BARRY SILBERT: Younger generation investors do not view gold the same way that my parents or grandparents did.
There are still very few break out examples of how blockchain can or will be used for non-speculative, non-financial use cases.
The thoroughness that you see in other asset class research does not yet exist.
If history repeats, which doesn't always- but if it does, you would expect that the all-time high of 20,000 will be taken out in this next run.
RAOUL PAL: At the very beginning of Real Vision, we cared about cryptocurrency. We thought there's a future in it that was going to be an important future of the financial system. And we've gone through some booms and busts. But that whole narrative is still very important to me personally, and I think to Real Vision, and to many of you in the financial world. We know it's not going away. And one of the first guests we ever had on that brought us into this crypto world was Barry Silbert.
Barry's an old friend, and he's a great thinker in this space. He understands the juxtaposition between financial markets and the digitization of assets and cryptocurrencies and blockchain and all of these things. He's been a pioneer in the field. And it's super nice to get him back on so we can just kick around the tires of this space, and really see what's going on. It build on from the Mike Novogratz interview that we did back in October, where it starts to build on the story of where this is really going now.
And as we know, this is not a very straightforward journey. It's a very complex world we're developing here, but an exciting one. But one of the key things is Barry started an advertising campaign that to many of you is going to be the worst thing ever. It's questioning the value of gold and raising the value of cryptocurrency versus gold. And I think just to start off, I want to show you that commercial, because it's going to get some of your blood boiling and others thinking, yeah, this is dead right.
SPEAKER: Why did you invest in gold? Are you living in the past? In a digital world, gold shouldn't weigh down your portfolio. You see where things are going. Digital currencies like Bitcoin are the future. They're secure, borderless, and unlike gold, they actually have utility. Leave the pack behind. It's time to drop gold. Go digital. Go Grayscale.
RAOUL PAL: Barry, good to get you back. We figured out just now that it was what? December-
BARRY SILBERT: 2014. December 11 of December '14.
RAOUL PAL: Wow. So, it's a long time ago. Because we've been massively big supporter of crypto, blockchain, the whole thing. And you were really almost our entry into that world.
BARRY SILBERT: Right? You guys have figured it just launched, right?
RAOUL PAL: Exactly, three months prior. And so, where was Bitcoin then?
BARRY SILBERT: 350 or so.
RAOUL PAL: And where's it today?
BARRY SILBERT: About 8000. So, I got to re-watch the interview. And I guess we'll do a victory lap right now and say I was probably pretty, right.
RAOUL PAL: Yeah, I think you can say that. And that's with a huge spike up and a huge drop as well. And it's still being very right. Once to get you back, just to pick your brains to find out where we are. We're on this journey and it's a long journey. We think we know where we're going. But we don't really know. So, let's start with where you think the journey is going. And then we'll back up to where we are now. And the stuff that you're looking at.
BARRY SILBERT: Right. Well, so I think let's go back to the for the past, I guess, four and a half years. So, in 2014, I would imagine the asset class was probably only worth a couple of billion dollars. Today, Bitcoin is worth about 125 billion. I would imagine that there were only a handful of exchanges-
RAOUL PAL: In fact, your investment trust is worth- now?
BARRY SILBERT: 2 billion.
RAOUL PAL: The same size, different times.
BARRY SILBERT: Indeed. Yeah, that's true. And, yeah, good to be a first mover, I guess. Yeah, so there were probably only a handful of exchanges that you could trade off of, there was no institutional involvement in this space. When Bitcoin was discussed on popular media, it was always described as tulip bubble Ponzi scheme. So, still quite a bit of that, I guess. And then, yeah, you fast forward-
RAOUL PAL: And it was also the criminal element, it was always going to say, it's the currency of criminals.
BARRY SILBERT: Silk Road, probably, yeah, Silk Road probably existed at that point. And there was this perception that Bitcoin was only used by criminals. And so, fast forward to today, it's different. I think the asset class, look, the asset class is here to stay. The asset class, as defined as digital assets, which would include both digital currencies and these token investments. So, the asset class is here to stay.
I think it's now being looked at as potentially an important part of a diversified portfolio. There are thousands of digital currencies and tokens that are out there, most of them we'll talk more about- you don't want to touch, but there's thousands of ways to play the asset class. And the infrastructure, the infrastructure comparing it then versus today, you've custody solutions now like institutional grade custody solutions, you have trading software, you have data and analytics, you have fantastic media editorial coverage.
And so, I think the asset classes really ready for the next phase, which it seems to me is institutional money moving into it. We've seen hedge funds dabbling. We've seen family offices dabbling, but the pension funds and the endowments and the insurance companies and the central banks and all the deep pools of capital haven't really touched the asset class yet. And I think that that's next.
RAOUL PAL: Do you not think it needs a clearer use case for them? Because there's so much theoretical use case. You and I was just talking off camera, everybody we know involved is investing in companies who have use cases. And it's in that dark period of everything's being developed, nothing's really come to market yet. What do you think about the use case for all of this? Or does it just become a trading asset?
BARRY SILBERT: So, we, as a digital currency group, my company we've invested in 145 companies now. And so, we're the most active investor in this space and so we have pretty good visibility and insight into what's working and what's not working. And I continue to believe that the number one use case is speculation right now. And that is not a bad thing. In that one, I think Bitcoin is going to controversial opinion here is going to displace gold over the next couple decades in terms of the role that gold plays in a portfolio.
RAOUL PAL: We will come back to that.
BARRY SILBERT: Yes. But separate from the story value gold play, I think that in order for Bitcoin and digital currency to provide the utility that people are excited about from a cross-border payment perspective, remittance perspective, all the friction that could be eliminated by the free movement of money around the world, not possible unless the asset class- the size of the asset class is larger, unless there's more volume and velocity in the on ramps, the off ramps. So, initially, the number one use case is speculation. As a market cap grows, you have more liquidity going in and out of different fiat currencies.
And eventually, you'll have the ability to operate as an individual or as a business exclusively in Bitcoin or digital currency and completely eliminate or bypass the middleman and all the friction all the costs, but none of that becomes possible. You can't create a better financial system that eliminates all the friction and middlemen, when you only have $125 billion asset class that trades $5 billion a day. It's just not big enough.
RAOUL PAL: And that's an interesting point. So, you think that speculation is one of the good ways to build the culture?
BARRY SILBERT: It's the only way. It's the enabler. It's the flywheel effect. It has to grow in value. And as it grows in value, it becomes more as a tradable asset. And as it becomes more a tradable asset, you get the derivatives and you get the futures and you get the infrastructure, and then you have the liquidity.
RAOUL PAL: But the argument is, is what are you trading then? I guess the answer is you're trading a future operability or something, you're trading the future use case I guess.
BARRY SILBERT: It's two things. One is if you buy into my hypothesis that Bitcoin is going to displace gold and so you're trading into an opportunity. So, there's 8 trillion of gold and then there's 125 billion in Bitcoin. So, that's one play. And the other is you're betting on the innovation. You're betting on the technology. You're betting on the community. You're betting on this new financial system that is going to get built within a couple decades. And that, that investment thesis is a little- it's a different analysis.
The gold analysis is okay, what is the probability that a cash or some of 8 trillion and then you discount that back and you say, okay, it's got a 5% chance it's going to happen, that it's going to catch 25%, you could do the math, still big number. Whereas if Bitcoin becomes the underpinnings of the new financial system, all of the value that gets tied up in Bitcoin, as it's moving around the pipes, it's like a working capital analysis. And so, if there's five or 10 or $100 billion tied up in the Bitcoin system as it's being used for all these use cases, you can make some assumption as to what the value of the asset class would be at that point. And that's not even valuing the blockchain use cases using the database for recording ownership around digital rights and identity and all the crazy ideas that we've invested in and you've heard about.
RAOUL PAL: So, you can you think of therefore, Bitcoin, thinking through your idea with gold and other areas is, you need to think of it in terms of option value. What is the probability of it ending up replacing gold? And then trying to impute that. My guess is you could probably apply some option pricing model and come up with some fair value whatever that means.
BARRY SILBERT: Right. And these small changes in your assumptions have a pretty meaningful impact on the outcome. And that's why Bitcoin will move up or down five or 10% in a week, because the very small changes in money flows, very small changes in perception changes the probability of the ultimate outcome. And so again, with gold as the, in my opinion, the number one use case, our digital gold, 8 trillion relative to 125 billion. For you to double your money in gold over the next couple decades, essentially, it's a bet against the dollar. It's a bet against fiat currency.
Certainly, on my belief that Bitcoin would perform well in that environment, but really, more importantly, if the world doesn't fall apart and if the value of the fiat and US dollar doesn't collapse, Bitcoin could and should still perform really, really well, because you're investing in this new financial system, this technology, this community, this restructuring and rebuilding of the way that value moves around the world, and gold is never going to have more utility. It's just going to, or not be perceived as this store of value that you put in your portfolio, that would perform well in periods of financial dislocation.
RAOUL PAL: Do you see- it used to be- people used to trade the gold-silver ratio for a long time. And one of the reasons why silver often outperformed in certain times is because it has two values. One is the precious metal value. And the other is the industrial value, because people use silver for a lot of stuff. And you think of Bitcoin in the same way, should hyper outperform in that magic scenario of devaluation of fiat currency, which probably at the end of the next recession, we're going to see some format of. But also, it has the price and the optionality of the future financial system, which, as you go into recession and you get to more extreme monetary policy, the probability explodes of having to choose a different outcome.
BARRY SILBERT: That's a super smart way to look at it. That's absolutely right. Absolutely right.
RAOUL PAL: Because one of the things I've been looking at, just to cross our two worlds over is the Japanese now own most of their government debt. In the next recession, they'll probably own all of it, which is a debt jubilee. So, what happens to the Japanese yen? Probably collapses because of the boom, because all debt's gone. I don't really know what that world is. But clearly, it's been happening since biblical times, this debt jubilee stuff. But in that environment, you think the Bitcoin has its proof. That is the environment that it is absolutely there for. Because at the end of that, there's going to be a huge distrust in financial system, what asset is what, how can you just write off assets? And having blockchain and the registration of assets and the storage of that data means that you actually get to own your stuff.
BARRY SILBERT: Right. And there's been a little taste of how Bitcoin may perform in I guess smaller example. So, Brexit, Bitcoin went up. Cyprus, Bitcoin went up. Brexit, Bitcoin went up.
RAOUL PAL: China now.
BARRY SILBERT: China. Yeah. Look at the past couple months, Bitcoin went up. And then certainly, plenty of examples where Bitcoin did not go up when certain things happened. But it's interesting that if you can think about- there's an interesting generational wealth shift that's happening that I think many investors don't take the time to think about or analyze. And so, the numbers that I saw, there's $68 trillion of wealth that will be handed down in the US alone, over the next 25 years to 68 trillion. So, the question is, as that value gets handed down from boomers to Generation X and Y and millennials, where's that money going to go? I would posit certainly that whatever is in gold, that percentage is not going to stay in gold.
Younger generation investors do not view gold the same way that my parents or grandparents did. I grew up, we weren't on the gold standard, I grew up in a period time where we weren't in war and have to worry about hiding value from the bad guys. And so, of the 68 trillion, whatever is in gold, is it going to all go to Bitcoin? No, of course not. It will go into Fang stocks. And will go into the Uber and things like that. But I do think that younger generation investors are open to the idea that what they have been told, or their parents have been told about the role that gold will play in their portfolio may not be right for the next couple decades.
And if you look at the biggest buyers of gold recently, who are the biggest buyers of gold right now?
RAOUL PAL: Central banks?
BARRY SILBERT: Central banks. So, what's interesting is gold bugs love to talk about how central banks are idiots. Said central bankers are idiots. Fiscal monetary policy they're doing yet then they run around and talk about how smart they are for buying gold. Over the past five years, the largest increase in demand for gold has come from central banks. Well, when the stuff does hit the fan, what do those central banks do with their gold? Do they keep on accumulating? Or are they forced sellers? They will be forced sellers. Are they going to use that value to prop up the currency? I would guess that they're going to sell off their gold before they start selling off their ports and their airports and things like that.
Okay, so that if the central bank demand disappears, we know in periods of recession and depression that people will sell their golds to buy food and fund their lifestyles. And from an industrial use perspective, I didn't appreciate this until we launched this drop gold campaign, the use of gold in electronics is down 30% over the past 10 years, down 30%. So, sales of smartphones are up like five or 10X and tablets are going to be- so, electronics are up hundreds of percent, yet the use of gold in electronics is down 30%. So, the demand for gold is basically jewelry and it's central banks. What happens when the economy turns down? I just don't see where the buyer comes from.
RAOUL PAL: Yeah, although I wouldn't even have the argument about gold, let's say gold is a fixed value. Okay, let's assume that it is. The argument, I think the better argument is, what is the value of cryptocurrency in that environment? And I think the generational thing, I did a piece about the pension crisis. So, I think part of that 68 trillion is going to get absolutely obliterated in the next recession because baby boomers are forced sellers before they even divest their assets to their kids. They're going to be forced sellers, because they need to realize some liquidity to retire on when it's just a standard retirement process.
And I think that that defensive financialization we're going to see part of is going to put that younger generation even further away from public markets and all the stuff that we grew up with. And I think they're much more comfortable with private markets. I think that VC world and the PE world and then the crypto world, the three worlds, they feel are more quantifiable and understandable to them.
BARRY SILBERT: Right. And it's also much more accessible. If you think about investing a private company stock, you have to be a high net worth investor. And you typically only get access to deal flow that's local to you. Where with this new asset class and these thousands of protocols and tokens and different players on the digital currency asset class, it's global and it's accessible to anybody who has a mobile phone. And that's exciting.
RAOUL PAL: And also, if you think about the set of opportunities that baby boomers had when they were in their 20s, right, they had the whole demographic wave in front of them. And they had equities by 1982. Repeat of seven in the S&P. They had interest rates at 15, 16%. So, they