unless Ripple’s trading at one cent, then eminently possible.

Chris Dannen: Well, after he’s done with it. Yeah, I’ve got to imagine. If I could find a way to short Ripple cheaply, I would probably do it.

Aaron Lammer: Augur, baby.

Chris Dannen: That’s a good point. But is it a liquidity?

Aaron Lammer: No. I bet on the highest volume market and I think it has like $500,000 in volume, but once you go down the list, once you get to the number 11 market, it has like $2,000 in volume.

Chris Dannen: Uh, that’s such a bummer.

Aaron Lammer: I think people just can’t long on. When you meet someone in China who’s not in the crypto world, I don’t know if you hung out with other people as a tourist and you say, “Hey, I run a crypto find and mine …” I’ve heard that, in Korea, you can really expect that an average teenager may be passionate about Ethereum. Do people even know what you’re talking about in China if you start talking crypto? I understand that this totally depends on who you’re talking to, but did you encounter people who wanted to talk about Bitcoin price with you?

Chris Dannen: I would say, yeah, there’s a pretty considerable cultural awareness of it, absolutely, and it probably owes itself to the fact that everything happens on WeChat and so it’s very easy to just get sucked into an ancillary WeChat conversation. I guess I mean that to say that memes probably spread more rapidly and comprehensively in a system like that. I have no data to back that up, but it would intuitively seem to be the case. And, yeah, I did see, what I would consider to be, national level mentions of crypto, whether in a retail store or in an advertisement. It’s there, for sure. I wouldn’t say that there’s a higher awareness than there is here, at least in New York, where so much of New York is Wall Street and Wall Street, they like sniffing about this a little bit more than, I think, the average folks do.

Aaron Lammer: Are you starting to feel Wall Street breathing down your neck?

Chris Dannen: No, actually, I maintain my amusement at all things Wall Street. It’s stunning to me how they can’t exercise whatever muscle is needed to understand why software people like this stuff. They purely see it as something that just trades on a chart. It’s axiomatic among traders. They’ll even say it as a point of pride, “I don’t even need to know what the product is, just show me the fucking chart and I’ll tell you what [crosstalk 00:37:38].”

Aaron Lammer: Yeah. Yeah, it’s all TA.

Chris Dannen: Yeah, exactly. Serious people would never say it’s all TA, but, obviously, you have, in the investing world, you have fundamental analysis and technical analysis. In crypto, technical analysis tends to mean chart reading and goat entrail reading and, in real trading, let’s say, if you’re a fixed income trader and you’re necessarily long short because you’re trading a bunch of sovereign bonds from little countries that are really liquid and they’re only over the counter, then you do have to have an understanding of how liquidity affects price and where demand may or may not come from. And those are all data points that you pick up, not from the Bloomberg, but from the phone, talking to people that you know that trade this stuff or that issue the stuff.

Aaron Lammer: Additionally, fundamental analysis in crypto is often like are the founders real people?

Chris Dannen: It’s binary.

Aaron Lammer: Do they know that they’re involved with the product?

Chris Dannen: Right, exactly. Did they upload that picture?

Aaron Lammer: Has anyone seen them before?

Chris Dannen: Yeah. Yeah, that too.

Aaron Lammer: Yeah. For you, I can’t say that we’re at the bottom because I have no idea, but we’re sitting near about at least a nine month low, I think, today-ish, does it change your day-to-day price, anything like that? Do you wake up, does it emotionally affect you at all? Do you wake up and see Bitcoin just ate 15% into the rest of the market a little bit more?

Chris Dannen: No, actually, fortunately, as miners, we do have long positions. We do have longs that are things that we can’t mine, so, in as much as I think that Bitcoin is the real thing, I also think that people are going to find ways to use something like Stellar, and I use Stellar as a specific example because they have done the most work towards creating on-ramps for developers to use the tech, which is not the case for a lot of these other projects, which are academic at best, and you can’t really build anything, like a real service, with them. We do hold longs, but it’s definitely not a plurality of the fund. I like to see the prices going up. I have friends and family that hold this stuff and most of them have been holding it for a while, but everyone’s in a better mood when the prices go up.

That said, I feel better when I’m right. If I think it’s going down and it goes down, I feel good, even if I have what’s going down. I care more about understanding the market and being attuned to its … like Benjamin Graham, the famous financial author, used to characterize the market as Mr. Market, this manic depressive character that gets really upset about bad news and really, really psyched about good news, I have much more of an ego stake in understanding where Mr. Market’s head is at than if it’s going in one direction or the other.

Aaron Lammer: Okay. We’ve been asking everyone at the end of the show, pie in the sky, January 1st, 2019, when you wake up in a dream, like a marshmallow fantasy, what’s Bitcoin?

Chris Dannen: $7900 or something.

Aaron Lammer: That’s your pie in the sky? Wow.

Chris Dannen: I don’t know if I really have a pie in the sky.

Aaron Lammer: Okay. There’s two questions. It’s the pie in the sky and then what’s your realistic belief and, for you, they’re the same, 7900?

Chris Dannen: I just don’t do pie in the sky. It’s not my angle of repose.

Aaron Lammer: We were close to 7900 last week, weren’t we?

Chris Dannen: Yeah. I’ll be happy if we’re there at the end of the year.

Aaron Lammer: Would any low shake your faith?

Chris Dannen: The thing is, I’m not really faith-based. That’s the thing is our investment thesis is basically that this system is useful for building financial businesses outside of the existing financial system and that there are costs to that. People are going to have a little difficulty with the interactions. Everybody knows this. But the benefit is that I think you can operate your financial business much more cheaply. I will always contend that, even if Bitcoin is 15 bucks, as long as it’s liquid and you can go out and buy a bunch of it, remit to someone, and then cash it out, that it’s still a net gain.

But what I don’t know is whether or not Bitcoin will continue growing without this sort of Ponzi scheme price effect that it’s created. It’s still useful. I still want to build businesses on the stuff, even if the price goes down, even it goes to 1,000 bucks or something. I think where I really question a lot of my assumptions is if it dropped significantly below where it was last fall. At that point, I would have to start to think, all right, well, maybe most of what we saw in 2016 and 2017 was manipulation. Obviously, the last part of 2017 is manipulation or some type of collective euphoria, but if we dipped below 2800 bucks, I’d start second-guessing where we were a year and a half ago.

Aaron Lammer: The hard part for me to wrap my head around there is when the price doubles or quadruples, you expect the technology is twice as far along or its potential has double or quadrupled, and, if you look at the period, say, of Bitcoin between $2,000 and $20,000, did Bitcoin become 10X better or did its potential become that much more extreme during that period? It’s less than a year, and other than Lightning Network, did much happen during that year?

Chris Dannen: Yeah. I would say yes. I think that there was a civil war that happened and UASF won and I think that, in many people’s minds, was the last Rubicon and that now there’s almost nothing that can derail Bitcoin.

Aaron Lammer: And there was a having that was being led up to. It’s like everything else. It’s like what happened this century? Oh, a lot, a lot happened. All right. Will you come back on sometime to talk about all the things that we’ve forgotten that happened?

Chris Dannen: Certainly, absolutely.

Aaron Lammer: All right. Right on. Tell people who want to find you on the web where you are.

Chris Dannen: Yes. You can follow me personally @ChrisDannen on Twitter. You can find us on the web at iterative.capital. We do a stellar, not stellar as in the crypto, but just very good daily newsletter.

Aaron Lammer: I found myself accidentally using the word tethered in sentences and almost landing in a pond, but then pulling myself out of it a lot.

Chris Dannen: Yeah, it seeps into the brain like a worm. But please sign up for our newsletter. I’ve been told by many of our LPs and friends that it’s the best in the industry. We look at the subscriber list, a shocking number of really smart, credentialed people that are reading what we write every day, so add yourself to that list at iterative.capital. Click subscribe on the upper right hand corner.

Aaron Lammer: Cool. Thanks.

Chris Dannen: Thank you, Aaron. always a pleasure.

Written by

The official podcast of Bitcoin crashes. Hosted by @aaronlammer and @jaycaspiankang. Mailbag/contact: hi@cointalk.show

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