Nic Carter is, formally, a partner with Castle Island Ventures, where he guides investment in public blockchain projects. But his influence and stature in the crypto community has exploded over the last two years thanks to his brain, not his title. We called Carter up to talk about that unexpected journey, the problems and potential of blockchain, and how cryptocurrency is like a Massively Multiplayer Online Role Playing Game.
How’s your morning going?
Not bad. Really busy here. We’re putting the finishing touches on this startup we’re incubating out of our fund, Coinmetrics. It’s something that I started a long time ago, and now we’re setting it up as a startup.
The first thing I wanted to talk to you about is, I noticed you have an M.A. in philosophy. I’m curious how that training might have influenced your thinking about cryptocurrency or finance.
I studied philosophy at St. Andrews, a small university in a kind of fishing village in Scotland. I guess they called it an M.A. because it’s a Scottish university, but in the U.S. it would be considered a B.A. My main focus was ethical and political philosophy. And more so than anything I’ve done subsequently, that was really useful for me to take stock of cryptocurrency, especially the political side.
I see echoes in social contract theory all the time. Especially when you have projects that are trying to introduce full-stack governance so that these new digital commons can come into existence, and the token holders can govern them collaboratively. I think everyone would benefit from stepping back and looking at some of the prior art, and understanding that we’re tackling these very political problems of governance that have existed for hundreds of years.
Essentially, they’re harkening back to enlightenment ideals, and to thinkers who are often really neglected. I am often a little puzzled that the people designing the systems are comp sci PhDs. There’s nothing wrong with that, but I think a more reflective take would be useful. Especially considering the really high stakes.
What we're trying to do is create a new social contract that’s codified in some way. So it's worth revisiting the canon there and looking at Hobbes and Rousseau and Locke.
It’s interesting you say that, as a working VC. There must be relatively few people in the financial and investor class with that sensibility.
Well, of course I’m going to talk my own book, but I think there are a few investors that are very philosophically minded. There’s this interesting debate now about whether allocators should have a technical or engineering background given that it’s a technical market, or should just be macro, big-issue thinkers. And I don’t claim to be particularly technical.
Who are the philosophers people in the space should read?
What we’re trying to do is create a new social contract that can be encoded or codified in some way. So it’s worth just revisiting the canon there, and looking at Hobbes and Rousseau, and Locke to some degree. John Rawls is a key linchpin here, because his most influential contribution was asking: How should we design a society, and how should we orient our minds, if we want to decide how to allocate resources fairly?
He came up with this thought experiment, the Veil of Ignorance. The idea there is that if you want to have allocative strength in a society, you should reason assuming that you don’t know what your future position within that hierarchy will be. That will let you make decisions that are as fair as possible. And that’s extremely relevant, because if you talk about airdrops versus proof of work distribution, versus token sales, versus ICOs—all those end up having significant effects on who is actually allocated the new currency or the asset.
We’re continually experimenting with this stuff, so it’s good to have an appreciation for some of the influential political thinking.
You mentioned St. Andrews is in a small fishing village in Scotland. How did you end up going to school there?
My family is British, and I wanted to reconnect with my roots. I was born English and then I grew up in D.C. I stayed in Scotland for my master’s [in finance], too. I really like Scotland. If you’re a golfer, St. Andrews is a great place.
ICOs are selling you air, with no recourse whatsoever.
Your affiliation now is with Castle Island VC, but a lot of your profile in the community just comes from being a good writer and a really clear thinker. Which of those came first?
The Castle Island role probably wouldn’t have happened if I hadn’t, not to sound full of myself, if I hadn’t made a name for myself as a blogger. It’s funny that there’s such an occupation as a Twitter personality, but I guess that’s what I am.
The chronology is that I was completely anonymous, just basically a bitcoin or cryptocurrency enthusiast, from 2013 to 2016. I didn’t write anything or say anything publicly. And once I got my master’s in finance, I felt a little bit more empowered to actually post. I also learned some better data analysis skills, and started posting a bunch of interesting charts. Not technical analysis, but proto-Coinmetrics stuff. Coinmetrics covers on-chain activity to try and determine the ground truth about the usage of these assets.
Then I started blogging more expansively about bitcoin, and about the language that we use in this industry, usually from a more critical perspective. My master’s thesis was about corporate governance of crypto assets, in particular ICOs. I was comparing token holder models to shareholder rights: When I buy a token, what am I buying? What kind of rights do I get?
And basically the conclusion is that ICOs are selling you air, with no recourse whatsoever. And that has always colored my view on them. I wrote that in early 2017, so I to some degree preempted a lot of the insanity that took place later on.
You mentioned technical analysis. Do you think that approach to individual crypto assets is relevant at all at this point?
I’m sure many traders have used it to to good effect, but I believe that most T.A. signals can be reduced to an algorithmic understanding. And then if the sophisticated quantitative funds were to enter the market, they can easily just introduce algorithms to trade on those signals far more effectively than humans do.
To me, T.A.’s something that may have worked in the last few years, but it’s not a productive thing to learn, because inefficiencies in trading are guaranteed to stop being useful once they’re employed. That’s the law of finance, almost. The cat’s out of the bag.
I’m fascinated by the rhetoric and presentation of technical analysis columnists and YouTube videos and things like that. I wonder what viewers and readers gain when that knowledge is publicized, and presented as insight.
I think the business model is establishing credibility, and then selling memberships to a paid Telegram group.
A lot of the financial journalists that would have been really well equipped to cover this stuff have refused to give it the time of day, because it was so subversive.
You recently wrote about how how terrible media coverage of cryptocurrency is. What is your advice for an organization that’s trying to come at it fresh, and do better?
There are a few problems with crypto journalism in general. One that I’ve pointed out a few times is that as a new, hot industry, a lot of the really solid analytical talent went to the really lucrative jobs right away, so there’s a dearth of good journalistic talent.
And it’s such an alien thing to conceive of—non-state money, new kinds of pseudo-equity, decentralized organizations—that a lot of the financial journalists that would have been really well equipped to cover this stuff have refused to give it the time of day, because it was so subversive. The Financial Times, for instance, has notoriously been super anti-crypto. That’s a shame, but I think it makes sense. If you’ve been covering commodities forever, I don’t know where a virtual commodity fits in your set of mental models.
Then there’s the issue of conflict of interest. A lot of the major publications are affiliated in some way with entities that seek to gain from the coverage. And you can try and firewall the editorial and the news desks, but in practice, I think it’s been kind of sloppy.
There’s also continued debate about conflict of interest ethics for individual journalists.
That’s totally unsolved. It’s very well understood in equity markets, you probably shouldn’t have a position in like a small cap stocks you are covering. But bitcoin seeks to compete with the dollar, right? So are you conflicted if you have a dollar position, like dollar denominated savings? Probably not. That’s a little preposterous. You have some journalists who take really principled positions: I think Laura Shin says she doesn’t own any cryptocurrency.
And then so many authorities who are routinely interviewed as experts who have a really strong incentive to push a narrative one way or another, because prices respond so reflexively to news and media coverage and PR. So you have experts who have made a name for themselves, and they’re also running a side project or an ICO, so they have an incentive to attack competitor projects and elevate their own, either subtly or not so subtly. And you get journalists who may be unaware of that, and they will just print what essentially becomes PR for an ICO or some blockchain project. That’s an epidemic.
There's a reason crypto takes hold of people so strongly: it's a casino, and a political forum, and a tribal affiliation, all rolled into one.
Over the last 18 months, we’ve seen a huge number of commentators and entertainers enter the crypto space with pretty thin understanding of any aspect of it. As somebody who’s extremely rigorous, how do you view YouTube personalities, or others who are trying to get people involved, but not necessarily on a really solid intellectual grounding?
Someone described cryptocurrency as the world’s biggest MMORPG recently, and that resonated with me. There’s a reason it takes hold of people so strongly: it’s a casino, and a political forum, and a tribal affiliation, all rolled into one. So there is a place for analysts, and there’s also a place for entertainers. I don’t want to delegitimize any class of commentary. People who just post T.A. charts all day, there’s a demand for that, and those people satisfy that demand.
For the first time ever, we have this 24/7 quasi-equity market which is global. Which I think is completely novel—a permissionless global casino, basically. If you’re under 18 you can probably still play: Just borrow your dad’s credit card and buy some bitcoin, and you’re off to the races. So there’s a reason it took hold, and all of these social media and YouTube personalities were attracted to it.
What they're doing for the most part is gambling—but in a really interactive and social way.
Obviously, Wall Street has always been a casino for some people, but I feel crypto is a breadcrumb trail leading people into certain ways of interacting with the entire market.
I think they’re two sides of the same coin. You have volatility traders, and you have this very interactive social media approach to investing and trading. Even in conventional assets, this has been really the trend over the last 10 years, social investing. And that was massively intensified in crypto because it wasn’t really policed in any way.
Look at the Tesla short [seller] story: You have hordes and hordes of people on Twitter shorting Tesla, and then talking their own book by participating in this game where they just mock Elon Musk. I don’t have a view on Tesla one way or the other, but it’s really interesting that it becomes this participatory game.
I think it’s actually all part of the same late stage in the credit cycle, where money is cheap and people want entertainment. They can justify this by by calling it investing, but what they’re doing for the most part in many cases is gambling, but in a really interactive and social way. It’s super fun, but I think when a deleveraging event occurs, not just weed stocks and the more vibrant side of the options market, but also the crypto market probably gets wiped out.
I mostly agree, though if you look at it from an information-rich markets perspective, there could be an argument that all the chatter is somehow increasing efficiency. If you have people constantly fighting in every venue about the value of an asset, that somehow resolves toward the truth.
I think informational efficiency has increased. But the amount of noise has also increased, so it’s hard to parse it.
You mentioned the likely scenarios for deleveraging. One idea that has been floated is that bitcoin doesn’t operate on the same logic as the rest of the market and therefore is a some sort of haven. What do you make of that argument?
It would be a great story. To me that’s an empirical claim, and we won’t know until we have a massive correction in equities. And then we’ll see whether bitcoin holds up and not. I think my view is the counter-narrative, which is that bitcoin is a highly liquid risk asset. So if I had to guess and we have a serious correction in equities or a recession, I think bitcoin suffers as well. It’s still more of a gambling device and a plaything.
You formerly worked at Fidelity, and they just made a pretty huge move with a new institution-focused crypto trading service.
I think that’s pretty monumental. Consider that bitcoin has been around for 10 years and we have one of the largest asset managers in the world, who spent the last three or four years contemplating it and then finally building out a dedicated service. I think the launch went well (they weren’t my direct colleagues at Fidelity), and I think [Fidelity Digital Asset Services] will be a really massive success.
My subjective feelings that a lot of these large allocators are probably not as willing to custody their assets with some of these startups, and would trust the Fidelity name and brand. And having some knowledge of how the product works, I think it probably is the best custody solution that exists today, and the soundest from a regulatory perspective.
It goes to show how just how far this thing has come—sometimes you have to pinch yourself. This really was magic internet money. As late as like 2013, it was a joke and a meme.
I would say as late as 2016! There were a lot of people taking it seriously, but a lot of people definitely not.
I remember conversations I had in business school. I was probably the only bitcoin or cryptocurrency person there, and I was laughed out of all those conversations. And it’s just been such a monumental shift in the last year alone.
This was a really well thought out, compliant ICO, and it was an absolute failure. And I think that might be seen as the death knell of ICOs.
Another one of your recent, very popular and attention-getting pieces argued that people who invoke the term “blockchain” are piggybacking on the success of bitcoin, without necessarily having an application that should be compared to bitcoin. Would you call yourself a bitcoin maximalist?
Man, I really dislike that term. Keep in mind that it was popularized by Vitalik back when he was trying to publicize Ethereum, and a lot of bitcoiners were criticizing any alternative or altcoin at that time, and he wanted to open up some conceptual space for the existence of other assets. So I don’t deny altcoiners’ right to exist.
I think a lot of critiques of bitcoin maximalism fail the first test, which is to actually define the term. Many bitcoiners believe that in a free market competition for money—which currently does not exist, because you have sovereigns that enforce fiat within their borders—the monetary network effects take over, and you have a concentration into one or a few assets. That’s the perspective that is often maligned is ‘maximalism.’
Bitcoiners will often say that that is a descriptive, not a prescriptive view. They’re not prescribing anything, it’s not that they deny the right of a competing asset to exist. They just believe that in a free market competition bitcoin is most likely to prevail. So if you sit back and actually engage with the views of bitcoiners who are often derided as maximalists, the views are not really that dramatic or toxic.
I would say I do think bitcoin is most likely to win in that free market battle. But I don’t see it as an inevitability. And I certainly acknowledge that other interesting projects and assets exist and I pay attention to them.
So from that perspective, what are the sorts of applications that you think have similar enough characteristics and dynamics of bitcoin to at least be potentially feasible?
It depends on the time frame. People talk about where we are relative to the internet’s progression—are we in 1997, 1995? I think we’re probably in, like, 1980.
I think there are fundamental challenges involved, before these mainstream applications are possible. Scaling is just one of them. Really nuts and bolts problems like UX and key management are the big inhibitors right now. People are entrusted with their private keys and they just have to figure out how to store them? We’re going to look back at that in 10 years and be like, ‘Wow, that was barbarous.’
So, in the near term, I just I like the non-sovereign money use-case. It’s not the most exciting to the technologists, but that’s exciting to me because it gives people the chance to opt out of their local monetary systems. And those are people who have never had that choice before. This has occurred historically, like with dollarization in Zimbabwe. So I don’t think it’s too far-fetched that we might have bitcoinization in a state with a really weak currency. The infrastructure isn’t there yet. You’d need many more exchanges, and peer-to-peer exchanges that couldn’t easily be shut down by the government in the case of a currency crisis. But that I think is is a likely event that might occur in the next 10 years or so.
I also like the notion of dis-intermediating advertisers, bringing publishers closer to end-users and monetizing attention more directly. You could load up your browser with 50 bucks worth of whatever crypto asset, and then browse for a month, and then a proportional share is sent to all the publishers that you visited. I think the really tiny payments are an endless opportunity, because under the current regime with credit cards, you have to have a minimum size for those payments.
Just borrow your dad's credit card and buy some bitcoin, and you're off to the races.
It’s interesting you mention that, because we obviously just had the huge failure of the Civil token sale, which is a publishing effort. I think people might look back on that failure as quite significant, and I’m not sure it’s getting as much serious treatment as it should.
I agree, I think we might look back on that and think, ‘OK, this was a really well thought out, compliant ICO, and it was an absolute failure.’ And I think that might be seen as the death knell of ICOs.
So what sort of stuff are you investing in at Castle Island?
We mostly focus on operating companies at seed stage. We’re going to incubate Coinmetrics, which is an on-chain data business, and Casa, which is a promising key management tool and custody service. The model there is using multi-signature transactions to de-risk individuals’ engagement with their keys. So, you know, you have a bunch of different Trezors and if you lose one of them, it’s OK. You can recover from that. And we’re looking at the kind of boring, conventional stuff—companies that are solving basic UX issues for users. We’re definitely not looking at buying the hot new protocol. That’s not really our skill set. We come from a financial-services background.
What do you see as your most important role in the cryptocurrency ecosystem?
I definitely wear a lot of hats. For a long time, it was definitely running and funding Coinmetrics, and making that a useful, free, and open-source service for anyone who wants to learn important facts about public blockchains. Now I blog on a personal basis, and I have a voice in a few different venues. I’ll be at an International Monetary Fund conference next month, and maybe I’ll be able to educate some people who are influential in public policy, but don’t understand bitcoin as well. The other thing is trying to sensibly allocate capital to projects that make sense. But I would say my biggest influence is just writing Medium articles.
It sounds like you’re still grappling with what your role is, just because so much has happened over the past couple of years.
Yeah, I really didn’t expect any of this to happen. The Fidelity hire was a surprise to me. I was just kind of piddling along doing my own thing. I never expected any of my blogging to take off, and I definitely never expected that I’d be raising a venture fund.
And I’m not trumpeting myself here. In many respects I was unprepared for all these changes. I am still very ignorant about the market and cryptocurrency. Just bitcoin itself, I’ve spent thousands of hours thinking about it and trying to grapple with it, and I still find it an endlessly interesting problem.
Virtually everything I do is just a quest to understand this stuff better.