On this episode of Okay, Computer. Dan talks with Brian Kelly, Founder & CEO of BKCM, about the grim macro outlook for markets (3:09), how higher interest rates are impacting business decisions (7:08), why the Fed and other central banks may not be able to contain inflation (14:02), cryptocurrencies struggling to prove their use cases (22:27), if Bitcoin can still become an alternative investment against inflation (27:09), and how Brian is diversifying BCKM’s portfolio. Later, Dan sits down with Chris McMillan and Trent Martensen, Credit Suisse internet & web3 investment bankers, about creating lasting value within web3 despite the industry’s recent headwinds (39:38), their top takeaways from the crypto-focused Mainnet Conference (46:00), where they’re seeing promising use cases for crypto and web3 technology (49:13), the future of NFTs for creators (53:04), and the impact of web3 industry layoffs and why it could benefit legacy tech companies (59:56).
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Transcript:
Dan Nathan: [00:00:36] Current Ad. Welcome to okay computer. I’m Dan Nathan. I am joined today by a very good friend of mine, a long time friend of mine, Brian Kelly. You know him as BK from CNBC’s Fast Money, but he’s also the CEO and founder of BKCM, which is a digital assets firm. He literally wrote the book on Bitcoin, the Bitcoin Big Bang, I think that was published in 2014. Is that right BK? [00:01:02][26.5]
Brian Kelly: [00:01:03] That’s right. Yep. With a little thank you and dedication to you, my friend. [00:01:06][3.1]
Dan Nathan: [00:01:06] I think I was on I was on a back cover, I think. [00:01:09][2.9]
Brian Kelly: [00:01:10] You wrote a blurb. That’s right. [00:01:11][0.6]
Dan Nathan: [00:01:11] I was really hoping to be on a front cover and really a kind of broader acknowledgment of just how that book got the print. But I didn’t see that so maybe. [00:01:19][8.1]
Brian Kelly: [00:01:19] Well I did get you a very modestly placed bottle of whiskey. [00:01:23][3.7]
Dan Nathan: [00:01:24] It was Japanese whiskey. Was delicious. [00:01:25][1.3]
Brian Kelly: [00:01:25] Was Japanese yeah. I think it might have been like 30 or $40 for the whole bottle. That’s pretty fancy. [00:01:29][3.8]
Dan Nathan: [00:01:30] I will say that. It is funny. I remember the book party was in DC GS headquarters in Flatiron. Yeah, there was like about 50 people there. I was surprised at the time that there was 50 people other than me who is writing book reviews of Bitcoin. But back then who knew what Bitcoin was? But you wrote the book buddy, so congrats on that. [00:01:50][19.8]
Brian Kelly: [00:01:50] Yeah, that was a long time ago. It’s been ten years, almost nine years since I started writing that and it was a fun process and then maybe I should do another one, one of these days. [00:01:59][9.0]
Dan Nathan: [00:01:59] I think you really should follow it up. I remember reading it at the time, understanding very little about it. But one of the things I think that anybody who’s senior on fast money and obviously you do plenty of podcasts, I think one of the things that you do really well is demystify some pretty heady topics. And we want to get to some of those heady topics because when you think about markets, not just crypto right now, there’s a lot of things that are outside of people’s real houses that are kind of determining the asset flows, if you will. And we’re seeing a lot of volatility across assets. And so I want to get into some of that. I also want to say so as people stick around, because after Bill and I are done, I have a conversation with Chris McMillan and Trent Martensen. They are Internet Web3 investment bankers at Credit Suisse. So it’s really interesting. We’ve had plenty of investors. We’ve had plenty of both public and private markets practitioners and all different parts of technology. I don’t think we’ve yet had investment bankers on. And one of the things I also think is interesting about these two guys is that they are specifically focused on Web3. They’re still doing Internet 2.0 investment banking, but they have a primary focus on Web3. So that’s a really interesting conversation. So stick around for that. All right BK let’s get into it here a little bit. Let’s start with the stock market here. The S&P 500 topped out on January 2nd of this year. And we spent a lot of time talking about this talking heads a little bit when we were coming into the year, most market strategists had targets in the S&P 500 that was probably trading somewhere around 4800 north of 5500. They were expecting a good year for 2022. Now, interestingly, and this is stuff that you and I spent a lot of time talking about, is that pockets of risk in the markets, whether they were high valuation tech that recently gone public but unprofitable SPACs meme stocks. I mean the list goes on and on. By the time we got to January 1st of this year, a lot of those stocks had already corrected. Many had crashed from their 2021 highs. They saw a massive deceleration in whatever metric you’re looking at due to a pull forward during the pandemic. So that was already starting to come unraveled. And then there was this focus on valuation and profits. But something happened in November of 2021, the U.S. Federal Reserve changed their tune on easy Monetary Policy. So explain a little bit to me about what they did nearly a year ago and why that was kind of the death knell for high valuation, unprofitable investments in markets. [00:04:32][152.8]
Brian Kelly: [00:04:33] So the basic idea is if you’re doing any type of company valuation, you want to project what those earnings are going to be into the future. And so do some simple math and say, okay, for the next ten years you’re going to earn a dollar a share. And then you do this thing called discounting where what does that dollar a share ten years from now worth today? And you come up with some sort of valuation for the company. Now what you do is you use an interest rate for that valuation and for that discounting. And if the interest rates really low, then the number today is really high and you go, boy, this company is worth a lot of money. But as that interest rate goes up and it’s just math for your UK viewers, as that interest rate goes up, the value of the company starts to go down. Not too different than if you think about a bond, right? All a bond is is a stock with a bunch of guaranteed cash flows. So as yields go up, the price of the bond goes down. Same type of thing for stocks. The only difference is stocks tend to be more volatile the equity. And then why does it hit companies like unprofitable companies or growth companies with no profits, but maybe lots of revenue. It’s very similar to a zero coupon board where you’re not getting any of those revenue. So all of it is kind of, hey, I’m going to get paid something in the future. And there’s this belief that in the future, those earnings are going to be worth something. So that’s kind of the basics behind it and why that changed all the valuations. [00:05:59][86.3]
Dan Nathan: [00:06:00] Yeah, and it was kind of a 1 2 punch, though, as I mentioned just before, is that in 2020, after stocks had corrected briefly in the spring, very severely, then we had all of that monetary and fiscal stimulus and things went berserk and valuations way overshot. I think the conventional wisdom by investors and they had been conditioned to this since the financial crisis, that the Fed would just get accommodative. They would just continue to either leave rates very low, keep pushing on programs like quantitative easing, making the cost of capital cheap, and pushing capital out across the risk spectrum. So that was the btfd buy the fucking dip thing that worked for a very long time and then it worked extremely well in the back half of 2020, in the first half of 2021. But once we had the vaccines, once we had this change of administration, a lot of investors like, wait a minute, zoom paying 30 times sales or whatever SAS company you want to talk about. We’re going to see a massive deceleration. These companies got to grow into these valuations and this is not a great place to be. That unwind started happening in mid 2021 and then it was that gut punch, I guess, of the Fed really turning course on what was probably what, 12 years of very, very easy monetary policy to basically combat the inflation. That was just obviously an outgrowth of all of that extensive monetary and fiscal stimulus that we saw in such a short period of time. Fair enough. [00:07:32][92.0]
Brian Kelly: [00:07:32] Yeah, I think that’s pretty fair. To give another example, if you look at last night on Fast Money, we had Tilman Fertitta, who owns Golden Nugget and Del Frisco’s and Landry Seafoods and all of that, and he gave a really good insight into how the macro impacts business decisions. And so what he said was, listen, my whole business, he does about $1,000,000,000 a year in EBITA. He takes that EBITA and goes out the bankers and says, okay, I want to borrow money because I want to open 20 new restaurants and I want to open another casino. And he was able to do it at the beginning of the year at maybe 5% or so. He’s locked in. But now that rates have gone up, he’s seeing deals being done at 10 to 15%. So from his perspective, the business decision is, I’m not going to grow anymore. I can’t make money at 15%. Therefore, I’m not going to open another Landry’s or another casino anywhere. I’m just going to sit here and do nothing. No more job means no more jobs. That means no more construction. That means all those things. And you can see how this one little decision filters down to the very local level of business decisions. And that is essentially how the Fed controls monetary policy. And that is kind of what they talk about when they say, oh, there’s a lag in monetary policy. They started this a year ago or more than a year ago. And now Golden Nugget Cansino is saying, hey, we’re not going to expand. So now you got to think about what does it look like this time next year? And you’re probably looking at a pretty severe slowdown by this time next year. [00:09:02][89.5]
Dan Nathan: [00:09:02] Yeah, but isn’t this exactly what the Fed wants to create here? And that’s one of the reasons why it’s really, I think, hard for investors to get their arms around, because if you’re new to markets in the last ten or 20 years, for that matter, accommodative monetary policy has been your friend for investing, whether it be hard assets or whether it be the stock market or things like crypto, which we’re going to get to in a moment. And that’s the thing I think that’s turning things upside down right now and one of the reasons why BK And I’m curious what your thoughts are, is that this is a new paradigm and we don’t know how inflation ultimately gets tamed. We don’t know where interest rates end up topping out. And so when I think about the stock market and looking at it through that lens, I look at the S&P 500 is down about 23 and a half percent. It’s very near its lows for this cycle here. And the Nasdaq 100 is down 31%. And again, we know that the Nasdaq 100 and the S&P 500 is about five or six stocks that make up a disproportionate amount of the weight of those two market cap weighted index. But I just don’t think peak’s that 23% on the S&P 500 is going to be where this thing bottoms out given this massive unwind. So talk to me a little bit about that. [00:10:13][71.1]
Brian Kelly: [00:10:14] I couldn’t agree with you more. I mean, I think we’re in the first couple innings of this. Unfortunately, maybe it’s fortunate. I mean, it’s going to be unfortunate because people are going to have some economic pain, but ultimately we will wash things out and we will start again and we’ll be about a stronger base. So think about it this way. In 1987, Alan Greenspan just came in. And for those of you who haven’t been in the market since then, Alan Greenspan was the formal Fed Reserve chairman he came into office right before the 87 crash. Stock markets crash. What does Alan Greenspan do? He immediately cuts rates. And so what that told everybody in the markets was the Fed’s got my back. That’s what they started with the Greenspan put. Now we call it the Fed put. And frankly, for 30 some odd years, that’s what we had. Whenever the stock market went up too much, they raised rates. Greenspan called that irrational exuberance, and whenever it went down too much, they cut rates. And so the Fed had your back on both sides. But now they have explicitly said we do not want the stock market to go up. Neel Kashkari, about a month ago or so, he was very happy to see that the market went down because that’s what the Fed wanted. There’s an article in the Wall Street Journal that the rally in the stock market right before the Jackson Hole meeting meeting caused Jay Powell, the chairman, to tear up his speech and go with something more simple so that the stock market would go lower. So you have the exact opposite of what we’ve had for 30 years, and they’ve blown a bubble in every single asset class. I don’t care what it is, whether you want it to be housing, crypto, sneakers, whatever it is. There’s been a bubble that’s been a 30 year plus bubble, and now we’ve got to deflate that bubble. And you no longer have the Fed. So what we don’t know is what breaks in this scenario. So everybody’s counting on this kind of even glide path down, soft landing, all of that. But the history of finance in history, history, economics will tell you that when you start to get moves in markets like we’re getting today, things break that we haven’t thought of before. And all of a sudden, that’s when you get those big shocks. And I think we’re just at the beginning of that. [00:12:13][119.5]
Dan Nathan: [00:12:14] Alright. So when you say big shock, just the volatility that we have seen, let’s say the upward volatility in yields here in the U.S., that’s not something we’ve seen ever to this magnitude. The percent in which they have risen off of a very low base, the way the dollar has moving this, the volatility that we’ve seen in industrial commodities. This is just to show you what sheep so many of these strategists are, though. Do you remember all the calls for 150 and $200 barrel of oil? This was just months ago. This is literally like a couple of months ago. And now we have crude oil trading at 78 or whatever. And I get it. There’s weird supply demand dynamics. We have all this stuff that we’re still dealing with supply chains. We’re still dealing with China, who’s been still locking down cities of ten, 20 million people. So I get it. It’s going to be weird. One thing I wanted to say, Biggs, is that this is an interesting tweet. And again, this seems so 2020 or 2017, for that matter. But at novel, you know, novel rather con is this thought leader. And he had this tweet that’s caught some steam overnight here. So we are recording this. This is Tuesday, end of the close here. But his tweet was panic led to lockdowns. Lockdowns led to fiscal stimulus. Stimulus led to inflation. Inflation led to monetary tightening. Tightening leads to recession. The panic wasn’t free and the bill is coming due. And again, take the beginning part out of it, the lockdowns, the panic, and now whatever the remaining part, the last part is probably the most important part is that the bill is coming due. And interesting because in the wake of the financial crisis, when Congress was introducing TARP and Rick Santelli on CNBC was on the floor of the CME screaming about inflation was going to come and it never came. It took a black swan. It took a pandemic for that to happen. But interestingly, we have this black swan event. We had an event where people were not only worried about their livelihoods in their homes and their assets, they’re worried about their health. And so this was a bit of a weird one. So I guess my point is we have inflation. The Fed used to be dying to get inflation to their target of 2% on the upside. Now they’re trying to get it to 2% on the downside, what is the likelihood that they’re able to achieve that goal? [00:14:17][123.7]
Brian Kelly: [00:14:18] Very low. Very low. Unless they push us into something that would look like the 1930 style depression, in my opinion, because they’ve lost this race unfortunately. If you look at what’s happened over the last, frankly, even six months, but even three months, you talked about oil going lower. People think it’s going to be $200 a barrel. It’s $75 a barrel today. We’ve seen copper and every single commodity. The Bloomberg Commodities Index hit a low it hasn’t seen in several years. So typically you’d say, oh, that’s deflationary. Yet we’re seeing high inflation levels. Why? Because that inflation has seeped into the services sector. It has seeped into wages. You see a lot of union activity. Why is that happening? Because people need to pay their bills. So Starbucks folks are unionizing. Amazon folks are unionizing. What are they unionized for to get higher wages? And that’s already happened. Not only that, on the fiscal side, you’re getting stimulus checks. I mean, we’ve seen that in Europe. They’re giving stimulus checks out to make sure that people can pay for their heat. They’re capping energy prices. We just passed a $700 billion stimulus package here in the U.S. while the economy was going great. So, I mean, this is what’s happening is there’s still money coming into the system. It’s just not coming in from the Fed to reserve. And so, therefore, what the Fed is talking about is demand destruction and what that is. A really a fancy term for is they don’t want you to have as much money as you used to so you don’t spend it and you can’t pay the higher price. But if you keep getting money from fiscal stimulus or caps on gas prices or whatever scheme they come up with, you’ll never stop paying the high price. Therefore, inflation doesn’t go down. So no matter what the Fed does here, they’re behind the curve. They will have to create a very severe recession, in my mind, to get as close to 2% as probably more likely that they just say, you know what, we’re going to have to live with 3 to 4% for the next ten years. [00:16:09][111.4]
Dan Nathan: [00:16:10] All right. So let’s talk about a term we’ve talked about inflation. Now let’s talk about weakening demand because you’re going to have a recession that’s going to be weaker, demand that’s going to be slower growth. And that gets you to a point what you would call stagflation. So we’ve seen stagflation area environments in the past. We haven’t really seen one since the seventies, but not great for risk assets here. Let’s take the D-word, the depression word out of here. Let’s say that’s not happening. Let’s say these advanced societies, we kind of have the safety nets in place and we have the ability to do a whole host of things to avoid that. What’s the likely outcome here if we are in a recession? And, you know, one of the things I think people forget is that after the financial crisis, weeks after we had TARP and we had this V reversal in markets, and we still had high unemployment. But late in 2009, 2010, it started coming down and it felt like maybe we were out of the woods. But there was still this obsession from economists and strategists, actually many business owners and operators, that we were going to have a double dip recession here. Right. So I guess my question is, the last recession we had in 2020, we kind of manufactured an exit out of that with $4 trillion of fiscal and monetary stimulus. Now, what do we do? Do we do the same thing? Do we actually get back? You just talked about all the stimulus that was just printed. Do we go back to a place, though, where we are becoming very accommodative? Is that the pivot that we’ve heard talked about? That was the reason why the stock market had that big rally from mid-June to mid-August, because the expectation was that if we do see slowing growth, that the Fed is going to have to get more dovish and then therefore, we’re going to see other central banks around the world do that, too. [00:17:43][93.4]
Brian Kelly: [00:17:44] Right. So that’s the old playbook. But I think given the volatility in the market and what just happened in the United Kingdom, you can’t rely on that playbook anymore. And I think that really is where the conundrum is. So what happened in the U.K.? The U.K. got a new government. They decided, hey, guess what, we’re going to cut taxes because that’s going to put more money in people’s pockets. That’s stimulative. And we’re going to do all these other public policies and how we’re going to pay for it. We’re going to borrow money. While the bond market said, you’re not going to borrow money from us, at least not at the interest rates that you’ve been paying. And so the implied assumption with all of these solutions to a downturn, to a recession, is you can have this fiscal and monetary policy, well the U.K. is finding out very quickly that that fiscal policy to normalize point, the bill is coming due on that, and it’s going to cost you a lot more than it used to, if you can even get it done. Now, let’s flip to the other side and say, okay, the Fed’s going to be dovish. Well, the issue that the Fed has with being dovish is the same issue they had in the seventies. As soon as they turned to be dovish, then all these asset prices start going up again and inflation becomes embedded again and you end up with higher inflation. So unfortunately, they’re really between a rock and a hard place. It’s going to take some creative thinking to try to get out of this type of thing. [00:18:59][75.1]
Dan Nathan: [00:19:00] Okay. So as an investor, though, one of the lessons that we learned from the .com implosion post 2000 was that time was a really important ingredient to the market’s bottoming. And it took from the highs in March of 2000 to the lows in October of 2002 for the market to bottom. But the Nasdaq didn’t make a new high for 14 years or something like that, which is truly insane. And so that’s some of the pitfalls of trying to buy stocks, which I have done. Trust me, I own a handful of stocks that are down 70, 80% from their highs, and I bought them recently over the last few months. And a stock that goes down 80%, let’s call it a year into a bear market can still get cut in half again. And that could be a very painful endeavor. And then we have a handful of stocks in the Nasdaq, for instance, Apple’s only down 14%. The Nasdaq’s down 31%. The Nasdaq 114% of that is Apple one stock. There’s 100 stocks in that index. And so, again, that relative outperformance is something that’s keeping the S&P and the NASDAQ propped up here. But again, if we’re going to go into a protracted bear market or a recession, ultimately Apple’s businesses will suffer. We think about their exposure to Europe. You think about their exposure to China, you think about all of those sales. Over 50% of their sales come from outside of the U.S. And you think about the strength of the dollar here in this stock is something that just it’s like a siphon for capital here in the U.S.. Talk to me a little bit about that concentration of these five or six stocks that make up 30, 40% of the Nasdaq, 130 or. 25, 30% of the S&P 500. [00:20:38][98.2]
Brian Kelly: [00:20:39] I think it gives you a false sense of hope, particularly if Apple is a huge part of your portfolio, which for a lot of people it is. It’s almost a cult stock people have. They love their iPhone. They love their iPad. And so they’ll buy the company and they’re never going to sell the stock. So to me, that’s probably why you have the outperformance. But if we just kind of take away that emotion about it, I think you’re right. We’ve had this upgrade cycle in Apple that’s over. So everybody who’s going to be able to buy the iPhone 14 has bought it. If we go into a protracted recession, I think it’s unlikely that people upgrade as aggressively as they have. So you’re going to get some deterioration in demand and that which is going to hit their earnings, which means price should theoretically go down. And so that’ll bring the Nasdaq down even more and it’ll take some time to recover. So I think you’re right. I know we’ve all been indoctrinated with by the dip by the dip cost, average down, all of these things. I just personally, it’s my personal opinion how I’m investing. I don’t think that this is the time to do that because of my view that I think we have a protracted recession and then secondarily because of the demographics. And this will segway into the other part. But you think about what we’ve had over the last 30 years, you’ve had every single baby boomer or every month putting money into their 401k or their IRA. Automatically those baby boomers are starting to retire. They’re going to start saying, Hey, wait a second, I don’t want to be in the stock market as much. I need this money for retirement. So that machine is reversing now. And then you look at guys like us who aren’t the old guys, but we’re not young folks anymore. Yeah, we’re invested in fine, but we’re not the big demographic. It’s the millennials and younger. Those are the new investors, and they prefer to invest in crypto. So if you think about where the money’s going, it’s going into crypto, or at least some of it that would have otherwise found itself into a 401k or an IRA is finding its home in crypto. [00:22:27][108.6]
Dan Nathan: [00:22:28] All right. So let’s talk about that. That’s a good segue way there. So what do you think that millennials find so interesting about crypto? And again, you and I have talked I feel like for hours and hours, for years and years about what kind of a bull case is. Let’s just talk about Bitcoin, for instance, and you’ve described it as a new form of payments, as digital gold, as censorship, resistance. I mean, the list goes on and on and on. Now, some of these haven’t held up yet. I know that we’re still really early on. I know that Bitcoin White Paper was written more than ten years ago and it was probably written for different reasons that millennials are investing in crypto right now. What do you think the bull case is and why are millennials attracted to crypto more so than, let’s say, traditional assets, a 6040 portfolio? [00:23:10][42.5]
Brian Kelly: [00:23:11] That’s exactly it. It’s not your mother or father’s portfolio, that’s why. Right. I mean, millennials certainly have this idea and it’s probably for the best that they’re going to change the world, that it’s up to their generation to change it all. And they’re not going to do it the way that their parents or their grandparents did. So this represents a new frontier, a new opportunity, and it also represents a little bit of a counterculture where you can get in early and you can be a part of it and you can be a part of the community. And one of the things that to me was really striking when I first got into Bitcoin and crypto was it really was about community. And millennials love a community. That’s why we have all these social networks and all of that. That is part of the culture. And so to have a cryptocurrency succeed, you have to have a community, you have to have a very strong community, multiple different parties, multiple different stakeholders actually contributing. And I think that gives them a sense. I feel like I’m speaking on behalf of all millennials, so I’m probably get tomatoes thrown at me. [00:24:09][57.4]
Dan Nathan: [00:24:09] Which is kind of weird because you’re old as shit. [00:24:11][2.0]
Brian Kelly: [00:24:13] Exactly. Exactly. That was born well before the millennium. My point being, I think there’s a sense of ownership, a sense that this actually can change things. And that’s why millennials tend to be attracted to it. [00:24:27][14.1]
Dan Nathan: [00:24:27] So there’s been this just booms and busts in crypto. And so, for instance, the same millennials who are in, let’s say, Bitcoin or ether dogecoin or whatever, for the community, for the culture, for all the things that Fred Mauldin likes to talk about too. And as it relates to NFT projects, everything like that, I mean, most of them, unless you were there years ago, you’re losing money and you’re losing money in an asset class that is getting smaller and smaller, that doesn’t have any real regulation around it Right now, where there’s been tons of scams, liquidity is kind of poor. I’m kind of like taking the other side of this. I mean, listen, I’ve heard you say this for years and years. The trade in crypto has largely to do with institutional adoption for it. That’s the thing that’s really going to make it stick. [00:25:14][46.8]
Brian Kelly: [00:25:15] Yeah. So first of all, the first thing I said and I’ve said this for years, I even think I said it at my book party and I might’ve even written it in my book. Bitcoin solves a lot of problems. It doesn’t solve human fear and greed. I don’t care if you’re buying an NFT or a Ethereum or IBM. That is just human behavior. That’s what’s going on. It’s just exacerbated in crypto because of the liquidity. Because there’s no generally accepted valuation metric and because there’s not institutions. And so what’s the bull case? Let’s just take Bitcoin. The Bitcoin community is firmly said we are an alternative currency to the other fiat currencies in the world. We are digital gold, but we’re better than digital gold because you can use it to buy things on the internet. That is the entire prospect for Bitcoin. [00:25:57][42.8]
Dan Nathan: [00:25:58] Do people buy anything on the internet with it? [00:26:00][1.7]
Brian Kelly: [00:26:00] Some people do. Not a lot. [00:26:01][1.1]
Dan Nathan: [00:26:02] Have you bought anything on the Internet this year with it? [00:26:04][2.1]
Brian Kelly: [00:26:04] I have, yeah. Yeah. I even think I bought your bottle of Japanese whiskey with that, if I remember correctly. [00:26:09][4.4]
Dan Nathan: [00:26:09] Yeah, but that was just content for your book, probably. [00:26:11][1.8]
Brian Kelly: [00:26:12] No. Yeah. Well, so listen, the use case for Bitcoin so far, as I said the other day, has been to get richer than your neighbor. That’s really been the use case. And now we’re entering a period of time where you’re starting to see with the volatility in G7, G20 currencies and the volatility with countries finances, that there’s an opening for something like Bitcoin to fill that void. And that’s really the investment case. Now gold used to fill that void. I think bitcoin has as good a shot, if not better to fill that void in people’s portfolio where they say, hey, you know, in this case you normally buy gold when you get chaos like this. Let’s buy some bitcoin. [00:26:51][38.7]
Dan Nathan: [00:26:51] Yeah. So two things. They both act really poorly. If you think about gold. When Russian tanks were rolling into Ukraine and made a multi-year high back in February and March above 2000, and here we are now, gold at 1627, you could do that math. I mean, since then, bitcoin is down worse. True, bitcoin is down more. And I guess my point is, is like we’re having the highest inflation readings in 40 years. So when is the digital gold characteristics going to take place here? [00:27:19][27.9]
Brian Kelly: [00:27:20] Right. So there’s two things I would say about that. So let’s take for example, the perfect example I would give you is you’re looking at it from a very US centric point of view. If you’re sitting in Britain right now in Bitcoin, year to date, Bitcoin priced in pounds is up 16%. Okay? So you just take a look at that and say which currency would rather have? We’re sitting in the year here in the U.S. with a very strong dollar. You’re much better off getting dollars. You can get 1.7% or more in your Marcus account from Goldman Sachs. So you’re much better off being in dollars. But you can start to see with what’s going on in the U.K. where Bitcoin can have a place in somebody’s portfolio to protect against a situation like that. So that’s number one. Number two, in terms of the inflation hedge, bitcoin is an inflation hedge just like you can buy future inflation futures. So break even. So the Federal Reserve said, hey, we’re fighting inflation. So now I don’t need an inflation hedge. But once the Federal Reserve loses that credibility, once we say, hey, wait a second, you know what? Maybe this isn’t transitory and maybe they’re not going to get it to 2% and maybe it’s going to be at 6% for five years. Then Bitcoin becomes an investment alternative and I think that time’s coming. We’re not there. But I do think that time’s coming. [00:28:35][75.5]
Dan Nathan: [00:28:36] All right. Two points here. So you’ve been unusually bearish for a Bitcoin guy on Bitcoin for the better part of this year. You’ve said it on fast money for months and months now. You’ve said it on our podcast for months and months. So you just laid out a very succinct reason why there’s a certain group of investors out there, or there’s certain types of people in the unbanked world or in parts of the world where their currency is collapsing or whether you’re in a war torn area. I mean, the list goes on and on where bitcoin solves lots of problems. But here in the U.S., Bitcoin in dollars is down 72% from its highs. And so that’s a tough trade. So why have you been bearish in 2022 on Bitcoin and what changes your mind where you start basically getting more active based on those pillars of the bull case that you just laid out? [00:29:29][53.0]
Brian Kelly: [00:29:30] Yeah, well, you need some more chaos in the U.S. and so you need inflation to be ingrained and rooted. And more importantly, for the marketplace to believe that right now people believe that inflation is going to slowly start coming down. If that doesn’t happen, that’s the first thing that you’re going to see and people are going to say, All right, I need an inflation hedge again. What can I do? I can buy gold or I can buy Bitcoin. So that’s number one. Let’s look for non transitory inflation that is predicted. Maybe it’s break evens, whatever it is moving forward. The second thing is you probably need I’m not in the pivot camp. I’ll just be very clear. I’m not in the pivot camp on the Fed. However [00:30:08][38.3]
Dan Nathan: [00:30:09] You’re saying as a catalyst for bitcoin. [00:30:10][0.8]
Brian Kelly: [00:30:10] I don’t think the Fed will pivot is what I’m saying. If the Fed pivots. Absolutely. It’s a massive catalyst for Bitcoin. I just don’t think that’s going to happen. But it’s a little more nuanced than what we’ve been looking at. I think what’s likely to happen or to me a fairly likely path and I’ll just lay it out as a probability. I’m not saying this happens, but if we want to think about what the bull case for Bitcoin is, you look at what’s happening in Europe, their currencies and their bond markets are breaking. You look at what’s happening in Japan. Their currencies are breaking, their bond market might break. At some point, those yields and the U.S. yields go beyond what central banks want them to go. And therefore, they have to come in and start buying bonds. And that is more of a, hey, we’re going to keep the spread between the U.S. and Europe at a certain price. But to do that, then you do have to print more money. You do have to increase liquidity. And to me, that would be the chaos, cure and the catalyst for Bitcoin. [00:31:07][56.8]
Dan Nathan: [00:31:08] Okay. So the other thing and I know the answer to this because I’ve heard you say it for years and years, going back to God’s call it 2016 and 17, the last retail craze that we saw in crypto, if someone listens to you BK and they say, You know what? It’s easy enough for me to buy a little crypto here and put it in my portfolio as a hedge against all these things that you talked about. What do you recommend or not as an investment advice? But when people ask you, hey, what percentage of my portfolio, of my investible assets should I have in this asset class? Is it somewhere similar that people used to say, you should have about 5% of your portfolio in gold? Is that what you would kind of say? [00:31:45][37.3]
Brian Kelly: [00:31:46] Yeah, not investment advice, but this is what I tell my friends and family is somewhere between 1 to 5%, depending on your risk tolerance. And here I’ll just give you my logic on it. Let’s say that 5% of your portfolio is $10,000. I’m just giving an example. I know for you it’s multiples of that. But let’s just say your investment portfolio, 5% is $10,000. If I’m wrong about Bitcoin and it goes to zero and I could be we could say, hey, this thing just didn’t work, that $10,000 is going to hurt. But you know what? That it’s 5% of your portfolio. It’s not going to change your life. Let’s say we’re right about it. And Bitcoin gets a bit again and we go from 20,000 up to 100,000. Okay, that’s a5x that 10,000 is now going to be 50,000. 75,000. That’s a meaningful part of your portfolio. So it’s all about risk reward. Don’t put too much in because then you can’t ride out the volatility. That’s the most important thing. You got to ride out the volatility. [00:32:38][52.1]
Dan Nathan: [00:32:39] So lastly here, talk to me about BKCM. You are invested across the spectrum in both tokens, but also you guys make VC investments. How do you think about diversification in your portfolios there? And again, you’ve been unusually bearish. You have the sort of tools to hedge to be short. Those are things that generally most investors don’t have the ability to do, especially in emerging asset class like this. How are you thinking about portfolio management right now and are you starting to get a bit more interested? Sentiment could not be worse. All these jokers with their laser eyes, there’s only a couple of them left on the Twitter. Are we kind of near intermediate term bottom? We also had the ETH merge that people are really excited about. You said it on the show in the over the course of the summer. I remember because I asked you on fast money, you said, I think it’s going to be a buy the rumor, sell the news. And it got to 2000. It dropped like a lugged at 1300. So just curious how you’re thinking about near-term playing this because it’s tough press on the short side, correct? [00:33:40][60.6]
Brian Kelly: [00:33:40] So listen, I don’t think anybody any home game or let’s call it somebody who’s not in the business should be shorting Bitcoin. I just think it’s way too volatile about an asset. You can get your face ripped off. Trust me, I’ve done it several times. Even though I’ve been bearish this year, I’ve got my face ripped off every couple times, so it happens. So you got to be able to deal with that. So I don’t think anybody should be doing that. The issue that Bitcoin has right now is that it is highly correlated to the stock market. And so until that correlation breaks, it’s hard to get tremendously bullish on Bitcoin. I think that correlation breaks, but for right now that is just how people are trading it. So I would say if you think the stock market’s going to flush down again, which I happen to think it is, then I would think that bitcoin and ethereum are probably flushed down as well. [00:34:26][45.4]
Dan Nathan: [00:34:26] Yeah. Which is kind of a bummer because it was supposed to be uncorrelated to the stock market or at least that’s what a lot of goals were. So now we know that was kind of one of the bullish thesis. [00:34:34][8.0]
Brian Kelly: [00:34:35] It waas but I always had a problem with that because it didn’t take into account the fact that if you’re saying that this is going to become an institutional asset class, then by definition it’s going to get correlated to other assets because that’s just how institutions run their portfolio. They run cross correlation. So I don’t think it should be 70% correlated to the stock market, but maybe ultimately 20% correlation in the stock market is probably right. [00:34:57][22.2]
Dan Nathan: [00:34:58] Well, BK, I think our listener got a sense for what a brilliant macro mind you are, and I mean this sincerely. I really enjoyed your commentary. For years and years you and I have been doing fast money together for ten, and you were always our kind of go to guy on all things macro. And then when you started BKCM, after you wrote the Bitcoin Big Bang, check it out, people. It’s almost cute now that you wrote a book back in 20 1314 on Bitcoin, but I always appreciate your takes. It’s not hyperbolic. It’s not all the B.S. that you see on Twitter. All those guys have basically packed up shop. It’ll be interesting to see when they come back. And the sentiment again. I think this is also the lesson The Nasdaq. And I think what you’re suggesting here is that as bad as sentiment is right now, it can get worse. And that’s what we’ve seen throughout these crypto winters, if you will, right? [00:35:45][47.1]
Brian Kelly: [00:35:45] Yeah, I think that’s exactly right. I’ll leave you with this, is that if we get this next leg down, that is going to be a time and a price. And I don’t know where that is. Let’s call it Bitcoin. 15,000, 10,000. That price gets me interested on the bull side. I got to have a couple other catalysts, but if I’m thinking about a road map and price wise where I start to look at this thing, 10 to 15000 Bitcoin, I’d get pretty excited. [00:36:10][24.7]
Dan Nathan: [00:36:11] All right. Well, excuse me, because you got me scared shitless. I got to go make some hedging trades. All right. Listen, man, I really appreciate it. So stick around, everyone. I have Chris McMillan and Trent Martensen from Credit Suisse and their Internet Web3 coverage coming up next. Thanks again BK. [00:36:25][14.1]
Brian Kelly: [00:36:26] Thank you. [00:36:26][0.3]
Dan Nathan: [00:37:12] Current Ad. Masterworks Ad. Taboola Ad. Chris McMillan is an Internet and Web three investment banking director at Credit Suisse joined the company earlier this year. Previously, Chris worked at Wells Fargo as a director and vice president, focusing on software, Internet, digital media, investment banking. Trent Martensen works in an Internet and Web three investment bank at Credit Suisse, joining the company earlier this year. Before Credit Suisse Trent worked in investment bank is Wells Fargo and Gordon Dial. Welcome back to okay computer I’m Dan Nathan. I am here with Chris McMillan and Trent Martensen of Credit Suisse. They are the Internet and Web three investment banking leads at that fine institution that I have been a consultant advisor to, their investment banking group and their equity capital markets group for nearly six years. So guys, welcome. [00:39:30][137.9]
Chris McMillan: [00:39:30] Thank you so much for having us. [00:39:31][0.8]
Trent Martensen: [00:39:31] Thanks Dan. [00:39:31][0.2]
Dan Nathan: [00:39:32] All right, let’s get into this here, guys, because, again, we have not had too many investment bankers on okay computer. We’ve had a lot of practitioners in Web two and Web three. But what I found really interesting meeting you guys earlier this year, you both joined the bank earlier this year, Chris, you spent time at a large money center bank in investment banking covering Internet. And now what you’re doing, I think, is very different because you and I had a conversation the first time we met and we spent a lot of time with Trent, also as a former practitioner in the space, about the excitement and the opportunity that you guys see in the investment banking world for coverage of this Web three space. And I came up in the business in the late nineties, and I just remember the excitement of some technology practitioners, whether they be bankers or whatever, about the Internet. And then I remember from many the pushback that was about this new fangled technology. So talk to me a little bit about this, because I think 20 some years on, I think there’s similar dynamics to what I experienced back in the day in the late nineties. [00:40:31][59.3]
Chris McMillan: [00:40:31] Yeah, I totally agree with that. As you mentioned, I was an Internet banker before and really more focused on Ecom Marketplace style businesses. Back before moving to Credit Suisse earlier this year, I joined in February. And, you know, part of that was because I was excited about Web3 and looking to stand up new true Web three coverage from an investment banking perspective. I’d had a number of conversations in the past, and Trent was one of the people that I talked with because he’s been involved in the space for quite some time from a development standpoint. And I thought that was really, you know, an opportunity to do something special on the investment banking side. So super happy to have Trent join me. And I think there’s a massive market opportunity from a banking perspective. [00:41:06][34.7]
Dan Nathan: [00:41:07] And again, an early effort because I think a lot of people are trying to figure out what Web three means. You know, Package McCormick, a friend of mine who writes Not Boring, who comes on the pod quite often earlier this year, I think probably late last year, was quoted by defining Web three as the Internet owned by the users and builders, orchestrated with tokens. And again, there’s lots of different iterations. I think that was kind of widely quoted. He wrote this really good piece with Chris Dixon of A16z for the economists that they picked up. And again, there was this big debate, remember, late last year when Jack Dorsey was saying the VCs own Web three and then people like how do we define this? And I thought that was a really succinct way of doing it. And I’m curious because, Trent, when you and I first met, we talked about you were again, as Chris just mentioned, a programmer on the blockchain. You were involved in a couple of really interesting projects. Talk to me a little bit about how you found your way into investment banking and why you think this is such a unique opportunity right now. [00:42:00][53.7]
Trent Martensen: [00:42:01] Yeah. So I mean, speaking on kind of how to define Web3 to begin with, I’ve always said that Web three is just the Internet as defined by engagement rather than users. And a lot of the ways that we value as investment bankers, whatever we want to on the Internet would be based off of users. And instead what we see is a really interesting kind of segway is that the only way to truly create lasting value within Web3 is to create something that has true engagement by the users. So that could mean fewer users, more engagement, it could mean more users less engagement. But we generally see that less users can create more monetary gain by kind of working together and working with each other within an ecosystem and engaging in that ecosystem. So that’s one interesting way, but kind of on my segway from practicum into banking and back again, I started learning on the blockchain a long time ago nearing the beginning of the Bitcoin initial market. And one of the things that I was thinking is this could be really cool for ways to move money. And that’s where I started. But Bitcoin wasn’t really ready at that time for development. And so [00:43:19][78.4]
Dan Nathan: [00:43:20] Some would stay still not. [00:43:20][0.2]
Trent Martensen: [00:43:20] Some would stay still not [00:43:20][0.0]
Dan Nathan: [00:43:22] And better ways to move money around to. [00:43:24][2.5]
Trent Martensen: [00:43:24] Exactly. [00:43:24][0.0]
Dan Nathan: [00:43:25] It hasn’t proven that use case. [00:43:26][1.0]
Trent Martensen: [00:43:27] Yet right. So Bitcoin didn’t really work in creating an application grouping on top of it. And so I took a year or two off and came back a few years later and started to work at the beginning of, you know, Ethereum And it was better, but it was still really difficult because there wasn’t exactly a code base to utilize. There was an exact. Lee. A lot of these building blocks that we come to know so well in regular programing, so took a few years off again. And that was at the time when I was having to decide how am I actually going to make money? Then my previous two experiences had said, Web3 is not ready yet, and so went to banking, spent four years doing that. And then kind of in the interim, after I left a previous employer, you know, I took a gauge around and I said, Wow, I think Web3 might be ready. I think we’re still early, but I think it might be ready for people to be able to come in and add an element of financial conservatism, raising capital in a professional way, and starting to think about M&A and starting to be on the front foot there. So I found it to be a great time to mold those two backgrounds. And yeah. [00:44:41][74.9]
Dan Nathan: [00:44:42] Yeah. I think one of the things it’s interesting is somebody has seen some of these technology, let’s call them bubbles. And you know, sometimes in markets, in banking and stuff like bubble has a real negative connotation. I think what’s really interesting and I think what we’re going to see here with crypto and web3 is that the term bubble attracted a lot of really smart people, a lot of capital. And so some of that capital is going to be very productive. And so to the point that you just made a trend and I’m just curious, Chris, because you’ve seen this in Web two, it’s been really hard to compete with incumbents. And so as an investment banker, you think about, okay, you have young companies looking to raise capital, looking to do interesting things, and you kind of look at them and you say you really want to take on Amazon and e-commerce, you know, or whatever. And so talk to me a little bit about where you think we are. Trent. Just use the term early here and again. I mean, you don’t want to be a Johnny come lately. I think we’ll look back in five years from now. And no matter what happens in Web three, you weren’t going to be bandwagon guys chasing this thing. There will be iterations that work. One of the biggest criticisms is that it’s a solution in search of a problem sort of thing. But to the point that Trent just made about engagement, what’s different about Web two and web three is the way that people engage with whatever, whether they be decentralized apps, whether they be the transfer of value or something like that. So talk to me a little bit about where you think we are and what your timetable is, because again, this is going to be a marathon, not a sprint. Amazon.com lost 90% of its equity market cap from its highs in 2000 to its lows in 2002. And earlier this year, it was nearly a $2 trillion market cap company that’s going to do over a half a trillion dollars in sales. [00:46:17][95.3]
Chris McMillan: [00:46:18] Yeah, I think that’s exactly the right focal point. We were just at the main net conference this past week and one of the questions we kept getting is where are we? Like, what any are we in? And the common answer was batting practice. I tend to think that maybe we’re in the first inning. And the reason I think that is that there is a ton of capital that is being put to work in the space. And I think that many would argue that some of that capital is being put into questionable places, and I don’t disagree with that. I think that where we are right now is we’re trying to figure out what are the strongest use cases like, what problem are we actually solving? And I think that was another theme from the conference. [00:46:51][33.2]
Dan Nathan: [00:46:52] How is real quickly the main net because I remember last year, 2021 seemed like a big event. I mean, it seemed like everybody if you just looked at Twitter or just it seemed like anybody was anybody in the space was here in New York City. How was the attendance this year, year over year from 2021? [00:47:08][16.4]
Chris McMillan: [00:47:09] I think the attendance was strong. I think I think we made a number of good contacts and a number of good conversations really appreciated that. It would not doubt if it was down a bit from last year. I wasn’t there last year, so I can’t make a direct comparison. Although it’s no secret that the crypto markets in slightly different shape this year than it was last year. [00:47:25][16.2]
Dan Nathan: [00:47:26] Alright. And then the attitude towards investment bankers, because again, this web3 ethos seems to be like, you know, our friend Meltem was like, don’t sell your NFT to the bankers. That was early this year, late last year. And now I think a lot of people are holding a bunch of NFTs maybe me included would actually sell them any bid that I saw I might see that was near the purchase price and I’m kidding a little bit. How are bankers being perceived? Because again, there’s a couple of trends. I’m going to talk a little bit about this. We’re seeing a lot of these companies retrench. We’re seeing mass layoffs across the board and we’re seeing valuations contract. And then we’re also seeing the value of underlying tokens have come in really hard. So I’m curious, I have to think that bankers in a place like this where a lot of people are worried about, let’s say down around, is if you’re running a company or finding capital, they’re going to be kind of all sites or eyes possibly. [00:48:12][46.3]
Chris McMillan: [00:48:13] Yeah no, it’s interesting you say that. So, I mean, I think another one of the themes of the conference was the professionalization of Web3. Honestly, I think when we think about Web3, we think about what matters, what we look at as we look at users in the system, we look at development on the chain. And what we’ve seen is that while prices have declined over the last several months, which kind of makes sense, you know, in the context of the macro economy and the fact that there’s just frankly been excess leverage in crypto system, it makes sense that those prices would decline. [00:48:38][25.2]
Dan Nathan: [00:48:39] Well listen there’s hundreds of stocks, high valuation tech stocks that are down 60, 70, 80%. So again, to assume that you wouldn’t see crypto tokens, which are some of the most speculative. Assets be down the same amount when you’re seeing the moves that we’re seeing in currencies, the moves that we’re seeing in commodities, the rapid rise in interest rates, that actually makes no sense. And there’s no reason why you would put crypto in a special bucket relative to them, in my opinion. [00:49:03][24.2]
Chris McMillan: [00:49:04] Well, that’s right. Yeah, I agree with that. The way that we look at is we look at the price of ether compared to the Nasdaq and compare it to the S&P 500. And what you’ll see is that in recent months, the correlation between those has actually increased over time. I think there is more leverage in the crypto system, to be fair, which is why it has declined. But if you look at the number of daily active users on the Ethereum system, on the Solana system, it’s actually stayed remarkably steady. So, you know, there’s over 350,000 users, I think over 370,000 users now for ethereum and nearly double that for Solana. And over the past several months, since late last year, while Ethereum has been down, you call it 70% or so development on the blockchain in terms of the active projects has actually been up nearly 40%. And for Solana, it’s been up nearly 250%. So I think that’s a sign of a maturing ecosystem. And I think that kind of speaks back to why are these conferences becoming more professionalized? Why are they more receptive towards bankers? And I think that’s because of a combination of the ecosystem is growing up a bit. I think we’re figuring out better use cases and how we should be addressing problems with this new technology and sort of ultimately what Web3 is going to be like grows up. [00:50:06][62.5]
Dan Nathan: [00:50:07] So what do you guys see right now? It’s like, okay, we’re early innings. Like you guys said, we might be in batting practice, we might be in the very first inning. Some of those iterations like, you know, Chewy is a wildly successful petcare company direct to consumer. Well, there was Pets.com in the late nineties and it flamed out. So what are some of the early things that you’re really excited about that you think despite the Tokenomics maybe not working right now, it’s first iteration that you’re really optimistic about? What are some of the use cases? [00:50:34][27.4]
Trent Martensen: [00:50:35] Yeah, I mean, I think if we’re talking on the gaming side, it’s it’s actually a lot of games that have significant counterparts. A lot of the country loves playing fantasy football or fantasy baseball or something like that. And to be able to throw a web3 ecosystem around that we’ve seen be very successful. I mean, we’ve seen upwards of 20 $300 per active user, which is unheard of in terms of gaming. If you have something that’s $200 an active user, we’re in a pretty good ballpark. So I think there’s things that can work today. Another practical application that we see is fractionalization within the music industry, and what this allows is for creators to create a song divided up into 2000, 3000, however many different pieces they would like, and actually distribute royalties to those two or 3000 people buying them, which obviously has long term implications both for the creator keeping their IP and also for their fans being able to participate. [00:51:35][60.6]
Dan Nathan: [00:51:36] So this is basically disintermediated existing infrastructure where like a middleman, basically a label is paying out to a creator, but then they own all of the IP and then they accrue all the value from there on out. [00:51:46][10.5]
Chris McMillan: [00:51:47] Yeah, that’s exactly right. And what that allows is it allows the creator to monetize that song up front. It allows them to get perfect data on who their fans are both from, who bought that NFT upfront as well as who they sold it to on the secondary. So now when they go to market concerts, they know exactly who to send that to, when they want to do fun things like backstage passes or it’s secret events, they can send those invitations directly to those people who own that NFT [00:52:10][23.3]
Dan Nathan: [00:52:10] Yeah, and really interesting because I have a good friend who’s working on a project that is not Web3 but is actually thinking about a lot of those same issues about as a creator, how does he actually have a better relationship with his fan where a lot of the value of his art is not being disintermediated by all these middle men, if you will? But it’s interesting, you know, one of the pushbacks that he has and he spent a lot of time thinking about this with a lot of very engaged fans, is that they’re just not there yet. And this goes back to what, Trent, you were saying on the wallet front or whatever the user experience is not there. So again, going back to a little bit like picks and shovels and some of just the traditional design that goes into some of these apps that are going to be like the on ramp. And that’s one of the reasons why, again, Opensea and Coinbase, they were easy to use and you could even say a Robinhood. That was actually what made Robinhood unique. It wasn’t free trading. Everyone was going to have free stock trading was an easy onramp to that thing. So again, I think the music is a great example. I think it’s early and I think again, as bankers or as VCs, I mean that is the opportunity setting for seeing how these sorts of evolve. And then it’s not just it’s going to be sports, like you said, it’s going to be ticketing, it’s going to keep on going on. So I really like that use case and as a fan of art and sports, I’m excited to actually engage with those sorts of opportunities. [00:53:24][74.3]
Chris McMillan: [00:53:25] I think you hit the nail on the head. I mean, I think the two things that we really need to drive further engagement in the system is an improved user experience and to reduce friction in the system, which is somewhat the same thing it’s today. This is super easy for Trent. It’s somewhat easy for me, and it’s super challenging for my mom. And we’ve got to make it easy for my mom to do this in order to to use this more broadly. [00:53:45][19.6]
Dan Nathan: [00:53:45] Yeah, exactly. Let’s think about creators. I think the creator economy is something that’s kind. I’ve been linked with Web3. And so I think what obviously the Internet is allowed people to distribute whatever they create a very economic format where they get a lot of leverage on that initial thing. But I guess the issue that a lot of people I know so many people were like, oh, my goodness, pictures of cartoon apes trading for this, that or whatever. Now we’ve seen the floor values come in. We’re seeing the volumes come in dramatically. So let’s go back to some of these stats that you’re tracking here. I know that this was something on Opensea that was picked out of nowhere, some publication a couple of weeks ago. They picked a moment in time in May and then they picked a date in August and they said volumes were down 99%. Let’s just assume it’s not down 99%. The trading of pfps on Opensea, let’s assume that is down 50% or something like that, which might be conservative actually. What does that say about the hype that was created around some of these creator models and their ability to monetize them? [00:54:43][57.8]
Trent Martensen: [00:54:44] I think the creator models, it proved itself out that it could have value. Now, did these nfts provide the value to end consumers that the dows or maybe the creators originally said that they would have? [00:54:58][14.6]
Dan Nathan: [00:55:00] So community was culture. It was something that was scarce, that which should show kind of gain in value over time. [00:55:07][7.3]
Trent Martensen: [00:55:08] Right. And I think where we’re seeing it going, what we can ask is what’s here to stay? I think NFT is of art for, you know, secondary markets for certifications. I think that’s going to stay, I think for people who are creating really valuable things, maybe it’s a Nike creating shoes or it’s it’s a creator on that that are actually creating things of value. NFT And that to make it easier to sell on a secondary market, to make it easier for consumers to confirm that something is true or not nft ng loyalty programs so that you can actually. [00:55:42][34.7]
Dan Nathan: [00:55:43] That’s the best use case right there because we all know we love our airline points. We love our credit card points. There are useful in some ways that’s the analog to a lot of normies is like how you would participate in one of these environments. Chris Coming from, it was interesting that you mentioned like when you think about corporates, remember last summer 2021 when Visa bought that crypto pong, they paid 140 grand for it and supposedly they got millions and millions of dollars of press for doing that. And they created a mechanism in which some of their users who are interested in these sorts of rails had the ability to possibly participate. Talk to me a little bit about that. From a traditional investment banking standpoint. I’m assuming that some of your existing clients are coming to you and asking, how can we participate this? How can we have a foray to an audience that might not normally be our traditional audience and how they have to do it authentically? I think that was kind of the lesson through that. In some ways, visa buying a crypto punk, you’d say, That’s kind of weird, but in some ways it was actually a brilliant bridge towards this, like, kind of emerging ecosystem. [00:56:41][58.4]
Chris McMillan: [00:56:42] Yeah, totally. We’re talking to large cap tech companies that are looking to build out their web3 strategy on a daily basis. And I think headlines like Starbucks announcing their NFT loyalty platform that they’re planning to launch by later this year, things like that. And you grab headlines, you get people’s attention. I think it has the potential to really change the way loyalty programs are run more broadly because it creates a more dynamic ecosystem with more value to the users. And to the point earlier on Nfts, you know, I think what’s here to stay is something that has utility for the user. So whether that be utility in the form of a loyalty platform, utility in the form of new tools to use in a game or even utility to the individual. From an art standpoint, I think that can all have value. I think what we’re trying to figure out now is what has more long term value to users and what do people really care about versus what are they just using as an investment opportunity? Because I think some of the things that were just used as an investment opportunity are starting to fall away, just given the price of crypto has declined. Therefore, it’s not as valuable as a speculative investment anymore. And I think we’re now getting down to what has real utility. [00:57:39][57.7]
Trent Martensen: [00:57:40] I think there are expansion periods and there’s building periods, and without the building periods you’re not going to get an expansion of anything. And I think the industry needed to work on the technology, it needed to work on the consumer experience, it needed to work on a lot of these things that they went so fast that they were overlooked before. So there is the bridging problem. There’s just this problem that it’s not easy for normal people to get in, to use it and to really. [00:58:12][32.1]
Dan Nathan: [00:58:13] Which hasn’t been fixed to be fair. [00:58:14][1.2]
Trent Martensen: [00:58:14] Hasn’t yet. It hasn’t yet. I think there are great companies working on it. I think it’s a matter of time and whether that means token prices return to where they were before, I’m not actually sure that they’re in a altogether terrible place. Yeah, I think there was an over exuberance. We’re still up 900 plus percent from just two years ago. I think if you would look back on any asset that’s up 900%, then you would think twice about saying. [00:58:43][28.7]
Dan Nathan: [00:58:44] Yeah the problem is, is that during these periods of over exuberance, you get a lot of people who are that incremental. Buyer. They’re kind of buying at the top, they’re puking at the bottoms. They keep hearing things about the merge, the merge. Then that’s going to be a catalyst and they buy it. And then it’s down 40% over the last three weeks since the merge. I mean, so there’s just listen, this is the stuff that goes on traditional markets. Again, I like to think of this if we’re now talking about Bitcoin, ether, Solana, a handful of others, you know, take out the stablecoins. You’re talking about a market capitalization of under $1,000,000,000,000 easily. But Chris, this is the one thing that I think you know really well as a traditional technology investment banker, trends in V.C. and venture are the things that are going to dictate, let’s say, the next few years. And we know that there have been billions of dollars that have been raised to be deployed in Web three, and that’s going to be deployed 2020 to early 2023. Talk to me a little bit about that and what you think that means for the ecosystem, because I’ve said this on this podcast on CNBC plenty of times, some of the smartest people that I know in finance and tech have gone into this space. And that’s one of the things when I look at you guys and I think about what you’re trying to do at Credit Suisse, I think you have absolutely nothing to lose to focus on this. You could go back and focus on e-commerce and on music apps and all that. So and all that stuff’s great. There are going to be some really cool things that evolve that look very much like Web two web two and a half or whatever. But the things that you were probably going to spend the next 20, 30 years of your life working on are the things that literally get funded probably now next year or two years from now. [01:00:19][94.6]
Chris McMillan: [01:00:19] I completely agree. I think it’s great that there is as much capital earmarked for investment in Web3 as there is today. I’m excited to see the percentage of overall tech funding increasing for blockchain. I think what’s really important though is for VCs to focus on projects that work, and that’s part of what we’re trying to do and we’re having conversations with VCs. [01:00:39][20.0]
Dan Nathan: [01:00:40] And you’re speaking to projects and founders at slightly more mature levels, is that correct? Because again, when you think about what early stage VCs do, they bet on people and they bet on ideas and they don’t know that they’re going to work yet. I mean, again, when you’re doing seed investing, you haven’t reached product market fit yet and stuff like that. [01:00:58][17.2]
Chris McMillan: [01:00:58] Yeah, yeah. No, totally fair. We’re not talking to companies that are at the seed stage, but we’re talking to companies that are shortly thereafter. So we’re taking a different approach than you would expect to hear from most investment bankers in other industries. Just given the fact that this is a developing ecosystem, we think it’s important to have conversations with companies and developers at all stages and in Web3 in particular. Right now, what we’re finding is that the value of a project is really determined just based on whether or not the use case really works. So you can go from a low valuation at a seed stage to a very elevated valuation of a series A or B, depending on whether or not there’s a real use case and a real problem that you’re solving. So we think it’s important to develop relationships with these VCs to help them as they’re evaluating projects, just as we think it’s important to develop new relationships with these web3 native companies to help them think through strategy as they grow. [01:01:46][48.5]
Dan Nathan: [01:01:47] Yeah. So Trent let’s talk about this. You’re kind of a newbie to investment banking when I say just a few years, but you spent as much time in, let’s say, the crypto ecosystem. Prior to that, there was seem to be a huge brain drain from web to and also from traditional finance into the crypto space. Over the last few years now we’ve seen lots of layoffs at a lot of big companies, some of the big platform companies. Obviously, Coinbase, Opensea, they’ve kind of announced that. And I have to assume that a lot of people who went to do some of these earlier stage projects where maybe the Tokenomics don’t make as much sense from an incentive standpoint anymore, we’re seeing people leave them and possibly go back. Talk to us a little bit about the talent landscape and some of the trends that we’ve seen over the last couple of years and how you think you see that shaking out over the, let’s say, the next year or so. [01:02:33][46.2]
Trent Martensen: [01:02:33] Let’s start with the talent landscape that’s a little bit difficult to define across Web3 because they’re so diverse. The developers, I mean, without the developers, there really isn’t anything right now. There’s probably a lot of these things we’re saying in terms of development is because these languages, the rest of the world, the solidity of the world, they’re not Python, they’re not Java, they’re not C or Objective-C or C-sharp that are taught really anymore. And so these are offshoots that have to be learned and have to be understood and have to be mastered. And a lot of the time that it’s taken to get where we are have been people attempting to master those languages. And where do we sit now? There probably aren’t enough developers for the size of the ecosystem today, and so we have to break it up into two different sides, right? There’s like the PM side in which there’s probably not enough projects to manage because there aren’t enough developers to work on those projects. So that might have been a little bit over it. Skis, the sales and marketing of it might have been a little bit over its years. So I think there are elements of this that we might see some moving back to Web two, which I don’t think is a bad thing. I think it’s an education system for web. To to have people who are in Web three and say, oh, I understand how that works. I worked there and I’ve seen it firsthand. That’s a good way for it to spread. And then on the developer side, I really just think it’s time. I don’t think we have enough as it is, especially not for what people are trying to do. And so I think there’s kind of two sides to this, right? There’s people obviously being laid off and that’s terrible. But I think there’s going to be places for them at Web two companies that are trying to figure this whole thing out. [01:04:16][102.7]
Dan Nathan: [01:04:17] So, Chris, when you think about your practice, you’re obviously spending time Web two, Web three. And we just kind of spent a lot of time talking about some of the things that the timing in which we see things shaking out. And what are some of the things that really excite you right now, though, when you think about earlier in your career, when you were just focused on marketplaces, you were just focused on consumer applications, things that people were starting to download every day on their smartphones. How do you see this playing out over the next few years? There will obviously be exciting applications for entities again that will obviously be very useful, decentralized finance sort of applications. Again, I’m just curious, what are the things that most excite you in thinking back to earlier in your career, the things that excited you about Web two as far as Web3 right now? [01:04:59][42.4]
Chris McMillan: [01:04:59] Yeah, definitely. I think we as investment bankers have to be somewhat strategic in focusing our time on where we think the market opportunity is. And frankly, I think that there is a larger opportunity coming faster than a lot of people realize. And we’re trying to focus on where we think that hits first. So we’re focusing on infrastructure providers, you know, tools and analytics for developers, that kind of thing. [01:05:20][20.5]
Dan Nathan: [01:05:20] So picks and shovels are going to be a really important sort of investment theme, and I’m sure that’s where a lot of VCs are really focused on right now. We’re seeing a lot of funding right there. [01:05:28][8.1]
Chris McMillan: [01:05:29] That’s absolutely right. And honestly, I think that there are going to be a number of players that are going to be much more scaled and will be household names within the next year or so. Beyond that, exciting applications exactly what we were talking about earlier in terms of NFTs and new use cases for the blockchain, I think that’s sort of the next evolution and I think that will drive the next set of really exciting companies. Where we’re really focused right now is sort of the infrastructure and tools, and we’re super excited to be doing this at Credit Suisse. Credit Suisse is one of the banks that was on the forefront of technology innovation in the nineties, in the 2000s. And as you can see, they’re really leaning in on that by hiring us and allowing us to go after the web3 market where somewhat early compared to other banks. And we think we’re taking a differentiated approach. And having Trent here been a developer on the blockchain, it gives us unique access to on chain data. So we’re trying to go deeper and take a more thoughtful approach. [01:06:16][47.6]
Dan Nathan: [01:06:17] Well, listen, guys, I’ve really enjoyed meeting you guys over the last couple of months. I’ve really enjoyed hearing about what you are there to do. And I think you’re on to something because again, I think a lot of investment banks or a lot of traditional financial institutions are going to be really hesitant to kind of plant a flag in the ground. And I think the ones that do it early, they remain consistent. They are authentic, they are transparent. They talk about the limitations within their own institution to do this sort of stuff. And I think that’s the way to go. Everybody can cover semiconductors and hardware and science and all that sort of stuff, but actually figuring out how some of those existing models get disintermediated and where the brain drain is going to come from, I think that’s really important. So guys, I appreciate you being here on okay computer and I hope we will do it again soon. [01:07:01][44.1]
Chris McMillan: [01:07:02] Thanks so much for having us. [01:07:03][0.7]
Dan Nathan: [01:07:03] Thanks again to our presenting sponsor Current and our supporters Masterworks and Taboola for bringing you this episode of okay Computer. If you like what you heard, make sure you hit, follow and leave us a review. It helps people find our show and we want to hear from you. Email us at contact at risk reversal, WorldCom. Follow and connect with us on Twitter at okay computer pod. We’ll see you next time. [01:07:03][0.0]
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