Welcome to Season 2, Episode 20 of Meet the Expert® with Elliot Kallen!
Investors looking to enter the "cryptoverse have a number of questions to address — whether to buy a lot of one currency, divide their money between multiple cryptocurrencies, or indirectly participate through an ETF.
Elliot Kallen brings on Parker Waldron, Partner at SkyBridge Capital, to discuss cryptocurrency as a long-term investment, who should invest in it, and how much to invest.
Meet Our Guest
Partner, SkyBridge Capital
Parker Waldron is a Merrill Lynch alum, former Financial Analyst at Viacom, and in 7 short years, has ascended from Associate to Partner at SkyBridge.
Parker holds a Bachelor’s degree in Political Science from Dickinson College.
What is crypto?
Elliot Kallen (EK): What is crypto? How do you define it? How broad is it?
Parker Waldron (PW): At SkyBridge, we’ve taken a pretty big stance in crypto. We’ve been fairly public with how we’ve adopted it and how we’ve grown, but it took us a fair bit of time to get into the space.
It is a very new asset class and it is still emerging, globally, in terms of how people use it and how people view it.
We started researching it about 4 years ago, started personally investing 2 years ago, and made our first allocation at the firm about a year ago. We have about $800 million invested in crypto, predominantly in Bitcoin. And it has grown substantially.
The History of Money
To understand cryptocurrency, we have to take a step back and look at the evolution of money as a whole.
In the earliest civilizations, we used to transact using the barter system. You and I would exchange goods and services.
Then, we evolved to a more efficient transaction system using currency, like shells, stones, and beads, to gold coins, and finally to paper dollars, and now to digital currencies. Digital currencies are now the most efficient way to transact.
Bitcoin was the first cryptocurrency, created in 2009. There are about 6,500 cryptocurrencies to date, and that number will continue to grow each day.
How does Bitcoin mining work?
EK: What is Bitcoin mining, and how does it work?
PW: A miner is not going out with a pick and shovel and going into a field and mining Bitcoin out of the ground; Bitcoin mining is all digital.
Mining is the way that Bitcoin is introduced into the open market, as well as approved on the blockchain.
This process is performed using sophisticated hardware that solves an extremely complex computational math problem.
In addition to introducing new BTC into circulation, mining serves the crucial role of confirming and validating new transactions on the Bitcoin blockchain. This is important because there is no central authority such as a bank, court, government, or anything else determining which transactions are valid and which are not. Instead, the mining process achieves a decentralized consensus through proof-of-work (PoW).
What is the blockchain?
EK: What is the blockchain, and how does it work?
PW: A blockchain is a database of information. Data is stored in blocks that are then chained together.
Blockchain is the digital ledger, or record-keeping technology, behind the Bitcoin network.
How secure is the blockchain?
EK: What we’ve seen so far is that everything is vulnerable to hacking or digital criminality. Can the blockchain be altered or destroyed?
PW: In terms of the broader blockchain security, if you look at the history of money and how that’s transacted, a trusted network is the #1 thing needed to maintain the integrity of that currency.
Based on the community of the blockchain, if 1 individual were to go in and change a single block, it would therefore trigger a change in every subsequent block in the blockchain. When cryptocurrency was created, it was designed in a way to prevent bad actors from altering the broader blockchain. You can see which block in the blockchain was altered, and figure out where the error or attempted error was made.
China made very big waves a few times this year. First, they banned mining. Then, they banned Bitcoin as a currency.
This isn’t the first time China has tried to ban Bitcoin. Chinese banks began to prohibit the use of digital currencies in 2013 and stepped up regulations after 2016.
We believe they’re doing this as they implement the digital yuan, but in our opinion, you can’t ban Bitcoin. Today, there are over 150 million individuals who own Bitcoin. When the user base of Bitcoin surpassed 100 million, you’ve entered peak velocity in terms of that network and that network’s growth.
Yes, China has banned Bitcoin, but there are still people in China using Bitcoin, and wallets in China that are actively holding Bitcoin.
One of the founding principles of Bitcoin is that an unregulated, decentralized, permissionless peer-to-peer network—meaning that a government cannot find or control that Bitcoin.
From a headwind perspective, we’re still pushing all-time highs.
Interested in investing in digital assets?
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Will there be a U.S. Digital Dollar?
EK: I’m a big fan of King Dollar. I want a strong U.S. dollar, and I want it to be the currency of the world. I know that China wants to take that over and become the currency of the world. Why is the U.S. allowing Bitcoin and other cryptocurrencies to exist?
PW: At SkyBridge, we would indicate that the digital dollar is coming out as well. We’ll continue to progress in that direction.
The U.S. won’t ban Bitcoin because:
- It’s hard to do that at this point. If they wanted to do it 5 years ago, they might have had a chance. There are 150 million people using Bitcoin globally, and over 45 million Bitcoin users are in the U.S. The U.S. base has already adopted Bitcoin and is using it widely.
- It’s not necessary to ban Bitcoin. If you look at Bitcoin as a network, we liken Bitcoin to the technological advancements making improvements in our day-to-day lives. If you look at some of the largest financial companies today, they are spending millions and billions of dollars evolving to compete with one another to allow cryptocurrencies into their platform. If the U.S. were to ban the Internet in the late 90s, they would’ve missed out on a massive economic opportunity. We believe the exact same storyline exists in Bitcoin today. They understand that Bitcoin has grown to a size where they need to embrace it and adopt it. And it’s great to see that the likes of Gary Gensler and Jerome Powell have publicly come out and said they would accept Bitcoin and work with it.
Similar to how the U.S. Postal Service and FedEx can coexist and provide different use cases for different individuals, the “digital dollar” and Bitcoin can also coexist.
What was one of the drivers behind the bullish case for Bitcoin?
PW: That ties back to the macro backdrop. Bitcoin was created out of the Financial Crisis in 2009. Currencies around the world today, including in the U.S., are being debased. And when you debase a currency, you are debasing the country. When you look at the U.S. dollar, we believe that roughly 80 percent of its purchasing power has been lost over the last 50 years.
In 1971, when Nixon removed the US dollar from the Gold Standard, we were no longer backed by anything. As a result, the U.S. dollar and the U.S. government could kickstart those printing presses.
Coming out of the global financial crisis of 2007-2008, you saw an acceleration of that process.
And again, coming out of the global pandemic last year, you saw a further acceleration out of that process; there was more money printed in June 2020 than there was in the first 200 years of our country’s existence. There are 38% more dollars today than there were in June 2020.
Traditionally, in this scenario, investors would look to hard assets — real estate, gold, other commodities — as a way to hedge out against that currency debasement. Bitcoin has emerged as a viable and useful allocation tool for that currency debasement.
Bitcoin can’t be devalued; there is no central governing body that can devalue what you own in Bitcoin.
What is the proper cryptocurrency allocation for a growth-minded investor?
PW: We’re guiding our clients towards a 2-3 percent allocation. There are others, such as Paul Tudor Jones, who believe anything shy of 5 percent is very bearish in terms of your allocation.
There are different ways to get exposure at this point. The most comfortable first step is through various fund structures, as opposed to owning the actual coins directly through Coinbase.
Cryptocurrency regulations are underway. How will this affect the outlook on cryptocurrency?
EK: Is regulation good? Warranted? Excessive? Or is it what we hate — more government intervention?
PW: Anyone considering an allocation to a cryptocurrency, regulation needs to be underlined and circled, and investors need to understand what lies in that regulation bucket.
There’s a big difference between regulation and overregulation. Overregulation is what Russia and India tried to do, and what China presently does.
Regulation is what the U.S. is currently doing, and it’s a good thing for cryptocurrencies. When you look at the institutional adoption of Bitcoin, the brighter the spotlight we can shine on the industry, the better. That helps conservative investors feel more comfortable in cryptocurrency as an investment.
Taxpayers are now required to disclose whether they invest in a cryptocurrency. The IRS is saying This needs to be a bigger part of our broader tax mandate. Look at how many U.S. citizens are participating in cryptocurrency. This is a big sign that the IRS is adopting it in that way.
In terms of the cryptocurrency adoption story, the retail demand is tremendous. You’re seeing that in a very big way. You’re getting 150 million users across the world, increasing by 1 million users each week for Bitcoin ownership. It’s a fantastic supply and demand mismatch, seeing as to how you have a 21 million fixed supply of Bitcoin.
The institutional side is where you can see a lot of momentum swing for any asset class. To add context, there are 3 major insurance companies today that invest in Bitcoin. There are 5+ college endowment funds that invest in Bitcoin. Of the 40,000 public companies around the world today, there are roughly 32,000 that invest in Bitcoin.
These are all positive signs that point toward cryptocurrency as a safe asset class.