The Exchanges

Q Okay, so do you still believe it's sub-twenty-five percent that actually happens because of the downside, the asymmetrical downside risk?

A I think it's still quite low. I mean, the SEC has made, you know, a pretty definitive decision about this, that the underlying markets for Bitcoin are too unregulated, and therefore they're not going to allow a regulated product. So it's kind of a circular argument in that it's too unregulated, so we won't regulate it. But, you know, it is as it is. But the interesting thing here is also that the Winklevoss brothers, kind of a Facebook fame, you know, are the, the entity kind of, uh, that were pushing that big ETF that, that was disapproved in March. Um, after it was disapproved, they submitted an appeal to the SEC, um, to reconsider the decision. Surprisingly, I don't know what was in that appeal. It's not a public record. Um, I didn't expect SEC to grant that appeal, but they have. And so they are reviewing the decision. It's possible that we get a reversal and the ETF is approved. Um, again, I'd pin those odds pretty low for the same reasons as before.

AI assessment note: “I think it's still quite low.”

Q know all that credit card data is in one spot. It creates a target. Well, Grayscale, I imagine by setting up this kind of Bitcoin investment vehicle, they've created essentially a target, I believe. Is that a real threat? And what are your thoughts generally on whether it's an ETF model or, or what Grayscale is doing? What is your thought on kind of this kind of crypto hedge fund?

A Yeah, so you're right. It has created a honeypot, right? And so, you know, important in this context is actually that the honeypot is actually bigger on the exchanges. So, you know, Coinbase, Kraken, Poloniex, Poloniex probably being one of the bigger risks out there. Um, you know, these are giant honeypots of Bitcoins, and the problem is once they're gone, they're gone. There's no getting them back, right? Um, but overall, if we, if I circle back to, you know, GBTC, the Bitcoin Investment Trust, I mean, the reality is that That's Grayscale's, right? Yeah, that's Grayscale's product. Yeah, exactly. So, you know, the reality is that this is the best product, um, that exists today. Um, it's not a perfect product, but it's the best that exists today, and the only way to get exposure to an exotic asset that is Bitcoin in a traditional security wrapper, right?

AI assessment note: “It has created a honeypot, right? And so, you know, important in this context”

Q just reading the data off the site. They've got about four and thirty seven million bucks in assets under management, about 1.8 million shares outstanding and Bitcoin per shares about go close to .1. If someone listening right now, I mean, can any of them get exposure to Bitcoin going through this? If they're, if they're illiterate and not on the technical ways that Bitcoin actually works or crypto works.

A Yeah, absolutely. So, you know, a lot of the companies make it pretty easy. Coinbase being one of my favorite, Kraken being another, um, you know, the user interface is pretty simple. It just looks like a regular standard kind of email address and password, um, and then just with a little bit more kind of two-factor authentication and stuff to keep your Bitcoin secure. Um, but, but you don't have to be really technically savvy to be able to, to go ahead and acquire those. You know, as you try and, as you extract your Bitcoin, so when you buy it on Coinbase, you can move it to your personal wallet so that it's outside of kind of that honeypot and only you control it. Um, you know, as you go down that road, it, It requires a little bit more technical expertise, but honestly, there are a lot of products out there that make it pretty simple today.

AI assessment note: “Yeah, absolutely. So, you know, a lot of the companies make it pretty easy.”

Q inventory and be available for sale only after three years. I understand the first part, which is they sold 33% in the token sale. So let's skip to the second. 33% will be given away to companies and users to accelerate network growth. Can we look at this and basically say that's the equivalent of the ten million dollar Stripe fund or the slack investment fund to fuel their ecosystems?

A I would say that's, it's very, very similar. Yes, absolutely. It helps you solve kind of a chicken and egg problem, right? Of, you know, if I'm civic and, you know, one of their, the main things they would like to have is, you know, a login with civic button everywhere that, you know, doesn't give away as much of your personal information as like a login with Facebook type button. Um, but how do you incentivize a bunch of people, a bunch of websites and login services to have that button, um, before you have a huge user base and how do you have a big user base until you can log into all these? So you have this chicken and egg problem and tokens are one way to help solve that. I mean, I know in particular for, You know, a couple of websites that we run, you know, we'll definitely have a civic login and that's because we want some of those civic tokens. And so civic will reward some of the people in the ecosystem that, you know, integrate their service with tokens directly. Um, the concept of mining is not that, you know, it's not, but in this context, I mean, you can think of it, it is a direct parallel that's, you know, you're thinking about it the right way.

AI assessment note: “I would say that's, it's very, very similar. Yes, absolutely.”

Q Um, and so, you know, what I'm trying to understand, Spencer, is how do you, when you decide you want to take part in a token issuance as an investor, like, like how, what, what you mentioned, it's like a line for Burning Man, but how does it actually work?

A So, I mean, each of these kind of token offerings is going with slightly different models. I think the civic one has been the best run to date. Um, in particular, you had to use kind of their identity application in order to stand in line. You know, when that token sale opened, you said that I want to participate. Um, and you know, you got some placeholder in line. You might've been towards the front. You might've been towards the back and you know, that offering to prevent kind of the FOMO that we've seen in some of these offerings, um, just kind of went on a rolling basis. First person in line gets the option to purchase, you know, a package of up to a maximum size. And then, you know, once all the packages of a maximum size are sold out, you start to kind of scale people back so that, um, you know, if you're towards the back of the line, um, you either might not have gotten a chance to participate, or if you did at a much lower amount than, you know, people at the front, but, um, you know, such as the nature of something that's in limited supply with, you know, outsized demand.

AI assessment note: “First person in line gets the option to purchase, you know, a package”

Q You famously predicted, uh, many, many months ago, I think late last year or early this year, uh, that there was a sub 25% chance of the U.S. Securities and Exchange Commission approving a Bitcoin ETF. Uh, first off, do you still believe it's sub 25%, and if so, why that prediction?

A Very good question. Um, so, you know, it's really around the nature of the underlying markets of Bitcoin, right? So it's very difficult for regulators to get comfortable with it. Not that they shouldn't be able to get comfortable with it, but that it's difficult, and I acknowledge that. Um, and overall, from a decision maker standpoint, if you're at the SEC, you know, this is one of those things where if you approve this, this particular ETF, and it goes really well, you know, nobody comes back and kind of, you know, gives you a big promotion, right? But if you do approve it, and something goes wrong, you know, maybe a billion dollars worth of assets flows into this type of a fund, um, And some, some sort of a hack or something like that happens, you know, you might lose your career. Um, so, so it's just kind of this asymmetric downside risk from a regulator's standpoint of approving such an ETF. Um, you know, that said, that's kind of been my historical perspective. I still largely think that's the case. There has been a change in administration at the SEC that could be a little bit more favorable, um, to kind of working with, with, with cryptocurrencies in general.

AI assessment note: “I still largely think that's the case.”

Q How much is that the mere news that they're reconsidering that drive up the value of crypto?

A Um, you know, it didn't seem to have much of an effect. It felt like we had a huge buildup as the kind of, the original kind of approval decision came, came to a head, and it literally, the SEC waited until the last day to make a decision after, you know, about three years of reviewing this particular filing. Um, it felt like, you know, the price was kind of ramping up in anticipation of a potential approval, in which case, you know, if it were approved, you would have kind of a flood of assets coming in, um, and potentially pushing up the price. And so you had speculators kind of moving in beforehand. Um, Still, that said, when it was disapproved, we saw this quick spike down in price. I mean, literally a spike down for maybe 30 seconds or so, and then price was just right back to where it was before. So, so far it seemed pretty resilient, and it doesn't seem like there's a lot of speculative activity kind of just around this decision.

AI assessment note: “it didn't seem to have much of an effect.”

Q Okay. Good. Uh, last part and the remaining 33% will remain in the company's inventory and will be available for sale only after three years. Why do they do that?

A Well, because you have to think about it, just like, um, you know, if you're doing venture rounds, like you don't raise all of your money, you know, right away. You start with seed, you start with series A. I mean, the idea is that, you know, we want, Civic wanted to sell enough tokens and get that distribution very broad to create this initial user base to kind of, again, solve that chicken and egg problem and kind of grow their network effect. Um, but down the line, they think these tokens are going to be worth more than they are today, right? I mean, that's the reason why companies holding on the balance sheet and why they've reserved some for a future sale. So, you know, just like a company doesn't sell all of its equity up front in its first round, Um, you know, in this case, this is certainly not equity in any regards. Um, but also, you know, if you think that it's going to be worth more in the future, then you'd prefer to wait and sell some of it at a future point in time.

AI assessment note: “if you think that it's going to be worth more in the future”

Q venture capital in my last company, it would basically be, like, me saying, I'm going to raise ten million bucks, but I'm actually selling a bunch of my equity, and I'm going to cash out nine million of it, right? So, like, that's not a good sign of confidence to the business. How do people manage what they pull out to actually run the business versus what they keep in?

A Yeah, absolutely. So, I mean, most of these, taking the funds that they raised and, you know, largely converting it into kind of a fiat currency, US dollar, euros, or something like that, because they have to pay their bills, right? Um, some of them are being a little bit more speculative of, okay, we're going to hold some of the funds that we raised and keep it in cryptocurrency. Um, you know, that's, that can play favorably, like in the first blood example, and they sold at 11 dollars. And I mean, today, you know, Ethereum trades at about 180 dollars. Um, so, you know, left a lot of money in that table, but it could have gone the other way as well. It could have gone down to one dollar, right? So, you know, I think most of the more prudent teams are doing a pretty significant conversion up front, um, and maybe.

AI assessment note: “most of the more prudent teams are doing a pretty significant conversion up front”

Q So, what's interesting here, and I want your perspective on, there is a perverse incentive structure where Coinbase is actually incentivized to not see widespread government adoption of crypto because they need people to be putting money through their system to, to, to exchange it to make money. Is that accurate? And if so, uh, if the government does approve this kind of thing, does Coinbase go out of business?

A You know, it's a reasonable question. I think that if Coinbase had that problem, this would be a very high class problem for them to have. Um, in reality, merchant processing is an insignificant portion of their business, right? So this ability to, I mean, like Coinbase a lot of times will do that directly for a merchant, right? So, you know, somebody's paying you in Bitcoin, I'm Expedia.com. Somebody has tried to pay with Bitcoin. Most of the time what those services are doing, whether it's Dell or Expedia, Microsoft, or any of the other websites that, that Either do or have historically accepted Bitcoin, they're converting it immediately. So they're using a service provider like Coinbase or BitPay to convert that to fiat currency immediately. Um, that is not as big of a, it's not as meaningful of a business as just the exchange business overall. And so in that situation that you described where, you know, this becomes very widespread adoption and people are just paying directly. What you described there, by the way, is a circular economy, right? So when I pay with Bitcoin, the company actually takes in Bitcoin and doesn't try to convert it. Um, And so, you know, to the extent that we get to a circular economy, there's a lot of capital that needs to flow through these on-ramps that are Coinbase and Kraken and these other major exchanges. And so, you know, again, I really don't…

AI assessment note: “I really don't think they'll be hurting... Coinbase is going to be in a very, very good position.”

Q You have a unique perspective. You have a very unique perspective. Are most people liquidating 50%, 80%, 10%? What are you seeing?

A I'd say most of them are liquidating upwards of 80%, but, um, you know, some of them like to roll the dice a little bit more. Um, you know, the teams that we're working with, it's, you know, that's not the reason why investors invested in your token sale, was for you to speculate on the price of Bitcoin or Ether. Do yourself a favor, convert to a currency that you can actually pay your bills in and pay your developers in. Um, and yes, you might leave some upside on the table, uh, and, you know, you might also avoid downsides. So, you know, just mitigate the risk. That's not why people came in and participated in your token sale, was for you to speculate on those cryptocurrencies. So, um,

AI assessment note: “most of them are liquidating upwards of 80%”