The Heath Barnes Show

Mortgages Reimagined

with your host, Heath Barnes

Cryptocurrency 101 With Phil Bonello

HBS 9 | Cryptocurrency


Today on the Heath Barnes show, we’re speaking with Phil Bonello, partner with Plaintext Capital, a firm actively managing a portfolio of crypto assets by combining a venture investment framework with quantitative signals to manage risk.

This is an exciting episode because although it’s not about mortgages, I’ve had many people ask for an episode about cryptocurrency, and Phil is one of the best in this field.

He has more than six years of professional experience in crypto investing (a lifetime in this industry), including being Director of Research at Grayscale, the largest asset manager in the crypto ecosystem.

Phil is a great guy, he has unbelievable knowledge in this space, and as this is a subject I’m passionate about, I can’t wait for you to hear what he has to share.

Listen to the podcast here


Cryptocurrency 101 With Phil Bonello

I’m extremely excited to have Mr. Phil Bonello on our show. I know it’s not about mortgages but more importantly, it’s about cryptocurrency. I’ve gotten a lot of requests from our readers to do an episode on cryptocurrency because some of you know I’m into cryptocurrency. The reason I brought Phil on is that he is one of the forefathers of cryptocurrency because of his background. Here’s my relationship with Phil. My nephew, Ben Landon and Phil were our best friends. Phil has a great track record of working at Grayscale. If you haven’t heard of Grayscale, it is the largest holder of cryptocurrencies in the world. Phil could probably tell us more about that.

It’s ironic that we are having this show after Jack Dorsey stepped down from Twitter and decided to focus on Block. Here’s the quote that Jack says, “I don’t think there’s anything more important in my life to work on. I don’t think there’s anything more enabling for people around the world.” What he’s speaking about are Bitcoin and cryptocurrency. Welcome, Phil. I appreciate you being on the show. I love to know how you got into cryptocurrency.

Thanks for having me, Heath. I’m excited to be here. I have been hopping around in the cryptocurrency space for several years now. I was working at IBM out of college. I worked on predictive maintenance systems. It’s having a sensor on an industrial machine, and it would tell you when the machine was going to go down. I was into machine-to-machine communication, and at some point, I was on a message board on the internet.

I happened upon this thing called Ethereum. Ethereum essentially is a distributed network. It’s a little bit like Bitcoin but it allows for more flexibility in what you can do and build on it. I went down the rabbit hole and started some independent research trading. I worked for a research firm called Messari. I joined a hedge fund called Ikigai Asset Management. Later, I joined Grayscale Investments to lead their research efforts. Grayscale is the largest asset manager in crypto. They have $60 billion under management. When I joined, it was $2 billion. A few years later, it just exploded.

In 2017, some of our research shows they had $200,000 million. I don’t know any organization that’s gone from $200 million to $44 billion or $60 billion. That’s amazing.

They are the fastest-growing asset manager of all time. That’s pretty amazing.

You left Grayscale to open up your own “hedge fund” called Plaintext Capital. At that time, you were 30 years old. That’s a pretty aggressive thing to do but I would do the same thing. Tell me how that came about.

I was at this hedge fund from 2018 to 2019. The crypto world was not the same at that point. It was just Bitcoin and Ethereum. I was interested in doing research and making investments but there weren’t any investments to make. In the past years, we’ve seen the explosion of decentralized finance, which is borrowing, lending, exchange, structured products, and derivatives. It’s basically the re-imagining of all finance but in a decentralized fashion.

We’ve seen Web3, which is a large encompassing sector but it could be a distributed storage. It’s disrupting the AWSs of the world. We have things like shared compute. We have NFTs now and content monetization. There are so many different sectors that are investible. It made me want to get back into the investment side of the business and put together a thesis and strategy and get out there.

Finance is about supporting commerce. Share on X

I’m sure it happens to you as well. What do you say to the people who are like, “I’m too late in investing in Bitcoin or cryptocurrency?”

People aren’t too late to learn. From an investment standpoint, this is a very volatile and cyclical market. It’s tough to time correctly but it’s not too late to learn. 1% to 5% of the world is pretty knowledgeable on crypto at this point. We are still in the 1997 to 1998 area if we are comparing it to the dot-com boom. There’s still a lot to learn and build. The user interface and experience are not there yet. We haven’t seen adoption at scale but it’s coming.

The one thing I hear from most people when they hear I’m in cryptocurrency and don’t understand it, they are like, “Explain Bitcoin and Ethereum to me. What do I need to know about cryptocurrency?” Most of my readers have the same question. They have some money to possibly invest and don’t know how. As you said, it is never too late to learn. What would you advise them? What would you say to someone that says, “Explain it to me?”

There are so many different parts to explain. There’s Bitcoin, which is a currency. There’s Ethereum, which is a development platform or network, and then you have applications. These applications operate without any central authority. That’s what’s important. From a learning standpoint, I would point them to resources like Messari. Messari is a good research dashboard. They put out content all the time. They focus on all different sectors. It’s a good platform. They are knowledgeable over there. It does take time to get your feet wet and hands dirty.

When I got into cryptocurrency at the beginning of COVID, I didn’t know anything about cryptocurrency. Several people said something to me about it. I started teaching myself through YouTube. I’m not that computer literate. I am deep in the middle of DeFi now. For our readers that don’t understand what we mean when we say DeFi or Decentralized Finance, let’s say you own $500,000 worth of Ethereum. You can borrow up to 80% loan-to-value and get this at a rate of less than 1%. It’s decentralized. Meaning that there’s no one that’s going to tell you, “No.” How do you think DeFi will change the crypto industry moving forward in the next few years?

Your example is a good one. One of my partners came from JP Morgan. His a-ha moment was when he saw lending platforms in DeFi. At JP Morgan, let’s say that his client has $1 billion and wants to take out a $100 million loan, he has to file all this paperwork and proof of assets. It’s a big ordeal and takes a long time. That’s someone with $1 billion in JP Morgan. With DeFi, you don’t have to ask anyone’s permission. You can just go in there. As long as you have the collateral, you can take out a loan. That’s a great example.

DeFi, to me, is the necessary infrastructure for the rest of commerce to exist in crypto. When we think of finances and a sexy thing in day-to-day life, you are not just going on. Now, it’s become a little bit bigger deal with speculation, meme stocks, and stuff like that. Borrowing, lending, and structured products are not everyday tools for everyday people but that is backend infrastructure and will support commerce, generally. That’s what finance is about, supporting commerce. We will start to see all commerce built on top of DeFi. Those liquidity rails.

HBS 9 | Cryptocurrency
Cryptocurrency: DeFi is the necessary infrastructure for the rest of commerce to exist in crypto.


If I was going to do an analogy, if you want to get in the finance business with the stock exchange and loaning out money, you’ve got all these regulations. If you want to be your own bank in the crypto industry, you could be your own bank, loan out your own money, and make insane returns. I don’t think people understand or have seen this side of cryptocurrency like you and I have. The banks are nervous about it. For people who say, “I’m too late moving forward,” no.

It’s still very early.

I talked to Phil a few years ago. I don’t know if you remember that conversation. I was like, “What should I do?” You were like, “Go with 50% Bitcoin, 25% Ethereum, and 25% Altcoins.” I wish I had listened to your advice. I’m taking your advice now, but I have changed it. For people that are reading, how much Bitcoin do you think they should have? How much Ethereum? How much is Altcoins for someone that’s dabbling in it?

This isn’t investment advice. They lie at different levels in the risk spectrum. Bitcoin has been around the longest. It’s the largest market cap asset. It’s reasonable to assume that it has the highest probability of being around in the future. Ethereum is the second oldest major crypto and the second highest by market cap. That’s the second least risky. It’s the most conservative.

You certainly can make outsize returns dabbling in the alternative assets in crypto but it’s hard to weed through exactly what is good out there. I usually steer people towards the more conservative end of crypto until they are comfortable with what’s going on. They have been through some market cycles. Crypto is insanely volatile, which is great on the upside. That’s why a lot of people love it. It’s also pretty brutal on the downside if you don’t have a risk management system in place. It’s important to have that risk mentality.

How do you respond when people say, “Bitcoin or the crypto market is too volatile?”

Certain people have to deal with it differently. Some people should dabble and get in 1% of their net worth, so if that disappears, they are not going to be super upset. As they continue to learn that 1% might turn into 5%, they are going to be incentivized to learn and dig in more. For people who are young and can take on more risks, that volatility is an opportunity. If you have a good understanding of a project, that volatility on the upside is rewarding. I personally love the volatility. You have to have a risk management system in place.

That volatility is an opportunity. Share on X

I personally liked the methodology of trend following. People have different methods for implementing trend following but a simple method is taking two moving averages on a chart. When one crosses above the other, you buy, and when it crosses back below, you sell. It’s a very simple, unambiguous methodology for managing risk. It’s simple but it’s something that has been used for 150 years now. There’s no magic there but it will make sure that you don’t lose all your money.

Bitcoin and the cryptocurrency market are volatile. As would the stock market is if it was open 24/7, 365. A lot of it is governed by the SEC, and they have so much leverage you can take out. In a cryptocurrency, there’s no one governing. You could take out an insane amount of leverage, which causes all of this volatility. As of late, they brought out the futures contract as an EFT, which makes the market even crazier. Back to your point on the market cycles, can you go through for the readers where every year, there’s a four-year cycle and what that’s about?

Some people will talk about a four-year cycle relative to the Bitcoin halving. For those not familiar, Bitcoin has an emission schedule. Every four years, that emission gets cut in half. People speculate that it causes a new bull market. I don’t know if that’s true but I know that we have gone through multiple boom and bust cycles in crypto. It has been educational to be around those because you experienced this insane volatility in a matter of years, whereas, in traditional markets, it’s more of a decade plus where you see these boom-and-bust cycles.

I’m not sure exactly how to explain it but a good way to think about it is that new technology comes out, which creates a story and buzz. That then creates price increases, which creates more buzz. New stories come out around those price increases. It’s a positive feedback loop until the price becomes a part of fundamentals or a rational story that they start to collapse and there aren’t any new marginal buyers. That’s why I like trend following. If things are going up, hands off the wheel and let it go up. If they are going down, hands off the wheel. Maybe I’m wrong here but let it go down. I’m going to wait for this to settle itself out. It’s a very cyclical market.

Is the main strategy you use when investing trend following? Are there other strategies you like to use for those people that want to get into cryptocurrency and want to learn about it?

I would say it’s a very easy risk management strategy. There’s something else that I like to keep track of. As you mentioned, there’s leverage in the market in crypto. There’s a product called the perpetual swap in crypto. The perpetual swap has a funding rate. It’s the financing rate to hold a long or short position. When you are long, it’s a perpetual swap contract. Sometimes when the market is super overleveraged, you will have to pay 150% APR to hold that long position.

To me, that’s a signal that there’s way too much demand for those levered products. You probably want to tread carefully. It’s the same on the short side. Sometimes the funding gets negative, and by taking a long position, you will get paid to do that. That’s typically a signal that you would probably want to be in the market. It’s an idea of taking what the market is paying you to take. When financing is super high, you probably want to be careful. When it’s super low, you might want to be a little more aggressive.

HBS 9 | Cryptocurrency
Cryptocurrency: In the crypto industry, you could literally be your own bank, loan out your own money, and make insane returns.


Can you talk about the different sectors now that are in the crypto space and what those look like?

You said that you got into crypto when COVID started. A lot of people jumped in after $4 trillion was printed. That relates very well to Bitcoin because Bitcoin has a fixed supply throughout, where there will only ever be 21 million Bitcoin. That’s in contrast to the ever-changing and ever-growing money supply in all countries. Central banks have their hands on the wheel and are taking us for a ride. A lot of Bitcoiners are interested in Bitcoin because it’s this money that can’t be controlled by a central authority. That’s one main and big area, which is currency or money.

As we talked about DeFi, it’s a huge sector that has grown. That covers anything from the exchanges. There are P2P or Person-To-Person exchanges. There’s no central party that is coordinating that exchange, person-to-person lending, structured products, and derivatives. A lot of people use Coinbase, Gemini or whatever it may be. You can start to do everything that you do on Coinbase, Gemini, or FTX on these decentralized platforms.

The user experience is lacking a little bit. At times, it can be expensive but we are moving in that direction. Here’s the final area, and it’s a big area. I mentioned that DeFi is a building block for the rest of commerce. We are starting to see the rest of that commerce be built out. A big part of it is content creation. I mentioned NFTs, which are Non-Fungible Tokens. All that means is that there’s a unique signature tied to a unique item. It’s like having a signed baseball card or basketball. That is the only one of those.

It hadn’t been duplicated. Like you said on a baseball card, there’s no way to create fraud with an NFT.

The digital signature is that unique digital signature. It can’t be forged. That digital signature has to point to something. It has a point to a piece of content. That content is now being stored, in many cases, on decentralized storage networks, which is cool. You start to see these different pieces of crypto fitting together like streaming music, for instance. Artists have notoriously been underpaid on these streaming platforms.

Now, artists can launch NFTs, which are music NFTs. They can create their distribution schedule. They can make 1 song that only gets sold to 1 person or create 1,000 songs that get sold to 1,000 people. They can create infinite songs. That distribution experience is from the artist to the user, not from the artist to a label, to a streaming platform, and to the user. They own that user experience and ownership experience, which is important. We will see all media and content creation disrupted.

The only way we will ever get out of debt is we print our way out of debt. Share on X

It’s giving the power back to the people. You talked earlier about inflation. You started talking about it, and Bitcoin has a limited supply. I remembered several years ago, I happened to jump in a cab in New Orleans with Ron Paul, my wife, and me. It’s total luck. I didn’t know him very well but we got into a conversation about the debt. He said, “The only way that we will ever get out of debt is to print our way out of debt, which is the same way most countries end up paying their debt off.” I don’t see us being the world reserve currency in a couple of years. It may be some type of cryptocurrency.

Ron Paul is a legend in the Bitcoin community because he had the foresight to say, “The only way that countries get out of debt is to debase the currency that denominates that debt.” That’s what every country and government has done throughout history. It will be interesting, whether it’s Bitcoin, Ethereum or some new crypto. Some people talk about central bank digital currencies as being the potential way to take over. A central bank digital currency is no different than any fiat currency. The reason is that it’s still controlled by the central bank. Since it’s so controlled by the central bank, it will be printed or the supply will be expanded in the same way that currencies are now.

It’s also important for the readers to talk about currencies. I look at most of the cryptocurrencies not really as a currency but more as assets. It means you can use them to buy things. You can use Bitcoin or Ethereum. For the ultra-wealthy in the world, what they are looking for is trophy assets. A trophy asset is something that’s always going to go up in value. You can borrow against it. There’s nothing that is going to impair it. Whenever someone says, “How can I buy stuff with this?” I’m like, “Think of it as a savings account that you will have forever. You should never take it out of the market. Learn about it.” Like you were saying, learning makes you powerful. It also will help you in your investments moving forward. It’s the future.

Some people take issue with the currency part of the cryptocurrency. They get stuck on, “I can’t spend it here. I can’t spend it there. I don’t believe that Bitcoin will take over as the global reserve currency.” That’s all fair but that’s the only one part of crypto. As I said, there’s DeFi and assets that represent DeFi. Those are more equity-like assets than they are currency. NFTs are more art than they are currency. The currency aspect is one portion of the whole story.

You can now borrow against NFTs in decentralized platforms. People say, “With Bitcoin, what’s it backed by?” What would you say when they say like, “What’s it backed by?” as a reason why they wouldn’t buy it?

It’s backed by social consensus. Everybody agrees that it has value. It has, for several years now. To be frank, that’s the same reason that the US dollar has value. People believe in it as a unit of account and a medium of exchange. If they didn’t, they would sell it, and the price of dollars would go down. We are seeing that, frankly. People are selling their dollars for speculative assets because those assets go up relative to the dollar. It’s a social consensus. Some people will push back on that and be like, “That sounds like a Ponzi scheme.” Money is a Ponzi scheme that doesn’t die.

I will tell you about the Ponzi scheme. Think about this. If we were not the reserve currency, you don’t see your dollar going down in value. You can’t print 30% of all currency in circulation in a year without it going down in value. We are being told that inflation is only 6%. That’s what we are being told.

HBS 9 | Cryptocurrency
Cryptocurrency: Look at most of the cryptocurrencies not really as a currency, but more as assets, meaning you can use them to buy things or borrow against them.


The CPI doesn’t include investment assets. It doesn’t include the price of real estate. It includes rent but it doesn’t include investment assets, which that is what I appreciate. The people who have money don’t say, “Now I have more money. I’m going to buy a ton more milk.” They say, “I have more money. I’m going to go buy more investments to compound my returns.”

If they came out and said, “Inflation is 15%,” people would be like, “What?” For our readers, on a simple basis for inflation, if inflation is 6% but it’s higher, let’s say 10%, what does that mean for their stock portfolio?

You have to start with what’s the definition of inflation. For me, I strictly look at the expansion of the money supply. I want to outperform the expansion of the money supply because otherwise, I feel like I’m getting robbed. We saw 25% to 26% of all dollars ever printed in the last few years. To me, that is the true measure that I index against. When you think of it in that term, you have to outperform 26% to make sure that you are not losing money. When you look at equities, they are 25% to 35% or something in the last few years. I don’t think it’s a coincidence that that’s the number. It’s not about the numerator. It’s about the denominator, and the denominator is getting debased.

That’s a great point. Everyone is looking at their stock portfolio, and it’s gone up 25% or 30%. They don’t care but what they don’t look at is, “Tell me this. How is it that half the nation was unemployed, and we immediately had a correction?” That’s when I started listening to some YouTube by Michael Saylor. For those who don’t know Michael Saylor, he is the CEO of MicroStrategy. They are the first company to buy Bitcoin as a hedge against what was happening. How do you think that is going to affect the market moving forward, where corporations are taking their dollars and buying Bitcoin as a hedge against inflation or putting their dollars in? How’s that going to affect the market?

It’s a huge positive for it. In what timeframe that happens, I’m not sure. We started to see it happen. Square started to buy Bitcoin for their balance sheet. MicroStrategy’s entire balance sheet is Bitcoin. I forget some of the other ones. MassMutual purchased some Bitcoin for their balance sheet. There’s a wave that is beginning. Crypto is a small asset class relative to a ton of wealth there that is in the world. As more businesses start to get into using Bitcoin and crypto as reserve and investment assets, it’s going to be a pretty big deal.

I appreciate the time you spent with me. I would love to have you back in the future, having somebody like yourself. For those of you that want might want to invest in cryptocurrency, Phil has done a great job so far with his hedge fund. I appreciate your time. How would people be able to contact you?

Twitter is usually where crypto happens. A lot of stuff happens on Twitter. My Twitter is @PhilJBonello, simple enough, and then email. Thanks for having me on. It was great talking crypto. We would love to come back some other time.

I want to acknowledge you for being curious. One of the things I learned about you which got you into crypto is that you were curious and a constant learner. I acknowledge you for that. I’m looking forward to seeing where you are going to be in a couple of years. I’m going to be watching you. Thanks for being on the show, Phil. I appreciate it.

There you have it. It’s another great episode. Don’t forget to check out You can find out more about all the ways we can help you on the website. That’s it for this episode. Have a great week. We will talk next time.


Important Links


About Philip Bonello

HBS 9 | CryptocurrencyFounding Partner at Plaintext Capital, an actively managed crypto investment fund. Previously, Director, Research at Grayscale Investments, the largest manager of the digital assets and Head of Research at Ikigai Asset Management.


Leave a Comment

Your email address will not be published. Required fields are marked *