Novogratz Distilled

NOVOGRATZ DISTILLED
https://www.bloomberg.com/news/videos/2017-09-26/how-macro-trader-novogratz-became-a-bitcoin-convert-video
This incredible Bloomberg interview with Novogratz, an early backer of Ethereum, is fascinating and an absolute must watch for anyone interested in the cryptocurrency space, whether as an investor or a trader. I have created a partial transcription, below. It contains one of the most fascinating, all-encompassing explanations for the rise of Bitcoin and Ether I’ve seen, as well as its attraction for macro-traders, and a bit of an insight into where it might be heading.
Watching it, I think you will come to the same conclusion I have: trading cryptocurrency with its high level of volatility, is the perfect environment for the trading junkie. It contains all of the excitement of the jungle – the highs and lows, or as Novogratz puts it in this interview, “the zeniths and the euphorias,” - all in a normal day’s online, cyber trading adventure, without ever leaving the sofa. You’re not even trading something tangible. It’s like CFDs wrapped into a coin and – in a further removal from reality - represented by a quasi cartoon character with an exciting name that would be at home in a kid’s cartoon or video game. Except this real life video game has real life consequences and applications. [As I’m editing this, it’s hitting me, like a cannon ball right between the eyes, that trading on the DEX brings this virtual reality jungle into the living room. Buy Bitshares, folks, to bring the jungle to your living room, and hedge your wealth with assets that can’t be liquidated or confiscated easily. On the other hand, if the penny drops, the Bitshares Exchange could get banned, globally and devotees of crypto could well become crypto refugees.]
Okay, back to Novogratz, distilled:
I was actually feeling pretty comfortable about trading cryptocurrency. I was thinking of it as an investment and maybe a replacement for my everyday income (teaching – where I go to be verbally abused with impunity by up to 150 mini-adults on a daily basis, but that’s another story), until I watched this interview. Seeing the cryptosphere promoted by someone like Novogratz, no surprises his chosen college sport was wrestling, and the way he talked about it, admitting that most ICOs are IDEAS that haven’t progressed beyond the white paper to the prototype testing stage – and that Ether is in the “implementation” stage - made me think it’s a bubble that could end badly, judging purely on his demeanour and projected greed. I kept seeing Gordon Gecko.
Novogratz agrees with the interviewer that the cryptocurrency boom is akin to “Dungeons and Dragons on steroids,” (referring presumably to coders), and “Revenge of the Nerds.” He also says he sold out of Bitcoin at $4980, and tried to buy back in in the low $3000’s. (I, too, sold out of Bitcoin at the same point, but I didn’t buy back in.)This man is a trader. Cryptocurrency is a trader’s wet dream. I’m sorry guys, but having watched this, all I see is people getting rich on trading exchanges. Novogratz says he is invested in three exchanges, and trades on multiple exchanges because exchanges are risky. I repeat, exchanges are risky. They could run into liquidity issues. He also states that if he trades on an exchange and he knows the guy running it, if anything untoward happens to his investment, he might go down there and “give him a shot.” His exact words, if you don’t believe me, watch the video. Little people don’t have that luxury of punching the exchange bookie on the chin if he suddenly has a liquidity issue because the odds on an outsider have lengthened, and it comes romping home, leaving him short. This man is a pure capitalist. By that I mean, he is trading this thing to the moon because the volatility gives him the opportunity to get in, and out: this situation exists only because there are people willing to take up the position and give him liquidity. Jesus H Christ. Having watched this video, I feel like running for the exits now. No wonder China stepped in with regulation.
I have posted previously on Steemit about the need for Bitcoin to be pegged to an asset that has an accepted rating of value, outside of the cryptocurrency world, and I have earned a certain amount of derision for that stance. I stand by it as I see it as an avenue for preventing wealth depletion via the massive volatility swings in asset prices. Watching this guy, Novogratz, talk about biffing someone at an exchange on the chin if anything happens to his investment just drove it home to me how risky playing in this world is. He basically confirms in this interview all of my worst suspicions about the world of cryptocoins. His obvious joy in the space seems to emanate from his delight that every time something is built on Ethereum he gets to buy in at a discount – in other words, the ability to make money from thin air. Yes, don’t we all, but Novogratz describes it from a purely macro-trader perspective that is difficult to marry to the joy of the technology itself. It’s like the joy he would have got planning a hunt, tracking the prey, maybe having to take out the next tribe on his way to the kill – and the euphoria and elation he would have felt on success as he pushes that herd of mammoth over the cliff, and stands on the herds’ leader and fist pumps the air. Novogratz is an uber alpha-male. The people at Ethereum working on the new ventures and the platform itself aren’t portrayed as cynical capitalists, unlike Novogratz. He’s just happy he got into what they’re selling early (through a connection to a college room-mate – go to college, kids).

Gold is going to step into this market to bring it stability. I’m positioning for a meltdown, as any serious investor should. This space is so volatile that investing for a meltdown is the only position to take, which doesn’t mean stay out, it means, invest only what you can afford to lose. I thought this crypto show was legit, until I watched this video. It’s a high stakes roller-coaster, where it’s headed, nobody knows. Skip the ride, and you miss out on potentially the greatest gains of your lifetime.

This transcript is an extract from the Interview, the full interview which can be viewed by clicking the link, below. The interview is between Bloomberg’s Erik Schatzker and Mike Novogratz, from 26 September 2017:

https://www.bloomberg.com/news/videos/2017-09-26/how-macro-trader-novogratz-became-a-bitcoin-convert-video
TRANSCRIPT: (begins at 08:50):

INTERVIEWER: Tell me something, how does someone who immersed himself in macro-economics for 30 years, right, who pored over current account deficits, who placed bets on interest rate differentials get comfortable, conceptually, intellectually - physically, even - with something as abstract as cryptocurrencies?
NOVOGRATZ: You know, in a lot of ways, this is a market like any other market and you can – you see the psychology of fear and greed and events in the charts, the same way you’d see them in the charts of the Indonesian Rupiah or Dollar/Yen or Treasuries. They’re exaggerated because of less liquidity and because you can’t get short. There’s not a real good way to short, and so, when they fall - Jamie Dimon makes a comment, China bans the exchanges - the trendline breaks, they fall a lot farther than they would have in other markets because there’s just not a short base to cover and so you go until you reach a new level of support and kind of rebuild your base. But I kind of break it up into three buckets. A good chunk of this is a macro trade. This is - like I said, this is a culture revolution. I can see the money moving into the space. I have had three to four, you know, key money centre banks, the big players out there – the marquee guys – approached us recently just to learn more about the space. They want to trade it, they want to invest in it, they want to bank it; there are going to be futures exchanges set up – there are two competing groups that were in our office this week, “Hey, will you partner with us?”, and so we’re looking at both of those pretty carefully and so, the institutional march to bring credibility into this space is well on its way, and with that there’s just going to come more money, and so this tide is moving up and the experiment - I said a while ago we went from experiment to implementation, and that’s when I got very bullish. When I first bought it, the whole thing was a bit of an experiment, but now I’m positive that this is implementation and what I mean by that is, in 1987, 1988, we dreamed about what the internet could be. The internet is so much more ubiquitous today than anything we ever dreamed about, right? The same is going to be with blockchain. You’re going to see blockchain technology everywhere in 10, 15 years. It’s going to be a different world in lots of ways. Now, someone like you won’t notice, it’s behind the television set. You know, who cares where the wires go? Right? Do you really care if all the big corporate treasuries have private blockchains to shift around their money at the end of the day? No, you don’t, you won’t even notice it, but people are going to lose jobs. It’s going to displace people. Where it makes a bigger difference is that the technology and the spirit of it cuts out the middle man, right? It’s this decentralised world. So in a decentralised world, music doesn’t have the big labels, artists go direct to consumers through, you know, blockchain. The coders who are building all this stuff are getting a lot more of the value than they would at, say, Google or Facebook. Your own data, right, Facebook, Google, our health insurance company, own our data. In a decentralised world you’re going to own your own identity. And so, when I look forward four or five years, the possibilities really get your animal spirits going, and so----
INTERVIEWER: So you’re excited, you’re also serious?
NOVOGRATZ: Dead serious.
[…]
NOVOGRATZ: Listen, I’m not saying valuations don’t get to stupid levels, and some companies right now are already at stupid levels.
INTERVIEWER: What about some of the obvious issues, let’s say, right? The roller coaster volatility, the Initial Coin Offerings promoted by Floyd Mayweather, right, who now calls himself “Crypto”, and Paris Hilton, and the mysteries like, who on earth is Satoshi Nakamoto and of course, all the smug arrogance that comes along with this world?
NOVOGRATZ: Yes, so listen, the ICO market is, you know, part wonderful and there are some amazing entrepreneurs and amazing ideas in it, there’s fraud, there’s some quick – get-rich-quick schemes-----
INTERVIEWER: It’s the wild west .
NOVOGRATZ: it’s the wild west, and so, when I think of how I invest, I have a macro hat and a macro piece to try to understand what’s really moving the market and then there really is a VC/micro detail focus piece – we have a full team of people looking into these things and meeting the companies - and in some ways, you know, you want to be long good companies at stupid prices, and short bad companies at stupid prices because all the prices are way ahead of where they should be. One of the advantages of being a macro guy is, you understand psychology of bubbles and kind of, how to ride the horse. There’s not one Warren Buffet you know, GRAM investor, that’s going to be buying any of these ICOS because they don’t represent value and it really is kind of the tech investor mind of opening up your imagination to these disruptive technologies.
INTERVIEWER: You encountered no shortage of oddballs in your career on Wall Street, but let’s just take a moment, right? You’re a Princeton grad, you were a US Army helicopter pilot, you were a partner at Goldman Sachs, you’re sitting here in a Tom Ford suit, how do you deal with the Bitcoin world? I mean, it’s like Dungeons and Dragons on steroids.
NOVOGRATZ: You know, if you kind of think about the journey of the last 30 years, it’s been the Revenge of the Nerds. I mean-----
INTERVIEWER: Bitcoin is the Revenge of the Nerds?
NOVOGRATZ: The whole tech boom is the Revenge of the Nerds, right? I mean, it used to be that the athletes got the Supermodel, and now it’s the guy that founded Twitter, and what’s unique about this world is you get all kinds. You do have the Dungeons and Dragons coders, but you’ve got an unbelievable core of very earnest people that are quasi revolutionary.
[…]
INTERVIEWER: There is a big debate – a raging debate – over cryptocurrencies, which is – what are they really? You know, you traded currencies for the better part of your career, are they-----
NOVOGRATZ: They’re not currencies.
INTERVIEWER: They’re not? Well, at least we’ve resolved that.
NOVOGRATZ: We’ve resolved that. They’re not currencies. Currencies need to be stable. As much as I spend my years, you know, hours, weeks, looking at Dollar/Yen and the Euro, when you step back, and walk away from the screens, Dollar/Yen has been plus or minus 15% for much of the last 15 years, the Euro the same way, and on any given year, this is the biggest year the dollar’s moved 10%, and so, for something to be-----
INTERVIEW: Bitcoin dropped 30% in two weeks.
NOVOGRATZ: -----for something to be a currency, you need stability. Right, I’m not going to buy this glass one day for a dollar and it’s going to be $7, you know, a week later, and so, when I think of Bitcoin, I think its use case really becomes digital gold. It’s a store of value.
INTERVIEWER: Okay.
NOVOGRATZ: We don’t buy and sell [beep] gold, nor do we do it in Google shares. “Right, I’ll buy that suit for half a Google share,” right? No. But you could. Also, you know, and so – and then people get fussed up around Bitcoin as a currency. It really is going to be a store of value, and there’s, you know, it’s a limited supply. One reason also, currencies - limited supply currencies never work, because they’re too easily manipulable. They squeeze up and squeeze down, and so I see Bitcoin going much higher because there are very few of them and lots of people are going to want to buy them because it becomes just a store of value. (I used to think this, too, which is why I bought in – but now I don’t. I think BTC is botched coin, LOL, @katyclark)
INTERVIEWER: How high?
NOVOGRATZ: You know, it could – the hard part about speculative fevers is they can really go to places you can’t think of. So if you think about 1999, we didn’t have these things, and what’s interesting about a cell phone is that it gives everybody on the planet access to participating in this ecosystem. In 1999, during the tech bubble, if you were upper middle-class Korean or Taiwanese or Indian, you couldn’t buy Cisco or play in our stockmarket. Everybody on the planet can play in this.
INTERVIEWER: So you’re making it sound to me as though you buy into the Metcalfe’s Law of Valuation for Bitcoin or cryptocurrencies, that it’s the, you know, the value of the network is the square of the number of the participants? Is that - I don’t know, I guess I’m asking you, what valuation models apply to cryptocurrencies?
NOVOGRATZ: So, the way I think about Ethereum valuation, to start with that is, I look at Ether as a commodity, and - think of it as fuel - and you need a little bit of fuel for each calculation that gets done on the Ethereum blockchain, and so if I think of the future and how many calculations get done on these things, how many transactions, and I multiply that by a little bit of fuel, the market cap should be the net present value of the discounted cash flows, and so, what will constrain the price growth is how fast the network can grow, and so both the Bitcoin blockchain and the Ethereum blockchain have big issues with speed at this point. Now the bet you make is, there are a lot of smart people working on that problem. To give you some sense about the scale of the community, so Consensus - I keep talking about this company because it’s kind of the ecosystem company for Ethereum, it’s the commercialisation business of the Ether project, they put up-----
INTERVIEWER: Which company?
NOVOGRATZ: Consensus put, online for free, developer apps. Me and you would never download those in a million years. Only coders would download developer apps. Over 105,000 people have downloaded developer apps. You don’t download a developer app unless you’re going to code with it – right? it’s not like I’m just going to put it in my back pocket . So there’s 105,000 people working on this ecosystem and so the idea, the bet I’m making is, that, these guys are really bright and they will stay ahead of fixing. But we actually kind of trade the spikes on this. How far ahead can it get from how fast the network goes.
INTERVIEWER: How do you know when to buy and sell? How do you trade this thing?
NOVOGRATZ: You know, there are multiple ways to trade. One is, it’s just macro. It’s like, trade the ballet of the charts, the ballet of the prices. I always tell people I need a story and a chart and there’s a lot of information. And so, part of it is event driven and access to information. So one of the things we keep trying to do – I keep trying to do – is put myself in the centre of the ecosystem, it’s when you’re the centre of the ecosystems and it’s still a relatively small world, you know what’s happening. and so, when the Ethereum Alliance got announced, it was well telegraphed that it was going to get announced, you talked to people, you knew it was going to get announced. Then it gets announced and the price goes way, way up and so I would call that an event-driven trade. The broad trading of it is macro, though, you’ll see many zeniths and euphorias and so I sold at $5000, or $4980, I actually sold some Bitcoin and then, you know, three weeks later, tried to buy it in the low $3000’s and you know, listen, if you’re good at that and you’re a trading junkie, it’s a lot of fun. It does increase your tax bill, and so if you’re somebody who’ll just sit and sit and sit, that’s a different strategy. But the other part of it is this investing part – it’s almost like a long short equity mindset – or a venture capital mindset - all these ICOs and pre-ICOS, and you know, for us, sponsoring and helping these companies figure out how to go through the system, you get a buy-in at a discount and there is a profitable business in that as well.
INTERVIEWER: You’re trading what, Bitcoin-----
NOVOGRATZ: We trade-----
INTERVIEWER: -----Ether-----
NOVOGRATZ: I’ve -----
INTERVIEWER: -----Jesus coin?
NOVOGRATZ: Not in Jesus Coin. I’ve taken the approach to participate in all sides of the ecosystem, so I have mines - investments in mining-----
INTERVIEWER: To create new coins?
NOVOGRATZ: To create new coins. You know, that’s been an interesting business. It’s been a money loser for us in local currency terms.
INTEVIEWER: Right.
NOVOGRATZ: I spent Bitcoins to buy a Bitcoin mine. If I had spent dollars to buy a Bitcoin mine, I would have made a lot of money. But you were better off just owning the Bitcoins and in Ether you were far better off just owning the Ether than building an Ether mine. But what the mines do do is you plug into that community and it’s an amazing information source of how this whole ecosystem is working. But we also invest in – I’ve invested in three exchanges, you know, way back; we’ve invested in so, equity of companies, venture capital, we have invested into ICOs - so ICOs and pre-ICOS . The thing about it, it’s like an equity offering and you know, it’s not allowed to be an equity offering, so it’s not an equity offering and the SEC is coming down with some regulations on what is an okay ICO and what’s not an okay ICO. What is unique about that is, the SEC only said, “These are bad”, by definition means, these other ones right now are okay. So our regulators have been very open-minded. From the first time I went down to the FED in 2014 and talked about Bitcoin. I think these guys see this as a real, positive fundamental thing in the long run and they’re trying to help guide it, and understand where to get in and not to get in.
INTERVIEWER: Where are you trading - what platforms?
NOVOGRATZ: So, you know, we’re fairly large and so we trade at lots of different exchanges and one of the tricks, or the risks in this business right now is, the riskiest money you have in the system is being left on the exchanges because-----
INTERVIEWER: So central clearing there-----
NOVOGRATZ: And there’s the, you know, they’re not that well capitalised and so you don’t leave that much money on the exchanges, and so we trade in lots of them. You know, Gemini here in New York, Cameron and Tyler’s exchange, is one of our go-to places because that got regulated, you feel a little bit better about it, and you know, I know these guys so if something really bad happened, I can go down and give them a shot. [Finished at 28:49 – if you feel like listening to the end, take it up here].
Back to me
Phew! That took me much longer than I expected to transcribe, so I hope you get a lot out of it. If you want to read more, check the interview. They go on at this point to talk about financial institutions getting involved in trading cryptocurrencies, Bitcoin futures markets, etc. which Novogratz is very excited about, because obviously, he’s going to be heavily involved. I’ll leave this with one final quote, which backs up how I feel about the Bitshares exchange, and what I take from this interview with Novogratz and the future and potential of cryptocurrency in general:

NOVOGRATZ: The revolution is, moving into a decentralised world.

---

DISCLAIMER: This is not the whole interview. It contains what I consider the interesting bits from: [08:50 – 28:49].
Where you see this […] it means I didn’t think this part of the interview added to the crux of the cryptocurrency issues I want to highlight. 
https://www.bloomberg.com/news/videos/2017-09-26/how-macro-trader-novogratz-became-a-bitcoin-convert-video