All Podcasts Between2Chains B2C0033: Inflation and Mt. Gox Distributions are Bullish for Risk Assets (w/ Jeff Dorman)

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Nov 01 2021 . 38 MIN
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B2C0033: Inflation and Mt. Gox Distributions are Bullish for Risk Assets (w/ Jeff Dorman)

In this week's episode of Between 2 Chains, Jeff Dorman joins the show with our host Peter Hans,and takes us through inflation, the macro-economic environment and what's is going on with Mount Gox.

 

Show Notes

SUMMARY:

In this week's episode of Between 2 Chains, Jeff Dorman joins the show with our host Peter Hans,and takes us through inflation, the macro-economic environment and what's is going on with Mount Gox.

 

Visit www.realvision.com/crypto to join crypto revolution.

You can reach Peter Hans on twitter @peterdhans82

 

IN THIS EPISODE:

1. Jeff begins the discussion by discussing the state of inflation in November.

2.Peter discusses how Bitcoin ETF's are used to de-risk the asset and asset class, as well as what is driving its price higher.

3.Jeff walks us through Paul Tudor Jones' Bitcoin thesis, and says, “if you actually go back and reread what he wrote, it wasn't a Bitcoin thesis at all, It was an inflation thesis." 

4.Peter shifts the focus to Mount Gox, asking about Jeff's thoughts on it.

5. Jeff elaborates about Mount Gox's beginnings, ups and downs, declaring bankruptcy and then coming back.

6. At the end Jeff discusses Fortress's participation in bitcoin and digital assets, as well as the company's relationship with Galaxy digitals and the key takeaways from the strategy to buy Mount Gox.

 

 

TRANSCRIPT:

NOTE: Following transcript is generated using AI. Minor errors might be present.

 

 

REAL VISION 00:00

Welcome to the real vision Podcast Network.

Before we get going, we want to remind you that Jeff Dorman is the co-founder and chief investment officer of ARCA funds. And Peter Hans is ARCA funds managing director. The commentary and opinions expressed in this podcast are solely those of the podcast participants and do not necessarily reflect the opinions of our funds or its affiliates and are subject to change for any reason without notice. Any discussion of investments or investment strategies within this podcast are for informational purposes only, and not to be construed as a recommendation to buy or sell any particular investment security, digital asset or strategy. Investing in digital assets involves a high degree of risk and volatility, including the risk of the total loss of principal and now enjoy the show with your host Peter Hans.

 

PETER HANS 00:51

All right, this is Peter Hans and welcome to this week's episode are between 2 chains it's been a couple of weeks but it's Thursday, October 28 while recording this.

Jeff, how are you doing today?

 

JEFF DORMAN 01:13

Great, Peter, how yourself?

 

PETER HANS 01:14

I am. I'm just fine. Thank you. It's been a wild month, good month. You know, and during the end of the year, a few few interesting things to talk about, you know, definitely the macro environment. Inflation is an interesting topic right now, it's one that, you know, not only not only market participants care about but you know, the everyday life you care about it. You know, I've got my wife asking me all the time about about lumber prices and what they're doing. And is this the wrong time to be, you know, contracting to do some built in cabinets in our in our garage? Or do we pick the wrong time to build a farmhouse, all this sort of stuff. So, you know, inflation would be an interesting thing to talk about. And then I would love to better understand what's going on with Mount Gox. And these, the bankruptcy claims and what that might mean for the overall market, you know, a little bit maybe of how this process works. And that could be, you know, probably an interesting thing, because we're we're we try to be educational here. And typically, it's educating, you know, a more traditional investor audience about the digital assets market. And this could be a case where, you know, it's twofold. We're talking about, you know, the digital assets issue, but we're also talking about a traditional bankruptcy client, and how that could work. So kick it off, where do you want to start things of those two topics here?

 

JEFF DORMAN 02:35

We'll start with what you said beginning that this is a bit of good known for you, I think. I think the kids are calling it up October. October isn't a good month across all risk assets here. So yeah, it's, I don't know what that means for November, because I think you could just do.

 

PETER HANS 02:49

Govember

 

JEFF DORMAN 02:51

What's that

 

PETER HANS 02:51

Govember

 

JEFF DORMAN 02:52

Govember? I like it. Yeah, we can we can do that. But yeah, it's been a it's been a it's been a good month, I think people have high expectations for the rest of the fourth quarter as well, for digital assets. So you know, we're pretty bullish as well. But um, yeah, we'll start with inflation. I know the, the audience can't see you, but you're not 70 years old or up?

 

PETER HANS 03:08

I am slightly older, actually

 

JEFF DORMAN 03:10

older than 70. Okay, well, you basically you have to be, you have to be 70 years old to have any actual knowledge of what inflation looks like, because the last time we had any meaningful inflation was in the late 70s, early 80s. So unless you're about 65, or 70 years old, you've never experienced it here in the US. And unless you've lived in some place with hyperinflation, whether that is, you know, certain areas in South America or South Africa, or, you know, Turkey, you've never really experienced inflation. So I think it's funny that so many people now have a view on inflation. And obviously, there's real supply chain issues and everything going on right now. But the reality is, this is a very academic topic, and the people who have actually lived through it will tell you, we had no idea that it was happening when it was happening, it was too late by the time we saw it. So you know, if you've ever taken economics courses, if you've ever, you know, looked at things like the Phillips curve, which looks at economic interest based on inflation, and based on interest rates, you can draw all the economic, academic conclusions you want on what inflation looks like. But in reality, it's almost impossible to see coming. And it's almost impossible to think about until it's too late. So it's an interesting topic, for sure. And we have all these different ways to measure it. Right, sir, certainly, we have the CPI and anybody who actually has looked at the components of the CPI that comes from the government, you can see that it's kind of a joke, right? It's not really representative of anything that actually matters in the real world. You know, it doesn't include a lot. In fact, a lot of times they strip out food and energy. So if you live in a world where you don't need food or energy, and the CPI is very valuable to you, but I can't I don't think I've ever come across anybody who doesn't need food or energy. So not very relevant, right? You know, if you don't need health care, if you don't need, you know, college, then you're not going to be worried about the CPI. But again, most people need health care. Most people need college so There's a lot of things that get in the CPI measurement that are just not really relevant. Then on top of the CPI, you know, what else do you have? Well, you have rates, right? You know, if anyone who's ever heard the term real rates versus nominal rates, right nominal rates talks about what is the interest rate on the 10 year treasury, which is right around 155. Today, but real rates is the tenure minus the rate of inflation, while the rate of inflation fluctuates all the time. And again, it's based on that CPI. So right now real rates are negative, meaning if you own any sort of a fixed income insurance, you're actually going to lose money on that, because the rate of inflation is greater than the interest that you're earning on those bonds. But that inflation rate is incredibly fluctuating. But there is a there are some ways that in the financial world that we measure this, like you have five year four, five year five year breakevens, which basically tell you, you know, what do you expect to make, and that has been rising faster than then really ever in the last 25 years. So all that long winded way of saying we have all these different ways to measure what the market thinks inflation will be. But there's no actual way to know for sure what it is in real time. And if you go back to the 1980s, you know, interest rates were 18% in 1981. If you invested in like a 30 year government bond in 1981, you crushed it, right? I mean, interest rates went straight down from the low from the early 80s, basically, until so today, right? 40 years of just interest rates going straight. You also had a lot of things in the demographic world that are eating to a non-inflationary environment, right? You have unbelievable advancements in technology, which is always deflationary, you've had a huge demographic change in terms of how much older society has gotten, which is also very deflation, a deflationary because, you know, people who leave the the workforce are obviously not contributing to society, and they're not eating to wages and prices. So you do have a lot of real deflationary pressures offsetting this near term inflation that has been happening in the last year. So anyway, all I'm saying is, I have no idea what inflation really looks like, I don't know if it's transitory or not, I don't run a shipping company. So I'm not feeling it every day. But what matters is the market is expecting inflation. And that is taking a real toll on markets. And I think when you look at Bitcoin being up almost 40% Now month to date, there's been 9000 articles talking about the Bitcoin ETF and how that's been the driver of Bitcoin prices. I don't know if that's actually true, it might actually be because the every single measure that we have that looks at inflation, from rates to CPI to you know, these, these, these breakevens are basically saying that inflation is taking off and that's why risk assets across the board from home prices to Bitcoin to equities are booming right now.

 

PETER HANS 07:42

So, expectations of inflation driving any I guess dollar denominated asset, like Bitcoin higher, I suppose the argument, at least in my mind, for the for the ETFs potentially driving the price of Bitcoin higher or less, less technical? And frankly, I'm not exactly sure. You know, how, how the, you know, demand out in the options curve would affects the spot price of Bitcoin? So I'd love to hear any thoughts you have there. But, you know, my thought very simply, is the approval of a futures based Bitcoin ETF by the SEC and Gensler, who's been, you know, extremely vocal about the asset class over the past, you know, nine months, is kind of a very overt blessing that, you know, their their aim is not to regulate this out of existence or to destroy Bitcoin or to ban it. You know, I think, you know, that's something that, you know, they've always said in this country, and, you know, personally, I don't think it's ever been at risk. But, you know, this is this is action, right? There's no, there's no way that the SEC is going to approve an instrument and then fight to destroy, destroy it later on. And I think that that's kind of a de risking of the asset and the asset class, which is driven the price higher, my opinion, you know, not that inflation wouldn't also play into that.

 

JEFF DORMAN 09:16

yeah, I'm not suggesting that the Bitcoin ETF wasn't a watershed event and it wasn't a big deal. It certainly like you said it is a little bit of a de risking from a from a government standpoint, it's certainly aided into inflows, there was a there was a billion and a half of inflows into digital assets. Last week, the largest ever for contacts. There's been 8 billion of inflows all year and a one and a half billion of that 8 billion came last week, and 1.3 billion of that one and a half billion went directly into these new Bitcoin ETFs. So I'm not suggesting that doesn't have a powerful force. There's clearly new money sitting on the sidelines, that was waiting for a registered product like this, that trades publicly that they could put investment dollars and, you know, I think that is a big deal. But I also again, when you look at year to date, you know, in the s&p is up 6% this month alone, that's a big deal for, you know, the s&p when it's only up 20% For the year it's up 6%. This week, you know, oils up 72% This year, housing prices, all time highs, wages all time highs, job opening all time highs, you know, it's like, you know, basically everybody except for the Federal Reserve is telling you that there's inflation. And I just think that's a bigger, longer term force. I think the Bitcoin ETF is a short term force. I think the inflation is a longer term right now driver of all the risk acid, you know, so I think it's right. But yeah, for sure. I mean, the Bitcoin ETF deserves to be talked about it. I think the first application for Bitcoin ETF was in 2013. So certainly, there's a little bit of a relief that this finally was approved. And to your point, there is definitely a regulatory de risking involved, but also, you know, hard to really know everything that the the SEC is thinking, right, I mean, you know, months after allowing Coinbase to go public, they've made, you know, executives at Coinbase his life hell with regard to other products they've been trying to launch. So, you know, there's always a little bit of conflicting information coming from the SEC, and I certainly wouldn't want to make a blanket statement that the approval of a Bitcoin ETF means that all of a sudden, everything is going to be rosy coming from the SEC.

 

PETER HANS 11:16

No, no, not at all. But but that's it. I'm not sure that I agree that it's conflicting. Right? You know, the reason that it's not that it was finally approved, it's a Bitcoin futures ETF was approved. And to my knowledge, all of the past filings have been for, you know, Spot Bitcoin ETFs. Which, you know, I think, objectively speaking, is is a is a superior product for the consumer, but in the SEC, his eyes, right? Bitcoin is not a regulated asset. And, and the bigger issue, arguably, is that the exchanges on which it trades are not regulated with Bitcoin futures, at least, you know, those are trading on CME and regulated exchanges. So there's some sort of oversight as to as to the products and consumer protection, that the SEC obviously doesn't see with Bitcoin and with exchanges, like, like, Coinbase. You know, same thing with Coinbase. Right, you know, allowing the company to go public is is, you know, now it's a regulated, publicly filing entity, right? You know, and I can't imagine the SEC, preventing any company from going public. Now, maybe the company is doing illegal activities or something, but, you know, you can't prevent the company from from going public. But, but that doesn't mean that the public company can do whatever it wants to do. Right, you know, they can still enter into business lines that are not a lab. So I don't I don't think that's necessarily, you know, at conflict with each other. It's actually like, quite straightforward. So what we ultimately need is, okay, well, who's gonna regulate Coinbase? Who's gonna regulate these exchanges? How are digital assets going to be regulated? And I do understand that guests are saying that the rules are very clear. But that, frankly, got bullshit. Right. Like, they're not remotely clear. At least I don't think they're clear.

 

JEFF DORMAN 13:14

Yeah. And I think that's, that's absolutely true, right? I mean, you know, whether it's the SEC or the CFTC, they're fighting for who is in a better situation to be regulating the entire asset class. But I think more importantly, you know, shout out to ARCA co founder and CEO Rayne Steinberg, he wrote an article recently talking about how we're not even sure digital assets is an asset class anymore. It might just be a technology that underpins all asset classes were, effectively there's equity, like digital assets, there's bond like digital assets commodity like digital assets, currency, like digital assets. So for the SEC, or the CFTC, or any regulatory body to claim that they have oversight of all of digital assets, quite frankly, it's impossible to do, because these these instruments are all completely different. So to your point, there's no way that there's clarity, because these instruments are different. And, you know, quite frankly, I think, for the most part, they're doing the right job. They're doing the right thing right now, the regulators across the world, which is trying to figure out what actually does fit within existing frameworks, while also acknowledging that a lot of new laws are going to have to be written to regulate the majority of the industry. So you know, as you and I both know, and we talked about before, a lot of what you read and hear from Gensler from others is political lip theater. But what's going on behind the scenes is is, you know, pretty well documented that they don't really know how to regulate this entire industry, and they're trying to figure it out.

 

PETER HANS 14:30

Yeah and there's absolutely, you know, regardless of what others might say, there's definitely a, you know, a little bit of a battle for jurisdiction, right, because, you know, this is an exciting new developing asset class, that, you know, it's not clear where CFTC has jurisdiction where SEC has jurisdiction, who's gonna have jurisdiction over the exchanges, maybe it falls to FSOC. Right? There's, there's a lot of ways you can look at it. And, and that's a big part of why, you know, Gensler is so vocal on this is, you know, he is a regulator he is interested in technology, he does want oversight in this, it's not that he wants to destroy it or hates the industry. This is this is political theater to, to gain oversight of the asset class. CFTC hasn't been as vocal. Partially because, you know, up until very, very recently, there's, you know, there was an interim Commissioner, and that interim commissioner was, you know, finalized by Biden, I believe, still needs to go through the Senate approval process. But, you know, and I don't, I don't know what the stance is, in terms of, you know, you know, how much how much lobbying, public lobbying, and they want to do on CNBC or Twitter to likes, but but, you know, it'll be it'll be interesting, personally, as much as I some what enjoy following the regulation, you know, and feel like I know, kind of how it works. I'm more looking forward to this has been resolved.

 

JEFF DORMAN 15:59

Yeah, for sure. 100%. I think I think a lot of us feel the same way about the resolution, but go back to interest rates and inflation for a second to close the loop here. You know, one thing that's that's really interesting is if you go back to I think it was April of 2020. When Paul Tudor Jones first came out with his Bitcoin thesis, if you actually go back and reread what he wrote, it wasn't a Bitcoin thesis at all right? It was an inflation thesis. And he said, I'm playing inflation in a variety of different ways. Right? One of it is we're doing Treasury curve steepening meaning, you know, we're shorting the 10 year and 30 year and buying the two year they were they were long bank and energy stocks and technology stocks. They were long floating rate notes, which fluctuate with interest rates, they were long gold, and of course, they were long Bitcoin. What's what's actually interesting is, there was a huge amount of people jumping onto that inflation trade in the second and third quarter of this year, and none of it worked. And it was mostly because a Fed chairman, Jerome Powell actually did a really good job of convincing the market that this really was transitory that there was no long term inflation. And as a result, all of those trades, not necessarily Bitcoin on the Bitcoin started to fall in May as well. But all of those trades really got crushed in the second and third quarter. And it's only been in the last few weeks that that those trades have started to work again, we're steeping or started to work, we're gold started to move, Bitcoin really started to move, you know, energy and textiles. In fact, if you look at the probability of Fed rate rate hikes by the end of 2022, just since September 1 alone, the probability went from 40% to 95%, based on the Futures Curve, so that's telling you that the market has in just the last six weeks has basically said there is almost 100% probability now that the Fed is gonna start hiking rates in 2020, to download up from 40% to six weeks ago. So when you look at stuff like that, and you look at the correlation of, you know, these five year breakeven yields, which again, is a measure of inflation, compared to the equity market in Bitcoin and other things that are inflationary, it really has been a perfect correlation over the last two months. And I think that's why again, I'm not gonna say the Bitcoin ETF didn't matter, the Bitcoin ETF absolutely matters, and it actually had a lot of trickle down effects into rates in the digital asset market as well. But I really still think the driver of risk assets for the most part has been these renewed inflation expectations.

 

PETER HANS 18:07

Got it, yeah, I think I think it's really well put, you know, I, I don't know, I do wonder about the transitory aspect of it, though, just because it is very clear supply chains are still messed up, you know, now, I don't know what that has to do with? Well, I just don't know, I guess. But But I think it's very clear, obviously, you can't print this much money. And you can't have this sort of economic policy without having long term ramifications. And there really is no going back. You know, there wasn't there was an interesting article in sorry, no, your magazine but interesting article and believe it was the Times this morning about might have been in the Washington Post about, you know, the the quote, unquote, like, you know, billionaire tax and, and, and, you know, the pros and cons of it. And one of the really interesting thing that I thought was like, we already have a wealth tax in this country, for everybody who owns property, because you pay real estate taxes, right. And in certain states, you know, Texas, New Jersey, right, Massachusetts, those real estate taxes are significant. And because most people, that's the biggest portion of your wealth as a as a leverage transaction, you're already paying a wealth tax on your assets that you own. And it's just that, you know, billionaires for the most part, like the majority of their net worth is not in their primary home, you know, so it was actually quite interesting. Like we actually have a wealth tax in this country already. It's just a, like, it's a regressive wealth tax. And I never thought of that. I thought that was a really interesting point. Interesting.

 

JEFF DORMAN 19:43

Yeah. Well, we'll see. I think most people know Washington is run by lobbyists, which is run by billionaires and corporations. So the idea of a new billionaire, unrealized, tax is pretty unrealistic to actually get through Washington, but we'll see. It'll be interesting for sure. Yeah. I also thought Yeah, Just going back to digital assets for a second, I think there was for those who follow Sheba coin Shi B and some of these other meme tokens like Dogecoin, you know she was up 1,000,000,000% right now. And there's actually one wallet that you can track on ether scan that put in about $8,000, less than a year ago, and it's now worth $5.7 billion of just Sheba alone. But that wallet hasn't moved that Well, it hasn't moved since the initial purchase. And there's a rumor that it's possible that this person lost the keys, the private keys and actually doesn't have access to the 5.7 billion of Sheba. And then I started thinking about the wealth tax. What happens if you have to pay unrealized gains taxes on something that you just made $5 million on, but you literally lost the key. How do you how do you prove that you don't have access to this $5.7 billion? So once I

 

PETER HANS 20:51

Prior they know who's wallet it is,

 

JEFF DORMAN 20:53

Well, that's a fair point. But the assuming you can, I think it'll be you know, once again, digital assets throws a monkey wrench into existing laws and regulations, like how do you prove who actually owns what? And if you actually own it, how do you prove that you actually have that you still actually have ownership of it and haven't lost it? So once again, digital assets will leave Washington Flomax with these new rules or regulations they're trying to push through.

 

PETER HANS 21:15

I mean, can you imagine it? First of all, it's very possible that person doesn't even know that they have it like it you know, because

 

JEFF DORMAN 21:26

I mean, there's a lot of people have multiple wallets a lot of people forget about wallets or just didn't do a good job with AppSec of holding on to their private keys so yeah, there's a good chance he doesn't that person doesn't know they own it to good chance they forgot about it to good chance they don't have access to it

 

PETER HANS 21:39

Live it doesn't wallets that I have no access to now they're all empty, but I haven't been, you know, a ton of wallets that I've opened up just to dish it out. I've no idea how to get into.

 

JEFF DORMAN 21:49

Yeah

 

PETER HANS 21:50

Okay 30 Metamask.

 

JEFF DORMAN 21:51

Well, I look forward to the IRS coming for this guy for $3 billion of Sheba revenues.

 

PETER HANS 21:57

Rosie is the American

 

JEFF DORMAN 21:59

he or she no idea who this person is?

 

PETER HANS 22:03

Yeah, exactly Interesting. All right, let's, let's switch gears a little bit. Mount Gox back up a little bit. I mean, I know the history there. But but you know, for the benefit of the audience, maybe spend, you know a little bit just going over the history because I know this back in the day like this was the way to buy bitcoin, like if you wanted to buy bitcoin in 2011. Like you pretty much had to go to Mount Gox. Right?

 

JEFF DORMAN 22:27

Yeah, absolutely. And, you know, maybe maybe people at ARCA like ourselves who all have credit backgrounds. Right? You know, you started as an interest rate trader, I started as a corporate bond trader, shout out to Mike Dershowitz who's at ARCA. Now, who was a former distressed analyst, we have a lot of people who are interested in bankruptcy and distress processes. And maybe this is more interesting than us and others. But but the mount Gox story is fascinating, right? I think it was founded in 2007. And actually, the name mount Gox actually comes from an acronym of Magic, the Gathering Online exchange, the card exchange, and it pivoted to Bitcoin in 2010. I think there was a French developer in 2011, who bought the site, moved it to Tokyo and ended up growing it into the largest Bitcoin exchange by 2013. At one point, I think they were doing two thirds of all Bitcoin volume. But you know, behind the scenes, as you can imagine, they grew too fast, they didn't really have security and became hackers Paradise, and over eight between 2011 and 2014, a bunch of hacks added up to over 850,000 Bitcoin, which would be worth, you know, almost $60 billion today. So as a result of all this, Mount Gox became insolvent, they shut down the website filed for bankruptcy in early 2014. Early 2014 is a long time ago, the bankruptcy process has been held up for a couple of reasons, right? One is Japanese bankruptcy processes are a little bit different than here in the US. So it's not as the bankruptcy laws here, the US are much more friendly to to creditors, and really kind of work towards resolution faster. In Japan, they went really slowly. And there's a couple of reasons for that, right. One is that you know, who gets paid in bankruptcy processes, it's the lawyers and the judges, so they're no hurry to move things along. Right, the longer they can delay these, the longer they continue to get fees for this process. To his there was actually a really a lot of wild claims that came in. There was I forget the name of but there were there was one organization that claimed that they were the ones who should have access to all of the stolen Bitcoin that was recovered, because mount Gox damaged their business. And it was like a two or three year fight of this one company trying to prove why mount Gox damaged their business and why they should have been entitled to 100% of all of the proceeds that came from the bankruptcy now that eventually got dismissed, but it held us up for three years. So anyway, long story short, is Bitcoin was trading at $300 per coin back when this bankruptcy process started, and now you know, as I'm looking at it today, it's at 61,500. So what ultimately happened is over 80% Or about 80% of the stolen Bitcoin, they've never recovered. They've only recovered 20% So you know, Normal bankruptcy process if you're only recovering 20% of the assets, you'd be like, Okay, well, this is terrible, you know, my recovery is so low, I can't believe I lost all my assets. The problem is because Bitcoin is up so much a 20% recovery on Bitcoin is actually a huge win. From a credit standpoint, they're about to get a windfall, they're about to get about 42 times their initial claims, driven by just that moving Bitcoin prices. And actually a few big distress hedge funds like fortress who bought significant amounts of claims from individuals, you know, they're about to get a windfall that is going to be even in excess of 42x, because they bought a lot of these claims at, you know, sometimes 30/50/70 cents on the dollar. So there's a couple of big hedge funds are about to make a killing. And there's, there's a lot of individuals who are about to get a lot of money back. So long story short, what happened is just these last in this last week, they finally came up with a, with a with a wind down plan here and starting on November 20, the long awaited bankruptcy process and distributions are about to begin. And what this means is about $9 billion is about to come back in Bitcoin to the original creditors. On top of that, there's gonna be about $1.7 billion worth of cash from liquidations that they already made and probably even more interestingly, is there's a little bit of bitcoin cash and Bitcoin Satoshi vision and other Bitcoin forks that are in here as well. So don't forget Bitcoin has forked multiple times since 2013. A lot of a lot of the, you know, acids that we don't take that seriously but certain some certainly some people in the market still care about all these different Bitcoin forks like Bitcoin cash, Bitcoin, Satoshi vision, even weird ones like Bitcoin, gold and some others. The all these forks happened while this Bitcoin was sitting with the trustee in the bankruptcy process. So all that's going to be distributed as well. So it'll be really interesting. I think my takeaway on this is a couple things, right? One is, we're never going to see a hack like this ever again, right? This was because of a really poor infrastructure, really early days, there are so many different ways to protect yourself now from, you know, third party insurance like Nexus mutual to just, you know, better companies and better wallets and better AppSec to the idea of, you know, as you mentioned, so much of the activity used to be at Mount Gox. And now, obviously, there's, you know, hundreds of different companies across the world that are transacting digital assets. So, so one is I don't think we're ever going to see something like, the two potentially more interesting link in this in a second is what happens to all of these distributions. What happens to the cash that's being distributed? What happens to the Bitcoin that's being distributed? What happens to the bitcoin cash? I think I'll pause there, because I've been talking for a while. But I think that's what's going to be most interesting here starting on November 20. And as long as it takes for these full distributions to come out.

 

PETER HANS 27:33

That's fascinating. So, let's think about kind of what this means, I guess, for the market. So yeah, it is, I guess, I never thought about that, you know, even claiming 20 cents on the dollar, you know, based on 2011. But bitcoin is up, however many 10s of 1000s percent, it almost like, is very beneficial if you're getting a recovery on that, because you would have sold, you know, most people would have sold at some point over that. It's like having a lock up. It's like, No, you can't sell and now all of a sudden, you're sitting there, you know, Bitcoin was at 100 bucks, and now it's at 60,000. You know.

 

JEFF DORMAN 28:11

A lot of people did sell right I mean, that's what fortress and other distress hedge funds did is they literally went they you know, when there's a bankruptcy, it lists all the creditors so fortress, other hedge funds had a list of every single person who was filing a claim in the mount Gox bankruptcy, and they went hand to hand combat after each one of these people said, Hey, would you like to sell your Bitcoin claim? We'll buy it from you at 30 cents on the dollar. 50 cents on a dollar

 

PETER HANS 28:33

Totally yeah I mean, that's a claim, which I mean, yeah.

 

JEFF DORMAN 28:38

That's another way of so

 

PETER HANS 28:41

100%

 

JEFF DORMAN 28:42

So I think did sell and but the people who didn't sell, you know, like you said, it was basically like being forced to hold on to something that absolutely from an emotional or psycho psychological standpoint, at some point over the last eight years, they probably would have been tempted to sell, but they didn't because they couldn't and now they're about to, you know, get it back with all of these games. So maybe this is maybe the moral the story here is long term investing for the win, but yeah, there's a lot of money coming back to people who decided to stick with this and wait for the ultimate resolution.

 

PETER HANS 29:10

How much of that buy fortress do you think was just a normal, you know, kind of distressed bankruptcy analysis, irrespective of the asset versus having some sort of macro view on the on the asset? I mean, I'm sure they had some sort of service scenario analysis if bitcoin got a skyrockets.

 

JEFF DORMAN 29:30

I think it was, I think it was 100% a bet on Bitcoin and a way to buy bitcoin cheaply. Um, you know, no fortress?

 

PETER HANS 29:36

Yeah.

 

JEFF DORMAN 29:36

You know, there was two or three other big hedge funds who did the same thing, but don't forget fortress. Fortress has been involved in Bitcoin and digital assets for a while, you know, for those who know the firm Galaxy digital, which is a public

 

PETER HANS 29:46

Yeah,

 

JEFF DORMAN 29:46

their CEO and founder Mike Novogratz used to be pretty important portfolio manager at fortress and fortress does business with Galaxy. In fact, they sourced a lot of the claims through galaxy, so their fortress has had ties with digital assets for a long time. I told you that almost all of their interest in this was not a bet on the recovery so much as it was a backdoor way to buy bitcoin.

 

PETER HANS 30:07

Yeah, yeah, no, I you're, you know, you're definitely right. There are some hedge funds who, you know, had a major part of their strategy strategy buying mount Gox claims.

 

JEFF DORMAN 30:16

I think there's two or three major takeaways from so the first one is, are we worried about $9 billion of Bitcoin and about a billion dollars of bitcoin cash coming onto the market and flooding the market? My answer to that is not really for a couple reasons, right? One is, it only makes up about, you know, 9 billion of Bitcoin is a big number. But that's about 25% of the average daily trading volume. It's not actually that big of a number on the bitcoin cash, a billion dollars of bitcoin cash is coming back. That's about 6% of the daily trading volume of bitcoin cash. So I don't think it's that material. But you know, it's certainly a big number, I think it's more, I think it's more likely that the market will panic around November 20, about what it could mean that the actual dollar impact itself from the selling that comes from this, and also the money is not all coming back on November 20. It's going to come out over a series of time. But you know, there is a significant amount of bitcoin and bitcoin cash coming back to the market. I do think over the next three or four weeks here, you'll start to see that narrative pick up about what happens with the supply. But I think there's two more interesting things that are that are potentially more interesting to them. The first is that the $1.7 billion in cash is potentially more interesting, because don't forget none of these other digital assets that exist today like DeFi and gaming and NFT's and web 3.0. And, you know, smart contract protocols. None of this stuff existed back when the mount Gox went bankrupt. So all of these people who have this money tied up in Mount Gox, probably didn't have as much liquid net worth as they wanted to, to go out there and buy some of these other digital assets that are you know, equally if not more interesting than Bitcoin. So with $1.7 billion coming back to them over the course of the next couple of months, where do you think that money is going? It's probably not going back into Bitcoin. They're getting enough Bitcoin back. It's probably going into smart contract platforms like ethereum, Solana, you know, avalanche, Terra Luna is probably going into DeFi like Ave and compound and sushi and uni, it's going into, you know, gaming like x infinity. And you know, you name it right. So I think $1.7 billion of cash going to people who presumably like digital assets, and we're early is likely going to be a huge tailwind for the digital asset space, much more than any sort of a headwind from the Bitcoin and bitcoin cash itself. And I think yeah, and I think the other Yeah, I think the other main takeaway from this, if you go back about a year and a half, two years ago, the the US government seized, I don't remember the exact amount it was well over a billion dollars of Bitcoin, and they auctioned it off. And that auction got gobbled up by traditional investors, many of which we never heard who it was. And the rationale was, that was a cleaner way for traditional finance firms to buy bitcoin directly from the government than it was basically doing it on exchanges or through OTC transactions where they would have to reveal their name and their identity, there's a good chance that let's say fortress owns a third of these claims, right? So let's say 3 billion of the $9 billion is going directly to fortress, there's a good chance that money to into fortress never even makes it on the open market for one is because Fortress has been hedging this for years, right? They've been using the futures market, in the derivatives market with puts to be hedging out some of this Bitcoin they're getting so one is they don't actually have that much risk to begin with. Because they want to unwind their short, but to is, I actually think there's a very good chance, there's a couple of big firms out there who will bid fortress directly for this Bitcoin and say, you know, we want exposure, we'd rather just do a bilateral transaction directly with you then deal with signing up on a coin base, or in New York, Digg, or galaxy or whatever. So I think there's a very good chance that we never even see this Bitcoin that is coming back to the market.

 

PETER HANS 33:38

Wow. Yeah. It's fascinating. I mean, it isn't a true that, you know, fortuitously, you got your start in the market because of your, you know, your high interest in Magic the Gathering Online and how much you used to play that?

 

JEFF DORMAN 33:53

Yeah, it was a huge player. I'm not even sure that I even knew until maybe recently that mount Gox stood for Magic the Gathering Online, but now that I know, I can't stop looking at it, because it's really, it's really fascinating that that's where the name came from.

 

PETER HANS 34:07

I heard that a while ago, but I forgot it until you just mentioned it. So.

 

JEFF DORMAN 34:13

Yeah, yeah.

 

PETER HANS 34:14

Alright, anyway I guess we'll see what happens. But I think you made a great point about like, ultimately, who's them you know, everything comes down to marginal buyer and marginal seller in every market, this this asset class is no different. You know, irrespective of the technology advancements and advancements of different sectors of the economy. You know, one of the reasons I'm, you know, so bullish over the next decade is is, you know, there are very few if any, marginal sellers, right, no one in this asset class is like, you know, what, like, I'm out this is this is crap, like, it's not going to happen. But there's tons of money pouring in, you know, pension funds, endowments, you know, RIA is high net worth individuals, right. Like there's so much money on the sidelines that is yet to come into this asset class. that the the aggregate valuation can only go higher. It's just pure supply and demand. And, and really interesting, you know about like there is a, you know, a headwind or rumored headwind about these claims being released and people liquidating Bitcoin like one, you know, yeah, it's not that much in the grand scheme of things but to like, the money even if they do sell their Bitcoin, like, what are they going to go by, you know, they're not they're not buying like, you know, GM stock, you know, or treasuries, they're, they're, they're buying other digital assets, right? They're putting this into polkadot or Luna or solana or ether or, you know, or protocols built on top of these layer ones. So it's, it's, uh, yeah, it's it's a great point, you're dead right? Or maybe they just find more Magic the Gathering cards.

 

JEFF DORMAN 35:47

Maybe there's gonna be a huge boon to trading cards actually, it's a good point that you if you think of the the birth of NFT's versus the birth of trading cards like this could be a huge tailwind for lefties. If a lot of this money was piled into entities.

 

PETER HANS 36:02

whole another episode, I got to have Sasha on to talk about NFT's again soon because it is the sports side of NFT's you know, which I'm personally interested in is just massive. I've been looking at this company you know, Gary Vee's candy digital, you know, Peyton Manning's and investor and they've licensed now at the MLB obviously MLB cup shots been huge like it's just it's just wild like it's it's so conducive to you know, everything that gets at least in the US, but I'm sure the rest of the world is the same just with probably different sports and celebrities, like people just crave that stuff. It's it's it's going to be cute.

 

JEFF DORMAN 36:43

Wouldn't that be? Wouldn't that be full circle irony if fortress launches in NFT fund on the heels of this getting all their Bitcoin and dollars back and they pour it all into the NFT's as a as a thank you to the original Magic the Gathering Online exchange

 

PETER HANS 36:59

I like that a lot. Perfect. Alright, Jeff, well, as always, you know, great conversation. We'll do it again next week.

 

JEFF DORMAN 37:11

Alright.

 

PETER HANS 37:11

Alright absolutely. Thank you sir.

 

REAL VISION 37:23

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