Animal Spirits Podcast - Talk Your Book: Bitcoin Doesn't Know It's Price

Episode Date: February 13, 2023

On today's show, we are joined by Jack Neureuter, Research Analyst at Fidelity Digital Assets to discuss a sentiment check with Bitcoin, use cases, a year in review for 2022, how Bitcoin has held up better than expected, and much more.   Find complete shownotes on our blogs...  Ben Carlson’s A Wealth of Common Sense  Michael Batnick’s The Irrelevant Investor  Like us on Facebook  And feel free to shoot us an email at [e-mail] with any feedback, questions, recommendations, or ideas for future topics of conversation.      (Wealthcast Media, an affiliate of Ritholtz Wealth Management, received compensation from the sponsor of this advertisement. Inclusion of such advertisements does not constitute or imply endorsement, sponsorship or recommendation thereof, or any affiliation therewith, by the Content Creator or by Ritholtz Wealth Management or any of its employees. Investments in securities involve the risk of loss. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. The information provided on this website (including any information that may be accessed through this website) is not directed at any investor or category of investors and is provided solely as general information.)  Learn more about your ad choices. Visit megaphone.fm/adchoices

Today's Animal Spirits Talk Your Book is brought to you by Fidelity Digital Assets. Go to FidelityDigitalist.com to learn more about how they work with advisors and find some of their research there as well. Again, that's Fidelity Digital Assets. Welcome to Animal Spirits, a show about markets, life, and investing. Join Michael Batnik and Ben Carlson as they talk about what they're reading, writing, and watching. Michael Batnick and Ben Carlson work for Ritt Holtz Wealth Management. All opinions expressed by Michael and Ben or any podcast guests are so. solely their own opinions and do not reflect the opinion of Ritt Holt's wealth management. This podcast is for informational purposes only and should not be relied upon for investment decisions. Clients of Rithold's wealth management may maintain positions in the securities discussed in this podcast. Welcome to Animal Spirits with Michael and Ben on today's show. We speak with Jack Newrider. We spoke with Jack a couple of months ago in Boston. Ben, do you remember when it was? Was that October? It was October, yes. We were joking about it that. We thought that that was the Crypto Winter, but that was before FTX fell apart. Oh, wait a minute, no,

it wasn't. It was. It was? Yes, that was before FTX fell apart. Oh, it was like a week before, actually? Was it October 10th? Yeah, yeah, right, you're right. It was just before. I think the show ran a little later, but yeah, it felt like a crypto winter, and that was before FTX had fallen. So things got even worse from there. Yeah, you're right. I'm looking at the chart now. If we could have seen, if somebody would have showed us the chart of Bitcoin in the future, we would have said, Well, what would we have said? What would you have guessed blew up? Binance? That's a good question. I don't know. Regardless, it was a tough year for crypto in general, obviously, from all the blowups, the leverage escaping the system, and then the macro environment.

It was a very tough year. And here we are. We'll record this on February 1st, so it's only been a month. But there's been a heck of a rebound in price. And what to ascribe this to, Ben, I don't know. Our animal spirits returning to the crypto market. Is it bouncing along with the rest of the risk asset universe? Is it anticipating a Fed pause? Who knows? Okay. Well, Jack did a new report for Fidelity that just came out doing the 2023 look ahead. We get into that. We get into a lot more with crypto. What's happening, how last year was more boring for certain parts of crypto than you would think, which was interesting take. And even more. So here's our talk with Jack from Fidelity Digital Assets.

We're joined today by Jack New Rider. Jack is a research analyst at Fidelity Digital Assets. Welcome to the show, Jack. Yeah, thanks for having me. So we've got this titled as a listener mailback episode, but given the environment, guess what? There's no listener questions. Well, we've got listener questions, but they're not exactly great ones.

I was going through the Animal Spirit's inbox to pull some stuff up. And as you might imagine, the questions that we were getting about crypto in 2020, 2021 look very different than the questions that we got at the tailings of 2022. It was not about adding to the portfolio. It was about how do I get out? So where do you think we are in the cycle? If you look at sort of the context of, in particular to Bitcoin, we've seen like these four-year cycles where you have this halving event and then roughly 12 to 18 months after you have these supplied demand imbalances and potentially the price ends up running, or at least has historically every single time. And then you've had these blow off tops and we sort of have seen evidence of

that again into these bare markets and extreme drawdowns. And so it's certainly not the first time that Bitcoin has had a 70, 80% drawdown. In 2022, you have to look at other assets as well because it wasn't just Bitcoin falling 70%. It was Bitcoin falling 70% alongside traditional assets having a historically terrible year. So in that broader context, and if we sort of look at the cycle, you could look at even back in November and December and sort of this bounce that we've seen recently as we're 400 days into a bare market, could we have just made a potential bottom? And then do we see this sort of year of chop and volatility, which has historically happened in prior cycles? I don't want to take for granted that anybody listening knows what

the having is. Can you just explain what that is and when the next one is coming? Bitcoin miners get paid via what's called a block reward. And a portion of that block reward is a block subsidy. It's Bitcoin's inflation rate. And then the other portion of the block reward is Bitcoin's fees. And over time, what's in theory supposed to happen is fees will make up a greater portion of Bitcoin miners incentive or reward, and the subsidy will diminish. And that's what gets you to this asymptotic supply schedule where there's only ever going to be 21 million Bitcoin around the year 2140. So they claim. Yeah, exactly. Who knows? There's some pretty big people that are questioning whether or not there'll be 21 million. If you look at its issuing schedule, roughly every four years,

Subsea gets cut in half. Jack, we talked to you at a live event for Fidelity Digital in October. And at that time, it felt like we were already in this crypto winter. And that was before all the FTX stuff came out. So things already felt pretty bad. Turns out that was the fall. That was just the fall. It wasn't the winter yet.

Yes, it wasn't literally the fall. And then the FTC stuff came out. And things already felt pretty negative then. And I think we asked you at the time, are you surprised that Bitcoin hasn't fallen warm? Michael and I keep talking about this. After the FTC stuff came out, Michael and I were behind the scenes telling each other. or not on the show, Bitcoin's going to go to like 8,000, 75. It like it has to with all this stuff happening. Were you surprised at all by the resiliency of Bitcoin in that environment when it felt

like just things were already bad and then they just went from bad to worse? I think there were basically two major headwinds last year. One was the macro environment, which was a headwin for all assets. As a consequence, this tide going out and liquidity tightening environment caused issues for firms that maybe didn't have great risk management or in other cases maybe worse, not to necessarily comment on any firms in particular. But if we look at this drawdown, you saw in May and June, there was one period of time where you had failures of some crypto lending entities and some of these centralized entities that went bankrupt.

And then you had a second wave at the end of the year of bankruptcies and failures across the centralized finance space and crypto. ETH's bottom came in May June, that first wave. And for Bitcoin, its bottom came recently, at least the current bottom of this cycle. And if you look at Bitcoin on chain, two-thirds of Bitcoin hasn't moved. And honestly, I mean, we would say sentiment got so bad during that period of time. If you didn't sell then, I think the question has to be asked, when would you have sold? It's kind of hard to like paint an environment that was in many respects.

worse from a sentiment or optics picture for people that were owning or holding or buying Bitcoin at the time. The number is two-thirds or so that have held it probably for a long time, did the same thing and didn't sell. Yeah, two-thirds of Bitcoin on chain hasn't moved in over a year, and that's near an all-time high. And so when you're talking about, well, where is price set? Price is set on the margin, of course. So it's that last third of Bitcoin that's moving around in short-term holders' hands that's ultimately setting the price. But I think, you have to ask the question of, if you didn't sell during that period of time, what was going to make you capitulate? The thing that just surprised, I think, a lot of us was the price. So it got

as low as, call it $15,000. If you're using a reference point, let's just use the March 2020 bottom. That got just under $4,000. Pre-pandemic, it was $10,000. The March low was $4,000. Pre-pandemic, it was $10,000. and the low here was 15,000, you would have expected it to, I don't know, undercut one of those prices. And for whatever reason, it just didn't. But I think putting it in the context of like actual adoption and usage, how many active users are there? Well, we've been at a plateau of active users on Bitcoin that's significantly higher. How many are there? It depends on addresses. I don't actually have the number else top of my head here. That's okay. I exposed myself as a new boy last time I gave a glass note stat. So I'm going to avoid doing that this time. I want to get

into adoption a little bit. But in your paper, so you guys did a 2023 look at Fidelity Digital Assisted and we'll publish it, there's a subheader that says price action aside, Bitcoin didn't have much of a story in 2022. Please explain. I think that's part of Bitcoin's story is Bitcoin makes intentional design tradeoffs that make it boring and make it simple, but that ossifies the code and it makes you sort of able to trust its rules. Bitcoin sort of has two explicit use cases. One, it's an aspiring store of value. They'll only ever be 21 million Bitcoin. And the other, is I can permissionlessly send you guys Bitcoin or I could send it to somebody in China, India. It doesn't matter. It's a censorship resistant medium of exchange. And with Bitcoin,

that's the story. And then upgrades don't happen frequently. It takes a lot of buy-in collectively and a lot of people able to say we need to make code changes or upgrades because the whole point of Bitcoin is that it ossifies and it's this boring non-financialized asset that's just this non-sovereign store of value asset versus something like Ethereum went through an entire consensus mechanism change. Some would liken it to like, you're flying in an airplane and you're changing the engine. And that's just because Ethereum is different. It's more like a tech platform that developers can build on top of. And so with Bitcoin, you sort of characterized last year as it was boring, but that's not necessarily a bad thing. It's still transferred trillions of value.

I think $4 trillion in U.S. dollar value was transferred on Bitcoin last year. you said that Bitcoin is an aspiring store of value because I think the last few years have kind of been a good test case of that. Do you think that the way that Bitcoin is set up because it has this regulated supply that it's just always going to be a supremely volatile asset and trades 24-7 and all these things, is crypto just set up to be extraordinarily volatile? Or do you think that there is a chance that as the market gets bigger and matures, that that volatility will slowly decline? That's a good observation. I actually just did a retail discussion on. on crypto volatility in Bitcoin.

And one of the quotes that I pulled from, it's a blog series called Gradually and Suddenly by Parker Lewis, Bitcoiner talked about Bitcoin has a fixed inelastic supply schedule. And that is one of its core value propositions. That drives its scarcity. And that's why people potentially invest in it as the aspiring store of value. But at the same time, it's inelastic supply schedule makes it more volatile. Because if you think about a traditional commodity like oil,

Well, there's been more demand for oil over time, but inflation adjusted, the price of oil has fallen because the demand and supply sides of the price equilibrium are both moving, whereas with Bitcoin, the supply side isn't responsive. And so it's always this changing demand. I think over time, instead of 100 million people using it, if you have billions of people using it, well, then it becomes less and less volatile. And technically speaking, over its 10, 12 year history, that volatility has actually come down, even though it's had a seven, 70% drawdown last year. It still has come down slightly. So I think overtime becomes less volatile, but necessarily it is a volatile asset because of its supply and elasticity. I just want to talk about some of the use cases. You mentioned that there was four trillion dollars that was moved in 2022, which sounds like an extraordinarily large number. For what purpose was that money moved? Who and what and why? What's going on there? It depends. In a lot of cases, it's just people moving assets off of an exchange into their own wallet. That's most of the use case of Bitcoin is just to transact with one another, which we all sort of know, at least in developed countries,

doesn't really happen. I don't practically use Bitcoin in my day-to-day life, and I don't really have a need to. But I use it as an aspiring store of value, and so you can buy on exchange and then move it off exchange, and that gets registered as a transfer of value on Bitcoin's ledger. I totally get the aspiring store of value. I think it's actually a really great narrative. Is that all it is? Do we think that anybody will ever use Bitcoin as currency, which is not a Maybe it is not for some people because I know it's coined as a digital currency, but nobody uses gold on a daily basis to buy and sell goods yet people think it as loads of value. So can you talk about that dichotomy? Yeah, well, I think getting people to use it as a true medium of exchange doesn't just happen overnight because it requires a different unit of account. Satoshi's or Bitcoin itself is an entirely different unit of account from US dollars. And that

change doesn't happen overnight. And we talked about El Salvador, I think, when we had originally got together at that conference and mixed results and still kind of TBD in terms of what that ends up meaning and what it becomes. But some people are using scaling technology on top of Bitcoin to transfer Satoshis to buy cups of coffee. So it's happening on a micro level in certain places, but certainly not on a large scale. And I think that that's just more a testament to the fact that using a different medium of exchange, you need an actual reason to do it. And currently in developed countries, is using Bitcoin better or is it more of a pain than using Visa and MasterCard? It's not the value prop for people in developed countries anyways that have access to financial

services. That was decided really in like 2017, August of 2017, you had the Bitcoin Cash Hard Fork, which, what was that? That was basically a discussion of, Is Bitcoin all about being as decentralized and secure as possible and not about having tons of transactions scale through its base layer? And what ended up happening was you had a fork, this hard fork, between Bitcoin Cash and Bitcoin. So you had basically two Bitcoins, and then the market decided which one is actually Bitcoin. And ultimately, the store of value Bitcoin that has less throughput on its base layer,

which was the original design of Bitcoin, won out, at least under the market's decision in terms of price, and Bitcoin Cash, which was Bitcoin, but with a bigger block size that could have more throughput and more transactions, putting forth the medium of exchange argument ultimately failed on a relative basis anyways. You mentioned that last year was a relatively boring year for Bitcoin, even though it fell 70%. Do you think it was also a relatively good year for looking just in terms of other types of cryptocurrencies where maybe people thought, okay, I'm going to stick with the name brand as opposed some of this other new stuff, these algorithmic stable coins that could potentially completely

go under, maybe some of these other protocols that people really don't understand, that they're just more a lot of hype than anything? On a relative basis, of course, within the crypto space, because everything was down 60 plus percent, it was relatively good for large network effect ecosystems, mainly just Bitcoin and Ethereum. Because they have the network effects, Bitcoin is seen as the bellwether asset of the crypto space. And a lot of people that are allocating to the space just allocate to Bitcoin because it's a simple way to get exposure to the space. And so I think on a relative basis,

Bitcoin and ETH won out because really the speculative environment started to go away. And as you go down the scale of from Bitcoin to ETH, there's a steep drop off in terms of acceptance, institutional adoption. Really, frankly, an understanding of whether or not these things are securities in the regulatory environment. We still don't know, largely outside of Bitcoin, but especially outside of Bitcoin and Ethereum. That institutional adoption is something that people have been pointing to as a bullcase for a while. How did that hold up in the face of such a huge drawdown? Was money flowing out of the space from big institutions?

Were they coming in? What happened there? There's not clean data on this. There was still VC investment. It was still one of the highest years for venture investment, but I think a lot of that was capital that was already allocated to VCs that had cash on the sidelines, so to speak, for going to use that phrase. but I would say that career risk is cyclical and this space is very cyclical.

And so if you went back to 2020, we had Paul Tudor Jones talking about the space. We had corporate treasuries that decided to buy Bitcoin. You had some pensions and endowments that had previously made VC investments that were making it clear like, hey, we did invest in the crypto space, look at us. And now you had sort of the exact opposite. You had a lot of people walking back statements or people that wanted to even like talk to us and get educated on the space. My job has changed over the past two years. In terms of two years ago, we were talking to a lot more clients and prospects about wanting to get educated on the space versus over the past six months or so. We're doing a lot more internal building

for sort of the next time that sentiment and price shifts and people want to look at this space again in a serious way. So I would say that it's cyclical, but even things like we do our annual survey and we did our survey last year during this drawdown. I think it was surveyed through like April and June of last year, if I'm not mistaken. All of the survey points are still up and to the right over the long term. And a lot of the traditional financial institutions continue to build products in this space for the longer term. Well, to that point, just yesterday, BlackRock announced that they're buying 7% of Silvergate, which is the financial institution that is essentially the bank for a lot of these crypto companies. So they're not pulling back.

Not to comment on that specifically, but we do an internal newsletter that are right with some folks, just to keep a lot of people internally up to date with what's going on in the crypto space. And it felt like every week for a period of time throughout 2022, there was another update of some sort of either direct or indirect competitor of Fidelity that was getting involved in the space. And even from a firm perspective since 2014, I would say, from my view, Fidelity has gotten more and more convicted in this space over time, particularly for long term and the implications that it can have. So while the short term cyclicality certainly is there in terms of people that were having conversations, maybe aren't, or if there was one or two people

bought in in the room into the crypto space that really wanted to start allocating, but the rest of whatever pension plans investment team wasn't bought in, maybe they're not having that conversation today because of the career risk and the sentiment shift for the time being. But, I mean, you guys know, it's the same with retail. It's the same with institutional allocators, is price does have a way of changing the narrative and changing the sentiment and conversation. As bad as the FTX debacle and everything surrounding it was, people have a relatively short memory, especially if price doubles. I don't know where the line for people to get FOMO.

I don't know if we're approaching that. We'll see. But Ben and I were just talking about this on animal spirits this week. Ben positive is the catastrophic blowups that we've seen actually bullish for Bitcoin, not crypto, but for Bitcoin, because it reinforces what it is and why you want to own. And to that point as evidence, Greg Zuckerman tweeted, according to coin shares, last week, $117 million of inflows went into crypto, which was the biggest week since July, and out of the $117 million, 116 million went to Bitcoin, which sounds unbelievable. But if that's to be believed, what do you make of that? You make a great point. There's a lot of irony in the fact that there was a bunch of centralized companies that were lending and weren't doing things they were supposed to be doing.

And all of those blew up last year. And Bitcoin kept mining blocks and Ethereum kept executing smart contracts. And the whole point of this space was to offer a decentralized alternative. But yet many people were taking these decentralized assets and then shoving them back in a black box that's opaque and not transparent. It's the exact opposite of what crypto was created for in the first place. And I think that's part of like even in that 2023 look ahead, we centered it around getting back to crypto's core principles. because everything that sort of happened, the washouts from last year, it had nothing to do with Bitcoin itself and the actual underlying network.

Obviously, one of the big selling points of crypto when it originally came out was that it's this trustless thing. And it seems like last year, a lot of that trust was broken. And it wasn't really the crypto itself. It was the companies. Maybe this is a softball because Fidelity is in this space, too. But do you think that we just really need bigger financial corporations to handle this as opposed to these new up-and-comers that seem to have really let,

people down? Is that how the trust is going to be built back up where we have some bigger companies like Fidelity come in and say, okay, we're going to handle this for you and make it safer to own this stuff as opposed to these new up-and-coming companies who don't have the history of managing risk and managing clients and taking care of assets? I think from my viewpoint, ultimately, how do you scale this industry? I don't think it scales through everybody having their own hardware wallet. Realistically, that's the 5% of crypto-native people that are going to want to do that out there. And that's great. And that optionality, the fact that you can have assets on a platform and then withdraw them into your own wallet, that's the whole point of this space.

But at the end of the day, how do you scale it? It's through centralized custodians. But pushing for more transparency, pushing for third-party audits from large legitimate auditors, those are the stepping stones. And I think that this drawback, although it's unfortunate, provides an opportunity for some of these tradfai institutions to step into the space and help take it to its next level of maturation, if that's what we want to call it. So we're going to get to how Fidelity is working with advisors and their clients, but before we do, I just want to touch on Ben keeps asking about

when is there going to be something that is for mass consumer adoption? Is that ever coming, or do you think that we're maybe thinking about this wrong, and it's going to be more behind the scenes, and the paradigm shift that people were talking about, it's just not going to come to fruition. Where do you stand in that? Obviously, we're guessing here, but what's your opinion? Yeah, it's a good question. You're kind of grasping at straws because there isn't the use case that we can point to directly and say, that's the killer app at the moment. But again, let's think about the age. If I was to make that argument around Bitcoin and

Bitcoin cash, we didn't really know what Bitcoin was until 2017. That was eight years into Bitcoin's history. Well, Ethereum and DAPs at large, Ethereum didn't launch until 2015. You didn't really see some of the largest applications on Ethereum until 2018. So we're only for pushing five years into that. I think in another three to five years, I think that's the timescale that we could point to something and say, whether it's digital identity, whether it's some of these applications coming out of NFTs, or if it's just defy plus more regulation that allows real world assets to be pushed on chain. And then all of a sudden, that's able to take off. Like, there are these different avenues that I could see potentially flourishing in the future. We're not there yet. We're still

in our infancy, I would say. Michael just wants you to say title insurance and concert tickets. That's the only thing he cares about is those two things. Do you think last year was also a decent year for Ethereum and maybe some of those challengers fell by the wayside as well? Because it was kind of like Ethereum is the next big thing. It's going to be like buying the internet before it became the internet. And then we had, okay, there's a competitor. Now here's another competitor. Was it a decent year for Ethereum, too, in terms of that competition? Yeah. I mean, you had the successful transition from Proof of Work to Proof of Stake, which we had talked about before, the merge. And that was really what 2022 was about for Ethereum. And sort of continued building on top of Ethereum, these layer

twos, which allow for more throughput on top of Ethereum that settle back down to the base layer chain, continue to be built out. And I would say the L1 trade, if you look at it, at least on a market cap basis. Ethereum has really held up. It's total value lock, the amount of actual assets that are on top of Ethereum. There's basically no other chain that compares in the smart contract space. And so I would say 2022 on a relative basis was a win for Ethereum. I'm looking at a chart of Bitcoin divided by Ethereum. And it looks fairly bullish from Bitcoin's point of view. Do you think that this is like in the more risk off trade that we're in right now? Fending might be muted. Go ahead, Wise guy.

I was just going to make a joke that Michael wants to do technical analysis for him. I'm going to go right now. Listen, I'm just looking at supply and demand. You look at whatever you want to look at. That ETH BTC chart has been looked at a lot. And it was really looked at in particular back in September around the time of the merge. A lot of people are saying, okay, if you reduce the energy consumption of Ethereum, that plays to the ESG narrative of the investment of Ethereum relative to Bitcoin.

It makes ETH a yield-bearing asset. that it lowers its issuance rate, which if you combine that with an upgrade back in 2021 that caused a certain portion of each transaction to be burned, then you actually get net deflation of ETH if there's enough transaction volume. And all of that sort of combined to everybody saying, hey, Bitcoin and ETH have been sort of battling on this roughly ETH being 50% of Bitcoin's market cap. And maybe it could break that to the upside following the merge. And that didn't happen, but also where to price action go? The bottom. fell out of crypto towards the end of the year. And so I think it'll be interesting to see this

year. In particular, there's an upgrade called the Shanghai upgrade roughly estimated to happen in March, which allows for ETH that has been staked to be unstaked, which currently, if you stake ETH to earn a yield, validate transactions, you can't actually take that ETH out of your validator, withdraw it and go use it. It's illiquid until this upgrade comes. And it's causing a reduced amount of ETH to actually be staked, roughly 14% relative to other proof of stake chains, it's usually 50 to 70%. And so I think that once we have that upgrade happen, you could be talking about that ETH-BTC ratio retesting this 50% resistance level.

So let me ask you this. It's Tuesday. We just got the Fed decision, 25 basis points as expected, and markets are doing what they do. They're up, they're down, they're up to, whatever. What do you think about the Fed's role in the life cycle of crypto, whether it's risk appetite, if it's actual meaningful. What's your take on this? Bigger picture, I think the whole story around Bitcoin has to do with, if you look at the makeup of the system, there are large

balances of debt on sovereign balance sheets. And it's just a big math equation. Can you grow your way out? Statistically speaking, hard to make that case. And so then you have two options. You can sort of explicitly default, which I don't think many people are arguing for, or implicitly default through debasing your currency over time. And that's ultimately what Bitcoin was created for is to play against that scenario or hedge against that scenario. And so I think you zoom in on the last year and we have quantitative tightening. Sure, but what's the average duration on U.S. government debt? It's like five and a half years. And so it takes a while to roll that over for net interest expense to pick up for that to potentially be a problem for the Treasury. And so all

of that just plays out over the long term. I think the argument is can you tighten and stay higher for longer for too long. I think the average Bitcoinser would probably take the under on that. Let's talk about Fidelity Digital Assets. What are you guys doing for clients, for advisors and their clients? Fidelity Digital Assets is wholly owned subsidiary of Fidelity Investments. And we're in-house. We are our own custodian. And we plug into a trade execution venue. So advisors can reach out and get in touch with us if they want to, to be able to learn more about the space if they just want to chat with our research team or potentially on board and be able to buy and sell Bitcoin and Ethereum. You mentioned something about trade execution. Does that mean that unlike, say, some of the

competitors, you're not a custodian and then exchange, you're just the custodian? Yeah, we're just the custodian and we plug into a number of external venues. If I'm an advisor committee for research, here's the question I would have for something that I didn't appreciate enough, I think, last year. And that would be the amount of leverage in the system. So if you done any work on, how do you get your head around figuring out what the leverage in the system is? Because That was a lot of the problem, I think, with the price cascading is just you had these leverage waterfalls where levels are hit and people just get knocked down, knocked down, and they had way more leverage than we thought. And a lot of it was because they were on these exchanges and

putting this leverage on. Is there any way to wrap your head around it? Because that I thought was one of the more interesting things about crypto is that a lot of the stuff that happens that should be visible, but maybe a lot of the leverage in the system was underestimated. How do you wrap your head around figuring that out? Some of it's hard to quantify. So there's two types of leverage that was happening. There was one, there was the lending entities themselves that were lending to institutions, sometimes uncollateralized, sometimes under-collateralized. And that was a lot of the lending that ran into issues. There's another market that's like a perpetual futures market. A lot of these offshore exchanges

allow you to trade leveraged futures. Those exchanges self-report their total volume and their open interest. And so you kind of have to take some of that with a grain of salt. The problem is, is that this opaque, centralized lending to some of these crypto-native hedge funds and institutions, that's what blew out last year. And there was no transparency into that black box. But if you added up some of the math, especially from some of the bankruptcy filings, you can add some of the math up. And you get to like $20 billion of lending going around this space that was driving some

of this market action. I think it's fair to observe that because a lot of these lending entities no longer exist, we have a different market structure moving forward. And we have seen lower levels of volatility, at least recently, in Bitcoin. So it'll be interesting to see over the next six and 12 months without these entities in existence. Do we just end up repackaging and rebuilding those entities that lend Bitcoin, or do we just have this different market environment?

And what does that actually mean? I don't know what it means, but we'll find out in terms of price action and what happens to these markets over the next six months. Jack, anything that we didn't cover that you wanted to? I think ultimately, we've been here before. I would stress the difference between prices and networks, asset prices, and the actual underlying networks. It's a point that I think I said earlier.

Bitcoin blocks continue to be mined. Ethereum continues to execute smart contracts. That's what really matters in the long term. The use cases, I think, again, that's something that you could pick at and say there's a lot of speculation in the space and there's not clear use cases. If you look at the underlying tech, it's really pretty impressive what it's doing, especially when you look at the price changes last year. For all intents of purposes, Bitcoin doesn't know its price.

Ethereum doesn't know its price unless you have a third-party Oracle for a decentralized application. The networks are the networks. The prices have been historically volatile. Expect that to happen. And then how do you adjust for something that's volatile in a portfolio? It's through position sizing, ultimately. The silver lining from last year would be the price dropped 70% And you don't know at that point if people are just going to pull back and stop the mining operations,

but that stuff kept going. Yeah, blocks continue to be mined. Hash rate's actually on an all-time high, ironically. Interesting. Okay, where can we send people to learn more about Fidelity Digital? Fidelity Digital Assets.com, click on research. If you want to find our research, there's some context there if anybody wants to reach out to us. I'm at J underscore New Writer on Twitter, and I think our company Twitter's at Digital Assets.

Perfect. Thanks a lot, Jack. Thanks, guys. Okay, thanks, Jack. check out Fidelity Digital Assets.com to learn more and send us an email Animal Spiritspot at GMO.com.