Kevin O’Leary reveals his crypto investment strategy | Interview

Investment shark Kevin O', Leary, aka Mr. Wonderful, used to be among the loudest critics of cryptocurrency.

Sounds such a scam like that's just totally BS and I'm not going to take real money and put it into this thing. It's never going to happen.

Since then, o' Leary's views have changed dramatically and now he's managing a highly diversified crypto portfolio.

I am a huge advocate for Bitcoin. I treat it as an asset no different than a AAA office tower in Boston in individual tokens and coins and chains. I've got 33 different positions.

What is Mr. Wonderful's current investment thesis on crypto and what are the hottest projects he is betting on? Find out in another exclusive cointelegraph interview. So for a long time you were a vocal skeptic of crypto, but then you changed your mind about it and now you're an advocate. So what was the turning point that made you change your mind about cryptocurrency?

The regulator. What I started to see, I have many, many investments in financial services industries. Many of them are regulated already because they're issuing indexes and securities and whatever else. I cannot afford to be non compliant. That's, that's not possible for me. Everything I do has to be compliant by the regulator, otherwise it causes chaos in my business businesses. I have multiple investments. And so there was a period where the regulator was extremely proactive and you know, not constructive on cryptocurrencies. And it was a very difficult time with the SEC and the other regulators in the US So during that period, yes, I was a skeptic because I didn't anticipate anything that would change my mind if the regulator didn't. And then all of a sudden things started to change. I invest globally, so I'm very aware of what's going on in Switzerland, France, Germany, Australia, New Zealand, Canada, the Nordic countries. The regulators there started to open up and I have investments in those countries and in Canada, for example. So where the regulator allowed for ETFs that held the underlying being Bitcoin and Ethereum. So when I started to see that happening on a, on a global basis, I started to allocate towards crypto and have not stopped since then. So when facts change, I change also. I'm not, I'm not so rigorous that I don't have flexibility. And that's exactly what happened. And so now I'm extremely active. I have a staking desk. I work, you know, very closely with companies like FTX and Circle. I'M an investor in ftx. I'm a paid spokesperson for it them. I'm very active on the platforms. So. And I thought this year, here we are towards the end of 2021, I anticipated at the beginning of the year I was a 3% weighting in the operating company and cryptocurrencies as a basket. Today I'm over 10% and a combination of increasing my position in staking and also the capital appreciation of these assets over the last year. So to say that I'm involved in crypto today is an understatement. It's a very large portion of what we do.

Okay, cool. And if you had to point at a specific moment that made you change your mind? So you talked about the regulators and the change of attitude that the regulators had. But did that happen gradually or there was a particular moment in time where you thought, okay, this is the time I can get in.

The moment was when the Canadian regulator approved the first Bitcoin etf. Everybody knows that Canadian regulators are conservative and they don't make moves without talking to their global counterparts. For them to do this meant that they'd already had some kind of dialogue with other regulators in other jurisdictions and decided those were the rules for the Canadian etf. That was the moment.

Okay, cool. So what is your current investment thesis on crypto? If you had to broadly describe, what is your investment thesis on the crypto industry? Right now?

I look at crypto not as coins or tokens. I look at it all as software. It's productivity software. The projects that are going to last and be here, you know, a decade away from now are ones that actually solve problems. So let's, let's give an example. I'm an investor in Polygon. Why? Because I had a chance. You know, I'm very fortunate guy. I'm able to call up the leaders of these projects and these teams and they return my call and I asked to meet them anywhere in the world. In this case, we met in Dubai with the Polygon team. I'm an investor in software engineers. I always have been. I've been in the software industry for 20 years. They're very, very strong. And their mandate, what they decided to do, is to try and reduce the cost by sitting on top of Ethereum and aggregating transactions. So the gas fees are a fraction of what they would be if you're doing one at a time. I thought that was a brilliant strategy and I made an investment in Polygon. The same with Solana, the same with Ethereum, the same with hbar, all of these are software. If you're investing in, for example, in Google or in Microsoft, what are you investing in? You're investing in software. Why wouldn't you invest in crypto? It's software too. And the regulator is, in my view, going to eventually support these initiatives because of the tremendous economic enhancement and productivity they provide for the underlying economy.

So talking about specifically your portfolio in crypto, can you give us a bit of an overview? If you can give us some details about your portfolio construction in individual tokens.

And coins and chains. I've got 33 different positions, wide range of diversity. You know, I look at this the same way I look at managing an equity portfolio. Never more than 5% in any one name, never more than 20% in any one sector. So that theory, that mandate means that I can go up to 20% in crypto. Right now I'm just over 10, about 10.7. But I've also made equity bets. For example, I have an investment in WonderFi, a Canadian company that is democratizing DeFi. So they're providing, they're launching their product in January. They've been working on it for over two years. One of the biggest challenges for the individual, like my daughter or my son, who want to do staking and remain compliant with tax authorities, depending on what jurisdiction they're in, is it's very complicated to actually do it. If you have $14,000 in your bank account and you decide that you'd like to stake, stake some of it, wonderfi is working very hard to make that very easy to do. And that's one of my investments, because I think cryptocurrencies are not just for the crypto elite. There's a huge demand within the population to solve for the fact that interest rates are so low. So just on staking alone, that's a huge opportunity. I'm a big believer that NFTs, which are basically digital wallets of information, are going to be very big in the physical asset world. One specifically that I'm part of the advanced thinking on, if you want to call it that, I'm funding a white paper on it right now, is for the watch industry. The watch industry, as you may know, is one of the fastest growing asset classes in the world right now. Multibillion dollar secondary market in trading, fine timepieces. And we don't have any NFTs for authentication and insurance purposes. We want that and so does the watch industry. So the idea would be if you take a high resolution scan of the dial, you can identify that watch in perpetuity and you could avoid fraudulent trading of a piece that was made to knock it off. And that's of great interest to all the great watchmakers. Just my collection alone I want to do that on. So the whole point is there's so much activity on NFTs and yes, I'm an investor there.

Yeah, that's fascinating because you mentioned so many different projects and so many different coins, but your attention seem not to be too much focused on Bitcoin at the moment. So I'm curious to know what is your view on Bitcoin? Has your view on Bitcoin changed since you became a crypto advocate and how.

Yes, I have a position in bitcoin. It is not my largest. It is close. It's up in the top quartile though. Ethereum is larger than Bitcoin right now for me. I am a huge advocate for bitcoin. I treat it as an asset, no different than a triple A office tower in Boston. It's an asset. I don't consider it a currency. Everybody has their own opinion. My opinion is it's an asset. So I hold it. I don't trade it. I do stake it. But the point is I'm not selling my Bitcoin. The challenge I have with bitcoin and the whole industry has this challenge is we've got to deal with these ESG issues. There's a lot of criticism around Bitcoin because the amount of energy it takes to get a coin awarded. And in that area I'm working very hard. There's lots of initiatives to create Bitcoin. And I'm not saying we're bifurcating the bitcoin market, that one coin is different than the other. But if I'm a sovereign institution and I work with lots of sovereign institutions because I'm in the indexing business, they would like to fund bitcoin mining where they keep their own awarded coins, knowing with 100% certainty that they. They mine them in an ethical and efficient, sustainable manner. And that is where a lot of the new capital is going. And whether that be wind or solar or nuclear or whatever, those, all of those projects are happening globally and they're being funded by sovereign wealth because sovereign wealth has ESG and sustainability committees on top of their asset decision making. So the next generation of coins awarded are probably going to be held in perpetuity on balance sheets of companies that are funded to make them sustainable. And you know, that's one way to solve that problem.

But you say that every investor could invest up to 20% into a specific sector. So I would say, I would ask you what should happen in the regulatory atmosphere in the US to convince you to bring your allocation up to that 20% into the crypto industry.

What I really want to have happen is I want the regulators to bring policy forward on stablecoins. That's what I want. I want, because stablecoins are very important to me as a hedge against inflation. And specifically the one I've chosen to work with is USDC because I think it's the most advanced in terms of, in dialogue with the regulator, not here, but in geographies all around the world. It's a form of payment. It's also a form of hedging against inflation. Because if I can at least marry my staking program with inflation currently at 6%, at least I'm holding value. But I can't really do that until the regulator rules. Because even within my own operating company, with my own compliance department, they're considering stablecoins as an equity no different than a stock. So I really can't get past 5%. It's not like I can hold a huge 30% cash position. I mean, you know, when we sold off our commercial real estate, we had a huge cash position. We couldn't, it was 30% of the operating company. So, you know, we've been working hard to redeploy that capital. But I really want the regulator to rule on stablecoins. Now, you know that there's been some controversy with certain stablecoins with the regulator. I don't touch any of that stuff. Anything that's involved in, in, in a fight with the regulator, I have, I want nothing to do with. I am not a crypto cowboy. I work in a compliant environment. I don't want to get on, you know, some kind of a mission saying we have to sue the regulator. That's insanity. That's crazy. And that's really bad idea. And so I think all of us in this industry should understand that we work with the regulator to generate the most advanced policy we can get. And that the reason we do that, it's in our self interest of sustainability. And also it gives us way more in terms of what institutions can allocate into these asset classes. So we should definitely be thinking about that.

That's interesting because you choose stablecoins as one of the main tools to get value out of your assets. While cash, if you hold cash, you end up losing value. But a lot of people would say, why don't you use bitcoin then why you choose stablecoins instead of bitcoin?

Well, the challenge I have and many institutions have with bitcoin is volatility. So when you are managing or you're a fiduciary for capital, volatility is not your friend because you're mark to marking value of a portfolio every 24 hour cycle. So if you've been given a mandate by an institution, and most of these mandates are based on diversity and stability, your number one mandate is preservation. So if you're managing for a pension plan or university or state fund or whatever it is, that volatility really hurts you when you're being graded in terms of your mandate. And so I don't think you're going to see there's nothing wrong with putting Bitcoin in a 5% weighting up to a 5% weighting and treating it like an equity or an alternative. And I see tremendous interest in doing that from a 1 to 5% generally on average a 3% weighting would where you find bitcoin. But you're not going to get there to a 20, 30% in Bitcoin in an institutional or sovereign mandate. You're just not. Stablecoins have that potential if they were regulated.

You seem to be pretty confident that the regulators will eventually enable crypto to thrive. On the other hand, I had a conversation with Mark Jusko a few months ago who was expressing this very common narrative in the crypto space which goes like, there are the incumbents of traditional finance, like banks and the FINA financial intermediaries that are going to lobby the regulators or still use their influence in order to slow down this crypto revolution that we are looking forward to happen. So don't you see the role of the incumbents as a major issue for crypto to develop further and to get the regulators on their side?

I don't agree with that positioning. I don't think that's going to happen either. The only entity that can control the pace of regulation is the regulator themselves. And it doesn't matter what the incumbents say or do. They will go with the flow of productivity innovation. Banks, you know, are winning and losing all the time in terms of who makes more money, who has a higher return on assets. I can tell you what motivates a traditional money center bank is return on assets. They, they spend their whole day trying to figure out how do we optimize for return on assets. And if they're not looking at cryptocurrencies, they'll be left behind. That's what's going to happen? Because when the regulator finally rules just if it was just on stablecoin alone, they would have to open a stablecoin desk. Of course they would. Now, are they going to start from scratch or are they going to be working on it quietly in the background? My guess is they're working on it quietly in the background. They would be foolish not to be.

I wanted to ask you another question regarding the situation with inflation. So, as you said, inflation in the US is hovering around the 6% points. And the Fed now intends to wind down the stimulus measures in order to contain this trend. So how are these macroeconomic dynamics going to impact the crypto industry, the crypto prices in the months to come?

According to you, you're being taxed at effectively 6%. If you hold cash, maybe you don't want to call it a tax, but when inflation 6%, your buying power 12 months from now is 6% less. And that's a lot. And so we now have added pressures, and I'm no different than anybody else trying to figure out where do I deploy this, where can I get stability in this cash, where can I find a way to hedge? And it brings me all the way back into stablecoin. So I'm a huge advocate for solving this problem with stablecoin. It doesn't mean I don't want to invest in the other blockchains or the other coins or tokens or other ideas. I do. But. But I can't do 30% positions in mandates of any of them. That's too volatile. So these issues are not going away. The dialogue is not going to change. You're going to see a lot of discussion about this in the first and second quarter of next year. And you're right on the money to be covering this. There's no question this is going to be very important. And I think we're going to start to see some moves with the regulator very shortly. Not just in the US we talked about Canada, we talked about Germany, talked about Switzerland, the same. Those regulators are all talking to each other. They're all talking to each other. If we could just agree on one stablecoin between those jurisdictions, that would be huge productivity enhancement. And I anticipate that will happen.

Awesome. Okay, Kevin, that was a great conversation. Thanks a lot for jumping on our show.

You got it.