Coinbase Global Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
August 1, 2024

There are 17 speakers on the call.

Operator

Second Quarter 20 24 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer Thank you. Anil Gupta, Vice President, Investor Relations, you may begin your conference.

Speaker 1

Good afternoon, and welcome to the Coinbase 2nd quarter 2024 Earnings Call. Joining me on today's call are Brian Armstrong, Co Founder and CEO Emily Choi, President and COO Alicia Haas, CFO and Paul Grewal, Chief Legal Officer. I hope you've all had the opportunity to read our shareholder letter, which was published on our Investor Relations website earlier today. Before we get started, I'd like to remind you that during today's call, we may make forward looking statements. Actual results may vary materially from today's statements.

Speaker 1

Information concerning risks, uncertainties and other factors that could cause these results to differ is included in our SEC filings. Our discussion today will also include references to certain non GAAP financial measures. Reconciliations to the most directly comparable GAAP financial measures are provided in our shareholder letter on our Investor Relations website. Non GAAP financial measures should be considered in addition to, not as a substitute for, GAAP measures. We are once again using the SAI Technologies platform to enable our shareholders to ask questions.

Speaker 1

And in addition, we will take some live questions from our research analysts. With that, I'll turn it over to Brian for opening comments.

Speaker 2

Thanks, Anil. I'm excited to share an update on our 2024 priorities. Let's start with driving regulatory clarity, given the significant progress here in Q2. 1st, advancing crypto legislation has emerged as a mainstream issue in Washington, DC. StandWithcrypto.org has amassed over 1,300,000 crypto advocates globally, many in swing states.

Speaker 2

And these advocates are making their voices heard as an important voting bloc. Politicians on both sides of the aisle have taken notice, and there is growing momentum to pass comprehensive crypto legislation, potentially even this year. Beyond legislation, we saw major wins both in the judicial and executive branches. The Supreme Court overturned the Chevron deference precedent in a case argued by our newest board member, Paul Clement. This case is significant for Coinbase as it removes a long standing precedent that courts should defer to an agency's interpretation of ambiguous statutes.

Speaker 2

We see this case as a sign of Supreme Court skepticism to agency overreach, which we view as a positive overall for our industry. In the executive branch, the SEC dropped multiple investigations against the industry and also formally approved the Ethereum ETFs, which began trading last week. We are also increasingly optimistic that the next administration, whether Democrat or Republican, will be constructive on crypto. The rhetoric has shifted. To continue to advance progress on crypto policy and capitalize on this momentum, we contributed an additional $25,000,000 to Fair Shake in Q2 to help elect pro crypto candidates.

Speaker 2

Since we went public, we have reiterated the need for regulatory clarity. Why does it matter? Well, clear rules would be a major unlock for innovation in our financial system, and it would ensure that this industry is built here in America. Many entrepreneurs and companies that want to build in the crypto space are sitting on the sidelines or going overseas until there is this clarity, given the regulation by enforcement environment. 90% of institutional investors say regulatory clarity would boost their confidence in investing more in crypto.

Speaker 2

For these reasons, Coinbase will continue to push for clear rules in the courts, in Congress, and in the November elections. While we're heavily invested in driving clarity in the US and abroad, the vast majority of our resources, time, and attention as a company is focused on building great products. So let's talk about how we're driving utility. To bring a 1,000,000,000 people on chain, crypto transactions need to be cheap and fast and it needs to be so easy to use that people don't even know they're using crypto. We're investing on the frontier to make crypto seamless for both consumers and developers.

Speaker 2

Most of the building blocks for utility, like payments, are now here. Layer twos, like Base, enable 1 second 1 cent global transactions, and it's here today. Stablecoins like USDC enable global transfer and settlement in dollar terms today. And smart wallets offer seamless onboarding, so users no longer need to remember 12 word passphrases. In short, the components are coming together for us to see more and more global transaction flow on crypto rails.

Speaker 2

And I'm excited to report that we're now seeing almost $20,000,000,000 per week in USDC transaction volume on base. We're also seeing startups build on chain versions of major Web2 apps like Spotify, Instagram, YouTube, and X. Building new versions of these applications on chain gives creators new ways to monetize and remix content while fully controlling their own data. This is the vision for the future of the Internet, commonly called Web 3. Coinbase Developer Platform, or CDP for short, is our developer product similar to what AWS did for the Internet, which we believe will help more on chain apps be created by offering developers best in class tools.

Speaker 2

Last but not least, let's move to how we're driving revenue. Q2 was another strong quarter, and it was our 6th consecutive quarter of a positive adjusted EBITDA. Subscription and services revenue reached an all time high, with transaction revenue declining versus Q1. Coinbase is now an all weather company with increasingly diversified revenue streams, and I'm proud of our disciplined managing expenses. In closing, Q2 was another great quarter across the board.

Speaker 2

Whether the market is up or down, we're driving the industry forward, building more predictable revenue streams and creating long term shareholder value. Now I'll pass it over to Alicia for a more detailed view of our Q2 financials.

Speaker 3

Thanks, Brian. Our Q2 results reflect our continued revenue diversification and execution on our goal to generate positive adjusted EBITDA in all market conditions. Total revenue was $1,400,000,000 Our expenses were within the outlook ranges we provided last quarter and adjusted EBITDA was $596,000,000 Further, we strengthened our balance sheet to $7,800,000,000 in USD Resources. With that, let's dive into the Q2 details. Starting with transaction revenue, Total spot trading volume declined 28% quarter over quarter, driven primarily by lower crypto asset volatility.

Speaker 3

Our total transaction revenue was $781,000,000 down 27% quarter over quarter. I want to note to you that our transaction revenue benefited from growth in derivatives and Coinbase wallet trading fees, where we do not report trading volume associated with these 2 revenue streams. We were happy to turn on fees in Coinbase wallet in q2, following the favorable court ruling on wallet in our motion to dismiss. Our other transaction revenue was down 6% quarter over quarter. We were able to significantly reduce base fees in the quarter, which as Brian mentioned, helped drive 300% quarter over quarter growth in the number of transactions on base.

Speaker 3

Turning to subscription and services revenue. As I mentioned in my opening, we were pleased to further diversify our revenue in q 2, and subscription and services revenue grew 17% quarter over quarter to $599,000,000 We saw growth across the board, but it primarily driven by stable coin revenue and blockchain rewards revenue. We note in our letter that our blockchain rewards revenue benefited from a one time $8,000,000 validator reward. We're also pleased to see continued growth with Coinbase 1. Moving to expenses.

Speaker 3

Our total operating expenses were $1,100,000,000 which were up $229,000,000 quarter over quarter. 3 drivers contributed to this growth. 1st, a $117,000,000 quarter over quarter change in our gain loss on operational crypto. We recorded a gain in q one and an expense in q two, as crypto prices were lower in the second quarter as compared to the first. 2nd, we saw a $67,000,000 quarter over quarter increase in our variable sales and marketing expenses.

Speaker 3

Higher USDC reward payouts driven by higher on platform balances, and higher performance marketing spend driven by attractive marketing conditions. Beginning in late q one, we've seen more marketing opportunities that meet our investment criteria. We take a disciplined approach to balancing marketing investments with growth. We have clear guardrails in place that ensure the vast majority of our non brand marketing spend pays back within 1 year. The 3rd driver of the expense increase was a $26,000,000 quarter over quarter increase in policy spend in support of driving regulatory clarity.

Speaker 3

All policy spend is now recorded in general and administrative expenses as we view them ongoing, and we have updated prior periods accordingly. Despite our sequential decline in revenue, our profitability was solid in the Q2. Net income was $36,000,000 and was impacted by a $319,000,000 in pretax crypto asset losses associated with our investment portfolio. The vast majority of these were unrealized. These losses represented a $248,000,000 after tax expense.

Speaker 3

Our adjusted EBITDA was $596,000,000 and our balance sheet remains strong as we ended the Q2 with $7,800,000,000 in USD Resources, up $733,000,000 quarter over quarter. Finally, a few callouts on our outlook for the Q3. First, our subscription and services outlook reflects some modest headwinds as we go into the Q3. This is primarily due to the July Ethereum price declining about 3% as compared to the Q2 average, our expectations of a September interest rate cut, some increases in expenses related to USDC as we work to drive global adoption of USDC as the most compliant stablecoin, and the one time $8,000,000 blockchain reward benefit I mentioned earlier. We are going to work hard to grow native units to try and offset these headwinds.

Speaker 3

However, our range has been updated to capture this market environment. 2nd, we plan to further grow our variable marketing spend in q three. Variable marketing expenses can fluctuate widely quarter to quarter depending on factors like the on platform USDC balance, the overall market conditions, and the number of available marketing opportunities that meet our customer cost of acquisition targets. Our outlook range is wider than we provided historically, and it reflects the range of possibilities we see. Last, while we are expanding variable expenses to meet evolving market conditions, we also expect to prudently increase headcount throughout the rest of the year, primarily to support our product and international expansion efforts, and to strengthen our product foundations and quality.

Speaker 3

We remain focused on managing our fixed expenses closely and believe these investments will support continued revenue diversification and product quality. With that, let's go to questions.

Speaker 1

Thanks, Alicia. So we'll take the first three questions that were the most voted upon from the SAVE platform, and then we'll take some live questions from the analysts. The first question is, how does Coinbase view the potential impact of Base's partnerships with companies such as Stripe and Shopify as well as the impact of the newly launched Smart Wallet on increasing crypto adoption. Brian?

Speaker 2

Yeah. So our whole goal here is to try to shift crypto to power more and more utility and not just be an asset class that people buy and trade, hoping it will go up in value, although that's going to be a big business for us for a long time. But if we're ultimately going to achieve the potential of this, we need to get a 1,000,000,000 people or more on chain who can benefit from this update to the financial system to bring more economic freedom to the world. So to do that, there's some foundational building blocks. We need to make all crypto transactions fast and cheap, ideally under 1 second and 1 cent to send transaction anywhere in the world.

Speaker 2

And we've now achieved that with Base. We also need to make crypto a lot easier to use to get a 1,000,000,000 or more people. Not everyone in the world knows the technical details nor should they have to know the technical details of crypto. And so we're making a lot of efforts in that direction to make it easier. I mean, one example of this is was mentioned in the question, our smart wallet launch.

Speaker 2

So this is it solves one of the biggest pain points in crypto. Previously, for to get onboarded to a self custodial wallet required you to have a 12 word passphrase. People had to write this down or save it somewhere. Sometimes they would lose it or, not store it securely. With smart wallets, people can now onboard just using, what are called pass keys.

Speaker 2

Typically, it's a biometric, like a like a thumbprint on a mobile device. And this doesn't there's nothing they have to remember. It's secure. It's fast. They're onboarded in a few seconds.

Speaker 2

So it's a great example of getting onboarding solved. Now if you take base, smart wallets, USDC, which is a stablecoin that meets with the MICA compliance in Europe and is trusted, you start to see some of the building blocks coming together where we can really start to drive that utility. And of course, partnering with some of the biggest companies out there to integrate crypto rails is a huge piece of that as well. So, you know, 2 of them were mentioned in the question. We're going to continue to try to partner with every fintech, every bank, every neobank, you know, even more traditional companies to try to integrate crypto into part of the global financial system.

Speaker 2

That's how we're really going to update the financial system, and we'll do more and more partnerships.

Speaker 1

All right. 2nd question, which says, first of all, thank you for all the community support for things like Stand With Crypto. What else is being done to support better regulation in the industry and how can we as shareholders help? Brian?

Speaker 2

Yeah. Well, first, thanks for the shout out on standwithcrypto dotorg. If anybody hasn't signed up there, I would encourage you to do it. Invite your friends. It's a organization that we were proud to donate to, that's helping educate voters and there's 52,000,000 Americans, you know, 400,000,000 ish people globally that have used crypto now.

Speaker 2

It's important that in democracies around the world that we help folks get educated on different candidates and give them the tools to help support. So, you know, on standwithcrypto.org, and specifically, you can call and email your representatives, see how what their position, their voting record is on different crypto bills that have come up. You can donate to pro crypto candidates. You can also, most importantly probably, just make sure you're registered to vote and get educated on those different candidates. Now Stand With Crypto is great, but it's just one pillar really of the different efforts going on in the industry.

Speaker 2

You know, of course, we're pursuing clarity on the rules in the courts, and we have our court case going on there, which we hope will create good case law. You know, there's lots of other pieces to that in terms of getting FOIA requests answered, shining a light on some of the activity that may have been happening there. Even we have oral arguments going forward in the 3rd Circuit to press the SEC on its on undoing rulemaking following the Administrative Procedures Act. So there's a variety of things going on in the courts, which we think will help create good case law. In Congress also, we're seeing bipartisan legislation have, a path forward.

Speaker 2

There's real energy now in the Senate, taking up the strong bipartisan majority that got passed in the House with the 5 21 Bill. The Senate is now working on their own version of that, so we're optimistic to see more progress there. Yeah, so these are all and of course, you know, Fair Shake is an organization that we were proud to donate to. It's helping elect pro crypto candidates. So these are all things that can contribute to the cause here.

Speaker 2

If any of you want to know what you can do more to help, I'd start with standwithcrypto.org and make sure you're signed up there and contact your representatives and register to vote.

Speaker 1

All right. And our final question from Seb. What level of revenue are you projecting for custody in funds of the crypto ETFs? Can you break that down between ETH and Bitcoin? Additionally, what types of revenue are you projecting for the base chain?

Speaker 1

Alicia?

Speaker 3

Thanks for that. So ETFs have been great for our industry. They have really generated a flywheel of activity across our product platform and deeper engagement across the ecosystem. It's unlocked new capital. We're benefiting in 3 ways.

Speaker 3

We get trading, we get custody, and we get additional financing business in our prime financing from our institutional clients with the ETFs. We're not breaking out total ETF financial impact at this time. Our view is that this is just adding to existing products and revenue streams that we have, and we don't speak about specific sub products or client activity on our platform. But we're really pleased to see the overall interest that the ETFs have brought to the crypto industry and to our product. Additional types of revenue for the second part of the question that we're projecting for base.

Speaker 3

Our focus, as I mentioned in my opening remarks, is driving developer activity. We're driving those transaction volumes that we commented on. We're doing this by driving down fees, increasing the scalability, and creating a powerful developer platform that's enabling anybody to build these on chain products. We believe that this growth will then add users to develop over products. We'll add developers and apps on base and that in turn will drive transaction volume and will drive down sequencer fees and we will then see revenue as a result of that, those efforts.

Speaker 1

Thank you. And so with that, Christa, let's open up the line for our first question, please.

Operator

Certainly. Your first question comes from the line of Devin Ryan with Citizens JMP. Please go ahead.

Speaker 4

Great. Thank you. Hi, Brian. Hi, Alicia. I just want to ask a question about the derivatives platform.

Speaker 4

And we're tracking just quarter to date a continuation of building volumes there. And I know you're not breaking it out in revenues separately yet, but it sounded like it was a positive contributor in the second quarter. So I wanted to just get some perspective around how you think you're taking share in that market. I know it's coming off of a low base. What are you seeing with customers coming on platform?

Speaker 4

And then over time, are there opportunities to either take up the average spread per trade or drive other incremental revenues, with the customers that are trading derivatives? You're trying to think about kind of the bigger picture of where this may be going since it's trending positively. Thank you.

Speaker 2

Yes. So I'll start off and then maybe I'll hand over to you, Alicia, on some of the margin questions. So, just zooming out, derivatives is about 75% of all crypto trading activity by volume. And so it is the majority of trading volume. Now the take rates are lower on it, but it is really a key part of the market overall.

Speaker 2

And so I'm really glad that we are now in market, both in the U. S. With Coinbase Financial Markets and then internationally with our international exchange as well. So primary goal at this point building liquidity, adding users, growing share. We had some really good wins in Q2.

Speaker 2

You know, in the US, Coinbase advanced, we were able to include more contracts there. We were the 1st platform to offer margin to crypto futures for a handful of different assets, for instance. We've also been adding actually for a Coinbase financial market, we've been adding some real world assets as well, like gold and oil commodities futures, which was pretty cool. We were able to operate that all under the same license. For Coinbase International Exchange, we also expanded our asset coverage quite a lot in q2 we added 25 additional perpetual futures contracts the volume has been really good today actually on coinbaseinternationalexchange so you can check that at international.

Speaker 2

Coinbase.com so we're just building on this momentum building the features that our customers want and need and then there's a MiFID license that we acquired earlier this year when we're expecting that to close in 2024. That will allow us to unlock derivatives in 20 or more EU markets. That's a pretty big deal. And so you can kind of just see Coinbase following this path of we're not always first to market, but we do it the right way. We do it the compliant way, the secure trusted way.

Speaker 2

And so we're the trusted counterparty that many of these folks have been waiting for to enter the market, and I think that's going to pay off as a really good long term strategy. Alicia, anything you want to add?

Speaker 3

The only thing that I would add, as Brian said, it is early. And at this point in time, derivatives, while an important future growth driver, is not a material driver of our financial results. What I wanted to comment on in Q2 though is because we do report revenue associated with derivatives but not volume. What you can see is that a beginning disconnect between the revenue and the volume that we report, which is spot. And so the growth rates of those 2 are the change.

Speaker 3

You need to understand that there's between numerator and denominator when you may calculate blended average fees for our platform. So that was the important message that I wanted to communicate in the quarter. As we grow, as we really close these product gaps and expand to these countries where we can market, as Brian said, we're optimistic that this becomes a bigger component of our revenue in which we would break out more details and give you more transparency on the results in our future financial filings.

Operator

Your next question comes from the line of Ken Worthington with JPMorgan. Please go ahead.

Speaker 5

Hi, good afternoon. Thanks for taking my question. So Coinbase continues to promote USDC. To what extent is Mika really a game changer in Europe for USDC? And to what extent would you expect to see a migration now out of say Tether into USDC, not just inside Europe, but maybe globally given the credibility USDC gets from this framework?

Speaker 5

And then if we think about the use cases for DC being sort of threefold, building digital asset trading, DeFi and dollarization, where does Coinbase see the biggest potential to drive USDC adoption, both near term and over time?

Speaker 2

Yeah. Well, I'll start off and then, yeah, I'll pass it to Alicia here. So the, yeah, the MICA legislation is a really big deal, in Europe. As far as we know, USDC is the 1st MICA compliant stablecoin, and so the exact implications of that, and how the regulators will view other stablecoins in Europe, we don't know, but it's the first compliant one and that's a very important step. So we're bullish on this, I think that having just a trusted stablecoin is a huge deal.

Speaker 2

It's allowing people to actually, you know, use crypto rails for ordinary transactions, earning a living, paying for food, transportation, housing, and engaging in these new kinds of web3 and DeFi applications, having something that is not just a store value, but it's actually a medium of exchange is is really powerful. So I think it's a big deal. Alicia, anything you want to add?

Speaker 3

I would just come back to, like, the building blocks that we're putting in place is setting a strong foundation for future growth and adoption. So as Brian said, getting the regulatory licenses that will enable us to scale globally. We now have a very transparent stable coin. We have Base, which is offering fast cheap transactions. We have smart wallets.

Speaker 3

And so all of these building blocks together really set a stage where we can grow off of a very important foundation. And we're seeing this impact on our financials already. Where USDC has become the fastest growing stable coin faster than other major competitors with market cap is up 30% year to date. Our average on platform balances increased 50% quarter over quarter. And we're starting to see, as Brian mentioned in his opening comments, over the recent weeks, 20,000,000,000 of transaction volume on USDC on base.

Speaker 3

So the foundation is set, we're excited where this can go, but MICA has been a critical unlock because as we think about growing USCC to be a global compliant stablecoin, we have a really strong foundation that we're now able to build from.

Operator

Your next question comes from the line of Benjamin Budish with Barclays. Please go ahead.

Speaker 6

Hi, good evening and thanks for taking the question. I was wondering if you could give us an update on your balance sheet strategy. We noticed the cash build continues to really grow. And it seems like with the business generating cash and the spending really kind of ramped down from a few years ago, there may not be as much of a need for it. So any update there?

Speaker 6

And then kind of along the same lines, you've been generating now a lot of your gross profit from interest income. And just curious if there's any thoughts around the hedging strategy should rates start to come down? What's your kind of philosophy there? Thank you.

Speaker 3

Thanks for those questions. Yes, we're really pleased with the balance sheet strength. We are using cash as we've mentioned in our prime financing business. A large amount of that cash was used to support the ETF launches in Q1 and Q2 with the Bitcoin ETF and now hopefully the Ethereum ETF where you can see a lot of day to day or week to week volatility of those loan balances. We did grow prime financing fees within the quarter.

Speaker 3

And so you can see while the balance at the end of the quarter was down versus end of Q2, we saw growth intra quarter for those balances. So using our cash to support our products is a primary use case for us. We also as we shared when we did the convert raise in Q1 that we would be paying off the 2026 convert. And so some of that cash is already pegged for a future payment of the 2026 convert on the balance sheet, which will bring down the cash balance at that time. We also maintain a strong balance sheet, so we can be opportunistic as we look for other investment opportunities, both organic and inorganic across the world.

Speaker 3

And that is something that has been core to our strategy to do tuck in acquisitions or growth acquisitions when those opportunities present themselves to us. And so we think of it as just building opportunistic capital for us to enable that we can be ready for all markets and opportunities that present themselves. And secondly, on the comment around interest income, we obviously did benefit from the interest rates with USDC over the past year. We are prepared, as I mentioned in my remarks, for rate declines. Our goal is to continue to grow native units around USDC and use cases to offset that.

Speaker 3

And we've also explored various hedging. We are not the issuer of USDC in managing the reserves on that balance. And so I can't speak to that strategy specifically.

Operator

Your next question comes from the line of Owen Lau with Oppenheimer. Please go ahead.

Speaker 5

Good afternoon and thank you for taking my question. Could you please talk about the recent retail engagement and how does it compare to earlier this year and the last full run back in 2021? How much of them have come back? And also, Mangox has started the repayments in July. Do you see some of these creditors coming back and reenter this space?

Speaker 5

Thanks.

Speaker 3

Owen, I'll start with that. So our BTL engagement is different from the bull run because in the last bull run, we really only had a trading product platform available to our retail customers. Today, we offer staking for customers. We have USDC rewards. We have more products within wallet and our smart wallet that we just launched to engage users in a breadth of DeFi applications as well.

Speaker 3

And so we are seeing our retail engagement now expand in many different ways where we have different customers behaving in different ways in the platform than we saw in prior cycles. What we see as consistent is that retail behavior trader traders specifically who are coming on the platform to buy or sell crypto behave very in line with prior volatility. And so volatility patterns mirror this cycle compared to prior cycles. But the deeper engagement is with the breadth of the portfolio that we now have.

Operator

Your next question comes from the line of Mike Colonese with H. C. Wainwright. Please go ahead.

Speaker 4

Hi, good afternoon and thank you for taking my question. Can you provide an update on your strategy and potential product roadmap for Coinbase Asset Management? And really how you guys are thinking about that in the context of an improving political environment in the upcoming elections? And how that can really influence both the timing and types of products you decide to roll out here? Thank you.

Speaker 2

Yes, I can start on that. And if anybody wants to jump in, feel free. So currently Coinbase Asset Management has been a really good offering for our institutional customers who want to have different ways to different strategies really to access the crypto markets and package those up into really easy to use products. I think your question kind of alluded to the policy environment and you know we don't know exactly what will happen over that over the over the next year on that but I do think we'd ultimately like to see a path where we could start to you know get index funds retail products in the crypto space. That was going to require some, a different policy environment where we can get some of those things approved.

Speaker 2

But, you know, personally I'd love to see like a coinbase 500 sort of similar to the s and p 500 a market cap weighted index that retail could participate in. I think these things could be really beneficial, but, it's it's too early at this moment. I don't see any path to do it, in the near term. And so we're going to keep pushing on that one over time with our policy efforts.

Operator

Your next question comes from the line of Joseph Vann with Canaccord Genuity. Please go ahead.

Speaker 7

Hey, everyone. Thanks for taking my question this afternoon. Maybe this one's for Brian. If we do get some crypto legislation, clearly a positive for the industry and might be a green light for big TradFi players to enter the space in a bigger way. How do you see that relative to Coinbase's position?

Speaker 7

Would you see big TradFi guys as competitors or partners or maybe it's coopetition? Just it might be a little early here, but it'd be interesting to get those views. Thanks a lot. Yes.

Speaker 2

Well, I think you're right that the lack of regulatory clarity is probably the biggest blocker for institutions to put more and more funds into crypto. We have a huge number of them as clients, in Coinbase Prime, our institutional product. And when I meet with them, you know, they'll often say, oh, we've got, you know, 1 or 2 or 3 percent of their funds in some portfolio in they're holding in crypto. And I ask them, well, what would it take to be 10, 20, 30 and they all say regulatory clarity. So I think getting these new pools of capital unlocked, it would be certainly a huge step in that direction.

Speaker 2

And by the way, the ETFs have been a portion of that unlock already, right? You know, the Bitcoin ETFs and Ethereum ETFs did get approved. We saw new pools of capital open up from that. But the regulatory clarity goes way beyond just new pools of capital coming in. That's great, but perhaps, like, the more even exciting part of it is that today, you have to be pretty resilient to be a crypto entrepreneur.

Speaker 2

I mean, most of these folks, they're, you know, if you're in your early twenties and got a couple of folks right out of college with a laptop and a dream and they want to build a build a crypto company, You have to be pretty intense to go into this market and you know, you might get a Wells notice in the 1st few weeks and you have to call your parents and tell them that you're being sued. So that's not most entrepreneurs' idea of the first company they want to start. Now many of them are still doing it anyway or they're just going overseas, But it's really hard to put a, you know, dollar figure on this. But if we actually have a welcoming environment where the rules are clear and everybody can just follow them, we could see a huge surge of innovation, with all kinds of new applications being built. By the way, you know, the the biggest partner the partners that we talk to, you know, some of the biggest tech companies in the world, when we talk to them about integrating crypto, they often will say the same thing.

Speaker 2

They'll say, well, let's try to wait for regulatory clarity. So for instance, with the MICA regulation that passed the comprehensive crypto legislation in Europe, that actually did open up a bunch of conversations in Europe, and they're all hoping that it happens in the US as well. So anyway, you can look backwards and say, man, where where would we be if this clarity had been there 5 or 6 years ago? And but I'm an optimist. I try not to look at the past.

Speaker 2

I try to look at the future. So where will we be in 5 or 6 years if we get something passed in the U. S. As well and clear rules are good for everyone.

Operator

Your next question comes from the line of Pete Christiansen with Citigroup. Please go ahead.

Speaker 8

Good evening. Thanks for the question here. Brian, I'm very intrigued by the comment on the increase in the on chain initiatives, Fortune 500, so forth, super interesting. I was just wondering if you can call out some discernible trends here. I know you mentioned Spotify, many to many kind of market.

Speaker 8

That's interesting. What about like B2B or B2C? And then with some of these early adopters experimenting with Web3 development, are you seeing these players experimenting at their core level or is it really at the application level? And finally, what's Coinbase's role simply in the development process of on chain initiatives? If you could just help us crystallize that, I think it would be really helpful.

Speaker 8

Thank you.

Speaker 2

Yes, sure. So a lot of the core pieces, I think, are there now with these Layer 2 solutions and smart wallets like we talked about. You know, Coinbase Wallet as a self custodial wallet can be an easy platform for these folks to interface with, USDC, etcetera. So a lot of the core pieces, I think, are now there. ENS is another one, by the way, having the Ethereum name system.

Speaker 2

So having sort of these identities online that can accumulate reputation and, these are all kind of core building blocks. So I think a lot of the innovators are now coming in at the application layer and we're actually hosting a hackathon called Basecamp, today in California And we have hundreds of builders there learning about, how to build on chain, launching new applications. It's a really cool event. I was just dialed in earlier this morning. These kinds of things are happening more and more frequently now, and you can think about a lot of the big big applications in web 2.

Speaker 2

Think, you know, think about what would Airbnb or Uber or Wikipedia or some of the social apps like X or Instagram or music apps, right, like Spotify. Like, what would these look like in a web 3 world? And, you know, I think the the people creating the content, whether you're the biggest artist in the world or you're kind of an an average person getting into it, they can actually own their own content, have a direct relationship with their fans, directly monetize their fan base. People can remix content. There's an attribution chain as people remix this whether it's text, audio, video, there's an attribution of provenance that's formed on chain to prove where these things came from and what were the derivatives of which can the monetization can flow through all of that.

Speaker 2

And then also it it kind of really rewards the early people who come in to build these these networks, right, like an Airbnb or an Uber on chain. So it's great. We're seeing a lot of innovators come in and and the way Coinbase can contribute to this, I mean, one of the main ways is we're building a developer platform, right, called CDP, Coinbase Developer Platform. It's kind of like our version of AWS. We had a we had a bunch of these tools internally we were using to build our own apps, and we said, hey, we might as well expose them to 3rd parties, allow 3rd parties to build on top of them.

Speaker 2

Some of those are going to be Web 3 startups building on chain. Some of them might be Fintech companies or banks or financial service companies that want to integrate crypto into their products. Some of them might be shopping like kind of e commerce checkout solutions that want to have crypto as an easy way to pay globally that has lower fees than paying 2 200 basis points for credit cards or having high decline rates, high chargeback rates. So we're seeing interest from merchants in those regard. So the answer to your question is we don't really see it as competitive with these other firms, we see it as we want crypto to be integrated into every part of the global economy.

Speaker 2

You know, every every commerce solution, every payroll solution, every bank, every FinTech, every neobank in every emerging market around the world, every cash pickup location. We want really crypto to be the rails that power the future of the global economy and because they're better rails, they're faster, they're cheaper, they're more permissionless, and that's what's going to increase global economic freedom if we can update the global financial system.

Speaker 3

I couldn't have said that any better, but I just want to say, Brian, like, this is our belief. And what we are now focused on is building the user experience. We are focused on fixing cost, fixing speed, security and user experience. And that is what you see our building blocks coming together to enable this future that Brian has just painted for us.

Operator

Your next question comes from the line of Dan Dolev with Mizuho. Please go ahead.

Speaker 9

Hey, guys. Hey, Brian. Hey, Alicia. Thanks for taking my question. So really good results.

Speaker 9

Wanted to know something about pricing. So it looks like consumer transaction take rates ticked up 13 basis points. Maybe you can talk a little bit about the pricing environment and drivers of the uptick in sustainability of that. Thank you very much.

Speaker 3

Thanks for the question. So as I noted in my opening comments, we have 2 revenue streams, derivatives and wallet fees. Those are revenues for us that hit consumer transaction revenue, but there's no associated spot trading volume in our reported spot trading volume metric. And so if you take the revenue divided by the trading volume, it's a little bit of apples and oranges. Spot trading is the vast majority of our revenue.

Speaker 3

But now we new growing revenue streams that are not yet material, but are now starting to influence that blended average fee rate if you do a divided by b. And so that's why we really wanted to call out that difference between the change in revenue versus the change in trading volume this quarter in my opening comments. So we saw the same mix between simple and advanced trading this quarter that we did in Q1 and we didn't have any material change into our fees this quarter as well. We continue to experiment. Experimenting with our consumer fees is one of our key strategies to make sure that we continually understand the market and our customer behavior.

Speaker 3

But this quarter it was really due to growth in new revenue streams that aren't reflected in the trading volume.

Operator

Your next question comes from the line of John Tordaro with Needham. Please go ahead.

Speaker 4

Hey guys, thanks for taking my question. Me and a lot of my peers were down at Bitcoin Nashville last week or so. And Trump spoke, he spoke very positively on crypto. Given you guys have been close to kind of the political landscape this year, is there more hyperzian support for crypto behind the scenes than what we're seeing? Or would you know 4 more years of a Democrat, would there continue to be kind of similar to regulatory standstill and some of the difficulty in the crypto environment?

Speaker 2

Yes, I can jump in. So the first thing I'd say is crypto is really non partisan. There are really strong champions on both sides of the aisle at this point, and a few skeptics, by the way, on both sides of the aisle, but it's predominantly, I'd say supporters at this point. And as you noted, there's been a big rhetoric shift, really from both sides. But you you mentioned one that, you know, certainly got a lot of attention in the last week.

Speaker 2

I mean, we just feel we feel like there's been a monumental shift. We feel very lucky that this political constituency is now being taken seriously in DC. You know it's it's a massive voting block. I think it was a group of people that felt underserved in the past and they felt like they're, you know, the industry and they were being attacked. And that's, we've seen a shift from both sides.

Speaker 2

Now every voter has to, of course, make up their own mind. We want to make it easy for people to do that. There's various orgs we've contributed to, which try to make that easy, like stand with crypto.org. And it's not just about at the top of the ticket, by the way, it's every, you know, congressional seat and local election as well. So 1,300,000 people have raised their hand and said they want to elect pro crypto candidates on Stand With Crypto.

Speaker 2

Almost all of those are many of those are in the US, but we'd like I think it could be it could be much bigger than that. We you know, 52,000,000 have used crypto. And so if 1,300,000 of them are are active or a little bit less than that, that that's great. So, I don't know what else to say besides that. I think we're feeling like there's a lot of momentum.

Speaker 2

Let's just leave it at that.

Speaker 1

All right. I think we have one more question in

Speaker 10

the queue.

Operator

Your final question comes from the line of Patrick Mollie with Piper Sandler. Please go ahead.

Speaker 10

Yes, good evening. Thanks for taking the question. Brian, in your prepared remarks, you said that you expected a little bit of a headcount increase in the back half of this year. I was hoping you could just elaborate on those comments and maybe help us understand how you're thinking about an appropriate headcount, and maybe just comment a little bit more on where you expect that growth to come from? Thanks.

Speaker 3

Yes. I'll take this one to start and Brian, maybe you could add on. So I did mention in my opening comments that we do plan to increase hiring through the back half of twenty twenty four. This growth is going to predominantly go to our consumer and our international platforms, as well as shoring up our product foundations to enable us to scale with the growth that we anticipate in the long term business. So we are being prudent in managing these fixed costs.

Speaker 3

We haven't given a specific number, but we are going to be very thoughtful about investing in key areas of growth that we continue to see and make sure that we can meet the moment of the market.

Speaker 1

All right. Well, that does it for today. Thank you all for your questions, and we look forward to talking to you again next quarter.

Operator

This concludes today's conference call. Thank you for your participation, and you may now disconnect. We're offline.

Speaker 3

Thank you.

Operator

You're welcome. I'll see you on your next call.

Speaker 3

Okay.

Operator

Law, pleasure is gold.

Speaker 11

Thank you for joining us. Thank you for coming to this panel session. I'm Nico Ascari, digital markets correspondent at the Financial Times. And I'm joined this afternoon by a wonderful panel where we will be discussing the role of crypto in portfolios and strategic crypto asset allocation. So to discuss all of this, I'm joined by Blu Machilari, Head of Digital Asset Strategy at T.

Speaker 11

Rowe Price Matt Halstead, Director of Real Estate Investments and Digital Assets at the Teachers Retirement System of Texas Matt Haugen, Chief Investment Officer at Bitwise and Sebastian Pedro B, President of Coinbase Asset Management. So thank you all for being here. I guess the first place to start, the first place that I'd like to start is how you think sort of broadly investors should be thinking about and should be considering investing in crypto if they haven't already or if they are how they should be considering changing that obviously with the developments of the Bitcoin ETF approvals, the potential ETF approvals. What does that landscape look like, Sebastian?

Speaker 12

Sure. Well, first of all, welcome to the 1st institutional cycle for digital assets. I mean, look at this room, look at who's here. We are there. We have started the 1st cycle for digital assets.

Speaker 12

So when we think about investing, we have to think about that regime that we've just now entered. We're in the 1st institutional cycle. So that means things are happening, it's time to act, but that doesn't change the rules that many institutional allocators follow. You have an IPS, you have capital market assumptions. You have a strategic asset allocation.

Speaker 12

You're going to follow those rules, those procedures, which underpin how you invest for your constituents. That's not going to change. But what's next? Well, you've already invested $50 some odd 1,000,000,000 in venture capital. That's happened in crypto already.

Speaker 12

What's next is probably hedge funds. Bitwise have got a multi strategy fund. We've just launched our own. And Index, these liquid expressions are coming to institutional portfolios because the cycle has started. We've got new laws, we've got regulations and we have operational excellence with counterparties.

Speaker 12

So all those risks have receded and now we're starting to move from illiquid to liquid. I'll leave it to some of the index experts to think about valuation.

Speaker 11

We'll get to valuation, but just firstly broadly, Matt, like how what does that landscape look like in terms of investing in crypto and how has it changed?

Speaker 13

Yeah. I absolutely agree with Sebastian. It's changing from a focus on venture capital into liquid assets. I think institutions broadly over allocated into VC and have very little allocation to liquid, and they are now moving in. I would say, the biggest change over the last year is the realization that easy ways and easy ways to do it.

Speaker 13

And so, people are reckoning with the fact that that is the case. They didn't have to invest in crypto or consider crypto pre ETF, because there were challenges, there was a great deal of regulatory uncertainty. They no longer can do that, and so they're effectively, you know, short this asset that is part of the broad capital markets and they are trying to catch up.

Speaker 11

And Matt from your perspective how are you thinking about crypto investment and crypto asset allocation?

Speaker 14

I think the biggest challenge I think we've had, just saying accessing the institutional investor world is that referring to the universe of assets represented on chain as crypto I think does us a pretty big disservice. If you think about the variety and the breadth of what you can own with a token or with a digital asset you know some of it is venture capital, some of it's a commodity, some of it's art, some of it's pieces of a community. Intellectual property. And so I think probably the biggest thing that needs to be done to make progress and kind of penetrate big sources of capital is to clear up what crypto means. It's really just a format.

Speaker 14

And tokenization in general is a formatting exercise that is allowing for standardization of how things move around. And part of the big breakthrough of Blockchains and Crypto in general is really the merging of communications networks and financial networks. And having that be redesigned, in real time. And I think if you frame that to a professional investor, it tends to change the conversation. It's not, I don't think it's controversial to anyone to suggest that a portfolio should have exposure to you know, emerging technologies.

Speaker 14

People have become accustomed to that now for for decades in our field. And so I think if people start to understand what specifically you have the ability to own and access via crypto assets or tokens, I think you start to get a lot more curiosity. And so I think all institutions should consider exposure to technology. I don't think that's controversial. And I think that the amount of investments that will be on offer and accessible on chain is going to grow dramatically to over time represent almost anything.

Speaker 11

And Blue, you might mention curiosity. Where does your curiosity sit in the crypto world? How do you think people should be looking at this?

Speaker 15

So I think that one of the things that always surprises me is that when we begin looking at digital assets, most of the time we start with Bitcoin. And in many ways, it's the hardest one to get your mind around from like a traditional portfolio management, equity model. So we sort of start with the hardest thing first. And I think that we're seeing very much that the ETFs have brought the discourse more into the mainstream. And I think that the conversation, has become will And I think that the conversation, has become well, okay.

Speaker 15

So why aren't we doing this rather than why should we do this? And that's a much more constructive place to start from.

Speaker 11

I want to comment evaluations, which you mentioned, Matt, but also to remind the audience that we will be taking questions. So please scan and send in your questions which I'll ask the panel near the end. But on valuations, Matt, how should people tackle this? How should people tackle? Let's start with bitcoin for example.

Speaker 11

How do you think about valuations? I mean there are a lot of models out there, a lot of numbers thrown around, but if an investor is looking at bitcoin wanting to get exposure but looking at the volatility, the potential returns, where do they start from?

Speaker 13

I think the biggest thing to focus on when you talk to institutions about valuation is not whether it should be 68,000 or 72,000. It's whether it's 70,000 or 0. I think most institutions are worried that 0 is a possibility. The way I talk to institutions about bitcoin is look, it provides a service. The service bitcoin provides is the ability to store wealth without relying on a government or a bank in a digital format.

Speaker 13

If you want that service, you can't pay a fee. You can't pay $10 a month or subscribe to it. You have to own the asset and from that perspective, valuation is no different than anything else. If you think about Salesforce, it provides a service. If more people want Salesforce's service, the price of Salesforce stock goes up.

Speaker 13

If fewer people want it, the price goes down. If 0 people wanted it, the price goes to 0. The same thing is true of Bitcoin. If more people want this service of storing wealth without a government or a bank, the price will go up. If fewer people want it, the price will go down.

Speaker 13

If no one wants it, the price will go to 0. But I think, you can sort of disarm that argument about whether it's worth 0 by framing it as just another service. The unique thing about this service is you can't pay a fee, you have to own the asset. And for me, that sort of solves that existential worry for people, because evidently, there are millions of people and millions more each year who want this service and so we see prices going up. So, I think that's more important than the, you know, 72, 68, 65.

Speaker 13

No one cares. If it's not 0, they want an allocation. And I think you can get them past 0 with that kind of argument.

Speaker 12

Sebastian? You know, I think, when we think about valuation, I think it's great to step back and recognize how emerging this eco system is. If we're thinking about the valuation of ETH or Solana or Bitcoin or whatever token and network you want to talk about, then I would ask our panel and I'd ask all of you, what are the accounting standards that these protocols have to follow so that we can show that all of these things are comparable? And the answer is, there is no standard, right? So, let's see.

Speaker 12

You have still emerging but not final regulation. You have a lack of standards on reporting. How do you compare these assets is not clear. There's no you can't say price to book or price to sales or price to earnings because all these numbers are very different. So what do we have?

Speaker 12

We have a very inefficient market, right? This is an early stage market where the fact that you can have an argument with an institution about whether it's worth 0 or 70,000 That's a chasm that doesn't happen except for every now and again on a stock exchange, but that's not our topic. It's just the reality that we're very early in this market. So active strategies have a relatively easier bar to get over in terms of a hurdle because how early the industry is. In 5 to 10 years when all of this is clear, regulation, reporting standards, etcetera, then it'll probably be harder to eke out excess returns for LPs.

Speaker 12

But in the near term it seems like that's something we should also take away. The fact that we have this sort of debate in valuation just tells us how early we are in this asset class.

Speaker 8

But do

Speaker 14

you guys think is it going to 0 the right question? I don't think that's the right question. It's if it happens how quickly does it happen and how much liquidity do you have along the way? And so if you were just to take bitcoin out of it and say we have this asset it's a $1,000,000,000,000 market cap You know we have a proxy for where it could be, that's that's 10x that. And we're still not really sure what this asset might do.

Speaker 14

Like it actually could evolve into have different sources of earnings that could do different things over time. And if you were to say I have this asset that's $1,000,000,000,000 today you can take allocation to it. By the way it's liquid. It trades. It actually has depth to the to the volume that it trades.

Speaker 14

My downside is I lose 25¢ on the dollar, maybe 50¢ on the dollar if I'm paying attention. I have 10 X upside, maybe better, and I can bet that in size. And I think you talk to the people that are the larger investors in the world, you you never see that set up. So often, if you have that asymmetry, you have that liquidity, it's a tiny opportunity. Like, maybe you could bet a couple $1,000,000 maybe you could bet $10,000,000 You can't put a $1,000,000,000 plus position on.

Speaker 14

And I think that's the thing that institutions are gonna wake up and look and say, I at least need to understand this better. I need to understand how this fits into my portfolio better. Because if you're right, that is a, it's it's a trade that comes along quite quite infrequently in your career.

Speaker 11

I mean, we've got an audience question sort of tangentially along those lines, which says, how do LPs look at the percentage of asset allocation in crypto versus other asset classes, for example, venture capital, PE, credit and so on. What are those conversations like for you, Matt? And Blue?

Speaker 15

So it's actually a philosophical question that we've had internally. And this idea that to in our sector, we often refer to this 1% allocation, which is sort

Speaker 8

of arbitrary and doesn't make sense.

Speaker 15

Right? So I also very much look at it as both an asymmetrical trade and as a binary event. So, an asymmetrical trade and as a binary event. So, in that sense, does 1% make any sense? Not not really.

Speaker 15

Like, it should be 3. It should be, you know, greater than 1, or it should be 0. And I think that I think that there's a psychological component where people need to test the waters and get comfortable and then sort of move in. I think it's a, it's a paradigm shift from the way that we look a lot at a lot of other asset classes, and I think that it takes time for people to to sort of ease their way

Speaker 11

into it. We were talking outside about investing in crypto as an asset in terms of the token and investing in blockchain, the technology and companies that are built on that. Do you think it is possible and have I guess the tone of conversations changed in terms of people saying we will invest in the blockchain companies, but we will not touch crypto itself. Have those sorts of conversations changed or is that still the way that people are thinking about it?

Speaker 15

So the the conversations, that I've encountered plenty of times, are not about investing in blockchain companies. So it's not the idea, oh, we should do VC versus we should do native on chain tokens. It's the idea that blockchain is a fantastic operational technology that's going to revolutionize everything we do in financial services and crypto is a Ponzi scheme and not a good idea. And there's some cognitive dissonance there. And I think that one of the things that we've seen over the past few years, I feel like we've seen a lot of movement growth development in terms of real world use cases.

Speaker 15

And I'm now able to go in and describe something and say, well, there's a technology and it's going to allow you to execute cross border payments near instantly, you know, 90% reduction in cost, complete transparency, accountability. It won't get lost in the mail. Doesn't that sound like something we should all stop and do some analysis on? And everyone says, yes. And I'm like, well, it's a blockchain.

Speaker 15

And the way that you get exposure to that is by buying the associated crypto asset. And so, I think it's sort of a knee jerk reaction that you get from people. And I found almost everyone I've ever spoken to about it has been willing to sit down and sort of once you talk it through, it like it it pretty much resolves itself, I think.

Speaker 12

I would just add, you know, who here has not bought a product on Amazon because you're worried about the volatility of the stock or what the PE ratio is? Please raise your hand. Like, have you not bought those shoes that showed up the next day? No, of course not, right? So, when we think about the network and the asset, we have to back up and recognize like we're treating crypto unfairly, right?

Speaker 12

Amazon could deliver something and so you use it, right? And guess what? Amazon stock did pretty well. ETH is delivering something now and people are using it. What do you think is going to happen to the value, right?

Speaker 12

We think what's ultimately going to happen here and I don't know if Samara is still here. I want to agree with her that RWA is a terrible term for what we think are really smart assets. Like that's what we're in the process of doing. Today, these rails are being cleared but we know it's bitcoin, it's ETH, it's base, it's a variety of things but what we're going to deliver, much like Amazon did is smart assets. So assets that actually can do more and be more for your portfolio.

Speaker 12

So when you say what's the right percentage, I mean the answer is 100%, right? Eventually, we are going to, as Blue said, we're going to upgrade the entire financial stack here with these better rails, right? And today, you can invest in these rails. And tomorrow, we're going to upgrade these assets. We're going to now have smart assets.

Speaker 12

And then we're going to look back and say, geez, I wish I could have bought those rails before everything flowed on the rails. So yes, 0 is the wrong answer. 1% feels like the wrong answer for the native crypto assets and if we're going to upgrade all of the assets to be smart assets longer term, then it's I agree with Blue, it has to be more than 1 or 2.

Speaker 13

I just tossed in a few fun anecdotes from Bitwise, we do 20,000 meetings a year with investment professionals around crypto, financial advisors, institutions, family offices and we have a suite of decks that we can choose from and slides that we can choose from to have those discussions. I will say that I have not used the crypto not block chain slides in our deck in 4 years and 4 years ago they were maybe the most common slides that we use. So, I do think that conversation has changed. The other anecdote from our slide consolidation is, we used to talk a lot about 1% and now, based on what we're seeing in clients, we talk a lot more about 2 and 5% and 5%. So just some data from Bitwise's unique experience.

Speaker 11

And that's in liquids, liquid strategies, right?

Speaker 13

Yeah. Liquid outpatients, yes.

Speaker 11

So I mean I'm interested in that as well as someone in the audience about how you think about how investors should think about liquid investment compared to VC investment and compared to equity stakes for example. And I know we've sort of touched on that briefly, but I guess is it more of a challenge to sell the liquid token investment to investment committees?

Speaker 15

So, I I think that very much depends on who you're talking to and what their sort of focus and objectives are. So, from the T Rowe perspective, for us to have an asset class perspective on digital assets, it was absolutely critical that we have experience trading end to end natively on chain, right? It's an operational technology. These assets move differently. They settle differently.

Speaker 15

AML KYC is different. You're not using the same OMS, PMS, any of these systems. And so for us, it was being natively on chain trading from start to finish, which I think is very similar to probably what most of our personal experience has been, which is crypto is learning by doing. And so for us, that was very, very important at the institutional level. But I think that there I think that there are a lot of circumstances in which the versatility of the ETFs at the the format is especially if you have a large established back end middle office, the ETFs are like plug and play.

Speaker 15

They work with everything. You don't have to build anything new. You can include them in other financial products. It's the ease of use, I think, has just been astounding and I think that's been one of the drivers of this success.

Speaker 14

In my experience, it's it's been more difficult because tokens are conflated with cryptocurrencies, which is conflated with Bitcoin. And that traditionally has been this macro conversation that people have been uncomfortable with. Because the branding and and just kind of the broad coverage of the industries is generally really bad from, mainstream channels where people are consuming their information. And I think one of the biggest challenges is most large traditional institutions work with buckets that are an artifact of the consulting industry and benchmarks and things that were completely appropriate for asset allocation and portfolio construction but really haven't adapted or changed or evolved. And I think one of the biggest things that I've realized is that this is disruptive technology to the investment management business itself.

Speaker 14

So like classic innovators dilemma. Folks are trying to treat this like a sustaining technology and plug it into portfolios that, make this asset, give it gives them the wrong signals. So an example of it in the liquid market would be our public equity portfolio should have this token exposure because these are tradable assets on a public market. But what is a crypto asset? Like I said at the beginning it represents all these different things but most of them tend to skew towards early stage venture capital risk and if you benchmark that against the S and P 500 it gives you the wrong signal And so what that's resulted in is a lot of challenges from early adopters within investment firms advocating for liquid strategies as they should, because liquidity is a feature, not a bug of investing.

Speaker 14

And over time I think these portfolios will change and will adapt, but the compromise that I've had to make is just let's put it in a traditional venture capital closed end fund wrapper, People are more comfortable with that. It allows us to wear and survive the volatility in the industry. And I just think that it will take time for the market to gradually evolve. And it will likely result in a lot of the legacy participants going out of business and new firms being built that fully embrace the way that the world is changing. And I think most venture funds will be will look more like hedge funds and not the the other way Okay.

Speaker 14

Around over time.

Speaker 11

Yeah, Matt, you want to Yeah.

Speaker 13

I would just add 2 things. I mean, obviously, if you had a clear choice liquid or illiquid, liquidity is a feature, as you said, particularly in a volatile asset where you can volatility harvest. You don't actually need bitcoin to go up to make it a valuable part of a portfolio. It can go sideways or down if you harvest the volatility and still increase your risk adjusted returns. I think it is true that many people started with, with venture, basically because of career risk, or if you're being more charitable because they didn't know how to do diligence crypto native exposures.

Speaker 13

I do think there's a movement to multi strat funds, because people are moving up the chain of comfort on their diligence factor, but I think it's probably incumbent in what we're going to see is the illiquid side to deliver different types of returns from the liquid side. I think for the last generation, you've seen illiquid funds delivering liquid like returns and that's probably not good enough now. I think multi strat funds and other funds are going to have to deliver different pattern of returns. And I think that's what you're going to see for the next few years.

Speaker 12

I mean, I think people understand that it takes it takes time to make something bigger in a portfolio. And it really takes time to go from 0 to 1, right? That's really the problem that most allocators are suffering with. And I think we also have to recognize there was a bit of a stop start that we had last cycle that people are still kind of licking their wounds from and they're looking at this current change and we're all saying, well, is it for real? Like, is it really real this time?

Speaker 12

Right? And I think that's that that's we're all feeling that hesitancy because it, you know, it was wonderful to hear Brian talk about the Senate working on multiple bills to bring crypto potentially into the regulatory mainstream this year in the United States. I can tell you for sure on our desk a month and a half ago that was not the expectation. So, I think if we, who are doing this every day, are still kind of basically having recency bias where we're stuck saying is this really happening? It just feels too good to be true.

Speaker 12

Think about then what it takes for that. We really need to kind of believe it and then see that progress happen because I think people are also gun shy on the margin from what happened a couple of years ago, where every major pension fund had a digital asset working group and they all called them dogs, right? And we were all geared up to do things. In a few instances they did do things and it did not go terribly well. So, this is our second chances in the industry.

Speaker 12

We have to do it right. I think it is being done right, but I think it's going to take a little bit more time for the all clear for some institutions, but not much more. I mean, we are really knocking on the door. If you think about end of year planning cycles, who is going to go away for the summer, come back and say: Okay, we're not going to do something in crypto in 2025? Like 0%, right?

Speaker 12

Everybody is going to get off the beach to do something. And there are in many cases, to borrow a phrase, the haze in the barn. You did work for 2 years and then Luna blew up and then FTX blew up. You'll come back and say: Okay, a lot of that research was quite good. And now what has transpired?

Speaker 12

It's all gotten better, right? And that's going to make it a lot easier to make this transition from illiquid to liquid. And I think we're going to see it over the next 6 months.

Speaker 11

Just on your point around the, I guess, recent the blow ups of recent years, what lessons do you think have been learned around that? What harsh lessons I suppose have been learned around that?

Speaker 12

I mean I think the harshest lesson everyone learned was FOMO kills quickly. Right? The rush to do anything is always a bad idea. Right? It's fantastic to see this sort of event happening and there's a lot of enthusiasm here.

Speaker 12

But the thing that's most bullish is that we are all tempered in our excitement, right? We are still talking about some of the frustrations and around kind of moving this forward within our own organizations, not so much at Coinbase of course, but in general at allocation houses. And so, I think it's just going to take a little bit more time to get through the memory of before and people are going to move, I think, more decisively, but they're not going to be moving in big audacious chunks, right? 100 plus dollar tickets into individual companies, which is what happened last cycle in certain instances. I don't think that's going to happen again, right?

Speaker 12

I think people are going to rely on their GPs and to be a little bit more risk averse as they push more consistently forward.

Speaker 11

And you mentioned some of the frustrations, not a Coinbase you say, but otherwise. I'm interested, Blue, in what challenges you face when it comes to pitching crypto investments internally in a sort of traditional financial institution. Right? What are those conversations like?

Speaker 15

So I think that we still have a portion of people who will say, well, it's a Ponzi scheme or it's used for illicit activities. I personally think it can't be both of those things. You kind of have to pick 1 or the other. They're mutually exclusive. But, and and then beyond that, I think we now have people who are looking at it and asking, well, there's no cash flow.

Speaker 15

How do we put this into my traditional framework of where I sit on the asset class spectrum? And I think that that becomes a challenge and there are, you know, issues that arise in a multi asset viewpoint, issues that arise in an equity viewpoint, primarily around cash flows. If you are a passive holder versus staking, what does participation look like? And how do you model that? And I think it's a lot about education and it's a lot about sitting down and saying, we shouldn't be taking our existing models and copy pasting them on top of this.

Speaker 15

That's it's not going to work. And it's an educational process that you that you work through. And I can say that, you know, the whenever the morning after we got back from Thanksgiving, I sat in a very large meeting and, you know, right after FTX blew up and 3 different people in the room said, so this is the end of crypto. Right? And I was like, well, Soros, did we all sit around and say, is that the end of the pound?

Speaker 15

Like, no. That's not how this works. And and I think that we've had a lot of ground to cover, but I actually think it's been a really healthy set of developments for the industry as a whole. I think people are much more conscious of leverage, much more conscious of the interconnectivity around how we use credit. So I actually think it's it's helped the the industry mature in a way that was really critical to bring us into this cycle.

Speaker 11

Matt, what about you? What what sort of conversations and challenges do you perhaps face pitching this internally? Is it the same as Blue?

Speaker 14

Oh, man. Trying to help people envision investing in something because it's plausible, not because it's likely. It's very hard to do. And in general, at large traditional institutions, is much more of an agency mindset than a principal mindset and that is reflected in risk aversion. And I think early a lot of what I tried to do is inspire, like to say, hey, can you envision the way this world is going to change?

Speaker 14

And if so, how might we invest in that? And how might that lead to extraordinary returns for our members? And I think in general, that approach is ineffective. And I think when you understand the goals and the motivations of the individual you're speaking to in the organization you're speaking to it makes more sense. And so I think it's more if you were to go now what does the downside look like And why can you get the security in your mind that you know this isn't going to be a bad outcome for you, and set you back more broadly.

Speaker 14

Because you have to understand like the goals of these organizations are broad and they're vast. And the trade offs that might be made, even if the returns are are compelling, could be unacceptable. Because it could be a catastrophic setback elsewhere. And I just think understanding that is the key to everything. And then making something abstract relatable, I think being a student of history is probably the most helpful, tactic that I've found to to get people to move forward.

Speaker 14

And making it relatable. And then helping understand like throughout human history, even professionals have been really bad at at visualizing and projecting what transformative technology might look through. When you start talking about blockchains and AIs like, you know, I believe crypto is being built for its robot market participants and A. I. Agents.

Speaker 14

Like, this whole idea about people using crypto in general is missing the point. And that we are having to rebuild the system for from scratch, to like visualize what a future world might look like that we've never seen in history. And so, that challenge is, it's remarkably difficult. And so I think a lot of it is, you know, just trying to use analogies and and and really mitigating downside through bet sizing and positioning. Because I don't think there's any way, there's no way to force this.

Speaker 14

And I think the general investment management business has largely been built around fees, which is don't get fired is the mindset. And that culture permeates the industry. And so there's a lot of people that said advance this idea further and I'll pay you 10 times more. And that is the culture of large scale professional investing today.

Speaker 11

Sebastien, what do you make of that?

Speaker 8

I was

Speaker 12

just going to say, I think what our allocator clients need is more tangible use cases that they can see make a difference in the markets in which they already operate. And what's phenomenal about crypto is we've created some great use cases, store value and payments. But a lot of those two things are really helpful for people that are mostly not in this room. Right? They are transformational in emerging markets and there's been discussion of it.

Speaker 12

Discussion of it. What we're starting to see is the evidence that these rails, right, are creating differences in traditional markets. They are actually disrupting real world activities. So, for example, Figure Lending is now the number one non bank HELOC issuer in the United States. So, from issuance to securitization, they're saving about a 100 basis points give or take versus traditional processes.

Speaker 12

You know, I think the number one game in asset management is not to sell the product, it's to sell the outcome. I think we can all get on board with an outcome like that that they're using in their case providence, but they're using a blockchain to create a better financial outcome for the investor that buys the production and for the borrower who's borrowing the money. Neither side is, to Matt's point, touching crypto, right? To them it's just working in their existing flows. But figure lending is owning that in between.

Speaker 12

That's an example that as it becomes more apparent to people, you're going to see more of those things. And then I think it becomes a much easier conversation to the end of this year because they'll say Oh, yes, I got my HELOC off a figure. What's blockchain are they using? And then they'll understand that, you know, that now something a smart asset is occurring. In this case, it's a HELOC, but smart assets are being created and now these rails are really valuable.

Speaker 12

We're very close to that point.

Speaker 11

We're running out of time but the last question is an audience question. I want a snap answer each please. And I think Sebastian you sort of already answered it. The question is what percentage of institutional portfolio assets will ride crypto rails in 5 years? And I think you said 100% earlier, right?

Speaker 11

Yeah.

Speaker 12

At least in certain markets, I think we're going to get to 100%.

Speaker 13

Yeah. I think that's, that's exactly right. I just agree.

Speaker 8

Matt?

Speaker 14

In 5 years?

Speaker 11

5 years. Oh, 5 years.

Speaker 14

Very low. Very, very low amount. I would agree the end state 100% Okay. Or close to it. 5 years, less than 5%.

Speaker 13

Okay. Yeah. I, I, I wanna make clear, I didn't understand the terms of

Speaker 11

the question. So

Speaker 13

5 years. Yeah. I'm 100% eventually and slightly more than 5% in 5 years. I do think it's a longer term story.

Speaker 11

Okay. And Blu, finally.

Speaker 15

I, I'm along the same lines, 100% ultimately single digits 5 years out. But I think there will be jurisdictions that get to 80% plus in 5 years. I think I think Brazil gets there. I think Argentina may get there. So I think that there are going to be jurisdictions that make the move wholesale in a way that that really shows us what can happen.

Speaker 11

Optimistic note to end it on. So thank you so much. That's the end of our panel. That's the end of our time. So thank you so much to our panelists.

Speaker 16

Welcome to the Huberman Lab Podcast, where we discuss science and science based tools for everyday life. I'm Andrew Huberman and I'm a professor of neurobiology and ophthalmology at Stanford School of Medicine. My guest today is Robert Greene. Robert Greene is an author who has written more than 5 bestselling books, including The 48 Laws of Power, The Laws of Human Nature and Mastery. He did his bachelor's training at the University of California, Berkeley and the University of Wisconsin at Madison.

Speaker 16

Robert Greene's books are both unique and important for several reasons, not the least of which is that they explore the interaction between the psychology of self, self exploration and the psychology of human interaction, all rooted in history and modern culture. And at the same time in a way that pertains to everybody. I first learned about Robert's work from reading the book Mastery, which to my mind is a brilliant exploration and

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