Long-Term Investing Ideas in a Volatile Market
Simon recently spoke with a $35 billion global asset manager about how they're navigating the market volatility. The key takeaways are to think long term, tune out the noise...
March 21, 2023 – By Simon Erickson
Our “No limit” podcast features 7investing advisors Luke Hallard and Krzysztof Piekarski breaking down investing-related topics.
Episode 13 of No Limit focuses entirely on Luke schooling Krzysztof about the banking industry and the reasons and fall-out from the Silicon Valley Bank failure. Krzysztof follows this tutelage with his views on why blockchain technology and smart contracts are a powerful paradigm shift that has become all the more important in response to the lack of stability and transparency in the banking system.
But if banking failures aren’t your cup of Joe, fear not, we talk March Madness and which company we think should win the 7investing tournament vs which company might deliver the best real-world results. Shuffle the deck, deal the cards, good luck to all the players!
Luke: Hello, and welcome to another episode of No Limits with Krzysztof and Luke. This is a spooky episode. It’s number 13.
Krzysztof: That’s just superstition, right? The, the birds are chirping, the sun is shining, everything’s going smoothly.
Luke: You mean the entire world is not driven by the cadence of the No Limit podcast.
Krzysztof: It’s not what , where in the world are you right now?
Luke: Uh, I’m still in Lake Tahoe. I’m on day 68 of my ski season. I’ve got another two and a bit weeks to go. Uh, the mountain’s been closed for some time. Cause I’ve had so much snow. It’s, uh, like a re a record season. In the last sort of 50 years, I’ve never seen anything like it. It’s pretty crazy.
Krzysztof: I’ve never heard of a mountain being closed for too much snow.
Luke: We, uh, we’ve managed to ride a chairlift for the first time in a week yesterday, and it’s like riding through a tunnel. They’ve actually had to dig like the chair out it’s nuts.
Krzysztof: That’s crazy. So meanwhile, I’ve been on a isolated beach cuz uh, classes are out. So I have, um, Spring break started, uh, for me last Thursday. So I immediately took myself to a place with no in internet access, no gadgets, no nothing. I was on my hammock. I was drinking my pina coladas. Life is good.
What did I miss? Anything? Seems birds are still Yeah, like I say. Sweet. Okay. So do we even have anything to talk about
Luke: Yeah. Well, yes. It’s been a quiet week, isn’t it? Oh, I, I suppose there was nearly the complete collapse of the financial system that did happen a few days ago.
Krzysztof: Wait, what? I thought we went
I thought 2008 would’ve taught us everything we need to know.
Luke: It pretty much did,
Luke: was some Wrigley little bank that doesn’t quite fall under all of the capital requirements and the liquidity requirements that the big systemically important banks do. But anyway, we’re talking about Silicon Valley Bank and it’s probably a good way to kick off today’s podcast. Should I try and give an outline of what I think happened?
Krzysztof: yes, please, because I am a banking fool and I really don’t understand the ins and outs. I think you do. So give us the lay of the land, the big picture of what’s going on with Silicon Valley Bank and the the tremors, the earthquake tremors that everyone was feeling over the weekend.
Luke: Yeah, and those, those tremors are still quaking, albeit we do seem to have a nice, clear resolution at least. Uh, US depositors. So Silicon Valley Bank. Focused on supporting the tech sector, kind of banking almost clients that for some of the bigger banks, might be considered a little bit unbankable because they’re so young. Um, maybe pre-revenue in some cases, kind of a slightly unusual business model. And Silicon Valley Bank were interesting in that this was almost their entire client base.
You know, if they called themselves something a little less focused perhaps that had had a bit bit more of a broader business model, but they. All about banking, these kind of clients and what’s happened in tech over the last year, two years. Well, if you’re an investor in growth companies, you know, painfully in your pocket that many of these tech companies are really suffering and they’re hemorrhaging revenues, they’re hemorrhaging customers.
They still have all their cost base, and so they’re having to withdraw their funds from s v b from their banker because they’ve gotta pay their bills, but they’re not generating the same revenues. They’re. And so s v b, has been seeing quite consistent, strong outflows for quite a long time.
So the kind of deposit base is shrinking. Now, that wouldn’t necessarily normally be a problem for a bank. It’s not great for the bank’s business model, but it shouldn’t be like a mortal risk of the bank. But unfortunately, S V B did some kind of silly things that they shouldn’t have done. And the main thing is, Um, they didn’t hedge their interest rate risk.
I, from what I’m reading, like barely at all. But, you know, maybe, maybe there’s a bit of gray here, but they certainly didn’t hedge to the extent they should have. When you’re a bank, you want a balance like the maturity and the interest rates of your inflows and your outflows. You gotta kind of balance the books. And s PB unfortunately didn’t do that. They thought perhaps they were being smart and they invested the money they were holding.
A large chunk of it, like more than 50% of it in like government backed, uh, bonds and US treasuries, that sort of thing. But if we look at what’s happened also over the last 12 months, interest rates have climbed precipitously from like less than 1% to four to 5%.
Krzysztof: Hey, Luke. Could, could I ask you one, one clarifying question, which I imagine some of our listeners might appreciate? I’ve been told bonds are the safest investment vehicles you can get, right? Like, if you’re not gonna stick your money under your mattress, buy bonds from uncle. , that’s, that’s, that’s the, the big, uh, billboard on every highway.
Right. Tell me why that’s a apparently problematic.
Luke: Yeah. Well if you buy like a 30 year. At 1%, which is what you would’ve bought it at a couple of years ago when interest rates were super low. Well that’s on your balance sheet and you’re gonna earn that 1% over that long fixed term period.
So, super reliable and, you know, no risk of default from the US government. Um, but if interest rates rise, and suddenly you can get three or 4% by investing, like sticking your money in a regular bank or buying some, a newer issue of that bond or the old issue of that bond suddenly worth not a lot of money.
The value of it goes down cuz it’s only paying 1%, whereas like new bonds would be paying maybe three or 4% and that’s what happened to svb. They had a lot of their capital tied up in these super low-paying bonds, which were current at the time, if they’d been managing their interest rate risk, they’ll have been, , hedging this gap between the interest rate they’re owning and the interest rate they need. And that would’ve cost them money to do that. But that’s the nature of a bank. That’s kind of, that’s kind of the whole purpose of a bank. It’s, it’s, it’s its business model.
Um, and because SVB didn’t do any of the stuff, they kind of put themselves in this crosshairs of customers suddenly taking their money out. Not earning enough interest to cover those customer deposits, and suddenly they ended up in a situation where they had a run on a bank .
I’m Presumably they’ve seen this coming for some time. They saw that they needed to raise some money. To pay some of these customer outflows. Suddenly that spooked customers, they were like, hold on. How come my bank doesn’t have enough money to pay me? They’re having to raise money to pay out my deposits.
And then you had a run on the bank where all of the customers suddenly were flocking, literally queuing up in the streets, trying to get their money out, and the bank didn’t have it. So they’ve effectively gone into like the banking version of receivership over the weekend. And really good news for deposit holders is yesterday, Sunday, the 12th.
Um, the US government have announced that they’re going to make whole all us deposit holders. So, um, normally you’re only insured up to I think a quarter of a million dollars. Now the government effectively are making that an unlimited guarantee and they’ll make that money available today cuz we were all in a bit of a panic that the companies we are invested in, a lot of these little sassy type, fantastic little growth companies might be in really big trouble if they’ve lost like a huge chunk of their own balance sheet.
Krzysztof: All right, Luke. That’s a lot, that’s a lot for, uh, bear of low brain like me to process. So, can I rewind the tape a bit and ask you just, just for some clarifying points, going back to this concept of bonds are really safe. That is a thing, right? That is a, a thing in the investment world, right?
Like it’s one of the sa if, if you are very risk averse, invest in bonds and don’t think twice, right?
Luke: Yes. Yes,
Krzysztof: If I’m managing silicon valley Bank, and I think to myself, okay, I have a massive inflow of deposits from the venture capital world and I don’t wanna be egregiously stupid with it.
I’m gonna invest it in these, uh, really safe in asset classes, including, I guess, primarily bonds. only to find out. Turns out that in the situation of extremely quick rate hikes, the bonds lose value. But that loss doesn’t show up on the balance sheet, right, because of the maturity date, but MI as the management team acting irresponsibly.
And second piece of that question is, in hindsight, now that things are obvious, what they have done instead.
Luke: Yeah, there’s a couple of things to dive into there. Um, I dunno if I’ll do full justice to this, but actually. As a bank, your business model isn’t to take customer deposits and stick it in, stick that money in low-risk treasuries and low-risk bonds. Your business model actually is to loan that money back out at a higher rate than you’re paying, so you’re making, you know, like a small margin.
This is why banks have been a terrible investment and a terrible sector for the last decade or so, where we’ve been in this almost zero interest rate. Because they, you know, they have such a tiny margin. Now we’re in like a four or 5% interest rate environment. It’s actually great for banks that are operating effectively and managing their risk properly because they can earn a bigger margin because they’re loaning out money at the same time as they’re borrowing it.
Krzysztof: So what you’re saying is in this instance, even though bonds are classified as extremely low risk, it’s still an investment. It’s still one of those low risk. Doesn’t mean no risk.
Luke: precisely. And banks have to take risk, like, not take risk in, in that they, you know, the risk of going bankrupt, but they should be extending credit to their customers. Some of the customers who need money and they’re holding money, For the customers who have excess money, but they should be making a margin on the balance of their inflows and their outflows.
All banks hold some bonds. But SVB had like way, way too much in this low risk inverted commerce, low risk, um, asset class. They should have been lending out much more money.
Krzysztof: So in hindsight, the ratio of investment to bonds versus loans was way skewed.
Luke: And that would’ve been okay if they hedged that interest rate, like when they saw interest rates going up. you Have like an enormous financial risk management department and all of these big banks because it’s a hugely complicated job to manage your inflows and outflows plan, the maturity of all your.
Investments and make sure if interest rates move materially in any direction, you are kind of protected, but it costs you money to do that. You know, you’re paying to, to hedge in that way to sort of ensure your position. And svb, I guess they thought they were being smart and they didn’t do that.
Krzysztof: So that was my next question. You’re in the banking industry and you see the macro situation. You see the Fed being as hawkish as they’ve been in a long, long time. Interest rates are spiking. How do you not not do what you just said? I mean, is that just sheer incompetence or is there other unknowns that we can’t figure.
Luke: So if you’re a bigger bank, the rule used to be you were considered systemically important. , if you were holding an asset base of over 50 billion, and then I think maybe five or six years ago that moved up to 250 billion.
So actually SVB would’ve fallen into the old criteria. They no longer do. So what that meant is, an example. There’s something called, the liquidity coverage ratio, it’s like a funding requirement, essentially. It says banks that fall into this regulation have to have enough ultra liquid assets, basically like cash or, you know, near cash assets to cover a 30 day run on the bank.
Well, these rules don’t apply to S V B under these new guidelines because they’re the below the 250 billion, uh, watermark. So, you know, did they break the, the rules and the regulations? I mean, I think they probably. , but not as materially as you might think. Like they have some latitude to operate as they choose to, but it’s clearly incredibly irresponsible.
And like I say, they must have seen this coming for months and months and months, but by then it’s probably too late. They’re sitting on this huge, like paper loss. And they got forced to realize that loss because customers were withdrawing their. So they were sort of unlucky in a sense, but also the, you know, their irresponsibility and poor decision making.
Put them in a position that this bad luck could strike and, you know, strike them mortally as it has done.
Krzysztof: Yeah. When, when I’m sitting at the poker table, I, I know, uh, luck is going to enter the equation to a significant degree. And that’s part of the structure, right? What was the market cap on silicon? It was the 19th largest bank in the us
Luke: didn’t know that big. Okay. Could
Krzysztof: Oh, or, uh, maybe I just made that up. But it was pretty large, right? I don’t like hearing this, this, this idea that luck was involved. A gigantic bank. I mean that they got unlucky somehow. I mean,
Luke: yeah. Oh, no, I, I totally agree. Like it’s a situation of their own, uh, machinations and like, the thing that’s horrific, really, like I, I, I applaud the US government for the steps they’ve taken kind of necessary. For them to underwrite depositors. Like if you are like a, not a Silicon Valley company, it’d be like a little mum and pop business.
Right. Um, well, okay, here’s a real good example. A true example. So you’ve got like a bunch of mums making bank every month by selling things on Etsy, like the marketplace for handmade like arts and craft. And over the weekend we had the news that Etsy were unable to pay out some of their sellers, like their customers on the platform because they couldn’t get access to their funds cuz they had their money tied up in S V B.
So, you know, the US government had to step in in this way, otherwise the repercussions weren’t just to like these hedge funds. And you know, these like rich bankers that have impacted every. So that would’ve been really, really ugly. So I’m, I’m, I’m glad that’s happened. Like a bunch of companies I’m invested in have kind of been rescued, but if you’re an investor in svb, your share capital is worth zero now, and that’s kind of as it should be.
Your company mismanaged things pretty badly.
Krzysztof: So a follow up question for you, uh, I think, we’ll need to go into the fallout in the venture capitalist firms that might have been affected, not affected and all that. But before we get there, Luke on the most fundamental level is not the Federal reserve’s literal.
like their little, uh, shingle outside the window that says if there’s a bad, say situation at your bank, like a bank run, our job is to shore up, the temporary outflow of cash so that you remain solvent. Is that not, not like a way to understand.
Unlike say 2008, where I guess the whole system was infected via over leveraged useless investments, right? that in this case, the bank had this say. Case of poor management plus bad luck, but in spirit, it was not a malevolent actor and therefore the Fed’s job is exactly to do what they did.
Luke: I guess this, this deposit protection scheme we have, we call it the Fs c s in the uk. I think. In the US they call it F D I C. So that exists to provide these protection to depositors. About the scale of this kind of wipeout of, of these big corporate accounts, the majority of which had way more than the $250,000 insured limit.
Like that. That was, that was an extraordinary situation that did require a specific decision from the government. And they’ve, I think you’re probably right, they’ve taken the only decision they could take, um, because of the risk of kind of panic and fear in the streets and maybe, you know, a mass run on all the banks.
Krzysztof: I guess my question is, is, is more why was it even a decision to be made? That’s, I guess what I’m asking. You have one job, right? I mean,
Luke: find the cash, you gotta find the cash from somewhere, right? So, um, you know, even if you use the US government, I think having the president involved in this decision probably is the right thing to do, plus it’s good optics. And the other inter really interesting thing here actually is, um, so the US government are in the long run.
They’re gonna make money out of this, um, because like fundamentally this is a liquidity problem right now because those bonds are worth less than they should be. But if you had like a huge long time horizon and essentially infinite pockets, which is what the US. Has, all they need to do is they’ve, they’ve kind of bought up these positions.
They just need to hold these bonds to maturity like 30 years or so time and they’re gonna get their money back. So, um, it’s just this, it’s kind of a temporary problem, um, that a private corporation isn’t in a position to deal with cuz they’ve kind of created this problem for themselves. But actually that’s, that’s not a big deal for the US government.
And funnily enough, my ex-employer h s. I’ve, I’ve jumped in and taken this role in the uk. I saw it announced just this morning as I was checking the newsfeed. So, um, brokered by our Prime Minister and a few other folk, um, HSSBC have now bought up the UK arm of Silicon Valley Bank for one pound. And if, if Hssbc can integrate this into its UK operations, actually they’re probably gonna make a decent amount of money out of this.
um, and take on like a whole bunch of really interesting clients, which would probably be good for the bank too.
Krzysztof: So yeah, I guess maybe it’s a good time to segue . I think recently I’ve been going on and on about this concept of being contrarian, which is sort of really related to, you know, be greedy when others are fearful.
But, Hmm, it’s not quite the same thing because, I guess greed and fear are emotions, whereas being contrary is saying something that has nothing to do with emotion but is contrary to. , the majority of people looking at the same situation , which is a hard thing to do. I think that I’ve spoken about that, how hard emotionally, psychologically it is to say something that is, you’re the only one in the room saying this.
Right? But those are the situations that I love as an investor, because that’s really, if you’re right and you’re contrarian, that’s, you’re also rich. So . Right now I’m looking at the companies that are falling because they have some ties to Silicon Valley Bank, and I’m perceiving a temporary, hysterical overreaction.
And now I’m not talking about the banking industry, right? I’m talking about just the, the, the companies that did banking with Silicon Valley because. Unless I’m being extraordinarily naive, I am seeing the government stepping in there is insurance up to whatever quote is, and yeah, it’s gonna be messy and there’s gonna be a lot of time it takes to untangle the, I mean, all of that, right?
But in the end, if I’m an long-term investor and I’m thinking even two years out, and I know my, my company was involved with svb, but you know, they’ll be fine. You know, maybe temporarily, their balance sheet’s not gonna look as pretty. As assumed then why would I not try to take advantage of some of these, uh, sale prices?
And in fact, personally for the record, uh, with one of my recommendations, uh, I did just that, uh, this morning. In fact, when the stock was opened up, uh, I don’t know, it was like something like a 30% haircut in just the past couple days. Accentuated by the fear over the. and my own process was, is the company fundamentally solid or not?
Even if it takes a short term hit, and my answer was, it’s fundamentally solid or solid enough that this is an overreaction. Therefore, let me be contrarian and buy more shares. Tell me why I’m stupid to have done that.
Luke: No. No, not at all. I, I fully agree. In the end ultimately, perhaps, maybe I’m understating it a bit of a nothing burger. Now it looked like it could have been a complete disaster. Now the government have taken that step and they’ve said everyone’s gonna have access to a hundred percent of their cash.
Like today should be no impact, hopefully to our, um, our fantastic little growth companies. Um, prob probably there’ll be some like operational complexity for everyone cuz I. CFOs are having emergency meetings all around the world right now and saying like, guys, where do we have our money? Um, we need to spread it around a little more.
Um, so I think we’ll probably see some of that stuff, but that’s just kind of, you know, background, operations and decision making. Um, but yeah, if you’ve picked up some stuff at a 30% discount a few days ago, that’s probably gonna serve you very well in the years.
Krzysztof: In Right. This reminds me too that the, the operational excesses that we saw in 2122.
I guess Elon is the poster boy for saying all of these companies are bloated to, you know, like a blo, I don’t know, bloated like a white, like a fat, I was gonna say fat cow, but
Krzysztof: but I’m not sure if that’s a good metaphor. Anyhow, they were already in the process of ex of, of extreme cuts. You’re right. All, all of the big tech giants, right.
Krzysztof: it seems to me that this is yet more incentive that that sends out yet another signal to everybody that unless you become, as a, as a, uh, chief executive in your company, unless you put cash in operational efficiency and excellence at the tip of the top and you leave yourself. runway for the next, I dunno, two years, then you’re being negligent and then that, so my prediction is, I guess that from an investing standpoint, that the companies that are already cash flow positive and operationally positive probably will end up growing bigger and stronger faster. Because they’ve been doing it all along and that the companies that were somewhere caught in the good enough. Or excessive kind of structure, they’re about to have right severe, uh, layoffs.
Luke: And we’re seeing that right now. You know, even before this weekend, everyone’s tightening their purse strings, seeing what’s coming with the recession, and then they’re trying to make sure like shore up their balance sheet, shore up their outflows. Make sure they can kind of weather this storm.
But you’re absolutely right, like companies that are already free, cash flow positive, um, and growing at a nice rate, I think we’ll see them accelerate versus those that are, were perhaps sort of struggling before this environment was upon us.
So Chris off, that was a pretty, uh, light runthrough of what’s been happening with SVB and in the markets generally. Should we have a quick reflection on what’s happening in March? We’re running March Madness at seven. If you’ve been following Simon Erickson on Twitter, you’d have seen him tweeting out every day last week.
Uh, our March Madness brackets and we’re pitching 16 fantastic companies up against each other. And I’m not really a sports guy, but we got these brackets, it’s gonna like 16 to eight to four, and then we’ll have like an ultimate winner at some point. I. The championship is on the 23rd of March, so if you wanna check out March Madness, go look at any of our Twitters or go to 7investing.com/marchmadness.
If you are on the Twitter, you can have a vote, have a say in who you think should go forwards to the next round. I’ve got my favorite horse. I wonder if. You have someone you would predict as being the winner, noting that we are recording this on the 13th of March, and so we have, we’re still in round one.
We’ve got no idea who’s really gonna make it to the end.
Krzysztof: I do have my, my horse and it is, uh, it is Tesla.
Luke: Tesla, right?
Luke: market cap today, you say you think Tesla’s going to deliver the greatest investor returns over the next three years up against those other 15 fantastic companies.
Krzysztof: Yeah, I think Tesla’s gonna win the tournament, but I’m not sure, I think other companies have a better shot at producing overall returns, from today’s price. , but tournament wise, it is two separate questions.
Luke: You’re right. Tesla’s got a strong chance, right? It’s a divisive stock, but probably an investor favorite. So decent chance that does win the tournament. But if we do think about who’s actually gonna deliver the, the greatest returns from its current valuation over the next three years, I’ve got a bit of a dark horse here.
I don’t think it’s gonna do well in the tournament, but it could be the best return. I’m going for Disney.
Krzysztof: No. Get outta here.
Luke: the house of the mouse. I doing like woefully mismanaged over the last year or so with all this like changing in leadership. They look like they’ve done a great job with Disney Plus, but actually the economics of streaming don’t seem to be working out.
But we cannot forget this crazy portfolio of intellectual property. They have these beloved characters and if they can just get the business model back on. like a sub $200 billion business. They could like multibagger from there. Can Tesla like double or triple its valuation over the next three years?
Maybe, but my money’s on the smaller company.
Krzysztof: I do not think it’s impossible for Tesla to triple from these prices, given what’s coming in the ener, what they’re about to reveal in the energy, their energy revenues with the mega packs. So I’m taking it all back. I think Tesla could both win the tournament in be the actual correct . The, the produce the largest gains. My dark horse though is, I hate to say it because, oh my God, I bleed into, I have nightmares, flashbacks, but I think upstart would be, has the greatest.
dark horse potential, especially if they survive the liquidity crunch and if the, there’s a fed pivot sooner than later and banks start getting serious about becoming more efficient with their processes. Upstart has such, such immense upside. , uh, they are not to be trusted. I’ve learned that the extraordinarily hard way, so yeah.
Luke: Good stuff. So you’ve got our predictions. I think we’re probably both saying Tesla for the competition, but maybe it’s Tesla versus Disney versus Upstart. For the real returns, if you wanna have your own say, go check out our Twitters. I’m @7LukeHallard Krzysztof, your @ 7flyingPlatypus.
Or go check out seven investing at Twitter and go have your own vote in the March Madness. We’re voting every day this week and next.
Krzysztof: Sweet. Shall we talk a little bit about smart contracts Luke
Luke: Let’s do that. I’m keen to hear what you’ve, uh, gleaned from reading the Arc Big ideas deck.
Krzysztof: I didn’t really learn much because I’m, I’m invested in this space in one particular, uh, company, which I’m happy to, to mention because at seven investing, we don’t do, we don’t offer crypto recommendations, but one of my highest portfolio holdings is chainlink. It’s complicated, so I don’t really wanna get into the details, but it’s a defi decentralized finance Oracle.
that is essentially a bridge. It works as a bridge of data from the real world, and it helps that data go on chain into the crypto world. That’s kind of, its, its function and the thesis is there can only really be one such Oracle network. Kind of like there could only really be one internet. You know, if you.
I’m sure there are multiple kinds of little sub-nets, but really there’s just one predominant network. And my thesis is that chain link will be that, that dominant, uh, bridge. But that’s neither here nor there. You and I were having a kerfuffle of, uh, . There. There I look. I guess I love that word. Uh, because, uh, you threw some fighting words my way when I picked.
Coin base to advance in the tournament. And I was wrong. And, uh, mistakes were made. But correct me if I’m wrong, you, you squeezed my shoes over. Crypto being funny money or that whole space being funny, money. Is that accurate?
Luke: uh, yeah, I got some crypto, but I’m kind of skeptical about that part of my portfolio. Tell, tell us, tell us why smart contracts are the future, though.
Krzysztof: So here’s the thing. I mean, this couldn’t be more apropo for the moment we’re in. The investment case is actually extraordinarily straightforward.
How simply can I explain this Straightforward investment case. Blockchains are the technology. I think of it as the math. The math, and the comput. . So I just think of it kind of as a, a global computer. When I think blockchain, I think global computer that, that handles transactions in the magic of this global computer is that anytime you have a transaction that runs on it, it’s transparent and it’s visible to everybody and there is no way to alter it. It’s a public ledger, I guess is, is how I think of it right now. What does that have to do with smart contracts? Smart contracts are, if you think about it as, uh, as applications that live on top of this computer. that offers you transparent receipts.
So the world we live in now primarily is a world in which, if I wanna send you $10, I go to my bank in some form or fashion, right? And via the banking system, I get my money from me to you. and now all is fine and good, right? Because the bank, the bank has its shingle and, and it has, it looks pretty. And the lobby has, has friendly people greeting you.
And most of the time it certainly does work most of the time . And that’s why people don’t pay attention to it. And this is why the moment we’re in it’s the water fire hose moment. You ought to be. Think to yourself, wait a second. In 2008, even the big banks that said, trust us, were proved to be outright liars.
I mean malicious, malevolent liars, who basically were doing such shady things that it was borderline criminal, if not criminal. I can’t, I mean, some of it was criminal, other was loop, holy, whatever. Right? But the point being was now we have what happens over the last five days, and it’s not the same category to me.
But nonetheless, if I’m an honest company, doing the good work, putting in the hundreds of hours, working on the weekends, right, and I’m banking with Silicon Valley Bank, again, trust us, we’re fine, we’re good, we’re honest. We’re doing right by you. And I’m then. Out of seemingly nowhere. Oops. Your money is maybe gone, but you sure as hell can’t pay your payroll next week.
So good luck. That whole trust us piece is, I don’t know how to better explain it. I could feel myself getting emotional cuz I’m throwing my jabs right now if you can see me and, and the YouTubes, but what I’m saying, Uh, even if 99% of the time trust us ends up working fine, that 1% should scare the living Jesus out of anybody that handles money.
So what does the smart contract and what does the Defi protocol that runs on blockchain offer? It basically says once you start transacting via smart contracts, you are taking all the middlemen out. and you’re going to program in some condition. Uh, when Luke is right about the March 23, man, this contest, I’m gonna wire him the hundred bucks I owe him at this date.
And there it is in the computer and there is no. The money will then be taken outta my account and into Luke’s, and there is no percentage lost and there is no the middle man. The trust us piece basically gets completely taken out of it. So that’s I think the, the primary case for, for smart contracts and from.
perspective. I just can’t unthink this. It’s like one of those things like once you see it, I can’t unsee it. I don’t understand how it, all of finance doesn’t move in this direction. And by the way, important point of clarification, the stuff I’m talking about is very different from the centralized platforms handling crypto stuff like Celsius and Voyager and Block five, and, uh, ftx, all of those things were central. In other words, the, it, it was using the crypto name as false advertising. Crypto, by definition is decentralized, meaning nobody owns it, therefore nobody can corrupt it. And so while all of that, that SH show was collapsing, The decentralized finance players, we’re still doing the work, we’re still growing the blockchains, we’re still writing the applications and the flows from all of that remain steady.
And what I’m seeing as of this morning is, by the way, Bitcoin is up a lot and uh, chain Link is up a lot. All of these things. My claim on this show to you is our honest players. And that the whole thesis investment is, this is honesty in it’s cruelest Ross form. There is no such thing as manipulating your, your numbers.
And that’s the other thing I want. I remembered Luke, the big concept here really is something called proof of reserve. Don’t, in other words, it applies so beautifully to the Silicon Valley Bank thing. just because your balance sheet says you have so much money in this and this form, or your CFO or CEO says, you, you have enough deposits…no way, prove it to me. And via, via smart contracts. , that’s basically what it does. It’s like public, like publicly. You could at any moment see exactly how much some entity has or doesn’t have. To me, it solves one of the greatest problems, really. I mean humanity still has left, these kinds of tremors in the, in our financial institutions would, could pretty much bring us back to the dark ages if it all does go the. Is solved via smart contracts. So boom, boom, boom,
Luke: I’m, I’m, uh, I’m not gonna argue with you. Uh, I. The fundamental technology, you’re right about my only block is that, um, there’s no real true application of this stuff right now. Um, it’s not to say there will never be, but there’s no, uh, no one’s using smart contracts in any material way beyond like a bunch of super like niche nerds kind of messing around, trading stuff.
No one’s using this for anything at scale.
Krzysztof: Uh, at scale yet, uh, I’m glad you qualified that because I was about to come at you. Come back at you, and unfortunately, I have to go. So it seems like we need to, um, we need to talk about the other piece of this, which is, uh, Bitcoin and then the NFTs and all of that, because I’m gonna, I’m gonna take your claim and, uh, and, and put it through the ringer.
Luke: We’ll pick it up in episode 14. We can resume our sparring.
Krzysztof: Yeah, so I guess today was, uh, kind of quick and dirty, fun with finance in the banking system. Episode . For anybody listening that is having direct difficulty because of the situ. , my heart goes out to all of you because this is incredibly stressful moment.
Uh, I hope everybody makes it through. Okay.
Luke: Yep, 100%. I think we’ve all gotten away with it as investors, but uh, it was, did feel like a bit of a close call. Anyway, a kind of happy place to leave things. Perhaps maybe we’re recording in two weeks time. Maybe we’ll see, uh, if some of those repercussions played out or not. Plus, we’ll see if, uh, predictions of March Madness came true.
Krzysztof: All right. Yeah. Looking forward to seeing you soon. Luke.
Luke: Okay, dude, if you enjoy today’s episode, uh, do us a favor and share it with a friend. Otherwise, we’ll catch up with you in two weeks for episode.
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