WRFH/Radio Free Hillsdale 101.7 FM - Wall Street Weekly: Big Moves with Bitcoin

Episode Date: February 23, 2024

Join Patrick, George, and special guest Sam Wegner as they discuss the recently approved Bitcoin ETF's and weigh its larger implications for cryptocurrency as a whole.

Welcome to Wall Street Weekly, a show where your host, George and Patrick, cut through the financial jargon to keep you educated and informed about the markets that affect our lives. Enjoy the show. You're listening to the highly informing, overperforming radio show on Radio Free Hillsdale 101.7 FM. My name is George Ackler, joined as always by Patrick Scott. And Patrick, we have a little friend in the studio today, don't we? Yes, we do. Today we're joined, as promised last week, by Sam Wagner, a did. dear friend from our investment clubs. I bet Sam wasn't expecting that we promised him last week,

but here he is on the show. So welcome, Sam. Hey, good to be here. So on campus, we call Ian Schlegel. You might remember him from last time. Talking about FTX, those were great episodes. You can find those on our Twitter page at Wall Street Pod. And we called him the King of Crypto.

So I think Mr. Wagner deserves a name of his own. Henceforth, we'll be calling him the Baron of Bitcoin, as that's what we're going to be talking about. Just as a quick disclosure, we want to remind our audience that anything we say on this show is, for entertainment purposes only and nothing we say is financial advice. We also want to disclose that our guest Sam has a position in Bitcoin, whereas Patrick and myself do not.

A big reason that I wanted to have Sam on is, as we've well publicized, we don't know much about Bitcoin. We do have it in our show logo because in the words of me, I guess, it makes us look more progressive, more hip, but we don't know a lot about it. A new story that caught my attention was the ETFs that were released for Bitcoin, and it just seemed like those could have widespread consequences for the industry. And as the main man on the research desk, Patrick, you're covering that story today. If you want to take it away. Well, like you said, it's it's one of those hip things, but we don't want to be those just old codgers that only invest in

bonds and stuff. And so we do want to be up to date with all of the modern trends and new investments. So it's good to be educated and informed on things like this. Let's go ahead and talk about the recent Bitcoin ETF story. When this popped up a few weeks ago, it's not brand new. Just for context, let's get a quick reminder of what an ETF is. So correct me if I'm wrong, George or Sam. But an ETF is a basket of securities that's sold as a single stock. And an ETF can track anything from the price of a single commodity to a pool of stocks or bonds. How is it different from a mutual fund?

A mutual fund is traded only once a day after the market closes, but ETFs are traded throughout the day while the market is open, just like regular stocks. So let's talk about the approval. the Securities and Exchange Commission gave. That happened on January 10th. Like I said, a few weeks ago, this isn't brand new, but they approved the first spot Bitcoin ETFs, and they approved 11 of them. Bot Bitcoin ETFs are just ETFs that track the current spot or price of Bitcoin. And something from a Forbes article, it says that spot ETFs allow shares of the fund to be created or redeemed based on market demand. And in this way, a spot Bitcoin ETF allows investors to gain exposure to the current price of Bitcoin without having to hold the asset itself. And despite this,

banks, investment firms, and financial advisors are still recommending that you do your own research and you know what you're doing. I saw this today from Fidelity's designated investments agreement. For reference, Fidelity was one of the 11 ETFs, Bitcoin ETFs that was allowed to initiate trade. And I just thought it was pretty funny reading this. This is what you have to abide by. This is what you have to sign when you buy Bitcoin or Bitcoin ETF. The first point is, quote, I am a sophisticated experienced investor. Yeah, those two words have never been used in the same sentence with a Bitcoin investor before. For sure. Sophisticated was not the first word that came to mind when considering Bitcoin, but perhaps. Definitely doesn't define me. Definitely. No. Let's see what else here. They definitely want to

pass on responsibility because point number three says, I am responsible for educating myself regarding designated investments, including reading the applicable offering documents, and this is 0.5. Fidelity does not, and I understand will not, advise, recommend, or solicit any transaction in a designated investment. To the extent I will have or have had communications with any Fidelity representatives about a designated investment, I agree not to rely on those communications as advice, guidance, recommendations, or solicitations. Basically, fidelity in all these companies, want nothing to do with the volatility that you are buying through these Bitcoin ETFs. So I think that's pretty telling.

I just have a question for Sam as we get into this. Even though they're going to try to get around, I guess, for lack of a better word, the risks of Bitcoin and what it could mean for their clients. Obviously, 11 firms, that's a lot of big reputable firms that want to have exposure to Bitcoin through ETFs and offer that as a product. Why do you think that is and why do you think it's come on so quickly? Well, like the rest of the world, assets that you can have, they want to ride the trend. Right now, crypto is really hot. Most firms are really going to want to ride the trend. This is not something new, though.

Like, a lot of us are seeing, all right, the SEC confirmed it. This has been a battle that's actually been going on between firms like this that have wanted to offer this and the SEC for close to like 10 years now. So it's been a long drawn-out battle. The reason why do they want to offer any stock is basically the more assets under management that they're able to have. I mean, I find it unique that they say, hey, we don't advise you on this. Like, don't buy this. But also, we'll take all of your assets under management, throw all your. your money into that. So it's like any asset that you have, basically. If they help you get it,

they're going to make a little bit of money off of it. Yeah, and I guess it would make sense that you don't want to be the one investment firm that doesn't offer crypto. If investors want to have this as part of their portfolio, and I think for a lot of investors, it's a pretty important diversification metric. You don't want to not be able to offer that. Yeah, and I think over the past year or two, it's been shown to be a really good store of value, quite frankly, and so they want to be ahead of the curve on it. So, yeah. So back to the Bitcoin ETFs to explain them a little bit. And I'm sure, Sam, you would probably know more about this than I. So correct me if I'm wrong, once again, Bitcoin ETF shareholders don't own actual Bitcoin. So the ETF itself owns Bitcoin, and it allots a

portion of the Bitcoin's value to each of the shares. And so one way I thought of this, this could be a wrong analogy, but I thought it was pretty good. But, you know, analogies with Wall Street Weekly are always risky. I thought it was kind of like the U.S. dollar on the goal. standard. When you own a dollar, you do not own a tiny bit of gold. You own a dollar. However, you know, a small portion of gold does back that up with the value. And so I thought that was pretty similar. For all the econ profs out there, just a reminder, this is the pre-1933 gold standard. George has got us covered here. I appreciate that, George. It's like anything. I mean, they've had crypto offerings before, but what makes the ETF so unique is that it's so very accessible to the

common person and that's why ibit has managed to get like within the first like week or two i think it had over like four billion assets under management which is just crazy what did the i b i think it's the black rock etf offering oh okay yeah it's managed to do very well and it's it's been accessible and so that's that's kind of what makes it special here yeah and so like you said this kind of makes bitcoin trading much simpler so you don't need to operate a digital wallet i don't think like coinbase and a host of other crypto tools although these investment firms that do create the ets they do do use Coinbase as their, quote, custodian. I'm not sure exactly what that means.

They're just managing it for you, like holding it for you. Okay. So, yeah, you can understand why it's so popular and why it was big news when the SEC approved these ETFs. And now moving a little bit away from ETFs as we move along with our crypto conversation on Wall Street Weekly on Radio Free Hillsdale 101.7 FM. A headline that caught my attention recently,

and for me has always been a problem with Bitcoin as I think even pro-Bitcoin investors have always faced this contention. Price, not intrinsic value, is the true measure of Bitcoin's success. And that's led a lot of people to say, if everyone wants the same rock, it doesn't make it worth any money. It's just the demand is driving up the price. And when we had Ian on, he mentioned that part of Bitcoin's value came from the blockchain technology, which it created. This week, I talked to you a little, Sam, about some of the use cases for Bitcoin that actually made it, maybe worth something more than just a digital token. I didn't know if you'd be able to go into

any of those on the show for us. Yeah, I mean, that's been a big concern for a lot of people. It's like, Bitcoin has a couple of uses. One is like a great store of value, but it's also a means of exchange. And for a lot of people, they found that it lies in the assets that it holds in its smart contracts. I don't know if you guys are like familiar with the smart contracts.

Smart contracts are basically the terms that they write up into the code in blockchain that basically makes them not irreversible, but makes them very safe and makes it so that if someone initiates a smart contract, you can almost be sure that those are going to be the terms. Those are going to, like, they're actually going to get their asset. They're actually going to be able to either give the asset and receive even money in a lot of senses. That's what makes it so valuable is that blockchain technology that they've started initiating and putting into other uses outside of just like trading back and forth. That's what makes Bitcoin a little more special than, say, an NFT.

which is just like its only value is like if you hold it and there's nothing that backs it up. But there's been a lot of progress in terms of having actual assets that they're putting the contracts for the assets in the blockchain technology. And people are able to basically buy a piece of that asset? And when you mean assets, are you talking about things that can exist outside of Bitcoin? Yes, correct. I mean, it can be digital. It can be, I don't know, you have the rights to a song even. You can put that into Bitcoin.

or some blockchain technology. But a lot of times, a lot of what it's been is on the frontier of modernization. I don't know how to put this exactly. But basically, a lot of it's been in countries that are not as well served in terms of electricity, internet, that kind of stuff. And they've been able to optimize the electricity in those nations due to using the excess electricity that they have and linking them up to basically mines where they're mining the Bitcoin.

and they're being able to use that excess technology to actually get something out of it and to buy back into the asset instead of just letting it go to waste because a lot of waste happens there. So that's on something slightly different than the actual blockchain technology. You're saying in addition to that technology,

it also has the ability in impoverished nation where a lot of the mining takes place. These people are able to take excess power that wouldn't normally be used. Yeah, so there's a company called Gridless, which is currently going to all of the dams and I don't even I'm not quite sure even how all of the electricity is generated over in Africa in parts of Africa obviously there's parts of Africa that are doing fine electricity-wise but in a lot

of for example the DRC Dominican Republic of the Congo they are connecting them up to the dams that are generating electricity I mean obviously they're being able to generate it well but people go to sleep here in America we're able to take that electricity and feed it into other things basically we're chronically online we're chronically using lights over there they're not so much. And so they have a lot of excess electricity that's not being used. And basically what they're doing is they're taking it and they're plugging it into mines and they're being able to get some use out of those. Right. And they're being able to actually use them. Yeah. No, that's actually like, yeah, really fascinating. I've also heard the argument that for

impoverished nations and this is one thing where I think digital currency specifically, Bitcoin is pretty cool, is you know what your labor is worth. Because in countries with an unstable currency or hyperinflation, you know, people are getting killed by government policies. But if you're working remotely and you're able to get paid in Bitcoin or other cryptocurrencies, you have the ability to theoretically get yourself out of poverty. Now, I know it's not that simple, but I think it's a cool concept at the very least. Yeah, there's been a lot of progress on that front too. Like there's a company called Kula. And Kula's, they're more of a missions. They're less of like a business. They're going out and they're buying up assets over. Right now they're in South

Africa, which South Africa is a very well-developed country, but they're in South Africa, and they've bought mines, and I'm talking literal mines, like silver mines here, and they've bought a lot of dams for electricity. And basically what they're doing is they're connecting those assets up to blockchain technology and then selling the coins for those, which a coin basically represents a smart contract. That's where that comes into play. And they're basically giving them to the mayor, governor, whatever the ruling body is of that area. And then they have control of that asset and they're able to play into the whole asset it's really hard to explain because they've attached all of the mines and all of the dams up to the same blockchain technology and what they're doing

is then they're giving out coins to these people that that actually live in the area so that they have some buy into the actual assets around them because a lot of people over there they have a wealth of resources over there they're just not able to actually use them basically they're equipping them to be able to use the resources that they have. So it's kind of philanthropic in a way? Yeah, it's very philanthropic. That's their main goal here. Oh, okay. Interesting. And he said it was Kula? Yeah, K-U-L-A. Okay. They actually just had their initial coin offering, I believe. Is that an American company? Yes. And I think that's a really good use case for Bitcoin's potential knowing what you're worth. And then also it sounds like this is more of having to find property rights. Obviously,

It's not going to get around some disputes if there's military involvement or poor rule of law or stuff. But private property rights are some of the most important things to getting a society up and running more efficiently. And it looks like that technology has a great opportunity to do that. I'm blown away by the uses of Bitcoin because so many people are fixated. Like you said, it has no value outside of its price and us trading it. One question that I asked Ian when he was on the show and I'm interested to get your perspective. is it's called a cryptocurrency. But if you look at the definitions of what a currency is or what money is,

it doesn't seem like Bitcoin really follows those in the sense of you want your currency to be kind of like a means of exchange and people, a lot of people just hold or in Bitcoin language huddle their assets. Additionally, though it's gone up a ton, that's not what you would think a currency would do. A currency is supposed to be relatively stable. So what type of asset class would you put this in or would you think it's a new asset that we haven't really seen before. You have to put it in its own class because you're

right that you don't want a currency going up like crazy, right? That's where you actually lose a lot of value in your currency. I think we're not quite at the point where it can be the pure means of like exchange. It's essential that it has the dollar to add some value to it as of right now. We'll see where that takes us. But my belief right now is definitely that it can't be its own currency. right. In a lot of ways, it doesn't fall into the definition of a currency. So it wouldn't be a good currency like the dollar because it's very volatile and it'll increase in price a lot. But if it's connected to the dollar, does that mean inflation can still affect Bitcoin? I mean, yes, when it's connected to the dollar, absolutely. Something that I would point out is while we talk about it being

very volatile, it's actually been, like while it's all over the place in terms of maintaining like inflation in its price. It's actually been better than the U.S. dollar as of the past two years. So it's actually protected its value a lot better than the U.S. dollar has. I think that's something to point out. I think right now it's necessary that we have the dollar. I think we've seen over the past two years that even with the rise in interest, people knowing about crypto, yes, it has gone up a lot. But I think it's also just due to its actual value as an act. As of right now, it's not yet a currency. I think it could be. If it maintains its stability, I think it very much could be. I think my concern with Bitcoin always, and I have a lot of

concerns with Bitcoin, but I think the major one is that you hear stories of the World Economic Forum and even the United States wanting to develop a digital currency. And with the backing of, you know, trillions of dollars of real estate and other natural resources, why would people use Bitcoin rather than a state-issued currency if that comes to pass within the next few decades in the United States or even worldwide potentially. Like, why would they use it?

Like, what is the benefits of using it? Yeah, why wouldn't they just switch cash out their Bitcoin, use US dollars instead if it provides the same value? I mean, sure, right now, there's a reason that we don't operate on Bitcoin. There's a lot of questions still to be asked and answered, but a big focal point of Bitcoin

is that it's decentralized and it goes to the person. and there's very little regulation of it. Government's not all in your money, basically. That's one of the main draws to holding cryptocurrency. We'd like to believe that our money is safe in a bank, and yes, it is. It's very safe in a bank, but also that money has been counted and regulated tremendously, whereas right now the SEC doesn't have a lot of regulations on the decentralization of your currency.

I think it's really important that we recognize that, yeah, while it's going to be, be a hard shift to get people to say, all right, the U.S. dollar has been around for as long as the U.S. has been around, right? And it's not going to be an easy shift from dollar to crypto. And I don't know a clear path as of right now. That's what I'm trying to figure out every day. How do we get to that point? But I do think that as a means of exchange, it provides much more fluidity and decentralization than the U.S. dollar does. Perhaps one thing we could see is maybe not Bitcoin becoming the replacement national currency to the dollar, but maybe it would be more of an international exchange thing. But another quick question I had is, is Bitcoin taxed in any way?

Right now, the SEC is basically coming up with taxes right now. That was a big holdup with the offering on like the ETF is like, all right, how do we manage all of this? How do we regulate all of this? Right now, people are using American dollars to buy Bitcoin mainly. And so there's a lot of trying to like figure out what the heck is going on. And that's where the idea of like an initial coin offering basically came from is they're following the format of stocks to basically, all right, you guys offer this many coins and you offer and we'll be able to track the price on what they're being sold. And so then they're being able to figure out, all right, how do we tax this?

They've come up with some menial stuff as of now. Like so with the initial coin offering, there's some taxes and stuff like that that goes into it. But other than that, I don't think there is. On the personal level, you still have some taxes. I just looked it up because it's treated as property. So I'm just looking at the IRS website right now, and it looks like Bitcoin is treated as an investment. So you're going to be taxed at that short-term or long-term capital gains. Even the SEC, the IRS treats it as an investment.

That's the Department of Treasury and the taxation authority, the SEC, which is responsible for regulating public companies, they've kind of gone back and forth on some of the classifications for a, accounting for public companies. How do you classify your crypto holdings? I think right now they have it as other assets, but there's still such a gray area of what it actually, no one really knows what it is. Yeah, I appreciate you clarifying just like personal level and a corporate level like with the company. In my crypto holdings, when I take them out, when I have gains, I'm taxed on those gains. So yeah, there is some taxation there from the IRS. Well, we're getting to that time. It feels like a Midwest best goodbye, Patrick, you know, well, I suppose. But the episode has reached its ending point.

And we want to thank Sam for coming on the show. We'll insert a round of applause clip right now. So thank you, Sam. We really enjoyed you educating us about crypto, as it is something that we're very curious about this point. Yeah, thanks for having me on, guys. It's always fun to talk about crypto. So, well, yeah, like George said, it was a pleasure having you, Sam. And you are always welcome back because that was a fun episode. Well, thank you so much and thank you, our audience, for tuning in to Wall Street Weekly on Radio Free Hillsdale 101.7 FM. We hope you join us next week.