C (3:22)

So I want to talk to you about that digital gold narrative. How did that actually come about? And why is it being questioned now?

B (3:29)

To think about bitcoin as digital gold is to double click on the scarcity feature. It's a hard currency or hard asset. Nobody can print a lot of it. And for the same reason that societies throughout history have wanted to have some amount of gold, people would then want some amount of bitcoin. More recently, a lot of people have really questioned the narrative because going back now to the last time we made the all time high, which might have been last fall, I think the price of gold has really surged and the price of bitcoin has gone down. So that's where we are now. But like I said earlier, I never loved the digital gold analogy because the plumbing aspects of bitcoin to me have always been just as important as the just it's an asset that has a finite supply argument. And, and just to put this in stark terms, let's go back to when Russia invaded Ukraine and, and a lot of people quickly rallied to donate a lot of money to the Ukrainian government to help with defense. Right? And a lot of people actually donate a lot of crypto. Um, and let's say the Ukrainian government also had a lot of gold in a warehouse somewhere outside of Kiev. But let's say the, the war had gone really badly and Russia had succeeded in toppling the government, and the government would have had to flee and go rule in exile. How would they have taken their gold with them? No, they probably wouldn't have. But with the bitcoin and other crypto assets, all the people in charge at the time when people donated crypto to them would have to do is take a private key. They could have even memorized the private key. That would now give them billions of dollars in purchasing power or millions or however much they had. This is why I think the plumbing argument is in many ways far more interesting when it comes to monetary insurance than the hard asset argument that gold represents.

C (5:52)

It sounds like one of the big differences between gold and bitcoin is that while both are scarce resources, it's actually much easier to store and transact with bitcoin. Right. So you stated that nation states are increasingly interested in expanding their assets in bitcoin and cryptocurrency. Why do you think that is?

B (6:11)

When we talk about foreign exchange reserves, we talk about literally how countries save money for rainy days. And they don't need to save really in their own currency because they can print their own currency whenever they want. And for many decades now, the US Dollar has been the reserve currency of the world. Something at its peak, like, I believe, well over 60% of all foreign exchange reserves were dollars. Having to do with the fact that every country does a lot of business with America. Having to do with the fact that people generally trust in America's political and legal system. All of these trends are now going in the opposite direction. Even in government macro circles, it's recognized that we are in a period of de dollarization where for various reasons, countries want to diversify away from the dollar. And while many central banks are buying gold, hard to store, hard to verify, hard to transact. So this is where I think almost by default, once enough time has passed, more and more countries will say, you know, this bitcoin thing is very easy to acquire, very easy to transact, and we no longer have to take the risk of some other countries politicians liking us doing the right thing or some other country's central bank not printing too much money.

C (7:33)

So you're no longer tied essentially to somebody else's monetary policy. Indeed, that's freedom in and of itself.

B (7:40)

Yes, it is.

C (7:43)

The academic discussion of what is bitcoin is a fascinating one. And the value it has for governments that hold it is important. But for institutional investors, the more important questions what does it behave like? And what factors drive changes in its value?

B (8:03)

The question of how does the asset perform? This is actually a homework assignment that I give to my students every semester to go download the data and crunch the numbers. And it's very interesting because bitcoin has gone through multiple phases over the years where it behaves very differently in relation to other assets. There was a period early on where bitcoin was very much a flight to quality asset, where if in the event of a macro event or a banking crisis like the one in Cyprus, the price of bitcoin appreciated materially, then many people will remember what happened during COVID which is that the price of bitcoin crashed along with everything else. And then in the years after Covid, the price of bitcoin soared along with everything else. So I wouldn't read too much into any one of these cycles. And for me personally, this is where I fall back on my mental model of this idea of monetary insurance. And the correlations have completely broken down now. So Bitcoin is not correlated with stocks right now. It's not correlated with gold, which is unfortunate for the people who really bought into the digital gold narrative. But I think this is the beginning stages of it. This is purely speculative, of course, but I think it starting to behave more like an asset that people want to own when there are problems with more traditional assets.

C (9:26)

That would mean that if everything feels a little crazy, you actually do want to kind of have that insurance, if you will.

B (9:36)

But over intermediate to longer time horizons markets can be very noisy in the short term. But I do believe that years into the future, when people look back on the current period that we're living in now, the numbers will actually start to show that if you move past the most short term time horizons, Bitcoin did start to act more like an insurance asset. If you think there's something to what I said about this idea of a it's not digital gold, but it's new financial infrastructure then, now when it's 50% cheaper than it was not that long ago, that's the time to start accumulating it. As to how much one should accumulate. Boring academic answer. Depends on your risk profile and what else you hold in your portfolio.

C (10:35)

This is a great time to bring in my next guest, Cosmo Jiang. Cosmo is a general partner and portfolio manager at Pantera Capital, one of the oldest and largest institutional investment firms focused on blockchain and digital assets. I've asked him to come on the show because I want to explore the impact of digital assets beyond Bitcoin in an investor's portfolio and talk about Omid's last words. It depends on what else you hold in your portfolio, he said. So how about at Cosmo, what else can an institutional investor hold other than Bitcoin that gives them access to this asset class?

D (11:16)

When I think about diversification, I think about it as not just about owning more things, it's about owning different drivers of return. So you have different things contributing to your portfolio. From that perspective, it's like, why would I want to own different drivers of return? Well, either because A, they're uncorrelated or B they offer something really compelling from a growth perspective. And I think crypto has elements of both. When I do think of digital assets, I, I think about it in two large buckets. There's Bitcoin and Then there's everything else, which is blockchain, the technology, that's Ethereum, Solana, all these other tokens. And the reality is they both have pretty different drivers now. There's cryptocurrencies and then there's protocols that, you know, represent units of value and. And so cryptocurrencies are kind of different. You need to put on your macro hat and there's not really any fundamentals to talk about there. It's just like there aren't fundamentals for gold other than technical flows.

C (12:10)

So what about the adjacent opportunities then? The businesses that aren't crypto protocols or tokens, but are actually connected to the ecosystem? What do you think about those satellite or adjacent investments? What do they look like then?

D (12:24)

So some of the things that we're most excited about, and as we get beyond, as you say, you know, layer one protocols like Bitcoin, Solana, Ethereum, are really a lot of the applications that are now being built on top of these base layers. So things like decentralized finance, which is effectively recreating our financial rails, except on blockchain rails, we find that extremely exciting. As we move beyond DeFi, there's a lot of other surface areas that we think are really interesting. Explore one area in particular that I'm spending a lot of time in, that Pantera spending a lot of time in is all the way that blockchain really uniquely enables AI adoption. There are so many interesting entrepreneurs that actually sit at that intersection of blockchain and AI, because blockchain and AI are both just branches of math. I studied math in college. Plenty of my smarter colleagues went on to study math and PhD. They all have both cryptography experience or blockchain experience, and statistics experience or AI experience. And so there's already this huge supply of entrepreneurs that sit at that intersection, are really interesting to explore that. So my background is also as a long, short equity investor for most of my career. And so I come from a world where I care deeply about fundamental value, about revenue, about ebitda, about cash flows, and my whole raison d' etre for entering the digital asset space. I started to see that more and more protocols actually had those characteristics and were able to be underwritten in the same exact way that I underwrote equities. And my goal was to bring that fundamental financial analysis rigor into the blockchain space. When you look at blockchain protocols, these can be analyzed and should be analyzed in the same exact way that you might analyze an equity with any, any equity company. You might think about, you know, what is their total addressable market, what are the users, how will they monetize their users, and then what's the expense structure to get to your, your earnings power? Similarly, with a blockchain protocol, you have this incredible ability to use on chain data to measure a lot of those same things. You can see how many users any given protocol has. You can see on the blockchain its revenue getting printed second by second. And so you can track that revenue and then you get a sense of what the operating expense structure might be and then how much cash flow ultimately get produced to return to token holders. It happens that most protocols, because they are new businesses and new startups, have less of a track record, less history, less data to use. But you can dream the dream and there's that same, you know, and so there's a wider range of outcomes, but you can still do that same sort of analysis. So this surprises many of our prospective investors when we talk to them. But for all of our positions, we have three statement models, right? We build out income statements, we build cash flow statements, we build out balance sheets to understand the know fundamental growth of this business.

C (15:12)

Cosmo, is there a point where not having any digital asset exposure actually becomes a risk for institutional portfolios?

D (15:21)

I think the answer is very much yes. And that is, you know, a driver of some of the interest that we're seeing from clients. Because if you think about what happened last year, not only did it became clear that there was regulatory clarity, that the governments are supportive, that access was improving, but also that, you know, quietly, Coinbase was added to the S&P 500 in the second quarter of last year. And what that does is all of a sudden, every single, every single professional investor now has blockchain exposure in their benchmark, right? Nearly everyone in the world uses some version of the S&P 500, or maybe it's MSCI to benchmark their returns. And truly, prior to Coinbase being added to the S&P 500, you had zero blockchain in your index. And so if you were, if you're a manager of thinking about where you want to be overweight or underweight, it was never a consideration for you. But all of a sudden, starting last year, you are now required to think about whether you are overweight, underweight or equal weight, the asset class. And so that is a major shift and a major change. So it does become risky to not have access to this asset class now that is actually in your benchmark and how you're judged against and because that happens to be outperforming everything else.

C (16:36)

Okay then is there a point where it's going to be too expensive to get into this asset class?

D (16:42)

We get that question a lot. And I think it's really important here to have a long term time horizon if you're an investor. The most important thing that every marketing department cares about if you run a consumer brand is what are the 20 to 30 year olds doing? Because you know, inevitably that they will, you know, get jobs, get more wealthy over time. And so their portfolio allocation or what they spend on what they believe in that will, those brands will have more value over time because those, those consumers will have more money over time and they'll replace the, you know, older cohorts that age out over time. And you know, today a lot of 50 to 60 year olds, the people with all the wealth have a lot of gold. But if you look at the 23 year olds, they all own bitcoin, they don't own gold. And so very clear to me over a multi decade time period that brand bitcoin is going to win out. And bitcoin today is a $2 trillion market cap. Gold is something like 35 trillion. So there's a real 10 to 20x opportunity and that is tremendous upside. And then from the blockchain technology, I mean I feel even more optimistic and more excited about the return potential.

C (17:48)

For institutional investors, building diversity in a portfolio is all about collecting assets that respond to different drivers. Omid Malikin sees Bitcoin as both a payment system and a hard currency. He says its role in a portfolio is to serve as insurance against investments that have different behavior patterns and protection from monetary debasement. Cosmo Jiang meanwhile is attracted to the growth potential of digital assets and protocols that push investors beyond Bitcoin. What I found interesting was the way he explained his approach to evaluating those assets and how it mirrors the approach common commonly used to put a price on traditional equity opportunities. So I'm going to give the last word to Cosmo because I want him to weigh in on the hottest topic in investing right now, Artificial intelligence. Are institutional investors over investing in AI tech and AI focused companies? And what does that mean for crypto related investments?

D (18:50)

Your goal as an investor should be to try to capture the total universe of potential growth opportunities. And it's pretty clear that today a lot of the equity indices over index to AI and you know, that could be for a good reason. I certainly think AI is going to grow tremendously over time, but they probably under indexed the next most disruptive technology today, which is blockchain. You know, everyone is making this big deal about whether I should be invested in blockchain assets or not. You know, blockchain. In the future, all of finance will be digital finance. All of finance will include crop blockchain assets. Many other businesses, including large AI companies, will be using blockchain. And so it'll just become part of our everyday allocation, whether that's through investing in blockchain focused companies or other companies that happen to use blockchain across equities, across tokens, or across currencies.

C (19:45)

I'm Angie Lau and this is Evidence Involving Money, a co production between Coinbase and Bloomberg Media Studios. Thanks for listening. Be sure to follow the show on your app of choice so you'll always be in the loop when we post a new episode.