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The Artisan Podcast - Bitcoin/Fintech: Has the Bubble Burst?

Updated: Jun 20, 2023

Listen to the insights of Peter Misek, co-Founder of Frameworks Ventures who was one of the earliest investors in Google along with Arthur Salzer, co-Founder & CEO of Northland Wealth.

Welcome to Northland’s The Artisan Podcast - a behind the scenes look where we share insights and views from some of the world’s top investors. The objective is to provide a deeper understanding of the complex challenges investors face today and the risks and opportunities we see for tomorrow.

In this episode find out:

  • Has the bitcoin bubble burst?

  • How to value bitcoin and other cryptocurrencies?

  • What is the next 'big thing' in Fintech?

  • Who will be the next PayPal or Square?

  • Does India present opportunities in Fintech?

Peter Misek is a co-Founder of Framework Venture Partners. Based in Toronto, he come with over 18 years of venture capital experience as an Advisor/Venture Partner for DN Capital including direct involvement in multiple unicorns. At Framework, Peter's investments include Paper, Incode, Continup, FlipGive, Daisy Intelligence, GoViral, TouchBistro, Wattpad and Wave Financial.

Prior to Framework, Peter was a Partner at BDC IT Venture Fund. With an entrepreneurial background, Peter is Chairman and Founder of SoundPays Inc. and an original programmer of the technology. Peter has almost 20 years of investment banking experience as Managing Director and co-Head of Global Technology Research for Jefferies in NYC and as Director of Research and Global Technology Analyst for Cannacord.

Peter holds a CA, CPA, from Illinois as well as a CFA.



Peter Misek, Joseph Abramson, Arthur Salzer

Joseph Abramson 00:01

Welcome to Northlands The ARTISAN Podcast. The objective is to provide a deeper understanding of the complex challenges investors face today, and the risks and opportunities we see for tomorrow. In today's episode, we ask Bitcoin-FinTech is the bubble bursting? Well, I guess if you look at the last couple of weeks, the answer isn't obvious. Yes, with Bitcoin cratering by over 50%, top to bottom. However, this is not unusual for bitcoin and happens every year or two. And these pullbacks have proved fabulous buying opportunities. In fact, bitcoin has been the best performing asset over the last 10 years. If you had invested just $1,000.10 years ago, you'd be worth 40 million today. But I guess then you wouldn't be listening today's webcast, you'd be on a beach somewhere sipping Pina Coladas.

So how do we make sense of this chaos? Well, luckily, we're joined by two experts with us today to help us out. First, there's Arthur Salzer, the Chief Investment Officer of Northland wealth management. And one of the first institutional investors in bitcoin in Canada. And Peter Masek, founder of framework ventures, one of North America's leading experts in FinTech. So going to head Arthur, bitcoin, up, down or sideways.

Arthur Salzer 01:27

After what we've experienced that carnage in the market, where we've, we've seen basically every leverage position blown out of the water this week, I'd have to say it's upwards from here.

Joseph Abramson 01:39

But I mean, surely bitcoins a bubble? I mean, just look at Dogecoin created purely as a joke and up 10,000% I mean, bitcoin has no cash flow, how do you possibly value an asset like that? What framework do you use to say whether it was worth 60,000, a few weeks ago, 30,000, a few days ago, or somewhere in between.

Arthur Salzer 02:02

So first off, it is a what we call an ultra-cyclical. So it is an asset class that periodically have bubbles. And we've seen these bubbles occur pretty much every four years around the halving cycle. So when you look at a valuation perspective, it can go back and the first time I was learning about tech was in the early 80s. And at the time, Sony had Betamax and Betamax was a smaller tape, higher quality picture than VHS, but VHS offered a broader selection of titles for its audience. And people instead of choosing Betamax, they wanted the selection, and they went with VHS, even though the product may not as has been as well. The same occurred when you look at a technology perspective, with Apple versus rim, rim had much better security, much easier to type on to send messages to each other, fully encrypted. However, it didn't have apps, it didn't have games. And what we saw was the network expanded faster on Apple, and Apple dominated that cell phone marketplace. And really, that's what we're seeing today. With Bitcoin, where there is a gradual adaptation, it's at about the same rate or even slightly faster than what we saw with cell phones, or what we call smartphones today. And at the same time, there's a halving, so the block reward, every four years gets reduced by half. So initially, back in 2010, when the first bitcoin was being mined, what we saw was a block reward of 50 bitcoin, pretty much every 10 minutes. And today, we're only at a fraction of that. So the new supply coming on is much, much lower every 10 minutes, yet the adaptation is increasing. And you do get periods of FOMO fear of missing out where people Chase, we've seen it with tulips, we've seen it with many asset classes, tech stocks, even in early 2000. And then dramatic pullbacks, so you have to understand that cycle if you're going to put capital to work in bitcoin or against stock-to-flow which is how gold is measured or diamonds or water, you have a very, very high correlation around this increased network adaptation, along with the new supply being reduced. And it's a very, very tight graph. The challenge really is is the day to day volatility around that the one standard deviation or two standard deviations is still quite large. But when you track it over the years, it's very, very close. Okay, so its basically tracking, tracking where it should be.

Joseph Abramson 05:16

I guess you bring up a good question, you can have the view as to the long term, as I mentioned, at the start the long term, Bitcoin has gone up tremendously. But with these hugely volatile moves in between, from a trading perspective, you know, how do you manage that for clients? I know that you put clients into bitcoin out about seven $8,000. I mean, did you ride all the way up to 60 and back to where we are today? Or, you know, how do you manage things from a shorter-term perspective, within that, that long-term, more positive thesis?

Arthur Salzer 05:53

From from a portfolio managers perspective, it's about managing the risk of the portfolio, both real risks fundamental risk that an investment fails, and then secondly, based on on price. So, asset allocation and right sizing the position makes a huge, huge difference. So, on average, we took a 5% allocation. We had read a Yale study that recommended six and a half (%)for, for the best return versus risk. 1% made a huge difference to a balanced portfolio. But where we were in the cycle, knowing that we typically experience the best of a bull market 18 months after the Halving, that's why we went with a larger allocation of 5%. And what we do typically is rebalance plus or minus a 50% move. So, if 5% grows to north of seven and a half (%), rebalance down, and bring it back. Subsequently, if we saw a drawdown to 50%, so 5% went to two and a half, we would add to bring it back up to weight. But you this is definitely an asset class, you have to rebalance.

Joseph Abramson 07:02

So is it fair to say that, that in the last several years, you've rebalanced several times, and then has it declined by enough recently, to rebalance back up? Bitcoin uses more electricity than then Sweden, and by the nature of the algorithm, it will use evermore electricity going forward. I mean, in what way shape or form is that sustainable?

Arthur Salzer 09:10

Well, that's what it is. It's a store of value. I mean, you know, Einstein came up with a theory of relativity E=MC2, and now it's E=MC2= BTC. So energy is never created, it's never destroyed, it simply moves from one form to another. And what BTC is, it's a digital form, digital form of storage for energy that can be moved nowadays anywhere in the world. And what you're seeing is a greater adaptation. From you know, what we call "green" or renewable power, where the new battery is becoming bitcoin. You mined bitcoin you when you mine x, when you have excess power, that typically we would dump or we would sell at a loss that now can be stored digitally. And I think it's going to change the valuations and change the usage.

Joseph Abramson 10:03

So Peter, do you buy that? I know that you're, you know, a bit of a different view in terms of the environmental impact of Bitcoin.

Peter Misek 10:11

I think this is a big Achilles heel that the blockchain and the technology has to figure out. And it's an incremental usage of electricity. It does not subsume or replace other money movement or other stores of value. And so for, for the time being, this is a problem that's going to become bigger, and it doesn't match up with millennials desires to be eco friendly. So Bitcoin and green, they don't currently work.

Joseph Abramson 10:42

So I mean, I, that makes a lot of sense to me, Arthur, is there any way that Bitcoin can respond and adapt? I mean, that's the very nature of technology historically, is its ability to adapt to change. I mean, otherwise, none of us would be here today. Okay. Enough about the environment. Another criticism of Bitcoin is, I mean, you can hardly use it transactions are extremely slow these days doing 25,000 transactions a second, Bitcoin can hardly do five. I mean, how is that useful? How will the cost I mean, $30 a transaction and rising according to a very legitimate source coin base? I mean, how's that competitive? Okay. Okay, and what about the argument that it can become a victim of its own success? So it's going to be self defeating? I mean, if you look at the US government, it makes a tremendous amount of money off SR Ridge, and they can get away with murder, right? They can put tons of money, they can have whatever they want. It all gets funded at a very low interest rate. So if this is a threat to the US government, why can't they just say bitcoins illegal, and then the price goes from 40,000 to well, zero. Okay, one to one to one Oh, And the infrastructure in the plumbing is getting built for for Bitcoin. And I think you're gonna see greater and greater use there. Yeah, I mean it makes makes sense to me makes sense to me whether whether it's Bitcoin or another alternative currency, I think we're too far gone to go back now and so maybe for now that's that's enough about Bitcoin. Peter, what do you think about some of the other cryptocurrencies?

Peter Misek 15:35

Well, our biggest challenges is we don't make bets on any individual cryptocurrency, okay? But we look at as infrastructure. So, okay, in FinTech, what we're looking for are companies that can provide services that reduce or remove the pain of something that a customer is feeling. A custodian custodianship of crypto assets is an area that we're very keen on, obviously, the infrastructure layer around payments, enabling payments, trying to create solutions around how energy storage can truly be used to make the grid more robust, more friendly, whether it's superconductors or whether it's hydrogen creation at endpoints. Those are all technologies that we evaluate. But stepping back, we look at roughly 1000 companies a month and 1000 companies a month roughly 20% are FinTech. And we now track over 21,000 companies across North America across 65 data fields. And we use that for the benefit of the ecosystem. So any, okay calls us, we let them know how they rank.

Joseph Abramson 16:42

Okay, that certainly makes a makes a lot of sense to me. And if we go back to the to the 90s. tech bubble, I mean, the safer way to play it was to buy, you know, the the arms dealers, rather than the countries that were actually fighting so that a lot of the telecom service providers actually went bankrupt. But they're the ones producing the income, I made a tremendous amount of profit, and are still around today. So if we look at that infrastructure, who do you see, what do you see as the big themes like like, what, what part of that infrastructure should we be invested in right now? Where are we seeing the innovation? And if you can throw it a couple of names? Fantastic.

Peter Misek 17:31

Yeah, so we think is, is that we will break it in the short term in the long term. Over the long term, we see arm infrastructure pervading in the cloud arm is going to cause 100 to 1,000x increase in computing power in 10 years or less, right. And that's going to be breathtaking. What that does, it's gonna have profound implications across the world, machine learning AI and even the blockchain. What we think shorter term is we're seeing is is the pandemic caused 10 years of innovation to be slammed into one to two years. And so we're looking for companies like a wave financial, like accounting that reimagine financial services and deliver them in a way that truly solves friction. Or we're looking at companies that can transform education, like paper, that reduce the education gap, now that people know you can actually learn online, but it's preferable to have in person. And so you combine the two and you really close this educational gap. And so in our portfolio, we're seeing unbelievable growth in companies that have taken advantage of this generational innovation cycle that's been caused by the pandemic, and are really, really solving big problems.

Joseph Abramson 18:41

So maybe just pull out one of those examples and go into a little bit more depth, a waiver or one of the others.

Peter Misek 18:50

So let's start with paper. Because I'm passionate about education. I think education is the big equalizer. It removes racial barriers, it removes gender barriers, it removes barriers, period, the more educated your population is, the better off you as a country are. And right now, the pandemic exposed, that the Western world is very difficult, very difficult to say that we have an equitable education program, especially in the United States. So imagine an ability to offer 24 by seven tutoring for an entire school district at a flat fee. And you're doing that with live tutors that are powered by AI that can at any one time, take the surges of demand and be able to do that in a very, very scalable fashion. And imagine the US government just gave you all those districts $200 billion to spend over the next five years. And that's a recipe for finally solving the education gap and papers, the only company in North America that can do it on a scale that that really will make an impact. So they now serve almost a million students in the United States, making them the second largest district. They're going to be serving 10 million students in the next year or so.

Arthur Salzer 19:56

I think that is fantastic.

Joseph Abramson 19:58

And so I think education is very exciting. And it's certainly getting disrupted. Right now, you know, more quickly, because of, because of COVID. And this is happening, you know, at all different levels, maybe we can just kind of gear down for a moment into, you know, a few sectors that you had mentioned. You know, maybe you can say, what will go on and maybe the next three to five years and, and some companies to play that. So, if we look at payments, particularly on the mobile side, you know, the emerging markets have figured out, and, you know, we look at ant financial and China is basically it's so big the government had had to limit them. The the market cap is billions upon billions upon billions.

Peter Misek 20:54

But in North America, we haven't figured out mobile payments, yet. We're getting there, but it's unclear. And it looks like there will be a big number one and a number two, to keep them honest. How do you see mobile payments, adapting in North American Europe? And what's over the next three to five years? And who's going to be the winner? I you know, who's gonna be the next PayPal so that we couldn't invest in Bitcoin 10 years ago, maybe we can invest in them now. And then we can be sipping pina coladas 10 years from now. Yeah, that'd be great. So we think payments are gonna be integrated in applications that people use every day, and that the payment layer will become completely seamless. And so for us, FinTech is not about digitizing financial services, it's about reimagining them, and embedding them in applications people use every day, I think the biggest, biggest winners of the integrated payments will be square, I think the next biggest winner will be Apple, and Google.

Now, private companies, we think companies that reimagine and embed these financial products and services, like accounting up like in encode, those are two of our portfolio companies, they are going to dramatically make payments faster, easier and almost completely secure, more secure than you visiting a branch. And so those companies in our portfolio are seeing 5x 10x annual growth. And that's the kind of performance that when you see these companies get the problem solved, right, that customers flock them.

Joseph Abramson 22:22

So it's certainly certainly makes sense. Maybe going a little bit more broad than that. And maybe I'm completely wrong here. But I see a few different areas in FinTech, where there's legacy companies that are collecting excess rents for basically doing nothing. I mean, I just bought a house, go tell my agent, this. I mean, those guys got paid 5% for a lot of money for essentially doing nothing. Is there anything that is going to disrupt that part of the market? So that I mean, if those commissions go down to let's say what they're worth, so from four to 5% to 50 basis points, that's money the seller and the buyer can can share. Is there is there any, you know, potential disruptors are there in the US or Canada?

Peter Misek 23:13

There's lots of disruptors The problem is in both countries, that government lobby groups have been incredibly successful at ensuring MLS has not only open and write have been very, very, very good at enforcing the those lobby groups interests, it is the most breathtakingly unregulated, uncompliant industry right in North America right now. It is it is a travesty. Every government official should be shaking their head and ask themselves, if you have a real estate agent who literally has to spend 40 hours of education and has seen their earnings 10x in 10 years for the same effort. It makes no sense every other industry digital has been brought in to disrupt that and make it more efficient. And the government's will not allow it. it's it's it's mind blowing.

Arthur Salzer 24:03

Yeah. You're right, Peter, I probably should have stayed in real estate. I got my real estate license in 1988.

Joseph Abramson 24:15

But Arthur is much more educated. I mean, don't tell him this, but the education of my agent is he was a swimming instructor. That's that's the level that he is actually a fantastic agent. And what about, you know, Visa, MasterCard, you said you covered them? You know, for four years, we have this oligopoly where they're getting two or 3%. Now they are doing something valuable. Don't get me wrong. It's just it's not worth two or 3%. It's worth 40 basis points. So any where do you see that industry going? Are the the king and queen are they going to lose their crowns? And if so, who are the potential winners?

Peter Misek 24:57

Well, so the Durbin Agreement, really exposed what all of the layers and fees are just to be clear, the Durbin Agreement shows that interchange can average between 50 basis points, and 110. So let's be, let's be crystal clear the 2% or plus that you get charged is because the issuers, the banks, the people who've provided you, the plastic have layered in services, whether it's loyalty points or other things to claim the value of those extra basis points. So the rails themselves cost between 50 and 110 basis points, they serve a great purpose. They need to invest, need to evolve, there's somewhere in the neighborhood of $100 billion is needs to be invested globally and those rails to make them real time and make them more useful. But ultimately, we see that being compressed significantly over time. And the value creation will be on taking that data and the layering and other services, whether it's created on demand identity, other things that remove other friction points.

Arthur Salzer 25:51

I mean, speaking of identity, have you have you looked at Microsoft's Identity Overlay Network - ION? What are your thoughts on it?

Peter Misek 26:00

It's a great first step a lot more than needs to be done. Identity, big problem, in my opinion, is the endpoints, the transportation of identity is less of an issue in our in our research, the bigger issue is the authentication and re-authentication that needs to occur on a regular basis. But, it's a great first step,

Joseph Abramson 26:18

That actually brings up a very valid question, it really doesn't matter whether you're doing the FinTech or any other area of VC. But you've always been able to make lots of money on cybersecurity prevention. If you have the right tools or company, is that a theme that you play?

Peter Misek 26:45

It's a theme we play within our vertical. So we want to see AI exploited at unbelievable million-x improvement over existing systems. And so one of our companies actually does that. And so they are anywhere between 1,000 and 1,000,000x better than existing systems.

Joseph Abramson 27:02

Okay, and then what about the question? I mean, I just, I did my MBA a year ago, half my class was Indian software engineers. That was that was here. And here, they get paid? Oh, I don't know. 300,000 plus a year in Silicon Valley, the Canadian equivalent of 500,000. In India, they were getting under 100,000. So I mean, why shouldn't all of these services go out to India, where you have tremendous entrepreneurs, you have very high level of intellectual capital. So you combine those things together, you've got a real innovation hub, you know, why aren't all the exciting companies coming out of India, you know, rather than Canada or the US?

Peter Misek 27:55

Well, so there are a lot of exciting companies coming out of India, there's somewhere around 100,000 startups in India, lots of unicorns coming out of the country, and offshoring. Just to put this in perspective, he used to be an Indian software engineer back in the early 2000s, made $5,000 a year. So they actually seen a 20x increase in their salaries, that has allowed a lot of innovation, and a lot of inflation to be held in a balance. And so what we continue to see is we're going to see over time, a lot of those software engineers and remote locations are going to see the price of their goods and their service match the the clearing here in North America. And so we see an equilibrium. The problem is, is globally there's a shortage of almost a million plus software rights. And there will be a shortage of 5 million in less than five years, it is a staggering problem for society.

Joseph Abramson 28:46

Okay, so there you have it. I mean, there's two ways to become wealthy. One is to go back 10 years and invest in bitcoin, and the other is today to to become a software engineer.

Peter Misek 29:00

So we've got a few more minutes left, Peter, maybe you can mention some of your, you know, big themes over the next three to five years. Yeah, our big theme is, is we want to invest in companies that have great core businesses, but where we can layer in financial products and services. So thanks, payments, think lending, think money movement, think money management, inside applications and services people in businesses use every day. And then the other side, companies that produce huge amounts of data that we can productize using machine learning, and create or innovate, to really, really push both the financial side, but also push the problems that they're solving at the other end. So it is a 10, 20 year horizon that we see these themes playing out over.

Joseph Abramson 29:51

Okay, so to wrap up, I have one question for each of you. Actually, it's not a question. It's an answer. So please provide this in the form of a question. If you were given $1,000 right now, and could only invest in one thing. What would it be?

Peter Misek 30:12

You go ahead, Arthur.

Arthur Salzer 30:14

I think today you'd buy bitcoin, still.

Peter Misek 30:18

I'd invest in my venture fund.

Joseph Abramson 30:21

Okay. Certainly, certainly makes sense. I mean, thank goodness, our listeners and Northland investors, well, we can do both. Because diversification is the only free lunch in finance. So if anyone has any follow up questions, you can email me at jabramson. That's a-b-r-a-m , like Mary s-o-n, like Nancy Thank you, and have a wonderful day.

Arthur Salzer 30:54

Thanks, Peter. Thanks, Joe.

Peter Misek 30:55

Thanks, guys. I gotta jump.

Joseph Abramson 30:57


Peter Misek 30:57



bitcoin, companies, fintech, education, invest, years, rebalance, government, peter, problem, big, services, money, Betamax, basis points, North America, payments, infrastructure, lobby groups, people

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