Is Regulation A Threat To Bitcoin? | Bitcoin Magazine

It's not what I want or you want; it's what the institutions want. Institutions that are just stepping in or considering getting involved in allocating to crypto want one thing: Bitcoin. We're not gonna print two trillion dollars worth of paper; that currency is going to be digital. It's just in what form.

You've historically been a strong critic and a strong advocate for Bitcoin, so when things change, I change. I mean, listen, I get this thrown in my face every time I talk about Bitcoin, but here are the facts. Yes, I was a critic for a while, but I got into Bitcoin in 2017. My first purchase, I got into a lot of issues with regulators; they were not on board for conversations about Bitcoin at that time. Everything's changed since then. You've got regulators in Switzerland, Canada, New Zealand, you know, even here, loosening up their discussions about digital and Bitcoin specifically. As a result, you know, I've sort of come out and said, look, I've got a three percent allocation in Bitcoin, and I intend to hold it as property.

All right, so why are you involved in Bitcoin? You said you got involved in 2017. What was it that piqued your interest? I mean, obviously, you're wildly successful in the legacy finance space, in the world of VC investing. What was it about Bitcoin that caught your eye back then? Why are you in the space?

I never looked at it as a currency. I looked at it, and I'll give you an analogy. I'm a huge watch collector. I collect very rare pieces from all around the world—vintage, new ones, etc. But what matters in the watch business is rarity, exclusivity, uniqueness. When you're able to buy, let's say, a watch manufacturer like FP Journal that makes 10 pieces and you're one of the owners of those 10, what do you think happens to the price? It goes to the moon, as they like to say, and that's exactly what happens. There's no difference with Bitcoin.

Clearly, at the end of the day, you have to make a decision. I look at it this way: if you're like me and you're allocating assets and you have a portfolio—prior to Bitcoin, I had a five percent weighting in gold. I've had that for decades. Now, the way I look at Bitcoin is, okay, binary decision: do I want to own it or not? Yes? No? If it's yes, what percentage allocation do I use? Because once I've made the decision to own it, I've got to decide what percentage of the portfolio it is, and for me right now, that's three percent.

Now, I do not consider it a currency; that's my personal opinion. Others might, but for me, it's a property. It's like an FP Journal watch—I'm going to buy it, I'm never going to sell it, I'm not going to trade it, I'm going to own it, and I anticipate it will appreciate over time and probably beat the S&P 500 index, just like my FP Journal does.

When you come, you say you don't think it's a currency, so you're kind of coming at it from more of a scarcity-first kind of angle, right? I think it may, it may end up being a good hedge against inflation. We don't know yet; obviously, the volatility is problematic for many institutional investors. I have taken the decision to say, look, I'm not going to try and trade in and out of price adjustments. I'm going to allocate three percent, and if the price drops, I'll buy more. That's the whole point, and that's what I've done.

The whole idea at the end of the day here is to keep that three percent allocation. Now, if I increase it up to five, I'll have to buy more, but that's a discipline of just portfolio management. The actual asset, Bitcoin itself, to me, is a property—it's something you own. Its value increases over time due to scarcity and complexity of mining and being awarded a coin; all of these things factor into it.

Now, the truth is, the institutional investor is not on board yet, but my thesis is when we resolve the issues around Bitcoin right now in the next couple of years and allocations start happening from sovereign funds and pension plans, you're going to see a material appreciation in price.

I think we agree with you strongly on that one. But when you talk about property, right? Property needs to be easy to transfer between people, right? I would say, if you compare—you just discussed watches, right? But you could also discuss, you know, maybe urban land, buildings, stuff like that that are historically used as stores of values. Would you say that with Bitcoin there's an advantage that it's more liquid, even if you're not necessarily planning on transferring it to another person?

I do not expect that there will be a healthy P2P transfer, you know, economy—a market for it. Yeah, I think it's great that it's so, you know, fungible in the fact that it's easy to transfer. I mean, that's built into the, you know, the whole metric of what Bitcoin is. I mean, you—it goes really back to the binary decision: do I own it or not? But, you know, everybody has an opinion about what it is. Some people do not own it because they don't believe in it. I don't see any reason why digital assets won't appreciate in value like every other kind of asset. Frankly, to me, this is an asset class, and you have to make a decision on what you own, how you own it, and what you want to call it.

I mean, the most desirable asset in crypto is Bitcoin. It is the gold standard of crypto, and basically, institutions that are just stepping in or considering getting involved in allocating to crypto want one thing: Bitcoin. Now, they have to own it sustainably mined; as you know, that's become an issue over the last few months. They also have some ethics committees that are involved in making decisions about asset classes—not just Bitcoin, any asset.

So we need to resolve these issues around the Bitcoin dialogue, and the reason I'm involved in that is that I want the coin to appreciate. I know the way to get it to appreciate the fastest is to get institutional allocation. How do I get that? I solve the ESG problem. I say I solve it; I mean collectively we've got to solve it. They'll start buying it when they can go to the compliance committees and say this is ethically mined and it's sustainably mined.

What would you say to someone who says the scarcity of Bitcoin cannot be preserved—that someone somewhere will print Bitcoin in the future? What makes you think that that won't happen?

The baseline algorithm for how Bitcoin is awarded is well known. I mean, it's not a secret. If you're asking me is it going to get hacked, my answer is no. I think the whole point of the chain is to identify, you know, these coins when they were actually awarded. It is a pretty solid structure, and over time, more and more people will agree that that is what gives them the confidence to own this property.

You know, I'd argue it's the same as any other asset. You know, you talk about diamonds for example—the attempts to identify diamonds one way or another or from, you know, mine one certain way versus another way; the diamond market's still very fungible. You basically weigh the carrots, you look at the quality of it, and you determine what the price is. We don't have that issue around Bitcoin; it's awarded—you know the date it was awarded. And so far, the value of each coin, regardless of where it was mined, is trading in tandem. The price is the price wherever it is.

Now, you may pay a lot of fees to trade your coin; it depends on what, you know, what platform you're using, but there are institutional platforms emerging that are compliant now, that are preparing for the day when a pension plan says I'm putting a three or five percent allocation; a sovereign fund might—that's billions of dollars. They will not do that if they think there's a way to basically fraud people out of Bitcoin. That's not going to happen; I don't think so. I'm confident; I'm not worried about it.

There are those out there that say that's possible; I don't believe that.

So I guess—I mean, very insightful answer, but to be a little bit more pointed here, from my viewpoint on Bitcoin, the scarcity is preserved because it's a distributed system—because it's a system that's not controlled by anybody. Right? And we've seen with centralized systems that they have a tendency to inflate their supply, be greedy, try and control things. Right?

At the same time, we have this competing interest that we want to see more regulatory compliance, more adoption within institutional circles. Do you view that as a bit of an existential threat? That if Bitcoin gets too centralized or too controlled by a small group of people, that scarcity, that value prop is at risk?

It's a great discussion. It certainly was at the fore of what was happening at Bitcoin 2021—that discussion was ongoing every day, and it is a concern. But generally speaking, when you think about Bitcoin—I don't see a situation where it's going to be made illegal anywhere. The thesis is, you know, the genie's out of the bottle; Bitcoin is distributed all around the world and used as property and currency in every country on earth.

So I don't really see even if one country says they're going to make it illegal how they're exactly going to do that. I think regulators would prefer to work with the fact that, this property—in my case property—is here to stay, and they're going to have to deal with it.

Now, I don't have a problem if in any jurisdiction they say, look, if you gain capital gains on the sale of your Bitcoin, you owe taxes. I own that on any asset; I'm okay with that. But regulating it out of existence is a low probability as far as I'm concerned—not going to happen. In fact, it's going the other way.

You know, let's just take a pragmatic approach looking at a two trillion dollar infrastructure package. We're not going to print two trillion dollars worth of paper; by the time that program is actually implemented, it's going to be some form of digital currency, whether it's just, you know, USD stablecoin or whatever it is, or just credits done electronically to governments at the state level or even contractors. That currency is going to be digital; it's just in what form.

So the world's going to move towards digital currency. Bitcoin was the beginning of that; it is the granddaddy of it all, which is why it's so desirable. It's the FP Journal watch I talked of earlier. If I only could own one digital asset, it would be Bitcoin, but I'm planning to own a lot more in a portfolio approach. Because it was the first, it's always going to have that unique position—being the first is always the first. And I don't think that governments are going to say collectively, in sync, let's ban all digital currency; ain't gonna happen.

All right, so a few minutes ago you mentioned that you think BTC needs to head to the ESG realm. What is your vision for getting Bitcoin compliant with these sort of regulatory? I mean, you're viewing them essentially as roadblocks if I understand you correctly. You're saying that we make Bitcoin ESG, and that unlocks all this institutional adoption investment. What does ESG Bitcoin look like to you?

Well, I'm very involved in that, and I've had many discussions with, you know, some of the larger players in Bitcoin in terms of ownership and assets, and the reason we have a collective interest in it is that we see the logjam being broken up and then institutions coming into an asset class we already are positioned in—that's a very attractive outcome.

Here's what I think: originally, the discussions were around the idea of tagging the coin. In other words, this coin was mined sustainably with hydro; this coin was mined sustainably with wind or solar. These coins were made in a way that there is no issue around burning coal, and it was made, you know, perhaps in West Texas or whatever, but it's tagged that way.

The problem with that thought is that all of a sudden, you differentiate two classes of Bitcoin—they're not fungible anymore. The thesis was that maybe the green one trades at a premium. I don't like that idea because I'd like to know that any Bitcoin trades in tandem with any Bitcoin price, and those prices are on a discovery basis 24 hours a day, every minute.

Here's a better outcome for institutions that do not own any coin yet, that are thinking of allocating. Here’s one solution: there are certain miners out there—take HUT 8 for example—that own every coin they ever mined on their balance sheet, and it was mined sustainably. You can just buy their stock and own that balance sheet—that's one solution.

And know with certainty the coin that you own through the equity ownership is ESG sustainable, and your compliance committee could check the box on that. But I think what really is going to happen with the 2.3, whatever it is, remaining coins—let's say 9 million—you set up a new miner and just do it again in West Texas, which right now looks very attractive; government's on board at state level.

You've also got lots of wind and lots of solar; you've got all kinds of extra energy there that you could use on a sustainable basis. So you set up a mine facility there, and if I'm an institution that only wants to know the providence of my coin, I simply fund that development. I put the CAPEX into that, and I take my payback in coin that I own, put on my balance sheet in perpetuity, just like a building in New York City.

I bought that property; I own that property. I know where it came from. I know with a hundred percent certainty that it's ESG compliant, and it's on my balance sheet. That is, I think, where we're going.

You've heard all of the discussions in the last few weeks about every miner moving towards sustainability, figuring that out, because the institutional buyer is asking for that at a very minimum. And I think that that development of that idea is really strong because it doesn't differentiate one coin from another; it just makes the next 2.4 million—the majority of them will be mined sustainably.

First of all, that answer makes a lot of sense. I mean, we were definitely interested in your thoughts on, you know, based on your prior tweets, you know, are these going to trade at different values? A lot of people have compared investing in Bitcoin to the gold rush, right? You have the people that mined gold and made money doing that—you also had people who made money selling jeans, work boots, and pickaxes. And I know you're a VC; you know, you're Shark Tank. Obviously, you've got this three percent portfolio exposure to Bitcoin. Are you invested directly in any companies in the Bitcoin space specifically with Bitcoin?

Yes, I have started to allocate capital. It's a very good question because the infrastructure required for Bitcoin and all the current digital currencies is going to be decentralized. So I recently took a large equity position in a startup that was called DeFi Ventures, and I renamed it Wonderful—sort of a rip-off of Richard Branson; if he can pull that off with Virgin, I can't, I don't understand why I can't do it with Wonderful—because that business is about, you know, making it easy for consumers to own Bitcoin and be able to monetize Bitcoin with smart contracts so they can get yield.

And so it has to be tax compliant; it has to be easy to use, and so we're designing that. That's one of my investments. I also have two others pending that are more institutional in nature that provide platforms for the world.

I do a lot of work with pension plans and sovereign plans in the indexing world, and in that space, they need compliant platforms. So if they want to invest in stablecoin or Bitcoin or a combination of both or write smart contracts, they do it on a compliance platform that actually fits with their institutional compliance departments. And those are two different ways to look at it.

And again, that, as you suggest, is infrastructure, and it really goes in supporting, you know, what I do on a portfolio basis. I'm probably going to bring my weighting up. I'm not announcing this today; I'm just saying I'm looking at increasing my allocation. Next stop will be five percent on Bitcoin, and at the same time, investing in infrastructure, so that I can actually do the same thing that anybody else wants to.

I would like to actually make yield off my coin, and that involves getting a platform that allows me to do that easily, compliantly, with tax reporting. I need tax reporting; I have to be compliant. You're hearing the same words coming out of me that every institution has, and we haven't really built those platforms yet, which is why I'm investing in some of the ones that are starting up. This is part of what it's going to take.

It's not just about getting people on board to buy Bitcoin because we've solved the ESG problem. It's then how do you manage your portfolio? How do you use it to create fiat? In other words, you can go to get a stablecoin on almost an interest rate basis through a smart contract and then convert that back to fiat if you want a distribution. So there's a lot going on back there in financial infrastructure, and that's the world I live in, and I'm extremely interested. So I am investing more capital.

I bet you—and I'm just thinking about today alone—how many meetings I've had this morning on exactly these topics. I'm spending 80 percent of my day, that I allocate to investment portfolio, on Bitcoin and crypto. Bitcoin has a way of doing that; it tends to consume all your thought processes once you start getting in.

For me and David, you know, we've been in Bitcoin a little bit longer than you maybe. We look at like a five percent allocation; you know, it's like what is this, an allocation for ants? Right? And we hear yield and the chase for yield, and me personally, I think that's a distraction. Right? And I think that Bitcoin is the type of asset that has major upside potential, is super scarce, going through an adoption phase. The returns have been absolutely insane year over year. Is there a number that you're looking for in terms of like making that risk worth? You know, risking your coins to get that kind of yield? Is there a specific threshold you're looking at?

There's many different strategies, and the problem with all of them is I had to hire two people just to implement them. It's so complex; the average person isn't going to go through that, and so we need to make that an option if you wish. It's not that risky; what you need essentially is volatility, and Bitcoin gives you volatility. The more volatility on Bitcoin, the more yields you can make.

So, you know, I look at it this way: somebody asked me the other day, okay, if you bought Bitcoin at, you know, 40 thousand and now it's— or, you know, 55 thousand and now it's dropped down to 40 thousand, does that bother you? I said, no, it doesn't because I've made the decision to call it property. It's like a building I own in Boston. The price of real estate goes up and down through market cycles, but I still own the building, and I feel the same way about Bitcoin.

I'm kind of agnostic to volatility on its price hour by hour; I don't really care. But the gift that keeps on giving with volatility is I know how to get yield out of it now, and so I think more investors are going to follow my path on this. The great thing about Bitcoin is it gives you lots of optionality. There are many things you can do with it if you wish to, and you may decide, as I have, that it's property and I want to mine the value out of that property, no different than when I own a building or hotel in Boston. I want to get monthly distributions because I rent the rooms out, I rent the office space; I can do the same thing with Bitcoin. I got no problem with that.

So earlier you sort of said, going back to the clean energy Bitcoin conversation, your answer is basically, look, if you want clean Bitcoin, mine Bitcoin cleanly—invest in the tech, go out to West Texas, do it here in the United States, and get the Bitcoin you know is cleanly mined. But we've also heard the argument tossed around, and I'm definitely partial to it, that Bitcoin itself incentivizes more efficient energy uses—that Bitcoin incentivizes renewable energy. You know, if you realize that the difficulty of mining Bitcoin is going to just keep increasing every four years, some people think we're going to reach a point where the only way you could even possibly mine the stuff is with renewables.

So do you buy into that argument that Bitcoin incentivizes investment in green tech, incentivizes investment in renewables?

I do actually, I'd go a step further. I would say because of the complexity you're talking about for the next two and a half million coins, it's going to advance semiconductor technology as well. You're going to need to be able to get renewable power—no question about it; you know, at two or three cents—and you're going to need a significant enhancement on the chipsets and the machinery it's going to take to actually process the awards going forward.

It just gets harder and harder, so that's got lots of people working on new technologies to do this, and I think that advances a lot of different things. Number one, it advances clean power, new technologies in solar and wind, certainly, end in hydro. But at the same time, you know, whatever machine you're mining with right now has got to get 20 more efficient in the next two years, and that's going to be the purview of American providers.

I think they'll be coming out; most of this stuff is made in China. We got to end that; we have to take lead here. If the Chinese are starting to shut down their miners or at least putting more pressure on them, why not pick up the slack in the pools here in the U.S.? Let's make this country the number one miner of sustainable coin, ethically mined coin, coin mined with sustainable power that matches every ESG concern. There's another 80 years of work to do, so it's not going away anytime soon, and we can lead the charge.

Now, not everybody agrees that Bitcoin is like the new gold. You know, gold's been around since the Romans; that's why I have a five percent weighting in that, and that was mined back on the island of Cyprus 2000 years ago. So there weren't really a lot of sustainability ESG issues back then. That same gold is sitting on the planet right now, and that's the argument, you know, people say it must be very, very polluting to mine gold and not ESG at all, and they're right. But the majority of the gold that's sitting on the planet right now was mined before there were any ESG tests at all.

So that's the way you look at that for the remainder of Bitcoin. This is going to be done sustainably; there's no question. It's not what I want or you want; it's what the institutions want. In order for to get price appreciation, in order to get Bitcoin to beat the stock indexes, we're going to need the institutions. We just—there’s no other question; it has to happen that way.

Which is why you hear every miner, and you certainly heard them talk—I moderated the panel for public miners, as you know, at Bitcoin 2021. Every single one of them, whether it's Fred at Marathon or anybody else, there was talking about how they're shifting their whole focus towards sustainability on the energy source. Frank Holmes, same way at Hive—all of them, same message.

So when you're speaking to these institutions, in some ways you are, you know, an advocate of Bitcoin. You know you've been in the space; you've clearly done your homework and have learned a lot about the ecosystem. What is your general message to institutions that are curious about—when someone calls you and they say, Kevin, what is Bitcoin? Why should I invest? You know, what is your message to institutional investors that are still on the fence?

I say to them, look, because they obviously see I'm out there talking about the three percent allocation, saying how did you do it? What methodology are you using? How are you getting around the ESG issue? That's how I actually got contacted the first time I disclosed I had three percent; it was the institutions I worked for in the indexing business that called me, and that’s when the dialogue started.

So the majority have not yet got involved in Bitcoin. You heard the same out of Larry Fink a few weeks ago when he talked about the global asset allocation business he manages—that he's not getting a lot of demand. And it's partly because of the letter he keeps putting out about sustainability, climate change, and everything else, that every asset—not just Bitcoin—every single asset should be tested for by your ESG committee to make sure that it is being created on a sustainable basis.

So my message is that the industry itself, the Bitcoin mining community, the global community, the majority of miners—certainly all the miners in the U.S. have pivoted in the last six months towards a sustainability model. We saw this first happen with New York's bill, which is still going through its iterations, saying that they will ban all Bitcoin mining except if you can prove that you are mining Bitcoin with 100% sustainable energy. So that's going to be the rule of New York.

Texas is a much more friendly government, and they also have a very good environment for sustainable energy sources, particularly solar and wind. At the end of the day, when I say to institutions, look, I can show you a path to how you can own a coin that you know the providence of—you just simply invest in a miner that's mining 100% of their coin and being awarded coins that are mined sustainably, and you'll own it.

And slowly that thought process is starting to go into the investment allocation committees, but we have not broken the logjam yet; we're nowhere near it. There's more work to be done.

One of the coolest parts about Bitcoin mining, to me, is that it's this quest for cheap energy. One of the main costs of mining is your energy cost, and to me, it's a permissionless system where anyone can plug in. It's one of the truest free markets that the world has ever seen—this competition among miners looking for cheap energy.

On the ESG side, I mean, this is a compliance hurdle that large corporate miners are going to be doing. That seems like it would undoubtedly increase costs. Do you expect that there's going to be two tiers of miners? There's going to be smaller miners that are more distributed, seeking out cheap energy, and then there's larger, more compliant miners that may be paying a higher cost net out?

You can be a miner burning coal, great electricity, and be very profitable, but you will never get an institutional following. If you really want to expand and raise CAPEX to build out more facilities, no one's going to support you unless you can do it on your own income. If you have enough, take all your profits, convert it back to fiat, build out, you know, facilities and wherever you're going to build them—that's fine.

Right now, every single public miner is telling the ESG story and showing how they can do it—and in some cases buying carbon credits, not because they want to. These are all added costs, as you suggested; they have no alternative. There's no other option; they have to be ESG sustainable, and they have to be compliant with their ESG committees, and that's the bottom line.

But, you know, going—when you start thinking about access to capital, there is capital available for those miners that have a path to doing 100% renewable energy sources, and the returns look really good. I mean, you know, Bitcoin is volatile—there's no question about it—but I think every day we move towards more adoption at the institutional level.

But there's going to be the tipping point—the proverbial tipping point—when all of a sudden one or two or three large institutions do an allocation, and you're going to see the price of Bitcoin skyrocket.

You talked about Texas being this sort of—especially West Texas—all the wind energy being a great place in America to go mine Bitcoin. You know, they changed their law; they updated the Uniform Commercial Code to provide regulatory clarity and just sort of, I guess, financial clarity around how Bitcoin works. I think it had to do with the ability to loan Bitcoin and some confusion there.

Do you think we're going to see that trend across the state? I mean because right now, if you wanted to build a Bitcoin business, there's a good chance you'd go to Texas. And if they start to see all this investment, all these companies move there, do you think that might trigger a domino effect? Do you think other states could be poised to follow Texas to try to capture some of that new investment?

I wouldn't say every state; it's going to be state by state. I'll give you an example: I think New York's a very poorly managed state, I think Massachusetts is poorly managed, I think California is poorly managed. And the way you can tell is just look at their tax rates. The lifestyle there is no better or worse than here where I am in Florida or Texas, and yet you pay a stratospherically higher tax rate. So they're just poorly managed; they make bad decisions, like the one they're making right now.

But Bitcoin mining in New York—they're not—they're just poorly managed. And so I wouldn't invest; I don't invest in businesses in those states because they're not competitive. I invest in businesses in Texas and in Florida because they're competitive, and they have a very pro-business; you know, Mayor Suarez here in Miami, he's very pro-business, he's pro-Bitcoin, he's pro-digital.

And so I prefer to do business here. I can make that choice as an investor every day, and I do. And so I think we're going to end up with states like Texas for Bitcoin, which has clearly made it a state mandate. They need to attract those jobs, attract that technology, and attract that desire for clean energy—all to their state at the same time.

Many representatives from Texas were at Bitcoin 2021; I met with everybody there backstage. It was the discussion about—they were smart enough to bring representatives to the conference, not knowing what would happen at that conference because nobody expected what occurred there.

You know, if we're going to talk about the conference for a moment, I tell you why I consider it important to me. That was a pivotal moment in the history of Bitcoin. It was a moment on the second day when it was clear that something was happening. Not only did they get the numbers wrong—or I should say you guys got the numbers wrong—but it's to your upside. The place was like Woodstock; it had gone from being a niche tiny little vertical to mainstream—mainstream press, mainstream politicians, mainstream investors, institutional investors—mainstream everything for those three days.

And the number of meetings I had and the dialogue that occurred and then the international press—I mean, it was a game changer. It will go down in my view in the years ahead as the moment the change occurred when Bitcoin went mainstream.

And you looked like you were having a blast. I mean, when I saw you, you looked like you were having fun.

Yeah, I was because some very heavy-duty watch collectors were there paying in Bitcoin—paying in Bitcoin for their watches. It was pretty cool.

What a Mr. Wonderful moment there—Bitcoin and watches being transferred at the 2021 conference. Will you be here at the 2022 conference?

Oh, no question! I just—I think it was well organized, it had the right topic matter, and the people that put that together in the discussions we had prior to the different panels—I mean, you know, public capital is the world I live in, so we always have to watch where institutional money is.

So the next conference, we're going to take an index of what's changed in 12 months: what did we achieve on the success scale, and what did we lose on the failure scale in terms of getting more institutional capital into the asset class? That will be certainly a panel I will want to moderate when we look at it because by then there should be at least a doubling in the number of public miners, and we'll have a much bigger contingency to talk to and get some indication of how far we've gone towards getting mainstream with institutions in terms of their ownership of Bitcoin.

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