Bitcoin is a hot topic! We had the pleasure of discussing the investment thesis for bitcoin on our Behind the Markets podcast with Ari Paul, the co-founder of BlockTower Capital, a crypto asset-focused asset management firm.
Prior to entering crypto, Paul worked as an options and commodity trader at Susquehanna and then as a portfolio manager for the University of Chicago’s endowment. His endowment looked for new markets in which professionals still were largely absent. When he entered crypto in 2017, Paul says that was the case. He would even argue today that “investment professionals” are still not meaningfully involved.
Paul sees tremendous risk in crypto assets, yet he sees these risks as idiosyncratic, uncorrelated risk that diversifies a portfolio and provides alpha potential.
Have Endowments Allocated Yet?
Paul believes 2 of the 10 largest endowments in the U.S. have direct holdings and 2–3 have invested into crypto funds. Paul hasn’t pitched endowments because he thinks that it’s such a fast-moving space, endowments will take a long time to come around. This could be a further catalyst of new demand for crypto assets.
History of Economic and Technology Cycles
Paul draws parallels from the railroads in the 1800s, early computers in the 1960s and the Internet in the 1990s—and how adoption trends follow similar patterns. There is a cycle known as the Gartner Hype Cycle, in which everyone views a technology as world-changing but gets the speed of adoption wrong.
In 1999, everyone thought everything would be bought over the Internet and all our interactions would occur online—which was correct, but it would take 20 years (and a pandemic) for this view to become reality. There was no infrastructure in ’99. We were all on dial-up modems, while less than 2% of the world had Internet access, and online credit card payments were difficult and not trusted.
Paul offers an analogy: Email came out in 1972. It took 20 years before the World Wide Web’s release and another 20 years before real scale came to both.
Bitcoin was launched in 2009 and is like email. Ethereum is like the World Wide Web—it came five years after Bitcoin, but it took about three years before real transaction volume occurred there.
But in the last 18 months, decentralized finance (DeFi) has taken off. Uniswap, a “decentralized exchange,” does $1 billion in transactions daily. There is also a budding art market referred to as NFTs (non-fungible tokens), and one standout is Top Shot, an official NBA collectible market (which did $30 million of transactions in its first two months).
Paul thinks DeFi will do insanely well over the next few years, but then there will be a rude awakening as to how long it will take for certain elements to play out, leading to a large drop in DeFi asset prices.
Bitcoin as a Medium of Exchange?
We also discussed use cases for bitcoin….