Cathie Wood: We Are Still In The Early Days Of Digital Assets

My name is Cathie Wood, CEO and CIO of ARK Invest. When we were going out in the early days, nobody believed us. Economic activity is energy transformed. I think the market's never been more inefficient than it is today.

Thank you so much. I'm happy to be with you, Robbie and Andy.

Sure. Well, you mean the innovation space or the crypto space?

Yeah. Well, the seeds for everything that's going on today, they were planted in the early years of my career. So in the 80s and 90s, I watched seeds being planted for everything that we're seeing today. We didn't get the cloud though until 2006. So that tells you the 80s and 90s ended with the tech and telecom bubble, which simply happened because investors were just throwing capital at anything that was .com or internet related. And unfortunately, the technologies weren't quite ready and the costs were way too high. So, as I said, the cloud didn't even exist until '06 with AWS. And I remember back then trying to explain to investors and advisers what the cloud was. It was such a foreign concept to them and we didn't get the really big breakthroughs in AI. So deep learning in 2012 and then even more important, transformer architecture in 2017 which effectively led us towards ChatGPT and natural language programming. So again, too much capital chasing too few opportunities too soon. We went through the bust and today we're in the opposite situation. We're ready for prime time with five innovation platforms as you say. Thank you for doing your homework involving 15 different technologies that are all converging and investors are fearful. They're really scared. As a portfolio manager, I much prefer operating in this environment than in the tech and telecom bubble. It was crazy back then. So I think and I know many people find this hard to believe. The valuations today are much lower than what we saw during the bubble and the technologies are ready and most importantly the costs are dropping at such an incredible rate that these technologies can be made available to more and more industries and more and more individuals. So that's how it started. Why did I start ARK in 2014? I started ARK because thanks to the tech and telecom bust and even more so the '08-'09 global financial crisis, we now have risk averse investors certainly in the institutional world, less so in the retail world. So risk aversion and I saw our industry go passive. That caused the boom in ETFs to begin and then even in the active world, benchmark sensitive. So watching portfolio managers really guide their screening for ideas with benchmarks. We don't do that. The screen for our ideas is our research, our original research. So yes, five platforms, 15 technologies and I think research has to be reorganized. In the traditional financial world, you'll see research organized by sector or industry or sub-industry. Many firms have five consumer analysts, five healthcare analysts. We think that in order to capitalize on innovation correctly and efficiently, that you have to set up a research team by those 15 technologies. Why? Because they're going to cut across sectors, cut across industries. So you have to be looking at the technology and not siloing responsibilities by industries.

I think this convergence is confusing. Tesla is a great example. Most directors of research handed Tesla to their auto analysts when rightly it should have been handed certainly at the very least to the technology analyst but even more specifically by technology to three people collaboratively: robotics analysts, energy storage analysts, and AI analysts. Instead, it was handed to experts in the internal combustion engine and human-driven cars. We're moving away from that world to electric and autonomous. So I think that is a source of the confusion. I think AI is moving so quickly and impacting so many industries at once that it's a little bit of a shocking experience and I think it's taking directors of research some time to say okay how do I organize correctly to be able to understand what's going on here. So they need yes by technology but then also a very collaborative environment. Instead, in the institutional world at least and I came out of it so I saw it regularly, if an auto analyst was given responsibility for the stock nobody else should touch it. That world has to change because again these technologies are converging and analysts have to work together in order to understand the potential associated with these stocks.

No, not back then. Actually we started looking at Bitcoin, talking about it, at my last firm. And I brought with me to ARK the lead analyst who was the person most intrigued by Bitcoin. He is now our chief futurist, Brett Winton. And I remember talking about it at our last firm and it was simply a curiosity. Okay, let's see what happens with this. In 2014 when I founded ARK, we actually had instead of five innovation platforms we had four. We had combined AI and blockchain technology into something called the next generation internet. And that's actually still the name of ARKW, one of our funds focused in those areas. And the reason we did that is we had the deep learning breakthrough in AI. So AI was getting more and more attention but it was still very fresh, very young. And then blockchain technology, we were more intrigued but we still didn't know if it deserved its own breakout, if people would even, if their eyes would glaze over just in a lack of interest. So but we were very interested and we wrote our first white paper on Bitcoin in collaboration with Art Laffer in 2015. And we simply were asking the question, could Bitcoin serve the three roles of money? So means of exchange, store of value, unit of account. And Art Laffer, I'm not sure if you know Laffer Curve, he's famous for that in the fiscal policy arena, but he's also a monetary scholar. His mentor was Robert Mundell who won a Nobel Prize for his monetary theory. And so we put our thesis in front of Art and from an economic point of view he helped us tremendously and I have an economics background. So I began to understand Bitcoin in a profound way because he said to me at the time, he said this is what I've been waiting for since the US closed the gold window in 1971. And I said, 'Okay, Art, that sounds like a pretty big idea. How big could this idea be?' And he said, 'Well, how big is the US monetary base?' And back then it was 4.5 trillion dollars. Today it's a little over six trillion. And Bitcoin was the equivalent, we called it network value at the time, of six billion dollars in market cap. Think about that. Six billion. And he was saying trillions. So I personally invested right away. And we looked around for the best way to gain exposure for our clients and we had to ask permission. New York Stock Exchange, SEC, we had to get through some regulatory barriers or bottlenecks and we found GBTC. GBTC really I think they had to go through a year of seasoning before they could launch it. And so that's where we started. Bitcoin at that time was $250. We took our first position in the summer of 2015 when Greece was threatening to leave the EU and we noted that wait a minute whenever there's a headline like that Bitcoin goes up. Hey this is pretty interesting. It's acting like a hedge, a hedge against disaster. And so we thought wow this could be not only a risk on asset but it could be a risk off, it could serve both roles at different times. So pretty interesting.

Well, I think there are a few things going on right now. And it was interesting. So we took our first position in 2015 and we were really made fun of back then. And you may or may not have been around and in the industry at that time but many people thought this was just a marketing gimmick and that's when I really knew that wait a minute we might be on to something big here when that many people make fun of you or just dismiss it, and a lot of it was dismissive. That makes me even more interested in a technology. So we have a global monetary system that really is Bitcoin, Bitcoin owns that space. DeFi. So Ethereum, Solana, I think they are running with that space. Hyperliquid giving them a bit of a challenge as well. The institutional interest. I think we needed Larry Fink actually to change his mind because he was saying, he was the leader of the pack almost and it was interesting that the leader of the largest asset management firm in the world was making it his business to dismiss Bitcoin. But his conversion was so extreme. And his conversion had to do with a vision and imagining the tokenization of everything. Finally understanding that wait a minute, the internet was not built with a financial layer and because nobody understood that commerce and investing would take place on it. In the early days it was just information exchange. Some people thought it was just for gambling and other illicit activity as much of innovation gets accused of that in its early days. And so I think his opening his eyes to future tokenization of everything was really important for the institutional investor and product development specialists to begin to imagine participating in this new age. So I give him a lot of credit for that. At first we were battling him and Jamie Dimon but then when his conversion took place it gave the industry permission to say wait a minute if I don't get on board here I might lose out if he's saying this is important. And of course BlackRock has something called Aladdin which is a technology platform for asset managers. Well, if he's saying it's important, then I better learn something about it. And so now, yes, and I also think critical critical critical to DeFi was the evolution of stablecoins. We just did a podcast with the founder of Binance, CZ, yesterday. And both of us agree that the biggest surprise to us from the early days of Bitcoin to now was the evolution of stablecoins backed by fiat. That also was quite anathema to sort of the crypto ecosystem in its early days. But now you see the Bitcoin OGs fully supportive. I mean, Giancarlo and Paolo at Tether, hugely supportive obviously of stablecoins, but they were from an OG point of view, one of the first two. And so I think they've brought the world along into this concept of stablecoins, which is the bridge from TradFi into DeFi. Importantly, we thought Bitcoin was going to serve the roles that stablecoins do now and certainly in emerging markets. But even in emerging markets, the Bitcoin community considers stablecoins the humanitarian kind of stepping stone into the crypto world. Humanitarian in that most people in emerging markets cannot withstand the volatility of Bitcoin and other crypto assets for their day-to-day living, you know, their hand-to-mouth. As wealth grows and we agree with this as well, they will move from stablecoins into more investments within the crypto ecosystem. So I think that's the other big surprise and has become the glide path for DeFi. And so the big question there is for us and we were trying to noodle it through with CZ yesterday, you know, is this a winner take most world, the stablecoin world? And the network effect would suggest yes. And I think the delays in the Genius Act and the Clarity Act have given Tether and Circle, USDT and USDC, really more running room to enjoy the network effect. So ironically regulations which should spur more stablecoins, the delay in those regulations have allowed for more of the network effect than otherwise might have happened. CZ thinks there's going to be a proliferation of stablecoins and our team does as well. Lorenzo, David, and Ry here at ARK, they do believe there's going to be an explosion in stablecoins. Whether or not that happens, I think everyone believes there will be consolidation. And again, based on the network effect, to just a chosen few.

We would tend to agree with you. So in the world of innovation generally, what happens is you'll end up with pure plays that can move faster and become more creative, just more nimble and then you'll have the traditional players embracing these new technologies first to lower their costs, increase efficiency, see increased productivity. But then those in the traditional world who do so the most aggressively and thoughtfully end up consolidating the more traditional world. So the easiest example there is when Amazon happened upon the scene and we were in the internet bubble I think the prevailing wisdom was oh my gosh traditional retail is going to be destroyed and of course a lot of boutiques have been displaced and disintermediated by the internet but if you look at what Walmart has done in particular, Walmart, you'll see how it has used the internet to build an online business and the guy who built it, I think they bought Jet, I think that was the name of the company, and that has ballooned and taken a lot of share from smaller traditional retailers. So Walmart has consolidated the traditional space. But then you have Amazon which is the big dog out there and growing much more quickly than Walmart but they're coexisting right and in fact what we're seeing Walmart do now which could impact Amazon is it's going very aggressively into drone technology and drone delivery in a way that I think Amazon has struggled to do so. And the way it has done so is working with companies who have worked closely with regulators and the regulators have been more forthcoming and enabling Walmart to move into drone technology than Amazon has. It's made a few blunders with the regulators and has been held back in terms of its drone technology and it was way ahead of Walmart. I remember in the early days of ARK writing about Amazon being on its ninth generation of drones and now it's just made some blunders I would say in its drive to pursue that technology. In the world of crypto likewise, we're going to have the traditional players embracing this technology. It's very interesting to watch JP Morgan in particular especially since Jamie was and still is in many ways the biggest holdout when it comes to Bitcoin. But you know he is letting his technology team overrule him and letting client demand overrule him as JP Morgan approaches this technology. In terms of watching DeFi build out, I think the pure plays are going to be, there'll be the network effect there. You know, Ethereum, Solana, Hyperliquid, we'll see. We would place our bets on them and we are placing our bets on them. We've bought some DATs for our ETFs. Bitmine Immersion is one. Solmate in the Solana space. And of course, we're tiptoeing in. We knew there were just too many DATs being created and that there would be significant fallout. And now because we post our trades every day, you'll see we've been tiptoeing back in a bit. Or we've been moving towards more pure play expressions of Ether and Solana when we're allowed to. Some of our platform providers do not want us to own a Bitcoin ETF certainly in the flagship or the Ether or Solana ETF. So we have to work with what our platform providers want and so you've seen us gain exposure there. So yes we think the DeFi world is going to be explosive. It has been already to some extent. We know there's been a lot of controversy about layer 1s, layer 2s, where will the economics and where will the value accrual be? And that's still sorting itself out. So, we're paying a lot of attention to it. But we still think the big three, or the big three I'll include Bitcoin especially now that we see wrapped Bitcoin and see it migrating to other platforms. But we would go with the big four then as I've just said.