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Bitcoin enthusiasts are aplenty, but few have convinced an investment committee to allocate. Instead of writing the thousandth blog extoling bitcoin, here is an excerpt of an interview with Dan Tapiero, CEO and Managing Partner of 10T Holdings and co-founder of Gold Bullion International. I only met Dan in the last week of 2020, but I thought his voice was the best on this topic. He has actually convinced an institution to buy bitcoin.
This blog is part of our no-jargon series of blogs and podcasts to explain bitcoin to investors. Previous blogs have tried to explain the developments driving bitcoin’s rally and to answer the question, "what is bitcoin?". For the full interview with Dan, listen to the podcast.
ED LOPEZ, HEAD OF ETF PRODUCT, VANECK: How do you invest in digital assets?
DAN TAPIERO, CEO AND MANAGING PARTNER, 10T HOLDINGS: 10T is a private equity fund that is explicitly focused on mid-to-late stage companies that are growing up in the digital asset ecosystem (DAE).
We’ve divided the DAE into three sectors: digital asset ecosystem gateways, next generation financial services, and blockchain infrastructure. And we have basically chosen three to five companies in each sector for our portfolio.
It's really like 1995 or 1996 in terms of the timing of the adoption of the internet. And why do we say that? Because in 1995-1996, 1% of the world had access to the internet, and today, a little more than 1% of the world have crypto wallets or crypto accounts. We look at the next 10 years, relative to the adoption of the internet, which increased by a factor of 15. Even if we’re half right about the digital asset ecosystem—which is actually growing faster at the moment—and it only grows 5x or 10x, we think the companies that we have in the portfolio are going to benefit over that 10 year period.
LOPEZ: How much has bitcoin influenced the development of that ecosystem?
TAPIERO: I think nothing exists without bitcoin. Bitcoin is essential. I think of it in terms of what Global Macro Investor CEO Raoul Pal likes to call it: the “pristine collateral of the evolving system.” It's the AAA high-quality collateral that's going to underlie the system. In the old world, the legacy world, you have Treasuries and lots of other bonds that are spread to Treasuries. Similarly, everything beyond bitcoin is a higher degree of risk, so that's the anchor, in my view, for the entire system.
LOPEZ: We're hearing more and more that institutional investors are adopting bitcoin. Why are they investing in bitcoin?
TAPIERO: I think that they see that it's an asset that isn't correlated to any other asset. I think that it's now large enough, at $2-4 billion dollars of market value, and now a trillion. They have enough liquidity in the market to put on a decent size position. I think also the CME introducing bitcoin futures, and now ethereum futures. For a large part of the institutional—and I include sort of the hedge fund world as well—they can't buy something that isn't deemed a security, but they can buy a future on anything. And so I think that's also helped.
Then there are some very smart people from the old world. Paul Tudor Jones, whose piece last summer was pivotal, is thinking about bitcoin as an inflation hedge. To me, it's more a hedge against the debasement of fiat currency. I don't think he's so focused on “What is the value of this tremendous new invention, bitcoin?” But that's okay. The framework that he put it into in that eight-page piece, calling bitcoin the “fastest horse,” I think that spoke to a lot of institutions. When you get someone like Paul coming out and writing a piece like that, people take notice.
LOPEZ: I know you've spoken with investment committees before to try to help introduce and have them incorporate bitcoin. Can you shed a little color in terms of what are the different decision points that they're looking at, and what got them over the hump?
TAPIERO: I chaired the investment committee for the endowment of a school, and it's a significant endowment. We had Cambridge Associates advise us, and basically in Q1 2019, I put forward to the committee the idea that we should own some bitcoin. I had one of the trustee emerita, who was very involved in this world, make a presentation, and it was discussed in the framework of “Let's put 1% of the endowment into bitcoin.” We made the case for it, and the committee came around and Cambridge signed off on it. Even if you didn't believe in anything about it, we were just going to risk 1%. And that's sort of the thesis that Wences Casares, CEO of Xapo, has put forth, and I think he's one of the most important people in the space in terms of getting people to take this toe dip. We laid out the case for bitcoin. We ended up buying it directly, so we own it. I think we're the first high school endowment in the country to actually own bitcoin directly.
This is something that could go up 10x, 20x, 30x, and your maximum downside is 1%. When you think about it that way—as an option on not just bitcoin but almost an option on the growth of this entire world—if you believe that we're moving towards even just a more digital world, this was a very simple, easy way for us to get exposure. It's certainly easier now, and it's not expensive either. It's just that it takes work. You can't just push a button, and it appears. But look, it's been worth it. It's been a nice contributor to the endowment. I think more people will start to think in those terms, more institutions, but I think the number is going to go up. I think instead of 1%, it'll be 2% or 3%. When you can quantify the risk, I think that really speaks to that conservative institutional mindset.
LOPEZ: So you have the potential for asymmetrical returns, lower correlation and diversification potential with the rest of the portfolio. And then the story of the potential future of finance or the economy. How strong are each of those arguments?
TAPIERO: I think that it doesn't have a correlation to other assets. I think that's important. Some people will say, “oh, well, if the Nasdaq goes down 30%, will bitcoin also drop?” Yeah, bitcoin will also drop, but I think bitcoin is really doing its own thing. It's the greatest returning asset in the history of the world. It's up 250% annualized for the last 10 years. That's not total, that's annualized. No asset has ever had that kind of return profile. And let's say you have a 60/40 traditional portfolio. If you had put 5% of that portfolio into bitcoin six or seven years ago, the performance of the entire portfolio would have doubled. So you don't need a lot of bitcoin for it to have impact.
I also think one important thing is that there's $190 trillion of cash plus bonds out there in the world, and a lot of the government bonds, of course, are yielding zero, or let's just say less than 1%. At least in my view, I don't think those bonds act as the hedge that they did in years past. If the equity markets have a little bit of a wobble or if the economy slows, I think the bond portion of these portfolios—especially insurance companies that are sitting at 70/30 or 60/40—is not going to be able to hedge the drop, or at least the sideways movement in the equities. And that's the interesting thing since 1981.
That 60/40 portfolio has been unbelievable, because every time you've had a little wobble, your bonds offset your losses or your reduced gains in the equity portfolio. Now bonds really can't go below zero, and I think people are out there looking for other assets for alpha out there and also for other stores of value. There's no question that owning an asset with a negative real yield doesn't help you and I.
MassMutual’s purchase of $100 million of bitcoin in Q4 2020 to me was the most important, single execution of the entire year. There you have a very conservative insurance company saying, okay, they have $230 billion in assets. They probably have $30 to $50 billion of Treasuries or bonds, and they probably are looking for ways to increase yield, because they have all these liabilities coming up. I really think bitcoin, and I actually also think gold here, too. I think bitcoin outperforms gold, but I don't think you have anything that's as pure a hedge for a portfolio and is, of course, tremendously liquid. Gold trades $50 trillion a year, and bitcoin probably trades only $5-$6 trillion now.
I still think gold has a place in the world, a very important place. And I think institutions, by the way, haven't yet increased their exposure to gold. I do expect there to be a coming wave of institutional adoption. I know that's not the consensus feeling out there. A lot of people think, “Oh, bitcoin is replacing gold.” I don't see that at all. There's some overlap in their functionality, but bitcoin is really something, as I've just discussed, much bigger than just a hedge in a portfolio.
LOPEZ: How do institutions approach the value or the valuation of bitcoin?
TAPIERO: We look at it from a whole bunch of different perspectives. The one that I like the best is to look at the bitcoin network and, of course, all the other blockchains as well. There are plenty of other public and private blockchains that have different functionality. There are trade-offs with many of them. But this is a whole world that's growing up, and there are already 50-60 different cryptocurrencies that represent different blockchains that have a value over a billion dollars.
I think about what is the most decentralized network of value worth? If the internet that we use today is for sending information, what is the internet of money worth? It has to be worth more than the internet itself. So, what is the internet itself worth? You can put any number you want on it, but it's probably at least $4 - $5 trillion. That's a small number, because Apple is worth $2 trillion and Amazon's worth $1.5 trillion. And those are just single companies. That's how I think about it very conservatively.
There are people in the space who think that bitcoin could be worth $100 trillion. I don't think that's impossible. There are people out there that think bitcoin can get to a million dollars. I don't think that's impossible. But I think $300-$400 thousand is sort of my target, so that'll be around $5-$6 trillion. It'll be established, it'll be known, and then we'll go from there. But I think about it in terms of also, how much would it cost to build that network today, if you were a single company? And again, I think it's trillions of dollars. I don't think you could. I think it's non-replicable.
LOPEZ: In the decision tree for an institution in bitcoin, how much does government regulation weigh in on that? Have you had discussions with institutions about that or the potential for new regulations?
TAPIERO: Well, right now, we think the regulatory backdrop is pretty friendly in the U.S. The people at OCC and CFTC have quite a lot of experience with Bitcoin—I would say capital B, the whole concept of it. I think that they understand that this is a powerful new creative force, and they don't want to limit the growth in this world. But they also don't need retail getting blown out and losing tons of money, and it is still a very speculative world, especially outside of bitcoin and ethereum.
People always ask, “will the government ban bitcoin?” Well, I don't really see why they would do that. I think bitcoin and the entire digital asset ecosystem is potentially going to be a massive growth driver for our economy. I think it also has the ability to create new jobs. If I'm a democratic legislator worried about the unemployment rate at 6.5%, where new jobs are going to come from, and lots of jobs probably disappearing permanently, all of the companies in this space—and I mean all of them—are hiring people hand-over-fist. It's just very small at the moment, but it's growing tremendously. I think it has the ability to be an important part of our economy.
LOPEZ: Earlier, you talked about when you finally started to buy bitcoin after it fell like 85%, a few years back, and started to kind of walk into it. At prices now, $40-$50 thousand how should one think about getting started in bitcoin?
TAPIERO: I tell everybody the same thing, and that is: Do not try to market time bitcoin. The way you should do it is to decide on what you want to allocate. Let's say you want to do 5% of your overall portfolio. Then you put yourself on a program, and you say, “I'm going to buy 1%, every six weeks for the next X number of months.” That's sort of how I would do it. Now, I think when it gets to $300-$400 thousand, that's a little bit of a different proposition—like, I'd like to see how things develop. But at $30-$50 thousand, you still have quite a bit of upside, I think, that's there.
Remember, it's extremely volatile, and it's extremely emotional. It's a new asset that's just sort of finding its place in the world. But remember this: only 1% - 2% of the world have exposure. It is very, very small. If you're thinking about wanting to hold 10-20 years, can this go to a very large number? Yeah, it can. Look, I was reading something about NYDIG coming out with some insurance products that would use bitcoin as the base asset. As you know, historically, insurance companies have used bonds, but there's nothing there. There's no yield. If you tie an insurance product to the price of bitcoin, all of a sudden, there are a lot of possibilities. I think that'll be this year, and next year, we'll start to see interesting products like that from people who are at the cutting edge.
LOPEZ: Speaking of that, what's one long-term trend that you see playing out over the next year, or several years?
TAPIERO: I think something very interesting that institutions can play is this yield that is offered on digital dollars or digital euro, and this is the stable coin market. You could buy bitcoin through Kraken, and then take your bitcoin and lend it on the BlockFi platform and earn 5%-7%. I think that there's going to be an arbitrage that the institutional guys are going to start doing. They're going to borrow from the legacy world at 1%. So you go to a bank, and borrow at 1%-3%. You take those dollars, go to the digital world and set up a wallet. You buy some stable coin—you buy USDC from Circle or there are a bunch of different stable coins. And then you take that stable coin and deposit on BlockFi, and you can earn that spread.
I've heard people say that yield is the killer app for the digital asset ecosystem. I think that's a very interesting trend that hasn't even started yet.
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