A Conversation with Tom Lee, Managing Partner & Head of Research at Fundstrat Global Advisors

The following transcript is taken from episode twenty two of The Scoop, The Block’s first podcast. Listen below and subscribe to The Scoop on Apple, Spotify, Google Play, Stitcher, or wherever you listen to podcasts. Email feedback and revision requests to [email protected]. This transcript has been edited for clarity and length.

Tom Lee is one of the great luminaries of crypto and finance Twitter. The former chief equity analyst at JP Morgan made headlines during the bitcoin boom of 2017 with his calls that the cryptocurrency would soar to its price target of $25,000. Fast forward to today; Lee isn't making anymore price targets on bitcoin but he still makes calls on the market -- leading Fundstrat, a market research shop covering both equities and crypto. On this episode of The Scoop, Lee shared his thoughts on how the research business has evolved over the last 2 decades, why he doesn't think bitcoin is a macro-hedge and the largest roadblocks keeping big investors out of the market. We hope you enjoy the episode.

Frank Chaparro Ladies and gentleman thank you so much for tuning into what is a very very special episode of The Scoop. I am joined of course by my co-host Ryan Todd -- first episode in a while. We're happy you're here and then our guest Tom Lee, managing partner and head of research at Fundstrat Global Advisors. He's a dear friend of mine and an accomplished Wall Street researcher with 25 years in the industry, known for his opining on the bitcoin and crypto market but also has spent time and most of the business that he operates is involved in traditional U.S. equities and emerging markets. He also spent time at JP Morgan as a chief equity strategist from 2007 to 2014 and we're very happy to have him here to discuss things shaping both the bitcoin industry as well as some other macro trends that we're noticing here at The Block. Tom thank you so much.

Tom Lee Glad to be here. Thank you for that intro.

Frank Chaparro I think an interesting place to start since we're both in similar sorts of businesses. The Block is a research and news platform and you guys are doing equity in crypto research. I guess my first question is when we think about equity, research and analysis we often just think about price targets and what a given stock is going to trade at and in the bitcoin world, what is bitcoin going to trade at? And you've had different theses around that for the past several years. How though are they actually different? Walk us through how those two businesses, last time we spoke over dinner I think you said bitcoin is only really 10% of the business you guys run. How is the 90% different from 10%?

Tom Lee They're very different businesses. My cumulative work experience is as primarily a fundamental research analyst. I started off covering wireless companies in 1993 and just for perspective in 1993 there were only 34 million cell phone users. Today there's four and a half billion. So it's an industry that's grown by about 1,000x since then. And the investment research business is really built around a couple of things, one is you have to develop like a thesis and sort of show some sort of how this tracks the true narrative and investors therefore as you sort of work with the thesis they want evidence to either support or refute your thesis. And so that's in their minds, the edge. You become their primary source and in the institutional business it's a pretty well-established world where there's active managers and funds and people own equities and their positions and then they have research providers and consultants that help them understand their positioning or calibrate their own views. Crypto is very different because number one, there aren't centralized organizations to deal with. So when you cover a company or you're covering a market there's already information so a company has investor relations and they publish data points like the equivalent of key performance metrics and industries will do surveys or they'll make announcements or they'll push towards legislation in an organized way. And I think crypto is really more like a hive mind community. There really isn't a centralized Mr. bitcoin spokesperson and there's no bitcoin company yet. And they're not publishing KPIs or talking to the trading desk. So it's a very different business and I think because of that it actually makes traditional institutions really leery of trying to enter the market because it's hard for them to believe that they can come in with an edge.

Frank Chaparro Is it then your job to come up with some of those KPIs and present them as part of your thesis almost giving more information or doing more of the legwork than you would with providing a thesis around something like Ford stock or...

Tom Lee I mean I'd say part of our business is trying to bridge that, trying to explain that if you're a traditional investor how do you develop a thesis around crypto and still sleep at night even though you're lacking all your traditional resources. I mean if you think about how an analyst at a hedge fund, so we're just talking about how they make a decision -- they do a lot of bottoms up work. They write up a thesis. They have a model but they calibrate all this information with either sell-side research or consultants and that way they have a consensus that they can either say is wrong or right and they get a lot of trading color and know where the bodies are buried and who's a holder based on a lot of this information and the data sets. In crypto someone really has to believe more in the 20 year roadmap. I mean I think that's the real basis to make an allocation decision and that's going to be the most important decision for fund -- to put 1% into crypto and then understand the work over the next 20 years. And so it's a very different timeframe process and yes it's very different. I mean I think that question could like last hours because there's a lot of differences.

Frank Chaparro Sure so what's the value then of your services if it is such a long term outlook? Why put out, I don't know the the rate at which you're putting out reports but if it's on a quarterly or monthly basis, if it is such a long term view, why do you need to update your clients so frequently?

Tom Lee I think it has to start with how traditional markets have evolved, so in traditional like liquid markets, let's just take equities which in the U.S. is 20 trillion but it's 66 trillion globally. These are large markets and to give you a sense, if you're really trading markets in the U.S. there's 4,000 stocks of which the top 10 most liquid stocks in America have 20 times the trading volume of Europe. So if you want to say in the world where's the easiest place to buy and sell stocks it's America. Now here's the interesting question. There's 4000 stocks. So you and I would say oh OK well the stock market is therefore the cumulative price action of 4000 different securities that are businesses that have their own sensitivity to the economy, to their demographics, right? 80% of the performance of a stock is explained by macro factors. So in other words if you look at the performance of an active managers portfolio probably 70% of that performance is explained by a top down decision either related to monetary policy, positioning around a regime change, responding to some cyclical indicator. It means that macro is still one of the, despite people sort of not believing that the [...] it still mostly explains how the stock market moves.

Frank Chaparro What about as it pertains to bitcoin?

Tom Lee Well I think that's very true therefore in crypto, so if I had to say, can you explain bitcoin by some simple measurements? Believe it or not there are some sort of simple macro things that have explained bitcoins price. We are approaching crypto research from the same lens that we're not the team that's going to do the bottoms up research on a project or tell you what the roadmap is for a project. That is something that we can do but it's a different domain expertise than what I'm trying to accomplish. Fundstrat may publish research on projects but that's not going to necessarily be my domain expertise. Some simple things, one, I think you can show really conclusively that bitcoin is a network value asset so measurements of adoption have explained price movements. The second is because there is a proof of work to bitcoin that mining has actually proven to be a pretty important sort of way to set parameters around what is fair value for bitcoin. And of course it's actually explained because miners end up selling or hodling their block rewards and so it ends up providing essentially, acting as a buffer or a rough range where bitcoin should trade.

Ryan Todd So you're talking about quote unquote intrinsic value backed into by the cost of mining or...?

Tom Lee Yeah and I mean like these words are really tough because these are native digital assets. But yes it's largely the concept. I mean I'd say for instance most people think FANG stocks are explained by their individual business model. So some will say oh yeah Facebook is ad sales and it's growth and Amazon is based on its sales and you could you go through every one of these major stocks and explain their business model. But we published a report last year that showed 75% of the return of FANG stocks is explained by the growth of global internet users. So in other words if you just did a simple network value model on FANG 10 years ago or 7 years ago and you said this is what I think the global Internet market will grow by, you got 75% the return of the FANG stocks.

Ryan Todd So you'd say the approach at Fundstrat across the composition of asset classes that you do research on is top down not bottoms up?

Tom Lee Yes. I don't know what like the generally accepted math like terminology is for top down versus bottoms up. I would say our work is evidence based research, in the world at top down when when you look at traditional markets when someone says they're top down they'll start with their theory that central banks drive the world and and so then they're truly top down in the sense that they're only looking at a handful of things. I think Fundstrat's research approach is what we call evidence based research so we try to say this is what historically can explain market behavior pretty well and if it's in conflict with what we see as consensus then we have a variant call and then that's where we try to sort of say look, focus on these sort of factors and then if our thesis is right then the market's gonna move in this direction. You could say it's top down but I would say it's really with the belief that a lot of evidence in history can explain the movement of markets and that what we try to find and identify and it's not always the same, it's not static.

Frank Chaparro Do you think, I think a lot o