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Capital Allocators – Inside the Institutional Investment Industry
[REPLAY] Crypto for Institutions 1: Eric Peters – The Macro Case for Bitcoin (Capital Allocators, EP.180)
00:56:31
Eric Peters is the founder and CIO One River Asset Management, where he searches for high conviction strategies coming out of his team’s expertise trading and investing in thematic macro, volatility, systematic, and inflation strategies – each as...
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- [00:02]
Ted Seides
Capital Allocators is brought to you by Ten east, an investment platform for sophisticated investors to access private markets. Ten east brings benefits of having your own family office without the cost and headaches of doing so. It's founded and led by Michael Lefel, former Deputy Executive Managing member of Davidson Kempner. Michael and his investment team offer members the opportunity to co invest by offering at their discretion. Michael and his team source, diligence and commit material personal capital to each investment. The opportunities shared on the Tennys platform offer exposure to private credit, real estate, niche venture and private equity and other idiosyncratic investments that typically aren't available through traditional channels. The principals have over a decade track record of investing in these types of exposures across more than 350 transactions post investment. The Tenney's team conducts ongoing monitoring and reporting, just as you'd expect from an institutional investment organization. I've known Michael for about a decade and after becoming impressed by the quality of Teneast offerings, its research process and high quality investment team, I became an advisor to the organization and investor in multiple offerings. You can learn more and join me as a member at Teneast Co. That's the number 10 East coast capital Allocators is also brought to you by SRS acwiem. Want to make sure your MA processes aren't stuck in the past? How about partnering with a company that's been defining the future of dealmaking for nearly two decades? Instead, when it comes to M and A innovation, SRS acwiem has reshaped the way deals get done more than anyone else. Streamlining processes for maximum efficiency and minimum headaches. Professional shareholder representation, online M and A payments, digital stockholder solicitation. Well, SRS acwiem pioneered each and continues to set the bar for game changing innovation. So leave the days of disjointed deal management behind and define your future with SRS Aquium. The smartest way to run a deal. Learn more@srsaqueum.com that's S R S A C Q U I O M Com hello, I'm Ted Seides and this is Capital Allocators. This show is an open exploration of the people and process behind capital allocation. Through conversations with leaders in the money game, we learn how these holders of the keys to the kingdom allocate their time and their capital. You can keep up to date by visiting capital allocators podcast.com my guest on today's show is Eric Peters, the Founder and Chief Investment Officer of One River Asset Management where he searches for high conviction strategies coming out of his team's expertise trading and investing in thematic, macro volatility, systematic and inflation strategies. Each, as it turns out, turns his focus on studying Bitcoin and cryptocurrencies. Eric made news in November when he executed a $600 million purchase of Bitcoin, then the largest public transaction to date. He has called Bitcoin the most interesting macro trade he's seen in 30 years in the business, and we kick off this miniseries with his Macro Case for the Digital Asset. Our conversation discusses the intrigue of Bitcoin as a form of money, how digital currencies will somewhat ironically, increase the power of governments, and the likely coexistence of Bitcoin with government digital currencies in the future. We then turn to the development of institutional infrastructure for digital assets, Eric's perspective on Bitcoin as an investor and as a trader, the reflexive nature of Bitcoin supply and the risks in the asset. Lastly, we discuss the story of Eric's big trade, the future of Bitcoin and institutional interests in the space. As you'll hear in these conversations, the infrastructure for institutions to participate in the space is firmly established and led by service providers whose names may be new to institutions. We're pleased that some of the leaders across research, trading, administration and fund management have joined Coinbase in sponsoring this miniseries. You woke up Monday morning and 149,000 bitcoin flowed into exchanges over the weekend. Seven and a half billion dollars worth of cryptocurrency is moving fast and you don't know why. With Chainalysis market Intel, you'd know this is only the seventh time ever that weekend inflows have surpassed 145,000 bitcoin. You would also know that these large inflows are followed by price declines and you'd be ready to trade. But you haven't subscribed yet, so you don't have this insight from Chainalysis Chief Economist Philip Gradwell. Don't be left behind. Subscribe today@chainalysis.com allocators FalconX is a leading crypto financial services company, providing institutions, trading, credit and clearing across all major crypto pairs. Fortune 1000 companies, family offices and asset managers turned to FalconX as a trusted partner in the cryptocurrency market. Falconx currently services over 250 institutions globally, and its backers include Accel, American Express, Coinbase Ventures, and fidelity. Visit FalconX IO to sign up and supercharge your crypto trading abilities. Since 2014, MG Stover has been the leading fund administrator for digital asset funds. With proprietary technology and dedicated teams focused on this asset class, MG Stover has proven expertise to streamline your crypto accounting and reporting needs. Give your investors peace of mind and go with the most trusted Firm in crypto MG Stover the Bitwise 10 Crypto Index Fund ticker BITW is the first and largest publicly traded crypto index fund in the U.S. the fund is managed by Bitwise Asset Management, a leading provider of crypto funds based in San Francisco. With over $1 billion in assets, BITW primarily holds Bitcoin and Ethereum today, along with smaller allocations to up and comers like Defi Assets, the index fund rebalances monthly to keep you on the right side of the fast changing space. To learn more, search for Ticker BITW or visit bitwiseinvestments.com Please enjoy my conversation with Eric Peters in this first of four episodes in the miniseries Crypto for Institutions. Eric, great to see you.
- [07:27]
Eric Peters
You as well.
- [07:28]
Ted Seides
And this is kind of unbelievable that about a year ago it came on the show and it was one of the first virtual ones I did. And now I'm super excited to actually be sitting across a big table from you.
- [07:39]
Eric Peters
We've both taken a COVID test. We're all good.
- [07:41]
Ted Seides
Yeah. The impetus for this was this paper that you wrote and your relatively new interest in digital assets. And I'd love to just get your perspective on how you started thinking about the case for cryptocurrencies. Blockchain investing.
- [07:58]
Eric Peters
It's something that I've thought about for a very long time. I've been fascinated by Bitcoin in particular, less so the extended ecosystem. It's mainly because I've just been interested in money. Not money for the sake of money, but just the study of money and interest rates and fiat currency. And I've spent my whole career on it. Right. So something new comes along and you're naturally going to be pretty intrigued by it. There have been other, I think, attempts at digital money, but bitcoin was the first thing that seemed like it was very real. And initially, look, I thought it was so real and it was so important that it would never be allowed to survive. And the reason that it wouldn't be allowed to survive in my mind was regulatory, was governments would look at it and just say, well you know what, Senior Ridge is a great power. Why would we ever give that up? There's no reason to give it up. And governments, generally speaking, amass power. They don't shed themselves of different powers. So I thought that it was initially something that governments would watch carefully. They would 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, and then just turn that into their form of money. But over the last few years, my think on that has changed. And that's when became much more interesting from an actual investment perspective.
- [09:17]
Ted Seides
So when you circle back a couple years before you were looking at it from an investment perspective, what was it about bitcoin that felt real to you as it relates to this concept of money?
- [09:28]
Eric Peters
It was very clearly a robust system in the sense that it was decentralized and it worked. And when I say it worked, it's interesting. A lot of people will look at the volatility that bitcoin has had over its life, and to date, it's had six discrete boom bust cycles. And they would say, that's a weakness. And I would just point out that I think that that's an enormous sign of strength. Actually, weakness is pets.com, the sock puppet stock that went to the moon and then collapsed and then basically flatlines at zero. To have something accelerate the way bitcoin has over its life and then have deep corrections and then stabilize and then make new highs, that's something that's very interesting, right? And so the more people who I got to know who had either become invested or become just passionate about it, the more intrigued I became. And so then you do the, like I always do thought experiments with things. So I'll look at, say, something like, I don't know, oil. And you say, are we really going to all be using fossil fuel in 100 years? The answer is kind of pretty clearly not. And then you kind of start winding back, and then it forces you to kind of think about, well, how quickly will transitions happen. Same thing for money. In 100 years, are we really going to be using paper dollars and copper pennies and things like that? It's like, obviously not, right? So then you start winding it back and you go, okay, well, how quickly will that transition take and what will it look like? And one of the interesting things that I concluded when I thought through things that way is that money will become digital precisely because it gives governments more power. And we can talk about that in a minute. So then the question is, well, can bitcoin or digital assets, will they be allowed to exist next to digital fiat? That was the important transition for me to start recognizing that the answer to that is yes.
- [11:20]
Ted Seides
So let's start with that. Concept of government power and digital currency. Play that out for me.
- [11:26]
Eric Peters
I think we're observing now what the government is doing with the dollar and the swift payment system. The US has had enormous power because the world uses dollars and uses that payment system. And for all the talk about things like Bitcoin being used for dodgy purposes, the reality is cash dollars or euros or any currency, once they're printed and they're distributed, they're very difficult to track. That's reality. Every transaction that's ever happened in Bitcoin's history is available. It's in public ledger. You can see every single transaction that's ever happened and will ever happen. So why would governments want digital currency? Well, I think they'd want digital currency because if you can force everyone. And by the way, I'm not trying to present governments as being just universally evil and bad. It's just, I think governments act a certain way, right? If you're the government and you want to stop money laundering, there's public good, stop money laundering, It's a public good to stop terrorist financing. It's a public good to stop criminals moving money around for all sorts of reasons. So if you really want to control those things, then force everyone into a digital system where every single transaction will be tracked in perpetuity. And then force everyone to have a wallet or a bank account that is registered. And then, guess what? Once you've moved people off paper money, there's no place to hide. And so that's how the government acquires power, through that. Because once they do that, well, think of all the things that you can do with that, right? One of the things you can do is you can stop money laundering and stop dodging movements. You can confiscate people's money, you can tax people, you can impose negative interest rates on some group of corporations or people. You can give other people subsidies. I mean, the government has enormous power once it associates a person and a corporation with a wallet and then can track every transaction.
- [13:22]
Ted Seides
So that presumes to some extent that the government controls that ecosystem when the whole ethos of Bitcoin is a decentralized system. So come back to that notion that you came to the conclusion that bitcoin can and will exist alongside of whatever governments choose to do digitally.
- [13:38]
Eric Peters
That's one of those fun questions to think through and also something that, as I've become more active in the space, I've come to see as being one of the reflexive elements in bitcoin. So there are a number of reflexive Elements in this asset class that I think are really unique. This is one of them. So initially I think it is pretty much unambiguously true that most people who are attracted to this tended to let's just use Bitcoin. Because by the way, a lot of what we talk about, we'll talk about Bitcoin can be extended to other assets. But let's say in the case of Bitcoin, initially, I think that most of the people who were attracted to it were attracted for a whole host of reasons, many of which included libertarian type reasons, where it's like, okay, well this is an anonymous form of value transfer, new world form of money, governments can't touch it, et cetera. It attracted a certain type of person, and a part of my brain is that kind of person. By the way, some of those people acquired very large positions, some just kind of traded around. But as this asset class has matured, and by the way, it's just beginning the process of institutionalization. So there's been a lot of maturations happened to get up to this point. But through that process what's happened is it was in some sense so unreliable and so threatening to governments in its then existing form that as more people entered it, they recognized there were needs for certain types of infrastructure. And as they started building those businesses, they realized that it takes a lot of money to build this business. As you build a business that requires a lot of money to build, you start thinking about, well, I need to make sure there's a valuable business, I need to make sure there's a return on this capital. And what you eventually get to is you get to an industry which starts building out the major structural pillars that turn it into a real industry, a real asset class. And each one of those requires huge investment. And so the people who are doing it recognize that in order for their investments to pay off, they actually ultimately need the industry become institutionalized. Which means you need to draw that institutional capital in. You need to get the regulators to sign off on what you're doing. And so if you're not the kind of person who can do that, you've kind of been left behind in this industry. If you are the kind of person to do that, you're the type of person that builds Coinbase, which is an example, which is most recently the values I've seen the private markets are $70 billion, right? So now if you're someone who's built a company like that, you don't want the dodgy characters in it. So as this market has matured. What's happened is the bad money has gotten pushed to the side, it's been ostracized. The bad actors, the bad players and the regulators have had to take it more seriously and they have started to get more comfortable with where it goes. And so a number of years ago, the regulators could have destroyed bitcoin. They can no longer destroy it. They could do various things. They can't destroy it really.
- [16:31]
Ted Seides
People started paying attention, say 2017, when Bitcoin price ran up and then later collapsed. What are those key building blocks that have come into place over those last three or four years?
- [16:41]
Eric Peters
So big one is custody, institutional custody. And you still see the headlines, I don't know what it was headlined a month or so ago about some poor guy who lost his password on his computer and his $20 billion or 20 million or whatever, it doesn't matter. They make for great headlines, great stories. But you go back to 2016, 2017, you really didn't have great custodial solutions. And so it was rather nerve wracking. And so if you're an institution and there are bad headlines about, I don't know, drug deals being used or arms dealers, we know what all the early adopter bad headlines look like, right? But you needed to have things like custody, you need to have good places to trade these coins. You need to have some regulation come in and kind of start getting a sense for how regulators are going to treat this. You needed to have things like PayPal, you know, their deal to basically to create a retail on ramp into these assets that integrates it with the existing payment systems. And then you need firms to kind of create the on ramps for institutions. Because like for instance, we speak with institutions all the time. And by and large, some have very small investments in the space, either through a venture deal that they did, or maybe with there was someone at the investment team that had great foresight and said, listen, we should start learning about this, make a very small allocation. Those things have happened not at scale. By and large, most institutions have not gotten comfortable with the players in this space. Institutions need someone to be able to feel like they can get access to the asset class without taking all of the operational fiduciary risks that they felt exposed to. But these are all issues that have. They started really being solved post 2017, and they're being solved at an increasingly fast pace right now.
- [18:29]
Ted Seides
So if we take for granted the operational infrastructure component of it for an institution, how do you start thinking about value? We know this isn't a cash flowing asset or how you think about Bitcoin in particular in the context of a portfolio.
- [18:47]
Eric Peters
So I partition my brain as part investor and part trader. Sometimes that can confuse even me. In some ways you're thinking about different timeframes and different drivers. One of the things really unique about this asset class and this opportunity is that what I see as a trader and what I see as an investor are completely aligned and highly convex. The easy answer is to just throw a number out there. We can talk about numbers, but I won't throw one out there initially. I'll just tell you how those different parts of my brain think about it when I think about it as a trader. When we decided to get into this marketplace and made at the time which was the biggest institutional asset allocation in the space, we wanted to figure out what were the best sources of liquidity to quietly get the exposure anonymously, get the exposure and get it on quickly before anyone figured out what we were doing and ran the price up on us. This goes back to early November with Bitcoin around 15,000. So we called all of our counterparties, which shall remain nameless. One of them we asked to get a line to trade futures. So now let's imagine that we need 10,000. I'm just going to make up the numbers. We need to be able to trade 10,000 contracts and we need to get our papers and we want to do it quickly and get this on before news leaks out. So let's figure out, can we get all the paperwork done in the next few days and can we get the position on really quickly? And we basically learned that it would probably take, I don't know, four to six to eight weeks to be onboarded with this and that we could probably trade 10 contracts. Okay, we need to trade 10,000. So if we wanted to do anything in S and P futures or treasury futures or anything else, the competition for our business is extremely high. So as a trader, what does that tell me? It tells me that the biggest institutions in this space do not yet have high appetite to be transacting and helping their largest clients transact and get size on in this space for whatever reason. So I would tell you that the trader's mind, the day that I have the biggest banks calling saying, we want to give you 10,000 lines and 100,000 lines or whatever it is to get your business and we'll get it done right away, that's one of a whole bunch of different trail markers that I would have to be like, okay, we're now at a different place. Right. So what does that tell me? It tells me that the on ramps have been built, they're being utilized, they're being leveraged, and so the world is operational. So forget about the price. I will tell you that given the institutional interest that you read about every day and that we see as a firm, until those on ramps are built and until I'm getting those calls from the biggest brokers and investment banks and is that, of course there's downside, there's always downside, any market, but I don't think there's much sustainable downside until we at least get to that point. So forget about what that price is, because that price, by the way, I said that when we were at 15,000, we're now today, I think we hit 50,000 today. Right, but that would be equally true at 100 or 150,000. It's just the price would be higher. But that feature that I just described of market function would not have changed yet. It takes time. Okay, so that's the trader in me, the investor in me is, look, this is the future of money. If it's allowed to survive and coexist with digital fiat, which I strongly believe it will be, then we're at the outset of a decade or hundred year journey in terms of what this asset class will become and new money will become. And is it likely that before any of these on ramps are built and investors are fully allocated, is it reasonable to think that from an investment perspective that you've already discounted the price of all of that innovation that's going to come on top of this platform already? And I think the answer, to me, the answer is unambiguously no. So I haven't given you a number. I mean, we can talk about numbers, but the numbers are much, much higher. And the thing is, there's no negative carry. You're not. So if you size it right for institutions, it's inevitably going to be very modest. And that's fine.
- [23:03]
Ted Seides
So you mentioned earlier the importance of reflexivity in this asset. And anytime we talk about money, you end up talking about faith in whatever that money is. How has reflexivity played out over the last couple of years?
- [23:20]
Eric Peters
Well, one of the ways is good money chases bad money out. That's really important. And as that happens, this is one of the great ironies, I call them inversions in this space. I believe that the price will become less volatile the higher it goes. And so that's kind of interesting, right, because you look at something that it's difficult to wrap your Head around the value of something because it's. It has no intrinsic value. It's the purest play on faith that you have. Now, by the way, you could say the same thing about gold. It's just we have so many thousands of years where for whatever reason, we've looked at gold as having intrinsic value and convinced ourselves of various things about it, that we think that it's real and you can touch it. It has substance. This doesn't even have substance. This is just stripped out all. It's like stripped out all the noise and said, okay, let's call money what it really is. It is faith. Okay? Dollar bills you can hold as well, and you feel like there's substance to them. It's silly. I mean, the Fed can create infinite amount of money electronically in the banking system just the same way that you could theoretically create infinite amounts of digital assets. The thing about Bitcoin is it forces you to look at something that just says, look, there are only going to be 21 million ever, okay? And we could argue around will that code ever break? Or something happened, but the highest probabilities there will only ever be 21 million. So you look at that and you go, okay, well, it has no intrinsic value, so what should its value be? If we want to assign this common faith as a store of value globally, and this is one of the super interesting things, I think it's probably, it might be the most important thing about bitcoin in particular is that because it has no intrinsic value, but it's a finite supply, its value could be anything. And so that's been a really important thing for me to wrap my head around. And I think it's maybe the least understood and maybe it's one of these things that I've just taken too many long walks to think about this. But the reality is, Ted, everything that you and I have ever traded in our lives, every single thing, has a supply reaction to higher price or lower price, for that matter. It just does. There's a supply response in every single thing we've ever traded. And things that we don't really feel like we're trading. Like our house housing has that supply. The price of water has that supply. The price of condos in New York, the price of gold, the price of oil, the equities. You and I were just talking about spacs. You know, the market's finding a way to create more supply, right? So everything we've ever traded has a supply response. If the price of Bitcoin goes up 3x like it just did. Or 30x, there literally won't be more that's mined. There'll be more. People will compete more aggressively to mine it, but it won't increase the pace of that supply. Same thing if it goes down, by the way. And so the reflexivity in that just means that there's this new dynamic that people can't wrap their heads around, which leads to a situation where if prices do start going up, the only way you can create more supply is to push the price sufficiently high that these people who have held through perhaps six boom bust cycles that have been utterly gut wrenching and most human beings couldn't possibly hold onto through that, who have thought this is going to go up a long way, you have to actually move the price far enough for these people to go, yeah, you know what, you got me at 50,000, I'm going to let a bunch go. And so there's reflexivity in that because the higher the price goes, the more money you suck in. The more money you suck in, the more institutionalized it gets. The more institutionalized it starts becoming, the more the regulators have to focus on it, the more the regulators focus on it at higher prices, hopefully the more sensible the regulation becomes, which invites more money in. And then you have this reluctant kind of supply response as prices go higher.
- [27:21]
Ted Seides
Where along the path did you decide it was sort of time for you to start buying?
- [27:27]
Eric Peters
Our clients are, broadly speaking, they think a lot about how to build robust portfolios to all kinds of market environments. Big market ups, big market downs. We've expressed views that it's highly likely that the late stage of this long economic and market and debt cycle will lead to a large monetary debasement, essentially. Which, by the way, if you're a market historian, that's obvious that that happens. The question is, when does it happen really? And so I think this latest, the pandemic and the policy response coming out of the pandemic seems very clearly to us to mark the beginning of that cycle. That's incredibly important for every investment strategy out there in every portfolio out there. But one of the things that's extremely difficult is if you have the Fed and the treasury in many respects co joined and the treasury is issuing a lot of debt and the Fed is creating money to buy that debt and then it's being spent and pumped into the economy and the Fed is actively trying to keep interest rates low so that the real interest rate is deeply negative, then you kind of know your bond portfolio, you're guaranteed to lose money. You're either Going to lose money slowly by owning it in the front end and just having your real interest rate work negatively, or you might lose money fast in the long end where the bond market really tanks and you get destroyed. So our clients have been really focused on that. And by November it seemed that we had the right time and some of our clients were really interested in actually making that kind of allocation. We'd just gotten through the election and I think as you saw these assets increase in value from the March lows, it became clear that policy was just going to continue to move toward this highly accommodative phase. These assets, what looked really interesting in that macro quadrant where you think about what policy is really doing, these assets are just uniquely positioned to do well. By the way, gold should do well as well. Except these are just this really interesting, highly convex version of gold that's I think, just deeply discounted. So that's what got us in. And thankfully we were able to when we did.
- [29:42]
Ted Seides
Have your clients thought about the use of Bitcoin, maybe other cryptocurrencies in the context of their portfolios?
- [29:50]
Eric Peters
You speak with all the same people. I think one of the major struggles that guys are contending with is, okay, let's say everyone in the world has a 6040 portfolio that they dress up in one way or another. Maybe they leverage it and it's some form of risk parity, maybe they amplify it with private equity, whatever, but it's a 6040 portfolio in one way or another. The problem is the 40 just doesn't work anymore. Right. And the reason that you love the 40, for the last few decades, our entire trading career, your and mine has been that interest rates have been declining and they finally got to a point where they just really couldn't decline meaningfully. So investors are looking at their portfolios. And by the way, this is, I think, a, a slow and painful realization because it lacks great answers or great solutions. But they're slowly realizing it's like, okay, so I own a lot of equities. I need to make 7% ish, and maybe it's 6 or maybe it's 8 or whatever, but it's in that zone. Equities are really expensive. My 10 year bond yields 80 basis points. The math just does not work. So they're looking at that and they're going, okay, so how do I think about a more robust portfolio? And some of them are thinking about the risk to monetary debasement and inflation. And that's very scary risk because then your bonds turn into losers. And if you look, you can try to convince yourself that equities are going to do okay in a mild inflation. But if inflation is even a little bit more than you'd hope as a fiduciary, you can't help but look at the 1970s and go, that could happen too, right? So your equities might lose money and your bonds lose money. Some of our clients think deeply about gold and some have allocations to gold. The ones who are thinking about digital assets are thinking about it in kind of that debasement hedge part of their portfolio. And it's really attractive because it is highly convex. So you could have a relatively small allocation and it could go up 10x or it could go up more than 10x. And so at a 2% allocation, by the way, that saves you from a lot of portfolio pain elsewhere in that kind of environment. So I think that's how they think about it. The last thing I'd say on that is they're also looking at this differently from gold in that you kind of have this call option on technology when you buy these assets that you don't have in gold. Gold will be the same in 2000 years as it was 2000 years ago. But these assets are going to be different and improved in a year and 10 years and 100 years. So you have exposure to that.
- [32:21]
Ted Seides
How do you think about the historical analog of Japan in their zero interest rate environment for whatever it is now 20 years, where it seems like they've continued to do just fine?
- [32:34]
Eric Peters
I'd say that's something really important to get right. And anyone in your seat or mine has thought about that probably their whole career. Let's look at a couple differences. Okay, so Japan, while it has a big economy in the world, it's a very small nation and it's aged very rapidly. US isn't. Japan is a very homogeneous society. US is kind of tearing itself apart right now. There are a whole host of differences that we could also go through. You know, Japan is sitting right off the coast of China and China had a big boom. And so Japan was kind of able to spend a couple decades just churning away really, and dealing with its aging demographics and some of its internal issues. But had this big customer right off its coast that was supplying machines too as they industrialized and things like that. So Japan kind of had it easy because they were the first to go through this. The world pretty clearly doesn't have it so easy anymore, and the US Definitely doesn't. So when you look at the US and You look at the massive deficit that we ran last year, this year's deficit's going to be 15 to 20%. With an economy that's actually bouncing back to life. I think it's pretty clear that the whole world got to this place where Japan had gotten to, which was very low rates, in some cases negative, like Europe. Monetary policy really wasn't lifting the economy anymore. Nothing was working. And every central banker in the world was pounding on the table for the last two years and saying, we have to borrow a lot of money. Fiscal policy needs to be involved or monetary policy won't work. And it's barely working anymore. They didn't want to say it doesn't work anymore because then the markets would have freaked out. But they said, we need your help. And so now you have this global catalyst, which was Covid and you've broken through this mental barrier that we, over the course of our career, there's been this economic orthodoxy that said you have to have an independent central bank or all hell will break loose. Well, guess what? We no longer really have independent central banks. They're working together with treasury and politicians are looking at that as a solution right now. And inflation hasn't taken off. So I think that we're just in a different mental framework at this point from a policy perspective. And that makes all the difference. It really does.
- [34:51]
Ted Seides
Let's talk a bit about what could go wrong from here. You highlighted some of the risks in the earlier years of Bitcoin. With the infrastructure in place, how about going forward?
- [35:02]
Eric Peters
There definitely are risks like there are in anything. And I think when you consider the investment proposition, in anything you do, there obviously are going to be risks. And you have to. I think you have to try to understand what they really are and then ask yourself, are they well reflected in today's price? And so let's go through the rest. I'd say that one of the big obvious risks is the regulatory risk. And those risks differ around the world, by the way, because theoretically the US could outlaw the holding of Bitcoin and that would, by the way, they could not make bitcoin illegal. It's this decentralized network that exists globally. You'd have to have every country in the world deem it to be illegal with harsh consequences, and it probably still wouldn't go away. The price would be a lot lower. So let's just talk from a US perspective. It's possible that the US regulators or this government or future government could come in and say it's illegal to hold it. Just like at a point in history, they said it's illegal to hold gold, that would knock the price down a long way. And then I think what would likely happen is that that decision would harm the US Interest to such a degree that that policy would be reversed, just like it was in gold eventually. But that's a risk, so that could happen. I think I've gotten much more comfortable with it as I've gotten to understand the regulatory environment and have interacted with them. I think that what people misunderstand is the intent of regulators is to create a sound foundation for digital assets upon which American entrepreneurs and financial institutions can innovate and can build. And financial services are a super important part of the U.S. economy. And so if you were to allow the foundation to be filled with cracks, and cracks are just bad actors, illicit activity. If you allow that to happen, you undermine the potential value of everything that you can build on that foundation. Whereas if you come up with sensible regulation, which doesn't mean everyone's going to love it, and that's the thing in this industry, a regulator will come out and say something and most people in the digital asset community will react very negatively. But really it's just. That's a normal push and pull between private and public sector. Right. But at any rate, I'm comfortable that they will not do that. But that's a risk. Another risk is that there's some kind of flaw in the code or major attack of some sort that takes the whole thing down. This has got to be the most hacked or this piece of software, this protocol has got to have withstood more attacks than probably anything in the history of mankind by super smart people. And they're also very smart people who are constantly working to fortify it. It's almost like a living technology system that has not viruses, that's fending off attack. And so that's one of the other reflexive features of this. The more money, the more valuable this becomes. You could say, the more it becomes a target. I mean, it's almost a trillion dollars. A big enough target. Right. The more value that people have in this, the more incentive there are for the people who hold their assets to make sure that it's as strong and robust as possible. So I think that there are some risks there, but the system is incredibly antifragile and so would bounce back from some type of attack that was moderately successful. There are ways that this can bounce back from some type of awful attack. And then I'd say the other risks are more around the custody of these assets, things being stolen, because at the end of the day, they're bear securities. Right? There are bear securities, by the way, that can be tracked everywhere. So even if someone steals something, a huge theft, you can see where that money goes, you can see what wallets it travels to. And the FBI and law enforcement and sec, everyone's going to be all over that. But if there were a large theft of some sort, then I think institutional investors could say, I'm not going to touch it for three years and the price would go down. And so, incidentally, that's one of the risks that we seek to mitigate with our fund structure to insulate our clients from that. Because to the extent that we can educate clients about why these risks are overpriced in the market, and we can also help mitigate these risks, I think as a fiduciary, we're doing the right thing because I think the market is overpricing all these risks and that's why the price is low relative to where it will be.
- [39:27]
Ted Seides
So I know in November there was a story that hit the news about the big trade that you did and the work you're doing with Brevin Howard. I would love to hear the story of the trade. So walk me through the trade, what it was like being in those markets, what you saw and learned.
- [39:44]
Eric Peters
Sure, it's fun to tell trading stories. I guess this was definitely the most fun trading story that I have because it was incredibly important that this be super secret just because you're dealing with an illiquid market. So I knew that we had to be super secretive. And so pretty much I only knew how much we were going to buy in terms of anything external. And we worked with the Coinbase team. We selected them, having done due diligence across the whole industry, everyone in the field, and we felt most comfortable with them as an initial partner for us. And we since are diversifying our holdings elsewhere, which was always the plan. And there are other great firms. It's just if we were to do the one significant transaction and do it with a team that I had high conviction, would have great discretion. It was with that team and with that solution where they have an agency desk, meaning I was able to interact with their institutional trading desk. They don't have a proprietary trading desk, they don't take principal risk, which just meant I knew that unless someone there leaked information, and I only dribbled information to them, so they never even knew exactly what we were doing in its full size. But unless someone leaked information about what we were doing. There was no one over there to try to front run our orders, which is always the terrifying thing when you're trying to do a big transaction. And incredibly, to their great credit, they put a very tight team together. We had a code name for the project, and I spoke with Brett Tejpal, who runs their institutional sales, and he's fantastic. We've done business in the past, so I knew him professionally, and he's just outstanding. So he kind of delivered the firm to one river. We had this very tight group of people, and I spent five days working with their institutional trading desk. And so what you discover with this asset class is their pockets of liquidity, their pockets of illiquidity. It's 24 7, 365. So I spent five days working with these guys, and we tried all different types of things. So there are all these great algorithms that are available through their TAGOMI system. And so I use those. But I also kind of brought in, I want to say old school, 90s FX trading, but kind of really. So, you know, it's like what you discover is if the market goes up to certain levels, there's so many algorithms in these markets. The market hits a certain round number, let's say 15,100, for instance, and if it starts backing off, there are all these algorithms that come in and just drill the price down. And so we'd observe that and we'd let things like that happen. Or one of the things that was kind of fun is as I was speaking with the team there, I was like, well, why don't we put some really big chunky bids in on the market? You can't do that. I was like, well, why can't you do that? Well, if you do that, then it'll be all over Twitter in two seconds. It's like, well, why is that bad? It's like, well, that's bad because then people will race the market up. But our view was that the price was pretty high at that point. And what we were trying to do is get the position on when everyone was worried that the contested election was going to tank stocks and bring Bitcoin down with it. And so what I really wanted to do is get some big holders to think that someone stupid was in the market putting big orders in and make it look like we were really dumb money, and then drill it through, because oftentimes people do that, right? They'll drill it through those big orders, hoping that they hit stops below, and then we would let those stops get hit below. They weren't our stops. And then we put even bigger orders down to try to scoop up all the stop loss selling. So there are all kinds of games that we played, which was fascinating to see. It was really helpful to understand the liquidity markets. But yeah, it took five days and by the way, we barely moved the price.
- [43:10]
Ted Seides
And so what was the total size.
- [43:12]
Eric Peters
Of that purchase we bought? I think this is all public information. We bought over $600 million of digital assets.
- [43:19]
Ted Seides
It sounds like when you talk about buying bitcoin and having to be sensitive to Twitter, it's hard not to raise the alarm bells of what's happened with all the crowdsourcing convexity of these assets, Robinhood and whatnot. How have you thought about what that means for cryptocurrencies?
- [43:40]
Eric Peters
It's a good question. I would say that there's a near term and a long term answer for that. The near term answer is that it's just a feature of the market and there are a lot of people saying all kinds of things in the marketplace. We've chosen to be very selective. This is the fourth formal thing that we've done in this interview with our activity in the space by Design because we're kind of treading very cautiously into what to say and when to say and how to say it. And it's been interesting because I think we're viewed as having important insights into what institutions are doing. So each time, well, the first three times that we've said anything, Bitcoin has moved by 15 to 25% within a couple days, which is kind of wild. But I think that that's. If I were to think about what's really moving the market and I look at the various things that have happened, obviously Elon's announcement was really important. I think those times that we've had something to say, not because it's one river, but because it reflects what we've done. The first large institutional transaction, I think are seen as being knowledgeable in that space. Those have had real impact. So my view is don't say a whole lot. I think a lot of the Twitter stuff that people say, so many things that it's part of the landscape. But does it really mean anything? I think Elon's the was important. I think Michael Saylor, some of the things that he said have been important and he's bought a lot. Right. So those are all important things. I think longer term to me is more interesting because everything I just described is kind of market noise. Whether markets moved because Elon did something or someone Else said something, maybe they move faster than they would have moved, but it's not like that's sustainably moving markets and keeping them in a place. Markets move because there's some underlying factor that's being priced in. And I think that underlying factor is the realization that this is part of the future and they're just wildly underpriced for that. And so that's why we're seeing kind of a repricing move. But I think over for the longer term, one of the things that could surprise everyone is what a world looks like when you have billions of people who can move money on their phone and are susceptible to information, are susceptible to misinformation. I think if you asked Mubarak whether he was surprised that there were flash protests and riots and that some of these new forms of social media combined with cell phones could ultimately topple his regime, I think he would have said that was impossible, which is probably why it happened. So I don't know what's impossible and what is possible. If you think about where the world will be in, let's say, 10 years, in 10 years, I have a high degree of confidence that almost everyone on the planet will have digital wallet on their phone and they'll view it as being as secure as Citibank or anything. And they'll be able to move money between currencies, both government fiat currencies, globally, they can already do that or in cryptocurrencies. But at that point, the little like the Twitter chatter, I don't think that will matter because I don't think that stuff ever matters. But. But in big events, maybe it does matter. Maybe there's a run on a currency in Japan or. I don't know what happens, but I think it's interesting. Things will be able to happen in a decade that today is impossible for them to happen. So it doesn't mean that wild things will happen, but new things will be enabled by this functionality.
- [47:12]
Ted Seides
So when you imagine what that might look like a decade from now, what are some of the things that you're envisioning?
- [47:18]
Eric Peters
Well, I always think about risks and opportunities. I think in its fullest form out a decade, it's hard for me to see that the ability for people to move money like that, it'll provide a lot of information to governments about, in a sense, how people vote with their feet around government policies. That'll be something really interesting because if you were in Switzerland and you weren't happy with what the Swiss national bank was doing with policy and you felt like, well, literally in 30 seconds I could move all my money from Swiss francs to euros or vice versa. That could be kind of interesting, right? And I think some of that stuff will happen. What probably will happen is those countries that have the most reckless policies will find that there is a greater check on them. And so historically those have been countries like Argentina or Venezuela. But maybe what will happen is that that group of countries that have more check and balance because of these private systems of moving money around, they may find that their policies are scrutinized more and that's probably a good thing. By the way, I'm a big check and balance kind of person. So I think what's important is that these currencies don't ultimately threaten sovereigns. And here's why I think that they won't. And so it's important for me to add that because I don't want to. I think I do the industry a harm by trying to suggest that these assets are such a check and balance on governments that governments lose control. I don't think that that's the case. I think they'll be powerful checks to a degree, but they will not overwhelm a big sovereign country. And here's why. Because the force of regulation right now is moving toward making these wallets and these systems transparent to government. So initially when we started the conversation talking about all these markets were anonymous and you could move money anonymously. All those things are still true technically in practice. Before I moved my coin into our fund, I had a pa, I had coinbase account. And I'm sure if I did something wrong that they would turn me in. There will probably be some people who continue to have anonymous accounts and they'll live in places like Venezuela and Argentina and Turkey and wherever. But I think that by and large, with these big credible nations like the US what will happen is the regulation will make sure the government knows where money is. And then if we had an event which pushed the price of Bitcoin to make up a number, a million or 3 million or $5 million or some crazy number, well, guess what? These guys can tax us. And you know what? They can also, if they're unhappy with how that's developing, they can say we're going to take the long term capital gains on cryptocurrencies from whatever 20% to 30 to 50 to 80, they can do whatever they want to do. So they actually have not lost control. But there is this check and balance. There'll be a pressure like their costs of changing tax codes like that people go, why are you doing that? And there'll be a lot of people that say that's not fair. But the reality is in a world where these guys are proactively trying to debase the currency, the dollar, having an account where they can tax a capital gain ironically becomes this new source of revenue for the government. This isn't bitcoin gone wild and take over the world. I think in some nations that are very weak structurally, that could be the case. It puts a lot of pressure on them. Place like the US not the case. Places like EU not the case.
- [50:53]
Ted Seides
And in the last couple of months, Michael Saylor's out of microstrategy talking about it. We've seen Elon Musk do a huge purchase for Tesla. What are you hearing and seeing from institutions of their interest going forward?
- [51:07]
Eric Peters
There's enormous interest and intrigue, really. I mean, rightly so. And that's driven by a lot more than just the price of this stuff going up. And I know that just because I don't know. Let's go back to the dot com bubble, which we live through. When we have calls with investment firms, it's often the case that we have 10 to 15 people, that they're all the senior investment people at every area of a huge firm. And the questions that are asked are a lot less about what do you think is the fair value of this or anything. They tend to be more questions about what's going to be the impact of these assets in the future of finance, in the future of our company and the future of the insurance industry. How do we think about this in a portfolio context? Can we really go into some of the currency debasement risks and what happens with inflation? So part of the discussion is on this appears to be a new asset class is I think, what most people are recognizing and they want to make sure that they at least have a baseline perspective on what it might mean so they can kind of go and do further research. I think some portion of them will allocate and some will wait and then eventually will allocate in some way. There really is enormous interest.
- [52:25]
Ted Seides
We've talked a lot about what you did in bitcoin and without going too much into it, because we'll do that over the next couple of conversations. How do you think about extending that to other either cryptocurrencies or blockchain assets?
- [52:39]
Eric Peters
So after we did this first purchase of these assets afterwards, only after I called Alan and just said revan owns a stake in our firm and I just said it's important for all of our clients to have an allocation to this space. It just is. What I've learned through this process is that there just aren't good vehicles for them to invest in. Which is not to say there are no vehicles. Right. Because you could go directly to Coinbase, you could go to any number of firms, or you could go to some of these firms that have built their businesses for the last five years in digital assets. And there are a number of them and they're great firms. Some of them, I'd say, look more or less like venture capital firms, some of them look more or less like investment banks. But there's no firm that really looks like one river, which I would say if I were to create a parallel, it would kind of be the vanguard of digital assets. And so I think that there's. In any new ecosystem, you need to have strong players in each of those, you need to have strong venture players. And of course you're going to. You need to have strong investment banks and you're going to. They're great trading counterparties, you need great custodians. And those things have been built agency trading desks or OTC trading desks. But then you need a vanguard to kind of bring the best in class parts of the ecosystem together into a well structured product where your client goes, okay, I'm dealing with one river. They're a great fiduciary, they're qpam, they've built ERISA compliant funds, all that stuff. They have diversified custodial relationships, they've got diversified sources of liquidity. So I know I'm going to get best execution, my assets are going to be safe, all those things. So my discussion with Alan was the industry needs this and so I'm going to build this out. And both Allen and Aaron Landy, who's the CEO of Brevin, who's just terrific, we all chatted about it and it made a lot of sense. I didn't need to ask permission, I was going to do it anyway. But Alan just threw his full weight and Brevin threw their full weight behind what we're doing because they agree. And Alan's deeply knowledgeable in this space. He has all kinds of investments throughout the ecosystem and is probably the earliest hedge fund person in this space. So we agreed on that. And so where that leads from a progression standpoint is I think, the most important allocation that can be made right now given this valuation level. And I said this at 15,000 and I said the same thing at 50,000. The upside versus downside is so skewed to the upside that the most important thing I can do as a fiduciary for my clients, which are big institutional investors, they're not small mom and pop punters or Robinhood investors. They're just institutions. So the most important thing they could do is get beta exposure to, I think, Bitcoin and Ethereum. Which is not to say that there aren't other interesting assets. It's not to say that there aren't going to be assets that for periods of time outperform those two. But it's probably the case that a lot of those assets over time won't even come close to the performance that I see out of these two assets. And so if we get our clients invested into this space, we are now deeply knowledgeable about these assets and are building the firm around that capability as well. We will effectively, I think, learn and kind of evolve as this asset class evolves and be able to be, I hope, a step ahead of where the industry goes. And then as different opportunities unfold, our clients can participate in those with us. Some will be big and scalable. Being in the beta is big and scalable. There'll be other niche ones that will have more limited AUM products, but that will happen over the coming years.
- [56:10]
Ted Seides
All right, Erkel, I can't get together with you without asking you a couple of closing questions. We did run through most of them, but I just got a couple for you. What is your most important daily habit?
- [56:20]
Eric Peters
Making a cup of coffee for my wife. Definitely. Definitely. If I don't do that, it's not that I'm in trouble. I wake up. That's just what I do.
- [56:27]
Ted Seides
And what is your favorite book?
- [56:30]
Eric Peters
I wrote about it recently in An Anecdote, so I'll throw out there Moby Dick. I love the classics. And speaking of Mara, my wife, she always makes fun of me because I have so little time to read that when I read novels, I like to read things that have just really stood the test of time. And I enjoy and it's a big part of what I love about markets and this industry is I love studying human behavior. And I think the classics, they're filled with nuggets that are just great insights about human behavior.
- [56:56]
Ted Seides
All right, Eric, one more. What is the biggest mistake you've made and what did you learn from it?
- [57:01]
Eric Peters
God, I've made so many, Ted. I won't go into details because it's personal and family, but it's an instructive lesson. So there was a time in my life, I think I did a very poor job of. For most of my life, was really being very transparent. And I felt like I had to keep things that I was thinking about and keep who I was kind of guarded. And my wife, Mara, just, she persuaded me that that was exactly the opposite of what I needed to do. And so the great irony is I feel like I've become one of the more transparent people in the industry through my writing. But it's been liberating to kind of be transparent. And one of the things you discover, I mean, number one, she was of course, like almost everything in my life, she was completely right and I was wrong and I didn't even realize how non transparent I was. But once you start becoming transparent with people and relationships that you have and are just open yourself up to looking foolish or whatever it might be, you end up having much more meaningful relationships. And that's been one of the greatest things in my life. But the reason it's a probably greatest mistake is it just it took decades to figure that out. And so it's like I'll never get those decades back. But that's okay.
- [58:08]
Ted Seides
Well, Eric, it is really great to see you.
- [58:11]
Eric Peters
It's been a while. Hopefully we don't. We both took Covid tests, but hopefully we don't, you know, didn't just get it yesterday an hour. Yeah, that was great.
- [58:20]
Ted Seides
Thanks so much.
- [58:20]
Eric Peters
All right, great. Thank you.
- [58:23]
Ted Seides
Thanks for listening to this episode. I hope you found a nugget or two to take away way and apply in your investing and your life. If you like what you heard, please tell a friend and maybe even write a review on itunes. You'll help others discover the show and I thank you for it. Have a good one and see you next time. This podcast is for informational purposes only.
- [58:44]
Eric Peters
And should not be relied upon as a basis for investment decisions. All opinions expressed by guests on the show are solely their own opinion and do not necessarily reflect those of their firm manager's. Appearance on the show does not constitute.
- [58:54]
Ted Seides
An endorsement or investment recommendation by TED or capital Allocators.