The Collision of Macro and Digital Assets | Eric Peters (One River), Brett Tejpaul (Coinbase)

Transcript

um awesome i'm brett tashball i look after the institutional business uh at coinbase uh by the way background i was 25 years in traditional finance uh sales and trading at jp morgan and barclays where i was for 16 years in the past couple years of trying to rebuild barclays and expand and innovate i got to a point where i felt like if i really believed in the disruption of financial services through technology i was probably seated at the wrong firm and so my sort of journey led to coinbase where i joined two and a half years ago um in that time frame everyone in the room probably knows coinbase for uh the retail side of the business and i

just thought it'd be a unique opportunity to tell tell you a little bit about the growth of the institutional business when i got there was a team of five people we had a few billion in assets under custody um which was mostly just high net worth uh people who had been invested uh for a long time we didn't have much in the way of of the the sort of clients that i spent my career covering hedge funds endowments asset managers pensions banks challenger banks you know the institutional world our trading volumes were tens of millions in a month if you fast forward to today the institutional business has 150 people dedicated to it in the sales training

and prime businesses the assets under custody for the firm are 258 billion but over 50 of which are now represented by institutions so a handful you know two three billion became 138 billion of course with you know the market correction things will move around a bit and our trading volumes once we had a more fully built smart order routing system agency trading and all of that grew from amplified from you know 30 million a month sort of thing to two to three billion a day and the volumes continue to uh escalate um so that's a little bit about the institutional business we'll get into it uh more i'd like a fulsome introduction from you eric and then i hope to do a

little bit more storytelling as opposed to sort of um advocacy if if you like so eric tell us about your background then we'll jump right into it sure thanks um nice to see you all here and uh it's uh it's great to be down a little hot out here right now by the way it is um so uh i've spent my career in uh in trading investing uh i'm mainly a macro investor um i started one river asset management about a decade ago uh trading mostly in vol and quantitative markets but always with an eye toward um kind of what's the what's the next big risk or opportunity so we spent a lot of time with our institutional clients or firms like uh i probably shouldn't name them but you know the many of the largest pension plans uh and banks uh in the us and

internationally um we um our move into crypto was actually in november of 2020. so we had we had anticipated probably a theme that a lot of you folks are pretty familiar with which is this monetary debasement theme but we spent the probably year and a half two years leading up to the pandemic anticipating that whenever the next recession hit we would see a very aggressive fiscal expansion of the u.s and that would be married to um uh to monetary policy and so you you observe these periods throughout history when nations economies get to points where they have uh an awful lot of debt and leverage in the system they need some

type of reboot sometimes that reboot happens through a big default more often than not it happens through a period of a policy choice which is really just to kind of inflate the debt away and i think a lot of people get hysterical about um about talking about you know policymakers creating inflation it's actually a pretty pretty rational uh policy choice in in an environment where there aren't many you know great economic choices so we had at it right we we kind of anticipated that um and so we were and our clients were very well positioned for it um uh having not anticipated pandemic we kind of just saw the the policy inevitability of of what happened after the pandemic

uh and in our hunt for really convex opportunities um we we saw digital assets as being something that was you know really poorly understood on a lot of different levels from a regulatory perspective from a custody perspective from trading perspective security etc uh and we felt that um you know that uh that these assets had had a long way to go so that was our entry into the space we made the decision subsequently to build out a digital asset manager uh as you know as part of our business um it's been a really exciting uh path to take here and uh you know our goal in digital certainly is to be the leading institutional digital asset manager so

anyway love it so i just want to frame that again for the audience so a 30-year veteran of trading macro markets mostly all on the buy side as we call it entered into crypto two and a bit years ago um has set up an independent digital asset manager now to scale the business so the storytelling part i think should begin at your entry point so as a practitioner of markets you're you're thinking about doing what was at the time a very significant trade take us through your thought process like what considerations were you thinking through how did you activate in crypto yeah so um so i traded crypto just personally but not you know we hadn't

made a move into this uh in the firm i i had a rough sense of liquidity at a at a you know personal uh trading level which you know wasn't the most liquid market i've traded i've traded a lot of really liquid markets um we we made the decision uh together with one of our largest clients is all public record by the way a large uk client uh to make at the time which is the largest institutional allocation so that was in november and it was on the back of this investment theme that i just described and um but the question was how to do it because we had over 600 million dollars that we were committing or that we intended to commit to the space and so um yeah we kind of we scrambled through a due diligence of all the different trading platforms uh even the even some

of the existing products because you know we're not we're not opposed to investing in other people's products if they're the the best expression of of an investment thesis and what you know what was apparent is that there are an awful lot of players in this space um but when you're looking to invest the type of money that we wanted to invest and my view has always been when you get into a market you get in quickly and when you get out you get out quickly um particularly if you're moving size just because the the moment other people figure out what you're doing you know market's going to run away from you so um we actually found that you know coinbase we i loved and our firm concluded that having custody

and institutional trading on an agency basis all in one spot and age but when i say agency basis i just mean that they don't have a prop business they don't have a market making business in the traditional sense and having spent the early part of my career on wall street you know i've i've seen plenty of of prop businesses and market making business front run customer orders so that was my biggest fear is that we were going to get front run and the structure at coinbase was you know was such that they just literally didn't have that capability so um anyway i uh i had known brett from his previous life and we had done all of our due diligence quietly through kind of intermediaries because we didn't want

anyone to know that we were looking at the space and i called brett up and said we've got i've got something to do and um you know we need to get approved quickly and uh and but i'm not going to tell you what we're going to do this is an exciting point um so you're fiduciary you manage other people's money um you need to be convinced that you can buy the best price sell at the best price safely custody assets you've already identified this conflict of interest that was absent in an agency model um tell us tell us more about your rationale and your level of comfort in advising

you know your end client on you know what was the experience like like before you had an expectation of doing diligence you bought some crypto was it a good experience a bad experience things to be improved upon um it was um there was a lot of uncertainty as you can as you can imagine just because we knew we knew when news broke of what we were going to do and and brett didn't i don't know how much he thought we were going to buy when we started you didn't tell me your full set yeah so um we didn't even tell everyone in our firm at all um i just kept dribbling i just kept saying brett you're going to get a 50 million wire 100 million dollar wire this afternoon he's like oh that's great okay so we're done it's like well not exactly um

and uh but you know there there was uncertainty around how the the regulators would would view the the investment that we made um the uk regulators um you know us were a sec registered investment manager our client was um was or is um registered with with the uk authorities and so and we didn't really know how you know even people in in our firm i had a pretty good sense for my firm but in in the client's firm how how they'd view a move into this space because as everyone here knows uh you know it can be pretty controversial it's less so than it was a couple years ago but um anyway um that that was just that was all exciting that the transaction itself was the most fun part is i've i've done some very large

transactions in illiquid markets over my career but nothing kind of quite at the at that uh at that ratio and and we got it done over five days the market didn't hear about it um we did it i i led the execution on our side which i honestly haven't led execution in anything for the last 20 years but that was probably a good thing because a lot of the a lot of the algos that these guys have um which are excellent and they're and they're many of them across their institutional execution platform but i think that it's prob my gut and we'll never know all we know is the result is that we we bought that much at below the average price over that period of time and i think it was you know working with an excellent team but

also kind of playing with these algos a bit and um there's some pretty there's some pretty quirky things in in the digital markets when you're you know kind of like for instance buying up to um a resistance level and then stepping away from the market and then kind of the market crashes and then people pile on and then you know you can kind of buy more so it was a lot of fun to to do um to do all those things but it was um the you know the fallout was that there there were all sorts of people uh and investors who you know questioned that move and uh you know thank god it worked out um it worked out very well that incidentally when we were able to keep it quiet which which is a freaking miracle um based on

everything i've seen in in market so we kept it quiet for a month and then um we were we were forced uh to disclose it and uh and so i called um eric schatzger bloomberg uh the the day before and said i think there's a story that you're probably gonna be interested in um because we figured we'd rather have him break it than you know just have to kind of publish a news release and uh and and when that story uh hit the tape that was the day that bitcoin blew through 20 000 and kind of never looked back so it kind of had confirmed our suspicions that just the you know the news that a large institution had actually put money into the space is pretty impactful so thank god we'd we kept it

you kept it quiet we were going to keep it quiet yeah and since then it's been a watershed moment for the institutions right because in the effectively year to 18 months since that time frame we've onboarded some of the largest asset managers hedge funds you know in the world and uh if anyone cares to look in our shareholder letter we put a pretty impressive list of clients there i won't name them one by one so crypto's something i feel like it's learned by doing and it was kind of fun to watch eric learn by doing trying to test uh the resiliency of the market test uh what would move the market take us through so here's a trivia question for us what's the most amount of bitcoin

you've either bought or sold on an hourly basis oh god all right certainly 75 to 100 million yeah 75 to 100 million an hour which which is kind of fun and take us through a little bit the process of running it 24 7 because we have you know asia open asia close volatile weekends yeah what what's it like it's not like a set it and forget it strategy is it no no i mean we we um while we used algos we were we would uh i we probably shouldn't go into great detail in terms of exactly we did but uh we we did a lot a lot of moderating of the actual algos just thinking that there probably are people who are a lot

smarter than i am who who know footprints of all these different types of execution uh you know do a pretty good job at front running so we'd kind of use multiple algos at different sizes we'd really speed up just to test the market kind of really speed up the pace of execution because with these algorithms you can kind of say well i'm going to try to buy um 10 million an hour or 50 or 100 and i think when we actually when we first started with your team because i knew how much we need to buy and i knew that the math was such that we had to buy like you couldn't buy it at two million an hour because there just was gonna be too much and so i remember your team was

like yeah you know we've done some pretty big transactions here and and uh i think anything more than two million an hour is gonna you know you're gonna really move the market i was like well that well let's just see you know like okay well yeah let's see like let's let's just do 10. like well you can't do 10. like well let's try you know let's let's let's try and so um one of the one of the observations i'd make is when you try to do something really fast and then you step away there are an awful lot of algos that just think some dumb money came in and then just you know they push it down really fast and really hard um and so yeah so anyway those are the you know those are the kind of the the types of things just to try to try

to look a little irrational the other the other thing that was funny was your guys um i said well what if we you know buy a whole lot and we step away and then we just kind of put bids below the market and and they're like that's great like one or two million i think let's just put 10 million you know every so often down you know for a long way i'm like well that would be stupid because all the guys on twitter go nuts and then you know then then there's just going to be this massive cascade it's like but maybe we want that um so uh yeah anyway it was it was i felt like it was taking someone my age who traded through a lot of crazy markets in europe in the 90s and saw a lot of this this type of

activity and then just applying it to these new algo driven markets which is fun so let's from the art of execution let's cover like one more point which is is it really 24 7 otc trading there's a memory i've got if i could jog your memory on thanksgiving if that brings anything back to you well uh you why don't you do the setup go ahead um so one of the things that was important to us is it's easy it's often easy to buy market it's harder to sell a market um typically and uh and you also it was important for us with our client and it was important for the client and and you know to to just kind of test

everything out that we could test out and demonstrate the the resiliency of these markets and and operations and you know cash movements and security etc and so um i i so i wanted to try to create number one we wanted to sell a bunch and just have the money flow out just to you know demonstrate that yeah you can you can give somebody money but can you get it back um and so you know we went through all kind of those standard tests um but what i really wanted to do is just test out our team in a 24 7 365 market and test out coinbase and so we made the decision we're going to buy 50 million dollars of of a bitcoin on thanksgiving day

and i didn't tell anyone i didn't tell my family i didn't tell our firm we didn't tell it and so i i i i was asking brett if you want to tell the story because i think it was a little hard for his uh his marriage yeah so we were driving up we had three kids in the car two dogs uh going up to vermont and the phone goes and it's you know eric peters and my wife's like brett i mean you've been talking to this guy for like weeks on end and jason and what's up like everyone quiet let me talk to eric put on my my airpods i'm like you're doing what wait when and you're like like now now i'm like i need i need 17 minutes i'm like drove in meanwhile in the 17 minutes i just got cell phone signal back and so

it started to call my team my head trader was with his family going to see you know his wife's parents and he had just left the house with his wife kids and and dogs and uh i asked him to turn it around and so he came back and his wife took the the kids the dogs and drove to her parents and so he stayed back and this chain of events happened in in geographic places around the world and then you know friendly eric said yeah no it needs to happen like right now and we did so we kicked off a buying program you know my wife was trying to still take the turkey out of the oven and all the rest of it she you know invited me and you gave me the you let me have thanksgiving dinner with my family so thank you eric

thank you very much memorable so many memorable experiences in trying to set up you know a marketplace and being tested to the limit at times but i was proud that our 24 7 otc trading did really work i think my head trader his family he missed thanksgiving dinner so you you you yo him one let's talk a little bit about um market volatility things have we've talked about financial disruption crypto store value you talked a little bit about that in in the beginning but with a setup of an potentially inflationary backdrop what would your observations as a practitioner of markets for these many years and it feels like crypto could be at like yet

another inflection point right now with respect to the market conditions like what are your thoughts going through your mind you're sanguine about it it's a it's a it's a moment in time it's a pivotal moment like what what are you thinking about here on the macro side on the macro side so um i'm one of these people i don't i think i've i've studied markets too long to believe that anyone knows what fair value of anything is i think i've just become too cynical about it so you know i love all these guys that just spend enormous amounts of time trying to figure out what the earnings are of this company which i think is a valuable pursuit and then you know so what's the price target it's like well the price target is a function

of the price to earnings ratio and and none of these guys can tell you why the price to earnings ratio is what it is because that's just based on you know on sentiment on policy on you know a lot of these things that that as a macro investor i think dominate a lot of the you know the the micro details so when i think about markets i think that that uh that free markets anyway are are incredible forward-looking machines um and i qualify that as free markets because there are an awful lot of markets that uh that today are less free than they were certainly when i started trading one of the things i love about crypto is just uh is it really is a free market

and people can talk about you know whales manipulating this or that but you know these are still people that are taking an awful lot of risk and so they're you know people that are betting and the markets are free and the fed is not the buyer of last resort or anything like that so i think it's natural to think that these markets are very forward-looking because that's how a a real free market operates and so and if and given that i'm i'm not a big believer in kind of determining what an actual fair value of anything is in the world let alone bitcoin or ether whatever asset i think in terms of of kind of market cadence and so you know for us when we when we were investing

we were we were at a point where we saw this policy becoming incredibly aggressive like just mind-boggling and aggressive if if you'd spent if you spent your career in these markets and you saw what the fed had done uh and what treasury had done meaning the government in terms of spending it was just to think that that the biggest economy in the world could borrow 15 percent of gdp and then have it fully funded by the fed it's just it's just there's no historical precedent for that even in a war by the way and so um when we bought we recognized that those things weren't fully appreciated and um and that there were a lot of headwinds to crypto that people if they learned more would feel

more comfortable about like you can custody these assets they aren't all only used by drug dealers etc and so there were all these forces that we thought would lead to a a you know a significant appreciation and so that's when we got involved we actually got out of all of those positions we still have you know we've reloaded at lower levels but we crystallized all those gains in the in the big run-ups so we we took over a billion and a quarter out of the market um and it wasn't because we didn't have confidence in the long-term success of these assets but you know when people are borrowing money to buy

bitcoin or any other asset and being very public about it and there's just there's just so much hype going on you you know if if you're as cynical as as i guess i've become i'm i'd like to think i'm an optimistic person but i just ruined your thanksgiving and um but you know the if you think about cadence you go okay well there's a a good time to buy is when people don't appreciate things and and you know it's off people's radar a good time to sell or certainly to not buy is when there's just an enormous amount of hype and then you know i think i think we're now in a in a place when you start seeing things like ust break and in the fed has initiated its its tightening cycle we're we're entering

the zone in terms of cadence where these are the general you know periods where you should be looking to accumulate positions um and that that's our that's our view um i don't think that the hiking cycle is finished but i do think given that crypto is such a free market i think that crypto rolled over anticipating that the fed was going to begin its tightening cycle and tightening financial conditions in a material way that's happening right now in a very mature way in many respects this is one of the fastest tightenings of financial conditions that we've seen in history it's not over either but i think what we'll see with these assets my expectation would be that they will bottom and they will start uh

appreciating again before the fed stops hiking so just because that's how they you know they'll look out six months and go well what these guys are are doing right now is unsustainable they're gonna have to ultimately you know pivot and uh and and these assets will start appreciating so that's kind of that's how i would think about the cadence and that's how we've always traded that's eric coming close to calling the bottom i love it that's what they're not put out of here like no i i'd say by the time we get to you know two-thirds of three-quarters of the way through this hiking cycle and we by the way we just started but i think it doesn't even mean that prices will necessarily be lower than here but in terms of timing and cadence um you know there's a lot of there's not a lot of

negativity in this room or a conference like this but in the broad world of of tech investments and you know there's a there's an awful lot of negativity but i don't i don't think it's over i think we're we're in it though no super well-reasoned argument thank you we just this this crowd needs to turn that into a like a three-word tweet so [Laughter] so let's pivot a little bit um so so how exactly do you got the jay clayton the former head of the sec to be on your advisory board um well so we uh i called call them uh what yeah you cold called them amazing tell us a story

um so aft after we entered this space um i've spent my career staying as far away and i tell this to jay in the nicest possible way um i've spent my career staying as far away from regulators as possible which is pretty easy for someone in my seat to do you just kind of know okay where are the lines that stay well within them um i knew that if we were going to go on if i knew that if we had a realistic chance of being the leading digital um institutional investor that we needed to get a lot smarter about regulation and in fact not even just smart about regulation but have have a constructive voice to help regulation regulators think through

what's the appropriate way to regulate this and i don't i wouldn't go as far to say as i know how to do it i just know that when you have a new technology things inevitably change and have to adjust and so um jay uh jay clayton was viewed somewhat as a you know kind of a crypto skeptic which meant for someone like me i don't need to fill my life with cheerleaders any people who have sage advice and you know and are good at challenging my views um and our our team's views and so i just cold called him the day after he left the sec and uh and he took my call and and and that started he was actually the only person who outside of our firm who came in in the

office during covid and and we had you know multiple kind of months of of luncheons we talked about you know and i think honestly i think he was just interviewing me to see if we were the right kind of mindset of a firm to help be a uh you know a thoughtful voice in in terms of trying to create the a sound regulatory foundation upon which the private sector can build and then the first meeting that we had um he made it very clear that that at his time at the sec that that was that was his objective you know as we all know there's a lot of hype there's a lot of there's there's a lot

of misallocation capital in this space a lot of wonderful exciting new ideas that are going to fail i i i applaud literally all of it except the fraud but from a regulatory regulatory perspective you need to have a sound foundation if you're going to do all of us in this room you know justice in terms of allowing us to to thrive and um and flourish with our various businesses and so anyway that that was um he's been an amazing uh advisor to have he helped me build out this really esteemed advisory board i never thought i needed one but now i realize that i do and yeah it's been been great it's been awesome to see him sort of really deeply

invest himself in the space you know i'd like to talk about project hamilton a little bit now sure uh so i'm not sure if any of you know what it is but um there's a collective of us who are looking for real use cases to for to disrupt the you know financial services and so when we think through um interesting applications of stable coins one of the things that we'll go a little deeper into but there's a group of us who are in conversation with the fed and the treasury with an idea to help help the u.s think about

issuing t-bills and settling them with privately managed stable coins and that may be a sort of a commercial controversial thing this week to talk about following last week's you know events but that conversation has been growing in terms of momentum and acceptance there's a bunch of things that that are in and around that idea such as uh sovereignty of the dollar national security issues considerations and and other and i think it'd be interesting to hear you reflect on sort of how we got to the idea instead of tokenizing something and way out in illiquid land and trying to have that be the catalyst

for a cascading effect of stable stable coin use courses how did we rationalize and rally around um uh sort of the t bills yeah sure so um when we thought about what what is it when we initially thought about what does it mean to be the leading digital asset manager for institutions kind of the obvious thing is well we'll come with a whole range of products for bitcoin ethan you know the next 10 or 20 coins and apply our our systems our approach to that and that's kind of the obvious thing the more you think about it um and most of you probably have uh the more you realize that this technology suite is is so

powerful from a kind of speed of execution and settlement standpoint that it it will allow for a much more efficient financial system and that financial system will become much more efficient not because we're all trading bitcoin but because we're using blockchain technologies uh to trade the 200 trillion dollars of financial assets that are not yet tokenized the question is how do you create the right regulatory foundation to allow for the tokenization of these 200 trillion dollars of more traditional assets and then you know once you create that foundation how do you actually make that happen and it's a tricky thing to do because

um the incumbent financial players have you know they have a stake and uh in not wanting to maybe open themselves up to competition from new companies or they they don't want to have to spend money to retool their entire systems and so we've kind of thought a lot about well how do we how do we make this happen and i think our view is you first need to really work with government and regulators and help them think through that regulatory foundation and then you need to start you need to pick some things to start tokenizing from the not i don't say the real world for the traditional world and so there's been a tendency for i think people to tokenize really liquid

assets like real estate um and uh and so our view is that the most important financial markets and assets in the world really is the us dollar and and treasury bills they really are and the wonderful thing that we observe is that in the stable coin market 95 of assets are in dollars they're not in yuan they're not in british pounds they're not in euros they're not in gold they're not you know they're not tokenized anything other than the us dollars so the u.s the u.s has actually been way late to the game relative to the chinese and and there's this ten there's this desire for the us to catch up um what we're advocating for and i think what you see

more more frequently from government now is that they are accepting that this the dollar stable coin market is a way to tokenize the dollar and do it in a way that um that can really scale without having to create a central bank digital currency and so once we one i say we once we as a nation tokenize the treasury market then i think what i the the iron what does it be one of the great ironies of bitcoin i think there'll be a lot of them but i think these technologies actually lead to the dominance of the dollar in the global system in a way that will really surprise people because once the world is able to use a tokenized dollar that's a privatized

token uh and they can buy treasuries that are tokenized what will happen is the rest of the financial system will go okay that's that's where we're going and everyone will move to these technologies so that's you know we we chose to not look at illiquid assets but focus on the short end of the financing markets because that's where most of the money in the world is and those are you know that's the important collateral for the global financial system and um yeah to brett's point you know we've we've been pretty engaged on that topic and and that's been an exciting thing to work on i i love the audacity of the idea to disrupt the world's largest short-term funding market with crypto i think it's amazing um i think one of the coach

the learning points that i received along the way of helping promote the conversation is not just advocate for the technology itself but to demonstrate to regulars that the application of the technology can actually lead to better outcomes and so taking away i mean i'm a survivor of a few different financial crisis including the the 2008 one and and having a global financial system which was so fragile um in those moments and settlement was a big big question so i i think helping to promote the topic that uh instantaneous final settlement is a good thing for a healthy financial operating system is a big part to the advocacy picture

i think with that we're going to keep it on time thank you so much for joining us today thank you so much eric thank you thank you all