Talk Your Book: Fidelity Digital Assets Mailbag

0:00Today's Animal Spirits is brought to you by Fidelity Digital Assets. To learn more about how they work with clients, go to fidelitydigitalassets.com.

0:33in the securities discussed in this podcast. Later on today's show, we are joined by Jack Neurider. Jack is a research analyst to answer some listener mailbag questions, and we're going to do some on our own before that. But before even that, Ben, this week end, I was listening to the Coinbase earnings call. Did you know that Coinbase bought OneRiver Digital Asset Management? No. What's that? So you might have heard of Eric Peters. Oh, yeah. All right. Yeah. Yeah. So he was a big proponent in the institutional space of digital assets. So that went under the radar, I think. I didn't know about it.

1:13That was in March. So relatively new news. Under the radar seems to be the theme this year for crypto, at least. Yeah. So Brian Armstrong of the earnest call said, quote, and we think that's really important because 80 % of Americans believe the financial system doesn't work for them. They see issues with it. They see that it's too slow. It's too expensive. End quote. I wouldn't necessarily take umbrage with any of those issues. However, I was talking to somebody about exchanging currencies, euro to dollar, whatever, something like that. And it was a substantial amount of money. Instead of sending, using the traditional rails, which charge you, I don't know, 6%, 8%, whatever it is.

1:56I just threw out the idea like, what about stable coins? What about US to USDC to Euro? Easy peasy, lemon squeezy. Do you know what the easiest way to do it is? Credit card. There's credit cards that have 0 % fees for international currency transfer. So you use your credit card and there's no fee to do it and you just pay with everything on credit card. I did not know that. Is there a limit? I mean, it depends on the credit card, but most of them will not say like zero transaction fees internationally. So that's how you do it. That is very interesting. Going on a European vacation?

2:34Maybe crypto needs its own credit card. So again, Brian Armstrong said it's too slow. It's too expensive. So this person said to me, wait a minute. Do you know how much it is to convert dollars to USDC on Coinbase? Now, this is not Coinbase Pro, which I'm assuming is lower. it was 3.8%. Okay. It seems high. I mean, it seems not really in line with what they're trying to do to the financial system. But anyway, I guess credit to them, their stock-based comp is down 54%. So maybe they're learning about discovering the year of efficiency. Anyway, I just thought that was interesting. All right, let's get to some questions.

3:15What's the best way to buy crypto if I don't want to open an account at Coinbase? Speaking of ETF, mutual fund, something else. OK, so they don't want to open an account at Coinbase. It sounds like they want to use a brokerage account. It would be nice if there was just a simple ETF backed by Bitcoin or whatever that you could buy. The regulators have not greenlit that yet for whatever reason. There's the ProShares one, right? The ProShares, but that's the futures one. OK, but what else is there? So I'm thinking about the first things that come to mind are Biddo. Yeah, what do you think that has in assets without looking?

3:57$800 million? Yeah, it's less than$900. It's almost a little less than a billion. Well, I assume it hasn't taken assets in, right? It had that big. Yeah, I mean, it's probably all the assets that came in the beginning. So there's Biddo, which is the pro shares futures-based ETF. And there's MicroStrategy. So I'm looking at a chart. Oh, wow, how about that? they don't track each other. What? I can't imagine buying micro strategy as a way to, I mean. Well, how else do you, I'm listening. I don't know. How else do you do it? But anyway, over the last, so year to date, Bitcoin, what do we say? Bitcoin's up 70%.

4:36Actually less today because, all right, so this is not real time. So the BidO ETF is up 51%. MicroStrategy is up 110%. Anyway, I don't know. If you had to buy Bitcoin - But it was down 74 % last year. MicroStrategy would be a leveraged bet on it, right? Because they took on debt to buy Bitcoin. All right. So if somebody asked you this question, how do I buy Bitcoin outside of Coinbase? Would you say, well, maybe just open an account at Coinbase? Like, what would you say? Robinhood? I don't know. I think if you want Bitcoin or anything like that, the easiest thing to do is probably just to buy it.

5:11even instead of looking for another alternative until there actually is an ETF. There's nothing that perfectly tracks it. Right. So open a Coinbase Pro account or Robinhood, something like that. I mean, yeah, it's hard to have a lot of faith in a lot of the third parties at this point. So I guess, I don't know. But Pro and Cons to everything. So Coinbase, the fees are kind of nuts. Robinhood, probably the fees are embedded. You probably just, I don't know, get bad fills or something. But with Robinhood, like I said to Jack later in the show, I can't move my crypto. It's just there. It is easy to move it in.

5:45It's harder to move it out. Actually, did you move all of your crypto out of Robinhood using your wallet? No, I moved it in there. You moved it in there? Now you can't get it out. You can't get it out? Well, no. I'm sure you can't. But it's a lot easier to transfer in than it is to transfer it out, right? Always. It's the Hotel California of crypto. Right. Hey, guys. Skeptical about crypto, but I kind of hear the use cases. Too many bad actors at this stage, just my two cents. Okay. I mean, yeah, I hear that. Well, don't you see the, isn't the rest of the question here? Isn't that the same question?

6:22We have clients regularly asking about crypto, but are nervous to touch it due to all the regulatory uncertainty. What do you guys think? No, those are separate, but whatever. Okay. Well, let's pretend those are the same questions. Beyond the two cents. The only thing I have to say about regulations is I'm just surprised at how long it's taken to do anything. that the regulators just don't seem to care. But Gary Gensler taught a class at Stanford or MIT or something, so people thought he was going to be helpful. Yeah. It seems like they're purposefully not doing anything. The ETF to me, that is the one that is probably the most surprising, that it's taken this long to let a Bitcoin ETF come to market.

6:59I can't believe it's taken this long. Agreed. And I don't really understand why they haven't said, okay. I really don't get it. One of the things that people spoke about for a bull case for crypto was that the institutions would come in. That didn't happen and might never happen. Guess maybe they will if prices keep going up, but who knows? Yeah, listen, that was certainly if you asked me in 2021, what was the near term bull case for crypto? That is what I said. And I was hand up, dead wrong. Yes, this is another surprise too. I agree. It seemed like institutions were ready to come in and they just almost didn't have enough time to, I don't know.

7:37Maybe it is because of the regulatory stuff and the not being an ETF. I guess we'll never know. We'll never know. Like if Terra Luna didn't blow up and three hours didn't blow up and there was mass liquidation, like there's definitely an alternate universe where it didn't crash the way that it did. Now, if the biggest exchange wasn't a giant Ponzi scheme, then you never know. I mean, right? No, but the real crash came way before. When FTX blew up, Bitcoin was already down to 20 ,000. Right. Yes. I agree. Guess we'll never know. Hey, guys, I bought too much crypto, and now it's like 50 % of my portfolio.

8:15I know that's too much. The volatility is annoying, but I'm still really bullish long-term thoughts. I guess that's a pretty good not to break. I mean, it must have been 75 % of the portfolio before the crash then. Maybe more. If it's 50 % now, I think one of the things that Bill Sweet always says to us or to clients that complain about paying capital gains taxes is, don't worry about paying taxes because that means you kind of won the game already. So I'm sure if you have huge gains embedded, even if you lost the money and you got it early, you're fine. But I don't know, the whole 24-7 market thing, like insane volatility, 50 % seems a tad high, if I'm being honest.

8:56I mean, for that kind of market, I think you just have to figure out what makes you sleep at night level and diversify down to that. I'm guessing this is a young person. And so maybe they're rationalizing it that it's going to be a smaller percentage of their portfolio as they add money to it, right? Like it's not like their steady state. And I hear this dilemma because if you're so bullish that like you would be kicking yourself if it goes higher, and yet you know that you have too much and you would probably be kicking yourself if it goes lower, that's a tough spot to be in. Well, the good news is the last three to five years has been a good case study.

9:35And man, I wish I had more in this or man, I wish I had less than this. It's true. I think you could kind of see what you're comfortable with based on what happened. All right, here's one more. Is AI everything crypto thought it was going to be? Sure, a lot of the AI stuff is people talking about what it will do for us in the future, just like crypto in many ways. But there are already tens of millions of chat GPT users, and we still don't have a killer crypto application for regular people. Curious to hear your thoughts on crypto versus AI. Yeah, that's a good point. Josh, what a post on that.

10:06I do think that every innovation in history, people have taken it too far, like thinking about what it can or will do in the future. And I do think crypto was the first time it happened in the social media era. So I think crypto was allowed to get ahead of itself too much because everyone had this megaphone, and you could see this stuff, like the prices and stuff happening in real time. If crypto would have been somehow invented back in, if the technology existed in the 1980s and you couldn't see tick by tick every second of the day, the price, I'm guessing that we wouldn't have had the crazy blow off tops like we had in 2017 and 2020 or 2021, right?

10:51I think it was just almost like bad timing for crypto because the price rise made it seem like the innovation is already here. And obviously, it's not yet. Well, I think the thing that's totally different about crypto is it's trying to change the financial infrastructure, trying to replace the rails that we've been using for the last 50 plus years, which is obviously a big, hairy, audacious goal. Whereas ChatGBT came to market, and instantly the use case was very apparent. I'm like, oh my God, this is magic. Crypto doesn't feel like magic. It feels like black magic or dark magic. Like it doesn't feel this way.

11:31So yeah, good question. And it's possible that we will just never have a retail use case where people were thinking like, what if crypto could do this? And we put everything in the blockchain and we tokenize this. I think we will. I don't know if we're gonna, I'm not saying that there's gonna be a chat GBT-like use case where there's like a light switch that onboards hundreds of millions of users overnight. I'm actually not in the camp at all. It's going to be like behind the scenes. If it's going to be used by a lot of people, it's going to be behind the scenes. It's not like people are going to go, oh, I'm opening up the crypto app to do this or whatever.

12:02You're not going to even know you're using it. Maybe. Don't you think? Maybe. Yeah. If it hasn't, I don't know. If we haven't got a good use case yet, when is it going to happen? Like in terms of retail adoption. Fair point. That's a point that works until it doesn't, I guess. Ben, we're still so early. I guess so. So it is, AI is a good dose of, you know, splash of cold water on the face of crypto, though. For sure. So, but I don't think, I mean, I'm sure there are narrative people out there working on why AI is good for crypto. Just like the metaverse is good, right? That train's never late.

12:39All right, here is our listener mailbag questions with Jack Newrider.

12:49We are joined today for the third time by Jack Neurider. Jack is a research analyst at Fidelity Digital Assets. Jack, welcome back. Happy to be here. All right, before we get into some of the questions that we've got, Ben and I were at a Fidelity Digital Assets event in October 2022, which seems like eight years ago, maybe like 15 years ago in the crypto space. That was before the SBF, FTX meltdown. And I think crypto, Bitcoin is trading like around 20 ,000, give or take. So we went through the whole meltdown and I'm sure there was a lot of other things that adversely impacted the crypto space.

13:33Here we are, the price was at 20 ,000 then again, before the meltdown. And here we are. It is Monday, May 8th, and the price of Bitcoin is $28 ,000, which is kind of remarkable. So that's a good segue into our first question, which is, crypto didn't work in 2021 and 2022 as inflation ramped up. Now it's working as inflation comes down. And especially during the recent bank runs, I don't get what drives price. Is it all just momentum traders. And I would add, I don't get it either. So Jack, what is it do you think that drives the price of digital assets? Yeah, I mean, there's certainly an element to everything in finance that we can't calculate.

14:15But what I will say, and you guys have asked me this, I believe both times we did Animal Spirits Talk Your Book episodes around the inflation piece, because inflation was six, seven, eight, nine percent, kept ticking higher. And we have not moved the goalposts on this one. I'll let you know if we have to do some goalposts moving. But so far on the inflation piece around Bitcoin, what I'd really say is you have to look at the entire picture. So the response function, as well as sort of the backwards looking data, because financial markets are forward looking. And so if you were using forward real interest rates, which I continue to sort of harp on as being the important marker for Bitcoin, what happened in 2022 made a lot of sense.

14:59Forward inflation expectations never rose materially. They've stayed below, I think, 3 % in the entirety of inflation running up and back down. So the bond market had been, whether it's right or wrong, embedding expectations that inflation would normalize and that it was ultimately transitory. Meanwhile, the response function was to raise interest rates rapidly. And so the net effect of forward nominal yields increasing while forward inflation expectations, which is what you take off of real interest rates not moving, means that the opportunity cost for all assets rose, forward real interest rates rose.

15:36That means higher discount rates. That means bonds on a relative basis are more attractive. And so Bitcoin being an alternative store of value, similar to like a digital gold, is the phrasing that some people like to use. It makes sense that the price of Bitcoin fell. And at the same time that Bitcoin bottomed out, which happened to be during, you know, and FTX and these other lenders sort of blowing up or failing, so to speak, and no longer existing. That was in Q4. That was the same time when real interest rates topped towards the end of Q4. And now we've seen them sort of come back in. We've seen a little bit of balance sheet expansion on global central bank balance sheets.

16:11And we've seen the price of Bitcoin rally a little bit in Q1. So to me, all of that sort of does end up netting out and making some sense. But it's just a layer deeper than just looking at backwards looking inflation. It's also obvious in hindsight, But I think a lot of people realized in the last 12 to 15 months that, oh, yeah, that's right. Crypto is a very long duration asset and it's still very young in its lifecycle. And I think that's something people forgot that all the long duration assets really got hammered last year. And one of the things I think you guys do the best talking about all the time is like in the short term, ultimately, we could make a case both ways.

16:44That's what sets the market. And that's probably why Bitcoin is trading 25 to 30 ,000 right now of, yeah, there's more users than there were four or five years ago. So the long term trend is intact. But ultimately, if the dollar rallies, the dollar rises and we're going into recession or something and you get a sell off of equity markets, then, yeah, Bitcoin's probably going to sell off. But if you stave off a recession and all of a sudden things start to look better on the equity side and risk rallies, well, then, yeah, Bitcoin's probably going to rally. And so to me, it just kind of like makes sense where we're sitting currently.

17:18And we're always looking at things of the bigger picture, as I think you guys always are. And so to some degree, like, yeah, I can't tell you whether we're going back down to 20 or up to 40. I think you can make a case on both sides. And there's those exogenous variables that we don't really know where they're headed over the next three to six months that will ultimately dictate that. So, yeah, like anything else, there's a lot of things that drive it, especially in the short term. It could be interest rates and the cost of capital. It could be the dollar. It could be inflation. It could be inflation expectations.

17:48It could be just risk appetite in general. It could be adoption. But I guess what I would ask is, over the long term, what do you expect? If I had to pin you down and say, what do you expect to be the single biggest driver? Now, again, there's a pie chart here, right? So I don't know if the biggest driver is 20 % of that pie or 80 % or whatever it is. But what do you expect 10 years from now to have been the biggest single driver of the actual price of these digital assets, whether it's Bitcoin or Ether or anything else? Yeah, I think if you ask the average person, especially when we're looking specifically at Bitcoin.

18:20And because Bitcoin is half of crypto's market cap, it was the first digital asset. It tends to be the first primary mover. Everything follows it. And then eventually they sort of run off of it. They have betas to Bitcoin to some degree, you could say. At some point, I think everything has its own taxonomy and will maybe start to do its own thing. But we're still a very immature, small asset class on the grand scale. So everything gets looked at through sort of one lens. But when you ask that question of over the next 10 years, what's the story? The story is that Bitcoin supply is pre-programmed, that 90 % of Bitcoin already exists, that its inflation rate will get halved every four years.

18:56So we're going into another halving event next year where its inflation will move below the rate at which gold is mined. So its stock to flow ratio will be higher than gold after next year's halving. And if you pit that against a picture of larger and larger sovereign debts in which you kind of look at the historical playbook when you have your debts denominated in your own currency and you're the reserve currency. You can kind of do the math. Do you want to default on that debt, which sounds extreme? And I think it does as well. Or do you want to sort of implicitly default on that debt by debasing the currency?

19:33That's been sort of the toolbox that's been used. And so if that toolbox gets used, Bitcoin should respond well to that as you debase your currency. There's this alternative monetary system. people can port value into. And that's sort of the major big picture pitch. But of course, you have periods of tightening like right now that I would argue would be unsustainable on a 10-year basis. We're already seeing things start to break, like regional banks. It's sort of like a balloon. You push the air in one pocket, you kind of push the problem somewhere else. And we're starting to see some of that.

20:02Jack, I'm going to get worried if you say hyperinflation. I'm going to get worried if you say it. Not at all what we're pitching here. Although in theory, it does kind of hedge you to some degree to some of those outcomes, I think, if you use that logic. Not that - I'll throw it out there. It'll - It could happen. It could happen. Volistically happening. Of course, some are saying that, not us. One more follow-up question to this. So Bitcoin's up 70 % year-to-date, give or take. It's one of the best performing asset classes. And it seems like it's sort of under the radar. I don't know if many people would know that.

20:35Why do you think there hasn't been this, I don't know, a headline FOMO or anything like that? Is it just people just got so badly burned like Mugatu in 2000? Not Mugatu. Damn it. What was Will Ferrell's character in Austin Powers? I can't remember. Either way, do you think it's just people got so badly burned in 2022 that they're just like, well, once burned, always shy or something like that? Yeah, I think, I mean, people got burned in after the 2017 run up. People also got burned after the 2013 run up and 2014 drawdown. It was just smaller scales each time and less capital involved. And it always took about two years to sort of get through some of those pains after the drawdown.

21:18Historically, the drawdown took about a year. That's exactly what just happened. We drew down 75%. And if we're using these historical analogs, Bitcoin has moved in four-year cycles because of this four-year halving. And in theory, some things have reacted to that. We saw a one-year drawdown. We're in the middle of sort of a one year choppy bear market in which sentiment is sort of churning. And you say like maybe Q1 was a turning point. We kind of are starting to hear those questions. But nobody's overly excited or like super speculative and euphoric about this run up because you guys know the drawdown math.

21:51You go down 75 percent, you go up 70 percent, you're still down 50 percent. Right. You got to go up 3x. And historically, we've seen a year of sort of chop once you found your bottom. That's 2023. And then if we're using the historical analog, you start to get constructive heading into next year and the year of a halving. That's historically been the time where you get back to sort of old all-time highs, and you start talking about sort of a new era and some sort of new narratives forming. So maybe that history plays out. Maybe it doesn't. Not saying, you know, not making a prediction there. But certainly looks similar to what's happened historically.

22:27All right. Michael, I think you're looking for Mustafa, I think was the guy's name. Mustafa. That's right. Great call. All right. Let's do it. Let me take the next one because I've got a follow-up before Jack answers. How do you guys think about self-storage versus the centralized platforms? Jack, I have my crypto, unfortunately, at a Greenleaf app that shall not be named, and I can't get my crypto off for some reason. They've got wallets that are available in most states besides New York. Although I did try self-storage. I bought, I think, a Ledger, and I got very scared that it was going to all disappear.

23:02I don't trust myself to use that. So how do you think about, or how should people think about self-storage versus a platform like Fidelity or one of the others? Yeah, so I think there's, you're asking on the individual side, there is an important delineation between the considerations that an institution has or that a delegated asset manager has when they're responsible for somebody else's wealth versus an individual. But speaking towards the individual side, because I think that's sort of where this is coming from, I think the considerations are similar. You're just making your own decisions.

23:36And so ultimately, it's easier to decide where you want the custody and how you want to allocate if you're allocating to an emerging asset class like Bitcoin and ETH in the crypto space. What I would say is it's like a tradeoff between whether or not you want to take a certain level of counterparty risk and do due diligence on having a counterparty or custody of the assets yourself but thinking of it sort of like in the digital sense of holding a physical bar of gold. So do you want to be holding those assets yourself? And do you trust yourself that you have the technical capabilities to be able to do that?