Inside The Booming World of Initial Coin Offerings

so it's just going to be me this week. So this is where normally she would interject something and then we'd have like some banter, but I'm not really good at solo banter, so I'm not even gonna try to say anything funny or coy. I'm just gonna jump right

to the topic. Unless you've been living under a rock, you've probably heard about the incredible frenzy that we've seen of late in a crypto assets, cryptocurrencies, whether we were talking about Bitcoin or Ethereum or I c O S or all these things just NonStop incredible moves these days. So it really is sort of, uh, you know, it's time that we talked about them here, and so today on the podcast, we have a guest who's very well positioned to talk about just what the heck is going

on in this area. His name is Chris Bernisky. He's the blockchain products lead at art invest which is a asset management company that has E t f s and they actually are one of the few firms that actually has exposure to bitcoin. So he is going to help us, uh sort out just what's going on right now? What is it where we are? Is this a bubble? What's going on? Why are people so excited about this area? Chris, thank you very much for joining us, Thanks for having

me so. First of all, before we get into this, what is our convest Our Convest is an investment manager. We were started in January, actually, the same month that Ethereum was announced by Vitalic. Right now we're approaching about a billion in assets. But the key to ARC is taking the open source software development paradigm and applying it

to Wall Street investment management and research. So whereas most investment managers keep their trades and their research close to their chest, we actually share all of that um because it allows our THESS to evolve more quickly and it abus trust within us. Tell us about your products, you have e t F. We primarily have e ts UM and they focus solely on disruptive innovation, and as a

thematic investment manager, they focus on different themes. So, for example, we have our Next Generation Internet ETF, which has themes like machine learning, cloud computing, Internet of things, and cryptoasts and so for example, in that e t F, bitcoin is actually a number one position. Uh. And then we've got other e t F like genomics or industrial innovation, so on and so forth. We do have a fintech mutual fund in Japan, and we do some separately managed accounts.

So we're a broad purpose investment manager. Now what's your background? You're talking? Sorry I keep forgetting the name of your title, but that's probably because it's unusual, you know, it's not most people blockchain projects lead. You can think of me as the only by side analysts to focus on crypto assets with a flavor of business development in there. So how did you become the blockchain products lead? Where? What's your background? How did you become the person who would

analyze these analyze these assets? Well, as with much of life, is a chance. Uh. But uh? In college in two thousand eleven, two thousand twelve, Uh, Bitcoin across the radar. I was a student at Stanford at the time, pretty tech focused environment and are exploring, uh, this brave new world, and that took me down a bit of a rabbit hole. I remember looking with friends at mining equipment on Craigslist and these racks of servers, and we briefly flirted with

the idea of having a mining operation. But you know, at the time, I didn't dig deeply enough to dissociate bitcoin from what was the major application at the time, which was the Silk Road, and so I interpreted much of what was going on as um illegal and UH didn't necessarily have the courage at the time to leap in. UH forgot about bitcoin for a few years. Joined ARC, and at that time, our director of research had invested

in bitcoin early on. It was something that we knew was going to be important, and so picked up the ball and ran with it, and UH that eventually led me here. You characterize yourself as a by side in the list, and that raises an interesting question, which is that when you hear people talk about any of these crypto assets like yeah, but you know, how how do

you value them? What is the fundamental value you know, it's with most things we have, uh, you know, with stocks, obviously, people have developed all kinds of models for valuing of

stock based on earnings and cash flow and growth. And with commodities the cost of mining versus the demand, and with currencies, things like purchasing power parity, and so all these established models that exist for the you know, the asset classes that we've been familiar with for a long time, and then people look at something like ethereum or bitcoin or you know, now they're you know, they're hundreds of these coins out there, and they don't have any idea

how to even go about saying, oh, this is a fair price, so this is undervalued or this is overvalued. So how do you think about that question? It's it's a great question. And if we think of this as a new asset class, it follows that we will have new valuation techniques. And it's big part of actually what I spend my time focusing on. I think of it as a combination of current utility value plus discounted expected

utility value UM. And to give you an example of what I mean by that, we can take bitcoin UM. A lot of people talk about people using bitcoin for remittances, and I know of a number of companies using bitcoin Fermances whose volumes are growing ten month over month, which is hyper growth. If we take the remittances market, it's a roughly five hundred billion dollar market, and assume at some future date bitcoin will take ten percent of that market.

Certainly at that point the market will be a little bigger, but we'll run with this for now. So ten percent of a five billion dollar market means bitcoin would have to store fifty billion in value in that year. Now you have to also slap a velocity on it, velocity of money for how often that asset's going to turn over, So velocity of the US dollars five. So we did what what is the five? What's being measured for the velocity?

It is the number of times that currency is turning over per year to facilitate the transaction cockits and services. So if we say bitcoin's going to be roughly five as well, we take that fifty billion in value transfer that bitcoin will facilitate divided by five to get ten billion in stored value that year that bitcoin will need

to have in order to facilitate that use case. So, just to back up, if you wanted to do fifty billion worth of remittances based on the sort of some expectation of how many times a typical bitcoin would move in a year, you would need Bitcoin would need to be worth ten billions, would need to store facilitate that much, facilitate that much of a market, Yes, and only for the remittances use case. Right, Um, And then what we can do is we can start to stack different use cases. Right.

We look at the globe a financial gold market roughly two and a half trillion. If bitcoin we're to take one percent of that, that means it would have to store twenty five billion in value for that use case. And so you can see how we can start to stack these different requirements for stored value. To get an idea of how what I call the network value of bitcoin, which is analogous to to market cap for stocks and uh.

The reason I say current utility value versus discounted expected utility value is the market price of this asset is comprised of what people are currently using it for plus the expectations for its use. And so for any expectations of its use, we have to discount that back to the present. So so combining these two values. We can get the current market price of these assets interesting real quickly. You're publicly each traded e t F to do have

exposure to bitcoin? How do you get that? We get it through Gray Scales Bitcoin Investment Trust UM, which is a trust that tracks to roughly one tenth the value of bitcoin. Now, with the way that the trust is set up UM, at least the publicly traded part, which is ticker GBTC trades o t c q X over the counter markets, it doesn't have a functionality to meet supply and demand, and so it tends to trade at a significant premium, which is something investors should be aware of.

So that has grown to be UM a number one position in two of our A t F s are Internet e TF air kW and our overall Innovation e TF. But knowledge to work and grow your business with c I T from transportation to healthcare to manufacturing. C I T offers commercial lending, leasing, and treasury management services for small and middle market businesses. Learn more at c I

T dot com Put Knowledge to work. All right, let's swim gears for a second, because you know, people are maybe heard of bitcoin for a while, and there's obviously been tons said about it, and it's the old man in the room. Yeah, exactly. The thing that everyone is talking about and curious about and asking questions about these days are these things called I c o s. And that's really what I want to talk about UM initial coin offerings. It sounds like I p o s, but

it's one letter different, regrettably. What what are they? You can think of them as the combination of crowd funding, which we all learned about through Kickstarter UM plus blockchain technology. So Kickstarter coincidentally started the same year that bitcoin launched, two thousand nine, and that taught us about how we can use capital from the crowds to fund projects. And then blockchain technology basically allows the decentralized storing and transfer

of value. And what we've been having at the intersection of these two is assets that are similar to bitcoin but perform different use cases. So atherorem is something that we will we will end up talking about, I'm sure. So that's a decentralized world computer UM, and it uses

the blockchain in order to facilitate value transfer. In order to pay for that computer, and in order to get that project off the ground, there was a crowd sale, so because blockchains are really good at storing and transferring this value, people are natively using that functionality to bootstrap

capital for their projects. So let's walk through how what kind of project it would be and how you would raise one would go about raising money through an I c O. Let's, you know, create a fictitious example or a real example. We can use a real example. Yeah, let's do that. A few weeks back, I participated in a crowd sale known as er gun. And what Aragon does. We'll walk through sort of my process right when I'm when I'm figuring out, Okay, am I going to participate

in this? First thing I do is okay? What is the use case? Is this survival use case? What Aragon does? You're gonna have to hang with me here. I'm just gonna listen. Aragon U is a platform on top of Ethereum, uses Ethereum's decentralized world computer, and it basically provides um and out of the box system in order for corporations to run on top of the theorem. So provides cap

table accounting, payroll management, things like that. And so what it's gonna be used for long term is facilitating decentralized autonomous organizations. So Ethereum is a basically is a crypto. It's a current cryptocurrency, but commodity crypto commodity that has all this You're called it a decentralized world computer upon which you can run new application, exact companies and stuff.

And you participated in the initial coin offering of a company that runs on top of ethereum, whose business is going to be facilitating other companies to run on top of ethereum. Yes, the only thing I would change in what you said, You've got to exactly correct is replacing company with protocol. These aren't that they're not companies and that they're not generating cash flows necessarily, they're facilitating through software distributed software. And so Arragon is not a company,

it's a protocols protocol. Does that mean that there's not like a corporate entity associated with it? Now, this is something of experimentation UM. Different projects are experimenting with having foundations or are different UM entities that won't necessarily classify as a cash generating company UM in order to support the development of the protocol. But there's not going to be you know, quarterly earnings calls on revenue and earnings and Eve done all these things. That was step one.

So that's evaluating long term, do I think this is going to be a viable project. Then look into the team, great pair of developers behind this project, and then we get more into logistics. And in order to participate in a lot of these sales, you have to send either bitcoin or ether to an address. And uh, let's let's

say we're using ether in this example. So what I'm doing there is I am sending Ether that I have, which stores value, right, and sending it to an address that lives on Ethereum's blockchain, and in depositing that Ether

in that address, basically that address records. Okay, this other address, which represents Chris, is entitled to a certain number of these units of Aragon, which is the ticker an team, and so in that process they're able to accept in mass capital um from the outside world that is then programmatically exchanged into shares of their of their new protocol these. Okay, so now you have these coins from the Aragon. What are they? What do you do with them? What are

they for? How do they create value for you? Um? Well, there there are those two aspects of value, right. The current utility value versus the discount and expected utility value. UM. The UH. The reason for Aragon. One of the main reasons for Aragon to have a native token is actually UH to facilitate a decentralized court. Um. So if you have these organizations right running on top of Aragon, let's say there's disputes, um, Since they're decentralized organizations, they won't

necessarily go to the courts we think of them. UM, they will actually go to the masses and let the masses decide upon what is the truth or not the truth, what is right or wrong, and pay out using the native Arragon token to the people that perform that service. So we've gotten very abstract. Yeah, no, I know, but that's right because you know, I think where it's seventeen and everyone's got an open mind and people realize. So it's okay, we can keep going down this. But it

is pretty abstract. It is abstract. Now, these courts are they like and you say that people are going to decide? Are there going to be literal votes? Is there people on a jury and who will participate? And is it like something like the algorithm decided? So decentralized votes, right, UM a broad set of actors that anyone can can participate in. If you have the token, yes, if you're involved within the network, you will get paid out in

the token UM for for voting correctly UM. And so what happens over time is as more organizations build on top of Arragon, there will be more demand for that token for these conflict resolution use cases. But there's also because this is open source software, it can evolve over time, there can be further use cases that are built in that require that and you need So let's say I'm a business and so you know, let's they go to the very end consumer some business and like, oh, this

seems could write there. You said, the Arragon is positioning itself as a service to businesses. Right, what's a kind of business that might benefit from this UM. Well, this idea of a decentralized autonomous organization, it's not like a typical entity as we get it now. It would be a sort of new kind of well organization's UM it

is taking your typical organization. Let's take an insurance company, right, So an insurance company is really a number of policies and procedures, right, a number of If this, then that statements. That's what claims management is. And what's happening is we are having um, these processes be written in software, so you can actually have a waterfall of decisions, right UM. If let's say, if Christ misses his flight, UM pay him thirty dollars. If he doesn't miss his flight, he

doesn't get paid anything. But it can become more complex than that, more conditional. And so these organizations, these processes

are being written in code. And the reason it's called the decentralized autonomous organization is just as we have autonomous vehicles, these organizations are expected to in part run themselves, and so in running themselves, they need to be on top of a platform that helps facilitate that and interfaces beneath that with ethereum, which is, you know, dividing the compute power to process all of these these decisions. Here's a question I have that als sounds pretty cool right now.

There's clearly a lot of uh, I think when I look at it, a lot of speculative fast money coming into the space, people who are looking for to make a get rich fast which is not necessarily an indictment because they've always that's always part of any industry, So it doesn't necessarily mean bubble. I don't know, but there's clearly just a lot of people looking for flips, looking

for trades. Two questions A is anyone actually using these tokens yet in a or and do any of these antionies actually exist where there's a real ecosystem for these tokens or is it still all in basically in the trading realm. Actually that's my first question. You know, are there any saying, oh, this is really here's an organization,

or here's a protocol and people are really using it. UM. A lot of these teams have what are called test nets, where they have what you could think of as a minimum viable protocol UM that's in development, just as for example with the Genomics company right something that's gone public, they're running it through the process getting it to the end market, the end consumer. And for Ethereum and the apps decentralized apps that are being built on top of it or protocols, a lot of those do not have

mainstream use as of yet. As you said, UM, there's a lot of discounted expected utility value or speculative value to these assets. But what's key right now for me when I look at something like ethereum, the users are the developers. It's it's not a mainstream application. My mom or grandma is not going to be using it. It's the developers and the developers, because this space is so young, um are the ones that are building it out. You have a lot of people starting to talk about this

as Internet three point oh um. It took a while. I mean, the Internet had its origins in nineteen packet switching, so it takes a while to build these things out. Right now, we have mostly developers using ethereum. We've got a lot of mainstream use cases for a bitcoin, I would say increasingly so um, and over time there will be more mainstream users, but right now they are definitely

mainstream speculators. There mains. I think that's a very well pushed So there are mainstream speculators sort of everyday people, or you know, even not many everyday people, but certainly people saving enough to like figure out how the geeks speculating, but nothing really you know, basically all of these projects are still in the infancy in terms of actual uses.

Everything is largely in its infancy. I mean, if we go back in time, so Toshi Nakamoto released the Bitcoin White Paper in late two eight, So the whole movement is not even a decade old. And and and you raise a good point where speculation lays the foundation for innovation. When we look at you know, the railroad boom, or when we look at, um the tech and telecom boom, we had a fiberglut. People build things out way too much. They got ahead of themselves. And that's okay, um, it's

it's a predictable pattern we've seen over time. Another question I have is could you get into a situation in which the speculators discourage actual usage. In other words, it's so it's perceived as being expensive. Let's say, you know, I'm trying to let's say, do something more. I know that there's some of these, uh like these ones that are trying to build prediction markets based on top of ethereum, which is something I've been looking into things well, you know,

trying to do my research. But I'm interested. I've always been interested in prediction markets and I think, you know, it's interesting idea and I missed, you know, I wish in trade were still around on some of these sides. But on the other hand, like do I really want to be Let's say I wanted to get involved in that. Do I really want to pay up to get involved in this prediction market or put my tokens at risk if the tokens keep soaring in price, and I'd be

better off just holding them UM so really quick. The prediction market thing, that's partially what underlies Aragon prediction market to resolve disputes for companies UM now in terms of the value of these tokens actually being debilitating to the underlying utility of the protocol UM. It's something I've been talking about with Joel manegro a lot um. Joel manegro So he was the blockchain lead at Union Square Ventures.

UM clearly reputable firm. UH, and one of our concerns is exactly as you said when you look at atherorum right now. For example, the native token for ethereum ether. The more that goes up in price, the more expensive it is in some ways to use the network, and so there needs to be a way UM and Ethereum has tried to solve this with the dynamic exchange rate for the units that you pay to use UM. It's

it's world computer called US. So people are working on ways to dissociate UM the rise and value of the token from actually using the underlying network. So basically, in other words, you don't want to have a situation where let's say, you know, going back to what's the dispute, what's the I c ou participate aragon aragon. So let's say it costs x amount of what's the unit called is to just called an arragon T. All right, Let's say, uh, it costs x amount of A and T for this

dispute resolution mechanism. You don't want a situation in which suddenly the value goes up five x and it's suddenly five x more expensive. You want to be able to create a protocol so that the price drops accordingly with the increase in value exactly. Now, what's what's nice about these things UM is as they accrue value, they do bring new people on board, right, and there's more capital UM in order to to to front the fund the

protocol development. So it is a balance UM. But you struck at the heart of something that does concern me. And when we when we think of how the VC world exists, right, vcs allocate capital for the long term in order to help these teams build out. If we have too much capital sloshing back and forth between these different protocols, that may actually hurt the value of what's being built here. So this is something that's that's under development, and I think teams are really focused on given the

recent rise in speculation. All right, well, Chris Bernsky of our convest thank you so much. This is a fascinating sort of sci fi world and I think, uh, you know, it's certainly very eye opening to me. I've done a little bit of research into this, but hearing you describe the layers upon layers and new kinds of entities, new kinds of mechanisms is fascinating and regardless of whether we're

in a bubble or whatever. And I hate using that word because when people, when media people use the word bubble, they're always wrong. But um, it's still very intriguing to watch. So thank you very much for coming on Brave New World. Yeah, exactly. That'll do it for this episode of the Odd Lodge podcast. Because Tracy isn't here, there's no point for us to uh have any banter at the end, So thanks for listening. I'm Joe Wisenthal. You can follow me on Twitter at

the Stalwart. You can find Tracy on Twitter at Tracy Alloway are wonderful producer? Sarah Patterson on Twitter at Sarah patt with two ts, and Chris are you on Twitter? I'm on Twitter as well. What's your handle? A r K blockchain? A r K blockchain? Check him out tweets a bunch of fascinating stuff about this space, and you'll probably learn a lot. Thanks for listening, but knowledge to work and grow your business with c i T from

transportation to healthcare to manufacturing. C i T offers commercial lending, leasing, and treasury management services for small and middle market businesses. Learn more at c i T dot com put knowledge to work