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Cryptocurrency Finance

A Dialogue on Cryptocurrency

I was fortunate to land a lengthy interview with Jalak Jobanputra, the founder and managing partner of FuturePerfect Venture. We spoke during a roundtable discussion hosted by Techonomy, in front of a live digital audience. Here is an edited version of our exchange:

James Ledbetter: Let’s start off by talking about the market because I think that’s what has grabbed a lot of people’s attention in recent weeks. When we conceived of this panel a couple of weeks ago, the way we pitched it was “Bitcoin keeps hitting new highs every day.” Literally the week we put out the email, it fell about 26% in one week. Can you talk about the volatility and what, in your opinion, makes it go up and down?

Jalak Jobanputra: A big question around Bitcoin specifically, and crypto more broadly, is how closely it mirrors the broader markets. For most of Bitcoin’s existence, a little over 10 years, we have seen a strong correlation with other assets. And frankly, there wasn’t a lot of data to go upon, because there wasn’t a lot of volume. We saw last March, when all the markets tumbled—including oil and including gold, which considered a safe haven asset—Bitcoin also tumbled, to $3000. We were in such an unusual macro environment, so much uncertainty, that everybody just wanted to go to cash.

Since then we’ve seen bifurcations in terms of what assets have done well and which ones haven’t. We’ve seen the equity markets, really led by tech, go up. And we have also seen a search for yield because we’ve been in a very low interest rate environment. People were looking at the kind of inflationary policies that were being put in place by governments around the world—a lot of money printing for stimulus—and macro investors were thinking “what can hedge against that inflation? What assets are independent of government monetary policy?” Bitcoin fits into that category. As more of these larger hedge funds started entering the asset class, plus corporates putting some of their own Treasury and balance sheets into Bitcoin as an investible asset, that narrative fed upon itself. I started getting calls last May, from money managers, institutions that that were considering Bitcoin and then we’ve seen that accelerate. So that that was the upward momentum.

We saw a correction, we’ve stabilized, but in context: a year ago, Bitcoin was at $3,000 and it’s now close to $50,000. So if you look at the growth and the acceptance of it as an asset class, I think it’s here to stay.

You referred to this increasing mainstream embrace of Bitcoin: Square has made a big investment; Goldman Sachs is moved back to allowing Bitcoin futures to trade; BlackRock has recently made an announcement. What do you think are the next stages of acceptance? What does that look like?

At the beginning of this session, most people in the audience said they think that Bitcoin will be used as a currency, a means of exchange, that’s really how it how it started, when it was created by Satoshi Nakamoto is this, this idea that you could store and hold and freely transfer this currency without government controls , without banks as intermediaries deciding how much you can send, and what the fees are going to be on top of it. We’ve seen that evolve into what it is now viewed as a
”digital gold,” a store of value. What’s exciting about it is it’s technology, and you’re combining technology with the biggest social network in the world and kind of a social construct, which is currency, but this currency happens to cross borders.

I will come back to store of value in a minute. But just going back to this idea of using it in your in your daily life: it seems to me that there are several barriers to that. One is just the logistics—we don’t have a widespread means of doing that. But the other comes back to this very volatile market. If the Bitcoin that you have is worth 20% less this week than it was last week, or 20% more, on either side of the transactions, that becomes something that people don’t want to spend or accept. Tyler Cowen wrote a piece a couple of months ago for Bloomberg Opinion, in which he said, it can be a currency, or it can be an asset, but it kind of can’t be both at the same time. I wonder if you agree with that analysis and if not, how do we get out of that seeming bind?

I don’t agree with it. If you go back to the early days of the internet, people would say: “That’s impossible, we’re never going to watch movies on the internet, mobile phones are never going to have the same processing power as NASA had once upon a time.” There are always naysayers, because most people are used to looking at the world through the status quo, and most people are paid to perpetuate that status quo. That’s why it’s so great to be an early-stage tech investor: you’re constantly around people who believe there’s a different way to do things. So we have a company called AZA, they’re still primarily based in Africa and are using crypto blockchains as backends for money transfers. You don’t have to worry about holding Bitcoin: they will do all the hedging for you on the back end, but they create a more efficient way to transfer money and do it with low fees and you’re not exposed to the volatility of Bitcoin. There are companies and different business models that are emerging around the usage of crypto and this is what’s so exciting to me.

The development of that payment layer is is a very interesting space, I agree. I’m gonna come back to the store of value and push you on this a little bit. There’s no question that the design of Bitcoin, even more than other cryptocurrencies, has qualities that make it very attractive as a store of value: the fact that there will only ever be so many Bitcoin in the world; that it’s decentralized and not in control of any one institution. But if you look at the way that people treat Bitcoin in the markets, it doesn’t look much like store of value. There was an analysis that came out last month from Bridgewater showing that on some days, as much as as 50% of all existing Bitcoin changes hands in the market; that does not look like store of value investment to me. Compare it to gold, the classic store of value: 1% a day, 2% a day. So do you think store of value is a crock that people say that they’re using to invest in? Or do you think that’s something of potential use in Bitcoin, but we’re not there yet?

Well, it’s all relative. Talk to someone in Venezuela, talk to somebody in in India, when demonetization was happening, or in China, when capital controls are in place, they would consider Bitcoin a pretty strong store of value. And, you know, Finance 101: you’re looking at risk/reward profiles, and I go back to, to how individually It really is. And what is great about something like Bitcoin is we can all individually decide what our situation is. I think that store of value narrative is really dependent on who you talk to. And I what other asset would you consider a better store of value?

Historically, gold, silver, platinum, precious metals. But I take your point that it’s to some degree in the eye of the beholder or the investor. When we talk about success of cryptocurrency, we usually go to Bitcoin, because it’s the oldest, and it’s the biggest by market cap. But do you think it’s necessarily the one, the leader? Could it be replaced by an already existing cryptocurrency, or one that hasn’t been invented yet? And what are the qualities of a cryptocurrency that might make it more valuable or more useful than Bitcoin?

So what made Bitcoin the crypto gold standard? It’s been around, it’s proven. The actual Bitcoin blockchain has not been hacked, it’s highly secure. The Bitcoin blockchain has been criticized for being too slow. But the tradeoff is, it is more secure than the others because of that. I’ve always believed that we’re going to have a multi-crypto, multi blockchain world, that we’re going to have different blockchains and cryptos, for different purposes. If you look at Ethereum, it’s very much a development platform…

Explain what that means, that it’s a development platform.

So Ethereum is a platform where developers can build different applications on it using this concept of smart contracts: if one event happens, say once I get a certain amount of collateral I will then lend out or be able to borrow crypto based on that. We’re also seeing this concept of nonfungible tokens that have taken hold over the last few months, we’ve seen a lot of buzz around non fungible tokens, and most of them are built on the Ethereum blockchain. I would say Ethereum has very different uses than than Bitcoin does. I think Bitcoin has become this kind of narrative on its own. And I’m not saying nothing’s going to displace that. But I’ve seen very little that has the simplicity that Bitcoin has.

I think there are probably people in the audience who don’t know what an NFT is. And then there’s one person who’s just told us in chat that Kings of Leon just announced their new album will be an NFT. Would you explain it briefly for those who have yet to encounter the virtues of cats that look like Pop-Tarts?

So NFT stands for non-fungible token. We talked about the fact that each Bitcoin or piece of Bitcoin has has a code to it, that unlocks it, and it’s a unique code. If you take that concept to any asset—trading cards, many of us grew up with baseball, trading cards, sports trading cards—think about now moving those to a digital format, and they’re verified to be true. With Kings of Leon: music is often copied, listened to and and the artists often don’t get royalties. If they issue a digital copy, that can be tracked on a blockchain, just like Bitcoin. You can take a piece of music, track it on a blockchain, see how many times it’s being accessed, how long it’s being played, you can put a limit on how many times that can be played. Then you can also create a smart contract that automatically rewards the creator. It’s been exciting to see artists and creators get involved in the conversation, because crypto has been a very technical conversation for many years.

I want to talk about what I think of as the “dark side” of crypto. There was a case recently in New York state, where the attorney general has got an $18.5 million settlement from the people behind Tether, which is a stablecoin that was advertised as being backed up with $1 behind every coin, but according to the Attorney General’s investigation, that was not the case, that company was playing fast and loose. There have been allegations that tether coins were used to manipulate the Bitcoin market, which I don’t think has ever been proven, but it’s there’s certainly a strong case,. There’s apparently one person or collective that owns 28% of all Dogecoin, which does not strike me as a recipe for a healthy market. How seriously do you take those issues? And what do you think would be necessary to resolve them to the point where they don’t spook some, you know, more traditional or conservative investors?

I want to see all individuals hold some crypto of some form, and have their own financial sovereignty. But I think we need to make sure that everyone is protected. There are always bad actors, there are always speculators and folks that want to take advantage of a lack of regulation. What we saw in 2017 was this big run up and it really took regulators by surprise. They’re much more on top of things and in terms of understanding the technology, they’ve hired technologists on staff. I often engage with regulators to make sure they understand that the promise of the technology. They’re very cognizant of the fact that for financial inclusion to happen, we have to allow people to invest in different types of assets. And at the end of the day, this is all trackable. I believe in free markets, where people can choose: if they think that a certain stablecoin or crypto has some shady business going on around it, they can take their business elsewhere. I think transparency needs to be a part of the process. So I think the market should shake itself out.

So let’s talk a little bit more about regulation. Biden’s nominee for the SEC, Gary Gensler, actually taught blockchain and Bitcoin at MIT, I think he has a pretty good grasp of it. What do you anticipate for crypto regulation in the near future? And do you have, in your own mind an ideal framework for how it should be regulated?

Wow, that’s a good question. I believe in as little regulation as as possible, while a technology takes hold. We saw this happen in New York, with the BitLicense. It really spooked companies that were building in the space because they didn’t know how the law was going to be interpreted. We’ve seen other jurisdictions that have taken a more hands-off approach and attracted a lot of talent. The mayor of Miami has been very open to talking to folks in the industry and figuring out how to support the sector. Innovation needs to have open space.

I wanted to ask one question that isn’t about crypto, but more other applications of blockchain that you think are really exciting right now that that are coming in front of your firm.

If you look at any system that can keep data honest and secure, and benefit from keeping that system secure, it’s really exciting. So I think about credentialing and education. If I could give that that woman in Rwanda and ability to prove that she can code or build websites, and there are enough people in this network that can vouch for her, that system will increase in value. Think about healthcare records: I may want to just contribute certain elements of my information. Some of my medical history, not my address, maybe my gender, and I can permission that out. And then companies can benefit from that data but without having that data be hackable.

A POLL OF OUR LIVE AUDIENCE REVEALED…

This piece originally appeared in FIN, James Ledbetter’s fintech newsletter. Ledbetter is Chief Content Officer of Clarim Media, which owns Techonomy.

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