Cathie Wood, CEO and CIO of ARK Invest, and Yassine Elmandjra, ARK’s thematic analyst, discuss their investment strategy with disruptive innovation, and how blockchain technology, especially Bitcoin, plays a major role in it. They explain why the unique market circumstances due to the coronavirus have led to more correlation between crypto and the traditional financial markets, but also why, in the long-term, it will ultimately be uncorrelated. We cover why they think crypto in the age of COVID-19 will see new opportunity, and when there will be a recovery of the larger economy. They also share, from an investor standpoint, their growing conviction in Bitcoin due to its long-term value proposition compared to other chains like Ethereum. Plus, we talk about the future outlook for central bank digital currencies, and how Libra will launch, albeit differently, than expected.
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Episode links:
Cathie Wood: https://twitter.com/cathiedwood?lang=en
Yassine Elmandjra: https://twitter.com/yassineARK
Yahoo Finance interview on ARK’s big ideas for 2020: https://finance.yahoo.com/video/cathie-wood-talks-ark-invests-222723696.html
Keynote on State of Digital Assets at Volt Capital summit: https://www.youtube.com/watch?time_continue=2729&v=c50TMCKsktA&feature=emb_logo
ARK’s Q&A video conference on COVID-19: https://ark-invest.com/research/bis2020?utm_campaign=BIS%202020&utm_medium=email&_hsenc=p2ANqtz–kCZDJ0VuIxNViHjN7KR7qOryEusndZqMfNp7JMkD4AIZJCv8otUtZm8YgPdmVYTZb3ylv4ysbxt8fRIUvngkRLcyvIw&_hsmi=85729999&utm_source=hs_email&utm_content=85729999&hsCtaTracking=14ee7e75-5bf4-46f8-8c8c-f5aeb84b32a7%7C5f5d3a43-f10e-4792-92de-96ef495eb5c6
Feature on Cathie Wood: https://www.bloomberg.com/opinion/articles/2020-02-18/cathie-wood-s-tesla-bet-puts-ark-invest-in-spotlight
Her views on Zcash: https://www.theblockcrypto.com/post/12660/cathie-wood-on-the-block-the-crypto-revolution-is-coming-jump-on-or-get-out-of-the-way
Transcript:
Laura Shin:
Hi, everyone. Welcome to Unchained, your no-hype resource for all things crypto. I’m your host Laura Shin. If you enjoy Unchained or Unconfirmed, my other podcast, which also features a weekly news recap up for every interview. Please give us a top rating or review on Apple Podcast or wherever you listen to the show.
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Laura Shin:
Today’s guests are Cathie Wood, CEO and CIO of ARK Invest and Yassine Elmandjra, ARK Invest Blockchain/Crypto Analyst. Welcome, Cathie and Yassine.
Cathie Wood:
Very happy to be here, Laura. Great to speak with you.
Yassine Elmandjra :
Great to be here, Laura, thank you for having us.
Laura Shin:
Cathie, let’s start with you. ARK Invest focuses solely on disruptive innovation. How do you define that, and why do you believe that blockchain technology is one of those disruptive technologies?
Cathie Wood:
Well, we define innovation platforms with three characteristics. The first one is that they follow a decline in cost curve. They’re technologically enabled, they have learning curves, and they follow a decline in cost curve. Think Moore’s Law except we have adapted a different law. It’s a relative of Moore’s Law. It’s called Wright’s Law and I can get into that if you’d like.
Laura Shin:
Yeah. Go ahead.
Cathie Wood:
Oh. Okay. Wright’s Law effectively developed by Mr. Wright in the early days of airplane manufacturing says for every cumulative doubling in the number of units produced, costs decline at a consistent rate for any new technology, and so you can see how it’s a relative of Moore’s Law. Moore’s Law is a function of time and Wright’s Law is a function of units or production, and so and it’s much more reliable and can be applied to any technology. It’s even more reliable for the semiconductor industry, again, because it’s a function of units as opposed to time and there’s been a slowdown recently in semiconductors, so that’s the first, a learning curve or decline in cost curve and from that we are able to learn when a new technology is ready for primetime and the way we find that out is we say okay, for every percent decline in costs or price, how much does demand increase and what you found in the early days of the internet or in the internet bubble you found that we weren’t ready for primetime for a lot of things and the most provocative example there is you know we thought we were going to sequence every person’s genome with DNA sequencing technology because we had just sequenced the first human genome and we were going to have precision medicine, you know ideal for each person and of course, the first whole human genome took 2.7 billion dollars to map and it took 13 years of computing power. We were not ready for primetime. We were not ready for primetime. We’re just getting ready for primetime now, below 1000 dollars soon to be 100 dollars and the healthcare world is going transform completely, so that’s the first, cost declines, Wright’s Law.
The second is that these platforms cut across economic sectors and the reason that’s important is because every time costs go down you really would like to unleash more and more demand, so the more sectors that an innovation platform touches, the bigger the opportunity to transform the world, and then the third…even in…well, we’ll continue with DNA sequencing then. Many people think that is just for healthcare. It is not. It is also for agriculture, very importantly for agriculture and any living organism, you know whether it’s animals, or plants, or fish, or what have you, so it’s going touch a lot more than human healthcare and healthcare here in this country is 20 percent of GDP so that already is a big perspective market TAM, total available market, but then you must think beyond that to anything that’s a living organism and can be sequenced, and then the third characteristic, so Wright’s Law, cutting across sectors, and then the third characteristic is it becomes a launching pad for more technology, new technologies.
So just to follow with the healthcare, the sequencing one, DNA sequencing has been the launching pad for CRISPR gene editing so gene editing, I mean DNA sequencing can read the genome and we are able to identify mutations that evolve in our genomes from year to year and CRISPR gene editing, ultimately, will be able to correct those programming errors and cure disease. Now, we’re the early stages of that now but we think it’s extremely promising, could not have happened without DNA sequencing and DNA sequencing couldn’t have happened without the computing age. So these technologies are building one on top of the other.
Laura Shin:
This is just so fascinating because as like you’re talking I can already kind of map how those three criteria you know lead you to Bitcoin and I know that in September 2015, ARK became the first public fund manager to invest in Bitcoin, so can you walk us through like how that happened.
Cathie Wood:
Yes. Okay, so absolutely. When we started the firm in 2014, we had broken the platforms out by DNA sequencing, robotics, energy storage, and next generation internet, and as we were evolving the research associated with each of those platforms, we were doing more and more research on blockchain technology and Bitcoin, and as you know, Chris Burniske was our first crypto analyst. Yassine Elmandjra handpicked by Chris, our second, and so we said as we were exploring it and understanding it more and more, and really understanding Bitcoin, too, you know that wasn’t just next generation internet technology that this was you know potentially the first digital currency and the first global means of whether means of exchange or a value unit of account, we said we have got to break this out and separate it from the next generation internet because it could influence every sector as we began to understand what this really was, and it is going to be the launching pad for much more innovation going forward.
So it started as next generation internet, hey, this is interesting. The internet was never conceived with commerce in mind. In fact, until 1991, people for, get this. Even I forgot it until I heard Steve Case give a presentation before I gave one and he said that it was illegal before 1991and I believe it was called the Communications Act of 1991, there was some act. It was illegal for consumers to transact over the internet, to do anything over the internet. Consumers really weren’t supposed to be using the internet. This was academia, it was for research, it was government, it was for DARPA, and then we unlocked it in early ’91. So back then, the internet was never conceived with commerce in mind and so it never included a payment platform as a part of the infrastructure, and we were then looking, as we learned more and more about Bitcoin and blockchain technology, we said, okay this is the missing link. You know what we’ve been doing over the internet, paying for things with credit cards and you know that’s kluegy and there are all kinds of security risks and what were we thinking.
Well, we were thinking about it appropriately in the early days because the knock on the internet and on Amazon is nobody was going to transact over the internet. It’s totally insecure and then of course, convenience trumped security and each of these companies who developed on top of the internet understood that security was mission critical for them so they each had to develop their own form of security, right, or make sure to harness all the security software out there and then you know encrypt it or make it their own some way shape or form. Well, this was what should’ve happened in the very early days of the internet. Now, with Bitcoin and digital currencies generally and you know blockchain technology, I believe we’re going to reorient how we do things even around the internet going forward.
Laura Shin:
Yeah. Yeah and it’s already happening.
Yassine Elmandjra:
Before I forget, to kind of echo Cathie’s point there, I think what we’re starting to realize now is that really the frontier of economic activity is increasingly pushed into this digital world and so now kind of the need for these new novel institutions to reliably enforce and provide what we like to define as assurances to wealth become increasingly important and so I think beyond just this idea of a native money, understanding that crypto networks and in particular Bitcoin are these novel, social, and economic institutions that unlock these new modes of human organization becomes all the more relevant in the context of kind of Cathie’s dissemination of the history of what got us here to begin with.
Laura Shin:
Yeah. So Yassine, why don’t you give us the background on how you came to work at ARK, and what it is that you do there.
Yassine Elmandjra:
Sure. So I cover crypto assets and blockchain at ARK. I joined in July of 2018, so shortly after Chris, ARK’s former crypto analyst left to start Placeholder and so really Chris handed me the baton and I’ve been very fortunate since to have a chance to fall into the crypto rabbit hole as a full-time job. Prior to that, I was in school so I went to University of Pennsylvania and double majored in Systems Engineering and Finance, and during my time in college, I was very fortunate to you know intern at a venture capital fund in the valley in which they kind of gave me an opportunity to look into crypto from both an investment and tech perspective and I found that what I was studying really this marriage between management and technology, between economics and technology, seemed extremely symbiotic with kind of the crypto space more broadly and so there, I was like I definitely just want to do this full time, and believe it or not, I found ARK through Twitter. I had seen Chris at one of his book signings. He had posted a tweet that he was going to have a book signing in New York and so I, the next day, booked a ticket five a.m. to go up to New York. There I met Chris and I had met Cathie for the first time as well and I would say the rest is history.
Laura Shin:
And I have heard you talk about how you initially got into Bitcoin then discovered Ethereum, but then came back to Bitcoin, so what do you mean by that and why did you come back to Bitcoin?
Yassine Elmandjra:
Sure. So I think a few things. I would say that there…I initially kind of got in actually just as a…my father had come to me randomly and said are there any interesting investment opportunities that I’m currently not aware of and you know Bitcoin was always in the back of my mind. I had never really kind of fallen deep into the rabbit hole and was given kind of that opportunity to do so, and so when you look at it from kind of an investment perspective, I was very kind of fascinated by what many considered to be this new asset class and looking at kind of Bitcoin as really that starting point, but not really the most interesting thing out there. Enter Ethereum where you know Bitcoin has extremely is limited in its capabilities, in its performance and provides specific guarantees but that obviously comes at the cost of being “scalable” and so when you think about kind of new forms of these decentralized information networks like Ethereum, they provide kind of massive amounts of feature sets that something like Bitcoin cannot provide and so intuitively, it seemed like you know Bitcoin would be something kind of far less interesting than the thousand other crypto assets that were out there and really Bitcoin was the MySpace to Facebook.
As I started to kind of realize from an investment standpoint where I think most values going to accrue and kind of what made Bitcoin so unique and why it had specific value propositions that quite frankly I think are very difficult to replicate. It goes back to really what these represent and so in this idea of providing kind of assurances to wealth, where you know the transition to a digitally dominant economy has brought rise to these institutional technologies that are supposed to provide you know specific assurances that compete with financial institutions, that compete with governments, that compete with markets, that compete with firms, and so this idea of kind of having an accessible digital foundation that offers strong assurances and consistently enforces these assurances was something that became I would say much, much more compelling than kind of the thesis that we tend to see in things beyond Bitcoin. So as we transition into this digitally dominant world, I think having these assurances to wealth, everything from kind of reducing the risk of expropriation and seizure to you know reducing the risk of arbitrary rules to monetary policy, everything from kind of lowering barriers to freely transmit and store value and doing all of this in a really honorable and native way to me felt much more compelling than kind of trying to reverse or flip the internet stack and so that’s ultimately why I came back to Bitcoin and find that to at least for me, be the most interesting thing in kind of this space that is very interesting holistically so.
Laura Shin:
Yeah and so this space is like wild on its own but then obviously now, for the last month or few months, we’ve had another wild card thrown into the mix, which is the coronavirus, and when I was doing the research, even like very recent articles just you know when I was reading them I was wondering, I wonder if you know Cathie would answer or Yassine, if either of you would answer the questions the same way and so Cathie actually, I saw that there was this Bloomberg article about ARK from February and it praised your ARK innovation ETF as “the best performer among 584 funds with at least one billion dollars of assets in the global equity market crushing the likes of Black Rock with a return of 165 percent over the past three years” and then it said that you beat 99 percent of the others in your category since ARK became a registered investment advisor in 2014 and you know just looking at it, I was like okay. So February is such a different time from now and with such an ETF where you know you’re placing bets on newer technology, which by definition are riskier. How does something like that perform at a time like this, and you know I don’t know what you would call this time. Like would you say we’re in an economic crisis? Like I’m kind of curious how you would characterize what’s happening.
Cathie Wood:
Okay. So I will separate this into two parts and talk about what we think is going on and then how we’ve performed. Okay?
Laura Shin:
Yeah.
Cathie Wood:
Okay. So my background is economics and that’s why it was so easy for me to be taken by Bitcoin, by the way. I think it’s a really background to have in order to understand what’s going on the Bitcoin front but so I and my mentor is Art Laffer. I don’t know if that name rings a bell. He’s in the economic world. He’s famous for something called the Laffer curve and supply side economics, and he actually is advising President Trump pretty regularly now.
So because I’ve been in the business for so long, I started in college in the late 70’s. I’ve seen 10 crises and that includes recessions, and they vary. Some are recessions and others are shocks. I would categorize what we’ve just been through as a shock. It’s an exogenous shock, a healthcare crisis. This did not start with the economy. It started with the coronavirus, so a shock. There have been two other shocks in my experience as an investor. The first was in October of 1987 and there was something called, a day called Black Monday. During Black Monday, the stock market dropped to almost 25 percent in one day, which is worse than what has happened in this go around in any one day and the reason was there was something called portfolio insurance that had been developed at the time and it had become so popular that when everybody started you know basically relying on the insurance and trying to get out the door at the same time, it failed and that’s what took the market down, there was a panic, and the second shock was 9/11. 9/11 was you know a terrorist attack, a terrible thing, but again, exogenous, so both of these were exogenous.
One was a portfolio insurance gone wrong. It was not well designed and maybe not even honestly designed. I don’t know, and then the second was a terrorist attack. Neither of those were started because of failures in monetary or fiscal policy. They were from outside the economic system, and what happened during those periods was the trends that were in motion before those shocks took place basically remained in motion. You went through maybe a two, three, four month period where the shock had people on edge and activity was subdued but we got through that and in the 80’s, we continued along the bull market and very strong economic growth in the early 2000’s, 2001. We were in the middle of the tech and telecom bust. We continued along that line for another 18 months and this time around, we had entered with the economy in an extremely strong position and it was from a couple of angles.
The consumer spending was very strong and the consumer saving rate was eight percent, roughly eight percent, very high by historical standards. It had doubled in the last five to eight years, and so the consumer had a nice, not all consumers of course. This is devastating what’s happening now for certain consumers, but on average, the consumer had a good level of savings relative to historical standards. You can go into the early parts or the later parts I think of ’90 and early parts of 2000 and see a saving rate of one or two percent, so much higher than had traditionally has been the case.
At the same time, you had had businesses who were, they were fearful of a few things and had been actually pulling back on inventories and capital spending for almost 18 months and it wasn’t a straight pull back in that inventories went down, they just weren’t keeping up with demand, and the reason for businesses were so concerned is that we were in the middle of the China-US conflict, trade conflict and that yield curves had inverted and yield curves historically within 12 to 18 months of an inversion, an inverted yield curve was a harbinger of recession. Well, the recession wasn’t happening, wasn’t going to happen but you had businesses very conservatively postured. You had consumers in a very good mood, record confidence, very high saving rate, felt good you know felt secure, and suddenly, the shock.
If we’re right and if both the fed and the administration have done the right things and they’re not all the right things. They’re throwing too much at this but we think in terms of fiscal policy, the loans are a good idea, to keep businesses intact so that there’s an infrastructure for employees to go back to. So we think that they’re doing enough of the right things and will continue to do enough of the right things including perhaps a payroll tax holiday for the rest of this year to encourage much more activity to come back this year. So we think that both of them have and I think this is the reason the stock market has been doing so well. It could correct anytime because we’ve moved up so quickly here. I do think the trend that was in motion beforehand will continue after we get through these three to four months. We’ll end up in a V-shaped recovery, very strong, and businesses will have to race to catch up to consumer demand. So I think…
Laura Shin:
Actually, one question I wanted to ask about that because you know in the various comments I saw of yours online was some of them were from kind of earlier before the unemployment figures that we have now, which at the time of this recording are at about 17 million. So has that changed your view at all about that V-shaped recovery?
Cathie Wood:
Well, what I will say…no. Actually, the V-shape is because of this you know. So just to explain that a little bit and in the context of prior two shocks. This shock is like the prior two combined and then you add some to it. So it is the biggest of the three shocks and I think that I was concerned in the beginning when I saw the government, there was a little bit of chaos there and I thought that would cause you know a lot of bottlenecks in terms of getting checks out there and getting loans out there but they seem to be working through those, and so I just heard recently that if you look at multi-dwelling residences, 90 percent are paying their rent, which is much better given the number you know the 17 million that have filed for unemployment insurance claims you know. These people are expecting to keep their jobs and want to continue to live in the same place, and commercial tenants at least for this one organization, which is very broad based, are paying 100 percent. I mean this is as of yesterday, well, early April I will say. They are 100 percent paying their rents. The biggest problem is in the retail and restaurant area where only 30 percent are paying and that’s where the help is targeted as well, a lot of the help.
So I think if we just hold these businesses intact, which is what this administration is trying to do and now that the fed is actually buying commercial paper and taking a lot more of the short-term funding risk out of the market. Again, all of this is trying to tide us over for the next three to four months so that these companies are still intact. They may not be operating at a very high capacity but they’re intact and there is a place for these employees to go back and we can start up again. I think, and especially the way the task force has been educating people about what’s going. They’re saying look. We’re going to come back really strongly. Now, President Trump is saying you know V-shape, we’re coming back stronger than ever before, Mike Pence with temper that a bit and say yeah, we’re going to do this safely and so forth so you have a little bit of that going on, but I do think by the end of this year we’re going to be surprised at how strong this economy is.
Laura Shin:
Okay. Well, so we’re going dive a little bit more into how the coronavirus will impact also the crypto markets but first, a quick word from the sponsors who make this show possible.
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Back to my conversation with Cathie Wood and Yassine Elmandjra.
Laura Shin:
So in your view, how do you think, you know obviously, like for years now and I think Chris Burniske actually was one of the people or he and Adam White wrote a paper that called this out. All the way back in I think it was 2016…
Cathie Wood:
Yes, it was.
Laura Shin:
…where it talked about how, yeah, the crypto markets or really it was mainly Bitcoin back then were uncorrelated to traditional markets and I was wondering if that’s still held here in the time of the coronavirus or you know how you think with this virus will impact the crypto markets.
Cathie Wood:
Sure. So I’ll start and then hand off to Yassine because he’s been updating that study as a matter of fact and we’re going to put it out fairly shortly, but just to start out, I was, obviously, we all were watching what happened to Bitcoin you know going down more than 50 percent into the 3000s when everybody assumed that the 200-week moving average, which everyone had been trained on and we had started out that way actually at pointing out that hey, it held even in the riskiest of times. It didn’t hold. It broke through that in March and you know there was so much going on with the rest of our world in equities that you know I was just looking at the correlation. I said wait a minute, Yassine. Gold keeps going up and Bitcoin has just crashed here. What the heck is going on?
So it certainly wasn’t correlated to…it was inversely correlated to gold, which was also a big surprise and you know you usually get these break downs when everybody assumes they’ve nailed it like that 200-week moving average when you’ve got so many people. It’s a little like portfolio insurance that I described in 1987 and you can even say the same in the equity market. There were a lot of low volatility strategies and risk parody strategies that fell apart in this period. They weren’t supposed to. Why did this happen? It’s because there was too much capital chasing that objective and there was too much comfort that they had nailed it. In other words, they thought the risk was out of the system and out of their portfolios in some great way.
When it came to Bitcoin, I noticed and we talked, Yassine and I, talked a lot about it. I noticed that okay, we got to the 200-week moving average around you know it was in the high 5000, 6000, and it kind of just stabilized there and everybody was getting used to the idea that yes, that’s it. It has held. If you go back to 2015 when we initiated our position, we initiated when it hit the 200-week moving average and it then continued to hug it. There is so much more capital now involved in this space and its hedge fund, speculative capital and the leverage that you know there were apparently and I didn’t even know about these people.
Yassine of course did but apparently, there were I will call them traders or speculators who were using 100X leverage and BitMEX was one of the places this was happening, 100X leverage and they were considered, apparently, you know as though they could do no wrong. You know in our business, I know if I ever feel like I, this is so easy, this is getting so…we are on to something big here that makes me cringe. It makes me shudder. I start looking for all of the risks and I actually start taking risk off when I start feeling that way. I think the people who were involved and actually got to 100X leverage were so inexperienced in terms of what leverage can do, they had no idea that it was going to shut down their firms. They had no clue. I guarantee you they had no clue. If I had known that there was that kind of leverage out there, Yassine did, but again, he was in that circle. It wasn’t something we talked about in terms of leverage, and in that circle these people had become very popular, very famous, but if someone had told me look. There’s something out there you know a fairly nascent asset that is being leverage at 100X. I would’ve said okay, get me you know, let me just tell you where the weak link in the system is and those guys will go down and they did.
So I know Yassine knows a lot more about this than I do and also, knows a lot more about the correlations but the only last thing I’ll add is that it makes sense. You’ve got so many more hedge funds involved who are not only involved in crypto assets but also, equities and bonds, there are multi-asset managers that when you get this amount of capital moving in, it is logical. When there’s a crisis in one market and there are margin calls, and there are margin calls all over the place and all kinds of assets, the correlation’s going to go to one in that moment in time but I think Yassine has surfaced some more interesting insights about the correlations in and around this period that I think will explain that we’re still very early stage in terms of this asset class and the correlations are still fairly low, so Yassine.
Yassine Elmandjra:
Sure. I think that sets it off quite nicely. It really has been interesting to see the evolutions, the narratives around kind of the crypto space more broadly during coronavirus. I would say for Bitcoin specifically, and Laura, to your point, there have been really two competing narratives that have been questioned during this first quarter of 2020. The first is obviously, kind of Bitcoin as this uncorrelated financial asset and then the second is Bitcoin as this safe haven asset. I think that you know it was a shock to many of us to see Bitcoin during this time suffer its second largest daily draw down in history and I think it was fewer than 15 minutes we saw Bitcoin drop from 7200 to less than 5400. It broke its 200-week moving average and that hadn’t happened in seven years and then it continued to sink touching I think 3800 dollars and then to Cathie’s point, the largest contributor to this sell off appeared to be these Bitcoin liquidation to satisfy margin calls on the BitMEXs of the world and BitMEX during that time saw almost a billion dollars in liquidations of its perpetual swap and the most over 24-hour period in almost two years, and so this sell off was definitely severe and it was in tandem with an equity market sell off and so questions have definitely been raised around Bitcoin’s legitimacy as an asset worthy of allocation. If especially if its claim to fame narrative has been its non-correlation and kind of the safe haven aspect.
If we dig into the numbers and actually Coin Metrics, its crypto asset data provider and Cathie was talking about we’re updating, we’re collaborating on a whitepaper with them and they actually recently released a report showing kind of the historical correlations and updating that into the coronavirus and so if we look at like kind of the history of Bitcoin with let’s say the S&P500. We see that it has been relatively uncorrelated. Since 2012, the correlation has stayed between 0.15 and negative 0.15, which signals kind of little to no correlation and then but over this last month, we saw kind of this correlation reaching new all-time highs and so is it fair to ask then does this recent correlation suggest that Bitcoin and the S&P500 are now suddenly correlated. I would say no because although, the short-term correlation did shoot up, I think it was still under kind of very unique market circumstances. You had kind of a lot of news about the spreading of coronavirus in which investors across every asset class rushed into cash and so really what we need to look at is correlation shot up between most assets in March, and in fact, to Cathie’s point about gold, even the correlation between the S&P500 and gold was also its highest since 2013 and so I would say over the long term, I expect the correlation between let’s say Bitcoin and the S&P to see some sort of reversion to the mean and then return to that range that we’ve seen since 2012, but at the same time, over the short term, I think that you know we very well may continue to see kind of relatively high correlation between the two especially since we’ve seen kind of strong correlation across all asset classes, and then…yeah. Sorry.
Cathie Wood:
No. I was just going to add one more thing, Laura. I think that this was a really good lesson. I think it will add to the maturity of the ecosystem because it’s so clear that the willy nilly leverage is not to be trusted and so you will have more scrutiny of leverage in the ecosystem, many of the crypto asset systems, and I think that’s a good thing.
Laura Shin:
Yeah and one other thing I did want to add was there were a few circumstances on that day that contributed to what happened on BitMEX one is that their systems actually suffered a D-DOS during this whole March 12, Black Thursday, liquidation period so that also affected things and then the other thing is there were a lot of arbitrage opportunities because the price of Bitcoin diverged wildly you know between the different exchanges and markets but the blockchain itself became so backlogged as people were trying to move money around to take advantage of the arbitrage opportunities that they weren’t able to and so I imagine that there are some liquidations that happened that maybe would not have happened if it weren’t for the fact that the Bitcoin blockchain itself was clogged and that the same happened with Ethereum, and for listeners who did not hear the episodes I did with Kyle Samani where he kind of breaks those down and then Antoine Le Calvez of Coin Metrics who was on Unconfirmed. Both of them in their shows, they kind of dissected what happened.
So one other thing that I wanted to ask you about was Cathie, I did see in a Yahoo Finance video that was about ARK’s big ideas for 2020. You talked about how your conviction in Bitcoin has only grown since the downturn from the last big bubble at the end of 2017 and I wondered why that was and you know how you look at its future outlook, like what analysis you make to say that.
Cathie Wood:
Yeah. I think from the…at the peak in 2017, Bitcoin, and I know these are not precise numbers, but you know whatever errors are being made are being made all the way through so Yassine can refine this a bit afterwards, but at the time, we were looking at the total network value of the crypto asset ecosystem and we noticed that you know Bitcoin had gone down to the low 30s as a percent of the total. As the Bitcoin price and all crypto asset prices kept coming down, Bitcoin shares started to rise and it rose to I think the low 70s. I’m not 100 percent sure where it is now. I think its high 60s, although, after the crash it may be higher, and what that told me again, bringing my economic roots back is you know Bitcoin is the reserve currency of the crypto asset ecosystem and that’s what a reserve currency is. The dollar right now I think is about 65 percent, 60, 65 percent of global currencies. Bitcoin getting up into the low 70 said okay, this is the reserve currency. This is the strongest currency. This is the most secure. That’s one of the things it told me, and I also think we were learning, we were doing a lot more research on wow, confiscation of wealth, this is a perfect antidote and at the time, we had MBS, is that his name, MBS arrest his own cousins in Saudi Arabia and lock them up in a hotel. I’ll bet there are a lot more, not just in the Middle East, but in emerging markets in any emerging country or even developed country where individuals fear there will be confiscation of wealth either in a direct way like it was in Saudi Arabia or in an indirect way think Zimbabwe the hyperinflation, Venezuela, Argentina. Argentina, 50 percent inflation, that’s crazy.
So I think that this idea of confiscation of wealth you know we can take out this insurance policy. We can carry it around in our head in terms of the key to unlock it instead of around with us. With all the hotspots flashing around the world, you think about China, Hong Kong, the protests in Hong Kong. What do they think is going happen finally? We just began to do more work and I think Yassine, the work you’ve done said if you took individuals in the world with I think we said with an investible wealth of one million dollars around the world and they bought out an insurance policy, which basically suggested that well, there’s a five percent chance in your lifetime that you’re going to see full confiscation of wealth. That total was about three trillion dollars just that use case. Just that use case. So the store of value certainly and this reserve currency role, there is no more important role for many and there’s nothing more viral than a reserve currency when you’re talking about currency markets. So Yassine, you might want to add to that.
Yassine Elmandjra:
I would say another additional point is actually kind of around the infrastructure and credibility amongst financial institutions in the community more broadly that has been accepted since 2017. So you know Cathie often likes to reference the Cambridge Associates report that came out around portfolio allocation specifically in how Cambridge recommended that institutional investors begin exploring these crypto assets more broadly, obviously, with Bitcoin at the forefront of that. You have you know institutions like Fidelity who are now understanding and recognizing that there could be an institutional appetite and in order to fuel the demand, you need to have kind of regulated custodial services and you have you know Fidelity that’s been mining Bitcoin for years now, now entering that space seeking to meet that demand.
We saw the recent launch of kind of that, everything around price discovery and market infrastructure, and I would say another one that a lot of people are dismissing or have not really looked at how profound the implications could be is around Square and what they’ve done in particular what Jack Dorsey has done as you know the CEO of two public companies who genuinely understand the value proposition of Bitcoin and is really doing everything he can with the resources that he’s been able to build over the last few years to kind of fuel demand for Bitcoin. I think the launch of Square crypto you know launching that first open source Bitcoin initiative could and we’ve seen has become a precursor for open source development from other institutions.
Obviously, questions around kind of sustainability, of funding for developers, that puts that to rest and so when you have kind of a lot of momentum that’s kind of being built around the institutions that are now deeming Bitcoin credible combined with the fact that now you’re seeing kind of these recent trillion dollar injection from the fed. It is possible that we are you know in amidst of this crucial inflection point for Bitcoin. I would say if central banks continue to inject money into the economy at these rates in which you know something like the narrative that we saw in 2017 will kind of pale in comparison to what we might see in the next few years.
Cathie Wood:
Okay. So I’m going to do, sorry Laura. I’m going to do just a little bit of a reality check on that because and Yassine agrees with what I’m about to say as well, but what we’re seeing and this is from personal experience is institutions while the infrastructure is being built around them right now, institutions are not ready to move aggressively into this space. We’ve had…you know we manage money for institutions. We have…one of our largest institutions owned GBTC and was trying to figure out a lower cost solution and we were trying to help them do that in the form of you know more of a private fund, which would be much more efficient from an expense point of view and they had trouble getting over the hump. They were almost there until they realized that it would be broken out as a separate fund and that they would be on the line as effectively espousing Bitcoin, and they just didn’t want to do that. So they stuck with GBTC even though they had started us on this search for a better alternative for them, so institutions and they trust us. I mean this institution has been with us, it’s one of our longest lasting clients, one of our firsts, and so they trust what we’re doing and they know we know our stuff when it comes to especially to Bitcoin and they wanted a lower cost solution but the optics of actually seeming to support it without being included in a much broader portfolio was something they couldn’t take.
I also have you know we know this an issue and I was with a group. I had an opportunity to meet with a group to try and talk through this institutional issue and you know I think the most important thing we have to do is educate, educate, educate. That’s why Yassine is right updating that whitepaper. The original one was Bitcoin ringing the bell for a new asset class. We’re updating it because we really do feel like it is time now that we’ve gone through these perturbations and maybe much more than that in these markets from a price point of view and yet, if you look at Bitcoin on any kind of moving average basis, it’s still appreciating year over year, so, from year to year. So we’re bound and determined to become a part of the solution to that problem, and you know you asked my confidence.
One other thing I wanted to point out is I also had the luxury of meeting some of the core developers in this space and…
Laura Shin:
For Bitcoin?
Cathie Wood:
Yes, in the Bitcoin space, and because my education was in both economics and finance, I was able to you know see how much they understood about economics and so. I was blown away by the sophistication in terms of understanding economic theory and understanding monetary policy, monetary theory, austerity economics and I have to say that has also boosted my confidence. I believe they understand how important that 21-million unit limit is especially in the context of what is happening, what started happening in ’08, ’09 in terms of opening the flood gates. It never turned into inflation so many people say oh, fine, we can do that again and we just have and it’s not going to turn into inflation. I disagree and I disagree for the same reason portfolio insurance didn’t work and low vol strategies didn’t work.
When everybody thinks something is a sure thing, it’s usually wrong, and I think to look at ’08, ’09 and to see inflation coming down actually. It came down after that. Why was that? Think about it. It was because the velocity of money collapsed. Consumers started saving more. They were spending and then spending was going at a good clip but they were also saving more all along the way and businesses had become very conservative, very, very conservative and what I mean by that is from an operations point of view. Some of them were leveraging up to buy back stock, which turned out to be a very bad idea, but that’s why I think this notion that inflation is dead. To the extent I hear that more and more just because it has been means it will be.
I will become more convinced we’re going to have an inflation problem because these reserves both from ’08 and ’09, and now again from today. We’re going to go up to nine trillion dollars in reserves. We started before ’08 at 850 billion. We went up to 4.5 trillion then and now we’re going to go to nine trillion. Those reserves are sitting on the balance sheets of central reserve banks and they are kindling. They are the kindling. When banks start competing against each other to make loans that kindling will be lit and you know when everybody feels we’re free and clear, and I don’t think that’s any time soon. I don’t think inflation’s a problem for the next two years at all, but I do think to dismiss it as a potential problem is a big mistake.
Laura Shin:
Okay. So yeah, I mean you guys have made a strong case for Bitcoin but I did want to ask you about Ethereum because as you probably know that does have more developer mind share and I wondered you know even though you can I’m sure see that. I believe the last big report I saw on this showed that there were about four times the number of developers in Ethereum as in Bitcoin. You know I was curious to know why does that not translate into investor conviction on your part and one other thing I wanted to throw in there was because I saw Yassine co-wrote a medium piece where…I’m just blanking on what the matrix was but it was something like unconstrained and constrained, and I also heard Cathie give a talk where she talked about the East Coast way of looking at the world and the West Coast way, and I just sort of wondered if that had anything to do with you know your views on Ethereum or really any smart contract, any crypto currency affiliated with a smart contract.
Cathie Wood:
Okay. I’ll start and I know Yassine has a lot more to say about it, but as an investor and because I’m not solely in the crypto space, I have to pick my spots and we run concentrated portfolios so I typically go with the highest conviction names in any space, in any innovation space and Bitcoin, bar none, is that for me. Ethereum, yes, we get back into that West Coast is this technology, is this software technology or is this money, and I think that the value in these ecosystems is going to be dominated by the currencies and Bitcoin being the reserve currency would be where I’d allocate most of our assets in this space, although, I could see over time if there are other currencies that evolve and some people think Ether could evolve into the kind of currency we’re thinking about you know the equivalent of the Euro, the Yen, or the Won, the Pound, what have you. I’m again, having to pick my spots. I’m going to focus in the crypto currency space where I think most of the value will accrue anyway and I’ll leave the technology side to others but Yassine.
Yassine Elmandjra:
Sure. So I would say just to add onto that, and I think what we’ve seen really the most salient distinction between crypto investment philosophies and it touches on this idea of like constrained versus unconstrained visions of crypto networks is you know looking at these networks as kind of a software first in which I kind of coined them as innovation maximalists or kind of money first in which kind of you can coin them as monetary maximalists. In which case if you look at it from a software first mindset kind of the killer app is definitely not money in the killer app is definitely not Bitcoin. In fact, you know the idea that you have some sort of that this whole space has nothing more to offer than this slow and volatile form of sound money to a software first mindset seems quite anticlimactic and so when you look at it from that mindset and from an investor focus mindset, you start to see that yes, there are certainly limitations with Bitcoin. The investor focus should rather be on kind of creating these expressive upgradeable base layer protocols with these large feature sets and the network infrastructure priority should be around scalability and know not having this very slow, yet reliable mechanism to transfer very, very small pieces of data.
When you look at it from kind of a money first mindset then you start and kind of end with Bitcoin in which case kind of the investor focus is really around kind of that assurance theory of money and looking at this really from a monetary view. I would say from an investor standpoint, there is this kind of discrepancy that people are kind of failing to realize between kind of value capture and value creation, and that’s where I would say our views on Ethereum differ in terms of where value is going to end up accruing long term. So the best analogy that I can actually give for this and actually Placeholder was the first to bring this up was actually in the context not of Bitcoin versus Ethereum but actually, of Ethereum versus Ethereum killers and so if you kind of look at this as okay, coming into this year, you had kind of a number of Ethereum killers that kind of planned to launch their main nets and we see kind of the Algorand and Hashgraph of the world who have been able to sell this dream of look, our technology is a lot superior. Well, that really hasn’t been reflective in where value has accrued. Obviously, in bull markets you tend to see that these are kind of levered beta plays and so you would expect them to trade up.
So at a time when Ethereum was trading at like 130 billion dollars of market cap, you had you know EOS and Cardano that weren’t even launched but had kind of tradeable tokens that were trading at 10 to 20 billion dollars in market cap. Now in bear markets, the disposition is a lot different especially at I would say the fundamentals are questionable and so I think that very similar to how Bitcoiners view Ethereum’s odds of kind of usurping it by using let’s say the developer activity as a metric. Ethereum’s view Ethereum killers odds as usurping it as in a very, very similar ways and that is it’s really hard to justify valuations based on kind of superior technology in feature sets alone, and so you first have to understand kind of what is supported I would say by Ethereum and Bitcoin’s market cap before you can justify why these Ethereum killers merit higher valuations, and there are things that are simply something like developer activity or feature set can’t really replace as a value proposition, and so I would say to Ethereum’s credit, it has built out an extremely robust set of stakeholders and I am bullish on the idea of experimentation on Ethereum. I think that there is very, very interesting experimentation but I remain hesitant to think that most value is going to accrue in the long run to things that they kind of aren’t proven forms of money.
Laura Shin:
All right, so we’re going to…we’re a little bit over time but do you guys have a few minutes to just do a lightning round of three last questions?
Cathie Wood:
Sure.
Laura Shin:
Okay. So one thing that I was curious about was I saw that you guys are also bearish on crypto currencies with privacy features like Zcash, but at least for the you know privacy crypto currency crew, they would say oh, the investment case for these is that financial institutions want to you know use these crypto assets but they don’t want all their transactions to be public. They want to have privacy features built in. So I was wondering like do you disagree with that? Like do you think that that isn’t going to be something that you know enterprise or institutions will have demand for?
Cathie Wood:
Yeah. I’ll start, Yassine, just because I know where this came from.
Yassine Elmandjra:
Sure.
Cathie Wood:
I gave a presentation in Boston where I said the fully dark coins I would be concerned about mostly because I think the government from a privacy point of view and especially you know everything that’s going on in the rest of the world right now I think this is even more of a risk. They are going to want some transparency for themselves. Now I know that certain of the coins are you know they will allow that you know it’s the users who are unable you know…
Laura Shin:
Visibility.
Cathie Wood:
…the transparency, yeah, the transparency, so I’m not saying point blank, 100 percent across the board. That I wasn’t really trying to say and I do think that they will you know iterate to a point where you know there has to be some oversight I believe you know to prevent a nefarious act, which you know really everyone involved should want but Yassine, you, I’m sure, have more.
Yassine Elmandjra:
Sure. I’ll take it from the lens of more like privacy as a technology. I would say that really the stance on being more skeptical about privacy points is really like if you consider privacy to be like an implementation of a technology I think that like in the open source world, I think that it’s nowhere near as defensible as what we would traditionally see and so the big caveat to that is if larger assets let’s say like a Bitcoin or an Ethereum end up assuming the same privacy features as these privacy focused coins then I think over the long term there is less of a value proposition for these privacy coins, but there is a big question on let’s say should we implement confidential transactions on Bitcoin’s base layer and that may come at the cost of auditing monetary supply, and so we see kind of the limitations with Z cash in its ability to audit monetary supply but at the same time having confidential transactions at the base layer. So there are these questions and I think that ultimately, we haven’t reached an equilibrium and then I would say from an investment standpoint, there is an argument to be made where if privacy coins or if a coin has the only…the only feature of a coin is privacy, then they could actually end up just being glorified mixers in which you know you want to mixer coins, you go into a privacy coin and then you come back out and you’ve effectively cleaned your coins in which case you know there’s high velocity in a privacy coin and so from a value accrual standpoint, it would seem kind of less interesting as opposed to pure store values.
Laura Shin:
And one other thing I wanted to ask about of course is a big event coming up on the horizon, which is the Bitcoin having and obviously, it’s coming at a really kind of crazy time in the history of the world you know not only the crypto market. So what is your outlook on what will happen at that time?
Cathie Wood:
Yeah. We have had a few brain storms about this and I would say about five months ago coming into this year. There was a lot of talk about the having and I began feel like as I think we hit 14,000, I began to feel okay, they’re pricing this in because it is a positive. First of all, it will be another proof point that we’re heading for 21 million you know successful software update and I think you know if you’re diminishing the supply relative to demand I think that’s a positive force. I’m glad that the discounting of it has been shaken out because if we were still at 14,000 or what have I’d say I don’t know how much is priced in but given what just happened, I don’t think much is priced in. Yassine?
Yassine Elmandjra:
Sure. So I think this is a really interesting topic. Honestly, I don’t have a straight answer. I think that two camps have definitely formed. There’s one camp that believes that the having is priced in like you citing the efficient market hypothesis and then the other camp believes it’s not. What I can say or what I do believe is that I think we’re going to likely see kind of minor lead selling pressure in which case unless the price of Bitcoin doubles, you’ll start to definitely see like minor lead selling pressures in that there will be kind of these minors that will be below their break even cost and so I do expect kind of a drop in the network’s hash rate but assuming that demand for Bitcoin remains the same, having kind of a having in this selling pressure could lead to increases in price. I think that the Bitcoin cash having is going to be…it sets interesting precedent for what to expect for Bitcoin. We definitely saw kind of a lot of minor lead selling pressure for Bitcoin cash particularly from their kind of just shutting off minors but again, you know this is the third having that the market will witness. It’s experienced only two havings in its history. Obviously, those two havings have tended to be kind of callus for bull runs but beyond that I’m not sure what’s going to happen. I’m very curious.
Laura Shin:
Yeah. Yeah. Me, too, especially with everything going on. All right, so last topic. I just wanted to make sure to touch on before we said goodbye is to talk about Libra and central bank digital currencies, which you know that was such a huge topic last year and then you know it sort of looked like the future was a little bit cloudy at least for those but then with all the coronavirus stuff now at least central bank digital currencies are getting a little bit more life in them and I wondered not only what your outlook was on those but also just how that would interact with what’s going in the economy because for instance, I did see that the financial stability board has been warning regulators about disruption that could happen from them. So I kind of wondered how you thought the coronavirus crisis or the impact of it would interplay with this push toward central bank digital currencies.
Cathie Wood:
Yeah. Yassine, you want to start on that one?
Yassine Elmandjra:
Sure. I would say largely what’s been very interesting the Libra in general I think has been very interesting catalyst putting kind of the term or the label crypto or crypto asset or crypto currency on the map. It’s been very interesting to see kind of the evolution of the narratives and how seriously regulators were taking it post-Libra announcement. I think we’ve definitely seen a lot of slowdown in the momentum on creating kind of this reserved backed asset of which the basket is up to Facebook to decide. We’ve seen kind of…we’ve seen a lot of pushback from kind of the EU. We’ve seen pushback from the United States. There are some that speculate that kind of Libra is never going to launch. I expect it to launch but I expect it to likely look a lot different than what it is was initially presented as. I’ve heard kind of through the grapevine that you know the best solution is to actually just have a fully USD backed Libra in which case you know you appeased regulators in the United States but that I would say sheds light on it. I would say one of the most interesting use cases in crypto especially amidst this recent uncertainty and that’s around stable coins more broadly. It’s been really interesting to see how the supply of all stable coins has grown to all-time highs around coronavirus and this is during kind of Bitcoin’s massive drop. I think that the most recent statistic was the stable coin market cap is around seven to eight percent of the total of Bitcoin’s market cap and so we’re starting to see this trend pick up and you know Cathie referenced emerging markets like Venezuelas, the Argentinas of the world. They would much prefer holding the US dollar than they would prefer holding Bitcoin, and having some sort of coin dependent on whether or not you could export your private key I’m not sure Libra’s going to enable that, but if it does, this could serve as a very, very interesting use case for emerging markets and we’re starting to kind of see how the stable coin growth is really a signal that investors are piling into these kind of crypto cash equivalents in times of uncertainty.
Cathie Wood:
The irony is US dollar based. We’ve just had this conversation about inflation. This would be another indication to me that people do not believe that what the fed has just done and other monetary authorities that the belief is that it will never turn into inflation, another indication of sort of the complacency out there. I find it very interesting.
Laura Shin:
Yeah and one other thing I was going to add is that the most recent episode of Unchained is an essay by Mariano Conti of MakerDAO Foundation who is Argentinian and he talked about his you know road through crypto currency basically but kind of earlier on he discovered it because you know in Argentina, the value of the US dollar you get through the banking system is different from what you get on…what we would call the Black Market but apparently, in Argentina, it’s called the Blue Market but anyway and so through that he you know got into I think it was Bitcoin at first and then later when stable coins came about, he you know for his freelance work started getting paid in dye and now he’s…that’s just for him the way to go and so you know that’s literally just I mean of course, it’s just one person but still like you know through that story, you can see like oh, okay, this is you know where this is being useful, this is somebody who says like this is superior to what’s available to me, so anyway, okay, well, it’s been so great having you both on the show. Thank you so much for coming on Unchained.
Cathie Wood:
Thank you very much, Laura.
Yassine Elmandjra:
Thank you, Laura.
Laura Shin:
Thanks for tuning in. To learn more about Cathie and Yassine, and ARK Investment, be sure to check out the links in the show notes of your podcast player. Some of you have heard the weekly crypto news recaps I read on Unconfirmed and have asked me for the links to the stories I mention there. You can also get them delivered right to your inbox with my weekly newsletter, which comes out Fridays. Go to Unchainedpodcasts.com right now to sign up. Unchained is produced by me, Laura Shin with help from Factual Recording, Anthony Yoon, Daniel Nuss, Josh Durham, and the team at CLK Transcription. Thanks for listening.
