Thomas Lee: Crypto market 2018 and the future of Blockchain.

Thomas Lee: Crypto market 2018 and the future of Blockchain.



so our next speaker is going to talk about our favorite M word we see this M word being blamed for everything that's wrong with this world talking about Millennials so presenting on crypto adoption growth with Millennials why it has nothing to do with a coins volatility please welcome our next speaker co-founder and managing partner at fun Strike Global Advisors mr. Thomas Lee round of applause please hello everyone I'm gonna spend the next 25 minutes or so talking about our views on crypto assets and how I think it really all links to really just a single demographic issue which is Millennials before I do that though I want to talk about a couple of topics the first is I want to explain to you a little bit about our firm so I'm the co-founder of funds track Global Advisors I've been in research for 25 years fun strat was founded in 2014 and a lot of us came from JP Morgan I was a chief equity strategist there but 25 years of experience is actually pretty common among my team just between the four senior heads here which is myself Sam dr. disk want Rob Schlemmer who's a technician and our policy strategist Tom block we've got about a hundred years of collective research experience and I can also proudly say that most of my clients we have 150 clients in in roughly 16 countries many of them actually have been my clients since 1993 and we advise roughly 75% of all traditional institutional investors both in macro and increasingly on the crypto market and if there's something I've learned over the 25 years and our you know our research and our sort of reputation is really built on the idea of using a lot of data to come to conclusions I think the single most important thing that explains most markets is demographics so when you think about big technological change often its roots are actually in a simple population trends in fact I'm not going to cover this here but even things like the tech boom of 91 to 99 or for 1948 to 67 were actually simply explained by labor shortage now the next thing I want to talk to you though about is the bear market and the reason I think it's a great starting point is as 2018 s been a disappointing year for the crypto market year-to-date Bitcoin is down about sixty seventy percent and the crypto market has done much worse and I would say that there's really two very simple reasons why 20 18s turned out to be so disappointing the first is 2017 saw a parabolic gains you know the Bitcoin returned 1,300 percent last year and that was actually on the low end there were many cryptocurrencies that had returned a hundred x or more so 2018 was simply a reversion to mean in terms of total performance and you might wonder well this has been you know this has felt catastrophic keep in mind bitcoin was last at four thousand dollars last August so we're talking about a bear market that has only put prices back to where it was seventeen months ago how about bear markets in traditional equities well I don't know if any of you were investing in equities during the 2000 2007 to 2008 bear market but the S&P fell to 666 at the low that price wasn't seen the last time the SP was at 667 was roughly 12 years before that so the S&P bear market or the glory the Great Recession wiped out more than 12 years of price gains or if you think if you take a market like Japan that market peaked in 1990 and still 38 years later still hasn't recovered its high so the the bear market that we're seeing in Bitcoin really is almost just a correction off the the massive move in 2017 but the second driver of the bear market I think is the flawed market structure today today Bitcoin has two primary investors it's it's comprised of whales you know some of the project founders are some of the original holders of Bitcoin and it's and then it's the retail investor there's virtually no institutional investor sponsorship within crypto that the crypto funds that exist today manage roughly four percent of all crypto assets equities or commodities or in fixed income institutional investors represent roughly 40% to 80% of a market so today the lack of institutions which tend to be either counter cyclical investors they buy when people are selling or longer-term oriented they don't exist in crypto I think that's one of the the weaknesses of the market structure today and of course in the last few weeks we've had a lot of things that have caused I think what I view as a temporary disruption you know we had the Bitcoin cash Fork Wars which diverted a lot of hash power a lot of miners began to sell their Bitcoin to really participate in that hash war we had so the risk of SEC enforcement as we started to see some icos refund and of course equity markets globally we're melting down and I think that macro sell-off was hurting Bitcoin but here's why our presentation starts because bitcoins in a bear market and I think there's a lot of despair out there in fact a lot of our clients believe Bitcoin is not just in a bear market they think the crypto market is completely broken and I think that's where we will disagree I think that this is actually a quite a healthy bear market it's helping reset investor expectations but it's also helping in anybody in industry and I'm assuming most people in this room are focused on the industry it's helping them focus on building real high return value capture products and again anybody in crypto should only be putting 2% of their money into the crypto market in terms of investable assets but more importantly you've got to use the right time horizon so let's think about time horizons so this is a list of some famous quotes I'm not gonna read all of them but I think one of the most interesting because I used to be a telecom analyst for most of my career actually is this from 1876 so the head of the British post office in 1876 said the Americans have need of the telephone but we do not we have plenty of messenger boys okay these are famous last words more importantly you might think innovators understand the future markets better and again I'm a former mobile communications analyst I did that from 1993 to 2007 and here in 1981 Marty Cooper who invented the cell phone he said cellular phones will absolutely not replace local wire systems so think about that that the guy who invented the first truly mobile phone didn't really understand the future potential and of course you don't want to be one of these people I think Robert Madcaps someone that's very interesting because he's the founder of 3com in 1995 he predicted I predict the internet will soon go spectacularly supernova and in 1996 catastrophic ly collapse so again a guy in the industry predicted the demise of the industry so again what is what am I trying to tell you guys I'm gonna say that nobody knows the future okay that that's the real emphasis even people who might you might think as the oh jeez okay or even Satoshi Nakamoto their vision of the future may not be what actually becomes the vision of the future for crypto now I think bitcoin is bent but it's not broken today Bitcoin already has staying power today Bitcoin on chain transaction volumes are roughly 1.3 trillion a year that's more than two and a half times the size of PayPal it's about seven times the size of discover and it's a not too many years away from surpassing the on chain volumes of visa and more importantly there is a lot of money being made in crypto so even though crypto prices haven't done well crypto exchanges have had remarkable profitability so we have some estimates I don't actually have the real numbers but bit max is probably going to make 1.2 billion of net income this year it would rank is the third most profitable exchange in the world finance would rank as the fifth now let me put this in perspective for you the Nasdaq had net income of 700 million dollars we all know the Nasdaq right it's a big famous exchange the CBOE made 500 million dollars last year bit max is making more money than both combined I mean there's a lot of money being made in crypto today so I think the exchanges are really proof and the on chain of Bitcoin are really proof that crypto is here to stay ok so now we want to talk about use cases you can't really have a long term story without some use cases so I wanna cover what I think are the four most important use cases today for digital assets programmable money you know blockchain number one I think the value capture today is that the blockchain is taking trust which has traditionally been either a person or an entity and it's actually decentralizing that it's putting it on to a blockchain the second real opportunity today in crypto is productivity I think this is completely misunderstood but blockchain is allowing industries to replace a lot of people to do the same job because whether it's trust or efficiency that's a that's a huge huge important driver in fact you have to keep mine today in the banking industry 50 percent of JP Morgan's operating cost is employee expense think about that JP Morgan's you know one of the biggest banks out there half their cost is paying people that's what blockchain and digital assets can replace now the third use case is optimizing working capital today 14% of all GDP now is locked up as working capital what I mean by that is whether you're a business or a company or a bank you actually have to keep a lot of cash sitting around which is account which is about four eleven trillion dollars globally today that's just money just sitting there doing nothing and of course the last I think really good use of crypto assets is store value so there's really four I think real opportunities in crypto and I want to explain to you why I think banking is the most Rumble vulnerable today this chart on the Left shows you the trend in interest rates which since 1970 has been falling but as you can see on the right the banking industry's share of profits are what they call value capture has actually risen see it's a myth banks don't make money from levels of interest rates or the curve I think that's what we traditionally believe but we can just show in this chart that banks make money by all economic activity it doesn't matter where the interest rate is how big is that number well today it's about five trillion dollars and in a decade it's going to be roughly seven and a half trillion dollars okay now you might say well that hey it's an 80 trillion dollar global economy you know five trillion I don't think that's out of whack well let's think about what that means it means today the average person spends three and a half weeks a year for the privilege of using the existing financial system so think about that you spend every one of it everybody in this room spends a month every year to use the financial system now that's both for interest credit card processing insurance okay these are all trust based intermediary reasons you're using the financial system and then let me help you understand this better Facebook which arguably if anyone uses Facebook knows more about you than any company in the world generates seven dollars a year by understanding you and selling ads against you the bank who never talks to you and thinks they know you because they have credit scores on you and all your financial records they make 862 a thousand dollars per year on the same user so is it any wonder that technology companies are eyeing the banking industry as the next area for disruption Facebook if they start to do banking like services could increase their revenues by more than a hundred times okay and of course banks are very local monopolistic five banks in the u.s. control half the sets outside the US three banks typically control 75% of the market the financial industry is essentially a cartel and I'm gonna skip now because I think that's sort of setting up the market opportunity but I want to talk to you about why it's also a story about demographics now demographics is one of the most underappreciated factors in markets in fact I might even argue that the only thing that explains any boom anywhere in the world is simply a demographic story japan's you know underperformance has been because of an aging population china's boom was simply a rural to urban population shift but I also would tell you that if you looked at the US markets just using demographics alone you could have predicted every bear market in the United States within one to two years with a 40-year lead time so think about that a single metric which is population explained every bear mark in the US with a 40-year advanced lead time and let me show you how this works these are the six living generations in the u.s. the oldest is the greatest generation and then there's it's roughly 20 year intervals the Silent Generation they're the children born during the Great Depression the baby boomers which were children of those Silent Generation Generation X which is my generation and then we have Millennials on the right I actually list the year that each of those populations peaked okay Greatest Generation peaked in 1930 at around the average age of 39 Silent Generation peaked in 74 at at the age of roughly 40 the Boomers peaked in 99 and Gen X is peaking this year well let's put that on a chart that's the stock market since 1871 and I've shaded each of the peaks of the generation what do you see there every peak of the generation has actually been the peak of the stock market you've had complete transparency to predict every bull market in bear mark just looking at population alone and the point of this is that the Millennials don't peak till twenty thirty eight and I think that's the only generation that's gonna matter for anybody in this room okay so there's two net billion Millennials globally it's forty three percent of the adult population and twenty eighteen is the year that there are now more Millennials that are producing income than living at home so this is why the crossover is happening today now we've done some consulting work for some companies and this is one of the outputs of our study but we show that in the next ten years in the United States alone ninety percent of all purchases of financial products are going to be decided by millennial so the the the single industry that's going to change the most in the next decade is going to be financial services driven by single generation and you can see part of that has to do with the income share that Millennials are actually doing quite well today but within a decade they're going to control the largest wallet in the US and it's already happening this is Chase credit card data and this is showing you you every year change the only customer segment at Chase that's consistently growing their credit card spending are their Millennials okay but what do we know about the Millennials number one this is a Facebook study 92% of Millennials don't trust banks first data did their own study 71% of Millennials would rather go to the dentist then listen to what a bank says and actually 33 percent believe that they won't even need a bank in five years why do Millennials hate the bank's remember the Millennials were teenagers during the financial crisis and in the u.s. 20 million households lost their home to a bank globally of course we the same housing crisis Millennials only remember that banks took their houses okay and of course now Millennials don't really even go to a bank you know 68 percent of Millennials do their banking primarily on them on a mobile phone I mean it's an app today to them Chase is just an app on their phone and they're gonna control roughly according to first data roughly seven trillion of assets by 2020 so again this is just us data but these are huge huge numbers and I think Asia is really important to watch because the adoption rate in crypto is much higher you know fourteen percent of Japanese males own a cryptocurrency and 23 percent of Korean adults 20 year-olds are active in the cryptocurrency market this doesn't surprise me Japan and Korea were the first with mobile adoption multiplayer gaming high speed internet a lot of the technological trends actually are driven out of Asia and I'm gonna skip a few charts here in the interest of time but let me just highlight gold because let's say that gold doesn't really mean much to a lot of people I mean I know people buy gold as investments and I think in Asia it's still very popular for jewelry but there was really only one generation that bought gold in size which is the Silent Generation that's the what I've done here is on the bottom chart I've listed the number of people aged 35 to 60 by generation and that dark red line is the Silent Generation remember these were children born during the Great Depression well when the dollar went off the gold standard 1971 the Silent Generation bought gold like crazy and it drove a 15 X gain in gold in a 10-year period that was the only time Gold's actually ever perform that strongly and again it's because of a single generation I think the same thing is going to happen with Millennials and crypto let me explain why if you had to say what was the biggest trade to have made in the last 20 years it was Fang or in Asia it was bat Fang is the for stocks Facebook Amazon Netflix Google $1,000 invested in Fang starting with Amazon turned into 1.5 million dollars in 20 years okay but here's the surprise seventy percent of that return was just explained by the growth of the global Internet if you had taken each of these four stocks at their IPO and not modeled their company at all but you just said I have a projection of how many Internet users are gonna grow over the next 20 years you would have gotten 70% of the return correct on these stocks it's all about the macro right the tactical and we've argued this with our clients our institutional that 70% of all return in equities is a tactical decision well you might say well that's once-in-a-lifetime it's not true in the 1980s the boomers became the biggest consumers right because it was a huge generation and so I'm showing you this chart that in the 80s consumer spending in the u.s. tripled in a decade never saw that before in any period and that tripling allowed consumer stocks the 7 biggest okay this is Walmart Home Depot Hasbro gap limited brands Dillard's to turn a thousand dollars into 1.2 million in that 12 year period I'm sorry in that 20 year period the Fang stocks of the 80s were the consumer stocks every generation creates another Fang and again I think the next big Fang is within FinTech whether it's square probably Bitcoin that's really the opportunity of of the generation and let me explain why again crypto I think is still in the earliest days there's only 50 million crypto wallets active ones at best I mean that's a that's an aggressive estimate but there's 227 million PayPal accounts and there's 4.6 billion Visa and MasterCard accounts if you use social network value which we did with Fang a 50 million going to a 4.6 billion wallet just using Bitcoin as a proxy would mean Bitcoin could be worth over 10 million dollars per Bitcoin in that 20 year period so again this is the big opportunity right just focus on the number of wallets and I think wallets growth is both a function of millennial adoption and the fact that Bitcoin and crypto digital assets are becoming an asset class by itself and so let me jump into this and I think that's why 19 we're gonna see some catalysts the first is and as I mentioned only 4% of the market is institutional compared to 40 to 80% in other markets but we now have some solutions coming fact is the most visible you know that's backed by ice we've got companies like Microsoft and Starbucks participating era's switches TD Ameritrade and fidelity is getting into this market so I think these are things that are going to draw real Fiat inflows but a different type of investor that's going to tend to be longer term and potentially counter cyclical but this chart didn't come out quite right but I can explain to you what's going on here the one thing that's going to keep institutions on the sidelines is they're gonna be watching bitcoins price to its 200-day moving average institutions typically like price momentum to confirm their decision and I'm just showing you since inception Bitcoin when it's above its 200-day has a forward return of roughly 190 percent every six months and it's got a win ratio or daily positive returns 80% of the time when bitcoins below its 200-day moving average it's just where it is today because the 200a moving averages around 7,000 Bitcoin only produces 18 percent gains every six months and only is positive 43 percent of the time institutions aren't gonna just come into the market just because backed launches they're waiting for Bitcoin to recover to its 200-day and I think that's the opportunity for everybody in this room unless you think crypto is completely broken we have a price correction taking place that has caused the price to fall even below its 200-day but if you've got a timer aizen that's not three months one year but two three years this is a golden time to be long crypto and again as soon as Bitcoin crosses above its turn today we know that there's gonna be a flood of money coming and one thing I'll emphasize again if you look at Bitcoin since 2013 its entire return comes from just 10 days every year the dark blue line shows you the average return a Bitcoin every year if you didn't if you subtract out the ten best days in the past five years Bitcoin has had a negative 25% of your return excluding the ten best days and of course as you can see that with the including the ten best days bitcoins been spectacular and I'm gonna sort of end it there but I just want to highlight the the crypto market is outside of Bitcoin and I primarily focus on Bitcoin it's more rational than you than you think the x-axis on these charts is the change in daily active users 30-day average okay but it's basically the more to the right it is the faster the growth and the y axis is price performance the tokens that have performed well this year are the ones that have actually grown their community and so I've exclude a Bitcoin but you can see Doge AOS and stellar luminar really the three best performing but they've also had the best growth in user base and you know I'm kind of at a time but I just want to highlight something else you know people may tell you there's too much speculation in crypto I'm going to say there isn't even enough but it's because we don't have institutional investors today for every dollar that's used okay in the global economy its traded ninety six times on a derivatives market as a speculative trade so in other words it's a hundred to one for a commodity like oil for every dollar of oil that's used at a gas pump or on an airplane its traded 31 times as a speculative commodity on a derivatives exchange Bitcoin today comparing exchange volumes to on chain is only got a speculation ratio of two and a half times so again we could see almost a 50x increase in speculative activity on Bitcoin and it would only match what was happening with the dollar today so I'm gonna leave it there and I think the slides will be available and I I know I realized a breeze to him but thank you very much thank you

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About the Author: Maximilian Kuhn

3 Comments

  1. Imagine if your about to go on the dole, Social Security. Why did I call something you paid into your whole life, welfare, and not something you should expect? Your government over promised, your living longer, and you do not means test it.

    Imagine if you bought .25 BTC for each grandchild, and out it into a trust. 5 years from now, 100th is distributed for you in a life estate, remainder for you grandchildren.

    Imagine if you bought .25 BTC for your children. Same as above, 5 years from now, 100th is given to you for life, then that 100th went to your children, remainder to your grand children. I wish this bear market had continued 5 more years, I’m broke.

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