The Pomp Podcast - #1339 Robert Mitchnick | The REAL Reason Why Blackrock is Buying Bitcoin

Starting point is 00:00:00 What's up, everyone? This is Anthony Pompliano. Many of you know me as Pomp. You're listening to the Pomp Podcast, which is my effort to find the most interesting people in the world and sit with them for hours while I ask questions in an effort to learn. So it would mean the world to me if you would subscribe to the show on your favorite audio platform, watch episodes on YouTube, and tell your friends and family about the podcast. My goal is to help millions learn from the world's most interesting people. So let's get into today's episode. Today's episode is with Robert Michnik. He is the head of digital assets at BlackRock. This conversation was recorded at Bitcoin Investor Day in New York City a few weeks ago. And Robert does not disappoint. In this conversation,

Starting point is 00:00:42 he explains how BlackRock got convinced to eventually go all in on Bitcoin and launch the Bitcoin ETFs. Then we go ahead and we talk about what are their clients saying? How exactly are people buying these assets? What are different advisors going to do in terms of allocation sizes, and what is Robert excited about moving forward in this space. We also get into many of the inside stories of how the actual funds got approved and what we should expect for the ETFs moving forward. It's always awesome to talk to someone who's been so instrumental in helping a company like BlackRock get involved in this space. And Robert is that person at BlackRock along with a number of his colleagues. So I'm excited for you all to listen to this conversation.

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Starting point is 00:04:08 All right. Next up, we have Robby Michnik, who is the head of digital assets at BlackRock. Robby is by far, I think, one of the smartest institutional investors and operators that has figured out some of the value proposition of Bitcoin and then done immense work internally at BlackRock to get them on board. and we'll see if he was part of the Larry Fink orange pill. But Robbie, come on up. All right. How did BlackRock decide that you guys wanted to get into the Bitcoin game? Well, we didn't just wake up one day and make that decision. I think that you look at our journey, it goes back really now six, seven years.

Starting point is 00:05:03 and it starts with studying the technology and this emerging asset class in a very measured way out of the gate, right? And I think if you look at the state of what it was then versus what it's become, that really paints the picture of how we ended up making the moves that we did, right? In terms of the state of infrastructure and institutionalization, that has come a very long way, particularly in the last three or four years.

Starting point is 00:05:42 The state of the regulatory climate is not perfect, obviously, but that has come a long way. And then most importantly for us, the level of interest that we had from our client base that was consistent and enduring even through the bull and bear market cycles, we saw that very clear pattern that our clients were increasingly interested in this and increasingly frustrated by the availability of efficient, turnkey, convenient, secure exposure solutions. uh, with which to get into this space is when you put all those together and you add sort of the, the capabilities that we built over multiple years, then you get to where we are today. So take me inside the organization. Um, you all do this work at some point, there's kind of a zero to one decision. Hey, we, we should do something in the space. Um, ETFs, you all have a stellar track record. I think at, uh, the time of filing was 575 and one. Is there a fear that I don't want to be the one to be the second, you know, 575 and two

Starting point is 00:06:54 or why ETFs and kind of how did you build the confidence to say, hey, look, we think actually we can get this through with the regulators? Well, there's certainly a lot of things that we considered in that decision, but I can tell you that one thing that we never considered was what will it do to our uh win-loss approval record um you know it came down to if you think about some of the things that we did that laid the foundation right uh starting in 2021 we began working with with coinbase and coinbase prime to uh integrate from a technology capability standpoint their prime brokerage trading custody into our aladdin investment solution so that crypto, specifically Bitcoin, out of the gate, could be part of the whole portfolio for the

Starting point is 00:07:47 Aladdin clients that chose it to be. And then in 2022, we launched a private Bitcoin fund, right, which was really important in terms, one, that was all you could do from a regulatory standpoint at that time. But two, in terms of developing the capabilities as an asset manager in this space. That was limited to our largest institutional clients in the US, but it was a really critical stepping stone. Then you get to start in 2023, and that's when we started to put the pieces in place to take that next step and deliver the ETF, which at that point, we had massive and clear client demand, right? That they were frustrated with how difficult it had been to get exposure. You had some clients who had tried to get exposure in this space and they'd been

Starting point is 00:08:38 subjected to high fees, high risk, underperformance of the price of Bitcoin, in many cases, all three, or maybe even worse, they missed it entirely, which was Bitcoin is the top performing asset in the world the last decade and seven of the last 10 years. And they missed it because they didn't have the wrapper, the format in a convenient, accessible way. Once you get the approval, I was pretty bullish on the ETFs. I thought, hey, this is going to be quite exciting. I did not think we would see the inflows that we saw as quickly as we saw. Did you all think this would happen?

Starting point is 00:09:18 And what has been your kind of reaction or analysis as to why so much capital has flowed so quickly into these funds? Yeah, it's been an interesting couple of months. I think investors are resoundingly choosing iBit for Bitcoin access, whether that's new investors to the space who weren't willing to do it when it had the frictions that for some Bitcoin direct investing incurred or investors who are already in the space but are choosing this as a more efficient, lower cost, more accessible, convenient exposure solution. So when you put those together, it's been obviously a lot. But when we think about our, you know, business and our client base, you have really kind of three buckets you could you could put it in. Right. One is end investors direct. And that channel, you know, right out of the gate has been very strong. Obviously, a lot of interest in demand right from small dollar up to ultra high net worth type players. Then you have wealth advisory, which, you know, many of those home offices are wealth advisory partners. They're still undergoing their diligence processes. Right. So for a lot of these firms, it's not approved at all or it's not approved other than on a unsolicited basis where the client has to ask. The advisor can't propose it. So that's still, you know, pretty early days.

Starting point is 00:10:50 And then on the institutional side, we're having lots of great conversations, a lot of sort of research and diligence and education happening. But that's early. They just operate on a longer timescale. And so it'll be interesting to see, you know, as the months and quarters unfold, how those other channels start to come on. Now, one of the things I think folks are very excited about BlackRock is there's a trusted name and there's a lot of relationships. And some of the pools of capital that previously have not participated, you know, very large pension funds, sovereign wealth funds, you can kind of go down the line of these pools. Any insight into what those conversations look like so far? Are they open to learning more? Are they, you know, hey, guys, I don't want to talk about this. Where are those kind of larger pools of capital currently? Yeah, I think that there is a really, really important discussion, debate, analysis going on of how to think about this from a risk and portfolio construction perspective.

Starting point is 00:11:52 And I would say that the Bitcoin and crypto industry broadly has not done a good job at all of speaking the language of traditional investors. Right. And one of the, I think, most confusing, unhelpful things that happened in the post-COVID era was you had people sort of accept this idea that Bitcoin was a risk on asset, whatever that even means. Right. It's kind of devoid of a fundamental basis, that concept to begin with. But Bitcoin is a risky asset. Right. It is volatile. It has a lot of uncertainty. But risk on is a different thing, right? It implies correlation to equities, fixed income, what have you. And what happened was Bitcoin has one, in our view, fundamental macro variable where it is highly correlated with equities. And that is it is massively short real interest rates, right?

Starting point is 00:12:57 It is short nominal rates, and it is long inflation expectations. And real interest rates is nominal rates, less inflation expectations. So it's massively short real interest rates. And real interest rates drove every asset under the sun between 2020 and kind of early 2023, right? They collapsed. Therefore, a lot of assets, including Bitcoin, rocketed. And then they surged as the Fed started hiking and inflation expectations rolled over.

Starting point is 00:13:29 And so the Bitcoin community sort of embraced this idea that it was a risk on asset, which I think was problematic for two reasons. One, because it was actually counterproductive to them. But two, more importantly, it's fundamentally it's probably wrong. Right. If we think about long term fundamentals and what it means to be a global, decentralized, scarce, non-sovereign asset, a lot of those fundamentals paint, you know, Mike was talking about some of these dynamics and challenges to U.S. fiscal situation and otherwise, they paint a very different conclusion in terms of how to think about it versus other assets on a long term basis. So what's happened is those institutional investors, they get kind of this digital gold hypothesis, but then they look at the past data from, you know, 2020 to 2022 and they go, well, you know, long-term correlation was low, but then it spiked. So, you know, how do we think about this in portfolio construction? So that's the kind of education journey that we're on. Now, you guys just, I think, put in application or announced a new type of fund that is going

Starting point is 00:14:42 to partner with Securitize. Tell us a little bit about what's the general idea there. And should we expect BlackRock to now go from Bitcoin, kind of building this fund on Ethereum, and here comes everything else? And as Mike said, dog with hat is going to be the next fund you guys launch. How do you think about what that fund is and then kind of like the long tail of these assets? Yeah, I think that crypto Twitter would love to believe that dog with hat ETF is coming next.

Starting point is 00:15:10 I actually don't know what dog with hat even is and didn't get that reference, but yeah. That answers that question. What I can say is that for our client base, it is Bitcoin overwhelmingly, number one, focus a little bit in ethereum and very very little everything else and when you think about it in terms of you know various metrics and dimensions i mean bitcoin 52 percent of the market cap of the whole asset class ethereum but 17 ish today maybe 18. and the next that is even sort of investables like three right uh and so it's just worlds apart there in terms of you know, track record, liquidity, product market fit, investor narrative clarity,

Starting point is 00:16:01 all these things, right? So that's where I think there's some misplaced speculation that there's going to be a long tail of others from us. And that's really not where we're focused. Now, as large pools of capital come in, whether it is actually, you know, the pension, sovereign wealth, etc, or just a lot of capital flows into the ETFs, it feels like the ground underneath the Bitcoin market is shifting a little bit. There's new types of allocators, things like rebalancing, which is basically blasphemy in the Bitcoin community, now come into play. And so do you expect volatility to dampen? Do you expect the end of the four-year cycles and the big boom and bust? How do you see the market moving forward,

Starting point is 00:16:43 given these ETFs and other institutional players? Yeah, it's a great question. I certainly don't think um we've seen the end of cycles uh in bitcoin i think you know by its nature um there's reflexivity in it right which is and that's and that's hard for a lot of traditional investors to wrap their heads around as you think about it you know if you think about a stock the stock price goes up but now it looks more expensive on a pe basis or or what have you uh and it goes down looks cheaper on a pe basis um with bitcoin when the price goes up the probabilities of success and adoption in some sense is digital gold are also changing when and when bad things happen the price goes down those probabilities you know are also changing so you create reflexivity and

Starting point is 00:17:36 that just reinforces the idea that you're going to have these cycles i think that they're still here to stay so people need to be wary of you have bull markets we'll have bear markets too even in this sort of post-institutional world um and then what becomes interesting is how do you think about the direction of volatility right because volatility over time has pretty steadily come down so maybe that continues to come down uh certainly returns going forward uh will come down it's not going to return 124 percent a year uh over the next decade like it has uh the prior decade. So these are the kinds of conversations that we're having. We're getting lots of questions from our investors, and that's a big part of the education journey. Now, when BlackRock decided to

Starting point is 00:18:20 do this, it struck me as literally the executive team, the CEO, all the way on down. There's got to be a lot of buy-in to get to this point. I was shocked when Larry Fink went on television and said, people are buying Bitcoin because it is a flight to quality. I joked with friends, I may have tweeted and said it's almost like he's the chief marketing officer of bitcoin um put aside the honorary title so so you came up with that title yes i came up with that title not you um but i said i certainly did to talk a little bit about um you know this idea of black rock going out and talking about because you guys could have just filed an etf right but but actually having larry or others from the firm talk about this and this idea of flight to quality it's very

Starting point is 00:19:05 different. If a Bitcoiner goes and says that, people are like, okay, whatever. But when a firm that frankly has built their reputation on helping investors find quality assets and allocate for the long term has done a very good job of doing that, it has a different weight to it. How do you guys think about maybe internal thoughts versus what you share with clients versus public communication around this? Yeah. I think when you have topics that are novel and complex, our clients expect us to be a thought leader and a thought partner with them, right? So that comes with the territory and that's what made our digital assets journey over six, seven years be a very deliberate measured process, right? Because we understood the importance of our weight and our voice

Starting point is 00:19:55 and to get to a point where we are today that took a lot of study and experience and education and you know the things that that we say come from a a measured thoughtful place right it's not by accident one of the things you and i have talked about recently is correlations and i think this is one very misunderstood but also two sometimes it can be hard for people to do the work to really understand what what the facts are there and so how do you all think about correlations inside of these portfolios and maybe positives or negatives based on those analysis yeah i mean i think it's probably the single most important uh debate right now in thinking about bitcoin where you know historically bitcoin's long-term average correlation's been uh close

Starting point is 00:20:42 to zero slightly slightly positive but close to zero but it's had periods where it spiked similar to to gold gold has had periods as well where it spikes actually if you put their correlation charts in a time series, they look remarkably similar. But that's a really important thing for institutional investors when they think about portfolio construction, because they're trying to understand in a small allocation, is this risk additive to the portfolio or actually is it potentially a diversifier or even a hedge, right? So that's a really critical conversation. It also is important for end investors to understand because it's the reason that you know, Bitcoin is generally not appropriate in a large concentration in a portfolio,

Starting point is 00:21:24 because in a large concentration, its volatility becomes a huge driver of risk. But in a more modest concentration, then the fact that generally it's been uncorrelated and has different fundamental drivers, that's where, you know, potentially becomes a different source of return and even in some cases, a diversifier. So that's a big part of the education journey. is there an average allocation size you're seeing from clients or a range that you're actually seeing them put out there? And I always joke that when people ask me, I'm scared to say anything other than 1% to 5%, right? That just seems like, okay, if you say that, you're not crazy. But I've seen many large institutions talk about much higher percentages in some cases. And so,

Starting point is 00:22:13 like what are you actually seeing people do? Yeah. I mean, obviously it depends on investor archetype and circumstances and all those factors, but I could say anecdotally, what we're seeing is kind of the normal range for those clients who are allocating, whether we're talking about in financial advisors on behalf of their clients or large institutions, it tends to be kind of in that one to 3% range. And then where are we going with Bitcoin and Wall Street, right? On one hand, I think a lot of people who bought Bitcoin early liked the fact that it was outside the system. BlackRock and other financial institutions creating ETFs and people buying that brings it a little bit closer into the system.

Starting point is 00:22:59 But maybe 10 years from now, what does Bitcoin on Wall Street look like? And what are these asset managers doing? And what are maybe the changes to the market or even to the players? Yeah, I think there's some irony in the fact that with the Bitcoin ETF and iBit, we took a crypto native investment exposure and we put it in a traditional finance wrapper. And with tokenization, we're taking traditional finance investment exposure and we're putting it in a crypto native wrapper. And that may seem contradictory, but it's really not because across our client base, there are those who are not comfortable yet with digital asset rails, but they want those investment exposures and they want that in a convenient, familiar wrapper. And we have clients who are comfortable and fluent on blockchain infrastructure, interacting with digital assets. And they want traditional investment exposures in that format because it's digitally native, global, programmable, instantly transferable, etc.

Starting point is 00:24:08 And that dichotomy will persist for a while. But eventually, I think we expect there will be some convergence that looks like sort of the best of the old system and the best of this new technology fused into a next generation infrastructure set in finance. And I'm not going to ask you for a price prediction, but you have been working on this for a while. you, your team, instead of BlackRock, do you have advice or maybe lessons learned from going through that process inside a large organization for those that work at other institutions that may say, hey, look, we're not doing something or we're just starting our process. What are some of the things that you thought were important? And you look back and like, hey, I'm glad we did this as part of the researcher analysis. And then also maybe things that you personally or people on your

Starting point is 00:24:56 team probably would share with them if they want to be part of that group to go and talk it inside of their corporation? Yeah, I'd say two things, maybe. One is you have to look for opportunities to get small wins. So you may have ambitions of what you would hope an org might do, but you don't start there. You build familiarity and expertise and trust and credibility with smaller prizes, but demonstrated successes that help people get comfortable with the technology and in this case, a new asset type. But you have to be careful because it's not throw everything at the wall and see what sticks, right? You want to have a high win rate where the projects that you advocate for are effective and well-executed. There's lots of orgs that

Starting point is 00:25:50 became disillusioned with blockchain and crypto because they took a try-everything approach and got bogged down in a lot of bad ideas that went nowhere. So be discerning and have some early wins. And the second piece is you have to be an honest broker. You don't work for crypto. You work for your institution. So everything you think about, you know, strategy and ideas and risks that may be taken have to be from the standpoint of the institution, not an individual who happens to be passionate about Bitcoin or crypto and wants to see this come forth in the world. And my last question for you is,

Starting point is 00:26:33 through that whole process, what have you been surprised by? The amount of inflows, the type of build buying the ETF, maybe something internally, like just what surprised you? Because I think it would really help us identify like the difference between expectations

Starting point is 00:26:49 and what ended up happening. And so like those surprises probably are pretty informative as well. I think the biggest surprise has just been the breadth of investor types that the ETF has resonated with and the level of variation in rationales for wanting the ETF. So when we talk about small dollar all the way up to ultra, ultra high net worth, we talk about wealth advisory, institutional and myriad use cases and rationales for, well, I used to hold this way and now I prefer to hold to the ETF because X or because Y or because there's just been way more of those than I think we ever expected. and for those that would like to work with black rock what is your suggestion so that you don't get harassed when you get off stage maybe you share that so we could save you some time well i think one of the things that's um important to understand working with large

Starting point is 00:27:52 traditional finance institutions is it's kind of similar to what i was saying a moment ago in a different context which is you kind of have to build your way up to it right we're not going to be someone's first large traditional finance, large asset management client, right? There's sort of a track record that gets built over time. You look at the partners we've worked with in this space, whether it's Coinbase or Circle or Securitize, they all started in places and built that credibility long before we ultimately entered the partnerships that we did. Robbie Michnik, everyone. Thank you so much. We'll be right back.

The Pomp Podcast - #1339 Robert Mitchnick | The REAL Reason Why Blackrock is Buying Bitcoin

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