RAOUL PAL: Ari, fantastic to get you back on Real Vision. And it's the first time you and I have actually sat down and chatted. You've been on Real Vision a few times now.
ARI PAUL: Just once, I think, with Ash Bennington-- which I'm actually going to be repeating fairly soon with him. But very much a pleasure to chat with you.
RAOUL PAL: So listen, I'd love-- firstly, just give people an introduction about yourself, what you do. And then we'll go dig back in the past a bit and get to how you got here.
ARI PAUL: Sure. Sure. So currently, I'm co-founder and-- I run BlockTower Capital with my co-founder Matthew. I'm CIO. He's CEO. So we kind of-- as many hedge funds function, we kind of split the investment firm down the middle in terms of who manages what.
And as an investment firm, we really look at the entire cryptocurrency kind of opportunity set and try to be opportunistic and thoughtful about how to maximize what we can do in the space. And that can mean VC-style underwriting of equity. It can mean liquid asset trading, trading options, and other types of derivatives. So we're very open-minded and opportunistic.
RAOUL PAL: So how the hell did you get into this? Or how in the hell did you get into Bitcoin, I guess? That's where we start. Or-- well, what was your entry point? Talk me through that.
ARI PAUL: Yeah. I-- something I like posting publicly because it's humbling and a reminder to be humble-- so in 2011, one of my smartest friends, who was a bond investor at PIMCO at the time-- he emailed me two sentences.
There was a 2011-- I think it was in-- oh, god. I forget if it was in The New York Times or The New Yorker, but it was a piece on Bitcoin. And he said, this looks interesting. And I responded definitively in 2011, ele-- digital currency will never have value because value comes from either a long-history value, like gold, or fiat backed by guns.
RAOUL PAL: What--
ARI PAUL: That was--
RAOUL PAL: What were you doing at this point? What--
ARI PAUL: I was a trader at Susquehanna International Group--
RAOUL PAL: [INAUDIBLE]
ARI PAUL: --which is a really big market making firm. And I was doing options market making as well as some kind of prop trading. So that was my 2011 answer. 2013, I traded another email with the same guy, where I was looking at Bitcoin. And in 2013, I didn't buy it partly because of Mt. Gox. It just looked scary to me.
And I wasn't yet a believer. But I was like, eh, maybe I'll speculate in this. And I'm like, nah, this is too hard. And I wrote him that, this looks like a classic bubble. And if it survives the collapse of Gox, that will be meaningful. That will be interesting. And then, sure enough, 2014 happened-- bitcoin's making Loads. We had Silk Road taken down. We had Mt. Gox fail. And I thought that might be the end of Bitcoin.
But when it wasn't-- I was a fan of Soros and some of his mental models around things-- around bubbles and around kind of asset cycles. And something he always said is that, when events should kill an asset but don't, take notice. That's very meaningful.
And so that was kind of my framing in 2014-- that, wow, everything just went wrong for Bitcoin, right? You had Silk Road, which was the biggest use case. You had the largest exchange. And yet, there's a floor here. There's still a bid. There's still usage. That's really interesting.
So I think my entry follows a lot of people who get into it from the financial side, which is, initially, total dismissal, then skepticism and a little bit of participation. So I bought my first Bitcoin in 2014 and traded a little bit but didn't really have conviction. And then I think, as often happens, you experience a full cycle. And it's that that kind of really turns you into a true believer because you have more time to research, and learn, and understand.
But also, experiencing the boom and bust in real time, as someone kind of watching the asset, just seems to provide a huge amount of confidence-- that, man, if this thing can crash 80%-- and we just saw 90% of the people who bought it kind of swear off of it forever because they were chasing momentum and buying the top. And it survived that. And it didn't just survive, but continues growing. It continues-- the ecosystem continues building in every possible way. That-- that's what really kind of makes a lot of people believers.
So I-- basically, heading into 2016, personally, I had a little bit of Bitcoin. I was interested in it. In 2016, I was at-- I had left Susquehanna. I was no longer a trader. I was now an investor. I worked for an endowment-- University of Chicago $8-billion endowment. I was a mid-career portfolio manager/risk manager there.
And late 2016, I just saw the right people starting-- start to get interested in Bitcoin. My own knowledge of it was kind of compounding. Like, you learn a little bit about--
RAOUL PAL: So-- OK. So talk me through that. At that point, what was-- because look, all of our frameworks have changed over time. So let's get back to you in 2016. What do you think this asset is at that point?
ARI PAUL: I thought of it as very much I think what we think of it as today, just with less confidence and more speculative. So I thought, this is a competitor-- well, I guess I say "what we think of it" today, but certainly that there's room for discussion around that. To me, it never made sense as a payment rail. Some of the early people-- not everyone, but some people pitched Bitcoin very early on as, this is going to replace Visa because you save 2% on credit card transaction fees, which never made any sense to me. That's-- no new technology gets adopted because of a 2% savings. Right? There's a huge friction to adopting new technology.
So the pitch that resonated with me was really the offshore banking analogy. So the offshore banking system is $20 to $30 trillion. And that incorporates a lot of different use cases. But basically, every billionaire around the world and every S&P 500 company has some assets diversified across jurisdictions.
And even if you're law-abiding and even if you expect to eventually be fully exposed to the legal system, you still want your day in court. Right? If you're Amazon and you have all of your bank balances in a single bank in New York state, then one judge pre-trial can freeze your bank. And suddenly, you're insolvent. Suddenly, you can't make payroll on Monday. So by having assets across jurisdictions, you give yourself a chance to make use of the legal system and appeal. And you can maintain your lifestyle or your business while that process happens.
So the question I asked was-- and I-- this wasn't-- I wasn't a discoverer of this analogy. It's, what if everyone could access the offshore banking system from their phone with no friction and no minimums? And my answer was, yeah, I think a lot of people-- even people who only have $10,000 to their name or less, they would love to have $1,000 in the offshore banking system so that it can't be demonetized, as happened in India; so it can't be confiscated by a corrupt politician; if you're a Hong Kong dissident, so your bank account can't be seized by the Chinese government. Right?
We-- as Americans, we sometimes take for granted that we have a pretty strong legal system here, right? For the most part, things are pretty fair-- not perfect, but pretty fair. But to many people around the world, they have to fear arbitrary confiscation by local politicians, local police officers.
So I thought, there's at least a $30 trillion addressable market here, probably much larger. Bitcoin is competing to capture a meaningful portion of that. So my view was, hey, if Bitcoin succeeds, this is easily 100x from the levels it was at in 2016. And I can't really handicap it, but I think it's got a good shot.
RAOUL PAL: Because-- that's interesting. Because I came in-- I mean, different people come in from different ways. I came in almost entirely different-- well, "entirely differently--" partially differently, because I was in Spain during the European crisis. And we almost lost our banking system.
And we'd just gone through 2008 and realizing that, when a banking system goes down, nobody knows who owns the assets. And then when somebody explained blockchain and Bitcoin, I'm like, oh, my god, so we can solve custody, rehypothecation, and we can also have an asset that can protect us. And that's kind of what started me down the whole rabbit hole. So go back to 2016. So 2016--
ARI PAUL: Yeah. So I was kind of-- I was gaining conviction. And I gained conviction also as a trader that we were basically about to have a parabolic growth period. And I had higher conviction in that than probably anything I ever have as a trader. And it was-- that really arose just because I saw kind of the right people learning about it.
And basically everyone who learned about it was interested and eventually bought some. It was almost everyone. And so you could see the ripples of knowledge and understanding. And I was seeing basically other people at the University of Chicago endowment buying, including managing directors. And they were buying small amounts at first and then more.
And it was just clear to me that, absent something changing, there's adoption happening. And these adoption curves are just going to-- these ripples of adoption are going to continue spreading out to more high-net-worth individuals, more-- I was having some friends, who you'd call retail, get interested, learn more, start buying meaningful amounts. So I became very convicted that this was going to grow, probably very fast. And then I started thinking about it from the endowment perspective. I wanted-- I was a good employee, or tried to be, and wanted the endowment to benefit.
So I started doing educational seminars kind of internally. I wasn't naive-- getting an endowment in 2016 or 20-- early-2017 to buy Bitcoin I knew was a tall order, right? It would take time. And so the-- my hope was, hey, maybe without me, this happens in 18 months or 24. Maybe I can move that timeline up by six or 12 months with education. And so I did some kind of internal educational meetings. I converted a lot of my colleagues to personally buying crypto assets.
But it was obvious that the endowment itself was still very far away-- that the operational and beur-- and largely, frankly, the bureaucratic hurdles to owning cryptocurrency were still pretty high. It hadn't yet-- in early 2017, it didn't feel validated. You didn't yet have enough gray-haired, trustworthy brands in traditional finance say it's OK. And the framing was very much, hey, if we put even 10 basis points into this and we lose it, are we going to look foolish? That was the concern-- it wasn't the risk. Because the risk of it going to 0-- that's a sizing question, right? As a portfolio manager--
RAOUL PAL: Yeah. yeah. it's an--
ARI PAUL: --it shouldn't--
RAOUL PAL: It's an option, at that. It's just an option. And you're an option trader. And you understand that, at that point in its cycle, it was just an option still.
ARI PAUL: Yeah, absolutely. But-- and-- but career risk is a very real thing when you're talking about institutional allocation. And so it wasn't, oh, what if it goes to 0-- we lose 10 basis points. It was, if we have 10 basis points in it and we lose that, we're going to look foolish. And maybe we face awkward questions and our judgment is questioned-- were we proper fiduciaries, all of that. So I realized it was going to take time on the institutional side. But I saw the high-net-worth individuals' retail coming in.
The one other angle-- I talked about the offshore banking angle. But the other angle that brought me to it was the one that's near and dear to your heart, which is dollar depreciation and fiat depreciation generally, which is something that-- when the 2008 financial crisis hit, I was a follower at the time, ironically, of Nouriel Roubini. I was a big fan of his at the time. I've read many of his books. And I was a believer that, eventually, all the money printing happening is going to cause the depreciation of fiat. And I listened to the right people at the time who said, this is going to take a long time, right?
So there were people in 2009-2009 who predicted imminent inflation because of the money printing. Smarter people or more experienced people said, no, no, the force of this crisis is so deflationary, it's going to take years. But basically, in 2009, I said to myself, at some point in the next decade, I'm going to want to get out of fiat. And I want to start looking for what the best hedge is or what the best alternative is.
And then-- and I didn't-- it didn't click for me in 2011 when my friend mentioned Bitcoin, right? I didn't make the connection. But then in maybe 2014-2015, I made the connection that I could easily see this being the asset that becomes kind of a shelling point that people galvanize around as the explicit bet that central banks around the world are just printing tons of money. So that was the other angle. It was the seizure resistance of the offshore banking system but also the depreciation resistance of having a fixed emission curve.
So in 2017, I'm at the endowment. It becomes clear that the endowment's not going to invest in the very near future. So I met my co-founder Matthew. We looked at the financial landscape. And basically, there were a few crypto investment firms at the time-- not very many. Most were basically being run out of apartments.
And we said, there's kind of the gap in the market. We think we can provide something of value. Let's launch a crypto investment firm. So we did that and launched in August of 2017.
RAOUL PAL: OK. That's a terrifying time to launch, right? So you launch. You get the cash drag immediately. Every time you get cash in from investors, you can't catch up with the market. Then it collapses. So how does that feel, right? You've set up a new firm. You've risked your career now. And now the damn thing goes down every day.
ARI PAUL: I actually consider us very fortunate in the sense that we knew we had to race to launch. My co-founder and I-- we decided to launch-- I think it was May 1. And that w-- you think about the timing-- to launch-- we launched August 15. That's one of the fastest hedge fund launches in history. And that was not accidental. We were working 19-hour days in parallel to make that happen.
And what I was telling my co-founder every day-- when we made the decision to launch, Bitcoin was I think $1,500. I said, Matt-- I said, Matthew, I'm looking at the charts. The next stop is $4,500. And it's almost a straight line there.
And I said, I think we're there in two months. We have to launch. We have to cap for this. And we were trying to launch August 1. It took us a little bit longer than we were hoping.
Literally, the night we launched, Bitcoin was at $4,400. While we were waiting to launch, it had gone up 3x. And so almost immediately after, we had the "China bans Bitcoin" scare. And Bitcoin fell to $3,000. And that was painful because we aggressively deployed because we were bullish.
And-- but I consider us very fortunate-- that we were able to ride the wave of the rest of 2017. And yeah, even though we only have five months of a bull market, it was a hell of a five months. And that enabled us to really establish ourselves as a firm that could then survive the winter.
RAOUL PAL: Well, what kind of investment did you find originally? So you're two madmen with this idea. Everyone's like, we're not going to touch this with a bargepole. But you managed to attract a bit of capital to start with-- who and how? What kind of people are in here?
ARI PAUL: Yeah. Our initial investors were largely from the VC world-- probably unsurprising. We, frankly, didn't even pitch institutions like pensions. We knew that they were a ways away. And we thought the best way for us to eventually have them allocate is just launching, and generating good returns, and generating a track record. Then we'll talk to them in a year when they're ready.
So it's largely VCs, who very naturally think about investments as options, right? So in a VC, you don't need to-- a VCs willing to accept a 0.
RAOUL PAL: Yeah.
ARI PAUL: Right? So it was largely VCs and some high-net-worth individuals. And the dollar amounts in this industry are pretty small, right? The-- even today, the dollar amounts managed by all funds in the space are almost trivial by traditional standards, right? In aggregate, I don't know what the number is-- maybe it's $4 billion today at most in aggregate.
So you're talking pretty small dollar amounts. But it's very meaningful when you have the volatility as well as the alpha opportunities. This is not an asset class where you need to be managing $10 billion to be able to generate a meaningful income, right? These are not corporate bonds we're trading.
And I'd say I think my-- while I'm not gray-haired and I'm certainly not viewed as experienced in the traditional financial sense, where you're normally 50 if you're a veteran hedge fund manager, in crypto, we were kind of the mature people in the room in the se-- we were known early on in the crypto world as the guys who wear suits.
And it's funny-- I never wore a suit in my earlier career. As a trader, I wore shorts and sandals. At UChicago, we dressed pretty casually. I put on a suit for crypto because I realized that that's kind of our role. Like, I'm not a cryptographer. I'm not an engineer. I can't be the kid in the-- the genius kid in a hoodie. What do I bring to the table? What do I--
And for allocators, it was-- we weren't pitching the moon. I didn't tell people, this is guaranteed to take over the world, and Satoshi is a time-traveling AI from the future, and Bitcoin is going to be $100 trillion-- it's inevitable. That wasn't our pitch.
Our pitch was-- we came across, I think, and very deliberately pitched ourselves as mature, responsible, sober managers who see an inefficient market. So part of the pitch was, even if you think that Bitcoin is tulips, they're very inefficient tulips that we can generate a lot of alpha on through active trading strategies.
RAOUL PAL: And do you think that being an option market maker in your past-- just having the ability-- the understanding of how to trade options, gave you an understanding of how to trade [INAUDIBLE] because it trades more like an option in terms of [INAUDIBLE] or whatever-- whichever way you want to look at it.
ARI PAUL: Definitely. Yeah. Absolutely. There's some asset classes where you don't need to think about regime