WBD111 Audio Transcription 

Travis Kling on Bitcoin's Relationship with Financial Markets

Interview date: Tuesday 28th May 2019

Note: the following is a transcription of my interview with Travis Kling from Ikigai Asset Management. 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 interview I talk with Travis Kling, Chief Investment Officer at Ikigai, we discuss how the traditional financial markets work, including quantitative easing, fiscal policies, Bitcoin’s relationship with these markets and concerns with tokens and smart contract platforms.

Interview Transcription

Peter McCormack: All right Travis, welcome!

Travis Kling: Glad to be here! It's been a long time coming man. We've talking about this for a few months!

Peter McCormack: When did we first meet? Was it about a year ago?

Travis Kling: Yeah, I think that's right. It's been a wild year, but a good run!

Peter McCormack: How was Blockchain week for you?

Travis Kling: Blockchain week was good. Sentiment was enormously positive and it felt like there was a good amount of maturation in general, I think year over year. I didn't go to the actual Consensus conference, just went to a number of events around it, went to Ethereal, went to a Digital Asset Summit, both those were great and a bunch of events and stuff like that.

There seems to be more adults in the room. There seems to be less charlatans, less scammers and all that's positive for the space. The biggest announcements I think that were made were Bitcoin specific announcements and that was reflected in the price action that we saw. So this is a great week man!

Peter McCormack: Were you hear last year?

Travis Kling: Yeah, then I was just jumping into the space, I left Point 72 in December 2017 and was making my way through the ecosystem decided that I was going to start Ikigai February/March of 2018. So then May 2018 was kind of the first time that I was really jumping into the... And had met some people at that point.

So a ton has changed in the last year for me, for Ikigai, for this ecosystem, spending all day, every day in the rabbit hole like both of us do, time does weird stuff! It really does weird stuff! Was that two days ago or was that a year ago? Cause I can't really remember. So it's been a hell of a year.

Peter McCormack: So last year was my first Consensus and I bumped into some people I've met last year and I was like, "oh shit, it's been a year since we met, but it feels so much longer!" With a couple of these people, I was like, "I'm pretty sure we've met up four or five times in the last year. We live in different continents!"

I found with Blockchain week this year, that there was a lot more focused on Bitcoin, as you saw. As you also said, a lot less scammy projects, although there was still a lot of nonsense if you went around the exhibit hall, but I certainly see a lot more Bitcoin. Why do you think that is?

Travis Kling: If I scroll back a year, I think it was almost a year ago that I tweeted, "the value proposition of BTC relative to its status quo, which is gold, is much more clearly understood that the value proposition for any other crypto asset relative to its status quo" and I've felt like that for quite a while. BTC is vying to be a store value. It's not a method of exchange right now.

It's too good at being a store of value to be a method of exchange right now and either the price has to go up a whole lot more and stabilize and people feel more comfortable about using it as an MOE, or maybe we're going to build some sort of like MakerDAO looking thing on top of Lightning where you can get 50% loan to value on a stable coin by parking your BTC in there, which I think there's a lot of BTC maximalists that think that'd be great.

People are using that in some ways and are doing that in more centralized waves right now. But Bitcoin.. It's gone through a lot of different phases. So sometimes when I talk to people, especially people that don't spend all day in this space, I just try and remind them, at least what I think Bitcoin is. To me, Bitcoin is a non-sovereign, hard cap supply, global, immutable, decentralized digital store value.

That's a lot of adjectives, but I think all of those are important and that's why I put them all together like that! I've been banging this drum pretty loudly for the last handful of months. It is a insurance policy against the monetary and fiscal policy irresponsibility by central banks and governments. It's not to say that BTC is a safe haven right now because it's not.

We're all speculating that, it will become a store of value or it will become a safe haven asset rather and we all believe that because it has the characteristics to be a safe haven asset. When you line Bitcoin up next to gold, there's a framework that you think about that and it's the six characteristics of money. It's durable, it's divisible, it's portable, it's uniform, it's accepted and it's scarce. 

When you put BTC next to gold within that framework, it actually looks pretty good. So while it's a risk asset right now, it is a risk asset with a specific set of investment characteristics that become increasingly more attractive, the more irresponsible central banks and governments are with their monetary and fiscal policies. If the Fed had not done their dovish capitulation at the end of January, I think $1,000/$2,000 BTC probably would have been on the table.

I think risk assets globally would be in a really tough spot right now. But because the chairman of the Fed, Jay Powell, they were rolling the balance sheet off and starting to tighten up interest rates over the course of, starting late 2017 accelerating in 2018, that started causing stress in the, in the traditional asset class markets.

Over the course of 2018 punctuated by this kind of dumpster fire for risk assets and Q4 2018 you had Steve Mnuchin calling the plunge protection team on December 24th and Jay Powell used this term "autopilot", about how the balance sheet roll off was on autopilot and the market really didn't like that. Who else didn't like that? Donald Trump didn't like that.

So Donald Trump starts talking shit to the chairman of the Fed on Twitter about being more irresponsible with an already irresponsible monetary policy. The crazy thing was that it worked and at the end of January, the Fed did this complete U-turn and dovish capitulation and accommodation by any means necessary and all further tightening on hold.

Then right around the same time, the ECB, the BOJ, the PBOC, the Reserve Bank of Australia, Canada, New Zealand, all of these central banks started cutting rates or started providing further quantitative easing. It is now clear that central banks globally have no path to end the largest monetary experiment in human history, which is quantitative easing and that is deeply bullish for crypto and specifically it's deeply bullish for Bitcoin.

Peter McCormack: Wow! There's quite a lot to unpack there. Okay firstly, you're pretty plugged into understanding the financial markets, you've had a entire career history within the financial markets. Does it surprise you that the US government is kind of accepting of Bitcoin?

Obviously with certain caveats and the SEC and the CFTC still have an ongoing situation where they're working out the regulations, but there hasn't just been an outright ban. Does that surprise you? Because it is a asset they will struggle to control in some ways.

Travis Kling: It's a great question and to answer the question, yes partially, I had been somewhat surprised by it. But I think it's unclear what the US government's relationship is with Bitcoin right now and I think probably different parts of the government, feel different ways about it, certainly down to the individual level. 

If you talk to the, the real OGs, the real OGs would tell you that this thing's been on the radar of the different parts of the US government from the very beginning. The tin foil hat comes on pretty quickly when you start talking about what that looks like. But I mean, you're intimately familiar with the Silk Road Story and the US enforcement agency's relationship with Bitcoin through that story is like... Don't forget that!

Keep that in the back of your mind. As we've continued through time, if I had to guess, I would guess that the government never thought that it was going to get to the scale that it has and that now it's gotten to be a little too big. Although, you can think about whether or not they're trying to do things where they can get the price more under their control.

In my opinion, a non-physically settled future, a cash settled future, is a really good way to manipulate the price of Bitcoin, because it removes the scarcity factor, which is one of the single most attractive traits of Bitcoin.

Peter McCormack: So you should probably break that down for people who wouldn't understand why.

Travis Kling: Yeah, so if I'm long a CME future for Bitcoin, I have exposure to the price of Bitcoin, without actually having to physically or not truly physically, but physically in the context of digitally physically own a Bitcoin in my wallet. That's this term re-hypothecation, that people have talked about before. There's gold bugs, there's like a 60-year-old gold bug sitting right here. A lot of these guys would say that gold kind of stopped acting like gold when the gold ETF came about.

There's also a lot of gold bugs that would tell you that gold didn't really act the way that it was supposed to or the way that everybody thought it was going to act on the back of the financial crisis and quantitative easing. My answer to that is that, if the central banks around the world own 25% of the supply of gold, which they do, and those are the entities that are most incentivized and willing and able to keep the price of gold from running away relative to their currency, I mean I think you could make the same argument about Bitcoin.

So I think there is kind of that competing, I mean there is that kind of thought hanging out there. Then I would say on the other end of the tin foil hat spectrum is during the financial crisis, the US government and other governments around the world, took on the losses of Wall Street and large financial companies globally.

They took all that onto their balance sheet and that's just what happened. You could make the argument that they wanted Bitcoin around in case that experiment went really wrong and a major country wrecked their currency or something like that, that you would have this sort of alternative.

You could make the argument that some government officials might thought that there was going to be an inevitability to a non sovereign form of money. Because when you put $4.5 trillion expanding a balance sheet, which is what the Fed has done over the last decade, that's unlikely to end well.

Peter McCormack: But how does it end? Because I don't understand the structure of financial markets or how they work. I understand what quantitative easing is, but are there certain measures within the economy, sort of measures whereby the debt gets so high, that it can't ever be cleared? Are there measures that somebody like you would watch?

Travis Kling: It's really hard to say. You would think that inflation would have showed up by now. There's a handful of reasons why it hasn't, the velocity of money has decelerated a lot, money just doesn't move as quickly and it's kind of sitting in places. So that's one reason, inflation hasn't showed up. Also, we've had an incredible amount of technological innovation over the last decade and all of that is deeply deflationary.

That's another reason that hasn't showed up. I think that quantitative easing is universal basic income for rich people. If you own capital assets, if you own stocks, if you own a business, if you own a bunch of real estate, QE was your universal basic income. So much, this shows up in the stats as well too, so much wealth over the last decade plus has gone to such an inordinately small amount of the population. It's just like Jeff Bezos, the guy can't spend it fast enough and so inflation doesn't show up.

That's an anecdote, but it's broadly applicable to what's going on. The way that all this plays out, again, really hard to say. In my opinion, the US monetary policy is one of the better monetary policies on a really crappy monetary policy block. It's like not the best house, but all the other houses are in way worse shape. ECBs in a really tough spot. The BOJ is in a really tough spot. Japan's in a really tough spot.

But the ECB is in a really, really tough spot and not only is their monetary policy in really bad shape, but then they're really feeling the social pressures, which is kind of burning the candle at both ends. You don't see Japanese people running around burning shit to the ground like they are in Europe! The likelihood that the Euro collapses in the next decade, I think it's pretty likely.

Peter McCormack: Do you think quantitative easing is a natural result of globalization, in that it feels to me like countries now compete so heavily on an international basis and they're competing with their economies and there's never a chance to slip up. It just feels like, from somebody who sits on the outside, who constantly looks at the news and follows the news and sees the different problems, different countries are having. Especially we've seen in Europe with the likes of Spain, Italy, Greece, Iceland at one point. It feels like quantitative easing is a tool for them to just to be able to keep up.

Travis Kling: It is all relative in a global economy like we have now, it definitely is all relative. Net trade deficits and things like that, all of that plays heavily into what ends up happening with your currency and your relative competitiveness of your economy on the global scale. All that makes a difference. To be honest with you, these central bankers, in a lot of the transcripts from the depths of the financial crisis when they were literally making this shit up, literally making it up.

So a lot of these transcripts have been released pretty recently and you go back and read them and you need to make sure that you're not giving these guys too much credit, because they really had no idea. They just went with this thing and it didn't work. They're like, "oh, we got to do more." Then that didn't work a d the market kept falling and there was a series in late 2008. There was just these series of things they just kept doing and kept doing until the market stopped plummeting.

Then they tried to not do it and then the market started crashing again and then there comes QE2. Then you had this thing called Operation Twist and then you had QE3 and it went so much further than I think anybody had ever intended. Now you've gotten to the point where risk assets globally are addicted to cheap money and if you take away that cheap money the global economy will fall apart. It's created fragility in asset classes across the world.

One of the things that when I was going down the rabbit hole personally on crypto, the first time I saw BTC was when Silk Road got shutdown. Just ready about it from a fascination perspective, these drug dealers made magic internet money to buy drugs on the Internet, that's wild! Mt. Gox got hacked early 2014 I was like, "okay, this is not something to pay attention to. Stop paying attention to it!"

Fast forward to the back part of 2016, price started going back up again and I got in the Bitcointalk forum and the sub Reddits and I remember being amazed that it didn't die after that. Not only was it not dead, I was like just looking at the activity, I didn't know what they're talking about because I hadn't read the white paper. I really didn't know what they're talking about. But just the sheer number of posts and the interaction on the posts, I was like, "this community is not only not dead, it looks like it's more vibrant than it's ever been before."

I'm a pretty big Nassim Taleb fan and I was like, "that is deeply anti-fragile for this thing to come back like that" and it's really hard to find anti-fragile assets these days, because they've been weakened by what's gone on with monetary policy around the world. In the same way when astronauts come back from being space in a long time and you've got to put them in the wheelchair when they get off the shuttle or whatever, it's like the same thing!

All these assets, they can't stand up to any real stress anymore. BTC struck me as something that stands outside of that. Now don't get me wrong, if it hadn't been for quantitative easing and don't take this the wrong way, all you Bitcoin people, because I love you guys, Bitcoin would still be an experiment in the closet of a bunch of computer science nerds, if it hadn't been for quantitative easing. God bless the nerds because they built this thing and now it is what it is. But Bitcoin stands outside of QE, but it is so vitally important because of QE.

Peter McCormack: I think a few will disagree with you on that! Do you envisage that any governments are actually buying Bitcoin because I can't see why you wouldn't accumulate some. I just don't, but I guess when we get the signal that one has, they'll all jump in?

Travis Kling: Yeah, so from a game theoretical perspective, let's just take GDP per capita as the measurement and just rank all the countries by GDP per capital. I don't know what country is in the low teens, maybe it's like Chile or something like that, I'm just guessing.

But if you're a country like that and your currency is like in pretty good shape, from a game theory perspective, the risk reward for printing a couple billion dollars worth of your home currency and going and getting whatever, 3%/4% of of BTC supply. You could go from the 18th best country to the 4th best country in a single generation if this thing hits. If it doesn't, then you wiped a couple billion! I completely agree with you.

Peter McCormack: You don't notice it!

Travis Kling: Yeah I agree with you. You hear chatter around. In late 2017, I heard chatter around, some really wealthy Middle Eastern families that were buying Bitcoin and they're all like the government anyways. It's kind of one and the same that royal families and the government's kind of one and the same over there. You hear rumors about some really wealthy Swiss families, some of the Nordic countries. You hear rumors, but I don't know! I feel like it's hard for me to answer that question without getting like the tin foil hat on a little bit! With how that's all going to shake out. But I think eventually it happens.

Peter McCormack: Yeah. You're like me, you're pretty new in the Bitcoin world. I'm the same as you. I discovered with Silk Road, but didn't really pay attention. Kind of tracked the price going down after Mt. Gox and just thought, "yeah, this is dying slow. When's it going to bottom out?" Then noticed it going back up. I still didn't pay much attention until the back end of 2016. How have you found coming in, as essentially kind of like a new person?

Because I found the experience brilliant, but also sometimes very hard, just to understand the full history and sometimes you make mistakes in your opinions, that you have to get corrected for and it can be a harsh learning cycle. How have you found it?

Travis Kling: Overall outstanding, really, really good! I've had a career in finance and in hedge fund investing, so I do have a brain that's just generally geared towards economic decision making type of stuff. There's a lot of things I'm not good at; science terrible, a lot of things I'm not good at. But that the game theory stuff, the behavioral finance side of things, the value proposition from just an economic perspective, that was all pretty duck to water for me.

I had to learn and I mean start from absolute stand still on anything computer science related and anything cryptography related. I'd never heard of a Merkle tree! I had to start from the very beginning. I remember the summer of 2017, I spent 20 hours reading about the Byzantine General's problem. Like it was just like, I did not understand this.

Then when I finally understood it and I finally understood the double spend problem in the context of a Byzantine general's problem and I was like, "oh man, I think I've got to quit my job and do this!"

Peter McCormack: The two armies on the side of the hill?

Travis Kling: Yeah, where they're surrounding the castle. It's like when people say "trustless", when people use that word, that "Bitcoin is trustless", that's what they mean and be like Byzantine kind of. So some of that stuff definitely took a lot of just basic learning, reading on the Internet. But it was amazing because there's so much information available for free on the Internet, that you could sort through and find it and shout out to Jameson Lopp for his depot!

That was one of the first things I found. What has been really refreshing though, is coming from the traditional hedge fund investing world, people are really secretive and closed off about kind of the manner in which they make money. Some of my closest friends are guys that manage money in other hedge funds, like these are guys that I've been friends with for a decade. I know generally what they do, but specifically, we wouldn't actually talk about how they go about executing their business, because it's treated as a trade secret.

Whereas it's really refreshing here that the community is so communicative and collaborative and don't get me wrong, there's fighting and tribalism and a little bit of the less desirable things when humans interact like this. But overall, the fact that we're all kind of trying to crowd source the truth together, is like one of the coolest things about doing this versus traditional asset class investing.

Peter McCormack: Yeah, crowd sourcing the truth... With a few fights in the middle! So I'm not going to do the full background, because you did it with Pomp. I can share that with people and tell them to listen to that episode, it was a fantastic episode. But what would be useful, is the part you've told me before, is the job you're in and then you had the kind of light bulb moment with crypto assets and you just made that decision. I remember you telling me, you just told your boss that day; "I'm done!" Tell me the story about that.

Travis Kling: Yeah, so I read the Bitcoin white paper in May 2017, and then fell down the rabbit hole and earnest June 2017. I also read this book called "The Inevitable" by Kevin Kelly. I don't know if you've ever heard of that book?

Peter McCormack: No.

Travis Kling: I mean maybe you don't need to read it at this point. I also read that book in June 2017 and Kevin Kelly is a futuristic co-founder of Wired magazine and it's basically a book that's called "The Inevitable" because he basically talks about these technological evolutions that are coming, that seemed like they're really far away, but they're actually not that far away. A good example is like autonomous driving cars, which feels like the Jetsons to us sort of right now, but a decade from now, they're going to be everywhere.

There's a lot of things like that with technology and it was a book that I read that got me, I think in the mindset... I'm not a tech investor as a career and I'm not a tech guy. I don't have an Apple Watch. I think Alexa is big brother, I've just always been like that. Reading that book, got me in this mindset of like the next couple of decades are going to be wild and that's kind of like what the book's about. I was thinking about crypto in the context of that.

Then for me it was, it was going through this self study and coming upon revolutionary concept after revolutionary concept and that kind of Byzantine fault tolerant one was a big one for me. Understanding the economic implications of hard forking and the potential for a super linear progress, because of hard forks where you can do this Cambrian explosion and just it's all open source.

So you can just throw a hundred ideas against the wall right now and see which one works out the best and keep going from there. Then the other really big one for me, that was probably the tipping point, was understanding the way that network effect, interacted with this asset class. So distribute ledger technology, AKA Blockchain, is an information protocol. It's like HTTP, it's like SMTP. You built the Worldwide Web on top of HTTP. You built email on top of SMTP, but the guy that built HTTP is not a billionaire because value didn't accrue HTTP.

You just had products and services that used HTTP and the companies that provided those charged revenues and the equity of them... And that's the Internet today. The equity accrued the value. So now you have this crypto asset, that at least in theory, and it's associated with this DLT and at least in theory that crypto asset can accrue the value.

You've got Bitcoin and the Bitcoin network. By having this token that can accrue value of the protocol, you can have speculators stand at time zero and look out into the future and speculate on what the value of a technology that drives a significant portion of its total value from network effect might be, if that technology is able to get through the bootstrapping phase and up the kind of S curve of adoption and get to the point where the average utility per user is compelling relative to status quo and then it tips over and it becomes viral.

All technologies that drive a significant portion of their value from network effect, have to deal with this bootstrapping problem. How do you go from 0 users to 2 million users or 5 million or 10 million, whatever the number is, where it gets up that S curve. But now you have this crypto asset and you can bet at the beginning and speculators are able to, through the potential for profit, pull a technology through the bootstrapping phase and up the adoption curve into existence.

Because crypto derives so much of its value from network effect and network effect doesn't grow linearly, network effect grows super linearly, that's Metcalf's law. There's math behind it and that means that the return potential for this asset class, is usually not linear returns, these are super linear returns. That's the reason why we look at Bitcoin's price chart on a log scale, because this shit doesn't make any sense when you look at it on a linear scale, because it doesn't grow like that! When I put all that together, that was like September 2017 I was like, "ahh, I'm going to quit my job!"

Peter McCormack: Have you ever read a book cooled "Engines That Move Markets?"

Travis Kling: No.

Peter McCormack: So it's a fantastic book. It talks about the key kind of engineering or technical technological advances that changed the world. So we have the railways and obviously that gave you the ability to move goods and services and people around countries easier. The telephone, the Internet etc.

I started to think that that book could be rewritten again in the future and perhaps include Bitcoin, as there is potential that this will have such a revolutionary change on financial systems and the way people just deal with each other, the resulting impact on governments, that we might look back in 20 years and there's a very different world from where were living in pre-Bitcoin.

Travis Kling: Yeah I like that. I will check out that book. The other thing that I had to go through actually before I quit my job was... So I understood the potential for the technology and then I had to answer the question whether or not the world cared, because I think that you run across a lot of people in this space, I call them techno utopians.

They are these people that are like, "if we would all just use technology for its intended purpose, the world would be a better place!" That's fine and in a lot of cases they're not wrong, but in a lot of cases they ignore human nature and just the way that humans just go through their lives and a lot of technology that would probably make the world, it'd be a net better place. Everybody's not a bunch of engineers walking around. I know that frustrates engineers, but people just kind of want to watch a lot of Netflix, smash some likes on Instagram and they don't really like change.

So I had to answer this question about, did the world actually care about the potential of this technology and what I circled up on at the time, which I think has certainly continued since then, was that there's this commonality that was running through some things that I was seeing socially and it was like, "why did Brexit happen in the first place? Why did Donald Trump get elected in the first place? Why did those two things happen at the exact same time on different parts of the planet?

Russian Facebook election ads, Samsung bribery, NSA spying, Libor rigging scandal, Black Lives Matter, Harvey Weinstein, Cambridge Analytica, there's a commonality across all those things. The best way to sum it up is power tends to corrupt and absolute power corrupts absolutely. We've seen that happen at all levels I think in society right now and society is really beginning to recoil from that type of thing. It appears to be getting worse, not better. Our political situation in the United States right now is a dumpster fire. I think it's as bad as ever! We're in a bad situation.

Look what's going on with tech companies right now and the way that people are recoiling with what they've done with user data and things like that. For a long time... It's also important that Millennials feel this more acutely than older generations. Millennials are the generation that think like, "all politicians are crooked, Wall Street is rigged and big tech companies take my data and they do crappy stuff with it, they don't keep it safe, they create a ton of value with it and hoard all that value and they're all worth $50 billion and we don't really get any of that value as a user."

I kind of put all of that together and it seemed like distributed ledger technology, which has a bunch of use cases, money being the killer app for now, was this technological platform to go drive societal change for the good and that's why we named the fund Ikigai, because for me, I felt like... Ikigai is an ancient Japanese concept, that means the reason for being. If you Google it, you see this Venn diagram, it's what you're good at, what you like to do, what the world needs, what you deserve to be paid for.

I had a career in hedge fund investing, I was pretty good at it, I liked doing it and I made a fine living doing it, but the world doesn't need another hedge fund manager. If the world doesn't get another hedge fund manager, the world's going to be just fine. But the world does need this technology, because it really has the potential to make the world a better place and it can do it in one generation. That struck me as the kind of thing that was worth spending the rest of my life trying to work on!

Peter McCormack: Perhaps if you and I were... You're a bit younger than me, but I'm 40. Sorry, I can't remember how old you are?

Travis Kling: 34.

Peter McCormack: It's possibly the last great innovation that we'll have in our lifetime, that we'll be of an age that we can be part of it. I mean AI is going to grow, I'm not going to do anything with that. This for me, was like... I kind of missed the Internet. I was there, but didn't really spot the opportunity. This is possibly the last chance we we would get.

Travis Kling: Yeah, I felt the same way a little bit too when I saw this thing. It's not once a decade or even once a generation that you get a new form of money! You look at your monetary history and this happens once every couple of hundred years, that we get an entirely new form of money and we've never had... The last time we had a non-sovereign controlled form of money, we were using salt for money, literally! Or nice sea shells, like pre gold days.

Peter McCormack: The game theory of the Bitcoin design itself is pretty incredible as well. So the early adopters have been highly rewarded, who've managed to hold on and there's a lot of libertarian folk within that as well, who understand the benefit of decentralized money of a fixed limit. I don't think enough people will connect Bitcoin with changing the world to a better place, that everyone's going to jump on board.

But I think enough people will come on board that they are now, which is driving this forward, incentivized financially as well. But there will be a group of laggards, who by the time, if Bitcoin does continue to grow, we'll have no other choice but join in. So it kind of appeals to different people's mindsets at different times.

Travis Kling: Yep, that makes sense. It's still way too early to say how different crypto assets and different networks are going to play out in terms of their role. Is there a world where everything ends up getting built on, on Bitcoin at one layer or another? Yeah, I mean that that could happen. I'm not a BTC maximalist. You can probably tell I'm a pretty big fan!

To be frank, our portfolio most of the time is reflective of that. We're actively traded, but the value accrual proposition for a lot of these other crypto assets is just not as well understood, because you have the value that's created by the technology and the value that's accrued by the token, those are two different things. A lot of people don't spend nearly enough time distinguishing between those two things.

The bridge between those two things is token structure and if you're not a money and you don't earn a monetary premium, then that translation of value created to value accrued, we still don't have a good handle on how to do that. There's been experimental different types of token structures, proof of stake. You've got work tokens, like Auger that are interesting.

People do burn and mint type of stuff like, and all that is super interesting to me. I do believe in the long term. I do believe that we will figure that out. But as we sit here today, that's all kind of much more unproven right now.

Peter McCormack: Yeah, so we'll get into that, because we'll probably have things we agree on, and things we disagree on. But tell me about the fun first and also, there's a bunch of people who won't actually know what a hedge fund is and there'll be scared to ask! Explain what a hedge fund is, how it operates, how it works?

Travis Kling: So we accept investors' money and we deploy that money on behalf of those investors into the crypto asset ecosystem, to generate returns and we get paid a percentage of the profits that we generate basically. So that's like the one second summary! The manner in which we do that and there's a million different strategies that hedge funds run. So the way we're set up is, up to 25% of our assets are under management.

We can deploy into venture investing in the crypto asset space. We can look at newly issued tokens, we can look at equity of entities that are issuing new tokens, we can look at picks and shovels, infrastructure type of equity. Then the remaining amount of the capital is deployed into a long/short multi-strategy hedge fund, which basically means that we have kind of five different strategies that sit at different places along the risk/return spectrum.

On any given day we deploy different amounts of our capital into different strategies based on the way we see the world at any given time. The manner in which we go about making those investment decisions is based on what we call our 4 foundations and the entire investing decision making processes is encompassed in these 4 foundations, which are qualitative research, fundamental evaluation, quantitative tools and event driven catalysts.

So we've built frameworks around each of those 4 foundations and we put processes inside of those frameworks and we built tools that help us execute those processes. In the same way that Henry Ford used to crank out model T's, you can crank out attractive risk adjusted returns like that. So it's like an idea factory. It's like you get the right people, in the right seats and then you take a bunch of information and stick it in the sausage maker and then you turn the gears and then it spits out attractive risk adjusted returns. So that's kind the short of it!

Peter McCormack: Can you talk anything about how the fund has performance so far?

Travis Kling: We've had a good year! We'll leave it at that.

Peter McCormack: Okay, good. So obviously you are a fan of Bitcoin, you've talked about that. I personally really struggled recently with anything that isn't Bitcoin, but I've struggled also to completely close the door. I shifted my entire portfolio to Bitcoin because I stopped trading and it's the only thing I marginally understand. I hear the arguments of maximalists against Ethereum and a lot of it makes sense.

But also at the same time, I do see people building things that are also being used. So I kind of get stuck in this place where I'm like, I fully support Bitcoin, I'm 100% behind Bitcoin, all this Ethereum stuff sounds like nonsense, yet there are people building things. I find DAI very hard to ignore, whilst trying to appreciate the comments of maximalists about Ethereum. Do you understand where I'm stuck with this?

Travis Kling: Yep. So we've done full qualitative review on the top 150 cryptos by market cap and we've got that subdivided into sectors and subsectors that look kind of like the S&P 500. You got your health care sector, you've got your utility sector and you got your technology sector. That's the S&P 500. We've done something similar for the top 150 and that sub sector approach helps us, just make sort of a mosaic of the crypto asset ecosystem.

Then we think about the characteristics of each sub sector and we think about most favorite and least favorite names within a specific sub sector. We think about... Specifically we think about how ready is the technology for the world within a sub sector and how ready is the world for the technology, which are kind of two different directions on the same street. 

There's a lot of use cases for distribute ledger technology and smart contracts. It's hard to imagine a world where smart contracts are not ubiquitous. Close your eyes, 20 years from now, aren't smart contracts just pervasively everywhere? I'm pretty sure they are!

Peter McCormack: They scare me with financial products though, when you combine it with an immutable record. If I have a problem with the bank, if my card is stolen or misused, my money's given back to me. If the bank has some kind of problem with the app or the website and something happens, my money's returned to me. It isn't an immutable record. I think about financial products and the movement of money and I think about smart contracts and I think about bugs. 

We had the Parity lock up. Recently, there was a bug that just came out in the smart contract on DAI. I try to understand and try to quantify whether companies would risk moving significant amounts of money around using smart contracts, when the records are immutable and I get to the point where I think, "I don't think they will."

Travis Kling: Great point. It's going to take time for sure. I think there will be instances in the beginning where the benefit for implementing some sort of process into smart contracts relative to the risk, will be compelling and you'll start off with those. Then people's understanding and usage and bug debugging of just that entire smart contract process will evolve over time and it'll get to the point where people will feel increasingly more comfortable with having increasingly more value or just important things kind of flowing through that process.

The thing about a lot of these other sub sectors outside of money as a use case, is that again, back to the two directions of the street, how ready is the tech for the world and how ready is the world for the tech? It's just like Ethereum just doesn't work that well and there's 20 other general purpose smart contract platforms that are gunning for the same thing and one or a handful of them or maybe none that exists right now because the thing that's going to make it hasn't been invented yet.

One of those is going to get or more of them are going to get massive traction and create a tremendous amount of value. I would assume that while that's happening, at least at the beginning, that the associated crypto asset will accrue a lot of the value. Although it's still not immediately apparent to me with the token structures that exist today that they will be able to accrue that value over a very long period of time because John Pfeffer calls this the "working capital problem", which is a really good point, the Velocity problem, AKA Chuck-E-Cheese tokens.

So all of that, I keep thinking that the mechanism design that is in place for a lot of the non-monetary use cases for DLT and crypto assets, the mechanism design is just, we haven't figured it out at all yet. You fast forward a few years and you're going to have these tokens structures that accrue value in a compelling way. It's like if you're the PHD at some Ivy League school that worked his whole life on mechanism design, if you're not designing tokens structures right now, I don't know what you're doing with your life because everybody that has an expertise in that area, should be fascinated with what's going on here.

You also have the potential to be enormously financially rewarded if you've nailed that. I get really excited when I see any kind of innovation on the token structure side, with any sort of little gimmick that can sort of hook in value accrual and make value more sticky. It's why I take my hat off to CZ in a lot of ways because the guy is relentlessly trying to present a compelling case to hold BNB. At every turn!

It's like, "oh, we've got fiat on ramps in Argentina, in Australia, but you got to have BNB. Oh, you got discount trading fees, but you've got to hold BNB. Oh, we've got these Launchpad IEO things", which is literally like free money because he makes sure that everybody that participates in an IEO makes profits, but you've got to have BNB. He's about to release margin trading and I'm sure you've got to hold BNB if you're going to trade margin on Binance!

All these little gimmicks and I'm excited about the things to come in terms of developments in token structures that are going to allow some of these non-monetary use cases to actually accrue value. A little bit of it is hopium, it's just believing that it's going to come down the pipe, but I am hopeful there.

Peter McCormack: So it's interesting what you said about that, because I was reading about something before you came up. So Bittrex is about to list VodiX and so that's another IEO. I worry sometimes that we're repeating mistakes of 2017 with a new badge. So just out of interest, because I wouldn't invest because I still don't think anyone has proven to me the value of these tokens. I've done it before and mainly lost money.

But, so I went on the VodiX website, just trying to figure out what the token is for and this is from their FAQ, "when will the VodiX token be usable?" And it says here, "when VodiX is listed, the token will then be tradable. The utility function will follow as we progress further down our technical roadmap." I was just like "huh?" I saw the Ocean protocol dumped 80%, and I worry that we're still burning people. People are still being burned, whilst people figure out how these tokens work or don't care. Does that ever concern you?

Travis Kling: A little bit. I think the total amounts of money are relatively, they're pretty small, relative to stuff that happens in the real world, like the financial crisis. Short time preference actions in general, worry me about this ecosystem. There's a lot of, certainly not the majority, but there is a minority of ecosystem participants that are willing to do something that's bad for the long-term health of this ecosystem, in exchange for something that can make them rich in the near term.

That's the stuff that when you see it, you have to point it out and you've got to call it out because it's still too early. Going back to my earlier point about the tremendously positive potential that this technology has, but the story hasn't been written yet. It can still be co-opted into and contorted into something that is just a shell of what it could have been and it can be co-opted by governments. It can be co-opted by big tech companies. It can be co-opted by bad actors with short time preference.

All of these people or entities are seeing the potential for this and depending on where they sit, could see the potential for it to be deeply disruptive to their status quo and they're shuffling their feet to try and get themselves in a position where they can benefit from it. In a lot of cases, that can be to the detriment of the people, which is what this is for. You see Mark Zuckerberg shuffling his feet and you see JP Morgan shuffling their feet and you see China's going to have a digital sovereign currency.

Everybody's shuffling their feet to try and box people out so they can keep in the status quo of power and we just got to be cognizant of that and remember that the true north here is the reason for all of this is, is because we have seen unchecked power fail at so many levels and this is an opportunity to decentralize that!

Peter McCormack: Yeah, it's kind of interesting because you've got this combination of an opportunity to change the way the world works and the way money works for the positive of society, whilst being able to make a huge amount of money off it.

Travis Kling: Yeah it's a weird thing. Some people try and kind of call you out on that or whatever...

Peter McCormack: But that's the game theory in there. It's designed that if people support this early on and promote it, that's the benefit. They're taking the early risk. I don't hold that against anyone and we could, with Bitcoin, create the richest person in the world!

Travis Kling: Easily, without a problem. I agree with that and it all depends on what you do with it on the back end. I think that there an above average amount of good actors in this space, I think! There's plenty of charlatans, there's plenty of scammers, there's plenty of short time preference folks. But I think there's also people that have a moral compass that they are willing to take big risks on something that's pretty early stage, because they believe in the potential for it and that's promising.

Peter McCormack: I tend to find within Bitcoin in the circles I mix that almost entirely are surrounded by good actors. I think we get people I question a bit more in the other projects, because that feels more like a FOMO to create the next Bitcoin or an opportunity just to enrich themselves. I know it exists within Bitcoin, but I tend to find that Bitcoiners tend to... I don't know, they support a better world a bit more, like you've talked about.

Travis Kling: Well you have the technologists too, that are incentivized by, not that they're bad actors, but what they really want to do is make cool shit and they're deeply driven by making something that has never been made before, that gets mass adoption. That can be a Crypto Kitty and that can be an exchange where you can get a 100x leverage and I'm not going to fault... My partner Timothy is a technologist through and through and this is a guy...

Peter McCormack: And he's a fashionista!

Travis Kling: And a bit of a Fashionista! But he's got the best heart heart ever, but he also just gets so fired up about cool technology and there's tons of people in that space. God bless them because they're the ones that are going to build all this stuff. So again, many use cases for DLT, money's a massive one, but I think we're also going to go in a lot of ways re-architect the foundational layer of the internet. That's going to take several decades!

But I do believe that that's going to happen, so that at the end of that or whatever "the end looks like", for that you're going to have an internet that's just much more of a decentralized place. If you talk to the internet OGs, all of them talk about how when the Internet was first built, instead of building it safely, they built it quickly to scale, because they to wanted to bring it to the world and they wanted to build a bunch of stuff on top of it.

So from the very beginning of the internet wasn't a safe, secure place and the reason that the internet became so centralized is because you had to have these third party middlemen, that could act as the gatekeeper to allow the internet to be safe. We all remember, I think I was in sixth grade when we got the internet and it was wild to think you'd put your credit card information on the internet! 

Then one day this little PayPal logo showed up to where you put the credit card and now people trust, "okay, now we're cool with putting our credit card information on the internet." That was the birth of the cypherpunk movement, was this small minority of people that said, "why are you building the internet like that? It's really unsafe.

See, it takes me 15 seconds to hack it and steal stuff on it." While the big internet grew and became increasingly more centralized, the cypherpunk movement was off playing around with, with computer science in conjunction with cryptography, trying to figure out a way to make a more secure internet and create an internet cash, an E-cash.

Peter McCormack: And we've got these scary pockets of power now. Twitter less so than Facebook, but still this ability to de-platform people or control narratives or even external forces manipulating advertising on these platforms to try and manipulate elections. It kind of becomes a bit scary and I look at some of these predictions for web3 and I don't think most of them are right, but at the same time, if we can somehow break down the power that some of these centralized entities have, I think that will a good thing.

Travis Kling: Yeah and just back to my earlier point, it felt increasingly more likely or it felt like culture was demanding that more and they're demanding it more because actors were acting worse and that's accelerated. I came to that conclusion in September 2017 and that's for sure accelerated since then and it's not that we're not going to have centralization in the internet decades from now, because I think you still do.

I think it's more about the ability to grant power, and this is a broad statement, but to grant power in instances where it's easier to grant power because centralization makes things so much easier in a lot of cases. But you need the ability to yank that back when whatever entity or person or whatever it is, starts not acting in the best interest. It's true at a microcosm level within, let's say like and EOS block producer.

If an EOS block producer starts doing weird stuff, then you can kick that block producer out and you can bring in another block producer. There's different consensus mechanisms that kind of kind of work in different ways like that and I'm hoping that we can get that structure perfected.

Then you can go take it, maybe 50 years from now, you can take that to the political level, to the government level and you can actually grant power to politicians, but you can have a system that actually works in removing that, if they start acting shitty, because it's pretty apparent now that that process doesn't really work anymore.

Peter McCormack: I think also with web3, again a term I've really struggled with, but if we get a more private web, when I say a more private web like control over our data, better privacy tools, I would be happy just with that. Just the ability to control our data, not having people looking at everything we do, because that's almost been the worst thing about the internet.

Travis Kling: I think that's inevitable. I think the world's going to demand it. The technology is either available or being worked on at a rapid pace to bring it and I think that adoption's going to happen.

Peter McCormack: Well we talked about the Microsoft announcement; decentralized identifies, built on the Bitcoin Blockchain.

Travis Kling: It's awesome to see!

Peter McCormack: So if you look down on the crypto market, as a hedge fund manager, what are the most important things that are happening right now? You've obviously had a busy week in New York. You've done a few TV interviews. What are the most important things that you are seeing happening right now in the ecosystem?

Travis Kling: Bitcoin is separating itself from the rest of the crypto asset landscape, as being the only institutionally investible crypto asset, which isn't to say that funds aren't institutionally investible, because I think they are. Index products I think are institutionally investible, but like as a single asset, it's just like Bitcoin... It's got a CME future. It's about to get a Bakkt future. It's increasingly traded on more regulated exchanges.

Custody has come a really long way, third party custodians, Fidelity is custodying one asset! Shout out to Abigail Johnson. This TD Ameritrade situation too. It's become clear... I knew this before this trip, but over the last 10 days, it's like talking to people and the focus around around Bitcoin from an institutional investability perspective, it's so much more liquid. I think that that matters a lot.

Peter McCormack: That came up in my conversation with Jill and Alejandro, when they're talking about the potential for people in Venezuela using cryptocurrencies. They talked about the most important thing about Bitcoin for that market is the liquidity, because people know they can just buy and sell at any point, which you don't really have with other assets.

Travis Kling: Yeah. I mean, specifically for institutional investors, size matters, because they're trying to put hundreds of millions of dollars to work and that's a lot for Bitcoin, but it's an impossible amount for basically any other crypto asset. 

Specifically for Venezuela and I don't want to talk about something that I don't know a lot about because I've never been to Venezuela and I feel really bad for the situation going on down there, but I think that if I'm in Venezuela and I could choose between a Bolivar and a Bitcoin, I think I would definitely choose a Bitcoin. But I think what I really want is a Dollar.

If I'm a farmer and I had a farm in Venezuela for five generations and then I was afraid the government was going to take my farm from me, so I sold it for Bitcoin in December 2017, you're in a tough spot!

Peter McCormack: Do you know what else was interesting that came out of that conversation? You're right about Dollars, they want Dollars, but they did a lot of research, six months research and found out all this interesting stuff. The thing that really stood out to me is when they turned around and said 5 $20 bills are worth more than a $100 bill.

Travis Kling: Oh, interesting.

Peter McCormack: Because you can't always get change. So you've just got to spend the money and sometimes you have to spend all of it! So also PayPal Dollar is different to a cash Dollar, is different too, I don't know if they have Venmo, but all these Dollars have different values as well. It just blew my mind!

Travis Kling: Interesting, didn't know that either! I believe in a decentralized stable coin going in and people like to throw around this term "bank the unbanked" a lot. You have 2 billion people on the planet without access to a stable financial system. 1 billion of those have no identity, have no path to getting an identity. So how do you go give somebody a debit card that doesn't have an identity?

How do you get a stable financial system into the hands of those 2 billion people? Well it strikes me that a decentralized stable coin that runs on a decentralized exchange that doesn't have KYC, that you can operate from a simplistic smartphone, strikes me as a really a really good bet. In the same way that landlines in Africa got skipped over as a technology and people just went to cell phones, the same thing could happen with traditional bank accounts, where a lot of Africans end up not getting traditional bank accounts, but they have digital wallets with digital Dollars.

I mean even within Africa, smartphone penetration is getting really high, so I think that's really promising. I think that people all over the world could use a little Bitcoin, but a stable method of exchange, there's a lot of research that shows that when you go in and take a previously unstable financial system and put stability there, life gets a lot better really quickly in places like that. So I'm excited for that! I think it does have to be something that's decentralized probably, because I don't know how like US governments get comfortable with, "we're going to go to places where we're not okay with the dictatorship there. 

But a decentralized stable coin could go and make those people's lives a lot better." I don't know, it's complicated and I'm not going to pretend at all to have the right answers. But when I think about areas where this technology could make hundreds of millions of people's lives better quickly, that strikes me as something worth going after!

Peter McCormack: Have you spent any time with Alex Gladstein from the Human Rights Foundation? Have you met him yet?

Travis Kling: I have met him, yeah.

Peter McCormack: He talks about this a lot and he's a really interesting dude! All right man, we crushed our hour quick! So just to finish up a couple of things. So looking forwards, what are you looking forward to over the kind of the next year? What are the interesting things coming up for you?

Travis Kling: I think watching the world wake up to the value of a hedge against the largest monetary and fiscal policy experiment in human history is going to be really exciting. The on ramps into crypto are much better than they were two years ago. The 30 second elevator pitch for Bitcoin, everybody knows it. That's not the case in 2017 and I use myself as an example. Up until late 2016, I thought the Bitcoin was magic internet money for drug dealers to buy drugs on the Internet and I was operating at more or less the highest levels of financial markets.

So people are much more familiar with it and also with all of the string of positive news announcements that we've had recently, another big difference today relative to last time is this likelihood that crypto is like a tulip and that all this is going to go away, is significantly diminished this time around relative to 2017. It's just hard to with a straight face look at all this and be like, "it's all going to go away!"

It's really hard to make that bet now and all of that backdrop, sets up for reflexivity to get even more wacky than it did in 2017, which is a little bit of a scary proposition. But I think there's every reason to think that the worlds... I just think we're gearing up for an explosion in demand for a crypto, generally Bitcoin specifically.

Peter McCormack: There's not many Bitcoin to go around!

Travis Kling: I know! If the whole world decides all at the same time that this quantitative easing, while simultaneously running massive deficits on top of increasingly untenable debt levels is not a great idea and we need a little bit of a hedge on that, there's not enough to go around! We got 17.8 million, but 60% haven't moved in a year and only only 10% have moved in the last 30 days.

That's why I love "Bitcoin days destroyed" as a metric. We pay a lot of attention to it internally. 10%! It's like $15 billion worth of Bitcoin has moved in the last 30 days. So if the world decides that they got to get a hold of a little bit of this stuff, that's why things can just get not linear!

Peter McCormack: Are you noticing a change in sentiment amongst people that previously weren't bullish on Bitcoin? People that are just dismissive, from year to year and you get some of your old buddies or old colleagues phoning you up and saying, "hey Travis, tell me about this Bitcoin thing!"

Travis Kling: 100%! I use it as a legitimate anecdotal signal of how many of my friends that have no involvement with crypto, hit me up out of the blue. If you get a dozen in the same week, which was last week, then like that matters! Again, back to network effect. The only difference between BTC being undervalued and overvalued today, is what the future adoption rate of Bitcoin's going to be. If more people come to Bitcoin, Bitcoin is undervalued today.

If the world decides that Bitcoin is not going to be a thing and walked away from it, Bitcoin in theory could crash to zero. So the world's awareness and understanding of the value proposition and willingness to invest a small amount of money in that, there's a virility to that. There's a super linear growth to that, that's Metcalf's law. I think we're definitely seeing the first endings of this thing starting to take off again right now.

Peter McCormack: There's just this undercurrent of excitement right now! You can just feel things!

Travis Kling: Yeah, I think that's right.

Peter McCormack: All right man. Well listen, how do people stay in touch? Who do you want to hear from?

Travis Kling: Twitter's great, @Travis_kling. If you want to learn about the fund, it's Ikigai.fund and then we've got this... Kana & Katana is our content depot and we've just got...

Peter McCormack: There's insane levels of content there!

Travis Kling: Yeah, so I write this monthly update letter that comes out the first of every month. We post it on Kana & Katana on a one month lag. So like April 1st comes out May 1st, but each one of these monthly updates is like 3000 words long. So yeah, they're pretty in depth and we also had this valuation depot that's a collection of the most important research papers, blog posts, quantitative analysis on fundamental valuation for crypto assets, which the vast majority of that is on Bitcoin.

So we just put together a repository of all that information and the feedback from that's been been really, really positive. It's good for people that know a ton about this space. It's good for people that know very little about the space. So that's all good and thanks for the time, dude!

Peter McCormack: All right man. Well look, I'm glad to finally get you on. So we talked about it for a while and obviously I've got to know you and become a friend of yours over the last year. So I really do appreciate you coming on and look forward to a beer in the future!

Travis Kling: Cheers, thanks man!