ETF Edge - Crypto Crunch & Digital Assets in 2022

Episode Date: January 10, 2022

CNBC's Bob Pisani spoke with Ric Edelman, Digital Assets Council of Financial Professionals founder and author of the “The Truth About Crypto” – along with Matt Hougan, CIO of Bitwise Investments. They discussed today’s sell-off including Bitcoin - now down more than 40% from its recent highs in November. What does the future of crypto look like and will we finally get a pure-play bitcoin ETF in 2022?  In the ‘Markets 102’ portion of the podcast, Bob continues the conversation with Ric Edelman. Hosted by Simplecast, an AdsWizz company. See https://pcm.adswizz.com for information about our collection and use of personal data for advertising.

The ETF Edge podcast is sponsored by InvescoQQQ, supporting the innovators changing the world. Investco Distributors, Inc. Welcome to ETF Edge, the podcast. If you're looking to learn the latest insights on all things, exchange traded funds, you're in the right place. Every week, we're bringing you interviews and market analysis and breaking down what it all means for investors. I'm your host, Bob Pisani. Today on the show, we'll get more on today's sell-off and delve deep into all things crypto with Bitcoin tanking. now down more than 40% from its recent highs in November.

What does the future of crypto look like? And will we finally get a pureplay Bitcoin ETF in 2022? Here's my conversation with Rick Aedleman, the Digital Assets Council of Financial Professionals founder and the author of a new book, The Truth About Crypto. Along with Matt Hogan, he's the CIO of Bitwise asset management. Rick, in your 2022 predictions, you say a third of American adults are going to own Bitcoin

by the end of 2022, that sounds like a big number. Why is there going to be such mass adoption? Well, we already have it, Bob. We're already at 26% of American adults. I'm simply ratcheting up to 33%. So a lot more people know about it and are investing in it than most realize. It's kind of like teenagers buying beer.

They're doing it. They just don't want you to know about it. They're not talking about. Matt, talk to us about the right way to look at all this crypto volatility. Rick and I have talked about this for many years. We cover the horse race here at CNBC, meaning we cover the daily price moves of virtually everything. But crypto and other collectibles, as you know, there aren't like stocks. Unlike stocks, Bitcoin doesn't

throw off a dividend. It doesn't have a future stream of earnings that you can discount. Like gold and comic books and other collectibles, it just sort of sits there. So what's the right way to look at all this price craziness? Bitcoin has a price, but how do you figure out what its value is? It's a great question, Bob. I do think it applies differently. to crypto assets like Ethereum, which do have some fundamental intrinsic value, and Bitcoin, which is mostly used as digital gold. Look, it comes down to supply and demand. And because the supply of Bitcoin is absolutely known that will only be $21 million, it comes down to demand. How many people want to hold a digital version of gold? How many people want a political

payment rail? How many people want sort of a hedge against the Fed, not getting the ease off of quantitative easing exactly right. I think most of the statistics suggest that more and more people are coming into the Bitcoin economy, as Rick mentioned. And so I'm optimistic on what the demand will be long term, but it really is a question of supply and demand, Bob. And right now, we're seeing a little bit of a pullback, but still some strong fundamentals underneath. Yeah, I feel the same way. I'm always agnostic on the price of things like people ask me what Bitcoin's worth. I'm agnostic on the price of it. It's worth whatever anyone will pay for it. You know, I collect rock posters. What's a Jimmy Hendricks poster worth?

It doesn't do anything. It just sits there. It's worth what everyone who won will pay for it at that moment. Rick, you're bucking the trend of almost everybody in the ETF business on Bitcoin. I know you're just a little tongue and cheap on this, but you do say the SEC will approve a Bitcoin ETF in 2022. Most of the industry think not. Is there a compelling reason to believe why they'll change their mind? And why would they, given that they've turned everything down so far?

Well, the SEC is running out of excuses, quite frankly. The industry is maturing. It's developing processes and systems that are resolving the bulk of the SEC's concerns. And at this point, it's just obstinements on the SEC's part. One of the big concerns that they've raised, that Chairman Gensler has raised, is that they can't control it well enough. Well, you know, they can't control gold or oil either. Those are 24-7 globally traded assets, and they just have to get over it. We need to recognize that people are buying this asset class. And in the absence of an ETF, which is the most popular, most familiar asset structure in the securities marketplace, in the absence of that, Wall Street's ignored, financial advisors are excluded, and that leaves investors to their own devices. And too often, they're getting themselves in trouble because they don't understand how those other assets or products work, because they're not getting the mainstream advice of the financial community.

By creating an ETF, the SEC will basically be allowing major Wall Street firms, brokerage firms, financial planning firms, major banks and insurance companies, to engage for the first time ever. And this will go very far toward consumer protection. Eventually, the SEC will say yes. There's no question about it. And it is kind of tongue-in-cheek, as you noted. I've been making this prediction for the last seven years. I'll one day be right. But we have to ask ourselves a simple question, Bob. How can the SEC say yes to a three-execis? inverse fund and not say yes to a Bitcoin ETF. Makes no sense. Well, that's something I would, you and I would agree on for sure. I don't know why the world needs a three X inverse of anything. But Matt, you're the expert here. You actually have engaged the SEC for many years, one of the thought leaders in this space. Does Rick have a point here, like they don't regulate

gold, for example, or oil? But on the other hand, there's not problems with fraud necessarily in gold, and there isn't problems with custodial issues and outright theft going on. Is there a difference here? I mean, Gensler seems to be saying there is. I don't think there's a material difference, Bob. There's certainly instances of fraud and manipulation in all sorts of commodity markets. I don't think they're materially worse in the Bitcoin market. And so if the same standards are applied to, you know, oil, natural gas, gold, silver, et cetera, that have allowed ETF to launch in those commodities, if those same standards are applied to Bitcoin and other crypto assets, I think crypto will get through.

I'm actually aligned with Rick. I'll take one step further than he said. He talked about sort of the real politic of it, of it becoming increasingly untenable, of it being a huge investor protection benefit. I'll add, and while I can't speak to Bitwise's filings, the quality of filings around Bitcoin ETFs have improved dramatically over the past year. Companies not just BitWise, but others are providing extreme amounts of data to the SEC to help answer their questions. And I think eventually the cumulative weight of evidence

will force them to move forward with an approval. And as Rick said, that's going to be great for investors. It's going to be more investor protections, going to be better products. It's going to be dramatically lower prices to access the crypto market that could save people billions of dollars over the long term. So I'm very hopeful we get it this year. I think this may be the year that Rick is finally right. But you're going to the SEC's point here. They denied it several in the last several years because they wanted more data, and they're getting more data. The quality is improving.

And so in a sense, the SEC is getting what they want. It's slowly, versus having this done five years ago, the whole ecosystem is a lot more robust now. Isn't it, Matt? I mean, I'm not trying to argue the SEC's point, but they are getting better data now. You have engaged them more, and you have been addressing,

their concerns and trying to cure, as the legal word is, the defects that they saw in the original filings. That's absolutely right, Bob. In fact, I would give the SEC credit. You know, the first Bitcoin ETF filing was in 2013 from the Winklevoss Twins. I would say at that time, the Bitcoin market was not ready for an ETF. There were no regulated insured custodians. There were massive arbitrage gaps. There was a lot of fake volume and wash trading in the market. There weren't ways to handle broker-dealer issues. There weren't even tax. There weren't even taxed. or audit things that were cleared up. We've solved the vast majority of those problems

and added more and more data demonstrating that they're solved. We've seen huge regulatory progress on the custodial side. We now have firms like Fidelity that are custodying Bitcoin. Bitcoin has gone from the edges, from the grassroots, from the retail community, to an institutional, robust asset that trades 24-7365 with very tight spreads and institutional market makers like Jane Street. So you're right, the SEC has gotten

what it wanted, the Bitcoin market has gotten better. I would just argue that it's time to get over the hump. It's time to deliver to the American investors, the lower cost and better protections, and easier access that an ETF can provide. So we're getting there. I think we may get over the hurdle this year. Okay. Rick, you recently founded the Digital Asset Council to teach financial advisors about digital securities. Your position has been for years that crypto is the most impactful development for commerce since the internet. I've seen you say that many times. You said we're in the very early stages of this. You say, think internet 1995. What kind of new investment opportunities will make themselves available in 2022? Well, it's really rather fascinating. This is really like

the internet back 20, 30 years ago. We have to recognize that this only comes along once in a generation. And the innovative technology is allowing business to operate fast. cheaper, with greater transparency, greater security, and this is why businesses are falling over themselves with the development of blockchain technology. J.P. Morgan came out with a study in December saying that banks are going to save $120 billion a year on their payments exercises. The Treasury Department, I'm sorry, the Transportation Department just this morning announced a research project. They're going to create digital tokens using the blockchain to help people park their cars.

to solve the problem we have in urban areas where people drive up and down neighborhoods looking for a parking space. They're going to use tokens to allow people to secure a parking spot or to sell a parking spot by using the token to use alternative transportation. If the transportation department is recognizing the value of blockchain technology to solve a fascinating problem that has nothing to do with the movement of money, this just demonstrates how broad and significant this technology is. and why it's going to be ubiquitous. Back in the 80s, fax machines were new and different. And you could differentiate yourself by bragging to your customers. I have a fax number. Today, nobody brags about it.

Everybody's got a fax machine. In fact, nobody uses them because of email. Bitcoin, blockchain, digital assets, tokenization are all going to be the very same thing. This is the extraordinarily early element of this. And we now have the benefit of experience. We know how the Internet, just exploded in growth through the 1990s. That's where we're at today, incredibly early

for the investors who are recognizing the opportunities that aren't going to exist 10 or 15 years from now the way they exist today. So, Matt, flesh that out for us a little bit. Bitwise as a crypto index fund, addressing Rick's issues, do we need to build out the picks and shovel parts of the ecosystem? Are there still not enough investments?

Is there really a dearth of publicly-transfinding? vehicles that are still out, that we need more. We've got, you know, Coinbase, but that seems to be a small part of it. Rick seems to imply this has got to get much bigger. Yeah, I absolutely agree with Rick. This is going to get much bigger. I actually think the wording is going to change. Bob, we're going to move from talking about crypto to talking about Web 3, which is just a more polite way of saying a crypto-backed, new version of how the world works. I think every company is going to be a crypto company at some point, and I think transition is going to happen faster than most. people think. What you mentioned, Bob, we need more robust public access points. Certainly a Bitcoin

ETF is one example of that, but one area of the market that is absolutely exploding right now is publicly traded crypto equities. You mentioned Coinbase. Behind Coinbase, there are a large number of crypto mining companies, their crypto banks, their crypto trading and asset management companies, and there's a huge pipeline of crypto companies that are planning to IPO in the next year or two years. companies with valuations in the billions. I think the crypto equity market may be one of the most overlooked corners of crypto, one of the most attractive ways for retail investors to play this space. You can buy them in your brokerage account. They're trading at reasonable valuations versus their growth. They have real earnings. The earnings growth is incredible. So that is a

place I would actively look. You know, let's hope that happens more often. And again, I don't, I'm not, I believe in blockchain is tremendous potential, but I don't pick any winners or loser. That's not my game. But Riot, Marathon, Coinbase, it's still a pretty small group of, a group that's out there. Enough of playing with the proxies, like, you know, the PayPal's of the world, or the short answer to everything two years ago was buy Nvidia, just buy stuff that are, you know, semiconductors that are built out. That's a pretty poor proxy for crypto growth by Nvidia or anything else like that in a semiconductor space. So I'm I'm very eager to see that actually happen.

In a way, this happened with many, many industries. Cannabis, for example, of not enough things, people. It's a much smaller industry. But this is a problem when investors get very interested in a subject, and there's not really anything directly to actually own at this point. Rick, I want to just get your quick take on the markets, and you too, Matt. Your key theme seems to be investors should temper their enthusiasm this year. That's what I'm hearing from you when I talk to you.

Can you explain that a little bit? Temper your enthusiasm. Well, we have just come off 13 years of the biggest growth in the stock market ever. The past three years, the S&P is up 20% a year. The long-term historical gain for the S&P is 10% a year. So we've doubled that annually for the past three years. We're all familiar with regression to the mean. We cannot sustain these very high double-digit returns in the stock market.

It's not realistic. And in fact, the Wall Street Journal had a story on their survey of 13 major banks on Wall Street, and their average expectation this year is 4.5%. So stocks are not expected to do as well as they've done over the past several years. We also have big problems in the bond market because we're seeing a rise in interest rates. And we all know the drill. When interest rates go up, bond values go down. We also know that real estate is severely challenged right now.

Homeowner prices have skyrocketed over the past couple of years, over the pandemic while commercial real estate is in the doldrums because so many people are working from home. So there's huge pressure on real estate prices right now. So for all these reasons, we need to recognize that past performance doesn't guarantee future results, meaning just because we've done really well over the past three years, 13 years, doesn't mean we're going to have that great of 2022. Matt, what about that?

I know you're not a global strategist for Bitwise, but you're a good market watcher. I've known you a long time. What Rick is saying makes some sense to me. I am a bit of a market historian. Mean reversion is a characteristic of equities and the bond market. We've seen years where growth has outperformed value. Value is doing better this year. We've seen many years where the S&P in the U.S.

has outperformed Europe and China, and yet Europe and China are outperforming this year. Does mean reversion make any sense in terms of looking at the markets this year? And you have any take on that? I think it absolutely does, Bob. As you said, I'm not a market strategist, but I speak to financial advisors every day about crypto and their broader portfolio. They're feeling all the stresses that Rick mentioned. Added to that, you can't just sit in cash because inflation will eat you away and eat away your principles. So you're really in a box. I think that's pushing people to look at more alternatives, look at places where strong secular trends can overwhelm sort of the negative risk-off sentiment and look for areas. like deep value, emerging markets value, international, which has been overlooked for many years. I do think there's a bit of a rotation there,

and you're going to see sort of a barbelling into those less-loved areas and into the disruptive innovation areas that Rick talks about so eloquently. So that's what I hear from advisors. That's what I feel in my own personal portfolio. Yeah, that makes complete sense to me. And I want to remind everyone, Rick has got a new radio show out.

It's called The Truth About Your Future. It airs every week. It's covering five topics that matter most. Rick, 20 seconds. What are those five topics you're going to be covering? Longevity says it all, Bob, because we're going to be living so much longer, and that means retirement security is paramount, and how are we going to pay for our long retirement of 30 or 40 years?

The best investment strategies now are exponential technologies, blockchain and digital assets. And if we're going to live age 100, we'd better take care of our brains and our bodies, and that means health and wellness rounds out the five. This is the subject we cover every weekend, the subjects that matter most, like you said. Now it's time to round out the conversation with some analysis and perspective to help you better understand ETF. This is the market's 102 portion of the podcast. Today we're going to be continuing the conversation with my old friend Rick Edelman, the Digital Assets Council of Financial Professionals founder and the author of a new book, The Truth About Crypto.

Rick, thanks for joining us on the podcast. I guess the important thing that I see here is your work on crypto and the Digital Asset Council that you founded recently. I know this is about teaching financial advisors about digital securities. When you talk to RIA's investment advisors around the country, what are they asking you about crypto and what do you think they really need to know for 2022? too. The conversation has shifted, Bob, very much. You know, back two years ago, advisors were highly skeptical that crypto was going to survive. They thought that Bitcoin was, if wasn't a fad, it was a fraud.

That sentiment has roundly changed. Now, more than a quarter of financial advisors admit that they personally own Bitcoin. And when I asked them in my surveys, do you think Bitcoin may one day fall to zero? almost nobody says yes. So everybody has now gotten used to the fact that this is a new asset class. It's here to stay. So the questions they're asking me now are very different. They used to ask, why should I care? Now what they're asking is, how do I explain this to my client? How do I get them to understand that they should have this as part of a diversified portfolio? So advisors have drunk the cool aid. They've gotten it. They've jumped down that rabbit hole. And I've recognized that Bitcoin,

and digital assets more broadly, deserve a place in a diversified portfolio. And so the fact that advisors are now, they get it, they understand that this matters, it's not going to be much longer before you're going to see them routinely recommending it for clients, and pretty soon you're going to have it ubiquitous. It'll be investment portfolios

just as routinely as small cap and emerging markets are. And how do you deal with these price swoons that you've seen? You and I have discussed this before, your point is well taken that you can't do fundamental analysis on Bitcoin. It doesn't have an intrinsic value, but it does have a price. And if it goes from 50 or 60,000 to 30,000, investors will sit up and take notice. They would set up and take notice of a 50% haircut in the S&P 500. How do you steal them for that kind of issues?

Well, this is the nature of any developing and maturing new investment. Think back to the, in fact, do this. When I have some fun, go take a look at the stock. charts of Amazon, Microsoft, Apple, or Google in their first decade as a publicly traded stock. And you will see the exact same levels of volatility that you're seeing in Bitcoin and other crypto. In other words, this is routine for an asset class that is new and different, an asset class that is maturing, that is evolving. So it's not something to be fearful of. It's something to be recognition of. You need simply to understand this is how it works,

not something to be afraid of. And you're going to see this from time to time as it further matures, meaning as more and more people become investors, as more institutions engage, and it becomes more and more solidified, you'll see less and less of this kind of volatility, just like you don't see it in Apple stock anymore

the way that you used to. You're going to have a similar experience in Bitcoin over the next five years. So what is the right percentage of ownership? If you were talking to an RIA, and the RRA said, okay, I have clients with $5 to $10 million in assets under management. Should I be telling them they should have 1% in crypto, 2%, 3%, and how would I break that up? What kind of ownership?

All Bitcoin, or should it be something else? Well, I'll give you three answers. First, I'm the guy who invented back in 2015 the 1% asset allocation strategy. So this is unusual because we know, as folks who make it. manage money for a living, that if you're not going to make a meaningful investment, there's no reason to make the investment at all. This is why nobody would ever tell a client to buy one share of Amazon. What's the point? You need to make 50, 60% of assets in the stock market in order to have a material impact on your outcome. But nobody wants to put 50% of the

money into Bitcoin. I don't. I wouldn't blame you for not wanting to do that because it's still emerging and still uncertain. But that means do nothing. If I'm not going to be doing 10 or 20%, because of the incredible price volatility that Bitcoin has experienced and is likely will continue to experience for some time, a 1% allocation has been demonstrated to show that it can have a material benefit on the return. But if it's only 1% and it goes bad, it's a lot. Instead of earning 6%, you're earned 5%. It's not going to hurt you a 1% allocation. So it's a great way to get started. Once you become more familiar, more knowledgeable, if you read my book The Truth About Crypto, and you begin to understand this better,

then you might ratchet that up to two or even three percent of assets. But you never need to go to 10 or 50 or 70 percent of assets. That's gambling. You don't have to do that. Instead, simply use it as a diversification tool in the portfolio. Where to do it, Bob? I'd give you three answers. Bitcoin only, because that's the number one asset class that's the most dominant.

It has 60 percent of the market cap in the entire crypto space. Back in the day, we used to say nobody ever got fired for buying. IBM. Well, you're not going to hurt yourself by buying just Bitcoin, or I should say it'll be the last coin standing if it does blow up. Number two, I'd say if you want to get a bigger market share representation, then use Bitcoin and Ethereum. I'm more excited about Ether than I am about Bitcoin because it has more commercial use case, and I think you're going to see it more widely adopted by big business. So Ether is very exciting. So a combination of Bitcoin and Ether is a great way to go. And third, if you really want a more diversified approach, the Bitwise 10 crypto index fund,

B-I-T-W. I'm an investor in BitW, and I own that fund as well. I'm a big fan of the work that they're doing there. This is basically the S&P 500 of crypto, the top 10 coins, giving you about 90% of the market because they're cap-waded. So it'll give you the Bitcoin and Ether, plus the other eight coins that are the biggest in the marketplace. They do all the work with rebalancing. You don't enough to worry about it. So I would say Bitcoin only or Bitcoin in Ethereum or the Bitwise 10 crypto index fund if you want a more diverse approach. You know, you made a very good point about Apple. Between 1997, the end of 97 and 2000, it moved almost 10 times and then crash down after that in the early part of 2001, back down again, dropped 70% probably. So you're right about the

volatility associated with tech stocks and new, I used to call it new tech stocks at that time. Let me just ask you about the broader markets. In discussions we were having last week, when I asked you about things that worry you about 2022, just on a macro level, you said the elections. What is it that concerns you about the elections? Well, we are, of course, in an election year. We're going to be focusing a lot of attention on it this summer as the campaigns heat up. We know the contentious nature of what's going on politically in our country and how narrow it is in the U.S. Senate and even close in the House.

And then we have all the state races where many legislatures are going to be decided. We have judges elected in many states as well. We have election boards where there are elections being held. So it's not just the federal level, but it's the state and local level as well. And we know that with Congress in particular, there comes along tax. policy, fiscal policy, you know, we have the bill back better law, the bill that is underway right now. What's going to happen come November if we have a change in control in the House or if we don't have a change of control? We're going to see massive impact to legislation that's going to come

in 2023 as a result of what happens starting in November election. And we're going to be paying a lot of attention to that this summer, which means investors are going to be filled with angst, wondering what's going to happen, who's going to win, what's the outcome going to be, what is it going to mean for tax policy, what's the impact going to be on interest rates and inflation, how much more money we're going to throw into the economy to try to dig out from the pandemic, and all of this is going to have a tremendous impact on stock prices and bond prices and real estate prices. And this is why investors are going to be on edge for much of 2022. Okay. Rick Edelman is an old friend of mine. He's author of a new book that's coming out soon,

The Truth About Crypto. And I want to remind everybody, he's got a new radio show out, The Truth About Your Future. And you can see that and details on it on the t-a-f.com. The-T-A-Y-F.com. Rick, thanks so much for joining us. Appreciate it as always. And, of course, we'll be coming back to you many times in 2022. Everybody, thank you for joining us on the ETF Edge podcast. Invesco QQQ believes new innovations create new opportunities. Become an agent of innovation. InvescoQQQQ, Invesco Distributors, Inc.