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PODCAST: NextBlock Global CEO Alex Tapscott on BitCoin, BlockChain, and Digital Assets

— James West

Alex Tapscott is the author, along with his father Don Tapscott, of “Blockchain Revolution: How the Technology Behind Bitcoin Is Changing Money, Business, and the World“. He is also the founder of a $20 million investment organization called NextBlock Global, which seeks to invest in the rapidly emerging digital assets economy. He joins us today one year after our initial interview with him to shed light on how the cryptocurrency market has grown from US$8 billion a year ago to today’s astonishing US$155 billion…in one year!

Transcript:

James West:    Alex, thanks for joining me again.

Alex Tapscott: My pleasure.

James West:    Alex, it’s been I guess a total of about just over a year, actually – it was in June 2016 that we last spoke, and at the time, you had just published your book, Blockchain Revolution: How the Technology Behind Bitcoin is Changing Money, Business and the World. So one year later, let’s start with, how has the landscape for bitcoin evolved since that conversation a year ago?

Alex Tapscott: Well, a year ago in the book, we said that within five years the financial services industry would be basically recognizable. And when it came to venture capital, it turns out that we were wrong; we were wrong by about four years, because fast-forward to today, and the venture capital industry has been completely transformed by blockchain technology. That’s because companies are no longer going to VCs and traditional investment banks to raise money, at least not exclusively, and that’s because they don’t have to – because what the blockchain technology has enabled is a new funding mechanism called an ICO, which stands for Initial Coin Offering. Kind of like IPO, except with a little crypto twist.

And what an ICO allows a company to do is issue a digital asset, which represents a piece of the product that they’re building, to a global market of thousands or tens of thousands of people, and raise large sums of money peer to peer. And that market has grown significantly over the past year to the point where it is now larger than all seed financing and venture capital across all industries.

So for some context for your listeners, last year the number of projects that raised money was in the tens, and the amount of money that they raised was about $165 million. This year it’s in the hundreds, and the amount of money raised is in excess of 2 billion. And all of this started, really, with bitcoin. I mean, you mentioned at the beginning what has bitcoin done in the past year; you know, bitcoin is the cryptocurrency that’s launched a thousand ventures, and kickstarted innovation and investment, imagination in basically every industry in the economy. And it was the pioneer that allowed us to value peer-to-peer, and that’s what all these entrepreneurs are now replicating with these new digital assets.

James West:    Mm-hmm. Okay, now, you say Initial Coin Offering. These initial coin offerings, do they not differ from what is essentially a digital currency that bitcoin occupies? Is that true? I’ve read that the SEC is treating Initial Coin Offerings as more of a security, whereas bitcoin and Ethereum and several, very few others, actually are referred to more as digital currencies.

Alex Tapscott: Well, the truth of the matter is, it’s a little bit more complicated than that. So the first thing to note is that bitcoin is a cryptocurrency, and that a lot of these other tokens are something a little bit different. So take Ethereum, for example: Ethereum is not a cryptocurrency in the traditional sense. It wasn’t designed to be a medium of exchange and a storer of value and a way to make payments, it was designed to be a platform to build applications and run what’s called smart contracts – basically, code that can mimic complex business logic, all using software.

And that’s what’s helped to kickstart this whole ICO revolution. So a lot of the tokens that are currently being offered are not like currency, they’re not designed as a unit of exchange, they’re actually part and parcel of the actual product that’s being built.

You mentioned the regulators. The regulators have provided an opinion on this in the past little while, and what they’ve said was a bit more nuanced. They didn’t say that tokens are securities; what they said was, just because you’re a token doesn’t mean you’re exempt from securities laws, but that not all tokens are securities, and it depends, obviously, on the facts of the case. The test they use in the United States is something called the Howey Test, which basically says, if you are a share of an enterprise that the expectation is that you are going to generate a profit primarily by the efforts of others – so, you know, the management team that’s running a business – then that is a security.

The truth of the matter is that a lot of these new companies and projects don’t really fit that mold, and determining which of these tokens are securities and which ones are not, is going to be quite an interesting challenge and opportunity for regulators for the foreseeable future.

James West:   I’m curious, Alex, as to what is the total global market cap value or entire capitalized value of bitcoin currently?

Alex Tapscott: The current value right now is $155 billion. So $150 billion as of today.

James West:    150 billion?

Alex Tapscott: Yeah. So to put it into context, when we last had our conversation, the total value of the market was around $8 billion, and most of that value was in bitcoin. Bitcoin today, just in and of itself, is worth over $65 billion in value. Ethereum, the last time we spoke, was worth about $600 million; it’s now worth about $27 billion in value. There are over 12 token protocols, so projects that have a digital asset, that are worth in excess of $1 billion. Last year, when we spoke, there was one: bitcoin. So this market is growing 10X every single year.

And even though it’s growing so significantly, it’s still a small fraction of what the total size of the market could eventually be. I mean ultimately, $150 billion is a large number until you remember that the market capitalization of RBC, one Canadian bank, is over $100 billion. So you could say this whole brand-new economy that’s got everyone so excited about what it could mean for so many industries, is still only one and a half times the market cap of one Canadian bank.

I think eventually, the market for digital assets could be in the many trillions of dollars, and I think it’s really only a matter of time before traditional asset classes, you know, equity, debt, royalties, futures, forwards, options, titles, deeds – are digital assets that trade on blockchain. Because in the end, there’s no reason why people should wait T plus 3 (phon)[0:06:28] to settle a trade in an equity. An equity should be a digital asset that moves peer-to-peer, much in the same light as bitcoin and other digital assets do.

So my company, NextBlock Global, we think we’re on the forefront of this new marketplace as one of the early investors that’s giving people exposure to the best opportunities in the space. We raised $20 million in the summer on a combination of institutional high net worth and strategic investors, and we are thoughtfully and strategically deploying that capital into this ecosystem.

Ultimately what we’d love to do is to give investors of any stripe – retail investors, public equity institutions, pension funds, sovereign wealth funds, etcetera – a vehicle to get diversified exposure to the space, run by an experienced team with a great strategy and a real track record, in a regulated and liquid product. And ultimately, I think that’s what’s going to help drive traction in this industry. So we hope to be a real leader, a pioneer, if you will, in this space.

James West:    Wow. Okay, so tell me: fundamentally, how do I evaluate the direction and the price, the future price, of any of the bitcoin or Ethereum? I mean, I just don’t understand; how do I put my finger on the fundamental drivers that have taken it from – like, so what could I have pointed to a year ago at $8 billion that would have said to me, this thing is going to be $150 billion in a year’s time?

Alex Tapscott: So, there are a few different drivers helping the value of these different protocols, and not all of them are the same. So for something like Ethereum, I’ll let you know what’s helped to drive the value. Ethereum is a platform to build applications; it’s basically like computer language that allows you to build companies that run blockchain software. What’s happened over the past year is something quite extraordinary, really, which is that Ethereum has quickly become the standard technology protocol for all new companies and applications that are getting built, or at least many of them.

So two-thirds of all new ICOs are done on top of Ethereum. So we’re talking two-thirds of $2 billion. The value of projects and companies built on top of Ethereum is now in excess of $2 billion or $3 billion.

So Ethereum is like owning the underlying protocol for the next generation of hugely disruptive companies and projects, and even though many of those companies might fail, it’s very possible that some of them could be the next Apple or the next Amazon or the next Google, and Ethereum is the underlying protocol on top of which these new companies will run. Obviously it’s going to create a lot of value.

So in the early 1990s, the only way you could get exposure to the internet revolution was by investing in the companies that were building on top of those platforms. So you know, Amazon, or Google, or Yahoo. This time, it’s different; this time, you can actually own a piece of the underlying technology. It’s kind of like somebody coming to you in 1993 and saying “I’ve got this cool new investment, it’s called The Internet. Would you like to own a piece of it?” Well, you couldn’t do it at the time, unfortunately. But if you could, it would have been a pretty good decision, because even though the internet’s not monetized per se, it’s probably worth over $20 trillion; that’s, at least, according to the CEO of Cisco Systems.

So to me, investing in protocols like Ethereum, protocols like Cosmos, Qutum (phon), all of these other underlying technologies, is kind of like owning a sliver of the internet. But what excites me the most is that I think this new internet of value could actually be worth way more than the first era of the internet, because the first era of the internet was an internet of information. You know, a way to move and store information peer to peer. The second era of the internet, based on blockchain, is an internet of value, a way to move and store assets peer to peer. And that’s going to impact value industries. And, you know, they’re a lot bigger than information industries. We’re talking about financial services, manufacturing, supply chain, government, etcetera.

So I think the disruption that’s going to be caused by these technologies is going to be profound, but the only thing that’s different this time is, you can actually own a piece of the underlying technology. That’s what my company does. We’ve got a portfolio of these underlying platforms which we think could be foundational for the next era of the internet.

James West:    Okay. So what does your fundamental analysis of the digital currency universe tell you about where are we going to be next year at this time in terms of the value market cap globally-wise of Ethereum and bitcoin?

Alex Tapscott: Well, the future, I believe, is not something to be predicted; it’s something to be achieved. And we’re actually working closely with many of these companies to help them achieve that future. So we hope that in no small part, NextBlock will be instrumental in building a lot of that value.

If I were to put a guess on it, it’s really hard to say. But it’s worth putting in the context of other asset classes. I mean, the global equity market’s worth $100 trillion-plus. Gold, one asset, is worth over $10 trillion. Already, you’ve got very smart people like Mohamed El-Erian, who’s the Chief Investment Officer of PIMCO, the largest gold fund in the world, saying that the reason gold isn’t rallying because of all this geopolitical uncertainty is because people have a better alternative. Bitcoin is the digital gold that allows investors to get exposure to a store of value that can’t be controlled by a central bank, that’s immune to global geopolitical risk, and that is easier to store and manage and move than the physical commodity.

So it’s anyone’s guess, but I think it’s going to be a lot bigger.

James West:    Okay. Alex, you know, I’ve got to come back to you sooner rather than later. There’s so many aspects of this whole thing that I guess I just don’t understand, nor do a lot of people my age. So we’re going to leave it there for now. I thank you for your time, but I’m going to come back to you in hopefully a couple of weeks, and continue the conversation.

Alex Tapscott: I would love that. Anytime you want to chat, it would be my absolute pleasure.

James West:    Fantastic. Thank you again, we’ll talk to you soon.

 

James West

James West

Editor and Publisher

I employ a Capital Efficiency Model that dictates money should never be exposed for longer than is absolutely necessary to the possibility of being lost. Thus, I routinely sell half my position when a stock doubles from my entry price, and I sell stocks that lose 20%, unless there are...
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Midas Letter is provided as a source of information only, and is in no way to be construed as investment advice. James West, the author and publisher of the Midas Letter, is not authorized to provide investor advice, and provides this information only to readers who are interested in knowing what he is investing in and how he reaches such decisions.

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