161 - The Smart Money is Here with Eric Peters

welcome to bank lists where we explore the frontier of internet money and internet finance this is how to get started how to get better and how to front run the opportunity this is ryan sean adams i'm here with david hoffman and we're here to help you become more bankless david fantastic episode this is with hedge fund manager eric peters really enjoyed this one got a ton of insights even more than i thought actually going in i knew this would be a great conversation it turned out even better than i thought what were some of your takes yeah eric is just a really

pragmatic thinker which is rare in this space especially somebody who's in the hedge fund world that yet is it almost as bullish on crypto and and defy as we are uh picking eric's brain uh really showed me that there are pragmatic thinkers out there who think uh in in pretty real terms about how this uh crypto revolution is going to unfold uh eric and and us were totally aligned on us uh thinking that this is a crypto renaissance and he did that without listening to our crypto renaissance podcast and so we pow out on that for a

while and overall had a deliberate discussion about how people that are not going to want to see change in the world how they're going to have to deal with this whole crypto thing and we talked about that from the perspective of governments and taxation of federal reserves and monetary policy of you know the the wealthy boomers who have everything to lose versus the younger generations who have nothing to lose yet everything to gain and how that sort of friction between these very polarized parts of the world how they're going to deal with

this whole crypto revolution so overall a very um pragmatic and interesting discussion with eric peters here yeah it's super cool it's very cool to see eric come to many of the same conclusions separately that we've come to it's like about money you know the history of money about even this idea of crypto being a renaissance about the you know the core value proposition being decentralization about how the us adoption might work so he came to many of the same conclusions that i think we've come to on bankless only from a separate angle the other piece of this is this is um okay so uh eric's

firm was uh in 2020 was like the first the largest institutional allocator to crypto okay now he talks about in the in in the first part of the the conversation about how difficult it was to buy the amount of crypto that they were buying it's like 500 million dollars or something like that 500 600 million so uh he talks about that and i just i i just can't get over how um big this is for crypto right like this is really the institutions are coming and they're not just coming for number

go up like i feel like eric and his team really understand this asset class and why they're buying the space it was also funny because uh i made an embarrassing mistake at the very early phases of this by like uh anyway you'll have to listen to hear what that mistake is but it's another example of like the crypto world doesn't have a lot of ties into the financial institutional investing world and they don't have a lot of ties to crypto so this is a very i think bankless listeners who've heard us talk to all sorts of different crypto native

companies and funds will get a lot of value from this specific conversation because eric comes at it from you know a traditional hedge fund manager how is a large uh allocator of capital that's done very well in the traditional world how do they think about crypto and what realizations are they coming to about this asset class so stay tuned for that we talk about quantum change we talk about young versus old and the generational stresses that might be a macro theme here we talk about the story of the us versus china

how they are playing the crypto thing how this is going to turn out from a regulator's perspective um we asked eric if he's worried about regulation in the u.s you'll have to tune in to hear his answer to that and then finally we end with the case for digital assets this is just a fantastic conversation we think you guys are really going to enjoy before we get to the conversation we want to thank the sponsors that made this episode possible matcha everyone's favorite decks aggregator has just launched an open beta for gasless trading so if you're trading more than

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involved in governance we are super excited about our next guest eric peters eric is the founder he's also the chief investment officer of one river digital asset management this is a traditional hedge fund that gets crypto really understands crypto they've been a massive buyer a voracious buyer of both bitcoin i believe ether too investing in change political economic technological change quantum change as eric calls it we're going to get into all of that today this is our opportunity to pick the brain of a hedge

fit fund manager that's been crypto red pulled i think eric how are you doing today it's great to have you on bank list it's great to be here uh i yeah i have never been accused of being red pill but that's this is not usually the type of podcast i'm on so uh so this is awesome well you know what this is gonna be fun because we don't often talk to you what we would call you know eric is you know may i don't know how you think of yourself but it's kind of a traditional hedge fund manager right so like we talked to a lot of crypto hedge fund managers we talked to

a lot of vc companies obviously people in institutional space but i think you have a really unique vantage point in that you've got kind of a bridge in the traditional hedge fund world and also in this crypto world so we want to learn as much as we can from you but like i guess my first question is so you guys are based in greenwich connecticut right and that's been called the hedge fund capital of the world there's a lot of big hedge funds out of greenwich connecticut uh what does everyone think about crypto in greenwich connecticut like do they all think we're crazy is you know is there a recognition that you

know some of this is is actually happening crypto's a real thing or do they just think we're flat crazy um well number one i love it you call it greenwich just because it's just that it's greenwich so it just shows the total like the total disconnect oh my god like this is all about you know filling gaps right so your world and my world are colliding and uh and they're colliding in grenwich

connecticut um so sorry to every all the greenwich listeners out there in bankless uh yeah it just shows my ignorance no i love it yeah they're all just a bunch of you know wall street guys that are in the city anyway um no uh it's excellent so look i there there are uh uh there are a growing number of people i think you you know you see them paul jones is on cnbc today i don't watch the nbc but everyone sends me his quotes all the time so uh

you know he's he's been a big advocate of this space and uh you know and he's he's based here so um increasingly i think i look i think i think people who are who have built their careers around identifying emerging trends and good investment opportunities are on this thing and institutions are puzzled as to what what to do but increasingly or being drawn into it and so place like you know like where we are and and quite frankly our firm is kind

of at the center of of of that transformation and i think it is a transformation i think it's incredibly exciting it's the most definitely the most interesting macro opportunity macro investment thesis i've seen in my career and uh and so a lot of it you know a lot of it will happen here right i mean a lot of the really exciting things in the technology side are not happening here but the connection to the legacy financial system let's call wall street with new technologies is is going to

first happen in the pools of capital that are directed by a limited number of people as opposed to some kind of big investment committee and those you know those faster moving limited group of people investment teams are you know are sitting here in in places like greenwich not certainly not just greenwich but that that's kind of how the capital moves do you guys feel like you guys you're leading the the way in greenwich like with run one river capital is there anyone else that's doing what you mentioned paul tudor drones right i know

he's got some exposure in the space but are you one of the first well uh i think i think that we are we are the first traditional alternatives manager which is otherwise called hedge fund but we're the the first firm that's that's built a business around that we're over eight years old so i built it i started this from in 2013. but we're the first uh alternatives firm that uh that is recognized the opportunity that digital assets need a dedicated

fiduciary so there are a lot of there are a whole bunch of terrific broader financial services firms in uh in digital assets and and a lot of those names are you know are pretty well known um but when we entered the space so we we made our first big allocation uh last november and uh right after the election and as we did we we worked with one of our big clients to try to identify how to best access this space what became clear is that yeah you could go out and

buy you could go directly and buy these assets but if you're a large investment firm that needs to work with a fiduciary there really weren't any dedicated fiduciary so there are firms that look like let's say diversified investment banks for for digital assets or crypto and they tend to have a a whole range of different services that they provide they may be doing prop trading they may be doing custody they may be doing merchant banking they may be market making they

may have some asset management products but there's there's no one that is just just coming out and saying look we're focused purely on connecting our clients to the opportunity the investment opportunities we see in this space we have no conflicts of interest we're working purely on behalf of our clients and so that was the op that was the business opportunity that we saw and so when i when we made the decision to kind of enter this space we felt all of our clients should be allocated to these assets um i'm sure we'll cover that over

the course's podcast but the reasons why but but there just was no one that they could really reasonably work with in order to get that exposure and so we decided to start building out those products that's how we entered this space well that's super cool a good timing too right november of 2020 and i believe that was at the time one of the maybe the largest ever institutional asset allocation to to crypto at the time yeah um i assume what did you guys buy at that time i don't know if you can go into all the details yeah no no i mean a lot of this is public we bought over 600 million

dollars of bitcoin and eth wow just right after the election and yeah and and it was it was a five day it wasn't 24 7 because i i don't stay up that long but uh but pretty much uh yeah it was that was a lot of fun is it hard to buy that much like i've never tried personally david probably has but like how difficult is it to buy 600 million dollars of bitcoin and eat it was uh it it was well number one i didn't know how

hard it would be either uh we needed you know we we really needed to be extremely discreet um we work with multiple counterparties right now but at the time we worked directly with uh with the folks at coinbase on their institutional desk okay and uh and they were terrific and uh quite frankly we kept all of it quiet until we were pushed to disclose it about a month later um but but yeah you know it was it really it was such an interesting period you know kind of

it was such an interesting execution if you just look at the whole thing in totality and said look we have to get this position on we decided that it was important to get it on fast um because if there was any news that leaked out we thought the market would fly and quite you know when when news did break in december that we had made that allocation that was the day that bitcoin broke through the old highs and and so that didn't really surprise in the sense that there have been a whole bunch of years where people have been talking about how institutions are going to come institutions are going to come yes and we were the first institution that came right so we kind of knew that

if word trickled out the thing would run away on us and i didn't want to be having to buy that much in a market that's running away so we yeah they're all kinds of you know games that we played with the market which was really fun to do i think it actually was ironically it was uh it was probably an advantage to not not be someone who has grown up trading these assets at size because i think a lot of people are super dependent on um algorithmic trading and lean on their

algos we used a lot of different algos that that coinbase had actually um but we used them in kind of unique ways and um and that that helped us kind of mess around with the market so they that i think they were a little confused as what was going on and and that worked to our advantage so we got it on we actually got the whole position on without moving the market um in fact we they we ran an analysis afterwards we got in below you know kind of below average prices during that period which um

yeah amazing it doesn't matter these these assets move so much you know a few percent here there doesn't really matter i don't think but uh but it you know whatever is great it was gratifying that we got it on quietly discreetly and we learned a lot through that process well and congrats on the timing it's really good timing of course we've seen big moves in both of those assets since now here we are at the time of recording we're uh just at over all-time highs for bitcoin and approaching all-time highs once again for eth so the timing could have been better i'm curious about the allocation at that time i don't know if that's public too but it's like how much uh eth versus

bitcoin what was sort of the the uh the split there yeah we don't really go into that but it was it was uh it was weighted more heavily toward toward bitcoin interesting okay and now we've seen obviously uh you know quite the appreciation of these since then but i also wanted to ask like because you have a few other notable things i think at one river capital we're gonna spend a lot of time on kind of the thesis and your general thesis for the space why you're doing things in digital assets but before we do some other interesting tidbits i think is uh you've got a guy

by the name of alan howard backing you as well uh i understand that's a very big name in the institutional investor space we uh and also uh jay clayton whom of course uh we recognized in the crypto world former sec commissioner um someone else is a former cia legal counsel so it's like a lot of the established institutions right of the

world are actually coming into this fund which i think you know says something a former chair of the sec somebody's former been like deep in government the cia side legendary uh you know fund manager in the past what do you think they see in this space do they just fundamentally believe your thesis for this space is that why they're jumping aboard here um that's a great question and it hasn't been phrased that way to me just you know uh the question is kind of whether there's a common thread i would say that

they're they're all interested for overlapping reasons but they probably uh are weighted differently so so alan uh alan and i have known each other for the last decade he actually invested he took a 25 stake in one of our asset management before we entered digital assets but he's since taken a bigger position in our the digital um subsidiary that we have and alan is one of the greatest investors uh hedge fund investors of of all time uh he

you know he he has he's known for having kind of a unique ability to identify opportunities and really size up and manage risk extremely well and those are very difficult things to kind of have in one person i think and you you know you rarely rarely see that and so he you know he's done a tremendous job of jumping on all sorts of trends over the years uh and capitalizing on them he was the earliest traditional hedge fund

person in digital uh he tends to remain pretty quiet about it but he was the first one and so he has he has interesting investments throughout the ecosystem um and has spent a lot of time on that and so i think he and i have wanted to be in business for a long time so i took a position in one river with the you know the the parent company initially and then was even more excited after we entered the space so i after we we entered the space he and i spoke about i didn't tell him what we were doing ahead of time of course

um but uh but so i think he you know he sees the market opportunity and the business opportunity um you know jay jay someone i hadn't known jay until i i and i look i i generally don't want to spend much time with regulators they've well like just to be clear you know we've we've had a couple routine examinations and and you know we're uh we've come out squeaky clean and but

that's kind of the extent to which i ever really wanted to spend time with regulators but i recognize after we enter this space that if we are going to uh if we are going to really uh be the best firm we can be for our clients and have a positive impact on the industry and i think there's a national interest element to this as well i felt that we were you know really under armed from a regulatory perspective just because having spent my whole career not really wanting to spend time with them entering a space that

where that's such a big driver i felt like we really needed to have the right uh and certainly advisors and so i actually just picked up the wall street journal i saw an article that he'd left the sec the day before and i just cold called them and said i'd love to chat and uh uh um he said let's get to get you know let's let's get together uh i you know i think he uh and then and then we you know we had a number of of uh of lunches uh over the the next few months and

and uh you know before he agreed to do this i think he just wanted to get whatever we both want to get to know one another and what was evident right out of the gate is that he and i the thing that we share more than anything is the belief that in order to uh in order to continue to have the leading financial services sector in the world the u.s has to get the regulatory foundation for this transition from legacy finance to

digital finance has to get that right that's right so so you know they're there look there are a couple approaches to this i think some of the purest and and i i have a lot of respect for people that were in this space really early i've paid attention to it my whole career or my you know throughout the the life of you know bitcoin onward but i think that there's a there's an element of people who think that this is the system that is there to be able to build something brand new after the old system crashes and burns and at one

level they're right it could but i don't think the old system is going to crash and burn i think what's that and certainly that's just not the approach we're taking th this is i think what we're building now and what you guys are you know what you guys are building and what your whole world is is seeing is an opportunity to rebuild a better financial system but i i think it's going to be built upon and will displace the legacy players and systems in ways that contribute to healthier society much more efficient financial system etc

and that i believe that that has to happen by working with regulators which is not to say never pressing regulators it's just to say to to kind of coordinate cooperate so that's kind of how that all that all went down and and and then and so that's jay and uh and then courtney ellwood uh she said she was the general counsel for the cia and uh i think her you know her position she's not a um an investor like alan howard and she wasn't a regulator uh like jay

she looks at this from the national security uh perspective and as do i by the way as a macro guy and one of the most interesting frictions is the one between the us and china right now and we'll probably talk about central bank digital currency but you know there there is a concerted effort to try to unseat the u.s dollar as the global reserve currency and i think that that would not be in the us's best interest nor our allies and they're all you know they're all sorts of other um

kind of adjacent tensions between those countries but i think from courtney's perspective i i always hate putting words in people's mouths but i think she shares the view that getting all of this right is in the u.s national uh interest and uh and and so so we all share you know i mean she recognizes that that's probably also a good investment opportunity for people involved because that's obvious but that's not a driver for her eric i think we need to unpack what it means to get all of this right and in

some of your writing that both ryan and i really truly enjoyed you called this decade one of the most uncertain decades of our lifetimes and so you are betting that we are going into this major transition not just for you know uh investing but just for how the world works this isn't some like new social media platform this isn't some disruptive fintech company this is uh this is what you are calling a quantum change uh which i think maybe uh if it were my

words we would be calling this a paradigm shift this is a new paradigm and so can you just unpack and elaborate on what you mean by a quantum change and why you think it this change that is happening is uh of the magnitude that that you think it is sure um i'll we'll let's go with the the kind of abbreviated version because we could spend you know time where your listeners would would certainly fall asleep uh but i don't know we're pretty into quantum

change but but yeah well look we'll try we'll try the short version if you want to if you want to dig in any deeper so let's let's take digital crypto let's take all of that let's take blockchain just out of the picture entirely for a moment so so i started my career in 89 and we have uh from apa from a global policy uh standpoint we have been pursuing a um a consistent policy through that entire period of time and

that policy has been more or less driven by central bankers and and so we came you know when i started my career inflation was pretty high this wasn't 1970s high but still by today's standards well sorry by today's stamps we're back to those levels but like roll the clock back a year um by those standards and by the standards the last couple decades inflation was high bond yields were high et cetera and and starting with greenspan uh a policy was

really introduced to a kind of every economic hiccup um the the federal reserve would lower interest rates in a material way kind of never ratchet them back up to the the starting levels as the cycle progressed and so and and kind of inflation came down interest rates came down the big the really big macro trends were increased globalization and deepening kind of technology technology

deepening throughout our whole society and by the way you couldn't even you couldn't even have globalization at scale without that technology so all these things played played in to one another um and amplified the impacts and what that led to was it led to this this period of kind of large income inequality as i said lower inflation lower interest rates very high overall debt levels and leverage right because you could just hold more debt if interest rates were low inflation was

very stable and it was it was kind of this these big macro forces were pressing us to a point where that monetary policy which was really monolithic uh had run out of it you know it it was no longer as effective as it had been from a much higher starting point of higher interest rates is this eric like the morphine drip kind of effect where like patient gets a shot of morphine and then another one and then another one but but it gradually is less and less effective

until basically you know patient no longer feels the effect of morphine yeah it it it's yeah it's like that i mean it's it's a little bit more mathematical but it i mean it's not the wrong analogy and the only thing that i would say with that type of analogy is i think that there are a whole group of people that look at that kind of policy and just say it was just morally bankrupt or you know it's terrible and when you start talking about morphine you're i don't know it has certain connotations i think that what we witnessed was we saw a real leveraging of the of the us

financial system and it was a policy that wasn't it wasn't a dumb policy it just but it had a natural end point by the way if you look historically through economic and market cycles going back hundreds and hundreds of years there are cycles right so and cycles play out because these dynamics happen because it you know naturally societies want to take on more debt because what does debt do it kind of pulls demand from the future to the present it all feels good like there are a lot of things that conspire to

push society you know into these cycles and it wasn't all the fed's fault it's like a lot of things work together but the fed was the dominant driver of these policies and because the the dollar is the global reserve currency every other central bank in the world more or less certainly of the developed countries more or less had to follow the fed's policy because otherwise if they diverge from it their currency would get really strong and their exporters would go out of business and they would scream at the politicians and the politicians would

pressure the central bank and so you ended up happening after 30 years of this this policy you ended up with central banks whose tool kit no longer really worked and you had the whole globe on the same system okay all these guys went to the same schools they all read the same books they all you know went and begged the nobel group for their you know their prize and economic they're all like they all thought this is being unfair but you know they they all more or less had the same paradigm and or the

same kind of mental model in terms of how to think about monetary policy right and so all of that drew us into this um or drew us into this point where we had the longest economic cycle in the u.s and the longest bull market up until the pandemic hit and for the preceding two years every central banker in the world was crying out for politicians to start spending money because they said listen our tools they're never going to say they don't work because that would spark a panic they kept saying our tools don't

work as well as we would like them to you have to start spending money but politicians couldn't really spend money because everyone was kind of stuck in this quasi-austerity mindset all right pandemic hit and that was the most remarkable catalyst imaginable to just get politicians to say throw out all those old rules everything that we've been preaching because we now have this global pandemic and we need to save the world and we need to do that with huge fiscal spending not i don't know what i would have done if i were in that

spot but i probably wouldn't have been hiking rates and you know cutting budgets so it's they i think the the actions were rational right but what that did is that that shifted us from a world of this monolithic central bank policy so i i would call that policy homogeneity so the whole world was driven by a group of people making decisions that had the same mental model more or less and it shifted us in this world where