The Breakdown - Why the World's Largest Asset Manager Is Getting Into Bitcoin

Episode Date: January 22, 2021

Today on the Brief: A new SPAC exchange-traded fund with bitcoin-experienced leadership First look at Brian Brooks’ possible replacement at OCC What to expect from institutional bitcoin price targets in the coming weeks Our main discussion: BlackRock comes to bitcoin.  BlackRock filings with the SEC suggest two funds might buy bitcoin futures. In this episode, NLW looks at: The signs leading up to BlackRock’s interest Why BlackRock’s CIO thinks bitcoin will out-compete gold for millennial investors  How ARK ETFs are seeing startling fund flows, causing larger market FOMO around innovation -- Earn up to 12% APY on Bitcoin, Ethereum, USD, EUR, GBP, Stablecoins & more. Get started at nexo.io -- Enjoying this content?   SUBSCRIBE to the Podcast Apple:  https://podcasts.apple.com/podcast/id1438693620?at=1000lSDb Spotify: https://open.spotify.com/show/538vuul1PuorUDwgkC8JWF?si=ddSvD-HST2e_E7wgxcjtfQ Google: https://podcasts.google.com/feed/aHR0cHM6Ly9ubHdjcnlwdG8ubGlic3luLmNvbS9yc3M=   Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW   The Breakdown is produced and distributed by CoinDesk.com

The future is, of course, by definition, shaped by innovation. And for all of these traditional financial firms, it's catch up or get left behind. And the time is now. This more than anything else is a good reason not to get overly stressed about these short-term corrections and movements in the Bitcoin price. It's about the arc of the markets. And that arc is bending this way. Welcome back to The Breakdown with me, NLW. It's a daily podcast on Macro, Bitcoin and the big picture power shifts remaking our world. The breakdown is sponsored by nexo.io and produced and distributed by CoinDesk. What's going on, guys? It is Thursday, January 21st, and today we are talking about why the world's largest asset manager is getting into Bitcoin. First up, however,

let's do the brief. First on the brief today, a new SPAC ETF. Here is an absolute jungle of acronyms and two of Wall Street or perhaps Wall Street bets favorite things coming together, SPACs and ETFs. ETFs are, of course, exchange traded funds that give people exposure to specific themes. So it's sort of like an index fund but traded like a stock. An example of a theme would be ARCS Innovation Fund, which invests in a set of companies to match their theses about how the world is changing, including in this case Tesla, CRISPR gene therapeutics, Spotify, etc. Now SPAC stands for special purpose acquisition companies, also known as blank check companies. and effectively these companies are an alternative way to take a private company public.

A promoter of a SPAC sells shares in their SPAC, which is a company that's publicly listed, but doesn't do anything. The entire purpose of that company is to go merge with a private company, again based around some specific theme, in effect taking that private company public when the merger clears. Spacks have had a long and not always great history in the markets, but over the last few years, become a much bigger part of the scene, representing a large and growing percentage of IPOs. The biggest critique of SPACs, or at least one of the big critiques, is that they're an Uber example of the irrational exuberance of the stocks only go up crowd. They are literally a bet on a dream and a promoter. I can certainly see a modicum of truth in this. I mean, anything that

touches public markets right now sort of hits the stocks only go up crowd or the Fed chair has our back crowd, so it's hard to get away from that. But at the same time, the whole betting on a dream and a promoter, it doesn't strike me as that fundamentally different than investing in a venture fund, where you have fund managers who you trust to go out and allocate to a great company based around theses that hopefully you agree with. Either way, we're not here to debate SPACs, at least not on this episode, but you know it was only a matter of time before there were SPAC ETFs, a way for retail investors to get exposure to lots of different SPACs in one convenient bundle.

The third such fund has just been announced and comes from Brady Dugan, formerly of Credit Suisse, and Mark Yusco, the head of Morgan Creek Capital Management, which you'll know obviously as a big Bitcoin player. The SPAC ETF is going to be actively managed and two-thirds will be put into companies that have already merged and one-third into new blank check companies. It was notable to me both in the context of this larger trend of SPACs as well as because of Yusco being involved. But with that, let's shift our attention to a different dimension of these markets, our first look at Brian Brooks' replacement at the office of the comptroller of the currency. Whoever replaces Brian Brooks has big shoes to fill, at least when it comes to the crypto industry. In his nine-month tenure as acting comptroller,

Brian Brooks had a massive impact, making it fundamentally easier for banks and financial institutions to interact with crypto in a variety of ways. Today, we got the name of his replacement, and it's Michael S. Barr. Now, Michael Barr was in the Treasury under Obama and worked on Dodd-Frank, but since then, he's been dean of the U-Michigan Ford School of Public Policy. His appointment was noticed by the crypto crowd, not just for the significance of the role, but also because he was on Ripple's Board of Advisors in 2015. It's not clear how long he was there for, and to be very clear, advisors are different than directors. Advisors can have anything from a meaningful relationship with executives to absolutely no role at all, and, to be very clear.

just be listed somewhere as a figurehead that theoretically builds trust. The only thing I could really find about his time there was the press release announcing his appointment to the board of advisors where he said, our global payment system is badly outdated. I think innovation and payments can help make the financial system safer, reduce cost, and approve access and efficiency for consumers and businesses alike. I also did a search through all of his old tweets. He's never tweeted anything about ripple, about crypto. He's tweeted out three times with the word Bitcoin, but it's always been articles that he didn't comment on. In short, we don't have any idea how he really feels about Bitcoin or crypto, at least not yet. There are big implications for this role.

Congresswoman Maxine Waters has asked Biden to repeal everything that the OCC did, along with a lot of other things. Biden froze all last minute rulemaking that hadn't been published as well yesterday, which luckily for us includes the FinC-SEN rule from Stephen Mnuchin, but also includes an OCC fair access rule that would make it harder for banks to block out crypto companies among other industries to access services. This is going to be an important position to watch for this industry for sure. Finally, what should we expect from public price targets in Bitcoin in the coming weeks? We are obviously in the midst of a down period. We're back all the way to 31,000, and Scott Minard, the CEO of Guggenheim was back on CNBC yesterday, saying that he expects Bitcoin to drop back to

20,000. This is the same guy who was talking about 35,000 just a week ago, but I think the context is really important here. And Alex Kruger sums it up perfectly, so let me just read what he had to say. Here's Scott Minard, who insists in trying to talk Bitcoin down so he may buy lower in February when his SEC approval becomes effective. Minerd, rather unintelligently, told the world he thought Bitcoin should be worth 400K before he could buy in full. You have to be a special of idiot to talk the market up before you buy, and an institutional cuck to nudge the market down trying to make people think you are selling when you never bought or bought peanuts. Obviously, Alex pulls no punches with his specific language, but I think that the broader point is kind of

interesting. This is a person who came out and said that Bitcoin should be $400,000, and then we found out that they were going to buy, but they weren't going to be approved to buy until the end of January. And then all of a sudden, part of the cycle that they had created the frenzy for was making it harder for them to acquire the amount that they wanted, you get the point here. It's hard to take seriously this particular source of price predictions, given the context of what their fund is trying to do. I think it might be fair to say that we're likely to see a lot of this, a lot of macro folks who are coming on saying we should be back at 20, 25, and at least in part, it's because they want a chance to accumulate more. These are people who are just moving into

the space, and all of a sudden the price had been pushed to double what it was when they were talking about it just a month earlier. Many investors want to be a part of the next bull run. Others seek to build their dream home, finally launch that startup or fund their education. Try NXO's instant crypto credit lines and borrow against any major cryptocurrency with no minimum or maximum withdrawal amounts,

no fees whatsoever, no credit checks, and flexible repayment. Not to mention the APR starts at just 5.9%. Stay on top of your investment game with nexo.io. And remember, it's your crypto, your credit, your choice. Get started at nexo.io. With that, let's transition to our main discussion, which is also about one of those big institutional players coming to the Bitcoin space.

First, the news. BlackRock filed prospectus documents with the SEC on Wednesday that suggests that two of their funds, BlackRock Global Allocation Fund and BlackRock Funds Five, are looking at Bitcoin. Specifically, they're giving themselves the ability to buy Bitcoin futures. The question then is how did they get here? BlackRock is the world's largest asset manager. They have 7.81 trillion in assets under management, and they've never so much as mentioned Bitcoin in a filing before. However, for close watchers, there was some evidence towards the end of

last year that perhaps there was interest in this space brewing. First, let's listen to Rick Reeder the BlackRock CIO of fixed income on CNBC for November 20th. You alluded to the distinction between what's happened with the price of gold and Bitcoin. You said that you think it's moving towards Bitcoin. Is that a long-term trend? Does that mean you're a Bitcoin bull? Listen, I think cryptocurrency is here to stay. And I think it is a durable, and you've seen the central banks that have talked about digital currencies.

I think digital currency and the receptivity, particularly millennials' receptivity of technology and cryptocurrency is real. Digital payment systems is real. So I think Bitcoin is here to stay. I have a Bitcoin bull. I mean, I don't do a lot of it or actually any of it in my portfolios, my corporate portfolios, my business portfolios. But, you know, it's hard to say, is it worth the price it's trading on today? But do I think it's a durable mechanism that, you know, do I think will take the place of gold to a large extent? Yeah, I do because it's so much more functional than passing a bar of gold around.

So the argument he's making is largely about the long-term arc of markets and interest. Millennials are interested in Bitcoin, and that means it's going to be more. more and more important. It seems so simple, but it's just demography when you get to it at its core. This was followed up at the beginning of December with comments from BlackRock CEO, Larry Fink. In a conversation with former Bank of England Governor Mark Carney at the Council on Foreign Relations, Think said that crypto could evolve into a global market asset. He also said that it had a real impact on the U.S. dollar, potentially making the U.S. dollar less relevant for international holders of dollar-based assets.

Given these different types of comments, plus the general trend of institutions getting into the space, it is perhaps not surprising to see that Black Rock has now arrived. There is, however, another dimension that I want to bring to this conversation. I pulled this morning to see what people wanted to hear about, and one of the options I gave was Kathy Wood and ARC ETF's monster performance so far this year. So by way of background, ARC is a fund manager entirely focused on disruptive innovation. It was started by Kathy Wood in 2014 and had a lot of years of contrarian bets. Kathy was on the show a few months ago and talked about these very long periods where

people looked at them like they were insane because they were interested in Bitcoin and crypto. In fact, you guys probably know Chris Berniske, the fund manager at Placeholder. He got his start doing research at Arc. That's where he went down the crypto rabbit hole. ARC was also one of the earliest and is definitely perhaps the most long-duration, high-conviction public market investor in Tesla, even in periods where that was a very unpopular bet. Last year, however, ARC had an absolute breakout year. It started with $3.1 billion in management and ended with $34.5 billion, 11x in a single year. Five of their six ETFs had triple-digit gains, and it ended the year ranked fifth in terms of fund flow.

It's already off to a rapid start this year announcing a new space exploration ETF, which immediately got Bonco attention, but it's not just narratives. The numbers on 2021 are even more insane. Eric Balcunas from Bloomberg noted this morning that the ARCETF family took in over $1 billion yesterday alone. In total for 2021, they've already now passed State Street, and you guessed it, BlackRock, in ETF fund flows for 2021, sitting at $6.7 billion. This is second only to Vanguard and means that they're currently on a pace to take in $136 billion this year. Now, of course, when it comes to Black Rock and their move into the Bitcoin space, Bitcoin is not the main thing that Ark is known for. That said, you have to think that there are a lot of other traditional investors out there who, if they weren't already, are now looking over at Ark with their set of theses about where

the world is headed, from money to genomics to space, and saying, we are behind A. F. The future is, of course, by definition, shaped by innovation. And for all of these traditional financial firms, it's catch up or get left behind. And the time is now. This more than anything else is a good reason not to get overly stressed about these short-term corrections and movements in the Bitcoin price. It's about the arc of the markets. Pun truly unintended. And that arc is bending this way. Anyways, guys, I hope. hope you enjoyed this show. Let me know what you think about arc's crazy performance, about Black Rock coming into the space. Hit me up on Twitter at NLW. Hit me in the comments on YouTube.

I appreciate all of you listening. Until tomorrow, guys, be safe and take care of each other. Peace.