Animal Spirits Podcast - Talk Your Book: Doubling Down on Crypto

Episode Date: October 31, 2022

Ben and Michael are joined by Jack Neureuter, Fidelity Digital Assets Research Analyst, and Ramine Bigdeliazari, Director of Product for Fidelity Digital Assets to discuss Fidelity's relationship and interest in crypto, proof of work vs proof of stake, crypto winter, 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.  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 FidelityDigitalest.com to learn more about how they work with institutions to invest in crypto and check out all of their research there as well. It's FidelityDigitalist.com. 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, by Michael and Ben or any podcast guests are solely their own opinions and do not reflect the opinion of Ritthold'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. Michael. Ben. There has not been very good news in crypto lately. I mean, this happens because it's a new, innovative place, but you see a lot of fraudsters and Ponzi schemes and those things have been in the headlines throughout this crypto winter or bear market, everyone to call it, and there just hasn't been much in the way of good news. I have not heard many bullish catalyst lately. Now, that's kind of how it happens during bear markets, but you and I got to spend some time in Boston at a Fidelity Digital Assets Conference where we emceed and then did a live

podcast. And I got to say, I came away feeling much better about crypto after that than I did before we got there. What was it about that event that made you feel better? So I mentioned there, a lot of the stuff you and I've heard over the years is you just have to follow the smart brains and what the people in Silicon Valley are working on in the weekends and what they're putting their money into and where they're going, you want to follow them and that's the place to invest. That makes sense to a point to me. But also eventually you have to have money follow, like big money. And a lot of it so far has been retail. But when I heard a company like Fidelity say, we've been in this space and we're forward thinking we've been in this space

since 2014, 2015, and throughout this crypto winter, we're doubling down. And we think this space still has legs, we're hiring more talent. I think if they would have just decided to like slowly back away during this crash, I don't know that anyone would have blamed them and said, what are you doing that for? But a huge behemoth asset manager like that that's saying, no, we still believe in this. We're doubling down. We're investing in this space. To me, that is a bullish signal from a place like that. Fidelity has, what, four or five trillion dollars that they advise on? I think you're selling them short. Is it bigger than that? Fidelity total assets, let's say. Well, it might be a little different because.

of the 401k or? I think it's 10. Okay. It's a big number is my point. So I came away impressed with the people there that we talked to. We saw urine and Timmer do a full presentation for like a half hour as a hologram. Okay. That was definitely a highlight because we weren't sure how that was going to go. I kind of thought it was like a Tupac hologram, which was like not really, this thing has legs. It was perfect. It was you only right there. It really felt like he was there in the room with you. There was two of these boxes with him. It was very impressive. I just think a place like that that has a big reputation and a lot of money and the fact that they're doubling down and saying we're plumbing ahead. No, we're not stopping just because there's this crypto winner in prices

of crash. We're pushing forward. I thought that was a positive signal. Yeah. So, all right, I don't want to step on too much of this conversation because there's a lot that we covered. So with no further ado, here is our conversation with Fidelity Digital Assets. All right, Ben, we're back. Okay, so earlier than day, Michael and I explained we do animal spirits Once a week, we're just talk about the markets and life and investing and what's going on and what we're reading and paying attention to. But once a week, we also do a segment called Talk Your Book where we bring in people from the asset management industry, fintech. The stuff that we're interested in, and we hear more about investment strategies and products. So we do interviews where we're trying to learn and trying to help our audience learn a little more too.

So that's what we're going to do here. So this is a Talk Your Book. We have two people from Fidelity Digital to help us out today. So Jack Newriter, who's an analyst, and then Rameen, McDellie Azari. It's great. I nailed it. I work here is done. I was wondering how you'd handle those last names.

Me too. They gave them to us phonetically so we could see behind the scenes, if we're opening the curtain here a little bit, we do this. Michael has butchered so many names over the years. You don't think so? I don't think so. That's okay. Yeah.

All right. So the first time I heard about Fidelity getting into the crypto space, it must have been 2015, 2016, and there was a story in Bairns or something saying, Fidelity is mining Bitcoin. And this is probably a year before the really big 2017 run-up where by the time we got to Thanksgiving, everyone was shilling it to their aunts and uncles at the dinner table. So how did Fidelity get into crypto in the first place way back in the day before it was a really new hot thing for people to get into?

How did that even happen? Historically speaking, Fidelity was founded, 1946. So that's 76 years ago. And not that I lived through those 76 years. But if we know there's one thing throughout history, this change is constant, you wouldn't remain at the size of Fidelity without embracing that change in innovation. In particular, if we think about like the age of information in the 90s tech bubble, Fidelity sort of acknowledged what was going on. And in 1999, spun up a group called Fidelity Center for Applied Technologies.

We use the acronym F-CAT, really with the core idea of being a research and development wing, where we could invest resources and individuals to build products and research about at the time, mostly focused around the internet, things as simple as in the 90s, being able to to trade mutual funds on the internet to buy and sell mutual funds. And Fidelity was one of the first to be able to do that. Walk that forward into where does this intersect with blockchain. And that's 2014. Some context is the price of Bitcoin in 2014 was $3,400. Market cap of Bitcoin at that time would have been $3 to $4 billion. And now today we're talking $350, $400 billion in size. And so literally 1% of the size that it was, Ethereum hadn't even been invented. And there was sort of a core group

that became focused on it and were able to dedicate their time and resources starting in 2014. I think there's always been this ethos of learn by doing. So building products, and they were able to in 2015 get funding to be able to start mining Bitcoin. And Abby Johnson has talked numerous times about the funny stories, getting packages from China that are mining equipment. And at the time, who understands what this stuff is and running into all of these hoops and hurdles. But ultimately, it's been through sort of this experimentation. 2015 started mining.

2016 built a proof of concept around custodying the asset because these are bearer assets. They don't sit at DTC, the way that stock certificates do. And then other experiments, 2017, started accepting Bitcoin in the cafeteria for Fidelity employees. And we can all sort of guess how that turned out. Did anyone actually use it? I think probably only the people that had initiated the project themselves. And really, like, you could say it was a failure, but you learn things from doing,

which is, okay, Bitcoin at the time and arguably today doesn't really have a purpose and developed countries as a medium of exchange. It's really primarily looked at as a store of value. And so sort of carrying that forward, I think maybe I can hand it to Rameen in terms of what did that business evolve into. Hang on. Before you answer that, you mentioned a bear asset.

When I hear bear asset, I think of Die Harder with a vengeance. Could you explain to us what a bearer asset is? So I do listen to the podcast a lot, but I'm not good with movie references. That and I'm supposed to quote a couple of survey statistics. Hang out, just to make sure listeners enjoy that. But bearer really meaning that you physically can hold the asset. Now, in Bitcoin's case, it's not physically a bearer asset.

I mean, you can hold a USB-like device that holds the private keys to that asset, but just meaning that somebody can have individual custody similar to holding a bar of gold where they're holding that asset and nobody else has ownership of that asset. Actually, it's diehard. It's the original, the bearer bonds, not with a V, right? Yeah, they're physical pieces of paper. My bad. All right. So let's just back up and just talk about Bitcoin, just very simply because I think

we gloss over it. And I wish that this was explained to me early on, because all that I saw was hype and not enough explanation. So very simply, Bitcoin is, I mean, he's all the buzzwords, an electronic peer-to-peer network, it's permissionless, it's self-sovereign. But so what? But why? I send money over Zell, over PayPal, or Vemma, whatever. Why does this need to exist? What is it solving for? People look at the value of Bitcoin in different ways, but primarily focusing on two. So first of all, the store of value component, right? So self-s sovereign, non-sovereign, not controlled by any central government or authority, right? So it can generally freely be accessed around the globe with no potential manipulation as viewed by the general public for printing money, things like that.

The other side of that is just looking at a globally distributed network that anyone can participate in. So if you have access to the internet, you can immediately interact with this network. Within the network, Bitcoin is very specifically designed to store and then track passage of value. Other protocols that we'll talk about, like Ethereum and other things, are built for very different reasons, have some of the same characteristics. But in some cases, they're more complex, many different functions available. Bitcoin is very specifically created as a decentralized mechanism to store and track value transfer. So through the consensus mechanisms that are built into the protocol, I can without fail, prove that I either own or do not own the asset. asset the Bitcoin. When I want to transfer to Jack or transfer to someone else, the protocol and the

participants in the protocol can determine whether or not that's a valid transfer. Do I actually have the ability to send that Bitcoin? So when people think about the value compared to like a Zell or other intermediated services, they look at that ability to generally interact with somebody else around the globe, somebody that I may or may not know and I can directly transfer them funds. And they don't have to trust me. They trust the protocol. So right now, when I'm sending money from Bank of America to JPMorgan or whatever, they each have their own ledgers, right? That's right.

And they have to verify, okay, Michael has money, he's good to go. And all of that takes longer than we would probably like. That's absolutely right. And so depending on how you send the money, has different timeframes. It could take multiple days, not open on the weekends, not open overnight. And so this is generally opening up that window where you can access your funds at any time on a global basis. And then we're talking about specifically the U.S. primarily are in developed countries.

But when you think about outside of the U.S. and less developed countries, the ability to access these monetary tools that are outside of particular government regime that is influenced by politics and things like that becomes very valuable. The best way it was explained to me, I think, is in the past, we could make a bet, and I owe you $20. And I hand you a $20 bill. And no one knows that I hand you that $20 bill. But there was no way to do that digitally before. That's right. And that's kind of what crypto is, is I can hand you $20 digitally. No big financial institution has to be there to say, yes, it's okay. a different way of doing it. If you had to tie like Bitcoin and blockchain and everything together, it would be about an innovation in like digital trust. And so removing the need for those centralized intermediaries changes interactions digitally, true decentralized digital ownership.

Is the world ready for decentralization? Just before we start, I was saying that I almost lost my Metamask account. I recovered it, which was good. But are people ready to be their own bank? It's a great question. I think when you think about decentralization, you're decentralizing risk. responsibility as well. So with your metamask account, it's solely your responsibility to know your passphrase. And if you don't know it, then those funds are lost forever. People may find value in having that control, but at the same time, they're taking personal responsibility for that. And if you lose it, there's nobody to call. I like privacy, but not that much. So in the wealth management space, that is of the utmost's important to us, is keeping client information and client money safe. And that's

why we as advisors have a third-party custodian. So how does fidelity fit in there to bridge that gap? And even though you're not going to completely live off the grid, that's not what a lot of people want. If you want to own crypto, but have it be more centralized and safe, how does that work with what you guys do? So we offer an institutional custodian. Basically, that works is in order to hold or own digital assets, you are custody private keys, essentially a private passcode, passphrase, that then gives you access to control those assets.

That's pretty complex. And if you do it yourself with a metamask account or something else, you bear that risk. In Fidelity's case for institutional clients today, what we do is we manage all of the on-chain management of keys and manage security associated with all the custody functions. And then what we do is then we provide a service that allows for our clients to then interact with us very similar to how they would with the traditional brokerage. So you log in with a username password.

We have additional biometric controls, things like that, that allow for increased user-level control, and then they can come to us, transfer us assets. we will safeguard them. We will report on them. We will do everything they expect that their traditional custodian would do. And so they're really looking to us to risk manage on their behalf. Is it integrated with the rest of their brokerage accounts or is it a separate login altogether? Today, it's a separate login. The reason for that is the current regulatory framework. And so Fidelity Digital Assets are institutional custodian is regulated separately from our broker-dealer entities and it is regulated by the New York Department of Financial Services. That is currently the

construct that is available to us. And so as a result, we operate as a separate business. Now, what I will say, and I think we'll talk about this some more probably is from an advisor standpoint, some of the things that brings difficulty with is it's a new entry point. They have a new service provider that they need to deal with. And yeah, it's not super easy. The onboarding process for institution is not immediate. And so what we're looking to do is provide that level of integration. So we understand that they do have to interact with the separate entity, but we want to build further integrations to aggregate or services for portfolio management. It does filter into Orion, Black Diamond, those sort of things.

We're working on more and more integrating with those industry tools. And so we're working with our clients set to understand where their priorities lie and then working with those service providers to ensure that we're able to get that reporting out just to try to make it as easy as possible for our clients. Jack, you talked about how you're trying to get ahead of things and you got in here early. But how much harder is it to handle the technology in this space? Because it's a whole different ballgame, right? The client's not using these keys, but fidelity has to. So you're building a whole new system, essentially. How does that even work?

That's why you're seeing the past year or two, if you pay attention to all of these announcements that you're seeing with, in particular, Fidelity's competitors, they're entering the space, but they're not building the custody product in-house themselves. To me, one of the key differentiators with what Fidelity's built is, if you've been around the space for eight years, you've had time to tinker with these things, and then build the products in-house with your own expertise and 1,000 people that work on cybersecurity throughout Fidelity and be able to rely on those resources. whereas a lot of the announcements you're seeing are like, we need to get a product to market,

and we haven't approached the space for the past decade. And so in order to do that, we do it through a partnership. And then what you're really interacting with is a back-end custodian that is separate from that traditional financial services provider. Last question on Bitcoin, and then we'll move off it. I think it's important because Bitcoin was the one. That's where it all started. And as Americans, we have very strong institutions that we have faith in.

Our dollar has never been higher, and so we all trust the situation that we're living in. However, the rest of the world does not necessarily enjoy the same situation, and so a lot of money is sent overseas, and the rake that a lot of these financial institutions take is egregious. We hear a lot about developing nations using people using Bitcoin as a store of value, which I totally buy into that story. But are there any numbers to support that, is that actually happening? Because I would imagine that nobody in the United States is using Bitcoin to transact with

their friends to pay for anything, right? We're using it to speculate, invests, or whatever. But what is happening in the rest of the world with Bitcoin adoption? Is it actually happening or is it just a story right now that might actually play out in the future? There's plenty of anecdotal examples, places like Belarus with women's rights marches where they had access to financial services cut off and they were able to receive funds from Human Rights Foundation, sending Bitcoin in through open source Bitcoin wallets.

We see things going on in El Salvador where 70% of the population is unbanked. And all you need is access to the internet with a mobile device and you can download a Bitcoin wallet. More so what we're seeing is anecdotal examples of people using in particular scaling technology on top of Bitcoin to be able to make micro transactions. Because if we're talking about using it as a medium of exchange, right now in order to send a transaction, it costs, I don't know, $2 to send on Bitcoin's base layer. And that fluctuates based on demand for block space. But ultimately, that doesn't make sense to be buying cups of coffee if you're paying $2 fees. especially if you're talking about in emerging countries where those are going to be less expensive and fees are going to be a greater percentage of those costs.

So I think, like, we're starting to see Bitcoin's promising scaling technologies enable that medium of exchange movement. But it's not there yet. Not in a widespread way, or at least there's not necessarily evidence of that in a widespread way. And what about the El Salvador experiment? How's that going? It's tough.

When you enter at prices of $45,000, $60,000, it is a volatile asset. And so it's still an interesting experiment to watch unfold. And stories vary. I mean, I've never been down to El Salvador. But some people say that there are vibrant communities that are adopting Bitcoin and using it and creating little micro economies around Bitcoin. And then there are others that say that, you know, they haven't seen adoption at the scale that some of the media has reported.

Okay, you said last question of Bitcoin, but I got one more. We saw a lot of charts today showing the history of Bitcoin drawdowns. And it's brutal. There's been multiple 60, 70, 80, 90 percent drawdown. So that kind of thing shouldn't surprise. anyone, if you've been paying attention. This happens on occasion in this asset class. I think the asset class is made to have that kind of volatility because it trades 24-7 and you have the scarcity element. So I don't think anyone should be surprised by that. I am frankly a little

surprised if you would have told me 36 months ago, the U.S. government's going to spend trillions of dollars. Inflation is going to go to 9 percent. And all these other things are happening that Bitcoin is going to get crushed. Now, you could say the same thing about gold. That would have been a perfect setup you would have think for gold. But I'm frankly a little surprised that it hasn't held up. And there's a number of reasons for that. The technology sector has gotten killed. So that's probably part of it. But has that surprised you at all that Bitcoin hasn't held up better in this environment? This is my favorite question. Because I've written about this and we've talked about this. And when you talk about the legs of these investment thesis that Bitcoin sits on,

to me, it's sort of like a stool. Most people look at it as either digital gold, so somewhat of an inflation hedge, or at least that's the theory. And then being a portfolio diversifier. And lastly, it's kind of like a venture asset, right? What else does it not do? Exactly, right? So we were talking about those three legs. And then for the past year, it's basically had no legs to stand on, at least if you look at performance of the asset. And in particular, the inflation one I find most interesting because if you look at gold as the analog, gold isn't necessarily an inflation hedge per se, but more so it has an inverse relationship to the movement of real interest rates. And what have real interest rates done year to date? They've gone straight up. Forward inflation expectations, tips, break even, you can say that they're wrong. You can say that the Fed messes with those markets. Like, there are different rationales for why maybe they're wrong. But tips, break-evens are down in terms of the expectations of forward inflation. Meanwhile, nominal yields are up. So wait, I don't want to put words in your mouth. Are you saying that Bitcoin predicted inflation

now it's predicting disinflation? No, I'm saying that it's a rational response because real rates have risen. And Bitcoin is an alternative store of value asset relative to traditional store of values like fixed income. It's relatively a risk-off environment flowing towards safety. So I have a different take. I wish there was an alternate universe where terror looting didn't blow up, where three hours didn't blow up, because I think that the environment that we're in was just a de-leveraging liquidity cascade. So we don't know. We don't know what the macro response would have been absent that event. Yeah, that's certainly a fair point. But, I mean, we were in the midst of a drawdown going into that. You could argue it exacerbated

it, would we have been down 60, 70%? Maybe not if we didn't flush everybody out. I don't remember when the flush happened. Was it in the spring? I can't remember exactly. But prior that I remember on the podcast, Ben and I were saying, like, kind of surprised that Bitcoin is holding up relatively well compared to the broader market of stocks was in a drawdown. And then, you know, the unwound came pretty hard. Yeah, I think you can also look at it as people generally are looking for safety in events like that. People lose some confidence in the space broadly. But they represent that and not holding the asset or not accumulating more and likely selling off. And so I think it's perfectly rational to think that was certainly going to accelerate any

drawdown. Something I've noticed is it's a little different than stocks in terms of how people pay attention to it in that I think people pay way more attention to the stock market when it's down than when it's up. And crypto is the opposite. People pay way more attention to when it's up and the prices are up. And it's kind of bizarre in that way because you'd think it would be the opposite. Michael and I always say like the higher the VIX, the higher the clicks.

Like people pay more attention to the financial markets when they're crashing. And when crypto crashes, it's kind of like people forget about it a little bit. Anytime something happens during a bull market, it's like Elon Musk changed his Twitter profile to mention Bitcoin. Bitcoin's up 10% this morning. And you don't get that stuff in a bare market. So we had this Ethereum merge in the last couple months, and there was a ton of press build about it in crypto space, but it's kind of like it happened. And it seems like it was almost a non-event. If that would have happened during the raging bull market, people would have been paying attention to that. And so is that something that people should have been paying attention to and they missed?

The other thing is, I don't know, maybe explain it to me like I'm five, because that's kind of how I feel like I need to understand what exactly happened. Was this a bigger deal than people made it out to be because it happened during a crippling bear market? I think it was a huge deal. It's monumental shift for the second largest protocol, second largest market cap crypto out there, ether. I think if the timing was different, I think we would have had a lot more buzz. I think those that are a little bit closer to the space, we were watching very intently and seems to have been incredibly successful to talk about what it was. The basis of this is it's moving from a proof of work protocol, similar to how Bitcoin runs, where there's minors that are validating transactions to what's called a proof of stake protocol where validators or participants in the network are validating the transactions, virtually performing the same functions as minors. When you prove a stake, the really easy way to think about it is you have to have a stake in the protocol to participate in validation.

So you have to actually own ETH in order to run a validator and participate as a quote-to-quote minor or as a validator at the transaction. and then you earn rewards for participating in the protocol. What was the number? 32, ETH. 32, okay. There's many different versions of proof of stake. So every protocol is built differently. It's all game theory-based.

Everyone's trying to get to a point where they can best balance security, decentralization, and speed or throughput. And so the way the Ethereum has done this is they very much focused on today security and trust as well as decentralization. And so the number of ETH that's required to participate being 32 is generally lower than some of the other protocols for that purpose that you could run it on your laptop if you have 32Eath, which is what around $50,000 at ETH, you could run a validator and participate in the protocol, earn rewards in ETH. What of rewards? Like yields? Yeah, so basically what happens is

the protocol will systematically distribute to you ETH, so in-kind rewards that come back that are earned in the validator and then eventually in future phases the protocol, you're able to withdraw that as earnings for your participation. My twins are five and I don't think they would have understood that. But I think 2017 was the first time I really started paying attention to Bitcoin. And I read the original paper, which is short, right? It's only a few pages. Like, it's not that long. And it wasn't like it was this aha moment for me and the light bulb went off. The guts of it, it's really hard to understand. And I think that's in wealth management space. Maybe the clients don't care. They don't need to care and understand why this stuff is functioning and why

it's working. I think the best way to explain it is just incentives. Like, you're incentivizing people to make sure that this network continues to run because they're being compensated for it. That's right. This consensus protocol, enables in protocol yield where you don't have counterparty risk. You're not lending to anybody else. You're not managing collateral. You're participating in the network and by participating, you earn yield. And so maybe I'll just take a step back in terms of what it does. So carbon footprint of the Ethereum protocol is drastically down. I think the number is like over 90% reduction through moving to proof of state versus proof of work. 99.95 something. Because you remove all of that effectively requirement to

compute and use real world energy. Did we just see like crashing computer prices because of this? Or did that already happen? Yeah, we saw interesting market dynamics. Like people that had these GPU units that you can use to mine Ethereum, you can't compete on Bitcoin's network mining with GPU units because they use specialized equipment that was like banned by Ethereum's proof of work algorithm. So what happens to all? Is that like the recycled? What do you do with that? It was expected to be coming. I don't think it caught any by surprise. But we saw sort of those GPUs flow or redirect their hash rate onto other Ethereum-based networks. And there was a fork of Ethereum when it moved to proof of stake, a fork that stayed as a proof of work network

effectively. But eventually, they'll be redirected for different purposes. We're already seeing that. We've used this line over and over. But John Oliver said that crypto is everything I don't understand about computers mixed with everything I don't understand about money. And it is just so true, like to penetrate this wall of, wait, what are we talking about? It's a lot. And so I think doubling down on education for advisors for their clients is paramount. And in the crypto winter that we're in, a lot of companies are going the other direction. I saw Notting laid off a third of their staff. DCG has a lot of turnover. There's a lot of people that are pulling back. And you guys, Fidelity, digital assets are going the other way. It seems like you guys are really leaning into

this. So maybe bring us up to speed on what you guys are working on. Continuing to double down in the space, as Abby Johnson set herself at consensus earlier this year, it's a large conference every year in the crypto space. And she spoke as one of the keynote speakers there. And really from a headcount perspective, I think over the last year, we probably doubled in size. And I don't know what HR's goals are, but I wouldn't be surprised if it's to double in size again. Is there a lot of talent out there now that are coming from other places that wasn't there before? I'm sure there's been competition for the last few years. Yeah, I'd say it's still very competitive, though. Certainly a little less so than earlier this year. But to what Jack had said, no change in our conviction in the space. This is a

long game. And so we're looking at a service the needs now. We want to be able to give our clients access to these asset classes now in the way that they want to and a variety of different services, different structures. The goal is to also prepare ourselves for what that future might look like. If you think in the future, what if bonds and equities or other assets were on a blockchain, we need to have that capability. We need to understand how we'd operate in these networks. Our goal is really to make sure that we're building the appropriate infrastructure and also the knowledge within fidelity. It's one of the luxuries of being attached to a large traditional asset provider. Right. You're not full crypto. So you have other lines of business like

and pick up the slack. And there's like pretty deep-seated conviction in this asset class changing financial services over time. There's the direct investment component of, yeah, you can come on and buy Bitcoin or buy Ethereum today. But eventually we're looking at things like defy and like what are the implications for financial services and just how trade settle and all of that infrastructure that Fidelity sits on top of currently. That piece is interesting to be the infrastructure because I think a lot of people at first thought it's going to be a medium exchange and we're going to buy Starbucks with Bitcoin and all this stuff. obviously that didn't pan out. People don't use Bitcoin for your cafeteria. But it seems like the

easiest use case for all this stuff, crypto and defy and all the stuff, wherever it's going, is just to make the financial system more efficient, make transactions, speedier, less costly, take out the middle. That's the whole thing, right? Taking out the middleman, in part, is reducing fees. So without being able to predict the future, is that the simplest endgame is that it's just going to make the financial system better behind the scenes and the pipes, whatever you want to call it. That's one application. What you see is Bitcoin is explicitly different from other digital assets. Bitcoin makes tradeoffs. The key tradeoff, we refer to it as the blockchain trilemma. Vitalik wrote about it. And I think 2017, it comes down to a tradeoff between centralized systems

and decentralized systems and then their complexity. So if you want to have a more complex system, i.e. if you're Ethereum, you can do more complex transactions than you can on Bitcoin. And maybe there's a different purpose for that because Bitcoin can therefore have less total compute, have less data to actually store, and therefore be more decentralized. And so there's an explicit tradeoff between decentralization and scalability of a protocol. It's not to say that only Bitcoin can accrue value or only Ethereum can accrue value or only a centralized system that is very complex and completely centralized can accrue value. It's a spectrum. And then there's different use cases because of the design of that protocol and because of the tradeoffs it makes.

And so in Bitcoin's case, it's an emerging monetary system. And alternative non-sovereign potential aspiring store value asset. In Ethereum's case, it's like a platform, a computing platform to enable applications to be built on top of it. And some of those nascent emerging applications are things like banking in financial markets infrastructure or like decentralized digital ownership, things like NFTs. So NFTs ushered in mass adoption last year, which I did not see that coming. That like really surprised me. Well, mass adoption is like 0.5% of the population. Okay, fine. But he was a part of it. I was, yeah.

So, Eurion was showing earlier his S curves. He was comparing crypto adoption with the internet and mobile. And I'm looking at GlassNode right now, and it's showing addresses with non-zero balances for Bitcoin. It's 43 million, which might as well be zero people in the grand scheme of things. That's not a lot of people. What is the next thing that accelerates global adoption? One thing to note about that statistic is that in a lot of cases, like with Fidelity

digital assets, we represent a single entity on chain, right? And so we have many clients. And so similar, I think about Coinbase and all these other entities. It works both ways. That's why we're here. So what's the real number? Coinbase would be one on there. Or less than, yeah. All right. So what's a real number? You're relying on survey data here. Oh, well, survey minutes. We're a pro survey podcast. A lot of the numbers I've seen one to 200 million people. Okay. And so the problem with using

addresses is I can have many addresses or I can have even one account that is linked to effectively one private key, but many addresses. And to that glass node, for instance, it's looking at it as different entities or different addresses. So you can have a single person with many addresses. Just got owned on stage. Yeah. It's like watching an NFL game at the bar and you have 100 people watching the game on one TV. All right. We get it. We get it. I was wrong. We got it. Or you can watch five games. Yeah, come on, Ben. Listen the knife. Things are obviously evolving. Like a 2017 thing first happened. It was Bitcoin Ethereum and Lightcoin. Now we move ahead five years. And there's all

this other new stuff. There's all these new networks, and Solana's going to be the next Ethereum, and then the next thing against Solana, and then defy and all these new things. Speaking of Lycoy, the Walmart partnership with them, remember that fake tweet? Didn't quite. So how do you think about implementing these new things that come along and kicking the tires on them and realizing like, okay, this is a meme coin? We're not going to focus on this. Wait, hang on, hang on. I want my question answered first. What brings in the next wave of users? It's a prediction because nobody knows, but what could it be? Is it price? Do we need another bull market? Utility? Accessibility.

interacting with these unique counterparties or service providers in order to build this asset class and mostly in spot, right, with less other options generally available to the public. And so further integration of those infrastructure providers, I think will be one of them. I think other access points to different products, potentially exchange traded products or other things will also be really beneficial for them for clients to build access to space. I still think an ETF would be huge news, which I think fits in the category of usability. I mean, that's usability of being able to allocate to the asset class. That's one thing.

And I think that's mostly regulatory in nature in terms of the hiccups or the holdups there. And then there's the other part of you said, for instance, you lost your metamask wallet. And that's like terrible user experience. It was awful. You didn't know what to do. I think you'll see an evolution of different providers, some that are intermediated directly through fidelity, for instance, and some that are less and less intermediate, where you're interacting with the protocols directly. Okay. So to that point, I got one of those hard drive thingies.

I'm very tech forward. What are those things called? A ledger, a treasurer. I got a ledger. I couldn't figure. I was going to lose my crypt that just sticking into my computer. It's hard. It's a pain in the butt.

So I think where you're going with this is places like Fidelity, digital assets, making the user experience better because right now it's bad and I'm not like that old. Like I should be able to figure this out. Well, I think that's ultimately what the group originally from like that 2014 to 2016 time period when they eventually said that we're going to go after institutional investors. They said, this thing is real technology. But the only way that it scales is you can't have the CIO of a pension fund with a thumb drive with 1% of their assets on it, right? Like that doesn't scale at all.

You need real institutional service providers in the space. Yeah, I think that's absolutely right. And then there's the access to the asset class and the participation angle. So like number of addresses and people actually interacting in the space. So beyond Bitcoin, I think the real building of these usable applications is going to be really important. Right. So actually unlocking the potential that we talk about for Ethereum, Solana, these other protocols. I've said this before, but one of the things that kept me on the sideline for so long,

so I was definitely like laughing at Bitcoin in 2013, I think it was the first I remember read the white paper. All that I saw as an outsider was the loudest, most obnoxious voices. That's like your first foray into crypto when you try and like learn about it. But then slowly but surely over time, you had the absolute smartest people in the world, at least investors with the biggest pockets and all the engineers are flowing into this. But I don't see what they're building because I have a job and I'm not inside. So when it's like they're building, they're building, they're building.

what are they building? What are these people working on? All these different projects. And I totally agree that all of these things should be viewed through the lens of a startup. It's venture investing. That's the risk reward profile, but it's liquid 24-7. So there's that too. But what are they building that we're not seeing? What are people working on? We talked about the merge with Ethereum. So the protocol developers are looking for ways to enhance the base protocol, right? The base foundational infrastructure of the assets. We're working on things like that, which is incredibly complex. And in most cases, they're working in a completely decentralized global team. In other cases, people are building these applications on top of the base protocol.

So, defy lending or other type of Web 3 type applications. And so they're trying to build use cases where you can actually interact on chain or utilize the underlying technology to unlock some benefits for the users. That's what they're building. I think a lot of the problem is it's that clip from the 90s of the Today Show where they're like the A with the circle around it describing email. We're in that phase still where what were some of the first applications of people that were using email.

they're like sending pictures of cats back and forth to each other as a comical thing. And that's like kind of what NFTs were. We're like people were buying pictures of board apes, right? And there's a direct monetary incentive associated with them. So it can look more and more like euphoria relative to the early stages of a technology that could be promising. But I think that we're still in those early stages. And I think is a valid question to say, when do the real true use cases emerge on a global scale? I think that's kind of what you're getting at.

We're not totally there yet. But if you really look underneath the surface, you can see there's a lot. a lot of real innovation happening here. And there's different ways that it's happening, right? So you look at some of the more regulated markets, the banks, the broker dealers, they're towing with this as well. They're just doing it in a different way. So they're looking to unlock potential to scale their post-trade processes by using

blockchain, fully automating everything. But they'll do that in permission network. So only other regulated institutions that are let into that network and participate. And then you have the public application building where you're actually building on public Ethereum where anyone can interact with those applications. So the risk of drawdowns is obvious in the space, but how do you avoid the risk of outright frauds or things that are just a house of cards so you don't end up with like the Terraluna tattoo like Mike Novigrat's on his arm at the very wrong time? Like, how do you weigh the risks of these new protocols, even if you see a lot of smart money going in there because there's a lot of smart VC money that went into some of these protocols that were effectively wiped out. So how do you ensure that you don't jump headfirst into one of those?

Yeah, it's very difficult. There's no consensus industry standard for audits and Zambi. average person, I'm not going to be able to. And most people won't build to go into the smart contract logic and understand whether or not there's some error or some issue or exploitation in the code base. And so it is pretty difficult. I think that's why you see in the institutional side, there's some hesitancy to directly participate in the open public protocols and defy applications. I think we will evolve. We'll get there. We're experimenting. And there's some maturation that's required. Ben, just read the white paper. Do you guys have a list of assets right now that you're saying, like, we're going to focus on these and everything else, wait and see?

Yeah, so I think that's right. I was talking more about, like, the defy applications and things like that, right? But in terms of the assets that we support, we support Bitcoin today, which I think makes sense. That's the concentration of demand, longest standing, largest market cap. We will be supporting by the time this podcast is released, we may actually be supporting Ethereum. We'll be supporting it pretty soon. The goal is for us to continue to extend that, right? And so we want to be able to support our clients and give them access to the assets that they want. But we have a very rigorous framework that we go into. And so we actually look at everything from the technology.

So look for level of decentralization, stability, deep protocol exploration. We have engineers that are very skilled in this. And then we're doing things like regulatory evaluation. We look at how we would secure the assets and operationalize this. And so we go through a lot of effort to understand what assets are we willing to and do we think we can support and for what services. Yeah, our goal is to support a lot more. And then we want to extend beyond crypto into digital assets in the future as well.

platform is meant to scale across all blockchain-based assets. I think there's also something to be said for like the Lindy effect or network effects is that the longer these things survive, the more people are paying attention to them. And as that value accrues, gradually over time, you can look at it as a bounty in some way for like somebody being able to exploit that protocol. And everything is software. I mean, there were even bugs in Bitcoin in 2010. And there was a bug discovered in like 2017, 2018, that was sort of covered up and then

patched. But all that to say is the longer something survives, you know, the larger that bounty accrues and the more eyeballs that are paying attention to it. And over time, these protocols harden or ossify and you can trust them more. And that really is the idea of Lindy is the longer something's around, the more likely it is to be around longer and therefore value accrues to it. Tara, how long was Tara around for a year? And it ballooned in size in seconds. And so the bounty in order for somebody to go after it in some malicious way, well, wasn't necessarily there until it was $60 billion as an ecosystem.

I'm zoomed way to it on this, but it seems like crypto has decoupled a little bit from the stock market. When the stock market was crashing, for whatever reason, Bitcoin and Ether were like relatively stable. You've got a 15 minute candles. Yeah, yeah. No, it's a day. It's a day. S&P's up 1% today. Nasdax, same. And Bitcoin's down 2%. Eth is down 2.5%. So it's a bit of a decoupling for now, at least. What might end the crypto winter? Is it strictly mass? Macro, what might be the spark, the catalyst that ends this high correlation? Unfortunately, from my vantage point, I would agree with you. It's macro. I think it gets to, we didn't really talk about, but like the broader picture of the macro backdrop, you've lived

in this environment where the leverage has been moved around the system and now it's on sovereign balance sheets. And so I think there's a question of how long can the system really tighten until eventually somebody has to step in. We're already seeing markets start to dysfunction. Ultimately, Bitcoin is sort of a put on that in some ways. It's obvious now in hindsight, but that's what a lot of people miss is just that it is a risk asset and that when risk assets get hit, correlations kind of go to one. That's the riskiest asset. It is currently, but I think over time, especially with Bitcoin, it can be seen as the network

of Bitcoin is incredibly non-volatile. If I own one Bitcoin, I own one of like 19.3 million that exists today, and I know the exact supply schedule going forward. Whereas if you think of if I hold a dollar, we can't even agree on what base money is across economists and who controls that money. supply right. Yeah, there's a faith-based element to both of them. Someone explained to me a few years ago, the biggest bull case for Bitcoin is it, it's a digital religion. People say, well, you can just make another one. It's really hard to replicate faith in something. And I think that's a big piece. That's what made it hard for a lot of people. That's a big part of it too. Yeah, network effects.

And just think about the time it took to build this network. As Bitcoin has developed this network, the global representation, any other protocol or asset to step in and gain that network share, take a very, very long time. I was surprised to see volatility when it approached 70,000, it was just as volatile at 70 as it was at 15 or 10, which surprised me a bit. The one thing that I think is different about this particular drawdown, and I think we all agree that you should go into this investment, knowing that at least you will get cut in half, right? That's the stock market.

So if the stock market gets cut in half, like, you better believe you're going to get cut in half with crypto, like again and again. That's just the nature of a boom-bust asset. But the difference this time is that there's a lot more people in crypto that are never coming back, that absolutely got blown up. The market cap was a lot bigger. I don't know that I feel too strongly about this, but how should we compare this current drawdown versus others? And is it silly to dismiss this as like, oh, we've been here before. This is just the

nature of it. How do we know? The one key element that's different this time is you have a Fed that is pivoted, right, for the time being. And that's where it sort of gets back to the point of what turns the crypto winter, so to speak. And I do think that there's a huge element of it that is just the broader macro environment. But for me, it's real rates have told the exact story. If you look at the chart of real interest rates, they've gone straight up, Bitcoin's gone straight down, and it's been a headwin for gold. So if you tell me where real interest rates go over the next year, I think there's a high correlation, at least historically there, and it makes sense to me. You're talking about building out institutional capabilities. Crypto was a little weird in that

retail was there first. For everything else, private equity and venture capital and hedge funds, it was all institutions first, pensions and domins and foundations and maybe even family offices. Crypto was different. Retail got there first. I guess the hope would be, to answer Michael's question, wouldn't it be that institutions are the next big dollars and they have a lot of money that could potentially come into the space? Is that the idea? I think that could be a huge catalyst and I also think that from a retail perspective, there's pretty broad adoption. I don't have the stats in front of me, but it's a pretty small percentage of those that actually have equity exposure. And so the more access that the retail individuals have through different means

and through different service providers, I think we could see more retail adoption, but the institutional adoption would be big dollar adoption as well as more stable investors, right? And so I think that could be a huge catalyst. What do you think is a fair time frame as we think about the future of crypto in terms of giving it time to build and mature and evolve? If we're still having this conversation and make it up, five years, 10 years, like when is the point in time we're like, all right, you know, this is a great experiment and for various reasons it just didn't work, how much time is necessary? I know that's an impossible question, but it feels like an arbitrary question. I think it's years, not decades. So if we're sitting here in 10 years, I don't think we're

having the same conversation. To me, ultimately, the market cap of the space is a little bit sub a trillion dollars. I think this is a pretty binary outcome. Either this space, broadly categorizing it becomes a 20, 30, 40, 50 trillion dollar space. And there's so much asymmetry to that versus looking at it in a one, two, three percent position in a portfolio. It's a call option. Exactly. Yeah, the other side of that is I think there's always going to be new experimentation. I don't see this ecosystem as being stagnant. I think we'll always be talking about the next thing. And there will always be questions about if that next thing is viable. Most of these protocols are built such that they are decentralized and they're available for

developers around the globe to try and experiment and build. And so I don't think we'll ever get to that point. Michael just wants to know when title insurance is on the blockchain. That's actually, that was my next question. So we've spent this entire conversation pretty much talking about layer one, the building blocks, Bitcoin and Ethereum. But for some real world application, and maybe this is a dumb example because this is what blew Paci up in that conversation that went viral.

but I bought my house and I refinanced like a year and a half later. And I need to buy title insurance again. It's like, well, wait, whoa, whoa, wait a minute. I literally just did this. So is that not a good example of something that should just be electronically verifiable? And if that's a bad example, what else is out there? Like, how do we bring real world data onto the blockchain? Discuss.

It's not always technology. That's the issue. And so in that specific example, I think the blockchain technology is perfectly capable of solving that problem, but there are other external factors that maybe wouldn't allow for it, right? And there's also challenges. So any kind of disintermediation of an existing service provider or market infrastructure provider, it's very difficult to get over that hump to then completely disintermediate. To extend onto your question, I think where we're going to see the most wide adoption of these

use cases will be where there's a lack of infrastructure available in the space. So think about a tokenization of real estate or private equity markets or private debt, where you're not looking to disintermediated existing market infrastructure providers like a DTCC, I think that's where you're going to have the most immediate traction in the financial services space. We have seen that in the regulated space, there have been successful implementations of private distributed ledger technologies. It's not happening on a huge scale today yet, but I think there's evidence that there's a lot of value to be unlocked there, specifically in those spaces where there just wasn't existing infrastructure, and this new technology opens up the opportunity for that to come into play. It's never going to happen.

You guys have any thoughts on the Metaverse? Is this going to put Facebook out of business? what the heck is going on? I look at them as relatively different trends. There's certainly intersection when you think about a decentralized metaverse. But to me, it's like one of those cases of it's okay to say I don't know in certain instances. I think a lot of people, especially in the crypto space, will try to say they know exactly what's going to happen five years from now. But ultimately, a clear answer is nobody really knows the answer. There's sort of different probability distributions in everyone's head. You would assume if the meta, whatever it is

worked out where you could buy digital goods online, that would be good for the crypto ecosystem. Crypto would go hand in hand with something like that where you're buying digital goods in a digital world. Yes, but is a metaverse created by meta centralized and how does that interact with other metaverses? I mean, I'm not going to claim to be an expert in the metaverse because spend my time studying crypto. But theoretically, I agree. I don't know what the future of the metaverse looks like. But theoretically, digital assets are more fit for purpose for exchange of value. whatever that value is in more of a decentralized world, whatever that Web 3 Metaverse world looks like in the future.

Our last question from me, and then we could turn to some list of questions if we have some and wrap up with whatever else you guys want to talk about with Fidelity, digital assets. One of the big themes of last year was value accrual to the users and the creators and not the platforms. I feel like that died. I haven't heard about that in a while. Any opinions or thoughts on that space? This isn't directly related to NFTs, but I think real yield.

is a discussion around a lot of these protocols. And that's, to me, a sign of a maturing industry, right? You can't subsidize your way to profitability forever. At some point, push comes to shove, and you do have to show some sort of sustainability in the long term. But I do think you could say that major brands getting caught up in the NFT hype, at least last year for the time being, was... Is that going to age poorly? I don't know. I think it was similar to the internet. There was a boom and bust associated with it. Now we look back and we say, oh, that was obvious. I think it's similar types of things happening here. There's euphoria. Everybody wants to be cool and get involved and make NFTs. And now we're in a different market environment 12 months later. But I think that

ultimately there's real tech here. You guys know better than anyone. A lot of these decisions that are being announced today were being worked on like eight months ago. Yeah, absolutely. I think this takes time. It's complex. In our case specifically, us as a custodian, us safekeeping client assets, things take a long time. And we need to make sure that we're delivering the right product for our clients. Any final thoughts, a la Jerry Springer? Just tell our audience, if they want to learn more about Fidelity Digital, where they go. I'll plug our research. We pretty much open source everything we do on the research side, and Fidelity Digital Assets puts education first in our conversations with clients. Fidelity Digital Assets.com, click on the research tab, and pretty much everything's there.

I'm at J underscore New Writer, pushing that research externally on Twitter. I'm not active on Twitter, but go to Jax. All right, well, thank you. Thanks, guys. Thank you. Thanks to Jack and Rameen for helping us on the podcast. Thanks to everyone from Fidelity for being so kind in Boston with us. We really appreciated it. That was a fun time.

Remember fidelity, digitalassets.com, and then Animal Spiritspod at gmail.com. Animal Spiritspod.com. We'll see you next time. Thank you. Thank you.