WBD008 Audio Transcription
Why Bitcoin is Failing with Kyle Samani from Multicoin Capital
Interview date: Friday 16th March
Note: the following is a transcription of my interview with Kyle Samani. I have reviewed the transcription but if you find any mistakes, please feel free to email me. You can listen to the original recording here.
In this podcast I chat with Multicoin Capital Managing Partner, Kyle Samani. Multicoin Capital are a Cryptocurrency hedge fund and in this interview we talk about Kyle's view on Bitcoin and Ethereum and their investment strategy.
Interview Transcription
Peter McCormack: Hi there, Kyle. Thank you for agreeing to meet me to do this podcast. Looking into your background, you have a computer background and your first start-up was at 23, Pristine?
Kyle Samani: Started a few years ago.
Peter McCormack: Yeah, can you tell us all about that and what you learned from that?
Kyle Samani: Yeah, happy to, Peter. Thanks for having me on, super excited to be here. So, I studied finance at NYU and thought I wanted to go work on Wall Street. While I was in college, I realised that was not my passion. Started working for a company right out of college that built software for hospitals, electronic records, so I was really deep in the weeds of workflow of doctors and surgeons and nurses and stuff in a hospital. I wanted to quit and start my own thing and Google announced this cool new toy in 2013, called Google Glass. I just thought it was the most compelling piece of technology I'd ever seen at the time.
So, I quit and started Pristine in May 2013; I was 23 years old. Pristine built software for Google Glass for use by surgeons. We ended up branching out into a few other areas within the hospital and within the healthcare ecosystem, but we were building solutions for Glass primarily for surgeons. Grew the company to a few million dollars' revenue, grew to about 30 employees, raised about $5 million in venture capital and then Google pulled the plug on Google Glass. That was a minor problem for me. I ended up pivoting the company and ultimately exiting the company and found myself unemployed in January 2016.
I spent about two months playing video games and then I discovered Ethereum in March 2016, and Ethereum is what really drew me into crypto. In particular, I was really drawn to the fact that with Ethereum, you can't pull the rug out from under me, given my experiences with Google and the Glass project. That platform risk was a particularly painful experience. And because it was decentralised and open, etc, I was not really worried that anyone was going to pull the rug out from under me. That was a particularly compelling draw.
Peter McCormack: How did you discover Ethereum because my background, most people I ask how they first got into crypto, it's either Bitcoin or Doge unusually. But how come it was Ethereum, how did that come up before, say, Bitcoin?
Kyle Samani: I bought some Bitcoin, I think, back in 2013 or 2014, but I was running Pristine at the time and so I was, "Oh yeah, I guess all the tech people are doing it, so I'll do it too", but I really had no substantial interest and I was too focused elsewhere. After I finished with Pristine, I was unemployed and I was, "Well, what am I going to do with myself?" I was like, "Oh, there's this Bitcoin thing", and then I discovered this Ethereum thing, and Ethereum is what really drew me in in a more substantial way.
Peter McCormack: What is the reason for that?
Kyle Samani: I'm a developer by background and I'm pretty technical. Software is my thing, I love software and the opportunities to build things on top of Ethereum, I was, "This is cool". I had only ever thought of Bitcoin as basically value transfer and that's basically all it can do. There are some limited scripting abilities, but they're pretty primitive. Ethereum obviously is much more expressive and it was pretty clear to me there was a large design space of things to build on top of Ethereum. That's what got me excited.
Peter McCormack: What happened between then and starting Multicoin Cap?
Kyle Samani: Yeah, so I discovered Ethereum in March, started diving into it, learning. At that point, I was, "Okay, I should learn this Bitcoin thing too". So, I delved into the history of Bitcoin, how it works, the debates, the various people, the characters, ideologies in the space. Then Ethereum, same thing, really learned how the things works, started investing in the space at the time. And just over 2016, my interest kept growing every week and I spent more and more time on it. I was unemployed, so I had lot of time to spend.
Meanwhile Tushar, who's my cofounder at Multicoin, he's my best friend, and he was working, he was not unemployed; but every night, we would share notes and talk about stuff, whatever, and just literally get more into it. We started doing some early ICOs in late 2016, I think most notably Augur. We started mining Zcash pretty early on and then, by the time we hit May 2017, we just realised that this is coming to speed and so we decided to view what we were doing professionally and launch a fund. So, made the decision in May and the fund went live on 1 August.
Peter McCormack: Was that all your own money, or did you raise capital alongside it?
Kyle Samani: Yeah, so at first, we had some outside capital, our primary anchor, LP, or premier anchor investor, whose name was David Johnston, Founder and Chairman of Factom, who's been an amazing person to work with, super helpful, super informative and really great.
Peter McCormack: Factom's a great project.
Kyle Samani: I'm a big fan. It's under the radar, I'm a very big fan.
Peter McCormack: One of my friends who worked for Facebook and has got a background in tech, he said sometimes the best money is to be made from the under-the-radar, boring projects.
Kyle Samani: Factom is not sexy, it's not fun to talk about, it's pretty boring, it is really cool and solves a lot of big problems for businesses. I think it's a really, really big idea.
Peter McCormack: So essentially, you've set up a hedge fund?
Kyle Samani: Yes.
Peter McCormack: How did you go about setting up a hedge fund if you have no background in finance? Was there a big learning curve or was it just like throw yourself in there?
Kyle Samani: So, we have a little bit of finance background. Tushar and I met at NYU, both studying finance. He actually worked on Wall Street for a little bit, but he also started his own tech company, so definitely we were more tech entrepreneur-oriented than hedge fund or investment banking oriented; although we do understand that world and a lot of our friends from college obviously are deep in that world, so we have a pretty solid understanding of just how it works.
In May, we got started. The first thing we knew we had to do was get a law firm and get lawyers and stuff. We were also on a pretty tight budget and so we called up our friends. Conveniently, one of our friends from college, whose name is Fred, he started his own hedge fund, just value, long, short equities;he's like a Benjamin Graham value investor kind of a guy. And he was a much smaller hedge fund, a few million bucks, mostly his own money or maybe his parents, I don't know who else, but a small hedge fund. And we were like, "Can you recommend some lawyers to us?"
He pointed us to a few lawyers and we ended up going with a gentleman named Simon Riveles. He's based in New York. Simon has been fantastic, he ended up being great to work with, helped us through all the legal docs, the questions, the what are common terms, what are not common terms, how do we do all this weird crypto stuff. So, got all that together over the summer, fundraising and it went live 1 August.
Peter McCormack: You are exclusively crypto investments?
Kyle Samani: We do exclusively crypto. We only invest in tokens; we don't even invest in equity of crypto-related stuff.
Peter McCormack: Are you aware of any key issues that face a crypto hedge fund that are different from a traditional hedge fund?
Kyle Samani: Yeah, so the most obvious one is custodianship; that's by far the biggest. Beyond that, there aren't too many other differences; custodianship is real. There are other, I think, smaller things. So, for example, how do you mark the price of the assets, because these things trade on so many exchanges and the price is different, and typically Korea trades in premium to the US but not always. So, if you use Clearkmarketcap.com, for example, to park your prices, assuming you're based in the US, you're generally overstating your prices. But occasionally you're not!
So, how do you market is debatable. What exchanges do you use; how do you manage counterparty risk? There are more substantial issues in crypto than a traditional hedge fund, but given how volatile these things are anyway, even if you miss marks on them by 2% or 3%, if normal daily swings are 5%, then it doesn't matter. But custodianship is the big one.
Peter McCormack: Then in terms of strategy, what is your approach to investment? Are you making short-term investments or are your positions long? What assets are you looking at? Can you talk to me about that?
Kyle Samani: Yeah, I'd be happy to talk generally about how we approach the space. So, officially we're a long-biased state-agnostic crypto hedge fund. We will use shorts and derivatives occasionally. If we do, that's going to be on a shorter-term time horizon. I don't think we'll ever be short the market, although there may be exceptions. We have no formal mandate at all to be long or short or to have some USD balance. We do use USD and derivatives to get neutral or short exposure as we like.
Our primary effort and energy is really deep fundamental analysis and rigour. Both Tushar and I are technical, we've both been tech entrepreneurs, we've both built companies. We've done the dance: hire people, recruit people, raise money, do all these things. So, we like to take bold bets on big ideas that we think can change the world. We spend our time, for the most part, thinking like venture capitalists, but just exclusively within the crypto ecosystem.
Whatever we do invest, we invest on a multi-year time horizon, so we always invest aiming for big returns and that's going to happen on a longer-term time horizon. That doesn't mean we won't necessarily grow a standard portfolio. We will reduce exposure to the market generally, either through derivatives or using US dollars. But when we make an investment, we make that investment intending to be involved, active, helping the team, knowing what's going in the weeds for multiple layers.
Peter McCormack: Even when there is a huge spike in price, are you usually ignoring that and expecting a drop? Are you looking to be in things for years?
Kyle Samani: Yeah, we always have multi-year intended holding period. The keyword there is "intended", so things change. If you think about a traditional venture portfolio, once you invest in a traditional private equity company, your assets are locked up for basically indefinitely, right. But here, obviously your assets are liquid and so, if we get information that causes us to change our mind about a particular investment, then we can either size it up if we get more conviction, we can size it down if we have less, or if we have lost all conviction then we'll obviously reduce it to zero. Or if something else has come up and we're just, "This is such an amazing thing, we need to take this capital and put it somewhere else".
Peter McCormack: So, your fund is essentially a calculated bet on the success of blockchain crypto and that essentially, we're very early and this most likely will be a multi-trillion-dollar market; therefore, what's the point in trying to overplay the markets now when there's so much growth ahead of us?
Kyle Samani: We're very long-biased. We expect these technologies are going to change the world, create trillions of dollars of value. I take that as basically a given. But there's lots of things to do from there, so market timing being the simplest example, but picking the right horses, adjusting things accordingly and then being value creative. For example, I've been very publicly not a huge believer in Bitcoin anymore; I was at one point.
Peter McCormack: We're going to talk about that!
Kyle Samani: I have lost a lot of faith. If you just went long with the market in general, today I think Bitcoin represents something like 40% or 50% of the total market cap of all the coins. If you exclude, let's call it just the outright garbage, it's probably closer to 50% to 60%. If you were going to just go long in the market in crypto, you're getting a lot of exposure to it might be even half the portfolios in the wrong camp.
It's not to say we have zero Bitcoin exposure; we have some Bitcoin exposure, but our Bitcoin exposure is pretty small. We think there's way more alpha to be generated on other assets.
Peter McCormack: There is often talk by various people in the crypto Twitter universe, I can't remember who said it, maybe it's Barry Silbert, but there is a flood of money waiting on the sidelines from institutional investors. You obviously are mixing in those circles now. What is stopping people invest, traditional venture capital or family offices; are they waiting for regulatory change; are they dipping their toes in the water; what is stopping this wall of money coming in?
Kyle Samani: For the institutions, the endowments, the foundations, the pensions and the sovereign wealth funds, maybe less the sovereign wealth funds but they pay out at least some handicaps, definitely the endowment foundations and pensions, they just have very strict operational and compliance processes for things. Quite frankly, none of the crypto hedge funds are there in terms of that.
Custodianship is the obvious one, but there are all kinds of other operational things that we're all getting in place. For example, one thing is employee trading policies. It's pretty standard that partners shouldn't be trading and no hedge fund should be trading equities outside the fund, or at least not without disclosing that; there has to be some sort of disclosure compliance process. If the hedge fund GP goes up and signs up with Charles Schwab, for example, to have some sort of personal retail brokage account, then part of the onboarding process is going to say, "Do you have any ties or restrictions?"
But in crypto, none of the exchanges have anything like that. So, there's a bunch of just logistical things.
Peter McCormack: Almost like, if one of the funds was looking to buy, say Factom, which isn't the most liquid asset, but if they were looking to put a considerable amount of money in, they could move the market, they would be able to buy ahead; are we talking about they can buy ahead of that and get a low price?
Kyle Samani: Correct, right. There's all kinds of just operational challenges and there's no way to tie, for the most part, identity to whoever's backing those trades. Custodianship is by far the biggest but there's all these other procedural operational things that are just barriers for them. The family offices, it's their money, they can do whatever they want; they're learning. Some have been very aggressive and have got in in a substantial way. My sense is that under 5% of family office money in the country is in crypto. I think a lot more is still to come.
Peter McCormack: There's a lot of talk about Wall Street traders increasingly getting involved, maybe privately. Do you think there are different challenges for Wall Street traders in crypto that means they can't just necessarily join this market and start making decent returns? Are the trading of these assets a completely different mindset?
Kyle Samani: I suspect most guys approaching this who work on Wall Street in some capacity have a very different view than I do about the market and how to play it. They're really smart guys and a lot of them know and hopefully they're smart enough to know, either be passive and buy and sit; or, if they're going to be active, you need to have a strategy. If you know which your strategy is, you know how you're going to return alpha, then hopefully you stick to it.
There are a lot of guys who've been trained on quant stuff, who've been trained on just trading and market sentiment stuff, and those guys can probably make money trading in crypto. Maybe they will do it 3 hours a day and not 12 hours a day, but they probably can still do that and make money. That's not my area of expertise, so I'm not really qualified to riff about it much, but I'm sure those guys are doing it successfully.
Peter McCormack: The market volatility, is that a good or a bad thing for you guys?
Kyle Samani: I'd say overall it's good, because volatility is how you make money; you don't make money if there's no volatility. No risk; no reward. I'm very comfortable with it. It scares people. Most of the investors we speak with, the thing is, we're not asking them for 30% of their balance sheet, we're asking them specifically for between 1% and 5% of their balance sheet. And, at 1% or 2% you can just say, "Okay, I understand the volatility is through the roof, but it's 1% of my balance sheet, so that's okay". As long you size the position accordingly, then totally fine.
Peter McCormack: Is positioning difficult, because some of these assets are quite illiquid if you're buying too much at once; are you having to buy over multi days?
Kyle Samani: Yeah. It depends on the asset; it depends on the volume that day and stuff. But yeah, we have bought to be set up that we can cost average into our positions. We use OTC desks and we have connections around the space to buy things in dark pools.
Peter McCormack: There is questionably or arguably manipulation in the market. People often talk about the whales. Is this a good or bad thing, do you see?
Kyle Samani: Market manipulation is always a bad thing, full stop, no exceptions.
Peter McCormack: But isn't that what also then drives the volatility?
Kyle Samani: I think that's part of it, I think on the smaller assets, in particular. On the larger assets, I mean on Bitcoin, to move Bitcoin substantially requires a lot of money. Typically at that size, it's not a guy swinging around, it's typically an institution and institutions just have more regulatory risk and are more conservative, and so I think are just far less likely to engage in that kind of market manipulation.
Peter McCormack: Do you think people are then overstating the role of whales within Bitcoin?
Kyle Samani: In Bitcoin, yes. At current sizes, absolutely. Bitcoin doing anything between $5 billion and $10 billion is a normal day for Bitcoin. I give you $100 million and if you just go and put an order on the order book, a market order, of course that's going to move the market if you're stupid about it. But in general, if you are reasonably intelligent about placing even a $100 million order, you can get in over a few days and be totally fine.
Peter McCormack: As long as the market itself hasn't moved in those days.
Kyle Samani: It will move over the course of that time, yeah. You have to assume it will move long.
Peter McCormack: I've seen that you recognise it's a bubble. I put this, I think, to Laura yesterday, are bubbles necessarily a bad thing?
Kyle Samani: No, not at all. Bubbles encourage people to get into the space, develop intention and energy going into crypto now, from both the tech world and the finance world. It's an order of magnitude more than it was a year ago. So, if this technology is not going to change the world, you're going to need tens of millions of people putting their blood, sweat and tears into this to make it happen. So, I think that's good. There is substantial economic risk and you just have to, again, be comfortable with that risk and size accordingly.
Peter McCormack: I've also seen you say there will be a crash or a slight crash.
Kyle Samani: It seems likely to me.
Peter McCormack: Was that a correction? That would be a crash in stock market terms, right?
Kyle Samani: In stock market terms, certainly January, February would have been a crash. I don't think this was a real crash; this was a correction. I mean relative to December, I think we're still up something like 100% since 1 December, so it's pretty hard to say that the market's in a terrible state. I'd expect at some point there will be a very, very large drawdown. It will be a valley of disillusionment, if you will, but we're not there yet.
Peter McCormack: As I said to you in the email, "When do you actually sleep?" because I notice you're tweeting and emailing all night!
Kyle Samani: I think last night I went to bed at 11.30pm. I woke up at 4.00am for my flight, 4.30am for my flight. Normal day for me is five and a half hours.
Peter McCormack: I want to move on to the Bitcoin thing, because I don't agree but I can definitely see your point; I think I understand where you're coming from. You put out some pretty challenging stuff on Twitter and actually, I think people appreciate it because you're driving the debate, which is good. Too often, everyone's singing from the same hymn sheet; but you said, and people have misquoted you, you didn't call it dead, but you said it's failing. Can you explain why you think Bitcoin is failing?
Kyle Samani: Yeah. So, my view basically for all things in life and the world is evolve or die; you're either evolving or you're dying, and I don't think Bitcoin is evolving at any substantial pace. Not to say there's zero development activity, but it's not very substantial of the development activity that is happening. I believe quite firmly that it's pointing in the wrong direction.
Peter McCormack: Can you expand on that?
Kyle Samani: Yeah, so Bitcoin Core, the group, they espouse, they call it maximal decentralisation, maximal censorship resistance, etc. Their basic view is that you have to put this variable and optimise for this variable, or all the variables; and one of the variables you have to not optimise for, if you are optimising for, I won't even say decentralisation, but theoretical decentralisation, I'll come back to that in a second; but if you're going to optimise for a theoretical decentralisation, one thing you have to forfeit is scalability among other things.
My view is that we won't have just digital gold, I just don't think that that will exist. I think we will look back on that term as an anachronism of the times and a function of really just more of the political debate around what Bitcoin should be. To me, given the problems, I think Bitcoin's view of what it should or shouldn't be, my view of what Bitcoin Core's views are, is that they're incorrect and just heading in fundamentally the wrong direction and the pace of evolution is far below what it needs to be.
Peter McCormack: In your eyes, what is missing?
Kyle Samani: I read a post about a week ago or a few days ago and it's titled, Models for Scaling Trustless Computation. It's long and it's pretty technical and involved, it does assume a pretty substantial knowledge in the space. But basically, my view is that store of value, just as its own thing, in and of itself, will not sustain in the long run. There are lots of smart people who disagree with me, and I respect a lot of their opinions as to why they say that.
I just think on a long enough timescale that you will have good stores of value that are censorship resistant that are trustless, permissionless, censorship resistant and are useful and have utility in that world where those things exist. I just don't see a place for Bitcoin, which basically is only censorship resistant.
Peter McCormack: Are there any assets out there you believe are achieving that right now?
Kyle Samani: I think there are assets today that have very credible claims to make, that they're on a path to achieve that and be superior to Bitcoin in achieving that and basically all respects. I don't think there's one today I can point to saying unliterally it's better, but I just look at the road maps for these things.
Peter McCormack: Can you point to any that you consider are in the mix?
Kyle Samani: In my post, Models for Scaling Trustless Computation, basically everything else in the post other than Bitcoin I consider to have a better shot at it than Bitcoin, primarily because these teams are willing to try out other things, they're willing to approach new models, make new sets of trade-offs and explore new design bases of things that can happen from there. The Bitcoin view I find to be extremely myopic.
Satoshi Nakamoto was obviously brilliant and came up with a very compelling new way to think about the world and technology and no questions asked, was a huge breakthrough. But I also find it basically impossible to believe that was actually the best and right model, now that we've had our mind opened up to this new design space of ideas, of thinking. I find it almost impossible to believe that's the case.
Bitcoin's view is basically they will not change any of those -- none of the core views of Bitcoin have changed really since inception. I think the design space to do new things is very substantial and we will ultimately find systems that are basically unilaterally better on all fronts.
Peter McCormack: You often talk, and it comes through on a lot of your posts, that you're not really a fan of decentralised governance. You essentially believe there are leaders and there are other people who aren't leaders and there are also very strong leaders, and I think you put out a guide to hiring CEOs from one company.
Kyle Samani: Andreessen Horowitz published something four or five, six years ago called How Andreessen Horowitz Evaluates CEOs. I tweeted that out I think a week or two ago.
Peter McCormack: I see what you're getting at and actually, even though I'm a fan of Bitcoin, I understand what you're getting at, because sometimes you just need somebody there to make a decision. Ethereum has Vitalik who can make a decision. I discussed this with Charlie Lee yesterday in that Litecoin is able to move faster and quicker, because he is essentially the leader and he can make decisions. And against Bitcoin Cash, Bitcoin never had an individual who could fight back against Roger Ver; so, I see what you're getting at.
Do you think decentralised governance is actually holding crypto back and it's a utopia that isn't required?
Kyle Samani: I think I can demonstrate quite empirically that that statement is true, that decentralised governance to the capacity it exists today does hold it back. I would argue the only projects today, there's maybe up to three that have some notion of decentralised governance, and those are Bitcoin, Dash and maybe Decred.
I know that Bitcoin is probably the most decentralised and, if you like, for example, Dash and Decred, they both have formal notions of on-chain governance and voting. But I find that within their respective communities, most of the thought is very homogenous and is overwhelmingly inspired and shaped by the foundations that shepherd the projects forward anyway. So, although they have this knowledge decentralisation in both Dash and Decred, I don't think that in practice, there's any substantial decentralisation of governance, although the systems theoretically allow for it.
In the case of Bitcoin, you very clearly do, because you have this clash between Bitcoin Core, a number of smaller basically underused implementations, as well as miners and there's the community at large and exchanges; and very clearly, there's multi-polar divergent views on what to do and how to manage the thing. It's very clear the one thing you can say without any doubt is that as a result of this, Bitcoin evolves much slower than everything else. We have massive amounts of evidence to support that.
The most obvious example recently is SegWit. People made a big fuss about SegWit, they thought about it for a long time and eventually it got implemented, I think, in what was it, August. I think today, it's been six, seven months, Bitcoin has I think 15% or 20% of transactions leverage SegWit, so the system just obviously evolves incredibly slowly.
Peter McCormack: Is there an argument though that moving slowly supports anti-fragility?
Kyle Samani: That's an argument I just flatly don't buy at all.
Peter McCormack: Okay.
Kyle Samani: Again, like on the short-term time horizon, that statement is probably correct. On any long-term time horizon, I think it's evolve or die. It always comes back to evolve or die. Bitcoin clearly does not evolve at a reasonable pace.
Peter McCormack: You're clearly a capitalist and the roots of Bitcoin are libertarian. Is that a clash? Is that potentially why you are approaching this like a capitalist, saying, "This is a project, it needs to make money, it needs to move" and they're the kind of projects you're interested in: money, revenue-generating, profit-generating, capitalist projects?
Kyle Samani: No, I understand that the whole point of crypto is to have systems where there is no middleman attracting rents which would be the "profits" you're speaking of. I fully bought into that and by definition, if you look at our portfolio, our portfolio is if not 100%, is overwhelmingly projects that don't have an explicit profit motive in terms of extracting rents and charging fees. So, I'm very onboard with that vision, I believe it will happen.
It is harder to make money in this new world and how you think about incentives and value capture and these kinds of complex issues. But I'm very much a capitalist, I think Bitcoin is very aligned with the capitalist view. It's just a very disruptive traditional notion of human organisation.
Peter McCormack: Does decentralisation matter, or where does decentralisation matter in this; or is it just an overused term?
Kyle Samani: It does matter. Decentralisation (a) there's multiple lenses through which things can be decentralised, but (b) in and of itself is not a means; it is only a means to other ends. So, some of the other truly valuable ends are things like trustlessness, things like having a neutral database, things like being permissionless, things like censorship resistance. Those are the four major buckets of things and they call it killing the middleman. So, decentralisation is a mechanism to achieve those kinds of ends.
How you prioritise them, how you measure decentralisation, there are different ways to do it, but it doesn't matter.
Peter McCormack: But not in all projects. Some of these projects could be achieved without decentralisation?
Kyle Samani: A substantial majority of tokens probably don't need to be tokens.
Peter McCormack: Right, okay. I saw you tweet out about Tezos a few times, which feels like a good place to -- it's not a project I'm actually that close to. I didn't get involved in the ICO, I have seen a bunch of drama based around it about the husband and wife and their involvement. I have seen about issues recently with somebody just left. Sorry, I've forgotten his name.
Kyle Samani: Johann Gevers.
Peter McCormack: Yeah. What's your view on Tezos because a lot of people are bullish about it and a lot of people are bearish, there doesn't seem to be a middle ground?
Kyle Samani: So, I'm in the bear camp.
Peter McCormack: And you're very outspoken about it.
Kyle Samani: In general, I think if we have a goal, a money thing worth trillions of dollars that impacts people all over the world and diverse countries use, in that state of the world it makes sense to have some notions of decentralised governance. There should definitely be an endowment or foundation that's the primary benefactor or the primary shepherd of that ecosystem, and there should be some notions of accountability and control. I believe that generally should be the case. I think we are in no way today close to that state of the world and I think right now, even playing with those ideas is a waste of time, because of the opportunity cost of everything else that you could otherwise be doing.
So, Tezos's claim to fame; there are a couple. One is a very strong focus on on-chain governance. I don't know the details of the project, but from what I understand it seems to be pretty closely either a direct democracy or a liquid democracy type of structure where basically, there's people who propose proposals somehow, somewhere, people who own tokens. Well, anyone can go look at those proposals and then you can basically vote based on your stake of ownership of the tokens. So, it's pretty oriented around a direct democracy, or at least it has a lot of inspiration from direct democracy.
I just think that is not very interesting relatively. If you have a benefactor and a benevolent dictator shepherding the ecosystem forwards, all of that complexity, all of that slowness, all of the decision-making can just be expedited on the order of probably 10X to 100X faster.
Peter McCormack: Is there a risk also that people are voting on decisions they don't understand?
Kyle Samani: There's those risks too. I actually think there are risks of toxic political campaigns, trying to manipulate opinions and all these other types of things too. But just fundamentally, if you have the technical expertise and the wherewithal and the competence to launch a blockchain project, which is no small feat, and get millions of people using it and people building apps on it and doing all these things, if you have the wherewithal to do that, you are in the top 0.001%, I don't know some very small percentage of the world.
That doesn't mean you are always right, that you're always the best, but that does mean you are extremely capable and you should synthesise feedback from your community, you should talk to your employees, to investors around the ecosystem, you should solicit feedback, be very honest and then make decisions and move forward.
Peter McCormack: One of the things I was trying to think about is examples in the real world where there are some forms of decentralised governance and where it has or hasn't worked. It might be a poor example, but I keep looking at the UN. You've got a bunch of countries with voting rights and decisions hardly ever get put through because of different political reasons. To me, that was the best example I could see of failed decentralised governance. Do you see any similarities with that?
Kyle Samani: I'm not terribly familiar with the UN or its structures or its history, so I'm not really qualified to comment on it. I will say that has drawn capitalism generally. The world and capitalism in particular is oriented around the concept of you as a person can do whatever you want. There's bounds obviously, like free speech and violence and stuff, but otherwise you can do whatever you want and go try and change the world, or you can sit at home and watch Netflix all day. Wherever you want to fall in that spectrum, you can choose to fall.
The thing about capitalism in general, capitalism is extremely inefficient structurally and yet it produces the most amount of innovation. So, when I'm talking about inefficiency, what I really mean is -- people are directly competitive, right; there's Google and Bing and DuckDuckGo and ten other search engine thingies, whatever; and there's right now ten different projects working on decentralised governance; and there's ten different decentralised exchanges and whatever. But there's all these people who have at least somewhat of the same general vision and they're all directly competitive.
In an "efficient world" wouldn't it be nice if those ten groups of people all got together and weren't competing and you got all those brands in one room and had them work on it together. The problem, of course, is that we don't actually know what the right answer is, and so you need to let things be competitive and play out. So, my view with decentralisation, and coming back to decentralised governance is, why should I as an individual even bother to try and vote on these kinds of issues or have some substantial say? Why not have just more projects in the world competing and putting forth ideas and letting the world vote with its dollars?
So, basically I think decentralising at the project level is just the wrong place to decentralise. I'd much rather just decentralise at the portfolio level. This is the same thing with your portfolio in capitalism. One company shouldn't do everything; a company should specialise and do what they do and then investors can choose where to put their capital.
Peter McCormack: I understand, yeah. Just back to Tezos though, you did also say you wouldn't invest in it.
Kyle Samani: That's correct.
Peter McCormack: I think that's more to do with the chaotic unprofessional operations as well, or partly to do with it.
Kyle Samani: That's, to be fair, hindsight bias.
Peter McCormack: But the question I want to go with is, why is it in crypto, these crypto companies seem to have this ability to operate with such chaotic, unprofessional structures; whereas in the private equity world it just would not happen? Why are they getting away with this?
Kyle Samani: It's purely a function of non-professional investors. Professional investors, if you're going to a capital firm or a private equity firm and your full-time job is and has been to evaluate companies, there's very vastly developed pattern recognition on things to look for, things not to look for, what do good teams generally look like at least, what are not so competent teams, etc. There are people who are wrong, there are lots of people who missed Airbnb, there are lots of people who missed Uber early. I'm not saying these guys are all perfect and right, but generally there's things that you look for in terms of team and idea and whatever, etc.
The problem is with all the retail investors is this is not their job. If you've ever been pitched to 300 start-ups, it's much harder for you to really assess what is good, what does a talented CEO or project really look like? What does a talented CTO look like? What is a go-to market, what are the even general tools available for go-to market strategies, and which ones might or might not make sense to employ here? All of these are just pretty elementary questions around how we evaluate things. I've been doing this for a long time and I've talked to 100 if not 1,000 of other investors who also do this professionally. If you're, "Oh, yeah, I was on the internet for an hour last night and normally I'm a lawyer or a doctor" your fundamental scope is orders of magnitude less complete.
So, you have all this retail money, this dumb money sloshing around, you have ideas that at least on paper sound interesting, you have teams that do at least a reasonable job of communicating them and getting them out there, and then everyone just shouts about crypto. Put that together and you can get tens of millions, maybe hundreds of millions of dollars into something that in the private equity world would no way get that, receive that kind of capital.
Peter McCormack: Especially without some form of mentorship that comes with private equity.
Kyle Samani: Yeah, border control, governance, but also just experience. And obviously, once private equity investors invest, if they're putting millions of dollars of their own money on the line, obviously they have some fiduciary responsibility to their investors, and not in all cases, but in most cases roll their sleeves up and help out and get involved and open their Rolodex and whatever else they can do. But if you just invested $1,000 off the street into Tezos, there's no right, there's no value there other than the capital itself.
Peter McCormack: So actually, is there a potential there, because there's been an increase in pre-sales and pre-sales to institutional money, which has seen various commentary on Twitter saying, "This isn't fair, this was a chance for retail", but actually is that going to potentially bring more professionalism into these?
Kyle Samani: The space is professionalising very fast, very fast. I think every venture capital firm in Silicon Valley today has someone who's had an affair with crypto and are working on it more or less full time, if not more than full time. So, that's happening. All the VC firms obviously have capital and they have Rolodexes and general operational know-how to be value creative. They're seeing start-ups go talk to them. 18 months ago, if you were a start-up and had some crazy crypto token idea, the VCs were, "This is nonsense" and they wouldn't talk to you. Now, they're dying to talk to you. So, that's happening.
A side product of this is that retail investors are getting less opportunity to invest in the highest quality projects. It's just a fundamental function of market dynamics and the best entrepreneurs want the best investors and the best investors don't want to write the $1,000 cheques, they want to write $10 million cheques.
Peter McCormack: With that, you also mentioned the bar. You set the bar pretty high, right, because the bar is pretty low?
Kyle Samani: I'd like to think so, but feel free to disagree.
Peter McCormack: I'm just thinking, has a bar even been set yet, right? Do we have any real proven successful projects out there we can point at and go, "This is a success; this is proven; this is working"? Even with Ethereum, if we ignore market cap, it still has proven to have certain scalability issues, which are being solved; I'm not questioning that. But do we have a bar that's been set yet?
Kyle Samani: Yeah, in terms of the general operations and such, there's a bar and there are great teams. 0x comes to mind. They've been very professional, they have never over-promised, they have never tried to go just raise money for the sake of raising money. They've delivered, they're a great example and they exceeded, they crossed that bar. I disagree with certain things and that's okay. I talked to them about it and they considered my opinion and our dialogue continues. If I choose to invest in 0x or not, I can invest knowing that I disagree. Maybe I'm wrong, maybe they're wrong, I don't know. But at least as an investor, I can make that assessment and then manage that accordingly.
Peter McCormack: What's gone right with 0x then?
Kyle Samani: Most things.
Peter McCormack: In terms of what are they doing right? Is it just the quality of the team?
Kyle Samani: They're very humble, they're just good people to get started with. They are frugal, they're not being wasteful with the capital they have. They're saving a lot of money and they're not burning it in stupid ways. They engage the community; they communicate with people. They aren't trying to just pump up their token price and do other kinds of shady behaviour. They're a platform on which other people build and it's very clear that they are engaging those parties and are working with them and helping them accelerate those things. So, they're doing lots of things well.
Peter McCormack: Okay, so let's move on to Ethereum. You're a big fan, I'd love to know why. You'll probably go into all kinds of technical details that I don't understand; I've done my best. But I'd love to know why you're so bullish on Ethereum.
Kyle Samani: Yes, so basically at the most simple level, evolve or die. Then other meta-view is you could have programmable money or not programmable money. I believe you should have everything be programmable if it can be, at just the most simplistic level. Beyond that, the Ethereum team and the vision, they are incredibly audacious. They have huge vision; it is a truly global vision; I think it's as big as you can think, given what they do. And they are trying to do things that are basically considered impossible. They're not proven to be impossible but they, on paper, may be impossible and they're going after it. They might not get it perfect but they're trying and that audacity I find extremely compelling.
The team has got some of the smartest distributed systems; people in the world are working either directly for the Ethereum Foundation or around the Ethereum Foundation. They're getting some of the best folks, the best brains and they're going after it.
Peter McCormack: What are the risks associated with programmable money? We know we've seen smart contracts neutralised, hundreds of millions deleted. Actually, I heard an interview with Olaf Carlson-Wee where he was saying, there's a real difficulty with hard forking to roll back these transactions, because should the blockchain be immutable, but really there's no loss for this money coming back; they're only recovering funds that have been not even stolen. What kind of views do you have on this area of risk and isn't this a big risk for institutions to start using smart contracts for programmable money?
Kyle Samani: It's a very complicated question.
Peter McCormack: Sorry.
Kyle Samani: No, it's all right.
Peter McCormack: There's three questions there.
Kyle Samani: One is dispute resolution. This is something that I think I'm probably in the minority of people in crypto in believing. I think you need some sort of dispute resolution system that can "break the rules" of the blockchain, the full-stop immutability, there's been a cryptographic signature, it's done, finality kind of a thing. I just think that's not how the world works. The reason we have courts in our world is to arbitrate disputes. Obviously there are problems with legal systems, but they exist fundamentally because there are disputes in the world, and likely there will be disputes in crypto things and you need some sort of way to accommodate that.
I honestly don't know, have any good sense for how dispute resolution should be managed. It's an extremely complex process, I'm not a lawyer, I don't study the history of judicial systems.
Peter McCormack: I imagine jurisdiction on that's going to be…
Kyle Samani: Jurisdiction, yeah, this is a super complicated problem. I don't claim remotely to have a sense for the right answer. I do have a sense that there are answers that are better than the status quo, which is nothing; so pretty low bar.
Peter McCormack: Potential risk though that if you do something, you are opening yourself up to more litigation in the future, because you set a precedent that something can happen.
Kyle Samani: There's real chances and opportunities that people do things that are stupid and blow up and who knows. Lots of things can go wrong, I'm not questioning that. My statement basically is the status quo does not make sense and therefore, do something that's not the status quo. I'm not saying much, but I am saying something. So, I believe that should be the case.
Given that there are no dispute resolution mechanisms today on smart contract platforms, there are risks, there are always catastrophic failure risks of the wallet gets attacked or something happens that's just out of your control, like no one could have forecast it. These things happen, it's unfortunate. I would prefer they didn't happen and when they do happen, I'd prefer there is some sort of dispute resolution system to accommodate that. I seem to be in the minority who believe in that.
But I am a huge fan of programmable money. The design space it creates I think is enormous and I think it's just starting to be explored. So, for example, I put out a piece a few weeks ago called New Models for Utility Tokens, talking about ways where you can think about how to create the idea of tokens and how you can do different things with the tokens and give them new properties, with burning tokens, with minting new tokens, with staking tokens, with accountability, with token curative registries, I know that's a whole bunch of terms. I don't know which of these will work, which will be the best, why they'll be the best, no idea.
What I do know is there's a massive new design space of things to be played with. There's lots of smart people playing with them and I'm reasonably sure some of them will become useful and will be used and adopted and we'll just change our paradigm to how you think about attribution, owning assets, co-ordinating large numbers of disparate human beings. There's clearly a large design space here that non-programmable money basically cannot accommodate.
Peter McCormack: Do you find at all that this new economy is potentially over-complicated?
Kyle Samani: No.
Peter McCormack: The reason I put that out there is, I worked in tech during Web 1.0 and Web 2.0; and from Web 1.0 to Web 2.0, we focused a lot on simplicity and usability and experience. What I find is the new people who come to this space just find everything so complicated. When you look at a lot of these projects that are being created, it seems to be that user experience and ease of use hasn't been thought about fully. Is that something to come, you don't worry about that, because that's something that I worry about?
Kyle Samani: Yeah, usability is a big problem. I'd say general product management, I call it product-orientation, is pretty pure in the crypto space. I'm fairly certain these will all become solved problems. If you look at computers back in the 1990s, right, it's the same analogy. People are, "What's the start menu thing in the bottom?" and, "What's this alt program; what is a program, a file system; what's a C: drive?" all of this nonsense and connecting to the internet, you needed to wait for the dialogue modem to beep and click and then sometimes DNS wouldn't work, your router; there was all this stupid stuff.
If you got everything in line perfectly it would work, but otherwise it didn't. Then basically, over we'll call it 10 to 15 years-ish time, all that stuff got basically automated to the point of no thinking required. That's where we're at today, is back in the 1990s equivalent. I expect this will not take 15 years to accelerate in terms of general usability. There are just so many more people who know tech now just generally in programming and design and product management and all these things; the labour force is much larger. And, there are so many standards that are well-understood for usability and design and all these things. So that, I'm quite certain, will be much faster than it was before.
The other thing is, it just varies by team. So for example, the Ethereum Foundation is very focused on protocol layer engineering and research and development, which is important for a lot of the protocol stuff that normal people don't want to deal with; they just have never really prioritised the user-facing stuff much at all. But there are other teams that have made different views. So for example, Dan Larimer built a thing called BitShares, I think in 2013/14, and then a thing called Steem in, I think 2015 or 2016, and now he's working on this new thing called the EOS.
Peter McCormack: You're a fan of EOS, aren't you?
Kyle Samani: I am a fan of EOS; I think it's super interesting. But my point is though, if you just look at him and his projects, BitShares usage is not very substantial, it's a pretty small community. I don't know the numbers, but it's not very large. Steem is bigger, but again it's not running at massive scale by any means. Both of those products, on the 1.0 release, worked and they worked well. They were good, high-quality consumer apps that you could put your mom in front of and your mom would understand the UI basically immediately and navigate and do whatever the thing was she was trying to do. That was true for both those products.
Now, EOS is not a product, it's a platform, so it's a little different. But conceptually, a lot of the same thinking and inspiration that went into both BitShares and Steem, you can see the inspiration, a lot of those concepts feeding into EOS. I think that's going to create a lot of opportunity to onboard new users. It's just much easier than Ethereum is.
Peter McCormack: In raising such a large amount of capital, that's a war chest for them to bring people onto EOS?
Kyle Samani: They have a lot of money and they are run by capitalists who are competent and know what they're doing. They're making bets and they're going after it.
Peter McCormack: Cool. Listen, I'm conscious of the time. I've got loads of questions, but I'm going to focus on a few that I think are important to me. I want to ask you about regulation. Some people love regulation, some people hate regulation. I am pretty confident you are keen on regulation, because it's probably good for supporting investment, but tell me if I'm wrong.
Kyle Samani: I prefer regulatory clarity. My general bias is less regulation than more regulation, with a few notable exceptions. But I would certainly appreciate more clarity.
Peter McCormack: What did you make of the Senate testimony on crypto?
Kyle Samani: Overwhelmingly positive.
Peter McCormack: Yeah.
Kyle Samani: I think there was a comment in there from, I don't remember which gentleman was speaking, but I think the comment was something to the effect of, "Had we had this distributed ledger technology prior to 2008, we may have foreseen the Financial Crisis and have been able to avoid it". Running a major federal regulatory agency and openly saying that to Congress seems like a screaming endorsement to me!
Peter McCormack: The question I put to both Charlie and Laura yesterday was, as America seems bullish and the States seems to adopt wealth creation technology and going full guns with this, do you think at some point China is going to have to come back online with crypto; because essentially, we're going to have an integrated financial system across the globe which, if they don't join, they're going to be excluded from?
Kyle Samani: They will get back into the game somehow, some way, some shape. I admittedly know next to nothing about the Chinese Government, but I just probabilistically find it impossible to believe that they're going to sit on the sidelines forever.
Peter McCormack: Have you tracked this Venezuelan petrodollar at all?
Kyle Samani: Not much.
Peter McCormack: Do you consider nation state crypto, because you've talked also about crypto being a threat to governments, ignoring the fact that the Venezuelan petrodollar was a total, what we'd call cluster-fuck in the UK? But we have Iran coming out, we have Turkey coming out talking about nation state crypto. What do you think is going on here; do you have any opinion?
Kyle Samani: I don't know any of the projects well enough to comment on them specifically. Generally, we have open permissionless systems and so governments can use them. My favourite analogy here is the internet. Back in the 1990s, all the tech entrepreneur people were, "Everyone's going to be connected and there'll be direct democracy and self-publishing and self-expression" and all these things. As it turns out, just private companies, Google, Facebook being the most obvious ones, and then the governments' mass surveillance, mass censorship kind of thing. So, it turns out that these open systems, the big guys who are already here can also use them. So, it's no surprise that we're seeing that happen now.
My general sense right now is this, call it the first 1.0 of government crypto things, I'm fairly certain it will all fail for some reason or another, whether it be functional incompetence and a lack of understanding and a lack of vision and other things, but they should experiment. I expect almost certainly within the next five years, a government somewhere will launch an open, permissionless crypto where that money supply is managed by that country's central bank. It will be price stable and it will be totally open and everyone around the world will be able to buy it. I expect that will happen much sooner than people think.
Peter McCormack: Right, okay.
Kyle Samani: I don't know what country it will be, but I just expect some country will do it.
Peter McCormack: Like a stablecoin, you mean?
Kyle Samani: That would be a stablecoin, yes.
Peter McCormack: That would essentially be a stablecoin. Okay, cool.
Kyle Samani: It will be managed by some government, some central bank somewhere, but it would be a priced stablecoin.
Peter McCormack: Right, okay. Last couple of questions, just want to focus on one specifically. You're a huge fan of Bitcoin Private, right? Did you see the price section today?
Kyle Samani: I have not looked.
Peter McCormack: It's absolutely collapsed, which obviously is to be expected. A lot of people who listen to my podcast are traders, they're investors. A lot of them don't have the experience or the knowledge that maybe you would have and they don't have the time to dedicate to it. But there's a couple of things that you put out: one, about holding no more than really ten positions, you don't need to do that?
Kyle Samani: I find in crypto, given how generally correlated the market is, you don't need more than about 10, maybe 12 positions to achieve meaningful diversification.
Peter McCormack: Then, something like Bitcoin Private is clearly one of those short-term view, I need to get in and I need to get out, opportunities which is not really great for the market. So, in terms of trading, what do you think are the key things that people should be focusing on when they're investing in crypto? What should they be looking to, and what should they avoid? You've obviously got a lot of experience now; you're looking at the market closely. What kind of advice can you put across to people who listen to my podcast?
Kyle Samani: Don't invest in things you don't understand.
Peter McCormack: But that might be everything in crypto!
Kyle Samani: Then just buy some of the big ones, Bitcoin, Bitcoin Cash, Ether, maybe some Litecoin, passive use, something like the whole 10 Index, there are other passive index products. If you want exposure and you know what you're doing, use some sort of passive strategy. If you're going to do anything active, then buyer beware.
Peter McCormack: You said Bitcoin Cash there. You're okay with Bitcoin Cash; you think it's a good project?
Kyle Samani: I think Bitcoin Cash has a more promising future than Bitcoin.
Peter McCormack: Really? Okay, I think we should let you answer that.
Kyle Samani: I mean very simply, evolve or die, and the Bitcoin Cash team has a far more ambitious vision. It's simply willing to change more variables and assume that not everything is scripture set in stone that the Bitcoin team is very rigid about. I think for basically that reason alone, Bitcoin Cash is more interesting and ultimately the brighter future.
Peter McCormack: Brilliant. I want to thank you for this. Final question: what's the future for you? What's the future for Multicoin Cap? How can people get hold of you and how should they get hold of you and who do you want to hear from?
Kyle Samani: Yeah, so we're running our hedge fund, we're growing, we're hiring. We're hiring analysts, engineers, data scientists, all on our website. Feel free to reply if you want. We're a new firm, growing our investor base. Yeah, we're just growing, a lot of things are moving in the firm.
In terms of how to get hold of me, I'm very accessible on Twitter. Just tweet at me @kylesamani. I generally respond to all non-trolls, although my volume is probably starting to get a point now where that may no longer be viable, but I do my best to be responsive. So, feel free to ping me on Twitter.
Peter McCormack: Brilliant, appreciate your time. Hopefully we'll do this again in the future. Thanks, Kyle.
Kyle Samani: Thanks, Peter.
