Meltem Demirors of CoinShares on Cryptocurrencies and Finance

It's certainly an exciting time for Bitcoin (BTC -3.39%) and other cryptocurrencies. In a recent Fool Live interview, recorded on March 18, Motley Fool board of directors member Randi Zuckerberg sat down for a chat with CoinShares' chief strategy officer Meltem Demirors to talk about Bitcoin, other cryptocurrencies, and the future of finance. You don't want to miss this one!

Randi Zuckerberg: Hi, everyone. I'm Randi Zuckerberg, and I am so excited to welcome just a fantastic woman who I have been lucky to call a friend, someone who's been on my SiriusXM radio shows several times. Meltem Demirors, thank you so much for joining us today.

Meltem Demirors: Thanks, Randi. I love your necklace, it looks fabulous.

Zuckerberg: Thank you. I thought if you're going to be like sweat pants on the bottom, might as well have a little flare on the top for Zoom. Here we are. Meltem give us a lay of the land. What are working on these days? What are you thinking about? What's top of mind for you?

Demirors: Does my audio sound OK or does this sound echoing to you? It's sounds good?

Zuckerberg: A little echoing but it sounds like you're in a church and you're preaching the gospel of crypto.

Demirors: I am. Hold on. I apologize, I couldn't find my normal headphones, so let me just quickly adjust. How do I sound now? Still good?

Zuckerberg: Yes you're great.

Demirors: Let's talk about what's going on in crypto. The last guest, Tim who was on, talked a little bit about, I don't know why we're here. I've been in this industry for seven years professionally and I've been a Bitcoin believer for longer than that. Here's what I think is so exciting and what's happening, because there is a broader macro story that's unfolding here that has historical context, economic context, financial context, cultural and social context that we kind of need to separate from the investment thesis and both kind of come together. I think what we're seeing overall is, we're shifting to a world that's defined by physical things and the physical lives we live, the physical jurisdictions in which we live, which are defined by the quarters of our nation states, into a brave new world that is digital in nature that doesn't have jurisdiction, where I'm not defined by where I live or what my passport says on it, where I'm not defined by my job. I really get to choose my affiliations and what identify with and who I want to be when I get on to the internet everyday.

I think in the midst of all of that, we're also witnessing a massive geopolitical reorientation, especially as we look at the growth of other economies outside of the United States, the change in global trade flows and the move away from an era defined by oil in conflicts over oil which were denominated in the petrodollar to an era that's really defined by all things digital and wars over semiconductors. We are entering into one of the greatest, and actually the greatest semiconductors shortage the world has ever seen. It's already impacted the automotive sectors. We saw with earnings reports from Q4 being impacted by plant shutdowns due to these component shortages, and it's going to hit every single sector in 2021. I think in the midst of all this sort of reorientation shifting, we used to have unilateral world that was built around the United States, the hegemon, and now we're shifting to this new multilateral world. But it's no longer just nation states, it's also digital states, and metaverses in these new worlds where we're spending time.

In the midst of all of that, Bitcoin is one such digital nation state, if you will, where people regardless of their nationality, where they happen to live, the jurisdiction in which they happen to be regulated; anyone can participate in the Bitcoin network. It is really truly been a bottoms-up primarily retail-led investment movement where retail grasped on the trend far before Wall Street did. Just for the last 12 months, we've really started to see Wall Street and institutions starting to get more comfortable with Bitcoin. Although I would say there's still a lot of FUD, or fear certainty and doubt, out there. But I just think it's very important to frame what's happened with Bitcoin in this larger context. Also if we look at what's happened in the S&P over the last year, this massive rotation away from core equities and toward tech socks and high growth, I think is really a symptom of investors were looking at increased taxes in the future. More aggressive tax policies from the U.S., people want to allocate their capital to growth assets that they can hold long-term potentially in their retirement portfolios, and Bitcoin fits perfectly in that categorization. I'll pause there, that's a lot. 

Zuckerberg: I love it. Why don't you talk a little bit about what you're doing at CoinShares. It's so interesting what you're working on and your unique viewpoint in this space.

Demirors: Sure. CoinShares is a digital asset investment firm. We've been around since 2013. I'm really excited to share that exactly a week ago, last Thursday on March 11, we publicly listed in our home market, which is the Nasdaq Nordic in Sweden, so we are a publicly listed, publicly traded firm, which is super exciting. If you go to CoinShares.com, under the investor relations section of our website, you can find a lot of information about our revenues, our cash flows. It's great to be able to provide that transparency to the market and I think it gives people a really unique view into the inner workings of our business. I know a lot of times, it's really difficult to understand crypto business models. But at its core, what we do at CoinShares is two primary things. We operate exchange-traded products. We have $5 billion in assets under management in our family of exchange traded products. They are traded in the European market, unfortunately not in the U.S. In the U.S., from a regulatory perspective, the SEC has not yet approved a Bitcoin ETF and when it comes to an ETC, or an exchange traded of commodity, or swap, the CFTC is still out on that as well. ETP is our asset management business, primarily focused on Europe for now, but obviously very excited about the opportunity to move into the U.S. and particularly to get Bitcoin into every U.S. retirement account. That is my personal objective over the next five to 10 years, is how do I get Bitcoin, even if it's a tiny allocation, into every retirement account in the U.S.? Then the other side of our business is really focused on trading. We run a large trading book that's focused on statistical arbitrage, and we've built a lot of trading infrastructure. We provide liquidity, fixed-income solutions, OTC services, etc, to other firms like us, and then we have a range of other activities. I focus on proprietary investments and M&A, venture capital investments. We also have an index product we've developed. We're working on building on-chain products as well, so there's a whole myriad of activities that are more exploratory. But really, the core of our business is bridging what's happening in the crypto space and connecting it to the world of traditional finance that I come from.

Zuckerberg: Now, what do you think are some of the biggest misconceptions about Bitcoin that are out there right now?

Demirors: I have a laundry list.

Zuckerberg: Do we have three hours to go through everything?

Demirors: It's really simple. Here are the three things I hear most often about Bitcoin. No. 1, that Bitcoin is only used by criminals. No. 2, that Bitcoin is boiling the ocean and it's going to destroy the planet from an environmental perspective, and No. 3, I think the one myth that honestly is so tiring is that Bitcoin is digital gold. Gold is a rock. Bitcoin is not a rock. Bitcoin is so much more than a rock. I find the digital gold narrative very limiting, and I think people often bring up the seven transactions per second number, which is so outdated because with lightning network, we can have millions of transactions per millisecond, so I would say those are the three arguments we hear all the time. I've been hearing them since 2015 since I first started talking to financial institutions and the media about Bitcoin, and I think all of those have been dispelled, but happy to delve into any of those more.

Zuckerberg: Great. Well, maybe we can circle back to some of those later. I'm curious if you're thinking right now only about Bitcoin, are there other cryptocurrencies that you're passionate about or excited about right now?

Demirors: Yeah, absolutely. Bitcoin's not the only game in town, but it is important to note, if we look at cryptocurrencies by market cap, Bitcoin is still 70% of the overall cryptocurrency market, and if you go to any price site that lists out the price of different cryptocurrencies, they will typically track something called the Bitcoin dominance index, which is the percent of Bitcoin of the market cap is comprised of, and historically, it's always hovered around 60% to 70%. I typically talk about Bitcoin the most because it's the asset that I think people are most familiar with, but we're also really actively involved in the Ethereum (ETH -2.78%) ecosystem. We have over $1.5 billion of assets under management in our Ethereum ETPs. We've seen a large number of institutional inflows over the last quarter into Ethereum-related products and funds, so we're definitely very excited about everything that's happening around Ethereum, particularly with the advent of decentralized finance and how much that's grown over the last 12 months. Other assets that I'm personally really excited about are, there a lot of new protocols that are launching that are focused on something called Web3. This idea of rearchitecting web services around protocols instead of around corporations. For example, one project I'm an investor in and excited about is something called Radical, which is building a decentralized GitHub and a number of crypto projects are already using it to push their code to this decentralized code repository. Another one that's really popular and widely used is a project called Filecoin (FIL -5.80%), which basically is building a new way of storing data using this distributed model as opposed to relying on AWS. I think there are a lot of these interesting applications that are emerging. My entire portfolio that I personally invest in is on my website on meltemdemirors.com. But I think generally, with the things I'm most excited about are Bitcoin and Ethereum, and then looking more broadly at some of the changes that are going to come to the financial services in compute and connectivity as a result of these new tools that we have in our toolkit. It is taking a long time. This is definitely along evolutionary arch, so we'd definitely say to everyone on this call, not investment advice, definitely proceed with caution and do your research. Missouri.io is a great website that has a lot of in-depth data points and research on each of these different crypto assets, and so highly recommend finding a source of information you like and getting smarter on it. But there are a lot of great ways in the U.S. now that you can trade cryptocurrencies, and so highly encourage people to start learning and start getting active, and obviously, crypto Twitter is also very active, very vocal, and a great way to stay on top of what's going on in this space.

Zuckerberg: So great. Meltem, one of the things I've loved that I've heard you talk about before is you liking the volatility of Bitcoin a bit to Tesla (TSLA 12.06%). You've compared it to stocks like that. Now, here at the Motley Fool, we talked a lot about stocks, a lot about Tesla, so I think people would really enjoy hearing your thoughts there.

Demirors: Absolutely. Actually, this goes back to one of the questions you asked Randi, which was one of the things that you hear most commonly as an objection to Bitcoin and certainly, historically, I think one of the objections that investors have had to Bitcoin is its volatility. Bitcoin is notoriously volatile and what's interesting is, we've done a lot of research on Bitcoin's volatility and we believe Bitcoin's volatility is the cost of the opportunity here. Volatility is very common around speculative tech assets and I think Tesla is a great example as well. Last year, everyone talked about Bitcoin's price rise. We started the year at around $7,000, ended the year at $20,000, actually closer to $30,000, which was exciting. But in that same period of time, Tesla and a number of other stocks completely blew Bitcoin out of the water. Tesla saw 700% rise last year, Bitcoin, 250%. So comparatively speaking, volatility is a relative measure, it really depends on what you're indexing against. If you index against the dollar, yes, Bitcoin is volatile and it's a cyclical asset as well. If we look at this cyclical trend, Bitcoin tends to follow an 18-to-24-month cyclical trend, but the broader secular trend has been up and to the right and that's something we look at and chart, and a lot of other industry analysts do as well. But I think longer-term, Bitcoin's volatility continues to decrease relative to other asset classes, and it's not because Bitcoin is getting less volatile, it's that everything else is getting more volatile. We live in a world that is dominated by markets. I believe investing is one of the new forms of the entertainment. As we've seen by the astronomic rise of retail participation in trading, across all asset classes, and so I think as a result, over the coming decade, as other assets and other parts of our financial system become more volatile, I think Bitcoin, from a relative comparative perspective, is going to appear much less volatile, which I think certainly helps make investors less sensitive to Bitcoin's volatility.

Zuckerberg: Yes. I'm curious how you personally got excited about crypto, and when you did start getting excited about the space, how did you get up to speed? What did you read, how did you learn? Because everyone's enthusiastic about learning about the crypto space, but we're all in different levels of expertise and knowledge. How do we get there?

Demirors: That's such a great question, Randi. I totally empathize with everyone who's just diving down what I call the crypto rabbit hole because we start with one inspiration. For me, in 2012, 2013, when I started learning about Bitcoin, there was only Bitcoin. For me, life was pretty easy because there was only Bitcoin to really talk about. For me, the way I began, so my family is from Turkey originally and I grew up in Western Europe and the U.S., so I'd never really thought about banking or the ability to have access to the banking system. But I needed to send money to Turkey and I couldn't because the person on the other end didn't have a bank account. My brother said like, "Hey, you should really look at Bitcoin," and I did. I was like, "This is super weird." But the first time I sent a Bitcoin transaction, it really sparked my imagination and it made me realize how messy money was. Like how is it that I could send a text message to someone for free and instantly in real-time but I couldn't send value to someone? Value is just zeros and ones, just like information. That's really what's set off the spark in my brain. Then I spent the next two years going to grad school, doing other stuff. As I was leaving grad school, I turned down my corporate job offers and I found an entrepreneur in New York who was working on a really cool idea around building a Bitcoin-focused investment firm. I didn't really know what my role was going to be besides, I'll join you, work on whatever. I'll sit in the closet.  I really just started going to a lot of meet-ups, talking to entrepreneurs, reading a lot of blogs. One of the great things about the crypto space is there's so much incredibly high-quality information that is available for free online. Every major firm in the industry publishes a huge amount of research. At CoinShares, we have a team of four that produces an incredible research. Again, I highly encourage people to check it out. But even just on Twitter, on Substack, on Median, on podcasts, on Clubhouse. People are putting out really incredibly thoughtful, exciting, inspirational content. It is an industry where once you find a few people who you like, who communicate in a way that resonates with you, I think it's really easy to start to learn. I typically encourage people to start with Bitcoin because once you get Bitcoin, everything else makes a lot more sense. When it comes to understanding Bitcoin, it's a much smaller surface area. It's an easier place to start. From there, it's really a choose your own adventure. There's so many different little rabbit holes, whether it's DeFi, decentralized finance, NFTs, and what's happening with creator economies, Web3, and decentralized applications and decentralized web. There's so many little niches. I think there's something for everyone in crypto. It's just a question on finding what little rabbit hole you want to go down. 

Zuckerberg: What rabbit hole are you going down right now? What's the latest thing that's captured your attention and mind?

Demirors: Down the same rabbit hole I've been down for seven entire years. Right now, an area I'm spending a lot of time on; I used to work in the energy industry before I worked in crypto, so I'm spending a lot of time thinking about how Bitcoin is going to impact the energy grid. In particular, how the development of the Bitcoin network in the form of mining can help fuel a renewable energy boom. That scenario I'm really excited about because it brings together building more resilient energy infrastructure, investing in renewables, and investing in making the Bitcoin network more resilient and more secure. That is one of my loves. It's also very relevant to some of the concerns that investors have around Bitcoin suitability with ESG mandates. Actually, I think Bitcoin, it's a perfect marriage for sustainability mandates. So I've been making a lot of investments in that area, doing a lot of research, and working on some new projects there. Then the other area, of course I'm always really excited about because I'm a huge nerd, is market microstructure. Thinking about taking the typically vertically integrated brokerage firm and breaking out all of those components. In my vision of the future, you can trade anything with anyone, at anytime, anywhere. You can clear, margin, and settle how you want, including to your own wallet that you hold the keys to. That's my bold, audacious vision for the future of finance. I'm very excited about all of the amazing work that's happening in that area as well.

Zuckerberg: I love it. We have just a few more minutes together, but I'm curious, for any of the investors on this call, what do you think people should be most optimistic and enthusiastic about with Bitcoin and crypto, and what should we be careful about as so many more people and institutions flood the space?

Demirors: Yeah. Look, I think what's so exciting to me about Bitcoin is how easy it is to access Bitcoin today. There's so many different ways for people to get exposure to Bitcoin, and as I said, my No. 1 focus is getting Bitcoin into retirement accounts. Given what's happening in this country, given the amount of money printing that's going on, given the Biden administration's stated intent, as well as many states' stated intent to raise taxes, I think putting cryptocurrencies, and in particular, Bitcoin into your retirement account and tax-advantaged account is a great way to preserve your wealth, and you don't need a huge allocation, a small allocation. Our research has found 4% is a great allocation in a traditional portfolio that balances a similar reward. Start with a small allocation, but you can't be on zero. Get a little bit in your portfolio. I think that's really important for me. I'm really excited about that. We're going to be announcing some things in the near future around how we're going to do that, which is where the rubber will hit the road. But let's get crypto into every retirement account in the United States. What I'm fearful of, look, is I think, anytime there's a new technology, there is typically an explosion of investments. There are always going to be people who are well-intentioned and also people who are not so well-intentioned, and want to use this as an opportunity to make money. I do think right now, in that NFT space in particular, as well as in the DeFi space, there are a lot of investment scams and investments schemes going on. So I really urge people to be cautious, to do their research, and to not, as we call it in the industry, ape into things. Don't invest in things without doing some due diligence. Don't send people on the Internet cryptocurrencies, because those transactions settle with finality, they can't be reversed. I would just encourage people to keep a level head and act rationally. Although, in today's world, I don't really even know what that means anymore. 

Zuckerberg: I love it. I wish that we could have gotten to all of the questions, and people raising their hand, but, we only had a limited time, and Meltem, I want to make sure that we've got the gems of your wisdom. Where can people go to connect with you, to read your research, and to keep up with what you're doing?

Demirors: Yes. I think Twitter. I'm very online as you know, Randi. I love Twitter. On Twitter, I'm @Melt_Dem, or if you search Meltem, you should be able to find me quite easily. @CoinSharesCo is our company Twitter handle. I think our website is in the chat. But if you search CoinShares.com, that's us. There's a whole great research page and we're reorganizing it around key topics over the next few months. Hopefully, that'll be easier to navigate. I write on Substack as well. You're welcome to find me there. I can't promise that it's so insightful, it's mostly just me talking about sci-fi a lot, I read a lot of sci-fi books. Let's see now, one of my passions as well. But yeah, feel free to reach out to me. Then my email is [email protected]. If you want to email me, feel free. But I would love to see people engage on Twitter in particular. I think that's where the crypto conversation really is happening today.

Zuckerberg: Excellent. Well, Meltem, it's always such a pleasure and an honor to chat with you. I learn something new every time. Thank you so much for lending your expertise and your time today.

Demirors: Of course, and I need to get this necklace, Randi. It's incredible.

Zuckerberg: Oh my gosh. You and I, we still need to chat because my son put all of his holiday money into Bitcoin and so we just still need to chat about the BitPiggys and everything. Anyway, I won't bore everyone here with that.

Demirors: Yes. I love it. Children building generational wealth.

Zuckerberg: I love it. Yeah, we need to connect on that too offline, for sure.

Demirors: Done and done. Thanks, Randi. It's great to see you. Thanks everyone for tuning in.