Animal Spirits Podcast - Talk Your Book: Fidelity Digital Assets Mailbag

Episode Date: May 15, 2023

On today's show, we are joined by Jack Neureuter, Research Analyst at Fidelity Digital Assets to discuss what drives the price of Bitcoin, where to store Bitcoin, Bitcoin staying out of the headlines, and much more!   Find complete shownotes on our blogs... Ben Carlson’s A Wealth of Common Sense Michael Batnick’s The Irrelevant Investor Feel free to shoot us an email at [e-mail] with any feedback, questions, recommendations, or ideas for future topics of conversation.   Check out the latest in financial blogger fashion at The Compound shop: https://www.idontshop.com   Investing involves the risk of loss. This podcast is for informational purposes only and should not be or regarded as personalized investment advice or relied upon for investment decisions. Michael Batnick and Ben Carlson are employees of Ritholtz Wealth Management and may maintain positions in the securities discussed in this video. All opinions expressed by them are solely their own opinion and do not reflect the opinion of Ritholtz Wealth Management. Wealthcast Media, an affiliate of Ritholtz Wealth Management, receives payment from various entities for advertisements in affiliated podcasts, blogs and emails. 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. For additional advertisement disclaimers see here https://ritholtzwealth.com/advertising-disclaimers. 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. Obviously nothing on this channel should be considered as personalized financial advice or a solicitation to buy or sell any securities. See our disclosures here: https://ritholtzwealth.com/podcast-youtube-disclosures/ Learn more about your ad choices. Visit megaphone.fm/adchoices

Today's Animal Spirits is brought to you by Fidelity Digital Assets to learn more about how they work with clients. Go to Fidelity Digital Assets.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. All opinions expressed by Michael and Ben are solely their own opinion and do not reflect the opinion of Ridholt's wealth management. This podcast is for informational purposes only and should not be relied upon for any investment decisions. Clients of Ritholt's wealth management may maintain positions in the securities

discussed in this podcast. Later on today's show, we are joined by Jack Newrider, Jack's research analyst to answer some listener mailback questions and we're going to do some on our own before that. But before even that, Ben, this week and I was listening to the Coinbase earnings call. Did you know that Coinbase bought One River Digital Asset Management? No, what's that? So you might have heard of Eric Peters. Oh, yeah. Oh, yeah.

Oh, right. Yeah. Yeah, so he was a big proponent in the institutional space of digital assets. So that went under the radar, I think. I didn't know about it. That was in March, so relatively new news. Under the radar is the, it seems to be the theme this year for crypto, at least. Yeah.

So Brian Armstrong of the earnest call said, quote, and we think that's really important. because 80% of Americans believe the financial system doesn't work for them. They see issues with it. They see that it's too slow. It's too expensive. End quote. I wouldn't necessarily take umbrage with any of those issues. However,

I was talking to somebody about exchanging currencies, euro to dollar, whatever, something like that. And it was a substantial amount of money. And instead of sending, you know, using the traditional rails, which charge you, I don't know, 6% or 8%, whatever it is, I just threw out the idea like, What about stable coins?

What about U.S. to U.S.D.C. to euro. Easy peasy. Do you know what the easiest way to do it is? Credit card. There's credit cards that have zero percent fees for international currency transfer. So you use your credit card and there's no fee to do it and you just pay with everything in credit card. I did not know that. Is there a limit?

I mean, it depends on a credit card, but most of them will not say like zero transaction fees internationally. So that's your, that's how you do it. That is very interesting. Going on a European vacation? Maybe that's what, maybe, maybe, maybe crypto needs its own credit card. So again, Brian Armstrong said it's too slow, it's too expensive. So this person said to me, wait a minute, you know how much it is to convert dollars to USDC on Coinbase?

Now, this is not Coinbase Pro, which I'm assuming is lower. It was 3.8%. Ooh. Okay. It seems high. I mean, it seems not really in line with what they're trying to do to the financial system. But anyway, I guess credit to them, their stock-based comp is down 54%. So maybe they're learning about discovering the year of efficiency.

Anyway, I just thought that was interesting. All right, let's get some questions. What's the best way to buy crypto if I don't want to open an account at Coinbase? I was speaking of. ETF, mutual fund, something else. Okay, so they don't want to open an account at Coinbase. it sounds like they want to use a brokerage account. It would be nice if there was just a simple ETF backed by Bitcoin or whatever that you could buy.

The regulators have not not greenlit that yet for whatever reason. Those are the pro shares one, right? The pro shares is, but that's the futures one. Okay. But what else is there? So I'm thinking about the first things that come to mind are Biddo. Yeah, what do you think that has an assets without looking? $800 million?

Yeah, it's less than $9.00. It's almost a little less than a billion. Well, I assume it hasn't taken assets in, right? It had that big... Yeah, I mean, it's probably all the assets that came at the beginning. So there's Biddo, which is the pro-share's futures-based ETF, and there's micro strategy. So I'm looking at a chart. Oh, wow. How about that?

They don't track each other. What? I can't imagine buying micro strategy as a way to... I mean... Well, how else do you... Listen, I don't know. How else do you do it? But anyway, over the last, so year-to-date, Bitcoin, what do we say?

Bitcoin's up 70%. Actually, less today because, all right, so this is not real time. So the BidO ETF is up 51%. Micro Strategies up 110%. Anyway, I don't know. If you had to buy Bitcoin. But it was down 74% last year. It's a micro strategy, you'd be a leveraged bet on it, right?

Because they took on debt to buy Bitcoin. All right. So if somebody asked you this question, how do I? I buy Bitcoin outside of Coinbase, would you say, well, maybe just open an account of Coinbase? Like, what would you say? Robin Hood? I don't know. I think if you want Bitcoin or anything like that, the easiest thing to do is probably just to buy it. You mean instead of looking for another alternative until there actually is an ETF?

There's nothing that perfectly tracks it. Right. So open a Coinbase Pro account or Robin Hood, something like that. I mean, yeah, it's hard to have a lot of faith in a lot of the third parties at this point. So I guess, I don't But pros and cons to everything. So Coinbase, the fees are kind of nuts. Robin Hood, probably the fees are embedded. You probably just, I don't know, get bad fills or something. But with Robinon, like I said to Jack later in the show, I can't move my, I can't move

my crypto. It's just there. There's no. It is easy to move it in. It's harder to move it out. Well, actually, did you move all of your crypto out of Robinhood using your wallet? No, I moved it in there. You moved it in there.

Now you can't get it out. Yeah. You can't get it out? Well, no, I'm sure you can't, but it's not easy to transfer in and it is to transfer it out, right? Always. It's a hotel California of crypto. Right. Hey, guys, skeptical about crypto, but I kind of hear the use cases.

Too many bad actors at this stage, just my two cents. Okay. I mean, yeah, I hear that. Well, don't you see the, isn't there the rest of the question here? Isn't that the same question? We have clients regularly asking about crypto, but are nervous to touch it due to all the regulatory uncertainty. do you guys think? No, those are separate, but whatever. Okay. Well, let's pretend those are the same questions, beyond the two cents. The only thing I have to say about regulations is I'm just

surprised at how long it's taken to do anything, that the regulators just don't seem to care. But Gary Gensler taught a class at Stanford or MIT or something, so people thought he was going to be helpful. And it seems like they're purposefully not doing anything. I just, the, the ETF to me, that is the one that is probably the most surprising, that they just, that has taken this long to let a Bitcoin ETF come to market. I can't believe it's taken this long. And I don't really understand why they haven't said, okay, I really don't get it. One of the things that people spoke about for a bull case for crypto was that the institutions would come in. That didn't happen and might never happen. Guess maybe they will if prices keep going up, but who knows? Yeah,

listen, that was certainly, if you asked me in 2021, what was the near term bull case for crypto? That's what that is what I said, and I was hand out dead wrong. Yes, I, this is another surprise, too. I agree. It seemed like institutions were ready to come in, and they just almost didn't have enough time to, I don't know, maybe it is because of the regulatory stuff and the not being an ETF. I guess we'll never know.

We'll never know. Like, if, if Tara Luna didn't blow up and three hours didn't blow up and there was mass liquidation, like there's definitely an alternate universe where it didn't crash the way that it did now. If the biggest exchange wasn't a giant Ponzi scheme, then you never know. I mean, right? No, but but the real crash came way before. When FTCS blew up, Bitcoin was already down to 20,000. Right. Yes. I agree. Guess we'll never know. Hey guys, I bought too much crypto and now it's like 50% of my portfolio. I know that's too much. The volatility is annoying, but I'm still really bullish long-term thoughts. I guess that's a pretty good not to break. I mean,

it must have been 75% of the portfolio before the crash then. If it's 50% now, I think one of the things that Bill Suit always says to us or to clients that complain about paying capital gains taxes is don't worry about paying taxes

because it means you kind of won the game already. So I'm sure if you have huge gains embedded, even if you lost some money and you got it early, you're fine, but I don't know, the whole 24-7 market thing, like, just like insane volatility. 50% seems a tad high, if I'm being honest.

I mean, for that kind of market, I think you just have to figure out what makes you sleep at night level and diversify down to that. I'm guessing this is a young person. And so maybe they're rationalizing it that it's going to be a smaller percentage of their portfolio as they add money to it, right? Like, it's not like their steady state. And I hear this dilemma because if you're so bullish that like you would be kicking your if it goes higher and yet you know that you have too much and you'll probably be kicking

yourself if it goes lower. That's a tough spot to be in. Well, the good news is the last three to five years has been a good case study and man, I wish I had more in this or man, I wish I had less than this. It's a true. I think you could kind of see what you're comfortable with based on what happened. All right, here's one one more. Is AI everything crypto thought it was going to be? Sure, a lot of the AI stuff is people talking about what it will do for us in the future, just like crypto in many ways, but there are already tens of millions of chat GPT users and we still don't have a killer crypto application for regular people. Curious to hear your thoughts on crypto versus AI. That's a good point. Josh wrote a post on that. I do, I do think that every

innovation in history, people have taken it too far, like thinking about what it can or will do in the future. And I just, I do think crypto was the first time it happened in the social media era. So I think I think crypto was allowed to get ahead of itself too much because everyone had this megaphone and you could see this stuff, like the prices and stuff happening in real time. If crypto would have been somehow invented back in, if the technology existed in the 1980s and you couldn't see tick by tick every second of the day, the price, I'm guessing that we wouldn't have had the crazy blow-off tops like we had in 2017 and 2020 or 2021, right? It's, I think it was just almost like bad timing for crypto because the price rise

made it seem like it was our, the innovation is already here. And obviously, it's not yet. Well, I think, I think the thing that's totally different about crypto is it's trying to change the financial infrastructure, trying to replace the rails that we've been using for the last 50 plus years, which is obviously a big, hairy, audacious goal. Whereas, uh, chat, GBT, T, came to market, and instantly, the use case was very apparent. Like, oh, my God, this is magic. Crypto doesn't feel like magic. It feels like black magic or dark magic. Like, it doesn't, it doesn't feel this way. So, uh, yeah, good question. And it's possible that we will just never have a retail use case where people were thinking, like, what if crypto could do this?

And we put everything in the blockchain and we tokenize this. I think we will. I don't know if we're going to, I don't, I'm not saying that there's going to be a chat, GBT-like use case where there's like a light switch that onboards hundreds of millions of users overnight. I'm actually not in the camp at all. It's going to be like behind the scenes. If it's going to be used by a lot of people, it's going to be behind the scenes,

it's not like people are going to go, oh, I'm opening up the crypto app to do this or whatever. You're not going to even know you're using it. Maybe. Don't you think? Maybe. Yeah. If it hasn't, I don't know,

if we haven't got a good use case yet, when is it going to happen? Like in terms of retail adoption. Fair point. That's a point that works until it doesn't, I guess. Ben, we're still so early. I guess so. AI is a good, good dose of, you know, splash of cold water onto the face of crypto, though, to show, like, so.

But I don't think, I mean, I'm sure there are, there are narrative people out there working on why AI is good for crypto. Just like the metaverse is good for, right? That train's never late. All right. Here is our listener mailbag questions with Jack Newrider. We are joined today for the third time by Jack Newrider. Jack is a research analyst at Fidelity Digital Assets. Jack, welcome back.

Happy to be here. All right. Before we get into some of the questions that we've got, Ben and I were at a Fidelity Digital Assets event in October 22, which seems like eight years ago, maybe like 15 years ago in the crypto space. that was before that was before the SBF FTX meltdown and i think crypto with bitcoin is trading like around 20,000 give or take so we went through the whole meltdown and i'm sure there was a lot of other things that adversely impacted the crypto space here we are the price was at 20,000 then again before the meltdown and here we are it is monday may 8th and the price of bitcoin is 28,000 which is kind of remarkable. So that's a good segue into our first question, which is crypto didn't

work in 2021 and 2022 as inflation ramped up. Now it's working as inflation comes down. And especially during the recent bank runs, I don't get what drives price. Is it all just momentum traders? And I would add, I don't get it either. So, Jack, what is it do you think that drives the price of digital assets? Yeah. I mean, there's certainly an element to everything in finance. that we can't calculate. But what I will say, and you guys have asked me this, I believe both times we did Animal Spirits, Talk Your Book episodes around the inflation piece because inflation was 6, 7, 8, 9 percent kept ticking higher. And we have not moved the goalposts on this one. I'll let you know if we have to do some goalpost moving. But so far on the inflation piece

around Bitcoin, what I'd really say is you have to look at the entire picture. So the response function as well as sort of the backwards looking data because financial markets are forward looking. And so if you were using forward real interest rates, which I continue to sort of harp on is being the important marker, for Bitcoin, what happened in 2022 made a lot of sense. Forward inflation expectations never rose materially. They've stayed below, I think, 3% in the entirety of inflation running up and back down. So the bond market had been, whether it's right or wrong, embedded.

expectations that inflation would normalize and that it was ultimately transitory. Meanwhile, the response function was to raise interest rates rapidly. And so the net effect of forward nominal yields increasing while forward inflation expectations, which is what you take off of real interest rates not moving, means that the opportunity cost for all assets rose, forward real interest rates rose. That means higher discount rates. That means bonds on a relative basis are more attractive. and so Bitcoin being an alternative store of value, similar to like a digital gold is the phrasing

that some people like to use. It makes sense that the price of Bitcoin fell. And at the same time that Bitcoin bottomed out, which happened to be during, you know, you mentioned FTX and these other, you know, lenders sort of blowing up or failing, so to speak, and no longer existing. That was in Q4. That was the same time when real interest rates topped towards the end of Q4. And now we've seen them sort of come back in.

We've seen a little bit of balance sheet expansion on global central bank balance sheet. And we've seen the price of Bitcoin rally a little bit in Q1. So to me, all of that sort of does end up netting out and making some sense. But it's just a layer deeper than just looking at backwards looking inflation. It's also obvious in hindsight, but I think a lot of people realized in the last 12 to 15 months that, oh, yeah, that's right. Crypto is a very long duration asset. And it's still very young in its life cycle. And I think that's something people forgot that all the long duration assets really got hammered last year.

And one of the things I think you guys do the best talking about all the time is, like, in the short term, ultimately, we could make a case both ways. That's what sets the market. And that's probably why Bitcoin is trading 25 to 30,000 right now of, yeah, there's more users than there were four or five years ago. So the long term trend is intact. But ultimately, if the dollar rallies, the dollar rises and we're going into recession or something and you get a sell off of equity markets, then, yeah, Bitcoin's probably going to sell off. But if you stave off a recession and all of a sudden things start to look better on the equity side and risk rallies, well, then, yeah, Bitcoin's probably going to rally. And so to me, it just kind of like makes sense where we're

sitting currently. And we're always looking at things of the bigger picture, as I think you guys always are. And so to some degree, like, yeah, I can't tell you whether we're going back down to 20 or up to 40. I think you can make a case on both sides. And there's those exogenous variables that we don't really know, you know, where they're headed over the next three to six months that will ultimately dictate that. So, yeah, like anything else, there's a lot of things that drive it, especially in the short term. It could be interest rates and the cost of capital.

It could be the dollar. It could be inflation. It could be inflation expectations. It could be just risk appetite in general. It could be adoption. But I guess what I would ask is over the long term, what do you expect if I had to pin you down and say, what do you expect to be the single biggest driver? Now, again, there's a pie chart here, right?

So I don't know if the biggest driver is 20% of that pie or 80% or whatever it is. But what do you expect 10 years from now to have been the biggest single driver of the actual price of these digital assets, whether it's crypto, whether it's Bitcoin or ether or anything else? Yeah, I think if you ask the average person, especially when we're looking specifically at Bitcoin, and because Bitcoin is half of crypto's market cap, it was the first digital asset, it tends to be the first primary mover. Everything follows it. And then eventually they sort of run off of it. They have betas to Bitcoin to some degree, you could say. At some point, I think everything has its own taxonomy and we'll maybe start to do its own thing. But we're still a very immature small asset class on the grand scale. So everything gets looked at through sort of one lens. But when you ask that question of over the next 10 years, what's the story? The story is that Bitcoin supply is pre-programmed, that 90% of Bitcoin already exists,

that its inflation rate will get halved every four years. So we're going into another halving event next year, where its inflation will move below the rate at which gold is mined. So it's stock to flow ratio will be higher than gold after next year's having. And if you pit that against a picture of larger and larger sovereign debts in which you kind of look at the historical playbook, when you have your debts denominated in your own currency and you're the reserve currency, you can kind of do the math. Do you want to default on that debt, which sounds extreme? And I think it does as well.

Or do you want to sort of implicitly default on that debt by debasing the currency, that's been sort of the toolbox that's been used. And so if that toolbox gets used, Bitcoin should respond well to that as you debase your currency. There's this alternative monetary system people can port value into. And that's sort of the major big picture pitch. But of course, you have periods of tightening like right now that I would argue would be unsustainable on a 10-year basis. We're already seeing things start to break. Like, you know, regional banks. It's sort of like a balloon. You push the air in one pocket. You kind of push the problem somewhere else. And we're starting to see some of that.

Jack, I'm going to get worried if you say hyperinflation. I'm going to get worried if you say it. Not at all what we're pitching here. Although, in theory, it does kind of hedge you to some degree to some of those outcomes. I think if you use that logic. Not that throw it out there, it'll be able to listically happening. Of course, some are saying that. Not us.

One more, one more follow-up question to this. So, Bitcoin's up 70% year-to-day, give or take. It's one of the best performing asset classes. And it seems like it's like sort of under the radar. I don't know if many people would know that. Why do you think there hasn't been this, I don't know, a headline fomo or anything like that? Is it just people just got so badly burned like Mugatu in 2000?

Not Mugatu. Damn it. What was Will Ferrell's character in Austin Powers? I can't remember. Either way. Do you think it's just people got so badly burned in 2022 that they're just like once burned, always shy or something like that? Yeah, I think, I mean, people got burned.

after the 2017 run-up. People also got burned after the 2013 run-up and 2014 drawdown. It was just smaller scales each time and less capital involved. And it always took about two years to sort of get through some of those pains after the drawdown. Historically, the drawdown took about a year. That's exactly what just happened. We drew down 75%. And if we're using these historical analogs, Bitcoin has moved in four-year cycles because of this four-year having and in theory some some things have reacted to that we saw one year drawdown we're in the middle of sort of a one year choppy bear market in which sentiment is sort of churning and you say like maybe q1 was a turning point we kind of are starting to hear those questions um but not nobody's

overly excited or like super speculative and euphoric about this run up because you guys know the drawdown math you go down 75 percent you go up 70 percent you're still down 50 percent right you got to go at 3x And historically, we've seen a year of sort of chop once you've found your bottom. That's 2023. And then if we're using the historical analog, you start to get constructive, heading into next year and the year of a halving. That's historically been the time where you get back to sort of old all-time highs and you start talking about sort of a new era and some sort of new narratives forming. So maybe that history plays out. Maybe it doesn't, not saying, you know, not making a prediction there, but certainly looks similar to what's happened

historically. Michael, I think you're looking for Mustafa, I think, was a guy's name. Mustafa. That's right. Great call. All right. Let me take the next one, because I've got a follow up before Jack answers. How do you guys think about self-storage versus the centralized platforms? Jack, I have my crypto, unfortunately, at a Greenleaf app that shall not be named, and I can't get my crypto off for some reason. They've got like wallets that are available in most states besides to New York. So, although I did try, I did try self-storage. I bought, I think, a ledger, and I was, I got very scared that it was going to all disappear. I don't trust myself to use

that. So how do you think about, or how should people think about self-storage versus a platform like Fidelity or one of the others? Yeah, so I think there's, you're asking on the individual side, there is an important delineation between the considerations that an institution has or the delegated asset manager has when they're responsible for somebody else as well, versus an individual. But speaking towards the individual side, because I think that's sort of where this is coming from, I think the considerations are similar. You're just making your own decisions. And so ultimately, it's easier to decide where you want to custody and how you want to allocate if you're allocating to an emerging asset class like Bitcoin and Eith and the crypto space. What I would say is it's like

a tradeoff between whether or not you want to take a certain level of counterparty risk and do do diligence on having a counterparty or custody of the assets yourself, but thinking of it sort of like in the digital sense of holding a physical bar of gold. So do you want to be holding those assets yourself and do you trust yourself that you have the technical capabilities to be able to do that? I'm a horrible counterparty. I don't trust myself. Well, I think the amount of effort that one would put into self-custying these assets has a lot to do with how much in assets they actually have, right? And then they can weigh out the options of what they want to do. So it's similar to like if you have $100 in your wallet, nobody would say you're crazy.

But if you have $1,000 in cash in your wallet and you're walking around the street, we start to think you're crazy and you scale that up more and more. There's similar technical tradeoffs depending on how you want a custody asset. So there's hot wallets and cold wallets and some are easier to use and some are harder to use. So instead of trusting a counterparty or an entity, The counterparty is yourself and your own technical capabilities when you're thinking about self-custying these assets. So you better know what you're doing when you're going into it. And at the same time, I don't think there's anything wrong with experimenting with these things. You mentioned, like, you got a ledger.

A lot of people will get a ledger, learn about it, and sort of send dust transactions. And that's how you really, like, feel using these networks, like, oh, I just made a transaction and it didn't go through a third party. versus like if you just go to a centralized exchange and buy the asset and let it sit there, well, great, but you can do that with an equity. You're not really using the networks themselves. But in terms of like custodians, I do think there's this element that didn't matter to many last year or prior, which is nothing bad had happened for the past year or two in terms of major custodians, major lenders. And so everybody got laxed in terms of.

the due diligence that they were doing. I do think that that has come back, definitely in the institutional space, but even to individuals asking the question of, do I trust the exchange or the custodian that I'm using? Do I know whether they're holding assets in cold storage or hot wallets? Is it an omnibus set up or segregated wallets? Do they have a third party auditor and who is that auditor that ensures that those tokens exist and that they're not re-hypothicated and lent? So there's a lot of considerations that go into, A, how you want to hold a, how you want to hold those assets with a third party or on your own? And then B, how do I actually go about choosing what provider to use on the custody side or what technology stack to use on the self-custody

side? How do you think about there's a lot of places that are offshore and the regulation stuff we don't have to get into, but some people prefer to use places that are offshore and there's U.S. places that are considering going offshore? How do you think about how do people even perform due diligence on that if there are no really rules or regulations yet? Yeah, I don't know how the individuals do that due diligence, but also at the same time, the individuals aren't really able to use external non-U.S. entities that aren't regulated in the United States, right? At least legally speaking. I know that there are U.S. citizens that use VPNs to get access to these platforms, but I don't think that they're doing due diligence on custody if

they're doing that, right? Right. So, Jack, let's say that I did decide to use my ledger, which is basically like a USB thing. You're sticking it into your computer. You would lose it in 12 days, Michael. Well, that's where I was, of course. That's where I was, so let's just say that I left it on my desk and one of my kids decides to, oh, what's this? It just throws it in the garbage. Is it gone forever or is there a cloud or is the whole point that it's on that, it's in the computer?

Depends on how you set it up. Typically, if we're just going to talk to like a ledger, a treas, or a traditional hardware wallet, what they'll have you do when you set it up. is create some sort of entropy, which is just like randomness. And then they're picking from a list of around 2,000 words at random. And then you have a seed phrase of anywhere from 12 to 24 words that actually represents your private key. So there's a link between these 24 words and your actual private key. And you don't want anybody to ever have access to those private keys or that seed phrase.

This sounds like National Treasure 7. Yes. And in some ways it is similar to like it's as foolish as it sounds because this isn't the way that the industry scales. Right. And so I think to some degree, the technology will get better and more embedded in traditional technology that we use on the self-custody side. And then the institutions and the quality of the custody from those institutional providers like ourselves, you know, continues to get better and more complex and more comprehensive. And so like I think ultimately that's, originally why Fidelity got into this space was 2015, we started mining Bitcoin, and then we said, how do we hold this stuff? And then once we asked that question, we said, if this thing's going to scale, someone needs a pension fund that wants to own this, well, they need a custodian to actually hold those keys. And that's why we built the business originally. So it's like a very relevant question, obviously. All right, here's another one. I'd be curious to learn how you approach

crypto with your clients. Do you ask if they own it or if they bring it up? themselves, what do you say? So this is more from the advisor side of things, but I'd be curious how that approach works at fidelity. Do you wait until clients are beating down your doors? Do you put it out there? How do you deal with that with clients in terms of letting them know crypto is available at fidelity? Yeah, so I think ultimately there's sort of a spectrum. If we're talking about the institutional clients that we work for, that we service, they tend to come from a traditional background because they're working with fidelity for the most part. That's not always the case.

Some crypto natives have inbound interests in our products and services. But they're, of course, tailored to be more simple, non-complex, conservative. You can hold Bitcoin and Ethereum, and that's it. And we'll hold it on your behalf and you can trade it if you want to. And so what we tend to see is a group of traditional fidelity investors that isn't interested in digital assets, but then there's a group that is interested. and they tend to fall in one of two buckets, the first being sort of the gold bugs, and the gold bugs see value in something like Bitcoin potentially. The other that we see alignment in is just

more being open-minded around technological advancements and the whole idea of digital property ownership, and they tend to ask a lot of questions around Ethereum. And so if there is ever like discretionary decision-making on allocation when they're interested, they tend to be interested from one of those two avenues. But there's also sort of the third bucket, which I would say honestly is probably the largest, especially in the delegated asset management space or the wealth management space of family offices and advisors like yourselves, which is end investors that are interested in an advisor that's sort of open-minded and thinking about planning for the future and wants to be able to offer a product or solution rather than tell them just to go do it

on their own on a third-party app. And that comes in like a non-discretionary form where they're able to allocate on behalf of the client because the client has interest in the space. And we tend to see a lot of that happen. I think for us, it was mostly people who held crypto and just didn't want to do it on their own anymore and wanted someone in the wealth management space to take care of them, you know, so they could rebalance or whatever and other people who were more interested. Is that seem all right to you, Michael? I'm sorry, I wasn't listening.

Okay. I was saying, when it came to Ritholtz, I think the way that our clients approach, it was some people were holding crypto and came to us and said, I did this on my own, I made a little money or I have some in there an allocation. I don't want to do this myself anymore. I would rather have you or someone else do it for me and make it part of my holistic plan and rebalancing and all this stuff. And then the other people who were just kind of interested in into Jack's point, other people just have no interest at all. I think that's kind of where the three buckets for us. Yeah, that's right, Ben. And I apologize for blanking on

that. In my defense, I was getting a chart ready for the next question, which is I'm looking kind of glass note chart. Jack, you sent me, you sent me straight on some of the potential muddiness of this data. But the last question is something that actually we discussed earlier. You guys spoke a few weeks ago about how the bold market of Bitcoin is sort of quiet. Not a lot of people are talking about it. Be curious to hear your thoughts. Thanks. Okay. So what I was looking at is the addresses with a Bitcoin balance over 0.1. And that has not even for a minute, like there's basically no dips. It's almost, not almost, it is up until the right, period.

It's up into the right. Is this, I don't know, your thoughts? Yeah, very savvy observation on your part. What are you using? Glass Node, you said? Yes. Nice. Yeah, I'm a big fan of a lot of the data on Glass Node.

And if you peruse through both on the Bitcoin and ETH side, and we've seen consolidation to Bitcoin and ETH, by the way, if you look at Bitcoin, Ethereum and ETH tokens, ERC20, pull out stable coins out of the equation. That's almost 90% of crypto's market cap. So we've seen network consolidation into basically the two networks that have real users, which is Bitcoin and Ethereum. And if we look at the underlying network data and we put aside the price action, I like to say you would be pretty shy. that the price of Bitcoin was down 75%, the price of Ethereum down 80, 85% at one point in June of last year. Because the data, a lot of it, is sort of up and to the right, like you said. Now, there's blips in some of it. You pulled one specific metric that continues to rise. If we look at the amount of illiquid Bitcoin, that's at an all-time high. If we look at accumulator addresses, addresses that have two inputs and zero historical outputs, we continue to see more accumulator addresses on Bitcoin and then people that are only buying. Yeah, exactly, right? These agnostic, like, they don't care if we were to like sort of group them into one bucket.

They're just allocating a portion of their wealth into Bitcoin and not thinking about the price. And in theory, they're looking at it on a five, 10 year time horizon saying I'd rather own Bitcoin than whatever else, you know, the alternative is. And we continue to see more of that happening on a relative basis. Now, granted, the price was down 75% last year. And so you have to sort of look at both of those. And that I think lends itself towards the conclusion that the exogenous variables, the centralized exchanges that were built on unsound business practices and the lending and rehypothecation that was taking place in the macro environment, which shifted, all was sort of the primary drivers of the drawdown in Bitcoin. And not

like a lack of users or everybody leaving the network and no longer using it. We're seeing the exact opposite. And so over the long term, you ask the question, the network data keeps trending up. The price is in a pretty extreme drawdown, but has seen this now four times of 75% or more. If you're a long-term investor and you're looking at this asset class and you know, see some merit to it, I think you can get constructive around the idea that maybe this isn't the worst time to be looking at it. Told you, Ben. Jack, let people know where they can find more of your research. Yeah, so we try to make as much of our research as we can, open source and available.

If you go in Fidelity Digital Assets.com backslash research, there's a spot where you can sign up and get on our research distribution list. And then I'm active on Twitter at J underscore New Writer, tweeting out different things that we're seeing from our research desk on a daily basis. All right, Jack, that was awesome. As usual, thank you so much for coming on. We really appreciate the time. Yeah, thanks for having me.

Okay, thanks to Jack. Thanks to Fidelity Digital Assets. Remember it's Fidelityitialassets.com if you want to learn more and email us to AnnalSpiritspot.com.