On Fintech Investing and the Importance of Specialization

26th April, 2021

It’s hard to believe, but over 80% of global payment transactions take place in cash. Warren Fisher, our guest on today’s show, is eager to see that number decrease and for digital transactions to become the norm. Warren’s company, Manole Capital Management purely deals with Fintech companies, specializing in the payment space. Not with the typical big payment players that you might be thinking of such as Visa and Mastercard, but with the payment processors and merchant acquirers whose names you have most likely never heard. Our discussion with Warren delves into why he has chosen the payment space as his niche, how COVID-19 has done a lot to boost the ecommerce industry, and why he believes that Fintech growth is only just beginning. We also discuss the most advanced digital payment solution of the last 10 years, which originated in an emerging economy country, the country which is nearing a cashless system, short-term trading versus long-term investing and Warren’s thoughts on Bitcoin. We hope you learn as much as we did from this episode!

Key Points From This Episode:

  • How Warren’s previous portfolio at Goldman Sachs differs to his current portfolio at Manole Capital, his own company.
  • Fintech; as defined by Warren, and what he sees as the “quintessential Fintech space.”
  • Current trends towards passive investments and specialization.
  • Characteristics that Warren looks for in a business which determine whether he wants to invest.
  • Why Warren’s company doesn’t utilize revenue multiples.
  • The numerous types of players in the payment space, which you have most likely never heard of.
  • How COVID-19 has accelerated the ecommerce trend and Warren’s future predictions.
  • Sweden’s trajectory towards a cashless economy.
  • The innovative digital currency solution which originated in Kenya.
  • Elements that make the Manole Fintech Fund different to other funds.
  • What the short books and long books in Warren’s company look like.
  • A brief analysis of the GameStop saga.
  • Why Manole Capital focuses much more on long term investments than short term trading.
  • Issues that Warren has with Bitcoin, and why he always has a laugh on May 22nd.


[00:00:01] JM: Hi, I’m Jenny Merchant, co-founder of PitchBoard, and welcome to The Pitch Podcast. We’re here to have thoughtful discussions with forward-thinking managers who are taking unique approaches to professionally investing capital. Through these conversations, we hope to introduce you to new ideas and strategies that will help you better manage your own portfolios.

“WF: Go back to 2010, ecommerce as a percent total retail sale was only 4.5%. Then by 2015, it shot up to 7.3%. Slow and steady rise of ecommerce taking share from brick and mortar physical retailers. Well, last year during the global pandemic that continued to rise, it got into the double digits into the low teens. I don’t know about you, I’m not going back to the mall anytime soon. I prefer to do a lot of my shopping, simply for convenience, online.”

[00:01:05] AH: Hi, this is Andrew from PitchBoard. I had the pleasure of speaking with Warren Fisher of Manole Capital, a boutique asset management firm exclusively focused on Fintech companies. We talked about the death of cash, the payments industry, and how he manages portfolios for clients. I think you’ll enjoy the conversation that follows.


Before we begin, we want to remind our listeners that everything in this podcast is for educational purposes only. Nothing here is tax, legal or investment advice. We don’t endorse any products, services or opinions made by our speakers. Some statements in this podcast may contain forward looking projections. These projections do not guarantee future performance, and any past performance does not guarantee a future result. Finally, nothing in this podcast is an offer to buy or sell securities. Speak to your own advisor before making any financial decision.


[00:01:59] AH: Hi, this is Andrew Hepburn from PitchBoard and I have the pleasure today to introduce our listeners to Warren Fisher, the Founder of Manole Capital in Tampa, Florida. Manole is a boutique asset management firm that exclusively invests in Fintech companies. With that, Warren, welcome to the show. It’s great to have you here today.

[00:02:14] WF: Thanks for having me on. I’m looking forward to it.

[00:02:17] AH: So, can you give us and our listeners just some background on your investing experience and your firm, Manole Capital?

[00:02:25] WF: Sure. I spent roughly 20 years at Goldman Sachs Asset Management. Mostly all of our clients were institutional in nature, think pensions, foundations, endowments. On the team, I started out as an analyst covering the financial space and the services space inside of technology, what has come to be known as Fintech. Over that two decades at GSAM, I eventually became a portfolio manager and really just stayed in love with the Fintech space.

When I started Manole Capital six years ago, instead of being a generalist portfolio manager that’s a mile wide and an inch deep, and covering all different sectors from healthcare to energy to consumer or materials or utilities, we decided to really specialize in our Fintech niche and so that’s what we do. We just focus in on this emerging category of Fintech and for us, the quintessential Fintech business is the payment space.

But maybe I’ll just start out with what we define as Fintech and for us, it’s really anything utilizing technology to improve and establish process.So, it’s an intentionally broad category niche. Some people think it is digital banks or alternative finance, some people throw blockchain and Bitcoin in there. It’s Regtech, it’s Fintech, it’s financial services. But for us, once again, the quintessential Fintech industry and business is the payment space.

[00:03:57] AH: Right. How did you sort of come to the decision to leave a larger firm and start your own and to focus on Fintech? Was there sort of a eureka moment you had that this was the sector that you wanted to focus on exclusively?

[00:04:11] WF: I launched Manole Capital in February 2015. I did not want to go to a generalist mindset. I really think the market is looking for specialists. While a generalist can give you a diversified portfolio across multiple sectors, I just wanted to spend all of my time doing research on the sector that I’ve covered for now, 25 years, and we still think we’re in the early innings of Fintech growth, but as our clients, our family offices and advisors and high net worth individuals, we really think everyone should look for a niche manager, find the best healthcare manager, find the best energy manager, and then within financials, we don’t own banks or brokers or insurance companies. We don’t own your traditional financials. And then within technology, we don’t own Facebook, Amazon, Apple, Netflix, Google, Microsoft. We’re really just a hybrid, a niche, and we really try to capture the Fintech space and provide our clients with exposure to that emerging category of Fintech in a very liquid way.

Because most provide Fintech access, most get their Fintech access through illiquid and opaque venture capital or private equity investments, and we pride ourselves on transparency, and liquidity.

[00:05:35] AH: It’s interesting that you talk about how investors are gravitating towards more specialist managers. Does that have to do with the rise of passive investing and low-cost ETFs and index funds?

[00:05:48] WF: Well, it certainly has impacted it. I think, in the ‘80s, and ‘90s, even into the 2000s, you can go ahead and see this massive trend away from active management towards passive. Partly that’s due to the fact that I think the numbers out of Morningstar show that over 80% of active managers fail to beat the benchmark. So, you’ve seen investors shift their attention from active to passive, and then with the advent of ETFs, you can really create niches or specialties or certain sectors to give thematic exposure to.

So, as those have grown, and they provide great liquidity for underlying investors, and frankly, the cost of investing in these funds is dramatically lower than, call it, your 2 in 20 of a hedge fund or your one and a half of management fee for a 40-F mutual fund. We’ve just seen this massive trend, a go from active to passive, and from generalist to portfolio specific or sector specific.

[00:06:55] AH: So, you mentioned you’ve been focused on Fintech in some capacity for 25 years. How is the sector evolved? I mean, I don’t know when the term Fintech started being used as a specific phrase, but I mean, it’s something that most investors have heard of now, but you were focused on this long before it became something of a household name, right?

[00:07:16] WF: Exactly. So, what is now a known term of Fintech, 25, 20 years ago I don’t think anyone would have heard of that. For us, it just comes down to business model. So once again, at GSAM, I was responsible for the financial sector, and I told you right now, we have no exposure to traditional banks or insurance companies. A part of that is we are looking for businesses that are predictable, sustainable, that generate recurring revenues, that have high barriers to entry work or a moat around their franchise.

We found that the payment space had companies that hit all of these ideal characteristics; pricing power, flexibility, the ability to handle and withstand market volatility.And then when you look at financials, you really have opaque balance sheets. They’re not predictable and sustainable. Certainly, we saw that with the financial crisis, you are making a big bet that the management team is going to rationally allocate your capital, and essentially lend it out to clients and make good risk assessments with that money.

So, we did not find the banks attractive at GSAM. I started to migrate our financial and our tech exposure for the team towards payments industries. So, Visa went public in ‘08, MasterCard went public in 2006. Visa can do 65,000 transactions a second. So, is it a tech company because they can do that many transactions per second? Or is it a financial company because they can move money from point A to point Z?

I don’t care what the classification is. I don’t get caught up with that GICS classification, is it a tech company or a financial company? I’m really looking for companies that have these characteristics that I just mentioned and it just so happens Fintech is that hybrid between tech, pure tech, and really, financials. The financial sector is about 75% comprised of banks and insurance companies.

[00:09:22] AH: For the [inaudible 0:09:23]

[00:09:25] WF: Yeah. So, Visa and Mastercard and the payment companies are often classified as tech companies and we know that tech is the largest sector in the S&P. But I didn’t get caught up on what sector. I just got enamored with these payment companies that just had all the characteristics we were looking for in stocks, whether it’s a payment network, like a Visa, MasterCard or PayPal, or it could be the payment processors like a Global Payments, or an FIS or Pfizer or Chase Paymentech or Heartland Payments in years past. Or merchant acquirers like a Square, or even the payment gateways like Adyen or PayPal’s Braintree or privately held Stripe. These are all the companies that generate predictable, sustainable, recurring revenue, almost revenue per swipe.

[00:10:15] AH: So, these aren’t ultra-early stage companies then that either don’t have much revenue or you know, let alone are generating free cash flow. These are, as you mentioned, these are companies that have strong free cash flow, strong recurring revenue?

[00:10:29] WF: Exactly. So, we don’t utilize revenue multiples. You’ll see a lot of companies nowadays as they come public or SPAC acquires them, they’re using revenue multiples and why did they use revenue multiples? Because they don’t have earnings and free cash flow. We saw how that played out in ‘99 and 2000, when the dot com era came to a crash. At that time, you were valuing companies on eyeballs and users and other metrics like that. For us, we look at free cash flow and earnings. All of our companies have to generate free cash flow.

I know Fintech has this perception of being cutting edge. But we often say certainly, it’s the case with payment companies that it’s very much more evolutionary than revolutionary. People think of Fintech as being on that cutting edge. That it’s so revolutionary. But why then would the United States in 2015 be two decades behind Europe and so far behind Europe and other countries for installing chips in our plastic credit and debit cards? Why do we still have mag stripes which were generated in the 1950s and ‘60s, on the back of our creditand debit cards?

Things in payment land don’t happen terribly fast. Think of it more as an aircraft carrier than a speedboat. Although the perception is that Fintech really is a speedboat that’s nimble and moving quickly around in the water. We just look at the payments industry, one, as very much not necessarily recession proof, but recession resistant and we’re always looking for secular growth companies, not cyclical companies. And often the banks and traditional financials are very, very cyclical.

[00:12:17] AH: I guess the payment companies that you invest in, they’re sort of like the infrastructure behind the scenes, right?

[00:12:23] WF: Absolutely.

[00:12:24] AH: People might see like a Chase Payment tack on a debit machine or something like that, they might recognize the name but there’s probably a lot of names that aren’t household names, right?

[00:12:35] WF: So, people know, the Visas and the Mastercards, with hundreds of millions of cards in force that they can walk into over 200 countries around the world in 40 and 45 million different merchants, and they can walk in and out of a physical retailer or brick and mortar merchant with a good or service simply by showing a piece of plastic with their logos on the bottom right. They know those brands.

But a lot of people don’t know that the authorization, the clearing, the settlement of a card transaction is done by payment processors, and they don’t have great brand names. They don’t need, to frankly, have great brand names. Those are the First Data’s of the world. The Global Payments of the world. The Chase Payment techs of the world. They really are doing the heavy lifting of a card transaction. That’s kind of phase one, people need to realize that there are significant different players in the payment channel.

So, going back to what we talked a little bit about earlier, we don’t invest in the card issuers. We don’t invest in the Bank of America, as the Wells Fargos, the Citi’s, the Chases that give you that credit or debit card, because for that risk of making a, in essence 30-day loan to you, they do get to earn the vast majority of the merchant discount rate, the interchange for doing a transaction. But once again, that’s a cyclical business. Because if you lose your job, and we saw 20 to 25 million Americans during COVID last year lose their jobs, what’s the likelihood of you paying back your credit card? Probably not terribly good.

Now, a lot of the credit card companies did terms to make it easier for those that were laid off. But we typically don’t love the lending business, that alternative finance, that card issuer business. We much prefer the transaction-based business models, the predictable sustainable business models that come with the networks, the merchant acquires, and the payment processors. We saw that play out last year with COVID-19 when people were staying at home, they were doing more ecommerce transactions. You were probably receiving your packages just like we were from Amazon Prime at our front door each and every day. Well, if you do an ecommerce transaction as opposed to walking into a store, that transaction has to be on a network. It can’t be done in cash.So, we’ve seen this big growth of ecommerce transactions stealing market share for brick and mortar retailers. So, that’s kind of one positive of that ecommerce trend.

If you go back, at least here in the US, go back to 2010, ecommerce as a percent of total retail sales was only 4.5%. Then by 2015, it shot up to 7.3%. Slow and steady rise of ecommerce taking share from brick and mortar physical retailers.Well, last year during the global pandemic, that continued to rise, it got into the double digits into the low teens. I don’t know about you, I’m not going back to the mall anytime soon. I prefer to do a lot of my shopping, simply for convenience, online. I think that ecommerce trend will continue to go up and up to the right, it’s not going to be 100%. It’s not going to reach 80%. But we envision over the next three to five years, ecommerce probably being in that 15% to 20% of total retail sales. So, that’s a great tailwind for a lot of our payment companies.

I like to say the other sleepy market share donor for all of my payment companies is simply cash. I don’t know about you. I don’t like carrying around cash. Not only does the flu live on cash for 17 days, but virus can live on paper currency for 72 hours. The CDC said last year that if you touch paper currency, you should immediately wash your hands. And so, we’ve seen a massive shift away from cash towards digital forms of payment, whether it’s on your phone or contactless payments, using your credit and debit cards. And people don’t realize it, but the vast majority of transactions that happen on a daily basis, purchase transactions globally, are still north of 80% done in cash.

So, there are great stories like Sweden, which is only 6% cash and is trying to get towards a cashless environment by 2023. Maybe they get there. They’re certainly trying to remove cash from their economy. But countries like Japan, and Germany are still over 80% cash. So, there’s a sleepy market share donor of cash transactions coming towards digital forms of payment, whether it’s replacing cash that’s in my leather wallet to a transaction that I can do on my phone.

If I go into the New York City subway system now, in the past, it was a Metro Card. Going back 25 years, 30 years, it was a token. Now, I could take out a credit or debit card and simply tap and go through the turnstile or I can take out my phone, put it within three to six inches of that turnstile, and I can pass through by using my iPhone or my cell phone as a payment device. We’re just seeing more and more of those transactions occurring, and we just think that we’re in the very early innings of Fintech growth.

[00:18:17] AH: So, on your websiteyou talk a lot about the, I think you call it the death of cash. How does it break down between OECD countries and emerging market economies? And where do you see the growth? I guess the growth in this case is the growth away from, the trend away from cash? Is it coming from both those emerging market and the OECD?

[00:18:38] WF: Yeah. So, on our website, we have a presentation that you mentioned called the Death of Cash, and there’s a great slide that comes from MasterCard, and McKinsey Consulting. They go back to 2006 and they break down total global transactions and how much is done in cash versus non cash. Like I said, it’s still at around 80% done in cash. But emerging markets are in the 90s. Still in the low 90s. There are countries like the US that are now roughly a third still done in cash, but you have to look at the size of the transaction.

So, Sweden, obviously very advanced, trying to remove currency, paper currency from their economy. But in the US, for transactions under $10, 55% of those transactions are still done in cash. So, it’s a slow and steady process of removing cash from transactions. The emerging markets get a bad rep as being fairly not developed, not institutional or sophisticated. But there’s a great product that started in Kenya, of all places, back in 2010. M-Pesa, was launched in Kenya, and it’s a partnership between Vodafone, and Safaricom, so the dominant cellphone providers in that country, and it’s essentially a digital currency, a stable coin, if you will, enabling transactions to occur on their phone.

So, the most advanced digital currency transaction over the last 10 plus years actually came out of Kenya. Emerging markets are really adopting this. We’re seeing it certainly in China. China has adopted QR codes on Alipay and WeChat Pay. We’re slowly seeing it here in the US, you can walk into your Starbucks now, use your phone to transact on their rewards program with a QR code. You can do the same thing at Dunkin Donuts, and there are a few retailers whether it’s at Panera Bread when you shop for lunch, or some of the larger chains, certainly CVS and Walgreens are also pushing their own QR code app. But we’re still a far way aways from seeing your phone replace your leather wallet for payments.

[00:21:07] AH: So, from a portfolio construction standpoint, how do you approach this as a manager? If I’m correct, you have a long only and then also have a long short offering?

[00:21:19] WF: That’s right. So, we do both separately managed accounts, as well as we have one fund, one hedge fund, the Manole Fintech Fund. So, our SMAs are available at Schwab, and Ameritrade, Interactive Brokers and a slew of other platforms. SMAs come as both long only and long short. On our website, we have a tear sheet for all of our products that just highlight monthly performance, top holdings, large exposures and other interesting metrics. But the SMAs come as long only and long short. The primary characteristic is these are all publicly traded Fintech stocks. Our version of Fintech.

What’s really different about our hedge fund, the Manole Fintech Fund is, it not only is long and short publicly traded Fintech stocks, but the hedge fund can own certain, and we own a handful of private Fintech companies. So, the largest holding in the fund is a company called Stripe, which is a dominant payment gateway. If you’ve ever purchased anything on Amazon, Stripe is one of the companies that helps that transaction, that purchase transaction, go through. If you take in an Uber or Lyft, that seamless payment transaction is done by a payment gateway like Stripe. They really are dominating, them and PayPal’s Braintree and Adyen, out of Europe on the Amsterdam exchange. Those are your three dominant payment gateways allowing ecommerce transactions to occur. What’s nice about the hedge fund is we can own Stripe, we own names like Plaid and others. But I can’t custody that private position at Schwab or Ameritrade or Interactive Brokers. I can put that private position into the fund.

Now, if I have too many privates in the fund, I can offer LPs, or limited partners, great liquidity terms, and we pride ourselves on offering transparency and liquidity for investors. And so, it’s a nice marriage, if you will, both public and private Fintech companies. The public companies obviously give us great transparency, and are very liquid from 9:30 to 4 o’clock every day here in the Eastern Time Zone. Our stocks trade like water with market caps, on average, over $100 billion. Names like Stripe and Plaid and others aren’t necessarily as liquid.

So, if the portfolio was too much in private, we would simply be a VC Fund, which we’re not. We like to offer our clients and investors quarterly liquidity with 30 days’ notice. Our privates run about a fifth of the portfolio and we have found that’s a nice, kind of, mix between public and private.

[00:24:11] AH: What’s the sort of long, short waiting? Are you net long most of the time?

[00:24:16] WF: Yeah, so the fund is three years old, a little bit over three years old. Over that timeframe, we’ve run with net long exposure in that like 30% range. It does vary from month to month as we take our long and short exposures and move them around a little bit. But on average, it’s been about a 30% net long exposure over the three years. It tends at times to get higher and lower. I think our peak was probably around 40% or 50% on the net long side. Right now, we have a fairly sizable short book, and so it’s a little bit lower, but we do run on the public portfolio with a net long exposure.

[00:25:00] AH: What sort of companies on the short side do you look to bet against?

[00:25:05] WF: So, we talked a little bit earlier about our preference for owning payment names that have great tailwinds, whether it’s the payment gateways that are capturing the growth that we’re seeing from ecommerce trends. Vice versa, if you want to look at it the thematically, we are short several names that are cash dependent. And what we mean by that, there are businesses that manufacture ATMs. When was the last time you went to an ATM? While certain countries are going ahead and still developing and launching and banks are launching ATMs, I don’t have a need for cash.

So, I like to say a lot of our short book are thematic names that are dependent upon cash, whether it’s taking cash out of an ATM, whether it’s moving cash. Money transfers is very much a cash process. It could also be literally the shuttling of money on cash from point A to point B. Then if you want to look at the characteristics of our short book of these companies, just like we’re attracted to companies that are market leaders, that have durable competitive advantages, that have predictable and sustainable recurring revenue, our short book is filled with companies that don’t have those characteristics. These are not market share leaders. They’re market share donors. These are companies that don’t have competitive advantages, or a big wide moat around their franchise where a competitor can easily get into their business, undercut them on price and take market share.

Lastly, we have, I’d say some of the short book, these are companies that are making very large acquisitions, because they’re not growing, they’re leveraging up their balance sheet and doing anything to grow. So, you’ll find that they are management teams that are not where we would consider properly allocating capital.

[00:27:05] AH: As someone who takes short positions, how much pause did the GameStop saga, and the other companies that were targeted for big short squeezes?

[00:27:13] WF: Yeah, it’s been fascinating. The late January environment, whether it’s GameStop, or others, the Memestops, if you will, certainly impacted Robin Hood, where a lot of them were trading Reddit and Wall Street bets. Got to a point where it had seven or eight million active users. And when you start putting 7 to 8 to 10 million retail traders together, and even if their purchases are not of size, they can buy 100 shares of a certain stock, 8 million of them buying 100 shares of stock really can move a stock.

I think it goes down a little bit to portfolio management, Andrew.To me, one of the big lessons from that late January environment was the asset management firm that was heavily short. GameStop had a very, very large bet on that name. And fundamentally GameStop has been an awful stock. If you were to look at the underlying fundamentals of that business, there’s no one who’s really dying to wait in line to buy a hot video game anymore. That was very much a 10 years ago, 15 years ago event. Now all that’s online. The fundamentals of GameStop have not been great. Now that advisor, that money manager, that hedge fund was very short that stock, and took an outsize bet on that position. And he was right, but when 8 million or 10 million people start going against you, you have to recognize that, you have to adapt, you have to adjust. If you had too big of a bet against a name like GameStop, why wouldn’t you kind of pull in your horns a little bit and adjust? What they did was they dug their heels and said, “No, we’re right. We’re smarter than these 10 million people.” Once the margin call started to come through, it was kind of game over.

But we don’t take huge positions, both on the long side and the short side. Our average long will be about 3%, 3.3%. Our average short is about 2% to 2.5%. So, none of those are what we’re going to call massive bets. Frankly, if we were to see something happen, similar to what happened with GameStop, we’re not married to our positions, I’m married to my wife. So, I would go ahead and move on, take my medicine, take my lump and move on. So, I think that was really kind of the lesson learned on that. Also, GameStop, and I don’t really know how this is possible, we only deal with prime brokers and platforms that are following very strict rules. I saw something to the tune that GameStop was over 100%, short interest was over 100%.

If I short a stock, I can’t short that position. I can’t create a short in that position if I don’t get that borrow from my platform. So, I’m kind of curious how certain players are able to short a stock above that 100% threshold. Now, obviously, you can use features and options to synthetically create a short, but we’re not recreating the wheel here. We run a very plain vanilla hedge fund. All of our positions are in individual stocks, no benchmarks or indices to create our shorts.

You talked a little bit about it earlier. I’ll talk maybe a moment on it now. Our long book, we are long term investors. We are not short-term traders.The short side of the book has much higher turnover, where if we’re seeking a 10% or 15% move on an individual security and we get it, we’re very much likely to take that and move on to something else. And do, while the long book, we are long term investors, the short book, we’re not traders, but we are certainly much more short term focused.

[00:31:17] AH: I guess that makes sense. Because I mean, with the short position, you have a defined amount that you can actually make, right?

[00:31:25] WF: An unlimited downside, right? If I buy a stock and it goes bankrupt, like certain companies did during the financial crisis, and I’m Lehman, I lost 99.9% of my investment. Okay. If I short a stock, and it goes upand it has unlimited upside, my downside risk is in theory, unlimited. It’s not 99.9%. My downside risk on a short is unlimited.

[00:31:54] AH: It reminds me when you say that, when Volkswagen became a one point very briefly the –

[00:32:00] WF: Largest company in the world, yeah.

[00:32:02] AH: Yeah. Any fund that was short that, before it happened was just absolutely taken to the cleaners.

[00:32:08] WF: Same thing happened with, I mean, Volkswagen, and I’m no auto industry analyst. But same thing happened a couple years back with Tesla. There was a very vocal group of investors that simply said that Tesla made no sense on a valuation perspective. And the fundamentals were struggling, they were raising capital in the market, and there was a very large group of investors that were short Tesla. Well, when that stock went parabolic, and then the S&P added it, they got annihilated.

So, it’s one thing to go ahead and make a bet on the stock on the long side or theshort side, you just have to keep it under control, you have to understand your risk. For me, that comes down to portfolio management and risk management, knowing what you own, and keeping that bet in a relatively decent size where we can feel comfortable with what this we are taking.

[00:33:04] AH: Right. I’d be remiss, seeing as we’re talking about Fintech today, if I didn’t ask you about Bitcoin and crypto, and I guess it’s a two-part question. First of all, is that something that you invest in, in your fund, and I guess more generally, what your sense is of the current sort of mega boom?

[00:33:25] WF: So, the last kind of big lift off for Bitcoin was late 2017. We do a lot of writing and our proprietary research is available on our website, manolecapital.com. I wrote a note, in essence, calling bull bullshit Bitcoin in mid-December of 2017. It was around $10,000 or $11,000. Within two weeks of me publishing that note, Bitcoin shot up to 20,000, nearly doubled on me. So, talk about just awful timing on that note. But if you look at 2018, you saw Bitcoin come down, I think it came down in 2018 by about 80%.

So, a part of my issue with Bitcoin has been in order to be a currency, you really need two things, two requirements. One, is it a store value? So, can this asset smoothly maintain its economic value, rather than rapidly depreciating? And certainly, you don’t want high volatility. That is still a question, but we are slowly seeing a lot of institutional investors and a lot of retail investors say Bitcoin is a better version of gold. It’s a digital form of gold. If you want to say Bitcoin has $1 trillion of a market cap right now, call it 55,000, 60,000, where it’s at, compare that to gold, which is I want to say a $10, $11, $12 trillion market.

Now gold has a lot of uses, about half of it for jewelry, and about a third of it for consumer electronics.But as a store of value, we are slowly coming around to the concept that digital currencies and Bitcoin can be a store of value, and certainly an inflation hedge. And we’re seeing, with interest rates being so low right now, and the government with stimulus programs last year from COVID-19, doing about $5 trillion in stimulus spending, there’s going to eventually be inflation, and many people look at either gold and now Bitcoin as an inflation hedge.

But for us the real issue, going back to that 2017 note, and to some of the work we’ve done recently, is we struggle with Bitcoin and digital currencies acting as a medium of exchange. Can I walk into a store and will I be allowed to walk out of that store with a good or service? Can I use it for purchasing, for trading goods and services between a merchant and myself? And the answer to that is, unfortunately, no. I can walk into Starbucks and use my phone to buy a cup of coffee, and I can use a credit card, I can use cash, and we’re just not seeing digital currencies and Bitcoin as a medium of exchange. But all of that is very quickly changing.

Last week, we saw Visa make an announcement about the end of March, we saw PayPal come out with an announcement saying that if you bought Bitcoin in your PayPal wallet, and literally they have millions of people, them and Square Cash App, had millions of people that are buying digital currencies like Bitcoin in their wallet. I can hold on my phone and store on my phone, say a $1,000 of Bitcoin. What they’re now going to enable me to do is walk into Starbucks or CVS or Walgreens or Panera or any of these merchants and use my PayPal or Square Cash App digital wallet, and allow me to transact, whether I want to use my Chase debit card, my Wells Fargo credit card, or Bitcoin.

The problem with all that, Andrew, is this. And this is kind of the hidden story that most people are not talking about. The IRS does not consider Bitcoin and digital currencies to be currency.

They consider it to be a physical asset. There’s a big difference when it comes to taxes, whether you’re a currency or you’re a physical asset. If I have an embedded paper gain, I bought $1,000 of Bitcoin on PayPal and it’s in my wallet, and that $1,000 is now worth $2,000. Great, let’s just say I want to go ahead and use some of that $2,000 of Bitcoin to transact at Walgreens or CVS or Starbucks. That is going to entail a capital gain, right?

[00:38:00] AH: Deemed disposition, right?

[00:38:02] WF:  So, PayPal, they just came out with an ad, I got it via email, saying you can now use your Bitcoin in your PayPal digital wallet to transact. And in the fine print, you actually have to, in order to do that, you have to give them a W-9, because every one of those transactions, you might incur a cap gains tax. Now, I don’t know, I like Starbucks, I really love Starbucks and coffee, but I don’t want to incur a capital gains tax as well as my sales tax in addition to my $5 cup of coffee.

[00:38:39] AH: Going back to what you mentioned about how one of the three characteristics of money is that there should be a store of value, and I think what you’re getting at there was a stable store of value. With the volatility that Bitcoin exhibits, I mean, it just seems like it’s a series of huge booms and huge busts.

[00:38:58] WF: Yeah, so one of the things, when we talked about our note in late ‘17, we went through an example that, let’s just say you’re a merchant, and there’s a lot of noise recently over the last month. Tesla bought $1.5 billion of Bitcoin and Elon Musk came out and said, “We’re going to allow you to transact in Bitcoin to buy a Tesla.” That’s great in theory. The problem with that is what happens if I return my Tesla? Now, I don’t think there’s going to be a ton of people who buy it and want to return it. But Tesla has the right to go ahead and pay you back in either cash or Bitcoin and that’s because of the volatility of Bitcoin. And we went, in that note in 2017, we went through an example that, let’s just say Best Buy has $1,000 TV that they’re selling. And let’s say their margins on that TV, Andrew, are maybe 5%, maybe it’s 10%. So, costs them 900 plus dollars to buy that Sharp or Panasonic or Sony TV and they’re selling it to me for $1,000.

Now, forget about all the costs of having a physical retail brick and mortar location, which has costs, rents. Forget about the cost of labor having employees there to check me out. Forget about the cost of electricity and insurance and everything that goes into running a store. Let’s just say they took $1,000 in Bitcoin from me at the point of sale, and I walked out that door with my TV, my 60, 70, 80-inch television. Whatever it might be nowadays. And they get paid that next day. They have a 2.5% call it cost to accept my credit card transaction if it was a Visa card. But if it’s a Bitcoin transaction, the fees would be materially higher, which they are. They range anywhere from 5% to 6% to 7%. But if they took Bitcoin, tomorrow morning, they would have, what would it be, in this example, $975 ballpark, in their bank account. If Bitcoin overnight, and Bitcoin trades 24/7, 365 days a year, if Bitcoin had a 10% move overnight, that merchant acquirer putting money into Best Buy’s bank account the next day, would go ahead and say, “Sorry, Bitcoin went down 10% overnight.” They would go ahead and take the hit on that volatility. All of a sudden, their margin on that TV would disappear. In fact, they would lose money on that transaction, if Bitcoin had a 10% move on any given day, certainly in that case, overnight.

So, the volatility of it really struggles to make it a great store of value. But look, there’s a lot of institutions, big asset managersand companies that are putting digital currencies like Bitcoin on their balance sheet. Tesla being one, Square being another, Micro Strategies being another, and they’re saying, “Look, it’s a better asset to hold than US dollars.” To your point, it’s certainly more volatile and this yearand last yearit has had a meaningful move higher. Last year it was up 300%. This year, it’s up almost double. But don’t forget, if you have it on your balance sheetand you’re a publicly traded company, and in 2018 the asset goes down 80%, your investors are going to be pretty upset with you with that decision of putting Bitcoin and digital currencies on the balance sheet.

[00:42:31] AH: Right, because you have to mark the market, obviously, right?

[00:42:34] WF: Yeah.

[00:42:35] AH: This has been fascinating. Is there anything that you’d like to tell our listeners before we sign off? Any topic? I think we’ve covered a fair bit of ground.

[00:42:44] WF: We did. One of my favorite things, one of the days that I look forward to is coming up in May, and it’s May 22, 2010, the first transaction using Bitcoin for purchasing goods occurred. I don’t know if you’ve heard about it. Laszlo Hanyecz in May 22, 2010, bought two large Papa John’s pizzas. And while they were great pizzas, they had all the toppings on them, those two Papa John’s pizzas, Laszlo paid 10,000 bitcoins for. And so that has a value of $550 million right now.

So, when you start to think about using Bitcoin or digital currencies as a medium of exchange, I always like to think about Laszlo, forget about the IRS impacts and the tax implications. I think Laszlo is probably all right, if he had some other Bitcoin, certainly that digital currency has gone straight up. But I always chuckle when May 22 comes around. That’s the first purchase of goods with Bitcoin and if that was any indication of how successful that was for Laszlo, I’d say he’d easily give up those two pizzas for getting back even a portion of those Bitcoins.

[00:43:59] AH: I feel sorry for the guy. Like you, I hope he has some other Bitcoins. He probably thought he was getting a hell of a deal at the time.

[00:44:08] WF: Yes. Those two pizzas probably were $25 if he were to pay for him in cash, and the value of the 10,000 Bitcoin was $41 or $42 at the time, so he thought he was giving a nice tip to the guy.

[00:44:22] AH: Yeah, I had some good pizza in my day, but –

[00:44:24] WF: Not that good.

[00:44:25] AH: Not that good. So, thank you to our listeners for listening to this podcast, and we’ll be back soon. But yeah, this was a great conversation. Thanks again.

[00:44:34] WF: Thanks, Andrew.

[00:44:35] AH: Okay, all the best.


[00:44:36] JM: Thanks for joining us on this episode of The Pitch Podcast. Make sure you check us out online at thepitchboard.com. If you liked our podcast today, please make sure to subscribe to The Pitch Podcast so you don’t miss an episode.


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