Want to Diversify Your Portfolio? Try Bitcoin, Say ARK’s Chris Burniske And Coinbase’s Adam White

Invest in oil and gold? In this episode, the co-authors of a compelling white paper explain the four reasons why they believe you may soon be investing in digital oil and digital gold instead. Find out why their analysis prompted Burniske to say of bitcoin, “That’s an investor’s dream,” why White mentioned the saying, “On the blockchain, no one knows you’re a refrigerator,” and how well ARK’s investment in bitcoin has performed.

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Show Notes

Transcript

Female speaker:

Welcome to Forbes Podcast.

Laura Shin:

Hi everyone. Welcome to Unchained, a Forbes Podcast produced by Fractal Recording. I’m your host Laura Shin, a Forbes contributor covering blockchain, digital currencies, and fintech. Thanks for tuning in. Today, I have two guests. First is Chris Burniske, blockchain analyst and products lead at ARK Investment Management, which is the first public fund manager to invest in bitcoin and the only one offering ETFs with bitcoin exposure. Joining Chris is Adam White, vice president of business development and strategy at Coinbase, which runs a popular bitcoin consumer wallet and an institutional exchange called GDAX. Welcome guys.

Adam White:

Hi Laura.

Chris Burniske:

Thanks for having us.

Laura Shin:

Chris and Adam are here today to talk about bitcoin and more generally cryptocurrencies as a new asset class, a topic they explored in depth in a white paper they co-wrote, but before we dive into their findings, Chris can you tell us a bit more about yourself in ARK?

Chris Burniske:

Sure, so ARK is an investment manager that was founded about two and a half years ago and we’re founded with the mission to inject the open source ethos of software development into Wall Street research and asset management. What that means is we share all of our research and publish every single trade we make so that the public can see everything that we’re doing and question our actions which makes us better and keeps them informed. We focus on the innovations that are shaping our future so things like autonomous vehicles, robots, cloud and of course blockchain technology, and so we use those investment themes to create ETFs as you mentioned and so I’m both an analyst and a products lead, so that’s a combination of research and business development and I’ve written a number of white papers on the blockchain space now. While I’m bullish on blockchain technology generally, I’m most bullish on Permissionless Innovation.

Laura Shin:

Great. Adam, tell us about yourself, Coinbase and GDAX.

Adam White:

Sure, so I lead partnerships and strategy at Coinbase. Coinbase is one of the easiest places to buy, sell, and store bitcoin, so for context, we’ve done almost four and a half billion dollars of transactions for our customers. I’ve been with Coinbase for almost three years. I was originally focused on bring bitcoin to merchants like Overstock, Expedia and Dell Computers and more recently I’ve been heading up product for GDAX, which is our institutional exchange and one of the most liquid trading exchanges in the US and throughout the world.

Laura Shin:

Great, so let’s talk your white paper. In order to determine whether bitcoin represented a new asset class, what criteria did you look at?

Chris Burniske:

So initially what we did is we reviewed a bunch of the preexisting literature out there, as with most research it’s important to first know what’s been done already and so one of the seminal papers is a paper written by Robert Greer. I’m amused by the name. It’s called What is an Asset Class Anyway? and what’s pretty clear in that paper is while there are some well-known characteristics, there’s still a lot of work to be done in precisely defining what an asset class is, so building upon Greer’s work and a few of the other notable names out there, we came up with four key metrics. One was investability and assets must first meet that metric and that’s broken into two things. One is sufficient liquidity, so enough volume turning over every day and then the second is mechanisms to invest. If an asset meets that which is pretty clear that bitcoin does, it trades over a billion dollars a day in exchanges and arguably just as much OTC and then we went onto look at three other things. One was the politico-economic profile, so and that’s something that we can get into later, but it’s the bases of value, the governance, the use cases. Next was the correlation, so how does bitcoin move in relation to other assets in the capital markets. When it goes up do other assets go down and vice versa and the last one was risk-reward profile which is a combination of absolute returns and volatility and I’m sure we’ll get into that as well.

Laura Shin:

And when you looked at the data, what did you discover?

Adam White:

I think we were surprised to find just how neatly bitcoin differentiated itself from other asset classes, so like Chris commented on, one of the first things we looked at was what’s the bases of governance for bitcoin. How’s it value created when you compare it other asset classes like precious metals, commodities like oil, foreign currencies even things like the equities market and what we found is that bitcoin or more largely digital currencies really kind of differentiate themselves uniquely, so one is that the price behaves very differently to market forces, so essentially what we did is we calculated one year rolling correlation among these varied asset classes and looked across the board and bitcoin had near zero correlation to all of them, and so what that implied to us is that bitcoin doesn’t follow in line with other assets. For example, if the price of equities are moving up does bitcoin move up with it or does it actually move the opposite direction and we found that it does neither, so to us this idea of diversifying one’s portfolio with an alternative asset class like bitcoin could be a prudent move for many asset managers or individuals.

The other thing that we found that was really unique was looking at the risk-reward profile and what that basically is, is a measure of risk in the form of price volatility to reward, which is essentially just absolute returns of bitcoin and when you compare those two you get something called the sharp ratio, which is just a measure of return per unit of risk and what we found is that bitcoin better compensates investors for the risks they’re taking three out of the last five years, so there’s always a lot of talk about bitcoin being inherently volatile or far too risky of an investment and what we wanted to do was measure that against the return of bitcoin and while there’s no doubt that bitcoin is more volatile than other asset classes we’ve seen two things happen. We’ve seen that volatility decrease over time, over 50 percent in the last few years, but we’ve also seen the return of bitcoin outperform that amount of risk so to us two big takeaways were that not only was bitcoin differentiated in the fact that it wasn’t correlated to other asset classes, it really provided a nice return to investors.

Chris Burniske:

And Laura, I’ll add onto Adam there, I think from the qualitative side as we worked to define the asset, as well as Adam, mentioned early on, this idea of governance, so when I talk with people within the financial services space, one of the first things they always ask me is, who’s controlling this, and it’s kind of this mind-blowing concept of there, technically is no single person controlling this, no single entity. It’s a balance between all the stakeholders and that’s really not something that we’ve seen with most any typical capital market asset and the one is use cases, you know this is really greenfield territory area for bitcoin in terms of, I wouldn’t use Apple stock to necessarily transfer ownership of my house, but I could potentially use bitcoin especially as we roll out SegWit and we see a more flexible scripting language in the future.

Laura Shin:

Okay and just unpack that a little bit at the end. What did you mean when you talked about a scripting language and SegWit?

Chris Burniske:

Okay. Yes, so SegWit is shorthand for Segregated Witness. It’s actually something that should be activated within the core bitcoin software in the coming weeks and what it does is, it does a number of things, but most importantly by segregating the signature that goes along with every transaction. It both allows more transactions to be fit into a block about 60 percent more, but it also allows a more flexible signature types so to speak, so you can do more varied forms transactions.

Laura Shin:

Okay, and so for the less technical part of members of our audience, essential it means that it’s going to make bitcoin more efficient and certainly more flexible to be used for other assets. Is that correct?

Chris Burniske:

Yes, and use cases like the Lightning Network which will allow high-speed microtransactions and then also this whole idea of sidechains where you start to connect other blockchains and anchor them in bitcoin or you can exchange assets between different blockchains. This all gets deeper into the technicals but the important thing for the listener to realize is that bitcoin is very flexible. It gets this bad rap in terms of being rigid compared to Ethereum but in time I think we’ll see the two become very flexible and compatible with one another.

Laura Shin:

And essentially the takeaway for investors is that soon they’ll be able to trade different types of investment products that are digital currencies is that the thinking?

Adam White:

Yeah. I think that’s generally our philosophy and mine as well, is that right now what we see is that bitcoin is the first prime example of this new asset class which we referred to as digital currencies, but even that name itself doesn’t quite capture what the underlying asset is. While Bitcoin is kind of used as a currency, I can send you money just like I can send an email to anyone, it’s this idea of an international network for value transfer. Like Chris eluded to, there’s other assets that you could also move through bitcoin. It could be proof of ownership. It could actually be something like a security or even land registry, so for in larger context we look at bitcoin as the first example of digital currency, but I think our belief is that we’re going to see a world where there’s not just one master digital currency, being that bitcoin. They see a world where there’s multiple digital currencies and each one solving a different problem. We’re seeing this happen with Ethereum, coming online, and having a higher order scripting language to create things like smart contracts which bitcoin itself is not incapable of doing but it’s just more difficult to do at this stage but at the end of the day all digital currencies are is programmatic money. It’s a way for machines to essentially talk to one another and move value in a distributed manner.

I think what we’ll see is a world where there’s many digital currencies, but they all settle and clear programmatically with one another and the end user isn’t’ going to have to worry about am I holding bitcoin, am I holding ether, am I holding something new altogether. It’s the same way that when I swipe my credit card to buy a cup of coffee at Starbucks, I don’t understand the inner plumbing of how a credit card network functions and an issuing bank, and an acquiring bank. All I need to know is that values move from my account ultimately to the merchant and in return, I’m benefiting from that service or product that I wanted to acquire.

Laura Shin:

That’s interesting because normally I think of, when you have cryptocurrency, you’re spending like just that bitcoin or in the same way that I would think about spending dollars or euros, but you’re saying that eventually that someday they’ll be used in the background and whether you have ether or bitcoin or whatever it won’t matter and it won’t just be…oh, that’s fascinating.

Adam White:

I think that’s exactly right. One of the things I always think about is potentially bitcoin succeeds when no one knows that their using it, so a good example of this is like we like to think that payments find the path of least resistance, right? The most frictionless way to move value. Right now, when I use Apple Pay, I have a credit tied to my iPhone so when I tap my phone, values transfer through that credit card network, but credit card networks carry with them high fees and other things. Digital currencies do not, so over time I think we could see a world where when I tap my phone, I’m ambivalent, that instead of value moving through my visa card it’s now moving through bitcoin because at the end of the day I’m not even focused on what that rail is. I’m just focused on the end product or service that that value transfer is providing me with.

Laura Shin:

Okay. Yeah, and there is some startups that are using bitcoin in exactly this way to move money in the background like Circle or Abra or Align Commerce.

Adam White:

Exactly.

Laura Shin:

All right. So actually, let’s move away from some of the consumer applications and talk about what professional traders are doing. Are we seeing them approach digital currencies as an investment?

Adam White:

I think we are. I think we’re still in the early days of how investors are creating a thesis around this emerging asset class called digital currencies, but we very much are seeing greater and greater interest in the investability of bitcoin. Early on 2013, 2014, I think most of the focus was on the applications of the technology, so we saw people using bitcoin in a transactional medium. Those were the merchants accepting bitcoin as a form of payment, as that really demonstrated a viable use case for bitcoin. I think what we’ve seen are more individuals and institutions alike come online and say, hey this idea of a blockchain has value and bitcoin is just one example and the largest example of a public blockchain.

There’s real value into owning a piece of that a token that helps power the network and what we’re seeing is that transactional volume compared to trading volume is actually shifting. That we’re seeing a great number or greater value of bitcoin moving into the trading world than, we are in the actual transacting. A good example of this is on a worldwide daily basis we see well over billion dollars of bitcoin traded globally per day. That’s not on par with some of the equities and obviously FX markets of the world, but it is a good sign that this market is not as ill liquid as thinly traded as many believe, but we’re really seeing it emerge as a global asset that many people can and do the trade.

Chris Burniske:

And Laura, I mean, part of what let Adam and I to actually brainstorm around this paper and write the paper was this idea of institutional interest and institutional investors, and validating with academic rigor the many ways in which bitcoin is displaying asset class characteristics, and so as Adam eluded to when you look at the trading to transacting ratio for bitcoin it’s currently just under 10 whereas global fiat currency is a tad over 20, so what we’re seeing is a building amount of liquidity in terms of bitcoin’s trading volume which is dropping. Volatility as we mentioned earlier, that brings in more institutional interest and then also very topical right now, right is Brexit, and so I was on CNBC recently because a lot of institutional investors are freaked out about the capital markets at the moment. People are fleeing from equities to bonds, there’s negative interest rates and so people are looking for areas to protect themselves and while bitcoin is still volatile, it’s been about as volatile as oil over the last year.

It’s increasingly being used…I like to call it as a disaster hedge, within the capital markets for capital market participants, and so again that’s why we’re seeing a lot of volume on both from exchanges, but also over-the-counter, which is a darker pool but some people are positing that over-the-counter volume is on par with exchange volume which you could, therefore, argue bitcoin maybe trading almost two billion dollars a day. Now there’s a lot that goes into that and people are concerned about how much volume goes through China, which is something that we can get into. I see it as all good for the Ecosystem, but again this is part of what led us to write the white paper.

Laura Shin:

So, there are a few things I want actually dive into a bit more in your answer. Why don’t we keep going with this talk about Brexit, I think Adam was saying that he pulled some interesting data about what was happening in terms of bitcoin around that time, what did you end up seeing?

Adam White:

Yeah. First off let me just caveat this and say that it’s really difficult to separate how Brexit is affecting the bitcoin world because there’s a lot going on right now.  We’re seeing China continue to devalue the yuan. We have something called the Bitcoin Halving Event coming up, which is a change in how much a new bitcoin introduced every day.

There’s really a lot happening, but what we did at Coinbase is being one of the largest bitcoin retail conversion services, is we said let’s take a look at our customers in the UK and let’s see how their activity patterns have changed over the last week and essentially what we seen a double-digit increase in the number of new user signups, as well as the amount of bitcoin purchased, so very specifically what we saw is the number of daily signups that usually occur, doubled on the day of the Brexit announcement, so we saw a lot of people in the UK start to say you know what, maybe there is value in being part of this global interconnected inherently international payment method called bitcoin, and we saw essentially a doubling of new users signup.

For existing users, we saw a 3.5x increase in the amount of bitcoin that they purchased on a daily basis, so while I think it’s too early to still say bitcoin is really this new safe haven investment, I do think we are starting to see initial signs at people approaching it that way and even more generally that people are discovering the value of a secure alternative investment when we see times of global economic turmoil.

Chris Burniske:

And Adam, correct me if I’m putting words in your mouth here, but I recall from prior conversations we’ve had when we had the Greek debt crisis in summer of last year, didn’t you guys see a similar pattern in terms of increased interest from that area?

Adam White:

We did the numbers were actually eerily similar, so we saw what looked like a doubling of new users’ signups as well as even a greater number of bitcoin purchase, so when we’re initially Grexit about a year or so ago, and now Brexit. We’re seeing very similar patterns with the wake…our users and new users approached digital currency.

Laura Shin:

And what about other world events? Those obviously, Grexit and Brexit are pretty similar, so are there other world events where you’ve seen driving other types of behaviors?

Chris Burniske:

So, Adam mentioned one, right? And that’s the fear of or devaluation of the yuan because roughly 90 percent of the volume driven through exchanges is coming through Chinese exchanges. There’s a lot of hypotheses out there and we do see instances of either when there’s chatter about the devaluation of the yuan or when it actually manifests. We do see some spike in volume there. Did you have any other thoughts around that Adam?

Adam White:

Not so much of the global macroeconomic environment. I do think they’re unique to bitcoin. You have this thing called the halving, which is what I eluded to a few minutes ago, essentially says that every day new bitcoin is minted or mined, very similar to how gold is mined and brought into the world on a daily basis, but that amount or that rate in bitcoin is actually set at the protocol level, so it’s not something any individual or entity controls, it’s written core into the code of the software, and what we’re seeing is in about 10 days the amount of bitcoin created is going to be cut in half, and what’s really interesting is watching how the market is actually pricing this in to the price of bitcoin. At a high level, I think it’s already largely factored in.

This is something that’s been known. It’s very transparent from the earliest days of bitcoin, right? So, it’s not an essential bank like event, where they announce a kind of quantitative easing or a new inflationary target rate. This is something that everyone’s known from the get-go, but what we are seeing is a lot of interest leading up to this event, because regardless of what happens, if the demand stays the same, what we know is the supply of new bitcoin is going to be cut in half that may have an upward effect on the price of bitcoin.

Laura Shin:

All right. Great, so I want to circle back to what Chris was talking about when he mentioned that you guys had the idea to work on this white paper because of institutional behaviors you were seeing, can you tell me a little bit more about how you came to work together and how you came up with the idea to write the white paper?

Adam White:

Sure. I’ll take that one. I mean as most things start it’s not as romantic of a story as I’d like to be able to tell. It was essentially reading the news and watching how ARK Invest took a very public and I thought a very important stake as introducing GBTC into one of the first ETFs if not the first ETF that was probably tradeable.

Laura Shin:

Can you tell people what GBTC is?

Adam White:

Sure. Chris, I’m going to turn this one over to you, because you did a lot of study on this.

Chris Burniske:

Yeah. Great, so GBTC is an over-the-counter security, so what that means you can kind of think of it like a publicly traded equity, like Facebook stock. It’s a little different but that is what GBTC is and it tracks to one-tenth of the value of one bitcoin. Now, the way that GBTC is created is investors that exit from the bitcoin investment trust, which is a private placement trust, those investors can sell into the public markets and exit their private placement, sort of when a company comes public that private equity gets sold into the public markets. That’s sort of the process from the bitcoin investment trust into GBTC. Now, the thing with GBTC is it’s a quasi-closed ended fund, so what that means is only when investors sell out from the bitcoin investment trust into the GBTC is more GBTC created, and so that’s why we actually see GBTC often trading at a premium to bitcoin’s price.

Now interestingly since we invested in GBTC in early days for that product it was September of 2015, we had instances where bought GBTC at a discount to one-tenth of a bitcoin and it has since gone 5x for us. We have it two of our ETFs, our Next Generation Internet ETF, ARKW, and our overall innovation ETF, ARKK, and it’s grown to a top 10 position in both. I think in terms of building on what Adam was saying about how we came together, you know obviously Coinbase is a thought leader in the space and ARK has been building its way towards being as much as well and we connected on an intellectual level, both curious about everything going on in the space, both realizing that a lot of education is still needed, especially to bring this back around to your more typical investor, more typical world citizen, and so that what was the genesis for this white paper and we’ll be working on future white papers here in the near future.

Laura Shin:

And so, do you want to finish the story about…

Adam White:

That’s it. The only part that Chris left out was is that we originally connected over a bowl of Pho in midtown Manhattan and like he said discovered shared interest in how the investment community was approaching digital currencies and specifically decided to dive into bitcoin and bring kind of the unique perspective from both sides. Chris on ARK side obviously with thematic research and really understating kind of institutional investors and Coinbase’s perspective which has unique insight into what our four million customers are doing with bitcoin around the world.

Laura Shin:

So, let’s talk about other Digital Assets. There’ve been hundreds of so-called Altcoins developed. Some of the more well-known are Ether, Litecoin, and XRP, which is by ripple, many of them languish in value though. What separates bitcoin from these other altcoins that have not increased in value?

Adam White:

Yeah. I think that it’s really kind of three things. Number one is bitcoin has a first mover advantage, so we have to remember bitcoin itself has only been around for seven years, but it was the first to introduce this idea of a decentralized blockchain. From that you have things like network effects, the more people use it, the more valuable it is for others to use it. That is a tremendous first-mover advantage that bitcoin has over digital currencies. Second is it’s also the most well-known.

Obviously, a lot of the press and public became first aware of bitcoin in 2012, 2013, when we saw some of its meteoric rises in value and since then it’s always been on the radar of people’s interest, I think much more so than other more obscure or newer digital currencies. The second one is that it has a clearly differentiated value proposition. When you look at other altcoins, many of them for a lack of better term is really just copycats to bitcoin. They take what’s essentially bitcoin’s open source protocol and tweak something very minor, such as the time to discover a new block or the amount of digital currency that’s introduced over time. These really aren’t differentiated value propositions and so there’s not a unique or compelling case for people to shift from using bitcoin to another altcoin.

Third is bitcoin’s track record of success, right? This protocol has been around for almost seven years. It’s really the first one introduced, and it’s been vetted and tested what’s essentially the largest white hat hacker program in the world, right? Because, if anyone can figure out how to break the bitcoin protocol, there’s a tremendous prize on the other side of that. Up to this point, no one has. We’ve definitely seen bitcoin companies built on top bitcoin have been hacked or compromised, but bitcoin itself never has. That trust, that belief that bitcoin has a very solid foundation is why we believe we continue to see people interested in bitcoin, rather than alternative digital currencies.

Chris Burniske:

And I agree with everything that Adam said there, and I want to emphasize one of his points, and that’s the idea of network effects. This is something that we maniacally focus on at ARK because the basic idea of the network effect, right? It’s best exemplified as by the telephone. If I alone have a telephone then that telephone is pretty useless, however, if Adam has a telephone and I have a telephone it gets more useful, and Laura if you have a telephone and it gets even more useful because we have three people with telephones.

Now with bitcoin, it has two really great network effects. One is the network effect of more users. The more people that I can send bitcoin to and that can send it to me and we can use it different ways, the more valuable it becomes and then there’s the network effect of developers, right? The developers like working with other really smart developers and building cool products for people and so these two network effects feedback into one another. I think what we’ve seen with a lot of the other altcoins or public blockchain cryptocurrencies out there is that while they come out hot, they don’t get that flywheel affect going of the network effect and so it’s easy for them after a period to fade into obsolescence. You know a few of them has done a great job of getting over that hump or that activation energy so to speak and it’s actually something that we follow very closely. We’ve had some developers shift from bitcoin to Ethereum and so as an investment manager that holds bitcoin, we very closely track these user and developer trends.

Laura Shin:

Are there any other factors that investors should look at when they’re deciding whether, to put their money in a new cryptocurrency? Beside from network effect?

Chris Burniske:

Yes. Definitely. I think this is where looking at things from a holistic perspective, from investors entire portfolio is really important, because the rap that bitcoin always gets is, oh it’s too risky and risk is quantified most commonly by volatility. How much does this go up and down every day? As Adam mentioned earlier, volatility has been dropping significantly but bitcoin is still a volatile asset.

Now, when you combine looking at volatility with this idea of correlation of returns, what’s interesting is let’s say on one day Facebook stock goes up, but on that same day bitcoin’s stock goes down or bitcoin itself goes down and on the next day, it is vice versa. What actually starts to happen is those price movements counteract one another and so the entire investment portfolio becomes less volatile and therefore less risky, and this is kind of a mind-blowing idea but it’s one of the cores to modern portfolio theory and it’s basically this, you can have a more volatile asset but if it’s zero to negatively correlated with other assets in your portfolio it can actually decrease the overall risk of your portfolio and we have seen instances of this with bitcoin in the past.

For example, if you had swamped 1 percent of equities, so stock positions in your portfolio into bitcoin in late 2014, you actually would have seen both the overall risk of your portfolio decrease and the absolute returns of your portfolio increase. That is an investor’s dream and that’s something that’s really important for people to realize when they are thinking about putting this into their portfolios.

Laura Shin:

So, speaking of that risk, before Brexit the cryptocurrency community poured more than 150 million dollars in to crowdfunding the Dow, which is what’s known as a decentralized autonomous organization and that is essentially an entity whose actions are governed by a series of bylaws that are programmed into computer code, but loopholes in that code allowed about 60 million dollars of the Dow currency which was called a Dow token to be stolen.  When looking to invest in cryptocurrencies, how can investors protect themselves from adverse events like this?

Adam White:

I think the answer is a very simple one. Its investors have to do their homework. They have to understand the risks. They have to know the idea of the investment entering into and there’s no substitute other than spending the time and energy to understand what that is. Many times, and for example in our white paper that Chris and I wrote, we pointed to Satoshi Nakamoto’s original white paper is one of the first sources that all interested investors should read.

For things like Ethereum, and Dow tokens I think that holds up as well. I don’t think there’s any investment manager out there or individual necessarily that would invest in an asset class they don’t fully understand. So first and foremost, you have to do your homework. The caveat to that is I’m acutely aware and I think many are that’s not always possible when we’re looking at things like smart contracts or decentralized autonomous organizations that raise essentially crowdfunding on a decentralized manner this is really pushing the envelope of technology and capital markets, however there are those out there that have the availability to read and understand code and that’s the beautiful thing about digital currencies like Bitcoin and Ethereum and digital assets like Dow Tokens. The structure, the protocol for how that asset is governed, is entirely open source and I look at it much like learning a new language. I may not invest in something that I can’t understand but if I can learn the language to read and understand that, I think it will help me make a more informed decision, so really to a high level, you’ve got to do your homework and you’ve got to understand what you’re investing in.

Chris Burniske:

And I do want to point something out here with the Dow and it’s something that investors should take into consideration when they’re looking at these different assets, and that is the underlying security, right? So, the Dow was an application that rode on top of Ethereum, so we can think of Ethereum or Bitcoin and Ethereum’s blockchain or Bitcoin’s blockchain sort of as an operating system, right? Just as I have my mac operating system and I have applications on top of that operating system, those are fundamentally different things, and so while the Dow was compromised and it looks like they are to resolve things, that is a very different beast from the security of Ethereum’s blockchain and so this was actually something I focus on a different white paper and that was looking at the long-term security of how the underlying compute infrastructure is essentialized, and so that’s something again that as Adam was saying investors need to do their homework and it’s upon us that are involved in the community to make sure that we do our homework and really educate everyone as best we can.

Adam White:

Yeah. That’s right. I think the Dow and really Ethereum are still an experiment, right? Ethereum, the blockchain, the worldwide computer, in essence, is really only been around for about a year. We’d be remised if we said this is absolutely going to be here to stay. I think users need to explore the technology. They need to test with it. They need to experiment. They need to play around. They need to get their hands dirty. This is really what Coinbase’s mission is all about is let’s provide easy unfettered access for people who want to acquire a little bit of digital currency, whether as an investment or whether they actually want to use the application. They actually want to use the network to send and remit value. There are services like Coinbase that try to do this in a very simple easy to do way, but ultimately, we are in the early innings of this kind of new wave digital currency.

Laura Shin:

Aside from bitcoin, the most well known or at least the most popular cryptocurrency is Ether, have you looked at the investing behavior on Ether, how is it different?

Chris Burniske:

So, I can head that off. I think, one of the things I find interesting about Ether is early days, I mean so Vitalik Buterin, he announced it in January of 2014, which actually coincidentally was the same month that ARK was founded, and early on the core developers of Ethereum and Ether as the cryptocurrency that rides atop Ethereum, they said this is not meant to be used as an investment. Ether is converted into gas and gas pays for computational units which perform operations within Ethereum’s world computer and the smart contracts therein, so I think of Ether more as a digital oil and bitcoin more as digital gold. Now, that said, you know people invest in oil and people invest in gold and the quote-unquote traditional capital markets.

These are just digital forms of those things. I think when I look at Ether long term, so I got lucky enough to invest in it on January of 2016 and so I’ve been a happy investor, but when I look longer term it’s going to be slightly inflationary that’s sort of the equilibrium thinking there and that slight inflation rate should match roughly the amount of Ether that people lose through different manners, whether they lose their private key or Ether is burned or whatever it may be, so that’s one thing that people should realize.  The other thing, foreign investment manager from ARK and as Adam said, it is such early days for Ether, that institutional investors have a much harder time getting access to it or getting comfortable with it.

The liquidity is a fraction that of bitcoin’s, and there’s no instrument like even if ARK wanted to own Ether right now, there’s no way we could possibly do that, and so I think again as we have seen with bitcoin, it’s just going to take time. There’s going to be this flywheel effect and it should become…you know I see no reason for it to be any smaller than bitcoin.

Laura Shin:

What developments do you expect to see in the future in terms of cryptocurrencies as an asset class?

Adam White:

I think one most notably jumps out to mind and that’s greater institutionalization. I think up to now it’s really been difficult for investors whether they be individuals or institutions to have exposure to this asset class. Companies like Coinbase, try to make it easy for people to buy a little bit of bitcoin and store it, but what we’re seeing is an emergence of the infrastructure, the exchanges that allow liquidity and trading for that price discovery process to happen.

The infrastructures coming into place and I think we’re going to see greater institutionalization in the form of new products, mainstream access and really bitcoin and digital currencies will look like any other asset that investment managers may want to add to their portfolio. What’s going to be driven from that though is that this idea why someone wants to invest bitcoin is going to move from a belief that the technology is going to used greater in the future to actual reality.

We’re going to see that happen. What we’re going to see are greater applications actually using bitcoin and digital currencies. The use case is things like using bitcoin for micropayments or machine to machine payments. I think we’ll see those come to fortition. We’re going to see that end value to the consumer actually in practice and I think that’s only going to add a flywheel effect to investors realizing that bitcoin and digital currencies are here to stay and that it’s something they should look at investing in.

Laura Shin:

And an example of machine to machine payment would be like if we’re driving or not driving but we’re riding in autonomous vehicles and I want to go faster than your car I can pay you a little bit, like in a micropayment to pass you?

Adam White:

Exactly. That’s one of my favorite examples. There’s this kind of saying that’s being tossed around that on the blockchain no one knows you’re a refrigerator and what it kind of represents is that in reality…in the real world I actually need to use my credit card or use an authorized payment credential to be able to complete a transaction, but bitcoin at the core is just programmatic value transfer between two endpoints and opening that up to machines to do things like lane passing for self-driving cars or having my refrigerator order a new gallon of milk and having it delivered to my house. I think we will see bitcoin be integrated at the protocol level of the internet of things from the ground up and it’s going to open up tremendous possibilities we can’t even imagine.

Chris Burniske:

And Laura, I just want to add on there, I think when we look back to 2016 and 2015 and 2014 and we’re in the 2030s or whatever it may be, we’re going to realize what early, early days we were in. When the internet was getting started there wasn’t the internet to disseminate the information about everything going on. With bitcoin and blockchain technology right now, all this information is flying around, and so people get frustrated, why isn’t it doing this, why isn’t doing that, well this is a fundamentally new technology. It’s a general-purpose technology, so on par with the steam engine with the internet with machine learning and these things take a long time to build, so a refrain you’ll hear a lot in the space is when the 1993 or 94, of the internet, where Mosaic came out, the first internet browser, and so there’s two sides to that.

One side is there’s a really bright and promising future in front of us, the other side is there’s going to be a lot of mistakes made, a lot of pain and a lot of learnings, which will drive the system and I think over time we will see an interconnected web of chains, much like the internet is composed of a massive system of intranets and it’s going to be that inter…the different blockchains that’s going to be really important for the overall value-add of the system.

Laura Shin:

What do each of you most hope people will take away from your white paper?

Adam White:

What I hope is that people begin to understand that while the technology may be difficult to understand, the pieces to develop an investment thesis are there. Our attempt at this paper was to say you can very quantitively measure the performance of this asset class and make an informed decision whether or not it’s something an asset manager or an individual wants to add to their portfolio, so my hope very simply is that people use this paper as one of the pieces to start developing their own investment thesis.

Laura Shin:

Chris?

Chris Burniske:

And I follow along very similar lines as Adam. It’s really important to me that people realize this is no longer fringe technology or dark asset. This is an innovation that is something that deserves utmost respect and atop that technology is this asset that displays really awesome characteristics for someone’s portfolio and it’s pretty clear to me, that while bitcoin is the first of its kind in this new asset class called cryptocurrencies, there’s going to be more to come and people should definitely be attuned to everything that’s going on in this space.

Laura Shin:

And Chris, where can our listeners find more of work or contact you?

Chris Burniske:

Yes. So, ARK’s open source ethos allows us to put all of our research on our website so that’s ARK, ARK-invest.com and people can contact me directly, my twitter handle which is @ARK blockchain.

Laura Shin:

And Adam what about you?

Adam White:

Yeah, so for the listeners out there that are interested in purchasing a little bit of bitcoin or soon Ether to get started, to experiment with the technology, very simply you can go to Coinbase.com. Alternatively, for the institutional investors and sophisticated traders out there, we operate a platform called GDAX, Global Digital Asset Exchange, where you can get started with a full spot exchange order book and that website is just GDAX, GDAX.com.

Laura Shin:

This has been a truly fascinating conversation. Thank you, both so much for coming on the show.

Adam White:

Thank you, Laura.

Chris Burniske:

Thanks, Laura, the pleasure was ours.

Laura Shin:

Thanks for joining us today. If you’re interested in learning more about Chris and Adam’s white paper check out the show notes, which are available on my Forbes page. Forbes.com/sites/laurashin. And please review, rate, and subscribe to the show in iTunes if you like what you’re hearing. Thanks again.

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