There’s a ‘big problem brewing’ in cryptocurrency space: Kevin O'Leary

Kevin O'Leary, Shark Tank Investor and Chairman of O'Shares ETFs, joins Yahoo Finance’s Alexis Christoforous to discuss an outlook on cryptocurrency and his take on Biden’s first 100 days in office.

Video Transcript

- Kevin O'Leary Shark Tank investor and Chairman of O'Shares ETFs. Kevin good to see you again. A lot's happened since we talked just a few months ago and I want to bring you back to August of last year before Biden became president. And at that time, you thought that Biden wouldn't be bad for the stock market, you thought it'd be pretty benign. Have you changed your outlook now?

KEVIN O'LEARY: No not yet. These proposals that he's-- in some ways he's beholden to a certain element, fringe element of his party and so he has to rattle the chains regarding the whole theme of taxing the rich and raising corporate taxes, and I understand the political pressures. But the reality of that actually happening anywhere near the proposal he's making is very low because it would make the United States the highest tax jurisdiction in the G20. And there'd be the reversions again and capital would leave the country and there'd be a lot of corporate financial restructuring. I don't think we want to go there, and I think members of his party knows that's not a good idea. So I think a much more tempered corporate tax rate is likely to come.

And then of course, we have this second leg, the infrastructure package, which both sides agree is desperately needed is how you package it because in the current bill, you're throwing everything in the kitchen sink in there. And that's the old game in politics and I think the market understands all that. This is just the normal yangyang that goes on between parties, and then you've got the fact that this is something for the market to think about and I know other others are thinking this way.

When you look at history and I'm a bit of a policy wonk, I go back and look at history regardless of which parties in the White House doesn't matter you tend to lose seats in the midterms. And so you've really got a bit of a time pressure on here. If Biden wants to get anything done in a big stroke way, he has to get it done in the first two years of his mandate because it's highly likely that he will be in a more precarious position after these mid-term elections.

That's just the way it is. You tend to lose seats and so this really delicate balance of power could shift it back for the check and balance that the US has been so good at doing for so long. So I think-- I don't see a lot of risk of a crazy tax change and I think the market's reflecting that.

- Have you made any changes Kevin to your personal portfolio when you look at some of the policy proposals that return to big government and big spending during the Biden administration? Even if it all doesn't pass, which is very unlikely but even if some of it passes has that sort of informed your portfolio decisions lately?

KEVIN O'LEARY: Yes, it has since we last talked. I have removed hydrocarbons from my core holdings. I used to be a big shareholder in Chevron, Exxon, Schlumberger. They are all gone. And it's not that I don't love oil companies I think they're very viable part of the economy and they're doing their hardest to clean themselves up towards the ESG mandates but here's the problem, I have many companies that I'm an investor in the service institutional clients, whether it's involved in FinTech or whether it's in the ETF markets Whatever, we listen very closely to what our clients want.

And today institutions they have a sustainability committees. They have ethics committees that sit on top of their investment allocation committees. And so if you're bringing in an idea, let's go to 3 and 1/2 % weighting in Chevron which is a fantastic balance sheet by the way, you're probably going to get shot down. And why that should bother you as a shareholder is, you always want a core position to have-- the incremental buyer should always be an institution. Should always be a sovereign. They're the ones that provide liquidity. But all of a sudden, you start to see these stocks being removed. Even though Larry Fink letter of just a couple of weeks ago that slammed the sector around ESG concerns.

This is a big problem because what happens is, you actually get a situation where because you're losing the incremental buyer over and over and over again as they duck out of hydrocarbons your price earnings ratios collapse. They go down. The companies still deliver earnings but the PE they trade at diminishes.

So I would argue you're going to have an underperforming sector in energy this year regardless of whether oil $60 or $70. So that's a big move for me. I've also started to adjust for inflation because I think another $2 trillion coming out of the helicopter sky being printed is going to show up in inflation somewhere and that I've reduced my holdings from 50, 50 fixed income, equity down to 70% equities now and 30% fixed income. And I put on a 3% weighting in Bitcoin which is new for me and that was an interesting transaction.

- Yeah. I want to talk a little bit more about that. So you're finally now playing in the Crypto space, are you using it as a hedge when it comes to inflation, why include that in the portfolio?

KEVIN O'LEARy: Well, I am using it as a hedge. I'm considering it as property and I think it acts that way. I mean it is volatile, there's no question about it. There is a big problem brewing in this space because I-- and I've mentioned this a couple of times. When I disclosed that I was moving to 3% weighting I got a mountain of calls from institutional investors saying, wait a second where are those coins from? And I said, well, everybody knows you can tell the time of creation but you can't tell location of creation.

Because currently 60% of coins mined in Bitcoin come from China where they don't care about sustainability and they certainly have issues around human rights. And so there are many institutional clients that do not want to own so-called blood coin from China. And as a result, we've got a really interesting situation emerging that the actual provenance of a coin over time one that's mined sustainably, one that's mined in the jurisdiction that supports human rights and everything else, the ethics committees approval could be worth more than just a generic coin that can't prove its provenance.

And I'm not sure when that's going to happen, but I have certainly shifted my holdings. I don't own random ETFs with blood coin in them. I know the provenance of where my wallet coins were mined now and that means I've had to take equity positions in miners. I've had to start investing in them with the covenants in place that I would like to be paid back in a royalty of a clean coin.

And I don't know if I'm the only person dealing with this, I suggest not. There is a huge problem going on in this industry and you're going to see it come to a head at the June 4th, June 5th Cryptocurrency here in my Miami-- Crypto conference here in Miami. The industry has done a poor job in lobbying its case around sustainability.

And I have-- I spent a lot of time talking to CEOs of miners and various entities that want me to invest in their mining operations. Collectively, they've done a horrible job. They don't push back and I'm hoping to be part of that solution. I'm trying to organize now a council of sustainability, certainly where I'll be investing in the companies that do set sustainable mandates, they will be the ones I invest in and I would like to make them a showcase for the industry that we care about sustainability. There's no reason a North American miner can't lead the way and take away the leadership from the Chinese who do not mine sustainably.

Now that may not matter to you but it matters to a lot of institutions. And until everybody gets on board and stops burning coal to create electricity to mine coin, it's going to start to have a huge differentiation like oil and water. We have got to fix this industry and we also have to go back to our politicians in various jurisdictions, including Europe, including Canada, including in the states where there's a threat now that some governors are talking about making Bitcoin mining illegal in their state if they don't clean up their act around sustainability. So this is a big, big issue in Crypto space right now.

- And Kevin you mentioned you're in Miami, I know you're there shooting another show. Can you tell us anything about it? What can we expect?

KEVIN O'LEARY: Well, I'd love to tell you about it but then I'd have to kill you. It's a secret but it's going to be-- it's going to be coming out soon. Really I just finished taping it yesterday. It is an extraordinary format. I wish I had thought of it. It's about business obviously. It's going to be on the CNBC network but you know when you--

I'll tell you something about television I've been doing it for so long. When you're shooting a show particularly a new format, and everybody in makeup and all the PAs, and all the crews and everybody that's working around you, there could be 150 people in a Giant Studio where we were here in Miami, is riveted to the line feed. I mean, they are riveted to the line feed. Which is an uncut edited feed going through the taping as it occurs. You know you have a winner and that's what's happening here.

- Yeah. I understand that. Well, you might have to kill me. That's pretty aggressive. But we still love you even though it's going to be on CNBC.