[Music] All right, welcome to the Neuvottelija- channel. For the third time, Martin Wichmann. Hi there. Thank you. Thank you.
Nice to be here again. Yes, and those two previous ones were Elon Musk's Bitcoins, meaning episode 64, where we discussed this radical and innovation, that a listed, even significant American company could own bitcoins, so that's where it started a couple of years ago, and then there was this drama episode where we went through the Terra Luna fiasco and in a way the fate of a kind of crypto mill, so to speak. Yes,
I've certainly seen all kinds of market cycles along the way, so here are a couple of examples of the good and the bad. And we're doing this as a double podcast. So I was on your—subscribe to The M podcast. Here, this "kvarn" is Swedish and apparently means "mill," and "mill" in English is "the mill." Is that how the logic goes? Yes. Yes. In such an innovative way we've come up with names. Yes. So there we went through actually the bond market and in a way this
Trump's America hegemony complex's rise in risk premiums and then questions like whether it leads to, for example, changes in asset allocation and whether cryptos, at least the better cryptos, could be winners in this change. This is the hypothesis I've been fueling for almost a decade now, and it seems that finally it's starting to gradually materialize, so we strongly believe in this. Yes, and in this way
among professional investors, it's quite accepted that at least a one percent allocation should be in these alternative basket crypto assets, the highest quality ones. Can't we say that alongside Bitcoin, there have emerged these proof-of-stake silver-level coins as well. Yes, we can have a debate about whether they are silver-level or gold-level alternatives,
but they are very different; in a way, the value proposition in Bitcoin is largely based on its scarcity. Meaning this hard cap, there will be 21 million Bitcoins and there will never be more, and the issuance is disinflationary like this, meaning every four years it decreases, and then on the other hand, these other blockchain technologies, for example Ethereum or Solana, are then again
more like these smart contract-based blockchains which enable the building of various applications and bringing different functions in there, and with smart contracts building these kinds of decentralized applications. Yes. And aren't these, at least Ethereum and Solana, the kind that have strengthened their position? Yes, those would be examples of two such largest smart contract platforms. Yes. Yes, good stuff, and I must say that this
was made in commercial partnership with Quan Capital, but it's a really fun concept, this kind of double podcast, so I really like it, that in a way you get to spar from both angles, so I think we should have more of these if others also want to do them. Yeah, first I got to tease you a bit and now I'm here in your hot seat right after.
Yeah, but regarding various themes, so in itself, when you look at this now, so didn't you join this Quan Capital setup, so what do you have... I originally know you as the founder of this Aave platform already. Yes, my own story in crypto started back in 2015-16 when a friend called from Germany where he was studying
for a while, saying "hey, there's this startup that makes payment terminal systems for crypto payments." And I thought this was a great idea. So I toured around the Finnish mainland visiting these IT firms and payment terminal providers. Very quickly I came to the conclusion that crypto payments might not be quite relevant yet in 2016. But through that I then became active in local communities. We created a Telegram group, which
was one of the largest in Finland at the time, and through that I met Stani Kulechov and joined a startup project called ETHLend, which then later rebranded as Aave and is today one of the world's largest DeFi protocols, with a market cap around two to three billion and there's about 40 billion in liquidity there.
Did you and Stani do this so that as founders you took the lion's share of the ecosystem, and now you are sitting on a massive pot. Maybe things have gone better for Stani than for me, but I've been through all kinds of cycles, ups and downs, and life is still with me, so to speak, but
it was around 2017 when these ICOs were at their hottest, so there, towards the end of that market cycle, we managed to do an ICO, a digital crowdfunding round, and ETHLend raised a good initial capital from it, but the tokens were largely distributed to the original investors who participated in this crowdfunding, and of course we covered operational costs on our part. Yeah. But Aave has
been a working business idea in a way. So basically, these smart contracts and cryptos are locked, enabling this kind of yield economy. What kept me in Bitcoin for a long time, besides this proof of work, was that it doesn't have that yield feature, so then either with something like Aave...
protocol on a DeFi platform or then, well, its money's other features, like in Ethereum where we are able to create this yield, so those have definitely been very good.
Yeah, and there are basically two slightly different yields involved here. Meaning Aave, which is a liquidity protocol that enables borrowing against cryptocurrency collateral and through that doing whatever each person wants with those borrowed funds, so there is basically a market side, so when you deposit there, you get interest income there and then correspondingly when you borrow, you naturally pay for it. And then there is also separately this, like, Ethereum staking
yield. So if you want to participate in maintaining the Ethereum network and through the proof of stake consensus algorithm, you then get rewards when participating in verifying and validating this blockchain. Yeah, by the way, I was in the fifth year episode of the crypto association Konsensus ry, we just went through the things of that time, and I'm eternally grateful for that, that I bought such a micro-stake
of Bitcoin and on Coinbase, back then the price was about 6,000 euros, so like, in good time. Now, I've slightly missed this Bitcoin and crypto rise. Of course, it probably would have been worth getting into Solana now, but then when this Trump-induced uncertainty regarding America as this general investment-hegemonic platform came up, I bought a little bit of Bitcoin at the 70k level
and it has again been a happy green spot there in this second-wave portfolio of mine. But how does this look to you, in a way, or for Kvarn Capital, this asset allocation game? Isn't it like at least somehow this—by the way, we are not giving investment advice here— but personally, it's like, it took me a long time to get used to it, partly through trying out that crypto association's podcast to just start making
crypto purchases. But now these last few years I've looked at it like, maybe a one percent allocation could be something sensible, just like a bit of a general allocation level, and that's what I've started to implement. But how do you see it yourself, is this type of thinking—meaning the early adopters have kind of changed into these portfolio investors?
Yeah. And as an investment bank, and when you think about this from a portfolio construction perspective, basically this traditional 60/40 model of stocks and bonds, if you sprinkle even a two percent Bitcoin allocation there, the Sharpe ratio just improves. And I think it's up to about 5%, after which it starts to decrease a bit along with the volatility risk. But at Kvarn, we offer this mainly to consumers.
Recently there was the Nordic Blockchain Association, so A comprehensive study on Nordic crypto investors, it's starting to be quite a significant mass, that well, there are over 2 million people in the Nordics who have already invested in cryptos. In Finland alone, 525,000 people own cryptos today. It is mainly among the young people. And then there was also this data point obtained from the
survey, which was that by the year 2035, an estimated 41% of the population in Finland will own cryptos. In other words, the market and the number of investors will grow by double digits over the next decade, presumably. And correspondingly, well, the same trend is very evident elsewhere in the Nordics. I would see that here is, in a way, this next generation looking for different kinds of investment targets. That
this kind of, well, looking at inflation and looking generally at which direction the economy is heading, we are further along the risk curve at the other end, with the assumption that one could also find better yield percentages. So yeah, that Sharpe ratio, or for me, one of my great investor role models is Ray Dalio, who is this macro strategist and founder of Bridgewater, so, well, he had this philosophy explained in his book Principles,
that he has this kind of alpha portfolio, well, combination, which is close to the idea that if you have assets that don't correlate very well with each other or even go in somewhat strange ways, and they all produce, or in a way, in their own asset class, well, excess returns or at least good returns, then that combined portfolio is of particularly high quality.
Indeed, an excellent book, I warmly recommend it to everyone, it's worth reading. But yeah, I would see that over the next few years, not only among the younger generation of investors, but also among institutional investors, this asset class is starting to establish its foothold. And as part of practically anyone's portfolio. There is, of course, the fact that it has become more common partly because these ETF products, which were
recently launched, broke all records. There are players the size of BlackRock whose big boss Larry Fink said—well, it took a couple of years—but practically speaking, he made a U-turn and said quite publicly that "I was wrong" and that there might be some value here after all, and now at a later stage recently he has even talked about how all securities will be tokenized, so I bet that in professional investor circles, the
professional risk of being the first to invest in this volatile asset class, which then drops by 50-60%, well not that it couldn't still do that, but that professional risk it has probably decreased significantly. Yes, that's how it is.
Before we go into that, uh, tokenization, I have some personal uh, experience with this kind of lifeline regarding real assets, so if you think about gold, well, at some point I had this kind of gold ETF, which then, like, had "belt and braces" in a way, that it had this physical gold reserve, which you could then be able to go and look at with a camera, to see that it really is there. So this involves a bit of a similar dynamic as with gold.
digital gold. So, those cameras for that, uh, Bitcoin or crypto wallet should somehow be built, so that this isn't just a Ponzi and, and then, uh, partly, like, solve this, this, like, problem of why it's worth having like, an intermediate investment like an ETF between you and the asset. And the first personal solution is that my memory is already so, so poor that I might not remember those personal keys anymore. Then it would just be
like, foolish to keep it as a direct investment, so I would even pay something for that, to have an intermediary.
Yeah. Unfortunately, we can't get cameras set up around this Bitcoin and they can't be photographed in this physical world, but then again on the other hand, maybe part of that blockchain value proposition is based exactly on the fact, that anyone can verify their own holdings from that ledger. So, in a way, maybe a bit of a comparison to your camera, the blockchain and these block explorers enable this. Uh, but as you said, for the majority of people, the idea that, uh,
they store their own keys and take on that technical risk themselves might be a bit too much to ask. Especially for the older generation, who are famously very competent with IT systems, so I would see in this context as well that service providers have a quite sensible, uh, value proposition to offer in that direction. Yes, that's how it is. And yeah, that's a good point, that in a way the idea of the public blockchain is, that all those transactions are, like, public and
auditable and verifiable by the blockchain, but then your, like, private key is then a separate risk there, where you then have to, uh, create a kind of, uh, secure space for it and such, so that it doesn't just like, disappear. Yes. Yes. And then there's, like, well, on the Bitcoin side it's very simple, you open that wallet, you store those bitcoins, but then, like, if we go to the yield side and you want to create some kind of interest yield for your own underlying asset,
at that point, service providers certainly have significantly better technical capabilities to offer this in a productized form to ordinary uh, investors. Yes. Then your point about tokenization, let's go into that to the personal side, and the intention now isn't to [ __ ] anyone, here comes a certain opening up about things, but well, it's all educational.
A few years ago, we had this kind of well, a certain kind of double hype. We had, well, negative interest rates. So people well, understandably didn't want to put money into some deposits and then get them back a moment later reduced, so it annoyed people for a reason, and they preferred to return to a situation where there's like a positive yield. This was like problem number one to be solved. Then problem number two was that, well, many
of these, well, uh, yield-producing but still safe asset classes were like a bit too big or for institutions to handle, so Lifeline, supposedly one of Finland's best, this kind of Venture Capital technology firm, which has set up these Supercells and Ouras, well, they asked me to invest as well.
We're not talking about huge sums, but anyway, into this concept called Real Stocks. So there, well, they tokenized these, well, positive yield well, supercore assets, and then maybe we'll dive into this tokenization. So it basically enables, like, if you have one, let's say for example some, uh, triple-A debt agreement and it's
say, in the vaults of three banks, for example, let's say 200 million, then this could be tokenized so that you and I could also get get that yield and then, or just like, put this central asset. So, well, this first problem was— negative interest rates have like, partially disappeared now. But this tokenization, this is like quite a really relevant problem that needs a solution. Yes, and it offers a solution to many problems. Like, an example is exactly this previously
mentioned BlackRock, which is now talking a lot about tokenizing securities, so in a way, we can bring that, well, crypto-native 24/7 trading there.
So in a way, the markets are open all the time. We get instant settlement, meaning basically this normal securities settlement T+1 or T+2 where, in a way, in the GameStop example, suddenly if I have a 140 percent float, meaning there are more shares in circulation than have been issued, partly due to these settlement delays, so this solves that directly, meaning in a way immediate settlement, continuous trading, and once again, if you want, you can
then hold your own securities yourself, and similarly then, the tokenization, well, it can be applied to quite many other asset classes as well. So in a way, now there are, well, the JP Morgans and, well, Chainlinks in collaboration, having tokenized money market funds.
Tokenizing real estate is practically quite possible. So in that context, well, real estate can be split into small parts and provide liquid markets. In the last pod, when you referred to this, well um real estate funds, where then due to various market dynamics, we are sort of a bit stuck, so these could in theory be quite liquid practically all the time. And through that, the need for capital to participate in, for example
real estate investing, could be dropped sig- significantly through this, like, fractionalization and with the help of liquid markets, whereby anyone could get access to these, well, whether they are risk-free or low-risk or whatever anyone wants to perceive them as, but nevertheless, investment opportunities would be democratized through that. Yeah, then there was a—perhaps a third problem was revealed, which maybe wasn't quite clear at the beginning, which was that, well, price formation and liquidity
are also like a problem that still needs to be solved separately. Meaning that it's not enough that you tokenize, but you have to create for those tokens like a price, and usually that requires some kind of marketplace. In that, the technical solution would have been that we would have, like, sought for these, well a listing. So in a way, some kind of exchange mechanism would have been created there. How well, like, in a way, can cryptos create that price marketplace or some kind of, well, exchange-type structures. Well
I mean, there are already, for example, on Solana, these peer-to-peer operating exchange services. So in a way, these exchange functions built on top of smart contracts. There is no counterparty risk there. In that regard, practically speaking, anyone can create a marketplace, add liquidity, and trading is in that sense so very open and easy.
Yeah. But then, well, there might arise these liquidity imbalances, where there's, say, some asset that well, for example, is oversold, then there isn't that buy—whatever the exchange unit is. I mean, this is where you might need to shift your brain into a new gear in crypto. They are like a bit like a matrix there, so that, well, when you usually always think that the source of liquidity is like the Euro, meaning in practice a bank's zero-duration deposit, well, you can think of it as you swapping, say
Solana for, well, Bitcoin or dollars. Yes, there can be several different trading pairs, so there can be like synthetic dollars, USDC or USDT. There can be Ethereum as a trading pair, and then in a way, well by default, if the price drops below the value of the underlying asset, then someone will buy it with the logic that you sort of get to buy in this case, for example, real estate at a discount and then again, if the price trades way up, then by default
at some point, it finds its true market value.
Yeah, yeah. That, well, market price information is such that if it's too, like, a specific asset, then you might not get enough information to form that market. But if it's a well, very broad set, like a dollar for example, then in a way, you don't need any separate information about it. It's like all, uh, public information is sufficient for calculating the price formation, but somewhere between the dollar and an individual
Finnish quota—I mean, real estate— there is quite a large need to create some information for that too. There is. Well, and there are usually market makers who then, in a way, professionally look for these market imbalances, which they then try to correct. Yeah, right. Then one solution that was also discussed in your, like, MIL podcast is this kind of basket. So, in a way, if you don't want to take, say,
the risk of tier-two cryptos, then you can partially solve this. A bit like as a global investor. Personally, I see that I have different weights, like 60 percent in the US. I've lowered this a bit now since there's uncertainty there, and increased the weight of Europe and Finland here, so in cryptos as well, you can create these baskets, meaning there's
a becoming more common solution too? Yes, these crypto indexes can be found already and I think they are even listed on Nasdaq in ETP form.
So, in a way, the most typical one is this market-cap-weighted top 10 or top 20 coins, and of course, you should probably wipe out the stablecoins and, in my opinion, a couple of other coins, but these will surely become more common on a larger scale, and then there's also the fact that you can add these yield components on top. So, for example, in the case of Solana and Ethereum, just participating in network validation generates,
let's say, 4-7% interest, and then there are these technical components, that if you participate in it or by running your own node and validator and participate in the execution layer, there's also this MEV component, so that by, like, reordering transactions, in a way, you can bring more yield into it, so there are many different possibilities. From these, you can then build entirely new kinds of
products. Yeah, right. By the way, is ETP related to an ETF, an Exchange Traded Fund? Yes, practically speaking, they are synonyms with each other. There's surely some semantic difference to be found, but in this case, as an example, these products listed on the Helsinki Nasdaq, they have the underlying asset as collateral one-to-one. Yes. So, one-to-one...
A way to dip your toes in the water is to buy from the exchange side, buy a bit of these products for your exchange portfolio. Yes. Yes. But there are, of course, their own costs, as always with these products. Whereas by buying directly through an exchange, there is a transaction fee, of course, but there isn't really an administrative fee in that case.
Yeah. And then there's the custody separately. So, don't you also have in a way, how does this MiCA legislation, by the way, enable this investment service activity, so it's like a kind of special investment fund type of category or what is it?
Well, actually, two different licenses, so this CASP, which everyone is now applying for under the MiCA legislation, is basically crypto-specific. Under CASP, there are different categories, for example, there are different categories, of which one and the most common example is this CASP, or Crypto-asset service provider. Then there are these ARTs, asset-referenced tokens, for example, gold-backed ones, and then there's the "others"
category, where basically everything else is put. For example, if you want to launch your own token, and then it actually limits the activity quite much to spot trading, so if you want to do derivatives or others, then those are under MiFID II, meaning an investment service license, and we at Kvarn have one of those too. Yeah. Do they have the same ones as at least one portfolio
service operation? It's really annoying when they have to have these these KIDs, and they have to—it's not enough that they're in English, they must be in Finnish, but it looks like really exhausting bureaucracy, so as far as I know, there are no such requirements. Yeah, yeah. It's actually I haven't applied for professional status yet, but there at least with this one service provider, I've already agreed that, yes, I am a professional investor here, so
I don't need special protection in these. I bet you'll easily get into that professional category, but as said, those are heavy, these compliance things that come with these various licenses.
Even now under MiCA, there were some tens of thousands of CASP applications in Europe, and the estimate was that probably 10% of them will actually get through and be allowed to continue their operations. And our view, at least, is also that this will to some extent lead to consolidation in the market. So, in a way, small players, two-person startup outfits. Simply the costs
resulting from it. Just filling out these applications and the required legal expertise, which is usually then bought from law firms, raises the overhead requirement so much high, in a way, entering the market today and applying for licenses is significantly more challenging than a few years ago. And this will also lead for medium-sized operators to the fact that, in a way, the compliance overhead inevitably drives them
to some kind of acquisitions or mergers being seen certainly within the next six months to a year. And now, in a way, partly because the Trump administration is significantly more favorable towards both crypto and acquisitions, we have now seen historically large, uh, purchases in the crypto market, so that Kraken bought NinjaTrader, meaning in a way a crypto exchange buys more of this kind of stock trading provider. Would it have been in the range of
1.2 or 3 billion. And then again, Deribit was sold. There was some 3 billion dollar acquisition, meaning a derivatives-focused marketplace. And perhaps also worth mentioning is Ripple.
About the Ripple protocol and technology, history, everyone can have their own opinion, but in a way they bought a Prime Broker like Hidden Road in the US, a mega-scale billion-dollar acquisition, and Ripple has its own stablecoin, which came a bit out of left field at that point, as the stablecoin market is mainly dominated by USDT, i.e., Tether, and then Circle's USDC. So apparently Ripple also has its own RLUSD stablecoin, which hasn't been seen much
in the crypto ecosystem, so to speak. So by default, usage is, if not negligible, then at least marginal. But then again, Hidden Road settles about three trillion annually. So in a way, when they move that trading onto their own rails, lo and behold, suddenly there is significant volume and demand for Ripple's stable coin. Yeah. Those are basically these stablecoins. So what we're talking about is
just a crypto-ownership-based way to own, for example, the dollar. So it's nothing more than that, instead of having a dollar currency account, you have this tokenized crypto ownership of dollars. Yeah. A synthetic dollar, where in crypto form issued with dollars as collateral, there are government bonds. There are bonds, T-bills, and treasury notes, and I think gold can also be found
on Tether's balance sheets; that Tether balance sheet is an eternal mystery, but once again, we'd need those cameras to film the vault to see what's actually in there. Yeah. I feel that regarding that, one doesn't need to be too worried, as for half a decade now, people have been wondering when Tether will collapse, and it's still chugging along and is a significant owner and buyer of US government bonds; it's an incredibly large
business, and its profitability rate is really, really high. Yeah, yeah. Here is So, in that Mielakso of yours, we also talked about these currency systems. So, we had this Bretton Woods back in the day, where the dollar was tied to gold and all other countries' currencies were pegged to the dollar, and then that gold link was severed by Nixon, and then we moved
into this kind of era. So, well, now some consider that risk possible due to Trump's actions, like potentially this dollar hegemony would be somewhat breaking down.
For example, JPMorgan's Jamie Dimon, the CEO, said famously a few days ago that "the bond market is going to crack." It won't cause problems for JPMorgan, but it will for you. So, there are starting to be these kinds of systemic risk bettors, and partly it shows; in my opinion, that rebound for Bitcoin from 70
thousand to over 100 thousand was partly caused by that "crack" recovery. So, there's also this kind of situation where people are wondering if the dollar hegemony's completely sovereign position is such a sure bet anymore.
Yeah, and I bet that this kind of alternative asset class can serve as one solution at that point. This has basically been the original hypothesis for Bitcoin since January 2009. That when this monetary policy today is quite, well, loose, to put it nicely, then as an alternative solution, Bitcoin offers this kind of digital hard money. As we emphasized at the start of the episode,
the issuance is predefined, and no one can then arbitrarily push a button and print more Bitcoins as much as they want; it will always be that 21 million, and you can't really get around that. And what's quite interesting is, in a way, if we make a relative valuation model where digital gold is compared to real gold—the market cap of gold today is
somewhere around 14-15 trillion, and Bitcoin is two or three trillion. So, in a way, if we reach parity with gold and assume that monetary policy continues on the same path as it is today, where presumably the value of gold will also rise to hedge against this risk, then by all logic, Bitcoin's value will, if not reach parity, then at least
rise significantly. Then again, if you think that Bitcoin's total addressable market could be roughly comparable to gold's market cap, why not even larger? Then again, when we look at these smart contract platforms that we've also mentioned as examples, if we in theory, over the next decade, we will be able to build most of the financial world's functions on smart contracts, eliminating counterparty risk, building global lending markets,
exchange services, etc., etc., so its value is significantly greater compared to, for example, the value of gold. Yeah, in this—well— in this Trump tariff dispute, which is partly a bit exaggerated, but in it, as at least one temporary consequence, the dollar has weakened while long-term dollar interest rates have risen, which is a rare phenomenon. Usually,
in these kinds of risk situations, the exchange rate of this reserve dollar strengthens and the yield decreases, and people seemed to read into this Trump legislative reform that there were some faint warnings that capital controls won't come directly, but like, since this Trumpian tariff policy is now just in physical products, some seemed to read that there's a small
risk for capital restrictions as well, so I think people have, for that reason, now shifted a bit to these supranational structures like gold and crypto, because here we're playing this regulatory risk as well.
Yeah. And capital getting stuck. Yeah. Well, that risk doesn't really exist with crypto, as you can always carry it with you relatively easily by remembering those famous passwords you also referred to at the start. There's another thing, that when you custody your own assets, they are your own assets. I would see this as an interesting alternative asset class in that sense too, because it lives purely in a digital environment. That's one part of its value proposition too. Yeah. And
then these—when the US weight in the stock market is about 60 percent and it has been, in the opinion of all of us pension investors, a kind of easy place to put money whenever it comes in, so let's put it in the US stock market; the world's most efficient capital market hasn't failed over the years. Now that this year has been very, very— one that at least contains increased risk, if not even made relative losses compared to other markets, so
that 60% weight has started to be reduced a bit even in institutional circles. One shouldn't exaggerate, but even a few percent reductions are shockingly large masses. But then at the same time, even though Japan, which is a significant currency area, has also seen interest rates rise, the euro has risen too, and then China is this kind of very, very difficult-to-open box of regulatory risk, so there isn't
really a region that replaces the US safe haven.
isn't right, then even a few percent allocation suddenly might find that, well let's see, let's put a small, small like...
toe in the door here with cryptos. Yeah. And I bet that's probably the first step for many, to sort of just get to dip that toe in the water and sort of get the first allocation open, after which a completely new investment world opens up from there and maybe a bit to play off what you opened up about the sort of macroeconomic uncertainty and also this sort of continuous inflating of the money supply, which has sort of led to the fact that, well, the stock markets have performed well up to
this point, housing prices are through the roof, so sort of if you today as a representative of the next generation try to think where on earth I should allocate so that I can even one fine day own my own home. It's hard for me to see that with a typical 60/40 type of portfolio construction you'd get anywhere at all, so then naturally eyes turn elsewhere, where by default the return
percentages are also significantly better. Yeah. And the dramatic nature of breaking that correlation matrix is perhaps exaggerated, but sort of because it has now at least temporarily broken in connection with this US safe haven, at least for me during this Bitcoin journey, it has been a bit annoying that there clearly has been some positive correlation with others, so it
sort of now, however, now that it has risen from say 7k to 100k while others have gone sideways, I think it has started to break—well, maybe finally, so sort of when the hypothesis for a decade and a half has been that it's a hedge against inflation. Well, when inflation rose and let's say stocks came down, Bitcoin correlated pretty much one-to-one with these risk investments. So we actually looked at this in one podcast with Timo Oinonen, specifically this correlation matrix, which had
all these US stocks, Mag 7 and others, and that correlation has been really strong, so we have indeed followed the rest of the market in that regard, but then again as mentioned, it's a young and relatively small asset class we're talking about, which only recently has gained the interest of the institutional investor base, so sort of if it were at some point decoupling and the correlation would break with all these
other stocks and especially these Mag 7 type technology stocks, maybe now could gradually be the time the correlation breaks and Bitcoin gets to fulfill its original value proposition as an inflation hedge and then again what these all the others aside, to wake you up, so silver-tier cryptocurrencies do that, you...
...didn't say shitcoin. Well, there you can find separate bronze and copper tiers, and metal, and I don't know what other substances, a rust bucket then separately. But well, these will surely still have volatility for a long time, and it's unlikely to change. I do believe that cryptos will still follow this cyclicity. One hypothesis is that it's linked, in a way, to this Bitcoin halving. Another is that if you
draw the M2 Money Supply curve on top of it, then that too is pretty much one-to-one. Which one then drives which and at what point the correlation breaks remains to be seen. But to return back to this silver basket, in theory, if we could build on top of these protocols and smart contracts the kind of applications that reach critical mass and we get this, like, find that product-market fit
elsewhere than just from transferring stablecoins, from the actual application side. It could be on the DeFi side or it could be purely consumer applications. So, in a way, at that point, for example, if Ethereum starts settling significant amounts of transactions through these different use cases, then in the case of Ethereum, part of that transaction fee is taken and burned, so in a way the economic
system might change from slightly inflationary to suddenly deflationary, and then you get completely different kinds of valuation models and ways to value the protocol, what its value could be and how it should be outlined in general. For example, one analogy that more experienced banking people usually grasp is, using Aave as an example, that Aave generates about a million to one and a half
dollars a day in protocol revenue. So, in a way, the loan book that's there and the liquidity where people borrow and deposit, from the resulting protocol revenue, which could in this case be reflected as company revenue, accumulates in Aave's treasury, which in this case could be the company's cash. And in theory, there's no obstacle to taking from the treasury and starting to pay that protocol revenue
to token holders, whereby in a way those who own the Aave token are shareholders in this metaphor, and the protocol revenue that is paid back to token holders would be a bit like a dividend, so then standard real-world valuation models come into play, where we can start thinking that, wait a minute, I have an internet protocol that generates cash flow, which pays back a dividend, and by buying this token I get access to that dividend yield. Yes,
indeed those cas... well, well...
well, "cash is king" analogies partly apply here too. I mean, in a way, quite It's an idiotic claim that, in a way, if you have an asset class, if it doesn't have a yield, that it would be worthless, that's obviously foolish, but it's good that there are some kinds of yields, so that it isn't just pure, like, ownership of ownership. This investment class itself, well,
in the allocation game, besides the rise in percentage allocations of these ETFs and ETPs and, like, BlackRocks, we then have this other exchange-listed class. For example, Saylor's MicroStrategy is a pretty classic creator of Bitcoin demand, in a way. What has this phenomenon been? Yeah, it's MicroStrategy, today they apparently go just by the name
Strategy. So, although at the start of the COVID boom, a listed company, an IT business, which was kind of a dying cash cow, and they were thinking that, well, we're not really innovating anything on the IT side anymore. What should we do now? Like, do we let it fade away gradually, pack our bags, and return the wealth to the shareholders. And in that context, he had then
found Bitcoin and come up with this new innovative business model, which today is the only significant business that Strategy conducts. In a way, the IT business is just a rounding error in that balance sheet; he buys Bitcoin for the company's balance sheet, issues various instruments, bonds, notes, and kind of leverages the equity value so that he can buy more Bitcoin for the balance sheet, and today
they are a quite significant Bitcoin owner; I think they have a couple of percent of all Bitcoins in circulation, found on MicroStrategy's balance sheet, and perhaps the interesting thing there is the financial engineering that he has been able to do through his own equity leveraging. So, in a way, when he issues these really low-interest notes and
raises capital and buys more Bitcoin, and then the MSTR stock trades at a premium relative to the NAV. So, basically, the Bitcoin position they have on their own balance sheet, in MSTR's market cap there is anywhere from a 1.5 to 3 or 4 times premium relative to it, so it has proven to be an extremely good trade, both from the perspective of an individual investor and also as a strategy
from MSTR's perspective to reinvent practically their entire business. Yeah. And now there are these copycat situations, some of which might be unhealthy, that basically any owner of a shitty business can decide to do this kind of, well, this won't work, becoming a Bitcoin investor, and there are some of these, so you should be careful, do your due diligence and then of course, once again, the problem of the missing camera, that
do you have the assets, so you should check this, that well it's nothing more than a call to KPMG, to come and check this thing. But on the contrary, I would see that in a way if you have a dormant business listed there on the Helsinki Stock Exchange and you're wondering what should be done next, then it's nothing more than a call in this direction, and we'll tell you how this MicroStrategy playbook is implemented. But yeah,
there's the 21.co strategy, or this Jack Mallers, the famous Bitcoin entrepreneur, who has tried to popularize Lightning payments, he joined something similar. There was this SPAC named Cantor, which then in a way was harnessed into this kind of Bitcoin Treasury company. Uh, there have been some seen related to Ethereum and Solana, though on a smaller scale, like Semler Scientific, they have actual
business in the background, but decided that Ethereum is their treasury asset. DeFi Technologies (DEFI), a listed company, is doing the same with Solana. In these, of course, the interesting thing is that with Ethereum and Solana you get that yield component on top of it, meaning you can actually generate cash flow and such through interest into the uh, part of the treasury strategy, and then in the case of Bitcoin now
it's perhaps more about leveraging your own balance sheet through the movement of capital calculation. Uh, and then perhaps locally it should also be mentioned, that this same phenomenon has now indeed arrived here in the Nordics as well, so a week or two ago, uh, Green Landscaping in Sweden bought some Bitcoin for their balance sheet. Now we're not talking about hundreds of thousands of Bitcoins, we're talking about a few. And a Swedish listed company Safello did something similar,
having a few Bitcoins and some TAO, for some reason they strongly believe in this Bittensor AI vision. And now there was even today, recently, some—was it PTC100 or BCH100, something like that, type, but clearly this trend is now quite— oh, bless you—so so quite clearly this trend has now in a way arrived here in the Nordics as well on a smaller scale, but perhaps here then
in a way, if you want to put on your risk hat and think about whether anything negative could come of this, buying pressure towards Bitcoin is naturally a posi- positive phenomenon, but then again, if more and more of these companies emerge and they start issuing one after another riskier various instruments to finance those Bitcoin purchases, so could a similar systemic risk theoretically arise here, which
was sort of referred to in the previous episode with Terra Luna and other messes and the difference there was that it was purely in crypto. It was very limited to that, so in a way when FTX collapsed, cryptos went down. But now we're talking about the fact that there are publicly listed companies that make these various leverage arrangements based on their own balance sheets. Yeah. So especially if and when they have this Fiat
currency-denominated debt, then it becomes... if they were all, for example, on the same bond duration, say five years, and there were a lot of companies on the market that have taken, for example, euros or dollars, maturing in, say, the year 2028, then if there were to be a big volatility spike, which would hit these crypto values, even momentarily, then through refinancing risk, there could be a bit of a systemic problem.
Yeah. And in MicroStrategy's case, they have about 8 billion maturing in 2027, '28, '29, roughly, of these various notes.
Of course, they have a very low strike price compared to what the stock price is today, and the conversion provisions are quite loose; I think it's like 130 percent of the strike price, so in principle, Strategy can just say that now we're converting these notes into equity, and in a way, the debt disappears from there in a certain way, but then again, when we remember that it trades at a premium relative to their NAV, if it drops—or rather,
if Bitcoin tanks quickly—and it's a volatile asset class, so we've seen these very sharp drops many times—who's to say that the stock couldn't drop with an even steeper slope, so if we're suddenly in a situation where, oh, these conversion provisions aren't met and maturity is approaching, which, from the perspective of historical cyclicality, isn't the peak of the
bull market, but on the contrary, we're in a bear market in the years 2027-29.
Theoretically, there could very quickly be a situation where they have to start liquidating several billion in Bitcoin holdings, which then again, from the perspective of Strategy's value proposition—that we never sell anything. Yeah, but this is completely hypothetical speculation. Right, and then again, in terms of Fiat money, if we have, for example, the US federal government alone being 37,000 billion dollars in debt, then in a way, these
individual billions are vanishingly small, so that in a way, the idea that the debt itself causes a systemic risk is not, in my opinion, a particularly relevant risk, but then again, relative to that underlying Bitcoin base, such selling pressures can be quite significant, so yeah, let's hope people have some patience there. Like, diversifying that funding over time and not just using leverage and stacking
leverage on top of leverage. In itself, this isn't the only problem, even though you could roughly say that for banks, 5% of their market value—market value is, uh, 7% of the total balance sheet, and they trade at, say, 1.5 times book value, meaning their equity is only 5% of the total balance sheet, so there are stocks that are extremely leveraged, and yet they very rarely cause systemic crises. Of course,
these banks have sometimes—like the Silicon Valley Bank bank run most recently, there were flows of tens of billions, and there was real fear that during the merger of Credit Suisse and UBS, the threat from Credit Suisse at the time— you can certainly get big drama out of those, and potentially, but it takes quite a lot to trigger a new financial crisis here. Yes, and maybe that kind of two-to-three-times
premium to NAV is justified from a capital efficiency perspective, because MicroStrategy is still able to keep buying more Bitcoin and has so far been able to increase Bitcoin holdings per share, which in theory, due to that capital efficiency, makes some kind of premium perhaps even justified, but you need a lot of leverage for that kind of price to be justified. I mean, a boring investment fund like that trades around 1x NAV, and sometimes there's even a discount when
there's a fear that management will come up with something too clever.
Well, that's how I saw it too, that a two-to-three-times premium is quite wild, but yeah, that's how it is, but the stock markets, especially leveraged ones—and leveraged ones where you combine fiat pairs with crypto—you're dealing with quite sophisticated risk, so it's not for everyone. Exactly. And these are sort of new innovations in the financial markets now. So let's see how this eventually ends. Yeah. What about, uh, Quarn Capital's products? Is there
something that might suit—probably just a good commodity, like a single crypto investment or a basket, comes to mind? What products do you have in the works or in your plans? Well, we have a few cryptocurrencies today that you can buy through the service, and that is also expanding recently, as we are in the coming weeks—maybe even by the time this episode is out— offering the widest selection of cryptocurrencies in the Nordics, and now with MiCA,
it's spot trading, but as mentioned, we have that investment firm license, which then makes it possible for us to bring in various products alongside it and offer different kinds of instruments then, both for crypto investing and maybe one beautiful day even, well, for stocks, ETFs, CFDs, and other fields. And then again, what will be done in the future for sure, are exactly these kinds of thematic baskets, so
in a way, every individual consumer doesn't need to familiarize themselves with all ten largest DeFi coins and think about which of these would then be the best one, but instead we aim to find an easy solution suitable for everyone, where through a self-balancing basket, you have continuous exposure to various crypto trends, whether it's DeFi, DePIN, or RWAs, meaning these Real World Asset sets, so we aim to bring these as part of our service offering. And then there are
naturally these yield strategies, so in the crypto market, by lending stablecoins, you can reach returns around 10% on both sides, depending a bit on whether you want to have 200% over-collateralization or diversified counterparty risk. So, productizing these kinds of various investment targets and bringing them to the Kvarn platform is what we are going to do during this second half of the year, and naturally we will then pursue growth from other Nordic countries as well, so this kind of expansion operation
is starting. Yes, and that is then—now that I am there myself in the professional investor category, at least for an investor of my type, but then also for some family offices, companies, and to some extent for high-net-worth individuals as well, so I suppose this can be offered to everyone. Yes. Yes. In a way, according to everyone's own risk appetite, so if you want that stablecoin
strategy, which ultimately has nothing to do with the underlying asset, where there's just 200 percent bitcoin as collateral and good liquidation buffers in case volatility turns the other way and the collateral value drops, you still get nearly 10% return from this kind of over-collateralized loan product, which is, compared to the traditional financial world, very exceptional. And then again, with diversified counterparty risk, if we reach the 10-15 percent
range, that is better yield than what most traditional funds and others can offer. And then in a way, from there you can gradually start dipping your toes in, whether it's one or two percent of the portfolio allocation, so Bitcoins, Ethereums, Solanas, and many hundreds of other coins are available, but I guess it requires a bit of getting used to, and then in a way, around Ethereum, Solana, and these proof-of-stake protocols, there is
that yield component, so in a way when you buy that Ethereum, you can get that interest yield on top of it, and then there are all these different subcategories, whether these are then those bronze coins To borrow your metaphor, there are these different decentralized finance applications, and there are these decentralized physical infrastructure networks and real-world assets, meaning essentially this tokenization of securities or
real estate and others that has been referred to, so there is like a whole investment field of its own, which for most asset managers and others is still completely foreign, so here, surely over the next half decade or decade, it will become mainstream in a significant way. All right, great. We've had Martin Wichmann as a guest for the third time, and uh, if you've watched or listened this far, please subscribe to the
channel. We only just scratched the surface of this gold and silver category, meaning Bitcoin and its forks, and then Ethereum and Solana, so let's discuss further in the inner circle what lies beneath this peak, both different coins and then protocols, so see you on the inner circle side. Thank you for the visit.