Inside Kevin O'Leary's Crypto Portfolio | Cointelegraph

There’s a lot of interest in the UAE because it's a very pro-business jurisdiction. They're very interested in innovation, not just in crypto but in all fields. For example, they have the most advanced DNA sequencing lab in the world. I was able to visit that facility and actually have my DNA sequenced. They did it in 10 days. As a result, I think those of us that are involved in investing in crypto are very interested to hear directly from the government.

The unique thing about the UAE that people don't understand, and while I was there I was very fortunate to get my citizenship, is that it's a small enough environment that you can get direct access to the regulator, and you can have an open dialogue with the regulator regarding what the policies are. It’s extremely interesting and entrepreneurial. There's no other region like it on earth.

So when I think about my crypto investments, cryptocurrencies are a global phenomenon. They're not really governed by borders; they're governed by regulators and policymakers. You really want to keep going to these regions and find out what direction the policy is going to go. I think, like Canada, Switzerland, and Germany, they're very advanced in the UAE. I'm extremely interested in making more investments there, and I spent a fair amount of time there, a total of 10 days.

I see it as a place—it's sort of the Switzerland of the Middle East. It's where you want to set up your operations and where you want to service that part of the world, which is growing very, very quickly. So I’m interested in working with Turkish citizens, Egyptians, Moroccans, Iranians, Iraqis, and you can do that out of Abu Dhabi.

So, what is your current investment thesis on crypto? If you have to broadly describe your investment theories on the crypto industry right now, look at crypto not as coins or tokens. I look at it all as software; it's productivity software. The projects that are going to last and be here, you know, a decade away from now, are ones that actually solve problems.

Let’s give an example: I'm an investor in Polygon. You know I’m a very fortunate guy. I'm able to call up the leaders of these projects and these teams and they return my call. I asked to meet them anywhere in the world. In this case, we met in Dubai with the Polygon team. I'm an investor in software engineers; I always have been. I’ve been in the software industry for 20 years. They’re very, very strong and their mandate, what they decided to do, is to try and reduce the cost by sitting on top of Ethereum and aggregating transactions.

So the gas fees are a fraction of what they would be if you're doing one at a time. I thought that was a brilliant strategy, and I made an investment in Polygon. The same with Solana, the same with Ethereum, the same with, you know, HBAR. All of these are software and they all have different attributes. If you're investing in, for example, in Google or in Microsoft, what are you investing in? You're investing in software. Why wouldn't you invest in crypto? It's software too.

In the case of crypto, just take for example Circle and USDC. USDC takes a lot of pressure and reduces fees in all kinds of different ways. In the case of staking, it gives you some kind of yield against inflation. So all of this, to me, is just software engineering. I have a broad portfolio, I'm very familiar with the engineers involved in each of these projects, I support them, I’m an advocate for it.

The regulator is, in my view, going to eventually support these initiatives because of the tremendous economic enhancement and productivity they provide for the underlying economy. As far as the U.S. regulator is concerned, they have the opportunity to lead the globe in policy, whether it be stable coin, whether it be Bitcoin, whatever it's going to be. I don't think they want to give up that opportunity; they just want to get it right.

Those of us that are waiting for their decisions are very optimistic. You can look at this two ways: you can say, okay, the regulators are getting in the way of growth. That's one way to look at it. I don't look at it that way. I look at it saying when the U.S. regulator makes its policy, the floodgates of institutional and sovereign wealth are going to pour into these crypto assets. I want to be well positioned before that happens.

I don't know when it's going to occur; it's not a matter of if, it's a matter of when. I’m very optimistic that they will take the lead and provide policy for global regulators. That's what I believe. It’s very interesting to see your statements right now, because when I— in the past— we have been looking at your conversation with Pampliano a few years ago when you were accusing him—not accusing him, but you were basically prohibiting him to hold the cryptocurrency.

It was very funny; we used that byte a lot in our videos to represent you as, like, the crypto contrarian. But now you are a completely different story, so that’s pretty cool. I remember that video. I remember that video, and Paul plays it every time I go on a show. The point was at that time the regulator was very non-constructive on cryptocurrencies, and we were discussing this in a highly regulated environment.

But anyways, look, I've changed my mind. You’re absolutely right; I’m a huge advocate and a supporter and, most importantly, an investor. Okay, so now that you are an investor, you told about a few of the cryptos you are invested in. You talked about Polygon, you talked about Solana, Ethereum. So talking specifically about your portfolio in crypto, can you give us a bit of an overview?

Portfolio in terms of do you hold, do you all like NFTs, DeFi, Metaverse? If you can give us some details about your portfolio construction. Yes, in individual tokens and coins and chains, I've got 33 different positions—wide range of diversity. You know, I look at this the same way I look at managing an equity portfolio: never more than 5% in any one name, never more than 20% in any one sector.

So in that theory, that mandate means that I can go up to 20% in crypto. Right now I’m just over 10%, about 10.7%. But I’ve also made equity bets. For example, I have an investment in Wonderfy, a Canadian company that is democratizing DeFi. So they're providing— they're launching their product in January. They’ve been working on it for over two years.

One of the biggest challenges for the individual, like my daughter or my son, who wants to do staking and remain compliant with tax authorities depending on what jurisdiction they're in, is it’s very complicated to actually do it. If you have fourteen thousand dollars in your bank account and you decide that you’d like to stake some of it, Wonderfy is working very hard to make that very easy to do.

That’s one of my investments because I think cryptocurrencies are not just for the crypto elite; there’s a huge demand within the population to solve for the fact that interest rates are so low. So just on staking alone, that’s a huge opportunity. Number two, I became an investor in Immutable Holdings, which is Jordan Freed’s company.

Why? Because specifically he's working—he owns the domain NFT.com. Now normally, I would not put a lot of weight on a domain, except in the case of NFT.com. There are so many S&P 500 companies that have NFT strategies that want the domain NFT.com forward slash fill in your corporate name. So he's going to be curating that; I'm an investor in that as well.

And yes, I own individual NFTs. I think, for example, I'm a big believer that NFTs, which are basically digital wallets of information, are going to be very big in the physical asset world. One specifically that I'm part of the advanced thinking on, if you want to call it that, I'm funding a white paper on it right now, is for the watch industry.

The watch industry, as you may know, is one of the fastest growing asset classes in the world right now—multi-billion dollar secondary market in trading fine timepieces. We don't have any NFTs for authentication and insurance purposes; we want that, and so does the watch industry. So the idea would be if you take a high-resolution scan of the dial, you can identify that watch in perpetuity, and you could avoid fraudulent trading of a piece that was made to knock it off.

That’s of great interest to all the great watchmakers. Just my collection alone I want to do that on. So the whole point is there's so much activity on NFTs, and yes, I’m an investor there. The whole concept here, everything we've just talked about, is all software. I keep going back to that. I look for the best teams, I invest in their companies, I invest in their tokens, their coins, their currencies, but it's all just software.

What is your view on Bitcoin? Has your view on Bitcoin changed since you became a crypto advocate? Yes, I have a position in Bitcoin. It is not my largest; it is close. It's up in the top quartile, though. Ethereum is larger than Bitcoin right now for me. Here’s—I’m a huge advocate for Bitcoin; I treat it as an asset, no different than a AAA office tower in Boston. It's an asset; I don't consider it a currency.

Now, everybody has their own opinion. My opinion is it's an asset, so I hold it. I'm not—I don’t trade it; I do stake it. But the point is I’m not selling my Bitcoin. The challenge I have with Bitcoin and the whole industry has this challenge is we've got to deal with these ESG issues. There’s a lot of criticism around Bitcoin because of the amount of energy it takes to get a coin awarded.

In that area, I’m working very hard. There are lots of initiatives to create Bitcoin, and I’m not saying we’re bifurcating the Bitcoin market—that one coin's different than the other. But if I'm at a sovereign institution, and I work with lots of sovereign institutions because I’m in the indexing business, they would like to fund Bitcoin mining where they keep their own awarded coins, knowing with 100% certainty that they mined them in an ethical and efficient sustainable manner.

That is where a lot of the new capital is going, whether that be wind or solar or nuclear or whatever. All of those projects are happening globally, and they're being funded by sovereign wealth because sovereign wealth has ESG and sustainability committees on top of their asset decision-making. So the next generation of coins awarded are probably going to be held in perpetuity on balance sheets of companies that are funded to make them sustainable.

You know, that’s one way to solve that problem. At the end of the day, I would argue that Bitcoin mining is at the forefront of efficient energy use. It really is; it's just that the rest of the investing world doesn’t take that view.

There’s been a lot of criticism of what happened in China initially by burning hydrocarbons to create electricity to make coin. You’ve seen all of the controversy in the last year. Now, at the Bitcoin 2022 conference, I think there’ll be a lot of good news in this area that’s going to happen in February, as you’re well aware, but it will definitely be the topic of discussion yet again.

Since then, hundreds of millions of dollars have been earmarked and exactly put into the ground into projects that are going to be more sustainable in wind, solar, and nuclear as I mentioned in different geographies. West Texas is a big focus right now, obviously, but there are other geographies that are also looking at it. So that’s the next big thing for Bitcoin.

But I— why wouldn't I want to own that for the long term? I mean, I just think the long-term prognosis for that is to own it beside gold as a hedge against inflation. Alright, that's interesting. But still, that's not your biggest crypto holding, and that's quite telling. It means that you believe that, for example, Ethereum—you mentioned that you own more Ethereum than Bitcoin.

It has a larger growth potential than Bitcoin in the future, I guess? No, but it doesn't say that I don’t like Bitcoin. What’s happening, though, a lot of the innovation that’s occurring within the software engineering—you’ve got to remember something. The hottest hands, the best developers in the world have moved over to crypto.

If you want to find the smartest engineers in software development, you’re going to find them in crypto. So again, I go back to Polygon. Polygon’s working with Ethereum; they’re working with it to make it more efficient. You know, I look at my Polygon investment as a quasi-Ethereum investment because what they’re doing is aggregating transactions; they’re making Ethereum more efficient.

Many people in financial services are concerned that Ethereum’s too slow, and that’s why they're looking at Solana for example. You have to make multiple bets; you can't bet on just one horse in crypto. You’ve got to go with the hottest teams with new innovation, new ideas, which is what I do. I again say I’m so fortunate because I have direct access to these individuals, and that's probably a little bit to do with the work I do in the media.

It doesn’t matter what’s—what matters to me is what can I do as an investor? How can I support their initiatives? I believe there’s a direct correlation between social media, the media, and market capitalization. My ability to help a company tell a story really matters. So if I can get millions of followers, as I have, and explain to them why I’m doing what I do and why I support these different teams, I think it's to everybody's benefit.

Good companies have ideas; engineers have ideas; they have innovations. People should understand what they are. I really recently took a position in Helium. I’m intrigued by the idea of providing low-cost Wi-Fi on a global basis, to democratize it, to make it less expensive in all kinds of geographies. I like that idea; it's a great initiative. Why not own it and let the managers and the miners around the world do what they’re going to do?

But there’s an economic reason to own that; it’s driven. I always believe the best ideas are driven by economic momentum; something you’re—some problem you’re solving, some efficiency you’re creating, some productivity you’re providing that gives you the long view. So is it—I’m a little bit more focused on enhancing productivity, economic value than, let’s say, you know, meme coins.

I have less of those in my portfolio, although I do support Potherium because I’m involved in cat DNA research. I own Sympotherium. I think the fact that they give back to animal shelters is good. But you know, that’s just one of the meme coins that I’m involved in because there’s a reason to do it. People know that I'm an investor in Base Paws; they're probably the most advanced DNA company for cat health.

It's been a very successful company, and there's a—there's tying together the crypto world with the real world of DNA testing and sequencing. Ah, and yeah, that’s cool.

So if we had to now describe the percentage of your portfolio that is now in crypto. You mentioned that you wanted to get to 10% by the year, but at the end of the year, but that's not about your personal portfolio; it's about your companies. Let me be specific: I said I started the year at 3% in the operating company. In fact, we're sitting at 10.7% today, so we have gone beyond our target only because many of the projects have appreciated so dramatically.

Most of this is held in my FTX wallet. It’s the platform— you’ve got to remember something that people just don’t spend enough time talking about in this industry. I lived it— when you have your own compliance department and you have an external auditor, and you have to file with the regulator, regardless of what geography you’re in, doesn’t matter. You need infrastructure; you need compliance infrastructure.

For example, when I trade a stock, if I trade a stock in— when I get off this call with you and I trade a stock in Zurich or in London or somewhere in the Eurozone, I mark to market that position instantaneously. My compliance people can see it instantaneously. At the end of the day, when the market closes, they can see exactly what percentage it is of the overall portfolio that the mandate allows—between 3% and 5% weighting. They’ll know immediately if there’s leverage on the position.

Everything is built into that compliance infrastructure and has been for decades. Every institution works under the same mandates. We have nothing like that in crypto. We have archaic methodology where we use spreadsheets to calculate percentages, and we’re constantly going back to look at the transaction in the chain, and the auditors are freaking out because they can’t see it, and they can’t mark to market.

I mean, this is a big problem; it’s a really big problem. So when you tell me, well, you know, do you think institutions are going to buy Bitcoin or any other? The truth is they are not even present yet in the crypto markets. And the reason they’re not is because they don’t want to be—because they have no way to do it on a compliant basis.

The most advanced companies in providing compliance platforms and infrastructure, in my view, it’s a personal opinion, are FTX and Circle. I was able, after six months negotiating with my own compliance department and my external auditors, to open an account with Circle and start to stake USDC. Same thing with FTX—months. It took months and months and months. But now at least I have my own internal team that can work with my own internal compliance and external auditors.

This stuff is a nightmare, and it’s not going to get fixed overnight. It’s the biggest problem that’s holding back the advancement of pricing of cryptocurrencies and chains. We’ve got to solve this problem; we have to fix this problem. And the regulator wants us to fix this problem, and the institutions want us to solve this problem.

That’s what I think the next two years is all about. Okay, and now I have a question for you about that. But first, I would like to know— so you said that you reached around 10% of the portfolio, but you say that every investor could invest up to 20% into a specific sector.

So I would say, I would ask you, what should happen in the regulatory atmosphere in the U.S. to convince you to bring your allocation into the crypto industry? Well, again, this is a personal opinion. What I really want to have happen is I want the regulators to bring policy forward on stable coins. That’s what I want because stable coins are very important to me as a hedge against inflation.

Specifically, the one I've chosen to work with is USDC because I think it’s the most advanced in terms of dialogue with the regulator—not here, but in geographies all around the world. It’s a form of payment; it’s also a form of hedging against inflation because if I can at least marry my staking program with inflation, currently at 6%, at least I’m holding value.

But I can’t really do that until the regulator rules because even within my own operating company, with my own compliance department, they’re considering stable coins as an equity, no different than a stock. So I really can’t get past 5%; it’s not like I can hold a huge 30% cash position.

I mean, you know, when we sold off our commercial real estate, we had a huge cash position. We couldn’t—it was about 30% of the operating company. So, you know, we’ve been working hard to redeploy that capital. But I really want the regulator to rule on stable coins. Now, you know that there’s been some controversy with certain stable coins with the regulator.

I don’t touch any of that stuff; anything that’s involved in a fight with the regulator, I want nothing to do with. I am not a crypto cowboy. I work in a compliant environment; I don’t want to get on, you know, some kind of a mission saying we have to sue the regulator. That's insanity; that’s crazy, and that’s really a bad idea.

So I think all of us in this industry should understand that we work with the regulator to generate the most advanced policy we can get. The reason we do that, it’s in our self-interest of sustainability, and also it gives us way more in terms of what institutions can allocate into these asset classes. So we should definitely be thinking about that.

And that’s interesting because you choose stable coins as one of the main tools to get interest on your—that you get value out of your assets while cash— if you hold cash, you end up losing value. But a lot of people would say why don’t you use Bitcoin then in order to keep those high returns instead of stable coins? Why do you choose stable coins instead of Bitcoin? Well, the challenge I have, and many institutions have with Bitcoin, is volatility.

When you are managing or you’re fiduciary for capital, volatility is not your friend because you’re marked to marking value of the portfolio every 24-hour cycle. So if you’ve been given a mandate by an institution, and most of these mandates are based on diversity and stability, your number one mandate is preservation.

So if you’re managing for a pension plan or university or state fund or whatever it is, that volatility really hurts you when you’re being graded in terms of your mandate. I don’t think you’re going to see—there’s nothing wrong with putting Bitcoin in a 5% weighting, up to a 5% weighting, and treating it like an equity or an alternative. I see tremendous interest in doing that from a 1% to 5%, generally on average a 3% weighting with where you find Bitcoin.

But you’re not going to get there to a 20%, 30% in Bitcoin in an institutional or sovereign mandate; you're just not. Stable coins have that potential if they were regulated. Specifically, I think the stable coin of choice currently, at least for me, is USDC because they seem to be more, you know, Jeremy Allaire who sat in front of Congress recently seems to be more in tune with what the regulator wants and is willing to be very compliant.

That gives me some—it doesn’t mean it doesn’t guarantee me anything, but it gives me some assurances that he gets the joke, so to speak, about compliance. You seem to be pretty confident that the regulators will eventually enable crypto to thrive. On the other hand, I had a conversation with Marc Yusko a few months ago who was expressing this very common narrative in the crypto space, which goes like: there are the incumbents of traditional finance like banks and the financial intermediaries that are going to lobby the regulators or still use their influence to slow down this crypto evolution that we are looking forward to happen.

So don’t you see the role of the incumbents as a major issue for crypto to develop further and to get the regulators on their side? I don’t agree with that positioning. I don’t think that’s going to happen either. The only entity that can control the pace of regulation is the regulator themselves, and it doesn’t matter what the incumbents say or do. They will go with the flow of productivity and innovation.

All of these different chains, all of these different tokens, and all of these different ideas for currencies are all very innovative. Whichever ends up winning, if you want to call it that way or gets the majority of market share, all of the incumbents will fall in line. Banks don’t set policy; they operate under policy.

They have a say in it; they can talk to the regulator, and they do, and there’s nothing wrong with that, and they’re an input. But no one bank is bigger than the regulator. Banks are winning and losing all the time in terms of who makes more money, who has a higher return on assets.

I can tell you what motivates a traditional money center bank is return on assets. They spend their whole day trying to figure out how do we optimize for return on assets, and if they’re not looking at cryptocurrencies, they’ll be left behind. That’s what’s going to happen because when the regulator finally rules, just on—if it was just on stablecoin alone, they would have to open a stablecoin desk. Of course, they would.

Now, are they going to start from scratch, or are they going to be working on it quietly in the background? My guess is they're working on it quietly in the background. They would be foolish not to be. As you said, inflation in the U.S. is hovering around the 6% point, and the Fed now intends to wind down the stimulus measures in order to contain this trend.

So how are these macroeconomic dynamics going to impact the crypto industry, the crypto prices in the months to come according to you? It’s a great question because if you asked it just 60 days ago, I would have said the majority of the inflation that we see in the U.S. economy right now is driven by the fact that the supply chain is broken.

I have investments in over 30 private companies, and I’m well aware of the situation we have right now regarding supply chain issues. So if you’re manufacturing in the U.S., as we are in many of our companies, our supply chain is broken to lower-cost components. So we’re having to source them domestically at a 30% price increase, and we’re passing that on to our customers.

That is why I would have said inflation was temporary. I don’t believe that anymore; inflation is now where it is in major commodities like energy, like gasoline, like food prices because we have over-stimulated the economy. We have printed so much money in the last 24 months. You can argue it was important to do that during the pandemic, but the pandemic is rolling on as you know.

It has different—luckily vaccines are helping manage it, but supply chains are still broken. But really what’s happened is there was just too much stimulation, and as you saw yesterday, the Build Back Better plan is dead. That’s very good for the American economy because that was stimulation that was going to be inflation on steroids.

That was a very, very bad idea. And as a result, the check and balance system doesn’t matter which side of the aisle you’re on; bad ideas never make it forward. That was a bad idea. But now dealing with real inflation, it’s going to put much more pressure on the whole system to find solutions.

Particularly for cash holdings, you’re being taxed at effectively 6% if you hold cash. Maybe you don’t want to call it a tax, but when inflation is 6%, your buying power 12 months from now is 6% less. And that’s a lot. So we now have added pressures, and I’m no different than anybody else trying to figure out where do I deploy this? Where can I get stability in this cash? Where can I find a way to hedge?

It brings me all the way back into stablecoin. So I’m a huge advocate for solving this problem with stablecoin. It doesn’t mean I don’t want to invest in the other blockchains or the other coins or tokens or other ideas; I do. But I can’t do 30 positions in mandates of any of them; that’s too volatile.

So these issues are not going away. The dialogue is not going to change. You’re going to see a lot of discussion about this in the first and second quarter of next year, and you’re right on the money to be covering this. There’s no question this is going to be very important.

I think we’re going to start to see some moves with the regulator very shortly, not just in the U.S. We opened this interview with the United Arab Emirates, we talked about Canada, we talked about Germany, we talked about Switzerland. Those regulators are all talking to each other.

They’re all talking to each other. If we could just agree on one stable coin between those jurisdictions, that would be a huge productivity enhancement, and I anticipate that will happen.

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