William Quigley from Opskins | WAX Token (Part 2)

Welcome to the Puck Venture Capital and Beyond, a show that explores the evolving landscape of the Venture Capital world. We'll have candid conversations with today's VCs and entrepreneurs who are shaping those changes. I'm Jim Beer, managing partner of Behrendtrough and president of CMG Advisors. This podcast brings change makers to the table to discover the inner workings behind decision making strategies and ultimately how they got to where they are today. We're back this week to resume our in-depth discussion with William Quigley of OPSKINS, exploring the volatile world of Bitcoin and cryptocurrency.

As a reminder, this is the second part of a two part interview. So if you haven't already done so, be sure to check out the first part. If in order to get Bitcoin adopted by the masses, they have to go through what I have to do, it has no chance. I'm serious. There's no chance.

We need to remove all of the complexity from Bitcoin. All of it. So, William, we were talking earlier about this concept of decentralization which is a big part of cryptocurrencies and more specifically the blockchain. So there is this notion that you can do away with the Uber or the Amazons of the world because you can essentially bypass the middleman. So in the same way that cryptocurrencies can take away the ability of governments or banks to have higher wire transfer fees or conversion fees, there's been speculation that you don't need Uber to be an Uber driver.

I mean, could you go right into the blockchain directly and drive so to speak? Could you see a universe where your suppliers don't need Amazon? Could you have a blockchain marketplace that does away with the markup that these companies like Amazon are currently passing on to consumers? Yeah. And it's a it's a good question.

It's a question that, you know, you could spend many months contending with. Right? Because this is one of the core areas in which the Bitcoin blockchain and blockchain technology in general is gonna disrupt global commerce. But the example I will give you is this. In any transaction where there's a trusted middleman, an intermediary, where you need someone in the middle because you have two people, you know, person a and person b.

And person a and person b don't trust each other because they don't know each other. I don't feel comfortable sending you a payment and then having you send me an item. And you don't feel comfortable sending, you know, me an item without being paid, so we're stuck. This is the problem, by the way, that ops can solve in a centralized way. We said, okay.

People are trading digital items back and forth with each other, but it's always a standoff. Hey. I have the item. Send me the money. Yeah.

But if I send you the item and, you don't send me the money, then I've lost out. What's my recovery? So what Omskine did is it said, you know, one person sends the money, the other person sends the item. You trust us to do the right thing. And, you know, and that and that has worked very well for us because it turned out there were lots of people who wanted to trade, but they were afraid to trade directly.

So the way the blockchain works, and this gets into something called smart contracts, is you can program your money. Imagine if you had a dollar bill and you could literally tell the dollar bill, go into Jim's bank account and stay there as long as he does the following things. But if he doesn't do those following things, I want you to come back to me. Right? There's a there's an element of that with cryptocurrencies, which use smart contracts.

So, Ethereum is like bitcoin, but you can program it to do what you want to do, essentially. And we call these smart contracts. Everybody's familiar with the idea of a contract. You write a contract, it's on a piece of paper, you send it out. Well, this is a contract that you program into a computer.

And for instance, you can say, if you have a digital item, hey, I'm gonna write a contract that says, I have this item. I want a $100 of value for it. I'm gonna take it, and you wanna buy it from me. So I'm gonna write a contract that says, Ethereum, you know, take my digital item and hold it. And this is on a this is a piece of software that that you're instructing.

So it's not a human. So you go and program it and you say, Ethereum contract, you take this digital item and hold it until Jim sends to your contract 3 ethereums. Right? That's that's the payment method. And when you send to my smart contract three Ethereums, it releases the item to you and then the smart contract sends the three Ethereums to my Ethereum wallet.

So now, I don't have to trust you, and you don't have to trust me. You just have to trust that the software is gonna do what the smart contract says it's going to do. And like anything in life, by the five thousandth time you've asked a software to do something and it does it, you start to feel like it's gonna continue to do it. And so we are just beginning the age of smart contracts. And smart contracts, as I said earlier, I'd like to you know, the analogy of, if you could imagine every time you had a dollar bill and you were paying something, you could tell it why it's going to be paid.

And if that task is done, it stays with that person. And if it doesn't, it comes back. The courts would have a lot less to do. Right? Because disputes would be settled by this piece of software.

Now to your listeners who are thinking this through, they're like, well, aren't there things that maybe are more judgment calls? You know? If I say, I'd like the prettiest blue vase, and you promise to give me the prettiest blue vase, a digital blue vase, and I don't consider it to be such a thing. Yeah. That's hard for the smart contract at this point.

Right? And initially, what we'll have is there'll be things that are very concrete. Right? Things like you could imagine if it rains tomorrow in Santa Monica, you pay me x amount of dollars. And if you if it doesn't, you know, I pay you.

Those things that are knowable and objective. That's where we start with. And then we're gonna evolve to, to, I assume over time, things that are less objective as we get into artificial intelligence and whatnot. That's where cryptocurrencies are going. Cryptocurrencies are going to a place where the middleman will be removed, a piece of software will be put in the middle, and that piece of software is probably not gonna demand very high payment because it can do things very efficiently.

Once you write the piece of software to do something, it can be replicated a million times. So what's the real cost? Very little. So the transaction costs will wind up going way down. And what we know in economics is as transaction costs lower, the volume of transaction goes up.

So everybody's gonna benefit. So let me ask you what I consider maybe an unfair question, but it's something that keeps me up at night. When I buy a stock, I know that there is a PE ratio, price earnings ratio, and I can say for fast growing companies, I'm willing to pay a 50 PE, or a slow growing company, a 10 PE. And I know in a bubble environment looking at a hundred year thing, sometimes a 50 PE company will go to a 100 PE. But there still is something I can point to that has some valuation.

When I'm trying to make an intelligent decision as to whether or not to go long or short Bitcoin, and I go to my friend, William Quigley, and I say, William, you've been buying this from the time it was 10¢ to a dollar to 10¢ to $30 to $3 to $300 to $30. And we have a limited universe of Bitcoin and we're mining it, so there is increased demand. But it's not like like the central bank that's using quantitative easing, so there is some limitation on it. How do I get comfortable with some valuation metric? Yeah.

And that's that is kind of the the elephant in the room, right, when it comes to crypto currencies. People say, you know, lots of securities, if they're that, or other stores of value, like gold or diamonds or platinum. There's something tangible that underlies, the value we assign to it. I guess I would say to you that is a, that is an outdated mode of thinking. I understand why there will be people who say, now this sounds like a bunch of hooey.

Right? And this is Jim, it's a great question. There's there's so many ways to answer it. On the one hand, you could say, at the end of the day, why is an ounce of gold worth $1,200? Is there a is there a physical law that we've discovered that says, oh, an ounce of gold is worth $1,200?

No. There's not a physical law. Well, what about, the utility majority of gold, you know, the price isn't based on the fact that you can use it for fillings and whatnot. Now, you could argue, well, going back thousands of years, people have valued it. And so society has developed almost, you know, an innate sense that it's valuable.

And so it's part of our DNA. It's it's scarce. It's valuable. So we assign a certain value to it. But the reality is, it's arbitrary.

All valuations are arbitrary. When people begin to poke holes at any cryptocurrency, and they usually do it with an example of, if I buy a stock, then that stock is worth something because that stock certificate gives me an ownership stake in a collection of assets, and those assets produce, profit. And, you know, I get a piece of that profit, theoretically. And yet I say, but all along the way, how are you valuing so many things like in economics, what we call agency cost? The fact that you don't control that company, a group of board of directors does.

They maybe only partially control it. The employees and management control it. But even beyond there, often the suppliers, talk to anyone who who sells to Apple, they might control it. So it's almost an illusion that you think you can assign some sort of hard tangible value to your asset. Right?

Whether that be gold or that be that that be a stock. So first, I would say that that value is, at the end of the day, totally a subjective measure. But the ultimate way to do it is to say what would two people bargaining at arm's length trade it for. At the end of the day, that's the best indicator of what it's worth. So one sort of maybe unfair answer to what you ask is just, well, if I think Bitcoin's worth $18,000 per coin, if, if there's a buyer willing to buy it and I'm willing to sell it, then the value is $18,000.

It does not matter why that buyer thinks it's worth 18,000 and why the seller thinks it's worth 18,000. All that matters is they're both willing to do something, seller willing to part with it, buyer willing to buy it at that amount. So up until recently, that's the level of discourse in, the value of cryptocurrencies. That's been the level of discourse. It's simply been, you say, you know, I need to have an underlying asset that pegs the value of a Bitcoin, but the reality is all I really need is to know somebody's willing to pay me for it.

There's so many additional layers we can go down as to as to, okay. But beyond that, is there something hard and factual you can give to me, William, that justifies a certain valuation? Well, what I can tell you, beyond that is just that Bitcoin has certain properties that are vastly better than a piece of gold. With gold, you say, well, you know, if I have a certificate and it's backed by an ounce of gold, my no. My certificate is worth $1,200 because it's backed by a piece of gold.

I'm like, well, let's say you then turned in that certificate for a piece of gold. What exactly would you do with that piece of gold? Well, it's heavy and it's, you know, easy to steal and, you know, you'd have to you'd probably have to store it some place safe. So actually, it's a cost to you. Right?

You gotta freaking figure out what to do with it. Does it iron your shirt? You know, can you eat it? Is it entertaining? None of the above.

And does it help you in conducting a transaction with another human being? Kind of. But let me ask you, Jim. When was the last time you pulled out gold nuggets and used them to buy something? I'm gonna assume never.

You never have. A Bitcoin is I like to call it digital gold. It allows me to give something to you that is highly liquid. Meaning, I'll give you a, you know, we can do a we can do a contest. You have a block of gold and I have a Bitcoin.

How fast can I transfer that Bitcoin into a euro, a dollar bill, Japanese yen, versus how fast you can? I guarantee you, I can convert my Bitcoin into currency faster than you can. I also guarantee you, I can transfer my Bitcoin to another person at the speed of light much faster than you can. And I guarantee you one other thing, that I can prove my Bitcoin is genuine way cheaper and way easier than you can prove to me this shiny lump is gold. That means, in other words, there's a lot of things that are value about my digital gold, what I call Bitcoin.

Does it deserve, therefore, to be worth $18,000 versus $1,200 for an ounce of gold? Well, who am I to say? So you convince me that there is an inherent value to the extent people determine there is an inherent value. Meaning, that if they are gonna use it for a constructive purpose and and it becomes a use for bartering like gold or otherwise, there is a value to that. But in an evolutionary world where you've got 7,000,000,000 people on this planet and a lot of people don't even know what a Bitcoin is and we are evolving into its value, is it safe to say that the value of a Bitcoin in 2050 could be a billion dollars or it could be a $100?

Because until there's an adoption of it in a universal way where people really come to accept it like gold, that at this point, there's a lot of other metrics going into it, like, I wanna get onto the train, for instance. I agree with you. There's an inherent value. But until the absorption becomes more universal, is where that trading range gonna end up gonna potentially be? Yeah.

What you're talking about, another highly sophisticated, question, frankly. I'm sorry. Which no. It's okay. We always struggle with it.

The question is, so you've got value of something because it can do something, what we call utility value or functional value. And then you have value for something because people are anxious to get it. And why are they anxious to get it? Because they believe it's gonna be worth more down the road. We'll call that speculative value.

Right? And there's perhaps a balance of the two, right, which allows people to say, I don't mind holding that because maybe it goes up in value over time. And there's a healthy amount of speculative value, and then there's an unhealthy amount. Right? And maybe we could argue right now it feels a little bit unhealthy because Bitcoin keeps going up so fast.

But in a free market, there is an invisible hand that drives all these things, and there is no master company or or overseer that says, Bitcoin's price is a little too high right now. Let me let me reduce it. It's a little messy, the process. And what we've seen I'll take a a simple example. You've got a company like one most be aware of, Uber.

Uber started out and at first probably wasn't worth much. I think the value of the of the a round was like $6,000,000. Ultimately, Uber became worth $70,000,000,000. But how did it go from being worth 6,000,000,000 to 70,000,000,000? And did it follow the path of as Uber became popular and as more and more people adopted Uber, the value of it in a nice step function went up.

Absolutely not. And it never does. What happens is, and what happened with Uber and with any company, people at first undervalue it because working, and then the really, really insightful people who can look where the puck is going and can say, you know what? The way this thing is growing and the the numbers of people who are starting to use it and continue to use it is such that I can foresee this thing being worth a lot more money than it currently is. So let me invest now in anticipation of that.

And what happens in all tech companies, and it's probably true of all assets, is that what we call the terminal value, which is the final value something is worth once it fully realizes its potential. In finance, we call that terminal value. Often, assets like really cool ecommerce companies and apps get valued rapidly to their terminal value long before they've actually delivered on the promise that justifies the terminal value. The fact that I know a billion people are going to use Uber, but there's only a million people today, And if a billion people were using it, it would be worth 70,000,000,000, causes me earlier than that to say, well, you're gonna get there eventually. I'll make you worth 70,000,000,000.

I'll pay 70,000,000,000 today. Yeah. But it's not worth 70,000,000,000. But it will be eventually. This is the way all assets go.

And believe me, there's a whole bunch of issues with this that create problems for employees and shareholders and whatnot that we won't even get into here. But suffice to say, there's no way to cap that. You know, there's no way to say, you're not allowed to value Uber at 70,000,000,000 today because, you know, they have to get done with a lot of their homework first before they're allowed to do that. Investors anticipate what something's worth, and they will bid the value up to that price long before it's justified. That, you could argue, is an element of Bitcoin, where people see that 7,000,000,000 people are gonna use it, that it'll be the principle way people conduct commerce.

It's cheaper. It'll have smart contract capability, which means all the transaction fees of middlemen will be will be swept away if you use it. That with that, they say, wow. This thing's gonna be better than a US dollar. It's a messy process assigning value because it's a collective group process.

And everybody has a part in the decision. It's it's supply and demand. The more people who want something, the more scarce it is, the more valuable it is. And eventually, we hit something called equilibrium. Equilibrium.

And people are kinda like, okay, this is kind of the long term value that it should be. We're in what could be considered a speculative run. I have a slightly different take on it. I believe that had people really been looking in twenty twelve, thirteen, fourteen, fifteen, and '16, they would have seen how transformative Bitcoin was and they would have valued it at much more than it was back then. We're just getting a catch up.

So let's catch up to where it deserves to be today based on how much it's used and what the value is. And then over the next, you know, couple of years, maybe the pace of growth will slow, or maybe we will once again see some additional use case that we can't see today that blows our minds, that justifies Bitcoin doubling or tripling in price again. You know? It that's that's how I think about it. This area of of valuation is fraught with all kinds of controversy, but it's often the case that the controversy comes from a rapid increase in the price of something.

Even if you suppress the price, and for long, long, long periods of time, it was undervalued. The fact that you now adjust the price to a value it deserves to be, because it moved so fast, people object to it. We all know that. Right? Some guy is working for you.

He's mowing your lawn, and he deserves to be paid $50, but you paid him 5. And then at some point, you know, maybe when you were paying him 5, he deserved to be paid 5, but at some point, he deserved to be paid 50. Well, if in one fell swoop, he said, I want 50, you'd say, that's a 10 fold increase in what I was paying you before. He's like, well, that's because you didn't pay me what I was deserving for the last five years. Right?

So that gives you some perspective on how I look at things. There are others that we could go into, but, maybe for a different talk about why Bitcoin may even now be with what we know about it may be dramatically undervalued. For instance, cryptocurrencies may become the primary way people own an interest in a company. Stock certificates become obsolete. You can't easily trade your stock certificate.

You can't authenticate the stock certificate. You have to actually send that certificate, if you hold it to the company, and the company has to authenticate it. Well, that's a process. It takes time. It could take weeks.

If I can instantly send it and know it's legit, there's a lot of value in being able to prove with 100% certainty the genuineness of something that we've never seen before. And this is a power we have with cryptos that we don't have with any other asset. This was wonderful. I can't thank you enough. I've heard so many people talk about the cryptocurrency, the blockchain.

And you may not see this because you're so in the middle of it, but you are able to marry the creativity and the sophistication. Because of your unique background as a Harvard MBA, Arthur Andersen, accountant, venture capitalist who also is in there with gamers, you live in both worlds. And so the fact that you can describe it in a a way that a gamer will understand it and has been using it for years, but also in a way that somebody that's buying Google or Amazon or or is a good on the Internet and bring it down from 30,000 feet down to where we can understand it, I mean, that that's a gift. Well, I'm glad you think so. By the way, you know where that comes from?

That comes from having a very difficult time learning. So I chose very consciously in 2012 that because I it was so hard for me to learn that I thought, okay. I am going to never talk about something in crypto unless I understand it. And there's a lot of stuff I don't understand, so I don't talk about. I kinda have an inkling of, so that helps.

That can be gross. However, if in order to get Bitcoin adopted by the masses, they have to go through what I have to do, it has no chance. I'm serious. There's no chance. We need to remove all of the complexity from Bitcoin, all of it, so that you're not even really aware you're using it.

We need to just strip it away, put it all in the background. Crypto today does not have those Steve Jobs esque people. There are not people who are really good at eliminating all that clutter and crap and just saying, what do you wanna do? Let me do it for you. Join us next time when we sit down with Steven Beetz, a long time venture capitalist turned entrepreneur who is paving the road ahead in the world of autonomous cars.