Name: Balancing The Ledger: How To Invest In The Crypto Economy, Goldman Sachs Goes Bitcoin, and Andra Capital's Silicon Valley Coin
Uploaded: 2018-05-04
Duration: 12 min 5 s
Description: Chris Burniske, partner at venture capital firm Placeholder, and co-author of ‘Cryptoassets,’ joins The Ledger team on this week's episode.

[ MUSIC ] Welcome to Balancing the Ledger, where finance and tech intersect. I'm Jen Wieczner. I'm Jeff Roberts. And today we're joined by Chris Burniske, a partner at venture capital firm Placeholder and co- author of the new book Cryptoassets. Thank you so much for being here, Chris. Thanks for having me. So we have to talk about Goldman Sachs getting into cryptocurrency They've confirmed now officially that they are opening a Bitcoin trading operation to trade Bitcoin futures and other derivatives, not actual Bitcoin yet. But they say maybe that's coming. This is a big Wall Street institution getting into Bitcoin. Chris, is this a big turning point for the industry? I think this is more signalling of Bitcoin's legitimacy Goldman has built a reputation for itself certainly, over the decades and especially as a technology first investment bank and so the fact that they are venturing in to this new technology, this new asset class Is just indicative of what's to come, I think, from other financial institutions. But Chris, on a practical level, some people are pointing out, they're simply creating a derivatives product to help clients trade futures. So presumably, this will not introduce a bunch more liquidity, or have any kind of immediate effect on pricing? Yeah, I believe it's a non- deliverable forward And it's Goldman's way, at least I see it is Goldman's way of waiting into the space. They're not going directly to try and to custody physical BitCoin. They're not exposing themselves so directly to crypto exchange risk. They're working securitize puzzle pieces sort to speak, that fit into their existing. Financial infrastructure, while still offering their clients more direct access to Bitcoin. If I understand correctly I mean a lot of the price rise that we've seen so far in Bitcoin has actually largely been driven by individual investors, retail investors And so now having this institutional money coming in is this going to be the next leg up for the industry? I think institutions are important and there are a few questions that remain certainly right noow there is a regulatory overhang. People are holding their breathe to see what ball drops next with the SCC and CFTC there's also concerns around custody because As we just brought up, Goldman is not directly handling the claim itself. Tax ramifications, especially as you get deeper into some of the cryptoasset realm like staking, how do you tax those things? So there are as of yet unanswered questions that, as those are answered, you will have more and more financial institutions coming on board. With examples like Goldman as the earliest indicators. The other big news this week too was this firm called Andra Capital. They've raised $ 500 million for this tokenized venture capital firm. Their target, I guess eventually is $ 1 billion. So basically it's a cryptocurrency to allow people to invest in a venture firm, and then venture capital- backed firms. And the name, Silicon Valley Coin, I mean, come on. Exactly. It's a big race, I don't think of this as a crypto asset though. I think of this as tokenized ownership in a venture capital fund. And I think we're gonna see a lot more of this tokenization of existing asset classes, just as I think it was 2004 when we had our first gold ETF exchange traded fund, and that is just adding existing asset classes that have existing well known value drivers, But adding them to New World rappers. And so it's interesting. But I see it as incremental innovation as opposed to disruptive innovation. And speaking of venture capital, you've recently you've recently started Placeholder, which is your VC firm. Tell us a little bit about your philosophy for the firm and what you're looking for. Sure, so Placeholder is a venture capital firm that invests in decentralized information networks. Incentivize with a cryptoasset. And so what that means is although we are a venture capital firm, we are not focused on equity as an asset class, we are focused on cryptoassets as an asset class. Or what people commonly refer to also as tokens. Our north star is the developers, the reason we chose to do a venture capital firm versus a hedge fund is to create a ten year cocoon of capital So since it is a ten year committed capital fund, our relationship with our investors, our understanding with our investors is that we're not legally obligated to return the money prior to ten years from now. Of course we can return it more quickly should that happen. But what this allows us to do is ignore Mr. Market And really focus on the developers and the engineers and the projects that we support. And going to work for these networks. Some of our LP's include Morgan Stanley, Invesco, Aberdine and Standard. And of course USB, Foundry Group. So these are household names that are interested in crypto. Have waded into Crypto. And are further exploring the scene. Some of this sounds so familiar, Grant. We have. Traditional limited partners, we have something that looks like a VC. However, the part I can't get my head around is what's an exit gonna look like? In traditional VCs, after seven years, the company might go public or gets acquired and then distributes the cash to the limited partners. How is that gonna happen seven or ten years now on the crypto front? Well the interesting thing is, we get to choose when we exit and that is very different from a traditional. We see that focus is on early stage equity. Our thinking is we are a liquidity provider when things crash. We build our physicians slowly but with conviction over time. And then either when the thesis is played out, or we've lost our conviction in a team. Or maybe the whole market is irrationally exuberant and everything's up 10x marketwide, and we decide to wind down the fund. That's when we will exit. There are ways potentially, again, because these assets are liquid and it depends what happens with placeholder, where we can exit without selling. And that would be actually be transferring it to a separate vehicle. RLP's can then choose, well, do we wanna just continue to hold this? There's a lot of flexibility, and we just don't know yet. In your book, Cryptoassets, you've actually layed out a model for valuing some of these crptoassets. And we know a lot of people think bitcoin just trades on whatever the headlines are or whatever the hype is, what people are saying on Twitter. But you said that actually there might be some more fundamentals underpinning all of this. Part of the thinking with cryptoassets is that they are not businesses, right, and they don't have business models. They don't have profits. They are real single, or multi- good economies that deal in these digital services. So what I end up doing is I use an equation known as the equational exchange, which is mv = pq. Where on the left side of the equation you have m which is the size of a monetary base multiplied by v which is the velocity of that money, the number of times it turns over in a year. So say if you take, for example, the U. S. dollar. Monetary base of roughly four trillion right now. A velocity of roughly 5. That equals 20. On the right- hand side of the equation, you have PQ. P is the average price of a basket of goods offered by that economy, and Q is the quantity of goods. And together, that represents the economy. So again, for the U. S ., that's 18 trillion but approaching 20 trillion. And so those two sides need to match. What I end up doing, which is a little unorthodox, is I solve for the necessary monetary base of a cryptoasset, to provision an economy of size PQ at velocity V. And so that requires me setting up models that actually look somewhat like a DCF, if you were to just look at them from 30, 000 feet In terms of each year, I'm projecting out the price of the basket of goods, say, it could be file storage, transcoding, or bandwidth or whatever it may be. The quantity of that good to give me a dollar size of that economy, divided by a velocity of the cryptoasset. To let me know, okay, in that year, what does the monetary base need to be? How would this metric work as sort of a pure currency as like a Bitcoin or like a Litecoin? Does it apply equally? I'm just trying to understand the basket of goods in that case. It does apply. It's a little bit more fuzzy, say conceptually, in terms of the gooder services actually a currency. Money over internet protocol. But you can use, just for an example to break it down. If we were take remittances, say, remittances globally, I think is roughly $ 500 billion and if we say okay, of that flow Bitcoin will provision 10 %. That means there will be a flow of $ 50 billion. Using BitCoin's blockchain. So really the economy of BitCoin moving money as a service. And then if I say BitCoin's velocity is going to be ten, I divide that 50 billion by ten to get a monetary base of size five billion specific to that used case. But then I can do it for gold, I can do it for business to business payments. I can do it for all kinds of things and Stack these huge cases to get a network value for these assets. In the last year, the end of last year people were talking about, well, Bitcoin is in a bubble. It was approaching $ 20, 000, now we're a little bit under 10, 000. How do things look through that lens of the network value and the valuation metrics compared to where we were? Sure. The idea of a crypto PE ratio brings us into the relative valuation side, which can be instructive for where we are currently And so the common ratio used right now is called the network value to transactions ratio, where you have network value, which is really the number of coins outstanding multiplied by the price divided by the on- chain transaction value, and the reason we use the on- chain transaction value there so that's really the utility of a crypto network, again supporting this economy size PQ. Just as the utility of a company is to create profits that benefit the shareholders. And so if you look at this ratio, this NVT ratio, we were getting into bubble territory at the end of 2017. And so that was an indicator that things might be overheating, that the market is valuing BitCoin's network value, on a richer evaluation. Then it historically has given the transaction value. And we correct it and we're right now, at least the last time I checked, in a historical norm situation. Norm? So we're about average not relatively under- valued or over- valued? Around there. Around there. Okay, so there's no clear signal whether it's a good time to buy or not? Well, if you take say the average of theMVT ratio overtime, and then again it depends exactly how you calculate the numerator, how you calculate the deniminator, it's somewhere in the 80s So you can use that as a historical baseline. I don't know, Placeholder now being a venture capital firm, I don't focus on the day- to- day of the markets like I used to at ARK Invest. But the last time I pulled these numbers, it was just below that historical norm, which would say, okay then it's a little under- valued But I would caution people of reading into this indicators to much. It's still very early days for crypto. We have just about a decade of data, actually really less because markets really only started to come online and be robust with mount gooks, robust. And so we need more data. We need more historical norms. And I think a lot of a theory will conform to the fact as these network values persist as transaction values grow, we will just See these patterns in these ranges that these relative valuations fall into. That's all we have time for today. Thank you so much, Chris, for being here. Thanks for having me. I'm Jen Wieczner. I'm Jeff Roberts. And for more Balancing The Ledger, please come to Fortune. com. We'll see you next time. [ MUSIC ]

Chris Burniske, partner at venture capital firm Placeholder, and co-author of ‘Cryptoassets,’ joins The Ledger team on this week's episode.