The Exchanges

Q introduced, you had written, call it a white paper, a memo called An Institutional Investor's Guide to Crypto Assets that I read, and for someone who doesn't know a lot about the space, it just made a lot of sense to me. Like, I could understand, 85, 90% of it, it was sophisticated, but not too, not Too tough. So how did you first get involved in looking at cryptocurrencies?

A So I had the good fortune of being a friend of Vincis Casares, who is known as Bitcoin Patient Zero. I think it was Reid Hoffman who gave him that name, because he had infected Silicon Valley with Bitcoin back years ago. And we were in Chile, it's this great place, and we were chatting, and in 15 minutes he explained Bitcoin to me. And, and the, and the explanation was simple. It was, at least, and I'll even simplify it further. It was basically, look, money is, is our invention of a ledger to keep track of what we owe one another. It's a debt ledger, right? And Bitcoin is a better tech than we've ever had for that. It's probably going to fail because it's a new tech, and new technology often does its venture. But if it succeeded, you can actually think about why it would be worth a lot more. And just a basic understanding of, hang on, this is an interesting new technology. I understand what its potential use case is, even if it's not that today yet. And the fact that it was quite obviously an asymmetric option. And I think in the portfolio, it's good to have some asymmetric options, some things which hopefully have a positive expected value. So it's not a lottery ticket that, you know, you're expecting to lose money, but you're expecting hopefully to make money on, on average. But if it works, it could be a big payout. And if it doesn't work, well, you made a small bet anyway,…

AI assessment note: “I had the good fortune of being a friend of Vincis Casares”

Q So then how do you think about the other?

A Yeah, the 85. So I'm a perfect markets guy, at least in, to the extent that I think it's a useful heuristic, meaning I don't really engage in deep philosophical debates about whether markets might not always be perfect. My view is, is that the cost of exploiting any imperfection probably equals or exceeds The value of going after that. So as a consequence, I don't believe sort of that I'm going to go and outperform by being the cleverest guy at picking stocks or, or even frankly picking individual passive private investments. I think if you're not in control and focused on it, just that action of picking, I'm not convinced is enough. So I try to exploit what I think we can exploit. And we have the good fortune that our assets significantly exceed our, our needs. And that gives us an edge, or a couple of edges that I think are a priori exploitable, if you will. We effectively have an infinite investment horizon. And as a consequence, we can tolerate illiquidity across a, you know, significant percentage of our portfolio. And we can tolerate quite a lot of volatility. So what I think about it is, you start from the perspective, hopefully, you know, you're investing in Things that, where at least over the long term, the coin is biased in your favor. Maybe a little bit, but at least biased in your favor. And the key is just making sure you can keep flipping the coin. And so you can…

AI assessment note: “we can tolerate illiquidity across a, you know, significant percentage of our portfolio.”

Q And are you doing all that through funds?

A Well, so on public side, I'm an indexer. And that's typically almost like global market cap weighted. Maybe we have a bit of emerging markets we don't, depending on whatever, but I don't try to over-engineer that. I try to save on the, on sort of fees and tax on that front. Private equity, I'm a big fan of the asset class. I think that leveraged buyouts in particular are just to A great asset class. And, you know, just the simple fact of, at the beginning, you know, sort of at the basic idea of just buying cash flowing businesses with predictable cash flows, levering them up, getting a tax shield, it's just a very effective way to get several hundred basis points of additional return. And because of my, my years at KKR, I have the good fortune of knowing a lot of the great GPs in the space and, and therefore the opportunity to invest in, in their funds. And I think that's just a great way to do it. And, and We have probably like a foundation level allocation of that kind of stuff relative to total assets, because we don't need the liquidity. We think it gives us predictably higher returns in a meaningful way. And we think the odds of us if we invest in a top GP of, of there being capital impairment in a fund are just zero or, you know, very remote. And so anyway, that's why we look at that.

AI assessment note: “therefore the opportunity to invest in, in their funds.”

Q How do you think about the fees you pay the managers that you're giving money to?

A We pay de minimis fees in public markets because we're indexing. On the private equity side, given my background, we can do some on a friends and family basis, but sometimes we're paying fees. I look at it this way. I think it's a great asset class. I like the product. Trying to do it yourself. So how are you gonna get out of fees? Well, you gotta do it yourself. It's hard because what you're gonna end up happening is, is that you're either gonna be less diversified or you're gonna have lots of small checks and incur a lot of expense. Due diligence and other expense relative to the check sizes. And I'm not sure in the end that you're net winning. I think that, you know, the opportunity to invest In a large fund that has scale, and yeah, you're paying fees, but probably you're paying less in the end than you would if you were trying to go out and create it yourself. And then the alternative is not doing it at all, but I think that's dumb, because I do expect that we're going to get a low double-digit net, maybe mid double-digit gross return out of these, and that's better than I expect out of the public market. So, you know, it's kind of, yeah, I'd rather pay less fees, and I think if you can, you should, but The alternative of doing it yourself, I don't think actually is cheaper in the end.

AI assessment note: “The alternative of doing it yourself, I don't think actually is cheaper in the end.”

Q When the option, effectively, is liquid, How, do you revisit it, or do you just say, hey, I'm putting this in a lockbox for 10 years, we'll see what happens?

A Yeah, great question. Well, one thing is to be intellectually revisiting it, the other thing is to actually be doing something about that. I'm not certain about anything in life, so I'm constantly reassessing and reevaluating and adjusting and, but I still view this as a long-term VC investment, and it's almost to me like it's an anomaly that is liquid, and I try to ignore that. Except for rare moments. It really has to do with, like, major shifts in views as opposed to, oh, it's 20,000 dollars at Christmas, and now it's, you know, 6000. We're going to try to trade that range. I admire people who can do that. I don't think that's a skill of mine, so I don't try to.

AI assessment note: “I still view this as a long-term VC investment, and it's almost to me like it's an anomaly that is liquid”

Q And the framework you used was really breaking down this ecosystem into store value and utilities, and why don't you talk through what you learned about each of those?

A Kind of the current universe of investable opportunities, which, Are protocols trying to either be money or utility? In utility, I'll break into smart contract platforms or decentralized applications. That's simplifying. There might be exceptions, but I'm trying to capture and simplify as much as I can because there's so many things. In the future, there'll be tokenized claims on cash flows and non-fungible tokens and collectibles. I think those could be interesting opportunities, but I'm not talking about that today and also in my paper because it's coming, and I don't want to imply that none of that's interesting because it's a different animal. So, first of all, these things aren't Cash flows. It might be securities, according to the SEC, at least everything but Bitcoin, but they're not cash flow claims, right? So you can't value them by discounting expected cash flows. They're currencies. I mean, either actually trying to be some form of money, or they're currencies in an inside of a protocol's little closed economy. So if you want to do something on the protocol, you've got to do it via this internal currency. So, well, you can't discount cash flows. You can look at The equation of exchange identity. And that, remember, is M money supply times velocity is equal to GDP, or, you know, quantity of transactions times the average price of transactions, Q, P, M, V equals P, Q. I…

AI assessment note: “Kind of the current universe of investable opportunities, which, Are protocols trying to either be money”

Q So let's tackle both sides of that. What's the process to find that business in the first place?

A I approach it the following way. There are things that I'm interested in at any given point in time. Themes. And I start to dig in and spend time, maybe spend a bit of money, Trying things out. And that can mean everything from just, I'm spending time reading and meeting people, or maybe I'm going to conferences. Maybe I, even something specific, I go after a potential like seed acquisition, or I hire a consultant to look at this, that, this or that thing. It then becomes very much a matter of actually seeing what's working and quickly killing what isn't. At one point I was saying, well, you know, maybe I should be more focused on just pure tech investing. This was back in 11 and looked at different models For how you could somehow systematically be a better early stage tech investor, because I think it's a very hard thing to do. So I was looking at different ways to go about that, and ended up kind of concluding, it's hard, and I ended up passing. I thought there was an interesting idea, and I mean, some people will laugh, but you know, kind of like the Amman resort of retirement homes. Sort of super, more and more wealthy people, getting older, you could create a kind of a new brand that would provide some of these facilities. And I, you know, spent a little time looking into it, And then just concluded it was really capital intensive and not, you know, not that exciting. You…

AI assessment note: “I start to dig in and spend time, maybe spend a bit of money”

Q And do you have biases of the various potential investment alternatives?

A Yeah, well, so the implication of what I just said is we tend to be kind of all risk assets all the time. Now, sometimes there's cash flow issues, meaning you've got commitments, and so sometimes you've got distributions, and so you end up with some cash, or maybe you, you have a slight amount of sort of tactical leverage in the portfolio just because you're meeting commitments and not funding that by selling assets and stuff like that. We don't buy insurance we don't need, meaning we don't want to exchange our long-term average return For volatility suppression that we don't really need. And if we're sufficiently diversified, and we have a long enough horizon, we shouldn't be exposed to that much risk. I mean, even if the markets come down, you know, two, 2008, whatever, you know, markets come down 50%. Well, that's a bad trip, but you're not going to go bust. And as long as you just ride it out, you're going to be fine in the long run, provided you weren't levered. So we're all risk assets. And so that typically translates into public equity, private equity, venture, And then our own venture, but you know, venture being venture capital.

AI assessment note: “we tend to be kind of all risk assets all the time”

Q In terms of the knowledge that you now possess about this. So, what did you do from there forward?

A So, when I first did it, I said, guys, and I remember calling the office, and they're like, oh, ok. And I said, yeah, this is a ready, fire, aim investment. Because, you know, it's got these asymmetric characteristics. We're gonna bet a small amount. If we lose it, we lose it. Realistically, we're probably, even then, not gonna lose it all. We'll probably lose, you know, goes down to 50%, we'll lose half, so therefore it's okay for us to invest and then figure it out later. So I, we did it, and then it started going up, so that was a motivation to, to learn. And I kind of went from not knowing more than 15 minutes with Vince's, which is, frankly, uh, already a privilege, to knowing some. I said, wait a minute, you know, this is other stuff, and this, we ended up adding, this is early, this early 17, Some Ethereum and Zcash and, and other things. And that was sort of where we went from a silly, small amount of knowledge to superficial knowledge. And then they all kept going up a lot more. And as the, uh, summer rolled about of last year, it got to the point where I said, well, this is now on a mark to market, meaningful enough that, you know, and just kept digging, kept digging and reading and reading, talking to people, but frankly, reading even more than talking to people. One of the challenges, I think, in the crypto space is pretty much everybody who really understands it Ha…

AI assessment note: “just kept digging, kept digging and reading and reading, talking to people”

Q There is this question of this is a venture capital investment. Like other venture capital investments, there may be something else that comes along that forks or otherwise that Solves more of the need of what a digital gold would look like. How do you decide when to switch?

A Yeah, a good question. So I think about So we don't just invest in crypto. In fact, crypto for us is a small part of what we do, and I would say, frankly, for anyone who's not running a crypto fund, it should be a small part of what you do. You shouldn't bet the farm on any of this. This is just another tech, and we invest in, you know, software and genetics and other things, and that's, it's just one more venture capital category for us. It's not, and I think that's smart for everybody. Now, and the consequence of that is I look at each investment in crypto as a discrete risk. I'm not trying to say, I've got to make money in crypto, so I have to cover all the crypto bases. I look at each individual one as where the opportunity cost for me is investing less in an LBO fund, or in the S&P, or the Euro stocks, or whatever. And so I, the problem I have is that I just think the odds are disproportionately low compared to the market caps to justify shifting assets from non-crypto to crypto. And I, the analogy I use is that, to me, diversifying inside crypto is like, A champion, a world champion poker player trying to smooth out her earnings by playing slots on the way to the table. You know, you're actually increasing risk and decreasing expected returns by diversifying.

AI assessment note: “to me, diversifying inside crypto is like, A champion, a world champion poker player”

Q If the needs of working capital through the blockchain technology or the cryptocurrencies are modest, why does that accrue then to value of Bitcoin?

A So, my point being, I think there's two different things. So let's remember where this all started. This all started when someone calling themselves Satoshi Nakamoto built on prior innovations in cryptography, data structures, digital money, and solved a hitherto unsolved problem with digital money, which was how to prevent it from being spent twice without relying on a central authority. And that is actually a big deal. That's a big breakthrough. And the concept was great. So now we have a non-sovereign, decentralized, peer-to-peer, secure form of money. And then people said, oh, wait a minute, now we can kind of vary this invention to create all these utilities, smart contract platforms, and so forth. Then they said, Well, we saw how much Bitcoin became worth. It would be quite cool if we could do this with our own native currency because, well, it's self-interested, right? You know, it's a way to make a lot of money. As opposed to, for example, saying we're going to build a protocol, which they could have done, that is just doing whatever I'm trying to do, but where the blockchain is secured by fees paid in a non-native currency. They could have, but they didn't. They created these native currencies. I think that's kind of a little bit of a conceit. You know, they did it because it was self-interested to do it. But there they are. There are these things. Now, when you move o…

AI assessment note: “when you move off of that kind of original... these things may be useful, but”

Q So as an insider from the buyout, Industry. What do you think you know about other GPs that LPs might not?

A What can I say? I, I was in the sausage factory for a decade, and, and I love sausage, meaning I think it's a really good asset class, and I like what it does for overall portfolio returns. The top GPs are very good at risk management and good at diversification, and, and as a consequence, the chances of, again, investing in a fund and getting less than your money back are in practice quite low, if, to the point of any trivial, and then I figure I'm going to get LPs in a large buyout fund, you know, should probably expect low double-digit net returns, but that's great, because it's predictable over, you know, over time. I think it's important to diversify across vintages, mostly, and clearly, it's fairly easy to see which firms have a long track record and, you know, a deep bench, and I think that's important, and there's a bit of a negative selection, so I don't feel the need to kind of go way off piste and try some new manager to try to eke out a couple hundred basis points of extra gross returns, maybe, when I, but it's kind of the opposite, or they don't want to I don't want to invest in a fund and then have impairment, and I know if I go with top managers like KKR, I won't, I won't have that happen, but vintage risk is important to manage, so we try to have an allocation every year and say, okay, this is how much we want to commit every year, and keep that more or less smo…

AI assessment note: “I was in the sausage factory for a decade, and, and I love sausage”