Rich Habits Podcast - 65: EXCLUSIVE Interview w/ BlackRock (Bitcoin ETF)

Episode Date: May 20, 2024

In this episode of the Rich Habits Podcast, Robert Croak and Austin Hankwitz sit down with Jay Jacobs, the Head of Thematic Investing and Active ETFs at BlackRock to discuss their IBIT Spot Bitcoin ETF. To learn more about IBIT, click here!---Subscribe to the Rich Habits Newsletter, click here!Join us for an Options Trading Webinar, click here!---⭐ Download our FREE Budgeting Template – ⁠⁠click here⁠⁠⭐ Earn 5.1% on your savings with a High-Yield Cash Account – ⁠⁠click here⁠⁠⭐ Trade stocks, options, music royalties and crypto on Public – ⁠⁠click here⁠⁠⭐ Get a $35 bonus when you start saving & investing with Acorns – click here⭐ Automatically buy stock where you shop with Grifin – ⁠⁠click here⁠⁠⭐ Protect your family with term life insurance from Suriance – ⁠⁠click here⁠⁠⭐ Use code “Spotify” for 15% off our 4-module video course – ⁠⁠click here⁠⁠⭐ Optimize your portfolio with Seeking Alpha – ⁠⁠click here⁠⁠---👤 Explore everything Austin does – ⁠⁠click here⁠⁠👤 Explore everything Robert does – ⁠⁠click here⁠⁠❓ Ask us questions for our Q&A episodes – @richhabitspodcast on Instagram📬 Inquire about working together – [e-mail]---Hankwitz Group LLC has an existing business relationship with NEOS Investment Management LLC. The opinions expressed are those of the author, and the author owns several NEOS ETFs.

The ride that steals the spotlight every time it hits the road, that's the Volkswagen Tiguan. Its sleek exterior makes a first impression you can't ignore. Step inside to find available full leather seats and wood accents. Under the hood, the available 201 turbocharged horsepower engine gives it a fun to drive edge. The refined Tiguan, you deserve more style. Visit vw.ca to learn more. SUV, German engineered for all. presents Laura versus fruit flies. Swarming your fruit and terrorizing your kitchen. These little freaks

multiply at a rate that would make a rabbit say, yo, chill. But Laura shopped on Amazon and saved on cleaning spray, countertop wipes, and fly traps. Hey, fruit flies, your baby boom ends here. Save the Every Day with Amazon. All right, everyone. So this episode is going to be a little bit different. We are joined by Jay Jacobs, the head of thematic and active ETFs at BlackRock, to talk a little bit more about their spot Bitcoin ETF. We ask them questions about the custodian process, how they were able to attract so many

new investors, what they think about the asset class and its volatility, as well as a ton of other questions. You guys are going to love this interview and you're not going to want to miss it. Yeah, I mean, as always, we do. dig deep to give you all the best information. And in this instance, we went right to the horse's mouth and that is BlackRock. We are in there. Jay is incredible and just really teaching everybody and sharing all of this information to help everyone make the best decisions. Should you buy Bitcoin directly? Should you buy Ibit through the ETF? What is the best way? And I think this interview

really crushes that. I even learned some things and really open my mind up to how great these products are for the everyday and institutional investors. With that being said, let's jump right into the interview. In this episode of the Rich Habits podcast, we're joined by Jay Jacobs, the head of thematic and active ETFs at BlackRock. As you might remember from a few months ago, we had the opportunity to sit down with Rachel Aguirre to learn more about what BlackRock is doing with their retirement-focused ETFs. You all love that interview. And with Bitcoin ETFs on the top of everyone's mind, we thought this would be a great opportunity to run it back. Jay, thanks so much for joining us, my man. It is a pleasure to join both of you. Our audience is really interested in learning more about where Bitcoin and cryptocurrency

and general might fit inside of their own portfolio. So getting to sit down with you to answer their question as well as our questions is going to be a blast. Can't wait to jump in. Yeah, I'm so excited about this episode, Austin, and really looking forward to hearing Jay break it down, you know, straight from the source because, you know, we have so much activity in the markets right now. And the halving just occurred and there's just so much going on and I just can't wait to get into it. Same here. So let's jump into our first question, right? Ibit alongside other spot Bitcoin ETFs were launched on January 11 of this year. And in only 37 trading days, Ibit became the fastest ETF in history to hit 10 billion in AUM. Now today, I bit alongside Fidelity, Arc 21 shares and Bitwise

are some of the largest ETFs by assets under management after only 70, two days on the market. So Jay, where is the demand coming from? And why do you think investors are showing a specific preference for iBit over the other spot Bitcoin ETFs? We've been hearing for years that there's been tremendous demand to access Bitcoin through the convenience of an ETF. In a lot of ways, this is what ETFs have done best for several decades, which is that they provide this really convenient, efficient exposure to everything from the SMP 500 to baskets of bonds to thematic exposures. and Bitcoin is just the latest innovation of how to bring that ETF structure to an additional asset. So we really see this as the introduction of a scalable bridge between traditional finance and Bitcoin.

I think what's key here is that it really appeals to a wide range of investors. ETFs are for everyone, anyone who's logging into their personal trading account to a financial advisor who's managing assets on behalf of their clients to some of the most sophisticated institutions in the world. An ETF is a great vehicle for them to get exposure to Bitcoin. Now that Ibit is available, that really gives people that efficient tool. Why Ibit versus everyone else. You know, I think what's clear is that, you know, BlackRock has a tremendous expertise in the ETF space.

We have 400 ETFs in the United States. We have 1,200 ETFs around the world. We manage over $3 trillion in ETFs globally. And this has really developed a massive amount of expertise in efficiently managing ETFs, providing the best institutional-grade infrastructure, working with some of the best partners in whatever asset class we're trying to get exposure to. and really packaging a high-quality product for investors. So I think that's the expectation of BlackRock across our entire suite.

And when we launched Ibit, you know, investors were really looking for that quality. And what is BlackRock doing to educate investors of all experience levels to really get them informed on why this makes sense and why Ibit is so important in this field of ETFs for Bitcoin? Education's been key to us since day one since launching this product. I mean, I think we have to recognize that first this is an ASE and asset. So for anybody, this is relatively new. Whether they've been tracking Bitcoin since day one, it's only been 15 years.

You compare that to thousands of years of history with gold or hundreds of years of history with equities. So it's new. Importantly, this is a volatile asset. And I think the more volatile in a lot of ways that begets the need for more education because investors need to understand, if this thing can be up or down a lot in a day, what does that mean for my portfolio? How should I approach this in terms of sizing?

How should I approach this in terms of my expectations? How does this interact with other components of a portfolio? like stocks and bonds. The unique characteristic about Bitcoin is that it's generally fairly uncorrelated over the long term to stocks. It's at a point two correlation, meaning it's very, very differentiated. Just because stocks are up or down doesn't necessarily mean Bitcoin's going to be up or down. So there's really a tremendous need for that education in the market. You know, that's been core to our objective since day one since bringing out the product. But Robert, to slightly push back on your framing, we are not saying that every client needs this in a portfolio.

We are saying that this is a unique asset. This is what we've observed with this asset. This is a way to think about it. And it is up to the investor to make that choice, whether it makes sense in their portfolio. And if so, how much? We would say that about almost every asset. It's up to the investor and what their financial goals are and what their time horizon is and what their risk tolerance is, all those great questions.

Every portfolio is going to be different and suited to a different investor's needs. Bitcoin may make sense for some, but we don't think it's going to make sense for all. And what are you seeing thus far as far as adoption and as a percentage? percentage of portfolio. What are you seeing? Are people at 1%, 2%, 5% on average? Talk us through that. Again, it's really wide range depending on client type. I would say generally it's skews towards, you know, very low, you know, figures, kind of low single digits because Bitcoin is a volatile asset and behaves differently. Investors are seeing that, you know, even kind of a small amount of Bitcoin can impact a portfolio's risk and, you know, volatility characteristics in a meaningful way. So what we've seen from our clients are those relatively low allocations. Now, again, different clients. are going to behave differently. You know, when we look at the financial advisor space, I think what's

very interesting here is a lot of financial advisors are realizing that their clients, who maybe are lawyers or doctors or engineers or, you name that, had been buying Bitcoin. And it's the advisor's responsibility to understand the entire financial picture of their client. And so realizing now that their client owns Bitcoin, they can offer, why don't we pull this into the portfolio that I manage alongside your stocks and bonds and look at this whole thing together. And then we can decide how Bitcoin you should have. Maybe it's more, maybe it's less. But I think the importance of the role that the advisor plays in managing this asset now, because Ibit is available for an advisor to use, has really changed the conversation with advisors around that portfolio use case. I love it. And since 2018,

investors have had the ability to invest in Bitcoin futures ETFs. And we've discussed this with our audience quite frequently, but we'd love to hear in your words, what's the difference in why a spot Bitcoin ETF like Ibit is generally considered a better option than Bitcoin futures. Bitcoin futures are a financial instrument that, you know, are looking to give exposure to Bitcoin, but it's not giving direct exposure. It is a derivative. It is an instrument and you can have tracking error between a future and the underlying asset, no matter what that asset is. What we've seen historically is that the futures in the Bitcoin space had traded at a significant premium above spot Bitcoin. And it was for a very specific reason, which is a lot of financial institutions,

were not and maybe still not, are able to invest directly in Bitcoin. So they were using futures instead. And if you have a large amount of demand for something, that can start to skew kind of how it tracks. And so there is essentially a convenience premium that was associated with these futures because it was the only way for a lot of institutions to express an review on Bitcoin. So historically, you've seen that those futures have just not tracked Bitcoin particularly well. If you want Bitcoin exposure and you want it to track very closely, you really need that spot exposure. So that's what these ETFs are providing. They're not investing in a derivative of Bitcoin. They are investing in Bitcoin directly. You know, IBIT owns as of today, over $17 billion of Bitcoin, and that is actual Bitcoin held by our custodian in account specific

to Ibit. That's kind of as direct as he can get in the sense of a fund, owning the exact asset that people are looking to get exposure to and nothing else. I think that's awesome. And thinking about now sort of these Bitcoin futures ETFs, I'm looking at a Bitcoin future ETF that I think was probably the one Robert was alluding to here that launched a couple years ago. And if the data served me correct, they've seen outflows, right, of over $17 billion out of this ETF. And I'd imagine some of that outflow is being then reallocated to the spot Bitcoin ETF. So to your point, Jay, it's interesting to see how not only are investors realizing, wait a second, maybe these futures derivatives aren't exactly tracking Bitcoin like I'd want to or it's, you know, overvalued in relation to Bitcoin. So it's so

cool to see you all are now giving everyone access to true spot Bitcoin ETF capabilities. I think it's a lot of fun. And we see that across various different instruments. You know, again, in a lot of ways, the ETF is really the way that people wanted to get exposure to Bitcoin for many years. And so they tried different approaches previously. You know, you had people buying some equities that kind of traded like Bitcoin. We saw people buying futures that are related to Bitcoin but have some tracking air. We saw people trying to buy Bitcoin directly on crypto exchanges. But the ETF really solved a lot of those challenges in terms of really getting precise exposure with low fees associated with it and institutional great custody.

And so for a lot of the flows that we're seeing today, I think we could say a meaningful percentage of it is people who already had some Bitcoin exposure previously through one of these other ways, the futures or owning Bitcoin directly or these equities. And I've been shifting it to the ETF as that vehicle of choice. Now, I think the next stage of adoption of Bitcoin is really going to be more about people who maybe don't have an investment view on Bitcoin yet. Maybe they haven't had to have an investment view because they couldn't access it in any way. We talked about how a lot of financial institutions didn't really have a way of getting Bitcoin exposure, where it was only through future. So now that it is accessible to more people, I think that'll put the impetus on more financial professionals to have a view either positive or negative on Bitcoin. And therefore, that could be driving more flows into the I bid ETF going forward. But a lot of the first way I do think is people who already had an investment view.

It is more what's the right structure to express that view. Totally agree. And I love that you mentioned the word access because that kind of rolls into my next question, right? we saw you all publish this awesome explainer video regarding the three most important things to know about your spot Bitcoin ETF, Ibit. And these were broken down into number one, access, number two, convenience, and number three, quality. So kind of coming back to this idea of access, we know that Coinbase is listed as the Bitcoin custodian for the ETF. And we also know that you've had partnerships with Coinbase in the past. What does it mean to be a custodian? Can you

Talk through the relationship of that. How does it work and how did you choose Coinbase? Absolutely. So for actually any ETF owning any asset, you need a custodian. If you're buying stocks, if you're buying bonds, if you're buying gold, someone needs to store that on behalf of the ETF because at the end of the day, the ETF is essentially a claim on those assets. While there are large banks that have been in the custodian game for many decades, if not even centuries, because digital assets are relatively new, there's been kind of new infrastructure that's grown up around it to provide things like custody services. And that's where Coinbase has really come in as, you know, one of the most experienced custodians in the digital asset world, the largest custodian in the digital asset world. And importantly to us was really willing to partner with us to make their custody solution fit our needs as an asset manager. You know, as I mentioned earlier, we manage, you know, 1,200 ETFs around the world, $3 trillion. We have a lot of technology and infrastructure built around managing those ETFs in a scalable, efficient, high-quality way. So it was really important to us that this one other ETF, you know,

alongside those 1,200 other ETS, but this Bitcoin ETF would look and feel and be managed in the same way that all those other ETSs around the world are managed. And so we had, you know, a long dialogue and spent a lot of time with Coinbase really thinking through how do we integrate this digital asset custody solution into our technology to make that as seamless as possible. And I know, you know, maybe this is all kind of on the back end, infrastructure stuff that maybe goes a little bit underappreciated in the, in how the ETF world works. But this is essential to managing an ETF efficiently for clients. You know, I just think it's a tremendous partnership between BlackRock and Coinbase to be able to integrate that technology. You know, what's literally happening on the back end is when money comes to our fund, we are going out and we are buying Bitcoin and that Bitcoin is being stored by Coinbase custody. And they operate several digital wallets for us. They are segregated wallets that are kept separate from all their other clients.

There's a vast array of security measures that are put in place to protect that Bitcoin in cold storage. We're just kept offline away from the internet. And that just gives us, you know, so much confidence in our ability to manage this Bitcoin ETF for so many clients. So before we go into the next question, I want to reiterate something and ask it. And that is, were you considering anyone other than Coinbase because, you know, we love Coinbase. We believe they're the best.

But from your perspective on a much higher level, was there another consideration? But before you answer that, Jay, let's take a moment to hear from this episode's sponsor because we can't talk about ETFs without mentioning our favorite income focused ETT. This episode of the Rich Habits podcast is brought to you by Nios Investments. Nios offers ETFs that aim to offer monthly income while providing core portfolio exposure across equities, fixed income, and cash alternatives like T bills. Their ETFs may be particularly interesting for folks looking to generate passive income inside of their investment portfolio.

They even offer ETFs that provide exposure to the S&P 500 index or the NASDAQ 100 index, while aiming to offer high monthly income beyond what investors would receive from plain exposure to the index. Their funds may serve as a compelling income-focused alternative or complement to many of the investments already in investor portfolios. If you're looking to add passive income-focused ETFs to your portfolio, consider learning more about Nios's ETFs at NiosFunds.com. And as with all investments, investors should carefully consider their investment objectives, risks, charges, and expenses of Nios exchange traded funds before investing. To obtain a prospectus containing this and other important information,

please visit NiosFunds.com. Please read the prospectus carefully before you invest. Nios ETFs are distributed by Foreside Fund Services LLC. An investment in Nios ETFs involves risk, including possible loss of principle. The equity securities purchased by the funds may involve large price swings and potential for loss. A fund's income may decline when yields fall.

Fixed income securities will decline in value because of an increase in interest rates. All right. Let's jump back to Jay. We've had a deep partnership with Coinbase for a while now, integrating into their technology, doing a significant amount of due diligence on their processes and their custody services. So we really felt that this was the best partner for us in bringing out IBID and making sure that we had the best quality solution for clients. I love it. So one argument against cryptocurrencies in general has,

always been about volatility. And many investors think that with institutional adoption of Bitcoin would lead to less volatility due to this massive kind of stamp of approval. Others argue that easier access to shorting and betting against Bitcoin-related financial products will only add to the volatility. And how does iShares go about communicating the volatility that comes with Bitcoin? Because with mass adoption, do you think volatility will ease in the future? We've been really upfront with clients about the volatility of this asset. I think it's a very key characteristic of Bitcoin is that it is volatile. This is Nissan. In terms of size, Bitcoin is roughly a trillion dollar asset, which is still small on the global scale. You look

at gold as a 14 trillion dollar asset. You look at equities as, you know, a hundred trillion dollar asset. So it is small, it is new and it is volatile. What we've seen over time is, although this is a volatile asset, that as there's been more adoption of Bitcoin, volatility has come down somewhat. So to put this into context, Bitcoin has about 50% volatility right now. Equities are about 15 to 20 vol. So it is significantly more than equities. But a 50 vol is relatively similar to some of the individual stocks in the tech space that also have about a trillion dollar market cap. So you could look at it through that lens as in our portfolios today, we might have small allocations to things that have similar amounts of volatility. So I think it's important to

acknowledge the volatility, acknowledge the trend of volatility and what drives it, as well as to contextualize it with what that means in the context of big asset classes in a portfolio, as well as some other kind of small allocations that people might already have. Larry Fink recently said ETFs are step one in the technological revolution in the financial markets, and step two is going to be the tokenization of every financial asset. So do you mind walking our listeners through what tokenization is and why it's so important to the financial markets and BlackRock in general? Yeah, I mean, I think if we start with the ETF with Ibit, you know, this is something that we've been working on for several years as really bringing, you know, of the digital asset space into modern infrastructure. We've seen that there's significant demand

from our clients for digital assets. I think a lot of that has been concentrated on Bitcoin because it's the largest digital asset. It's got that 15-year track record and people are really more than other digital assets more familiar with this. But it doesn't necessarily have to stop there. I think we've been very focused on where can we make an impact in that digital asset space with the Bitcoin ETF being kind of the predominant way. But I think there will be other opportunities in the future to leverage digital assets and tokenization to bring out no kind of other services or products for investors. So it's an area that we're keeping a close eye on and working diligently kind of behind the scenes on to really expand in a thoughtful way our digital asset offering. Now, does that mean

that iShares is looking to get more and more into digital assets over the coming months and years? I mean, are we going to see an Ethereum. ETF hit the markets here in a couple months or maybe by the end of the year? I can say it's still very early in Bitcoin. So we're very much focused on that and the education on Bitcoin. All I can say around Ethereum is, you know, there's a lot of factors that, you know, would have to come together and it's in registration with the SEC. But we're a few months in with Bitcoin. I think there's still a lot of growth opportunity to do more education around Bitcoin, to enhance kind of the full, you know, financial sectors of use on Bitcoin and kind of expand people's consideration of the asset. So that's still our main focus today. I love it. And Jay, for people who

are listening right now that want to learn more about Ibit, that want to watch that really cool video that you had published. Where do they visit? Where do they go? Where do they search on that Google search bar? It's as simple as iShers.com slash iBit. We have some great videos. We have some great insights. We're going to continue to update that going forward. As we've said, throughout this podcast recording, we are very focused on education and we're excited for investors to be on that journey with us. So we would definitely recommend people visit iShers.com slash iBit to see our latest. Jay, thank you so much for hanging out with us on this episode of the Rich Habits podcast. And I think we'll probably have you back here perhaps in a couple months.

I know you guys are cooking on a couple ideas behind the scenes as it relates to other themes that you guys are focused on sharing because you are the head of thematic investing. So hoping that goes well and we have you back on the show very soon. I would love to be back. Thank you guys for having me. What a great interview with Jay Jacobs. I mean, I learned so much. And I think the biggest takeaway for me was about that volatility aspect.

I didn't know that Bitcoin was about a 50 vol compared to, you know, the stocks that talk about being a 15 to 20% vol. So it's interesting to see that. And then also he called out that stat about a point two correlation to the stock market. So I mean, as an investor, I'm always looking for ways to diversify and sort of keep my investments moving while maybe we have volatility in the stock market. Bitcoin could be that extra little push in the other direction. But Robert, what were some of your biggest takeaways? Yeah, I would say just understanding the relationship with Coinbase and how important it is because, you know, so many people hear of some of these ancillary exchanges getting in trouble and they're worried about their money. And I always tell them

that that is not the case with Coinbase. And when you hear, you know, how BlackRock is so deeply entrenched with Coinbase as is others using Coinbase as the custodian, it just really makes me feel that much more secure about the future of Coinbase and Bitcoin and these ETFs. So that would be one part for me, but also secondarily, is to understand how much effort they're making in the education process for institutional investors and large family offices because so many of them have had to sit on the sidelines for years and years unless they personally took some side money and invested in Bitcoin because they didn't have the right vehicle and now they do. So I think this interview just really clears up a lot of the confusion of what is the difference between a person going

straight to Coinbase to buy some Bitcoin or doing it through their broker, BlackRock, through their personal accounts. And so I think that's just really important to understand those differences. And this interview really cleared that up a lot. Most definitely. And I'm looking forward to having Jay back on the show, hopefully here in a couple weeks. I know they're dropping. I think on June 25th, he told us that BlackRock is sharing their big themes that they're focused on for the rest of 24 and beyond AI, geopolitical, things like that.

So it would be really cool to have Jay back on the show to talk a little bit more about what Black Rock's investing into and how BlackRock is thinking about the markets. Yeah, I love it. This was a great episode. I'm really glad we mixed it up with this interview because it just gives people this up-to-date, incredible information. And, you know, not everyone has access to the people we do to be able to get it right from the company itself. So really, really enjoyed it. With that being said, everyone, don't forget to follow us on Instagram at Rich Habits Podcast. There's also going to be a link in the show notes below to join the Rich Habits newsletter. You heard that right. We launched a newsletter. And included in those emails are fun charts to stay up to date on your favorite companies and how

they're performing. So again, don't forget drop that email below to subscribe to the Rich Habits newsletter. And if you learned anything from this episode, please give us that five-star review. Share with a friend who's also curious about cryptocurrency and the state of the markets. And we'll see you next time. Thanks, everyone. And have a great rest of your week.