Ep. 179 - Steve Kotler: Tomorrowland: The Future is Rich (in Possibility)

Transcript

This isn't your average business podcast, and he's not your average host. This is the James Altucher Show. Okay. We're gonna get to insane stories of Wall Street in a second. But as long as it's we got Omid and Dan here. And, Omid, can you describe what you did on crypto for Citigroup? You just recently left that position. Are you allowed to describe your top secret work for them? Yeah. Sure. I I was a I was a contractor for Citi Ventures, which is the corporate VC arm of Citi, but, other than venture investing, Citi Ventures is also involved with all the different innovation efforts throughout the bank. So I was sort of a, at large crypto expert that I worked with whatever part of the bank and sometimes clients had an interest on the topic. So this might be dated by the time this episode comes out, but, at this moment, the crypto markets are in are in chaos, and Coinbase, because of bulls**t headlines, everybody thinks or suspects might go or has a chance of going bankrupt. Correct me if I'm wrong. This is a mandatory disclosure, that was just put into effect by the SEC that all companies that have trade in crypto assets have to just say that, hey. Crypto assets, like any other assets, applied to bankruptcy laws applied to them. So it's nothing other than that, but the headlines don't mention that. They just say, oh, Coinbase mentions the word bankruptcy, in their SEC filing. Yes. And a lot of this is, I'm sympathetic. A lot of these crypto companies operate in this vacuum where they have to comply with things like requirements of disclosures, but because there are literally no laws and there's no precedence of how they operate, they just say, like, here are the things that can go wrong. And specifically with this issue, it wasn't that Coinbase can go bankrupt. What freaked people out is that if Coinbase goes bankrupt, they had to say something like, where you might lose your coins or then Coinbase might lose client coins. Which is also ridiculous. It's as it's as if they're saying Coinbase is like Lehman Brothers in 2008, when in fact, Coinbase is more like Fidelity in any year of Fidelity's existence. They just simply take customers' money, and they buy what assets and they the customers want, and they take fees, and that's how they make revenues. They're not like closeted hedge funds like Lehman Brothers was. James, just real quick. Let's hope this isn't your, Cramer, Bear Stearns moment. Yeah. Well, cool. So Kramer famously said that your money is safe if you keep it in Bear Stearns, which it wasn't really. And that was the problem. But but here's the thing. Like, okay. On the one hand, all the headlines are not telling the truth about what this disclosure is really all about. But could purse the real question I have is, could perception equal reality? Like, could there be a run on Coinbase because so many of our people are scared about the headlines and that causes the problem? Seems unlikely because unlike Bear Stearns, as far as we know, Coinbase is not a levered institution. No. There's but but other than that, I mean so that's what I mean. They don't speculate in in anything. They're not like Lehman Brothers. They're more like Fidelity. So even if there's a run, they just liquidate everybody's accounts and return the money, and that's that. Right. And and the specific, this comes I spoke to people, friends of mine, who spoke directly to, Coinbase Legal. The reason why they gave this disclosure is that, it it the way they see it, as far as they're concerned, their client assets are held in the bankruptcy remote fashion. That even if Coinbase does go under, clients will just be able to go be like, well, they had 5 of my Bitcoins, and then you get it back. And they're confident that for people who use Coinbase's separate custody service and cold storage, that would hold up. For people who use Coinbase Exchange, so say if you're a retail user and you send a Bitcoin to Coinbase because you wanna sell it, those coins are held in a omnibus commingled pooled account. And, again, as far as Coinbase is concerned, they're still your coins even though they're mixed with everybody else's coins. Their concern is, again, because there are no laws or no precedents. If coin a company like Coinbase goes into bankruptcy, maybe a judge would feel differently. Right? Maybe coin Coinbase has creditors. They put a claim on the coins, and they say those are in bankruptcy remote. I get that. But which is part 2, which is that Coinbase has $6,000,000,000 in cash, Yeah. Has been largely profitable until now. This quarter's loss was 490,000,000, but there's a lot you have to unpack that number quite a bit to to research it. It would it would be a long time before Coinbase was actually in any trouble. So that aside, right now in the crypto markets, we're getting a lot of liquidations, because of margin calls and fear and uncertainties about pegged stable coins and so on. Why should crypto exist? Why doesn't it go to 0 and some other things? You know, eventually, the world's gonna move to a digital asset economy. But it doesn't have to be now, and it doesn't have to be Bitcoin. I'm being the devil's advocate. Why should you be a believer that that's not what's happening here? Well, I wouldn't actually agree with that statement if we say all crypto. Like, there's plenty of crypto that I would argue should not exist. Oh, yeah. Let's say 95% of cry I when I say crypto in this case, I just mean Bitcoin. Yeah. So why I think Bitcoin should exist because it is algorithmically minted and apolitical money that in the world that we live in now serves a useful purpose. It's sorta like the Switzerland of money that in a time of growing global conflict and polarization and things like what happened with Russia, Ukraine, the fact that individuals, corporations, and governments have a way where they can transact value where another government cannot prevent them is useful. Right. I agree. And the idea that there's this just like you don't do business with people you don't trust, you don't use currency you don't trust. Like, if I wanted to buy your book and I said, look, Omen, I'll buy your book, but I need to pay you in rubles, You'd probably say no way because you don't trust rubles. And and the and the dollar and and people trust the dollar, but with the dollar, there's still, like, a handful of people who are deciding monetary policy, deciding the value of the dollar in your pocket, and you can't fully trust it. Not to mention all the intermediaries for a transaction, all the transaction fees, the potential for for fraud and forgery, and and so on. So all that aside, though, the dollar is more trustworthy than any other currency. And, again, I'm playing devil's advocate because I'm bullish, but why can we believe that Bitcoin will not go to 0 and they'll just figure this whole crypto thing out later? 2 things. 1, what I said earlier that it does actually serve an important utility, and that's not the utility. Today. Yeah. And that's not the utility of a speculator who wants to trade something or bet on something to go up. There are a lot of things you can use for that. But, one thing that's actually very unique about Bitcoin as far as money is concerned is that other than cash, Bitcoin is the first money in history that comes with its own payment system. It's certainly the first digital money in history that comes with its own payment system. You know, the dollar doesn't have that. If you if I wanna send you dollars, if we were in the same room, I could give you cash. Otherwise, we have to go through a myriad one of multiple different payment systems that are controlled by a corporation or a government. And, you know, at best, that means that we charge it we pay p fees that we'd rather not pay, and there are probably delays that we'd rather But there's upside too, though. Like, I trust Visa. I trust PayPal. I trust the US government on the whole. Now I admit I'm paying fees, and there's privacy issues. But, for the average citizen, who cares? Like and and the fees are baked into the prices of everything anyway. So that last point is interesting. I actually feel like a lot of merchants would disagree with you that it's okay. I mean, they trust Visa and and whoever too, but if they got 5% gross margins and paying 2% on a credit card swipe, they would rather find someone that they could trust that could be a lot cheaper. But but for simple transactions, there's fees on Bitcoin too? Yes. Although with the additional infrastructure being built out, like the Lightning Network layer 2, that will be insignificant. It'll certainly on a long enough timeline for small transactions, I'm confident blockchain payments will be you know, you're paying a couple of basis points, a lot less than what traditional payment intermediaries charge. And to be clear, I'm not saying that, like, Bitcoin is gonna replace the dollar, that people are gonna start buying coffee or paying rent with Bitcoin. What I'm saying is with Bitcoin specifically, the fact that there is sort of a global universal backup plan, that in case your existing method of saving and paying doesn't work, which a lot of times the focus is like, oh, if there's censorship, like what happened to the Canadian truckers or Yeah. You know, the US confiscated Afghanistan's, central bank reserves. But I would point out because when you make that argument, people say, well, you know, I'm I live in America. I live in Germany. That's not something I worry about. That is a luxury of the first world. And for 1,000,000,000 of people on this planet, they really do not have some kind of a trustworthy way to make savings and transactions in the same way that you do with Visa. Well, we'll look at, like, right now. I mean, we've sent 100 of 1,000,000 of dollars of Bitcoin to Ukraine, which we would not have been able to do otherwise. Or look at in terms of trust, look at Argentina a couple decades ago, just reached into everyone's bank account, took half the money, and said we'll pay you back, like, in 6 years. Good luck. And and that doesn't we could say right now, oh, that will never happen in the US, but those are famous last words. Right. And I think what's great about the existence of something like a Bitcoin is that it encourages the powers that be to not go to, like, you know, to not turn it up to 11 when it comes to things like financial censorship because now they'll have to say, oh, you know, if we start doing a lot of things like that for example, if we start saying, oh, we don't like this protest movement, so we're going to prevent it from using PayPal or have a bank account, which did come out of the Canadian trucker movement. But there's no reason why you, you know, you could have a right wing politician that says, oh, I don't think the Black Lives Matter movement should be able to receive funding. Right. And the interesting thing about the Canadian one is he invoked a law that they had recently passed and had never been used, and he invoked it incorrectly, and no one did anything about it. Yeah. Like, he broke the his he he broke the law, and it was very overt break the how Trudeau broke the law. Sorry, Dan, that we're going into this. No. No. That's fine. Yeah. Because this is on everyone's mind, all that stuff. But but, Olin, I wanna go even one level deeper, which is Ethereum and other crypto apps and and DeFi and so on. Because because those things obviously are even getting hit more than than Bitcoin and a lot there's a lot of investors. Let's say I have a real world use case for NFTs. And one thing I I don't know if we've I think we've all discussed this is a basic real world use case might be ticketing. New York Knicks sells me a ticket for a $100. I sell it to a scalper for 500. Scalper sells it to someone for a 1,000. The New York Knicks only makes money on the transaction to me. But if ticket if all tickets were turned into NFT, if there was a an NFT Ticketmaster, then the next would make royalties on every secondary transaction. And this is a great real real world use case. This is actually being developed. It's no different than, some other applications like NFTs for for and crypto for medical care, and records and real estate deeds and so on. But we all say, oh, this is a this is what Ethereum and NFTs and crypto are good for. But why can't just a centralized secure database do this? Because Do any of these things. Because you wouldn't have the same trust assurances. So one one of the there's a term in crypto that's kind of, counterintuitive, but it's this idea of trustlessness, which is that a trustless system is one where you don't trust anyone, but you trust the outcome. So if you have your NFT on a blockchain like Ethereum, you don't trust whoever sent it to you. You don't trust the Ethereum miners. You don't trust Vitalik Buterin. You don't trust your wallet provider, and you don't have to. It's designed in a way that you can still trust that your NFT is your NFT, and that if you go to send it to Dan, nobody can stop you. And now Dan can trust that he gets the NFT without even having to trust you. But what if, like, Amazon or Google made the secure database for ticketing to to provide all the functionality I just described? Yeah. I trust Google and Amazon. I mean, some people don't on the fringes. But in general, we all I mean, I use Google. I don't think there's using my data for anything nefarious. So, I use Gmail. I don't think they're reading my emails every day. So so what's the issue? Why do I really need, NFTs and Ethereum for this? One, not everybody would agree with you. And, by the way, isn't the point of Gmail for them to read your emails? Like, why why? I think they're reading mine every day. It's true. I do get a a high degree of erectile dysfunction ads whenever I send emails to my wife. But, did you did you get, like, a, like, a tracking history, like, a map history every month or something? Oh, yeah. I did get I get I I don't know if it was some beta program or whatever, but for a while, on the 1st of every month, I was getting an email from Google. I don't get it anymore. I was getting an email from Google that said, oh, James. We thought you might like to see where you've been this month. And every day, it was me they would show my path. It would was me staying in my apartment all day and then walking 300 feet to the comedy club across the street, staying a half hour there, and then walking 300 feet back. Like, I was the laziest person in the world according to Google. And that was a little weird that they knew every step I took, but but I didn't mind that much. It was just unusual. So But but, yeah, that that aside, I do trust Google to keep track of tickets. But but, you know, Google's a great example because I I use them in my book to talk about how like, one of the, core concepts, and it is what what I call the curse of history, which is the more you trust someone or something, the more likely they become to take advantage of it. In a moment, maybe we'll talk about someone like Bernie Madoff is the is the perfect example of that. Right? Like, a lot of people trusted him to manage their money. They wouldn't have trusted you, me, and Dan nearly as much, which would have made it a lot harder for us to pull off a Ponzi scheme. And the amazing thing about Google is if you go and read the original paper that was published by, Page and Brin where they proposed their PageRank algorithm and talk about how they can improve search, there is an entire section on how advertising is a bad business model for a search engine company. It it's the first appendix, and it's something like advertising and its mixed motives for search. And they even cite an example that they say, oh, today, if you go and search Google for a cell phone, what you get is, the first thing that comes up is something about, people talking on their cell phones and driving being dangerous and could lead to accidents. If advertising were the business model, then what you would probably get is an ad for a cell phone, and that would diminish the quality of the search. The irony of that is that today Google is the world's biggest advertising company, and if you search for smartphone, probably the first thing that comes up is an ad for the Pixel phones that they sell. So it's a perfect example of, like, all these people trusted Google, and now, you know, I think there's a reason why their motto is no longer don't be evil because a lot of people would say, well, that's richly ironic considering they exist to monetize people's information. Yeah. No. I their motto now is do the right thing, right, or something like that? I I don't even know, but, you know, the funny thing about, like, if you trust Google with something like your NFT, and your NFT becomes increasingly valuable or your portfolio of NFTs because the world you described comes true. Right? Tickets are NFTs and Or or or tickets track secondary sales and provide royalties. So and and they're guaranteed to give me access to the stadium. Because when you buy a ticket from a scalper, you might not be guaranteed to have access. They may not be real tickets. They could be forged. Right. But if you're using a secure database in the center somehow, that does all the same functionality, why wouldn't I just use that? Why do I really need this extra layer of Ethereum and and whatever? So what happens if it's a ticket for an event for some kind of a speaker or comedian that Google doesn't approve of? Right. Well, presumably, right now well, okay. You're right. Because YouTube has certainly banned people. Right? So if, like, you know, take someone that they've banned, I I don't I don't wanna name any names specifically. They could ban anybody. And and maybe that person is blocked off from, you know, selling tickets, to their events is what you're saying. Whereas whereas the NFT Ticketmaster can't do that, and it's already happening in today's world. What's good with the NFT is that the nobody can disagree with the fact that you own it and whatever the chain of provenance is, that, like, you got it from a comedy club, and then you turn around and send it to Dan. That is trusted less information that becomes universally available. And, you know, even if the issuer goes bankrupt because the other problem you have is when you're like, well, what if Google manages everything in a secure database? Well, now Google is sort of a custodian of a pseudo financial asset that could grow to be 1,000,000,000 and 1,000,000,000 of dollars' worth of money, and then if Google fails, like, all of that goes away because who's managing the secure database? Nobody. So it comes down to a question of resilience that, like, yeah, as long as everything goes well, having Google issue the n or manage the NFT is fine. It's actually better because it would be much better UI UX than how NFTs on Ethereum work, but you just do not have the same kinds of, assurances that you would want. Okay. I buy into all that. So two questions then. One is, do people understand that? Because, again, we know very smart people. Like, we all know Nassim Taleb. Nassim Taleb's been in our trading circles since we started trading, and he's been on this podcast. I'm a big fan of his books, but he wrote a paper today, you know, basically saying, you know, none of this is true. Like, all of this could go to to 0. So why is he such a smart guy? Why is he so wrong here? Because I believe what you're saying. By the way, I'm a big fan of Nassim too, and I Me too. I'm a fan. I've had lengthy conversations about this with him, and he actually blurbed my book, kindly enough as as did, one James Altucher. Nassim and I Yes. 2 2, I don't know, 2 peas in a pod. Yeah. Well, I I thought it was good to represent the pro, you know, the the the believer and the anti. And I think, actually, Nassim makes certain good points about crypto, but, part of appreciating all of this is is you have to be able to take all of these different variables and factors and see them come together into one elegant solution. And Nassim has not reached that point yet. I hope someday he does. But, otherwise Why he hasn't reached that? He's a genius. That I couldn't tell you. I think part of it is actually, in my experience, the smarter people are and the more knowledgeable they are about the way the world has worked up until now, the harder it is for them to appreciate why this different way of building trust could potentially be superior. So in my case, I guess, I was kind of an idiot, and then I stumbled into Bitcoin, which it was easier to learn it, but I did go through this multiyear process where I was skeptical and confused. I thought there was something unique about it, and I wanted to learn more. And then, eventually, I realized I I just had to learn to let go of my mental model of how people interact or how a financial system works. And then once I did that, I was able to sorta, like, see the light on how this new way of building trust, which unlike every other way, including the ways that Nasim supports, was invented for the world of today. Right? Like, let's not take for granted that almost all of our existing systems, especially for anything remotely financial, was at least architected before the Internet and smartphones and all of that. Like, it was built for a world where people still you know, use mainframes and made telephone calls and stuff. So so assuming what you're saying is a truth about, you know, Bitcoin, Ethereum, crypto in general, Is there enough momentum behind this truth that it sticks around? Even though, let's say, some small percentage of the world now is is using anything crypto related, is there enough momentum to to keep it going, or will people fall back into the the dark ages pre crypto and try to do this with secure databases and and PayPal and Venmo instead of Bitcoin? And, you know, because we're just at the beginning of adoption. Honestly, we're at the Internet in 2001. We're ahead it's been around the web had been around 10 years, but people still thought it was a fad, and no one had put in their credit card numbers into ecommerce sites yet. Yeah. I think it it's it's clearly volatile, you know, because the prices are volatile. So what happens is, like, a bunch of people get really rich off of crypto, and then you have a period like this past month where a bunch of people lose a lot of money in crypto. But, the direction of travel is in building momentum. And a good example of that are the NFTs that you mentioned for things like art and collectibles. That's a brand new asset class that never existed before. But is that a worthwhile asset class? Like, who I don't care about that stuff too. And I know some people do, but Yeah. Even that market's starting to slow down. Yeah. And there too, I wouldn't be surprised if, you know, maybe not even 95, maybe 99% of all these NFTs end up worthless. But, it was interesting to me how a lot of I've met a lot of people in the past year who had no interest in Bitcoin or blockchain or DeFi or stablecoins, but there was something about the idea of digital collectibles that resonated with them. So they went through the trouble of setting up a wallet and going to, one of these platforms like OpenSea and buying an image or a video or a song or something. By the way, the other thing you mentioned about the adoptions of crypto is the UI. So, clearly, the UI of a bank is better than the UI of SushiSwap or some DeFi exchange. Depends on the bank, but but let's go with this. Yeah. But but I do think that gets solved. It it reminds me of, Unix. So Unix is a very academic, almost obscure out outside of academia and and and techies operating system. And so Linux was created to make it a little more usable, but even that wasn't usable. But then suddenly, you had companies like Red Hat and VA Linux, which constructed solutions that made the UI a 1000 times better. And now every company uses Linux. You're using it right now even if you don't realize that one of the devices in your on your desktop is is Linux based at least, if not all of them. And so, so I think the same thing will happen. Like, people will start making a bunch of tools to make access to you know, it's it's hard for me to Dan here on the call, he buys all my crypto for me. It's hard for me to figure out, like, wallets and exchanges. And we just buy what Ooma tells us to buy. Exactly. So so it's hard to figure out, like, all the complexity on on these things because the UI is so so awful, but I I kind of assume things will get better. And the and the final thing I wanna state is a network is you know, there's Metcalfe's law where a network is of the value of a network is an exponential factor on top of the number of users. So the more users of crypto there are, the more valuable crypto is, and the more likely it is to stay. But in a period like this where the number of people fleeing crypto just because I'm out of fear right now is declining, that also makes the decline in value exponential. Could that death spiral down? It could. And for specific projects and protocols, that could very well mean the end of them. I would guess, like, Bitcoin and Ethereum have passed the point where they're at that level of existential risk. Yeah. But, actually, can I ask you you a question, James? Since you have a computer science background and you brought up Linux, do I understand correctly that most of the Internet's core infrastructure runs on Unix or Linux? Absolutely. And that's free open source software that anybody can use, nobody owns, and is managed by, nonprofit foundations. Is that right? Linux is that's correct for Linux. Yeah. Okay. So why doesn't the Internet just run on Microsoft or Google instead? Alright. That's a good point. I guess because well, first off, the engine that was not popular until Tim Berners Lee made the first web browser and web server, and that was built on top of Unix and Linux. So that could answer your question right there. But even so, at the same time, there was already AOL and CompuServe providing kinda online services, and those never had as big acceptance as, the web. I would argue, though, the the web and the web browser wasn't even necessarily the original web browser wasn't necessarily a better interface than AOL's interface. So, yeah, you make a point that perhaps people wanted something that was more democratic, more populist. And so the thing is economic policy is democratic on a in a crypto environment, a Bitcoin environment as opposed to economic policy of the US now. 99.999 percent of us have no say in economic policy, whereas in a Bitcoin environment, either everyone does or nobody does. Yeah. And I'll even simpler than that. The reason why I was asking that question is, like, I think of everything from a resilience point of view. And if a third of the Internet ran on some closed source Microsoft software, then the Internet wouldn't be resilient for a couple of reasons. 1, at any point in time, Microsoft could say, hey. This is really popular. We're gonna start charging for it. It was free up until now, but, you know, it's gonna be, like, however they would charge for it. 2, because it's closed source, only people at Microsoft know how it works, which means that if there are certain flaws in it, you don't have necessarily the best and brightest looking out for it, which means that someday something catastrophic could happen. This goes back to the point about, like, why do you want core infrastructure like Ethereum? It's totally transparent, and it's totally open source, and nobody owns it. So, 1, you have, like, a 1000000 people looking at it. Right? You have all the world's best and brightest can go in there and opine on, like, oh, I think the software, the code, the algorithm, whatever is valor vulnerable, and this happens. And then it gets patched up. And then the other thing is, like, Ethereum itself is not one they're gonna be like, oh, you guys really like what we're doing with NFT, so we're gonna charge $1,000 per transaction. Because it's decentralized, these existential threats are significantly diminished. Yeah. You know, that's a good point because let's just take the Google example. When Google's algorithm changes, it significantly hurts 1,000 or even millions of businesses while benefiting 1,000 and millions of others. And it's unpredictable, and it's not transparent, so there's no way to prepare for it.