Animal Spirits Podcast - Talk Your Book: The Bitcoin Halving

Starting point is 00:00:00 Today's Animal Spirits Talk Your Book is brought to you by Fidelity Digital Assets. Go to Fidelity Digital Assets.com to check out all of their research and learn more about Bitcoin, crypto. Very interesting. They got some nice research pieces up there, including understanding that Bitcoin Havening. And I learned how to pronounce that on today's show. Having, Havening. Yes. Dealer's choice. Fidelity Digital Assets.com. Welcome to Animal Spirits, a show about markets, life, and investing.

Starting point is 00:00:27 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 Ridholt's wealth management may maintain positions in the securities discussed in this podcast.

Starting point is 00:00:53 So it's been almost a month since the Bitcoin ETFs launched and they're just on fire. Not only the price, which hit an all-time high, but yesterday, Jim Bianco tweeted and we're recording this on Friday, March 8th. The 10-spot Bitcoin ETFs had 709,820 trades yesterday on March 5th. This is more trades in SPY and QQQ combined. Wow. I was bullish on the launch. This has exceeded my expectations by a factor of, I don't know, pick a number.

Starting point is 00:01:25 The volume might be even more impressive than the assets. that's growing because the volume is, there's a crazy high amount of turnover in these things. So that like how liquid it is now, that's pretty crazy. Yesterday, Fidelity, the ETF hit a record daily inflows of four, this is from the block of 473.4 million. Again, these are these are massive numbers. So do you remember when the dream in 2017 that first really big bow market was, okay, this is all retail, but what happens when institutions come in? Pensions and Endowments and Foundations. Oh, yes. Yeah, but I don't think RAs was at the top of the list, really, for many people

Starting point is 00:02:02 of this is going to make big changes. But obviously, that has to be a big part of it. Yeah, I think that's a good point. I think during that bull run, it was just way too early for advisors to even consider getting involved in most cases. I think most people assumed the institutions would be the first ones that would want to. But obviously, giving them this vehicle in the ETF structure has opened up a lot of avenues that people weren't really considering. So today's show, we talked to Matt Horn from Fidelity Digital

Starting point is 00:02:29 Asset Management, and Chris Kiper, also from Fidelity Digital Asset Management, just to learn more about the launch of the ETF, what's going on in crypto, behind-the-scenes stuff. Great timing for this conversation. So here is our talk with Matt and Chris. We're joined today by Chris Kuiper. Chris is a director of research at Fidelity Digital Ascent Management. Also with us is Matt Horn. Matt is the head of business development for Fidelity. Digital Asset Management. Gentlemen, welcome to the show. Thank you for joining us. Thank you. My pleasure. Thanks guys for having us. All right, Chris, we're going to start with you. We had you on, let's see, November 13th.

Starting point is 00:03:07 And it was good timing because this was just a couple of weeks after the tweet that sparked the recent rally. This was from Bitcoin magazine. Just in U.S. Court of Appeals issues mandate that the SEC must review gray scale spot Bitcoin ETF application. So that sent the price of Bitcoin from 29,000 to start the day and at the end of the day significantly higher, 34,000, something like that. And then over the next couple of weeks, we got a rally into the ultimate approval and launch of the Bitcoin ETFs, which took the price from 34,000 all the way to, let's see, January 11th was, it was the peak.

Starting point is 00:03:49 All right. So like 49,000, then we got a little bit of a pullback to 38,000. here we are today at 66,000, Bitcoin is such an interesting asset class, just in terms of the price, the supply, the demand, what moves it. People thought that, boy, this is a long way an introduction, forgive me. People thought that everything was priced in, that the ETF was priced in, that whatever flows we're going to happen were priced in. Again, they ran 33,000 to 49,000. Well, it's been not even two months. And here we are at 66,000. So safe to say it wasn't price. And when you think about, or were you here like Normie Midwitz, like me, talk about

Starting point is 00:04:25 things that are priced in with crypto specifically. How do you think about what's price into the market? Yeah, it's a great question. And one, I obviously don't have the answer to. Nobody does. But just to go through your timeline there, I'll say one thing we kind of got right on the research side and one thing we got very wrong. What we did get right was we did think it was going to be the classic Wall Street adage by the rumor sell the news. And no offense to my colleague, Matt here, but I did think there would be kind of a sell-off after it was finally approved because you saw this in a lot of the data, like the speculative data, the derivatives, the open interest on the futures and options for Bitcoin. There's perpetual futures on Bitcoin. And so you saw

Starting point is 00:05:06 those perpetual rates, those funding rates spike up to 30% annualized into the end of last year, the calendar year and the beginning of the year. And then they all just collapsed once it was finally approved. Wait, Chris, I'm sorry. I'm sorry. What does that mean 30% funding rate? So it gets a little technical, but Bitcoin has futures that don't expire. They're called perpetual futures. And so to balance these, to match the buyers and sellers, if there's more people that want to go long, they have to pay a funding rate to the shorts and vice versa. And so when the funding rate gets really positive, that means more people want to go long and they have to pay the shorts. And it was at a rate. These are assessed every eight hours, but if you annualize it, it was at a 30% annualized

Starting point is 00:05:48 rate, meaning there was just super bullishness from the speculators in these derivatives going into the ETF. And then we got the approval, and it was classic Wall Street by the rumor sell of the news. All these things collapsed came back. You mentioned the pullback. And I thought, okay, we got that call right. And then I said, I think these products will have a nice start out of the gate because they're highly anticipated, but it's going to be a slow burn.

Starting point is 00:06:10 If you think of these products, they're going into the RIA market, advisors. It takes a long time to get onto all these platforms, as you well know, that's your expertise. not mine. And you got to educate people on them. So I thought, we'll see a nice slow burn of demand in the next one to two years. And I'm happy to say, I was dead wrong. I mean, these things are trading enormous volumes, even larger volumes today than they were in the first week. And we've seen massive flows. And so that's the thing that you're seeing. And just one other quick point, I think on the last podcast you had me on, I probably talked about how we saw some potential for a supply, a tight supply environment. And I think that's what you're seeing. We saw coins leave

Starting point is 00:06:52 exchanges. We saw people holding onto their coins a lot longer, ill-liquid coins. And then you've got this new demand from these ETF and ETP products. And then that's meeting this, this constrained supply. And that's why I think you're seeing it in the price action. I was in the same boat as you of the, okay, sell the news thing makes sense because you had a huge ramp up. And then I thought the same thing. Like I thought it's going to be a slow trickle in because people will be very, defensive right away. They'll wait, especially the advisor community, wait and see, see how it trades a little bit. And there was that kind of wait and see period for a couple weeks, maybe a month. And then all of a sudden, the flow is kept coming and coming and coming to your point,

Starting point is 00:07:27 the volume two. It's hard to tell with ETFs because you don't know exactly who's putting the money in, but do you have a sense of how much so this is advisor-driven and how much of it is more people who are hedging or trading on a daily basis or just individuals? Yeah, I'll give that one. I'm a bit hop in here, Chris. Yeah. Great question. question, Ben, I would say it's really all investor types we're seeing at this point. To your point, it is hard to know with ETFs and the granularity with which market participants are trading in a particular product. However, it is fair to say, just based on my interactions and my team's interactions, it is pretty widespread. Obviously, retail is here. I think there's a number

Starting point is 00:08:09 of reasons why this is happening, right? But we're also seeing other investor types come in. This is really capital accessibility story, in my opinion. For over 10 years, Fidelity's been active in the digital asset space, building a bunch of different capabilities for different investor types. However, the ETP structure here really does democratize access to a variety of different pools of capital, which really didn't exist before this. You guys are obviously financial advisors. All day long, you deal with clients, you know, registration types, account types, etc. It's a lot easier, frankly, in many cases, to use an ETP in those types of accounts than trying to go direct to some maybe crypto-native exchange, right? And that was sort of the case for the first

Starting point is 00:08:54 wave of this. Bitcoin and other digital assets are pretty interesting because it is one of the only things I can think of, only asset classes or emerging asset classes I can think of where retail could access it easily first, and then really institutions that I'd argue maybe ease of access for financial advisors is kind of here now. So it's a capital. So it's a capital. have a little accessibility story where a lot of entities, whether it's retail or financial advisors on behalf of clients or even some institutions that didn't want to go direct with a crypto entity, can now easily access exposure to the spot price of Bitcoin, through a vehicle with which they're probably accessing other asset classes right now. So I think that's

Starting point is 00:09:32 a big part of the story is just the accessibility issue here. One more thing bad too. It's really it's on the investor experience to a degree where this doesn't apply to every investor, but there definitely are investors out there that want to see all their assets in one spot. They don't want to have multiple logins or try to kind of API something in. It can get complicated for certain investor types. Now, there's plenty that happen to go multiple platforms, multiple logins. I'd argue institutions have been doing that for years with private investments. But for a decent amount of investors that we've come across and advisors too, it's just

Starting point is 00:10:05 easier to have it all in one spot. And I think the ETP structure does give you that too. I was bullish on the launch in terms of how many assets this thing would gather. I think I underestimated how quickly it would happen. The numbers are astonishing. So there's a account on Twitter, Hodel 15 Capital, that does a really nice job talking about the different ETFs and all their holdings. So between the Fidelity Wise, Arge, and Bitcoin ETF and the other biggest one, it's been

Starting point is 00:10:38 not even two months and already almost 270,000 Bitcoin, which is, I don't know, 15, 16 billion dollars. That is an insane amount of money. And it has to be coming from RAs. Just because the pools of capital that we control, there's no other explanation. So I guess I didn't think that it would happen this quickly, especially given the run up in price. I thought maybe advisors would be more sober. But I guess the counterpoint to what I just said is that if you're allocating one to two percent of your client's money, which I'm sure is probably generally the case, then, you know, sort of, I don't want to say what difference doesn't make where you get in price. But at one to two percent, you'd be a much less price sensitive buyer than if you were

Starting point is 00:11:26 coming in like with a 10 percent allocation, of course, you're probably going to be more likely to take your time. Is that how you see it? For sure. There's an adoption curve here, right? I think there's always a cohort of advisors who maybe are early to something emerging like this, right? If you think of the advisor community, obviously, RAs have a bit more autonomy than other, you know, types of advisors. So I would say for years, there's been a handful of RAs that may have been, you know, leading the charge here on this adoption. I'd say it's still early, though, Michael, because as we know, a lot of these bigger platforms still haven't approved a lot of these products just yet. It's potentially in flight here. Like the Morgan Stanley's of the world.

Starting point is 00:12:07 Exactly. The bigger platforms. You know, and obviously that's a whole other sort of pool of assets that could potentially come in here. So like I said before, it's definitely broad activity across all investor types, retail with, you know, like I said, you know, IRAs can now buy stock Bitcoin via in ETP, right? So that's a big pool of capital as well. It's just the I are, how many assets in the U.S. or IRAs?

Starting point is 00:12:34 I don't have a stat in front of me, but it's substantial. There's obviously a migration out of, call it, you know, higher friction products that were meeting the need before into these more liquid ETPs, right? So is that migration happening to? I know you can't say it, but we can. So, GBTC, I think, I think a 198,000 Bitcoin has come out of GBTC. I don't think, so there's like an argument, like should you net that out of all the other ETF flows? My answer is absolutely not because if you had the foresight to invest in GBTC, you are likely sitting

Starting point is 00:13:13 in a large gain, right? And so fine, if you're doing it an IRA, then sure, you're going to get out of that product, which is, you know, multiples times more expensive on the expense ratio than a Fidelity Bitcoin ETF, for example. But that makes a lot of sense. But in a taxable account, you're not paying capital gains just to save 100 basis points or whatever it is. So I think that the money that's coming out of GBTC is, I'm making this number up.

Starting point is 00:13:40 Is 10% of it coming back into other ETFs? Is it 15? It's not half. No way. So even if you were to net out half of the flows, which I think is aggressive, still by any stretch, the Bitcoin ETFs has been spectacularly successful. And I'll end with this data point. Will Clemente, the third, tweet.

Starting point is 00:13:57 Bitcoin ETF inflows have absolutely blown golds out of the water, not even close. So he shows a chart, GLD flows, and he even adjusted for inflation. And still, GLD flows. It was nice, but Bitcoin's just gone vertical. Like, it's not even, it's apples to oranges. So how do you guys think about, I don't know what you could say there, but just the terms of the money coming in and netting it out and just the size of this thing? I would agree with you.

Starting point is 00:14:24 despite the up flows of legacy products, they're still overwhelming demand to see net inflows, right? And you're seeing it in the asset growth for sure. It's very exciting, it's very encouraging. Again, it's hard to say exactly where it's coming from. I think you're seeing with some of the bigger products now, you know, a pretty mature trading activity, right?

Starting point is 00:14:45 And these kind of two, not only two month old products here, which is kind of pretty encouraging. We'll see where it goes. And what's interesting, back to Chris's earlier point on just the supply issue, right? These spot products are buying Bitcoin. They're not using any sort of derivative of Bitcoin. They have to physically go out and buy they sought this demand.

Starting point is 00:15:04 And what's interesting, Chris, I like your thoughts here too. If they could gold or other kind of scarce assets to stores of value, when there's more demand, gold miners will generally mine more gold more quickly and get it on market and kind of supply needs to demand, et cetera. You don't have that here. You have this sort of fixed supply schedule, we're entering the having here in about a month and a half, where, you know, there is sort of a finite supply here in scarcity elements where I think a lot of folks are kind of waking up to that reality. You have this wall of new, accessible capital meeting, you know, a finite supply digital asset. So it's kind of, it's, I think that's where you're seeing right now with the activity.

Starting point is 00:15:43 That's one of the things Michael has talked about. And I didn't, Michael, I didn't know we were talking in terms of number of bitcoins now. That's like Josh talking about stock prices. Nope, sorry, rejected. That's not, nope. Talking about the number of Bitcoin is very valid. Okay. No, I'm just saying, I didn't know.

Starting point is 00:15:56 You talked about how there's $198,000 flowing out of GBTC. I didn't know we were, you're just like on it with that. I didn't realize it. Anyway, so the supply thing is something actually Michael's been harping on for a while. So we've also talking to show how pronouncing words is kind of hard. So that halving, it's not halving because I'm sorry, the L in there is like hurts my brain to look at. So you guys have a new piece on this. It's like half and half cream.

Starting point is 00:16:20 I don't know. into halving, halving? So, Chris, explain that a little bit to us, too, because as sort of nobs in this space sometimes, it's hard to understand. But the way that I understood crypto the first time that it really made sense is like trying to wrap my head around it was it's an incentive system. And so maybe you can explain that side of it and what the having actually means for that incentive and the supply.

Starting point is 00:16:41 Yeah, sure. So the debate, first of all, between having or havinging, I've heard. I think they're both valid. I mean, this is language. We have to come to a consensus among. a distributed non, non-centrally controlled thing of language. So I'll allow either it. For the Tolkien fans, it reminds me of like hobbits is, halving, I don't know.

Starting point is 00:17:00 Oh, there you go. Anyway, the halving. So it's written in the Bitcoin code, and this is the protocol itself, where approximately every four years, the number of new Bitcoin coming out gets cut in half. So currently, approximately every 10 minutes, 6.25 Bitcoin are created. So this is new Bitcoin coming out. you can think of them being minted, right? And around April 18 or so, that's going to be cut in half. And it gets cut in half immediately, like overnight. It's not a gradual thing. So it's going to go

Starting point is 00:17:29 from 6.25 to 3.125 to 3.125. So there's currently 900 new Bitcoin coming out per day. And that's going to get cut down to 450 Bitcoin per day. So why is that important? Well, I mean, first of all, why does it do that? And this is how Satoshi, the creator of Bitcoin made it. And it was so the number of Bitcoin that come out get released really, really quickly. So if you had a curve, it would go way up, and then it starts to taper off. So there's currently 19,000, 644,000 Bitcoin out there already. And remember, there's a 21 million supply cap. So most of the Bitcoin are already released. And then if you're cutting that in half every four years, we're not going to see that near 21 millionth coin into the year 2140. And so it was kind of a way to bootstrap the network, because who's

Starting point is 00:18:15 getting the new coins, it's the miners, the people securing the network. And that's their reward. That's their incentive to do it. They're not doing it altruistically. They're doing it because they get these newly minted coins that they can then go sell and hopefully make a profit. There's all kinds of Bitcoin miners and minor company out there today. So getting back to our supply conversation, this is important because if the supply gets cut in half overnight, new incoming supply and demand stays the same, econ 101 says the price has to adjust. And also on that point, too, you kind of touched on and alluded to. The supply is very interesting because, as you said, it's completely inelastic to the price. So unlike other commodities, you mentioned

Starting point is 00:18:53 gold, oil especially. One of my favorite stats is to look at our demand for oil. It's insatiable. It just keeps going up and up and up. But the price of oil, especially on inflation-adjusted terms, is actually down from 10, 20, 30 years ago. So how can our demand just keep going up, but the price of oil goes down? Well, it's because we keep bringing on new supply. The higher price induces more people to bring on supply. You cannot do that with Bitcoin. It's fixed. It's program. Nothing can change it so that the price cannot bring on more supply. It can only bring out more sellers who may want to sell at a higher price. Investing 101 states that known facts will be pricing to the market. So the happening, you said is on around April 18th and

Starting point is 00:19:38 Bitcoin has continued to go parabolic. It's now at 67,269 a coin. I don't know if it's anticipation of this or the supply things. But the way that I've been thinking about Bitcoin is I'm keeping it extremely simple. This is nothing more than supplier demand, Chris, as you just mentioned. I think last time we spoke, I threw out a number that like 70% of all Bitcoin hasn't been traded in over a year. Most people are, you have to rip the Bitcoin from their cold dead body. Like they're just not selling.

Starting point is 00:20:07 Of the $19 million, you mentioned, I know a lot of has just been lost, like just wallets that just are never going to be recovered. There was a tweet last week again from Hodel 15 Capital, new Bitcoin produced by miners last week, 6,160, Bitcoin purchased by ETFs last week. 30,029. So there is just a demand supply imbalance that is taking prices higher. And it's just really fascinating to watch. Because to your point, there's no other assets like this. Like, not all stocks, but if a stock was going up as much as this Guess what? You issue more stock, right? Like, that's what companies do. They take advantage. Isn't the retort here, though, that there's all these other types of cryptos available as well? Isn't that

Starting point is 00:20:50 the only retort that, yes, Bitcoin is fixed supply, but we have all these other coins coming on to. This guy. Is that a valid, you know, that, yes, but there's other coins that do other things as well. It's valid in that if someone's just looking for exposure to digital assets. They might do that, right? But Bitcoin is Bitcoin and everything else is not Bitcoin. And there's a reason we think, I think Bitcoin is superior in terms of its security and its decentralization. And that's why people want to store value in it because it's the most secure, it's the most decentralized. If you want to store trillions of dollars of wealth in something, you want it to be the most secure, the most decentralized, the one that's had the longest history, the longest uptime, the one that hasn't been hacked.

Starting point is 00:21:32 And everything else is just a copy. And we talked about this before. It's the network effect, right? Where I could create my own Wikipedia, no one's going to come there. There's no network effect there. watch that's just as good as a Rolex, but it's not a Rolex, right? Are you surprised at all, though, that some of these other coins have such high market cap still? That's the thing that kind of boggles my mind, the ones that really haven't done anything. Yeah, Doge coin is over,

Starting point is 00:21:54 Doge is 20 billion, I think. Does that surprise you at all? This is like another psychology lab sort of thing, but are you surprised that all these coins are still around in some cases? Yeah, if you look at the long arc, the top coins of even a few years ago are not the top coins today and aren't even existing for many of them. They're completely defunct or have a zero price. But I'll agree with you. I mean, I'll put myself in that camp. I'm a little older than some people in the space and there's some areas where I just say, I don't get it. But value is subjective and the market is a free market. If people want to put value on it, I guess they're going to. But I'll continue to make the case for why I think Bitcoin is very different than a lot of

Starting point is 00:22:33 these things. There's a lot of people that say like, oh, it doesn't do anything. I'm waiting for use case. I said to Ben, a couple of weeks ago, you know what Bitcoin does? It works. It does exactly what you think it's going to do. The code works, the purpose of it, whether you say, like, there is a purpose or not. It does what it does. And it's doing what it's doing. I know it's not very profound, but maybe that's, maybe that's enough. I think that's exactly it. As I say, you know, Ben, back to those coins you're talking about that have large market cap, but maybe apparent no use case. Obviously, if someone tried to liquidate any substantial portion some of these, right? You might find quickly that there is no value there, right? So it's

Starting point is 00:23:12 definitely part of it too. It's getting price in the margin, right? All right. So Bitcoin is going parabolic. Are we surprised a lot. So a lot of the narrative in 2022 and 2023, listen, Bitcoin took a nosedive for reasons that are very apparent, right? Like the SBF FTX blow up was not, did not inspire confidence. But now we're rapidly approaching all-time highs. Guess where interest rates are? they're still pretty high. I think one of the interesting things about crypto is that it's so it's so hard to pin down like what's going to move. I think in this particular environment, it's incredibly crystal clear that it's more demand and supply. But it is doing that in the face of more restrictive monetary policy. How are you thinking about what's what's the current

Starting point is 00:23:59 framework for crypto and macro? Is there one there or is it secondary to like what we should be focused on. No, you hit exactly what we've talked a lot about in our research notes, which is Bitcoin, according to our research, at least, is very responsive to monetary conditions. So whether you want to measure that through M2, changes in M2, Central Bank balance sheets, it's very responsive to liquidity. And so through 2020, 2020, as you saw rates go rock bottom and inflation go high, you had negative real rates, Bitcoin did amazing. That made sense to us, huge rally. And then we had. The Fed raised rates fastest pace in history.

Starting point is 00:24:38 Inflation came down. So real rates became very positive. Bitcoin suffered major drawdown. That also made sense to us. But in 2023, and we note this in our look-ahead piece, Bitcoin completely decoupled. So we do an inverse of one of the charts. You can see they're tracking together. And then Bitcoin completely decoupled.

Starting point is 00:24:55 It traded sideways while real rates continue to get more positive. And then at the end of the year, of course, it rallied decoupling even more. Now, you could say, well, that was due to anticipation of the ETPs that we just talked about. Maybe now it's more anticipation of the halving coming up. That's all valid. And maybe that is the answer. I personally am in the camp that Bitcoin may be sniffing something else out on the macro front. And the reason I say that is because you're seeing the same behavior in gold.

Starting point is 00:25:23 So whether it's another wave of inflation, and I always like to reference the 70s, people think the 70s was just this homogenous high inflation area. and it was actually a decade of two major waves of inflation. So maybe we get another wave, these inflation move in waves. Or it could be sniffing out things like the high structural fiscal deficits we're going to be facing here or whatever it is. But that's what we're currently watching. Again, I don't have the answer, but I do think there's more macro to it than just the Bitcoin

Starting point is 00:25:52 specific stuff. I was going to bring up gold because there has been a relationship because people thought at first, well, gold's a good inflation hedge. But then you'd take these stats like gold's down. on an inflation justice basis back to 1980 or something after that huge run in the 70s. And then people will say, well, actually, gold is inversely correlated to real interest rates, like you said, right? When real interest rates are high, gold tends to do poorly, and that's probably because gold doesn't mean cash flows, there's no dividends. And gold is

Starting point is 00:26:16 doing well in this period of, like you said, as inflation falls and rates stay higher, you have higher real rates. My takeaway for this for crypto, and you can correct me from wrong, is that the macro, any macro relationship is constantly changing and evolving, I think, depending on the environment. I think that's the mistake a lot of people made with crypto and inflation. The first time is thinking that it's going to be this perfect hedge. And I think it's the kind of asset that is a chameleon that kind of shapeshifts and moves around it. It's not always going to give you a stable relationship with any of these factors. Yeah, I think that's a great point. I always like the article I read early in my journey. What does Bitcoin and the platypus have in

Starting point is 00:26:53 common? I don't know if you've heard that. I won't bore you with it if you have, but it's not one asset class, right? It's a multiple of these things that... Wait, what's the platypus then? What's the platypus analogy? So this was a great analogy. I unfortunately didn't come up with it, but it opened my eyes to it. It was an article by Spencer Bogart, and I read it in 2012 or 13 or something like that. And he said, what is Bitcoin and the platypus have in common? And if you go back to the history of the platypus in the late 18th century, early European settlers found it in, I think, Australia, 1790, and they said, what is this thing? It doesn't fit any of our classifications. You can think of the platypus. It's got the bill of a duck, but it's got fur like a mammal, but then it lays

Starting point is 00:27:34 eggs, and the male platypus has a poisonous spur on its hind leg. It's a very weird animal. They sent a drawing to their European counterparts, and they thought it was a hoax. They said, no such thing exists. This is not true. They then sent a pelt of it back, and they still didn't believe them. They said, this is the skilled work of some Asian taxidermist who sewed a bunch of parts of an animal together. Now, of course, they realized this thing did exist, but decades later, they were still arguing about how to classify it. And they eventually had to come up with its own not species, but genus, whatever the classification is, the level that it was at. It had to create its own category. And so it just helps unlock that thinking that Bitcoin is a category

Starting point is 00:28:16 creator. It's kind of like a commodity. It's kind of like a currency. It's kind of like all these other things. And you can't put it into one or the other. So I think that speaks to your point that the narrative changes as well. When it was early, everyone talked about payment network. And then, you know, that morphed into things like store value and digital gold. And it changes as the environment changes. So the narratives were changing. And then people were pointing at people who pointed to narratives. And that doesn't work anymore. But that's the nature of this asset class is that it's not static. It responds to different things in different environments. And maybe it's difficult to predict ahead of time. And maybe we're just making it up. Maybe we're just

Starting point is 00:28:54 making up narratives to fit our narrative. But it does seem unique in this sense that it just marches to the beat of its own drum with the exception of, you know, the historic rate tightening cycle, which killed all risk assets. Yeah. It has a very low correlation over time to all the other asset classes, even gold, real estate, commodities, everything. So we were saying that well, if Bitcoin is an inflation hedge and we just had the highest inflationary environment in 40 years, then how do you explain Bitcoin going from 68 down to 18? And now some people said, well, no, no, no, Bitcoin front ran the inflation. It told you it was coming. I think that's, I think that's a joke, frankly. But we don't know what would have happened in the inflationary

Starting point is 00:29:38 environment if FTX wasn't a criminal enterprise. Like, if that didn't blow up, who's to say that Bitcoin wouldn't have gone to 150,000? Like, we don't know. Yeah, I think that's that point spot on. I'll push back a little on your previous point, though, because a lot of economic research and financial research shows inflation, and we've got to get our terms right here, if you're saying just kind of the general price inflation, CPI, that does follow creation of money. There's a lag, but there's a definite link there, right? Especially if you do a lot of money creation, it's even more pronounced. Now, there's a lot of other factors, right? But if you say A equals B and B equals C, then A has to equal C.

Starting point is 00:30:19 So if you're saying money creation leads to inflation, and if Bitcoin does indeed follow and is closely correlated to money creation, which I think it is, I mean, we have a very limited history. So that could change. But so far it has been. Then I do think that Bitcoin is in many ways inflation hedge, but it's an inflation hedge to monetary debasement itself, not necessarily the lagged effect of the price. if that makes sense.

Starting point is 00:30:44 You lost me at A plus A. I'm not got to math. So, Matt, the point Michael brought up earlier about RIAs being potentially a big driver of flows makes a lot of sense to me. The one dream I remember back in the first time around that Bitcoin really ran up in 2017, we had that ramp. The dream of the future was institutional capital. And maybe you can lump RAs in there.

Starting point is 00:31:05 But we got an email from a family office last week who was giving us some feedback on crypto. And I always asked them, well, what percentage do you have if your family office in crypto? and they told us, I think it was two to three percent range was the answer. Any sense of the institutional bandwidth here or institutions coming into this space, family offices, endowments, foundations, pensions, that sort of thing. Yeah, it's a great question because I feel like it does, this has changed over time. You know, on the institutional side, so let's call it Pensions, foundations, endowments, and family offices. It feels like family offices have sort of been in this space for a number of years now. They're looking at long-term investing and sort of

Starting point is 00:31:42 disruptive technologies and this sort of hit probably hit their radar, you know, a couple of years ago, right? That's thought saying every family office, but generally speaking, you know, I've met in any family offices. You do have a non-zero exposure to the space, whether it's direct to coins or even through maybe some secondary play, like a venture fund that's, you know, invest in the space. True institutions, it still feels early days. It really does, right? And I think there's a lot to consider there with obviously what they were dealing with with rising rates. So they had probably bigger issues there on risk over the last few years than how to insert more risk here potentially. You do see, again, a front edge curve here where there were some CIOs who did put a non-zero position in.

Starting point is 00:32:27 Generally speaking, probably Bitcoin, Ethereum, just the very major layer one tech coins, right? It's still early days, though. It does feel early days there. I think there's a long way to go on engaging that community, on education, et cetera. I think it doesn't help the short history here. I think a lot of folks in that world like to see, obviously, a longer history, potentially, see how it interacts in different environments. Obviously, we talked about inflationary environments.

Starting point is 00:32:54 They may want to see how it behaves over different cycles, right? So it could be a little bit early with that community. Chris, as you and your team zoom out, what sort of framework are you using to, value Bitcoin. How large do you think the opportunity is? Of course, this is, you know, predicting the future is difficult, but just the framework through which you're thinking about this asset class. Yeah, I think if you're talking about just Bitcoin, and it's a whole other discussion on these other coins that we've mentioned before because they have cash flows and dividends. You can apply some more traditional financial models to them. But Bitcoin, of course,

Starting point is 00:33:26 is difficult because there is no direct cash flow dividend. So we do have a piece out there called valuing Bitcoin. You can do the supply side. If you've heard of like the stock, flow model. That's one way, but that's just supply, modeling it with supply, not demand. And then we do a demand model where we look at proxies like the growth of the internet. And so if you say, this is how fast the internet grew with users, and then you compare that to users with Bitcoin. And we use Bitcoin addresses, which is not perfect, but it's the only proxy we have for users because a user could have more than one Bitcoin address or wallet or multiple people could be on one address or wallet with an exchange, but at least gives you

Starting point is 00:34:03 something, you can start to try to model that out. But ultimately, I think it gets back to Bitcoin as an aspiring form of money and store of value. So it's really just a Tam total addressable market exercise of what percentage of each market, store of value market, could Bitcoin take? So gold is the most obvious. And we're currently at maybe what, 10% or so of gold. And then you start looking at things that other people store wealth in, art, cars, collectibles, houses, real estate. And then you can start doing your own math on those as well. So things seem great right now again, and it's funny how quickly the vibes can shift in crypto because the price, it seems to happen almost faster than any other asset class,

Starting point is 00:34:46 where it feels like when the stock market is running up, a lot people tend to get more worried, especially in recent decades. In crypto, it's almost the opposite, where as the prices rise, people get just more and more euphoric. So how do you then prepare the new entrance to this space for the, you know, for the, the really bone-crushing volatility that you can see because there are going to be still air pockets in times where Bitcoin crashes, even if it's in a longer-term uptrend. Yeah, I'll start it. Matt can jump in with some stuff here. But generally speaking,

Starting point is 00:35:18 you're right, even in bull markets, and we had a posted on Twitter chart of this a while ago, even in major bull markets of hundreds, thousands of percent run, you had regular drawdowns of 20, 30, 40 percent. The last bull market, we, of course, had a lot of the debacle's blowups where we had 60, 70% drawdowns in a year. So you've got to be prepared for that. But if it's just volatility, then it's about risk management. It's about position sizing, right? And Bitcoin's volatility has declined.

Starting point is 00:35:45 It's even less volatile on many timeframes and metrics than some stocks, just as one example, Netflix. It's less volatile than Netflix, but people still own that in their portfolio. But then also it gets to your point, too, on a macro basis of why people get more excited and not worried about it. And I was thinking of this the other day because I come from the traditional finance background and did a lot of work in my early career on value investing. And when you come up with a value stock, for example, you say, here's my thesis. I think the stock is undervalued.

Starting point is 00:36:15 You want to find it before everyone else does. And then you want everyone else to appreciate that and realize it's undervalued. So then it gets fully valued. And then you say, okay, I'm out. The alpha is taken. But with Bitcoin, the thesis is if it's becoming this store of value, like I mentioned, capturing those addressable markets. of store of value like gold and stuff, the more it goes up, the more it's validating its thesis

Starting point is 00:36:37 as a store of value. And that's really weird to think about. It's really hard to get your head around that because psychologically you want to worry like it's going up too much, should I take profits. But it's like, no, it's validated its thesis more at $10,000 than $1,000 and $100,000 than $10,000. And I think that's the really interesting thing people will have to come to grips with here. Yeah, I agree. I think position is I see T and then time horizon too, right? have to understand this is an emerging asset class, right? Running an adoption curve is going to be volatile. And you really have to kind of see a future where this thing scales over time. And trying to time this, Ben, is like impossible, as we know, I'm trying to come in and out

Starting point is 00:37:15 of this. So, you know, for those where it makes sense to have a position, you know, long-time Verizon is key year. All right, Chris and Matt, this was a fun conversation. Appreciate you guys taking the time. Of course. Thanks for having us. If people want to learn more about Fidelity digital assets, Where do we send them? So for my side of the house, it's fidelitydigital assets.com. Just click on any of the research. We put it all out there for free. You can download it, read it all on our site.

Starting point is 00:37:40 And for my side on the Fidelity wise order to Bitcoin, exchange, treated products, Fidelity.com or institutional.fidelity.com. There's plenty of information on that product. Thanks, guys. Thank you. Okay, thanks again to Matt and Chris for coming on. That was great. Fidelity, digital assets.com to learn more.

Starting point is 00:37:58 Email us, Animal Spirits, at the conference. Pound News.com. They'll do.

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Animal Spirits Podcast - Talk Your Book: The Bitcoin Halving

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