Episode #70 Patrick Lowry of Iconic Holding & Cryptology Asset Group – Institutional Crypto Adoption, BTC ETPs, Bitcoin Mining and ESG, and NFTs

Patrick Lowry is the CEO and Managing Partner of Iconic Holding. Iconic Holding is a global crypto asset management group that started in 2017 with Iconic Lab, a global crypto VC and accelerator. Iconic also launched a series of crypto asset index vehicles under the Iconic Funds brand.
Patrick is also the CEO of Cryptology Asset Group. Cryptology is a Malta based investment company investing in crypto assets and companies around the world with portfolio companies including Block.one, nextmarkets and Iconic. Cryptology is the largest publicly traded holding company for blockchain companies and crypto assets.Previously, Patrick was an auditor at PwC and worked many years in private equity and in venture capital, most notably for the German stock exchange, Deutsche Börse. He holds an MBA degree, a BS in Finance and Accounting and a CPA license.

In this episode we revisit the crypto space. Patrick walks us through his first experiences in crypto, his view of the crypto winter and how it was to start a crypto company. We speak about institutional adoption of crypto assets, the future thereof, and how some instruments like BTC ETPs are structured. We then go into the widely discussed topic of bitcoin and sustainability of its mining, Elon Musk and his impact, and last but not least, Patrick explains NFTs and their use cases.

Links

https://www.coinbase.com/

https://www.kraken.com/

https://www.binance.us/en/home

https://twitter.com/APompliano?ref_src=twsrc%5Etfw%7Ctwcamp%5Etweetembed%7Ctwterm%5E1331559195603296256%7Ctwgr%5E%7Ctwcon%5Es1_&ref_url=https%3A%2F%2Fcryptotips.eu%2Fen%2Fknowledge-base%2Fanthony-pompliano%2F

https://www.anthonypompliano.com/

https://telegram.org/

https://podcasts.apple.com/de/podcast/blockchat-with-pat/id1508573590

https://bitriver.farm/en/

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TRANSCRIPT

EPISODE 70

[INTRODUCTION]

[00:00:04] ANNOUNCER: Welcome to The Wall Street Lab podcast where we interview top financial professionals and deconstruct their practices to give you an insider look into the world of finance.

[00:00:23] AVH: Hello, and welcome to episode number 70 of The Wall Street Lab podcast. I’m your host Andy, and my guest today is Patrick Lowry. Patrick is the CEO and managing director of Iconic Holding. Iconic Holding is a global crypto asset management group that started in 2017 with Iconic Lab, a global crypto VC and accelerator. Iconic also has launched a series of crypto asset index vehicles under the Iconic Funds brand. And Patrick is also the CEO of Cryptology Asset Group. And Cryptology is a multi-based investment company investing in crypto assets and companies around the world with portfolio companies like Block.one, NextMarkets and Iconic. Cryptology is the largest publicly-traded holding company for blockchain companies and crypto assets. Before, Patrick was an auditor at PwC and worked many years in private equity and venture capital, most notably at the German Stock Exchange, Deutsche Börse. And he holds an MBA degree and a bachelor in finance and accounting and a CPA license.

In this episode, we talk a lot about crypto. We’ve caught the second episode about crypto last couple of weeks, I know, but it’s an interesting one as well. We talk about how he got started in crypto. How he survived the crypto winter that is so famous. We talk about how to get exposure as a retail person and as an institution into crypto, for example, with a Bitcoin ETP exchange traded product. We talk about the very hot topic right now, Bitcoin and sustainability. We talk about Elon Musk. We talk about NFT’s. So it’s really cool episode to get you up to date with all the newest things crypto. And I hope you enjoy it, you learn something. And now, without further ado, my episode with Patrick Lowry.

[INTERVIEW]

[00:02:24] IP: Patrick, welcome to the podcast. It’s so cool to have you here. And I’m excited about today’s episode.

[00:02:31] PL: How’s it going, Andy? Always a pleasure to catch up.

[00:02:33] AVH: Yeah, I’m looking forward to see what’s going on in the crypto world. And before we start on where you are today, you’re now the CEO of Iconic Holding, Cryptology Asset Group. But where I know you from is from Iconic Lab. Is that how you started out in crypto? Or did it even start before that?

[00:02:50] PL: I mean, I guess you could probably say technically it started before that. I mean, just by way of quick introduction to myself, CEO of Cryptology Asset Group, as well as Iconic Holding. My background is in financial services. I used to be an auditor with PwC many, many years ago. Worked in private equity for a couple of years, moved over to Germany when I met my now German wife, and worked with the Deutsche Börse venture capital team.

For those of you that don’t know, the Deutsche Börse is the German Stock Exchange, or at least the flagship German Stock Exchange. And while I was on the VC team there back in mid to late 2016, I guess it would have been, some of the companies that we were submitting term sheets to, those that we thought were relatively interesting from the blockchain space, just because there’s a clear strategic crossover even back then for a stock market operator into DLT and blockchain technology, well, those companies rejected our offers for investments. They decided to do these crazy bullshit things called an ICO at the time, and that’s kind of where I threw my hands up in the air and said, “Okay, what on earth is going on?”

I mean, I was vaguely familiar with crypto at the time. I had a technologist friend back in 2014, 2015 told me about this cool thing called Bitcoin. I put like 100 bucks into it, lost it all. I guess it went down pretty significantly. I kind of just said, “Screw it. I’m out.” But then I started to become a little bit more intrigued as I started to deep dive into this space. So probably about like early 2017 or so, I was living in Berlin at the time running a VC fund, and a couple of guys were looking at these ICOs. They were looking at making some investments into these new blockchain protocols, even back then that the word coming out, these utility tokens they call them. I wasn’t necessarily convinced by them. But I mean, I was kind of intrigued. I wanted to learn a little bit more.

Being an American, I didn’t really have an opportunity to participate in any of them. But I started asking them – What’s actually kind of funny, we’re all sitting together at a bar that was called room 77, who was a blockchain bar in Berlin. It was one of the first places in the world. You could use Bitcoin to buy a beer. And we’re all sitting there and everybody’s trying to get into this one ICO. Only one of them ended up doing so, because I guess we just had bandwidth issues on the WiFi. And he was all happy. I asked him at the end, “So why did you actually invest in that token? I mean, what benefits do you have out of it? What does it do? Who’s the team?” et cetera. And he said, “Oh, I just invested into this because the team had LinkedIn pages.” I was like, “What? What do you mean they had LinkedIn pages?” He was like, “Oh, yeah, here’s the landing page.” And he was all excited about this, like he just hit the jackpot.

So he goes to the landing page. And it was just some generic WordPress, something rather talked about the token, said what it was doing, when the launch was. And then lo and behold, on the bottom, you had like four or five authenticated LinkedIn pages, right? I was like, “So you literally gave them 1000s of dollars because you knew the team? The team is on LinkedIn.” He said, “Yeah, normally, you never see people put their names associated with any of these token offerings.” And I’m just sitting there going, “Oh, my God!” As a VC, you look at these companies for weeks. You look at these companies for months before you ever even consider giving them money, let alone turning over a check, thousands of dollars, which I imagined wasn’t nothing for this individual just on a whim like that.

So I wasn’t necessarily convinced by ICOs in that regard. But I became fascinated by what that technology could unlock. Because in parallel with this back in 2017, I remember reading a Q1 report published by CB Insights that showed that the fundraising for blockchain companies, ICOs had raised like five or six times more than what was coming from VCs. So I fell in love with the concept of democratizing venture capital, and even more so fell in love with the concept of democratizing tokenized equity investments, that’s derivatives, etc. And that’s kind of always been my long-term view on the space that all assets will inevitably be tokenized leveraging this technology. So that’s actually where my partner and I we founded Iconic Lab, which is how you initially got to know us many, many years ago.

We raised our own token sale actually at the time. Very proud that we got our regulator to approve of it as not a security. They signed a no action letter saying it’s a utility instrument in their view, and we were off to the races. What ended up happening though is we invested in about a dozen or so companies, a couple token deals, a couple of different equity investments, and the portfolio performed wonderfully. I think we have something like six-five or seven MOIC on some of the investments that we’ve made in total within that Iconic Lab portfolio. So very, very exciting at the end of the day.

But what ended up happening is some of our, let’s say, larger ticket investors, they wanted exposure to blue chip crypto assets, so Bitcoin, Etherium, XRP, EOS, all that fun stuff, right? So I told them, “Okay, fine.” Before getting into the blockchain and the crypto space and not past life, I was an auditor at PwC. I used to do the audits of BlackRock, Vanguard, DFA, Dimensional Fund Advisors, private equity funds, I mean, all of those big asset management groups, right? So I told them, “Let’s watch an index fund group.” So we did. We launched an index fund group. Became regulated back in 2019, I guess it was at that point. We launched our first fund in January 2020. And it’s kind of just been smooth sailing from there.

I mean, even recently, under that Iconic Funds umbrella, we launched an exchange traded product physically backed by Bitcoin that is now trading on Deutsche Börse [inaudible 00:08:24], actually just happened yesterday as of this recording. So we’re very excited about bringing these more structured products, more familiar investment vehicles forward for qualified as well as individual investors. Making it easier to potentially gain exposure to what is the world’s best performing asset class over the last decade. That’s Bitcoin and crypto.

[00:08:44] AVH: I think that’s a lot of topics that we could dig into from here, but I would be really curious, because you’ve been fairly early, not super, super early into crypto, right? But then still, you’ve seen the crypto winter, right? I’ve experienced it myself. I got into crypto when I wrote my master thesis in 2016 and then like “Peeeeeeeeww Booog!” The big crash. How was it for you as an entrepreneur?

[00:09:13] PL: I mean, so I can’t say like I’m a crypto OG or anything along those lines. I’m certainly not, but I mean, I was there before that crypto winter, right? I remember the hype cycle of 2017. I remember the ICOs, the billions of dollars being raised, the 99% of assets that went to zero. The companies that were struggling and not just being kind of an entrepreneurs starting up Iconic Lab, which while it is an investment group, it was a startup investment group. Still is a startup investment group. I had some sleepless nights, obviously, but not even really so much for Iconic, for some of our portfolio companies. I mean, we probably made about 15 or so investments out of Iconic Lab. We’ve taken nine or 10 of them, I believe through series A. So we’re actually very excited with how that worked out. We lost like three or four along the way just because crypto winter – I mean, it came for all of us. It basically it was like what the others or the White Walkers from Game of Thrones coming in and just slashing the heads off of 99% of the crypto companies that were out there, right?

[00:10:17] AVH: Yeah, I guess then if 9 out of 15 made it, if you have to fight the White Walkers, I remember in Game of Thrones, it barely went well. So I think it’s a good ratio.

[00:10:26] PL: I mean, it was difficult. I mean, some of the companies had difficult fundraising. A lot of them ended up having difficulties in managing their assets. I mean, we invested Ether into some of the companies. We invested Bitcoin, just because that was predominantly what was on our balance sheet. We wanted to maintain a large crypto position. And what ended up happening is they just mismanaged treasury. A lot of ICOs actually ended up mismanaging treasury. So one day what you thought was $250,000 in Bitcoin ends up being only $100,000. And guess what? You now only have a burn rate of what? Two or three months, rather than the five or six that you thought you had to get to your next fundraise.

I mean, also difficulties around some of the applications that were being built. I mean, if you remember, these ICOs, these token sale projects, they were raising on the concept of a white paper. They hadn’t built out a business model quite yet. They most of the time hadn’t even built out a working prototype, an MVP, any regard. So a lot of them had difficulties actually executing some of the building of the platforms that they had out there.

I mean, ICOs kind of get a bad reputation, because everyone will point to them and say, “Well, these were worthless. A lot of them were security offerings that should have been registered. 95% of them were scams.” And while all of that kind of holds true to a certain extent, I do believe that most ICOs were by entrepreneurs that were genuinely good intentions. They just, A, either came into too much money too early and blew it. Or B, they really weren’t entrepreneurs, founders, that were worth investing in, either because they didn’t have the right business model or weren’t the right team to execute this, which is just part of the risk of a typical startup space. It’s just for startups, you have that bottleneck, you have that gatekeeper, that’s the VC, right? That it’s supposed to be their job on behalf of their accredited investors to find and source those up and coming founders and entrepreneurs.

And it’s kind of interesting to see the space evolve that we’re kind of still going away from that, particularly in DeFi over the last couple of months, if not a year or so, that these DeFi coins are kind of revolutionising what ICOs were to a certain extent. But even then, you still have name brand VCs that are involved in backing a lot of these, a lot of the big crypto players investing in them kind of pseudo acting as that gatekeeper, but still democratizing and decentralizing that wealth generation opportunity. So it’s interesting how that shifted a little bit over the last couple of years from the ICO craze.

[00:13:03] AVH: I mean, what I was thinking about is when you told me in the beginning, startups didn’t want your cash, as Deutsche Börse is VC. And suddenly they’re like, “Maybe it’s not such a bad idea to have a big brand name VC on their team just to give them some credibility,” right? Because maybe people got a bit worried if it’s just a typical ICO kind of scam. I think it’s harder to scam like a really hardcore due diligence VC.

[00:13:33] PL: That’s true to a certain extent. But it’s actually interesting how this ended up playing out. Because initially, yes, a lot of VCs out there, they would put a couple million into these token sales. But what ended up happening is those VCs, even if they didn’t just put it full on the token, it was typically a hybrid deal. So you would buy into the equity, and then buying into the equity got you allocations of the token either at a severe discount, or effectively for free, right? You were considered part of the team tokens, or whatever.

So the initial backing of some of those VCs was considered highly valuable for the markets when it came to investing in those tokens. But lo and behold, those VCs flipped the tokens, started liquidating immediately. They would make their 10x on the investment basically right out of the gate, and then they would hold on longer term to maybe some tokens just to see what the hell happened. And then they also had the equity investment. So then venture capital actually became a significant detriment to companies that were raising capital, because it was just naturally assumed that you’re just going to get dumped on by the big investor, the venture capitalist that happens to be behind that protocol.

I mean, you probably even remember, this was the problem that we were trying to solve with Iconic Lab and the ICNQ token, where anybody that invested in the ICNQ token or was holding the ICNQ token in their wallet, they had the right but not the obligation to Invest in ICOs that Iconic Lab was doing, but they got to invest in at the exact same terms that Iconic Lab did. So we pass through the good deals, the cheap deals on tokens that we got to our own token holders trying to kind of solve that VC issue of dumping the tokens.

Crypto winter hits. So that use case didn’t end up really going much of anywhere. We still have the token. It’s around and kicking. And we’ve built out other use cases for it that have been wildly successful. But that initial use case is something that we always really wanted to go back to eventually. But with crypto winter and VCs, not having the best of reputation when it comes to investing in some tokens, it was difficult from a narrative perspective to continue to push that narrative and that utility anymore.

[00:15:44] AVH: Yeah, I mean, it makes sense. It’s just the market is shifting, right? But now, let’s jump a couple of years ahead and look into after the crypto winter with more and more – I mean, I feel like every day I’m reading, UBS just opens trading desk. Goldman Sachs now offers crypto to clients. Can you bring us a bit up to speed? What’s happening here? Why are they adopting it right now? Is it market pressure? Is interest? Is it –

[00:16:16] PL: I’ve been having conversations with banks, institutions, high-net-worth investors, family offices for the last four or five years around crypto related topics. Of course, initially, it was predominantly met with skepticism. But if you met any trader, for instance, a guy from Wall Street, maybe he was doing credit derivatives or something like that, everybody loved the concept of Bitcoin and crypto, not because of its fundamental values, but because of its volatility, which is kind of counterintuitive. Everybody thinks that institutions don’t want in because it’s volatile. And for certain elements of an institution or a bank, that is true. But traders were chomping at the bit to get in. I mean, I’m pretty convinced that just about any Wall Street trader in their private time has been trading Bitcoin and Ether in the background and their bank just doesn’t know about it, right?

But I think the catalyst that really happens, and it was really kind of a perfect storm. I wrote about this last year.it was actually the COVID pandemic. I mean, obviously, with the COVID pandemic coming through, the economy lock downs, it certainly hasn’t been the easiest time for all of us over the last 12 to 18 months or so. But that pandemic couldn’t have hit at a better time for Bitcoin and crypto. And the reason being is because it became evidently clear that we need a digitized world. That we are at risk being together with one another. That is certainly true. And services and goods and financial services in particular need to become more digitized.

But the real catalyst was the timing of the COVID pandemic, particularly in Western society with the Bitcoin havoc. Because all of a sudden, you had everybody in crypto putting such a focus on this Bitcoin havoc. I’m sure you’ve probably talked about that on your podcast before. Should I discuss that really quick now?

[00:18:02] AVH: I mean, just as a refresher. I think it’s a good practice.

[00:18:05] PL: So the people that contribute to hash power to the Bitcoin network, we effectively call them miners. There’re the groups out there that are securing the network and processing all of the transactions on it. Any compute or node, we call it, that correctly puts together the next batch of transactions participates not only in the transaction fee, but what we call a block reward. And, initially, the block reward back 12 years ago, if you were mining Bitcoin, was 50 Bitcoin. So immediately it would show up in your wallet. You had 50 Bitcoin if you were the computer that effectively process the algorithm quickly. Then got halved to 25. It then not halved again to 12.5. And currently after last year’s halving event, the block reward is only 6.25 Bitcoin. And this was a mechanism built into this by the initial Bitcoin core contributors a long, long time ago that kind of created a disinflation rate for Bitcoin. So the supply of Bitcoin that goes into circulation over time gradually decreases, and this halving event occurs every four years.

Well, there’s a lot of study out there around what effect that might have on Bitcoin’s price. And in actuality, this is very standard market analysis that people that trade commodities will use when they effectively try to price gold, or oil, or silver, or anything along those lines. And we call it the stock to flow ratio or the stock to flow model. While there were certain people out there that started applying that to Bitcoin, because you looked at the stock of Bitcoin that currently exists in supply relative to the flow of Bitcoin into circulation, and at each step of the halving cycle, you see a clear correlation on a logarithmic scale that shows that Bitcoin always lockstep increases in price.

So what happens is in March and April 2020, and I remember this, because at Iconic we actually had an event on March 12th in 2020. We were doing an event in New York City. We had Fidelity there. We had Genesis Trading, Numero. We had people from Pantera that were showing up. I mean, bigwigs in the crypto space to sit on a panel in our New York event. Well, Donald Trump goes on television the night before, March 11th, and says, “Guys, we’re shutting down all flights to in front of Europe.” And that was kind of like the light switch, I guess, in most people’s heads or the light bulb going off as to, “Oh, shit, this COVID pandemic needs to be taken seriously, right?”

So the next day, we have our event, March 12th. I don’t need to tell you what happened that day. Bitcoin went down to like what? $3,500? Half of the crypto market cap literally got wiped out in one day. We call it Black Thursday in crypto, right? Bloody Thursday. And basically what happened is people started to really take COVID seriously. And then you have the halving event in April.

Now, the response that our governments and central banks have had to COVID has seemingly become just endlessly print money to keep our failing economies afloat. And they’re injecting that money. In some countries like the United States a little bit into the pockets of its citizens some fun helicopter money from Mr. Donald and Mr. Biden, but others are injecting it more into businesses. Others are injecting it into asset managers, BlackRock managers, like what? 5 trillion in their ETFs of the feds money, right?

So now you have Bitcoin being come known more as this digital store of value, this digital gold, because of that disinflation rate, that halving that continually occurs. And this comes in parallel with the largest money printing endeavor that we’ve ever seen in human history. For those of you that don’t know, money printing always, without question, ends up leading to inflation, and in some cases, hyperinflation. So now you have enterprises that are looking at their balance sheets that are sitting on significant amounts of cash are going, “Well, what the hell do we do with this money?” because nobody pays dividends anymore. These old legacy companies, they’ve even stopped paying dividends, just because that’s a tax event. People, investors, especially professional investors don’t want to receive dividends. They want the money reinvested into growth of the company, and then they just have their capital appreciation on the increase in share price or the increasing value of the fund they’re invested in. So you can’t give the money back to investors that creates tax and favourability. So what the hell do you do with it?

Well, you have Michael Saylor come along, the CEO MicroStrategy. And he says, “You know what? I’m tired of this shit. I have 500 million in cash. I’m putting it all on Bitcoin.” Lo and behold, he goes out and he buys $500 million a Bitcoin. It turns out it was a good strategy, because he then goes on to raise a couple billion dollars in 0% coupon convertible bonds predominantly from banks such as Morgan Stanley, just because these banks were looking for any opportunity to gain exposure, even if it was indirectly in through a company into Bitcoin. And what you’re starting to see is that really take hold in institutional and capital markets as well as for families. And even enterprises like Elon Musk’s Tesla, just because they see the risk of the pending inflation. Even just earlier this week, I think the first inflation numbers, the CPI came out in the United States, and it’s the highest it’s ever been since 2008 when we, God forbid, printed about a quarter of a billion dollars,750 billion. And that was unheard of at the time. We’ve now printed what? 7 trillion? And we’re surprised that inflation is starting to creep in. And we all know CPI is the biggest bullshit parameter for measuring inflation anyway. So the real inflation rates actually probably in the high single digits closing in on double digits. Just look at the price of lumber, right? So that’s kind of the perfect storm that has led to Bitcoin being where it is today.

[00:24:03] AVH: Okay. So, now even companies invested more and more and more. And with MicroStrategies, people tried to get exposure, but is that why also now more and more exchange traded products like the Bitcoin ETP and like those kind of institutional vehicles are coming up or are even companies are investing on like buying Bitcoin, Etherium and all those cryptocurrencies directly? Are you trying to get exposure buyer products? Like how is this entire market born of ETFs, ETPs, ETNs and all of that?

[00:24:42] PL: So, I mean there’s a big distinction between the European capital markets for this as well as the United States markets, right? There has been a push for instance in the US for a Bitcoin ETF for, oh God, the better half of the decade. I think the Gemini guys were doing it for some time. The Winklevoss twins. You have Bitwise, one of the ETF a while ago. FENNEC, they’ve probably been the strongest pusher for this over the last couple of years, and everybody’s been trying to push for this Bitcoin ETF.

The problem is, is that the SEC initially cited concerns around custody of the assets that that would be a risk for retail American investors, and therefore they flat out rejected Bitcoin ETFs. Okay, fine. Custody issue gets solved. Oh, no. Now the issue is actually market manipulation. We think that exchanges such as Bitmex and Bitfenix and all those other players that are out there are manipulating the price of Bitcoin with Tether. Let’s send the New York district attorney after them. And that’s our reason why we’re rejecting a Bitcoin ETF.

Well, that didn’t exactly work out for them, because Bitmex ends up kind of going the wayside a little bit. They replace Arthur Hays now. And Bitfinex basically becomes completely exonerated for any allegations around Tether, because guess what? Tether has always been legitimate. So now the SEC is kind of pushed up with their backs against the wall as to why they shouldn’t admit a Bitcoin ETF.

Now, US is based on common law, so they can cite precedent as to why their interpretation at the SEC means that they should be able to reject certain investment vehicles for Bitcoin and other crypto assets. And that’s perfectly fine. It’s their prerogative. That’s just how the SEC works. But if you look at this from an international perspective, over in the EU, the overarching governing law for securities, for exchanges and their trading is of course MiFID II. In Canada, you also have kind of the same phenomenon where these types of structures are not necessarily governed directly by common law, but rather ordinances and the regulators are not empowered to necessarily reject investment products for any reason.

So in Europe, you’ve had a couple of exchange traded products initially trading on multilateral trading facilities, MTFs. It’s kind of effectively a fancy word for an OTC desk that had Bitcoin and other crypto assets as the underlying, and those have been trading in Europe since 2015. The guys at Coinshare, I think they were the first ones to get this out over half a decade ago. And since then, you’ve had a couple of other groups that popped up out of the woodwork to issue these types of products as well. You have 21 shares.  You have FENNEC that got in the game, Wisdomtree, etc.

In Canada, you ended up having a group, 3IQ, as well as a couple of others that tried to push for a pseudo ETF. It’s not a pure ETF. It’s still closed end, but it’s an ETF. And the Canadian regulator initially rejected their ETF applications. What the guys over there did is said, “Okay, fine. You can reject it. But then you have to prove Bitcoin is manipulated. If you reject this ETF application because you say Bitcoin is manipulated, you as the regulator have to definitively prove that. Guess what? Canadian regulator couldn’t do it. So now you have an ETF over there.

Same phenomenon kind of happens over here in Europe, particularly around products that could be admissible to a regulated marketplace. The difference between the MTF and a regulated market predominantly being you have a CSD, a central clearing house in the middle. It’s considered a more trustworthy exchange environment to a certain extent as such. And you started to see a couple of regulators get pushed back on this. Why are you not admitting Bitcoin backed products?

And in Europe, you can’t do this through an ETF. Based on UCITS law within MiFID II, you have to have certain diversification requirements that are met. So you effectively can’t have a single asset ETF in the EU, similar to what you can do in the US. So you have to do this through what’s called an ETC. And the ETC is effectively – It’s an ETP, an exchange traded product. It’s used as an exchange traded commodity. An ETC in many regards. And this is how they built out gold, ETFs, over here in Europe. The flagship of course for this is probably [inaudible 00:29:08].

So a couple of groups out there, for instance, the ETC Group, Iconic, FENNEC and 21 Shares, we’ve all created similar products, ETPs, that we’ve now had admitted, regulatory approved and trading on regulated marketplaces now in Europe. So it’s kind of interesting to see how that has evolved over time, because now you have these historically trusted investment vehicles that are now backed by crypto assets that offer investors exposure to Bitcoin, to other crypto assets, without having to deal with the issues of custody and all of that complexity. Just because a lot of people aren’t familiar enough with the technology. They don’t know the difference between a cold storage or a warm storage custody solution. They don’t know what a multi-signature address is. So they would rather trust an asset manager.

Actually, there was a report that I think Cointelegraph put out towards the beginning of this year. And they said something like that region-based family offices, over 70% of them didn’t want to have Bitcoin directly held. They would rather trust an asset manager. And they were perfectly fine paying a management fee to a manager to properly and safely secure those assets on their behalf, which is kind of counterintuitive, because those in the crypto space, we always say not your keys, not your crypto. But from a practical perspective, a commercial perspective, you can see why that makes perfect sense for the lay person or for institutions, and especially institutions because a lot of them cannot touch Bitcoin directly for AML and compliance concerns. So this is where you’re starting to see a lot of those investment vehicles come out of the woodwork. You’re starting to see more innovative products start to be built in various regions of the world. There’re rumors that Hong Kong might have an ETF coming out in the next couple of months. Singapore has been working on similar products. It’s really exciting, because you’re really finally starting to see genuine adoption of Bitcoin and crypto as an asset class.

[00:31:09] AVH: Yeah, I think, as you said, it makes sense, because for family office, maybe they can get around some of the contractual restrictions not to buy anything that is not exchange traded. But many of the companies, many of the asset managers, wealth managers, they have literally like contracts in place that prohibit them to invest in anything that is not settled on an exchange or something like that, right?

[00:31:30] PL: It depends on the investor mandate. I mean, if you’re like an individual investor, if you’re like a single family office, and we’ve helped a couple of them set up their wallet structures, teach them what a cold storage solution is, help them which custody services to use, and we’re happy to set them up with Bitcoin or whatever crypto assets that they’re really looking at. But if you are like a multifamily office and you operate more like an investment manager, typically, you can’t just deploy directly to those crypto assets. There are certain restrictions, certain compliance mandates that you have to adhere to. Some families are comfortable with something that isn’t properly regulated and structured as a regulated product no matter what the underlying is. I mean, that’s why we actually have ETPs for gold, rather than family offices have a vault in their basement that they just put their golden, right? It’s just completely different.

[00:32:24] AVH: Could you go into a little more detail on maybe the difference between a gold ETP and the Bitcoin ETP, right? I think in gold, it works more like you buy the gold and you put it in a vault, right? And then how does it work in the crypto space?

[00:32:42] PL: So I can’t speak definitively to specific products, obviously, for compliance purposes. But in general, what I can say is this, if you have an investment in a gold ETP, let’s say that one specific note, because it actually is a debt instrument. In German, it’s called like [inaudible 00:32:58] or something like that. I’m pretty sure I just butchered that, but my German is horrible. So I apologize anyway. So let’s say that that note that’s trading on a regulated marketplace gives you the right to a bar of gold, a kilogram of gold. You can of course buy and sell that on a marketplace through your broker, through an online trading portal, etc. And you have the right to do so. But what you also have is the right to redeem that note. Go back to the issuer or go back to a regulated party and effectively say, “I would like to give you this note. Please give me the gold.”

And effectively what happens is you kind of go through hell. I have an investor that he did this just to test it and he wanted to see if he could get gold. So he did it. He redeemed the note. And it took forever for the gold to finally be delivered. Because the gold is sitting in like a Swiss mountain somewhere or like a regulated custodian just to be safe kept obviously, and it’s insured and all that stuff. So, I mean, relatively safe, but it took forever for him to get his bar of gold. He was furious.

With Bitcoin It works very similarly, but slightly different. So if you have a single note in an ETP, right? Let’s just say that note is worth half a Bitcoin for argument’s sake. So you can trade that on an exchange, on a regulated marketplace or an MTF throughout Europe. The note is cleared by Clearstream, and you can also, in lieu of trading on the exchange, you could theoretically go to a regulated counterparty or to the issuing entity depending on the nature and the drafting of the prospectus and you say, “I would like to give you that note. Please return to me half a Bitcoin.” And then the issuer gives you back your half a Bitcoin.

Now that Bitcoin at that point in time, similar to the gold, should be stored with a properly regulated custodian. So for instance, people will use Bitco. Other issuers use Coinbase. Other issuers use Fidelity. So trusted crypto custodians. People that are professionals at maintaining and safekeeping those crypto assets on behalf of the issuer, on behalf of the investors. So you kind of have the same quality and security assurances that you do with gold. It’s just that with the Bitcoin, because it’s digital, settlements occurs significantly faster. It’s not like you try to redeem your note for gold and have to wait a couple of months for your gold to show up at your front doorstep. But rather, the settlements can occur within one, two, maybe three days depending on whatever the disclosure in that perspective for that product is.

[00:35:43] AVH: It’s really interesting. I’m always fascinated on how those kind of new structures work. And I’d love to dig into that. Talking about things that are a bit newer, and I want to switch gears a bit, and I want to bring people a bit up to space on what’s happening in the crypto world right now. We’ve talked about the whole institution, the whole investment side going in, but there’s lately coming up more and more discussions about, for example, sustainability and Bitcoin mining. Do you have an opinion on that? Can you just maybe shed some light on where discussion come from and what’s your opinion on it?

[00:36:21] PL: So this discussion is now predominantly being used by individuals and reporters and journalists in the mainstream media. So people that typically spin the truth to begin with. I’m not one that believes in just about anything that comes out of the mainstream media’s mouth. And since you can no longer attack Bitcoin as being so volatile, you can’t create controversy with Bitcoin as being manipulated anymore. Well, the media has to create a new controversy so that they can continue to justify why people tune into their show or for clickbait, right? Sorry, for anyone that’s in the media out there.

So the media has come up with this narrative that Bitcoin is killing the environment, because it takes so much power to maintain the Bitcoin network. And people put out their statistics that show that, “Oh, to process a single transaction in Bitcoin is the same as to fly a plane around the world or something like that.” It’s complete and utter horseshit is what it is. All the power that’s contributed to the Bitcoin network on a continual basis is not just there to mine a single transaction, to process a single transaction or even a block of transactions, but rather all power contributed to the Bitcoin network is there to maintain a trillion dollar assets as well as a decentralized economy. So when you start thinking about it in that perspective, it starts to make a little bit more sense. It’s not just a processing of a transaction, but rather, it’s to maintain the hardest form of money in the world and the purest form of financial freedom that human beings have ever been able to create in our entire history.

So now you have the conversation around sustainability of how sustainable are our capital markets and how much energy goes into maintaining capital markets? How much energy goes into maintaining gold? And while there’re a lot of merits in those arguments, I don’t really like to use them. I prefer to use numbers to show how ridiculous this Bitcoin isn’t sustainable narrative is. So the amount of Bitcoin that is mined using completely sustainable and renewable energy sources is estimated to be between roughly 65% to 70%. So that means that we are using completely green energy for the vast majority of Bitcoin mining. And I don’t believe that there is any singular industry in the world that can even save something remotely to that level.

So I don’t really get where some people are attacking Bitcoin for its energy usage, especially considering the energy comes from renewable and sustainable sources. And then the second piece is this, what a lot of people don’t understand is that a lot of Bitcoin energy that’s contributed to the network comes from reserve energy. Because for instance, electric producers, people that generate power, they don’t just generate power purely based on what’s being used that day or what’s being used for that month. Power generation comes in fluctuations for those that are familiar with energy markets, and a lot of it is stored on grids. And that’s excess capacity, excess consumption available, that if for whatever reason there’s a natural disaster or whatever it may be, it’s sitting there for a rainy day effectively. And if it sits there too long, it dissipates. The energy just goes poof, it’s gone. Currently in the world, it’s estimated that we have roughly 50,000 terawatt hours of energy that is produced on an annual basis that is just not used. And this is energy that is produced using non-renewable resources, fossil fuels carbon, coal, I mean, whatever it is that you name it. So 50,000 terawatt hours of energy.

Bitcoin, on an annual basis, uses about 140 terawatt hours in total on an annual basis. To put that into perspective, human beings produce 50,000 terawatt hours to do nothing. Bitcoin is 140 terawatt hours, or 25 basis points, .25% of the total wasted energy to maintain the trillion dollar financial network that is the most significant accomplishment for financial freedom in human history. So when you actually start looking at the numbers, the logic behind Bitcoin not being sustainable doesn’t make any sense whatsoever.

On top of that, most mining companies are really working hard to become sustainable. Because if you can have sustainable renewable resources in a cost effective manner to use to mine Bitcoin, guess what? You have a severe competitive advantage over other Bitcoin mining facilities. And this is maybe one of the things that goes unspoken of is that the push for us to have true green energy, which while everybody is an ideal, we of course want to see happen. Everybody believes in this. It’s essential for the survival of the human race, especially for our planet, there has been a genuine lack of incentives to build this out, because those green and renewable sources are very expensive to harvest, very expensive to maintain that energy and very expensive to distribute that energy. Well, guess what? We just came up with the ultimate incentive, the ultimate capitalistic economic incentive to build this type of green sustainable energy, and that was Bitcoin. So I wouldn’t be surprised if in a couple of years from now we might look back on this and say the true catalysts for the global community to build sustainable and completely green energy sources was Bitcoin. And we’ll be thanking you for putting us in that situation, I believe.

[00:41:57] AVH: I think it’s a very important discussion to have. I haven’t read enough to like really have a strong opinion on that. But I’m wondering, just from a “capitalist point of view”, you said sustainable energy is more important to maintain, more expensive. Why wouldn’t I use as a Bitcoin miner? Why wouldn’t I use coal and like the fossil fuels? Why wouldn’t I use the sustainable versus the cheap fuels?

[00:42:23] PL: Also, some people aren’t doing that today, right? But if you have a completely renewable and sustainable source and you’re able to harvest that at a cost effective manner, that becomes more cost effective than coal. That becomes more cost effective than using fossil fuels over time. So that’s where a lot of research is being put into starting to tap into those sustainable resources. To give you a perfect example, there’s a company called Bitriver. It’s one of the biggest mining conglomerates up in Siberia. So they’re based in Russia. And what they did is they plugged all of their mining rigs, all of their HPC, all of their computer software, everything that they had into a hydroelectric dam, and that any excess capacity from that hydroelectric dam, which has a completely neutral zero carbon footprint, is used to mine that Bitcoin. So all the excess capacity that that dam produces that is not used by the citizens of that Siberian town or whatever it may be nearby is used to mine Bitcoin. And Bitriver just has a revenue share contract with the hydroelectric dam, and the hydroelectric dam is ecstatic because, hey, it’s free money for something that we’re producing anyway that’s going to go to zero regardless. And Bitriver has 100% zero carbon footprint Bitcoin mining. So it’s that type of facilities that is starting to come out of the woodwork. And that’s what I mean where I think that Bitcoin has created the ultimate incentive for private investors and capital markets to start really taking green energy generation seriously, just because before, you always kind of had the idealism versus the corporates that, I mean, didn’t want over regulation or something like that. Well, we might have actually solved that now, which is wonderful.

[00:44:09] AVH: But if it’s only running on overproduced energy, is it reliable enough? Or do they have to like, “Okay, well, actually, a lot of energy now was used by the dam. People are – I don’t know. It’s super cold. So they plug in their heaters. Or it’s super hot, so they plug-in their ACs.” And now the mining facilities, they don’t get enough electricity. Is this a risk or –

[00:44:33] PL: Well, I’m sure you can probably see a world where groups might just build their own hydroelectric dams to mine Bitcoin. You can probably see a world where groups will start building their own solar fields to mine Bitcoin. So what’s going to happen is you’re going to start to see this energy consumption, energy generation being driven away from the standard uses that you and I are more familiar with, but private institutions will be financing this type of research to build out cost efficient sustainable energy sources to effectively just mine Bitcoin and to mine other cryptocurrencies and for other uses. So it’s not just going to be the ones that we’re currently relying on to provide us for our utilities on a day-to-day basis. But I won’t be surprised within the next couple of years that we see the world’s first completely Bitcoin mining solar farm. I mean, why do you think Elon Musk tweeted about – I think it was just yesterday, right? He tweeted that they will no longer accept Bitcoin payments because of the environmental concerns around Bitcoin. Obviously, it’s completely bullshit. But I wouldn’t be at least bit surprised that in the background, because Tesla, while it is a car manufacturer, a real USP is the battery that they’ve created and the ability to conduct and generate electricity. Elon is going to have a mining farm. That’s just inevitably going to happen. Elon will be mining Bitcoin in a completely green fashion, and I wouldn’t be surprised to hear about that before the end of this year.

[00:45:58] AVH: Is it just going to be Bitcoin or Dogecoin?

[00:46:01] PL: Might be Dogecoin. I don’t know. I mean, Dogecoin is a perfect example of something that’s similar. Dogecoin runs on effectively the same proof of work concept that Bitcoin does. Dogecoin in that regard isn’t ESG or ECG, whatever the hell you guys call it, compliance. It’s not really going to be viable long term unless that gets solved as well too, right? And I wouldn’t be the least bit surprised to see that Elon is going to be mining Dogecoin in the future either.

[00:46:24] AVH: I’m curious to see what Elon will do. But we got to stay tuned definitely. Now, while I have you, I think there’s just one other topic, and I always love to talk with people in the industry, because I’ve no clue and I don’t like to read all about myself. So I’d love to have experts like you. What the heck are NFT’s and why is everybody talking about them?

[00:46:47] PL: So an NFT is a non-fungible token. To give you a little bit of context for this, so other cryptocurrencies that are not Bitcoin. Let’s use the second biggest, Ethereum as the example. Ethereum uses relatively the same technology as Bitcoin, except it enables what we call a smart contract. And a smart contract, you can think of as nothing more than a complex if then statements in Microsoft Excel that I’m sure most people are familiar with. And the smart contract effectively is deployed on Ethereum and automates the processing of a transaction.

Basically, if X happens, do Z. If Y happens, do X, right? And what people did with the smart contracts is they created tokens. That was actually what led to the ICO revolution a couple of years ago. People were able to create in their own smart contract any token for anything that they wanted. So what happened over the last year or so right now is people started creating what’s called non-fungible tokens, fungible being an economic term for being able to be traded against one another.

Basically, you want shares, you want assets to be fungible, stocks, bonds, whatever. Meaning you can trade it for dollars. You can trade it for other stocks, etc. And that’s actually one of the big use cases of tokens. But what a non-fungible token is, is a completely original, authenticated, indisputable, unique asset that is secured by that smart contract. Meaning that if it’s an NFT, there can and only ever will be one of those NFT’s. You can’t replicate it, because if you replicate it, it won’t be the authentic original anymore. You can’t really – and because it’s on the blockchain, it’s immutable, it’s auditable, it’s transparent, we know who the owner is. And it really authenticates the origination or the authenticity of any digital piece, any digital asset. So what happened is a lot of people started using this for digital art. People would create paintings. People would create original art pieces and would start selling them to retail investors, institutional investors, whatever they may be online, and that became a way for people to raise money if you’re kind of one of those young and starving artists. This really kind of came full heal when a very famous digital artists, Beeple, ended up selling one of his NFT’s for I think something like $69 million or something like that. The actual number eludes me. But he’s sold an NFT, an authenticated on-chain original piece that was all 500 original NFT’s collectively that he had done before. And that’s all for like $69 million.

Well, I’m not an artist. I don’t care much for art anyway. So I think the digital art aspect of this is kind of bullshit. The reason being is because, Okay, sure. Somebody can have an original piece of art stored on the blockchain, but I can have a screenshot of it? And it brings me the same pleasure. So I don’t get it from that perspective. But where I love NFT’s is when it comes to influencers and generating loyalty to influencers. So, for instance, Eminem, the US rapper. He released beats. He released pieces of some of the songs that he was writing on the blockchain. He released it as an NFT. And people were buying it up like crazy. So that’s an interesting use case. Because if you’re an influencer, if you’re a celebrity or a personal love with a public profile, you now have an ability to kind of monetize and give an opportunity for fans and individuals to become closer to you. They can effectively own a piece of you, right? So that aspect is actually kind of cool.

What I really love is the effect that NFT’s can have in gaming. For instance, you can have skins that are very popularly traded in, I don’t know, those World of Warcraft or Call of Duty or whatever games those are. Sorry. I haven’t played a video game since like Donkey Kong.

[00:50:48] AVH: Yeah, I know. All the skins in Call of Duty. I bet there’s like a ton of skins in Call of Duty. I don’t know. Maybe I’m making –

[00:50:54] PL: A perfect example, Fortnight. My nephews, they now play that Fortnight game, right? And it was so cool. It was so exciting because they were finally able to buy like a Spider Man skin. They were able to dress up their little fighting character as Spider Man and go off and kill Wolverine or something like that. And if you can create unique experiences with NFT’s, unique skins, unique in-game assets that people can own and then trade, and the scarcity of those assets are secured and the authenticity of those assets are secured on the blockchain, that’s a billion dollar industry effectively overnight. And you have people that are now building that out.

I saw one platform that they basically have an automated algorithm that creates NFT racing horses. And based on the certain skill sets of that unique horse, the unique skill sets of that individual breed of horse, it algorithmically determines how it might compete in a race given certain other external parameters. And then you can have the horses breed with one another that creates a new unique horse potentially, and you can sell those for Ethereum. You can sell that for legitimate money on the Internet. And you’re going to start to see this type of stuff come out of the woodwork over the next year or two. And NFT’s are probably one of the most fascinating case studies to see how this will evolve, because it’s so much more than digital art. It’s gamification, its uniqueness, its influencers. NFT’s might have the opportunity to touch about every vertical out there. Even NFT credit cards will probably be something that comes out of the woodwork in the future.

But this really kind of gives credit I think to the blockchain space. It’s not just a Bitcoin anymore. I liken it to the emergence of the Internet back in the late 2000s. The Internet went through its tech bubble, tanked. Hundreds of tech companies go under billions, if not hundreds of billions of dollars lost, right? But out of that came companies that survived that tech winter, let’s call it, that understood how to build good user interfaces, good user experiences, and good products and services on top of that new internet technology, that Internet protocol. Those ended up becoming the Facebooks, the Googles, the Amazons of the tech world, right? Now, the biggest companies in the world. Blockchain is doing the exact same thing literally right now.

The initial protocols were built and developed. We have Bitcoin. We have Etherium. We have BNB, EOS, XRP, all of these other protocols that are out there that have their own unique value drivers, right? Over the last year, you’ve started to see real use cases. Not just ICOs, but real use cases and real applications being built such that you can interact with an application built on Etherium on your phone and you won’t ever know that you’re actually interacting with a blockchain. You won’t care that you’re interacting with a blockchain, because it works the exact same way that all of the other protocols of the Internet work on your phone to begin with. And I’m really excited to see the adoption of these applications, because it’s going to be massive, not only for the adoption of crypto assets, but it’s going to be a very strong paradigm shift away from centralized economies into decentralized economies. No longer will you have an Amazon that can kick people off of their servers. No longer will you have a Twitter or a Facebook that can ban people because they disagree with them politically. The decentralized economy is at its precipice, and it’s going to be very interesting to see it evolve over the next couple of years.

[00:54:23] AVH: It’s going to be very interesting indeed. And for anybody that wants to prepare themselves for this kind of future, let’s call it, where can they get some resources? What should they start with? What should they look out to maybe as a wrap up for this interview?

[00:54:38] PL: The first thing I always tell anybody if they want to get their feet wet in crypto, you have to do your own research. You have to really understand the assets. You have to understand how Bitcoin works, how blockchain works, and you really need to understand how all of these different applications can be built on top of the blockchain, because it’s not just like you go and you download your finance app or your new social media app on your phone. And there’s no real economic value tied to it. In crypto, to become a part of a project, you have to invest money effectively. You have to save money, and you could lose all of that money. So there is that caveat to it. So you really need to do your research.

Some of the best resources that are out there for this, don’t go to crypto Twitter, and for the love of God, don’t go to TikTok. Whatever you do, don’t listen to those little teeny bopper influencers there that tell you to buy Dogecoin or whatever it is, because you’re going to lose everything. I can already tell you now. Go to the reputable sources. Go to Coinbase, who has a giant catalogue of wonderful material. Go to Kraken. Go to Binance, Iconic. We have a whole bunch of research reports that we’ve done so many different value drivers of crypto assets. We write articles every week about some of the new and emerging things that we’re seeing out there. Really go out there and consume this content and start to learn about it.

Follow Anthony Pompliano. Follow some of the prominent and trusted influencers out there and learn what they’re investing and learn what their thoughts are. From there, get into Bitcoin. Develop a portfolio. Become familiar with decentralized applications. Learn what Uniswap is. Learn what [inaudible 00:56:15] swap and pancake swap, and get involved with these projects. The best source for any of this is working directly within those communities. And the beautiful thing is, is that in this decentralized economy, you can go on to Telegram on your phone and instantaneously become a member of some of the communities that are building these projects. I mean, just don’t do Twitter, don’t do TikTok for the love of God. But yeah, just really indulge yourself. Dive in headfirst and don’t look back.

[00:56:45] AVH: Awesome. I think we’ve got enough homework. Me included. So don’t be like me. Just don’t try to start a podcast and ask people to get your knowledge. Do the research yourself.

[00:56:55] PL: Fair enough. Actually, oddly enough. You know I have my own podcast that I do with Iconic. I’ve been doing that for the last year or so. I find it interesting, because I wanted to do that, because we had to start having some influencers and other people in learning about what they were building on the platform. I ended up learning more about crypto, about projects that are out there doing that and speaking one on one with those entrepreneurs, those founders, or with industry experts than I did reading or doing anything. So it might not be a bad idea to go start a podcast and start interviewing some of these people. I learned more doing that than I have in anything else.

[00:57:32] AVH: Okay, then I revise myself. Start a crypto podcast and then you learn about it.

[00:57:37] PL: There you go. And I’d be happy to be your first guest if anybody takes that advice.

[00:57:41] AVH: Awesome. See? I already connected you with your first guest. Patrick, it’s been such a pleasure to catch up again. Hope to see you in person soon. And hey, all the best.

[00:57:50] PL: Much appreciated, Andy. Thanks for everything, and I look forward to seeing you back in Frankfurt.

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