Mark Yusko, founder and CEO of Morgan Creek Capital Management, will be attending the Paris Blockchain Week Summit, and will be the main guest of the Fintech Night at La Place (April 16). In the meantime, he took time to sit down and go back to the hedge fund heyday for us, and explained why Bitcoin is the very next big thing.
Hello Mark, you’ve been through this transition from the hedge fund environment to the world of crypto… So how could you describe this transition that you have been able to witness and you’ve been part of in a few words ?
Okay great great question and really important given everything we’re going to talk about during the week. I’ll go a little bit backwards to go forwards but I came out of the endowment management world. I worked at the University of Notre Dame, there I learned the asset allocation business and then came to the University of North Carolina where I live today in Chapel Hill, and the thing that that was interesting in both of those experiences – and that was in the mid 90s and early 2000s – was that, at that time, the idea of hedge funds, of private investments venture capital things like junk bonds were all very scary to fiduciaries to the heads of pools of capital, to endowment foundation, to pension funds… so our job was really to help educate those board members in those fiduciaries. We had to explain that all the bad people were not in hedge funds. There were all kind of people doing things that they were supposed to be doing, and that’s why they were in these unregulated pools of capital. And every story in the Wall Street Journal would talk about unregulated pools for rich people and try to make people scared of hedge funds.
So, fast forward twenty years later: there’s over three trillion dollars in hedge funds, everyone invest in hedge funds and nobody’s afraid of hedge funds anymore, and you know, our business started 15 years ago. I’m boarding Morgan Creek helping institutional investors, family offices and individuals gain exposure to alternative Investments, whether that be hedge funds, private investments, real estate commodities, but alternative Investments
About six years ago, I ran into a friend of mine, Dan Morehead, who had started a hedge fund 13 years ago when we had been an early investor in that hedge fund called Pantera Ventures. They are now a blockchain and crypto focused business. Back then, Dan and I deciced to shut down his hedge fund and start two funds: one Bitcoin fund, and one blockchain infrastructure fund. I was a neophyte at that point. I was not part of the tech culture, I was a tech investor, but I was not into cryptography in 2008-2009. I was not into Silk Road activities and I had no exposure to Bitcoin and blockchain all throughout 2008 to 2012. But when I talked to Dan about it, it made sense to me, and I took the decision to back the picks and shovels, the infrastructure and I invested in his blockchain infrastructure fund. That’s been a very good outcome. That fund I think is up almost ten times since 2013, but the Bitcoin fund is up 86 times so clearly I should have put all my money into Bitcoin, but I didn’t do that.
So now it’s 2015. I’m spending a little bit of my time, like five percent, trying to convince my son who’s graduating from college to go work at Coinbase. He didn’t do that. We start to invest a little more, start talking to clients. And the interesting part of the story is I write these very long letters; I wrote one paragraph in early 2015 on Bitcoin as an interesting investment. And literally the reaction was: « hey, if you don’t stop talking about that magic internet money, will fire you! »… And that’s a really odd reaction. So at that moment, 10 to 15 people still didn’t really get it.
So I spent two more years really digging into technology and infrastructure, made a few more investments, but again focusing more on infrastructure. We invested in exchanges, we invested in protocols, we invested in tools, but I really wasn’t doing much speculating in crypto itself. We actually made an active decision not to participate in the ICOcraze in kind of 2017 and that, at the time, was very unpopular but turned out to be pretty good decision.
About a year and a half ago, I met. I met with Anthony Pompliano through a couple of mutual Investments . We were in Raleigh for breakfast one day, and after about a week of getting together we just realized that we saw eye-to-eye on a lot of things, so we decided we would do something together. We came together about 12 months ago and formed Morgan Creek Digital. It is an operating subsidiary of Morgan Creek Capital and I brought in Pomplianoand his partner into Morgan Creek. We set out to raise a dedicated fund. At that point I’m spending, 40 plus percent of my time on crypto blockchain, Bitcoin, and I realized that there’s this huge opportunity.
So I really believe that blockchain technology is as transformational, maybe more transformational than the internet. And if you look at technological advances over time, they tend to follow a 14 year cycle. We start with mainframes and no connected devices, to microchips and miniaturization to personal computers, still nobody with connected devices. Then we had this thing called the internet in 1996 and then by 2010 we had the mobile net where we had ubiquitous access to the internet broadband and supercomputers in our hands, these things we call phones, although no one talks on them. And now I think in 2024, which is still five years from now, I think we will see the blockchain era, what I like to call the trust Net.
Technology arises when it becomes invisible. Do you remember when the first cell towers went up? Well, you never even looked at them. No one really knew how two cell phone worked, and clearly the first phone wasn’t invisible. It would weight six pounds and cost 399,99 dollars and it certainly wasn’t invisible. Today, you know, no one sees cell towers anymore. Everyone’s got a smartphone mobile. Technology is ubiquitous as everybody uses it, so it’s invisible. Same thing with computing power. In the old days, you had mainframes, they were certainly not invisible. They took up whole rooms. And again now, you’ve got a super computer in your pocket. So invisibility is when you know technology has arrived so clearly. Today blockchain technology and crypto technology are not invisible because people are talking about it. People are worried about it, they are pointing at it… But I think 10 years from now every machine will make payments to other machines invisibly through crypto. People will transact items of value digitally whether it be stocks bonds, currencies, commodities and all those things will become second nature to all of us. It will become invisible at that point.
About Bitcoin: you mentioned recently in some articles that to you, this is a very good investment, and a good bet on the long term. You also stated that 2020 the credit bubble we will start to blow up. So do you feel we get to some kind of end of cycle on one hand and something new starting on the other hand ?
Such a really important question. There has been a lot of people who have written in the past five or six years about this this end game or flash point. In fact, you know, I think four or five years ago, one of the most downloaded articles in financial services was this article entitled « End Game » by Raoul Pal from The Global Macro Investor and The Real Vision Research. And it was basically saying that we were going to reach a flash point where Sovereign governments have over-indebted themselves to the level where we’re going to have a Weimar Republic type hyper inflation and and really big problem. And everyone got worried about that and other people talked about it. It was really popular for a couple of years, but then it kind of faded away and people were like: « Well what’s going on ? How can we have this supposed deleveraging that was going to take place after the global financial crisis ? » And yet since the global financial crisis, we’ve actually not only not delevered. We’ve actually increased global debt by 75 trillion dollars and that doesn’t make sense.
So there are still people who believe that we’re heading for this this big flash point, and I’m actually not in that camp. I actually think the reason Bitcoin is important is that it represents a sound monetary system, as an alternative for a portion of your capital to protect from the ravages of inflation. One of the things that’s very interesting and we’ve all become immune I guess to the effect is: governments for thousands of years have used the same tools to extract wealth from the poor and middle class and give it to the elites and that tool is inflation, right? It feels like taxes. It’s not taxes, it’s the wealth tax in the form of inflation, and central banks are able to devalue currencies by creating more of them.
There are many examples about that, like in France. I was just down in Louisiana a couple weeks ago and we went on this tour and they talked all about the Louisiana Purchase and you know why we got this amazing deal from France? We bought all the land that touches the Mississippi River for 15 million dollars. Ok, back then this was a lot of money, but it wasn’t a lot in the end because the Franc had basically become worthless as they printed too many of them, and it was the second time it happened. So it wasn’t the first time and governments have a habit of doing this when they need more money. They just create it and by doing so that creates inflation, and that inflation steals wealth from the masses because the masses don’t own the assets they have. Income is made less valuable when inflation happens and real assets go up in value.
But the reason why I’m worried about the debt and the debt crisis and the 2020 debt crisis is: if you think about the history of government, they will always overspend, they will never choose to default because then they lose power. They will always choose inflation and that inflation can be combated with something that has a sound monetary policy.
And the reason I like Bitcoin is that it may not be the best technology, as it’s slow. But the reason it’s slow is because it’s the most secure. Right now, you need to be less secure like Visa and really, really fast but everyday people have to get new credit card numbers because someone steals their numbers. That’s not very secure. There have been hundreds of millions of transactions on the Bitcoin blockchain: never one fraudulent transaction in the history of the Bitcoin blockchain. That’s crazy. It just doesn’t seem possible but it is, because slow allow you to be secure and fast less secure.
And so what I like about Bitcoin, it may not be the best technology. It may not be perfect. But it has a sound monetary policy. There’s a fixed supply actually even a shrinking supply because some people lose their coins, and over time, you don’t have a central bank. There’s no one central authority who can suddenly push a button and devalued currency. Not if the whole community decided to do that, ok ! They could certainly do it, but it wouldn’t be in the interest of the community.
Recently it was announced that Morgan Creek Digital raised over 14 million dollars for a venture fund, and actually it was anchored by two public pensions and several other institutions, which is a first. Could you tell us more about this project and how it happened ?
It’s really important and I appreciate you getting at the root of it, which is the lead investors , that is what makes it special. We launched Morgan Creek Digital a year ago. So we were one of the newerentrants. You’ve got groups like Andreessen Horowitz, they’ve been around a long time. The crypto group is new, but they have been around for a long time. You got Paradigm, a brand new group, but spun out of Sequoia. So we’re kind of a newer entrants. We went out to raise this venture capital fund in focusing on picks and shovels infrastructure. We wanted to do it quickly and wanted to go out for a small fund. We originally targeted 25 million, and what we realized pretty quickly is there was interest amongst institutions. And that was one of the first. There were some institutions that went into Paradigm because of the relationship with Sequoia. But up to that point all the other funds had basically relied on family offices or individuals.
But because Morgan Creek Capital has been around 15 years and had lots of institutional relationships, we were able to earn the trust of some of those institutions. It means university endowment, Foundation, Hospital management company, insurance company, but the big one was these two public Pension funds that said: « Look we know that traditional assets are going to have challenging returns over the next decade based on evaluations. We believe that innovation, as an asset class, is really important and that Blockchain technology is one of those innovations that we think is going to be transformational. We trust you, Morgan Creek, because we know you, and you put together this good team and created Morgan Creek Digital, so we will take that leap to be first. Things takes a lot of courage and a lot of leadership. So we’ll take that leap to be first into this this new fund ». That’s a big deal for us. It’s a big deal for, I think, the industry because that means other pension funds can now be emboldened to say: « yeah, look there’s a dozen or so groups out there ».
Morgan Creek was created to become one of the trusted advisors in the digital age. we want to be an advisor that institutions, families, individuals trust to help them integrate crypto assets into their portfolio. One of the ideas that we’ve been supporting at Morgan Creek, since it was created 15 years ago, it’s – and I don’t like the term alternative investments – alternative thinking about investments.
Last question, you come to Paris next month. And so you will be one of the speakers at Paris Blockchain Week Submit and main guest at Fintech Night at La Place. So what can we expect from you at both events ?
Yeah.The nice thing about these types of events is you bring together thought leaders from all the different segments of the industry, from technologists, to asset managers, to users, to investors… And what’s exciting for me is to have the opportunity to share a view of how we integrate all of those users of this emerging technology into what I think is going to become a new financial system.
Each Evolution – and I use that term intentionally, evolution as opposed to revolution, it’s the evolution of computing technology – is now allowing us to evolve our financial system, which is, you know, impaired because of our reliance on the banking system and our unwillingness to let the system cleanse itself. So one of my favorite kind of irony is the genesis block right is the headline on the chancellor approving the second bailout for the banks and you know, the reason Bitcoin exists today is because of a loss of faith in the financial system following global crisis.
And what’s exciting is everyone is coming to Paris Blockchain Week Summit is involved in some way in helping to craft and forge this new financial system. And I’ll share a few ideas of why I think that’s important, and how I think we can all help contribute to that and why I believe that is the greatest wealth creation opportunity most of us will see in our lifetimes and I mean, I can quote my pinned tweet on my Twitter is: « The greatest wealth is created by being an early investor in innovation. Making that investment requires believing in something before the majority of people understand it ».
And I think that’s where we are today: there’s a small minority of people who really have spent the time to go down the rabbit hole, and learn about and find out what’s important about this technology and this transition, this transformation… And most people don’t understand. So they poo poo it, and they criticize it and you know, they say it’s not real or that it’s rat poison, but what gets me really excited is if people say « Oh my God, how can you be so positive, don’t you have doubts ? » I’m like, « of course I do » and in fact, I started a hundred percent skeptical. In fact everyone I’ve met in this industry was skeptical. I think this is really smart to get started from a position of skepticism.
So that’s what I’m going to talk about, which is this evolution of a new financial system: why it’s important, how we can all get involved, and why it’s such an exciting time for all of us.