In this compelling bonus episode of the Master Investor podcast, renowned investor Cathie Wood, founder and CEO of ARK Invest, sits down with host Wilfred Frost for an in-depth exploration of the cryptocurrency landscape. Wood, a vocal advocate for digital assets and disruptive innovation, shares her nuanced perspective on the future of cryptocurrencies, distinguishing between true cryptocurrencies like Bitcoin and crypto assets, while explaining why she believes only a handful of digital currencies will ultimately succeed. From the revolutionary potential of stable coins and decentralized finance (DeFi) to her firm's strategic investments in Bitcoin, Ethereum, and Solana, Wood offers insights into how blockchain technology is poised to eliminate traditional financial middlemen and reshape global monetary systems. The conversation also touches on the ongoing Bitcoin versus Ethereum debate, ARK's selective crypto portfolio strategy, and Wood's economic analysis of recent market movements in both digital assets and traditional safe havens like gold, providing listeners with a comprehensive view of the digital asset revolution from one of its most prominent champions.

Podcast: Cathie Wood Part II: Why Bitcoin Will Always Be #1 Cryptocurrency

Host: Wilfred Frost, Founder of Master Investor Podcast

Guest: Cathie Wood, Founder of ArkInvest

Wilfred: Welcome back to Cathie Wood, who we caught up with earlier in the week, and she's still with us for a bonus crypto conversation. Cathie, thanks so much for sticking around.

Cathie: My pleasure.

Cryptocurrency vs. Crypto Assets: Understanding the Distinction

Wilfred: So, you are a big believer in crypto, of course. Are you a believer in all cryptocurrencies or only certain cryptocurrencies?

Cathie: No, not all crypto or supposed cryptocurrencies. We don't think there are going to be very many cryptocurrencies. In fact, there's cryptocurrencies and then crypto assets.

Bitcoin owns the cryptocurrency space when it comes to pure crypto. And now we have stable coins which are cryptocurrencies as well, but they are tied to the dollar because they're collateralized primarily by treasury securities. So Bitcoin is the cryptocurrency and we think it's going to be the biggest one by far.

Now it's focused on—it's a monetary system, rules-based. The rule is quantity theory of money, so 21 million units, that's where it's stopping and we're at about 20 million units right now. So that's quantity theory. Stable coins are based, as I mentioned before, on the dollar, and if you can find a way to use those stable coins, which you can in the decentralized financial services—in DeFi, decentralized financial services—you can earn money from your stable coins.

Just this last week, Coinbase introduced a product allowing holders of USDC who do not get the interest payments—they're not allowed to by regulation—but they're allowed to lend their USDC in the DeFi ecosystem, and they can earn as of last week 10.4%.

The Case for Stable Coins in Developed Markets

Wilfred: So I want to get into stable coins as a sort of idiot's guide if you can for me, because I can see the argument why a dollar-denominated, easy-to-move-around asset is attractive—whatever people want to say in the underworld or in certain countries where assets might get seized or whatever else is the case. What is the argument for someone that lives in London or someone that lives in New York? Because you can transfer a dollar with great ease or a pound with great ease, earn interest, have it backed by the central bank and the government. What's the advantage of doing that via a stable coin if you're in one of those countries?

Cathie: So, and you're right, there are two major stable coins today. Tether is primarily outside the United States and outside Europe now after MiCA—the regulation. So it dominates—the two have 90% of the market. Circle is quote-unquote more regulatory compliant, certainly in the United States. And there is a Euro version of USDC in Europe which has not taken off. So those are the big two.

Now why would we in the developed world—you understand the emerging world and we thought bitcoin was going to serve that role, so stable coins coming along has taken some share from bitcoin, which we didn't expect when we did our original analysis.

So in this world, what we're doing is taking the middlemen out of financial services. And what are the middlemen? All of those middlemen in the traditional financial world are there to lower risk—the risk of a transaction to the various financial institutions participating.

When we move into the world of blockchain technology, it's peer-to-peer. The middlemen go away. So the way I like to describe it in a way that's more understandable: for credit cards, it's automatic 2.5% tax on each transaction. Again, function of middlemen. That doesn't have to be anymore. We will—and the tax will be anywhere from 2% to 4% in the developed world or 25% if you're doing remittances in the developing world like, say, Nigeria.

All of that flattens out and goes to fee-based to the blockchains, which will drop to 1% or less.

Wilfred: Where are those fees at the moment? Because it's not like the cost of crypto mining and transaction cost at the moment—it hasn't got down to 1% yet.

Cathie: No, no, no. All of this is going to happen over time. I mean, yes, if you're operating in the world of just crypto, I just gave an example of USDC—a person saying, "Hey, personally, I can lend that out for a 10.4% rate. I'm not going to get that anywhere else." So that's one side of it. And that's kind of a saving rate. And those who are borrowing at 10.4% could never get that rate. They're too small. The banks won't have anything to do with them.

So that's the other thing that's happening because of DeFi. It is those who could not get loans, or the loans would be prohibitively expensive, now can. And savers on the other hand who are loaning the money out, they get a much better yield on their savings.

Wilfred: And but obviously take a bigger risk than placing that in a bank.

Cathie: But these are transparent ecosystems, and many loans are over-collateralized. And we learned this during Three Arrows and Luna and that whole meltdown. Anyone who was on-chain—their collateral was wiped out right away, meaning the financial institutions got their money back. If you were in the opaque and very centralized FTX ecosystem, you lost all your money. So it actually was safer to be on-chain than to be at FTX, which of course was a fraudulent company.

Bitcoin vs. Ethereum: The Great Debate

Wilfred: Let's touch on Bitcoin versus Ethereum because we had Tom Lee on a few weeks ago and he's a bull on Bitcoin, but he's even bigger bull on Ethereum. He thinks it will surpass the size of Bitcoin. Why is he wrong on that? Why is Bitcoin always going to be bigger than Ethereum?

Cathie: So Bitcoin serves three roles, and yes, we would differ with—I know you get on very well with Tom and we do too. Yes.

So the three roles: Bitcoin, as I mentioned, is the global monetary system, rules-based quantity rule to be sure, and that alone is a very big idea. It is also a technology—so layer one blockchain technology, never been hacked. The other blockchains cannot say that, right? And so that's why the monetary system is based on it. And it is the first of its kind in a new asset class. We wrote our first white paper on that in 2016.

So a new asset class. So it's got three very important attributes to it. I do think that Ethereum is playing a very important role, and therefore Ether, the native currency in the DeFi ecosystem.

A lot of the fees are going to the layer 2s. Robin Hood, for example, announced that it was going to start its own layer 2 like Coinbase has. It's called Base. They get a disproportionate amount of the fees. Now the question is: are there going to be so many layer 2s out there that they're going to start competing against one another and confer more importance to the layer 1? That is a possibility, and that is why we're invested in ether and we do think it powers the DeFi world. But I think these competing interests are maybe something that Tom and I can debate a little bit.

ARK's Crypto Portfolio Strategy

Wilfred: And they're always great debates when you have them and very friendly. And I know you're a buyer of Bitmine, the company. What about—is there a long list of other cryptocurrencies that you believe in, or is it actually a handful only?

Cathie: It's really only a handful so far.

Wilfred: Which are the other ones?

Cathie: Well, of course we've got Bitcoin now in our public funds. These trades are public, so I can tell you our exposures are Bitcoin, Ether. We're finally able to get an acceptable—from a regulator's point of view—way to play Ether, and we chose Bitmine Immersion.

And then Solana is the third one, and we can talk about that as well in terms of its role. That one is through—well, it's Breera Sports, and everybody thinks I or ARK just bought a bunch of sports teams, which we did not. This is the company into which Solmate—a Solana treasury—is being folded and supported by the UAE, Middle Eastern, and my mentor, our advisor and my friend Art Laffer is on the board of that one. So that's been very interesting. So those are the big three.

Hyperliquid is the new kid on the block, and we're waiting to see how that all plays out. It's exciting. It reminds me of Solana in the earlier days, and Solana has proven its worth and is there with the big boys.

So those we think are—and then of course there are other services like money market fund and Uniswap and a few like that, GoTo, which is related to the Solana ecosystem. So we will play certain derivatives, but if you're talking about the big boys or girls, those are the big three right now.

Gold vs. Bitcoin: A Market Analysis

Wilfred: And because we're nearly out of time, I just wanted to come to get your view in the end on gold because it's actually a really interesting day for us to ask this question. Gold and silver are up significantly. Of course, we're recording this on Monday this week, and Bitcoin and Ethereum 45 minutes ago when we started the conversation were down quite sharply, and it's not often that we've seen those two trade in that same way on the same day. Do you think the argument for gold is sort of stronger than ever? I mean, clearly the performance has been very strong this year. Where do you stand on it relative to Bitcoin?

Cathie: Well, we don't own it, and we're not saying it's going to be a bad investment either. It's just not what we do—technologically enabled disruptive innovation. But with my economics hat on, I always take the performance of gold seriously. Typically, it is a harbinger of inflation. I don't think that's the case this time.

We monitor something called the metals-to-gold index. So metal prices to gold prices—that has dropped below 0.89 levels. And it's got me actually worried about, okay, what is going on out there? It could be related to China and they're still going through a deflationary unwind of the property speculation there.

I think what's happening with gold this time around is geopolitical risk. And you'll notice on Friday night all of the chaos around H1B visas, right? And I think that uncertainty—it's like, "Oh my gosh, all of the foreign students from India and China and their parents," everyone's looking at this saying, "What is going on?"

Personally, I think it's just a negotiation with India that's going on and this will all be fine because we don't want to lose the best and the brightest from anywhere around the world, despite what—despite the rhetoric you hear right now. So I think that's all going to change, but it doesn't matter. The headlines are blaring and people are saying, "Okay, what do I do?" And people with a lot of wealth, so maybe older generation, are maybe shifting some into gold. They're not probably putting it into the digital asset world.

Closing

Wilfred: Well, Cathie, we are out of time. I've taken you for longer than we were meant to run. It's been such a pleasure to catch up in person, and a reminder to people that the full-length episode dropped earlier in the week as well as this crypto bonus episode. Next week on the Master Investor podcast, we will be joined by Freddy Lait, the founder of Latitude Investment Management. Make sure to tune in for that one. And if you've enjoyed the conversation, please do subscribe and leave us a five-star review.

Cathie: Thank you, Wilfred. It was fun.