Capital Allocators – Episode [REPLAY] Crypto for Institutions 1: Eric Peters – The Macro Case for Bitcoin (EP.180)
Release Date: December 16, 2024
Host: Ted Seides
Guest: Eric Peters, Founder and Chief Investment Officer of One River Asset Management

Introduction

In this episode of Capital Allocators, host Ted Seides engages in an insightful conversation with Eric Peters, the Founder and Chief Investment Officer of One River Asset Management. The discussion delves into the evolving landscape of institutional investment in cryptocurrencies, particularly Bitcoin, exploring its macroeconomic implications, institutional infrastructure development, and future prospects.

Eric Peters’ Journey into Cryptocurrencies

Eric Peters begins by sharing his long-standing interest in the study of money and fiat currencies, which naturally extended to exploring digital assets like Bitcoin. He recounts his initial skepticism, believing that governments would suppress decentralized digital currencies to maintain their sovereign power over money.

Eric Peters [07:58]:
"I thought it was so real and it was so important that it would never be allowed to survive... governments would watch carefully, determine which thing in the private sector ultimately proved to be most robust, and then they would effectively take it over and kill the private market for it."

However, over the years, Eric's perspective shifted as Bitcoin demonstrated resilience and the infrastructure for its institutional adoption began to solidify, making it a compelling investment opportunity.

Government Power and Digital Currency

A significant portion of the conversation addresses the interplay between government power and the rise of digital currencies. Eric elucidates how digital currencies can inadvertently enhance governmental control by enabling complete transaction transparency.

Eric Peters [11:26]:
"Once you've moved people off paper money, there's no place to hide... the government acquires power, because once they do that, think of all the things that you can do with that."

He discusses the government's preference for digital currencies as tools for combating money laundering and terrorist financing, highlighting the inherent trade-offs between privacy and oversight.

Institutional Infrastructure Development

Eric outlines the critical infrastructure components that have emerged over the past few years, facilitating institutional investment in cryptocurrencies:

1. Custodial Solutions: Robust institutional custody options have been established, mitigating previous risks associated with storage and security.
2. Trading Platforms: Enhanced trading venues have been developed, enabling large-scale transactions without significant market disruption.
3. Regulatory Frameworks: Sensible regulations have been introduced, providing clarity and fostering a conducive environment for institutional participation.
4. On-Ramps for Institutions: Firms like PayPal have created seamless entry points for institutions to invest in digital assets without bearing excessive operational risks.

Eric Peters [16:41]:
"They needed to have things like custody, good places to trade these coins, regulation to understand how regulators are going to treat this... These issues have started really being solved post-2017, and they're being solved at an increasingly fast pace right now."

Investment and Trading Perspectives

Eric distinguishes his dual roles as an investor and a trader, emphasizing how these perspectives synergize in his approach to Bitcoin:

• As a Trader: Eric focuses on liquidity and execution efficiency. He shares insights into executing large trades discreetly to avoid market disruptions.

  Eric Peters [18:47]:
  "Once the on-ramps are built and I'm getting those calls from the biggest brokers and investment banks, there's downside, but I don't think there's much sustainable downside until we get to that point."

• As an Investor: He views Bitcoin as the future of money, asserting that its potential is vastly underestimated in current valuations.

  Eric Peters [18:47]:
  "This is the future of money. If it's allowed to survive and coexist with digital fiat, we're at the outset of a decade or hundred-year journey in terms of what this asset class will become."

Reflexivity and Value Proposition of Bitcoin

The concept of reflexivity—how market activities influence the asset's value and vice versa—is central to Eric's analysis of Bitcoin. He argues that Bitcoin's fixed supply inherently ties its value to market confidence and institutional adoption.

Eric Peters [23:20]:
"Everything has a supply response. If Bitcoin goes up, there's no increase in supply. The reflexivity means that higher prices attract more institutional capital, further driving up the price."

He compares Bitcoin to traditional assets like gold, noting that unlike gold, Bitcoin's technological foundation allows for continual improvement and adaptation, adding a layer of dynamic value appreciation.

Risks Associated with Bitcoin

Eric candidly discusses the potential risks inherent in Bitcoin investments:

1. Regulatory Risks: The possibility of stringent regulations that could hamper Bitcoin's usage and value.
2. Technical Risks: Vulnerabilities in the blockchain or major security breaches, although he emphasizes Bitcoin's robust and resilient network.
3. Custodial Risks: The potential for theft or loss of digital assets, mitigated by institutional custody solutions.

Eric Peters [35:02]:
"Regulatory risk... They could outlaw holding Bitcoin, but it's decentralized, so you'd have to make it illegal globally, which is nearly impossible."

He reassures that the market is overpricing these risks, presenting a favorable investment landscape relative to the underlying potential.

Case Study: The $600 Million Bitcoin Purchase

One of the episode’s highlights is Eric's narration of One River Asset Management's landmark $600 million Bitcoin purchase, the largest public transaction to date. He details the meticulous planning and strategic partnerships that enabled this substantial investment without significantly impacting Bitcoin's market price.

Eric Peters [39:44]:
"We worked with the Coinbase team, selected them after due diligence, and executed the trade with utmost secrecy to prevent market front-running."

This trade exemplifies the evolving sophistication of institutional strategies in navigating the cryptocurrency markets.

Institutional Interest and Future Outlook

Eric observes a burgeoning interest among institutional investors, driven not just by Bitcoin’s price appreciation but also its potential role in hedging against monetary debasement and inflation. He anticipates continued growth in institutional allocations to digital assets, positioning them as essential components of robust, diversified portfolios.

Eric Peters [51:07]:
"There's enormous interest and intrigue, driven by more than just the price going up. It's about the impact on the future of finance and portfolio robustness."

He also touches upon the broader implications of digital wallets becoming ubiquitous, envisioning a future where billions have seamless access to and control over their financial transactions.

Expanding Beyond Bitcoin: Other Cryptocurrencies and Blockchain Assets

While Bitcoin remains the centerpiece, Eric acknowledges the potential of other cryptocurrencies and blockchain-based assets. He emphasizes the need for structured investment vehicles akin to One River’s approach to facilitate broader institutional engagement.

Eric Peters [52:38]:
"There aren't good vehicles for institutions to invest in beyond Bitcoin and Ethereum. We aim to build out this ecosystem to provide comprehensive investment options."

This expansion strategy underscores the anticipated diversification and maturation of the digital asset investment landscape.

Closing Insights

Eric concludes with personal reflections, sharing his transformation towards greater transparency and the profound impact it has had on his professional and personal relationships.

Eric Peters [57:00]:
"Once you start becoming transparent, you end up having much more meaningful relationships. That's been one of the greatest things in my life."

He also recommends "Moby Dick" as his favorite book, appreciating classics for their deep insights into human behavior, which parallels his analytical approach to markets.

Conclusion

This episode of Capital Allocators offers a comprehensive exploration of Bitcoin's role within institutional portfolios, the necessary infrastructure for its adoption, and the intricate balance between technological innovation and regulatory oversight. Eric Peters provides a nuanced perspective that blends investment acumen with a deep understanding of macroeconomic trends, making this a must-listen for institutional investors navigating the evolving terrain of digital assets.

Notable Quotes:

• Eric Peters [07:58]:
  "I thought it was so real and it was so important that it would never be allowed to survive... governments would watch carefully, determine which thing in the private sector ultimately proved to be most robust, and then they would effectively take it over and kill the private market for it."

• Eric Peters [11:26]:
  "Once you've moved people off paper money, there's no place to hide... the government acquires power, because once they do that, think of all the things that you can do with that."

• Eric Peters [23:20]:
  "Everything has a supply response. If Bitcoin goes up, there's no increase in supply. The reflexivity means that higher prices attract more institutional capital, further driving up the price."

• Eric Peters [39:44]:
  "We worked with the Coinbase team, selected them after due diligence, and executed the trade with utmost secrecy to prevent market front-running."

• Eric Peters [51:07]:
  "There's enormous interest and intrigue, driven by more than just the price going up. It's about the impact on the future of finance and portfolio robustness."

• Eric Peters [57:00]:
  "Once you start becoming transparent, you end up having much more meaningful relationships. That's been one of the greatest things in my life."

Disclaimer: This summary is intended for informational purposes only and should not be construed as investment advice. Always conduct your own research or consult a professional advisor before making investment decisions.